All right, everyone, let's get started with the next fireside chat. We're very pleased to have Akash Palkhiwala, the CFO and COO, I think from last year? I don't know. When did the COO happen?
This was January.
Gotcha. So since last year-
Not too long ago.
We've added another C title for you.
Yeah.
So we can get into a little bit of what that means later.
Of course.
But first and foremost, thank you so much for coming up. I know that, we're gonna get into some of the diversification and longer term strategies, in a bit, but why don't we start off a little bit on the near term? Are we back to kind of normal seasonality in your core handset business, and so the normal puts and takes, good quarters, bad quarters, relatively speaking, are how people should look at it, or are we still dealing with some cyclical inventory dynamics?
I think from an inventory perspective, and we've been consistent on this, we've kind of normalized over the last couple of years, right? And so we went through a build cycle, we went through a drain cycle on the inventory, and then I think we've been kind of normal for the last two or three quarters on the handset side. There's some inventory dynamics still left on industrial, but I think we're pretty close to the end of it as well, but yeah, overall, I think when you step back from all of that, we're back to kind of running our business on a normal cadence. The products that we have in our pipeline, very excited about what's coming up.
I think I've said this in previous conversations. We have a new chip coming out, and we typically announce it at our technology summit, so this may be a plug-in for that. If you listen in in October, we'll be talking about our new chip, and we'll bring our custom-designed CPU into our chip. A lot of advances on Gen AI, new architectures on camera and GPU, so very excited about what's coming up in the business.
So if normal seasonality is implying or starting to come in, and again, this will be the last near-term question, I promise.
Fine.
You guys have a further confusing variable. You have an extra week in September.
Yes.
Then you alluded to kind of, I think, 5% year-over-year growth in December, which seems to imply sub-seasonality at a time when some of your customers are actually applying better than 5% year-over-year growth. The next question is, how do we reconcile all of these? Because it sounds like it's a little worse than seasonal, but the extra week and everything can confuse it.
Yeah. So first of all, let me maybe give broader context on the business, right? So the business has normalized. There's no change in share versus any expectations. I think we're doing extremely well on the premium tier. As I said earlier, we're excited about what's coming up as well. So this is not a question about share. The second is content. As we've said in the past, we've seen tremendous content growth. There's a lot more complexity going into chips, and I think we've been rewarded for it for the last couple of years. We're seeing that going forward as well. So when you kind of step back from those two factors or those two comments, then you're talking about kind of shorter-term dynamics that are related for other issues. And so I'll start with the 13 versus 14 week.
Don't blame me for it. I didn't come up with this fiscal year structure, where every six years we have an extra week that shows up in one of our quarters. And so, good news is I don't have to deal with this for another six years. But when you look at the June to the September quarter, what happens is we go from 13 to 14 weeks, so clearly there is a benefit that comes from it, contemplated in our guidance. And what happens is QTL, you have an extra week of revenue. For OpEx, you obviously have an extra week of OpEx.
On the QCT side, what you end up seeing is not a relative increase in the extra week because a lot of the build that happens for the Apple launch happens earlier in the quarter, and so you see a benefit, but not as much. However, the other factor we're seeing that goes from June to September, and we've been very clear about this as well, is that we our license to sell to Huawei got revoked, and as a result, we have Huawei revenue, had Huawei revenue in the June quarter, we don't have it in the September quarter. So those are the two factors that go into guidance. It doesn't kind of fundamentally change what's happening with the business. When you go from September to December, we obviously go from 14 weeks back to 13.
But otherwise, it's just timing of purchases by customers. The underlying business is very strong, and I think, when you look at what we're doing on the diversification side, very excited going into fiscal twenty-five.
Perfect. As promised, we'll move away from the very, very short term.
Yeah.
Think a little more structural now. So let's talk about the diversification side of things. Why don't we start at the highest of level and talk about the organic versus inorganic side? Because I think it'll probably be the shorter part of it, let's do the inorganic first. How does Qualcomm look at M&A to accomplish that with the fact that your handset-related businesses can be, you know, 80% plus of the company, but is going down over time? Do you accelerate that via acquisitions? If so, small, large, how do you think about that?
