Q2 2021 Qualcomm Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the Qualcomm second quarter and fiscal 2021 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you would like to ask a question. During this time press Star then the number one on your telephone keypad.
To withdraw your question Press Star then the number two if you're using a speakerphone. Please pick up your handset before pressing the numbers. Please limit your questions to one question and one follow up as a reminder, this conference is being recorded April 28 2021.
Playback number for today's call is 8776606853 international callers. Please dial 20161 to 7415.
Way back reservation number is 13718356.
I would now like to turn the call over time, where you see a Lopez huddle and vice President of Investor Relations. Mr. Lopez <unk>. Please go ahead.
Thank you and good afternoon, everyone. Today's call will include prepared remarks by Steve Mollenkopf, Cristiano Amon and of course <unk>. In addition, Alex Rogers and Don Rosenberg 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 Dot com and a replay will be available on our website later today.
During the call 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 could cause actual results to differ materially from the forward looking statements.
And now to comments from Qualcomm's, Chief Executive Officer, Steve Mollenkopf.
Thank you Mauricio and good afternoon, everyone. Thanks for joining us today.
When we reported Q2, just one year ago, we were in the early stages of the pandemic much has happened since then including many things that will define our future well beyond this past year.
One of the undeniable things, we have experienced and at an accelerated pace is the importance and reliance global citizens have on robust connectivity and the need for low power high performance devices.
This has reinforced and amplified our mission city.
Sitting here in San Diego today, we are optimistic about what we see on the horizon, yet while the pandemic impacted nearly everyone. At the same time last year. The experience today is very different depending on where you are in the world in particular I want to acknowledge our employees customers and partners in India, you and your families are.
In our thoughts and we are here to support you through this very challenging time.
Of the many things that have impressed me during my 26 year career at Qualcomm at the top of the list is how our company mobilized in the past year, leading to strong results like we reported today.
Our fiscal second quarter non-GAAP earnings of $1 90 per share exceeded the high end of our guidance driven by higher licensing revenues and solid performance in our chipset business, representing non-GAAP revenue and EPS year over year growth of 52% and 116% respectively. Despite the backdrop of a challenging environment.
<unk> these results and our guidance reflects the strength of the company and the importance of our technologies not only to the mobile industry, but across many industries.
Several years ago, we put in place a strategy to lead in five G, which today is delivering results beyond our expectations.
Even this fiscal year with all the unusual challenges we are on track to deliver results better than what we expected when we started the fiscal year.
As exciting as our current performance is I cannot underestimate the long term opportunity for Qualcomm and how well positioned the company is where we have a unique opportunity to exceed our success in handsets as industries adopt the wireless roadmap. This enviable position is what I find most rewarding when looking back over the past seven.
In years undeniably over my tenure as CEO I dealt with and overcame unprecedented challenges, which I always put in perspective, our mission and singular focus of inventing breakthrough technologies transforming how the world connects computes and communicate is important and hard to do our challenges tightened our focus.
On this mission and at the core innovation was always the solution.
As a result, Qualcomm enters the five G era with our whole company stronger and more resilient. Most importantly, we never lost focus on the impact and opportunity Digitization will bring to our customers partners governments and consumers worldwide as a result of our collective efforts.
Speaking is assumed to be former CEO I believe there is virtually no limit on where cristiana can lead Qualcomm the industry's he can enter and the role the company can play in the global ecosystem I am very excited to watch this play out to all our employees I. Thank you for your tireless devotion and commitment to our strong culture and core values.
No. It is a very it is very exciting for everyone to Qualcomm to witness how our inventions change the lives of billions of people around the world as we know they will thank you I will now turn the call over to Kristy auto.
Thank you, Steve and good afternoon, everyone. Thanks for joining us today.
Quarter end guide reflect the great execution across the company in a very challenging environment and reinforces the significance of our technologies.
Our snapdragon premium and high tier products, along with our modem to antenna RF front end are the foundation of our <unk>, Hence our strategy now and into the future day.
Expansion of our addressable market in this smartphone tears has to position. The Snapdragon 800 tier is synonymous with Android flagship mobile experiences.
We continue to be the mobile technology platform of choice for disk tiers and this is reflected both in our product performance as well as our traction with leading smartphone Oems such as Samsung Xiaomi Oppo vivo and now honor.
Our latest generation Snapdragon 888, five T. Mobile platform has now more than 40 device shipped or announced globally and we expect to see more than double this number come to market in the coming months from future product announcements.
Our highly differentiated position in premium and high tiers, our modem to antenna leadership.
In the continued transition of Huawei volume two Oems using our solutions have positioned us to grow faster in smartphones, while youre being able to capture the most significant portion of the revenue opportunity.
In RF front end, we continue to see broad and growing adoption of our solutions.
Five G leading performance at the component and system level ease of design and global reach continue to be key differentiators of our modem to antenna solutions.
As a reminder, virtually all of our <unk> design wins continue to be powered by our RF front end solutions, whether they support <unk> five day sub six <unk> millimeter wave.
