QUALCOMM Incorporated (NASDAQ:QCOM) Q1 2020 Earnings Conference Call February 5, 2020 4:45 PM ET
Company Participants
Mauricio Lopez-Hodoyan - VP, IR
Steve Mollenkopf - CEO
Akash Palkhiwala - CFO
Cristiano Amon - President
Alex Rogers - EVP and President, Qualcomm Technology Licensing
Conference Call Participants
Samik Chatterjee - JPMorgan
Mike Walkley - Canaccord Genuity
Chris Caso - Raymond James
Stacy Rasgon - Bernstein Research
Ross Seymore - Deutsche Bank
Matt Ramsay - Cowen
Rod Hall - Goldman Sachs
C.J. Muse - Evercore
Timothy Arcuri - UBS
Srini Pajjuri - SMBC Nikko Securities
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm First Quarter Fiscal 2020 Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator instructions] As a reminder, this conference is being recorded, February 5, 2020. The playback number for today's call is (877) 660-6853. International callers, please dial (201) 612-7415. The playback reservation number is 13697473.
I would now like to turn the call over to Mauricio Lopez-Hodoyan, Vice President of Investor Relations. Mr. Lopez-Hodoyan, please go ahead.
Mauricio Lopez-Hodoyan
Thank you and good afternoon, everyone. Today's call will include prepared remarks by Steve Mollenkopf and Akash Palkhiwala. In addition, Cristiano Amon, Alex Rogers and Don Rosenberg will join the question-and-answer session.
You can access our earnings release and a slide presentation that accompany this call on our Investor Relations website. In addition, this call is being webcast on qualcomm.com and a replay will be available on our website later today.
During the call today, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our website. We will also make forward-looking statements, including projections and estimates of future events, business, industry trends or business or financial results. Actual events or results could differ materially from those projected in our forward-looking statements.
Please refer to our SEC filings, including our most recent 10-K, which contain important factors that could cause actual results to differ materially from the forward-looking statements.
And now to comments from Qualcomm's Chief Executive Officer, Steve Mollenkopf.
Steve Mollenkopf
Thank you, Mauricio, and good afternoon, everyone. We are pleased to report strong results in the first fiscal quarter with non-GAAP earnings of $0.99 per share, above the high end of our guidance range, led by strength in our chip business. We're also pleased to see strong year-over-year revenue growth in our licensing business.
As you can see from our strong results, our business reached a key inflection point exiting fiscal Q1, demonstrating the positive financial impact of our 5G strategy to grow our addressable dollar content per device with higher-performing core chipsets and new RF front-end content. Virtually all of our 5G Snapdragon design wins are using our RF front-end solutions for 5G sub 6 and/or millimeter wave, including design wins based on our second-generation solutions.
As we continue to execute on our RF front-end strategy, we are pleased to see our RF design win pipeline contribute to the strength of our quarterly results and our outlook. We are in a strong position with leading technology and intellectual property and the best products in the company's history. Our 5G roadmap extends beyond release '17, placing us on the cusp of a multi-decade mobile transformation as 5G increasingly becomes the foundation for the digital transformation of industries beyond smartphones.
Turning to QTL, we have now signed over 85 G license agreements up from 75 license agreements last November. Most recently, we signed extensions with 2 key Chinese OEMs through the end of March as we work to complete long-term 5G license agreements.
Let me now spend some time updating you on 5G traction globally. As we start the year, there are over 345 operators in nearly 120 countries, investing in 5G, including 45 operators in over 20 countries that have launched commercial 5G services, spanning both the sub-6 and millimeter wave spectrum. Looking forward, we continue to expect millimeter wave to be deployed in all regions.
Additionally, more than 45 OEMs have launched or announced commercial 5G devices, many of which are using our Snapdragon 5G platforms. On the product side, we recently introduced our flagship Snapdragon 865 mobile platform that we expect will power many premium tier Android smartphones this year. We also introduced the Snapdragon 765 and 765 Gaming Mobile platforms with an integrated 5G modem.
With over 275 5G devices announced or in development, spanning multiple price tiers, our product offerings will help make 5G more accessible to consumers. We also expanded our 4G lineup with new mobile platforms that enable our partners to offer sophisticated solutions that meet global 4G demand, particularly in emerging economies across multiple tiers and price segments.
Turning to Korea, last December, all three Korean operators combined reported approximately 4.7 million 5G subscribers and are forecasting continued growth throughout calendar year 2020. We see Korea as a leading indicator for the pace of 5G adoption. Of note, the expected 5G subscriber growth is not just isolated to the sub-6 frequency bands. Carriers are planning millimeter wave service in 2020.
Turning to China, 5G device sell in increased through December. The China Academy of Telecommunication Research reported sell-in of 13 million 5G handsets in calendar Q4 2019. Importantly, 5G handset sell-in penetration reached 19% in December 2019. We are already seeing devices priced as low as RMB 2,000 or approximately USD 285 million. At this point, 5G can address approximately 40% of domestic China smartphone sales.
