高通 (QCOM) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm second 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, April 24, 2013.

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

International callers, please dial 404-537-3406.

The playback reservation number is 29888090.

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 George Davis.

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 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 also would 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 results or -- actual events or results could differ materially from these projected in the forward-looking statements.

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

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

Thanks, Warren, and good afternoon, everyone.

We are pleased to report another strong quarter with record revenues up 24% versus a year ago, driven by broad-based demand for smartphones and strong semiconductor volumes.

In recognition of our strong financial position and the continued growth in our Business, we recently announced a 40% increase in our dividend, and a new $5 billion share repurchase authorization.

In QCT, we continue to drive technology and product leadership, saw the first product announcements by our customers on our new Qualcomm Snapdragon 600 and 800 processors.

We launched our new Qualcomm RF360 front-end solution, and we extended our support of the industry's widest range of operating systems to include Mozilla's web-based Firefox OS and innovations such as Facebook Home.

Qualcomm is now ranked by revenues as the third-largest semiconductor provider in the world, up from sixth last year and ninth the year before, according to HIS.

Turning to QTL, total reported device sales came in towards the high end of our prior guidance range, reflecting continued global adoption of smartphones, particularly in emerging regions.

This marks another record quarter of total reported device sales and QTL revenues.

We also continue to grow our licensee base, and now have over 230 CDMA licensees, and more than 50 single-mode OFDMA licensees.

Looking forward, we believe our long-term growth drivers remain intact, and are increasing our calendar year 2013 3G/4G device forecast in line with this view.

Smartphone adoption continues at a rapid pace.

Gartner estimates that approximately 700 million smartphones were sold in calendar 2012, up 44% year-over-year.

Further, they estimate that in 2017, more than 1.7 billion smartphones will be sold, representing an approximate 20% compound annual growth rate versus a 2012 base.

Smartphones become more than just a technology product, empowering people to connect and interact with the world like never before.

And we are working to deliver continuous improvements to this user experience through our investments in industry-leading innovations in smartphone technologies, including the CPU, the GPU, multimedia subsystem sensors, displays, connectivity, and, of course, last but not least, the modem.

Emerging regions are experiencing the fastest growth for 3G, as 3G networks mature, and the breadth of affordable smartphones expand.

Wireless Intelligence reports that at the end of the first calendar quarter of 2013, 3G connections including CDMA 1x in emerging regions increased 34% year-over-year to approximately 1.1 billion.

According to analysts, 3G connections are now more than three times the number of fixed internet connections in emerging regions, making mobile the leading, and in some cases the only platform for computing and internet access.

Let's take China as an example.

Wireless Intelligence reports that there are now more than 1.1 billion wireless connections, of which only -- approximately one-third are 3G, including 1x.

There is a large remaining opportunity as consumers migrate from 2G to 3G and 3G/4G multimode.

[Tiomor] reports that than six times the number of sub RMB1000 smartphone models were launched in 2012 versus 2011.

By the way, RMB1000 is approximately $160.

All three carriers in China reported increased data traffic and revenue, with China Telecom reporting a 47% year-over-year increase in data revenue for 2012.

And beyond the phone, it is important to remember that we are pursuing multiple incremental growth opportunities, including mobile computing, and what we refer to as the internet of everything.

We are still in this early stages of mobile computing, but we believe the fundamental benefits of always on, always connected and sleek form factors will create a more compelling user experience than traditional computing devices.

We are encouraged to see a diverse set of vendors experiment with different form factors and multiple operating systems, as they look to address the evolving computing environment.

Further, as it relates to the internet of everything, we are leveraging our core technologies to support a range of applications for a diverse set of vertical industries, such as automotive, smart energy, security, health care and the connected home.

As an example of momentum in that space, General Motors recently announced its intent to put LTE connectivity into its entire fleet of 2015 Buicks, Cadillacs, Chevrolets and GMCs.

And that is following similar announcements from BMW and Audi, for investing in a variety of solutions to help meet the rapidly increasing data traffic demands that these opportunity are creating.

We refer to this as the 1000X data challenge.

We are making good progress with technologies such as carrier aggregation, LTE broadcast, and new small cell deployment models.

Further advances in 3G network technologies such as HSPA+ and new overlay LTE networks are being deployed at significant rates.

And according to the GSA, there are now over 160 commercial LTE networks globally.

China Mobile announced plans to expand its LTE TDD trial network to include 200,000 base stations by the end of 2013.

And Snapdragon and Gobi-enabled LTE TDD devices are starting to achieve China Mobile's network certification.

