Qualcomm's diversification into data centers and automotive offsets Apple revenue decline; non-phone revenue exceeds 50% in FY2027.

Qualcomm is launching its annual Snapdragon conference as the company expands further into AI-powered personal computers, the automotive sector, and data centers. Qualcomm's theme for this year revolves around the concept of "agent AI" that moves from mere applications to understanding user intentions.

As you know, the Snapdragon conference is our annual celebration of the new technologies we bring to all peripherals and cloud devices. So, we are reviewing these new innovations, and one of our areas of focus at this conference is generative artificial intelligence.

We believe the next transition will increasingly involve agents, the consumer's interaction with these agents, and then agents acting on behalf of the consumer. It is a completely different model.

I think artificial intelligence has become much more capable. These agents can understand the consumer's context, absorb the information they possess, and then a device such as a phone can determine the consumer's location, what the camera sees, and what sound the microphones pick up.

All of this context becomes a very important entry point for agents to understand how to fulfill the purpose requested by the consumer. Therefore, we will transfer this technology not only to phones, but also to cars, industrial equipment, personal artificial intelligence and wearable devices, and finally to robots and personal computers.

So, we are very excited. This is a horizontal technology, and it represents a very significant shift in the industry. Qualcomm is actually at the heart of this transformation, and we are very excited to be a part of it and excited to talk about it here at our event.

At the event, you announced the "Snapdragon 8 Elite Extreme" and "Elite 6G" platforms for flagship phones. Why is launching two leading and distinctive chips for this generation so important?

Also, what level of processing power is required to run these independent factors directly on the device?

Yes, I think we are seeing an expansion in the premium phone market, aren't we? As the telephone continues to become increasingly important in every consumer's life, more and more people are buying more expensive phones.

Therefore, in the premium phone category, which are devices that cost more than $600, we see this market expanding globally, not only in developed markets, but even in emerging markets we see this trend.

As a result, we thought, why not split our roadmap in that category and present two segments? One that gives you the highest levels of high performance is our Snapdragon 8 Elite Extreme chip.

Then there's the Snapdragon 8 Elite, which is in a slightly lower category, but still offers impressive performance and improvements over what we had last year. So, it's about leadership in the premium category.

Snapdragon has done this every year, and this is another year in which we deliver an incredible product that all OEMs worldwide use in their devices. It's a very exciting time, and you should expect to see a lot of new devices with these chips arrive over the next few months.

One thing I found particularly exciting as part of Qualcomm's projections is this acceleration in AI capabilities on the device as we head towards 2027, rather than seeing a plateau in growth.

So, I'm curious, what gives you confidence that consumers and developers are ready for such a rapid adoption cycle?

You know, it's a very logical technology from a consumer's point of view. The transformation of artificial intelligence into an agent is at the heart of this, as we discussed previously.

The amount of computing power and chip capabilities required really changes when moving from the previous model of consumer use of artificial intelligence to proxy artificial intelligence.

What we offer with these chips is this added capability that allows you to do that. And remember, one of the most important things about these devices, because they all run on battery and battery life is very important, is that we offer these technologies with very high performance and very low power consumption, and this is fundamental to how our customers differentiate their products in the market.

There is also an audio component to this. You have announced the second generation Snapdragon Sound Elite. How do you view the transformation of earbuds from a mere device for streaming music or making calls without needing to carry a phone, to an always-available interface for personal artificial intelligence?

Yes, one of the device categories we are most excited about is the third device in the consumer ecosystem. You have your phone and your personal computer, but we envision a third device that many consumers will use.

There are different form factors for this third device. It could be a pair of glasses, like the Ray-Ban Meta glasses you saw. Or it could be a pair of headphones, or a watch. As a result, this device can see what you see and hear what you hear, and you can have an interactive AI conversation with it.

One form of this device is earphones. We are very excited to announce this new product, as you will not only be able to do what you have been used to with your headphones so far, but you will actually be able to add a camera to the headphones, adding a wider perspective of what it can understand around you, as well as placing an AI “agent” on the headphones so that you can have a conversation with it.

Tell the agent what task you want accomplished. It can then work within the data system present in the headset, or resort to the cloud when needed to perform the task. So, there is a very exciting range of new products coming up, and we are fortunate and excited about this product category evolving across different forms, and SnapDragonSound technology is a step in that direction.

Since the phone is the focus of this system, we need to talk about this years-long shift away from "Apple". In the third quarter call, I indicated that Qualcomm's share of the latest iPhone launch would fall below your previous forecast of 20%.

I am curious to know the reason for this accelerated decline, and whether supply constraints are a factor in it?

I think it's a conversation we've been having with Apple about downsizing over the past several years, and we've been very transparent with investors, so our future plan with the company is to actually move into these new areas of diversification.

We have already discussed how Apple's revenues will be fully offset next year thanks to growth in the automotive, data center, and Internet of Things sectors. So we are excited.