Beyond smartphones, we are extending our RF front end solutions and automotive Pcs mobile hotspots fixed wireless access in the broad Iot category.
Off note given our design win pipeline and revenue run rates, we are on track to exceed our analyst day RF front end revenue target of $3 $6 billion by fiscal year 'twenty two.
With five <unk> sub six and four G representing the majority of our RF front end revenues.
Additionally, as five millimeter wave technology expands into other geographies, we expect significant expansion of our opportunity due to increase silicon content and value.
At mobile World Congress, Shanghai in China, and in collaboration with China, Unicom Z T. He ended G. S. M. A we worked with 39 Chinese industry, leading companies to showcase their high performance and rich applications on our life <unk> millimeter wave network.
This level of collaboration underscores the significant attention to millimeter wave in China and the opportunity ahead, beginning in 'twenty to 'twenty two.
In automotive, we're growing across telematics C V to X digital cockpit, Adas and autonomy and we're also well positioned for upcoming general computing and acquired a cloud platforms. We expect to lead in this segments as cloud connected business models evolve and the electrification of the car.
<unk>.
At the digital chassis has become one of the most important assets of automakers, we are becoming a leading technology partner for the automotive industry with capabilities across all of these domains are automotive design win pipeline is up over $1 billion since the end of fiscal 'twenty to approximate.
<unk> $9 billion today.
Along with Alto Iot is becoming a significant growth engine with better than anticipated performance across all categories, namely consumer networking and industrial.
We achieved our second consecutive quarter of over $1 billion in revenue.
Trends such as the enterprise transformation of the home expansion of broadband the convergence of personal computing with mobile the intersection of physical and virtual spaces in the ongoing digital transformation across many verticals are driving growth in one of their largest sam expansion opportunities for us.
Yes.
In consumer as the industry redefined sports from El Computing, we're confident about our growth in Android Chrome OS and windows on Snapdragon wear we expect new products with leading new VF Cpus by the end of the next calendar year. We're also seeing our early investments in extra platform.
Reaching scale and in the growing category of Wearables, We believe snapdragon sound and Snapdragon wear will become the leading technology solutions within the Android ecosystem.
In networking, we are a leader in Wi Fi access points in five day broadband we're benefiting from the global connectivity required for remote work school in play and the migration to Wi Fi six and mashed technologies.
Our five <unk> fixed wireless access solutions are seeing broad adoption globally.
Going forward, we also have an opportunity to expand into upcoming private <unk> networks and public open ran.
In industrial we have seen continued adoption of our technologies across the broad industry segments key growth areas to name a few includes smart energy tracking metering industrial handhelds retail automation and autonomous drones.
As connected Iot edge devices get scale and provide access to the data and contextual information that is fueling the exponential growth projections of cloud ecosystems, we're increasingly confident in the long term growth opportunity for our Iot business.
Turning to our licensing business, our second quarter results reflect the strength of our unmatched patent portfolio value. We are the global five VIP leader with more than 135 day license agreements signed to date up from over 120 last quarter with all major handset manufacturers around the globe.
<unk> licensed.
We continue to develop and Pat the newest central innovations for future releases of <unk>, which we expect to have a longer lifecycle than prior generations due to its impact on multiple industries.
We believe that our model of early research and development consistent standards leadership flexible licensing and global implementation support will continue to add value to our partners and stockholders for years to come.
Overall, we continue to see unprecedented demand across all of our technologies and businesses as the current environment is accelerating the scale of connectivity and processing at the edge.
Despite the industry wide semiconductor supply shortage, we are utilizing our scale and working across our entire global supply chain to maximize our ability to capture this opportunity.
We expect material improvements by the end of the calendar year due to planned capacity builds and multi sourcing initiatives.
As one of the leading drivers of advanced semiconductor technology platforms. We're also excited to see more foundry investment in the United States consistent with the United States government strategic priorities.
Finally, we're extremely proud of our collaboration with NASA jet propulsion laboratory on ingenuity Damaris helicopter powered by Snapdragon Snapdragon made it to March and help power the first ever autonomous flight on another planet. This is yet another example of our ingenuity.
I would now like to turn the call over to our cash.
Thank you Cristiano and good afternoon, everyone.
We are pleased to report strong second quarter results with non-GAAP revenues of $7 9 billion and non-GAAP EPS of $1.90, which was 15 cents above the high end of our guidance range.
These results reflect a year over year increases of 52% and 116% in revenue and EPS, respectively, driven by strength across QTL and <unk>.
In QTL, we recorded revenues of $1 6 billion and EBT margins of 74% both above the high end of our guidance range.
The outperformance was primarily driven by stronger handset shipments, especially in China. In addition, our results include a benefit of approximately $80 million from adjustments to prior quarter royalty estimates Inc.
<unk>, we delivered revenues of $6 3 billion and EBT of $1 $6 billion on a year over year basis revenues were up 53%, while EBIT grew 137% delivering on our commitment to increase operating leverage.
We achieved the high end of our guidance range with EBIT margins of 25%.
