QUALCOMM Incorporated (QCOM) Earnings Call Transcript & Summary

It's -- so in general, I think the mobile market is a mature market. I think we have a very high smartphone penetration across the globe. And as we look past 2020, and we look at 2021, we see the market kind of resuming growth, but it's in single digits. So we don't see anything that's really structurally different with the mobile market. And from a QTL standpoint, it's just tracking the market. You don't have any outliers. So all of the OEMs are licensed, it's very stable. It's just tracking the market. There is a disconnect between QCT and QTL, and maybe we should spend a little bit of time on this. The industry, in the past, especially a lot of the financial analysts who always look at the correlation between QCT and QTL. And I actually saw this happening in our earnings call. People said, okay, if QTL is tracking the number of subscribers, and that is showing a smaller overall market. QCT is up, that means inventory in the channel. You're selling in, but there's no sell-out. And we said, no, there's no inventory in the -- I wish there was inventory in the channel that we have a supply chain situation. The reality is QCT is growing faster than the market because of some of the factors we outlined before. And QCT has now other industries that are diversifying the company revenue. We got like over $1 billion in the IoT segment. And we have a very strong pipeline in automotive, which is tracking well. So that kind of creates a little bit of a separation. That's why if you look what we did 2 earnings call ago, we stopped talking about QCT, QTL. We said, look, there's a licensing business, there are handset business, analog front end, automotive and IoT and that's kind of more reflect to where the company is going.

Got it. Okay. Yes, that was helpful disclosure, too, by the way, that additional vertical disclosure. So what about the -- you guys kept the 5G forecast unchanged in this last earnings report, but you're calling out the supply shortages, you're flagging Android here. Is it mostly -- are you mostly talking 4G shortages then as we look into June and then that resolving itself? Or is there some 5G shortage out there too on Android?

It's across the board. It's 4G and 5G. So as we said, the demand is now paced by supply. You have probably a lot of lower end units of 4G, they're larger in numbers, not in value. But you have significant shortage of that, too, because of emerging markets. And the reality is, we do believe that this is going to get better as we get to the second half of the year. Because you have the -- you have 2 issues hit you at the same time, right, which is you have demand for the products they are designed in today, and they are like in the shelf or in the market, they're validated with carriers. And you're going to sell when you can sell those demands. But then the next product comes in. So the ramp is not only gated by supply but gated by the product launch cycle. So we're going to see the seasonality. And then we think now as we get to the December quarter, we have not only the supply chain normalized, but you have all the new product cycles. And as we said in the call, we're very happy with the design traction that we see, not only for the existing generation product, but for next-generation product as well. So that's why we're kind of more -- we talk more about we're happy with this, even though there's a short-term temporal supply chain issue. We -- all of the growth drivers kind of remain intact.

Great. Okay. Yes. let's move on to RF, RFFE and talk about that a little bit, just to make sure we get -- that's an important topic, and we were surprised at how high that revenue number was when you guys finally disclosed it. So clearly, a lot of traction there. I guess, is there anything you can say about that in terms of expected medium term growth? Where do you -- can you put us in a ballpark, low single digits, mid-single, something like that, so we understand kind of what you expect on growth there?

