高通 (QCOM) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm first-quarter fiscal 2013 conference call.

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

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

(Operator Instructions)

As a reminder, this conference is being recorded January 30, 2013.

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

International callers, please dial 404-537-3406.

The playback reservation number is 85067601.

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

Mr. Kneeshaw, please go ahead.

Thank you, Ryan, and good afternoon, everyone.

Today's call will include prepared remarks by Dr. Paul Jacobs, Steve Mollenkopf, and Bill Keitel.

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

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

During the 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 these 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.

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

Thanks, Warren, and good afternoon, everyone.

We're obviously off to an excellent start in fiscal 2013, and pleased to report a record quarter, driven by strong year-over-year growth in both our QCT and QTL businesses.

Revenues were up 29%, and non-GAAP earnings per share were up 30% compared to a year ago.

In QCT, we delivered record chipset volumes, which included eliminating the constraint on 28 nanometer devices, as we had expected.

In addition, QCT continues to drive technology and product leadership as we announced the new Qualcomm Snapdragon 800 and 600 processors.

Featuring ultra-high definition video playback and capture, and our latest generation microarchitecture with clock speeds up to 2.3 gigahertz per core, the 800 processor is class-leading.

And we continue to set the bar for the smartphone user experience.

Turning to QTL, our licensees reported stronger than expected total reported device sales, as a broad-based adoption of 3G and 3G/4G products continues, driven by strength in smartphones.

We continue to invest and innovate across a broad set of technologies and believe that our patent portfolio applicable to 3G and 4G products is the most widely licensed in the industry.

In fact, we have now over 225 CDMA licenses and licensees, and more than 40 royalty-bearing single-mode OFDMA licensees.

Now, with respect to our display business, we recently announced an expansion of our display arrangement with Sharp, in order to accelerate the commercialization of our Pixtronix MEMS displays, utilizing Sharp's IGZO technology, with the goal of driving high-performance, lower-power displays for a variety of devices, including smartphones and tablets.

Our Pixtronix technology uses a MEMS-based shutter system to deliver color performance similar to OLED, with wide-angle viewability and lower power consumption than LCD or OLED.

As we previously indicated, we're increasing our focus on licensing our display technologies, including our next generation mirasol display technology, while at the same time directly commercializing certain current generation mirasol displays.

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

Smartphone demand remains strong.

Gartner estimates that approximately 169 million smartphones were shipped in the third calendar quarter of 2012, representing a 47% year-over-year growth.

In China alone, Gartner estimates that approximately 47 million smartphones were shipped in the third calendar quarter of 2012, representing greater than 115% year-over-year growth.

In the US, both AT&T and Verizon Wireless recently reported a healthy fourth-calendar-quarter smartphone sales, with close to 20 million units between them.

And in emerging markets, Wireless Intelligence estimates that there are now more than 1 billion 3G/4G connections, representing 34% year-over-year growth.

In China, in particular, Wireless Intelligence estimates that there were 325 million 3G connections, including 1X, at the end of 2012, which represents 49% year-over-year growth.

Now, this brings 3G penetration to 29% in China, so excellent progress and still plenty of opportunity ahead.

China Mobile recently announced a pre-commercial trial for LTE TDD, and Qualcomm chipsets were in 14 out of 31 devices selected for the trial.

In addition, I recently attended China Telecom's Annual Handset Fair, where they discussed having 480 CDMA 2000 ecosystem partners, and their goal to have 200 million mobile subscribers by the end of 2013.

And there are currently over 0.5 billion CDMA 2000 connections globally, according to Wireless Intelligence.

With increased penetration of data-centric devices and higher usage, we continue to see robust growth in wireless data.

In order to address this growing demand, we remain focused on addressing what we call the 1000X Data Challenge." We're working to expand wireless data capacity by 1000 times from its current level.

We believe that small cells operating in a licensed spectrum band, and using advanced interference management techniques on a dynamic basis, will be an important component in meeting the challenge.

There was positive progress on this initiative in December when the FCC proposed to convert the 3.5 gigahertz band into a dedicated licensed spectrum band for small cells.

Additionally, operators continue to use the advanced network technologies, such as LTE, to help address growing demand for data.

Globally, the number of LTE operators has now reached 145, according to the GSA, representing greater than 200% year-over-year growth.

And Wireless Intelligence estimates that global 4G LTE connections, which run on multimode 3G/4G devices, reached approximately 60 million in the fourth quarter of 2012, up more than 500% from the prior year.

Finally, we continue to see the opportunity for non-handset devices as positive for our business.

In early December at Dell World, Dell highlighted upcoming support from multimode 3G/4G and the CPS 10, their Windows RT-based tablet, as well as across their portfolio of business tablets and notebooks.

In addition, auto manufacturers are now announcing multimode 3G/4G connectivity in new models.

And together with AT&T, we announced a plug-and-play development platform based on Gobi, that will enable a wide range of applications and devices to connect to AT&T's network.

So, to conclude, we've completed a record quarter at Qualcomm, and we're pleased to be increasing our fiscal 2013 guidance.

We're continuing to execute against our strategic priorities, and we look forward to addressing the growing set of opportunities ahead.

So, thanks.

And I'll now turn the call over to Steve Mollenkopf.

Thank you, Paul, and good afternoon, everyone.

Our QCT business had another great quarter, with record MSM shipments, revenues, and operating profit.

