QUALCOMM Incorporated (NASDAQ:QCOM) Q2 2024 Earnings Call Transcript

QUALCOMM Incorporated (NASDAQ:QCOM) Q2 2024 Earnings Call Transcript May 1, 2024

QUALCOMM Incorporated beats earnings expectations. Reported EPS is $2.44, expectations were $2.33. 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 Second 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, May 1, 2024. The playback number for today’s call is 877-660-6853. International callers, please dial 201-612-7415. The playback reservation number is 13745532. 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 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 accompanied this call 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 Q2, we delivered non-GAAP revenues of $9.4 billion. Non-GAAP earnings per share of $2.44 was above the high end of our guidance. Revenues from our chipset business of $8 billion reflect strong premature demand for Android smartphones and continued momentum in automotive. Licensing business revenues were $1.3 billion. During the quarter, we also made significant progress on our leading technology and product roadmaps as well as executing on our growth and diversification opportunities. Let me share some key highlights from the business. As we drive intelligent computing everywhere, we are enabling the ecosystem to develop and commercialize on-device GenAI applications across smartphones, next-generation PCs, XR devices, vehicles, industrial edge, robotics, networking, and more.

To that end, we recently launched the Qualcomm AI Hub, a gateway for developers to enable at scale commercialization of on-device AI applications. It features a library of approximately 100 pre-optimized AI models for devices powered by Snapdragon and Qualcomm platforms, delivering four times faster inferencing versus non-optimized models. As AI expands rapidly from the cloud to devices, we are extremely well positioned to capitalize on this growth opportunity, giving our leadership position at the edge across technologies, including on-device AI. In automotive, the Snapdragon Digital Chassis is the industry’s leading technology solution, and we’re pleased to announce that our design win pipeline has increased to approximately $45 billion. We’re growing faster than the addressable market and remain on track to achieve more than $4 billion of automotive revenues in fiscal ‘26.

In premium and high-tier smartphones, our Snapdragon mobile platforms continue to set the bar for performance in on-device GenAI capabilities. Recently launched flagship Android devices powered by Snapdragon 8 Gen 3 are seeing strong demand globally, especially in China. We are extending the most sought after 8 series capabilities, including on-device AI, to a broader range of flagship and high-tier smartphones with the new Snapdragon 8S Gen 3 and Snapdragon 7 Plus Gen 3 mobile platforms launching in the second half of 2024. In cellular modems, we have again established a new industry benchmark with the Snapdragon X80, the world’s most advanced 5G modem RF system. The X80 supports 5G advanced, the next era of 5G, in addition to direct to mobile, 3GPP compliant satellite communications and leading release 18 features.

Additionally, our networking solutions continue to gain traction as the Wi-Fi 7 transition expands to the enterprise. We are excited about the upcoming launches of next-generation Windows AI PCs powered by Snapdragon. The Snapdragon X Elite is the leader in performance on-device AI and power efficiency for the Windows ecosystem and is optimally positioned to lead the transition to true AI PCs. I’m also pleased to share that we recently expanded our compute portfolio with the Snapdragon X Plus platform, which is designed to address a broader range of device tiers. In XR, we’re seeing good momentum in augmented and virtual reality. In particular, the Ray-Ban Meta glasses powered by our Snapdragon AR1 Gen 1 platform continue to gain traction with consumers.

Additionally, the Meta Horizon OS running on Snapdragon is now open and available to third-party hardware makers. This is a significant milestone as it will expand the device ecosystem. Finally, at the Embedded World Conference in Germany, we announced two new solutions for the industrial IoT ecosystem, the Qualcomm QCC730 micro-power Wi-Fi SoC and the Qualcomm RB3 Gen 2 platform. The QCC730 is specifically designed for IoT connectivity in battery power industrial, commercial, and consumer applications, featuring 88% lower power consumption than previous generations. And the RB3 Gen 2 platform is a complete hardware and software solution designed for a wide range of products, including various types of robots, drones, industrial handheld devices, and more.

