It's an airplane mode right now.
Just to show that it's running entirely on the
device, just doing all the computation.
And you can see it created a whole unique image.
Qualcomm's tech is inside nearly all our smartphones.
It pioneered the ability to connect wirelessly in the
80s all the way to the 5G modems of today, making
licensing fees for every device that communicates
using its patented core technologies.
And now it's working on an entirely new way of using
generative AI.
Qualcomm is an inventor.
They're an intellectual property company.
Qualcomm also long held the title of world's biggest
fabless chip company by revenue.
But with the hype of ChatGPT, Nvidia's revenue
has now soared past Qualcomm's making it the new
global leader in fabless chip design.
And Nvidia's stock shot through the roof too, making
it a $1 trillion company.
The king has been overthrown.
For now, powerful GPUs like Nvidia's are used to train
large language models to generate text or images by
tapping into a huge amount of data in the cloud.
But at Qualcomm, CEO Cristiano Amon is making a
big bet that one day generative AI will be in
high demand off the cloud, too.
Running massive amount of competition in the data
center for every word that is generated.
I think we have a very unique capability to run
those models locally and not only improve
performance, but you significantly improve cost.
And while its modems are currently inside every
iPhone, that's also set to end as soon as next year.
Apple is about 20% of Qualcomm's revenue today, so
it's a pretty sizable hit.
So now Qualcomm is focused on diversification.
It has a new partnership with cloud computing
providers and just expanded its auto offerings into
motorcycles and new in-vehicle generative AI
capabilities.
We've taken all of these technologies that we've
built, and then we apply it not just to mobile phones
but to VR headsets, to AR headsets, to computing, to
automotive.
CNBC went to Qualcomm's headquarters in San Diego to
see its latest tech firsthand and asked top
executives and analysts what's next for the longtime
wireless ruler as Apple develops its own silicon,
smartphone chip sales falter and generative AI
pushes GPU companies like Nvidia to the front of the
pack.
In 1985, seven colleagues from a tech start up called
Linkabit met in the home of Irwin Jacobs in San Diego,
where they thought up the idea for Qualcomm, short for
quality communications.
Jacobs would remain at the helm for 20 years.
Irwin is like a legend.
It was his vision that built all of this.
In 1989, it made a bold move away from the accepted
telecommunications standards at the time,
placing the first phone call using Code Division
Multiple Access. With CDMA, several transmitters send
information simultaneously over a single communication
channel. It became the foundation for 3G, 4G and 5G
today.
It was trying to solve that problem, which is trying to
get enough capacity so everybody in the world could
have a cell phone.
Nobody believed them. Nobody thought CDMA would work.
Not only did they make CDMA work, but then they went on
and made the rest of mobile work better.
For a short time, Qualcomm made its own cell phones,
releasing the first commercial CDMA smartphone
in 1998. Its first Snapdragon chipset for
mobile phones came out in 2007, and it remains the
product Qualcomm is best known for today.
Snapdragon processors help power and connect phones,
PCs, tablets, cars and more.
Multiple billions of transistors within that tiny
form factor. And that really is the brains of the
device. That's where a lot of the digital processing is
done. That includes the modem that does the
communication with the cellular tower, et cetera.
Chris Patrick heads up Qualcomm's smartphone
business. He's been with the company for 27 years.
At the end, in the heart of the products that you love,
that you use every day, it's a very good chance that
Qualcomm's at the center of it.
And it's not just Qualcomm hardware at the center of
our devices. It also makes money from licensing the
core technology concepts that shape how we
communicate. Today, Qualcomm says it has 140,000
patents.
I have a number of patents myself because really that
is that was the idea of Qualcomm, is this fusion of
long-term R&D, really ideation, thinking about
kind of the future and how we could solve problems and
then this practical application to real
products.
One of the things that tends to be misunderstood about
Qualcomm is it's not only a chip maker, it's also a
company that licenses its intellectual property.
And that creates revenue streams from companies like
Apple, from other OEMs that the company makes, even if
their chipsets aren't being specifically used in a
device. And it's probably one of the most
controversial parts of the Qualcomm business.
In 2017, it faced two major lawsuits, one from the
Federal Trade Commission over unfair patent licensing
practices due to its monopoly position in
wireless chips. In 2020, Qualcomm ultimately
prevailed. The other lawsuit came from Apple,
which sued Qualcomm for roughly $1 billion for
charging royalties for technologies Apple said
Qualcomm had nothing to do with.
Months later, Qualcomm sued Apple for patent
infringement. Two years later, a settlement brought
an end to all legal action between the companies.
Also in 2017, Qualcomm faced a $117 billion hostile
takeover attempt from Singapore-based chip giant
Broadcom. The deal was blocked by then-President
Donald Trump, citing national security concerns.
There was a period of time for four or five years where
it was just like one thing after the other.