Yeah. So maybe I'm gonna take this opportunity to step back a little bit and talk about our broader strategy, how it fits into what is happening into the industry, and how the company has evolved, right? So a lot of you have known Qualcomm for a while. You remember us as a connectivity company. We've transitioned to, I'd say, a computing-first company. Of course, we are still the leaders in connectivity, but tremendous assets in computing. And the fundamental premise of the company is, can we take the assets we've built for handsets and apply it to new industries as they are going through inflection points? So automotive is a great example where we've succeeded. The industry is going through an inflection point. The digitization trend, obviously everyone knows about it, that's happening in the car. There's electrification as well.
We are not a part of that. We're really focused on digitization, and we're seeing very significant benefits. We've. It shows up in our numbers now, that that's happening. The next market in our minds that is changing massively is the PC market. We're going to see the market transition over, with or without Qualcomm, and our obviously our assumption and our claim is that it's gonna happen because of Qualcomm. The market is gonna transition over to a different kind of chipset platform, more like the phone, that has not just CPU competence, but very low power GPU, camera, audio, video competence as well, and connectivity. So there's a lot of things that are changing, and we get a chance to intercept that.
Doing XR devices, AR, VR devices, I think there's a lot happening there as well, and Qualcomm, we're by far the leader in our minds in that area as well. And then finally, industrial. So we're at this place where we're sitting with a great set of assets and handsets, and we are applying those assets to all these new areas. And the way we are applying it is we're taking advantage of inflection points that are happening in each of these markets. While we were going through this journey, AI happened, and we have a very specific view on how AI plays out in devices. Of course, there's a lot of training inference happening in the cloud.
But our view is like computing, which happens in the cloud and happens on the devices, we're gonna see AI happen in the cloud and happen on the device. There's just a lot of sense in terms of cost, performance, new use cases that can be enabled when you run inference use cases on the device. And the rationale is pretty simple: Run inference where the data sits. The data sits on the device. You run inference on the device, rather than send the data to the cloud to run inference there. And you take advantage of the resources that are sitting dormant in the device versus using pretty expensive cloud resources to run those things.
So we have a pretty clear view, and in our mind, it's kind of a no-brainer, that a lot of the AI inference activity is gonna happen on the device. And we have a really strong portfolio of technologies that can run AI on the device. We, of course, have the CPU and the GPU, but more importantly, we have our neural processing unit, NPU, that is really the basis for the Copilot+ service that Microsoft is coming out with. And so they're taking advantage of the power-efficient NPU that we have in place. So we think we're in this journey of taking advantage of handset assets, bringing it to other industries. But when you combine AI on top of it, we think it becomes a no-brainer, and that's the opportunity in front of us.
Before going into some of the specific end markets, I want to dive a little bit into the technology side of it.
Sure.
You mentioned about kind of Arm-based PCs, low-power processing at the edge, been a Qualcomm quality for many, many years. I guess my question is: Is it because of the architecture or because of what Qualcomm does with it? Let's say Arm does penetrate all these different markets, why does Qualcomm win, even if... Is it just because of Arm and you're a leader there, or are you doing special things on top of it?
Yeah, so we've used off-the-shelf Arm cores to build chips for PCs for a long period of time, and I'd say we have not been very successful. One of the big changes that's happening now is that we've built a custom Arm CPU core with the team that we acquired, and the performance of it has been outstanding, and now it's in products, right, so everyone can test products that are out there, and it's clear that the performance is very strong, and we do it at extremely low power, and that really adds a different dimension to computing devices, so we really think that's what's unique about us, and that's why Qualcomm is well positioned to make the transition happen.
When we've had some of the x86 competitors or incumbents up on stage, they talk about there not being necessarily a core advantage and that they're gonna have battery lives that can equal yours. What do you think the core advantages of a Qualcomm-enabled or Snapdragon X Elite-enabled laptop versus a traditional?
I think the battery life advantage is significant. It's improved in devices today. I think you have Apple doing the same thing, and we've seen the performance of their devices relative to x86 systems. So to me, what we're claiming is not a speculative statement. It's now improved in devices, and everyone can test it out. And then the second advantage I think we have is it extends to on-device AI. Being able to run it on our NPU, which has been kind of the basis of the technology comes from the DSP that we've been running our modem on for very, very long period of time at very low power. That is another technology that is extremely low power. So even if other people have an NPU, the power advantage is gonna be extremely significant.