The RB3 is supported by the recently announced AI Hub and also feature support for Qualcomm Linux, a comprehensive package of operating system, software, and developer tools for our IoT platforms. In summary, we’re very pleased with the continued progress on our growth and diversification strategy. Beyond handsets, we have established leadership positions across automotive, XR, and networking, and we are well positioned to do the same in PCs, industrial, and Edge AI. We’re optimistic about the opportunities ahead for the company and will continue to execute on our plan to deliver long-term growth and value for shareholders. 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 second fiscal quarter earnings. We are pleased to announce another quarter of strong non-GAAP results with revenues of $9.4 billion and EPS of $2.44, which was above the high end of our guidance range. QTL revenues of $1.3 billion and EBT margin of 71% were in line with our expectations. QCT delivered revenues of $8 billion and EBT margin of 29%, which was at the high end of our guidance range, reflecting strength across handset and automotive. QCT handset revenues of $6.2 billion included the benefit of flagship Android smartphone launches powered by our Snapdragon 8 Gen 3 mobile platform. QCT IoT revenues increased 9% sequentially to $1.2 billion, which was slightly better than our expectations.

We had another record quarter in QCT automotive, with revenues increasing by 35% on a year-over-year basis, reflecting increased content in new vehicle launches with our Snapdragon Digital Chassis products. We returned $1.6 billion to stockholders during the quarter, including $731 million in stock repurchases and $895 million in dividends. During the quarter, we also announced an increase in our quarterly dividends from $0.80 to $0.85 per share, consistent with our commitment to dividend growth. Lastly, the sale of the restrained control system business successfully completes the divestitures of the Non-Arriver businesses related to our acquisition of Veoneer. We are very pleased with this acquisition, and the Arriver team is executing on the development of our computer vision and drive policy ADAS software stack targeting vehicle launches starting in late ‘25.

Now turning to guidance, our forecast for global 3G, 4G, 5G handset units remains unchanged for calendar ‘24. We estimate that global handset units will be flat to slightly up on a year-over-year basis. This includes expected growth of high single-digit to low double-digit percentage in 5G handsets. For the third fiscal quarter, we are forecasting revenues of $8.8 billion to $9.6 billion, and non-GAAP EPS of $2.15 to $2.35. In QTL, we estimate revenues of $1.2 billion to $1.4 billion, an EBT margins of 69% to 73%, reflecting normal seasonality for handset units. In QCT, we expect revenues of $7.5 billion to $8.1 billion, an EBT margins of 25% to 27%. Consistent with our previous comments, we anticipate QCT handset revenues to decline by mid-single digit percentage sequentially, reflecting a seasonal trend due to the absence of flagship handset launches in the quarter.

We expect QCT IoT revenues to grow sequentially by low to mid-single digit percentage as we continue to see a gradual recovery from the macro factors impacting the industry. Following our record performance in the second fiscal quarter, we expect QCT automotive revenues to grow by low double digit percentage quarter-over-quarter as the increase in our design wind pipeline continues to materialize into revenue. Lastly, we expect non-GAAP operating expenses to be approximately $2.2 billion. In closing, we are pleased with our execution and financial performance for the first half of the fiscal year. Specifically, we saw year-over-year handset revenues from our Chinese OEM increase by greater than 40% in the first half of fiscal ‘24, reflecting our strong competitive positioning and recovery of demand.

Looking forward, our technology leadership positions us to continue to execute on our diversification strategy across IoT and automotive. In IoT, we look forward to normalization and demand across our customer base exiting fiscal ‘24. In addition, we’re excited about the launch of our next generation AI PCs powered by our Snapdragon X Elite and X Plus platforms from all leading PC OEMs starting in mid-24. These PCs will deliver industry-leading processor performance advanced on-device Gen AI features, and extended battery life. In automotive, we are pleased that our design win pipeline has increased from $30 billion in September ‘22 to approximately $45 billion, providing confidence and executing to our long-term revenue targets. This concludes our prepared remarks.

Back to you, Mauricio.

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

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Q&A Session

Operator: [Operator Instructions] The first question from Matt Ramsey with Cowen.

Matt Ramsay: Thank you very much. Good afternoon, everybody. Cristiano, I wanted to ask you a question about sort of handset modem and RF architecture as we move into sort of the era of AI in handsets and mobile devices where I think it’s likely that the compute system and the memory system of the phone take up more battery life potentially as we try to compute some of these applications for AI inference on the device. And I wonder if that how that changes your potential opportunity for your modem business integrated with your RF business. There was a one of your competitors talked about a socket loss last night and I think it went to you guys I wonder if you might comment on how or why, but I think it’s a bigger picture question as the compute subsystem of the phone puts pressure on the modem and RF, does that give you opportunities for further integration? Thanks.

