高通 (QCOM) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the QUALCOMM first-quarter fiscal 2011 conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded January 26, 2011.

The playback number for today's call is 800-642-1687.

International callers please dial 706-645-9291.

The playback reservation number is 36932148.

I would now like to turn the call over to Warren Kneeshaw, Vice President of Investor Relations.

Mr.

Kneeshaw, please go ahead.

Thank you Mark.

Good afternoon everyone.

Today's call will include prepared remarks by Dr.

Paul Jacobs, who is joining us from Davos, Switzerland; Derek Aberle; Steve Mollenkopf; and Bill Keitel.

In addition, Steve Altman and Don Rosenberg will join the question-and-answer session.

An Internet presentation and audio broadcast accompany this call.

You can access them by visiting our website at www.QUALCOMM.com.

During this conference call, if we use any non-GAAP financial measures as defined by the SEC in Regulation G, you can find the required reconciliations to GAAP on our website.

I'd also like to direct your attention to our 10-Q and earnings release which were filed and furnished respectively with the SEC today and are available on our website.

We may make forward-looking statements relating to our expectations and other future events that may differ materially from QUALCOMM's actual results.

Please review our SEC filings for a detailed presentation of each of our businesses and associated risks and other important factors that may cause our actual results to differ from these forward-looking statements.

Of specific note, we've excluded the Atheros business from our guidance.

As it relates to the proposed acquisition of Atheros, before making any voting decisions, investors are urged to read the Atheros proxy statement and other relevant materials when they become available because they will contain important information about the transaction.

Now, it is my pleasure to introduce QUALCOMM's Chairman and Chief Executive Officer, Dr.

Paul Jacobs.

Thanks Warren.

Good afternoon everyone.

We are very pleased to report record revenues, earnings per share and MSM chipset shipments in this quarter driven by increased demand for smartphone and data-centric devices across an expanding number of regions and price points.

It's been a successful quarter, and there really is a lot to be excited about.

First and foremost is the continued unabated demand for wireless data.

Gartner expects sales of smartphones in the fourth quarter of 2010 to grow 15% sequentially and over 70% year-over-year.

Gartner forecasts annual smartphone shipments to grow more than 50% year-over-year in 2011 to reach approximately 440 million units.

Of course, speaking of smartphones, we are happy to see the Verizon iPhone announcement because it's been a subject of intense speculation but I have to say we have no other comments to make on that topic.

In addition to smartphones, we are announcing increasing volumes of new 3G enabled device types such as tablets and e-readers.

Our Snapdragon family of chipsets, including our dual core products, are well-positioned to target the range of devices that we expect to be launched this year.

[To] help support the traffic and provide higher data rates to consumers, operators are continuing to invest in the latest technologies and are purchasing additional spectrum.

Adoption of advanced wireless technologies will continue to be a catalyst for network and device upgrades in the coming year.

Verizon launched LTE in 38 cities and started offering data modems based on QUALCOMM's multimode solution.

AT&T continues to promote its HSPA+ service.

As announced, they will be pulling in their launch plans for LTE.

Furthermore, we've also demonstrated LTE TDD in India.

The evolution of 3G also continues to be a bright point for our business with the GSA announcing that there are currently 103 commercial HSPA+ networks, 13 of these offering 42 Mbps data rates with dual carrier HSPA+.

According to CBG, three operators have launched DO Rev.

B networks while an additional four operators have announced plans to deploy the technology.

Our leading position in these technologies in multimode chipsets allows us to address the complexities these heterogeneous networks create, positioning us very well for the future.

As a further example of how our opportunities are expanding, Microsoft announced that the next version of Windows will support systems-on-a-chip architectures, including ARM-based systems for QUALCOMM.

We have a strong working relationship with Microsoft, and at CES they demonstrated the next version of Windows running on our Snapdragon platform.

We've also announced that we've entered into an agreement to buy Atheros.

You've heard us talk about our vision around the convergence of mobility computing consumer electronics.

As we commented on our recent call, this announcement should be viewed as a statement about our commitment to provide a complete set of solutions to address this trend.

This acquisition will allow us to build upon our capabilities, add to our suite of best in class technology assets, provide new sales channels.

We are looking forward to the transaction closing and joining with a proven leader.

In addition, we announced the agreement to sell substantially all of our 700 MHz spectrum to AT&T and wind down the FLO TV network.

This is a win-win outcome, and we are excited that AT&T intends to use carrier aggregation technology to provide supplemental downlink capacity to its customers.

Our plans include supporting these capabilities in our chipsets to support AT&T and other operators around the world looking to take advantage of additional unpaired spectrum to support their wireless data plans.

Overall, the 2G to 3G migration remains healthy and vibrant, as increased competition and wider variety of more affordable 3G devices are driving the shift to wireless data globally.

According to Wireless Intelligence, 3G connections are expected to grow more than 25% in 2011 to 1.6 billion.

A big part of this growth will come from emerging regions that have been primarily driven by 2G in the past.

Both China Telecom and China Unicom aggressively drove the uptake of 3G smartphones in the second half of calendar 2010 through the direct purchase and subsidy of these devices.

As a result of these and other efforts (technical difficulty) operators are reporting significant growth in EV-DO and UMTS subscribers in the past two quarters.

China Telecom reported approximately a 68% increase in EV-DO subscribers while China Unicom reported an approximately 85% increase in WCDMA subscribers for the second half of 2010.

We see the same trend continuing through 2011 as bold operators continue to drive the uptake of mass-market smartphones.

