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The Six Five Insider Edition: Akash Palkhiwala Talking Qualcomm Q4 and the Year Ahead
by Daniel Newman | November 3, 2022

On this episode of The Six Five Insider Edition, host Daniel Newman is joined by Qualcomm CFO Akash Palkhiwala for a recap of the company’s results for Q4 and a look at the year ahead. Their conversation also explores the following:

  • The broad macro environment, the economy, and Akash’s perceptions on the overall market
  • The diversification of Qualcomm’s business into IoT, RFFE, PC, and Automotive
  • How Apple continues to depend on Qualcomm
  • Partnership updates with Samsung and Meta
  • Why the company feels confident in the mid-term despite short-term headwinds

You can watch the full video here:

You can listen to the conversation here:

Disclaimer: The Six Five Insider Edition is for information and entertainment purposes only. Over the course of this webcast, we may talk about companies that are publicly traded and we may even reference that fact and their equity share price, but please do not take anything that we say as a recommendation about what you should do with your investment dollars. We are not investment advisors and we do not ask that you treat us as such.

Transcript:

Daniel Newman: Hey everyone. Welcome back to another episode of the Six Five Podcast Insider Edition. I’m Daniel Newman flying solo today, talking to Akash, CFO of Qualcomm. Excited about this Insider Edition. We’re on the heels of earnings and on the backs of an earnings day it’s always great to have the chance to talk to those on the inside. Akash, welcome to the show, how you’ve been?

Akash Palkhiwala: Very good. Very good. Daniel, thanks for having me. Looking forward to this conversation.

Daniel Newman: Yeah, Akash, it’s a bit of a crazy time out there. We’re in a middle of a rate hiking cycle. We talked about this in the background, middle, the beginning, but we’re in a point now where the world is definitely coming off of the free money, off of the zerp and the tech industry is kind of trying to find its balance. And of course semiconductors have been on a long supply chain shortage, we’re coming off of that.

But Qualcomm has really bucked the trend all the way through this. The company has had great result after great result after great result and I think you’ve finished off the year with another record result. Largely I think the market has to appreciate that. But of course timing, Fed day, everything’s going on. Give me a quick synopsis. What happened yesterday on earnings day? What was Qualcomm’s big report? What came out?

Akash Palkhiwala: Sure Dan. And maybe I’ll step back and start with this fundamental thought that I think in this world where there are significant headwinds, macroeconomically, digital transformation becomes even more important and we are at the center of it. And I think that’s the opportunity in front of us is as digital transformation of industries happen, as digital transformation of home and enterprise happens, we have the ability to be the technology provider for the transformation.

Yesterday we had great results. Our fiscal 22 results were just outstanding. We did very strong year over year growth. We had record revenues in our fourth quarter as a company. We had record revenues in QCT. We had record revenues within IOT and automotive, which is really our priority area in terms of diversification away from handsets. And so we are very happy about the results. The QCT margins came in above expectations. It’s certainly an area of focus for us in improving the gross margin profile of the business, the operating margin profile of the business and we’ve been able to deliver on all of that.

And as I said before at the beginning of the conversation, I think we’re at the front end of a 10 year curve on digital transformation and we’re happy to be a part of it.

Daniel Newman: Yeah, it’s really interesting that you pointed all that out and we are on this longer curve. I made a couple of assessments, I’d love to get your take on it Akash, the first assessment was in the beginning of the pandemic we saw such an acceleration in transformation and companies pretty much through the kitchen sink at doing what they had to do to be able to, in the beginning it was survive, then it was thrive. The beginning was we just need to get everybody mobile. We need to buy more PCs, we need to get more connectivity up, we need to get software running. And it was throwing bodies, it was throwing technology, it was throwing money at things to try to get the market going. And then all the policy kind of got really loose. So it was like, here’s a lot of money, here’s a lot of stimulus, here’s a lot of tax breaks, and companies are great, we’ll stay kind of, “Fat and happy.” We’ll hire all these people, we’ll keep our projects going. Now it feels like we’re kind of hitting this point where companies are like, oh gosh, it’s normalized a little bit, it’s slowed a little bit. Do we need to slow our hiring down?

But in the end, I think digital investment actually maybe didn’t go as far as it could have because people did throw so much at getting their businesses running short term that now they’re looking at automation, they’re looking at AI, they’re looking at connectivity, they’re looking at cloud and they’re saying, we got to finish these projects and get a little lighter and a little bit faster. I don’t know if you’re seeing that, but that kind of feels like what’s going on right now.