This reflects our strong operating performance driven by favorable product mix and gross margins, which more than offset a reduction in the orders within the quarter by a global handset OEM.
RF front end revenues increased 39% year over year to approximately $900 million on the strength of our product portfolio across 45 day sub six and five day millimeter wave.
<unk> millimeter wave products accounted for less than 20% of our second quarter RF front end revenues.
We expect millimeter wave deployments in other regions, such as China to be a tailwind for long term revenue growth.
Automotive revenues of $240 million grew 40% and Iot revenues of $1 1 billion grew 71% on a year over year basis.
As we continued to see strong momentum for our differentiated product portfolio.
During the quarter, we completed the acquisition of <unk> for a purchase price of $1 4 billion before working capital and other adjustments.
This acquisition provides us with a strong CPU team with industry, leading expertise in high performance processors and <unk>.
Lastly, we returned approximately $2 2 billion to stockholders during the quarter, consisting of $734 million in dividends and $1 5 billion in stock repurchases.
Turning to our global <unk> handset forecast for calendar 2021.
Based on the strength in the first quarter, we have an upward bias relative to our prior estimate of high single digit year over year growth.
Our calendar 'twenty 'twenty. One forecast continues to include an estimate of $450 million to $550 million five G handsets.
Next I'll summarize our guidance for third fiscal quarter we.
We now expect a stronger outlook in both QTL and qcd relative to our prior expectations, which we shared last quarter due to several positive tailwind.
We're forecasting revenues of seven 1% to $7 9 billion and non-GAAP EPS of $1 55 to $1 75 with.
With year over year growth of 53% and 92% respectively at the mid points.
In QTL, we expect revenues of $1 35 to 1.55 billion up 39% year over year at the midpoint with EBT margins of 68% to 72% our revenue guidance midpoint is 100 million higher than our previous estimate reflecting the positive bias in total handset shipments.
In Q C. D. We estimate revenues of 5.8 to $6 3 billion and EBT margins of 24% to 26%.
At the midpoint this represents year over year revenue growth of 59% and EBIT dollar growth of 151%.
A stronger forecast for Q city reflects upside and Iot design traction in handsets in RF front end and improved product mix.
We are pleased with the success of our diversification strategy as we continue to extend the adoption of smartphone technologies in automotive and Iot.
In the third quarter, we expect Iot revenues to increase to $1 $3 billion.
We anticipate non-GAAP combined R&D and SG&A expenses to grow 3% to 4% sequentially, which includes a full quarter impact of expenses from the <unk> acquisition and investments to enable additional sourcing for supply.
Beyond third quarter, we expect growth to be driven by five G flagship launches for the holiday season by major Oems and strong demand across Iot and automotive <unk>.
In addition, with the continued transition of Huawei handset volume to other Oems. We estimate gives at these annual addressable handset and RF front end revenue opportunity to increase by up to $10 billion, given our strong product portfolio. We are positioned to benefit from this opportunity starting in fiscal 'twenty two.
Before I finish my prepared remarks on behalf of all Qualcomm employees I want to thank Steve for his contributions over the past 26 years and wish him the best for a well deserved retirement as CEO.
During his successful tenure as CEO he navigated significant challenges to put the company in a strong financial and strategic position.
I look forward to working with Cristiano and the rest of the Qualcomm team to build on its vision and capitalize on the opportunities in front of us. Thank.
Thank you and I'll now turn the call back to Mauricio.
Thank you operator, we are now ready for questions.
Thank you Tequila question Press Star then the number one to withdraw your question Press Star two if you're using it.
A speakerphone please pick up your handset before pressing the numbers one moment. Please for the first question.
Our first question is from Mike Walkley with Canaccord Genuity. Please proceed.
Great. Thank you congratulations on the strong results and Steve My best wishes for Whatever's next debt, including some hopeful a fruitful fishing trips for Ya.
Mike My question for the group is with June seasonally softer quarter for <unk>, but.
But the guidance quite strong could you just update us if theres any supply constraints that are still adversely impacting the guidance for the June quarter, and then just just a follow on with the Huawei Sam opportunity you highlighted at the end of the cost.
Maybe you guys could just touch on your view for the second half of calendar 2021 in terms of potential share gains.
For you into the Android installed base. Thank you.
Yeah.
Yeah, Hi, Mike said Gosh, I'll I'll take the first one from a from a third quarter perspective, we are really seeing a lot of benefits from the QC decide both in terms of kind of improved product mix, which is helping helping out performance. What we're seeing there is really.
Since we saw supply constraints, and which we continue to see across a broad set of businesses.
We were able to take action to optimize our product mix both across tiers and then also when we had reductions in orders by a large OEM handset OEM, we were able to redirect debt capacity.
<unk> integrated snapdragon products with strong margin profile. So it's really a combination of those things. So while we remain in supply constrained we've been taking actions to manage to optimize the mix within within the constraints we have.
Your second question was.
John.
