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Cristiano/Stacy Rasgon Cage Match...

QUALCOMM Incorporated (NASDAQ:QCOM) Bernstein 38th Annual Strategic Decisions Conference June 1, 2022 2:30 PM ET

Company Representatives

Cristiano Amon - President, Chief Executive Officer

Conference Call Participants

Stacy Rasgon - Bernstein

Stacy Rasgon

Good afternoon everyone! Thank you so much for coming today. I’m Stacy Rasgon, Bernstein Senior Research Analyst covering U.S. Semiconductors as well as Semicap Equipment, and I cannot express what an honor it is to have our guest here today. This is Cristiano Amon, the President & CEO of Qualcomm in his first appearance I believe at SDC.

So Qualcomm, Qualcomm both as a company and a stock has been through an awful lot over the last five or 10 years, from China to the EU to FTC to Apple, the hallway. I mean the company's business model has suffered wave after wave, at least fought off wave after wave of attacks from regulators, customers. It’s made a lot of investors’ gun shy for a long time as it wasn't clear what was going to come down the pipe next.

But sitting where we are today now, I do think it finally appears the company is come out the other side of this. Virtually every regulatory and customer dispute that they had has either been dismissed or settled in Qualcomm's favor mostly. Through it all they continue to do what they do best, namely investing and developing the world's best communication technologies and now reaping the benefits of that. Especially now as the 5G cycle is now well on and continuing.

I think the story though goes beyond that. They're not leveraging their not insignificant expertise to drive new, into new adjacent markets, things like industrial, things like automotive and others. But you are now getting large enough to actually materially add to the model and to the growth outlook, as well as to significantly diversify the revenue base away from what historically has been a smartphone story, and I don't think it's entirely a smartphone story anymore. I think the further we go, the less it will be a smartphone store. But to tell us all about that, it gives me this great pleasure to welcome Cristiano. So thank you so much for being here.

Cristiano Amon

Thank you, thank you so much. I really appreciate the opportunity and good talking to you in person.

Question-and-Answer Session

Q - Stacy Rasgon

In person, thank you. So before I did into any of that, look you’ve been at Qualcomm a long time. You’ve been in the CEO seat now for what, about a year?

Cristiano Amon

Not yet, 11 months.

Stacy Rasgon

11 months, almost a year.

Cristiano Amon

I think honeymoon ends at 12 months I guess.

Stacy Rasgon

I don't think anybody gets a honeymoon these days.

Cristiano Amon

I agree.

Stacy Rasgon

But I guess, I mean obviously you were there through everything I just described. But like what is different now versus that period. And I guess, you know at a high level how is this strategy now different if at all under your leadership versus maybe what we’ve seen in the past.

Cristiano Amon

No, very good, I appreciate the question. Look, it is a complete new Qualcomm and I actually thought about it, whether we'll use this example or this comparison. You know what I will, because it may be easier for me and investors to see.

When you think about the, what is really happening to Qualcomm and the fundamental thing behind the new strategy is the elevator pitch on Qualcomm is we have two major assets. Anything wireless communication, and we invest a lot – we have creative standards. We invest a lot to make sure we're number one. We're number one in cellular, number one a WiFi, number one in position location, number one in Bluetooth, anything wireless communication, but also everything high performance computing for low power device.

So if I can just do a comparison, not a great comparison, but I think I'll be able to prove my point. If you look at companies, for example, let's use the case of Nvidia. They had a GPU, which is a Graphics Processor Unit. It’s a parallel computing and they had a market, that was the gaming market. But then all of a sudden there was this brilliant idea that there is another market for parallel computing, and all of a sudden you saw the opportunity within inference and training, because that for crunching a lot of data and make predictions with fishing intelligence in parallel computing.

I think I can draw a similar parallel to Qualcomm. There are now a large number of end markets and applications for the Qualcomm assets in addition to mobile, and I think that’s the that’s the fundamental of the new strategy. So mistake to look at Qualcomm right now and try to make parallels with the Qualcomm in the past, which is a lot of people look at Qualcomm in the past and say this is a comms company for the mobile market where most of the business is the licensing business. There is nothing wrong with our position in mobile and license, but the reality is the Qualcomm is mostly growth is in the semi space, where license is a stable part of the company. It will remain stable, will remain an important I think source of cash flow which allow us to continue to invest in R&D.

The new mobile strategy, its change is doing well, but the reality is about really creating opportunity for technology in new markets, and that's the new Qualcomm. It's about a connected processor company that is enabling the digital transformation at the edge of many industries and that explains why we – what is happening to us in automotive business, what happened with us at the broader IoT business and it's – we all of a sudden have a lot of new end growth market for the company and that's changing the trajectory.

Stacy Rasgon

Got it. I mean you’re actually right. When I started covering the company, I mean it was – I think licensing was 80% of the profit back then. It almost didn't matter what was going on with chips and licensing was growing. This was the smartphone and 4G cycle and it was very – and it is a different story. I think licensing is, I will not say its stable, but its chips have content story and adjacency story that is really what's driving it. So maybe we could dig into each of those.

Cristiano Amon

Yes.

