QUALCOMM Incorporated (QCOM) Earnings Call Transcript & Summary

Hello. Welcome, everybody. I'm Joe Moore. Happy to be here with Akash Palkhiwala, who is the Chief Financial Officer of Qualcomm. Thank you, Akash, for joining us.

Thanks for having me, Joe.

So I wonder if we could just start out, it seems like one of yours and Cristiano's focus areas has been this kind of revenue diversification or maybe just expanding avenues for growth. And I want to get into some of the specifics of what you're doing in automotive, in IoT and RF. But just generally can you talk about the philosophy and kind of what's driving your decision making around this? I don't know if it's diversification effort is the right word but around the expanding scope of your business.

Yes. So what we've seen over the last couple of years, and especially with the pandemic, we've seen an acceleration of digital transformation happening. And it's really a start of something much bigger that's going to -- we think, going to be relevant over the last next several years. And as a result of that, we're seeing everything trying to get connected to the cloud. And so this is true not just for cars but also various segments within IoT. And you can pick your industry of choice, whether it's retail or transportation or utilities, manufacturing. And when you see that trend happen, it is something that works in our favor. It automatically demands technology that have been created for the phone because phone is the first device where everything is connected to the cloud. And so you're seeing all these devices that are asking for connectivity, whether it's 5G or WiFi. They need AI at the edge. They need processing. And the company that we think is best positioned to provide that technology is Qualcomm. And so we feel like we're in a fortunate place because the industry is transforming in a direction that favors us, and so we're seeing demand for mobile technology. And the cars, we're seeing demand in various IoT end segments. And we feel like this is at the front end of a transformation -- digital transformation change that is happening that will carry us and grow our revenues for the next several years. And then you're seeing the benefit of that show up in our fiscal '21 results, but we feel like there's a long way to go.

Yes. And you mentioned this, but I mean 5G technology is kind of disruptive across more than just smartphones. It gives you kind of a wider breadth, a longer tail in terms of the types of things you can attack. How does that change things? The fact that you guys are sort of the dominant 5G baseband vendor, how much do you think that opens up new opportunity for you?

Yes. Certainly, if you think about how 5G was designed, following up on 4G, it was primarily designed for the phone. It was designed for more bandwidth and faster data rates. When 5G was designed, those were still key requirements, and you're seeing the benefits of that in 5G performance. But it was also designed for things that 4G failed to have or did not have, which is very low latency, very high security and the ability to change the mix of all these vectors to get different performance metrics that are suitable for various different applications. And so as an example, if you think about health care and the need to connect various health care devices to the cloud, security becomes one of the key applications, and it's very important that we can do that in a secure manner. Well, 5G is inherently designed to be more secure than previous technologies. The second example is cloud gaming. Clearly, that's something that companies like Netflix and Microsoft and others are investing in aggressively. For those technologies as well or for those applications, one of the key things that's required is very low latency, especially for gaming. You're going back server and coming back in a very fast very fast manner, and it's something that 4G could not handle. It's something that even WiFi cannot handle. And 5G is perfectly suited to handle the low latency. And so when you think about how 5G was designed, it was designed for these new use cases, for new industries, for new applications. And that's the thing that's exciting to us because when you -- we're going to see a lot of 5G in phones, and we're at the front end of it. We still have several years to go in terms of growth within phones. But when you combine it with the comments, the first question that you asked and the digital transformation that's happening, you combine that with the power of 5G and the advantages 5G brings, the 2 combined, just a tremendous opportunity for us in other areas. And that's why we're excited that there's a need in the market and then there is a technology that meets that need, which is 5G obviously. And then that's going to help our financial performance.

Yes. That makes a lot of sense. So maybe, if you could talk about, we can go to the QCT business a little bit and talk about your sort of chipset business. And maybe before we get into some of the specifics, if you could just talk about the overall supply chain environment and obviously not unique to Qualcomm, but there's a number of constraints that you guys are seeing, that the whole industry is seeing really across front end, back end. Like how are you guys managing through that? And where are the constraints potentially most severe?