In the U.S., the 5G network build-out is progressing well at the top 4 carriers across sub-6 and millimeter wave spectrum. Verizon is leading the deployment of enhanced mobile broadband with millimeter wave service in 31 cities and is expanding their device roadmap to approximately 20 new 5G products this year.
T-Mobile's 5G network now covers more than 200 million people and more than 1 million square miles across the United States. AT&T expects to have nationwide 5G coverage by calendar Q2. And Sprint expanded their 5G network coverage to 9 metropolitan areas.
I would also like to highlight two recent developments on spectrum in the United States that will help drive even greater momentum for 5G. First, the FCC gave final approval for commercial use of the CBRS band, taking advantage of spectrum sharing techniques that we and others in the industry began working on years ago. The CBRS band is well suited for enterprise, smart city and industrial IoT deployments.
And second, the FCC's latest millimeter wave auction which includes the largest amount of millimeter wave spectrum ever up for bid in an auction, is ongoing and will bring up to 3.4 gigahertz of additional millimeter wave spectrum to the U.S. market.
Turning to automotive, as a measure of our continued automotive success, our design win pipeline is now over $7 billion, up from $5.5 billion a year ago, which does not include any impact from our recently launched autonomous driving platform, Snapdragon Ride. We continued to benefit from our systems level expertise, expanding our automotive solutions to include an autonomous driving platform, Snapdragon Ride.
With a long history of automotive innovation, we now -- we have now become a trusted adviser to many of the world's leading automakers. Over 125 million vehicles use our broad range of automotive solutions, including telematics, in-car connectivity and infotainment platforms.
Our Snapdragon Ride ADAS platform represents a significant expansion of our addressable market. We look forward to seeing our Snapdragon Ride ADAS and autonomous solutions on the road in 2023.
We are very pleased with the FCC's unanimous vote in December to move forward with allocating spectrum in the 5.9 gigahertz band for cellular vehicle to everything technology. Since that vote, we are seeing traction for cellular V2x in the 5.9 gigahertz band across regions. Looking forward, we continue to remain optimistic about our growth opportunities in IoT, always connected PCs and cloud AI.
Lastly, as the coronavirus situation continues to unfold. Our thoughts are with the many Qualcomm employees in China, our customers and suppliers, their families, as well as those who are impacted by this unprecedented situation. As Akash will share with you, we have considered the impact of the coronavirus in our forward guidance based on the limited information we have at this time.
I would now like to turn the call over to Akash.
Akash Palkhiwala
Thank you, Steve, and good afternoon, everyone. I will begin with a discussion of first fiscal quarter earnings. Our results demonstrated strong execution with revenues of $5.1 billion at the high end of our guidance range and non-GAAP earnings per share of $0.99, $0.14 above the midpoint of our guidance.
The outperformance in the quarter was driven by strength in QCT across 5G, RF front-end and adjacent platforms with revenues of $3.6 billion, an EBITDA margin of 13%, which was above the high end of our guidance range.
MSM shipments of 155 million units were consistent with the midpoint of our guidance. QTL delivered revenues of $1.4 billion, a 38% increase year-over-year and EBIT margins of 72%, reflecting the benefit of a seasonally high quarter. We returned approximately $1.5 billion to stockholders during the quarter, consisting of $710 million in dividends and $762 million in stock repurchases..
With that, I'd like to turn to our global 3G/4G/5G device forecast. We continue to expect approximately 1.75 billion devices for calendar 2019. Our forecast for calendar 2020 remains unchanged at 1.75 billion to 1.85 billion devices, including 175 million to 225 million 5G devices. This forecast continues to reflect flat handsets and low double-digit growth in non-handsets.
Now let me walk you through our financial guidance. For our second fiscal quarter guidance, we are estimating revenues to be in the range of $4.9 billion to $5.7 billion and non-GAAP earnings per share of $0.80 to $0.95. There is significant uncertainty around the impact from the coronavirus on handset demand and supply chain. Based on the information we have at this time, we are widening and reducing the low end of our guidance range. We remain in active contact with our employees, customers and suppliers as we continue to monitor the situation.
In QCT, we expect second fiscal quarter revenues of $3.9 billion to $4.5 billion, an EBIT margin of 15% to 17%. The midpoint of our revenue guidance represents approximately 16% growth sequentially.
We estimate MSM shipments of 125 million to 145 million units, a 13% sequential decline at the midpoint. This trend is consistent with historical seasonality and reflects the latest demand signals from our customers. Sequentially, we expect revenue per MSM to be meaningfully higher, reflecting increased content with 5G device launches in addition to normal seasonal mix shift towards higher tier chipsets.
Our guidance includes a greater than 50% increase in RF front-end revenues in the second fiscal quarter on both a year-over-year and sequential basis.
For QTL, we estimate second fiscal quarter revenues to be in the range of $1 billion to $1.2 billion with EBITDA margins of 61% to 65%. We anticipate second fiscal quarter non-GAAP combined R&D and SG&A expenses to be up 5% to 7% sequentially due to normal seasonality.