Stacy Rasgon

Let’s talk chip content first, and it is – I can't avoid talking about handsets. So we will talk about handsets. But let's maybe start there from a constant story in handsets. As you went from 3G to 4G to 5G, we've seen content go up, and with 5G though the continent increase has been massively material. And can you maybe talk about some of the drivers of that, and where are we on that cycle. I mean 5G now is maybe the third of this, but it’s mostly high end, and like how does that look as 5G starts to mature in terms of like the content versus like where we are now and where we're going?

Cristiano Amon

No, that's good. Look, happy to talk about handsets. It's I think…

Stacy Rasgon

I will ask the China question in a moment.

Cristiano Amon

That’s okay. I’m ready for it, but Qualcomm I think will continue to be the company that is setting the pace of innovation in the smartphone business and it’s always going to be part of the company, but there are a couple things that it's also changing in the handsets. So first I'm going to answer your question directly.

When we move from 4G to 5G, what we saw was at the same tier, where there is a premium tier, high tier, mid-tier, low tier, we saw about a 1.5 multiplier in terms of revenue, because we had the additional silicon content of the 5G modem, plus RF in, plus you know just a better combination of technologies in the processor. That was the story when we start moving from 4G to5G.

However, I keep hearing sometimes from investors, there was a couple questions since we had our earnings about, well is 5G migration completed and then what's going to happen. Should we think about the Qualcomm business now, you have that in-cycle and now there's going to be a commodity business. No, completely different, and exactly what's driving the increase in ASP and earnings in silicon content is not 5G anymore, its processors, so let me walk you through that a little bit.

5G transition, it happened already in many markets. But when you look by tiers, premium, high, mid, premium and high is already 5G. Even if you go to emerging market, the best 4G phone you can buy is a 5G phone. That transitions with your car. So actually the question about is this – is what's happening to Qualcomm is let's see what happens when the 5G migration is completed is in some markets like the United States, it’s already happened several generations ago. Samsung Galaxy S10 was 5G.

Q - Stacy Rasgon

I mean even China is 80% 5G now.

A - Cristiano Amon

Galaxy S20, 5G, 21 5G, 22 5G. What’s really happening is in addition to the 1.5 multiplier to more than our front end, what we see now is content growth in the process are bigger GPU, bigger NPU, large number of image signal processor and the story of looking a QCT, ASP increases and the contribution to bottom line has been more of a content processor story than a modem story. A couple of points I know that you wanted to keep the handset questions short. It was my goal as well, but I needed to bring this up, because I think it’s an important topic.

Also, our strategy as a company in mobile changed. There is a new strategy, which is we have – and I've been very vocal about this. We're focused in premium and high android. Share of wallets, we have you know I think about a couple of quarters ago 40% higher revenue than our nearest competitors and not interested in commodity businesses, race to the bottom, and I think as a result of this strategy we see things going in the right direction, which is increasing share at Samsung, as well as continue to execute on the Hawaii address in the market.

Stacy Rasgon

Got it. So is this why – like obviously everybody is terrified about China. China handsets look awful. It's not new by the way. They peaked in 2016, so I don't I know, but it hasn't affected you. Is that why, is that more low end you're not playing there. It's not a market that you're -- because it certainly hasn’t. This version with the numbers have been coming in and it hasn’t seem to have impacted at all.

Cristiano Amon

Yeah, let's talk about present and let’s talk about the near future. So because of our strategy to be more focused on premium and high tier, I think there has been a little bit more resilient. We see as a road, there's a trend that continues to happen within the mobile market that doesn't grow, as flat to a downward bias because of the channel lockdown. There is a richer mix. You know the phones are gaining utility. But the reality is, China is about 20% of the market right now.

China is or at least was unit a few days ago on a massive lockdowns. I think that has significantly suppressed the size of the market in China. I expect that it will bounce back, because we’ve seen that COVID wave in developed and developing economies, we saw that impact. So and, but having said that, I think our position in China, it continued to be strong, because what was happening to Qualcomm's mobile has nothing to do about the size of the market. The market, it has a negative bias right now, but what's happening to us is structure. We're – Hawaii left the market, so we’re executing into that and we're gaining share at Samsung. That's exactly the story of the Qualcomm mobile business.

Stacy Rasgon

Got it. Let's talk about that Hawaii obviously. You talked about $10 billion and $10 billion becoming available. Have those phones already gone elsewhere though, like is it still available or is that volume already moved?

Cristiano Amon

I think we're well into our way to do this and I think it's – you kind of see what happened in the market. I think the most of the winners has been companies like, Vivo, OPPO, Xiaomi, and I think it’s kind of early to tell what's going to happen in Europe. I think Samsung still has an opportunity to exercise some growth there.

Stacy Rasgon

Got it. And I guess with Samsung, so you said that, you share, it’s mostly high end right. It's doubled effectively. You were at around 40% before, now it's 75% or 80% in the flagships in the Galaxies. I guess what's driving that and when did it happen? It feels like it happened quite rapidly and then I guess as a follow on, the biggest question I get on obviously is the sustainability. I mean look, I guess it’s no different, like every year you're fighting for every stock, but that's just the nature of the business. But how do you think about longer term sustainability of that?

