QUALCOMM Incorporated (QCOM) Earnings Call Transcript & Summary

All right. Good. I guess it's still morning for us out here. So thanks, everybody, for coming back. We'll get started with our next fireside chat. We're very happy to have Nakul Duggal, who is the group GM of the Automotive and Industrial business at Qualcomm. Qualcomm as you all know, is heavily into the handset side of things, but is over the last 5 years plus is heavily invested on diversifying their business, and Nakul is the head of some of the biggest portions of that. Probably, at least in my estimation, I don't think the company has really said it, but probably runs somewhere upwards of 1/4 to nearly 1/3 of the company. So we're very happy that you could come up.

Thank you for having me.

So why don't we jump into a little bit about the diversification strategy at the highest level. How are you -- and we'll dive into the individual businesses here in a bit. But at the highest level, the goal to diversify, the resources you're given, the strategic imperative, all of that, whether it's the Board or Cristiano or Akash, how are you tasked for running that?

So thank you again for having me. I've been with the company for -- I celebrated 30 years in June. So I understand the history of the company. I understand how we invest. I understand how we build ecosystems. One of the things that became pretty clear as we were focused on diversification about 10-ish years ago was what is the value of the technology stack that we build in markets outside of our mainstream markets. And what became pretty apparent was our understanding of markets outside of our core mobile business was fairly limited. The approach that we took when we were starting to build out our automotive business was -- how do we build a much more intimate, much more proximate business that is aligned around the needs of the auto industry. And this was a decade ago. So automotive was obviously very different from what you see today. And it allowed us to appreciate the complexity involved in quality, in safety, in supply chain resilience, in the long life cycle that is required, the software differences. And we have since taken automotive as a business that we manage pretty much completely independent of the mobile business. So it gets not only the resources and the investments needed, but it's a much longer view on how are we going to see success there. The approach that we took in automotive helped us in formulating a lens through which to look at other markets like industrial, markets that have a slower-moving cadence, but obviously much more committed to the transformation that then comes along. And so those approaches have certainly helped us cement the way that we then invest as well. And then the bets that we make, whether M&A or strategic partnerships, that's all part of that same strategy.

So let's dive a little bit into the automotive side of things. I think you guys are doing -- you're on track for nearly $4 billion in revenues in this calendar year. You're a bit ahead of what your targets were. And I think over the last 5 years, the CAGR of that business has been about 40%, incredibly impressive, especially at a time where many of the auto semi companies are having some challenges just cyclically. So talk a little bit about what has driven that growth looking backwards, and then we'll get into some of the forward growth drivers as you drive towards your goal of having, I think, $9 billion towards the end of this decade.

Yes. So I think one thing that automotive requires apart from everything else that you have to do is a tremendous amount of predictability that the supplier has to provide to their customer. It's become a very complicated market in the last 5 years or so. And because of all of the complexity that automakers already deal with, electrification, geopolitics, supply chain resilience, when they look to us, one of the things that they find is a global player that invests heavily in software has a very broad portfolio of semis -- is able to think 5 years out, make those investments on behalf of the automaker. And that just makes us a very stable, reliable supplier that is focused on the transformation that's going on in the automotive space, central compute, SDV, driver assistance, automated driving, all of that. And a lot of those bets were made by automakers 5-plus years ago. So as they make those bets, they look at what bets are working, which ones are not. I think the revenues that we delivered a year in advance are really an indication of winning at the right time, those programs essentially launching at the right time. And frankly, being very broad-based. We supply into pretty much every automaker globally. So we are not as affected by changes in the type of drivetrain that is selling or what happens in one part of the world versus the other. We are fairly insulated to that.

So how would -- if we just took the $4 billion in revenues now and the $9 billion that you have as your target, I think, at fiscal '31, talk about how the mix changes within that. And I know you have even just to keep throwing around large numbers, $45 billion design pipeline, I believe. And how important is that transition from probably the connectivity side to the ADAS side, et cetera?

