QUALCOMM Incorporated (NASDAQ:QCOM) Q4 2023 Earnings Call Transcript

QUALCOMM Incorporated (NASDAQ:QCOM) Q4 2023 Earnings Call Transcript November 1, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Qualcomm’s Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded November 1, 2023. Playback number for today’s call is 877-660-6853. International callers, please dial 201-612-7415. The playback reservation number is 137-41-657. I would now like to turn the call over to Mauricio Lopez-Hodoyan, Vice President of Investor Relations. Mr. Lopez-Hodoyan, please go ahead.

Mauricio Lopez-Hodoyan: Thank you, and good afternoon, everyone. Today’s call will include prepared remarks by Cristiano 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 accompany 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.

A technician working on a mobile device, indicating the company’s wireless internet access capabilities.

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 could 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 Q4, we delivered non-GAAP revenues of $8.7 billion, and non-GAAP earnings per share of $2.02 above the high-end of our guidance. Revenues from our chipset business of $7.4 billion reflect a more stable Android handset environment. Licensing business revenues were $1.3 billion. During the quarter, we also made significant progress on our leading technology and product road maps while improving operational efficiency. We remain fully focused on our future growth and diversification opportunities. Let me now discuss key highlights from the business. As we enter the age of generative AI, we’re seeing an unprecedented pace of innovation.

On-device Gen AI is evolving in parallel with Gen AI in the cloud enabling entirely new use cases. It has the potential to change how we interact with our devices making the user experience more natural intuitive, relevant and personal with increased immediacy, privacy and security. We have quickly established Qualcomm as a leader in on-device Gen AI for smartphones, next generation laptops, XR and automotive, and we are well-positioned to benefit from this opportunity. We expect high performance on-device AI to become a requirement over the next few years, driving content, units, or both. Our Snapdragon platform is highly differentiated from its competitors. First, we significantly increased the AI processing performance in power efficiency of our best-in-class NPU, CPU and GPU.

Second, we are collaborating with multiple partners in ecosystems to enable a host of consumer and productivity based AI models running natively on our platform. Third, we’re enabling multibillion parameter Gen AI models to run continuously and concurrently for multiple use cases, including multimodal. For example, in the latest Snapdragon 8 Gen 3 smartphone platform, state-of-the-art large language models, such as Llama and [Vicuna] (ph) up to 10 billion parameters are running at up to 20 tokens per second. And large vision models such as stable diffusion can generate images from text in less than one second with ultra-low power consumption. As always running on-device Gen AI becomes pervasive we believe it will create one of the most significant changes in user experience similar to the transition from the feature phone to the smartphone and the introduction of the graphical user interface for PCs. Snapdragon will play a significant role in this transformation.

We also reached an important milestone in our expansion into PCs with the announcement of our Snapdragon X Elite platform. It is the result of a relentless pursuit to create the ultimate intelligent computing experience and establish Snapdragon as the industry leader in performance and power efficiency. The Snapdragon X Elite includes our first implementation of the custom Oryon CPU, which exceeds the multi-threaded CPU performance of any x86 or ARM competitor in its class. It also matches the single-threaded CPU peak performance of the leading x86 CPU competitors at 70% less power. Additionally, our premium integrated Adreno GPU delivers up to two times faster performance than the competition at ISO power or matches competitor peak PC performance as 74% less power.

Snapdragon X Elite also features our newest Hexagon NPU. With 45 tops of performance, the Hexagon NPU is capable of running Gen AI models with over 13 billion parameters on-device. In total AI performance of the Snapdragon X Elite across CPU, GPU and NPU is 75 tops, the highest in the industry. Microsoft is redefining the entire Windows experience with the AI Copilot and the Snapdragon X Elite is built from the ground up for this opportunity. We look forward to PCs powered by Snapdragon X Elite from leading OEMs starting mid 2024. The merging of physical and digital spaces remains a significant future opportunity for Qualcomm and we recently launched a Snapdragon AR1 platform, our first dedicated platform for smart glasses. AR1 Gen 1 was developed in close collaboration with Meta and powers the new Ray-Ban Meta smart glasses.

It features a dual ISP camera system for premium photos and videos as well as powerful on-device AI for image enhancement virtual assistance, real-time translation, visual search, and more. Together with Meta, we’re developing next generation technologies to create the future of spatial computing. The AR1 Gen 1 along with a previously announced Snapdragon XR Gen 2 are a testament to the strength of this long standing partnership. Across the industry, Snapdragon remains the platform of choice for all leading VR, MR and AR designs. In networking, we continue to be a global Wi-Fi leader across enterprise and home networks as well as broadband gateways. Our Wi-Fi 7 solutions are seeing strong traction with more than 350 design wins across all categories to-date.

We recently announced several new collaborations, including with Charter Communications in the U.S. and EE in the UK, both of which are preparing to roll out enhanced next generation Wi-Fi 7 connectivity to the residential and small and medium size business customers. We’re excited about the launch of our Fiber Gateway Platform which adds 10 gigabit passive optical network capabilities to our portfolio. With Fiber, in addition to 5G and Wi-Fi 7, we’re now positioned to lead in next generation broadband solutions. Additionally, our unique service defined Wi-Fi technology signature feature introduced with our Wi-Fi platforms offers a unified data flow management architecture from cloud to device. It delivers orchestration, classification, scheduling, and insights to enable the end-to-end management of home networks in real-time optimizations across devices.

In automotive, the digital transformation of the industry continues to bring new levels of computing, intelligence and cloud connectivity to the vehicle. These trends are driving new user experiences, advancements in driver assistance, autonomy, and safety. They also offer the potential for new revenue opportunities as vehicles gain the ability to evolve with over the air updates in digital services. The vehicle is becoming software defined and the Snapdragon Digital Chassis remain at the center of this transformation. We are pleased that our Digital Chassis solutions will bring advanced capabilities to the upcoming Cadillac ESCALADE IQ, which is planned for commercial production in 2024. The Cadillac ESCALADE IQ will be equipped with the Snapdragon Cockpit, Snapdragon Auto Connectivity and Snapdragon Ride platforms.

Additionally, we’re proud of our partnership with BMW for all vehicles as well as the upcoming Neue Klasse. We’re also excited that the Snapdragon Digital Cockpit and Connectivity solutions now powered the new Mercedes Benz User Experience starting with the 2024 E-Class sedan. We recently expanded our Digital Chassis offering with the launch of two new platforms for two wheelers and other vehicle classes such as motorcycles, e-bikes, scooters and all-terrain vehicles. Our new platform design wins and launches with Gogoro Harley-Davidson and others are receiving positive feedback from the ecosystem on their ability to advance technology development and bring new user experiences to these vehicles. Finally, we announced a new long-term relationship with Amazon Web Services to enable automakers to integrate cloud technologies into their vehicle development lifecycle.

The offering combines the Qualcomm Cloud AI 100 solution our Snapdragon Ride platforms as well as AWS breadth of services and capabilities. This will advance the future of software defined mobility and change how vehicles are designed and developed. In handsets, we announced our latest premium mobile platform the Snapdragon 8 Gen 3, which delivers industry leading performance and extraordinary experiences to consumers for the upcoming Gen AI era. Some key features include intelligent capture with the world’s smartest AI powered camera, console level gaming with ray tracing with global illumination, studio quality audio, the world’s first XSPAN technology, best-in-class connectivity, and the world’s fastest on-device AI processing on a smartphone.

We look forward to flagship device launches powered by the Snapdragon 8 Gen 3 by global OEMs and smartphone brands, including Xiaomi, Honor, OPPO, Vivo, OnePlus, Sony, and More. In addition, we recently entered into an agreement with Apple to apply Snapdragon 5G Modem-RF systems for smartphone launches in 2024, 2025 and 2026. This agreement reinforces our track record of sustained leadership across 5G technologies and products. We are proud of our ongoing relationship with Apple. As we look forward, our technology roadmap has never been stronger and the fundamentals of Qualcomm’s growth drivers remain unchanged with significant opportunities in the coming years. We continue to focus on stockholder returns in executing on our ongoing diversification opportunities while maintaining operating discipline.

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 fourth fiscal quarter results. We delivered non-GAAP revenues of $8.7 billion and EPS of $2.02, which is above the high-end of our guidance. QTL revenues of $1.3 billion and EBT margin of 66% were in-line with our expectations. QCT delivered revenues of $7.4 billion, an EBT margin of 26%, which were near the high-end of our guidance on strength in handset and automotive revenues. Handset revenues of $5.5 billion increased 4% sequentially and were higher than expectations due to the benefit from the early stages of recovery in Android demand. IoT revenues of $1.4 billion were down 7% quarter-over-quarter, including softness in industrial IoT demand.

Automotive revenue grew 23% sequentially to $535 million, making this the 12th consecutive quarter of double-digit percentage growth on a year-over-year basis. Non-GAAP operating expenses decreased 1% sequentially to $2.2 billion. Before turning to guidance, I’ll summarize our fiscal ‘23 results. We delivered non-GAAP revenues of $36 billion and EPS of $8.43 despite the challenging macro environment. We remain focused on our strategic priorities of extending technology leadership and driving revenue diversification, while taking significant steps to improve our operating efficiency. We continued our strong momentum in automotive and delivered record revenues of $1.9 billion, with year-over-year growth of 24%, progressing towards our target of greater than $4 billion in revenue by 2026.

We exceeded our fiscal ’23 cost action target, reducing non-GAAP operating expenses by 7% relative to the fiscal ’22 exit rate, executing on our commitment to manage the cost structure given the current operating environment. Our business continues to generate strong free cash flow, with a record of $9.8 billion. Lastly, our balance sheet remains strong with $11.3 billion in cash and marketable securities. Now, turning to guidance. We are seeing early signs of stabilization in demand for global 3G, 4G, 5G handsets. We now estimate that calendar ‘23 handsets will be down mid-to-high single-digit percentage relative to calendar ‘22, an improvement from our prior expectations. In the first fiscal quarter of ‘24, we are forecasting revenues of $9.1 billion to $9.9 billion and non-GAAP EPS of $2.25 to $2.45.

In QTL, we estimate revenues of $1.3 billion to $1.5 billion and EBT margins of 70% to 74% with sequential growth driven by an increase in global handset units for the holiday season. In QCT, we expect revenues of $7.7 billion to $8.3 billion and EBT margins of 26% to 28%. On a sequential basis, we estimate double-digit percentage growth for QCT handset revenues and anticipate both IoT and automotive revenues to decline consistent with last year. QCT handset revenue forecast includes the benefit of normalization of Android channel inventory and higher demand due to the acceleration of flagship launches with our newly announced Snapdragon 8 Gen 3 mobile platform. Notably QCT handset forecast include sequential revenue growth of greater than 35% from Chinese OEMs. QCT IoT revenue forecast reflects the industry-wide cyclical factors we’ve previously discussed, including lower demand and elevated channel inventory.

Lastly, we expect non-GAAP operating expenses to be flat relative to the fourth fiscal quarter. As we enter fiscal ‘24, we are encouraged by the early signs of demand stabilization in handsets and our strong competitive positioning across revenue streams. Key industry trends such as heterogeneous mobile computing and on-device generative AI provide a strong foundation for content growth and expansion to new device categories, driving growth opportunities for Qualcomm. In closing, I want to thank our employees for their hard work and dedication and for remaining focused on execution and continuing to deliver industry leading products. This concludes our prepared remarks, back to you, Mauricio.

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

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Samik Chatterjee with JP Morgan. Please proceed with your question.

Samik Chatterjee: Yes. Hi. Thank you. Thanks for taking my questions and, congrats on the results here. I guess if I can start with Cristiano your comments about on-device AI becoming pervasive in a few years, I think investors are largely looking for more sort of evidence and validation that this is going to be a key focus area for a lot of OEMs smartphones and other device OEM. So, as you look over the next sort of 12 to 18 months, what should investors look at in terms of more validation of either wins or revenues that you expect from the monetization of the trend, in relation to what investors can really look to as milestones to validate that this is actually going to be sort of playing out over the next three to four years. And I have a follow-up.

Cristiano Amon: Thank you so much, Samik, for your question. For those that have not seen, I think, I would recommend to see the highlights of our Snapdragon Tech Summit that just happened a couple of weeks ago when we announced the results of our investments in Gen AI. I’ll tell you Samik that on-device Gen AI, as I mentioned in my prepared remarks, are evolving in parallel to the cloud. And it’s going to have a significant impact in how you change the user experience. Just think about a simple use case as you’re texting, every single test that you write could be an input to a model, and that could bring prediction of your behavior and bring other applications. We demonstrated a number of use cases. They’re under development by many other OEMs. There are a number of different models from large language models to large visual models.

One unique position of Qualcomm we have many of those models running natively on a platform. We’re creating a model zoo for Snapdragon. And you saw announcements from Microsoft, from Meta, from what we’re doing on Android, we’re doing with our Chinese partners. And you’re going to start to see those signs. Especially what flagship device is launching in ‘24, as you started to see those use cases changing photography, changing, messaging, changing scheduling, changing assistance, how you should think about this financially for us? You have the potential to create a new cycle for phones, and it will have an impact on increased silicon content. Just to put in perspective, we have significant increased the processing performance of our AI, processing in the device or NPU is going to have silicon content, is going to have an impact on mix, and it’s going to have an impact on unit of all of it.

And it’s likely going to start as use cases get developed with flagships launching ‘24, but it could be very significant as you look at the next two to three years.

Samik Chatterjee: Okay. Got it. And for my follow-up, I guess, you’re sounding a lot more positive around the recovery in the Android OEMs, sort of the smartphone market. I think investors at the same time are grappling with the potential sort of puts and takes, particularly when it comes to your primary or a large, Android customer Samsung using more in house solutions going forward. So, when we think about sort of, seasonality beyond the December quarter, particularly around the launch periods, how should we think about your market share with Samsung progressing and what impact does that have on relative to your typical seasonality from December to March? Thank you.

Cristiano Amon: Very good question. Let me unpack that question. Let’s divide the conversation in two. I think the first part of the conversation, as we said in the prepared remarks, we’re happy that the inventory dynamics that we have seen within the Android, business are largely behind us right now. And, one data point that we provided in a cautious, I think, remarks is sequentially from Q4 fiscal to our guide, we’re seeing a total growth of revenue from Chinese OEMs, both in China and outside China of 35%. And I think that shows that our customers are in a great position. I think even facing new interests in the market. And, it’s also strength of our road map and the stabilization of the market. The second question is about Samsung, look, we’re happy with partnership with Samsung.

There’s the upcoming launch of the GS24. We expect to have the majority share. Our product is really great. I think as I said, we probably have one of the best product roadmaps in the history of the company, especially in the Gen AI processing capabilities. And the product is getting better. We were happy to talk about what we have done in PC with our new Oryon CPU. That CPU was coming to mobile especially in ‘25, and we expect even more, I think, evolution of Gen AI. So the roadmap gets better over time. Overall, we’re positive about our relationship Samsung. Thank you.

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

Matt Ramsay: Thank you very much guys. Good afternoon. I guess for my first question, Cristiano, I did pick up on the 35% growth sequentially with China OEMs. But you guys, the question I’ve been getting a ton is around Huawei and what they’re doing. So, you guys called out, I think, last quarter that they were going to be getting some supply on seven nanometer from SMIC and being able to do some devices themselves. And you called out an impact to your revenue. But I think longer term into all of next calendar year, there’s some expectation that they might get some more supply. Some of it from SMIC on seven, some of it from SMIC on 16. And that might be a unit headwind to some of your other OEM customers. Maybe you can sell into them as well on 4G. So, if you could unpack a little bit of what’s going on with Huawei and how you see it impacting the market in China that would be helpful. And I have a follow up. Thanks.

Cristiano Amon: Thank you for the question, Matt. I think maybe separate and first, as we indicated in the last earnings call, I think we indicated that we don’t have any more projection of selling our 4G, I think, SOCs to Huawei. And, going forward, we don’t expect to have any significance, it’s going to be a very small, I think, contribution from Huawei. I think the more interesting answer to your question, and that’s the reason I provide the 35% data point, is as Huawei launched the device, we what we are seeing from our customers is continue, I think, growth from our customers on the Android side. We see a mix improvement of our customers moving towards flagship and, it’s kind of reflected in our numbers. So it does not change, I think, the trajectory that we have with our Android customers in China.

And there is a possibility that I think that Huawei is upgrading their existing customer base. You know there was a data point, there’s about a 100 million Huawei former customers with a four to five year old Huawei phone, and that could have an impact on increasing the TAM.

Matt Ramsay: Thank you, Cristiano. I guess as my follow-up, it was very impressive, some of the products that you put forward for the PC market at the latest Snapdragon Summit, I think you were right to call out the performance levels, the power levels and the much, much different support from Microsoft. I guess what I’m trying to understand a little bit more is support for ARM PCs, whether in gaming or in enterprise use cases, by other ISVs. So folks that might need to use other end applications that wouldn’t be touched directly by Qualcomm or directly by Microsoft. Cristiano could you give us a little bit of an update there? What are you seeing from the ISV ecosystem and in what parts of the PC market do you see potential momentum for your products? Thanks.

Cristiano Amon: Look, there’s a lot to unpack here. I can speak about this for a whole day, but I’m going to try to be succinct. First thing, we’re incredibly proud of the accomplishments of our team. I think, Snapdragon X Elite took the leadership position in this space for any mobile computing device. We’re incredibly happy with performance of the new CPU, both single-threaded and multi-threaded performance. But not only that, I think it’s important to highlight the AI processing capability because that’s key to answer your question. If you look, versus announcements on NPU or some of the other ARM competitors. We had 45 tops performance on the NPU with a total tops performance on X Elite of 75. And that aligns with the transition that Microsoft is making towards a Windows AI future, especially the new services with the Copilot and everything we’re doing with Microsoft, on-device working together on-device AI with the cloud and with the Azure endpoint.