Qualcomm Incorporated (NASDAQ:QCOM)
20th Annual Credit Suisse Technology, Media, and Telecom Conference
November 29, 2016 12:45 PM ET
Cristiano Amon - President
Kulbinder Garcha - Credit Suisse
Okay, thanks everybody for attending. My name is Kulbinder Garcha, I am the Telecoms Equipment and IT Hardware Analyst at Credit Suisse. We’re happy to have from Qualcomm, Cristiano Amon who is the VP of Qualcomm Technologies and President of CDMA Technologies.
So Cristiano thanks for attending our conference, and as many [indiscernible] discussion, I have few questions to start off maybe one thing broadly when I think about the wireless aspects in particular of the QCT business where you have most of your responsibilities. Can you speak about just the end market growth because one of the concerns I think investors hold is to the key product categories best in smartphone or mobile phones and tablets really not showing much growth, tablets are probably shrinking and smartphone revenues wise aren’t showing material growth? So what do you think about the end market? Is there a growth opportunity do you think? And in also within that is it more of a share on dollar content again story for QCT?
All right very good, maybe I’ll just start by saying good morning to everyone. Thank you very much for the opportunity to be here. And I've been few minutes late, just landed. But I want to talk -- when we think about mobile, for us it is a growth market, it’s still going to be a growth market. I think maybe important to understand that couple of things happening in the industry. When you look at the just the numbers alone, even when we said for calendar 2017, we still believe at the midpoint grows at a 7%. But we’re at a time in between gigs, I think maybe that’s the best way to put it we’ve seen that many-many times, every time you have a transition technology, you have faster than accelerated growth rate of devices. And I think the industry, it is still the largest consumer electronic industry, and the trends for the industry they all very positive.
I think we see even though we have the time between Gs received, first of all the use case is changing things such as virtual reality, augmented reality as well as more and more productivity that is done in a mobile device that's creating a demand for higher performance of us. More and more data going to the cloud creates faster connectivity and then connectivity plays the quality and the speed of your connectivity is far from being good enough, actually plays a role in the type of the use case.
And then, I think you see a transition in the coming years to 5G, which also going to drive growth. So I think we continue to believe it is a growth market, it is a market in transition is no different than what we have seen in the past. But like I said it is the number one consumer electronics segment today for every technology for camera, for gaming, for multimedia and more capabilities added to devices, I think more use cases demand, more silicon, that’s how we see it.
And maybe as you grow 5G, can you speak about early days of 5G, I guess what you think the timeline is? And also what you've observed, observed in the past, is that drove in new technology cycle partly given your intellectual property business, Qualcomm of being quite early as well as commanded a leadership position. When you think about 5G, what are the pros and cons around your position and also the timing to speak about that?
Yes, I think it is important to be with 5G, I think you said correctly for the nature of our business. But I also believe that we have seen in 4G that the transition of the smartphone business is going to faster cycle than we've seen before. If I can maybe use as an example, in 3G when we had the transition from 2G to 3G, the speed of 3G to 4G has been much faster and the difference elements of the 4G technology which we started at 100 megabytes per second and then quickly we go to 300, 450, we are now at 600, and we're going to gigabyte speed. So, I expect the 5G transition will be accelerated as well.
5G started with the time horizon about 2020, we expect that we’re going to see deployment as early as 2018. We will be doing trials with number of operators worldwide next year. Around the second half next year, you will see deployment as early as 2018, but I think the actual ramp of volume for 5G it should be, we're thinking about second half 2019 or 2020.
But definitely it is in the early stage, I think a lot of use cases are being study and developed. But I think clearly what we have saw when you look at the economics, every new technology from 3G to 4G and expect the same to be true for 5G. It becomes better for operators to deliver more bits, so we expect the operator community to be very interested and drive an accelerated transaction when 5G happens.
What that from a consumer point of view are the top three let's say at this stage who'd be your best guess in the top three technological benefits of 5G?
That’s a very good question. I think we’re just in the middle of the discussion. Maybe what I can do is to talk about number of possibilities under decision and development between and the operators and many partners and develop access. One easy one that we call enhanced mobile broadband just more speed, more speed and lower latency, that it’s an ability for you to get to multiple gigabits speed at a very low latency, and the latency has been driven down, the time of you to make a connection.