And so we're very excited, very confident that the product leadership's position for us for the next several years is gonna be very strong in PCs.
And to the extent Arm has core advantages over x86, and I know people will debate that, but to the extent it does, if other Arm entrants, Arm-based entrants come in, is that where the Nuvia technology, the customized chip, the more specialized NPU that Qualcomm offers, will differentiate versus that potential threat?
...First of all, I'll say, this is a very large market, and it's all x86 today. So to the extent that it transitions over to a different architecture and Qualcomm gets a large portion of it, we'll be very happy with that transition. So, for us, the incumbents are x86, and who we are competing against are the x86 incumbents, and we obviously have a great product. From a new ARM competitor's perspective, I think we welcome the competition. I mean, you've seen in ARM devices, Qualcomm has been very, very strong in every other device, and phone obviously is the main example, and we're seeing it in automotive happen as well. So we're okay with that competition. We've done well. We've led on performance.
We've done extremely well in the high-end premium tiers, and we are ready to do that at PCs as well. So we welcome the competition.
So last question about the AI PC side of things. What's Qualcomm's definition of success in that market?
Yeah, so, we'll obviously talk about it a lot more at our Auto and IoT Investor Day later in the year. So I'm not gonna try to preempt that.
November 19th for everyone.
November 19th, but there, there's really kind of two players in the industry today, and there is a share mix between the two players, and what we want to be is one of the top players in the industry. So, I think that's the framework under which we are operating.
Let's switch over to the auto side of the diversification story. I think your business is up about 50% this year. It's amazing when we're having so many other auto-related companies saying, you know, the pace of the recovery is slower or the cyclical downturn is persisting. You guys keep growing right through it. Talk about what's, no pun intended, driving that success.
Yeah. Yeah. So, as I said earlier, for us, the most important thing is to enter these new markets when there's an inflection point on the technology side. The automotive industry, massive inflection point happening. Digitization is how I would outline the inflection point to be. And so we're going from all cars are getting connected, the inside of the car, you have a tablet-like experience, we have obviously ADAS happening, and then the car architecture is changing. More and more technology is going into a central compute rather than being at the edge within the car, and that puts us at an advantage. So everything that's happening in the automotive industry is something that plays to Qualcomm advantage. And what we've been able to do is really kind of take the technology we have and build the right products for what that industry needs.
It needed us to learn new things. It needed us to learn auto-grade, how to build auto-grade products, to how to handle different temperature ranges. In terms of quality and software reliability, the bar is different. ADAS, we have the hardware platform, our chipset, but then we also built, acquired a software team, and we've built an ADAS stack as well. Sometimes the conversation stays on chips, but one of the things that gets missed is the asset that we have in terms of our software expertise. If you think about Digital Cockpit within the car, the platform is very complex. There are several different operating systems that are present in the car.
You also have to deal with the real-time operating system that the OEM needs for the car functions, but then you also have to deal with the whether it's Android or some other version of it that is required for the consumer experiences. And you have to make all this work at the same time, sometimes with one piece of silicon, including certain ADAS features, and then you connect it all to the cloud through telematics. And so it is a very complex system, and you can't think of it as a component anymore. The sale happens at the OEM, not really kind of tier ones and tier twos anymore for us, and then we are selling the entire system, and that's the advantage.
We can sell all components to you, and we go from the highest tier car to the lowest tier car, and we're clearly a reliable customer supplier for all these OEMs, and that's what our advantage is.
Again, not to front-run November nineteenth, but from where you are today, you seem like you're well on pace to at least meet your $4 billion target. I think it's fiscal, not calendar, 2026?
That's right.
Either way, a couple of years out.
Yep. Yep.
Talk about how that business—what drives the growth from today till then, and how it evolves, you know, between connectivity, infotainment, ADAS, those sorts of, how those layer in.
We've talked about our design win pipeline, right? And that's the kind of what we were trying to do is, when the revenue stream was smaller, we were trying to give a sense of how are we doing in winning the designs, because as everyone knows, the way the automotive market works, you win something today, revenue shows up in three to four years. And our design win pipeline is extremely strong. Last number we gave was $45 billion, and a third of it is related to ADAS. And so that is what is translating into revenue as new cars get launched, new platforms get launched. And the trend that's in our favor, I think, is in some ways the digitization change within the automotive industry is accelerating. It's not just a high-end car feature. Every car wants the feature.