Looking forward, we continue to see two inflection points in fiscal 2020. The strength in the first half of the fiscal year reflects the first inflection point on the acceleration of 5G demand. We expect our third fiscal quarter performance to be in line with our second fiscal quarter, consistent with historical trends in our QCT business. We expect the next inflection point with the launch of additional 5G flagship handsets to be in the fourth quarter and extend into fiscal 2021.
In conclusion, we remain confident in the long-term growth opportunities we outlined at our Analyst Day, including 5G adoption, RF front-end content capture and expansion of our technology into adjacent platforms.
Thank you and I will now turn the call back to Mauricio.
Mauricio Lopez-Hodoyan
Thank you, Akash. Operator, we are ready for questions.
Question-and-Answer Session
Operator
Samik Chatterjee
So if I can just start off on the guidance itself and you mentioned kind of the seasonal decline in some unit shipments. So just wondering if you can walk us through the kind of sequential move from the 155 million unit shipments you had this quarter to the new range of $125 million to $145 million. How much of that is seasonality and what are you really factoring in terms of the kind of budgeting for the virus impact? And what you're hearing from OEMs in terms of delays that might be impacting that range that you're guiding to?
Akash Palkhiwala
Samik, this is Akash. So if you take the midpoint of our guidance range and look at the sequential decline, it's approximately a 13% decline. And if you consider the seasonality in previous years, we've seen a decline of 16% to 22%. So it's largely consistent with the sequential decline we have seen in the past. So that's kind of your question on seasonality. This also -- our forecast also reflects the demand that we currently have from our OEM partners. And so that's -- it's also consistent with the demand we're seeing at this point.
Samik Chatterjee
Okay. And then if I can just follow-up on the ASP ramp here. So if you take the guidance that you have, the average ASP seems to ramp up sequentially from $23 on the MSM unit to $31. I'm just wondering if you -- that's already a 23% sequential increase, if you're doing the math right. Just wondering if you can share your thoughts about what that ASP ramp looks like because it sounded like you're expecting more RF content to come through later half of the year?
Akash Palkhiwala
Yes. Samik, yes, you're doing the math right, it's consistent with our view. Really, there are 3 drivers to the ASP increase. First is our normal sequential increase because of the benefit of the mix improved. What happens is we launched our new premium tier and high tier chip during this time frame and new devices are launched with it. And so you see a mix shift to premium and high tiers, which benefits us. So that's the first driver.
The second driver is with 5G coming in, the transition from 4G to 5G, it gives us an opportunity to increase the content in the core chipset before RF front end. And so you have incremental monetization from that. And then finally, RF front-end also impacting that because we have, as we've talked about, we have a very strong design win pipeline, not just on the core chipset, but on RF front end as well. And now that is being reflected in our guidance.
I'd also note that in my script, I went through -- I provided a data point on RF front-end revenue growth. So we're seeing 50% -- greater than 50% revenue growth in RF front end both on a sequential basis, so first quarter to second quarter, and a year-over-year basis. So it's our design win pipeline going up and the revenue and the forecast now.
Operator
Our next question comes from Mike Walkley with Canaccord Genuity.
Mike Walkley
Great. Yes, just building on some of those questions. I guess, first, maybe for Cristiano. Can you update us on the competitive environment for 5G, particularly on the Android side? How do you see 5G ramps potential Qualcomm share improving over the course of the year? And with the x55 coming, how should that also maybe impact share and ASP trends?
Cristiano Amon
Mike, thanks for the question. So there's a lot there. Let me just talk a little bit about the ramp and the impact on the new chipset. So we said in our script that the number of designs on 5Gs are now 275. 2/3 of that design pipeline now is on our second-generation chipset. So we continue to see traction especially as we go from our first 5G product or second product that is increasing. And in that traction, we continue to see the trend of high RF front end attached on Snapdragon.
Competition, we expect to have competition since the very beginning. This is a very competitive market. However, we're not seeing anything on competition different than what we expected in our planning assumptions. So we expect QCT share to remain strong. We have made assumptions on -- throughout the year, that it is consistent to what we have seen in the market, and there's nothing new there.
Mike Walkley
Great. And just a follow-up for clarification with the ramp laid out in the guidance on Q4, is that also an ASP ramp coming again on better 5G mix? Or is it more towards a unit ramp? Obviously, new customer, Apple coming back into the model and just more seasonal trends, can you help us think about what kind of ramp on those 2 metrics? That would be great.
Cristiano Amon
Yes. So on the ASP side, the way we think about ASP is a factor of -- a combination of a couple of factors. One is just as we go from 4G to 5G, we've talked about how we expect the revenue opportunity for us to expand by 1.5x between the core chipset and the RF front end. But then also, as we go across the tiers, down the tiers, starting with the premium and high tier, but then eventually going into mid-tier later in the year as well with 5G, the combination of those factors will inform the average revenue per MSM.
And then for later flagship launches that happened in the fall time frame. Again, it will -- kind of the same 1.5x rule should apply as we go from 4G to 5G, and it's really a question of how the mix plays out across the tiers and the OEMs that drives the weighted average ASP.