So actually that you can assume endless storage, everything into data can stay in the cloud 100% at time. You also change, how you should think that about what type of services you run on your device. The other one which is more for an operator prospective is, as you get the densification of the cell site and you start just looking a millimeter wave for example as an option for 5G in addition to sub 6 gigahertz, you started to have a full conversions of Wi-Fi and seller networks.
When you actively could provide different type of business models, you can be on an unlimited data, on a Wi-Fi type network built with millimeter wave with much denser cell sites. You can have limited data in the broad mobile network. So, there is a number of business models being develop.
The other one important to mention about is not directly to consumers, but as you started to have very low latency in speed, when you think about companies, and I think lot of companies has been to this process of consumerization of IT, if you will or basically cloud-based IT, it puts mobile operators on position. So actually outsource a lot of services that you actually run within your private network because you have the latency to run those things on the mobile network.
To your specific questions on consumers, you asked me three, I gave you one enhanced mobile broadband. The second one is and actually that’s one of the key attributes of 5G, its broad connectivity for beyond smartphones. So, one of the drivers of the 5G technology development is its being developed as a very flexible system that you can go from high speed to low speed and actually it's being designed from the beginning to connect things.
So with the Internet of Things, you'd be able to directly use that as a fabric to connect many other devices beside your smartphone. And that leads to the latency capability; you can start putting more mission critical services into the wireless network. One of things that has been a difference between wireless and wireline, all of the service that require very high reliability, five, nines of reliability as an example.
Those traditions have not been in the wireless network, once you reduce the latency and you build with 5G elements that provide reliability for the way to link from mission critical services you start to have those into the devices as well. And I think the last one is probably a more pervasive we are due to reality and augment the reality experience.
Okay, thank you for that. And let me to bring the current environments in more, when I think about both the base band and the IT business, what the interest is being there is being a lot of exits in that industry. However, it seems as competitive as ever in the sense and there has been a lot of volatility in QCT's own financial performance both market share and margin wise. Is there a point at that which since equilibrium is seen, I can't foresee when have things, but this seems to be overhung on the QCT dynamics frankly going forward, there you guys have a good years than a bad year. Two good years and then a bad, and specifically, I guess the concern is given that we are at that point as you mentioned between 4G and 5G and many of the competitors have opened the 4G site, is it just going to be that kind of volatility into maybe 5G rolled out? Are there specific competitive advantages for Qualcomm in the wireless chip business that you can articulate?
I appreciate the question. I think the nature of the mobile business is probably one that it's a product cycle by product cycle, it's interesting because it's very capital intensive like as a significant amount of R&D to develop those platforms and they have very short cycle times, so because there is a nature of the business. I’ll say that maybe reacting to your question on competition, we always had very competitive environment, and I think the competitors have changed overtime as mobile started to go into many other industries.
And I think it's very clear today that mobile has been moving into many of the consumer electronics industry and now it's moving into the full conversions of computing and mobile. And I think that overtime has changed the competitive landscape, also changed comparative landscape when the 3G and 4G and the smartphone transition move from developed economies to a merger economies, and growth move to merger economies to change the comparative landscape.
I think the good story as overtime I think the broad basket of technology of Qualcomm and the ability to be a leader in the proceeding technology as we face new competitors will be able to maintain acquisition and build product capabilities change in the nature of the market. So that’s how we think about the business.
Specific to the vectors of competition in this time between Gs, I think what we see is a very positive trend in China that I think our story in China continues to be positive despite the highly competitive nature of the market. And the reason is the market is moving up, I think there is a very simple trend that we saw across the board as we go to emerging markets that when you get you first smartphone, price is key, when you go through the next upgrade cycle then performance and features matters, we're starting to see that. The whole market and China is moving up.
We see ASPs growing across multiple tiers and I’d say the mid and the high segments, we saw growth of double-digits in terms of its relevance in all to the overall size of the market. That explains the QCT trends in particular because of the presence in present year and our strategy to cascade technology from the present tier to the growth tiers.
