QUALCOMM Incorporated (QCOM) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks for participating in the Canaccord Genuity Growth Conference. My name is Mike Walkley. I'm the communications, IoT and security analyst for Canaccord Genuity and really excited to have Qualcomm's CEO, Cristiano Amon, for a fireside chat conversation today. For participants in the audience, I will do my best to include questions. So please type questions in as you're watching when they come to mind, and we'll do our best to cover them. Cristiano, thanks so much for joining us today. It's always a great pleasure to speak with you. And I hope you and the Qualcomm employees are safe and healthy.

So just to jump right into it, part of our thesis on Qualcomm's stock and what we just talked about is I think if Qualcomm continues to deliver expanded QCT margins and then shows the diversifying revenue growth as evidenced by RF IoT and automotive, that represented over 40% of revenue in Q3, I think the multiple of the stock is set to expand and consistent with our buy rating. Maybe to start off today, Cristiano, as part of the revenue diversification strategy that you really helped do as you were running QCT, and now that you're a CEO, maybe we can just start with the nonsmartphone part of the business and let's just jump right in maybe to the IoT business. That's a business that grew an impressive 30% sequentially during the June quarter and 83% year-over-year. Can you share with investors kind of the growth drivers of that business?

Absolutely. I think, first of all, Mike, good to see you and happy to participate in this conference, and I appreciate the opportunity. We -- one thing that you said, it's 100% right, the way we see it. I think the company is diversifying very fast. We have an incredible opportunity. There's demand for Qualcomm technologies across virtually every industry. I agree with you that we have an incredible opportunity, even coming up in our Analyst Day to rerate the company. The company is a lot more than mobile right now. And I -- your question on IoT is spot on. Not all IoT is created equal, as you know. And we're very happy. We have a very diversified IoT set of revenues. It is growing at a very fast rate, as you pointed out. And we have a number of opportunities there. The way I will simplify what our IoT segment is, and if you look up the digital transformation that is happening at a very fast pace across a number of companies and I'm sure the market buys and believe on the growth of the hyperscalers in the cloud, you believe they're the future cloud-based economy. So if you look at the growth projections on the hyperscaler, there's an enormous amount of devices to get connected and data that goes to the cloud. We're the company enabling the other side of the data center. So this intelligent connected edge, this is where our IoT segment is. And we think about Qualcomm, not only a company that owns the mobile space, but we have an incredible opportunity to own this intelligent connected edge. And within that IoT segment, we see a number of growth factors. First, a complete upgrade of broadband at the edge. This is happening at the home, at the enterprise, it's driving our networking business, mesh, transition to Wi-Fi 6, in the future, Wi-Fi 7. We saw the first wave, which was the transformation of the home. And now, we're seeing the second wave, which is as people go back to the workplace and the workplace look like hoteling and needed to have a lot of capabilities for telepresence, that is changing that as well, we see the networking to continue as 5G gets deployed by the enterprise for a lot of private networks. And that's all happening within the networking. And we were able to create a whole new business. For the very first time, cellular technology can be an augmentation of fiber. And with the extension of 5G broadband, especially sub-6 and millimeter wave, we just broke the barrier of 10 kilometers range with millimeter wave, we've seen enormous opportunities within the landline side of the carriers as they continue to upgrade broadband. So that's driving a lot of the network opportunities. The other ones on the consumer side, we're seeing devices from one end of the spectrum. We're becoming the alternative to the Apple ecosystem on everything related to earbuds. We -- Snapdragon Sound, we have now over 50 agreements, which is incredible in a short period of time. And you think about a lot of people on their phone and their PCs, how they think about audio. And on one hand of the spectrum, you have companies like Bose and others using our technology, and then in the consumer IoT, go all the way to Peloton bikes. So it's very diversified. It's about bringing mobile technology to a best array of consumer devices. And then industrial, that is where I think the most exciting part is of our IoT segment, which is digital transformation and enterprises are connecting everything, first, to the enterprise, connect their people, and now they're connecting their assets. We've seen that happening at retail, oil and gas, manufacturing, health care, with a lot of intelligent connectivity, highly reusable for mobile. It is accretive to the QCT revenues. It's very diversified. We used to count Qualcomm customers on 2 hands, and then one hand, when we saw the concentration of mobile. We have over 13,000 customers now within the IoT segment. And we're very happy about that opportunity, and we want to be the company that will own the connected intelligent edge with everything we have on IoT.

Great. That's very helpful. And with that 13,000 customer base, obviously helping diversify your overall revenue mix, how should we think about just the margins for that business given it's a smaller base, but a lot of volume goes through there?