Yeah, I can take that this cristiana look it's we're extremely happy and the opportunity in terms of Phoenix San expansion. It you know if you look at our markets such as mobile which is mature.
You don't see that very often and expansion of Sam at about $10 billion and Qualcomm is very well positioned for debt. So as far as second half 'twenty. One we're very happy with the traction that we have in our premium and high tiers across our customer base with new customers as well as honor and that's a great opportunity is going to be.
One of the largest growth drivers from our mobile business alongside our front ended the ability to have snapdragon 800 equal premium to Android.
Thank you.
Thank you. Our next question is from Chris Caso with Raymond James. Please proceed with your question.
Yes. Thank you good afternoon, and Steve Congratulations all the best.
First question is related to supply and you talked about in your prepared remarks.
Supply coming at the end of the year and being able to attack that that Huawei replacement market in fiscal 'twenty two.
Can you give us some sense of how much incremental supply comes in before then do we have to wait until the December quarter in order to get that volume and as a follow on to that how does that align with your customer.
Alex introductions again, a lot of product introductions typically happened towards towards the beginning of the year in the Android space.
Yeah.
Hi, Chris This is Cristiano look theres a lot in there let me just start with the supply.
The overall supply constraints.
Constraining semiconductors for us, it's really across all product lines. So it's not unique to one thing or the other is not only a smartphone you know frankly, it's a good position to be in debt, we actually have more demand than supply across all of our business and that's a that's a good sign and gives us confidence about the growth position, we are utilizing our scale.
And with debt, we have the ability to have been supporting or our suppliers capacity planning, we can provide stability of demand and in turn get stability of capacity, where we're one of the few companies. They have the ability to do multi sourcing at the leading node and we have done a lot.
Debt.
With our roadmap debt all of that to combine it give us material improvements in supply by the end of 'twenty, one positioned us very well for 2022 and the full extent I think is as the cash outline with 10 billion Sam expansion on Huawei now I want to go back to your question about how we think about our cash.
<unk> customer product introductions Ive said before.
We were very happy with the progress, we're making in premium and high tier that's a that's a.
Right opportunity for Qualcomm and its reflecting in the product mix as we still have right now even as we show growth, we still have a more demand the supply gives us an opportunity also to.
Have the ability to focus on the products to give us more value to us into our customers. Both on on the premium side with RF front end attach and that's really showing the numbers with a much improved product mix.
And then Chris that's a cash just to add quickly Chris Shadows Commons.
As you know towards the end of the year a lot of the flagship phones get launched both for the holiday season going into Chinese new year, and so we do feel that with the supply constraints opening up a bit that allows us to take advantage of those launches and really expand into the the Huawei Sam.
That's great. That's good color. Thank you.
Next question is on on Q T L and based on your guidance. It would seem that your the revenue that you're suggesting for the third quarter is back on what you've previously expressed as as the normalized.
Normalized QTL revenue is that what we should expect now going forward that is that a reflection of the handset market is now normalized and therefore, the QTL revenue is normalized against the plan that you've talked about in the past.
Yeah, that's a that's a definitely a reasonable conclusion, we did see upside significant upside in the March quarter end, which is reflected in our results.
But as we go from March to June what we're forecasting is really a normalized market within the handset market consistent with the historical framework, we've set up and Thats, a reasonable way to model the business going forward.
Thank you. Our next question comes from Joe Moore with Morgan Stanley. Please proceed with your question.
Great. Thank you I'm wondering if you could give us more color on the.
The reduction in order she talked about from one vendor.
How does that play out when you're in kind of an allocated environment and and then in terms of the supply constraints, maybe if you could just talk about you know.
If I'm, placing a new order now that's not in backlog like how long are waiting how tight is the situation. Thank you.
Yeah, Joe it's a cash.
Hum.
Really as you would expect given that given the kind of broad breadth of demand we have across not just mobile bird, but all of our adjacent markets, including Iot and auto.
We will take benefit of any reductions on orders from an OEM to really redirect the supply towards the highest margin.
<unk> that we have.
In working with our customers. So that that's that's really the action we took and it's it's it's obviously a good good thing for us to be able to optimize the available supply across our customer base and that's what's reflected a.
As one of the benefits in our June quarter guidance.
Maybe if I can address here Joe your second question as far as supply constraints. It looked at not much more than it's going to get better at the end of the year. So we some of the orders that you know that.
We still cannot fulfill even though were seeing growth and is reflected in our results and the guide we expect to see towards the end of the year and into 2022 are much more favorable supply environment.
Thank you. Our next question comes from the line of Stacy Raskin with Bernstein Research. Please proceed with your question.
Hi, guys. Thanks for taking my question I wanted to ask about a question about the sequential guide across the businesses youre guiding them to slow down 10%. It looks like chip revenues guided down about 4% I know you're talking about normalization of the market, but is that just a timing thing given the nature of the constraints and what youre, making is it indicative of a mix of like the interplay we didn't.
Handset versus non handset.
What can you tell us about that.
The drivers behind the difference of those two.
Segment guidance.
