Qualcomm Inc (QCOM)
Q1 2020 Earnings
Conference Call
Final Transcript
Corporate Participants
Mauricio Lopez-Hodoyan
Vice President of Investor Relations | Qualcomm Incorporated
Steve Mollenkopf
Chief Executive Officer | Qualcomm Incorporated
Akash Palkhiwala
Executive Vice President and Chief Financial Officer | Qualcomm
Incorporated
Cristiano R. Amon
President | Qualcomm Incorporated
Conference Call Participants
Samik Chatterjee
JP Morgan | Analyst
Mike Walkley
Canaccord Genuity | Analyst
Chris Caso
Raymond James | Analyst
Stacy Rasgon
Bernstein Research | Analyst
Ross Seymore
Deutsche Bank | Analyst
Matt Ramsay
Cowen | Analyst
Rod Hall
Goldman Sachs | Analyst
C.J. Muse
Evercore | Analyst
Timothy Arcuri
UBS | Analyst
Srini Pajjuri
SMBC Nikko Securities | Analyst
Presentation
Operator
Ladies and gentlemen, thank you for standing
by. Welcome to the Qualcomm First Quarter Fiscal 2020 Earnings Conference Call.
[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
Vice
President of Investor Relations | Qualcomm Incorporated
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 the 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 or
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
Chief
Executive Officer | Qualcomm Incorporated
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 are 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 80 5G
license agreements, up from 75 license agreements last November. Most recently
we signed extensions with two 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
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
selling 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 RMB2,000 or approximately $285. At this point, 5G can address
approximately 40% of domestic China smartphone sales.
In the US, the 5G network build out is
progressing well at the top four 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 nine 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 US 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 continue 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 have now become a trusted advisor 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 Corona virus 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 Corona virus 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
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
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 and EBT 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 EBT 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 to 1.85 billion devices, including 175 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 Corona virus
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 and EBT margin of 15% to 17%. The
midpoint of our revenue guidance represents approximately 16% growth
sequentially. We estimate MSM shipments of 125 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 EBT 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 reflect 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
Vice
President of Investor Relations | Qualcomm Incorporated
Thank you, Akash. Operator, we are ready for
questions.
Questions and Answers
Operator
[Operator Instructions] Samik Chatterjee with
JP Morgan. Please proceed.
Samik Chatterjee
Analyst
| JP Morgan
Hi, thanks for taking the question. 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 to 145, how much of that is seasonality
and what you really factoring in, in terms of the kind of budgeting for the
virus impact and what are you hearing from OEMs in terms of delays that might
be impacting that range that you’re guiding to?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Hi, 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. 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 are
seeing at this point.
Samik Chatterjee
Analyst
| JP Morgan
Okay. And then if I can just follow-up on the
ASP ramp here, so if we 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 33% sequential increase if you’re doing the math right.
I’m 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
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yeah, so you’re doing the math right, that’s
consistent with our view. Really there are three drivers to the ASP increase.
First is our normal sequential increase because of the benefit of the mix
improved. What happens is we launch our new premium tier and high tier chip
during this timeframe 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 our RF front-end revenue growth. So we are 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 showing up in the revenue in the forecast now.
Operator
Mike Walkley with Canaccord Genuity.
Mike Walkley
Analyst
| Canaccord Genuity
Great, thank you. 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
as 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 R. Amon
President
| Qualcomm Incorporated
Hi, Mike, thanks for the question. So there is
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 in 5G are now
275. Two-thirds 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 to our second product that is increasing. And in that traction we
continue to see the trend of high RF front-end attach on Snapdragon.
Competition, we expect to have competition
since the very beginning on — 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 had made
assumptions on throughout the year that it is consistent to what we haven’t
seen in the market and there is nothing new there.
Mike Walkley
Analyst
| Canaccord Genuity
Okay. 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 unit ramp, the 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 two metrics, that would be
great. Thank you very much.