Look, the -- you saw that the QCT margins, I think, continue to improve. And what we like is what we do in outside handsets, and especially in the IoT segment, we have a very high reuse factor on technologies that got developed from our mobile system. And as a consequence, they're all accretive to QCT margins. And we're very happy, not only with the growth rates, those end markets grow at a much faster rate than mobile. The growth rates are similar to what we see on the cloud, and it makes sense. It's just the other side of the link. And the margins are much higher than historical QCT margins.

That's great. I think when people think of digital transformation, sometimes they think of just software companies, but clearly, Qualcomm plays a big role in that, and your IoT business is showing that.

Somebody has to connect things to the cloud.

Exactly. Somebody's got to do the key connectivity. And with 5G coming, there's even more opportunities. One area you didn't really touch on, but I think could be a really strong growth driver within IoT, is how 5G plays a role in mobile broadband. Can you talk about this opportunity and what inning we're in, in terms of that growth driver?

No, absolutely. I will argue that it was a whole new opportunity that got opened up for Qualcomm on 5G that we didn't have before, which as we continue to see the expansion and growth of the mobile market, from 4G to 5G, in that it drove that 1.5 multiplier. On top of this, we see 5G becoming a part of our broadband. And the way to think about this is operators have to lay out fiber. It's not -- it's an expensive proposition. It gets amortized sometimes 7 to 10 years. And now, with 5G, they have the ability to do that in a more economical way, and we're seeing some of the CapEx going into fixed wireless 5G. It's growing very fast. It's a material business right now in QCT. And we have very high engagement. There's probably over 70 devices now launched or in development for fixed wireless access, both across sub-6 and millimeter wave. And we expect that trend to continue. And it's a whole new business we added to 5G, in addition to the smartphones.

Great. And early days, and what markets are you starting to see the uptake of fixed wireless?

It's across the board. It's from developed economies. There's a lot of activity in the United States, especially for rural broadband, but also emerging markets. It's becoming very, very active as well as in Europe. And the way to think about this, Mike, is the pandemic really underscored the value of connectivity, and the working from home or even the new enterprise needs broadband. We -- people want to do what we're doing right now, video. The existing networks in the past was not ready to do that, and that's driving a massive broadband upgrade and is taking 5G to the fixed segment as well, in addition of mobile.

Great. Maybe we'll switch gears. So let's keep moving forward to the automotive telematics and the digital cockpit opportunity. This business now exceeds $1 billion in annual run rate. And as I believe supply improves for autos, given supply constraints, I would have to think this business has some strong tailwinds over the coming quarters to years. I think you even shared you have a $10 billion revenue design win pipeline. Can you discuss the competitive environment as I would think if you're a global auto OEM, shipping cars to like the U.S. and European markets, you almost have to go with Qualcomm's 5G leadership positions? But you know better than me. What do you -- how do you see the competitive environment and the growth opportunity in auto?

Look, I'll tell you, we're super proud, we're super proud of the automotive business. The automotive business probably is like the postcard of the Qualcomm diversification strategy and how transformative our technology is to the end markets. What's happened with the automotive, it's -- we've been -- we have a $10 billion contracted backlog. About $1 billion now is already turning into revenues. And the way to -- the elevator pitch in the Qualcomm automotive story is, if you look at a market cap of companies like Tesla and you look at what happened with the automobile especially with electrification, you have a skateboard chassis, have batteries, and they have a computer on wheels connected to the cloud. I'm oversimplifying, but you get the message. So for all of the other core OEMs, Qualcomm becomes the technology partner with capabilities across all domains. They help them transform their companies and build products that are equal or better than what has happened now with companies like Tesla, which the market is really looking at the value of the opportunity in the future of the automotive industry. We're working with them and connecting the car with the cloud. This is just not about connectivity. You run connectivity. You run applications. There are application processors and AI at the connectivity box. Later, we're going to add Cellular V2X, car-to-car, car-to-pedestrian, car-to-traffic lights, and that's going to create intelligent transportation. That gets connected, what's happening with the in-car experience, the digital cockpit transformation. We see multiple screens, power bar silicon, whether it's the infotainment, the dashboard, the heads-up display, smart mirrors, the rear-seat entertainment, and those things are interconnected. What happens on the telematics, for example, Cellular V2X, feeds into your mapping from the infotainment. You populate the map of the locations of cars and pedestrians and then your dashboard, looking at you with the driver-facing camera, whether you pay attention, which leads to the next opportunity for us, which is an extension of what we're doing, which is ADAS. We think that Level 2+ ADAS is going to be as pervasive as cruise control, airbags and seatbelts. And it's going to drive scale. While full autonomy is going to still take a few years to get to scale, I think ADAS is going to drive scale, and we look at the natural extension of what we're doing. So automotive is a great story for Qualcomm. And we'll continue to probably build on our automotive platform. As for your question about competition, I think, in one way, we compete with everybody or we compete with nobody because Qualcomm is in a very different position. We're really providing a system solution across multiple domains to the automaker, and we want to be the digital partner of the OEM industry.