Sure Stacy it's Akash, So let me start with QTL.
As I mentioned in my prepared remarks, the two key drivers for QTL in the March quarter were a significant.
Can't really higher than expected units, primarily driven by China, where the total handset markets that was that was the main driver and then we also did see a benefit of approximately approximately $80 million due to adjustments to prior quarter royalty estimates.
Debt that benefited our second quarter performance. So as we go from Q2 to Q3 on the QTL side. We obviously don't have that royalty estimates adjustment benefit in Q3, and then the second factor is really what we're assuming is a more normalized handset market going into Q3.
We saw some weakness in the December quarter strength in the in the March quarter, but when you kind of abstract back from the quarter to quarter variances, we think it's prudent to forecast going forward on a normalized market. So that's that's really what's driving QTL.
From a capacity perspective, you're right, we're assuming a 4% quarter over quarter decline.
If you as you will recall, our new premium tier product launches in the March quarter. So when we go typically from March to June there was a little bit of seasonality.
Part of that is offset by really the supply framework and so that kind of calibrate us a little bit on what happens between the quarters anyway. So that's really kind of the key drivers there. The one thing I'll highlight is and I mentioned this in my prepared remarks for Iot, we have a very strong demand going into the June quarter.
We have a forecast of $1 $3 billion, increasing from $1 1 billion in in March So I'm very happy to see the diversification across the businesses.
That's helpful. Thank you if I could ask a brief follow up I know you've called out honor.
Specifically several times as both a customer and a potential growth driver can you talk a little bit more about them do you have any any thoughts on where I guess your share is low today, but.
Any thoughts on where that can go what your average ASP or tier that youre attacking with on who is going to be and does the Huawei license that you signed last year is that license directly transfer over to honor that you have to sign a new license with them and if that's the case, having signed one with John.
Stacy This is Alex let me just answer that question really quickly we have separate agreements now with Huawei in with honor. So all of that is covered under separate licenses.
Hi, Steve This is Chris.
We we had no traction with on or you know across their product portfolio, but you know as you would expect a lot of our focus and that's where we actually have a very unique position to market is really high and premium tier and and debt has also been kind of as I said earlier, it's really reflected how.
Our product mix is changing as we see a lot more demand for premium and high.
Yeah.
And then Stacy I'd just add it's a cash I'd just add debt, we do expect our honor to be a significant customer going forward with our traction with them.
Thank you. The next question comes from Blayne Curtis with Barclays. Please proceed with your question.
Hey, Thanks for taking my question I wanted to ask a millimeter wave you talked about I think China in fiscal 'twenty. Two is just curious if you saw any additional geographies rolling out millimeter wave this fiscal year this calendar year.
Hi, Blayne this is Chris Shannon.
Millimeter wave is commercial today in the United States and Japan, We also see a lot of it.
Essman and in Korea is index market. There there are a few things you see the initial signs in Europe.
Auctions have completed in some states. We're excited about China, just given the scale of the China market right now.
We have a lot of activity leading into the Winter Olympics as as China Unicom and the companies like <unk> are working to Don.
Have a lot of millimeter wave activity.
And coverage and services around the Winter Olympics, and I would think that at the beginning of starting to get more traction in China. The reason, we talk about China is because.
The scale of China will significantly change the dynamics of millimeter wave are getting it faster to more markets you know.
Due to the economies of scale of China.
Thanks, and then if I could just ask you on you highlighted new via you've been in the.
RPC market with Snapdragon before just curious there's a lot more focus on both client and it's all of the data center for arm processors Amazing Library of your plan.
And the last couple of years, and where you see the best opportunity to deliver that.
The new via asset gives us a lot of flexibility you should think about it is having a scalable leading CPU asset to to get to get to where they have other qualcomm assets. Our focus right now as outlined in you know, what we've been saying and what's.
The earnings call is we have an incredible opportunity now.
With compute and of course, the premium tier phones, and automotive and some of the segments, where you are at right now.
We are very happy help computing has been redefined our number one use case on a P. C. Right now is a communicator device and I'm sure you relate to this and some of the transition across the board.
Two arm architecture really create a big expansion opportunity for Qualcomm and we're very focused to make that happen with our leading position in leveraging the new CPU, having said that I think this asset gives us a lot of flexibility to continue to be expanding and to all of the different.
Business vectors, we're building in the company.
Yeah.
Thank you. Our next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.
Hi, guys. Thanks for letting me ask a question and Steve Congratulations on your retirement.
Our cash one for you is in the last couple of quarters, you've given us a heads up one quarter beyond guide just when there was something unique happening in the market I guess in this instance, given the fact that you're talking about share gains in the Huawei ecosystem seasonality has had different implications over the last couple of years with some of your.
Our bigger customers is there any sort of color that you're able to give in the back half of this calendar year puts and takes versus what you would deem to be normal any sort of guidance along those metrics.
Yeah sure. So so while we're not guiding our guiding fourth quarter at this point, let me highlight a couple of things that maybe is a framework to think about the rest of the year.