Yes. So as we've said on our earnings calls the last couple of times, we're seeing broad constraints across the board, across all technologies and then front end and back end, as you said, Joe. And also, it's not something, as you said rightly, is not specific to Qualcomm. It's just broad industry impact that we're seeing. So our financial performance has been great, but we would have done even better if we have the supply that we need. What we've been doing as a company, obviously, over the last several months is putting in place actions that relieves our supply constraint as far as possible. And as Cristiano mentioned on the call last week, we expect a lot of the constraints to improve materially for us by the end of the calendar year. And it's really a combination of a couple of set of actions that we have taken. Over the last year, we've focused on creating dual sources for several of our chips. And this is not just for the modem and the application processor, Snapdragon chips but also for RF chips also for PMICs, codecs, where we are moving our parts to foundries where there might be additional capacity available. We're moving it to nodes where there might be additional capacity available. And that allows us to take advantage of the capacity that foundries might have. A key thing for us is scale, right? When you're the same size as Qualcomm is, it allows us to leverage our relationship with the foundries to improve the situation as far as possible. I mean we have a strong relationship, obviously, with TSMC and Samsung, but we also use GlobalFoundries. We use SMIC, S-M-I-C; UMC, all the other foundries. And so that has allowed us the ability to leverage all of them, has allowed us to address some of our concerns. The second set of actions we have taken is capacity that was previously planned for expansion in certain nodes. We expect that to come online towards the end of the calendar year. And again, this was previously planned already being put in place by our supplier partners. And so as that comes online, that is going to tremendously benefit us as well. And then maybe the last thing I'll say is in terms of action, the company has taken within the supply constraints that we have, I think we've done a good job of trying to steer the mix of what we are building towards the strongest margin products. Within mobile, we're focusing on premium and high-tier but then also focusing on IoT and auto, where we can. And so being able to optimize the product portfolio within the existing supply is also something that has helped our financial performance.

Yes. That makes a lot of sense. Okay. Maybe if we could start talking about some of the pieces. And I guess, first of all, I appreciate you guys kind of giving us the clarity into RF, autos, IoT, sort of the various subsegments. Maybe we could start with RF a little bit. That business has more than doubled from last year. I think it's ahead of your sort of multiyear targets already above $4 billion business this year. Can you give us some color on the breadth of that business? Can you talk about the growth drivers of RF? And do you expect to be a major player outside of your own baseband design wins?

Yes. So on the RF business, we're pretty proud of the journey we've been on in that business. We -- as you know, we acquired RF360 from TDK a few years ago. And at that point, that asset was maybe the fourth or the fifth largest RF player in the industry. Since then, our focus has been on really creating the strongest product portfolio. I mean just like handsets, we think of having the strongest product portfolio as the basis for the business going forward. And so we've invested ahead of revenue, obviously, for that market, and we invested in new technologies that we think were needed to address some of the expansion opportunities that were coming up. So fundamentally, as we go into 2022, we think that we have a very broad product portfolio, and each product individually by itself is competitive in the marketplace. So that's our starting point. Second is our relationship with the OEMs. We obviously -- for all the handset OEMs, we are a key supplier to them. We have very strong relationships with them. And that channel is important and powerful, and it allows us to leverage the channel to expand our business opportunity there. So that's the second part of our RF front-end success. The third is engineering-wise, how we design the products is really we think of it as an end-to-end design that starts with the modem and ends at the antenna. And that allows us to focus on performance metrics that some of our competitors who only have a modem but don't have RF front end or our competitors who have RF front end but don't have the modem cannot focus on. And so that end-to-end product leadership, product development approach is very critical in defining our position in the marketplace. So all of this put together has gotten us to this point where we think we are one of the largest players, if not, the largest RF front-end player within handsets. And really, the question is where do we go from here. And maybe I'll outline 3 or 4 key growth drivers going forward. First is, as 5G goes into all the other volume of handsets that it has not yet penetrated, we will continue to have an advantage with our RF front-end solutions. One of the key drivers for our RF front-end growth has been adoption of 5G in the premium and high tiers. And as that happens in lower tiers, we feel like we're going to have an advantage in terms of expanding our position. So that's the first one. Second is when you think about 5G outside handsets going into telematics within cars, our plan going forward is to offer the 5G RF front-end solutions to that market as well. And so looking forward at our design wins, we are very confident that that's a growth opportunity that's very high probability for us, and we'll be able to grow into. The next one is as 5G gets adopted in IoT and you're going to see 5G get adopted across, just based on the discussion we had earlier in the conversation, across various different verticals, manufacturing, transportation, eventually enterprises. And when that happens, you're going to see a whole new set of devices demand RF front-end technology. That will be another advantage for us. And then the last one is WiFi. I mean it's a market that we are obviously one of the largest WiFi chip companies, but we've not yet focused our RF front-end development efforts on WiFi. That's one of our next target areas. And so we do feel like that's going to be another area where we'll be able to grow and grow RF front end. So kind of stepping all the way back, we're in a great position. We've come a long way. We still have several more growth curves to go through, so pretty excited about what's in front of us in the business.

