QUALCOMM Incorporated (NASDAQ:QCOM) Barclays Global Technology, Media and Telecommunications Conference Transcript December 7, 2022 3:10 PM ET
Company Participants
Akash Palkhiwala – Chief Financial Officer
Conference Call Participants
Blayne Curtis – Barclays
Blayne Curtis
Happy to have with me Akash Palkhiwala, he is the CFO of QUALCOMM. Welcome.
Question-and-Answer Session
Q – Blayne Curtis
We will get to the handset part, but I guess maybe I wanted to kind of start, you have had an Analyst Day and then an Auto Day.
So, obviously, diversification has been the theme. Maybe you could just spend a few minutes on just what it means for QUALCOMM and we will dig into the different pieces. But, obviously, there’s an auto piece, but maybe you can point us to some other areas that may not be on everybody’s radar and then we will dig into more stuff.
Akash Palkhiwala
That’s great. So, first of all, thanks for having me here and everyone thanks for coming. So you know when Cristiano became CEO about a year and a half ago, even before that, we were, obviously, focused on diversification.
But one of kind of the key changes he made to the focus of the company going forward is really transition from a connectivity chip company for the phone to a connected processor company for the edge. And so it’s a fundamental transition, not just from how we position the company externally, but really how we operate internally, how we make investment decisions and like.
And so the premise is being — as everything gets connected to the cloud, we have the ability to take the technologies we had created for the phone and apply it to other industries and so the premise of the diversification plan is very simple.
And if you look at automotive, clearly, the industry is going through a once in a lifetime transition in various ways and the technologies we have in phones become extremely relevant to the auto industry.
You look at broader IoT opportunity within consumer edge networking, industrial, the same trend applies, right? And digital transformation, obviously, a very big deal right now and it’s almost like with the macro environment becoming more challenging, digital transformation is actually a tailwind and transitioning from a technology perspective is becoming even more important for industries to survive and thrive.
And so we are in this unique position where we happen to have a technology portfolio extremely relevant to a bunch of industries and the plan — diversification plan is really based on taking that and applying it to different areas. So that’s the framework.
Blayne Curtis
We will definitely drill in a couple of the pieces. I wanted to obviously go to auto. You — this pipeline increased substantially during the year, you said $30 billion, obviously, there’s a long horizon on that as is auto. So got a couple of pieces. But first, can you just walk us through, from a company that had gateway content for a while that’s grown digital cockpit is, obviously, a spot that’s right in your wheelhouse and then obviously the ADAS and autonomous maybe eventually. Can you just walk us through that content per car, where you are in terms of adoption of those kind of three different components in…
Akash Palkhiwala
Yeah. Yeah. So maybe I will start with kind of the history of how we started in automotive and where we are going. So previously we have been focused on connectivity as does the key set of chips that go into car. And when we talk about connectivity, the 4G going to 5G, there’s WiFi, Bluetooth, position location, powerline communications for communication within the car and so there’s a whole set of connectivity technologies that we sell into cars.
The second is, as the internal experience within the car, both from the infotainment center, the cluster, rear seat entertainment, driver monitoring, smart mirrors, there’s a lot of stuff happening within the car and then the software assets as well. We have the ability to be the chip supplier and the software supplier for those areas. So that’s the second domain that we have went into.
The third domain is ADAS chips, bringing our hardware capabilities into ADAS.
And then the fourth, which came through — partially through the acquisition of Arriver as a part of Veoneer is ADAS software and we are getting a team with a lot of safety expertise, a lot of auto specific software expertise that we are bringing to bear.
So when you put all of these pieces together, you have connectivity, digital cockpit ADAS, and within ADAS we have both the vision platform and the drive policy platform, hardware and software.
We call it the digital chassis, right? It’s on the physical chassis, sits on top of the physical chassis. If it’s a digital chassis that really if you are an automaker and you are looking for a set of solutions for each of these areas and you want it for the lowest tier car, all the way to the highest tier car.
And everything being software compatible, you write once and use it across all tiers, you use it across all domains. It’s something that’s unique to us because of the scale of technology that we have, we can bring all of these to bear.
And so when you look at the design win pipeline and we gave the breakdown, we didn’t show the numbers, we showed a pie chart that breaks down the $30 billion and what you will see is now our design win is very well split between all three domains, connectivity…
Blayne Curtis
Right.
Akash Palkhiwala
… cockpit and ADAS. So very excited about where the industry is going, very excited about what we can bring to bear. You made a comment on the timing of the revenue ramp, which, I think, works out well for us as clearly shorter term drivers in other areas and auto coming on the back of it gives us kind of growth opportunity for a long period of time, predictable growth, which is different than the handset market. So as a part of the portfolio, in my role, I am excited about what it brings to bear.
