高通 (QCOM) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm third-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 July 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 94423621.

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 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.

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 10-K and 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements.

And 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 successful quarter driven by strong year-over-year growth in both our chipset and licensing businesses.

Revenue was up 28% and non-GAAP earnings per share was up 16% compared to a year ago.

Adoption of 3G and 3G/4G technologies continues around the world, and our licensees report stronger-than-expected total reported device sales, driven by strength in high-end smartphones.

Looking forward we are now forecasting approximately 14% growth of 3G/4G device shipments in calendar 2012.

Reflecting a slightly more cautious outlook on the macroeconomic environment, we now also expect the profile of the calendar year to be more backend loaded as new devices are launched for the holiday season.

Although our outlook for semiconductor volumes in the fiscal fourth quarter has been reduced from our prior expectations, we are ramping our supply of 28 nanometer chipsets.

We accept expect this ramp, along with new devices launched for the holiday season, to result in a strong December quarter for our semiconductor business.

During the third fiscal quarter and up through today we returned approximately $1.4 billion in capital to stockholders.

This includes approximately $1 billion in stock repurchases.

We believe that the combination of dividends and stock repurchases are an effective means to increase our stockholders' returns and build additional stockholder value.

In QCT we are continuing to see strong demand for our new Snapdragon S4 and other 28 nanometer chipsets, and that demand continues to exceed our available supply.

We will continue to ramp capacity in the upcoming quarters consistent with our prior expectations; however, the constraints on 28 nanometer supply by continuing to limit our potential revenue upside this fiscal year.

QCT continues to drive technology and product leadership, including the sampling of 802.11ac solutions for mobile computing and networking products, and several new chipsets in the Snapdragon S4 family.

QTL continues to grow and expand its base of licensees, and we now have over 215 CDMA licensees, including our first major Brazilian licensee, Digibras Group.

We now also have more than 25 royalty-bearing single mode OFDMA licensing -- licensees.

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

On the spectrum front Bharti Airtel, a leading wireless -- Indian wireless operator, acquired a 49% interest in our Indian DWA entities.

One of our key objectives from the outset of our investment has been to include a strong Indian operator as our partner in the Indian venture with the scale, experiences and resources to deploy and operate an LTE TDD network.

We are very pleased to have Bharti's participation and support in this effort.

Also, related to spectrum the European CEPT reached an initial conclusion, which is subject to final approval, to harmonize the L-band for supplemental downlink.

This is the same spectrum that we own in the UK.

It is an important milestone, and it opens up the potential to have our carrier aggregation technology deployed widely across Europe.

With respect to QMT, we are now focusing on licensing our next-generation mirasol display technology and will directly commercialize only certain mirasol products.

We believe that this strategy will better align our updated roadmap with the addressable opportunities.

Looking forward, we believe that our long-term growth drivers remain intact.

Smartphone demand continues to grow.

Gartner estimates that approximately 145 million smartphones were shipped in the first calendar quarter of this year, representing 45% growth year-over-year.

In China alone they estimate that approximately 33 million smartphones were shipped, representing greater than 160% year-over-year growth.

This year Gartner estimates that China will become the largest consumer of smartphones.

And just to give you some idea of the interest, I recently attended China Telecom's 3G handset fair, where it was reported that more than 20,000 industry players and 200,000 consumers attended.

And at that event China Telecom encouraged their manufacturers to launch a full range of smartphones from flagship devices through all the tiers.

The overall growth of 3G remains strong, especially in emerging regions.

According to Wireless Intelligence, at the end of June, of the 1.8 billion 3G connections globally, there were greater than 900 million 3G connections in emerging regions, representing a 42% growth year-over-year.

We believe the burgeoning opportunity beyond handsets is in front of us, and moving forward we will be driven by the growth in 3G/4G connectivity from tablets, mobile PCs, machine-to-machine and other devices.

We are encouraged by developments in the computing space with Microsoft's support behind the Echo system for Windows RT, with general availability expected in October.

On the legal front I wanted to give you an update on our ongoing SEC and DOJ investigations.

As we noted in our 10-Q which was filed today, we have discovered, and as part of our ongoing cooperation with these investigations, have informed the SEC and DOJ of instances in which special hiring consideration, gifts or other benefits were provided to several individuals associated with certain Chinese state-owned companies or agencies.

Based on the facts currently known, we believe that the monetary value of these benefits in aggregate to be less than $250,000, excluding employment compensation.

We are continuing to investigate the circumstances related to providing these benefits and are attempting to identify whether any other benefits were provided.

We are continuing to cooperate with these investigations, but we are unable to predict the outcome.

Given the ongoing nature of the investigations, we will have no further comment beyond the foregoing and what is contained in our Form 10-Q.

So to conclude, we have completed another solid quarter at Qualcomm, and despite some challenging near-term market dynamics and supply constraints, we are very pleased to see the continued growth of 3G and 3G/4G multimode smartphones, as well as new mobile computing devices.