And I apologize, by the way, I shut off my video because I have not the best connection and I keep losing -- I keep cutting out. So I want to make sure I'm not [indiscernible]

No worries. No worries.

And maybe in the context of RF, you could talk a little bit about millimeter wave and what the opportunity is there and how you see that progressing across geographies.

Yes. Millimeter wave is a technology we are very excited about. And we continue to have the debate with people in the industry, investors as well as to how broadly it's going to get deployed. Our view is eventually millimeter wave will be very broadly deployed. It's just physics really because you're going to run out of spectrum in sub-6 across all geographies. And when that happens, we're going to have to deploy millimeter wave to increase bandwidth because we don't see the need for bandwidth, increased bandwidth going away anytime soon. And so when you draw a curve of need for increased bandwidth, you combine that with a curve of available spectrum and there's an intersection point where sub-6 is just not going to be able to offer up the spectrum -- amount of spectrum required for wireless networks. So we see millimeter wave being broadly deployed. It's going to be focused on certain kinds of deployment. It's kind of -- we think of it as a layered cake, where millimeter wave sits at the top. And so for dense environments, for hotspots, for enterprise and manufacturing environments, for private networks in ports as an example, we see several applications where millimeter wave is ideally suited. It gives you the data rates, the latency, the security that those applications need, and we eventually see millimeter wave being broadly deployed across everything. Now from an RF front-end perspective, we have a very significant advantage. I'd say most, if not all devices that support millimeter wave today use our RF front end. And so we're excited that as millimeter wave gets more broadly deployed, first, the RF front-end market will expand; and then second, within that, our competitive positioning will become stronger. And so both of those reasons, we're excited about what's in front of us there.

Okay. Great. Very helpful. And then maybe shifting gears to talk about autos. It's a $1 billion business for you guys growing 80% last quarter. Can you talk about the aspirations in cars? And then maybe touch on the Veoneer announcement last week, the proposed acquisition there and how that fits into your strategy.