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yeah, 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 have talked about how we expect the revenue
opportunity for us to expand by 1.5 times 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 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
happen in the fall timeframe, again, it will kind of the same 1.5 time 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.
Operator
Chris Caso with Raymond James.
Chris Caso
Analyst
| Raymond James
Hi, thank you. Just first question is just a
clarification of what you guided to for the third fiscal quarter and you said
the performance to be in line with the second fiscal quarter. Just give some
more color around that, is that with regard to QCT, QTL together? Is that
referring to revenue, is that a margin assumption as well?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yeah, so the way we think about the year,
Chris, it’s kind of playing out largely as we had expected. In the last call we
outlined that we saw a couple of inflection points through the year kind of
both in the first half of the year and then in the fourth quarter. And our view
kind of hasn’t changed. We have seen a little bit of an acceleration in 5G
deployment, which shows up in our results for the quarter and the guidance. And
beyond that as you go from second quarter to third quarter, it just plays to
the normal seasonality of our businesses.
Chris Caso
Analyst
| Raymond James
All right, thank you. And with regard to QCT
now, just a couple of questions there. With regard to the MSM guidance for the
March quarter of 135 million midpoint units, how many of those are 5G now, if
you give us some sense of how, I guess, the 5G penetration into the product
line right now. And then following from that, with the big jump that you’ve had
in ASPs for all the reasons that you mentioned, is that something we should
expect to be sustainable through the year, perhaps does it get better as 5G
attach rates increase, is there perhaps some natural ASP declines as products
mature. Could you give us some sense of how that progresses through the year?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yeah. So, Chris, this is Akash. We are not
breaking down our 5G units at this point as a percent of our total MSM units.
But the way to think about that number is really look at new handset launches,
that launches that will happen in the quarter and over the next six months and
those we expect primarily to be at the premium and the high tier mostly be 5G
launches. And so the volume driven by those launches would be 5G.
Cristiano R. Amon
President
| Qualcomm Incorporated
Hi, Chris. This is Cristiano. Just some data
point, maybe it will help you get to the answer. If you look markets such as
United States, I think the device requirements where they move on some of the
flagships and the high tier products, they are 5G products today. But the China
one is interested in what we said in the script, which is 5G sell-in
penetration reached 19% in the month of December and some of the price points
are ready can address about 40% of the total China market based on the price
point we’re seeing in the market. So all of this good indicator about the 5G
transition.
Operator
Stacy Rasgon with Bernstein Research.
Stacy Rasgon
Analyst
| Bernstein Research
Hi guys, thanks for taking my questions. I was
wondering if — I want to ask the Corona virus question a little more
explicitly. What would your QCT, MSM guide be for Q2 if you weren’t baking in
any Corona virus?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Stacy, what we are factoring into our guidance
is really looking at the demand that we have from the customers and the
information we have from them when you look at — on the MSM side. When you
look at the overall EPS guidance, as you’re aware, we typically guide a $0.10
range. And what we did to include the impact of the virus is to reduce the
bottom end of the range by $0.05 to reflect the information we have at this
point. But it’s really something that we’re going to continue to monitor as we
go forward.
Stacy Rasgon
Analyst
| Bernstein Research
Got it. Thank you. So my follow-up, I want to
ask about QCT pricing and margins in Q2. So you’re guiding revenue per MSM up
33% give or take sequentially and I get that. Why are you guiding chipset margins
only up a few points, like 3 points, like what are the gross margins of these
5G parts look like. Is there like a headwind there or is something else going
on with the remainder of like 4G pricing is that washes out. I guess I would
have expected more margin upside given that sheer magnitude of ASP upside,
what’s going on there?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yes, Stacy, it’s Akash again. I think the
numbers we gave out are actually very consistent with what we had outlined at
previous earnings release. We had indicated a mid-teens growth in revenue and a
mid-teens margin profile and we are guiding 15% to 17%. I mean, as you know,
well, it’s a combination of just total units, the pricing environment and then
the profitability around it and it’s very consistent with our expectations.