Look, I'm comfortable telling you that we're kind of in a very good position to achieve, like the target we put in, about 20% of the overall market. We said that in the Analyst Day, like in 2019, right before this crazy 2020. And we're in a very good position to do that. Don't want to make a projection above that, even though I feel very good about where the business is. And there's one thing is worth highlighting. I thought there was a little bit of a confusion in the market. Some people thought that, that business was mostly related to millimeter wave, and it's not the case at all. We only have millimeter wave today in the United States, Japan and Korea, on some of the premium tier devices. So a lot of that content is really sub-6 and across the board across all different tiers. And we actually find our revenue very diversified. Some of our other competitors are highly concentrated on one very large U.S. customer. We actually have that distributed across the board. So we actually like the diversified strategy of the revenue. And I'm going to answer your question about growth in a different way. What could happen that we will do much better? It's millimeter wave penetration in other industries, in other countries, I should say that. So one thing that we're tracking very well is will millimeter wave come to Europe? Or will millimeter wave come to China. So we saw that Germany did issue the auction at the beginning of the year. 82 -- they had 82 private license of millimeter wave. And then the big -- it's expectation as one of the big carriers, public carriers will deploy millimeter wave. So we're going to track in that auction. Germany deploying, it could be a very good sign about millimeter wave coming to Europe. And so we're tracking that. And then most important one is will millimeter wave come to China? If it comes to China, then you have a different ball game, right? Because the China has a very important role in also bringing scale to the mobile ecosystem to the Chinese OEMs and we're tracking very good activity towards 2022 for the Winter Olympics. So if millimeter wave deploys beyond the existing markets, that's a major tailwind for RF front-end business. We're not counting on that. I think we're just sticking with our predictions we made on Analyst Day. We're very confident we're going to be able to achieve that. But there's a lot of upside opportunity, depending on how the market evolves and how millimeter wave gets deployed.

Yes, we agree with it. Maybe you could say another word about China and the activity. You said you're tracking activity toward the Winter Olympics. Say a little bit more about that in terms of what could happen there, I guess?

The -- there are 2 issues that points to millimeter wave in China. So one issue, there's the China government sponsor activity with the carriers. They identified 100 verticals for 5G industrial deployments and with the majority of those using millimeter wave. And for those 100 verticals, they have dedicated trial activities with different companies from industrial sector, automotive, health care and so forth. And many of those use cases have millimeter wave indoor campus deployment. We're participating with the carriers, China Mobile, China Unicom, China Telecom and some of our partners in China. And those -- that activity as it evolves to enterprise and industrial deployments with millimeter wave in 2022 and beyond, is one driver for millimeter wave. The other one is when the Olympics come back, post-pandemic, China, assuming that the 2022 winter Olympics may be the very first back to normal Olympics. And they've been planning for millimeter wave launch with a number of different use cases, especially as you think about venues and stadiums and all of that. And we've been working with the carriers in China, preparing for that event as well as an OEM. So those things could drive larger scale deployment of millimeter wave in China. If that happens, and that becomes a requirement for China devices, just add the millimeter wave to that Huawei SAM expansion and the Qualcomm position with Vivo, OPPO, Xiaomi, that's a very good tailwind for our business. But we're not there yet. We're just tracking the development, and we like what we see.

Yes. I -- when you say the first thing you're talking about in China is industrial application, right, not smartphones. So it would be mostly industrial automation, that kind of thing. Is that correct? And then the second thing is maybe smartphones.

But in the first one, in the 100 verticals, you have smartphones in some of those verticals, especially some of the future enterprise. But -- and you have known smartphone applications as well. And then the Olympics is the smartphones.

All right. Let me give you one Qualcomm advertising shot here. So we -- we've done a lot of work on millimeter wave. It looks to us like you've got a 2 to 3-year advantage there. But then a lot of your competitors say, no, no, no. We can come in and we can compete on millimeter wave, we can do that, too. So can you talk a little bit about competitive moats and where you see your technology protected from that?