As you obviously know, George Davis has joined Qualcomm as our Chief Financial Officer, and I would like to welcome him to his first Qualcomm earnings call.

We are off to great start, and I am looking forward to working with George in the months and years to come.

So to conclude, we have just completed another strong quarter at Qualcomm, and we are pleased to be increasing our fiscal 2013 guidance.

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

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

Thank you, Paul, and good afternoon, everyone.

Our QCT business had another excellent quarter, with revenues and earnings before tax increasing 28% and 14% year-over-year, respectively.

We shipped 173 million MSM chipsets, up 14% year-over-year and at the high-end of our prior guidance range, reflecting strong demand across our portfolio, including our QUALCOMM reference design solutions.

Looking forward, we are expecting another record year for QCT, growing revenue and earnings before tax on a strong double-digit basis year-over-year.

This growth is in excess of the rate of growth of estimated industry 3G/4G device unit shipments, and the year-over-year percentage increase of our expected operating expenses.

Further, the year is unfolding better than we initially expected, and we are successfully increasing our share and our share of content in devices.

This strategy is delivering strong revenue and per unit dollar margin growth year-over-year, albeit with downward pressure on the QCT gross margin on a percentage basis, as expected.

In total, we are pleased to raising the Company guidance, in large part due to the strength of our Chip business.

Flagship devices announced this quarter that contain our chipsets include the Samsung Galaxy S4, the HBC One, the LG Optimus G Pro, the Blackberry Z10, and Sony Xperia Z smartphone and tablet.

Our strategy of pursuing a diversified customer base, including all the major OEMs and across all major operating systems, uniquely positions us within the industry.

We also continue to grow devices targeted at mass-market prices and emerging regions.

Our Qualcomm reference design program continues to build momentum with OEMs now shipping handsets based on our MSM 8x25Q quadcore chipset, and a developing pipeline for our LTE chipsets which will support the anticipated rollout of LTE in China.

In total, there are now more than 850 Snapdragon-enabled devices launched or announced, including approximately 200 devices based on our Qualcomm reference designs.

The pipeline of future Snapdragon-enabled devices also continues to grow, and there are now more than 475 additional Snapdragon-enabled designs in development.

Devices based on the Snapdragon 600 chipsets are launching now, and we expect commercial devices based on the Snapdragon 800 chipsets to launch on schedule in the middle of this year.

Carrier requirements that support the demand for growing network capacity will increase the complexity and requirements for modem and connectivity technology, and represent a sizable opportunity that aligns with our key strengths.

Our family of 3G/4G multimode chipsets leads the competition in mode and band support, as well as the integration of the latest Wi-Fi 802.11ac.

We are already on our third-generation of LTE modems, and with the MDM 9x25 and Snapdragon 800 chipsets, while others are still working on their first-generation.

This quarter we announced our new Qualcomm RF360 product, which addresses the next challenge with global LTE, OEM SKU proliferation coming from RF complexity and LTE band fragmentation.

We continue to execute on the strategy which we outlined for you in the past.

We innovate across multiple technology vectors, CPU, graphics, modem and connectivity, optimize the design point for the unique requirements of mobile, integrate these technologies into a tiered chipset roadmap, and deliver these chipsets at scale across multiple customers NOSs.

These technology investments enables superior performance, lower power consumption, faster time-to-market and continually raise the bar for competition.

The success of this strategy is reflected in our growing share, and the many OEM flagship devices already announced based on the Snapdragon 600 chipset, and the increasing device pipeline of more than 200 Snapdragon 600 and 800 chipset-enabled devices.

We believe it continues to position us well in the smartphone space, but also in the growing opportunities of mobile computing, the internet of everything, and the connected home.

That concludes my remarks.

And I will now turn the call over to George Davis.

Thank you, Steve, and good afternoon, everyone.

I am delighted to join the Qualcomm team, and look forward to working closely with the investor and analyst community in my new role.

We are pleased to be reporting strong financial results today, and to be increasing our financial outlook for fiscal 2013.

Fiscal second quarter revenues were a record $6.1 billion, up 24% year-over-year and 2% sequentially.

Non-GAAP operating income of $2.2 billion was up 18% year-over-year, and non-GAAP earnings per share of $1.17 was up 16% year-over-year.

Sequentially, non-GAAP earnings per share were down $0.09, reflecting seasonally lower QCT shipments and higher operating expenses, partially offset by 17% revenue growth in QTL.

As a reminder, this quarter reflects two very different seasonal periods for our main business segments.

For QCT, our March quarter is a period of seasonally lower demand, following the retail-intensive December quarter.