Akash Palkhiwala: Yeah, I think that’s a great question and there’s a lot in there. I think if you break it into two parts. In my mind for semiconductor industry, there’ll always be a cyclical short term cycle and you have to live through it and keep your eye on the big prize, which is really the long term opportunity because when you can step back and look at digital transformation, and I think you had some great examples of digital transformation of enterprise that happened through COVID.

But when you think about transformation of industries, whether you pick healthcare or retail, utilities, manufacturing that has barely started. And the amount of efficiencies that you can bring into play, which obviously is a very important thing for all industries today, the amount of new customer experiences you can bring into play by deploying digital transformation at scale is tremendous. It will reduce your cost structure.

I mean a great example would be a retail store where you can use technology to make sure your shelves are stocked with items that people want in time and then be able to change prices on the fly based on supply and demand. And there’s tremendous margin opportunity for retail stores in being able to do that, and that hasn’t even started at scale. So I really do think that while enterprises have been transformed, the transformation of industries is still at the very front end and it’s a 10 year curve. Everything needs to get connected to the cloud. And really we are the chip provider for the most cloud connected device, which is the phone. And so we have the ability to take those technologies and apply to different industries. And that’s why I’m excited about what’s in front of us.

Daniel Newman: I love that example by the way, in retail, I remember talking about this several years ago. I said dynamic pricing has to be part of the future. The ability for the environment, the store to know who’s in front of a product, what that person’s willing to pay for a product or capable of paying for that product. And it’s all going to be the data that’s going to exist on that connected device that’s going to be in our pockets. And so that is a core business for Qualcomm. But furthermore, I mean you sort of alluded to it, but retail IOTs and IOT as a whole has become what? A $7 billion business and the company has been amazingly agile at transforming. And I just want to reiterate this for everyone out there. I don’t think the market fully appreciates this story yet.

But look, because QCT have record revenues, you guys have record device revenues on your mobile handset business all year long. But meanwhile, your revenue distribution, you’ve built a front end, our front end business, a automotive business, an IOT business that are all well over a billion, two of them are over a billion a quarter, their IOT business is over 7 billion a year. And I think you grew your automotive pipeline by effectively the same size pipeline as Nvidia has in total for their automotive business. And that’s not a knock on Nvidia, 11 billion’s a big business. But you did that in two months. So talk about this diversification because I don’t feel like that’s fully being appreciated no matter how much Cristiano’s been talking about it.

Akash Palkhiwala: I know, I know. So I think the fundamental premise of our diversification is relatively simple. It’s about every device wanting to connect to the cloud. And we can take the technologies we created for phones, which is connectivity, all kinds of connectivity technology, not just 5G but wifi, Bluetooth, PLC, all kinds of technologies. Second is low power processing. And third is artificial intelligence at the edge. And our ability to bring those technologies into these edge devices across industries is what’s exciting for us. As every device gets connected, you could have Qualcomm Snapdragon inside all of them. And that’s our vision is enabling these digital transformation for a whole new set of partners versus who we’ve worked in the past with.

Daniel Newman: And I like that and from a macro view of Akash but I also think it is super important that everyone looks at it and says, look, it’s a $7 billion business for Qualcomm. So while I think the market’s always understood and appreciated and treated the business with that in mind. But now you’ve got these new recurring streams, you’ve got market diversification. And I think for an investor that’s looking at the current situation, the price and where it sits today and is thinking long term is, you got a company attached to all these trend lines, the future of cars, the future of connected environment, our handsets, and by the way, our evolving handsets, wearables.

I mean let’s talk about a couple partnerships. You had one announced with Meta, you had one announced with Samsung and then you had a pretty big announcement in your earnings about Apple. I want to start with that because I want to really lean on this one. So for the last 20 years, Apple was going to leave Qualcomm, but in all serious respect, the last three years it’s been a pretty serious talk ever since they made the acquisition from Intel of 5G intellectual property, Everyone said, oh, they’re going to build their own mode. And then another years passed and you guys have done two things remarkably well. You’ve moved down the amount of revenue and dependency that the company has. I remember you presenting this at your investor day last year doing a really good job of fading that Akash, but at the same time they keep coming back.

So for whatever reason you’re proving two things in my opinion. One is how valuable you are as a partner for Apple despite the legal environment that we’ve seen. And two, how hard it actually is to build 5G RF systems for these mobile devices. I mean talk about that. They’re leaning in pretty big time, at least for what another year.