A - Cristiano Amon

Yeah, so look, what's happening right now I think has been a result of focus and execution, really focus of strategy on premium and android. We're very happy with the fact that we gained share at Samsung. The Galaxy S22 now, we are north of 75%. I know you didn’t ask this question, but I will remind how the math works and why this new strategy is working well for Qualcomm.

One Galaxy S22, because I have the whole Snapdragon 8 series there, its equivalent of selling modems to 5 iPhone. So it's a very good trade to gain share at Samsung. And I think what's really happening is a combination of factors that make us believe we're in a very strong position to keep and grow within Samsung; I'll give you three different factors.

One factor is, if you look what's happening with the Chinese customers, Vivo, OPPO, Xiaomi, Honor, they are doing well in China, but they are really focused on growing into Europe. Those companies unlike Hawaii, they did not have a very strong premium brand. So if you actually look at their advertisement in detail, you are going to see all they talk about it is, I have Snapdragon 8 and I think that puts a lot of pressure in the market.

By the way, Snapdragon unaided awareness in China is 80% without us doing anything on – we don’t have an Intel insight type thing right, and it’s done by our customers. And as a result I think it puts a lot of pressure on Samsung for the markets they have executed. The second data point is, I will point you out to the Samsung advertisement right now. If you look at their advertisement, in a number of regions, there were traditionally regions they used the Knox part Samsung advertisers Snapdragon 8 as an ingredient brand on the Galaxy S22. That’s how they…

Stacy Rasgon

Even where they are using Knox?

Cristiano Amon

Yes, that’s how they are communicating to the consumers. Now I'll give you the data point number three. We are investing to have a highly differentiated solution. It’s not about what we do only on the modem side, on under GPU. I think the 300 GPU has capped the crown of the highest performance per watt in the industry. But also the NUVIA team that is now part of Qualcomm is also designing a CPU that we're going to take to mobile as well, as far as Snapdragon 800.

So when you put all those things combined, I think our focus strategy, the competition I think with the Chinese customers, Snapdragon’s positioned in the market. In our IP, I think we're in a very good position.

Stacy Rasgon

Got it. I'm going to ask one more handset and it’s on – I'm not going to ask the Apple questions. I think we know the answer that it’s in the model going away. If it doesn't go away, great, right okay.

MediaTek, this is the other question I got. Obviously, it's what's the competition look like. But I could argue that it's a better market structure. Like where we’ve seen price wars in the past there were more players. There is effectively two merchant players now in MediaTek. But they are trying to move up. You’re kind of moving a little more into the mid-range. Like what does that interaction look like?

Cristiano Amon

Yeah look, it's a whole new world right now, let’s just look at before and after, right. Before you have a lot of our Chinese customers. The max they will go to will be a high tier. The premium tier was occupied by Hawaii and then you have in many markets outside United States, Japan, and you have Samsung with your own processor. It was just, it was a crowded market and as for MediaTek you know competing for the high, mid-low.

I think it's a completely different market structure right now, that's number one. Second, we're very focused on share wallet and premium high tier, that's to Qualcomm strength. That’s what also drives the IP road map that we can apply in our one technology roadmap to automotive and IoT and all the other industries. And the other thing is, I don't think us or MediaTek are looking at this as a growth market, it's a mature market and it's such I think there has been a very rational approach towards the market. And I feel pretty good, there's plenty of room for both of us.

Stacy Rasgon

Got it, okay, no more handsets. Let’s talk cars.

A - Cristiano Amon

Yes.

Q - Stacy Rasgon

So you talked about like a – what is a $16 billion pipeline at this point?

Cristiano Amon

That is correct.

Stacy Rasgon

What is in there? What kind of – I know you did the infotainment, you did connectivity, but I don't get the impression the $16 billion is primarily that. What is there? I mean like, what is the time frame? How does that ramp and what’s driving that?

Cristiano Amon

Okay. So, there is lot of questions I there. So let me just taken in layers. First one, $16 billion is the design win pipeline that we announced in the last earnings call. After the earnings call we announced Volkswagen Group, that's not included in the number. Second, data point, I think the $16 –

Stacy Rasgon

What was that to Volkswagen by the way, what product?

Cristiano Amon

It’s ADAS for Volkswagen Group.

Stacy Rasgon

Okay.

Cristiano Amon

The second data point is within the $16 billion the majority of it is telematics and digital cockpit. ADAS, it’s going to be new addition to it. It's very – they is very small in there. It’s going to, there are design wins that are not yet computed in their numbers, but I think that is a growth storage.

Here's how you should think about the Qualcomm in automotive business, and we're very proud of it because in a very short period of time we'll be able to build a position and really winning the future of the automotive industry. We created a Digital Chassis Platform. The Digital Chassis Platform, it has a number of components they can – you can use… [Cross Talk]

Stacy Rasgon

What do you mean by Digital Chassis, first of all?

Cristiano Amon

Yes.

Stacy Rasgon

What does that mean?

A - Cristiano Amon

So today, today, and let me start at a high level, because this is – at least I believe is an interesting conversation.

Q - Stacy Rasgon

That’s why I’m asking.