Because QTL records royalty on subscriber device sales on a quarter lag, our fiscal second quarter results for QTL reflect the strong demand period of the December quarter.

QTL reported strong growth in 3G/4G device shipments by its licensees, driven particularly by smartphones in both developed and emerging regions.

Total reported device sales rose to a record $61.1 billion, up 15% sequentially and 18% year-over-year.

Devices shipped by our licensees in the December quarter were estimated at 279 million to 283 million units, with an estimated average selling price of $214 to $220.

QCT shipped 173 million MSM chips at the high end of our prior guidance range, driven by strong demand across our portfolio, including QRD chipsets for emerging accounts.

Revenue per MSM was relatively flat sequentially, and QCT operating margin was in line with expectations at approximately 17%.

Non-GAAP combined R&D and SG&A expenses grew 14% sequentially, exceeding the high end of expectations due to increased patent, legal, and employee-related expenses in the quarter.

Operating cash flow was strong at $2.2 billion, up 17% year-over-year and 36% of revenues.

During the quarter, we returned $431 million of cash dividends to stockholders.

Let me now spend a few minutes on our outlook for the fiscal year and our fiscal third quarter.

We are raising our guidance for fiscal 2013.

We now estimate our fiscal 2013 revenues will be approximately $24 billion to $25 billion, up 28% year-over-year at the midpoint, and up $600 million from our previous guidance.

We estimate our fiscal 2013 non-GAAP earnings per share will be between $4.40 and $4.55, up approximately 21% year-over-year at the midpoint, and up $0.13 relative to the midpoint of our previous guidance.

Our fiscal 2013 operating margin percentage estimates for QCT and QTL are unchanged.

We expect combined non-GAAP R&D and SG&A expenses for fiscal 2013 to grow approximately 21% to 23% year-over-year.

This is a modest increase over our prior estimate, primarily due to increased patent and legal expenses and variable employee costs.

Let me spend a moment on calendar year 3G/4G device estimates and fiscal year device ASPs.

As a baseline, we have updated our estimate of 3G/4G devices shipped in calendar year 2012 upward to a range of 928 million to 945 million devices.

This represents an increase of approximately 18% year-over-year at the midpoint.

This is somewhat higher than our prior estimate led by emerging region demand, and provides a strong base for the growth we expect in calendar 2013.

For calendar year 2013 3G/4G device shipments, we now estimate that between 1.015 billion and 1.085 billion devices will be shipped by our licensees, driven by strong global smartphone demand.

At the midpoint of our calendar 2013 guidance and the revised calendar 2012 range, we estimate 3G/4G device growth will be 12% year-over-year.

We estimate that the average selling price of 3G/4G devices for fiscal 2013 will be between $216 and $224, consistent with the midpoint of our prior forecast.

We estimate our non-GAAP annual tax rate to be approximately 17% to 18% for fiscal 2013, consistent with our prior expectations.

Now turning to the third quarter of fiscal 2013, we estimate revenues will be in the range of approximately $5.8 billion to $6.3 billion, up approximately 31% year-over-year at the midpoint.

We estimate non-GAAP earnings per share for the third fiscal quarter to be between $0.97 and $1.05, up approximately 19% year-over-year at the midpoint.

We anticipate that fiscal third quarter non-GAAP combined R&D and SG&A expenses will increase sequentially approximately 2% to 4%.

In QTL, we estimate that our subscriber licensees will report total reported device sales of approximately $51 billion to $56 billion in the June quarter for shipments made in the March quarter.

At the midpoint of that range, we expect total reported device sales to be up approximately 12% year-over-year, and down approximately 12% sequentially reflecting post-holiday seasonality.

In QCT, we expect to ship between 163 million and 173 million MSM chipsets during the June quarter.

We expect a stronger mix of chipsets targeted for high tier smartphones to drive revenue per MSM higher, resulting in sequential QCT revenue growth of more than 5%, despite the reduction in expected volumes.

We expect QCT operating margin percentage to be relatively flat quarter-over-quarter at approximately 17%.

That concludes my comments.

I will now turn the call back to Warren.

Thank you, George.

Operator, we are ready for questions.

(Operator instructions)

Mike Walkley from Canaccord Genuity.

Please go ahead with your question.

Thank you very much.

I was wondering if you could discuss the ASP trends for the total device market?

It seems like there is a lack of high-end product introductions during the March quarter.

But there was a lot of high-end flagship devices ramping into the market during the June quarter.

Could we expect that QTL ASPs maybe to increase exiting this fiscal year, relative to your guidance?