It's not just a car feature, two-wheelers want that feature, and so it's something that is going to hit the broader transportation industry, not just consumer vehicles, and so I think this is a trend that we're well positioned to benefit from. The trend is accelerating, and we have all the right technologies, so the revenue growth is really about product launches now, because a lot of the design wins has already happened.
So I think you guys are gonna talk a lot more about all of that, the diversification side, but, let's talk a little bit about the handset side as well.
Yeah.
... AI into handsets. We talked a bit about AI into PCs before. How do you see the handset as a vehicle for the same sort of compute intensity rising and how Qualcomm's positioned?
Yeah, so, we think the handset is actually a perfect device for a lot of AI use cases. When you get constrained by real estate, and obviously, the size of the screen is a constraint, being able to offer new user experiences that are based on AI are gonna become extremely important in our minds. We started talking about this a year ago, and the conversation was about: Is it really going to make sense to do it on a device? I think a year later, now the conversation has moved on to: So what's gonna be the use case? Because we all believe that it's gonna happen on the device, but what's gonna be the use case? The use case, my view on it is it's very similar to what happened with applications.
We started off. When app stores came in, we started off with five applications, and then we had fifty, and then we had five hundred, and then we had a lot more. The same thing is gonna happen to AI. We're gonna start with a select set of use cases, which are being deployed right now. I'd say Microsoft is doing a lot on the PC side. Google, Samsung, the Chinese OEMs, they're doing on the handset side. But we're in the front end of the innings. When we have this conversation a year from now at this conference, we're gonna be talking about a lot more use cases happening. And in our minds, it's a certainty that a lot of the AI use cases on the phone is gonna run on the device. It helps from a security, privacy perspective.
It helps from a latency perspective. It helps a lot on the cost side, because you're using free compute power on the device. And then there are new use cases which you can only do on the device. You can't really keep going back to the cloud. So all of those reasons make it very obvious to us that a lot of AI use cases are gonna happen on the device. The real conversation is: Does it really change the smartphone completely, right? Is the use case the way you interact with the device, and is it gonna change from the... Right now, we use our smartphone as if you're using a machine. Are you gonna use a smartphone as if you're talking to a person?
Does the concept of an AI assistant completely transform the way a smartphone is used? In our minds, and Cristiano over here, he would say, in five years, we know that is definitely gonna happen. I don't know if it's gonna happen in two years or three years or four years, but by the time we go through the next five years, the way we interact with the phone will be a lot more user-intuitive, as if you're talking to a person, and you don't have to give the kind of specificity in terms of instructions. You don't have to go into a specific app and say, "I want to look for a flight from this place to this place at this time." You should be able to talk, and the AI assistant should be able to do something for you.
I think that UI transition is gonna happen, which is gonna really make it, and a transition that requires a different set of technologies, and that's why we're excited about it. Because we are clearly the leader in having AI capability on the device, and this transition is gonna help us.
In your view, whether it's near term, midterm, long term, your answer might be different, but do you think it's a content gain for Qualcomm, a unit gain, or both?
Content gain for sure, and it happens in two ways, right? One is if you look at the premium tier, more technology going into devices. Across the other tiers, people are buying more expensive devices. So the content gain kind of shows up in different ways across tiers, but it happens across all tiers. The real question is: How likely is it that the handset market transforms? And that obviously is a very significant factor for all of us who are in the industry. Our differentiation from a share perspective is also very strong, and so we see it as a longer-term share opportunity as well.
So those are kind of the three vectors: content, share, and TAM. And then we know that the content benefit is coming through. And then the remaining two, we're gonna have to see how it plays out.
Is this what gives you the confidence in thinking, at least at the high end of your stack, that you should have double-digit ASP or content increases gen to gen?
This gives us the confidence, and also history gives us confidence. We've done that over the last three or four years, and you've seen it show up in our numbers. And so we also know the next two or three chips that we're making already, and so that also gives us the confidence, and we're talking to our customers about it and the features that they want in those chips. So it's a combination of those factors.