Cristiano Amon

There's before and after, right. Before the way the industry would work is a core company will have a model and they will have a bunch of electronics they are going to become to the model. In some cases the electronic was designed as part of that model design. They will have a number tier ones, they will bid and we'll get a lot of RFP’s for different people building components to this part. You have micro controllers, you have IVI, you have all those different processes.

Well a couple of things that are changed now, high level. Number one, I think car companies realize that they need to have a direct relationship with semiconductor companies. Some of them, they didn't really understand what the importance of semiconductor is.

Q - Stacy Rasgon

They are discovering that now.

A - Cristiano Amon

Number two, the market expect the car companies to be tech companies. I love to keep bringing this example. At some point Rivian selling hundreds of trucks was worth more than Volkswagen. So the – what it’s basically saying is the companies need to be tech companies, they need digital assets.

The piece number three which is, it's not about component from the car, but do you actually have a digital platform that they can build on the digital platform a lot of software assets and then apply that up and down for different models, that's the unique thing about the digital chassis, so that's what we did. And you can see in our design win, for example when Stellantis come out and said, I selected Qualcomm across 14 different brands, it's not about I got this model. So that's what we did. This uptrack in digital chassis is a complete digital platform, its modular. You can add components to it.

Some silicon gets reused and you can do all the thing that is in the CBOX, all the different connectivity, connecting part of the cloud, there is a core to cloud service platform, you have the digital cockpit for every single screens in the car, then you have ADAS that ranges from in-cap all the way to level 3 plus. You can do a combination according to level of course, ADAS plus digital cockpit in the same SOC, and then on top of that you have processor for autonomy.

The last part of the answer is, we are – the next addition to our design wins has really been the ADAS story. First one was GM, both Ultra Cruise and Super Cruise running on Qualcomm. The second one was BMW. We also did a very unique BMW announcement. We’re jointly developed to drive policy and I have the rights to the software so I can offer to other OEMs. Then we have Renault. We talk about the Stellantis and the most recently Volkswagen.

Q - Stacy Rasgon

Got it, got it! And so what does Arriver bring to the table?

A - Cristiano Amon

It's basically a proven computer vision stack for our computer vision SoC that’s part of ADAS and you know it really, it was the perfect asset you know to basically build on the Snapdragon Digital Chassis as it relates to our computer vision, surround camera and the computer vision stack of Arriver is now part of the Snapdragon Ride ADAS platform.

Q - Stacy Rasgon

I mean the customer announcement that I found most interesting with Arriver was BMW. For those of you on that may not know, like sort of the original triumvirate done on autonomous driving was Intel Mobileye in BMW and they were the first – and even before Intel bought Mobileye, it was the three of them and then Intel and Mobileye merged like not that long after and now we've got BMW moving deal on vision which is sort of the Mobileye bread and butter. I’m like how, how do I read that? Like am I reading that – like at a high level it seems obvious, but I mean like what does it mean?

A - Cristiano Amon

You're reading that correctly. You know at the end of the day there are certain customers which are Halo customers and I think the customers have been the forefront of technology innovation and I think the BMW decision to move to a Qualcomm platform and to do joint development with Qualcomm, it was well noticed by the rest of the automotive industry and I think is being reflected in what has happened since then, and you know the Stellantis and the VW are not small projects.

Q - Stacy Rasgon

Got it. Can we maybe talk a lot more broadly on your ADAS and autonomous? I mean are you trying to go for like full autonomy or like what's the angle here?

A - Cristiano Amon

I love answering this question. Look, we're actually going in for scale, and at the end of the day we do have some engagements where customers, they are going to go to level 4 autonomy using our processor. I think we're very well positioned there, because you cannot put a server in the trunk of a car. The power envelope is different.

I point out to Mary Barra at the CES press conference saying, open the trunk of the Cadillac Lyriq. Show a little [inaudible] box and said the whole thing run here on Qualcomm, no liquid cooling, none of that, none of that. So however, I think the scale business and what's going to generate a lot of revenue is really ADAS and we're being very focused on from regulatory in-cap to level 2 all the way to a 3 plus highway itopoli and then parking, and I think that has an opportunity to be attached to every car, like airbags and ABS and I think that's where really the revenue opportunity is going to come.

Fully autonomous vehicles are going to come, but most likely in my opinion you’re going to see those into first instantiation delivery vehicles in the bike lane at a lower speed, because the regulatory environment is complex and we'll see what happens. But we're very happy that we actually build the platform that allow us to scale and get to revenue faster.

Q - Stacy Rasgon

And what are you doing in its – I guess it's vision, is it just like they were all compute, like what are the actual like pieces that you’re doing there?

A - Cristiano Amon

Yes. So we do a lot of the computation across different types of compute from CPU to GPU to NPU. We have a lot of the image signal processors for a lot of – plus the computer vision stack, and then we have a sensor fusion that captures all the sensors that come from radars and lidars and all the other sensors. We're partnering for you know third party provider radars and lidar, but it all comes to a sensor fusion, and then our software, for example I talked about the drive policy process all of this and that's when one we’re jointly developed with BMW.

Q - Stacy Rasgon

Got it, got it. And I guess what do you view as the primary company? I mean obviously the two merchant sources out there are Intel Mobileye and Nvidia. Are those the ones that you're seeing? Is there one where you seem to be winning like more than the others; is it too early to say?