Revenue and operating profit were up 34% and 45%, respectively, versus a year ago.

We shipped 182 million MSM chipsets, above our prior expectations, reflecting strong demand across our portfolio, including China emerging account shipments, which more than doubled year-over-year, and multimode 3G LTE shipments, up more than 90% sequentially.

We were pleased to see our chipsets driving many of the flagship smartphone models announced this holiday season, including the Google Nexus 4; the LG Optimus G; the Nokia Lumia models, and Samsung Galaxy S III and ATIV S; the HTC Droid DNA 8X and 8S; the Motorola RAZR M; and the Sony Xperia T and TL.

With our leading technologies, broad product roadmap, and relationships with all the top OEMs in the industry, our design pipeline continues to grow.

There have been more than 600 Snapdragon-based devices announced, and another 170-plus devices announced, based on our Qualcomm Reference Design solutions.

Looking ahead, there are more than 450 Snapdragon-based designs in development and over 100-plus designs based on our QRD solutions.

As you know, our strategy is to set the technology design point for our industry, and we have succeeded again with our recently announced Snapdragon 600 and 800 chipsets.

Our new Snapdragon 600 processor builds on the momentum of our highly successful S4 Pro processor.

The 600 includes our new quad-core Krait 300 CPU, running up to 1.9 gigahertz, and our Adreno 320 GPU.

Our new Snapdragon 800 processor includes our new quad-core Krait 400 CPU, running at up to 2.3 gigahertz; our new Adreno 330 GPU with two times the compute performance of our Adreno 320; the third generation of our leading LTE modem, which adds LTE advanced and carrier aggregation support; as well as integrated 802.11 AC Wi-Fi.

In addition, the Snapdragon 800 is the first chip in the industry to use TSMC's 28 nanometer HPM advanced process technology.

We expect Snapdragon 600 and 800 chipsets to deliver up to 40% and 75% better performance, respectively, than our previous industry-leading Snapdragon S4 Pro.

There are already more than 90 designs in development using the 600 and 800 processors.

And we expect commercial devices based on the 600 in the second calendar quarter of this year, and based on the 800, in the middle of this year.

We are also continuing to invest and grow our business in emerging regions.

And with our differentiated technologies and products, we believe we are well positioned versus the competition in this segment, as subscribers migrate from 2G to 3G and multimode 3G LTE.

Last week in China, we held our biannual QRD event with participation by 145 OEMs and ODMs.

We had multiple emerging accounts, including Yulong and Tianyu, announce handsets based on the Snapdragon 8 x 25Q, making it the first quad-core chip for high-volume 3G smartphones.

There are now over 60 8 x 25Q designs in the pipeline from over 25 OEMs.

Separately, we have also announced a reference design for our 8 x 30 chipset, which contains dual Krait CPUs, integrated LTE TDD, and TD-SCDMA, and support for all operators in China.

Also of note, the first TD-SCDMA device based on a Snapdragon processor was launched by Nokia in the December quarter -- on time.

Our mobile connectivity design traction continues to grow, with 400-plus devices based on our 28 nanometer S4 and Snapdragon 600/800 products.

We also announced our first NFC chipset, with a new tri-band 802.11 AC/AD reference design and our StreamBoost technology, to intelligently optimize home network performance.

We are off to a great start in fiscal 2013, with exciting growth opportunities ahead, including continued global smartphone and multimode 3G LTE demand.

We continue to manage our business for long-term revenue and operating profit growth.

And we continue to see the year unfolding broadly in line with our initial expectations.

That concludes my remarks.

And I will now turn the call over to Bill Keitel.

Thank you, Steve, and good afternoon, everyone.

We had record quarterly results, and we are pleased to be raising our estimates for fiscal 2013 revenue and earnings per share.

Our record first-quarter revenues of $6 billion were up 29% year-over-year and at the high end of our prior guidance.

Non-GAAP operating income was a record $2.45 billion, up 31% year-over-year.

Non-GAAP earnings per share were a record $1.26 per share, up 30% year-over-year, and $0.14 above the midpoint of our prior guidance.

QTL contributed $0.06 of gross margin improvement, driven primarily by greater-than-expected 3G/4G device shipments.

QCT contributed $0.05 of gross margin improvement on the strength of higher MSM shipments and favorable product costs.

Lower operating expenses contributed $0.02, and higher returns on our cash and marketable securities contributed $0.01.

Total reported device sales reported by our licensees for last September's quarter were a record $53.3 billion, above the high end of our prior guidance, greater than expected device shipments in both developed and emerging regions, particularly China.

We estimate that total reported device sales were comprised between 233 million to 237 million 3G/4G device shipments at an average selling price of $224 to $230 per unit.

QTL's operating margin was 87%, and we shipped a record 182 million MSMs during the quarter, exceeding the high end of our prior guidance.

And QCT's operating margin was 26%.

As I mentioned at our Analyst Day in November, we are seeing more efficiency in the 3G/4G inventory channel, as the industry continues to move toward an open retail channel versus a carrier-centric channel.

Consistent with that trend, our MSM delivery interval has been shortening, which introduces additional volatility in the timing of shipments, and therefore, impacts our ability to accurately forecast quarterly MSM shipment timing.

Non-GAAP combined R&D and SG&A expenses were lower sequentially, which was a bit better than our prior expectations.

Operating cash flow was a healthy $2 billion, up 11% year-over-year and 33% of revenues.