So I think connectivity is a very predictable -- I guess, it's the most predictable part of the composition of the revenue. It's mostly our modem business, the RF business, some WiFi attach alongside it, some Bluetooth, some GPS. We have a power line communications business. The remainder of the business is actually very proportionate to the rate at which cars are moving towards central compute. -- bringing in a tremendous amount of integration of a number of different ECUs that were previously discrete and disparate. Now these are all getting integrated. And it's happening across multiple automakers and multiple generations at the same time. So to give you an example, there are more conservative automakers that are launching products that we introduced in the 2020, 2021 time frame this year on a very large global footprint. So they will essentially take some of our Gen 3 cockpit products and deploy them across their global fleet. And those will last for 7, 8 years. And then there are others who are taking our Gen 5 platforms, which we only sampled beginning of beginning of '25, and those will go SOP first quarter of '26. And the -- I won't get into the content delta, but the performance delta between Gen 3 and Gen 5 is probably 15x. So we have this very interesting trend that is now happening in the auto industry where everybody is moving towards their next-generation architecture, but the rate of adoption is not the same. So we benefit from being able to see really fast-moving companies adopt new technology and rush to compete, while at the same time, we have a very stable, very predictable foundation on top of which previous generation silicon is getting deployed. To add to that, as we start to see ADAS wins coming in and ADAS on the silicon side really started to scale for us early part of, I guess, middle of '24 is when we started to actually get designs to scale up with our Gen 4.5. So we started to build our ADAS silicon about 3 years ago, and we have announced 20 OEMs. This number will just keep growing because everybody is going to start to kind of move in that direction. Because architecturally, we have aligned the cockpit architecture and the ADAS architecture, it allows automakers to significantly save in software cost. They have to build once and then they can deploy based upon the workload that they have. So you will see a lot more of the compute concentration over the next 5 years. And I think it will be a combination of high-performance, high-value compute with a foundation of a lot of the legacy programs that we have won that will continue.

So in some ways, it's analogous to Qualcomm going from a connectivity leader to a compute leader across the entire company, whether it even be in handsets, the same thing is happening in automotive.

I think that's right.

So is the majority of -- and you might even have had charts in this at your last analyst meeting, so forgive me if I didn't recall. But the majority of the $4 billion today, is it safe to say, is more the connectivity and cockpit. And then towards the $9 billion side, the ADAS side will be a significantly larger portion than it is today, and that's the direction of travel.

Yes. I think -- and I think you will start to see a blend of ADAS and cockpit just in terms of architectures. We introduced the Flex architecture. And so that blends it. But yes, I think you will see a lot more of the compute portfolio in the next 5 years.

So when we think about the ADAS side of things, what's the primary differentiator that Qualcomm has?

So I think there are a couple of things. In markets where the ADAS stack is well understood and you know what you're looking to deploy, whether it's urban Navigator an autopilot or highway navigator an autopilot where the number of sensors are well known, the stack is fairly robust. We excel at being able to then optimize that for silicon, optimize it for power, optimize it for performance. That is something that is there in the history of the company. It's there in our architecture. And so that's where we are really able to extract a significant amount of performance on a per millimeter square basis on the thermal envelope that we have provided, and that's helping us win quite a bit. The other piece that helps is our tiering. So we have built a portfolio, especially for ADAS that allows us to go towards the -- I wouldn't say the real tier, but entry and then above. And so we are very well positioned with the portfolio on entry, mid and then premium. And so customers who are building their stacks and are starting to mature them, harden them, they want to be able to have a common portfolio that allows them to be able to think between tiers in the same generation and also across generations. That I think, is making a huge difference in terms of the rate at which we are winning in ADAS.

And that scalability that you're mentioning, how is that applicable on both the hardware/semiconductor side as well as on the software side?

Yes, absolutely. So the software architecture that we have is the same software platform that travels from a premium tier SoC all the way down to an entry-tier platform. And so that saves OEMs a significant amount of switching cost. And then to the extent possible, we also try to maintain that across generations.

And discuss on the software side, the importance of the Arriver acquisition from a few years back.

Yes. So we decided perhaps a bit late that the stack business was something that we had to get into because it was going to have high attach. It was going to be global. It was going to become part of every vehicle. And I think clearly, that's how it's turning out. Rather than doing it organically, and we've had a team that has been working on the stack for quite some time. We decided we needed to have a team in-house that had real-world experience in actually deploying this. It was the right idea. We did this right in the middle of COVID. So it was not the best time to get into the middle of a complex acquisition. But what helped us was BMW was very interested in working with somebody that they could have a very close partnership with in terms of driving their next-generation stack requirements, ADAS requirements. So it became this 3-way and 2-way once we acquired Arriver, where we've built out our stack team over the last 3 years or so. We have built the computer vision stack in-house. It's going to be commercial by the end of the year across 60 countries, 100 countries next year. And if you think about it, this is something that we did from a standstill. So in 2022, we had no stack. We will have this global stack launching next month. And then with BMW, we partnered to develop the drive policy stack together. So the Arriver team was very instrumental in not just bringing in the expertise, the IP, the experience, but also creating a foundation inside the company on how to go build a stack business, a stack product, which is something that Qualcomm obviously has not done before. So I think it was the right time and has been hugely instrumental in the success.

