高通 (QCOM) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm second-quarter fiscal 2011 conference call.

(Operator Instructions).

As a reminder, this conference is being recorded April 20, 2011.

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

International callers please dial 706-645-9291.

The playback reservation number is 56703245.

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

Mr.

Kneeshaw, please go ahead.

Thank you and good afternoon, everyone.

Today's call will include prepared remarks by Dr.

Paul Jacobs, 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, and you can access them by visiting www.qualcomm.co.

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 would also like to direct you 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.

On a specific note, we have excluded the Atheros business from our guidance.

And now it is my pleasure to introduce Qualcomm's Chairman and Chief Executive Officer, Dr.

Paul Jacobs.

Thanks, Warren, and good afternoon, everyone.

We are very pleased to report another strong quarter with record revenues as the demand for smartphones across an array of geographies and tiers continues to grow.

Our product leadership and expanding set of industry partnerships positioned us to benefit from the strong secular trends in wireless, and as a consequence, we are raising our revenue and earnings guidance for the fiscal year.

It has been another very successful quarter for Qualcomm, and there is a lot to be excited about.

At the Mobile World Congress, we announced a variety of new industry-leading multimode modems and a new advance micro architecture for our Snapdragon family of processors, which we believe will continue to extend our power and performance leadership position in mobile computing.

Our new architecture supports single, dual and quad-core processor integrated solutions, as well as discrete application processor chipsets which will further expand the addressable opportunity for our products.

And as the first chipset provider for Windows Phone 7, we were pleased to see the announcement that Nokia would be adopting the Windows phone operating system and look forward to supporting that new collaboration.

The Snapdragon family has been designed to help our customers efficiently support a range of device tiers and to speed time to market with features like software and hardware compatibility across chipsets.

We are also pleased to be working closely with Microsoft on their announced plans to support the next version of Windows to ARM, further evidencing the accelerating convergence of mobility and computing.

On the licensing front, I'm also pleased to report that we have resolved our dispute with Panasonic.

We have now resolved the two disputes which had been impacting our ability to fully reflect the operational performance of QTL, and Derek will talk more about this later.

In terms of CDMA-based device demand trends, the key drivers remain healthy and intact for continued growth of our business.

Demand for smartphones remains strong across multiple geographies around the world.

According to Gartner, in the fourth quarter of 2010, sales of smartphones exceeded all PC shipments for the first time in history, and looking ahead they are forecasting that sales of smartphones will exceed 1 billion units in 2015.

Driven by an increased demand for smartphones around the world, wireless data traffic continues to accelerate.

According to Strategy Analytics, mobile data traffic more than doubled in 2010 and is expected to grow by 10 to 12 times through 2015.

To address the growth in wireless data, operators continue to make network investments in the latest radio technologies for both existing and new spectrum.

According to the GSA, in the past year, commercial HSPA+ deployments rose 136%, and the number of LTE commitments grew to almost 200, including the launch of 18 commercial LTE networks.

According to the CDG, there are now 13 operators committed to launching EV-DO Rev B networks.

And the migration from 2G to 3G continues around the world with wireless intelligence reporting that at the end of March there were approximately 1.3 billion 3G subscriptions globally, up approximately 30% from a year ago.

In developed regions, we continue to see strong trends for smartphone adoption.

According to CTIA research, as of the fourth quarter of 2010, the number of smartphones reported on North American carriers' networks was approximately 78 million, representing a 57% increase from the year prior.

Verizon Wireless recently launched the LTE-capable HTC Thunderbolt, demonstrating our leadership in LTE smartphones and multimode technology.

And additionally in North America, we are beginning to see the influence of affordable smartphones in the prepaid segment as smart phone penetration rates ramp at Leap and MetroPCS.

According to GFK, in key Western European countries, smartphones with high level operating systems accounted for 74% of 3G phones sold in December 2010, up from 44% a year ago.

And in Korea, since the beginning of this year, each operator has announced plans to introduce 20 or more new smartphone models.

With respect to Japan, we are, of course, saddened by the recent tragic events.

But despite this disruption, we have received reports that wireless technology, combined with social networking services and an early earthquake warning system, played a critical role for communication and safety of the people in the affected regions.

Preliminary indications are that demand has held up fairly well, similar to what we have seen in other past events of this nature.

So although there is some uncertainty, we do not foresee any significant impact on the overall demand profile for wireless devices.

Turning to China, China telecom recently reached 100 million CDMA subscribers and expect that 50% of their new subscribers will use EV-DO this year, up from approximately 25% in 2010.

Additionally, according to Sino-MR, of the 3G phones, excluding one-X phones, sold in February in China, 46% were smartphones, representing more than 300% increase from a year ago.

In India, all operators with new 3G spectrum licenses have now launched with HSPA+ networks and together cover more than 100 cities.

Mobile broadband continues to gain momentum with expansion of EV-DO Revision A networks, reaching more than 500 cities, and demand for smartphones in India continues to grow with 10 new Snapdragon-based smartphone launches in January and February alone.

And a couple of other items of note.

We are pleased to announce the creation of the Qualcomm Foundation.

It is a charitable organization which will focus on education, health services, sustainability and the arts.

Qualcomm has a long history of philanthropy and service, and the foundation is another way that we can give back to our communities around the world.

And finally, we will be hosting our second annual Uplink Conference on June 1 and 2, and as many of you know, Uplink is unique in that it brings together developers, device manufacturers, mobile operators and technology providers to help identify opportunities across multiple operating systems.

It should be another great event, and I look forward to seeing many of you there.

That concludes my comments, and I will now turn the call over to Derek Aberle.

Thank you, Paul, and good afternoon, everyone.

We continue to see favorable industry trends that are driving growth in the licensing business.

These trends include solid unit shipments during the December quarter, positive handset ASP trends within both developed and emerging regions, and growth in sales of incremental connected devices.

These trends help drive record unit shipments and total reported device sales during the December quarter.

Going forward we expect to continue to see strength in handset ASPs in developed and emerging regions driven by growth in smartphones, including greater penetration into mid and lower tiers, a richer mix of devices in emerging regions such as China and India and continued growth in tablet volumes.

Accordingly, as Bill will discuss, we are raising our fiscal 2011 ASP estimate range from $190 to $200 to $199 to $209.

We also expect the volume and breadth of new connected devices to continue to grow.

In addition to tablets and e-readers, we are encouraged to see the emergence of new connected device categories such as the recently announced 3G-enabled Sony NGP gaming device.

As Paul mentioned, we are pleased to report that we have now resolved our dispute with Panasonic.

As you may recall, the arbitration have been proceeding in phases.

In the first phase, which was the only phase that had been completed as of the time of the settlement, the arbitrator had rejected Panasonic's claims that Qualcomm breached the license agreement.

We are pleased with the terms of the resolution, which reflect the established value of our patent portfolio.

Over the last few months, we have now successfully resolved both disputes that have been impacting our ability to fully reflect the opening performance of QTL.

Accordingly, our second fiscal quarter results include the recognition of revenue attributable to these resolutions, including approximately $400 million in revenue related to prior periods.

In closing, we are very pleased with the industry trends that are helping to drive our licensing business, as well as the successful resolutions we have recently achieved.

QTL continues to be well-positioned for strong growth ahead in a very dynamic global wireless industry.

Thank you and I will now turn the call over to Steve Mollenkopf.

Thank you, Derek, and good afternoon, everyone.

The QCT business executed well and very much in line with our expectations this quarter.

We shipped approximately 118 million MSMs, just above the high-end of our prior guidance, driven by strong demand for products across the chipset portfolio.

As we forecasted previously, our results this quarter show a trend very similar to last year with annual customer pricing resets and seasonal operating expense increases typical for this time of year.

Consistent with this trend, both our average revenue per MSM and our operating margins were down sequentially, but in absolute terms, our revenue and earnings before tax were well above the same period last year with revenue up 28% and earnings up 21%.

The trends and requirements for OEMs to succeed in wireless are aligning well with the strengths of our business, particularly in the areas where we continue to make significant investments.

First, our platform approach is a strategic advantage for us, and our broad chipset roadmap has helped us grow across multiple device tiers.

Second, the importance of integrated chipset solutions for our OEM partners is clearly accelerating due to the superior performance, lower power consumption and time-to-market advantages it delivers.

Our 7000 and 8000 series shipments are up 70% in the first half of this fiscal year as compared to the last half of fiscal 2010, growing faster than the wireless device segment and demonstrating that integration is the leading choice for mass-market and high-end smartphones.

The range of Snapdragon devices continues to grow as well.

Our customers announced the 100th Snapdragon-powered device this quarter, and the pipeline of devices and design has increased to approximately 200.

We are continuing to expand our portfolio in the growing tablet category as well.

There are now eight different Snapdragon-powered tablets announced from mobility and computing leaders like HTC, HP, Acer and Asus with approximately 30 additional designs in process.

Our LTE solutions lead the industry and continue to build momentum.

Our LTE chipsets power the HTC Thunderbolt, various USB dongles, and newly launched LTE hotspots from Samsung and Novotel, which also incorporate our Wireless LAN products.

We are also seeing many devices and designs that are pairing our application processes and LTE technologies together, demonstrating that OEMs value a complete solution for processing and connectivity.

At Mobile World Congress, we announced eight new chipsets as we continued to quickly drive technology across our modems, application processors, graphics and connectivity solutions.

We expanded our overall leadership in 3G and LTE multimode modems announcing several new chipsets that redefined performance at the high-end and take the latest 3G and LTE technology to mass-market price points.

We also announced our next-generation mobile application processor architecture for the Snapdragon family, which will again redefine performance for the industry by delivering 150% higher overall performance, as well as 65% lower power than currently available ARM-based CPU cores.

This chipset architecture is based on 28-nanometer technology, which enables us to cost-effectively integrate LTE, 3G, Wireless LAN, Bluetooth, FM and GPS in single, dual or quad-core designs for smartphones and next generation computing devices.

The first chipset in this next generation Snapdragon architecture is our industry-leading multimode 3G LTE MSM 8960 chipset, which is on track to sample this quarter.

Our leadership in graphics and the strength of our gaming ecosystem continues to grow this quarter.

We announced an agreement with SRS Labs, which allows us to bring HD and 3-D audio to movies and games, as well as a strategic relationship with Gameloft to deliver an enhanced mobile gaming experience on Snapdragon devices for the top game titles.

We now have over 100 HD and casual games optimized for our GPU and expect this number to continue to grow.

The year is progressing much as expected.

As we commented on in the past two quarters, we expect to see an increase in the variety and tiering of smartphones, specifically a greater mix of mass-market smartphones.

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

With respect to our semiconductor supply chain, we do not foresee any significant impact in our ability to supply product to our customers as a result of the recent events in Japan.

Our scale and broad set of OEM customers provides us a unique perspective on industry trends and enables us to better address short-term fluctuations in demand.

Finally, with respect to the Atheros acquisition, we met key milestones this quarter, including approval of the transaction by Atheros's shareholders, as well as the successful completion of Hart-Scott-Rodino review.

We continue to expect the transaction to close this quarter, subject to receiving one remaining foreign regulatory approval.

In summary, QCT executed well this quarter.

Our solutions approach and focus on integration across the broad roadmap of chipset products has enabled us to grow across multiple product categories and price points, as well as expand our pipeline of design wins.

These wins are across an increasing variety of device segments, OEM customers and regions, positioning us to continue to grow share in this dynamic environment.

That concludes my comments.

I will turn the call over to Bill Keitel.

Thank you, Steve, and good afternoon, everyone.

Today we reported record revenues of $3.9 billion and non-GAAP earnings-per-share of $0.86 for our fiscal second quarter.

We are also pleased to be raising our revenue and earnings guidance for the fiscal year.

Our better-than-expected results were driven by a number of positive items.

Most importantly, our core licensing and chip businesses contributed strong results.

3G device sales grew significantly with total reported device sales up 18% sequentially and with an average selling price per device of approximately $200 to $206.

QCT's 118 million MSM chipset shipments were above the high-end of our prior guidance.

During the second quarter, we resolved outstanding license disputes with Panasonic and another licensee which we discussed during last quarter's earnings call.

Since our non-GAAP earnings-per-share of $0.86 was significantly higher than the $0.79 midpoint of our previous guidance, I thought it would be helpful to provide an earnings walk of the $0.07 increase in non-GAAP earnings-per-share.

First, stronger non-GAAP earnings-per-share were not entirely driven by the dispute resolutions, although they did contribute approximately $0.06 and were driven primarily by the Panasonic license dispute resolution.

Recall that our prior guidance took into account resolution of the other license dispute.

Second, we achieved a further $0.06 of earnings improvement from our core operations, driven primarily by the strong demand for 3G devices and increased demand for our chipsets, as well as a bit stronger investment income.

Third, we restructured our Firethorn business during the second quarter and significantly reduced the run-rate of its operating expenses.

As a result of the restructuring and the reappraisal of the Firethorn business, we recorded impairment charges of approximately $120 million.

Fourth, we established a new Qualcomm charitable foundation to which we made an initial $50 million contribution.

The combination of the Firethorn impairment and charitable giving decreased earnings-per-share by approximately $0.05.

Investors can find this earnings walk on our Investor Relations website.

You can also find on the website an earnings walk from the year ago quarter, and that earnings walk distinguishes the approximate $400 million in QTL revenues related to prior periods that were recognized this quarter due to the resolution of licensing disputes.

Now turning to our updated financial guidance, we estimate that approximately 646 million to 663 million CDMA-based devices shipped during calendar 2010, an increase of approximately 29% year over year at the midpoint.

We continue to see healthy growth in global 3G sales, and as you would expect, we are monitoring the events in Japan very closely.

As you heard from Paul, we do not at this time see an impact on end consumer demand for CDMA-based wireless devices.

It is worth noting that if not for the uncertainty of component supply from Japan for 3G device manufacturers, we would have an even greater upward bias in our calendar 2011 CDMA-based device estimates given improving trends on consumers upgrading their 3G devices.

As such, we are reaffirming our estimate of between 750 million and 800 million CDMA-based device shipments in calendar 2011.

Using the midpoints of our guidance, we estimate that in 2011 the number of CDMA-based devices will increase approximately 18% year over year.

We now estimate the average selling price of CDMA-based devices for fiscal 2011 will be approximately $199 to $209.

The $204 midpoint is above our prior $195 midpoint estimate, driven by the trends that Derek mentioned earlier, and a couple of dollars of favorable foreign exchange impact.

We now expect fiscal 2011 revenues to be in the range of approximately $14.1 billion to $14.7 billion, up approximately 31% year over year at the midpoint.

Of the approximate $500 million increase in our fiscal 2011 revenue guidance range midpoint, approximately $200 million reflects additional QTL revenues attributable to the recently settled licensee disputes.

Improved outlooks for QCT and QTL drove the remaining $300 million increase.

We anticipate non-GAAP earnings-per-share to be in the range of $3.05 to $3.13, up 26% year over year at the midpoint.

In QCT our operating margin estimate is consistent with our previous guidance with a range of 22% to 24% expected in fiscal 2011.

We expect the combination of non-GAAP R&D and SG&A expense to grow approximately 15% to 16% year over year.

Specific to the third quarter of fiscal 2011, we estimate revenues to be in the range of approximately $3.35 billion to $3.65 billion, up approximately 30% year over year at the midpoint.

We estimate non-GAAP earnings-per-share for the third fiscal quarter to be approximately $0.68 to $0.72, up approximately 23% year over year at the midpoint.

We estimate that our subscriber licensees will report total reported device sales of approximately $35.5 billion to $38.5 billion in the June quarter for shipments they made in the March quarter, down sequentially reflecting post-holiday seasonality typical for this time of year.

We anticipate shipments of approximately 115 million to 119 million MSM units during the June quarter with revenue per MSM up a bit sequentially, and we expect a greater mix of chipsets targeted for mass-market smartphones consistent with our prior expectations.

We believe our visibility on fiscal third-quarter chipsets both supply and demand is relatively quite good.

We estimate the CDMA inventory channel will exit the fiscal year at the low end of the historical 15- to 20-week range, consistent with our prior estimates.

Our forecast anticipates a small bleed of channel inventory in the short-term, which we expect to be replenished prior to the end of our fiscal year.

We anticipate third fiscal quarter non-GAAP R&D and SG&A expenses combined will decrease sequentially approximately 7%.

That concludes my comments.

I will now turn the call back to Warren Kneeshaw.

Thank you, Bill.

Operator, we are ready for questions.

(Operator Instructions).

Brian Modoff, Deutsche Bank.

(technical difficulty) -- the second question is on the application processor market share.

While you are approaching 50% of the WCDMA market for baseband, what do you think your marketshare is in app processors, and what do you think you is going to be six months to a year from now?

Thank you.

Brian, we did not hear the first question.

Could you repeat that one, please?

Yes, the question -- sorry about that -- was around Japan.

Have any of your customers implied any difficulty procuring parts out of Japan to you?

Obviously you guys don't have any issue, but have you heard anything from any of your customers?

Thank you.

Sure.

We have -- a typical with these type of events we have been communicated with from the customer.

And some of them had indicated that they don't have the ability to ship, I think pretty consistent with what Bill said also in his view of the market.

I think we have reflected that in our guidance and our unit guidance as well.

We are, of course, building to a number that is larger than that, anticipating that they may be able to resolve those disputes or not disputes, but those supply chain constraints as we would in this type of situation.

I don't think it is a huge situation right now compared to what people think about in terms of Japan.

Your second question was about application processor share and others -- I'm sorry, I did not get all of it.

Yes, actually you have about 50% share or you are approaching 50% share of WCDMA baseband.

What do you think your share of application processors is now, and what do you think it will be in six months to a year?

Well, I would say it is pretty difficult to go with exact numbers just because they are so -- there are very different ways that people cut up the market share calculation.

I would say this, we are very pleased with the trajectory of how things have gone, particularly in the application processor business.

If you looked at where we were, let's say, in the 2007 timeframe when we really started to ship our first 7000-based devices to where we are now, we have grown quite strong in terms of using that technology.

As you are aware, we have been investing both in additional application processor hardware designs, but also into different software platforms, and that is really to enable us to continue to add new customers actually.

So, as things progress throughout the years, we are positive in terms of how things look for share in those areas.

And I think that is really consistent with our view that the integrated approach is the one that will win long-term, particularly as a lot of the growth starts to happen in the more mass-market or the feature phone replacement tiers.

Mike Walkley, Canaccord.

Steve, just following up on some of Brian's questions, could you update us on the competitive landscape that you are seeing on future modem technologies such as HSPA+ and LTE?

And as it relates to your relationship with Nokia, how soon do you think one of your competitors could support Nokia's transition to Windows Phone 7?

And then maybe just for Paul, given Qualcomm's early leadership position in LTE, how do you see the competitive environment?

Do you think there will be a consolidation among your competitors, and is that something you would look at also?

This is Steve.

I will take the first half of that.

So, as we have been saying, we really have thought of LTE and really all of the modem transitions, it has been important to have a multimode solution, and that has been the case in our view with the transition into LTE.

And, as you are aware, we had been shipping LTE solutions, not only in the United States but also worldwide into Japan and across multiple customers.

We are seeing, I think, some strong traction not just in the data-centric devices now, but forward-looking in our product portfolio that combines both our application processor and our modem solution.

You know, just like with WCDMA during the initial days, there were a number of folks who worked on initial designs, but it was I think difficult to stay with the investment required in order to maintain really the feature roadmap that is required, I think, to deliver high-end modems.

So we think that it will probably play out in a similar way with this transition as well.

In terms of consolidation, I would echo what Steve was saying.

You see different people coming at it.

Right?

You have the in-house solutions.

We have seen some of those already not gain traction and people come to us to get support.

You see some of the companies that started out, for example, in WiMAX trying to make their way into LTE and some acquisitions and consolidation happened because of that.

And obviously it is not just LTE that is causing it.

It is just the pace of operator rollout of new technology whether it is HSPA+, or LTE, or, as we drive forward on the new technologies, supplemental downlink we have talked about, LTE Advanced.

We are going to try and keep the pressure on, keep the investments going in those areas to make sure that we have a leadership position, and just to continue to force the competition to keep up.

And I do think that will create a more difficult dynamic for them, which certainly can lead to consolidation or just people dropping out of the business.

Tim Long, Bank of Montreal.

Just two if I could.

First, I just wanted to follow-up on the $40 billion reported for the December quarter.

I think the guidance was $35.5 billion to $38.5 billion.

So should we take that to mean that the underestimation by you was in ASPs?

And maybe related to that, tell us how we should think about you said good visibility into chips, how do we feel about visibility into the $35.5 billion to $38.5 billion?

And then, Bill, just a quick one, if you could just update us on what Panasonic means to the royalty rate numbers that you said we would be at 3.4% to 3.5%?

How much does that change that?

Thanks.

I will take the TRDS, your first question there, on the $40 billion number.

The ASPs did come in much stronger.

Volume was healthy, but the upside, Tim, was we think was more so driven by stronger ASPs.

The upgrade rate out on the consumer end seems to be very, very strong, which, if not for the Japan matter, that was the prime driver to what we are seeing behind higher consumer demand in that end market, but we thought it best to be cautious there given the Japan matter.

So upgrades are going strong, and that is showing through in strong ASPs.

I don't recall the second question.

Related to that, the visibility into the $35.5 billion to $38.5 billion, and then just a quick one, the royalty rate.

Sorry, what was your specific question on the royalty rate?

You had guided, I think, 3.4% to 3.5%.

I'm wondering how that changes now that Panasonic is fully being recorded?

Yes, again, I think we have cautioned a bit about the reliance upon the implied rate, although we did talk a bit about it on the last call.

The two data points I think we gave last call was with the resolution of the first licensee dispute.

We expected the full-year fiscal year to be in the range of 3.5%.

And then we said exiting the year, we were expecting something in the range of 3.4% to 3.5%.

I think now with the resolution of Panasonic, we would expect the full-year implied rate to be a bit higher than the 3.5%.

And I think, although you have to remember that there are fluctuations quarter over quarter and a lot of moving pieces here, we are still comfortable with the exit range of 3.4% to 3.5%.

Thank you.

Tim, on your confidence question on our guidance for TRDS for fiscal Q3, I would say our confidence is quite high.

Obviously the ASPs have trended higher.

We have incorporated that into our estimates.

Our licensees, a lot of our licensees share their forecasts with us, and so we are well aligned with them.

We typically do see a seasonal decline at this time a year, but other than that, I would say our confidence is fairly high.

Tim Luke, Barclays Capital.

Steve, in looking forward for the year for your business after a strong quarter this quarter, you are guiding kind of flattish for June.

How do you see the shape of the year developing as you move through the year, and how have you seen or expecting to see the broad ASP development?

Thank you.

And if I might, also for Bill just to clarify from your guidance, of the $401 million of incremental revenue from the settlements, how much was included in the prior guidance for the quarter, if any, of that $401 million.

Thank you.

On the first question, we really see the year unfolding pretty much the way that we have said all along since really November.

And, of course, we improved it a bit a couple of times here.

But it is really unfolding pretty much the way that we have discussed.

We think that right now you will continue to see the mix of mass-market smartphones probably a bit stronger than the high-tier devices that really dominated in the first half or the first quarter of the year.

We will continue to, as you know, invest in the business because we believe this is a very, very important time in terms of where we can position and build the business down the road.

And Paul mentioned a number of very exciting things are happening from new customer acquisition, as well as the migration of, I think, the mainline computing to OSs that would enable us to really grow our market up into the computing space.

So we will continue to make those investments into the portfolio.

I think you will see that continue in the results this year, but we feel very good about how the year is unfolding and pretty much in line with it as we have discussed.

On the $400 million revenue question, again, those are revenues that we booked in the second quarter related to resolution of a licensee dispute.

But it is revenues specifically that apply to prior periods.

Last quarter at this time when we had just resolved one of the disputes, we had guided an expectation of about $250 million that we will report this quarter related to prior periods.

So obviously there is about a $151 million increment now that we've got the second licensee dispute resolved.

I would say, though, that although the $250 million estimate was reasonably accurate, it was not exact.

And so it is not a pure split that you can take.

You cannot just take $151 million and assign that to the new dispute and $250 million to the prior.

But our prior guidance was in the range.

Very helpful.

Nice quarter.

Thank you.

Ehud Gelblum, Morgan Stanley.

A couple of things (inaudible) if I could.

The guidance of shipments being relatively flattish, 118 million this quarter and kind of, as you had guidance, 115 million to 119 million next quarter sequentially.

Historically that has been an up quarter in June, and I know there are a lot of other extenuating circumstances going on right now.

But can you just, Steve, give us a little background as to why you would not expect to see shipments possibly going up from the March quarter into the June quarter?

Could it be several -- I mean are you looking at several one or more devices that you were shipping into that possibly may have been pushed out a little bit giving you a little bit of caution in terms of what that shipment number is or just understanding that?

And then on QTL operating margin, if you do normalize for the $400 million for Derek and for Bill, you still get a QTL operating margin of 87%.

Not the 90% posted, but 87%, which is still the strongest I calculate that you have had in over two years.

Should we be looking for as revenue continues to pile on top of QTL that we could be looking for higher operating margin just from a pure leverage perspective at this point, or do you think 87% is the right number, or do you think it kind of comes down from there?

On the sequential shipments, I would say you probably answered it in your question to some degree.

It is a little bit unusual year because of the events.

Also, you should remember, too, that there is a pretty big transition happening in the industry as we move to smartphones and LTE and things, and those technology transitions also come along with some OEM juggling as well.

And so it is probably a little bit less seasonal in terms of the March to the June quarter probably than what you have seen in the more established pattern.

We probably saw a little bit also at the end of this quarter where some customers were looking to get parts because of the events in Japan that probably had a very small impact in terms of the optics of the numbers.

I don't think it really had a great impact in terms of the financials, though.

So if we actually look at what this means for the following quarter, it sounds like it is more to do with the OEMs that you are selling into than the markets.

So we should not necessarily look at the market being flat in the June quarter that goes into your September revenues?

Corresponding to your chips, it sounds more of the particular OEMs that you are going into is more flat, not the market?

Do you see what I'm saying?

I'm sorry.

What I was trying to say, there are really some transitions going on in the industry with LTE and the smartphone transition happening in some of the other markets.

So I'm not sure we are really trying to make a commentary on the broader market outside of what Bill mentioned.

And the QTL operating margin?

This is Derek.

I will take that one.

I think, as you said, if you normalize Q2 for the past amounts, we are about 87% operating margin as compared to around 84% from Q1.

I think we do expect that the margin will be higher than the 84% run-rate that we had before.

Whether it will be all the way to 87%, we will have to see.

You have got to remember the December quarter is historically a high quarter because of the December sales drive a big number.

So if revenue comes down a bit in Q3 and Q4, you would expect that to affect the margin a bit.

Simona Jankowski, Goldman Sachs.

Just a couple of questions.

The first one is on ASPs.

Obviously they are very strong in the royalty side of the business.

On the chipset side, they diverged a little bit and were down about 7% sequentially.

So can you just comment on why the strength in the broader market is not directly transferable into the trends in the chipset business?

And in particular is that a function more of mix versus pricing versus any other factor there?

And then just the second question is on OpEx, which I think came in a little bit higher than you had guided, and it seems like that pretty much was the flowing into the chipset business.

Can you just comment on what drove that accelerated investment in that area?

On the ASP, you are right they have been very strong in the market, reflecting upgrades in the smartphones as we all know.

It does diverge a bit in the chipset, and I think this is consistent with our strategy where we are pricing pretty aggressively this year to open up the broader market of smartphones to the mass market.

So yes, I think that divergence, we recognize it.

I think it is conscious on our part to be driving some of that divergence.

On the OpEx side, we did come in a bit higher.

If you put aside the starting of the charitable foundation, it did come in a bit higher.

We are expecting a bit higher for the year putting that aside as well.

With the increased revenues, there is a small amount of our operating expenses that tend to be variable with the revenue, but nothing I would regard as a significant change.

Ittai Kidron, Oppenheimer.

A couple of questions from May.

First, Steve, for you on QCT margins, you have kept the margin target for the year unchanged, 22% to 24%.

If you just take a look at the first two quarters, that implies that for the next two remaining in the fiscal year you are looking at essentially flat margins.

Can you give us a little bit more of the dynamics why is that the case?

Why margins should not improve at least somewhat sequentially into the next two quarters, which I don't know, it just seems a little bit unreasonable?

And second, for Bill, your profits from your portfolio, it looks like $100 million, about $100 million this quarter.

Can you give us an estimate at this point of what is the balance of your unrealized gains in your portfolio at this point, and what is the pace by which you think we will see them flowing through your P&L going forward?

We did not change the guidance in terms of operating margin for QCT for the year.

There has been some change, but I don't think enough to really bump us into another range.

Pretty much the same as we have said consistently the entire year.

We really expect that the mix of more mass-market smartphones tend to be the dominant shipments here throughout the year as some of these migrations occur.

And really the feature phone gets converted into the smartphone, which we think really plays into our advantages in terms of integration, and we want to take advantage of that.

That enables us, I think, to really grow our position in some of these new accounts both up and down.

When some of the things that we talked about in terms of these new customers and LTE and some of the higher tier products tend to become a little bit more as a higher percentage of the mix, we think that will change.

But I just don't think that is going to happen in the existing fiscal year.

On the investment portfolio, there is about a 5% net unrealized gain on the portfolio.

So it is just a little north of $1 billion unrealized net gain.

Looking forward on that, the bulk of that gain resides in fixed income instruments managed by select people that we utilize.

And it is really -- it is going to be a function of what they see their opportunities to either capture or transition their fixed income investments.

So it is pretty much in their hands.

Other than that, I think as you know, on a forward guidance basis, we only include a forecast of realized gains to the extent we are highly confident that they are going to happen.

For this quarter we did include in our guidance there is an amount of that, but going forward it is kind of just we will have to see how it goes as to what might be incremental of that.

Okay.

Good luck, guys.

Rod Hall, JPMorgan.

I just want to put a couple of things together that have been asked before with regards to the QCT business.

So the unit volumes that you are forecasting are pretty flat for Q3, and yet you guys have taken this big hit on margins.

I think the strategy was to try to reduce margins in order to pump up the unit volume and get access to this rapidly growing market, particularly the lower-priced smartphones.

But if we just take the data you have presented us with, it does not feel like that that strategy is working.

So I guess one of two things are going to happen.

Either Q4 we are going to see a very rapid ramp of unit volumes on QCT, which will make up for the difference, or the pricing strategy is not working, and maybe pricing is more aggressive out there from competitors then you guys had expected or something else is going on.

So I just wonder if you guys could just talk through what is going on with chip pricing out there?

Are people more aggressive than you expected, or do you think that everything is on track, and we ought to see some payback for the reduced margins in the next couple of quarters?

So, in general, I would say really the year and the pricing environment and really the mix in the market is playing out pretty much the way that we had thought.

And if you look at what is happening for us, we really feel like the strategy is working.

It is enabling us to maintain or growth share through the market as really there has been a pretty big mix in terms of which OEMs are shipping and then across different tiers.

And we really consider the game now has moved from providing one or two chipsets to providing a portfolio of chipsets on my smartphone side.

In some quarters I think you will see a bigger mix of emerging market or mass market smartphones.

In some quarters you will start to see more developed markets or higher end smartphones depending on what happens in a particular area.

You have seen both of those types of quarters I think in our results.

And I think if you just looked at it over a longer period of time, not just one quarter, I would hope that you would come to the same conclusion.

But we definitely feel pretty good about how the strategy is playing out.

It is also enabling us to acquire new customers, which we think also will pay dividends down the road as well.

So, Steve, you don't feel like you need to reduce pricing another notch to keep things moving?

You feel like the pricing levels you are running at now are the right levels I guess?

Yes, I think we see the environment pretty much in line with what we expected throughout the year really.

Parag Agarwal, UBS.

The first question, this is for you, Steve.

One of your competitors or your potential competitors is really aggressive on lead to the (inaudible) transition.

So I'm wondering what your plans are there now that you are shipping -- I mean sampling 28 nanometer, and are you guys working on any 22 nanometer products?

The second question is for Derek.

Any interest in Nortel LTE portfolio, and lastly, any update on Mirasol?

I will take the first question.

You got broken up a little bit, but I think the question was about our technology or our node transition.

And so we feel actually very confident in what we are getting from our fabless suppliers in terms of technology at the transistor level.

As I'm sure you are aware, we actually feel that we're in the front in terms of the 28-nanometer transition.

I should make sure everyone is aware, though, that we have the option to select even today and in the past more -- a higher performing transistor if we need to.

But we actually don't because we think that our combination of our mobile platforms or our mobile-centric solutions require a particular type of transistor that is a little bit different match between performance and power.

And so we actually have the ability even within the nodes that we are in today to select a more powerful transistor, and we don't because we think we have the right trade-off.

So we feel very comfortable on that.

Now, of course, we are pushing very hard to continue to keep the fabless semiconductor manufacturers and suppliers moving along the node transition.

And I would say over the last two years, the environment with the addition of Samsung and GlobalFoundries to the fabless world really created, I think, much more investment in that area.

We have feel probably more comfortable about where we sit today than where we sat two years ago because of that addition.

So we are getting very good service, we think, from our fabless foundry partners, and we continue to move forward with a system approach.

This is Derek.

I think you had a question about the Nortel portfolio.

As you know, I think we believe we have an extremely strong and valuable LTE portfolio and obviously WCDMA portfolio of our own, which has been validated through the agreements we have already signed.

We really just don't see the need for sort of to increment that with something like the Nortel portfolio.

And we have taken a look at it, and I think certainly at the price points that it looks like it is going to sell for, it is really not of interest to us at this point.

In terms of Mirasol -- this is Paul -- we are in the process of building the fab shell in Taiwan right now and have first phase of tools on order.

There is some impact of the situation in Japan on the ability of the tool suppliers to supply.

That has pushed out some of the investment that we thought would fall into this fiscal year into the next fiscal year.

In terms of the displays themselves, we are continuing to work with customers on launch devices.

The key for us is to ensure that we and our customers bring out very solid e-reader device to market when we launch that.

And, as we said before, the volumes are going to be quite small until the new fab gets online.

So really the first products are in some sense almost a beta for us to get the manufacturing processes going, and then we would expect to see that ramp up significantly with the new fab.

Mark Sue, RBC Capital Markets.

Supporting Nokia and Windows, does that mean one token device, or should we look for a family of design wins for Qualcomm?

And with the progress you have made so far, is there anything that might limit Qualcomm's ability to have Nokia deliver these Windows phones by the holidays?

I want to be careful, of course, to protect the product plans of Nokia and timing and such, so I will try not to do that.

But what I will -- what I can say is that I think it is -- we are actually very pleased that they made that decision, and obviously we have a unique offering in the industry, which is the ability to provide our solution across the tier of products.

And I think that is one of the things that Nokia, as well as other OEMs, find useful.

How that will play out in the market, how that will be received, I mean there is obviously a lot written about that, and we continue to invest very heavily in that account and are optimistic as to how it will play out.

But obviously you need to see how it goes, and they will continue to have our strong support.

Sure.

And Steve, as a follow-up, since you have now worked with so many different platforms, are you finding that there is less customization required so it becomes more an easy plug-and-play as you work with more and more vendors?

That's a good question.

I think every OEM is unique in terms of what they go after and what they value.

So it's hard to say.

They all have different strategies and require in some cases different approaches.

But in all cases I think they value a scale that we can bring to the business, and that seems to be one of the things that the execution that we have been able to build together across multiple years has been beneficial.

But I don't expect it to be any different here with this account.

You should know too that we have been working with them for a couple of years actually.

So we do know each other quite well at the development level.

That is helpful.

And Atheros, Bill, if I can ask, is that all on target?

Atheros, we have got one more international regulatory agency to get through, and beyond that, there has been a lot of preparation for the closing.

We still do expect to close in this fiscal quarter.

James Faucette, Pacific Crest.

I just wanted to ask a couple of clarifying questions.

First for you, Steve, you indicated that part of the reason we were seeing flat sequential chipset shipment forecasts for the June quarter was due to a little bit different seasonality of your customers and basically the development of the global market.

But you also seem to indicate that there was maybe some of your customers were not able to take as many chips as they maybe would like right now because of supply chain issues that they are having outside of your own.

I'm just trying to understand maybe what the individual contribution of those two elements are if I'm understanding those correctly.

And then maybe for you, Bill, in terms of the better ASP forecast for fiscal 2011 -- or, I'm sorry for calendar 2011 -- how much of that is due to better than expected upgrade activity, say, in developed markets versus the pricing environment and what consumers are willing to pay in the developing markets where you are seeing 3G handset buys for the first time?

Thanks very much.

On the first question, you know it is pretty hard to break apart the different items.

I think what I was trying to say in my comments is that you should -- this year is a little bit different than I think other years just due to the number of different changes that are happening as everyone is trying to migrate their businesses through the feature phone and smartphone transition.

Then on top of that, you have a transition to LTE depending on what's their product strategy.

Then you have the events in Japan.

So it is not inconsistent with that to see some units move around from quarter to quarter.

And so we don't -- I think it would be difficult for me to break them out.

I think the one trend, though, that does tie them together to some degree is that we are seeing that broad demand across the portfolio and across different OEMs.

It is just that they are -- I think if you played it back for several years, it is hard to find a pattern.

And on the ASP increase we are expecting for this year, it is very broad across all the geographies we track, both developing regions and developed.

In fact, in the developing area, the percentage increase that we are seeing in the ASPs is much more significant relative to the developed world.

Because, as you might imagine, you are coming off a somewhat voice-centric, load data-centric focus now into a smartphone and a, say, a DO Rev A and HSDPA or UPA capability.

And so the percentage increase on the ASP is pretty substantial in the developing markets.

But I think the key point is that we are seeing it broadly across all the regions we track.

Craig Berger, FBR Capital Markets.

Can you just explain why you are better positioned on the Microsoft platform than competitors and what some of those barriers to those competitors being able to supply into the Microsoft platform are so we understand your competitive dynamics?

Sure.

I think there are really two key elements.

The first one is obviously first mover advantage, which is we have been working with Microsoft for some time.

They have, as I'm sure you are aware, really limited the number of silicon partners that they worked on with Windows Phone 7 in order to make sure that they had a very consistent and well-tailored software experience to the hardware that we could provide.

So you have that number one.

The second part that I think we are probably better positioned than other folks is we have a bit of a broader technology portfolio, and that means really two things to the OEM.

The first thing is it means that they can deliver products across multiple tiers or different price points with the same or at least a very leveraged investment.

The other thing that we have that I think is a bit unique is the ability to support CDMA, LTE and WCDMA ecosystems either separately or in the same device.

And so those advantages really open up multiple markets with one investment, and really it is a statement of scale.

So we think that in this account is a very key thing.

And, by the way, that is something that we use in many different accounts in order to grow our place there.

So we think we are pretty well positioned there.

But, as I always tell the team internally, you have to earn it everyday.

So we have to go through the the launches and make sure that we keep ourselves and our customers in the lead.

And then just a quick follow-up, can you remind us about your new commitment to be a merchant ship supplier in some of these non-cellular markets, and as you think about integrating Atheros, sort of maybe what end markets or products might be most interesting for you to pursue besides the obvious Atheros businesses?

Sure.

As we said on earlier calls, as the market moves and the 2G to 3G migration happens in some of the other geographies that are served in markets where the operator may not be as strong as typically is the case or there is not an OEM or a strong OEM channel, it requires us to evolve our business model a bit and to line up more partners who can help us deliver chipsets into those geographies.

So we have evolved our product portfolio to provide a bit more of a reference design through partners.

So that is continuing to progress well.

We are, I think, timing the entry into those markets at the same time the 2G, 3G transition is occurring, as well as the migration to mass-market smartphones, but it is not a big portion of the business yet, that particular delivery of solutions.

Let me just add -- this is Paul-- the Atheros acquisition really lays the groundwork for us as we look forward to machine to machine world, which people call of 1000 radios per person, or the Internet of things, or all these ideas.

But fundamentally the idea is that wireless is going to be an enabling technology into a lot of industries, into a lot of devices whether it is Smart Grid and radios embedded into lighting and HVAC and thermostats and these kinds of things or healthcare or obviously the consumer electronics businesses, the networks businesses that Atheros is in right now.

But this is early days for machine to machine.

It has got a lot of hype around it.

We are well positioned because, in fact, Qualcomm started out as a machine to machine company with our OmniTRACS business way back when.

But we see this as a trend going forward.

We see it as a significant growth opportunity going forward, and we wanted to make sure that we were well positioned from the very start of this opportunity.

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 today's call?

Yes.

I wanted to say thanks to everybody for joining.

It felt like it was a very strong quarter for the business, for the core businesses.

You saw QCT with growth and good mix and new customers, QTL with growth also, and getting some of these disputes behind us certainly makes us feel good.

The world is clearly coming in our direction, and the investments that we have made in the past I think are paying off well with smartphones and significant data demand, changes in mobile computing.

And we talked about a number of growth drivers at the meeting we had in New York on 2G to 3G continuing to go strong.

Obviously smartphones we have talked about.

Emerging markets we are very, very happy with what we are seeing in terms of new technologies going into the emerging markets, allowing those markets to bridge the digital divide and really leapfrog lots of excitement around new devices.

Obviously tablets are the ones that capture the most attention, but we have talked about a number of others.

And then just this data demand driving the advanced technologies out there.

So making our leadership position with the R&D that we do and the expertise we have on the radio side be that much more valuable.

And, of course, we are now becoming experts in a lot of other areas because the phone is getting so much capability built into it.

So we continue to see significant opportunities to innovate and lead and be a great partner to new customers and, of course, a great partner to our existing customers.

So thanks very much for joining us.

Ladies and gentlemen, this does conclude the Qualcomm second-quarter fiscal 2011 conference call.

We would like to thank you for your participation, and you may now disconnect at this time.