During the first quarter, we returned $678 million to stockholders, including cash dividends of $428 million and $250 million to repurchase 4.3 million shares.

We are increasing our estimate for calendar 2012 3G/4G device shipments to between 915 million to 940 million units, up approximately 17% year-over-year at the midpoint.

The increase to our calendar 2012 estimate is driven by global demand for 3G/4G devices, particularly in emerging regions, including China and Latin America.

Turning to our guidance.

Given continued global macroeconomic uncertainties, we are continuing to maintain a cautious outlook for the year ahead.

We are reaffirming our estimate for calendar 2013 3G/4G device shipments of between 1 billion and 1.07 billion units, up approximately 8% to 15% year-over-year.

We are raising fiscal 2013 revenue guidance by approximately $400 million.

And we now expect fiscal 2013 revenues to be $23.4 billion to $24.4 billion, up approximately 25% year-over-year at the midpoint.

We are raising our non-GAAP earnings per share guidance by $0.13.

We now anticipate non-GAAP earnings per share of $4.25 to $4.45, up approximately 17% year-over-year at the midpoint.

We are also raising our guidance for GAAP earnings per share by $0.21.

And we now expect GAAP earnings per share of $3.61 to $3.81, up approximately 6% year-over-year at the midpoint.

We are reiterating our prior fiscal 2013 guidance estimates for QTL ASP, QCT and QTL operating margin percentages, as well as non-GAAP combined R&D and SG&A expense growth.

We estimate our non-GAAP annual tax rate to be approximately 17% to 18% for fiscal 2013, below our prior estimate, reflecting the retroactive extension of the federal R&D tax credit, among other factors.

The R&D tax credit benefit related to fiscal 2012 will be recorded in our fiscal second-quarter, and consistent with our prior guidance, will be excluded from non-GAAP results.

Now turning to the second fiscal quarter, we estimate revenues of $5.8 billion to $6.3 billion, up approximately 22% year-over-year at the midpoint.

And we estimate non-GAAP earnings per share of $1.10 to $1.18, up approximately 13% year-over-year at the midpoint.

We expect second fiscal quarter GAAP earnings per share of $0.98 to $1.06 per share.

We expect total reported device sales by our licensees to be $57.5 billion to $62.5 billion, up approximately 16% year-over-year, and up approximately 13% sequentially at the midpoint, reflecting, again, strong 3G/4G-based device shipments in the busy December holiday quarter.

We anticipate QCT shipments of 163 million to 173 million MSM chips during the March quarter -- down sequentially, which is typical, coming off the busy holiday quarter, but up approximately 11% year-over-year at the midpoint.

Our estimate for 3G/4G channel inventory through fiscal '13 is consistent with our prior expectations, remaining within the 11- to 16-week range, as we discussed at our Analyst Day.

We anticipate second-quarter non-GAAP R&D and SG&A expenses combined will increase approximately 10% to 12% sequentially, reflecting increased seasonal expenses, typical for this time of year -- notably, employer payroll taxes and increased marketing expenses.

We estimate our fiscal second-quarter non-GAAP tax rate to be approximately 16%, lower than what we expect for the full year, because it will take account of two quarters of the retroactive R&D tax credit approved by Washington.

That concludes my comments.

I will now turn the call back to Paul Jacobs.

Thanks, Bill.

So before we go on to Q&A, I wanted to let you all know that Bill has decided to retire from Qualcomm, effective March 11.

Bill has been a great partner to me and an outstanding leader in his role as CFO for Qualcomm over the past 11 years.

His financial leadership has played a critical role in establishing Qualcomm as a company known not only for leading-edge technology, but also for our superb fiscal performance and rigorous financial discipline.

And over the years, he's helped earn Qualcomm, his finance and investor relations organization, and himself, many distinguished awards for excellence in financial reporting.

Under Bill's leadership, the Company has achieved unprecedented financial growth and success, particularly through some very challenging economic environments.

And on behalf of the entire executive committee and all our employees worldwide, I'd really like to thank Bill for his strong financial leadership, partnership, and incredible dedication to Qualcomm.

So, we wish you all the best.

We're pleased that you've agreed to stay at Qualcomm to ensure a smooth transition, and will continue throughout the year to serve in an advisory role for the Company.

So, thanks again, Bill.

I'm also very pleased to announce that, after careful consideration, George Davis will join Qualcomm as Bill's successor, and our new Executive Vice President and Chief Financial Officer.

George currently serves as CFO for Applied Materials, and will join Qualcomm on March 11.

George is a seasoned financial executive and has been CFO at Applied Materials since 2006.

I look forward to George joining Qualcomm's executive team and working closely with him.

His financial expertise and leadership will be instrumental, as we continue to expand our business and strive to deliver strong financial results.

So I'd like to thank Bill again for his many years of leadership and commitment to Qualcomm, and I look forward to introducing all of you to George at our next quarter's earnings call.

So, I will now turn the call back over to Warren Kneeshaw.

Thanks, Bill.

Thank you, Paul.

Operator, we are ready for questions.

(Operator Instructions) Mike Walkley, Canaccord Genuity.

Yes, Bill, best wishes for a wonderful retirement.

It was always great to work with you.

And my questions are really for Steve, just on the competitive dynamics.

Can you update us on how you're seeing your competitors?

One, on the low end a lot of talk about quad-core competition.

And then on the high end, on the LTE side, are you seeing any increased competition this year?

Thank you.