Akash Palkhiwala: So our view on Apple and our relationship there is pretty simple, it’s very important for us to have the best modem. We’ve been the leader in modem technology, 5G technology for last 20 years and we continue to see a tremendous technology roadmap in front of us. We’re going to have the best product. That’s the only priority for us If we deliver the best product, Apple has to make the decision on how they want to use us. But what’s important for us is to continue to be at the leadership edge versus all alternatives, not just their internal effort.

What we did announce this time is for the 2023 iPhone launch, our previous planning assumption was we’d be at 20% market share for that device within Apple. And at this point we think we’ll have the vast majority of it. So we are excited about that. It gives a little more predictability to our business in a difficult macroeconomic environment. But in the end, as we’ve said in the past and Cristiano has said this multiple times, our focus is on the Android premium, high tier experience within phones, and the Samsung deal that we announced earlier in the year is a great example of that. I mean you look at Samsung, we talked about Apple, and then you look at all the Chinese OEMs and the premium high tier, each one of them uses us at scale in those tiers. That’s a great, great position to be in because that’s a very lucrative part of the handset business and we are happy to be there.
I mean the other key priority for us I mentioned earlier is diversifying into IOT and automotive. And I think you gave some great data points. Last two years in IOT, we’ve gone from $3 billion all the way to $7 billion and very quick transformative growth on the revenue side. And as I said earlier, we are at the front end of it as we look forward, I’m excited what’s in front of us. Our fourth quarter results by themselves, $1.9 billion in record revenues for our IOT segment and we have tremendous opportunity to keep scaling it further. I’m sure we’ll talk about auto later in the conversation as well because that’s another I’m excited about.

Daniel Newman: Yeah, absolutely. I’ll circle back a little bit to that one. We talked about the Apple, you mentioned Samsung. I’m actually in the process of writing a new op-ed for Market Watch. That was one of the things I talked about is there was two types of companies that I think are going to escape this complex market and I said one are companies that almost have no exposure to consumer and the second are those that have really big moats in premium. And of course we saw Apple’s results, we saw your results. And like I said, most of if any negativity and we’ll come back to that too about your result wasn’t about this quarter, it was about people’s concerns going forward. But the Samsung partnership is terrific. Apple continuing to lean on you is terrific.

Meta of course is a company that’s got a pretty polarizing opinion in the market right now. But I think we all agree the Metaverse a real thing, exactly how we arrive there, exactly which technologies and tools, what experiences are going to look like that may vary, but they are the company that has leaned in most to this, putting the most dollars forward and they picked Qualcomm as a key partner in actually enabling and creating. Talk about that partnership just a little bit and why you think that long term is going to be really good for Qualcomm.

Akash Palkhiwala: Yeah, that’s a great question Dan. We are very, very excited about the long term opportunity within augmented reality, virtual reality. So that’s the first key point. And we are believers that vision plays out in some fashion. And I agree with you that there is still not clear line of sight as to how it plays out, but it’s something that’s indisputable I think in long term as a trend and it’s going to happen.

The second is I think there’s a lot of problems that need to be solved from a chip technology perspective to make that market happen at scale. You need a very, very low power processing device, you need connectivity all the time and very good latency as well, and then you need to be able to send data to the cloud to do AI and gaming and other experiences. So those are things that Qualcomm does very well and so we become a natural partner for everyone who’s trying to make an augmented virtual reality device. Our agreement with Meta as a long term chip partner for them is a testament to that. And it’s also when you look beyond Meta, if you think about really every other company that’s trying to make a AR/VR device, Qualcomm has become the chipset partner of choice and that puts us in a great place as this marketplace out.

Daniel Newman: So over the next, less than a decade, I think by 2030 Akash they said that in a vehicle, so I’m just pivoting to another connected device here. But the vehicle, over 20% of the bill materials that is going to go into a vehicle is going to be chips. I was in New York City for your automotive investor day and you guys, like I mentioned, the 11 billion, just a laundry list, I think you marched up the CEOs of pretty much every major automotive company and all saying we’re going to go with Qualcomm. Very much a configurable approach that you’re doing with it as approach to the black box.

Just a quick double click on that really quickly for me, 30 billion in pipeline. People want to know the translation to revenue in the near term, especially with this kind of shortsighted investor core right now. Is this going to mean more revenue in the near term too Akash, or is this something people need to be really patient about?

