Qualcomm

Akash Palkhiwala: Thank you, Cristiano, and good afternoon, everyone. Let me begin with our results for the second fiscal quarter. We delivered revenues of $10.6 billion and non-GAAP EPS of $2.65, with EPS at the high end of our guidance. QTL revenues of $1.4 billion and EBT margin of 72% came in at the high end of our guidance, driven by favorable mix with global handset units approximately flat on a year-over-year basis. QCT revenues of $9.1 billion and EBT margin of 27% were in line with our expectations. QCT handset revenues of $6 billion came in as anticipated as OEMs remain cautious on handset bills due to the impact of challenging memory industry dynamics. QCT IoT revenues of $1.7 billion were up 9% on a year-over-year basis, driven by growth across consumer and industrial products. In QCT Automotive, we delivered another record quarter with revenues of $1.3 billion, representing 38% year-over-year growth driven by accelerating demand and increasing content per vehicle due to the transition of new digital cockpit and ADAS launches to our fourth-generation chipsets. On a combined basis, QCT automotive and IoT revenues grew 20% year-over-year, underscoring the continued diversification of our business, consistent with our long-term revenue targets. We also returned $3.7 billion to stockholders during the quarter, including $2.8 billion in share repurchases and $945 million in dividends, reflecting acceleration of our capital return program. Lastly, we released a previously recorded tax valuation allowance, resulting in a $5.7 million noncash GAAP tax benefit in the second fiscal quarter. This benefit is excluded from non-GAAP results. This reversal reflects new guidance on corporate alternative minimum tax issued in February by Treasury and IRS permitting taxpayers to deduct previously capitalized domestic R&D expenses. Before turning to guidance, I'd like to provide an update on the continued impact of memory industry dynamics on our business. Last quarter, we highlighted that the increasing demand for memory and AI data centers was driving uncertainty in memory supply and price increases to handset OEMs. And as a result, the handset OEMs, particularly in China, were taking a cautious approach by reducing build plans and drawing down channel inventory. These dynamics played out as expected in the second fiscal quarter and are also reflected in our third quarter guidance. As a result, in both quarters, our China QCT Android shipments are meaningfully below the scale of end consumer handset demand. We now estimate that QCT handset revenues from Chinese customers will reach a bottom in the third quarter and return to sequential growth in the following quarter. Now turning to guidance. In the third fiscal quarter, we are forecasting revenues of $9.2 billion to $10 billion and non-GAAP EPS of $2.10 to $2.30. In QTL, we estimate revenues of $1.15 billion to $1.35 billion and EBT margins of 67% to 71% with sequential decline primarily due to the operating assumption of weaker low-tier handset units. In QCT, we expect revenues of $7.9 billion to $8.5 billion and EBT margins of 25% to 27%. We are forecasting QCT handset revenues to be approximately $4.9 billion as a result of the impact of the industry-wide memory dynamics I just outlined. We anticipate QCT IoT revenues to grow by high single digits versus the year ago period, driven by industrial and consumer products. In QCT Automotive, following another record quarter, we expect year-over-year revenue growth to further accelerate to approximately 50% in the third fiscal quarter. Lastly, we forecast non-GAAP operating expenses to be approximately $2.6 billion in the quarter. In closing, while our near-term revenues are impacted by memory industry cyclical dynamics, we're confident in the underlying fundamentals around Snapdragon product leadership and content growth opportunities, including the adoption of agentic AI technologies. We continue to execute on our secular growth opportunities in automotive and IoT and remain confident in achieving our long-term revenue targets. In addition, we are very excited about the progress in our data center products and customer traction. We now expect initial shipments for our custom silicon engagement at a leading hyperscaler later this calendar year. We look forward to providing an update on our growth initiatives, including opportunities in data center and physical AI at our Investor Day on June 24. This concludes our prepared remarks. Back to you, Brett.

Brett Simpson: Thank you, Akash. Operator, we are now ready for questions.

Operator: [Operator Instructions] Our first question comes from the line of Joshua Buchalter with TD Cowen.

Joshua Buchalter: Obviously, I'm not sure you're going to be able to front-run the AI day you plan to host in June. But any details you're able to share or context on what the custom silicon engagement, what the scope is, what the magnitude is? Is this a CPU? Is it an accelerator? Is it a networking chip? Just any help you can give us beyond the press release and prepared remarks, I think would be helpful as that's where investors certainly want to dig in today.