And am I calculating it right, that your guidance also implies an uptick in ASPs for the June quarter?

Thank you.

This is Derek, and I will take that one.

Yes, I think we saw a little bit of a downward trend in ASPs in Q2, although that was in line with what we expected.

As we look back historically the last couple of years, we have seen actually ASPs kind of trend down in Q2.

But then they have tended to trend up in Q3 and Q4.

So as we look out at the back half of the year, we are expecting a kind of a rebound in ASPs, as compared to the Q2 ASP.

And that is including the offsetting effect from FX.

So I do think, both in the March and the June quarter, we should see some improvement in the ASP compared to Q2.

I will ask George.

(Multiple Speakers).

As a reminder again, our range for the full year is still -- we have narrowed it a little bit, but it still has a midpoint of $220.

Okay, thanks.

And then Derek, just on the FX, was there any impact to FX in the short-term, or any impact from the yen in particular?

And then just longer-term, with a stronger mix from low end markets, do you see the ASP trend as still kind of single-digit annual decline as a good way to think about it?

Thank you.

Why don't I just -- this is George.

I will cover the near-term impact, and maybe Derek, you can cover your views on the longer-term impact.

Actually we did experience some impact from the yen in the second quarter, and really for the full year.

But in both Q2 and Q3, the net effect has been minimal in Q2 in particular, because of the favorable impact from other currencies.

So for the full year, we see the FX being about a $1 impact on the ASP.

So not much of an impact, and virtually no impact in Q2.

So back on the longer-term trends, I think really, the trends that we have been seeing and that we highlighted back at the Analyst Day in November, two quarters in, are really holding.

And we see them remaining intact.

In particular, in the emerging regions, the ASPs have continued to increase.

And in fact, when we talked about sort of the tiers, the interesting thing is although the volume is continuing to grow there, the percentage of the units coming from the mid and high tier has kind of been holding.

And so I think both of those trends are consistent with what we expected at the beginning of the year and will continue.

But as you said over the long-term, as more volume shifts to emerging regions, in terms of our internal plans, we have got baked in assumptions that there will be single-digit declines in ASPs over the longer-term.

Thank you.

Tim Long from BMO Capital Markets.

Please go ahead with your question.

I just wanted to go a little further detail into the QCT gross margin.

Steve, you mentioned it down as expected.

I just want to put that together with a few things.

First, last quarter, Bill had mentioned a positive contribution to gross margin from QCT.

So I think it went up 2 or 3 points, doing the math looking like its -- it went down about 6 points or so, 5 or 6 points this quarter into March.

So it seems like a little bit of a reversal there.

Are you saying that as expected, I am curious what that means?

And what do we think about from the market drivers for this change in gross margin, meaning is it QRD and MediaTek competition?

Is it new LTE devices from competitors finally starting to hit the market?

And at some point, do we start to see a floor in this gross margin number for QCT?

Thank you.

Tim, this is Steve.

So in Q1, kind of Q1 from -- excuse me, Q2 from Q1, a couple of things happened.

One, is you get the normal calendar year price reset which hits in this quarter.

You -- we also had a bit of a weaker mix from the perspective of more units coming in from emerging markets versus developed markets.

The December quarter tends to be pretty heavy in terms of build up in the developed world.

So you probably saw a little mix -- regional mix move away from the developed world.

We also mentioned on the last call that we were in the middle of doing some -- we also think about how we do our pricing strategy, which I think comprehends not just the short-term but also long-term views of the competitive landscape.

One thing that I should mention, we really are not seeing significant competitive threat in the LTE area as you mentioned.

I think it is just more of a mix issue, and some of the calendar items that you have probably seen over the past years as well.

Okay.

And forgive me, but I thought that the ASP looked pretty much flat, December to March?

Right, so -- the mix could not have been that bad, (inaudible) flat, right?

What you saw, is you probably saw a little bit less mix from the high-end, and a little bit more from the emerging market area versus the quarter before.

Okay, thank you.

And Tim, this is George.

I would just add, that when we look at Q2, even though the volumes of MSMs were up relative to our expectations, the mix issue did have an impact of kind of neutralizing the benefit of those higher volumes.

And so, the outperformance in Q2 was more of a QTL story.

Okay, thank you.

Simona Jankowski from Goldman Sachs.

Please go ahead with your question.

Thank you very much.

I just had a question on the chipset side, and then one the royalty side.

Starting with chipsets, can you just kind of go over the puts and takes on the volumes expected in the June quarter, considering there are some significant major launches that you are participating in the June quarter?