We are looking forward to an exciting portfolio of device launches for the holiday season, and are anticipating a strong December quarter on the semiconductor front, and believe that we are well-positioned for the opportunities ahead.

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

Thank you, Paul, and good afternoon everyone.

I would like to first congratulate Cristiano Amon and Dr. Murthy Renduchintala on their new roles as Co-Presidents of Qualcomm Mobile and Computing Products.

Their leadership has been instrumental in our success to date, and I look forward to working with them in their expanded roles.

Dr. Craig Barratt will continue as President of QCA, focusing on connectivity and networking products.

And Jim Lederer will continue in his current General Manager role leading the support organizations across the semiconductor business.

QCT shipped 141 million MSMs this quarter, up 18% year-over-year, but below our prior expectations.

Our fiscal third-quarter MSM shipments and our outlook for the fourth quarter have been impacted by a number of factors, including a near-term reduction in the 3G/4G inventory channel, which we believe reflects a pause and a reprofiling of demand prior to the launch of some key flagship devices for the holiday season.

Additionally, we have seen some impact from customer mix shifts and competitive pressures in the low tiers, as well as a slowdown in the industry demand for USB dongles, particularly in Europe.

We continue to be supply constrained on our 28 nanometer products, but are ramping supply with multiple foundries in the September quarter and again into the December quarter, consistent with our prior expectations.

We currently project that we will be able to closely match supply with demand as we exit the calendar year.

The reduced demand profile and ongoing 28 nanometer supply constraints, as well as our increased efforts to bring additional 28 nanometer capacity online, and continued investments in our QRD and mobile computing programs in advance of the opportunities ahead are driving lower operating margins in the fiscal third and fourth quarters versus historical norms.

Looking ahead we anticipate a strong lineup of device launches leading into the holiday season, and believe QCT is well-positioned for the December quarter, particularly with the increasing supply of industry-leading chipsets for high tier devices.

Over 15 devices based on our S4 MSM8960 28 nanometer chipsets have launched to date, including the Samsung Galaxy S III, HTC One S and One X, LG Optimus LTE2; Pantech Vega Racer 2; and Sony Xperia SX.

There are now more than 420 announced Snapdragon-based devices with over 400 more in design, including 175 S4 designs.

Third-party reviews and benchmarks again reinforced our product leadership this quarter confirming that the Snapdragon MSM8960 outperforms quad-core CPUs-based handsets by using a complete multicore system with our custom GPU, DSP and dual Krait CPU cores.

We also sampled three new S4 chips this quarter, including the APQ8064 and the MSM8x30.

The APQ8064 includes four Krait CPUs, is the first to use our new Adreno 320 GPU, and will extend the performance expectations we recently established with the MSM8960.

The MSM8x30 integrates multimode LG -- or 3G LTE and is designed to enable 3G/4G smartphones at high-volume price points globally.

Our modem leadership also continues to be a differentiator for design wins in Modem Plus AP smartphones and tablets, modules and Wi-Fi personal hot spots, including over 90 designs in process based on our 28 nanometer 3G/4G LTE MDM9x15 modem.

While many companies are still commercializing their first LTE products, we have already announced our third-generation LTE chipsets and will continue investing in our modem roadmap to maintain our leadership.

Our connectivity solutions, which include Wi-Fi, GPS, GLONASS, Bluetooth and FM, continue to be used in a vast majority of our customers' designs on the S4.

Our new generation 802.11ac solutions are being designed into smartphones, tablets, computers and networking products, and align with the Wi-Fi industry certification timeline to enable 802.11ac interoperable products in market by early 2013.

In emerging regions our QRD program, which provides turnkey designs for affordable smartphones, continues to expand rapidly.

We continue to grow our QRD roadmap with differentiated technology, including our new Snapdragon 8x25 1.2 gigahertz dual core chipset, which began shipping commercially in July only two months after first sampling.

We are engaged with over 40 OEMs, many of which are now transitioning their platforms from 2G to 3G.

And these OEMs have announced approximately 50 devices based on our chipsets for China and other emerging countries.

In addition to the announced devices, we currently have 100 new QRD-based smartphone designs in the pipeline.

We also need to invest in mobile computing and are pleased to see the momentum building around the new ARM-based Windows platform.

As the only chipset providers supporting Windows on both PCs and phones sold commercially, we look forward to the availability of both Windows 8 and Windows Phone 8 this fall.

Looking ahead, while we are forecasting sequentially lower MSM shipments based on midpoints in the September quarter, consistent with the pause and reprofiling of demand, we expect a strong December quarter as new, high-tier smartphone devices launch for the holidays and we have improved supply of 28 nanometer products.

That concludes my remarks, and I will now turn the call over to Bill Keitel.

Thank you, Steve, and good afternoon everyone.

We had another good quarter.

Compared to last year our fiscal third-quarter revenues were up 28% to $4.6 billion, non-GAAP operating income was up 23% to $1.7 billion, and non-GAAP earnings per share was up 16% to $0.85 per share.