Yes. By the way, this is a great question. That's actually a softball. I appreciate it. Because when our competitors, especially, I think our main competitor talks about I have millimeter wave available in '22 that only validates what I just said about China, in '22, millimeter wave is starting to look very good, especially because if you have to say that you have millimeter wave in '22, if you want to be a player in China. So if anything, it just validates that it's coming. Now let me answer your question, and it's one that we're very proud of. We took a lot of early R&D and millimeter wave -- millimeter wave is very complicated to do. Because you can have millimeter wave, but then how does it perform? Does it perform economically? Do you have a range? Do you have the ability to do coverage for the carrier? Do you have battery life? Do you have performance? We just announced this week, our fourth generation modem for 5G. There's a lot of intelligence at the system-level because millimeter wave is about radio beam management. You have multiple antennas on devices, hand position changes, device position changes. We have a lot of computation. And I will tell you, when we started, the conversation wasn't about our competitors are going to have millimeter wave. The conversation from our competitors and everybody else, it simply does not work. That was the conversation. And we said, okay, do you like the Galaxy phone in a form factor, which is competitive in the Verizon commercial network, and that is working. We're generation #4. I point to technologies. You're going to hear a lot about this technology in the future. Technologies such as smart transmit, that you do a lot of real-time computational to optimize signals. We talk about technologies in this announcement about AI apply -- artificial intelligence apply to modems. So you have decisions based on how our signals are. Those things are highly differentiated for Qualcomm. And unless you have the whole thing, from digital to the antenna, it's difficult to replicate. That's the reason we use 5G as the entry point for RF front-end business.

Okay. Great. So we've got -- I just -- we've got 8 minutes left. I want to remind the audience that you can ask questions. I've already got a stack of questions here, Cristiano. So I may ask you a couple of those just to give the audience a chance here, too. One of the ones -- this comes up with investors with us a lot, too, is Apple and in-sourcing. I'm sure you hear about this a lot. Maybe talk to us a little bit about the risk of that. How do you see it? How would you frame that up for investors?

Look, I will be worried if I didn't get the question. I get it every time. So I'll tell how we think about that. In what we do for a living is modem. That's like the #1 thing for Qualcomm. We do many other things, but that's our core competence. And the simple answer to the question, as long as we continue to define the pace of innovation of cellular modems in the industry, there are always room for Qualcomm. So that's how we think about it. Now I believe that this is not new news. We have always had customers, especially if you have scale, to design their modem. And we're just at the beginning of this relationship with Apple. We kind of restored a relationship. We have a multiyear agreement with them. We're just a very first phone, the launch, we have some years to go. We like about the results of our joint work is just the phone speak for itself. And the way we think about it, if they succeed in doing their own modem, there's always going to be a room for advanced technology modem and probably more than one supplier. That's how we think about the relationship with Samsung. We don't make it our business any heroic assumptions that they are not going to succeed, and we are going to be the sole supplier. On the contrary, we also have competition in the sector. But we think that as long as we continue to drive the road map forward, we're now well positioned to be one of the suppliers of Apple, and it's really no different than our relationship with Samsung today.

Right. Got it. Just a kind of a hybrid relationship probably over time. Another question I've got is, if you were to isolate new products that you know about, we don't know about in the fall, do you have any content increased expectations for new product launches coming this fall?

We will continue to execute on this 1.5 metric, right? I think that is driving a lot of content increase for Qualcomm, which is higher value solutions to the 5G and the RF front-end. As the 5G transition continues, we said that we ended the year in 2020 at the high end of our guide, 225 million 5G smartphones. We're projecting north of 500 million in 2021. And then the 1.5 multiplier applies to that. And we continue to feel good about RF front-end. We see new bands get added. We see expansion into the 4G area. So those are all opportunities for more content, and we have to track for the next wave of design launches. Like one thing that I think was probably misunderstood in our business, versus some of the analyst expectation is their seasonality change because we have one large U.S. customer now. But even if you look for the Android conversation we had, there's a number of new devices launched through the latter part of the year. And there are always opportunities, especially on the RF front end.

Okay. I want to make sure -- we've got a few minutes left. I want to make sure we get to ARM-based CPUs and NUVIA, because I think that's an important topic for you guys as well. I guess the way I would frame this is the M1-based machines that Apple's launched are -- the performance of those is off the charts. We expect it to be good. It's probably better than we expected. I would think that puts a lot of pressure back on ARM designers like you, potentially, to provide something to the PC industry beyond Apple. Just curious where that stands? What does NUVIA tell us about your road map for CPUs that could be applied to PCs? Do you have anything available in the relatively short term? Or does NUVIA kind of mark the start of an effort for maybe having something a couple of years out?

Look, I think what you're seeing from Qualcomm is a very consistent behavior that we have over the years. I'll point you back a little bit to the past, right? When we moved from 3G to 4G, we realized that 4G, you're going to put a computer in your hands and in order to create a smartphone, we need a road map that wasn't what ARM was providing. And we basically built a CPU team, and we delivered first gigahertz-clocked ARM CPU in a mobile device. You may have -- you remember a long time ago the Scorpion CPU because that's what we needed to build on the opportunity. We see ourselves exactly the same space right now. We believe and continue to believe that mobile and computing are going to converge. That's why we started on the journey with Microsoft on Windows on Snapdragon. And we brought that to reality with the Surface Pro X design. The Apple M1 launch just validated that opportunity and started moving the development ecosystem and just say that's very clear, we have now a computing opportunity for a full conversion from mobile. And we needed to develop a CPU to have a leadership position in that. Then similar to the decision we made back then, that's what drove the acquisition of NUVIA. And we're so excited about that because the reaction from the ecosystem has been incredible. If you look at what happened when we announced the NUVIA acquisition, every single android OEM endorse our move for a premium smartphone with that exception of Huawei because we don't have a license, even Honor was there. And every one of them see that opportunity to further differentiate in premium smartphone is I think we raised the bar for our competitors there. And then you have from Microsoft in Google plus every PC OEM endorsing our entry into that PC space for high-performance CPUs. It's a very big opportunity for Qualcomm. I think the Apple M1 made that real and understood. We started it with our Windows on Snapdragon. Very excited about that. And you're probably going to hear from us, we have to close on this acquisition, with products in the future. So we're happy about that.

So how many incoming calls did you take from PC vendors after that M1 launch?

We have been busy. Road map discussions at all-time high.

Right. Right. Right. Okay. Let me just finish with IoT. IoT has been a really strong point for you guys through the downturn. I think every single one of us has probably upgraded our house Wi-Fi by now. How sustainable is that strength do you think? I know long term, there should be demand, but do you think we'd go through any kind of a demand downturn or normalization as we reopen?

No, not really. And this is one that is good to talk about the big industry trends. And I'll walk you through a few of them. So one thing, obviously, it was -- and you just mentioned about this is the enterprise transformation in the home. That is driving a lot of networking aspects. There's a lot of connected IoT devices in the home. But the other one, we saw also payments. Paper money gone during the pandemic. So what happened is a massive acceleration of retail, digitization of payments, points of sales. Then the other one that we're seeing, and that's a bigger one is companies sent everybody home, connect their people. But then they realized they needed to connect their assets. Their assets were not connected. So this whole broad digital transformation acceleration is driving a lot of IoT. We see a lot of activity with industrial, robotics, and I think that will have a very long ramp. And the way I'll summarize that to you is, it would, in general, we have a new technology like a generation of 5G. It takes about 5 to 10 years for the industry to kind of understand the potential. What the pandemic did, in about 2 quarters, ready or not for telehealth, you're going to have telehealth. Ready or not for remote education, you're going to have that. Ready or not to connect your assets when there are people working from home and they have to log in into the labs, you're going to have that. That is driving an acceleration. I think that demand is sustainable, it's going to continue to expand to many other industries. And we like because it's not only a diversified business, there's a lot of things in their IoT bucket. But it's also one that is likely to be very stable. Is not subject to the ups and downs that we see on mobile industry cycles. And that's one they have a much longer rollout of technology similar to auto.

Right. Right. Great. All right. Cristiano, well, we're out of time. We're a little bit over time, actually. So thank you very much for joining us. Great to see you. Maybe we'll see you in person someday, again. And thanks, everyone, for joining.

Thank you. A pleasure to be here, Rod. Good talking to you and look forward to see you in person as well.