I would have thought that you would see some better sequential performance there, than what you are guiding for?

Simona, this is Steve.

I try not to get into kind of the mix of different customers.

The one thing that I would say, is that throughout the year, we are probably a little bit diversified from big changes in the customer base.

And we are seeing kind of some customer mix change move around.

And you see that in our numbers, and probably in our mix a little bit.

But I don't think that quarter is -- has traditionally been the strongest quarter, relative to some of the other ones that we have had.

I don't know if there is anything ominous in there that you should be able to pick up or think about picking up.

So you are not assuming any kind of inventory correction or anything like that?

No.

If anything, I think you probably see little bit of an increase in our inventories, which you probably, you should think of as confidence in shipping some of the higher end chipsets into the market.

Okay.

And then on the royalty side, the question there, so your ASPs declined about 4% sequentially.

And that is despite the fact that in the December quarter, volumes in North America and other mature markets were actually quite strong.

And I would have thought that with that being higher ASP region that, that would have helped the mix for QTL.

And then conversely, we are now seeing and what was reported by AT&T and Verizon and others that North America volumes have really come down quite significantly in the March quarter which is being offset by substantial growth in emerging markets around the lunar New Year and so forth.

And so that would have suggested to me that the mix actually would get better and benefit your ASPs in the royalty segment in the March quarter for you report in June.

So could you just kind of dig a little bit more into, why that logic is not playing out?

Yes, this is Derek.

So I think, as I was trying to explain before the, we have seen actually more volatility I would say in the quarterly ASPs, with more kind of iconic high-end devices and the timing of the launches.

What we have seen is actually the ASPs moving around quite a bit.

Like if you look last year, we were slightly down in Q2.

But then the ASPs jumped up by like $15 in Q3.

So we are seeing more volatility.

I think the December quarter is obviously a very competitive dynamic, a lot of things going on in pricing.

And it is a quarter where we have less volume, coming from some of the higher ASP regions like Japan.

But as I said, as we look out and we have a certain amount of information already from our licensees, and then based on publicly available data, we do expect ASPs to increase in Q3.

And then as you suggested, there are a number of new higher end products launching that should have a positive impact on the Q4 ASP as well.

Okay.

Thank you very much.

Brian Modoff from Deutsche Bank.

Please go ahead with your question.

Yes, I got a couple of questions.

So one on the QCT margins, kind of guiding again at 17% in the quarter.

Can you kind of walk through a little bit of that I know obviously volumes aren't as good.

But you have had some of your expenses you typically incur in Q1 done.

Are there -- calendar Q1, are there incremental expenses, take outs, et cetera?

And then can you also talk about -- you mentioned a couple of times higher legal expenses.

Can you talk about, has there been a shift in litigation?

Or is there some event occurring outside of perhaps the smaller case in Florida that you are dealing with?

And then the last question, just around S 800.

You are talking about launch in midyear.

How is the design traction on that going, and how do you see that affecting your overall mix in ASPs in QCT?

Thanks.

Brian, hello, this is George.

On the QCT margins, we said for the full year as you may recall, that we saw 18.5% to 20.5% margins for QCT throughout the year.

We are seeing spending increase into the last half of the year.

So 17% at Q3 is still going to be consistent with that outlook.

And in fact, we recommitted to the margin outlook.

So I don't think that we really changed our view at all.

I do think that we are certainly seeing strength in ASPs for QCT in the second half of the year.

That will help.

But we are also seeing some ramping in the spending.

Brian, this is Steve.

A little bit on the 800 status.

It is actually doing well.

It is -- if you look at the uptick in the second half, the second half does look quite a bit better than what we would have thought in the January time frame.

A lot of that is, this a higher mix product that we have been investing in some time.

I think you are going to see good growth year-over-year.

And I think some accretion to the business as a result of those higher end products coming in.

And I think that is really responsible for some of the guidance movement.

And just back to your second question on legal expenses and other items.

That really was to explain the delta from our forecast of up 10% to 12% to 14%, to the 14% growth that we saw in Q2.

Litigation and patent are both up in the quarter.

Some on settlements.

Some of the patents obviously, there was the adoption of the First-to-File rule.

And so, there was a lot of accelerated spending on patent filings in the quarter as well.

So it is more of an increase.

Obviously, the big increase is year-over-year, and also on an absolute basis, the increase in spending is still coming out of the core business.

Great, thank you.

Kulbinder Garcha from Credit Suisse.

Please go ahead with your question.

A couple of questions.

I just want to revisit the QTC margin question again, and maybe some more for the full year for Steve.

