The Six Five team discusses Qualcomm’s latest earnings.

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Transcript:

Daniel Newman: Let’s talk about another company, Pat, that has a story to tell in AI that maybe isn’t getting full credit for it, but also a company that’s huge for handsets, and that’s Qualcomm. Qualcomm is a company – and Pat, you and I over several quarters have been really ringing its diversification plan.

A year ago they pivoted from kind of their four buckets to three. They used to be handsets, RFFE, their front end automotive and Internet of things. They took the RFFE business and kind of merged it across, kind of horizontally like I talked about with AI, because it’s part of every part of their systems. But now they’ve got handsets, automotive and Internet of things. We all again expected a fairly soft quarter from Qualcomm. We know chip shipments are down, we know handset shipments are in a lull. We saw Samsung’s dismal results. I mean they just were… what did their profit drop? Like 95%. It was some amazing number.

Patrick Moorhead: Yeah, memory. Memory is tough. It’s a tough business to be in, and particularly if it’s memory for smartphones.

Daniel Newman: Absolutely.

Patrick Moorhead: And displays and stuff like that.

Daniel Newman: Absolutely. But here’s the good part of the Qualcomm number, is they really were within range across the board. They came to the top end of their revenue guidance. They were in the range of their EPS guidance. Of course, they were down on a year-over-year basis. But this was down from those kinds of peak periods of time from shipments for over the last few years of mobile devices. Handset business continues to be softer, a little bit like the PC business. Like I said, Apple’s the outlier, and we’ll talk about that later in the show. Automotive has been a really great growth area for the company. Something that definitely was a lever to pull on of positivity. And then IoT continues to be a strong one plus billion on a quarterly basis. 1.4 this quarter. And it’s an area that I don’t think most people really think about for Qualcomm, but the ambient connectivity of technology in smart cities and buildings and factories and how Qualcomm’s technology plays a role, is very, very interesting.

The licensing business, of course, is going to slow down when you’re shipping less handsets, although they do get a piece of all the Apple business, still. And so that’s a part that actually helps prop up the business. I think the one thing, Pat, you and I’ll probably want to lean into here though is, that the handset business is a cyclical one like PC. And so it will come back, it will go down, it will come back up and it will rise. And the demand for mobile handsets is going to be driven by a few factors. One is, just refresh cycles. Refresh cycles naturally create more demand. But of course, in an economic slowdown, people will wait longer to refresh. AI though is going to create a whole ‘nother wave, because what Qualcomm is building in their handsets and devices is going to be inference at the Edge that can do a lot with these large language models, even when you don’t have connectivity or when you have connectivity that doesn’t require any interaction with the Cloud, Pat. And this is a really huge thing.

You and I were at Mobile World Congress, we were able to witness a 1 billion parameter large language model being run – stable diffusion – on a device that wasn’t connected to the internet.

Patrick Moorhead: Yeah.

Daniel Newman: Pretty impressive. But AI is going to be used for things also Pat, that are very practical. Things like privacy and security, things like making systems reliable and making sure you get the benefits of AI on your device even when you got limited or no connectivity that your device is still able to take advantage of AI. And, of course, AI has a very impressive… everything from their image sensors to their VPUs, to their security tools that are all going to use AI, that are going to make handsets more secure.

Interestingly Pat, we haven’t heard much from Apple about their AI strategy. Of course, they’ve got the AI sensors and stuff in their devices, but nothing yet about what they’re actually planning to do from a generative standpoint. Qualcomm, I think, really does believe, and I think, Pat, I have to say I agree, that the Edge… we’ve talked about it with PCs, and by the way, at Qualcomm’s in PCs, we haven’t seen the best of what they’re going to offer yet, which is something I’m more bullish on.

But we are just starting to hear about what this Edge inference is going to mean, and with large language models, the opportunity that’s going to create. I think there’s going to be a huge sell-through of devices when people can start to do 10 billion plus perimeter models on their devices without connectivity. And by the way, this isn’t just infused into handsets. This is going to be infused into automotive, which has been a huge growth area for Qualcomm. It’s going to be infused into IoT for ambient and sensing technologies, and it’s going to be embedded into their PC. So Pat, I’ve talked too long. I got a warning message from our producer, so I’m going to pass it over to you here. That’s my thoughts on Qualcomm.

Patrick Moorhead: You did a great breakdown and I want to thank Qualcomm CEO, Cristiano Amon, and CFO, Akash, for the time that they gave both of us breaking down the earnings. You broke it down really well. The one thing I want to remind everybody is that they did beat Wall Street expectations on revenue, and they miss and/or met, on EPS. It was really the future guide that was a challenge. Everybody knew that the smartphone market was down, but it was that guide that did this. I want to point out, too, that automotive 20% year-in-year growth, and they are likely gaining share there. And the company did talk about how it likely gained share in handsets, so you know, you can only control which you can control, and put enough investment in the future to make it happen. And one of those big investment areas, like you said, was AI.

And when I look at the case for Edge, Edge AI, it’s very simple to me. Whether you call it the law of gravity, wherever the data is created, is the best place for that compute to be. And that’s just historically been true for 40 years. So if you’re capturing all that data, you want to do something. If you want higher levels of privacy and security with lower latency, that’s just the way that you’re going to do it. So this isn’t a stretch for me. And whether it’s tablets, PCs, smartphones, XR headsets, the cars, industrial IoT endpoints, generative AI is going to make its way there. I mean, we’ve already seen intonations from Google. We’ve already seen, heard from, what Microsoft is going to do there. We see some little cookie crumbs in studio effects. Imagine when the entire weight of Microsoft that we’ve seen primarily in Bing so far, puts their weight into Windows.

So what’s the Qualcomm case? If this new generative AI could shift preference for the device makers, and maybe even allow them to charge more, that means the Qualcomm can charge more, or they’re going to take share, if they are the best person with the capability for the technology. Without a doubt, Android, hands down, I mean they’re dominant in that position. Then the question is between Android and iOS, where Tim Cook, last night on the call, made a few esoteric comments about it not being ready. Let’s be careful, which you would expect, particularly when I think Apple’s likely behind. It has not likely not been a focus and they’re not going to show up until it’s perfect. So, net net, I think Qualcomm is very well-positioned for generative AI. And if they play their cards right, and their partners do, they’ll probably pick up margin dollars.