As both Paul and Steve mentioned, our results this quarter and updated fiscal 2012 guidance reflects estimated reductions in the 3G/4G inventory channel in the June and September quarters, as well as our expectation that a greater percentage of calendar year volume will be sold in the December quarter as new high-tier devices launch for the holidays.

We continue to expect this to drive a strong December quarter for our chipset business.

In QTL total reported device sales by our licensees were up 31% year-over-year to $47.8 billion, and above the high end of our prior guidance range driven by strong smartphone demand.

We estimate that approximately 206 million to 211 million 3G/4G-based devices were shipped by our licensees in the March quarter at an average selling price of approximately $226 to $232, up approximately $15 sequentially, reflecting higher average selling prices in multiple regions, particularly Europe and developed regions in Asia, and combined with a lower mix of data modems.

QCT shipped 141 million MSMs, up 18% year-over-year, but below our expectations at the outset of the quarter for the reasons Steve just explained.

During the third fiscal quarter and the first few weeks of this current quarter we returned approximately $1.4 billion of capital to our stockholders, including dividends paid of $429 million and approximately $990 million for stock repurchases.

Now turning to our guidance.

We are modifying our estimate of global 3G/4G-based device shipments for calendar year 2012, reflecting economists' more cautious view on the 2012 world economy.

We now estimate that between 875 million and 935 million 3G/4G-based devices will ship in calendar year 2012, up approximately 14% year-over-year at the midpoint.

We expect the second-half profile to be similar to calendar year 2011, which had muted growth of 3G/4G devices in the September quarter, and very strong growth in the December quarter.

We estimate that the average selling price of 3G/4G-based devices for fiscal 2012 will be approximately $216 to $222.

The $219 midpoint is $7 above our prior $212 midpoint estimate, primarily driven by higher average selling prices in multiple regions, including an increased mix of smartphone shipments particularly at the high-tier.

We expect fiscal 2012 revenues to be in the range of approximately $18.7 billion to $19.1 billion, up approximately 26% year-over-year at the midpoint.

We anticipate fiscal 2012 non-GAAP earnings per share to be in the range of $3.61 to $3.67, up approximately 14% year-over-year at the midpoint.

In QCT we estimate operating margins to be approximately 18% to 19% for the fiscal year, lower by approximately 100 basis points than our prior estimate, and reflecting reduced expectations for MSM volumes, driven primarily by lower expected 3G/4G channel inventory and a reprofiling of demand prior to new devices being launched for the holiday season.

We expect the combination of non-GAAP R&D and SG&A expense to grow approximately 24% year-over-year.

We estimate our fiscal 2012 tax rate to be approximately 20% for both GAAP and non-GAAP, and a bit higher than our prior estimates driven by the mix of our foreign and domestic earnings.

Specific to the fiscal fourth-quarter we estimate revenues to be in the range of approximately $4.45 billion to $4.85 billion, up approximately 13% year-over-year at the midpoint.

We estimate non-GAAP earnings per share to be approximately $0.78 to $0.84, up approximately 1% year-over-year at the midpoint.

We estimate that our subscriber licensees will report total reported device sales of approximately $43.5 billion to $47.5 billion in the September quarter for shipments they made in the June quarter, and up approximately 16% year-over-year at the midpoint.

We anticipate shipments of approximately 134 million to 142 million MSM units during the September quarter, with revenue per MSM higher sequentially, reflecting favorable product mix, including lower sequential shipments for data modems and increased volume of 28 nanometer products.

We estimate that the 3G/4G inventory channel declined in the June quarter.

And our guidance includes an additional bleed of channel inventory in the September quarter ahead of new device launches for the holidays.

We estimate that channel inventory will exit the fiscal year at or slightly below the low end of the 13- to 18-week normal range.

We expect QCT's operating margin to be approximately 14% in the fourth fiscal quarter, approximately 500 basis points below the midpoint of our prior outlook, and driven primarily by the expected contraction of 3G/4G channel inventory and reprofiling of demand prior to new devices launched for the holiday season.

We anticipate fourth-fiscal-quarter non-GAAP R&D and SG&A expenses combined will increase sequentially approximately 11%, reflecting continued QCT investments in 28 nanometer, QRD products and mobile computing.

That concludes my comments.

I will now turn the call back to Warren Kneeshaw.

Thank you, Bill.

Josh, we are ready for questions.

(Operator Instructions).

Mike Walkley, Canaccord Genuity.

Bill, just two questions for me.

One, just on the mirasol going to a licensing model, could you remind us what kind of impact was -- mirasol might have had to earnings this year, and how that business model might change?

And then just on a higher level, on the royalty side, you know, much better than expected QTL ASPs.

But there are certain smartphones that are dominating the high end of the market, so with that coming more into the holiday season, would you expect us to see ASPs drop maybe for the next two quarters and recover again into the March quarter, given QTL's report a quarter in arrears?

I am just trying to get a feel for the new cadence of ASPs as they might be tied to certain high-end smartphone launches.

Thank you.

Sure, Mike.

On mirasol we did announce today a shift in our focus, a bit more of a licensing focus, number one.