Hi, Mike.

It's Steve.

I think there's kind of two dynamics.

On the high end, it's all about technology leadership.

And I think we've been able to keep ourselves in a pretty good position, both on the modem side as well as on the AP side.

On the low end, it's about scale and I think speed of execution.

Both of those things, I think, are benefits that we bring to the table as well.

We've come out with a number of products on the low end.

The first one is the 8 x 25Q, which I think is being received quite well.

We also announced at our event last week in Shenzhen that we're going to come out with the first of what will become many new low-end optimized chipsets, which is the 8 x 26.

There will be multiple chipsets like that coming out over the years.

So I think we feel like we've got a pretty good road map on the high side and the low side right now.

In fact, I would say, we're probably biased positively now on share.

We just feel like the roadmap and some of the investments are starting to pay off.

Great.

Thank you.

Brian Modoff, Deutsche Bank.

Another question for Steve.

When you see you're positively biased for share, particularly in China, can you talk about how you see that playing out, in terms of where you think you're at from a standpoint of low-end 3G share in that market?

And then overall share in that market.

And then another question on the yield efficiencies with the foundries.

It's -- our checks indicate (inaudible) 95% yield efficiency on 28 nanometer now.

How do you see that playing out for you with regard to your margins for this year?

Do you see 28 nanometers being perhaps more cost-effective than 45 nanometer this year?

And what about as you bring other foundries on, like GlobalFoundries, do you see that giving you some leverage on your margins in the QCT side of the business?

Thanks.

Okay, Brian, on the first question now, which I think -- remind me again.

That was related to low-end share --?

You noted earlier, you were talking about China competition.

You said on the low end, you're biased positively now on share.

Can you kind of quantify that a little bit, particularly with regard to China?

Where do you see your market share on the low end, and then overall in that market?

Thanks.

Yes.

Well, I'll try to stay away from any individual number, but what you're seeing in terms of a dynamic is that there's a conversion of 2G to 3G at the same time you're getting a conversion to smartphones.

So for us, we are picking up new customers and new geographies, because those transitions are essentially giving us access to what would be traditionally just 2G volume.

So we've been ramping our ability to address those customers, as you know, over the last several years, and they're starting to play into our hands.

Also, there's been a push -- and I think you'll see a push over the next 12 months, where technology will be turning over in the large carriers in the world, in particular in China, and they'll start demanding some of the combination 3G/4G technology that we have.

And I think that's probably a reasonable setup for us.

A technology change has actually always been good for us on the chipset business.

Your second question was about yields, I think.

What's happening with us, we've actually been quite pleased, actually, as to how 28 nanometers ramped in terms of yield.

I think Bill also mentioned in his remarks how we had some positive product cost in the last quarter, which was actually a result of that.

We're starting to bring on multiple fabs with more gusto now.

You will see, however, at the end of the year, you will see us transition the portfolio into HPM.

So I don't know to the degree that those events sort of produce anything different than what Bill would have talked about in terms of the margin profile, but pretty much according to plan, I think, at this point.

Okay.

Thank you.

Tim Long, Bank of Montreal.

Thank you.

Congratulations, Bill, on the retirement.

Well-deserved.

You will be missed.

Got a two-parter for you on the royalty side.

First, on the calculated rate, I know it does move around, but by my numbers, it went down about 10 basis points sequential.

So just curious if there's anything abnormal in there other than just mix.

And then, secondly, I just want to bring you back to something you had mentioned at the Analyst Day, where there was the potential for 25% unit growth in the fourth quarter.

That's what you typically see.

It looks like the midpoint of the guidance is a good amount below that.

Could you address why?

Is that just because the September quarter was maybe more than seasonal?

Or was there some other reason why we're looking like mid to high-teens sequential in the fourth quarter, when we normally see more?

Thank you.

Hey, Tim.

This is Derek.

Let me take your first question on the rate.

I think we were finishing the last quarter around [3.38].

And you're right, we're coming in a bit lower this quarter at about [3.3].

It's really a function of the things that we've talked about in the past.

But this quarter, probably the biggest driver is the fact that we had record TRDS.

And, in fact, it came in higher than we expected.

And so that, given the fixed licensing fees that roll through, and the infrastructure royalties that grow at a slower pace, it's going to have kind of downward pressure on the rate.

So that's really the primary driver.

We also had some other fluctuations, including lower audit recoveries and mix in there.

But that's really the primary driver.

Tim, this is Bill.

On the -- that -- taking us back to the Analyst Day and looking for upwards of a 25% unit growth from the September to December quarter, the difference we see now -- our midpoint estimate is about a 17% growth, third quarter to fourth quarter.

And a bit lower than we were previously expecting, but it's the result of a very strong September that came through in our licensee reports.

Okay, great.

Thank you.

Rod Hall, JPMorgan.

Thanks for taking my question and congrats on the retirement, Bill.

So just, first of all, I wanted to revisit the 28 nanometers situation.

I think the numbers suggest, anyway, that you guys cleared some backlog in fiscal Q1 to December, kind of maybe a good chunk of it.

And I just wonder if you could comment on -- maybe, Steve, you could comment on the backlog status as we head into fiscal Q2.

Is most of that now cleared?

Or is some of your guidance including some backlog clearance?

That would be helpful if you could help us understand that.

And then, Bill, I guess it's my last chance to ask this one, but could you comment on your underlying GDP growth expectation in your forecast now?