Akash Palkhiwala: Yeah, so automotive, as you said, we’re very excited about what’s happening within the industry. I think it’s a one once in a lifetime transformation opportunity for the industry and we’re very happy to be a part of it. When you look at the numbers for automotive for us, it’s staggering how quickly it has changed and how great position we feel we are in.

To couple data points, I think we went from a design pipeline of 19 billion that we gave at our July earnings, July end earnings, over to 30 billion. An increase of 11 billion that you pointed out, over a two month period. So very excited about the increasing interest and what you’re seeing within that is that we are clearly becoming a very strong player in ADAS. That’s a big silicon opportunity going forward. And the increase in design win pipeline shows our success there.

The other thing, if you look at what is happening within the ADAS industry, our bet was always between level two and level three and level four. That’s where the sweet spot we think is for the next several years. And it’s less about level five and you’re seeing some of the startups that had focused only on level five struggling with it. Our chip roadmap is really focused on the sweet spot within the ADAS market as well. And so we are very excited about that.

The third thing I’ll say, and this is the point you made earlier, is how our platform is scalable. It’s one integrated platform that goes across connectivity, digital cockpit, ADAS. So you go through all three areas that are very important to the transformation of the car. You could go from a very low tier car to a very high tier car and we can scale all the way up. You could just use our hardware or use our software offering, especially for ADAS that comes with it through the acquisition of Veoneer. And so being able to offer a scalable solution to the OEMs and we fit into their vision of how they want to transform their company is a great place for us to be.

Daniel Newman: Yeah, I like it as a land and expand strategy. My feel is you’re going to enter into a lot of different partnerships using one component or portion of this scalable offering and over time you’re going to be setting the company up very well to expand and get more of the total opportunity as opposed to we want the all or nothing approach. I think that’s a great strategy to win in this era especially because companies are moving at different paces to get into this space. One more area that I think kind of goes unspoken and this area probably doesn’t get broken out in earnings as much as it should, but seems to be very opportunistic. We’re seeing the likes of Lenovo and Microsoft and others that are all going to Snapdragon PC, Windows on ARM. What about that? I mean obviously the PC’s in a little bit of this kind of rut right now people feel. But it feels to me like an always connected PC that has great 5G modem connectivity, how big is that in the plans for Qualcomm?

Akash Palkhiwala: Yeah, so that’s a great question. If you look at, we talked about transformation of industries, we talked about transformation of the visual experience with AR/VR and then transformation of the car. One of the other transformations that we are leading is the transformation of the PC. It’s going from productivity only device to an always connected cloud experience device that’s used for communication and productivity. And so when that device transforms, what you need from the chip that is powering the device is also changing. And that puts us in a great spot to be a participant there. I think there’s so much tailwind behind the transformation of the PC and moving from X86 to ARM architecture. We’re very excited about it. I mean to me it’s less about the size of the PC market because we obviously have very small share today. If you look at the silicon opportunity across the scale of the market, it’s tremendous. And even if we got to 10, 20, 30% of that PC market, that’s highly accretive to our margins, highly accretive to our profitability. We’re excited about the traction we’re getting with Microsoft, with OEM partners because they want to be a part of the transformation, they will lead the transformation to ARM and we’ll be the chip supplier when that happens.

Daniel Newman: Yeah. Two quick observations. One is we’re in an era of market taking, where in a recessionary period when markets are not growing, you’re going to grow on alpha and company’s that grow on alpha mean they’re outperforming, they’re going to win more market share as opposed to grabbing the growth that’s in the froth in the market. So if you have the best product or most exciting product.

The second thing is I think we went through there was a period of time where the phone was trying to design itself after a computer and now we’re in the opposite era where the computer has to design itself after a phone. So if you were kind of observing the market, you would say, well that’s probably something Qualcomm knows a little something about. And so that makes you guys very interesting right now to say, hey, can we really revolutionize a PC, come up with something that’s performant, low power connected. And of course the Mac is kind of the ultra premium standard, the iPhone has been. So you guys have helped Samsung elevate their level on the Android device, now it’s time to do the same for Windows. And I think that’s going to be a really big opportunity over the next few quarters.