Cristiano Amon: Josh, this is Cristiano. Thank for the question. Look, I can't provide a lot of details, as you said, we don't want to front run, I think, June 24. But here's a couple of things I can tell you, which is alongside what we said in the script. I think we have spent the time, I think, building assets and we've been building our CPU. We have accelerator. We have a different solution for memory in the accelerator. We have added a lot of capabilities for custom ASIC with the acquisition of Alphawave and Connectivity, we have been pursuing customer ASIC. We talk about have an engagement with a number of companies and pleased with the engagement several quarters ago. And I think given the capabilities that we're developing and what's happening in the market, that's accelerating. So we're very excited. The only thing I can tell, it is a large hyperscaler and we're really thinking about a multi-generation engagement. But I think that's what we can say at this point.

Joshua Buchalter: Okay. I guess we'll stay tuned. For my follow-up, can you maybe walk through why you're confident that -- I assume it's fiscal third quarter that you were referring to with the third quarter, but why you're confident fiscal third quarter can be the bottom for Android sales -- Android QCT sales into China. I mean that's typically -- September quarter is usually a typically down seasonal quarter. And just given how low visibility is right now overall in the handset market, I'd be curious just what inputs you're seeing that gives you the confidence it's going to bottom in the June quarter.

Akash Palkhiwala: Sure, Josh. It's Akash. So if you think about the impact to from Chinese handset OEMs as a result of the memory dynamics. It's really 2 parts. The first part is the scale of the handset market. And there, we have seen some small decline in it, especially in the mid, low tiers. But by far, the larger impact have been the OEMs making a decision to slow down their bills and draw down on channel inventory. So both of these factors have been in our March quarter results and they're also represented in our June quarter guidance. And so what we end up doing in both quarters is really significantly under-shipping the end consumer demand for handsets as a result of the channel inventory drawdown factor. So as we look forward, we feel confident that the third quarter is now the bottom. And so as we go forward, the revenue is going to be much closer to the scale of the handset business versus the inventory drawdown factor continuing into our forecast.

Cristiano Amon: And Josh, this is Cristiano. I just want to add one thing because -- there's another way to look into this. As you know, because of our licensing business, we do have visibility of what happens in the market. So we know [indiscernible] true. We know how the [indiscernible] market is behaving even with increased price on the handsets. So it gave us a real good idea on activations and customer demand versus what we're shipping. So that dynamic outlined by Akash, is kind of very clear to us that Q3 becomes the bottom.

Operator: Our next question comes from the line of Samik Chatterjee with JPMorgan.

Samik Chatterjee: Cristiano, maybe just going back to the data center opportunity and just trying to think about if you can sort of help us think about the competitive landscape here. I mean you've had, which is the IP provider now announced they want to vertically integrate and make chips. You had NVIDIA announce that they are going to focus on the [ inferencing ] market as well. How are you thinking about the competitive dynamics where they are related to maybe 3 months ago or 6 months ago that you're now sort of going and trying to deliver these wins? And I have a quick follow-up after that.

Cristiano Amon: Great question. Look, I'll give our perspective. And I think we have now, I think, more clarity than we ever have about where kind of we are in the AI space. So a little bit of maybe at a very high level, right? In the beginning, it was all about training. It was all about creation of AI, a lot of GPU, very GPU-centric deployment. Infra started gain scale and then the conversation changed to -- I'm going to use my GPU from training on the cluster that I build and when I'm not training, I'm going to use that for inference. As inference starts to gain scale, we started to see dedicated solutions. The data center becomes more disaggregated. You have separate computing solution, some for compute bounds, some from memory bound. And now we're entering the, I will say, the next phase, which how AI is really going from infant generating tokens how do you generate demand for tokens, which all those agentic experience and those orchestrators, they run into a lot of the devices. So when you think at that landscape and you look at our IP, in the places that we could be very differentiated, I will start by our CPU. I think when you think about agents, CPU becomes very important. And I will argue, we were one of the companies that have a pretty good CPU asset. We've proven that CPU performance with leading performance on the markets that we are right now, such as PC, smartphone and Auto. And we have built and we'll provide details on Investor Day a dedicated CPU for agentic experiences in the data center. We're going to show the metrics, we're going to show how it performs. People will be able to compare. As you know, we have an architecture license, and we have a very, very high-performance CPU. So that's one of the assets. The other asset is how you think about the scale of a semiconductor company like Qualcomm. We're not small. And the ability to combine the IP with the ability to do custom silicon, make sure that, that yields make sure it's delivered with quality and combine a lot of the connectivity IP, which I believe Alphawave because it was a licensing IP company has a leading IP, the more you license, the better your IP becomes. The number three is how we think about the accelerator. You're going to need high compute density, low TCO. And we think that we have something unique, which is focused on a cluster that is disaggregating very specific function especially like [indiscernible]. I think the activity you've seen with companies like Grok and [indiscernible] just prove that you have opportunity for a dedicated inference accelerator. And the last point is, I would not discount the position that we have on the edge. If you actually track what's happening with Open Claw in all of the different desktop and co-work solutions, you rely a lot on a high-performance CPU device, which is also causing an upgrade cycle for us. So we look at this whole landscape, and that's how we feel so good about the agentic transition of AI, what it means to Qualcomm. And hopefully, on June 24, we'll show the details on the road map and an investor will be able to see where we stand, and please reserve a seat.