Operator
Ross Seymore with Deutsche Bank.
Ross Seymore
Analyst
| Deutsche Bank
Hi guys, thanks for letting me ask a question.
I wanted to stick on the theme of the revenue per MSM side but maybe take a
slightly different spin to it. You guys always do a great job of explaining in
detail what the revenue per MSM assumptions are and then you tie it together to
the EBT margins. But I wanted to see just conceptually going forward if the ASP
side or the revenue per MSM is the most powerful driver of the business, is
that accretive to the gross margin side. And I guess somewhat similar to
Stacy’s question, is there something detrimental to the gross margin side
that’s capping how much of the operating margin would otherwise go up because I
would think the ASPs or the content going up that much would be a very
accretive outcome for you.
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Hi, Ross. So it’s a combination of couple of
things. I think as we see more percent of our devices move to 5G, we’re going
to see a benefit not just on the revenue per MSM but also in the operating
margin. The second is, we are going across tiers. And so as we go across the
tiers and we have the second inflection point that will further expand the
scale of the 5G opportunity for us. As we outlined at Analyst Day, we
definitely expect to realize the operating leverage from the investment in 5G.
And so as we go forward, we will continue to see as we hit — especially as we
hit the second inflection point later in the year expansion in our operating
margins.
Ross Seymore
Analyst
| Deutsche Bank
Thanks for the details on that. I guess as my
one follow-up moving over to the QTL side of things, I think Steve said earlier
that you had 10 new licensees or 85 versus the 75 before. Does that do anything
to change things in the QTL revenue outlook to some sort of above seasonal
trends, whether it’d be in the March quarter or beyond as you’re getting more
people to pay for you with those — the new 5G licenses?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yes. The way we think about the — we plan QTL
from a 5G perspective is we have assumed that the market kind of stays at its
current structure and any 5G benefit that comes either from higher replacement
rates and more devices as a result of that, or it comes through an improved ASP
at especially at the mid and the low tiers, that would be incremental to our
forecast. Clearly as we go and sign the remaining licensees on 5G and go
through our entire licensing base to convert to 5G licenses, that’s something
that’s very important to us and critical to us as the transition to 5G happens.
Operator
Matt Ramsay with Cowen.
Matt Ramsay
Analyst
| Cowen
I guess I wanted to ask a little bit about, I
know Akash in the commentary in the guidance you talked about the normal
seasonality from December to March of 13% on units. But if you look back on a
year-over-year basis in both of those quarters, the total numbers are down
fairly substantially and with 5G ramping I wonder if the team could give a
little bit of update on the 4G business that you have and the market share
shifts that may or may not be happening or is this just all a market volume
story. Thank you.
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yeah, hi Matt, it’s a combination of a couple
of things. In these quarters last year, a year ago, we had a higher volume at
Apple since we were in the previous models and still shipping volume to them,
which is one reason for the decline. And then second as Huawei. While in the
scheme of things, they’re a small customer for us, they were a small customer
for us, we still had material volume with them. And so when you adjust for
those, the delta to what you would expect is extremely small and it just
reflects the general market environment.
Matt Ramsay
Analyst
| Cowen
Got it, thank you for that. And as my follow
up, I don’t know if this is for Cristiano or Steve, it’s sort of an
interesting, just a position that one of the big drivers of growth your Company
is 5G RF content. At the same time, one of the big players in RF is deeming
that business is non-core. Maybe you could just share your reactions to that
news if do you think is a result of your business or a future opportunity for
your business? And just how you’ve seen the customer base react? That would be
really helpful.
Steve Mollenkopf
Chief
Executive Officer | Qualcomm Incorporated
Sure. This is Steve. I would say, obviously,
it’s not a surprise to us. We’ve been building this for some time and working
really to get this opportunity into the business. The growth of opportunity on
the RF side for us due to 5G, I think, is a good story, a good continuing
story. We’re happy to see it grow across tiers. I think there’s still an
opportunity for other players. There’s obviously an opportunity on the 4G side.
