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.