And number two, commercialization, we are going to be focused on certain mirasol products.

The impact for the year -- this fiscal year will be relatively muted since we are largely through the year, but we do expect some changes to be taking effect for fiscal 2013.

On the royalty side, yes, Mike, we do expect quite a strong December quarter for the QCT business, and we expect a very large increase in the overall shipments of 3G/4G devices.

And that will then -- should extend into a strong second fiscal quarter for the QTL business.

On the ASP front, I think you know, I think it is always prudent to be cautious on ASPs rising.

We do -- but I think a reasonable expectation is low-single-digit decrease on an annual basis.

Great, thank you very much.

Tim Long, Bank of Montreal.

Just getting back to the chip business, I think you said ASPs went up and they are expected to go up again next quarter.

Just looking at the profitability there, obviously the volumes hurt, but it looks to me by my calculations we had another tick down in gross margin.

So I am just curious what would be causing the gross margin pressure still, is it just competition?

And then you did mention 28 nanometer helping the ASP.

I am curious, both an ASP and gross margin as we get into Q3, and really calendar Q4 when the volumes are fully there, how should that impact both ASP and gross margin, and how much of that will be passed through the model and how much will be used to maybe accelerate the QRD program?

So if you could help us talk about the balance between the profitability and growth as we transition to 28 nanometer.

Thanks.

Sure, I will take a stab at it here, but others might want to chime in.

On the chip ASPs, yes, we do expect a sequential increase from Q3 to Q4.

There is, of course, pressure on the gross margins.

We have been seeing that now for some time.

It is consistent -- largely consistent with our expectations -- no little surprises there.

But we have added into the business mix what has traditionally been lower gross margin products, number one.

Number two, as we're going more and more into emerging markets, it does have a lower cost profile and price profile, so that puts pressure on it.

But aside from the supply shortages and channel inventory corrections, we have been able to sustain still a pretty rich operating margin in this environment of pressure on the gross margins.

28 nanometer, I think, fits much into that fold.

I won't comment directly on the gross margin of 28 nanometer, but I think you are aware, we have stated in the past that we have been pricing pretty aggressively.

But nonetheless these are very rich products and we think we're quite a distance ahead of the competition as well.

So I do think it will be a nice positive to our business as we ramp 28 nanometer here.

Okay, thank you.

Brian Modoff, Deutsche Bank

Hi, guys, a couple of questions.

Steve, on the 28 nanometer can you talk a little bit about how you see demand in the current quarter?

You talked about hitting one-third of volume by September, is it still feasible?

In terms of the guide down sequentially just -- a lot of this are you seeing cuts in the 45 nanometer demand trends as well?

And then are you bringing a second source on for -- in terms of meeting the demand as you get into the fourth quarter, and are you happy with the yield that you are seeing on that second source at this point?

Brian, yes, it is Steve.

The 28 nanometer right now, as I said, we are supply limited, so it is -- and it is going quite well in terms of bringing up additional sources.

We actually have four sources that we are now bringing up.

If you track through the calendar year we are engaged with all of them now.

And it is going the way that we had thought.

You had -- you talked a little bit about the 45 nanometer products and such, and I think what you're seeing a bit of is a little bit less of the backfill that we would have expected.

And I think that is consistent with what we were talking about reprofiling of demand.

That is really a little bit less of the backfill and a little bit more waiting for the new product to come out.

So we're just working very hard to get those products out the door.

So in terms of talking through the -- talking about a more positive December quarter, some of this is you are getting demand, people want the 28 nanometer, so they are pushing demand into that quarter, is what you're saying.

That is right.

At the same time we have significant demand for the 28 nanometer products.

And as you get into the December quarter, you now have a tier of products on 28 nanometer, which I think is a big advantage for our portfolio, and they're moving forward.

And you are essentially in a situation where demand is increasing and supply is increasing, and we are trying to match those two ramps.

And we are just in execution mode getting through that right now and engaged with four fabs in order to do that.

Good luck.

Ehud Gelblum, Morgan Stanley.

A couple questions.

First, Steve, in the past you have given us a sense of the growth in Snapdragon.

I was wondering if you could do it again in terms of however you look at it -- quarter-over-quarter, year-over-year, half-over-half, whatever you can give us in terms of what the Snapdragon growth is?

And, Bill, on the ASP jump from the $214 to $229 in the March quarter, it seems relatively -- that is a large jump.

Can at least some of that -- obviously, you said that -- I heard the narrative that you said, and it makes sense that smartphones are growing.

But could some of that be explained by higher tablets that are going in there because they go in at the full ASP, as opposed to at the truncated ASP.

I am just wondering -- just any granularity we can have in explanation of that large jump and what we should do that that going forward.

And then when you were talking about this year unfolding similar to last year with a more muted September on the QCT unit side and a stronger December.

Last year we went from 127 in September to 156 in December.

So on absolute value term 30 units.

This year we're going to be somewhere in the -- by your guidance mid to high 130s -- probably high 130s, maybe around 140.