Has it changed since you guys reported last quarter?

And, Steve, if you could comment maybe on the 8 x 26 shipping date as well.

I don't know if you want to comment on that, but I was just curious whether devices with that product could ship in the middle of the year?

Are we still looking sort of toward the end of the year, when those devices would ship into the market?

Thanks.

Rod, this is Steve.

I'll just knock those out pretty quickly.

In terms of 28 nanometer, I think we probably cleared that sometime in the middle of the quarter that we just reported on.

There was some discussion in the industry about some of the OEMs also having some constraint outside of our part -- touchscreens and things like that.

You've probably read as many as I have on that.

But I don't know to the degree that that's been cleared or not.

The 8 x 26, just to finish up, it's really end of this calendar year.

And, Rod, Bill here.

On the GDP growth estimate that's underlying our current plan, it's unchanged from the time of the analyst meeting.

At the time of the analyst meeting, consensus GDP worldwide among economists was 3.4%, and we thought that was a bit rosy.

We based our plan on 3% world GDP.

Recently, consensus economists were down to 3.2%, and we're maintaining our basis of a 3% worldwide GDP growth for 2013.

Great.

Thanks, Bill.

Ehud Gelblum, Morgan Stanley.

Appreciate it.

Bill definitely will be missed.

Thanks for all the help and time over the years.

So have fun in retirement.

A couple questions.

Question one, when I look at your guidance for the TRDS, and back it out of your full-year guidance -- I'm sorry, your Q2 guidance for the full Company, and then sort of back into a QCT guidance, and then look at your unit shipment guidance for next quarter, you could sort of back into what you're thinking about ASPs.

It looks a little bit like you're guiding ASPs, Steve, to be up next quarter, is what I'm going for, in MSM shipments.

And I just want to make sure that that math is correct and that you are sort of looking for ASPs in chips to go up at least one more quarter.

And, if so, if you can give some color on the variability behind that and what happens going forward.

And then, Bill, on margins for QCT, at the Analyst Day, again, I think you had guided to somewhere around 18.5% to 20.5% for the full fiscal year.

We're now at 26% for Q1.

Last year, we did something similar.

We started off at 23% and we kind of came down through the year, but we had that funny thing with 28 nanometer that made the operating margin at the end of the fiscal year unnaturally low.

Are you -- do you still think we'll end up -- I mean, you made the comment that you're unchanged from the 18.5% to the 20.5%, but I mean, we've got to start pulling some 13%, 14%, 15% operating margins to get us back into that range when we start off the year so strong at 26%.

So I guess what I'm saying is, do you really still believe that?

And, if so, why would it get that low near the end of the year?

Okay.

Ehud, this is Bill.

I'll take both those questions.

On the MSM ASP, the expectation there, we had expected to increase a bit sequentially in the first fiscal quarter, and we successfully did that.

And, yes, you're right.

We do expect another increase sequentially in the second fiscal quarter.

Somewhat of a pattern we're expecting for the full fiscal year for QCT.

On the QCT op margins, we are holding to that guidance range that you gave.

For the second quarter -- second fiscal quarter, we're expecting a fairly significant dip in the operating margin.

It's based into the guidance we gave -- in a plus/minus 17% kind of range.

So -- and the decrease there, four drivers.

Number one is the volume.

We do expect a decrease in MSM volume in the second fiscal quarter.

Number two, QCT carries the bulk of the operating expense in Qualcomm.

And it's this time of year where we restart employee payroll taxes, and marketing expenses typically tick up in the December -- in the January -- starting in January relative to the December quarter.

Thirdly, it's the time of year where we typically do our price resets in the QCT business.

And then lastly, the QCT team has a fairly high degree of activity of new product work ongoing, and so we expect that to drive up the product costs, starting with this quarter.

Okay.

That's helpful.

Can you give us a percentage, like you do sometimes, as to, like, what percent of R&D is kind of going to future-looking types of revenue?

Or is that something that's not really quantifiable?

I would just repeat what we said at the Analyst Day, that we've got approximately 30% of our current R&D going towards projects that we don't expect to deliver revenue in fiscal 2013 -- oh, excuse me -- 27%.

It was 30% the year prior.

It came down to 27%, is our current expectation.

Simona Jankowski, Goldman Sachs.

And, Bill, I also wanted to extend my best wishes to you as well, into retirement.

Just a couple of questions.

One is more on the short-term chipset guidance.

I understand that you are expecting some normal seasonality there.

But it seems that the decline that you are expecting is perhaps not as conservative as I might have expected.

You know, you have the seasonality factor.

You've also got one of your big customers, Apple, whose implied decline in the March quarter is about the same magnitude as the total number that you're guiding to.

And so I'm just wondering if you're accounting for the normal seasonality kind of outside of that one customer, especially given that there might have been some excess inventory in China?

And also given calendar Q4 was larger than normal for you because of the shortage alleviation.

And on the other side of that, wouldn't we see a bit more of a correction in the March quarter?

And then I have a longer-term question as well.

Okay, Simona.

On the Q2 chipset guidance, fiscal Q2 guidance, we did factor in seasonality.

In the last few years, we often see a dip going into the March quarter, but relative to five, six, seven years ago, it is not as much as we used to see back then.

So we have taken account of that.

We also think that the channel inventory is being managed pretty tightly.

So hopefully, we're right on that estimate.

And therefore, maybe a bit less dip than what you otherwise would see.