And it makes a lot of sense, and it certainly seems like you look at the cars from prior years with a -- maybe a 4G infotainment system to future cars, your content has to be going up very nicely. So maybe you can comment on that. I know you want to save some of that for your Analyst Day from prior questions with you. And also, just building on that, the rationale behind the Veoneer bid going on and maybe you can share where you are with that process and what they might add to your portfolio if you're able to close that deal.

No, absolutely. Look, it's -- we're the natural owners of that asset. It's a natural extension to what we're doing in automotive. It just feeds into this whole conversation that we had about having capabilities on all domains and their computer vision stack, which is the Arriver capabilities, fits very well with our ADAS platform. We started a partnership with Veoneer for the computer vision stack about a year ago. And we're the natural owners of the asset. We're very excited about that. I think Veoneer has publicly announced that they are engaged with Qualcomm. We think we have a superior offer, and we're excited about what the future holds. At the end of the day, you should think about Qualcomm being the technology provider of the auto industry as they move to digitalization, and we're going to have capabilities on all domains.

Great. Can I just build on that answer, Cristiano? How do you think about the opportunity over the next several years? You have $10 billion in design revenue, when we know auto manufacturer design wins can take a while to production. But if you look -- for investors, if we're looking out 3 to 5 years from the $1 billion run rate you're on now, what kind of content per car do you see increasing or just revenue growth over a multiyear period?

Great question. 2 answers to your question. I think the first simple answer to your question is we have been winning a lot of designs. And usually, in the auto industry, you win a design a number of years before the car will go into production. I think how fast we got to $1 billion revenue is probably we'll continue to see that acceleration as many of the designs in the pipeline is going to compare it to revenue. And we're tracking ahead of the plan. So we're actually very happy about that. And we'll basically see the automotive business continue to grow as part of the total Qualcomm revenues. Second part of the answer is we have an incredible road map to increase silicon content, incredible. And we're just at the very beginning of that. As I mentioned before, in the telematics business, which has started as connecting the car to the cloud, now you have the ability on top of that to add C-V2X, which is car-to-car, car-to-pedestrian, car-to-traffic lights. We're adding multi-SIM management capabilities, and you have an opportunity to have car-to-cloud services, which it gets built as applications on top of the telematics. The digital cockpit transformation, it evolves with the evolution of the mobile industry. People drive their cars looking at their phone screens. And the reason they do that is because there's more technology in the phone than the dashboard. And that is now in the process of being -- transforming. We started winning all the premium, but we -- now, we see even entry-level cars with the opportunity to create a premium-type digital cockpit experience. That's why we're creating a multi-tier road map, and we see expansion that way. And on top of that, you're seeing some of the entry-level cars, some of the services, they're coming from those platforms, can exceed the profit of selling the car. Think about with 5G and in a different digital cockpit, a car company will be distributing gaming content with streaming of games, we don't need a console, as well as live TV as well as advertisement to ride-sharing. So there's a lot of opportunities there. We see getting from hundreds of dollars of silicon, to thousands of dollars of silicon, especially as we add ADAS to the platform.

That's great. And clearly, another business model, I have to imagine, is accretive to the overall company QCT margins. I'm going to switch gears to RF because I can already see in the queue here from people online a lot of RF questions. So you, on your earnings call, you a made bold prediction that Qualcomm is going to become the leading mobile RF supplier by revenue. Most doubted at your Analyst Day in 2019 that you would achieve this 20% RF market share, which seemed a bold statement at that time. Can you share with investors where you are relative to that 20% share today? Because I think your goal was to hit it by next year. And then what gives you the confidence to be the #1 share in RF, particularly with how well you're doing on these high-end 5G smartphones?