With the growth that you are seeing and the market share that you are gaining, and the mix improvement that you are seeing in LTE, I am just surprised that there just is not more leverage in that business, especially this year of all years.

And even the near-term, you are saying that you are seeing a higher mix of higher end chips going into the next quarter, but margins aren't going up.

So is something just competitive that you are trying to do?

Or are you thinking to try to block sockets for the long-term?

Can you speak about why there isn't more leverage this period this year?

And then for Derek, one of the debates that we have had over the years with you is about your [birth] to license, the significant 3G markets, smartphone markets developing out of the MediaTek world, if you like.

Is the increase to this year's addressable market number that you are seeing now, any function of your confidence in your ability to license phones there?

Or is it end demand driven?

Many thanks.

Hi Kul, this is George.

Let me just give some perspective on the full-year, on the margin.

Because and I think it is hard to see it for couple of reasons.

Number one, the margin performance for QCT is back-end loaded in the second half of the year.

And so you will see more of that impact and Q3 and Q4.

And we already have talked about the fact, that even on falling volume, you are going to see revenue and operating margin up in our expectations in Q3.

But, if you look at -- just step back and look year-over-year, QCT revenue will be up, say more than 35% year-over-year.

Operating margin we think will be up more than 40%.

And that is on -- again, we -- the OpEx is, it is really driving the OpEx growth of the Company year-over-year, but it is still at a lower percentage than its revenue growth rate.

So we are seeing, we are seeing some leverage in the margin.

Kulbinder, this is Derek.

Really the short answer is, it is end demand driven.

As I have explained in the past, we are continuing to grow our licensee base in China.

And our license agreements require payment of royalties, irrespective of whose chip is included in the device.

And I think I have taken folks through a few times, the robust process we have in place of monitoring the market in China, and really trying to drive compliance with our agreement.

So no change there, really a demand-driven story.

Thank you.

Ehud Gelblum from Morgan Stanley.

Please go ahead with your question.

A couple, I want revisit a couple of the issues that we went over already.

I may have missed some things, so I apologize if I am rehashing some concepts.

But on the QCT gross margin around 17%-plus, it is where you have guided it last quarter.

Can you give us a sense as to how much of that decline from last quarter's 26 was gross margin-related?

And how much was OpEx?

And to the extent that there was any gross margin decline in the business, how does that make sense, just help us get our arms around it?

Given that the QCT -- the chip in ASP was flat?

So maybe there was not a gross margin decline, it was all OpEx.

But I just want to understand that.

And going back to the previous question, that if it is all OpEx, why wouldn't that improve as you get through the year?

But just to understand that mix.

And then, on the QCT ASP itself, I think you had mentioned that it was flat because of the mix.

Obviously, at a higher end chips that we know that you shipped last quarter, there were also a bunch of lower end ones kind of kept it in step.

I think in the last conference call Bill had mentioned that he expected it to be up.

So I guess, what I am asking is vis-a-vis your expectations, what geographically happened?

Was the US not as strong as you had expected it to be versus your expectations, and was China just stronger?

And if that is the case, are you -- do you think you are gaining more share in China than you thought you were going to?

Yes, Ehud, this is George.

On the gross margin and OpEx, we don't guide that by -- at the segment level.

But I will say there, that it is in line with Steve's comments about the mix of business.

There was some, both gross margin and OpEx impact to get to that 17% number.

Okay.

I am not asking for guidance, but can you just give us a reflection from last quarter?

If the ASPs of the chips were actually the same, how would gross margin have gotten impacted?

It -- it is the dilutive effect of the additional volumes.

So additional volumes is bad for gross margin?

Those additional volumes were bad for gross margin.

Okay.

So lower end -- your lower end chips have lower gross margins than your higher end ones do?

Ehud, this is Steve.

Yes, that is correct.

In fact, I think what you saw, between what we would have guided at the beginning of the quarter and the end of the quarter is probably a little bit stronger units, and more units coming out of the developing regions versus the developed regions.

And so I think that -- those things do move around.

And we have talked about the ebb and flowing between the developed world and emerging world.

And this is one that is, probably a little heavy on the emerging world side.

Okay.

And then finally, do you expect that when you model going forward, and you are looking especially at the royalty side, as well as at the chip side, how do you -- with China going very soon hitting TD LTE and ramping on the 3G side, I would have expected more higher end than lower end coming out of China.

But is that relative to what is going on?

Are you seeing a stagnation perhaps in the developed world as China gets going?

Is that kind of the what, the story that we are looking at going forward?