In terms of competitive dynamic or what we’re
seeing from the customers, we’re definitely seeing the customers resonate with
the system solution. There are some features that we can add, that we’ve been
investing in, that I think people are finding valuable. But we’re happy to see
it flow into our business. We’ve been talking about it for some time, and it’s
great to see it actually in the results and in the guide.
Cristiano R. Amon
President
| Qualcomm Incorporated
Matt, this is Cristiano. I’ll just add one
thing real quick. Look, for us, the way to think about it, this is going to
become part of our core business. And that’s what you see reflected in the
revenue per MSM. We expect that uplift that we’ve seen on 5G and RF to continue
going forward, especially as we go down the tiers.
Operator
Rod Hall with Goldman Sachs.
Rod Hall
Analyst
| Goldman Sachs
I wanted to start with channel inventory. And
kind of — I know you don’t generally like to comment on it. But as we exit
March, given what’s going on with demand in China, do you have an expectation
that handset channel inventory there will be higher than normal as we exit
March? And just kind of what you think the flow of inventory might look like
over the course of a couple of quarters here.
And then I also wanted to kind of come back to
the competitive environment on 5G and ask you, how important share is to you in
that environment? And maybe, Steve, you could comment on what you would see as
advantages to having higher market share? Obviously, there are cost advantages
and so on. But there are other strategic advantages we might not be thinking
about that are important to you.
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Rod, from a channel inventory perspective, I
mean, obviously, given how we are closely following the situation in China, but
this is something that we need to continue to monitor. The key driver for us is
5G and 5G launches. And so in terms of inventory on 5G, we’re really at the
front end. And we have increasing demand from our OEM base. And really, the
challenge for us is how do we keep up with increasing demand, because it’s an
incredible opportunity for us to grow.
Steve Mollenkopf
Chief
Executive Officer | Qualcomm Incorporated
Yes, I think on share. I think — this is
Steve. I think on share, we’re not seeing anything that we didn’t anticipate.
We benefit, I think, a bit from a bit more geographical capability. We sell
into handsets that sell into more markets. They tend to be better units for us
and they give us not only scale kind of from the normal scale perspective, but
also, I would say, feature and diversity scale from things. If we have an
issue, a supply chain issue in the — or demand issue in China, we tend to have
the ability to have other regions to back it up.
So we tend to look at the business in terms of
our planning. We want to make sure that we maintain that strength across
different markets. And I think that’s going to serve us well.
Operator
C.J. Muse with Evercore.
C.J. Muse
Analyst
| Evercore
Just a follow-up question on the corona,
earlier question to Akash, just trying to get this right, have you tempered the
midpoint of your guide either on royalties or chipsets or you’re just
reflecting a wider EPS range?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yes, C.J., you should think of it as a wider
EPS range. I mean, it’s clearly something that we wanted to factor in our
guidance. So what we did is we kind of held our normal guide but moved the
lower end by $0.05.
Cristiano R. Amon
President
| Qualcomm Incorporated
Okay, helpful. As my follow-up, you’re guiding
revenues up roughly 5%, OpEx up 5% to 7%. So I guess, can you walk through
what’s driving the greater spending on the OpEx side? And how we should think
about operating leverage as we proceed through calendar ’20 and beyond?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yes. So maybe two points to it. First is on
the OpEx side, the increase is being driven by normal calendar year resets for
employee expenses. And so it’s really — that’s the primary driver.
As you think about the full year, we are — we
have given guidance before where we expect it to be — expect to be at the exit
rate for ’19 plus some small incremental on top of it. And so we’re still
sticking with it. I think if we execute to that and we have the growth on the
revenue side, it will allow us to expand our margins and realize operating
leverage.
Operator
Timothy Arcuri with UBS.
Timothy Arcuri
Analyst
| UBS
There’s a lot of questions on MSM ASPs. But
obviously, RF front-end really is the big piece of the story. But I guess, we
don’t really have any benchmarks in terms of what your revenue is there. And I
guess, in early 2018, I think you said that you thought that fiscal ’19 revenue
would be roughly $2 billion to $3 billion for RF front end.