If you recall from the Analyst Day, many of our customers are relying on us much more for their inventory needs.

And you'll see that when you look at our -- get through our financials, our inventories grew pretty nicely in the December quarter, in line with what we wanted them to grow.

So I think we've got Q2 pegged pretty well.

Albeit keep in mind that the order interval has decreased and so there is more volatility in that MSM number.

And then you had a second question?

Yes.

So just the second question was an update on the tablet market.

Do you have a sense for what percent of tablets are shipping with 3G and 4G attached in them right now, as opposed to Wi-Fi?

And based on the builds you're seeing, where do you think that might be a year from now?

Simona, this is Derek.

I think the percentage of total units that have been shipping with 3G attached has been relatively stable.

It's kind of bounced around a little bit and maybe come down the last couple quarters, some.

But as we explained at the analyst conference -- I think Paul went through this in his presentation -- we're really hoping and expecting that to kind of change course going forward, now that we see more flexibility on the operator side with data plans, and hopefully, more competition in the tablet device space with Windows RT and some of the new Android tablets coming in.

Thanks very much.

Stacy Rasgon, Sanford Bernstein.

Hey, guys, thanks for taking my question.

And, Bill, best of luck.

Question on the annual guidance.

So you're taking annual EPS up pretty much by less than you just beat, and you have a lower tax rate going forward, and the OpEx is basically unchanged.

I'm just wondering why that annual EPS guidance wouldn't be higher?

It doesn't feel like you're guiding to any sort of lift at all into the back half of the year.

Also, if you can -- one more question, if you could revisit that inventory question.

I know you were talking about customers relying on you to take more, but at the same time, you've built quite a bit of inventory in a quarter where, in front of a quarter where chipsets are going down.

If you could just help us rationalize what's actually going on with your own internal inventories, that'd be very helpful.

Sure, Stacy.

First, on the EPS guidance.

Correct.

Relative to our midpoint for Q1, we came in $0.14 higher.

And relative to the full year, relative to the midpoint, we're raising our guidance by $0.13.

So, I mean, in so many words, what we're saying is that although we saw a real nice improvement here in the first quarter, we're cautious on the remaining three quarters, given the macro environment.

And so we're not adding to the improvement, at least at this point, for the full fiscal year.

In terms of the tax item that you mentioned, yes, there was a positive on the -- because of the R&D tax credit extension.

The -- but if you recall, though, what we have here on the outlook is better for QTL, pretty close what we previously had for QCT.

And that, on balance, raises our tax rate.

And so that was able to, with the R&D tax credit extension, we were able to offset that.

There are other items that weren't that material, so I didn't mention them.

For example, foreign exchange in this outlook relative to the budget hit us about a penny.

So you've got some small things that are offsetting the benefit of the R&D tax credit extension, but from an operating standpoint, I think it's a pretty solid $0.13 raise for the full year.

And the inventories?

And then on the inventory, yes, we have increased our inventory.

Remember, now, we're increasing -- we've got a higher-end product that we've got a lot of demand for, which of course, that aligns with our guidance that we do think average revenue per MSM is going to be increasing here into the second quarter; in fact, into the full fiscal year.

So, yes, our inventory is growing.

We have been relatively short on inventory, given the 28 nanometer production shortfalls, relative to demand.

Now that's caught up.

And so, with the boost in our inventory, I think we're going to be better positioned now to handle the fluctuations that we typically see in customer order demand.

Great.

Very helpful.

Thank you, guys.

Matthew Hoffman, Cowen and Company.

And Bill, congrats on a job well done.

So I'll get one last question in here for you.

The largest change in the regional forecast was the uptick in China.

Can you kind of give us some color on whether TD-SCDMA and an uptick there really affected your view in the forecast?

Then this one's maybe for Derek.

As TD-SCDMA moves up the value chain here later this year, and we start to see more of a high-end offering in TD-SCDMA, will that have a positive impact on the royalty rate, assuming a greater portion of the Chinese market has multimode phones and maybe even some export?

Thanks.

Matt, this is Bill.

On the first one on China, I think it was pretty broad-based.

Yes, we did -- we are updating our estimate a bit, improving our estimate for TD-SCDMA.

But the strength across all three operators is quite strong.

CDMA 2000 is going very strong.

Take you back to the remarks that Paul gave earlier.

And then China Unicom with WCDMA.

So I think it's pretty widespread.

We're -- China is going quite strong for 3G/4G devices.

And we've seen that trend, and our updated estimates here are just improving that trend a bit.

Much the same for Latin America.

That's the other market of note I would draw your attention to.

We've seen a lot of strength there.

And just our most recent data points say that that's likely to be a bit stronger than what we had previously been expecting.

This is Derek.

On the TD-SCDMA situation in China, we have been continuing to collect some amount of royalties on TD-SCDMA, although, as we've said, we've struggled a bit with some of the local Chinese companies.

But I agree, we do see an opportunity as the volume hopefully migrates at the high end to multimode with UMTS or even CDMA.

And then with the trials launching, the inclusion of LTE.

That should open up an opportunity for us to collect on a larger portion of the China mobile volume.

I'm not sure it's specifically a rate issue, but certainly an opportunity to grow the revenue base.

Thank you.

Tal Liani, Bank of America.

Yes.

I have two questions.

The first one is just, I'd like to understand the assumptions about MSM seasonality into -- or semiconductor seasonality into the second half of the year.