So when you put together the hardware and the software side, what is the primary differentiation that you offer versus -- in the ADAS realm versus, say, the Mobileye side or the NVIDIA side, which tend to be the 2 primary competitors. And if there's other competitors you want to highlight, go ahead, but those are the ones I think of.

Yes. So I think there are multiple layers to a stack. I think the active safety stack, which is basically the foundation for making sure that you are able to be compliant with all of the global requirements. That is something that I think we are now working to get to par and perhaps even ahead of some of our competitors. Mobileye, obviously, is the gold standard, has been doing this for a long time. And so the goal is to be able to certainly meet and eventually get ahead of those types of requirements. I don't really look at many other stacks as really at that scale because if you look at the data, if you look at what's out there, other than stacks that have been built vertically by OEMs, there isn't really anybody else apart from Mobileye that I would say is at the same level. As you start to go to features and go higher up the stack, -- that then comes down to the OEM, what type of sensor set they're deploying, what type of features they are developing. And we actually -- and we welcome for those of you that are interested to come check out the [indiscernible] in Munich, and we'll have some here in San Diego as well starting next month. You can experience the customer functions. You can actually see for yourself the type of performance. That we are very proud of because that is something that not only have we built together, but we have -- so that is a stack that we can take and extend over to other OEMs, which is what we are in the middle of doing.

So you talked a little bit about the importance or we talked about the scalability side of things. When you talk about Snapdragon Ride and then you have the Flex side of things, talk about the Flex platform and the importance of it. And I get the sense that, that is a unique ability that you have on the scalability front. So just kind of expand on that, if you could.

So when we decided to start building safety-grade chips for automotive compute, it became pretty clear to us that this whole separation in a car between what is the infotainment domain and what is the safety domain. This was obviously historically made sense. But going forward, especially with AI, especially with physical AI, these lines will start to blur. And so architecturally, we decided that we will allow for an architecture that allows us to be able to run a software stack that doesn't differentiate between infotainment and driver assistance. We did that with our Gen 4.5 products. Now with our Gen 5 products, the level of performance that we are adding, it's 3 to 5x more powerful than the 4.5. You just have plenty of headroom to be able to run 2 stacks concurrently and still have room left over for more. So what we have started to notice is OEMs that own their own stack want to be able to run the stack as an application as opposed to a dedicated domain. And especially when you start to go mid-tier where you want to be able to get cost optimization, where you want to be able to go from 2 separate ECUs to a single ECU and potentially a single SoC. The Flex architecture makes a lot of sense. We introduced the Flex architecture for the first time. I think it was I think it was maybe a Snapdragon Summit in '24. We will launch with Leap Motor in China, our first Flex platform in the middle of '26. So this is an example where somebody who actually owns the infotainment stack and the ADAS stack in-house, they can go deploy this on the same SoC. And we're starting to see that interest from a number of different players.

And do you get the sense -- we talked a little bit about the uniqueness of your stack and the gold standard from a competitor point of view. What about just on the pure silicon side of things, the competitive landscape on that, do you tend to think of Qualcomm is coming from kind of the bottoms up and so more working your way from the L1 functionality up? Or do you have the headroom to start kind of at the top and go down and what the competitive landscape looks depending upon which side you're coming from?

I think we made a bet 5 years ago that when it comes to ADAS, we are going to focus on L2+. Right or wrong, that was the bet that we made. So L2+ and below, and that's kind of the market that we want to focus on. We deliberately did not focus on L5 and robotaxis and all of that. So the platform that we started to build was the same common platform for both cockpit and ADAS because we started to add the safety capability. And I think it was a very good decision because it has allowed us to flex in the direction of getting down to entry-tier chips, which we've now had available commercially over the last 3 years or so. And then this next generation, we have moved up tier into premium and super premium. So in the same window of time, we actually have this portfolio that really scales across the board. There isn't anything that we do not have as far as silicon road map goes on our platforms, except for some very basic entry commodity silicon. And so that makes it a portfolio that is super complex to contend with for many of our competitors because it is reliable. We have tens of millions of chips that we are deploying annually, multiple hundred millions deployed. They're all safety grade. They're all supply resilient, multi-sourced -- quality proven, software proven. And so for somebody that is trying to do this for the very first time in an environment where there's massive risk in terms of execution, in terms of a global footprint, geopolitics, I feel pretty good that I think we are actually in a pretty good place with the strategy. I mean, it's played out well.

Yes. Well, clearly, you're well ahead of plan and doing $4 billion in revenues already at a time, like I said before, that's been challenging. So something has gone very well for you. So that's definitely a complement. You said 5 years ago, the focus and the bet at the time was placed on L2+ and below. Has that evolved now to a higher level as you've succeeded and gotten more knowledge of the industry?