A - Cristiano Amon

Too early to say. Here's what is different about what's happening in Qualcomm Automtive. What is unique about Qualcomm is we actually have comparability in all domains. So it's not about ‘Hey! Here is my computer vision SoC,’ which is kind of for example what Mobileye is doing or this is like, this is my competition or platform fueled for autonomy. That's the beauty of doing the digital chassis.

The other thing that is unique to Qualcomm, our platform is actually open. It's open, it's flexible and allow the OEM to actually bring their own development in building the platform, it’s not a black box. So those two things are resonating with the OEMs, and the name of the game changed a little bit. It's about what is going to be my revenue opportunity over the lifetime of the car and how do I create a platform that my software investment can survive multi model, multi generation and that's what we've been very focused on.

Q - Stacy Rasgon

Got it, got it. You talked at the Analyst Day in terms of a revenue trajectory. I can't remember, it was $8 billion over eight years, what was that time limit?

A - Cristiano Amon

I don't remember the exact number, but here's what I can tell you that Akash remind me of that, we are ahead of plan.

Q - Stacy Rasgon

Okay. Got it, got it. Let's talk about industrial IoT now.

A - Cristiano Amon

Yes.

Q - Stacy Rasgon

First of all just very simple, what is in this group?

A - Cristiano Amon

Okay, right away, in hindsight actually coming here I was thinking about it, you know I wonder if that was the right name, but – because not all IoT is created equal, so let me start by telling what it's not.

Q - Stacy Rasgon

Okay.

Cristiano Amon

It's not about having a lot of micro controllers with WiFi and Bluetooth connectivity and the catalogue business to a distributed channel. That's not – that's – I think the Qualcomm IoT is a little bit different. It comes from the premise that when I started this conversation with you Stacey, we have those technologies that now have a different end market and how do we apply that to this end market. Now within our IoT revenue stream, we have a bunch of things there and I think I'm going to tell what is in there, and I need it to break down in consumer, edge networking and industrial.

Consumer – and by the way, to make it easy, both for consumer, its networking is three, so three-three. Consumer, there are three main drivers of IoT consumer segment. Number one is XR, virtual reality, augmented reality, here most of the headsets and things. Every single hand set there is commercial today is power by Snapdragon HR. I think our largest customer as you'd expect it was Oculus for Meta. It's already material in scale and there's going to be you know new ecosystem to come in line. We can come back to XR later, but just that there wasn't there. So mixed reality, virtual reality, head mounted display glasses, all in there.

The second thing in consumer IoT is tablets and future arm PC’s, which is the…

Q - Stacy Rasgon

Talk about newly in a minute too...

Cristiano Amon

Which I believe is an inevitable transition of PCs to one. The number three thing that is in the IoT consumer is if you look for example, Apple created an incredible market with air pods. So if you look at us in our Bluetooth capability, think about the Snapdragon. You hear things like Snapdragon sounds, [inaudible] it's providing that platform for the android ecosystem, attached to a Snapdragon in mobile, that's it’s – so a lot of for example, Bluetooth through wireless earbuds across multiple brands, those are the three things IoT consumer.

IoT Edge networking, we have also three things; Mesh WiFi access point for the home, Mesh WiFi access point for the enterprise and then wireless fiber, which is 5G fixed wireless. There's only three broadband technologies now. Fiber if you can get it to the home, hybrid fiber coaxial cable which is a U.S. centric thing, and then if you have DSL, the solution to that is 5G fixed wireless, that's one of the fastest broadband business. We have 125 customer premise equipment designs already. Those are the three things in the IoT Edge Network.

Then we get to industrial. Industrial is very, very broad. In industrial, I'll tell a little bit how we execute on this strategy. I think the opportunity is massive. We're somewhat paced by our ability to execute, but I think there is some – there is some logic in how we're approaching this. So the industrial we have now in excess of 13,000 customers, it's a build – it’s a big ecosystem plane and here's how we're organizing ourselves in the IoT Industrial. What's in that?

You hear us talking about retail robotics manufacturer energy, so it's by vertical. We go to each vertical, we have a lighthouse customer, that's where we developed the platform. Each vertical has a particular problem to solve, let me pick one example.

If you go back to two years, you’re going to see once in a while every quarter we have some sort of announcement with Walmart as an example. Walmart is a brick and mortar store. It now has to put e-commerce on top. When you do that, you have a lot of opportunity for technology, from handheld devices for navigation for somebody to be picking your shopping list, how to put smart cameras looking at the shelf, electronic shelf labels, you have self-checkout, you have a lot of different platforms.

Those platforms all use those two Qualcomm access connectivity computation or artificial intelligence. You have a number of IT service companies that are deploying those as part of their digital transformation. Once you get that solution retail, then you just copy and paste. You can go to Target, you can go to Carrefour, you can go to Kroger, you can go to it.

Then energy we're doing the same thing. We're doing the same thing with manufacturing. That's why from partners and manufacturing ranges from Bosch and Siemens, Grid Expertise was spun out of Enel as a result of doing a 5G smart meter, very diverse. That’s what’s in the industrial IoT.