Should we be looking again at the same 30 million uptick as we look into December or should we be looking at higher because it is just a bigger market and a bigger year?

This is Steve.

Your first question was about growth in Snapdragon.

Snapdragon is a big portion of our shipments now.

And if you look year-over-year it is probably in the high 20%s in terms of percent growth.

And that includes -- that is if I looked at the quarter we just -- we are reporting on now.

That includes the fact that a number of the Snapdragon products are, of course, 28 nanometer products and they are a bit supply constrained today.

So we would have even seen higher growth in that year-over-year.

So we're quite pleased with how the Snapdragon product line is ramping throughout the year.

And I will -- I think the second part is really more -- Bill could perhaps take.

This is Derek, let me jump in on the ASP.

I think actually the increase quarter-over-quarter on the ASP was pretty broad-based -- just generally stronger ASPs across both emerging and developed regions.

The tablet numbers, although they tend to go up and down with the market, have remained relatively constant in terms of a percentage of total units.

And so although, again, we saw strength across pretty much all products and geographies, it wasn't driven by an increase in the percentage of tablets as compared to total units.

This is Bill.

On your last question, the profile for the year, for 2011, calendar 2011, our estimate is about 24% of the total devices that year were shipped in the September quarter.

And then there was a large jump to approximately 30% of total devices shipped in the December quarter, and that is for 2011.

Our estimates for 2012 are based in the midpoint of that.

The 905 million total units is very similar to that profile that I just quoted for last year.

And, by the way, that is -- that information is now on our website if anybody wants to take a look at that.

If I can follow up.

So your QCT units matched that or is it going to be different because you have maybe unusually low share now with 28 nanometers restricted and maybe proportionally higher share in December once your restriction is over, so maybe will you be more drastic than that 21 to 30?

I think it is best I refrain getting too specific on the first fiscal quarter of 2013.

I will just say that we are looking for a pretty substantial increase in QCT's quantity of MSMs.

Great, I appreciate it.

Simona Jankowski, Goldman Sachs.

Just a couple of questions.

First to clarify, was your comments on the 28 nanometer for (inaudible) in the December quarter, was that referring to the entirety of the December quarter or just to the exit run rate?

In other words, would you [appeal] to an inability to meet some of the demand in the entirety of that quarter?

And then as it pertains to your chipset margins, is there any reason to think that in December chipset margins should not be above your typical average, largely given the volumes you are expecting?

This is Steve.

The supply really exits the quarter on a match situation.

It doesn't enter a quarter that way.

So at the beginning of the quarter we still have a gap that we need to -- we have to deal with.

But it improves throughout the quarter and we think it matches up toward the end.

It is Bill.

On the margin side it is -- all of it is preliminary here.

We do expect a nice increase in QCT op margin.

But understand it is still going to be very active quarter in terms of ramping the supply, so there are going to be a high level of cost supporting that.

So I think it is too early to comment or maybe even to expect that the December quarter would be above our averages in the past.

Okay, maybe just a question for Paul.

In terms of looking strategically longer-term at some of your big customers sort of becoming more vertically integrated -- and obviously we had the announcement yesterday from Samsung of buying some of the technology and productivity from CSR -- now how should we think about customers like that longer-term for Qualcomm in terms of your potential share of their silicon business?

Yes, so we have had these same issues throughout the history of the Company were internal efforts -- you know, people try to build the silicon for their own chipsets.

And I think the key way to combat that, as we have done all along, is to continue to drive the technology hard.

Obviously, we are driving it very rapidly in a number of areas now, not just the radio.

It used to be just the radio, but now it is also processor, graphics technology.

And we have seen -- and I'm sure you have seen a number of the benchmarks coming out, talking about how -- I think the latest one I saw was on graphics, how we were really winning on the graphics side.

But obviously also on the computing side we have had great comparisons.

So the key, as I said, is drive the technology hard.

Do people for their internal uses have enough scale to invest at the same rate that we do?

And the answer is generally no.

And plus we have just a level of experience that we can bring to bear.

And I think that strategy will continue to work as it has in the past.

Thank you.

Rod Hall, JPMorgan.

Thanks for getting me in their guys.

Just a couple of questions and clarifications.

I guess first on the channel inventory, I don't think I heard, Bill, you comment on how many weeks of inventory -- the inventory is reducing down to that below 13 level.

So I don't know if you could comment on what the change in channel inventory is from your point of view or the change in your expectation, I should say.

And then also I am just wondering on your GDP assumption, you have talked to us about what GDP assumption you make underlying your guidance.

I wonder if you could just update us on that.

Then on the -- just the overall demand picture -- if you could talk to us about the rate of deterioration.

Are you guys expecting demand based on what you are seeing out there remain roughly where it is now or do you think demand is going to continue to deteriorate, and at what sort of rate do you think that might occur?

And then on 28 nanometer just one more thing.

Can you quantify at all what kind of 28 nanometer shortfall you're assuming in the fiscal Q4 guidance?

Thanks.

Okay, first on channel inventory.