In India, Alliance and Tata Docomo and now more recently Airtel have all launched 3G services and we expect the remaining operators to launch services in the coming months.

Finally, on the licensing front, I'm also pleased to report that we have resolved one of the disputes that we had previously disclosed.

So to wrap up, we just completed the best quarter in the history of QUALCOMM, driven by strong demand and excellent execution.

Our broad licensing program and industry-leading chipset roadmap platform position us for -- well to take advantage of the many wireless opportunities ahead of us.

Looking forward, I am pleased to be substantially raising our full-year forecast for revenue and earnings driven by the many positive trends as the industry shifts to 3G and the broad adoption of wireless data for mobile phones and new data-centric devices.

That concludes my comments.

I'll now turn the call over to Derek Aberle.

Thank you Paul.

Good afternoon everyone.

As we expected when we presented in New York in November, we see favorable trends in the industry continuing to develop that will drive further growth in our licensing business.

In particular, we are seeing strength in ASPs in both developed and emerging regions.

September quarter activity also ended up being a bit stronger than anticipated, driven by smartphone shipments strength in the developed regions in particular.

This drove record total reported device sales and a strong sequential growth in average selling prices.

I'm also pleased to report that we have now resolved one of the two licensee disputes that we've been working to bring to a close.

This is not Panasonic.

It is the licensee that has been underpaying its royalties to us.

We are pleased that we were able to resolve this dispute in a manner that is consistent with the established value of our patent portfolio and without the need for litigation or arbitration.

The results of this resolution will start to be reflected in our fiscal second-quarter results, including a one-time catch-up for past periods.

As we discussed in New York in November, due to a variety of factors, including the fact that certain QTL revenue components such as fixed licensing fees and infrastructure royalties are growing at a slower pace than subscriber royalties, the increasing diversity of incremental product types with non-traditional royalty structures contributing to our licensing revenues, as well as the impact of intermittent licensee disputes, the implied royalty rate that you calculate based on the information we provide has become a less reliable metric for measuring the performance of the QTL business.

Having said that, the resolution of this licensee dispute increases our estimate for what we expect your calculation of the implied royalty rate to be for fiscal 2011.

We had previously said that we expected your calculation of the implied royalty rate based on the midpoint of our prior guidance for fiscal year 2011 to be approximately 3.3%, excluding amounts for prior periods.

While we have not yet finalized the accounting for the license agreement that we recently signed to resolve this dispute, we now expect the implied royalty rate you'll calculate for fiscal year 2011 to be approximately 3.5%, including a one-time benefit in the second quarter for periods prior to fiscal 2011 as well as the first quarter of fiscal 2011, and that we will exit the fiscal year with an implied royalty rate, as you calculate it, of approximately 3.4% to 3.5%.

It is important to note that this updated outlook excludes any potential upside that may result from the arbitration with Panasonic.

As we mentioned during our last call, we are very pleased with the outcome of the first phase of that process as the arbitrator issued an interim order finding that QUALCOMM did not breach its license agreement with Panasonic.

This supports our belief that Panasonic's claims are without merit.

In closing, I'm very pleased with the successful resolution we've announced today and continue to feel QTL is well positioned for strong growth ahead in a very exciting global wireless industry.

Thank you.

I'll turn the call over to Steve Mollenkopf.

Good afternoon everyone.

Our QCT business delivered another strong quarter.

We shipped a record 118 million MSMs and delivered both record revenues and record operating profits.

We are seeing stronger demand for our integrated chipsets compared to our prior forecast and are pleased to be raising our outlook for the remainder of fiscal 2011.

Smartphone-driven demand for our solutions, particularly in North America, was very strong again this quarter and contributed to a favorable product mix.

Our leading roadmap technology and integration capabilities are aligning well with industry trends.

Shipments of our 7K and 8K integrated chipsets were up more than 40% sequentially and more than 150% year-over-year.

Our leadership in LTE continues as we began volume shipments of our multi-mode 3G LTE chipsets last quarter.

There is a strong design activity in the pipeline with over 25 manufacturers developing more than 50 LTE devices, including data modems, LTE hotspots, smartphones and tablets.

Our support for multiple operating systems across multiple product tiers continues to position us well within the growing smartphone segment.

We saw over 30 new devices announced by our partners, including several industry firsts.

The Sharp Galapagos, which is the first 3-D mobile phone with 3-D display and 3-D capture, the first HSPA+ phones, including the T-Mobile myTouch 4G and the HTC Thunderbolt, which is the first 4G LTE phone for Verizon Wireless.

Windows Phone 7 devices began shipping this past quarter, all powered by Snapdragon with handsets from HTC, LG, Dell and Samsung.

We are also pleased to see Microsoft demonstrate a future version of Windows running on our Snapdragon platform at CES.

We believe our architectural advantages deliver high performance computing and graphics at low power and will enable new, innovative device types in the computing ecosystem just as they have in the mobile ecosystem.

This will open up significant new opportunities for our chipsets.

We continue to demonstrate our ability to execute at scale this quarter, which is required to succeed in such a large and expanding industry.

We currently have more than 150 Snapdragon devices in development, including more than 20 tablets.

Our new dual core MSM 8660 chipset is already being designed into over 60 devices by our partners.

The performance and efficiency of this chipset make it well suited to both tablets and phones.

It delivers console quality graphics for rich, on-device gaming and high-definition video.

The chipset also has integrated support for HDMI output, which means you can plug your phone or tablet into a TV to share photos, play games, or even watch high-definition 3-D video.