I don't know.

I will give my -- this is Steve.

But I will give my view on it, which is I don't think you are seeing anything in terms of stagnation.

You are probably a little early in the ramp of LTE TDD.

And you are still seeing I think significant transitions from 2G to 3G, which we are seeing in the low end chipsets.

The developed world tends to be peaking, meaning that it is dominated in many cases by flagship models, and concentrated volumes in particular quarters.

I don't if Derek or anyone else has any other view?

Rod Hall from JPMorgan.

Please go ahead with your question.

Yes, thanks for taking my question.

I just wanted to -- I want to ask one question, Steve, on the ASP.

I know there have been a bunch.

But you have talked about the ASP volatility increasing, which has obviously been the case.

And we know that that is due to a bunch of other, different things going on in the mix, upgrades from feature phones to smartphones et cetera.

But I wonder if you could talk about, what I noticed is your range of guidance on the ASP really -- that does not -- it has not changed that much, and hasn't widened up that much from since a year ago, even though the volatility seems like it is increasing.

So could you talk about whether you think the current range of guidance is appropriate, given its increased volatility?

And also, maybe talk a little bit about things like tablets, how they affect that?

Just how predictable you think that ASP is at this point?

And then the other thing that I wanted to ask you -- this the RF360 chip, a pretty interesting product.

Just, could you give us an update on where we are with designs and shipments on products for that and so on?

And what the timeline is looking like on that?

Has it changed at all since you announced the product?

Thanks a lot.

Rod, this is Steve.

I am assuming that you are referring to the licensing business guidance versus the chip guidance.

Is that correct?

Oh, yes, I am sorry, Steve, I am sorry.

Yes, I am referring to that.

So this is Derek.

Let me take a crack at it, and I will see if anybody else wants to chime in.

But obviously, trying to estimate the ASPs is a difficult process, although we get probably more information than most to help us in that process.

I think you know our feeling is that the range that we have set out is an appropriate range.

And when we think about the fiscal year ASP, we usually start out the beginning of the year like some of our other guidance with a wider range.

And then as we get closer, we go through the year and get closer to the end of the year, we will tend to narrow it up a little bit.

Because we can -- we feel like we have a little bit more -- some of the year is already under the belt, so we have less to forecast.

But again, again we feel like we have a robust process in place, and we are doing a pretty good job.

For instance, this quarter we had a relatively significant drop in the ASP quarter-over-quarter, yet it was in line with what we expected, and consistent with the full-year $220 midpoint that we had last quarter.

And we still see that as consistent with the guidance for the year.

So I am pretty comfortable with the process that we have in place.

And do you think volatility is increasing, Derek?

I mean just to --

I think quarterly volatility has been increasing, partially for the reasons Steve mentioned.

Which is as we get more of these iconic devices launching, and they are launching at sort of peaky times throughout the year, it has the effect of moving the ASP around more than it did in the past.

Okay, thanks.

And then on the RF360, we are pretty pleased with it.

It is something that you should see in the second half of this year.

I would say, as I have said before, we are not going -- expect us to sort of walk before we run in this product area.

This is a new product area for us.

And I think we probably have a lot to learn in terms of ramping a bunch of customers very rapidly.

And, of course, we have very large volumes now.

So we will probably take that one slow, in terms of how we ramp it, but pleased with how it is going so far.

Stacy Rasgon from Sanford Bernstein.

Please go ahead with your question.

My question, I had a question on the OpEx.

So the annual guide going forward from this point, you took it up about $160 million on a pro forma basis versus where you were last quarter.

It is sounding to me from your description actually a lot of it is not R&D, it is legal and some of this other stuff.

Can you give us some sort of an idea, of how much of a split of this OpEx increase is actually coming from the SG&A and legal side versus the R&D?

And can we consider or think about those increases on the legal front and patents and everything else as more one-time?

Or are those recurring?

This is Don Rosenberg.

On the legal side, as George said earlier, one of those is a settlement which is not material.

But it is clearly a settlement, it is one-time.

And as George accurately described before, as you know with the New America Events Act which was the modification to our patent laws, there was a First to File modification put in.

And some companies took advantage of making sure that they filed a lot of applications in a timely way, due to certain timing issues associated with that.

We did a very good job as always of filing patents so that we could get the kind of protection that we want.

And that was a one-time event in order to meet those deadlines.

And how much was that?

I guess, I am trying to get a feeling for how much of this increase is, I guess an increase in sort of core investment in the Company, versus comp increases, versus like one-time charges?

Sure.

I think in terms of the increase, you still have a meaningful piece of that, that is in the core business.