The other element I think that is important as the OEM market is becoming global. So a lot of the Chinese OEMs have been primarily focused on domestic. They're building the brand and they're growing outside China particularly because they’re seeking growth outside China as the smartphone transition New Year’s completion in China. That explain to QCT position has been enabling global launches, having a global scale, have presence in other markets.
And I think the last topic will be, if you believe that you will continue to have need for difference use cases in the smartphone augment reality and virtual reality as one them as well as more computing capabilities, that is going to separate I think the good enough technology on the application processor to the technologies we’ve been developing in QCT.
Maybe Cristiano, if I push down a little bit for the benefit in China would probably been three mode to five mode, and maybe let's say MediaTek was not as early or not available. So that could be going back to product cycle thing and the product cycles are short, having good strength in China now, they catch up, isn't that like, isn't that concerned that whereby we're seeing some 4G as well originally a year and year half behind than I guess in availability. So, like its name even visibility I acknowledged what you think on China's strength, but even better could be product cycle over the next year, year and half, is this globalization of Chinese OEMs a very differentiating point now versus the past?
That’s good. And I’ll go back to China. I think once our competition had 4G, I think as you pointed out with the change the game not only from our mode, but also to uplink aggregation, I think there's been acknowledged and the transition from LTE related events. Now, I would argue that moving forward in China, the ability that we have off being on a leading node earlier for the last year because we can leverage the development of process technology as well as the multimedia capabilities. For example you mentioned the modem, but we win a number of designs because we brought dual camera all the way from the premium tier to high end and mid tier in China versus our competitor.
So that ability to cascade down features from the top of the roadmap, which we have a very strong position to the last year. It is ongoing differentiation product cycle by product cycle. Now to the comment you made, I believe the concentration or the consolidation of the market in China actually plays more to our model into the competitive model. I think if you look traditionally our OEMs like LG, Samsung, Sony, HTC et cetera that have been playing in the global scale.
And they have to deal with multiple varying requirements for multiple markets and operators. And they cannot really afford to duplicate the R&D for every single platform. That has been our strength of QCT, as the Chinese some of the larger OEM being shared, we started to see that. We see now probably more than 80% of the volume in China is less then than 10 OEMs. As that happens as we start to go outside China, it put us in a different position versus our competition.
Great, could you speak about outside of base band and IT side there, the adjacencies that you look after on the RS and IoT and auto side? And what progress have you made so far obviously, you made your announcement recently as well on NXPI, how does that change that dynamic although the adjacencies and how big that they are? What benefits you get from what's happening?
That’s a very rich topic, so maybe I’ll start with the one that we’re most excited about it. Because that’s actually is the one that we believe in the mobile segment will drive double digit growth for QCT, which is the current end. So, the frontend as I see where we had been in the process of closing the acquisition of Epcos assets from TDK, and with that was our organic PA development, we will be able to have end-to-end solution with every single element and that we basically develop a frontend solution and put that side-by-side with our MSM platform.
I think the question in everyone’s mind is how we’re doing with our PA. I think we have said last year that we started our GAS [ph] PA development, both hybrid GAS and CMOS as well as GAS. And I think now as we started to sample our GAS PAs to customers that we thought we do it, towards the end of the calendar year, we're very excited with the results we’re getting. Exactly better than what thought would be in terms of performance and capabilities.
I think we’re getting into the process of building customers confidence of our PA, and as we expect to close the TDK Epcos acquisition; and in the beginning of 2017, we will be able to have an end-to-end solution to start ramping together for MSM towards the second half of 2017. So that one, I think is going well. I think it’s going actually better than we planned and that’s in terms of growth for QCT, that’s the one to this most exciting because if you look at our frontend market share on our platform today is about 5%. If you look of what we were able to do with the platform approach and Wi-Fi, it’s a very good proxy and success story that we wanted to follow with that frontend, that’s one of them.
The other one is automotive, I think and I will say the successfully ahead in automotive and early success in IOP I think has been key things that drove to the acquisition of NXP. I think we’re very encouraged by I think the position we can be in automotive, maybe might spend a little bit of time on automotive. Automotive, we done two things, one thing as we had a very strong telematics business, and I think the trend in automotive is excellent because today what we see from the auto industry is they spent in last decade connecting the car with itself.