Snapdragon's large installed base, strong graphics capabilities and software development tools have attracted a sizable community of gaming developers.

We currently have close to 100 casual and HD games optimized for our graphics processing unit, which we believe is two to three times the number optimized for any other mobile chipset.

We see this number growing quickly.

Our next-generation chipset architecture is on path to raise the bar for the industry again.

This architecture delivers 5X the performance and uses 75% of the power of our previous generation, which was already industry-leading.

We have mentioned -- as we've mentioned previously, the MSM 8960 will be the first chipset with this new architecture and an integrated LTE modem.

It is sampling later this year.

We will also update the Snapdragon line to include this new architecture at all tiers.

We will share more details of our plans at Mobile World Congress in Barcelona.

As we've mentioned in November, during fiscal 2011, we expect to see an increase in the variety and tiering of smartphones, specifically a greater mix of mass-market smartphones.

In addition, increased chipset shipments in emerging regions will be driven by the transition of 2G to 3G technology.

Our integrated solutions are particularly well-suited for these mass-market devices, and we will continue to price in order to grow share in this environment.

As we've commented on in the past, we also prepare to transition our product line towards our first 28 nm parts and continue to increase the focus on cost-optimized solutions.

In the nearer term, we do expect some seasonality in our fiscal second quarter, consistent with prior years, including the effects of annual pricing resets with our customers and MSM shipment levels a bit lower coming off a busy holiday quarter.

Finally, we are excited about the recently announced agreement to acquire Atheros.

This acquisition significantly expands our opportunities as a semiconductor provider.

With this incremental set of products, channels and customers, we can accelerate the extension of our technologies and platforms beyond cellular to computing, consumer electronics, and networking.

In closing, the QCT team is executing very well, driving our technology and integration leadership position in the industry.

We expect another wave of exciting devices based on our technology to be announced this quarter.

We are in a unique position to lead the transition to smartphones and always on, always connected computing and entertainment devices.

That concludes my comments.

I will now turn the call over to Bill Keitel.

Thank you Steve.

Good afternoon everyone.

We have another quarter of record results to report today.

We are pleased to be substantially raising our estimates for fiscal 2011 revenue and earnings per share.

The impact related to the recent license dispute resolution announced today will be recorded in our second fiscal quarter and beyond and is not reflected in our first fiscal quarter results.

Our fiscal first-quarter revenues of $3.35 billion were a record high, up 25% year-over-year and at the high end of our prior guidance.

Non-GAAP earnings per share were also a record $0.82 per share, up 32% year-over-year, significantly exceeding the high end of our prior guidance.

We shipped a record 118 million MSM chips during the quarter, towards the high end of our prior guidance, and average revenue per MSM increased sequentially, consistent with our prior guidance.

QCT's operating margin was 30%, driven by a favorable mix of smartphone chipsets.

Total reported device sales by our licensees were a record $34 billion, exceeding our prior expectations and driven by a greater-than-expected mix of licensee device shipments in developed regions, notably North America, Japan and Korea.

We estimate that our licensees shipped approximately 165 million to 169 million new CDMA devices in the September 2010 quarter, also a record.

We estimate the average selling price of CDMA devices was approximately $201 to $207 per unit, up approximately 12% sequentially, driven by the greater mix of devices in developed regions as well as approximately $8 of favorable foreign exchange.

QTL's operating margin was 84%, and the implied royalty rate that you calculate based on the information we provide was slightly lower sequentially, consistent with expectations and driven primarily by fixed revenue items and infrastructure royalties within QTL's total revenues.

Cash and marketable securities totaled $19 billion at the end of the first quarter, including $6 billion offshore -- onshore -- and $13 billion offshore.

During the first fiscal quarter, we paid cash dividends of $309 million, or $0.19 per share.

On January 14t, we announced another cash dividend of $0.19 per share payable on March 25, 2011.

Our non-GAAP tax rate was 19% in the first fiscal quarter.

We recorded a $32 million tax benefit in the first quarter of fiscal 2011 related to fiscal 2010 as a result of the retroactive reenactment of the federal R&D tax credit.

To facilitate a better period-to-period comparison, we excluded this tax benefit related to fiscal 2010 from our first-quarter non-GAAP results.

Our fiscal first-quarter non-GAAP earnings per share were $0.10 higher than our initial guidance midpoint of $0.72 at the outset of the quarter.

QCT was approximately $0.04 higher; QTL was approximately $0.03 higher.

The remaining $0.03 was a combination of a lower tax rate driven by the fiscal 2011 portion of the federal R&D tax credit and investment gains not included in our prior guidance.

We estimate that calendar 2010 CDMA device shipments were approximately 640 million to 660 million new devices.

Based on the 650 million midpoint of our estimate, 2010 CDMA device shipments grew 28% year-over-year.

Now, turning to our guidance, we are increasing our estimate for calendar 2011 CDMA device shipments.

We estimate that between 750 million and 800 million CDMA devices will ship in 2011, an increase of approximately 15% to 23% over the midpoint of our calendar 2010 estimate.

As I'm sure you noted, we are substantially raising our financial guidance for the fiscal year.

Of the $1.2 billion increase to our fiscal 2011 revenue guidance, approximately $650 million is driven by an improved outlook for our chipset business and approximately $550 million is driven by an improved outlook in our licensing business.

The approximate $550 million licensing improvement is due in part to the license dispute resolution and in part to a material increase in the base licensing business, independent of the license resolution.

The $550 million is also a net increase on top of the amount we included in our fiscal 2011 guidance back in November for the potential resolution of one or both of our licensee disputes.