The fact that you can do that sort of increase, and you're not relying upon a 4G to 5G transition, that at times would be the catalyst for it, that you can bridge the gap to the next G with AI also helps.
Yeah, and I think one of the conversations that sometimes gets lost in Qualcomm is the conversation ends up being about connectivity. And as far as we're concerned, as I said earlier, we are a processing company that is still the best in the world on connectivity.
Right. So let's talk a little bit more about kind of how the various markets are working, either geographically or by kind of the operating system. You guys, I think, you're 50% year-over-year in your China business, ex-Huawei, in this last quarter. Talk a little bit about what's driving that growth and how sustainable it is going forward.
Yeah. So, year-over-year, when you look at this year versus last year, I'd say there's two significant factors. First one is the content increase and the market shifting up within China. That has clearly happened, and you're seeing the benefit of that show up in our business, and I think those are, as I said earlier, kind of sustainable trends in the longer term because the phone continues to be an extremely important device for people, and as consumers upgrade their phones, they, they're continuing year after year to buy more expensive devices, and you see the benefit of that show up in our numbers.
The second factor is, last year there was an inventory impact in terms of revenue that we had in the quarter, and this year we think it's think of it as normalized revenue, so clearly, the year-over-year growth benefits from that as well, but I'd say, obviously, the second factor is transitory. The first one is really the underlying growth in the business.
And in the Huawei side of things, you've been very clear about what was in the business and is now not in it, and it's all 4G stuff anyway. But as you think about going forward, how do you think about their aspirations in 5G and what that may or may not do to your market share in that China market?
Yeah. I mean, I think generally when you step back and you look at how we've competed in these markets, we're not relying on one or two customers. We obviously sell to every major OEM at scale, and we're probably the largest supplier for each one of them. So I think we have diversity of customers, which is what really matters in the longer term in this market. From a Huawei perspective, what we're confident about is our product roadmap, right? We're in four nanometer, going to three nanometer, going to two nanometer. Very, very strong product roadmap across a variety of technologies. And our customers are really looking at making great products with it.
We'll stick to our strategy of leading in technology and delivering leading-node chipsets, and that's, I think, will hold us in good stead.
And then the last customer that, you know, the big U.S. modem-only customer, you can say the name if you want-
Yeah
... but I won't. One, they don't seem to fit with your "we're a compute company now," they're that's a connectivity company, 'cause their own choices. You've talked about in a couple of years' time, I think the latest guidance you gave was that you'd drop to about 20% penetration there. One, is that still the case? And two, what's the magic about stopping at 20? Is it a dual source assumption? Is it a QTL versus QCT assumption?
So this entire conversation is about QCT. QTL is kind of a separate conversation. We have a license agreement in place, and and so really kind of, I think what you're asking is a QCT question. From a QCT perspective, we're very focused on what we control. We have a three-year agreement with them that covers 2024, 2025, 2026 launches. We've said very clearly that in the last year, we expect to have 20% share of the launch, the 2026 launch. That's how we've always modeled our business. When we had the previous agreement, we modeled it the same way. We're gonna model it the same way here. What we control is that we deliver the best modem, the best product, and so we're continuing to do that.
We're gonna be a great supplier, and we're gonna deliver leading technology to them. The rest we don't control. So we are focused and we're transparent about what we're doing, how we're planning our business, and so when we make financial decisions, it's based on the assumption that our share is gonna go down, and they're gonna use their internal chip. If something else happens, that'd be upside to our forecast.
So why don't we switch over to QTL for a bit, and then we'll get to some of the financials to wrap things up. On the QTL side of things, it's been relatively stable. You'll have some renewals at different points in time, but is there anything that, any significant large renewals, risks to the upside or downside that we should think about, or is it pretty much stable with seasonal gyrations from here?
Yeah, I think we've kind of given an update on all the renewals that have happened, and as I'm sure you've seen, that we've been very consistent in our renewals, and none of the renewals have impacted our revenue run rate. So, I think we're in a good place. There is some more work to do, as we've been transparent about it as well, but I think we're in a good spot. The patent portfolio is great. I think we're seeing 5G Advanced now being deployed in China. We're going to see 6G come through at the end of the decade, and we're leading that as well. So feel pretty good about our patent position.