Blayne Curtis
I wanted to ask you about the software piece in ADAS. I guess when you did the deal, you were very excited and everybody always said when we do a deal. But then you announced BMW and made a point that it’s open. So I think that is a big component of it, but so a couple of pieces of the question. I think, one, why would you win, I think, versus at least two established players…
Akash Palkhiwala
Who are the two.
Blayne Curtis
… Mobileye, NVIDIA…
Akash Palkhiwala
Okay.
Blayne Curtis
… we will have the name?
Akash Palkhiwala
Yeah.
Blayne Curtis
But I guess, I think, customers want to have their own imprint on what the experience is going to be. But I guess, I am kind of curious, in terms of your ability to leverage, where is that software stack, I think, your lead customer is going to help push it along. How much can you then transfer that to other customers? Is this something, because you mentioned that it’s kind of like a 2026 timeframe with that customer. Is that kind of something that needs to kind of still prove out or you feel like you are still — you are in a position where that software stack is mature enough and you can actually get some additional customers to sign on for it?
Akash Palkhiwala
Yeah. So of the two competitors, we see Mobileye as the incumbent clearly in ADAS. They have been doing this for a period of time. We are the new entrant in the area. So we have been investing internally in ADAS for a long period of time and for several years. But clearly that theme in our mind was not at scale and did not have the industry specific expertise that is so important when you start talking about safety.
So when we did the transaction, there were two things we are looking for. First is, obviously, a team that has been doing this for a long period of time. Second is a team that brings auto specific safety and security experience that is so important when you are talking to the OEMs and then we were able to combine their effort with ours. But the third thing that was most important is the relationship with BMW that was simultaneous with the transaction.
And what we are doing with BMW is really bringing our assets to bear for them and commercializing a full ADAS stack together between the two companies and then we have the ability to take the stack and sell it to other customers.
So this gives us, I think, a lot of credibility simply because, first, Arriver had credibility as a result of having been in the industry for a long period of time. Second is you are commercializing the stack with a company that is widely respected within the auto industry and a great partner for us.
And when you bring those two together, you certainly have significant ability to take that combined solution into other OEMs and so we are seeing very positive traction from the OEMs. It’s reflected in our design win pipeline.
I mean, as you saw, we were in end of July, when we did our earnings release, we are at $19 billion, by the time we got to Investor Day, two months later, we were at $30 billion and that is proof of our success. A lot of the execution is spending, right? So clearly, our focus is now executing on the ADAS software stacked together with BMW and then making it available to others.
Blayne Curtis
I want to ask you on the — you mentioned the areas of increased content, the digital cluster, the infotainment, rear infotainment and such. Is there a way to think about, I mean, obviously, that’s been the hardest thing to pin down in terms of we see in the auto market. You have EVs as a trend, but then these cars also have tons more screens and they want them to look more like a Tesla, I guess. Can you just think about your content per car, I don’t know if you were willing to throw any numbers to it but?
Akash Palkhiwala
So at our Auto Investor Day, we talked about the opportunity for us, which we think is at 200 at the low end, 3,000 of the high end, right?
Blayne Curtis
Yeah.
Akash Palkhiwala
So there is a very wide range depending on which of the domains someone is buying from us and also depending on the tier of the current, right, so.
Blayne Curtis
Right.
Akash Palkhiwala
Typically the way a lot of our conversations with the OEMs work is, if you are an OEM and you have a luxury brand and then you have a low tier brand, what they want is to be able to write the software, one, supply to all tiers of cars. And so tell they will agree to multiple tiers of chipsets and we have a breakdown of where they are planning to deploy which tier.
But I think as we get to 25, 26, 27, I very much suspect that the OEMs are going to end up shifting up in those tiers, because the importance of having the technology that we are delivering for the OEMs, for the consumers as a competitive tool for them is only becoming more important and as they do that, I think, we are going to see a shift up in term of content.
The one last thing that I should have said earlier that’s unique to us is, at Auto Investor Day we announced the chip platform, where the hardware can be shared between ADAS and digital cockpit. So it’s unique to us.
You can have one piece of hardware do both and when you are an OEM and you are trying to scale your solution across peers to have the ability to do that is extremely unique and a pretty significant advantage for our customers.
