QUALCOMM Incorporated (NASDAQ:QCOM) Q1 2024 Earnings Call Transcript

QUALCOMM Incorporated (NASDAQ:QCOM) Q1 2024 Earnings Call Transcript January 31, 2024

QUALCOMM Incorporated beats earnings expectations. Reported EPS is $2.75, expectations were $2.38. QCOM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm First Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, January 31, 2024. Playback number for today’s call is 877-660-6853. International callers, please dial 201-612-7415. The playback reservation number is 13743224. I would now like to turn the call over to Mauricio Lopez-Hodoyan, Vice President of Investor Relations. Mauricio Lopez-Hodoyan, please go ahead.

Mauricio Lopez-Hodoyan: Thank you, and good afternoon, everyone. Today’s call will include prepared remarks by Christian Amon and Akash Palkhiwala. In addition, Alex Rogers will join the question-and-answer session. You can access our earnings release and a slide presentation that have [Technical Difficulty] on our Investor Relations website. In addition, this call is being webcast on qualcomm.com, and a replay will be available on our website later today. During the call today, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our website. We will also make forward-looking statements, including projections and estimates of future events, business or industry trends or business or financial results.

Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our SEC filings, including our most recent 10-K, which contain important factors that cause actual results to differ materially from the forward-looking statements. And now to comments from Qualcomm’s President and Chief Executive Officer, Cristiano Amon.

Cristiano Amon: Thank you, Mauricio, and good afternoon, everyone. Thanks for joining us today. In fiscal Q1, we delivered non-GAAP revenues of $9.9 billion and non-GAAP earnings per share of $2.75 above the high end of our guidance. Revenues from our chipset business of $8.4 billion reflect healthy Android demand and continued strong momentum in automotive. Licensing business revenues were $1.5 billion. We’re pleased with these results, and I will now share some key highlights from the business. In handsets, the Snapdragon 8 Gen 3 mobile platform is setting a new standard for on-device gen AI experiences for premium smartphones and powers all through flagship Android devices launched and launching this fiscal year. Notably, the Snapdragon 8 Gen 3 mobile platform for Galaxy is featured in the recently announced Samsung Galaxy S24 Ultra globally, in addition to the GalaxS24 and S24 Plus in multiple regions.

The GalaxS24-Series includes on-device AI features such as live translate, interpreter, chat assist, nitography and more. This marks the beginning of how gen AI will evolve the overall smartphone experience and highlights the significant opportunity for Snapdragon platforms. We’re also announcing that we extended a multiyear agreement with Samsung relating to Snapdragon platforms for flagship Galaxy smartphone launches starting in 2024. The extended agreement demonstrates the value of Snapdragon 8, our technology leadership and our successful long-term strategic partnership with Samsung. In the quarter, we also announced the Snapdragon 7 Gen 3 mobile platform, which brings leading gen AI capabilities to high-tier Android smartphones and is a category leader in both experiences and performance.

In our QTL business, we’re pleased to share that we recently extended several key license agreements. First, Apple exercised its unilateral option to extend its global patent license agreement for an additional two years, taking the existing agreement through to March 2027; second, we have renewed long-term agreements with two significant Chinese smartphone OEMs. In addition, we continue to negotiate new agreements or renewals with other key licensees and OEMs, including some whose current agreements are set to expire in early fiscal 2025. Automotive continues to be an important pillar of our growth and diversification strategy. Notably, 75 new models launched commercially in 2023 were for technologies, highlighting Qualcomm’s grown scale in automotive and execution of our design wins.

Earlier this month at CES, we announced our collaboration with Bosch to have our Snapdragon Ride Flex SoC power their new central vehicle computer. As a reminder, Snapdragon Ride Flex enables the fusion of infotainment in ADAS functionalities on a single SoC enabling automakers to realize a unified central-compute and software-defined vehicle architecture that scales across tiers. Additionally, we demonstrated digital cockpits connected services and advanced driver systems enabled by gen AI models running locally on the Snapdragon platform. This new capabilities can be enabled on a number of existing designs via a softer upgrade. This represents significant new opportunities for Qualcomm and our partners. In PCs, we’re driving towards the launch of Snapdragon X Elite in mid-2024 and are pleased that our design win traction continues to increase since the platform was announced last October.

We expect Snapdragon X Elite to set the industry benchmark for on-device gen AI and copilot experiences in addition to leading performance and battery life for next-generation Windows PCs. We recently expanded our mixed reality solutions with the announcement of the Snapdragon XR2+ Gen 2. Our new platform supports 4.3k per eye resolution and 90 frames per second in 12 or more concurrent cameras to deliver crisp immersive mixed reality and virtual reality experiences. We are proud to partner with Samsung and Google to provide leading XR experiences to Galaxy users by utilizing Snapdragon XR2+ Gen 2. In edge networking, we announced the Snapdragon X35 5G Modern-RF system, the world’s first commercial release 17 5G RedCap solution. The Snapdragon X35 brings a new class of purpose-built 5G for Internet of Things devices.