The first is just when you think about the demand profile handsets RFE Iot automotive really extremely strong we're gaining share pretty much in all markets and.
Very very very strong position in each of them. So you should you should you should think of each of those as a growth vector for us and extending into kind of Q4, and then going into next year.
Secondly, as flagship phone launches as I mentioned earlier in the call. They usually start in the August September timeframe going through December and so as those launches happen. That's a that's a favorable trend for us not just for handsets, but for RF front end as well with or without the millimeter wave.
And then the third is really supply improvement as Cristiano mentioned, we've been working very hard on.
Kind of partnership with our suppliers to improve this upfront and the supply profile going forward and as he said towards the end of the year, we expect a material improvement in supply so that'll be another vector that will drive us forward.
And so those maybe are three things that can be used to frame. The qcd profile and then from a QTL perspective, it's really consistent with our with our model. The way we have portrayed it as seasonality in the handset market changes that changes the revenue opportunity from QTL as well.
Got it thanks for those details I guess, that's my quick follow up our cash another one for you on the gross margin side of things. So we know what the perturbations that happened with mix between Qs T. In Q T L. But the QC T side has been very very strong I just wanted to see what are you envisioning is that the sustainable drivers of that.
The gross margins today at all over elevated or inflated due to your ability to prioritize and a limited supply environment or are there attributions of the mic or aspects of the mix between handsets RF auto Iot et cetera that gives you the belief that the gross margin improvement that you've delivered in Q C. T. Thus far as a truly sustainable.
Annabelle and can continue.
Yeah, Ross, we feel like we have a tailwind on the gross margin side really are across each across the mix of products across the markets. We have but also within each market and and it's really Cristiano has pointed earlier in the call where we are focusing on the industry, leading performance across premium and high tier brought.
That allows us to really have that price premium that that results and expansion of margins also as we kind of take the products that we have from mobile and the technologies, we have from mobile and we leverage it in in auto and Iot.
Ah tremendously scalable way for us to expand in those at those markets and as we do that we're also able to expand not just gross margins, but also operating margins.
Thank you. Our next question comes from Matt Ramsey with Cowen. Please proceed with your question.
Yes. Thank you very much good afternoon guys.
Our cash my my first question is on Q C T EBIT of our operating margins.
I think I went back and looked and were pre.
Pre 2010, I mean pre.
<unk> since you had a non holiday quarter that was 25% margin so well Don there maybe you could talk a little bit about the sustainability of margin expansion in Q C. T and given the June quarter is likely the revenue trough quarter for the year is is that 25% margin.
How we should think about the floor on margins going forward. Thanks.
Yeah, Matt Thanks for the question.
We're really happy with the with how the margin profile is played out I mean, it's it's it's a plan that we set in place and outlined at analyst day about 18 months ago, and and we've pretty happy to be able to execute to it.
Your observation is right I mean typically the June quarter is a drop from a margin perspective, and really as you look forward from here for us. The most important thing is the revenue scale enhance the things we highlighted in my prepared remarks, both from our Iot growth perspective, just gives us gives us.
Gail debt allows us to expand operating margins.
And then finally, the Huawei, Sam as we start approaching that Sam and really leveraging the existing products and roadmap of.
Both across handsets in RF front end and growing into that Sam we already have the product portfolio to go there. So as we grow there as well it'll it'll be accretive to operating margins, so pretty pretty happy with where we're at in and looking forward to improving that going forward.
Got it thanks for that as my follow up for Christiana, you guys were kind enough to share a slide Tonight.
That highlighted the diversity of the RF footprint across I think I don't know a dozen or so premium Android devices both.
From global Oems in China.
Question that.
I still get from investors is your confidence in the ability to sustain or maybe expand that footprint. As we go into next generation devices, maybe as some of the RF competitors have a bit more mature <unk> Stan stances in their portfolio. So if you have any visibility as to how the with those Oems the footprint Mike.
Continue as you go forward and be sustainable in the RF franchise that would be really helpful. Thanks guys.
No look Matt. Thanks for the question is a great question and.
I wanted to start, but maybe providing some data points and Mike.
Emphasize some of the data we provided in the earnings script.
We heard a lot in the past that our RF front end business a lot of people for the most of it was because of our leadership position in millimeter wave, which we do have a leadership position in millimeter wave, but the reality is millimeter wave represent less than 20% of the revenues that were showing in RF front end. The absolutely majority of it is sub six in <unk>.
Julie.
Which actually shows that we're winning not only at the system level, we're winning at a component level.
Otherwise, we will not come in as the fifth supplier and be winning <unk> sockets and debt it kind of really highlighting what we said at the end of the day you know you're going to have every single spectrum, whether it's our existing spectrum to DSS that goes to five G plus the new mid <unk>.
And in the millimeter wave bands, we feel pretty good about our roadmap of RF front end and the effect of winning designs across the board. It's a testimony that our strategy is working and.
To your specific question about if this is going to go away. We're now probably owes if you'll look at the beginning when we launched five G. In 2019 and early 2019, we're now move to Paul product generations, and we continue to win our effort on it. So we're very confident about this business. It is a great growth story for Qualcomm.