We think we are going to -- we are exiting here the June quarter at just -- or coming in -- we exited the March quarter -- just a little bit about 15 weeks.

We think we're exiting the June quarter at a little bit below 15 weeks.

And we think we are going to exit the September quarter at just below 13 weeks.

So, obviously, that September quarter, if that happens, which we obviously expect it will, would be almost a new low for at least our history.

What did you think before, Bill?

Did you think it was going to be around 15 and now it is 13?

I just wonder what you were expecting.

Okay.

We thought it was going to be more flattish between just a little bit under 15 to just above 15 weeks.

Okay.

So that is on the channel inventory.

On GDP we are aligned with consensus economists for 2012.

And you're probably aware they recently down-ticked from about 3.2% world GDP growth to about 3.1%.

Obviously a little bit more in the second half of the year relative to the first half.

For 2013 I would say we are a bit below consensus right now.

We are little more cautious than where consensus economists are.

But to translate that back into our estimate -- our midpoint estimate of 3G/4G devices.

So three months ago our midpointe was 915 million units, and our updated guidance here is 905 million.

That 10 million reduction is approximately a 1 percentage drop in the turnover rate -- replacement rate of devices.

We have previously been around 34%.

We're just -- we're a little bit about 33% now.

So as the economy weakens we typically expect consumers to hold onto their devices a little bit longer.

And we think this is concentrated for -- our decrease here is concentrated in Europe and North America.

Okay.

On overall demand, I think we have a good sizing on it now.

I think historically, just seen on a quarterly basis, we are pretty good at predicting MSM volume.

And obviously there is a lot of interest and focus on what we are going to be able to ship here all this quarter and then particularly into December.

So I feel like we have a good handle on it right now.

And 28 nanometer?

One on 28 nanometer.

Just how much is baked into the guidance in terms of shortfall?

Oh, in the shortfall.

Well, let me say this, first of all, 28 nanometer -- our shipment estimates both for the fourth fiscal quarter and what we expect for the first fiscal quarter, we are essentially in line with where we were three months ago.

So the QCT team is executing well on that aggressive ramp that we had talked about last time.

But going out of this quarter -- and if we couldn't ship all the demand that is in front of us for this quarter, I would just say that our revenue and operating margin would be materially higher.

Okay, okay.

Thank you.

Tal Liani, Bank of America.

I have two questions.

First, the NREs, I think you said before they're going to be 200 million.

Can you give an update on where it is?

And when would this be reversed?

Secondly, on the same topic, should we expect the OpEx intensity ratio or OpEx ratio to be relatively the same as you transition to smaller geometries, or are we going to see improvement sometimes once you're done with the 28 nano?

These are my two questions.

Thanks.

Sure.

Tal, still on the NRE, I think the 200 million is referring to the increase in R&D that we're looking at approximately this time of year versus where we were at the outset of the year.

I want to answer your question correctly.

Because that is approximately what we are up in R&D outlook -- current outlook for fiscal 2012 versus the outlook at the outset of fiscal 2012.

Am I vectored correctly with you?

Yes.

Yes, all right.

The key components of that foremost is spending around 28 nanometer products, both accelerating the supply as much as we could.

But then also there has been expansion in the products and the future roadmap for those products.

That is number one.

Secondly, would be the mobile computing.

We have stepped up our investments there relative to what we expected at the outset of the year.

Thirdly would be -- you heard Steve talk about how well we are doing on the modem.

And so we have stepped that investment up, both carrier aggregation being one example.

There is a lot of demand for that right now.

And then lastly would be QCA, the Atheros business.

Those would be the four primary areas that make up the great majority of the R&D increase this year.

Steve, anything to add to that?

I might say that this year is a little bit unusual in the sense that we pulled in some QSI investments essentially to accelerate the speed at which we are going through future nodes.

So this year is a little bit faster than you would typically see, because we're trying to go through the nodes even faster than we have done in the past, and you are seeing that in the OpEx this year in particular.

The other aspect, just to add to the QCA comment was we are seeing significant fanout in terms of design wins on our connectivity products, and we're essentially scaling up our ability to deliver on those design wins.

Those are probably the two -- two of the bigger topics that are happening right now.

And then the last one was on the OpEx -- operating expense intensity.

And particularly in light of as we go through new geometries from here.

I think the key there is scale.

And we are doing very well on scale.

So we have got a good opportunity to manage our operating expense intensity, I think pretty well.

But the key I think there is scale.

So if you look at -- just to combine your two answers -- if you look at the growth in OpEx this year, given that next year you have other plans and to drive different technologies, it is the [high] this year kind of one-off or is it going to be reversed?

Or is this just a new level that from this point onward it depends -- revenue growth will determine the margin level of the Company unless the decline in OpEx?

I think this year it is unusual in the respect that we have ramped the operating expenses even though we aren't able to ship all of our customer demand.

That is a rare case in our history where we can't ship demand.

But going forward then the operating expense intensity, I think we have said it in the past, we expect it -- our goal is to improve it.