The company is in a transformation phase. Next year, our non-phone revenue will exceed 50%, and within 3 years, smartphones will only account for a third of our revenue. Therefore, we are very excited about the company's transformation.

The data center sector has become a huge opportunity for us. We are growing in revenue at a very strong pace, and I think we have a long way to go. Therefore, we are very excited about our diversification plan.

Akash, it seems you already know what I'm going to say next. I have your goal of growing non-phone-related sectors, which will make up for all that lost revenue from products. You have set growth from 24% in fiscal year 2026 to over 60% in fiscal year 2027.

What gives you the vision to make such an explicit promise of compensation to Wall Street?

Yes, what we committed to on investor days was our expectation that non-phone revenue would make up more than 50% of our revenue in 2027. There are two very important drivers. The first is the automotive sector.

It is a business that has proven to be incredibly strong for Qualcomm. In the last quarter, we achieved year-on-year revenue growth of more than 60%. This growth rate puts us in a very good position to continue growing as we enter next year.

We are seeing widespread adoption by manufacturers globally in the United States, Europe, China, Korea and Japan as well. So, it's a very strong job for us. In addition, we talked about data center revenues, which will go from a very small base in 2026 to about 5 billion in 2027.

These two sectors are driving the bulk of Apple's revenue offset in 2027.

Regarding memory prices, hardware memory, and overall supply chain input costs, these have been under pressure. How do you protect QCT's gross profit margins from cost inflation while phone unit volumes remain relatively stable?

I think this is a problem that the entire industry suffers from. We have seen very high demand for memory in data centers, which has put pressure on consumer devices due to their limited ability to bear the costs based on purchasing power, and this has been taken into account in the performance we have seen this year.

Specifically regarding input costs, which we have seen increase, we have talked about passing these costs on to our customers over the next few months. We are implementing this plan, which is actually something we have to do as a result of the increased input costs we are experiencing.

Okay, let's move on to data centers; We saw your shares rise on Monday thanks to this newly announced partnership with Amazon. Could you explain the mechanisms of this deal and how custom inference chips and optical connectivity fit into the AWS data center roadmap?

Yes, we are very excited about the data center business. I think we are expanding the portfolio with which we enter data centers across four different categories. We work on custom chips, connectivity and networking, CPU chips, and AI accelerators.

In each of these areas, we have advanced partnerships with customers, and we have already announced many of them in each of these product lines. So, we are very excited. Amazon is our main customer in the area of custom chips, where we have talked about a deal worth $60 billion over the next ten years.

We are excited about that. I think they are looking for a partner with the size and technological capability, and Qualcomm certainly provides that in abundance. What you see is a reflection of their confidence in our capabilities and our confidence in the technological roadmap we provide for data centers.

It's one big step. We also have, of course, a partnership with another global cloud service provider whose name we have not yet announced. Meta is also looking to collaborate with us, and we have a partnership with them regarding central processing chips as well.

We are extremely excited. I think we've gone from not being influential in data centers this year to having all these partnerships, which is a real testament to the size and efficiency of the technology company.

You have set ambitious financial targets for the data center business, as you mentioned. $5 billion in revenue for fiscal year 2027. This grows to $15 billion by fiscal year 2029.

How much of this $15 billion target is already contracted under these two cloud provider partnerships versus uncommitted projects?

Well, when you look at the commitments of our cloud service providers, as I mentioned, we have a partnership with Meta on CPUs, and we also have a partnership with Humin, which is an emerging cloud provider in the Middle East.

Through these partnerships, I believe we have already come a long way towards reaching $15 billion. So, we are in a very good position. Obviously, these are not all of our connections.

We are talking with many customers about high-bandwidth computing technology, which is actually an innovative encapsulation technology that we are implementing that allows us to address one of the major constraints in data centers, which is memory bandwidth.

This greatly increases the memory bandwidth, which is a major additional component in how large data centers handle certain inferential workloads. So, we are excited about that.

I think this will add incremental connections alongside what we have just outlined.

Investors expect the first tangible revenue from data centers to materialize in the next December quarter. Are you still on track to achieve those initial revenues for dedicated chips before the end of the calendar year?

Yes, this is correct. Our fiscal year starts in about a week, and as we mentioned earlier, the first quarter of our fiscal year 2027 is when our revenues will start to grow. We already have purchase orders from customers as expected, and we have also started manufacturing chips at TSMC.

Therefore, we are very optimistic and look forward to building a very important business in the field of data centers as we diversify our activities.

One last quick question here, Akash. I mean, data center chips typically carry a very different profit margin than high-margin phone processors. How will achieving $5 billion in data center revenue in fiscal year 2027 affect the gross margin structure of the QCT segment?

Well, I think when you consider the long-term opportunity in data centers, we are very optimistic that QCT's gross margins will remain at our historical average as a result of some mix that will grow in our data center business.

This is our overall outlook for 2027, with most revenue coming from dedicated chip contracts, which we expect to have profit margins below QCT's average margins.