And the beauty of this we're actually winning on technology.
Thank you. Our next question comes from Simeon Chatterji with Jpmorgan. Please proceed with your question.
Hi, This is Joe Cardoso on for Sonic My first question is on <unk>.
<unk> is one of them commented pretty bullish bullishly about targeting flagship millimeter wave.
See opportunities next year, so just curious to hear.
Is on competitive landscape and market share dynamics going forward and whether you are.
China is more aggressive pricing in the industry.
Well look there's a there's a lot of good things in this data point I think this data point, when our competitors or our targeting millimeter wave in China is just validates that China is going to have millimeter wave and that's how we read it that's a great data point consistent with what we've been saying, it's going to add a lot of scared of millimeter wave.
With Qualcomm.
It's been very focused in in.
Strong position in premium and high tier, there's an incredible opportunity with the expansion of San it's everyone is benefiting I think it's an opportunity for everyone you know to be successful and generate growth and and.
And we really becomes we'd become equal to premium Android flagship opportunity and that's going to continue to be a key part of our mobile strategy going forward.
Okay.
I appreciate the color and then my second one is on the automotive revenue opportunity.
I appreciate the color on the RF revenue target, but was just curious relative to automotive revenue targets provided during the analyst day with the pipeline now at $9 billion as the revenue now target now completely accounted for or even north of that.
Or is there more room to make on the pipeline there. Thank you.
Yes, so just on the automotive side really since analyst day, we feel like our position has really strengthened and then this is not just kind of in telematics and infotainment our digital cockpit Ah, we're seeing an expansion of our product portfolio within within the market. So while we're not updating the guidance at this point.
We feel very comfortable with our position and we see it does expanding versus where we were 18 months ago.
Thank you. Our next question comes from Rod Hall with Goldman Sachs. Please proceed with your question.
Yeah, Hi, guys. Thanks for the question I wanted to come back to China, I know that last quarter.
You know things are weak and then we observed that Chinese demand on <unk>.
Mobile phones, improving this quarter and that's obviously been part of the QTL story here I'm. Just curious I know that you guys were thinking that China was moving into more of a mature market phase, where we would see elongated replacement cycles and so on I Wonder if the result here changes your mind on that at all.
And then I also wanted to come.
Come back and talk a little bit about RFP and whether you think you have a chance to see content increasing.
Particularly in high end phones as we move through the back end of the year or do you think that you know.
On a per phone basis youre content looks roughly similar so just wondering if you could comment a little bit on how content and Oh, I'm, sorry, I meant millimeter wave not just <unk>.
Kind of how that progresses through the back into the year.
Yeah.
Hey, Rod it's a cash.
So on the China data points really are the market in December was slightly smaller than we'd expected in the March quarter was big slightly bigger than we had expected I think you made a note of it in your annual report as well.
But really when you normalize for it is which which is how we think about the forecast going forward. It's reflected in the market guidance. We gave so we think of a high single digits is still a reasonable metric for 2021, but we do have upward bias given what has played out and we'll see how the rest of the rural less debt.
The rest of the year olds Hawk.
And on millimeter wave right, you're right, if if millimeter wave become.
A component of the RF front end, we highlighted that today is less than 20% of the RF front end revenues, the silicon and content and value increases substantially when you do millimeter wave you're talking about multiple modules into a device and you have antenna arrays and it is a key accelerator or RF front end.
<unk> millimeter wave becomes deployed more broadly across the <unk> footprint. Thank you.
Thank you. Our next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.
Thanks, a lot I guess I wanted to ask you about the autos pipeline, that's now up to $9 billion.
I assume that most of this was probably parked out into the middle of the decade, something like that but can you sort of help us maybe size. The average age of that pipeline and maybe how you think that debt.
Revenue rolls out it's a big it's a big number but if it's it's a lot different if it's over five years versus overstate nine years. So can you help us on that thanks.
Tim It's a cash so one of the reasons why we gave a revenue target in and at the Analyst day. It was really to put a framework around the scale of annual scale of the business and so as you'll recall, we said we'd be greater than $1 5 billion in 2024, and so that's still a reasonable way of.
Thinking about that business and as I said earlier, we feel like our traction in the market has accelerated and so we were well positioned to kind of execute at that scale and continuing to grow really in the even in the 510 year time frame.
So it's pretty attractive long term growth and we like the fact that it's predictable and it adds a slightly different mix than the rest of our business.
Look if I was trying to try to give you a little bit more color when I'm thinking about the timelines.
The development.
Lifecycle.
Within the automotive industry, so well know and the way we think about it is when a decision is made in cash.
Contract is awarded.
Usually if you get the technology contract award for the upcoming models and that's what exactly building on our pipeline. So everything you see in our pipeline is basically a contract awards and the day start show up and Randy and revenue Windows models get to S O P and day launch and.
And you continue to increases as we basically expanding.
Through our <unk>.
<unk> brands is the car companies.
I was trying to be really be focus on electrification and the digital chassis component of their assets.
Thanks, a lot I guess, just as a second question so our cash.
Have you sort.
It's sort of handicapped where you think the tax rate could go with these changes I mean, obviously, if it goes through at face value and the statutory rate goes to 28%.
And if the global intangible low tax income rate goes to 21% what if you just take that at face value what does that do to your tax rate.
Well, so I mean honestly, it's gonna early too early to see how it plays out right, where we're obviously you're talking to are looking at the various proposals that are being made so you kind of have one extreme proposal that I think you outlined there is other proposals that debt.
A lot more favorable day.
What we're really doing at this point is really working with the folks in D C and educating them on the most important.
Thing for US is really to make sure U S remains competitive and there's there's a.
There is really strong.
Reason for U S companies to continue to invest in R&D, especially companies like Qualcomm.
Who have a very high bias towards domestic R&D investments so that that's been our focus.
There is a missing details in the proposals debt allows us doesn't really allow us to give you a right answer to this question just yet, but we're hopeful we'll get some more clarity soon.
Thank you. Our next question is coming from the line of C. J Muse with Evercore. Please proceed with your question.
Yeah. Good afternoon. Thank you for taking the question I guess first question can you give a sense of what the revenue headwind from <unk> as a result of supply constraints and I'd be curious if that's concentrated primarily in handsets or are you also seeing it on the adjacency for us.
Yeah C. J. So we have not sized size the revenue headwinds really are within <unk>, we have not shared that data point, but it is something that is impacting all of our vector. So this is not just handsets, but also stretching into RF front end Iot and automotive and.
And it's a very significant number right. So we could.
In a perfect supply situation, we would have been much better off versus the results. We are offering and you know as we look forward, we think of that as a tailwind as we resolve these supply issues.
And things are much better for us towards the end of the year, we'll be able to grow into the opportunity in front of us.
That's helpful.
The follow up.
I guess two part question on the adjacency of your GCG business.
Near term into June do you think that Iot and auto.
Offset.
The seasonal decline in RF front end, such that that business could be flat.
Excluding headsets and then bigger picture for fiscal 'twenty one.
Given given what you've put together in the first half of the year it looks like that.
Business combined is growing 50% 60%.
Year on year is that the right kind of framework, we should be thinking about thank you.
Yeah. So C. J, we gave a pretty direct number on the Iot forecasts for fiscal third quarter. We said it would be in the $1 $3 billion range. So that's a that's a pretty good indication of how that business. Just continues to grow we just reported a quarter with $1 1 billion and then sequential growth from one.
One to one three.
Similar trends and in auto as well. So this is really a business portfolio. That's has strong growth vectors across the board in and as we look forward, we continue to see a similar trend.
Yeah.
Thank you. Our final question is coming from Brett Simpson with Arete Research. Please proceed with your question.
Yeah. Thanks, very much I wanted to ask him a little bit of biotech UCT and the second half seasonality that you see second half calendar year seasonality and just factoring in the supply challenges, particularly in the first half of the year, maybe the weaker flagship Android market in the first half of the year and then you look into the second.
A half and Youre talking about getting Mike.
Much more supply, particularly in the December quarter should we be looking at you know can you just maybe share with us that sort of first half to second half dynamic that you see today and could it be similar to what you saw in calendar 'twenty. Thank you.
Yeah. So from a second half perspective, clearly kind of as one of the key drivers are outlined earlier was our flagship launches that happened starting in the September timeframe and so we do expect to see seasonality as those launches happen.
And it'll be across the board across all Oems.
Across our Snapdragon 800 as well so.
Looking forward to those those launches materializing and especially as Cristiano said as supply gets addressed.
To a large extent into that quarter and allow us to benefit from those launches.
Okay. Thanks, and maybe just to follow up a cash can you maybe just comment on smartphone asps.
I know, it's not something that you specifically comment on.
Used to but it'd.
It'd be great to get your perspective, particularly with COVID-19 at the moment and five day adoption sort of like a rising at the moment, what sort of how do you see how do you see smartphone the Sps and how do you see the outlook as we go through this year and next year. Thank you.
Well.
Third we while we don't disclose the specifics I mean, if you look at some of our customers and them reporting their results, you'll see that at least at the premium high tier there is some upward bias on those smartphone asps. So that's that's really is the tier in which five G is penetrating first and youre seeing some of the benefits roll through our customers results.
Okay.
Thank you that concludes today's question and answer session. Mr. Online do you have anything further to add before adjourning the call.
As this was Steve's last earnings call I would like to take this opportunity to thank him for his leadership and tenure and it's been a privilege to work alongside him for more than 15 years to the good times and the hard times as we've grown and diversified the company.
Look forward to building on his legacy and I'm humbled by the opportunity ahead. This is an amazing time to be part of Qualcomm.
Thank you ladies and gentlemen. This concludes today's conference call you may now disconnect.
Uh huh.
Yeah.
Yeah.
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Okay.
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