It was just like whack-a-mole. It was insane.
And effectively on all the legal stuff, they prevailed
on everything. Like it was really amazing.
Still, such a big focus on licensing the tech behind
the curtain has created a separate issue around public
awareness.
The fact that people don't know it's Qualcomm often is
what is the hindrance.
You don't know when you buy that GM or that BMW that
it's powered by Qualcomm.
You don't know when you buy that Samsung device that
it's powered by Qualcomm, which I think is often its
friction in terms of investors and why it's
valued at often a much lower level than some of its
peers like Nvidia, Apple and others that are building
silicon.
But today, Qualcomm says licensing has become a
smaller portion of revenue while its semiconductor
business is growing. And those chips get their start
here, at a lab in San Diego where we got a
behind-the-scenes look.
Before we actually start any manufacturing, we put it all
together on one what's called emulation platform.
So it actually takes three of these.
Each of these is massive, 100 pounds, so 300 pounds
down to what's ultimately going to be a device that
looks like this.
Like all fabless chip companies, Qualcomm then
sends its carefully crafted designs off to be
manufactured at multi-billion dollar chip
fabrication plants, also known as fabs or foundries,
largely in Asia.
TSMC in Taiwan and Samsung in Korea and many others,
we're always the number one or number two customers of
all of those foundries, given our scale.
But mounting tensions with China and between China and
Taiwan have raised concerns about how much all major
chip designers rely on chip makers in Asia.
That's why Taiwan Semiconductor, Samsung,
Intel and others are now building huge advanced fabs
in the U.S. - to reshore manufacturing with
incentives from the $52 billion CHIPS Act, although
some of those plans have already hit delays.
Will you make any Qualcomm chips at the new plants
coming, the TSMC plant in Arizona for instance?
Absolutely. We are already, if I'm not mistaken, we're
already committed to around close to half of the
capacity it's going to be for Qualcomm products.
And we're the largest customer of Samsung's
current manufacturing facilities in Austin, Texas.
Once Qualcomm gets its chips back from the fab where
they're manufactured, it tests them using mock-up
devices to mimic the smartphones where they'll
eventually end up.
To make sure that the final system is going to work
exactly as we have intended to write the final software
that we then hand off to our customers.
When it comes to these core systems-on-a-chip, SoCs,
inside smartphones, Qualcomm really only has a
couple of competitors.
We have MediaTek based out of Taiwan, a very strong
competitor. We have the Exynos team within the
overall Samsung Corporation. And then more
broadly, we think of Apple as our competition.
Apple has indeed made its own A-series of processors
for its iPhones and iPads since 2010.
But inside every iPhone is also a Qualcomm modem.
And that's the part that connects to the cellular
network. We call it a modem or a baseband, and it's what
makes a mobile phone truly mobile.
And those are those are very difficult to design.
Today, there's really only three companies that make
them at scale, and that's Qualcomm, MediaTek and
Tsinghua Unisoc in China.
When its two year legal battle with Qualcomm came to
a close in 2019, Apple bought Intel's 5G modem
business in a move to develop its own cellular
modem.
Apple's made it very clear that they want to get rid of
Qualcomm entirely and go to their own modem.
Unclear if they can pull that off, when they will be
able to do it. It's very different than everything
else Apple silicon has built.
We have a relationship with Apple for the iPhone that is
launching in '23 as well.
But we have no plans for that relationship in any
direction in '24.
We don't have visibility whether we're going to be in
the iPhone in '24 or not.
Qualcomm has been open with investors that its deal to
supply Apple with chips for the iPhone won't last
forever.
Apple is actually a smaller and smaller portion of our
business. Really over the decades, we've diversified
very broadly. So even within smartphone, most of
our revenue, most of of what we do actually is not
Apple, but really is working with our strong
partners like Samsung and other outside vendors.
There is no doubt that people that are invested in
Qualcomm would like to see the company continue to
provide technology to Apple.
Having said that, this was part of the reason the
company became so aggressive in its
diversification efforts, was to make sure that it
never became overly beholden to any one company,
including Apple, which we've seen from this come a
very successful entree into automotive.
And Apple isn't the only one turning away from Qualcomm
silicon. Chinese smartphone maker Huawei currently uses
Qualcomm's 4G chips in all its high-end phones.
But it'll soon switch to 5G, turning to China-made
chips because of export controls on U.S.
companies providing advanced tech to China.
Meanwhile, smartphones as a whole are facing an
industry-wide downturn.
Shipments are on track to hit their lowest point in a
decade.
We had a couple of really good years during the
pandemic when everyone was buying new phones and
upgrading. And now we've entered the downturn.
And so cyclically, there's just less demand.
Right, and at some point that will turn around, that
will improve.
In August, Qualcomm reported weaker than anticipated
revenue for Q3, and it's planning another round of
layoffs after letting go of 415 people in June.