Samik Chatterjee: Yes. No, please look forward to talking about that more at the Investor Day. Maybe for my follow-up, just going back to the handset business. Can you just remind us of the multiyear agreement framework that you have with your primary premium smartphone customer, Samsung. You did have some sort of changes in the market -- in the share with them this year. I think there are some more indications for the step-down in share and more use of the in-house SoC sort of next year? Or can you just remind us sort of how you're thinking about that engagement long term? And what does the multiyear agreement sort of capture at this point?

Cristiano Amon: No, absolutely. I love answering the question. So this is a very, very stable, I think, a relationship with Qualcomm. I want to remind you all that we have reset the framework of this relationship. Historically, we always had a business with [indiscernible] that was in the 50% share between us and their own in-house silicon. That has changed to greater than 70%, as you know, and that has been the framework. And sometimes we get more than that, but we plan our business in greater than 70% share, which is exactly what we have said. You should expect that that is the framework of this year, and that is also the framework for next year. I would say that, that's probably one of the most stable relationship that we have, and we have visibility of what that entails. And we feel good about the position of Snapdragon. And I'll argue, I think given what's happened with agents, we have an opportunity to actually have a positive bias on that share.

Operator: Our next question is from the line of Chris Caso with Wolfe Research.

Christopher Caso: I guess the first question is just returning to the data center briefly. And to clarify what you mentioned in terms of the hyperscale engagement for the December quarter. Is that an engagement for an accelerator or a CPU? I understand your targeting both, it sounds like, but what's the particular engagement for December?

Cristiano Amon: This particular engagement, which we're going to have shipments in December is a custom product. We're working with a hyperscaler.

Christopher Caso: Okay. So no other specificity past that okay. Just with regard to QTL, and it looks like that's modestly down and likely due to what you've been talking about with regard to what's going on in the handset market. What's the right way to think about the QTL business as we go forward into the second half of the year? Do you think that we kind of maintain these levels and adjust for seasonality as you get to the end of the year? Or do you expect the impact on QTL to be more significant as you go in the second half?

Akash Palkhiwala: Yes, Chris, it's Akash. So as you saw in our results for the second quarter, year-over-year handset units were flat for the global units. And this was really kind of impacting our guidance as well, our actuals as well. As we look at third quarter, what we're guiding is some weakness in the mid, low tiers in the market. I mean this is obviously something that we are projecting forward, and we're going to track closely. But what we're seeing is the premium high tier of the market is continuing to hold and weakness in the lower tiers. And that's what's reflected in our guidance. That's a reasonable way of thinking about the market going forward as well.

Operator: The next question is from the line of Stacy Rasgon with Bernstein Research.

Stacy Rasgon: So if the China handsets bottom in Q3 and then they grow in Q4, that September quarter, September quarter, I think, is when we're supposed to get the Apple step down, which may be an offset. So I guess just how are you thinking about handset seasonality in the September quarter, given those kind of competing dynamics? How should we be thinking about that?

Akash Palkhiwala: Yes. Stacy, it's Akash. You're right. I think in terms of kind of handset revenues for QCT from Chinese OEMs, we do expect that the June quarter is the bottom, and you will see sequential growth from there. And Apple, you're right as well that typically, it's a growth quarter for Apple product revenue, and we do not see that at this point given the share assumption change. So those are the 2 factors you would use to forecast September quarter.

Stacy Rasgon: I mean do you think handsets growing sequentially in September or not given those two factors?

Akash Palkhiwala: Stacy, we are not specifically guiding it at that point -- at this point, but I think those 2 factors would be the input into the forecast.