Stacy Rasgon

Got it! And I guess just looking at those three chunks, consumer versus edge networking versus industrial, can you give us some feeling of like relative sizes within that group, if you can break it out?

A - Cristiano Amon

Yes, we don't break down I think the revenue across those three, but I think…

Stacy Rasgon

Can you give us the smallest?

A - Cristiano Amon

But I think I can give you some color about which ones are in the very beginning of the ramp and which, so let's just go back to each one of them.

I think we all can agree that mixed reality, virtual reality, augmented reality, we are just at the beginning of the ramp. So right now you see the Facebook ecosystem in place. I think then we talk about China coming online. We also have an announcement of a VR device for ByteDance Tik Tok that's coming in. Those things, just looking at the Facebook numbers alone already reached the threshold that you have now enough devices that develop work assistant generating content. So I think – and augmented reality is going to be bigger than virtual reality, so that one is the very beginning of the growth curve.

I have said that before, I’ll repeat it today. Fully immersive augmented reality glasses, which will probably start as a companion of your phone, it could be as big as phones, but we’ll see. You have – we’re about five years away from having the optics following the electronics and connectivity to get a fully immersive glass to look like this.

The second one is PC. PC it's a market that we’re seeing some growth in the market in the pandemic, but for us it’s all growth. So it's we believe in the transition arm, that's an opportunity for us there that's not yet material. So what do you – when you have XR, VR, it’s a ready material, PC is not yet material, it's about to happen.

I think the other one I want to highlight is we’re just in the beginning of this 5G wireless fiber. I think we saw lots of – we're well underway in the enterprise transformation of the home. That was the first wave of driving a lot of demand for WiFi access point. But now with the beginning of the enterprise transition, the enterprise transition is very easy to understand, because companies are going to hoteling, you come in, you book a cube or desk.

Main interface between you and the enterprise is WiFi, so you have to get WiFi everywhere. High performers WiFi for collaboration. You need to move the data to Microsoft OneDrive, so that, it’s the beginning of that. And then we'll get to industrial. As I said a lot of those solutions are still in development. We're barely scratching the surface of the TAM there.

Q - Stacy Rasgon

So I guess given all that, like I mean this business has been growing by leaps and bounds over the last year or two or three. What's been driving the growth? Has it been more like of the Edge Networking, the WiFi or is it the industrial or like what?

A - Cristiano Amon

So if you look at our IoT segment, last quarter 61% growth year-over-year, each one of those three segments in excess of 50% and I think the – if you look, if I have to single out a couple of things, on the consumer I think the story there was really not only VR, but also tablets. There has been – tablet is becoming a productivity and a collaboration device in a move from commodity tablet to premium tablet. Think about the competition to what is an iPad pro into a productivity use case.

The wireless fiber is on fire. In industrial what is really driving this is digital transformation of enterprises and I honestly believe that I know there's a lot of negativity out there, but digital transformation in enterprise is recession free. If you're growing, you want to invest in digital transformation, so to increased productivity and efficiency. If you're doing cost reduction, you will invest in digit transformation to increase productivity and efficiency.

Q - Stacy Rasgon

Got it. Let's talk about Arm PC's as a business. So you know there are some that sold today, and I mean windows RT started when? 2012 or whatever it was, probably the original surface, right. And even today, like I can go into a Microsoft store, I can buy a laptop with a Qualcomm chip in it today. They don't sell a lot of them, but you can buy them. It sounds like you think at some point in the not too distant future people are going to buy a lot more of them. Why?

A - Cristiano Amon

Okay. First of all it's a long journey. It’s not easy to switch an ecosystem and it's a long journey, but now you have all the elements in place, all of it and I’ll explain what is different and why do we end up finding ourselves in a great spot.

First, PC is changing, any change as a result of the pandemic in the hybrid work model. So think about a PC as the workhorse of productivity. First, big change. Number one use case on a PC is now communications, that's the number one use case on a PC, whether Team or Zoom. Actually it's a little bit for the mobile industry, it's a puzzle, because the mobile industry since there is a 3G trying to find a video telephony of the killer app that took a pandemic and that actually happened on the PC first, so it’s a communication, so connectivity is very important.

The new use case a PC, when would anybody try to think about the quality of the camera of the PC. That wasn't a feature to people who go to Best Buy to buy a PC; camera becoming very important. The ability to support multimedia, ultra mobility of better life becomes very important, that's one set of use cases, but I'm not going to stop there.

The second thing is the hybrid work environment changed how the PC is looked at by the enterprise. First, the enterprise is trying to move all this data to the cloud. It's easier to protect, easier to firewall, easier to maintain. So if you try to do a collaboration on a file that is Microsoft OneDrive in the cloud and you have poor connectivity, that wasn’t a great experience. So the bar for connectivity and connectivity anywhere is much, much higher.

The second thing that is happening is on-demand computing. I'll tell you this, pandemic hits, we had to cancel MWC. 2020 I said, whatever we had prepared to go in MWC, we're just going to do a virtual trade show from Qualcomm. So we brought Lenovo in and we did the demonstration that I thought was amazing, at the time it was pre-pandemic, pandemic was starting, nobody said anything about it.