Sure. So the way we think about cars is, in addition to the physical chassis in the car, there's the concept of a digital chassis, which requires several pieces of silicon. It obviously requires a bunch of software on top of it. The first is telematics. And telematics, just as cars get connected and we're seeing just an incredibly vertical ramp of connected cars, you're going to need 5G to connect all the cars, 4G today going to 5G tomorrow. And that just allows us to take the technology we've created for mobile and make it available for cars. So that's the first one. The second opportunity for us is digital cockpit, which is the dashboard within the car, the rear view mirror, the side view mirrors, the rear seat entertainment, all these screens are being transformed. They're going from a monochrome, black and white display, what it used to be to really becoming a smartphone. And as those devices become smartphones as video and audio quality and display processing, AI, all those things become more important in those devices, we have the ability to take our mobile chips and mobile technology and bring it to those markets. And so we think that's the second market that's of tremendous interest to us. The third is ADAS, and it's an emerging opportunity for us. We obviously have all the right chipset technologies to pursue that market. And so that's been our core strategy, is leveraging silicon from handsets into expanding into the ADAS market. But then beyond that, what we think would also be additive to our business opportunity is to have a software stack for perception for safety that we feel the Veoneer -- the Arriver portion of Veoneer would bring to the business. So very, very important for us to be able to take the Arriver software that's a part of Veoneer and take that perception safety software combine it with our silicon and offer an integrated solution to carmakers. So those are really the 3 parts. It's telematics. Second is infotainment or digital cockpit, and then last one is ADAS. The business today is primarily telematics growing into digital cockpit and infotainment in terms of revenue. When you look at design wins, those are the 2 that make up the $10 billion design win pipeline that we've talked about. The opportunity for us is significantly beyond that, and it really comes through those first 2 areas expanding but then also ADAS expanding. Maybe the last thought -- maybe last 2 points I'll make is, as I mentioned in my script, we had set out a revenue target at Analyst Day last year. We think like -- that we are significantly ahead of that target, so very happy with that. And then also when we look forward, the design win pipeline and the opportunities in front of us, we think position us to continue to grow auto for the next several years. This is, again, not a 2-, 3-year growth curve for us. This is a 5- to 10-year growth curve for us. And it's a lot more predictable than the existing business we are in, and it's a lot more longer term. So we really like how it also mixes in our portfolio. It leverages the technology that we have, but it also gives us long-term growth and more predictability than our existing business portfolio. And those are all attributes that we like.

Yes, that makes a lot of sense. And I think the value proposition of the Arriver business makes a lot of sense. But I guess where does your aspiration carry you? I mean you're acquiring essentially a Tier 1. Does that change the nature of what Qualcomm does? And how do you think about that with regards to working with other Tier 1s besides Veoneer?

Yes. So of the asset that Veoneer has, what we are primarily focused on is the Arriver asset, which is the software stack. We don't plan to be in the Tier 1 business. And so that's something that is not going to be a part of our portfolio once we are on the other side of the transaction.

Yes. Okay. And then within automotive, I know you've sort of talked about this $10 billion backlog. I guess is ADAS incremental to that, you think? And I get questions about how you define that backlog. Is that over what time frame? And how are you sort of judging customer forecast? Or are you discounting things that are further out? How does that $10 billion factor in?

Yes. So it really -- the $10 billion is driven by the first 2 markets we talked about. ADAS would be incremental, both the hardware piece and the software piece. It's really driven by telematics and digital cockpit or infotainment, whatever term you use for us. In terms of -- the second question, Joe, was related to the growth?

Yes. No, just how are you measuring that $10 billion? I mean is that -- are you -- is that entirely from sort of what customers are forecasting? Are you discounting at all? And is there anything that you're sort of probability adjusting that you think one is in also -- yes.

We're definitely looking at the total size of the market and forecasting based on it. I mean, as I'm sure you know that if you look at every customer's forecast and you add it up, it usually adds up to a multiple of the market size. So we're definitely calibrating it to what we think the market is and what we think the real opportunity is. And then in terms of timing of that revenue stream, if you -- we haven't specifically said -- talked about the timing, but if you just kind of generally step back and think about the industry, typically, when you win a design, the launch happens in about 3, 4 years. And a car has a new model and the car has another 3, 4 years of life after it eventually gets replaced by another model. So when we think about our design win pipeline, it's more in the kind of that time frame that I just outlined for new cars. And it's just a point in time that you're seeing $10 billion today, right? Two quarters ago, it was $8 billion. Last quarter, it was $9 billion. Today, it's $10 billion. I think one of the key messages that we'd hope investors have taken away is that our design win pipeline is really accelerating. This is not a mature design win pipeline. We feel like we're really at the front end of it, and ADAS is going to be tremendously lucrative when that comes in. And so they'll be very quickly additive to this pipeline.