Stacy Rasgon: Okay. And for my follow-up, you talked about like agentic devices and agentic smartphones like driving a shift and things, I guess, into '27. Do you think the memory issues are going to be done by -- like how much memory does an agentic smartphone need? And is that something that's going to continue to be a headwind do you think on this as we go into 2027? How do we think about the broader dynamics around memory as we go forward?

Cristiano Amon: Thank you for the question, Stacy. Look, it's a little early to talk about '27. I think 1 thing to see is I think the pace of change of AI is getting scale. When I think about the framework that I talked about it before, which you go from inference to now, you know how you generate demand for tokens with a lot of agents. And I think what we see is 2 things. One is the devices are changing the requirements in the design and the players. We see interesting associations now starting to form between smartphones and AI companies. We're starting to see some very interesting dynamics there which is changing the nature of designs. We see designs moving towards products they have much more capable CPU to run those type of products. And there's a lot of noise in the memory environment right now. I wish I could make a prediction on '27 is a little early, but we see a combination of some of the same companies that want a lot of demand for data centers and also getting involved with some of the devices at the edge as well. And we see new memory players coming and building capacity. So we're going to have to monitor the situation and see what happens in '27.

Operator: The next question is from the line of Timothy Arcuri with UBS.

Timothy Arcuri: Thanks a lot. I wanted to ask also about this custom that is going to ship in the fourth quarter of this year. I know you brought a team in from Alphawave. It seems a little fast to get something to market that includes your IP by the end of this year, given cycle time. So I think they had some chiplet stuff and maybe some custom DSP stuff. Is that the sort of thing you're talking about? Or is this truly something that includes a big portion of your IP that you've been able to turn around since the deal closed?

Cristiano Amon: Look, I think 2 answers. So we have -- I'm pretty positive for the past several quarters, we've been talking about engaging with customers in the data center. So I think when we start engaging and talking about some of the Qualcomm capabilities, it's probably, I think, even before the acquisition of Alphawave. I think the acquisition of Alphawave increase our execution capabilities in the portfolio of IP. I think you should expect that we're going to have a longer multi-generation agreement with those companies that brings a lot of Qualcomm capabilities to the table. I wish I could provide more details, but like I said, I don't want to front run what we're going to do on June 24. But I think we will provide a detail of everything we're doing. Our customers win in our roadmap and our IP.

Timothy Arcuri: And then I guess just as a follow-up, is the assumption still the same that like around your share in Apple. I know there are some signs that there's going to be a little more aggressive displacement. Is the assumption still that it's going to be 20% for the new launch?

Akash Palkhiwala: Yes. No change, Tim, to our assumption there. We've set of the 20% of the -- 20% share of the phones that will launch in fall this year and no product relationship beyond that. And this is -- this assumption has been consistent for the last couple of years. In terms of Apple product revenue for fiscal '27, we've seen sell-side models in the range of a little over $2 billion in terms of QCT product revenue in the year, and we think that's a reasonable place to model the business.

Operator: Next question is from the line of Joe Moore with Morgan Stanley.

Joseph Moore: You alluded to the weakness being more in the medium tier and the premium tier as being stronger. Is that something you can see where you're sort of taking limited memory allocation and that sort of drives just to sort of limit that puts it in the heart here. Just what are you seeing in terms of what that's doing to your mix going forward?

Akash Palkhiwala: Yes. I think the actions from the OEMs are obviously very logical. If you had to choose between which devices you put your memory allocation to, you would pick the premium and the high tier, that's where the profitability sits, and that's what you're seeing happen in the market.

Joseph Moore: Okay. And you talked about 6G in 2029. I mean is that -- what does that time frame represent? Is that sort of introduction of technology? Is there a shipments then? Just anything you can tell us about when 6G starts to become relevant?

Cristiano Amon: Yes. And look, thank you for the question. The reason I brought it up is because 6G is going to feel, I think, very different than the other Gs for Qualcomm. I also believe that 6G creates some very interesting, I think sovereign AI and data center opportunities, I think, for Qualcomm as well. You should be thinking about our time line, and we've been consistent with it. We will have prototype base, I think, demonstrations in 2028. Likely, we're going to have first silicon in '28, and we want early launches in 2029, and then we expect that to get scale by 2030.

Operator: Our next question is from the line of Ross Seymore with Deutsche Bank.

Ross Seymore: I want to go back to the handset side. And if you could just level set us to whether it's the fiscal second quarter or fiscal third quarter, what percentage of handsets is China. And you mentioned that a lot of the dynamics is how far you're under-shipping versus true demand, are you believing that true demand, whether it's China or elsewhere, is truly weakening still? Or is that side of the equation stabilizing despite the memory fairs?