What it is is we show a full Adobe 8-K video editing in the cloud using 5G millimeter wave, on-demand computing and you had no ability to say that this was not run on your PC. So this concept of on-demand computing, if you look of an enterprise that people had a workstation, you cannot move a workstation around from home to the office. So those workloads are all moving to the cloud, and you need a PC that can support that.

But don't take my word for it, just look at what Satya said to Bill last week, the future of compute is hybrid computing as well. You can even start thinking about eventually every PC is going to have an actual meter on it. So that is another thing to drive in its range.

Number three, Apple transition to ARM. When Apple transitions to ARM, it helps move the ecosystem. When a company like Adobe said my new software is going to be native on ARM, and that's going to be released, not a day late, that changed things. And then the last part of it is, it was a long road, but we're getting there. The Windows ecosystem, unlike the Apple ecosystem, the Windows ecosystem has a lot of legacy. It was not until Windows 11 that we now can run 64-bit app.

So now with Windows 11 there is no second class windows going from RT back there in 2012 to where we are right now. When you put all of this in place, all that we needed to do is to bring the cherry on top and say, let's just acquire the best CPU team in the world, and let's claim the performance leadership on the CPU, and I think that is going to be a big business for Qualcomm.

Stacy Rasgon

This is NUVIA and my understanding is NUVIA was effectively the M1-design team sort of…

Cristiano Amon

It was – I think it was the team that designed I think that breakthrough ARM processor and performance, and we're going to take it to first PC, then auto and then mobile.

Stacy Rasgon

Why PCs first with them now?

Cristiano Amon

Because I think the PC opportunity is real, and the PC opportunity, especially what we want to do, which is to go after the next-generation laptop for productivity, I think we have an opportunity to claim performance leadership.

Stacy Rasgon

And to be clear, in the targets you've given at the Analyst Day, the PC opportunity is not in those targets? So it would be upside.

Cristiano Amon

It's all upside.

Stacy Rasgon

Okay, so that's good. Obviously NUVIA was working on servers, and you guys did have an ARM server effort at one point, which you've kind of shut down a while ago. Is that not something you're looking at this point, especially with that asset?

Cristiano Amon

No. Look, I'm happy to answer that question. So right now, our strategy is very clear. We have an incredible opportunity at the Edge. Of course we'll continue to execute in mobile, but we have this automotive opportunity, we have this broad IoT we're talking about it. We have all of those opportunities that are perfect for Qualcomm and our assets outside the data center. Now, just put that in the shelf, that's what we're doing, that's our strategy.

There's another thing happening. The data centers, it's coming out, and this is moving to distributed computing. We see a lot of things in the Edge. When we look at our assets, the ability to scale our assets to higher performance, like for example, Inference Processor or the ability to do leverage from our CPUs, that's there for Qualcomm. We have – you know as we execute on the strategy, we look at those as opportunistic. It's not in our model, it could be upside to our model.

Stacy Rasgon

Okay, got it. Let's talk about the fourth segment, our RF front end, and I guess you could argue that handset-e as well, but still this is a new opportunity for you. Now you guys had an RF Front End effort a while back and this is RF360, and I think you sold a lot of envelope trackers and not so much of anything else. And I'll be honest, I was in the deeply skeptical camp on this business for a long time, and now it looks like you guys are actually bigger than Qorvo and bigger than Skyworks and bigger than Broadcom, at least within their mobile. What's different this time? Was this just a matter of like adding the filters so you finally have the portfolio or is there something else that's going on here?

Cristiano Amon

No, it's a great question. And I think at the end of the day it was a core competence that we needed to develop in Qualcomm. We definitely understood – it was easy to understand how we could create value, because we understand this space. A lot of the RF goes to our platform as we bring any new technology and any new band, and we needed to understand how we're going to go from digital and we had analog with the transceiver, we had Envelope Tracking, but how do we get to other technologies. So we knew it will be a long road, and we did that, some organic development, some with acquisitions.

But what we did is, when we went into the market we realized we didn't have all the assets and we're not competitive. So in all aspects, I think it was a premature enter to the market. But we learn our lessons, so what we did was say, we are going to pick an entry point, 5G is going to be the entry point, especially because 5G has a lot of applications beyond phones. Yes, today RF Front End is very handset centric, but it's growing as we grow into the other markets, we're attaching RF to it.

We knew the 5G as a technology, it’s not only phones grow in all those markets, we have a great opportunity to have a platform play abstract the alphabet super frequency band, especially for other industries, and then we set ourselves to develop every single asset so that at the individual component we can be number one. So we had to go develop PA’s with gas – that we have gas PAs. We acquired filter assets for TDK. We invest into that, and I think – I remember having investor conversation when somebody said, nobody can compete with FBAR.

Right now, if you think about the benchmark of performance is not FBAR anymore, is the Qualcomm ultraSAW and ultraBAW. Qualcomm ultraSAW and BAW has the absolute performance benchmark in the industry right now. But then we got Switches, we acquired Switches, we develop tuners. So when we had everything from digital to the antenna, then we reentered the market in 5G and the strategy is working, and it's working, we are very proud of it, and we'll continue to invest in technology, and we’re going to have an opportunity to take that beyond handsets to all those other markets that we're growing into.

Stacy Rasgon

What does your RF Attach look like right now?

Cristiano Amon

We used this statement and I’ll repeat the statement, because it continues to be the case. Virtually all Snapdragon designs have RF Front End attach. I think we have different degrees of attach. I think 5G is very, very high. 4G is a growth opportunity I think for us. There is RF attached to 4G as well. There is RF attached to 4G as well.

We actually had also some, starting to see traction as discrete. We are just selling RF by itself. They start into a range and I think it's a great story. There was four established players who would come in as a distant number five, high degree of skepticism, but we were able to execute, and it's going to be a big part of Qualcomm business going forward.

Stacy Rasgon

I guess within RF, what about millimeter wave. We're still waiting. I mean obviously it's been deployed here in the U.S. It really hasn't been deployed very much elsewhere. I know we're waiting on China. Is there a value profit? Like do consumers care? I mean my view and I could be wrong. My view is it's great as long as you're like standing under the tower and like there's no tree in front of you. I mean but maybe I have a different view.

Cristiano Amon

I have a different view. Okay look, there is multiple ways to skin this cat. So let me try something different, let me try something there. When you look for example, you look at every single country in the world that is going to do their 5G auctions and they pick 2.5 band, right or the C-band. There's nothing special about this band. If we were back to 2G, everybody is going to say that's a really bad band. If you look at the price of Spectrum in above 2 gigahertz, in the days of 3G it was pretty cheap. Reality is there's no more Spectrum available, 2.5 is the only one.

The other way to look at this is, if you look at what happened, like starting with analog cellular, then 2G, then 3G, then 4G, what happened is carrier’s been accumulating spectrum. They go to those auctions, they accumulate spectrum. Every single spectrum holding that they have is equal to one carrier of 5G, maybe two. So you have no way to go, but you needed to go to more spectrum.

Look, as Qualcomm when we move from CDMA to FDMA, I think our founder, I remember he said that, look we're starting to asymptote bits per hertz. It's a very small gain of putting and packing more bits in the hertz. We're asymptote with electrical magnetic waves, so there's only one solution, more spectrum. So now let's go back to that conversation. You get all those options at 2.5, and you get maybe 100, 200 megahertz, you get one or two carriers. However, you need more. So millimeter wave, there's nothing special about millimeter wave. It’s the only available spectrum and you can get chunks of 800 megahertz. So one answer to this question is yes, we can fight, we can debate, it's inevitable.

Stacy Rasgon

It needs to happen.

Cristiano Amon

It's inevitable. We can have a discussion about timing, but eventually you're going to run at a capacity. When you run at a capacity, you have to densify the network. Why is so much more attractive for every market to do 3.5 first, because you just put equipment in the existing tower.

It is high, it's high CapEx and increased OpEx for you to add new cell towers, get the permit and all this, but at some point you're going to need to do it and that's going to separate the haves and the have not’s. So I actually think some of the United States deployment of millimeter wave is very strategic, because we're going to have to build a gigabit society and you're going to have more and more data and you need to have the lowest cost per bit and the only spectrum of those millimeter waves.

Now let me give you the second part of the answer, to that question. United States, Verizon is building out. Every time I come to New York, I see more coverage outdoor with mobility. I think millimeter wave works very well on the 5G standard in a mobile environment, but also works very well indoor, in a campus. So one thing that is going to start to get traction with the early phases of that, I point you to an announcement we made with Microsoft and we said, Microsoft and Qualcomm jointly developed private 5G networks using Azure Edge.

The enterprise always built its own telecom. It used to be the PBX, then there’s WiFi access point. We sell a lot of that. We are the number one WiFi silicon for enterprise. The enterprise is going to build 5G. So one of the things we announced at the 5G Summit last month, we announced stand-alone millimeter wave chipsets, because then you don't have to have any other anchor network. You just deploy it and that's suitable to a lot of private network deployments. So the enterprise eventually is going to be driving building millimeter wave as well. So it's going to happen, it's just a matter of time.

Stacy Rasgon

Got it. So we are almost at a time, and I wish we had another hour, and I guess I could do this all day. But I will give you one last soapbox. You've got a room full of folks here. Why should investors buy Qualcomm stock?

Cristiano Amon

Look I – of course I have a bias, but I think investors still don't understand that some of the assumptions about Qualcomm are no longer relevant. Like for example, let me give you the list of things: When does the 5G migration starts to low down because your growth is based on 5G migration, nothing to do with it, especially if you look at what's happening between us and Samsung.

We've seen what happened in the mobile market, it's going to go to commodity, low teens margin, not the story for Qualcomm.

It's all about whether or not you have Apple business, not the story for Qualcomm.

Can Qualcomm really grow in a market that is already mature, which is a mobile market, not the story for Qualcomm? We actually have incredible growth opportunities in Ulta and IoT. We'll continue executing on it.

I actually feel at the last earnings call we had to be sorry for disappointing why was the quarter so great. But the reality is, it's a new strategy, it's really about understanding that there's a lot of new markets for Qualcomm technology, and I think this company has a great opportunity. I do believe the best of Qualcomm is yet to come.

Stacy Rasgon

I think that's as good of a place to leave it as any. Thank you so much for joining us.

Cristiano Amon

Thank you. Thank you.
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