It isn't -- that isn't a guidance point for fiscal 2013, but I would take it as a guidance point looking three years out.

And maybe, Paul I don't (inaudible).

Yes, I just wanted to say also, we are obviously investing a lot in QMT.

We're looking at the opportunities to -- on that business model to reduce some of the expenses that we have there, and so that could have a pretty significant impact as well.

Stacy Rasgon, Sanford Bernstein.

Thanks for taking my questions.

I was wondering, first, if you could talk a little bit about emerging markets.

We have seen some signs of weakness in emerging markets in handsets and in others.

And even some of your big customers were pointing to more weakness there.

But your own outlook seems to be pointing more weakness in developed markets.

And even where you took guidance down was more in developed markets than in emerging.

So if you could talk about some of the dynamics that you are seeing between those two that would be helpful -- and particularly potential impacts going forward on ASPs.

I think for -- and just a second question.

If you could just made the comment a little bit about the recent IT restructuring that you guys did.

If you could give us a little more commentary on the rationale for that?

And then any sort of impacts or not that that may have going forward, that would be helpful.

I will take your first point.

On the emerging markets side, no, we -- our estimates within that 915 million midpoint estimate that we shared three months ago, are largely intact.

So I have seen some reports here where some people are seeing some surprises here, there, but overall we feel that it is holding fairly steady.

So the two changes we have already made in our estimates for this year are North America and Europe, and really just a bit of an extension on the replacement rate that we had previously been forecasting.

So I think emerging is holding strong.

And then on the -- expect on ASPs, as we have said in the past, we are seeing smartphones penetrating the emerging markets, and so the ASP trends that we have been seeing on the emerging front has been really quite positive to us.

This is Derek.

Let me just take a second answer to your question on the corporate restructuring.

So we just went through the corporate restructuring for a variety of reasons.

I think it is something that if you look across various industries that companies will adopt as a corporate structure, separating certain businesses and liabilities for other reasons.

But also obviously a big part of this was to kind of reflect the way that we been doing business for a number of years, and to further protect the intellectual property portfolio for some of the activities of the operating businesses, such as the chip business.

And in particular we have been working quite a bit with open source historically and feel very good about the way we have been doing that.

But we expect that that need will continue to increase, and this just kind of further protects the important intellectual property that underpins the licensing business from some claims or inadvertent activities by others in the business.

Jeff Kvaal, Barclays.

I have a couple, gentlemen.

I think the first is to follow up on the internal production.

I think we have seen the pendulum shift back and forth between internal and outsource a bit over the years.

Where are we in the current swing?

Should we expect production to go a little bit more internal perhaps over the course of the next few quarters or years?

Then my second question is on the Intel ASML relationship.

I am wondering if you had some observations on that, how you feel about your access to capacity looking out over a 5- to 10-year period?

Thank you.

Hi, this is Steve.

I am assuming the first question is really more about the vertical customers.

I would say that it is really consistent with what Paul said.

I think it is getting harder and harder to create chipsets moving forward.

It is primarily because in order to create, particularly high-end products, you need to innovate across so many different technology vectors.

And unless you're fairly large and you have a fairly broad technology portfolio, and you are at the leading nodes, I think you're going to have a difficult time producing the type or products that you need.

So in our view it is actually getting harder to do chipsets and so therefore probably more favoring of our model.

With regards to the ASML and really the 450 move, our view essentially is that the industry moving in that direction and supporting larger wafers and really bringing the economies of scale even to further out nodes is something that we actually want to see happen.

But it is also the expense is so large it is unlikely to us that one company is going to be able to put something in place that will advance them, and given the fact that it is just going to require a number of different companies to put an investment in.

So we are happy to see that the industry is moving in a way that keeps Moore's Law working.

We think that is good for our businesses, as it is for others.

Are you comfortable that -- or should we expect you to be contributing to procuring that capacity yourself, Steve?

Is that something you would do on your own?

Well, I don't (multiple speakers) I think you will start to see some of our fab partners, perhaps, working on that.

But I don't have any special information on that.

We are still committed to the fabless model.

It has served us well.

And with our size I think we're probably a bigger player in terms of being able to influence it.

But I don't know to the degree that we will have a direct relationship in that particular issue.

Kulbinder Garcha, Credit Suisse.

I just want to dig into QCT margins a little bit.

I understand that you said they're going to go down to somewhere around 14% in the near term.

I understand the drivers.

I am wondering how quick the snapback is.

And the reason why I'm asking is as QCT margins hit a new low, I'm just trying to think, has there been any structural change?

Once upon a time ex Atheros they were at 30%.

Then we talked about mid-20%s, now we are at 14%.

I am just thinking as we look out beyond a couple quarters and as you get through these ramp issues are you really confident that nothing has changed in the competitive dynamic?

That is my first question for Steve.

On the ASP front, I understand the strength you have seen.

I understand, Bill, also the conservatism you want to think about with ASPs going forward.

But specifically as you go to the back half many of these product launches that are discussed or speculate seemed very high-end.