And it sounds like, in prior calls, you sort
of hinted that you didn’t get there. But I guess, just because it’s such a big
piece of the story. Can you sort of anchor it for us, where are you right now?
How much revenue maybe in fiscal ’19, did you do for RF front end. If you’re
doing so well, I would think you want to give us some numbers there?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yes, Tim, this is Akash. At this point, we’re
not giving a breakdown of our RF front-end revenue base. I mean, you have data
points from a while ago. And kind of the market has changed since then. And
we’ve kind of grown our business through the RF 360 transaction and just the
incredible opportunity to grow RF front end on top of 5G. So we’re excited
about where it takes us, and we’ll look for opportunities as we go forward to
provide more data to you. But at this point, we’re not providing any additional
information.
Timothy Arcuri
Analyst
| UBS
Okay. I guess then, I had a question on
expenses in QTL. And it looks like they bottomed in the mid $300 million range
back in September. But based on the guidance, they’re sort of ramping back up
by about $40 million per quarter. Is all of that legal expense related to the
appeal? And sort of how do you think about the trajectory of margins in QTL and
particularly the OpEx ramp through the year in that business?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yes. So for QTL, if the way to think about the
OpEx and the business going forward is really look at the first quarter actuals
and use that as the basis for the expense going forward. I mean, it’s — at
this point, we’re not necessarily looking to scale expenses and litigate and we
see it as largely steady state. You will see some normal increases and
declines. But it’s really kind of flat OpEx. And then based on how the revenue
shape changes through the year, that will — that is how the margin will get
impacted.
Operator
Srini Pajjuri with SMBC Nikko Securities.
Srini Pajjuri
Analyst
| SMBC Nikko Securities
A couple of questions. Akash, on the gross
margin, obviously, a lot of questions there. My question is, my model, I think
I’m getting close to flattish gross margin with almost 40% ASP increase here.
My question is, I know you’re ramping 5G and I’m suspecting most of the 5G
initially is high tier. As we go through the year and as you ramp more mid and
low-tier, is there a risk that gross margins could actually decline? Or are you
comfortable saying that gross margins can at least remain at these levels?
Akash Palkhiwala
Executive
Vice President and Chief Financial Officer | Qualcomm Incorporated
Yes. Srini, we’re not giving guidance on gross
margins. But really, from an operating margin perspective, the way we think
about leverage is really as we transition from 4G to 5G, we should be able to
hold or improve our structure. And then with OpEx guidance that we’ve
previously provided, the combination of those factors should allow us to meet
our long-term operating margin guidance.
Srini Pajjuri
Analyst
| SMBC Nikko Securities
Got it. And then maybe for Cristiano.
Cristiano, on the RF, you said vast majority of the modem design wins are using
your RF solutions. Any way to give us an idea as to what percent of the mix is
using millimeter wave? And where do you see that going by the end of the year?
Cristiano R. Amon
President
| Qualcomm Incorporated
Thanks for the question. Right now, we see
millimeter wave as a requirement for at least the majority of the United States
operators in this year, we are working towards the millimeter wave launch of
Japan and Korea. So we expect that to start to be a requirement on devices as
well. And we have an optimistic view that by 2021 we’re going to start to see
that going into other geographies such as China and Europe. So 2020 is a United
States, Japan and Korea story.
Operator
Thank you. That concludes today’s
question-and-answer session. Mr. Mollenkopf, do you have anything further to
add before turning the call?
Steve Mollenkopf
Chief
Executive Officer | Qualcomm Incorporated
Yes. So just number one, thanks to the
employees of Qualcomm for driving 5G, as I know you spent a lot, a lot going on
in the last year. I appreciate all that hard work. It’s great to see the
results flow through into the financials. We look forward to continuing that
and talk to everybody next call. Thank you, everybody.
Operator
[Operator Closing Remarks]
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