Because you're assuming -- and I know we spoke about it -- but you're assuming that EPS is going to be down in second half 20% versus the first half.

And in last year, that was a much worse year, it was only down 15%.

The previous year was down 13%.

So you're assuming that this year is going to be much worse seasonality-wise, much worse second half as the first half.

And I'm wondering about the MSM assumptions.

What drives this number so low?

And I know you spoke a little bit about -- you gave a very detailed answer.

So I want to focus my question just about the MSM assumptions for the rest of the year.

Thanks.

Okay.

Tal, it's Bill.

I'll take a cut at it, but maybe others want to add into it.

On MSM seasonality, we do expect -- obviously, we've given you our estimates, our guidance, for fiscal Q2.

If you just take the midpoint of that, we are expecting a decrease.

Midpoint is about 169 million MSMs compared to the 182 million we just reported having shipped in Q1.

Then going into Q3, at this point, we're modeling kind of a flattish number, and then an increase going into the fourth fiscal quarter.

On the -- how that correlates this year to our earnings per share as compared to prior years, recall that in the last couple of years, the QTL earnings strength has been very strong, at least in proportion to the QCT earnings strength; whereas this year, although we're looking for both business segments to grow at a double-digit rate, we're looking for QCT growth to be substantially greater than the earnings growth for -- coming from QTL.

Okay.

Kulbinder Garcha, Credit Suisse.

Thanks and congratulations to Bill again on a job well done.

On QCT, I understand some of the drivers with respect to the margin decline.

I guess the question I have for Bill and Steve is, the level of market share that you guys have in LTE, the mix shift that you are seeing on the ASP side that's going to probably continue, should be positive drivers throughout the year as well.

So just the magnitude of the QCT margin pressure seems surprising to me.

Now, why isn't that a reason why just the margins are at a structurally higher level?

Maybe they do drop, but certainly to 17% or 18% in the coming quarters seems quite extreme.

So I'm just trying to understand why that isn't more of a positive driver.

Or are you taking something aggressive on the pricing side more meaningfully than we think?

And then a question for Derek, specifically, on licensing.

There's a building sense now, and it's becoming quite clear, that you're going to sell maybe 200 million -- maybe 250 million 3G-enabled smartphones from the Asian Taiwanese chipset community, whether it's MediaTek, Spectrum, et cetera, and you guys should be able to license those phones.

How much of that market are you actually assuming that you can license in this year's guidance?

Are you being cautious because it's a different ecosystem to license?

Or is a significant amount embedded into your estimates somehow?

Any sense around that would be helpful.

Kulbinder, first on the QCT margins.

This is Bill.

You know, I gave the four major drivers for the decrease that is built into our estimate.

I'm not going to -- I'm going to stay away from assigning a value to any one of those four.

It will have to suffice to say that we're very comfortable with our forward plan in the business.

It is a large decrease in the operating margin, but it is, as we've said in the past, we're going to see quarterly swings.

It's -- nothing changed on what our three- to five-year goals are for the QCT business, nor our sense of our ability to achieve those goals.

So there are a lot of factors, obviously, but I would just say the pricing that we give is very thoughtful, very well considered.

And it's always with a mind towards where we're going to be looking a few years out.

Let me -- this is Derek.

Let me go ahead and take your second question.

So there isn't really a different base of customers that are buying from MediaTek or others.

I mean, we have now, as we've talked about, I think more than 70 companies licensed in China.

And pretty much all the major suppliers in Taiwan have been licensed for quite some time.

And those agreements require them to pay royalties regardless of whether it's our chip or anybody else's chip.

And so when we think about the market and we give our projections, we're really trying to capture the entirety.

And I feel very confident that maybe with the exception of some of the TD-SCDMA volume that I spoke about a few minutes ago, we're really well positioned to capture the sales of all 3G and 4G devices that are going to be supplied, irrespective of the chipset that's in there.

Thank you.

James Faucette, Pacific Crest.

I just want to add my voice to those offering congratulations and best wishes to Bill.

A couple of questions.

First, touching on the revisions or lack thereof for 2012 and 2013, Bill, you indicated that you hadn't changed your GDP assumption, but yet, we saw pretty substantial revisions up for 2012.

So, just wondering if there was anything that made you feel more cautious about how that GDP could have impacted us, especially since we are looking at a higher base for 2012?

And then, Derek, I wanted to follow-up on Kulbinder's questions, I guess, related to licensing.

In particular, on TD-SCDMA, could you give us an estimate as to what you think your current coverage or collection portion is on the TD-SCDMA handsets that are being shipped?

Thank you.

James, on the first one, we did see a very -- we are seeing a very nice upside to calendar 2012 3G/4G units.

And I would just generally say, it's fairly widespread by geography, but it's largely two main drivers.

One is the upgrade rate.

Apparently, subscribers upgrading to smartphones or upgrading their existing smartphone is one of the major drivers.

And then, secondly, we think we're continuing to see good progress on migration of 2G to 3G.

We don't have a specific reason as to why those wouldn't continue to be positive factors into 2013.

It was simply a matter of we're only three months into the new fiscal year, and we concluded that we have a positive bias in that 3G/4G unit forecast for 2013.

But we thought it was just a bit early in the year to be raising our estimates there.

We thought, let's wait another three months, see where we're at, at that time.

Although we're very pleased, obviously, with the total 3G/4G market, I think we all have to be cautious, given the macroeconomic environment that we're all seeing here.