The next ten years is about connecting the car with the cloud and in a lot of the business models, where the car industry is changing with the connected car. We expect the telematics or broadband connectivity to a car would reach a 100%. And we have a very strong position in telematics with the acquisition of CSR. CSR had a very strong position in audio and music with the car. They are the largest provider of hands-free together with both the position in telematics and the position we have on hands-free the two could adding Wi-Fi business and adding value with the WiFi connectivity.
The other thing that we did with the infotainment business and we were hoping to have two major design wins in the year of '16 to validate our plan. We actually get over 10, so we have been extremely satisfied with the pipeline of design wins that we got for the Snapdragon 800 series and infotainment. Now when you put that position combined with NXP, it put us in a very strong position for the automotive segment. I think with the semiconductor opportunity in the cars will bring both the basket of technologies that coming from mobile, the position in infotainment, telematics and connectivity in the NXP position, and I think within build a very strong automotive business within the next several years.
And the last one is probably IoT. We have been focused in a number of segments in IoT and we had across wearables and the smartwatches, control automation, connected home; and the whole concept of consumer electronics combining our technology with the processor security presence of NXP in the sales channel. I think that’s a very important asset we think of the acquisition that we have been developed a channel that is very good at dealing with hundreds of customers, they have a channel that deals with several thousands of customers that probably will be a very important asset to allow us to scale for IoT. So overall, I think we are executing on the trajectory that we set for the growth business and I think the NXP would just allow us to get to the goal faster.
Connectively these adjacencies, how bigger they are now in QCT?
We saw growth of about 40%, I think I believe we had publically indicated they represent about close to $2.5 billion in revenue.
Okay. Maybe one area of the business you can touch upon which is a too large smartphone OEMs that seemed to move around that market share a lot with you guys? And so maybe you can just talk about the visibility and the confidence you have even then just seeing stability that will be improvement from what we've seen in the last few years. So, how is the dynamic changing whether it's how they internally source versus externally your confidence in just stabilized in that position?
I think to your earlier comment, I think that’s a one of the things that makes the product cycle by product cycle in QCT, I think this concentration of two OEMs that's one of the reason. I think the China is important as well as the growth and adjacencies very important as they try to reduce the impact of that market concentration in certain markets in our business. That’s one of the things that we have done. We have planned all of our business and our financial projection assuming second sourcing of those OEMs, and we think when we finish the year in '16 even with some OEM second sourcing, I think we did equal better than what we expected.
Having said that, I think it's better for me to talk about trends. Two things, one an OEM is large enough, he is able to do twice the R&D to produce the same device. And I think that’s some of that what you see as some of the flagship products as some of those large OEMs, so I think the position that we take is first of all we whether be the provider of the technology device versus the low cost commodity device. And I think we have seen that, I think there is some tier downs into market as show the difference in products that we have versus competition. I think that’s how we dealt with the second sourcing of those OEMs during the days of 3G, it’s not that different.
Going forward, I think the pace of change specifically talking about the modem, which is important for one of the large OEM. I think the pace of change in the modem with LTE moving towards gigabit LTE, which happening right now. I think the operators invested in 4x4 MIMO. More the transition of Wi-Fi 802.11ax, 60 gigahertz, which is a millimeter way for Wi-Fi, it is 60 gigahertz of Wi-Fi 60 gig. And the upcoming transition for 5G, that’s a lot of complexity to deal with, not only the modem, but how you design your antennas, how you deal with our multivendor solution and else of the frontend.
So, we think the trend its one that favors QCT as an R&D partner of choice to maintain the modem up-to-date in the global scale. The second question, it is to the second source. I think we had shown that we did probably the right move about moving the Snapdragon to the latest process technology, and I think that has been important elements to ensure that we actually can provide synergies to some of our customers versus the synergies leveraging our scale in the industry. And I think, we’ll continue to drive our solutions with those customers, and as you said it’s going to be product cycle by product cycle, but the trends are positive for us.
Great. We're out of time. Thank you very much Cristiano.
Thank you. Thank you so much. I appreciate it.
End of Q&A
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