Blayne Curtis
I do want to shift to handsets and if we have time we can go back, but obviously, a lot going on in handsets. I wanted you to think about, I mean, this is mark has been interesting obviously. It’s been weak for over a year, almost year and a half. I think there is a couple components to that. So China, I think, there is a lot going on in China. I think there is been a lot of hope of like opening up, I guess, they have announced some changes. But then I think when you look overall 5G adoption is fully penetrated in kind of China and the U.S., I think, Europe is moving slowly. So I think when you look out, I think, maybe, like, there is regions like India is still adopted, but maybe not the same types of market. So, I mean, we are entering the fifth year of 5G adoption, not sure when sixth year. So I think, kind of two parts there, how do you think about the overall kind of growth of handset market and is there any hope that we have hit a bottom and we can see maybe been an up year next year?
Akash Palkhiwala
So we think of this in two parts. There is a short-term cyclical challenges of the industries going through and I will come back to that. And there is a long-term secular conversation, right? And so the easiest way to think about the industry right now is to kind of break it into two, because when wires cross across you kind of loose…
Blayne Curtis
Right.
Akash Palkhiwala
…loose the difference there. Short-term cyclical there is two things happening. One is you have an inventory build-up we talk about at our earnings release and we talk about a couple of quarters as the timeframe that we think it takes for that to go through normalization.
The second is just the overall market and the dynamics you outlined and then clearly China being a large significant portion of it. The way we think about it is, we will full admit we don’t have clarity on how the macro China situation plays out…
Blayne Curtis
Right.
Akash Palkhiwala
…in the short-term. And so we are trying to give as much transparency as we can around that and we have shared all the information we had at earning release and so there is no update to give at this point. And then so we are going to get through that period.
Now when you step back from that, you look at the longer term, there are several thing that are happening in the handset industry very important. First is the conversation 4G to 5G very important for us. But if you look at the last three years or four years in developed markets, the transition at all happen to 5G, but the content has gone up significantly because and then we shared this in one of our web slides, I think, couple earnings release ago.
A very relatively small portion of our content is now driven by 5G. Most of our chip content is actually the applications processor, CPU, GPU, AI, camera, audio, video, security, and each of these are ramping at a very significant rate in terms of what the consumers are demanding from their phone and then also what the OEMs are demanding.
And so the lot of the content growth that you have seen come through has actually nothing to do with 5G, it’s other capabilities in the phone and so that has its own curve independent of 4G to 5G transition.
Specifically on 4G to 5G, the markets that have not transitioned are really the emerging markets and especially India is going to be very significant and as the Prime Minister just announced the few months ago and we are seeing the operators being extremely aggressive in the transition.
So we are going to have that opportunity as that transition happens. But as I said earlier, for us the story is really about content increase on the application processor side and there are secular trends on increase within that.
And maybe one last point is, when you look at emerging market through COVID, one of the changes that has happened is, the phones have become the primary TV viewing device in emerging markets.
So it used to be one TV, 20 people watching the TV in rural areas, now that one TV are shifted over to 20 phones and everyone is watching their own content from their own phones. And when that happens it automatically drives an upgrade cycle on the phones, because next time you buy a phone, you want a more capable device and that is driving mix shift, even at the low tier of the market, which is great for us.
Blayne Curtis
Just kind of drilling into that a little bit, I mean, [inaudible] a flip phone, so, I guess…
Akash Palkhiwala
Yeah.
Blayne Curtis
…there is a storyline there to some point, but I think, we also saw from other markets, something are short, OEMs have kind of produced the highest then, right? Because they know that they can push on a consumer, so we got pretty desperate for certain types of products and we have seen things like PCs on the line already. Do you think that dynamic happened during the pandemic and hence that’s where more high end phones sold through just because that was available or you think that didn’t happened?
Akash Palkhiwala
There was a part of the phenomena and then that I think applies to every industry, it’s not…
Blayne Curtis
Right.
Akash Palkhiwala
…not just a handset or PC story, I think, overall, if you are going to become friendly [ph] you are going to be manufacturing higher end chips. We talked about us doing that within our own supply where that we were shifting across tiers and selling higher tier chips in the constrained capacity that we have. So that’s a clear trend. I would say that, that could — that would unwind to some extent and you are seeing that happen in the market…
Blayne Curtis
Right.
Akash Palkhiwala
…across the Board and not — again not the handset market, overall industry, across various things. But again, I go back to the short-term cyclical, long-term secular and our focus, we can run the business only for long-term secular trends. That’s what we are focusing.