So I would just say positive bias, but not enough at this point to cause us to raise those estimates.

James, this is Derek.

Let me take your second question.

The information on the TD-SCDMA volume in China is a bit difficult to get your arms around completely at times.

And I don't have a -- I can't give you a specific percentage today.

I will say that, as time has gone on and there's been shifts in sort of the supplier base, the percentage of total units, as best we can tell, that we're actually collecting royalties on, has come down some over time.

But then as you go forward, as I said, there's some trends that are going to shift things, we think, back in the other direction.

You know, higher percentages of these devices that are going to be multimode with either LTE or UMTS.

So it's really a bit hard to pin it down.

The other thing, just to make sure it's clear, when we give our estimates for unit shipments for the year, what we include is the percentage of total TD-SCDMA that we expect to get reported to us and royalties to be paid on.

Jeff Kvaal, Barclays.

Yes, gentlemen; thanks very much and, again, Bill, congratulations and best of luck.

My question, Derek, is for you.

And I'm wondering if you can talk us through a little bit big picture of where you feel that we are in the migration from 2G to royalty-bearing phones.

How far along in the penetration wave are we?

And how quickly do you think we might move up that penetration wave over the course of the next few years?

So I think the idea is -- and we've seen some exceptionally impressive growth out of QTL over the course of the last few years, as Bill suggested himself, that mix seems to be shifting the other way.

At least, this way -- this year, should that continue, how should we think about the growth trajectory in that business?

Thank you.

Sure.

I think what Bill said is I think we're seeing exceptional growth out of the QCT business this year, but we're still expecting significant growth from QTL as well.

So we're not suggesting we were expecting a decline there; it's more that QCT is really accelerating.

So you've got to think about it a couple different ways.

One is, if you look at the unit shipments, there's still a pretty decent amount of 2G volume out there that will be shifted over to 3G.

When you think about it from a TRDS perspective, meaning the units times the ASP, actually, the volume out there on 2G looks a bit smaller.

But I think the opportunity ahead is quite great, because we're expecting when those units transition from 2G to 3G, they're going to transition at a higher ASP.

Whether that's initially a feature phone, although those are rapidly going away, or more likely a low-end smartphone.

So as we look at our plan, and we've said we expect continued strong growth in the business over the five-year plan, that's because we see still quite a long runway.

I think China still has, what, about 26% penetration.

That was in Paul's note today -- or comments today.

And we've got places like Latin America, Eastern Europe, some very large markets that still have quite a ways to go through the transition.

And I think as they do that, they will go through at, I think, at a higher ASP than some of the early transitions to 3G in the past.

Okay.

Thank you.

Mark McKechnie, Evercore Partners.

About the end of the cycle here, but, hey, Bill, your onshore cash grew nicely sequential, I believe.

I think, what, by like $4 billion or so?

Am I right?

And maybe you could tell me a little -- tell us a little bit about how that happened.

And if you feel like the onshore/offshore cash challenges have subsided a bit here.

Thanks.

Sure, Mark.

Yes, total cash grew nicely, and more so on the offshore, but onshore did increase as well.

I mean, we're clearly in a position where we're hoping our 10b5-1 Program that we have in place will trigger to use up some of that onshore cash.

We think we're in a bit of an excess position on the onshore.

But having said that, I think you know our philosophy.

We like to be very patient on those buybacks.

And our history has shown that that's been the prudent thing to do.

That eventually, we'll deploy that cash.

But at least historically, we've been able to deploy it in a way that's a very good return for the shareholder.

On the offshore, and your question, am I more optimistic?

I think I'm probably just a nod less optimistic on timing.

I think we've all seen that we haven't seen any -- much -- or let's say sufficient cooperation in Washington that is giving me more optimism on an effective corporate tax reform, which is really what's needed.

And clearly, the agenda here in the near-term seems it's going to be consumed with debt ceilings, sequester, gun control, and immigration.

However, I remain hopeful.

I think it can be a good driver to further improvement in the American economy.

So, I remain hopeful, but my time frame on hope has just moved out a bit.

Great.

Thanks, Bill.

And congrats.

That concludes today's question-and-answer session.

Dr. Jacobs, do you have any closing remarks?

It's kind of hard to imagine that this is the last earnings call I'm going to do with Bill.

So I just want to say congratulations again, and thanks, Bill, very, very much.

Thank you, Paul.

I'm going to miss Qualcomm greatly.

I will.

Thank you.

Don't go too far away from us, Bill.

You're still part of the family.

And of course, we're looking forward to welcoming George at the next call.

And I have to say it's a great time, because the Company is really executing extremely well.

I mean, we're competing both at the high end and the value segment in smartphones, which are continuing to grow globally.

Real excited about the new products.

The new Snapdragons are gaining a lot of traction.

And we're putting new radio technologies, new processors, new graphics, all sorts of things that are getting integrated into those devices, really driving our lead and using our scale to advantage, in terms of being able to invest in R&D, and invest early and drive that.

And obviously the licensing business continues to grow strongly.

So, a ton of opportunities ahead of us, both in the traditional businesses and in the non-handset devices.

And so I think the Company is very, very well positioned to seize the opportunities we see for the future.

So, thanks very much to all of you.

And I guess we'll probably see some of you in Barcelona.

So, thanks again, and thanks, Bill.

That concludes today's conference call.

Thank you for your participation.

You may now disconnect.