Devices powered by Snapdragon X35 are expected to launch by the first half of 2024. We continue to believe that industrial edge devices with connectivity, high-performance computing and on device AI will become one of our largest addressable opportunities fueled by the secular trends of digital transformation. As such, we’re accelerating our investments in solutions, ecosystem and broad channel enablement to position ourselves for growth while we navigate the industry-wide inventory draw down. One key area of focus is to enable our customers to unlock the potential of gen AI at the enterprise using our chipset solutions. As an example, Zebra Technologies and Toshiba recently demonstrated on-device gen AI capabilities for enterprise workflows and inventory management at retail self-checkout, respectively.

Additionally, Honeywell showcased a Qualcomm-powered edge AI box for warehouse applications. As we complete the first quarter of fiscal ’24, ahead of our expectations, I’m very optimistic about Qualcomm’s trajectory and the opportunities ahead. The fundamentals of our growth drivers remain unchanged, our diversification strategy is working, and we’re making significant progress across mobile, automotive, computing, XR, edge networking, industrial IoT and more. At the upcoming Mobile World Congress in Barcelona, we will provide an update on our seller modem and connectivity leadership as well as on our overall scale of Snapdragon gen AI. I would now like to turn the call over to Akash.

Akash Palkhiwala: Thank you, Cristiano, and good afternoon, everyone. I’ll start with our first fiscal quarter earnings. We are pleased to announce strong non-GAAP results above the high end of guidance with revenues of $9.9 billion and EPS of $2.75. QTL revenues of $1.5 billion and EBT margin of 74% were at the high end of guidance, reflecting slightly higher handset units. QCT delivered revenues of $8.4 billion and EBT margin of 31%, both above the high end of guidance, reflecting strength in handsets and automotive revenues. QCT EBT margin includes the benefit of revenue scale, stronger product mix and operating discipline. Handset revenues of $6.7 billion were higher than our prior expectations primarily due to the increased demand driven by the acceleration of Android flagship launches with our Snapdragon 8 Gen 3 mobile platform.

Notably, our Android handset revenues from Chinese OEMs exceeded our expectations of greater than 35% sequential growth. IoT revenues of $1.1 billion reflect the industry-wide challenges we’ve previously outlined. We achieved record automotive revenues of $598 million which grew by 12% sequentially, reflecting the increased content in new vehicle launches with our Snapdragon digital chassis platform. Non-GAAP operating expenses decreased 5% sequentially to $2.1 billion and included the benefit of accelerated implementation of cost actions that we had previously outlined for the first half of fiscal ’24. Lastly, we returned $1.7 billion to stockholders during the quarter, including $784 million in stock repurchases and $895 million in dividends.

Before turning to second fiscal quarter guidance, I’ll update you on global 3G, 4G, 5G handset units. We estimate that global units declined by mid-single digit percentage in calendar ’23 relative to calendar ’22, an improvement from our prior expectations due to the recent stabilization in demand. For calendar ’24, we estimate that global handset units will be flat to slightly up on a year-over-year basis. This estimate includes expected growth of high-single digit to low double-digit percentage in 5G handsets. Turning to guidance for the second fiscal quarter. We are forecasting revenues of $8.9 billion to $9.7 billion and non-GAAP EPS of $2.20 to $2.40. The sequential decline in revenues and non-GAAP EPS relative to the first fiscal quarter will be driven by seasonality for a modem only handset customer in both QTL and QCT.

In QTL, we estimate revenues of $1.2 billion to $1.4 billion and EBT margins of 69% to 73%. In QCT, we expect revenues of $7.6 billion to $8.2 billion and EBT margins of 27% to 29%. For QCT handset revenues coming off strong performance in the first fiscal quarter, we anticipate Android revenues will be approximately flat quarter-over-quarter. On a sequential basis, we expect QCT IoT revenues to grow by mid to high-single digit percentage with QCT automotive revenues slightly down, consistent with the trend in the prior year. Lastly, we expect non-GAAP operating expenses of approximately $2.2 billion. This reflects typical calendar year resets for certain employee-related costs. In closing, we’re very pleased to start our fiscal year with strong execution and financial performance.

In QTL, as Cristiano outlined, we are pleased to have extended several key license agreements. We do not expect any material change in QTL licensing revenue run rate as a result of these extensions. In QCT, our technology differentiation will accelerate with our on-device gen AI leadership and introduction of our custom Qualcomm Orion CPU. We also remain well positioned to execute on our diversification strategy by extending our technology portfolio to deliver industry-leading products across automotive and IoT. This concludes our prepared remarks. Back to you, Mauricio.