Blayne Curtis
In terms of the inventory part, I mean, your business, actually, you are kind of underperforming the first half of 2021 and they kind of cut off, so you kind of counter trend as maybe the RF guys were correcting, so it’s been hardly kind match the two cadence with together. I think, you are now seeing a correction. So can I just — you — are you shipping — you are definitely shipping below trend, but have you — do you have a good sense of what the right run rate was, as you look at the back half of kind of when you started to see acceleration back up to 2021 into 2022, there’s some periods there that maybe that was building inventory, because we are now discovering it. But what’s the real run rate that you should get back to in terms of the handset?
Akash Palkhiwala
Well, so one way to think about this is, if you look at our fiscal year, our handset revenue grew by approximately 50%. And to your point, there was clearly some inventory build happening in a portion of it.
Now if you look at the calendar year revenue growth, which takes into account the adjustment we are seeing in the December quarter. So the calendar year is more of a — it takes out the build and a large portion of the bleed away.
Handset revenue still grew 30% for us in a mature market. So it is — that’s the content story we talked about earlier and the mix shift story we talked about earlier that’s helping us even when you kind of take out a large portion of the noise.
Blayne Curtis
What’s the right way to think about the customer that shouldn’t be named, but is it an Android vendor? I mean that’s been the one supply chain that’s been resilient through these corrections. There’s been a lot of news flow about production being disrupted and you really haven’t seen any semi companies comment on it. I think, do you think that supply chain potentially build inventory like everybody else or do you think it’s been managed better and is there anything you can comment on in terms of these recent shutdowns?
Akash Palkhiwala
Well, I mean, rather than talk about our customers, I think, the way I think about it is, there’s going to be — if there are short-term constraints in manufacturing in a given facility. One, typically, these OEMs have diversification in their manufacturing plants.
And then second, I would say is, usually they are pretty good at catching up manufacturing when they have constraints for some period of time. So not a new trend. OEMs go through this from time-to-time and it will normalize.
Blayne Curtis
I wanted to ask you a question about customers as well as Samsung and when you joined the — I think the internal modem term view was a lot louder. You said, I think, you and Cristiano were, like, we were going to execute. Well, fast forward, you are going to have all the share at Samsung and that transition at Apple has been delayed. So do you think that internal modem storyline that’s been kind of hanging out there in certain periods of time in the story is gone or do you think we should, long-term still think about a balance between customers having their own modems?
Akash Palkhiwala
Well, no change to anything we have said in the past, right? With Apple, we have been very, very transparent. At Investor Day, we said 20% share was our planning assumption for the 2023 launch.
Blayne Curtis
Right.
Akash Palkhiwala
Now we think we have a majority of the share for that launch, and we have said in fiscal 2025, we expect minimum revenue from them. So that’s our planning assumption. That’s how we are going to plan our business.
Product wise, it’s relatively simple, right? For us, it is always about performance and modem leadership. We have been the leaders in modem performance for a long period of time and there is — one, there is a very strong pipeline of products coming up.
Second, I think you are going to see second half of the decade, towards the end of the decade, we are going to start talking about 6G and we are positioned to drive both of those ranges. So we will focus on what we control and deliver the best product.
Blayne Curtis
The — I wanted to ask you about ASPs and gross margins, but I want to wrap it into a little bit of the 5G conversation we had. So if — and I know you answered the question that 5G is not the biggest driver, so maybe you already answered it. But I am — I think people look out there and say, all right, India 5G is going to be the best thing you can point to in terms of the 5G story and the view is those would be lower ASP products. So when you think about your overall business and over the next couple of years, do you think — because your ASP is, I think, they are up for my math like 35% or something quite and that’s mix and that’s maybe like-for-like, we don’t know. But you definitely benefited on an ASP perspective and the benefit gross margin as well. How do you think about that trending particularly as some of these regions that typically are lower end layer in?
Akash Palkhiwala
Yeah. So I will reiterate the 5G method. I think at some point people will realize that there is more technology in the phones beyond 5G or 4G. They use it every day. So it should have been more obvious.
So I think when you look at the phone, you have 4G to 5G transition remaining in all emerging markets. So, yes, India is one of them, but there’s a bunch of other markets and we are going to see the benefit of that very early in the 5G cycle. We talked about a 1.5x content increase when you go from 4G to 5G.
The second is whether transition happens on RF front end, we don’t play in RF front end on 4G-only devices. So when you go to 5G that opens up SAM for us.
The third is really content on the application processor side and that really is the story for us, that’s — when you look at the investments we are making, the progress we are making, CPU being a great example, where we have now PC class CPU performance coming up and they are going to bring it to phones as well. So we have this ability to really add an incredible amount of technology.
And so if you are an OEM competing in the premium tier globally, what we delivered to you is performance that allows you to keep your existing market share and grow it, and then take that same technology into all the peripheral devices, whether it’s tablets, hearables, wearables, PCs now. And so, in my mind, the SAM is expanding and just getting caught into the 4G to 5G conversation in phones is actually missing the point on the opportunity in front of us.
Blayne Curtis
In terms of that expanded content, I think, last earnings call, you rolled RF into the respective buckets and the answer was, you wanted to — business is elsewhere big enough that you wanted to put those in there. I think, what are you going to provide going forward in terms of color on RF?
Akash Palkhiwala
Yeah. We have been very clear, right? We had set Investor Day targets for RF as a revenue stream. And as I said in our earnings release, we will give periodic updates against that as well. So you are still going to be able to measure it alone as you would want to.
But the — I think the key message for us is, RF was a phone story for us in the past. As you look forward, every car goes to 5G, tremendous opportunity for us to win RF. Within IoT, there is the dongles that go into home, 4G going to 5G, Reliance in India, very, very focused on it. There’s an RF opportunity.
You go into every other device in IoT getting connected with 5G, there’s an RF opportunity for us as well. So it really kind of follows and it’s just a product line now into each of those end markets and so the change we are making just reflects where the business is today.
Blayne Curtis
So I would circle back. You have done a good job answering my questions. The — I wanted to ask on the IoT side, right? So people look at this business that had huge growth during the pandemic, and obviously, you have a lot of great drivers, there’s, I mean, all kinds of stuff in there, metaverse in there, there’s dongles, but then there’s a lot of WiFi and it’s hard to part though. You have been really good with disclosures, so you kind of every quarter you come up with a different area. You are going to break out. Right now you have seen corrections in one part of this IoT bucket. Do you think the rest of that kind of business will see some sort of downturn here or — and kind of where can you point to some areas that maybe you are going to see growth?
Akash Palkhiwala
Yeah. So, again, kind of going to long-term secular before I come back to the…
Blayne Curtis
Yeah.
Akash Palkhiwala
… short-term cyclical. The long-term secular growth, there’s like four areas that, I would say, and I highlighted at the Investor Day, where we have tremendous growth opportunities. First is in the PCs. You have seen the MAX transition over from x86 arm. I think there’s an opportunity for the PC ecosystem to eventually make that transition.
And from our perspective, the one thing that we — one piece of technology that we required to deliver a solution that exceeds existing options there was to have a CPU that met the performance benchmarks and exceeded it.
And so, NUVIA acquisition was important for us, because we got a team that allows us to deliver on that and so we are very excited about what’s in front of us. And as we go through the next several quarters, we are going to talk about it a lot more give proof points on performance, on traction. But that’s the first one.
The second is metaverse, and the way I think about it is, you can debate your view of how this — how big XR devices are going to be. There are people who say it’s going to be 50 million units. There are people who say it’s going to be 1 billion units.
The way I see it is, it doesn’t have to be very big for it to be material for us, because we are leveraging technologies that we develop for phone and so it’s very incremental for us. And the — really everything QUALCOMM does well is very important for that market. So it’s really a sweet spot market for us. So that’s the second one.
Third is using 5G for broadband access into homes. It’s not something that the developed world naturally thinks about, but for emerging markets, we really think 5G becomes one of the primary broadband technologies into the home. So that’s a great opportunity. It just extends what we have, very, very limited incremental cost for us.
And then, finally, probably, the longest — the biggest long-term opportunity for us is, as transformation of industries happen. A great example is retail, where the retailers are looking at tremendous transformation of technology in the store, I mean, it’s not optional anymore and so we could be a very good partner for them.
And that’s just one industry and there’s 10 of these that we are pursuing. So very excited about all four and each one will have its own time line, each one will have its own cycle. But when you put those together, it’s — I think the long-term opportunity is tremendous.
Blayne Curtis
Only a couple more minutes, but I want to ask, the one area you didn’t mention is data center. I mean you have had efforts in servers, you have AI efforts. I mean, what’s the status of your data center?
Akash Palkhiwala
I mean we have always thought of that as upside and opportunistic. That’s not a primary focus for us. If you just listen to Cristiano talk about our strategy.
Blayne Curtis
Right.
Akash Palkhiwala
It’s very much focused on the edge and so we are going to prioritize that.
Blayne Curtis
With that, Akash, I appreciate the time.
Akash Palkhiwala
Awesome.
Blayne Curtis
Take care.
Akash Palkhiwala
Thank you very much. Thanks for having me. Thank you.
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