Yes. No, thank you for the question. We are on track to become #1 in wireless. And it's amazing. There's still nonbelievers out there. Maybe we're down to one. Maybe we're down to one nonbeliever, I guess. But the growth of RF, it's incredible. It's been tracking our growth in 5G. We have now a very successful strategy divided in 2 approaches. One, we win at the component level across every one of the components of the RF. We're now setting the benchmark of performance even on the higher frequency filter modules. And we win at the system level, thinking about performance more than plus RF, which is an OEM. If they want to do that, they have to work with a number of independent companies and do their own engineering or they can get the modem plus RF with a lot of capabilities from Qualcomm. And that has been the key differentiation. In one interesting way, the RF is now differentiating the modem. And we expect that to happen because 5G is about managing frequencies and multiple radios on the devices. So we're very happy about that. That has opportunity to continue to expand as we take RF to other markets, as we bring connectivity beyond phones into our auto and our IoT segment. We're taking RF front end with it as a growth opportunity. And we're ahead of our projections that we made at the last Analyst Day, and we're very happy. Designs continue to increase. And the people that don't believe, they can already see the tier downs and see the content. And the majority of it, sub-6, is not millimeter wave. Majority is sub-6.

I think that's key to point out because a lot of people just thought you were a millimeter wave-only type RF company. And clearly, the tier downs are showing other. And I think another thing, just maybe you could touch on, just on the strength of your RF portfolio. I think you've shared that you're even winning some design wins that don't even use your modem, just showing the strength of your RF. Can you maybe expand upon that a little bit?

Yes. I'm happy to talk about the evolution. We started -- we knew that we needed to get -- as we look into the RF, as we started thinking about this, we knew we had to go to a process to acquire all the technologies, build a highly differentiated platform. And we use 5G at the entry point. And as we enter with 5G, we saw a lot of traction, the designs. As our solutions get validated, the OEMs are seeing the benefit, and proven in the marketplace, to scale. They're starting -- expanding that in 2 areas. One is 4G sockets. So we're winning 4G sockets now, in addition of 5G. You had some confusion in the marketplace because we were showing growth, and our competitors were also showing growth of 4G and the market didn't know what was happening. But now we're growing into 4G as well. The other one, we started to win RF without a modem into some of the platforms that have a competing baseband from Qualcomm. And I think this will just show what I said to you earlier. We're winning at the system level. We're winning at the component level. And it's a great opportunity for Qualcomm. And as we noticed, it's about the same percentage of millimeter wave content. It's in the order of 20-plus percent. If we had a lot more millimeter wave in the market, we would need a bigger boat.

Yes. And before, maybe just building off that, just how do you see millimeter wave? And with China trialing it or using it for part of the Olympics, what could happen maybe in that market to really jump-start a more global millimeter wave?

Look, we're bullish about that, Mike. Of course, we have to see how it will gain scale. But here's what's happened with millimeter wave. We had said that, a number of times before, at the end of the day, at the end of the day, every 5G system, it's just a matter of time, will have existing spectrum converted to 5G with DSS. You have the mid-bands and you have millimeter wave at the top. It's just a matter of time. But we talk about what -- in the Mobile World Congress, we see now 150 operators doing pilots, investing or commercially launch millimeter wave. And we have our eyes on China. So where we are right now is China Winter Olympics is going to have China Unicom. It's going to have a number of use cases using millimeter wave capabilities, the higher bandwidth of millimeter wave, the low latency, the ability to create immersive experiences with cellphones as well as new type of devices. And the OEMs are designing phones for the China market with millimeter wave for the Winter Olympics. So that's on track. That's progressing very well. The key question is once it gets started and the OEMs design those devices, where they can expand to the broader China. And of course, if that happens, it's an incredible upside to the Qualcomm model. Remember, when we talk about our 5G 1.5 multiplier, that assumes, the millimeter wave, it's concentrated in markets like the United States, in Japan and then Korea, coming up with some of the high-end premium devices, with everything else are fixed, and that's the 1.5 multiplier. If China goes millimeter wave and takes that to scale, when the China ecosystem takes it to other markets as well, we have a much higher multiplier to talk about it. And that's why we're so excited and so focused to get millimeter wave deployed.

Great. We're going to switch gears. We're halfway through our time already, and we haven't talked about the smartphone market, but under your leadership, you certainly -- at QCT, you certainly helped broaden the revenue base to more than just smartphones and a lot of investors seem to still focus on. Now that you're CEO, you get to oversee all that good work and hopefully continue to put up good numbers while you're there. But let's just switch gears to the 5G smartphone market opportunity. I've covered Qualcomm a long time, and it seems like a healthier high-end market than we've seen in a long time, healthier in terms of, one, your share; and two, there's just more customers to sell into. Can you talk about how Qualcomm is doing so well in the premium to high-tier market? And then kind of a second leg to that question is just that $10 billion SAM that you've talked about with Huawei, where -- what inning do you think we are in terms of penetrating that $10 billion new SAM opportunity for Qualcomm?