Mauricio Lopez-Hodoyan: Thank you, Akash. Operator, we are now ready for questions.

See also Retiring Abroad: Top 20 Places Boomers Prefer to Retire Outside the US and 30 Most Air Polluted Cities In The World.

Q&A Session

Operator: Thank you. [Operator Instructions] The first question is from Samik Chatterjee with JPMorgan. Please proceed with your question.

Samik Chatterjee: Hi. Thanks for taking my questions and congrats on the results here. Maybe if I can start with AI and particularly the launch of the Samsung S24. Now you have some incremental sort of experience in terms of devices launching in the market and the performance and consumer reception you’re seeing to that. So I know you outlined adoption of 3G, 4G, but any way of giving us some flavor of what you’re thinking in terms of adoption of these AI devices or AI on edge in terms of the smartphone market? How similar or different will that curve look like relative to 5G adoption? And any insights from the sort of pipeline you’re working on will be helpful for us? Thank you and I have a follow-up.

Cristiano Amon: Hello, Samik. Thanks for the question. This is Cristiano. Look, it’s early, but I think it’s — we’re definitely excited about what we see in the beginning. It’s not only unique to the GalasxS24, that has a number of now use cases running gen AI on the device. I mentioned a few of my prepared remarks like translation and you have a much more effective assistance in a number of different applications. We’re going to see productivity coming. But we’ll also see that happening with some of our other customers from China, launching a number of models. So I think we have a large number now of models being ported into our hardware for gen AI. I think we’re starting to see the beginning of new use cases. Reviews have been positive, and we are happy with we’ve seen the results following the launch.

I think we need to monitor the situation. But eventually, at a minimum, is going to have a favorable impact on mix, which is a trend that we continue to see premium and high tier with more computing power — is the fastest-growing segment in the handset market.

Samik Chatterjee: Yeah. Okay. Got it. And maybe just as a follow-up, the — and the Android OBX customers of the Chinese OEMs you work with, they exceeded your expectation in the fiscal first quarter — but as you’re looking to the second quarter, you’re guiding to a more flattish trajectory here? I know the industry has sort of been looking at inventory refill from those customers as well, driving some of the momentum. So just wondering if you can give us an update in terms of what you’re seeing from those customers? And if at all, Huawei and their reemerges in the market is starting to have an impact in terms of volume or market share for these customers as well in the context of your flat guide for them for quarter-over-quarter? Thank you.

Akash Palkhiwala: Sure. Samik, it’s Akash. As we have said previously, as we entered fiscal ‘24, our view was that Android channel inventory had largely normalized. And so as we go through the year, we typically see normal bill bleed cycle around handset launches. So that’s kind of the phase we are in from our perspective. In the first quarter, what we saw was higher demand due to the acceleration of Android flagship launches with our new chip, Snapdragon 8 Gen 3. And we saw very strong demand across all the major Android OEMs. And so happy, of course, with that traction and that momentum carries over to the second quarter as well. And that’s what you’re seeing both in our results and our guide going forward. In terms of your comment on Huawei, really what we’ve seen since Huawei 5G launch is that the premium tier TAM in China has expanded. And so we’re continuing to see strong demand from our customers post that launch.

Operator: Our next question is from the line of Matt Ramsay with Cowen. Please proceed with your question.

Matt Ramsay: Thank you very much, guys. I guess for my first question, Cristiano, I was fit to hear, I guess, the formal announcement of an extension with your partnership with Samsung. And you mentioned, I think, in your prepared script that it started with 2024 devices, but I assume it’s longer than that. So maybe you could give us a little context as to the links and any details you can share on the new agreement. You guys obviously have your new custom CPUs coming into the Snapdragon road map and some expanded MPU product as well. So we see kind of what the split is of share in the flagship at Samsung currently, but I’m just trying to understand a bit more about what this means for on a go-forward basis. Thanks.

Cristiano Amon: Thanks for the question, Matt. The agreement that we announced at this earnings call, it is a multiyear agreement. We’re not disclosing the duration, but there are several years into that agreement. And I think your observation is correct. I think it starts in 2024. I think as you look at the launch of GalaxS24 is a good proxy on how we should think about the agreement between us and Samsung. But most important is the thing that you outlined. Our road map is getting stronger over time, especially with our custom CPU coming to mobile, and we’re aiming to have the leadership position in the mobile performance on CPU. And our NPU continue to expand as we — as I mentioned before, we’re just at the beginning of the gen AI transition. I think in summary, we’re very pleased our relationship with Samsung, and it’s a very long-term relationship with this customer.