Cristiano Amon: Hello, Matt. Thanks for the question. Well, let me unpack this. I think as far as modem RF, we believe we have a very competitive RF front end portfolio and we have been really delivering unique features across the modem RF for system especially on power, as a general comment not related to AI but a general comment I think as you look at AI running on devices and AI running on the cloud modem becomes more important especially things like latency of response or hybrid AI models has a new importance of real-time connectivity. So we’re starting to see more and more the modem becoming more important. The real advantage for Qualcomm is not only on the modem RF even though I think we’re very proud of having the leadership position there is the fact that we actually created the ability to run AI pervasive on devices without compromising battery life.

And that has been reflected within our NPU performance both on phones as well as PCs, and in cars and I think that’s the key I think technology leadership position for AI which is the best possible performance per watt. Thank you.

Operator: Our next question is from the line of Samik Chatterjee with JPMorgan.

Samik Chatterjee: Hi, thanks for the question. And maybe if I can start with Cristiano asking sort of you mentioned the strong performance you’re seeing in the China market but maybe any more details in terms of just what you’re seeing in the market relative to any specific numbers that you can share because there’s been a lot of conflicting data points about the market being strong in 1Q and then maybe taking a breather so curious to understand what you’re seeing on the ground there in terms of the China market. Also it’s always been a sort of a leader in adopting new technology and seems like the AI phones are doing well, so how much of the recent strength do you attribute to AI led upgrade cycle versus a normal market rebound? And I have a quick follow-up after that. Thank you.

Cristiano Amon: Thank you, Samik. So what moves the market for us is it’s a premium and high tier and I think what we’re seeing in the China market is that the mix it’s improving, as the market has stabilized it when in return to some form of normality what we really liked is that within that market premium and high tier as a percentage continue to increase and that’s actually what’s driving the results and we are seeing the very first instances of on-device AI and GenAI being launched in premium devices and that has been resonating well to consumers, so it’s a positive trend that we like. The other color I’d like to add is we have not seen signs of weakness in the Android premium market in China especially with our OEMs so a lot of the strength really coming from premium devices from Xiaomi, Honor, OPPO, OnePlus, Vivo. And I think Huawei entering that market actually increased the overall term of premium Android.

Akash Palkhiwala: Maybe to add a couple of quick data points on top. As we mentioned in our prepared remarks, first half of fiscal ‘24, our revenue from Chinese OEMs grew by greater than 40% year-over-year. And that is also reflected in our third quarter guidance. So it’s a trend that’s holding up as we look forward. And then from a roadmap perspective, as you look into our new premium tier launches coming up later this year, in addition to GenAI, we’ll have our Oryon custom CPU core is coming in as well. So we’re very excited about the roadmap.

Samik Chatterjee: Got it. And for my follow up, maybe Akash, this is more for you. When you talked about the seasonality into the June quarter, hence if seasonality is sort of the typical seasonality that you see and the aggregate results or revenue being better than seasonal is really being driven by autos here with the low double date growth that you talked about, clearly very strong sort of pipeline of wins, but how sustainable is this sort of pace of improvement quarter-over-quarter in terms of revenue? Just want to get a sense if this is when we start to see more sort of inflection and auto revenue is given the strong pipeline you have and that drives better seasonal results going forward even into the September quarter. Thank you.

Akash Palkhiwala : Yes, from an automotive perspective, as we’ve given out a target of greater than $4 billion revenue in fiscal ‘26 and what you are seeing is really our design win pipeline materializing into revenue on our way to that number. And so that’s the framework as to how I think about it. Two key kind of data points on our design win pipeline, so as you’ll recall the last number, we had given was $30 billion in September, about 18 months ago, September ‘22. The updated number that we just provided is $45 billion of design wins, so obviously a very significant increase and off note within that approximately one-third is driven by ADAS, so we’re seeing a tremendous success now in ADAS and that’s adding to our design win pipeline.

Operator: Our next question is from Mike Walkley with Canaccord Genuity.

Mike Walkley: Hey, thanks. And maybe just building off the 40% increase in shipments to the Chinese OEMs holding through the June quarter guidance, just based on your expanding on-device AI portfolio, is this level of demand sustainable into the back half of the calendar year or ask another way do you expect the smartphone market to have kind of normal seasonal turns after the June quarter dip?