So I want to end talking about the hardest part of your earnings call. The hardest part of your earnings call is when you have all this great news, we beat, we beat, we beat, but we didn’t raise. In fact, we’re actually going to tame and give some caution. I said just about every company’s had to do this over the last two or three quarters, finally come back and say, you guys haven’t had this inflection, but you did this quarter. And you know, and Cristiano both very charismatic, very believable. But once you say we’re guide slower growth, it’s like everything else you said, it just becomes like that Charlie Brown, that wah, wah. It’s like they stopped listening. I think that’s a big miss. Talk about kind of the guide, talk about why you’re making the decision to kind of say for a very temporary period of time, we’re going to slow and how does the company come out of that and put its foot back on the proverbial gas?

Akash Palkhiwala: Sure, sure. So first of all, everything we said is a function of the macroeconomic environment. There’s nothing specific about Qualcomm that has changed. The opportunity in front of us is tremendous and it’s everything we talked about so far. So it’s important to remember that we did not guide anything specific about Qualcomm itself that’s negative. There are two things happening in the handset market. First is we’re seeing the market deteriorate a bit in terms of scale, and so we’d have the impact that comes out of that. But the largest impact we saw this time is since we’ve gone to a slightly lower market and we’ve gone from supply constrain to having sufficient supply, we are seeing the OEMs change their inventory policy and in the December quarter is when they’re drawing down on their own inventory of our chips versus buying from us.

So you have this short term phenomena that is a quarter or two that impacts what our revenue numbers are within those quarters. But really when you step back from it, if we are a function of the market size, we are playing in the most interesting part of the market, which is the premium height tier, in that area we’ve been gaining share and the content within the area is rapidly expanding and we’re going to continue to participate in it.
So within the market, we are in the nicest spot in the market and we are winning the most designs. And so we are still very excited about what’s in front of us. And I think that was a-

Daniel Newman: Oh, sorry, go ahead.

Akash Palkhiwala: Just one last point. Somehow in the conversation yesterday we got caught up in market trends, which of course we’ve been very transparent about, rather than the specifics of our position, which continues to be strong, defensible and growing.

Daniel Newman: Yeah, no, I was actually going to say, and thanks for finishing that thought, it’s really encouraging, Akash, because basically even though there is some softness that you’re communicating, you did mention you are, one, more diversified. Two, you are playing in that upper tier of the market, which in my opinion are both keys. Three, as I mentioned about enterprise strength, the business like IOT and industry focus gives you another diversification when it comes to being in the vehicles, this is a new and growing area. So even if the automotive market slows somewhat, your revenue should still accelerate. Cause you went from having almost no participation to small participation to a growing participation in a market. And so if the economy contracts by 2, 3, 4%, you’re still taking a huge part of market that didn’t exist for Qualcomm.

So I tend to think the overall perception of tech is a couple things. One, we need to bifurcate between alpha and beta, the good and the bad. And there are good companies that are doing good things and we like to bunch them all together. And I think that’s a temporary approach when things are a little bit uncertain, but long term the good companies will rise. Your performance seems to indicate that there isn’t really a lot of reason for alarm. We’re just dealing with gyrations of kind of algorithms, somebody punching a number into a spreadsheet and saying, oh, they changed the guidance and just spinning up the market. But if you’re looking on and saying, what are the trends? 5G, what are the trends? Automotive? What are the trends? Edge, cloud, AI. You’re playing in all those spaces with high margin, with great customers that are going to continue to buy stuff.

By the way, just about every device on the planet that sells there’s dollars going to Qualcomm. So if walk around the airport, walk around any mall and you see people on their phones, Qualcomm has a really consistent and real tie to that and that trend. So I say congratulations, strong quarter, a bright future. We’re all navigating tougher waters. But Akash, it was a great year and I think if anything, hopefully you can take five minutes and really appreciate all the work you’ve done before you get back to it for the new fiscal-

Akash Palkhiwala: Thank you, I appreciate it very much. And then as Cristiano said in his closing, we’re focused on the long term. That’s where we are executing. In the short term, we are doing everything we can to act on factors we control, including our operating expenses. So I hope that we’re doing all the right things. I hope the investors see it and we’re excited about what’s in front of us.

Daniel Newman: Yeah, I really appreciate you taking the time to join me here today on this Six Five Insider edition talking to earnings talking end of another strong fiscal year for Qualcomm. Akash, hope to have you back really soon. Thanks for joining the show.

Akash Palkhiwala: Thank you very much. I appreciate it.

Daniel Newman: All right, everybody, there you have it. Hit that subscribe button. Tune in for more episodes of the Six Five and the Six Five Insider. I know Patrick Moorhead missed you today, but for this show, for myself, flying Solo, really appreciate you tuning in. We’ll see you all soon. Bye-bye now.

 

About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio