高通 (QCOM) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm second-quarter fiscal 2012 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 April 18, 2012.

The playback number for today's call is 855-859-2056.

International callers, please dial 404-537-3406.

The playback reservation number is 62461105.

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

Mr.

Kneeshaw, please go ahead.

Thank you, Josh, and good afternoon, everyone.

Today's call will include prepared remarks by Dr.

Paul Jacobs, Steve Mollenkopf, and Bill Keitel.

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

An Internet presentation and audio broadcast accompany this call, and you can access them by visiting our website at www.Qualcomm.com.

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

I'd 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.

During this conference call we will make forward-looking statements regarding future events or results of the Company.

Actual events or results could differ materially from those projected in the forward-looking statements.

Please refer to our SEC filings, including our most recent Form 10-K and 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements.

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

Paul Jacobs.

Thank you, Warren, and good afternoon, everyone.

We are pleased to report another quarter of record revenues and earnings per share, driven by strong demand for 3G and 3G/4G multi-mode enabled devices across both developed and emerging regions.

Consistent with this performance, in March we announced a 16% increase in our dividend and a new $4 billion share repurchase authorization.

QCT delivered another strong quarter and announced several new products, including our third generation of LTE chipsets, our family of 802.11AC solutions, and our new Snapdragon S4 Pro processor, featuring our latest graphics technology.

We are seeing very strong demand for our industry-leading MSM8960 and other 28 nanometer products.

Although the manufacturing yields are progressing per expectation, there is a shortage of 28 nanometer capacity, and at this stage we cannot secure enough supply to meet the increasing demand we are experiencing.

We are working closely with our partners to bring additional capacity online; however, the constraints on 28 nanometer supply are limiting our potential revenue upside this fiscal year.

Looking forward, we believe we will see significant improvement in supply in the December quarter, and we will continue to work this issue aggressively.

Turning to QTL, our licensing business had another strong quarter, with total supported device sales by our subscriber licensees driven by continued global adoption of smartphones and other 3G connected devices.

QTL continues to grow and expand its base of licensees.

We now have over 210 CDMA licensees and more than 20 OFDMA licensees.

As with 3G, we believe that our 4G portfolio is the most widely licensed in the industry.

On the Spectrum front, we completed the sale of our 700 megahertz Spectrum in the US to AT&T for $1.9 billion.

And separately, our Indian subsidiary has received its ISP license from India's Department of Telecommunications.

I was in India last week, and I'm hopeful that the related Spectrum will be assigned to us soon.

Looking forward, we continue to see favorable trends across the key growth drivers for our business.

First, smartphone demand continues to be strong across all key regions.

According to Gartner, annual worldwide smartphone sales will now exceed 1 billion units in 2014.

LTE is increasingly becoming a catalyst for multi-mode 3G/4G smartphone adoptions.

In Europe the first LTE smartphones were sold this quarter, and here in the US, Verizon plans to add 4G LTE capability to each of their smartphone launches during the rest of 2012.

Second, subscriber migration from 2G to 3G remains strong, particularly in emerging regions.

According to wireless intelligence, 3G connections in emerging regions grew to approximately 850 million this quarter, representing close to a 45% year-over-year increase.

And further, they reported that China recently surpassed 1 billion mobile connections, yet only 24% of those connections were 3G if we include CDMA 2000 1X, leaving a long runway for 3G growth in this important region.

2G to 3G migration in emerging regions continues to be driven by smartphones.

According to Gartner, smartphone sales in emerging regions nearly doubled from calendar 2010 to 2011, with demand at the high end as well as more affordable tiers.

A third growth driver for us is the opportunity beyond handsets, including 3G/4G connectivity in non-handset devices, as well as the opportunity for Snapdragon in the evolving computing space.

The computing landscape is in a transition period, with the growth of tablets and Microsoft's plan to support Windows ARM based solutions.

According to industry analysts, annual shipments of tablets and notebooks are expected to exceed 650 million units in 2016.

We are increasing our investment in mobile computing ahead of revenues and are looking forward to supporting this new opportunity.

Fourth key driver is the continued deployment of advanced network technologies.

Operators are talking about significant potential increases in data demand on their networks, even as high as up to 1000 times this decade.

And they'll need to deploy a variety of solutions to effectively meet this challenge.

At Mobile World Congress, we demonstrated several throughput-enhancing techniques operators can use, including femtocells, heterogeneous network optimizations for both HSPA+ and LTE, as well as LTE broadcast services.

We are continuing to invest in developing a broad set of technologies to increase -- to deliver increased bandwidth going forward that will provide cost effective solutions to support increasing data demand.

And finally, we are moving toward a world where more and more devices around us will be connected and communicating with each other.

With our broad Qualcomm Atheros product portfolio and our strong footprint in mobile, we have the opportunity to deliver a unique set of technologies for the expanding Internet of everything.

Looking ahead, we will be hosting our annual Uplinq conference on June 27 and 28.

As you know, Uplinq is unique in that it brings together developers, device manufacturers, mobile operators, and technology providers to help identify opportunities across a variety of mobile operating systems.

Should be another great event, and I look forward to seeing some of you there.

To conclude, we have completed another record quarter at Qualcomm.

We are excited see the continued growth of 3G and 3G/4G multimode smartphones, as well as new mobile computing devices.

We are increasing our operating expenses to facilitate additional 28 nanometer supply and to continue to position our industry-leading chipset solutions for the opportunities ahead.

Thank you, and I'll now turn the call over to Steve Mollenkopf.

Thank you, Paul, good afternoon, everyone.

Our QCT business delivered another strong quarter.

We shipped 152 million MSMs, up 29% year over year, driven by increased demand for our integrated smartphone solutions and advanced modems.

Snapdragon shipments increased by more than 70% year over year, driven by growth across all price tiers, from Snapdragon S1 products to our latest generation of Snapdragon S4 processors.

There are now more than 370 announced Snapdragon-based devices, with over 400 more in design, of which over 150 are S4 designs.

As you know, we have made significant investments in recent years to establish a leadership position in LTE chipsets, and we believe we are succeeding.

In parallel, industry adoption of LTE technology is growing rapidly, and with our strong portfolio of products, we are at the forefront of this technology transition.

As a result of these trends, and as Paul mentioned, demand for our 28 nanometer chipsets continues to exceed available supply.

To address 28 nanometer demand, we are increasing our related operating expenses and are working closely with our fab partners to bring up additional capacity.

Within this environment, it is worth noting that our current estimates for total 28 nanometer shipments this fiscal year are largely in line with our prior guidance, though our forecast for the June quarter is a bit lower.

Our increased investment to bring up additional 28 nanometer capacity is expected to show results in fiscal 2013.

Across the rest of the business, demand trends are very strong and we continue to drive our technology leadership.

At Mobile World Congress in Barcelona, several leading OEMs announced their first Snapdragon S4 dual core devices, including Asus, HTC, Huawei, Lenovo, and Panasonic.

We also demonstrated our new S4 quad-core processor, the APQ8064, running four separate HD video streams; and we announced our S4 Snapdragon MSM8960 Pro, which integrates our new high-performance, programmable Adreno 320 GPU for higher-end mobile computing devices.

We announced and demonstrated our new 802.11AC WiFi solution and announced a broad family of 11AC chipsets for mobile, computing, consumer electronics, as well as home and enterprise networking.

Also, our new integrated connectivity solution, which includes digital WiFi, GPS, Bluetooth, and FM continues to be designed in by our customers in the vast majority of our growing S4 pipeline.

We continue to invest in our Qualcomm Reference Design program to support growth of lower tier smartphones in emerging regions.

Shipments into Chinese emerging accounts are expected to grow at a strong double-digit rate quarter over quarter while we transition customers to 7x27A.

There have been 10 OEM designs launched on our Reference programs over the last quarter with more to follow.

We are on track to expand the Reference Design programs to include a new dual-core Snapdragon processor, the MSM8x25.

We will do this before the end of the June quarter.

We are increasing our investments to address incremental opportunities beyond traditional cellular, including mobile computing and Windows on Snapdragon; and looking ahead, our leadership position across multiple technologies, delivered to our customers with a tiered and expanding chipset roadmap, positions us well for smartphone and computing trends in both emerging and developed regions.

That concludes my remarks.

I would now like to turn this call over to Bill Keitel.

Thank you, Steve, good afternoon, everyone.

We are pleased to report strong financial results today.

Fiscal second-quarter revenues were a record $4.9 billion; non-GAAP operating income was a record $1.9 billion, and non-GAAP earnings-per-share was a record $1.01.

3G/4G device shipments, particularly smartphones, grew significantly in the December quarter, driving record total reported device sales of $51.7 billion, up 25% sequentially and 29% year over year, and comprised of approximately 239 million to 243 million units at an average estimated selling price of approximately $211 to $217.

QCT shipped 152 million MSM chips, and revenue per MSM was slightly higher sequentially, both consistent with our prior guidance.

Our GAAP results reflected a $1.2 billion gain in discontinued operations from the sale of our 700 megahertz Spectrum to AT&T.

During the quarter, cash and marketable securities grew by approximately $4.6 billion on the strength of approximately $1.6 billion of free cash flow and approximately $1.9 billion in cash proceeds from the AT&T Spectrum sale.

Since our second fiscal quarter non-GAAP earnings-per-share of $1.01 is higher than the $0.94 midpoint of our prior guidance, I thought it might be helpful to provide an earnings walk of the $0.07 improvement.

First, QTL and QCT combined were better by $0.06, including $0.04 from QTL and $0.02 from QCT.

QTL's upside reflected record 3G/4G device shipments and total reported device sales in both developed and emerging regions.

QCT's upside reflected slightly higher MSM shipments and favorable product mix, partially offset by higher R&D spending.

Beyond the $0.06 improvement from QCT and QTL, the remaining $0.01 resulted primarily from higher investment income, largely offset by a charge for legal matters unique to the second fiscal quarter.

Turning to our updated financial guidance, we now estimate that approximately 787 million to 803 million 3G/4G devices were shipped during calendar 2011, an increase of approximately 21% year over year at the midpoint.

We estimate that between 885 million and 945 million 3G/4G devices will be shipped in calendar 2012, driven by strong smartphone shipments in both developed and emerging regions.

Using the midpoints of our guidance, we estimate that in 2012 the number of 3G/4G devices will increase approximately 15% year over year.

We now estimate the average selling price of 3G/4G devices for fiscal 2012 will be approximately $207 to $217.

The $212 midpoint is above our prior $210 midpoint estimate, driven primarily by higher average selling prices in developed regions.

We are reiterating our fiscal 2012 revenue guidance of approximately $18.7 billion to $19.7 billion, up 28% year over year at the midpoint.

We are raising our fiscal 2012 non-GAAP earnings-per-share guidance to a range of $3.61 to $3.76, up 15% year over year at the midpoint.

We estimate that QCT's operating margin will be towards the lower end of our prior 20% to 22% estimated range for fiscal 2012, reflecting the increased investments that Steve mentioned.

We expect a combination of non-GAAP R&D and SG&A expense for fiscal 2012 to grow approximately 23% year over year, driven primarily by increased QCT R&D.

For the third quarter of fiscal 2012, we estimate revenues to be in the range of approximately $4.45 billion to $4.85 billion, up approximately 28% year over year at the midpoint.

We estimate non-GAAP earnings-per-share for the third fiscal quarter to be approximately $0.83 to $0.89, up approximately 18% year over year at the midpoint.

We estimate that our subscriber licensees will report total reported device sales of approximately $43 billion to $47 billion in the June quarter for shipments they made in the March quarter, up 24% year over year at the midpoint, and down sequentially, reflecting post-holiday seasonality typical for this time of year.

We anticipate shipments of approximately 144 million to 152 million MSM chips during the June quarter and expect a greater mix of chipsets targeted for smartphones, for both lower cost emerging regions and multimode 3G LTE in developed regions.

We estimate that the 3G/4G inventory channel will exit the fiscal year at the low end of the 13 week to 18 week range, consistent with our prior estimates.

We estimate that fiscal third-quarter combined non-GAAP R&D and SG&A expenses will decrease sequentially, approximately 3%, primarily due to expense items that were unique to the fiscal second quarter.

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).

Mike Walkley, Canaccord Genuity.

Thank you very much.

Steve, I wonder if you could just elaborate a little more on the 8960 ramp.

Obviously, some of your customers are worried about your ability to supply, given the demand's greater than ability to supply.

So how do you manage maybe losing some share in the short term, and then also, how do you manage maybe some double-ordering that might come from customers trying to get that supply?

Thank you.

Mike, it's Steve here.

A couple things.

One is we have taken an approach to spread the supply across all of the customers as best we can.

And so, I think everybody is dealing with this issue, and obviously it's a pretty difficult issue to deal with.

But in the near term, some of the OEMs have been looking at alternative chipsets, in particular our Fusion 2 lineup, which can be substituted in some cases.

But other than that, it's really a question whether we are accelerating as best we can the supply, consistent with what I was saying and what Paul was saying.

We are really focused very much on getting additional supply throughout the year.

Tim Long, Bank of Montreal.

Thank you.

Just a two-parter on the royalty line, if I could.

It looked like the calculated rate -- I know you had said it would be down, but it looked like it was down probably 10 basis points, or a little bit more.

Is there anything other than mix in that?

You know, tablets, or LTE impacts, that are bringing that down, and where is that expected to go?

And then, Bill, on the ASP raise, I think last quarter you had said kind of flat sequential, and it looked like to get to the full year of 210, you were going to tail off in the back half of the year.

So now I guess there's less of a tail off.

So why do we think that now?

Is that just the mix of the chipset you're seeing?

Because obviously, it's going to be March/June quarter that's driving it, not necessarily what we just saw for December.

Thanks, guys.

This is Derek.

On the externally implied rate, I think last time, as you mentioned, we indicated that you should expect to see a sequential decline, and basically gave the reason -- and really, the primary driver there was we had very strong growth in total reported device sales, which obviously are positive for the business.

And we have fixed or more slowly growing elements in the revenue base, such as the license fees and infrastructure royalties.

So, effectively, in a rapidly growing quarter like we just had from a TRDS perspective, you'll see a decline in the implied rate.

I think we are still expecting for the full year to be in the range of 3.4 to 3.5, although I think our current expectation is we're probably going to be towards the lower end of that range, given that the -- sort of the TRDS size for the year is larger than we initially expected.

Let me make a couple comments on ASP, and then I'll see if Bill has anything to add.

I think largely we're kind of in line with what we expected in Q2; there were some puts and takes, but we basically came in about $1 lower, and we had about $1 of FX unfavorability in that.

I think the drivers for the back half of the year are largely consistent with what we expected, although we are expecting a little stronger picture in the back half of the year than we did a few months ago.

But we do expect it to trend down, based on higher units out of the emerging markets.

Just sort of normal ASP declines from moving down tier, and then also, likely a larger percentage of dongles coming in the back half of the year.

Thank you very much.

Ehud Gelblum, Morgan Stanley.

Thanks, appreciate it.

A couple quick ones.

First of all, can you explain a little bit, I guess either Steve or Bill, what you're -- you don't actually own fabs, you use, obviously, partners to work with.

So what does your OpEx -- what does your OpEx have to go up to increase supply, and what is your OpEx going to?

Is that temporary as -- if you can explain, first of all, what it goes to and is it temporary?

After a couple quarters, as you get to the December quarter and supply comes online, does that go down?

The more we understand about what that OpEx is, we can kind of figure out how that works.

And then since it's kind of relevant as to try and figure out what percent of your chips are sort of caught up in this?

Can you give us a range at least as to what percent of chips -- of shipments in the second quarter were 28 nanometer, and then your guidance for next quarter for Q3, what percent you think are going to be 28 nanometer?

Ehud, this is Steve.

With respect to OpEx related to 28 nanometer, one of the things that you do when you're looking to bring on additional sources is that you tend to have more unplanned tapeouts.

And essentially, you're taping out a faster rate in order to move the ramp faster than you might have had to do it earlier.

That's what we are doing today, and you are seeing part of that in the OpEx increase.

We're also increasing OpEx to drive the Reference Design program that I mentioned in my comments.

So a portion of it is -- I would consider it to be more of a one-time item type of issue, but then a portion of it is things that were related and investing in things for next year as well.

And your second question I think was about the percentage of products.

If you look at our S4 product lineup, and all of our 28 nanometer devices, they are of course all impacted by this shortage.

I made a comment last year -- or last quarter -- about the exit rate in terms of LTE devices leaving this year, and we are still in the same place.

We think that the high end of the roadmap and the LTE exit rate will be the same as what we mentioned before.

Can you give us a sense as to in fiscal Q2 or Q3 what that percentage was?

We didn't.

I think I said it was -- we expected the fiscal year, it to exit at a third of shipments.

Okay.

I was just hoping to get a kind of a current spot point as to what that looked like in Q2 and what you're expecting it to be Q3.

I think you said one third by the end of the fiscal year, but I was hoping to get some sort of where we stand and where the limitation is on a quarterly basis.

It's actually pretty small right now.

As we have been discussing, it's building throughout the year, and the multimode LTE products are starting to become -- I would consider it to be a table stakes type of feature at the high end of the portfolio.

And that's what you're seeing reflected in the forward-looking mix that we are talking about.

Simona Jankowski, Goldman Sachs.

Hi, Steve, I just wanted to clarify that comment.

If you still expect one third of your shipments to be on LTE despite the fact that some of the -- what would've been June quarter shipments are now pushed into the September quarter, wouldn't we have actually expected now to have a higher percentage be on LTE by the end of the September quarter?

And then also the clarification, given the shortages and the declining volumes in the June quarter, if you can just comment on why the inventory went up.

Just to be clear, the data point that I gave was an exit rate leaving the fiscal year.

And so I think there's really not a big change in that from that perspective.

I don't know if we are providing -- I wouldn't expect us to provide much color either way in terms of whether that's moving up or down.

But we are chasing supply quite a bit here.

As that starts to unfold, we hope to be able to increase those shipments.

Okay.

So just to make sure I understand the clarification there, so it will still be fair to assume, though, that even if the exit rate is the same than the full quarter for the September quarter of LTE shipments should be higher now than what you would have expected, given that some of the June quarter volume is pushed into September?

No, I think what I was trying -- I was trying to give you a very sort of qualitative number.

I'm not even sure to what accuracy it's changed.

But we expect about that same proportion to leave the year.

I don't know if there's a big change there is the point I'm trying to make.

And we expect to be supply constrained through the fiscal year.

It's really -- we are looking to the December quarter to see a significant improvement in supply.

And the inventory?

On the inventory, channel inventory -- we think we exit the year -- the industry exits the year about the same as what we had expected previously at the lower end of what we consider the normal band.

For ourselves this quarter, it's a good sign.

We have grown with inventory, which is going to be helping us here going into Q3/Q4.

Rod Hall, JPMorgan.

Thanks for taking my question, guys.

I just wanted to sort of go back to the basics on this 28 nanometer situation.

It sounds like, from Steve's comment, that the fact that you're exiting at one third of chips is more or less on track with what you had originally planned.

So I'm trying to make sure that I understand whether it's supply or demand that's causing the shortage.

It sounds like demand is just outpacing what you guys had originally expected it to, and therefore you're having to chase supply.

But I want to make sure that's the correct interpretation of what's going on.

And then I wanted to circle back around to the OpEx question and see if Bill could give us any more quantification on how much OpEx you guys are having to spend over the next couple of quarters.

I understood from Steve what it is being spent on, but I didn't get any idea of what the amount looks like over the next couple of quarters.

If you could clarify that, that would be helpful.

Rod, this is Steve.

I think your assumption is correct; your interpretation is correct.

So Steve, just to follow up on that, then that means that in the December quarter, if you guys get supply on board, you should see a pretty rapid ramp of 28 nanometer delivery, I guess, there is a pent-up demand there.

That's what we're driving toward.

Right.

How fast do think -- do you have any view on -- do you think it's a pretty immediate, rapid ramp in the calendar Q4, or do think it's going to take a few quarters for things to build up?

We've been trying to match available supply with demand here.

And as Paul said, we're going to see a significant increase in supply, actually, in the calendar year.

That's probably the most information that we can give at this point.

Okay.

Rod, this is Bill.

On the operating expenses, three months ago we thought operating expenses would grow year over year approximately 18%, and now our estimate is 23%.

And the bulk of -- great majority of that differential, in fact, all the differential is really QCT.

And as Paul and Steve mentioned, a lot of that is going towards trying to accelerate the availability and the ramp of 28 nanometer.

But then secondarily, we are putting a bit more investment into the Windows on ARM.

And then back to the -- on the 28 nanometer one, as Steve mentioned, much of that expense can get -- it comes on quickly but can get turned off quickly.

It's less of a people-related -- our own employee related expense, more of a NRE.

Parag Agarwal, UBS.

Thanks for taking my question.

Steve, can you please explain the alternative your customer have, given that the supply is constrained?

Can they -- what has been their reaction so far?

What -- are these customers willing to go to older Snapdragon designs?

Are they looking at alternatives, or are they trying to use their own captive solutions?

I think it's the combination of people -- in any constrained environment, people look for any alternative they can in order to solve the problem.

Now, what you have, particularly in this case, is these are devices that primarily are using LTE type of chipsets, and so the alternatives are a little bit smaller than they would be, let's say, in a general allocation scenario, maybe in another industry.

We've been helping customers to see how they can swap in our Fusion 2 chipset, which is the chipset that we've been ramping over the last eight months in production.

Now in some cases, also, our OEM partners are, of course, working with us very closely to try to help us accelerate our own supply.

And that is primarily what we are seeing.

And we do expect to see some alternative non-Qualcomm chipsets being used to solve that issue as well.

But I will remind you that in addition to the 8960, right on its heels is the 8x30, as well as the APQ8064.

So we are continuing to drive our tiered roadmap throughout the year on the same schedule, again, gated by supply here in the near term, but I think that's a pretty attractive roadmap that people are interested in doing.

So we need to solve the supply issues, and then we'll move the business on.

James Faucette, Pacific Crest.

Thank you very much.

I wanted to just turn quickly and tie in the Windows on ARM launch of products coming later this year.

If you can just talk about how your outlook for those products and how we should expect them to start to ramp may have changed because of supply issues, as well as any other issues?

Just trying to gauge how important the supply issue may be in that, and how your outlook for starting to penetrate the general computing market may or may not have changed.

Thanks.

This is Paul.

So, we've said before that revenues from Windows on ARM is really not this fiscal year.

And so that also probably dovetails well with our ability to increase the supply of chipsets.

So we'll see how this all plays out, but those things -- they aren't necessarily a this fiscal year kind of an issue.

In terms of designs that are coming out and our enthusiasm for it, I'd say that that is probably reflected by our continued investments.

We see a lot of interesting form factors that are coming out; Microsoft continues to release more and more information about its operating system and its plans.

We continue to be excited.

We see very good traction, interesting form factors, happy to see their confirmation about Office availability, and so forth.

So I think these are going to be great products, they're going to be thin, light, always on, always connected.

The kinds of things that people expect from mobile computing these days.

And we're definitely planning on delivering it and also to drive the chipset roadmap to continually improve the experience.

Stacy Rasgon, Sanford Bernstein.

Thanks for taking my question.

I was wondering if we could, again, just move back to the guidance on chipset shipments and the supply shortages.

So can you help me understand how chipset shipments in general are going down in the supply constrained situation, even though overall 28 nanometer capacity -- even though it's constrained -- is still going up?

What's going on?

Are there inventory issues?

Is it just splitting between other customers?

What's going on in the non-28 nanometer portion of your volume?

Is it some trade-off between 28 and 40?

Can you just give us some -- maybe a little more color on what's driving the decline in shipments even though you'd still expect the overall 28 nanometer capacity to still go up?

I'll take a stab at that -- this is Bill Keitel -- at your question, but maybe Steve will want to join in here.

Looking at the June quarter, our revenue outlook at this point is pretty much spot on with what we were expecting three months ago.

We are not seeing a lot of surprise here from our end.

The operating expenses are a bit higher, as we mentioned, but revenues seemed to be pretty much in line.

The somewhat flattish outlook for MSM chipset shipments is really not a surprise for us.

We think that's going to build into the September quarter and then again into the December quarter.

But again, they'd usually be up in this quarter anyway.

How can they -- how are they still flat to down because of supply constraints, even though capacity on that supply should still be going up?

I guess I'm still a little unclear on the math behind that.

What else is going on in the non-28 nanometer portions that's causing that reduction?

Stacy, this is Steve.

If you look at the demand, particularly in the high end of the portfolio in the LTE type markets, where the high modem features that are enabled by the 8960 -- there are a number of designs who if we had more supply, we could ship into that.

You're probably looking at a little bit of the high end not being there as much as we could supply.

As I said in my remarks, we've seen a little -- we see the same amount of chipsets broadly or 28 nanometer chipsets broadly throughout the year, but they have shifted a little bit out of the June quarter, which left a little bit of a hole there, I think, in terms of units on the 28 nanometer side.

Tal Liani, Bank of America.

Hi.

The question is a few things.

First on the finance side, QTL EBIT margin for 2012, the guide is [86] to [88]; this quarter is [89.4].

Do you think EBIT margin on QTL will go down, and why?

That's the inferred kind of guidance.

Second, the question about fab capacity, it may be a lingering issue in smaller notes in the future.

Intel is aggressively -- they have a roadmap and manufacturing for it, and the question is whether you are considering having your own fab for particularly these kind of smaller notes.

Is this something that strategically you think is wise or not?

Let's start with these two questions.

This is Bill.

On the QTL margins, the bit stronger market, particularly on TRDS and the higher ASP, that's driven upside that is showing through in revenue, but the operating expenses for the QTL segment have not gone up in the same proportion.

So we are trending a bit higher on that QTL operating margin than what we had expected at the outset of the year.

This is Steve.

With respect to the question about fabs, if you look at the fabless model, it's really served us well as a business, and we have the majority of our R&D dollars spent on people creating products for technology that we use, or patents.

It's really worked out quite well for us.

Now, as we move and become more of a leader in technology on the VLSI side and start to compete with people who compete in that forum, I think we'll probably evolve the way in which we work and probably even become closer with our fab partners versus rethink our entire business.

But I think it's just an evolution of how the industry is moving, and being at the size that we are, we are happy to be able to shape it in the way that I think is best for us.

Kulbinder Garcha, Credit Suisse.

Thanks.

I just want to clarify again on this 28 nanometer issue.

For Steve or Bill, with the -- normally your QCT volumes in the June quarter go up.

You're guiding them slightly down, and I'm just thinking that the smartphone market is strong; you talked a lot about China being strong for a long time.

And is all of this sequential slight decline just in volumes that you're maybe guiding to at a lower point -- is all of that just the constraint you're having in 28 nanometer?

That's my first question.

And I just want to be clear on that point.

And the second question is in terms of this higher level of spending you're doing, and it seems you're leaving everything for the December quarter till you, let's say, go a bit more back to normal, what confidence and visibility do you have on the -- is this -- and just emphatically, you can say that Qualcomm is saying it's not a yield issue, it's much more about bringing in more suppliers, that if we spend this money and we get to the calendar fourth quarter, and everything goes back to, let's say, a more normal QCT volume level and margin level.

Is that the right way of thinking about things?

Thanks.

On the first part of that question, the only supply shortage we are dealing with is the 28 nanometer.

And then again, to the point that is the June quarter abnormal -- I would caution people on looking back one, two years and assuming that every year afterward is going to be a similar pattern.

Again, this June quarter is largely in line with what we expected even three months ago.

We are not seeing much change here, in our perspective here.

There's going to be, I think, a lot of focus on product launches going into the September quarter and particularly into the December quarter.

But I don't see June, really, as abnormal or a concern from my standpoint for our year and looking forward.

On 2012 the first quarter of fiscal 2012, I'd say we feel pretty good about that.

Excuse me, 2013.

I'd say we feel pretty good about that, Kulbinder.

Obviously, we've got a little ways to get there, but the customer demand is strong, and we're working away to see if we can fill it and get caught up by that time.

Bill, just to be clear on that point, if everything goes to plan by that quarter, some of this elevated level of, let's say, OpEx you're seeing largely in QCT goes away hopefully.

Is that the right way of thinking about how the model works?

I would say it would look much more normal in proportion to revenues at that time, but that would only be one quarter.

So let's not jump too far ahead; we'll share our guidance for fiscal '13 as we normally do in November.

Okay, thank you.

Brian Modoff, Deutsche Bank.

I'll try to ask it a little differently.

So what would the quarter look like if you weren't constrained on 28 nanometer?

And then what are you doing with regard to getting that incremental capacity?

Is this all TSMC, or are you working with other vendors to bring more supply on from other sources?

I'll take the first part.

On the June quarter, it would be better, but I don't think it would be an increment that would be all that great.

But it would be a nice increment, but I think the September quarter would be much more meaningful in that respect.

And then the December quarter -- obviously the demand backing up into that.

Our goals are pretty high there in terms of filling this customer demand.

So, in bringing that capacity on -- how are you going to do it?

Is it with TSMC or is this another source?

In other words, is there any risk to getting that new capacity online in the timeframe you've laid out?

I think we are, in addition to working very, very closely with TSMC, we are also bringing on several alternative sources.

And it's the tapeouts into those alternative sources and moving up the ramp that's actually contributing to this pulse of OpEx that we've been talking about.

With respect to risk, anytime that you're on the front end of driving a node, there is risk with respect to the timing of how that comes on.

But so far, so good on that; we've been pleased with the way things have been looking with respect to yield, and we've been just adding supply.

But like any other time you're driving a node, these things take a little while to get running.

But we are full steam ahead, multiple sources now.

Jeff Kvall, Barclays.

Yes, thank you very much.

I think one of the implicit assumptions that many of us are making is that pre-LTE shipments are going to be easing down a little bit over the course of the June quarter.

My question is, if that is in fact the case, would that mean that we should be thinking about a chipset number that is lower -- an MSM number that is lower in the September quarter than what we have had in June before we then see a recovery in the December quarter.

That might help us quantify how much the uptick might be in December.

We're looking for a reasonable -- a healthy uptick into the September quarter on total MSMs.

Okay.

The important part to remember is we are really supply limited right now, and we are ramping supply.

Okay.

So should we think that that supply ramps in through the September quarter, and then you're at full steam entering December?

Is that how we should think about it?

Yes.

Anytime that you're ramping through the quarter.

In fact, in the quarter that we are in, and we are adding a substantial amount of capacity throughout the year.

So it's a ramp; it's not a shelf for some sort of pulse.

Excellent.

Thank you very much.

Craig Berger, FBR Capital Markets.

Thanks for taking my question.

I guess one thing is, if we look at QCT operating margins, what do we think is more -- a more normal operating margin range in a more typical environment?

And then, can you also just give us a sense of what you are seeing competitively in the chip space against other guys in 3G, like MediaTek or Broadcom?

Is that starting to weigh on ASPs?

I guess I'm just wondering what's the portion of baseband content in your ASPs versus other and how that's changed over time.

Thank you.

Operating margin in normal environment.

So last year we operated in a 22% to 24%, 23% kind of band.

This year we're expecting 20% to 22% band.

We do have internal goals to be improving on that over the next five years, but the environment today is pretty competitively intense, and we are doing well in that environment.

I think we're doing -- operating margin wise, we are doing better than many other players.

So I don't -- Steve, any other thoughts on that?

I would say the mass-market smartphone tier is a pretty competitive and crowded tier today; however, we look at our integration strategy that we've had in place for some number of years, and we've been driving across multiple technology vectors.

We think that that's paying off in terms of demand.

In fact, I think one of the reasons why we are spending so much of this call talking about 28 nanometer is because we made those investments over the last several years.

It's resulted in, I think, very strong demand.

We believe that those trends continue into the future, and we are continuing to make those investments, not only for the home space, which is the phone space, but we also think those same trends will yield an interesting business in the computing space, as Paul talked about, on the Windows on ARM transition that we think is going to happen in PCs.

So we are investing in computing upstream of that, and we think that that's a great place to be, and we think it's also something that is a unique capability or a more unique capability that we have compared to some of the competition, and you will continue to see us do that.

Shawn Webster, Macquarie Research.

Yes, thank you very much.

A couple items on the chip side of the house.

For your MSM pricing, can you share with us your outlook in light of some of your changing mix assumptions, perhaps for the next couple quarters, on how you expect your MSM pricing to evolve?

I was wondering if you could give us an update on trends within your Atheros WiFi business.

Was it flat, down, up sequentially in the March quarter, and expectations for June?

Shawn, Bill Keitel here.

On the average revenue per MSM -- so the quarter we just reported was a slight uptick in average revenue per MSM, pretty much in line with what we had expected at the outset of the quarter.

We are looking for modest upticks between now and the end of this fiscal year on an average revenue per MSM.

On the Atheros side, we are pleased with how that business has been integrated into Qualcomm.

One of the things that I think would even help it more is as we work through the ramp of our S4 chipsets, those chipsets tend to use -- the design-ins tend to have a very strong presence of the Atheros chipsets next to them.

So as we start to work through these supply issues with the 8960 and the S4 chipsets, we think that's a good opportunity for us to pull some of the synergies we've been talking about on the handset side through.

So similar trends in that business, and we are pleased to have it as part of the organization.

Ed Snyder, Charter Equity Research.

Thanks very much.

Don't want to kick a dead horse here, but Bill, if we go back all the way to '03, your June quarter unit volumes on MSM have been up almost every single year except for maybe one.

I just want to be clear, because obviously, with all the 28 nanometer supply issues, I think most people are concerned that it might be masking a slowdown in any of the other businesses.

So I know you said that it wasn't surprising the way it turned out for you three months ago, but most of the consensus estimates and most of the analysts were looking for more of a traditional increase.

If we remove all the 28 nanometer from the equation, are you looking at any dislocation, or slowdowns, or share loss, or any negative impact to either QRD or your traditional chip business, or is everything tracking pretty much as you expected, and most of this has to do with the product that -- the new product that you're trying to get out?

And then I had a question about -- in terms of supply, you mentioned that there are some sockets that are going to non-Qualcomm solutions during this period of constrained supply.

Is that more of the legacy products, or are you talking about -- there's not really any really compelling LTE solutions out there that I wouldn't think of, but if you can give more color on how large a group that is and in what technology that is, that would be appreciated.

Thank you.

I'll just say, again, I'd be cautious of drawing these correlations year over year.

I'll remind people back to when we guided the September quarter last year, people were a little surprised that our MSM guidance wasn't higher.

And our messaging was pretty clear that it's going to -- we thought it was going to come through strong in the first quarter of fiscal 2012.

People were looking at historical trends and trying to infer that there may have been something wrong there.

I think you will recall our guidance was spot on.

So, again, there's going to be other factors driving this market.

We are not going to get into chipset family by chipset family, but other than customer demand for the 28 nanometer exceeding what we can supply, the business is humming along, I think, very, very well.

And this is an opportunity that we are working hard to close up on by the end of this calendar year.

Romit Shah, Nomura Equity.

Hi, Bill.

If the manufacturing supply constraints remain ongoing, I guess, what other levers can you pull to get operating margins up over the next several quarters on the chipset side?

I don't -- Steve, I'll let you jump here.

I don't think the levers are that short term.

The pricing typically gets set well in advance.

We'll react through the year as competitors make moves, but -- and then on the [are in] -- that kind of speaks to the revenues and the gross margin.

On the operating expense side, it's primarily R&D, and the R&D investment we can't manage for a quarterly -- given quarterly outcome we might want to see on the P&L.

It has to be managed with that little longer cycle in mind, and I think Qualcomm has done very well with that type of focus on R&D over the years.

Steve, if I could, just on 11AC, could we start to see that technology in mobile phones this year?

We could.

You probably saw at Mobile World Congress, we did an over-the-air demo; in fact, I think it's the world's first over-the-air demo.

That actually used the commercial silicon that is in our 8960, and our 11AC chipset is actually just a swap of the RF chip.

It's a pin-for-pin compatible chipset.

So as the industry starts to develop and the certification starts to mature, it's a fairly easy upgrade for our customers in order to enable that.

And that same comment that I made about 8960 applies to the 8064 and the 8x30.

I think it's fairly well-designed approach to enable that market.

And I think you would expect that from us.

We tend to try to drive the front end of technology transitions, and we'll do the same thing and have done the same thing in the Atheros business.

Gus Richard, Piper Jaffray.

Thanks for taking my question.

Sorry to keep on beating a dead horse.

On the OpEx, as you work with new suppliers, historically, they have been willing to tweak the process to match your design roles.

At 28, that gets tougher, and I don't believe Samsung is willing to do that anymore.

But others may be.

How much redesign work do you need to port from one set from TSMC to another foundry, and/or is the increase in OpEx just tapeout cost?

It is -- we do tailor the chips for, really, the different camps.

Of course there are two camps there, depending on kind of the source of the VLSI technology.

We do have to spend incremental dollars to -- and I would call them tapeout-related costs to enable additional supply.

It's tapeouts and then load boards, and things that are used to qualify new sources of supply.

And it's those type of investments that we referred to as more of the one-time items, or the items that are in the NRE type of bucket that Bill mentioned.

Got it.

And in terms of your -- as far as you have today, it does sound like they are ordering more equipment, and that should be installed in, I think, the second quarter and ramp in the fourth quarter, is that -- have I got that correct?

I think it's a continual increase in terms of our ability to deliver and meet our demand.

So it's going to continue through the year, as Paul mentioned in his comments.

Mark McKechnie, ThinkEquity.

Congrats on a good, solid quarter, guys.

Hey, a question for Steve, and then for Bill.

First, for Steve, 28 nanometers -- just to be crystal clear on the 8960, is that product good to go, there's really no technical testing issues or what have you?

It's all capacity that you're waiting for?

And I'm kind of guessing that on 28 nanometers, you'll probably bring out, what, your 9615 to 9215s first, and then put the ramp over the 8960?

And then also wanted to know if -- wonder if you expect 802.11AC to show up on the 8960?

And then for Bill, just housekeepings.

How much of the cash is onshore?

And then, also, on your June guidance, if you can break out how much is on from investment income, how much you see there.

Thanks.

Mark, it's Steve.

It really is related to wafer starts and not yield, or any design issue related with the chip.

We are quite pleased with how the development worked there.

And your transition in terms of our roadmap in terms of timing sounds accurate.

Mark, it's Bill.

We've got $26.6 billion total cash at quarter end, and the onshore component was $10.8 billion.

And then on the investment income for Q3 and Q4, for Q3 I think at this point we -- the visibility we have, I would expect investment income, including realized gains, to be in line with what we've seen maybe the last couple of quarters.

But for Q4 -- fiscal Q4, we haven't included an assumption of any realized gains.

Matthew Hoffman, Cowen & Co.

Thanks.

I think most of my questions have been answered at this point.

But Bill, could you go over the investment income line for one minute please?

The $230 million was a little bit better than we expected.

And just to follow up on some of the earlier questions.

With Steve on the demand side, are you seeing any sort of pushouts from the Windows phone manufacturers especially?

There's just no problem with demand at all.

Thanks.

Matt, I'll take the first one on the investment income.

Yes, in fiscal Q2, it was a little higher than normal.

If you recall, last year we sold some puts in our stock.

There was a $75 million premium on those puts, and then as the stock rises, that premium is brought onto the P&L.

So with where the stock ended fiscal Q2, the majority of that $75 million has come to the P&L, and a little over $30 million of it was in fiscal Q2 alone.

So there was a bit of a spike in the investment income.

Exclude that, and I think fiscal Q3 looks to be similar to Q2.

Again, if you exclude that mark to market on those puts on our stock.

Matthew, this is Steve.

My apologies, but I think it would be difficult for me to answer that question without providing information about a couple of OEMs, so if you don't mind, I'll try to not answer that one.

This concludes the allotted time for questions and answers.

Dr.

Jacobs, do you have anything further to add before adjourning the conference?

Yes.

I wanted just to say thanks, everybody, for being on the call today, and really, we are gratified by the strong traction we are seeing on Snapdragon 8960.

The team that designed that product really executed along a bunch of vectors.

It's new radio technology, new microprocessor technology, new graphics, new connectivity, and a new process node, and that's what put that chip so far out in front of the competition and drove the really tremendously strong demand that we've seen.

We're going to drive those advantages going forward as well.

We've got some really good products in the roadmap.

Obviously, we are making the investments we talked about to improve our supply, and go after this Windows opportunity, and also to go after the emerging markets with the Reference Design.

The growth drivers of the Company continue to be very strong, and I think the big issue is that we are disappointed; I think our customers are a little disappointed with the fact that we have these supply constraints; they have all designed really exciting new devices around those things, and we are going to work as hard as we can to get more supply for the end of the year to really bring out those great devices.

So there's a lot to look forward to, and we are working hard to bring all that to reality.

So thanks very much, everyone.

And this does conclude today's conference; you may now disconnect at this time.