So doesn't that mix shift of the industry actually -- even to cut into Q4 it looked very high-end as well.

And that would help licensing for the whole of next year or for a significant part of next year.

What is wrong with that way of thinking of things?

Many thanks.

This is Bill.

I will take -- on the 14% op margin question and will there really be a quick snapback, yes, I feel like we just had a quick snap down.

I was expecting -- we were expecting 19% operating margin.

We lost a little bit of volume and we are at 14%.

So I do expect a quick snapback, using your terminology.

But maybe more important, we have said for some time now here our goal as a Company is to look over the next five years or so to be improving the QCT operating margin a bit.

And the June quarter, September quarter, really that is -- it is not having any impact.

It isn't making us re-question our goal there.

It is just a temporary phenomena that we think we understand it pretty well.

We also have a very significant investment in the pre-revenue opportunity, which is the whole mobile computing space.

So we certainly expect to get a good return on that investment going forward, but right now clearly weighing down the margins.

On ASPs, I think you are characterizing a positive outlook, at least for the next couple quarters, and we don't disagree with that.

But obviously there is a lot of pressure within the industry to be reducing prices -- both consumers and carriers and OEMs putting the pressure on their suppliers.

We are trying -- we are working hard to enable that best we can.

And hence I always think it is just a little bit better to be not looking for ASP increases, but just flat to modestly down, I think is the better outlook.

But I agree.

We are looking -- I think the next couple of quarters look pretty positive for us.

James Faucette, Pacific Crest.

Great, just a few follow-up questions.

First, back to Steve or Paul, related to your partnerships with your foundries.

I think Steve said that you're now sourcing 28 nanometer from four different partners.

Going forward as we look at future geometry and process improvements, should we expect you to continue to be diversified at the outset across multiple partners or should we expect you to return to concentrating on one or two key partners for future transitions, firstly?

Secondly, Bill, just could you just update us quickly on where we are at in terms of authorized buyback?

You have been fairly active since the end of June, or starting at the end of June, and I just want to make sure that I am know where you are at in terms of what you still have authorized.

Thank you very much.

This is Steve.

Our product portfolio at the high tier we tend to be on the leading node.

On the lower tiers or the mass-market tiers we may be one node behind.

So we tend to have a broad sourcing strategy to take account of the fact that we are on leading nodes and also following nodes.

We tend to engage with a lot of fab partners by necessity.

On the leading nodes, I think you're not going to see a big change in our strategy moving forward, with the exception that we do obviously a much better job of matching our ramps -- capacity ramps and demand ramps as we drive leading nodes.

For us you're going to continue to see us really taking advantage of the fact that you can play the integration game at the leading nodes.

And there is a number of different good roadmaps that we are seeing from the industry through the fab -- through fab partners and we are going to continue to drive the best ones that we can find.

On the buyback authorization, as of a day or two ago it was just a little under 3 billion.

But I think just think in terms of it is about 3 billion.

We have one more put that is set to expire for about 200 million, and so approximately 3 billion remaining authority on our buyback.

That is great.

Thank you very much.

Parag Agarwal, UBS

Thanks for taking my question.

Steve, I just wanted to know how do you plan to manage the QCT business as you try to balance revenue and the margins?

And come also, if you could give some color as to was their impact on the gross margins due to yields as you are ramping four foundry partners?

So, yes, we -- really consistent with what Paul said, we are now in a position where we are investing pretty heavily in a number of different pre-revenue areas.

The biggest one really being the mobile computing market, which we are very happy to see the software partners doing things that we think of going to bring that to a revenue event here in the near term.

So really the way that we are looking at the business this year is we are -- even though we are continuing to grow the business, we are still investing pretty heavily, because we like the opportunity that exists in front of us, particularly as more and more things leverage technology that you have to develop to be a strong phone player.

So we continue to drive that.

We think that will turn into, we think, a more positive trajectory in terms of the business moving forward.

(multiple speakers) question that I missed.

On the (multiple speakers).

Yes, with yield, any time that you are ramping a new source in the beginning part of a ramp you don't have yield and cost numbers consistent with several quarters into ramp, and we have that given the fact that we are bringing up multiple toll multiple sources.

But that is part of what we are spending a lot of energy now trying to get that as quickly as possible.

Thank you very much.

This concludes the allotted time for question and answers.

Dr. Jacobs, do you have anything further to add before adjourning the call?

Yes, I just wanted to close by saying that we are very happy with the strong growth this quarter.

Obviously, it could have been better, and we are disappointed that we are not able yet to fulfill demand.

But we are working very hard to bring up additional capacity.

And we are certainly pleased that our customers are working with us through the shortages.

And we are very excited that they're building some absolutely great product.

So we will work through this near-term.

We are looking forward to a very strong close to the calendar year.

And you know the nice thing is, people still love their smartphones.

They love wireless data.

We are working hard to give them better and better experiences.

That is really a great opportunity for us.

So thanks everybody, and I look forward to seeing you soon and talking to you soon.

Bye-bye.

This does conclude today's conference.

You may now disconnect at this time.