It employs around 51,000 people.
The macroeconomics, I think, is not unique to Qualcomm.
A lot of companies have been rightsizing their
business and we're no different than the rest of
our peers.
With uncertainty in the smartphone market, Qualcomm
has shifted much of its focus to chips for other
smart devices. Chief among them, cars.
So that's our brightest spot in our Qualcomm
differentiation strategy.
In a period of, I'd say three to four years, we have
significantly increased our presence.
We started in automotive a long time ago, but it was a
very small business.
That's something that's taking time, but these
design wins are indicative of a future.
They do create more predictability in revenue.
And the company is seeing more and more of the world's
largest automakers select its technology for at least
part of their connected automotive stack.
Qualcomm's digital chassis powers cloud-connected video
and audio, advanced driver assistance systems and
things like face recognition for automatic
doors. It's in cars like the new Cadillac Escalade IQ
and models from BMW, Mercedes Benz, Stellantis,
Hyundai, General Motors, JLR and Sony Honda Mobility.
The interior of our cars are starting to look a lot more
like our other consumer electronic devices, our
phones and our laptops.
And then on top of that, the automakers are starting
to tie a lot of those all those thousands of discrete
chips together into sort of more complex systems to add
assisted driving and infotainment and digital
cockpit. The problem is the auto market moves very
slowly relative to cell phones.
Qualcomm is also diversifying into the
connectivity of things, like virtual or augmented
reality headsets.
This is our AR2 Gen1.
So this chip is the foundational technology, the
center of AR glasses.
We're the partner of choice of Meta.
We have been working with Microsoft, we've been
working with Google and Samsung.
So we believe that's going to be an opportunity.
It's hard to time it, when everybody is going to buy
their glasses, but we know that that's going to be the
next computing platform for sure.
Well I think their chip sets in AR and VR will become
important because Apple will make this product
commercial. But I do think once Apple goes mainstream,
the demand will flow down.
Just like AirPods, there will be a thousand other
wearables.
And Qualcomm is also trying to break into the
competitive world of central processing units for
PCs, taking on server giants like Intel and AMD.
In 2021, Qualcomm bought CPU startup Nuvia for 1.4
billion. Although Arm sued Qualcomm in 2022, saying it
only licensed its architecture to Nuvia, not
its new owner. Still, Qualcomm says its Arm-based
processors will be in PCs by 2024.
I'm kind of tempted to dismiss that as, you know,
something that just, it's going to be too hard to
crack. But I think with AI and generative AI, if that
becomes a feature that consumers really want in
their laptops, then Qualcomm actually has a
really good solution. And so maybe this is the once in
a lifetime opportunity for Qualcomm to break into the
PC market.
Qualcomm's newest announcements do show a big
new focus on enabling devices for generative AI,
even when they're in airplane mode.
We talk often about this hybrid AI.
You're going to run things on the device because
sometimes the device has unique things in real time
from you, or you can give the cloud a head start.
But at the end of the day, I think the power of
combining the cloud with the device is very big.
With Nvidia's incredible performance since ChatGPT
came out in November, the big push toward AI is no
surprise, but Amon says it's been in the works far
longer.
We had the foresight to see that AI will become very
significant about ten years ago.
So over a decade, we've been developing capabilities
for you to be able to run AI as pervasive as
everything else you run on your phone.
In May, Microsoft announced plans for offline AI models
that will run on Qualcomm's Snapdragon processors.
And in July, Meta announced its ChatGPT competitor,
Llama2, will run on Qualcomm chips on phones and
PCs in 2024.
The company's biggest opportunity is to figure out
what are those AI applications, whether it's
tied to augmented reality, whether it's tied to
intelligent vehicles, whether it's tied to next
generation gaming, whether it's tied to productivity
tools and apps. Its ability to put chipsets into these
devices that can handle and process those different
workloads, and of course being able to monetize that.
So far though, large language models have run off
server farms filled with Nvidia GPUs that can handle
their huge computational and data needs.
For now, the business of on-device AI is unproven.
Is Qualcomm going to be able to upsell a premium for each
one of its licensees and each one of its chipsets for
having these advanced AI capabilities?
I think that particular answer will be the biggest
determinant in just how successful Qualcomm can be
in AI.
But even with uncertainty around diversifying use
cases for Qualcomm's tech, analysts say the company's
long-term outlook remains stable.
More and more things are going to have chips in them.
We're going to connect more and more things to the
Internet. It's going to take forever, but it will
happen. Cars will be the most visible example of
that, but it will be machines and light posts and
power tools and coke cans.
All those things will eventually get connected and
Qualcomm can participate in that growth pretty nicely.
The numbers need to catch up in some areas.
Longer-term though, it's hard to bet against a
company that provides the technology that's in just
about every handset and every device that we use
every day.