The new licensee amendment was just recently signed.

Though the accounting treatment still needs to be finalized, we expect our fiscal second quarter will include revenues from this licensee for sales in the second fiscal quarter as well as for past sales in prior quarters.

As Derek pointed out, we think that the implied royalty rate as you calculate it has become a lesser liable metric for modeling the licensing business.

Having said that, we estimate that the implied rate for the remaining three quarters of fiscal 2011, excluding amounts related to periods prior to the second fiscal quarter, will be relatively constant, in the range of approximately 3.4% to 3.5%.

As Derek noted, although we remain confident in our position, the arbitration with Panasonic may not be decided until after our fiscal year-end.

We therefore are not forecasting any amounts related to any resolution with Panasonic in this fiscal year at this time.

We expect non-GAAP fiscal 2011 revenues to be in the range of approximately $13.6 billion to $14.2 billion as compared to our prior estimate of $12.4 billion to $13 billion.

We are also raising our fiscal 2011 earnings per share guidance by $0.28 per share.

We anticipate non-GAAP earnings per share to be in the range of $2.91 to $3.05, an increase of 18% to 24% year-over-year.

We estimate the average selling price of CDMA-based devices to be approximately $190 to $200 for all of fiscal 2011.

In QCT, although the opportunity to be in the higher end of this range is now a bit better, reflecting stronger volume and mix expectations, we are reaffirming our prior estimate that operating margins will be in the range of 22% to 24% for fiscal 2011.

The expected decrease in operating margins for the remainder of fiscal 2011, relative to the last couple of quarters, reflects our continued expectation of a greater mix of mass-market smartphones and our new chipset products to service demand.

We expect the combination of non-GAAP R&D and SG&A expense to increase approximately 12% year-over-year, higher than our prior guidance of approximately 7%, reflecting variable costs related to our greater expected revenues as well as some foreign exchange impact.

Based on the midpoint of our updated guidance, R&D expense will improve to approximately 17% of revenue, similar to the rate we experienced three to four years ago, and SG&A expense will improve to approximately 10% of revenue, the lowest rate in the last five years.

We estimate our non-GAAP annual tax rate to be approximately 21%.

Now, turning to the second fiscal quarter, we estimate non-GAAP revenues to be in the range of approximately $3.45 billion to $3.75 billion, and non-GAAP earnings per share to be approximately $0.77 to $0.81.

Based on the midpoints, we expect second-quarter revenue and earnings per share to increase year-over-year by 35% and 34% respectively.

We expect total reported device sales reported by our licensees to be approximately $3.65 billion to $3.85 billion -- pardon me, approximately $36.5 billion to $38.5 billion, up 35% year-over-year based on the midpoint.

We anticipate QCT shipments of approximately 113 million to 117 million MSM chips during the March quarter, down a bit coming off the busy holiday quarter but up 24% year-over-year based on the midpoint.

We expect revenue per MSM to be down quarter-over-quarter, driven by annual pricing resets with customers, consistent with historical norms.

We expect lower operating margin sequentially.

Our estimate for CDMA channel inventory is largely consistent with our prior expectations, remaining at the low end of the historical range through fiscal 2011.

We anticipate second fiscal quarter non-GAAP R&D and SG&A expenses combined will increase approximately 11% sequentially, reflecting normal increased seasonal expenses primarily related to employee payroll taxes.

Our fiscal second quarter non-GAAP earnings per share guidance midpoint is $0.03 lower as compared to our first quarter.

We expect QTL to be better $0.17 sequentially, driven by revenue related to the new license dispute resolution and increased device volumes reported by licensees for the busy holiday quarter.

We estimate that the one-time revenue benefit related to periods prior to the second fiscal quarter will be approximately $250 million, or $0.09 per share, in the second fiscal quarter.

We expect QCT to be approximately $0.10 lower, driven by the seasonal lower volumes and pricing resets mentioned earlier.

Non-GAAP combined R&D and SG&A expense growth accounts for approximately $0.05, and the remaining decrease is driven by the dilutive impact of increased share count and lower sequential income as we do not include estimates for uncertain realized investment gains losses in our forecast.

Net unrealized gains on marketable securities were $968 million at the end of the first fiscal quarter.

That concludes my comments.

I'll now turn the call back to Warren Kneeshaw.

Thank you, Bill.

Operator, we are ready for questions.

(Operator Instructions).

Mike Walkley, Canaccord Genuity.

Thank you very much.

Bill, I just wanted to build on the guidance you just gave us.

Can you help us maybe think about the cadence of your QCT chipset margins to get to your full-year guidance?

I know you just gave us some math we can work through, but would they recover more midyear as marks the lowest quarter, or is it kind of at this lower rate for the rest of the year stable to get to your guidance?

If you could help us think through that and the seasonal trends.

Also, just on the royalty side, with this one-time payment, is that $250 million included in the guidance?

Should we use that number in calculating our implied royalty rate or is that separate?

Thank you.

On your first question, the QCT margins for the rest of this year, we do expect, with this Q2 guidance, a pretty substantial decline from the first quarter into the second quarter, again, consistent as with what we expected at the time we were with you in New York three months ago.

From that point, I would just say that, at this early stage, we expect to be going out of the year just a bit modestly higher on the margins, but of course that will be a function of volume and mix as we go.

On the $250 million, I think what - the key there is just to know that when you look at Q2 in terms of comparing it to what you want to model for Q3 and forward, is that was an amount that really relates to prior periods.

We haven't gotten into, as of this early stage, of how much of that might be Q1 versus prior periods.

The deal was just recently signed, so we haven't gotten that far yet.

But I think, with the information we've given here on the call, including our expectation of implied royalty rate, hopefully you've got enough to do some decent modeling of the business going forward.

Derek, do you want to --?

Let me just add one thing on the rate.

I think we made two points on the implied rate that you calculate.

One is that, for the full fiscal year, taking into account the $250 million, that we expected it to be in the range of 3.5%.

Then we also said, exiting 2011, meaning the fourth quarter of 2011, we expect it to be between 3.4% and 3.5%.

Great.

That's very helpful.

Thank you very much.

Tim Long, Bank of Montreal.

Thank you.

If I could just follow on the royalty side there, could you just frame for us maybe -- it sounds like, steady-state, you went from $3.3 billion to $3.45 billion at the midpoint with this deal signed.

Should we expect, when the other deal is signed, a similar magnitude of change?

Then also on this topic, could you just talk to us?

It was a much bigger tablet quarter.

So what impact did tablets have on the rate?

I calculated at 3.1% or so in the quarter.

Was there a tablet impact?

Is it consistent with the guidance that you gave us as far as the dilutive impact of tablets at the analyst day a few months ago?

Thank you.

On the first point on the difference between this deal and the other dispute, I think we haven't really gotten into trying to characterize one versus the other.

I don't think we are prepared to do that today.

Remember when we went out and we gave prior guidance, we had said that there was an amount, whether it was probability adjusted or otherwise, but there was an amount that was included in our prior guidance related to resolution of a licensee dispute.

So, now there is some increment about that that's now in the guidance as a result of actually concluding the deal, which is pushing a -- making a positive move on the implied rate.

I'm sorry, Derek, could you just remind us?

Was there a $200 million number given a year or two ago?

What was the sum total of the two at one point that was given?

We said for -- through the end of fiscal 2010, for both disputes, that there was approximately $200 million in revenue not being recognized or deferred.

How is it $250 million?

Well, that was as of the end of 2010, so what we're saying is for the prior period, as we've said prior to Q2, it would be amounts for the first fiscal quarter of '11 as well as prior periods to that.

So you have a missing quarter in there.

Then on your tablet question, I think the tablets quarter-over-quarter were up in terms of both units and the percentage of total devices reported to us.

So as we explained in New York, given the capping program we have in place, that's going to have an impact on the implied rate, which you are seeing to some extent this quarter.

Okay, no change to the impact that you talked about, 5 or 10 basis points?

I'm not sure what you're referring to.

Bill said the full-year impact would be -- Bill Keitel said 5 to 10 basis points on the full-year effective calculated royalty rate based on the tablet program.

Yes, I guess we can follow-up.

I'm not aware of that.

Thank you.

Brian Modoff, Deutsche Bank.

Hi guys, a couple of questions for you.

Looking at the ASP guide of $201 to $207, even backing out the currency effect, it was still $193 to $199, up nicely sequentially.

How do you see that trend through the year as you see increasing amounts of smartphones countered with obviously some increase in lower-end smartphones, but which still have decent ASPs and then also the effects on tablets?

That's question one.

Question two -- Steve, looking at the -- NVIDIA made a lot of noise at CES around design wins in the sector with the graphics chip and their -- or that processor.

How do you see Snapdragon?

You made some comments around 60 design wins with the 8960.

How do you see your design activity in both tablets and smartphones moving through the year?

How do you see the timing of launches of these products?

Should we see more from QUALCOMM over the next couple of quarters I guess is the question.

It's Bill.

On the ASP, within that TRDS guidance that we gave, it does include a modest decrease in the average ASP through the rest of this year, but I would say it's being favorably impacted by both tablets and smartphones as a whole.

But nonetheless we do see a lot of movement towards mass-market smartphones that should help grow the market, but as a consequence also lower the average selling price a bit.

I'll just add one other thing.

I think, as Bill pointed out in his comments, and as I did as well, I think we are continuing to see positive trends both in developed and emerging markets on ASP.

I think one thing that pushed the ASP up this quarter was just more strength in developed markets, so I think really, going forward, the ASP for the year, the question will really be the mix between the developed and the emerging regions.

This is Steve.

With regards to the tablet and the smartphone traction, as you could tell from my comments, we are very comfortable actually and confident as to how that design ramp is going.

It's probably what distinguishes us a little bit from some of the other competitors that you've seen.

I think we are engaged with a little bit more broadly -- or a little bit broader customer base, and so I think our time to volume will probably be a little bit faster when you consider how many different partners that we are engaged with.

So we feel very comfortable with that.

The other thing to remember also is that, in addition to a migration to dual core and advanced graphics, which we are seeing and we've been supplying in our chipsets, you are also seeing a migration to a higher tier modem feature set as well.

So, as we go through the year, I think you're going to start to see more and more of these high tier tablets and high tier smartphones be associated with LTE as well.

Both of those areas of technology, graphics, processors -- graphics and processors on the application side, as well as the LTE modem, are areas of strength for us we think.

More world phones in terms of multiband, multibug.

Not only that, I think there is going to be a requirement for any market to take your tablet or to take your high tier smartphone and to migrate that to other markets.

When they do that, I think there is going to be a demand for MultiMode LTE, multimode being 3G as well as 4G, coupled with that high tier processor.

Then in addition --

Including EV-DO?

EV-DO as well as HSPA+.

Excellent, thank you very much.

Tim Luke, Barclays Capital.

Thanks very much.

Maybe to follow-on on that, Steve, if you could touch on when you think those design wins might begin to ramp for you with that multimode functionality, and if you could give a little color on your general perceptions, or maybe Paul, with respect to opportunities broadly this year in China or India.

Then lastly, Bill, you touched on inventory.

Could you just give us some feel for where inventory is and how you see it trending currently, both across the channel and for you guys?

Thanks.

This is Steve.

I'll take the first one.

I think you'll see our dual core designs start to ramp I would say late in the first half, maybe a little bit later than what you're hearing for some initial designs from other folks, but you're going to start see that I think across multiple OEMs.

We probably didn't benefit from being the lead design for the new software coming out of some of the software partners, but we are rapidly adding that capability in across multiple OEMs.

As I said, once you couple it with LTE, I think it starts to create some pullback to us.

So we're pretty comfortable how that's going to ramp.

With respect to China, I just got back from a trip to China, and I was at a conference at China Telecom held for I think it was a few thousand of their partners.

They declared it to be the year of the 3G smartphone.

So, I think that's going to do well.

Then these launches that we are seeing in India really bode well too because, once again, we are going to see a very strong push for 3G, a lot of competition, and then we are looking forward to getting LTE TDD up and going there too.

Tim, on the channel inventory, we gave some specifics on that outlook, our forecast back in New York three months ago.

Our current estimates are pretty tight to that prior forecast.

We did expect some inventory build for the holiday season.

Our best estimates, it wasn't inordinate.

We expect a modest work-down here over the next two quarters, a little uptick going into the final quarter of this fiscal year, but at this point going out of this year, our channel inventory forecast and QCT's forecast is based on the forecast that the channel remains quite low.

Simona Jankowski, Goldman Sachs.

Thanks so much.

Just a couple of questions on the royalty rate.

First, I just wanted to confirm that my calculation basically points to a slight decrease sequentially to 3.1% to some 3.25% of the calculated rate.

But stripping out the effect of tablets, it seems like the underlying rate did not change, so I just wanted to confirm that I have that roughly correctly.

Then secondly, your comment that the royalty rate would exit at about 3.4% to 3.5% is about a 40 basis point acceleration of 3.1% percentage that you just reported.

But then the settlement only adds about 20 basis points to the full-year royalty, even including the catch-up.

So to me, that implies that the rate is actually accelerating from now through year-end, and that's despite the increasing tablet mix.

So I just want to understand if that thought process is correct.

If so, then what's driving the higher royalty rate between now and year-end, stripping out the settlement?

It's Bill.

I'll take a stab here, and Derek, if he has anything to add, chime in.

The slight decrease in Q1, I think your math is based on the numbers we provided.

Yes, we did see a slight decrease.

It's mix of product, not a change in rates for any licensees.

As you're aware, we have been expecting tablets to increase, connected devices to increase, so that slight decrease in the Q1 was consistent with our expectation.

As for the full year, there is an uptick due in part to the resolution.

Obviously, there is the implied rate that you calculate based on the information we provide.

There is a fairly significant increase in Q2, but then we've given you the data so that you could pull out of that, if you like, the amount of that that would be attributable to prior periods.

Then for the full year, in addition to the license resolution amount, we are expecting some mix shift that does slightly favor the implied royalty rate.

Then, as we said previously, the remaining dispute with Panasonic, that's not included in our guidance, so that would be further upside if we can successfully conclude it this year.

I guess, Bill or Derek, that's actually kind of the essence of the question is what is driving the increase in the royalty rate?

Because for to increase on a net basis despite the deflationary impact of tablets, it would mean that some other category that is even higher -- at a higher royalty rate is actually growing faster than tablets.

I guess I'm just kind of curious what that other category would be.

Yes, Simona, we are not going to get into further disclosure there, but I think I would just point lastly to what Derek said.

This implied royalty rate, it's an indicator.

It can be suspect.

You have to be careful how it's used because it can give some wrong signals.

But the reason we gave you the data points we did was to just help you triangulate through what this license dispute resolution is in the context of our year versus just the ongoing business without -- independent of that resolution.

Rod Hall, JPMorgan.

Thanks for taking my question.

I've just got a couple.

One is with regards to the revenue guidance.

I just wanted to clarify, make sure I understand, you're raising revenue guidance at the midpoint by about $1.2 billion.

For the last three quarters (technical difficulty) you had in Q1 (inaudible) raise of over $1 billion.

But I just want to make sure that $250 million payment is also in there.

Is that correct?

So we should be thinking something over $750 million is (technical difficulty) organic revenue rates (inaudible) it back into the year.

I guess that also includes some of these royalties coming back.

I just want to make sure we understand that correctly.

If you could comment also on how that additional revenue, whatever it is, $750 million or maybe it's a little bit more than that, how it comes through in the different business forms, particularly QCT and QTL, that would be helpful.

Okay Rod.

I'll try and answer the question here.

So yes, we are raising our revenue guidance by a total of $1.2 billion.

The low end and the high end of our guidance increased by a total of $1.2 billion.

That does include the revenues we expect this year as a result of the license dispute resolution that we just announced here today.

And then within that license -- let me further -- before I do, of the $1.2 billion, approximately $650 million is attributable to the chipset business, QCT, and approximately $550 million of that is attributable to QTL.

Then the only other data point we shared on the QTL breakdown was that we expect, at this time, approximately $250 million of Q2 revenue that is in that $1.2 billion raise for the full year.

We expect about $250 million to be attributable to periods prior to the first quarter.

So that license dispute resolution is --

First quarter (inaudible).

-- first quarter in prior periods.

And so that license dispute resolution number is specific only to QTL.

That does not port directly into QCT.

Does that address your question?

Ittai Kidron, Oppenheimer.

Hi.

Thanks and congrats on a good quarter and guide.

Can you give us a bit more color on what you're spending the R&D on?

You mentioned that you're going to raise your R&D run rate for the year.

What is it that you see a need for?

Second, Bill, with regards to your annual guide, does it still excludes gains of the portfolio as well as your guidance earlier in your investor day for the year?

On the operating expense raise, we are getting negatively impacted a bit by foreign exchange on the op expense, so that's a piece of it.

We have not included the Atheros business in our forecast, but nonetheless we have incurred fees with advisers that will be paid regardless of whether we close that transaction or not.

So you have those two elements.

Then there is a small piece of our total expenses that tend to be variable with revenue.

The major R&D spends, I would say no major changes from the programs that we had lined up and the allocation of the R&D dollars lineup across the programs from just three months ago.

As always, we continue to review those amounts, debate those amounts.

But after we lock in the budget, the amounts tend to be -- the changes tend to be relatively small, so no significant new introductions at this point to the R&D program.

With regards to the gains on the portfolio?

Yes, then on the investment gains, yes, we are staying with our past practice of not including a forecast of realized gains.

I did point out that, as we have had now for a few quarters, the net unrealized gains are over $900 million.

Now, the reason we don't include that is because we think it's just suspect to forecast.

Historically, there tend to be a bit more gains than what we are able to clearly see.

But anything that crosses over, anything that isn't highly certain, if we don't have investments maturing that are going to have a gain, if we don't have managers that are saying they are going to exit a position or at the time we give guidance if we already have -- our money managers have realized gains, we include that.

But beyond that, we do not include.

Hence why on average over the last number of quarters you see a bit more income there reported than what we guide.

Ehud Gelblum, Morgan Stanley.

Thanks guys.

One clarification just to make sure we totally beat this dead horse, but I want to make sure I am understanding it completely correctly, and then a question.

That is that $250 million or $0.09 is completely in the guidance for next quarter, so that when the EPS guide of next quarter of $0.77 to $0.81, that includes the $0.09 boost from this.

That's correct.

Okay, good.

I just want to make sure I understood that.

So then my questions are if we do a little math on this, your full-year EPS guidance at the midpoint is [now] $2.98, and if we take off the $0.82 you just did and the $0.79 which is the midpoint of your guidance for next quarter, I think you've got $1.37 leftover, which then if you divide by 2 is about $0.68, $0.69.

So the back half of the year is going to do roughly $0.68, $0.69, by your guidance.

Then if you look at your guidance for Q2, the $0.79 at the midpoint of $0.77 to $0.81, take off the $0.09 from the $250 million, next quarter is basically $0.70.

So Am I right to assume that your guidance is assuming basically, on an apples-to-apples basis, roughly $0.70 flat for the next three quarters with no growth as you go through the year?

Why would that be as opposed to seeing some growth?

Then a quick question for Steve.

When you're looking at the integrated chipsets you're selling, are you selling -- are you seeing a difference between more 7000s and more -- or more 8000s?

I would imagine, with the developed markets doing better now, that you're seeing more 8000s selling but do you expect more 7000s to sell as we get into next few quarters, and that's a source of margin pressure?

I'll take the first part of your question.

Your math is largely correct.

I won't comment on whether it's approximately $0.70 per quarter for the next three quarters equally.

There is -- I think I did mention earlier we are expecting a little bit better in the fourth fiscal quarter at this point.

But your math is correct.

A couple key drivers there -- in QUALCOMM's first half of any fiscal year, we get the Christmas affect, both in QCT and QTL.

So over the years, the first half does -- of the fiscal year -- does tend to be greater than the second half of the fiscal year.

That's number one.

Number two, as we pointed out, you do have this $250 million that does relate to periods prior to the second fiscal quarter, and so we won't see that in Q3 or Q4 in the second fiscal half.

Then thirdly, as we went through in New York and in effect what we are reiterating here is that QCT is aggressively going after what we see is a fairly substantial smartphone mass market.

We've got new products as well to go at that market.

For fiscal 2011, we expect the margin on those products to be lower than what we have historically seen with new products.

The target is that, in fiscal '12, we follow on with replacements product, namely the 28 nm, that brings those margins back to the level that we want to see.

So, I think those are the key drivers.

But your math is -- it's basically correct, yes.

Maynard Um, UBS Global Asset Management.

Thanks.

Bill, if I could check my math also, if I just run through it, it looks like your chip margins would have to drop to mid to high teens, just taking in all the color you gave in your EPS guidance for the second quarter.

That's a significant drop from the 30% you just had when you compare that to last year where you did have a price cut with mix shift.

I understand I guess the new products that you have in being aggressive, but this still seems to be quite an unusually large drop, and maybe conservative, and maybe if there's a shift to baseband or some sort of a baseband only product, is that the big impact?

If you can kind of walk us through that.

Then separately if you could give us a little color on the use of the offshore cash for the Atheros deal, that would be great, how that works.

Thank you.

On the QCT margins, so our estimates for the year is to be in the range of 22% to 24% for the full year, consistent with what we said three months ago.

We did note that, within that range, we are edging a little bit higher than where we were at the outset of this fiscal year, but that edging, so to speak, is not enough that we felt comfortable raising the 22% to 24% range.

So, obviously, to end up with an average of 22% to 24% after having just reported a quarter here of 30%, we expect a substantial decline.

We do expect that it is built into our guidance here for the second fiscal quarter.

It is just -- it's the same drivers that we are seeing today as what we saw three months ago.

We see a greater volume going forward relative to the recent couple of quarters of more developing market, and then we do see this opportunity to drive a mass market of smartphones.

We are targeting that with new chipsets that we have and those chipsets that do have lower margin than traditionally we've seen in the past.

This is Steve.

Maybe I could add one other comment, which is that we do have a calendar year pricing reset which does hit us in the quarter that we are talking about.

This year, not unlike other years, a similar type of move.

Then in addition, I think there's also some employee payroll type issue that hits as well and that probably impacts a little bit on top of the function or the trends that Bill mentioned as well.

The other thing to remember is we're coming off a very strong quarter where you had significant growth or a significant number of unit really in the North America space and in the smartphone space, the high tier.

So there's probably a little bit of seasonality in that as well.

Great.

And on Atheros?

Nothing new on the Atheros.

We are -- things are progressing along.

We expect them to file their --

Sorry, Bill.

Just on the mechanics of how you can use offshore cash to do the acquisition.

Really nothing new there.

We still have that hope, but really nothing new.

Great, thank you.

Kulbinder Garcha, Credit Suisse.

It looks like that question has been withdrawn.

We will proceed to the next.

Mark Sue, RBC Capital Markets.

Thank you.

Bill, if I subtract $250 million from the $1.2 billion of incremental strength, is there a way to sort of rank order the new positive dynamics that you're seeing?

Is it regional?

Is that Apple?

Is it tablets?

Is it a faster adoption of LTE?

Just some color there.

Then Steve, are all device makers sort of on board with this mass-market opportunity for smartphones?

There is some thought that dumbing down the smartphone may actually limit the broad appeal.

Just kind of how low is low for you and your thoughts there?

On your first question, in terms of rank ordering, I think the drivers here are pretty broad.

The chipset demand on QCT, we are seeing a unit -- better units than for the fiscal year than what we saw three months ago.

We are seeing a pretty good healthy increase across a number of products there.

After this first quarter, on balance, we're seeing -- we have seen an uptick here in some of the demand for the higher-end developed market products.

But as we said, we do expect that trend to be shifting a bit here as the year progresses for QCT.

So I think that's -- and then that much traces back into the licensing business as well.

The other thing I do want to point out is, in November, we said we had an undisclosed amount, but we had an amount in our guidance that we thought was prudent, prudent based on our expectations of that time of resolving one or both of the licensee disputes.

So although there is an increment here in our guidance just for the resolution of this licensee dispute, the absolute number is greater than the difference, being it's making up -- it's covering that prudent amount that we had put in our guidance at the outset of the fiscal year.

Tal Liani, Bank of America.

Hi.

I just want to go back to the question that was asked about the royalty rate -- sorry, the QCT margins and also the question that was asked about use of offshore cash.

So on QCT margins, every year, you said you have a reset of prices.

Now, last year, I think you priced the HSPA 14.4 at the same price of 7.2.

I think that was part of the reason that the margin was down.

What happens this year?

Is it just price cuts across the board, or is it more specific to your dual core that you're trying to penetrate to the market, etc., and your reducing the price there?

Any color you can give us, because if I just do the math, the margins for the next three quarters, assuming -- there is going to be one quarter below 20% of margin, and I just want to understand the dynamics there.

The second point, in your answer on your offshore cash, you answered it "I hope it's going to happen." So what happens if it doesn't happen?

Which means what happens if you cannot use offshore cash to pay for Atheros acquisition?

Thanks.

On the QCT margin part -- this is Steve -- maybe I'll try to also complete the answer to that last question, Mark's question.

So we do see a strong trend to mass-market smartphones.

It tends to be correlated to people who are engaged with multiple operators worldwide.

Those folks who are probably a little bit more concentrated in the United States probably don't see it as much as you would tend to see if you were engaged worldwide.

It tends to be driven in some areas by the transition from 2G to 3G, as I said in my remarks.

That being said and then maybe tying this to the op margin, for us sequentially you've got a normal calendar year price reset, this year not unlike other years, if you go back from our side.

In addition, you have a little bit of a mix shift in terms of sequential mix shift toward the mass-market smartphones.

Those two events combine and you get a sequential drop in terms of the op margin.

I'm not sure if you're going to see a number quite as deep as you may be calculating, but we definitely will see a difference in the sequential number.

On your cash question, just to be clear, we are not making any change in what we said just a little bit ago when we announced the Atheros deal.

It's just that we've got a ways to go here on the planning as -- and just getting to the point where the acquisition does in fact occur.

So, we've got a ways to go on that.

If we would not use offshore cash, we have $6 billion of onshore.

So if we did use onshore, there would be less available for stock buybacks.

But other than that, I don't see a significant difference.

So --

Got it.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Dr.

Jacobs, would you like to add anything further before adjourning the conference?

Yes.

I'm really glad to be able to report such a record quarter.

It's really because many of the decisions we've made on investments are paying off -- LTE launches, Snapdragon traction, advanced technology.

We've got great stuff coming up at Mobile World Congress too, so a lot of good things are going on.

We had a very busy quarter and start of the year.

I can't say that every quarter is going to have so much excitement in it, but I can say that capital (inaudible) all of the opportunities ahead of us are definitely going to make for exciting times in the future.

So I wanted to say thanks to everybody who is a part of it, and thank you for your support and for joining us today.

Ladies and gentlemen, this does conclude today's conference call.

You may now disconnect.