Akash Palkhiwala: Yes, Ross, when you think about the total handset market, and this is more of a QTL comment, right, that's where we are seeing that the -- there's a slight decline in mid-low tiers, but the overall scale of the handset market has not changed much, at least in the March quarter, and we're going to obviously closely monitor that going forward. In terms of QCT shipments to Chinese customers, it's a factor, as I said earlier, of 2 things. It's not just the scale of the handset market, but the OEM decision to drawdown on channel inventory. And so my comments earlier were about the drawdown of channel inventory will end soon, and that's us calling the bottom on the quarter. And then really, our shipments will reconcile to the size of the handset market.

Ross Seymore: Okay. And I guess for my follow-up question, shifting gears to the automotive side of things. You mentioned about the ADAS side starting to ramp and growing 50% this year, so -- or at least in the next quarter, so doing very, very well. As you go from more of a cockpit business to the ADAS mix increasing, how does that change the revenue trajectory and perhaps the gross margin trajectory in your automotive business?

Cristiano Amon: Yes. So this is Cristiano. I think what you see is it accelerates revenue dramatically because it's a lot more silicon content. If you -- and that is true actually on both sides. I think what you saw is when we went from generation 3 to generation 4 in digital cockpit. We -- I think we keep mentioning the car, it's really becoming a computing surface. We saw a step function increase in the capability [ silicon content ]. You expect another 1 when we go from fourth generation to fifth generation. And as we add processors and you started to see more and more development of L2++ in direction towards Level 3, you're starting to see the amount of computing power going up. So for us, it's basically a significant revenue accelerator within automotive.

Akash Palkhiwala: And specifically on your question on gross margin, I'd highlight maybe 2 additional factors to what Cristiano said. I think we have the we're transitioning from a chip sale to a [indiscernible] sale. And so as we go to a module, it increases the revenue opportunity for us as well. And then in addition, we have software opportunity on top of the the chipset, which also helps our margin profile. So net debt, we still model the business in line with our corporate average, but it really is a business that has several vectors of growth as both of us outlined.

Operator: Our last question is from the line of Vivek Arya with Bank of America Securities.

Vivek Arya: For the first one, Akash, you mentioned Apple product sales, I think, $2 billion plus for fiscal '27. What about the royalty contribution? How does that evolve as you approach the date for kind of renegotiation negotiating that business?

Akash Palkhiwala: Yes. So pending the renegotiation, the royalty, we don't expect it to change, right? It should be in the same scale that it's at, and it's an independent business separate from the chip business.

Vivek Arya: And for my follow-up, Cristiano, back to the hyperscaler discussion, I realize you'll give more details at Analyst Day. But was -- is Qualcomm's intention to approach this from an ASIC perspective, I thought you plan to enter the data center from a merchant perspective. But are you saying that now the goal is to approach it from an ASIC perspective? And if that is the case, what impact does it have on margins? Like are you really going to compete head on with the other ASIC suppliers that are out there. So this is going to be more kind of a one-on-one right type approach to the market as opposed to approaching the market in a broader merchant. So just what is kind of the broader strategy, go-to-market strategy that Qualcomm has in this business?

Cristiano Amon: Very good -- great question. I think the answer is all of the above. Look, we -- first of all, as a new entrant, I think we we're very flexible. But we also look at the reality of what's happening in the hyperscalers. You can see that the majority of the revenue for semiconductor companies is heavily concentrated in a few number of very large companies. And those companies have now had indicated very clearly, they have different -- as the data center gets disaggregated, you have different approach to compute to connectivity. And you should assume that Qualcomm will play on merchant, on custom and it's going to be a combination of how we're going to configure our IP and different IP blocks for different solutions is going to be a bespoke business.

Akash Palkhiwala: And specifically on your question on this custom engagement we talked about, we do expect that to be accretive at the operating margin level.

Operator: Thank you. That concludes today's question-and-answer session. Mr. Amon, do you have anything further to a before adjourning the call?

Cristiano Amon: I think the obvious thing I want to say is please ask everyone to attend our June 24 [indiscernible] Investor Day. We intend at the Investor Day to really highlight not only, I think, everything that is happening with the new Qualcomm, but also I think the details of the products and technology we have been developing for the data center space, provide an update in how physical AI is transforming our business and provide the clarity that we have today, how really agents and agentic experience exactly has a broad implication in our entire business. And I'm looking forward to speak to all of you, and I'd like to our partners, our employees for a great quarter as we continue to transform Qualcomm. Thank you very much.

Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.