Just because it's a question I get from some of the more risk focused folks, when somebody is no longer a modem customer of you, when somebody is no longer a 4G purchaser, a customer of yours, does that in any way, shape, or form add risk to the QTL side of the equation?
I think what really matters in this business, and this has played out over the last lot of years, is when you have the best portfolio and you have a policy of licensing consistently across the ecosystem, that that is the right way to do this business, and we've been very successful at doing that. Pretty confident as we go forward, that business model structure is the right way to proceed.
So let's switch gears over to the financial side of things and some of the margins and specifically the QCT side. I think everybody knows QTL is pretty darn stable there at a very high level. On the QCT side, you guys have been pretty consistent in the upper 40s%, maybe lower 50s%, in a quarter here and there. If we tie that together with the diversification efforts that we started off talking about, how do you see that QCT gross margin changing, if at all, going forward?
Yeah, I think generally, our long-term guidance on QCT gross margin has been that we expect diversification to be accretive at the dollar level and not specific gross margin movement as a result of it. I think it depends a lot on which business within our portfolio scales up faster, whether it's slower, and then is it automotive, is it PCs, is it industrial, XR? Various things happening in the business, and so each one kind of has its own profile and largely connected to the industry they are from, right? The industry they're competing in. When we think of QCT gross margin, we talk about the weighted average for the business, and we don't think diversification kind of materially changes it one way or the other.
Of course, as we kinda grow into different areas, we'll, we'll update that.
If we think about the automotive side, for example, is it in aggregate, it should be accretive, or does it really depend what you're doing in automotive that matters?
So I think when you step back and look at our strategy, our strategy is to reuse technology we've created in mobile, apply it to all these new areas. And that strategy, by definition, is accretive when you get to scale in each of these businesses. And that's what's important for us, is really about leveraging one large pool of R&D, expanding the addressable market for that R&D pool. And that, obviously, longer term, is a margin accretive approach, for the business.
So if it had to be one or the other, the QCT gross margin or the EBT, as you guys describe it, if the diversification continues to work really well, automotive goes to $4 billion and beyond, AI PCs work, do you think there would be more leverage on the GM or the operating margin line?
Well, again, I'll stick to what I just said, which is kind of our profile is that it stays in the range that it's in. And of course, there'll be some minor variance on either side, but we think longer term, that's the framework for the business. Operating margin should benefit as we scale in a bigger way. One of the things that I think is also gonna be important when we talk about margin is what happens with the growth in our industrial business. Because we're, it's like talking about automotive at the beginning of the curve. The industrial market is going through a very significant change in our minds, so it's been an MCU market to a large extent.
With AI coming in, MCU was already moving to processor plus connectivity, and now with AI coming in, on-device AI is gonna become extremely important. Think about robotics, drones, cameras, manufacturing lines, agriculture, transportation. All these industries are going to want to do AI at the edge, and I think the minute you make the assumption that that market is transforming, it's very much like automotive. The market was changing, and what we had perfectly intersected the new needs of the market. You're going to see that happen in industrial over the next three or four years, and we're already seeing that happen, by the way.
But the journey of the revenue growth is gonna be over that period of time, and I think there is this tremendous opportunity that is not well understood today, but over the next several months, it's going to become a lot more clear, and we'll talk about it at our Investor Day as well.
So last question I have, and this will tie back into that diversification theme, and again, hopefully not just front run the November event. M&A to accelerate this, you know, you made an attempt with a big deal. It basically got blocked through no fault of yours or NXP's. And then you've done relatively smaller deals that have been complementary and have gone very well. What's Qualcomm's philosophy on M&A?
Yeah, our strategy is unchanged, right? We've clearly outlined our organic plan, and we think that's a great plan, and if there are assets that we need to acquire to accelerate the organic plan, we're going to do that. Those are typically smaller acquisitions. Larger acquisitions, we've looked at consistently, obviously, over the last several years since NXP got turned down, and we've chosen not to pursue it. So I think our approach to M&A is not going to change. We are going to look at both kinds of acquisitions, but really what fits mostly in our portfolio is smaller acquisitions that accelerate our plan.
Gotcha. Well, Kash, we are pretty much right on time, so thank you so much.
Perfect.
-for coming-
Of course.
and sharing your insights.
Thank you. Thank you very much.