Maybe it's easier just a step back and look at the full year-over-year.

Still when you think about a 21% to 23% increase year-over-year, about 95% of that -- not to be too specific -- but in that area is really related to spending increases in QCT and QTL.

So it is -- this is really about investment in the core business.

Got it, and I get that.

But given the amount of revenue upside that you are showing, you are really not showing the kind of EPS leverage that one would expect.

At least we would expect from the kind of revenue upside they are showing.

I mean, OpEx increase here, this is probably $0.07 or $0.08 of that EPS that is going away.

So, again, I am just trying to get some feeling for how much of this is recurring, and how much this is actually going forward from here, that they can actually drive further growth beyond the 35% or 40% we are seeing this year.

Trying to look as, in terms of what it can drive in the next year and beyond?

Yes, the nonrecurring piece is -- would not be a material impact on the year-over-year.

Okay.

All right.

Thank you.

James Faucette from Pacific Crest.

Please go ahead with your question.

Thank you very much.

I want to go back to question on licensing in China.

We have talked about, I think there has been mention of faster growth in the market there, than some of the other emerging markets.

I am wondering if we can get a sense for -- from you Derek, as far as where do we feel like the coverage is on collecting royalties from producers in that region in particular?

And I am just trying to get the sense for potential upside and growth, as you improve the coverage there and add more licensees, is kind of my first question.

Second question is for Steve Mollenkopf.

As we look over the medium-term to long-term, I think we have talked a lot about how there has been some mix that has impacted margins.

But yet the ASP has been relatively stable.

How should we think about the ASP development on the chipsets over the long run, particularly as you start to roll in some RF component, et cetera?

Can we remain stable?

Or should we expect those chipset APSs to decline at about the same rate that the handset ASPs are anticipated to?

Thank you.

James, this is Derek.

So on China licensing, I think I can probably break it into two parts.

I think generally we feel very good, as I have said that we are continuing to add licensees to the base, and grow the number of licensees in China.

I feel very good about the compliance efforts we have there.

So I think we are confident that we are collecting reasonably well on the sales there.

The one exception that is pretty well understood I think is, we have had some struggles with the local Chinese companies necessarily paying all of the royalties that they owe on TD-SCDMA units.

And although we have a large number of countries licensed for TD-SCDMA, given the political sensitivities there, that continues to be an issue for us.

And we have got a number of strategies in place to try to address it.

But as the TD-SCDMA volumes grow at China Mobile, that -- there could be a gap there between -- well, there will be a gap to some extent between what we are collecting on, and maybe some of the numbers that you are seeing come out of China, unless and until we are able to resolve the situation.

Having said that, I think there are some trends that should help reduce the size of the issue.

One of them is, that we do believe that the higher end of the portfolio is going to have a combination of UMTS and LTE, or at least the UMTS for global roaming and other reasons.

So as to the products that include those technologies in addition to that TD-SCDMA, we don't anticipate having the same issues that were experienced -- experiencing on the TD-SCDMA.

So again, as this is shifted over time, where I think the volumes were quite a bit smaller historically, and the mix of the supply base in China has also shifted over time to probably favor more of the local Chinese companies that have been a bit of a struggle.

But we will continue to work hard to see what we can do to solve it.

James, this is Steve.

On your question about I would say, kind of growing content and what the trajectory look like, if you step back and look at the business, what I think you are seeing is, as the mix shifts -- kind of the historical mix in our business has been very modem-centric, and it has had a particular gross margin associated with that.

As we go into getting more and more content on the phone, which first is coming in the form of application processors, and adding in that functionality, what you are seeing is, I think a growth in the raw dollars, and the gross margin for MSM, but a reduction in the traditional gross margin percentage.

Now we are still seeing significant growth as a result.

And clearly, we are -- it has been an accretive thing for the Company as you look back.

So I think what you are seeing, and what people are trying to figure out.

And as a particular quarter has a mix between modem and application processor, or different geographies such as the last quarter, you tend to see that move around a little bit.

And that is probably what you are seeing.

Now our view is, this is actually a very good business for us.

We are able to produce a business that grows faster than the market.

And now that it is at scale, it is growing faster than our rate of growth of the operating expenses.

So we think that is a very good business.

It also I think provides the springboard to go into some additional markets, such as the tablet market which we really have not participated in a great way.

Primarily, because the OS that we put our biggest bet on has yet to sort of develop, but we think it will.

So we look at this as a build scale in the smartphone space, and use that going to some adjacent markets as well.

We also think that to be successful, you have to have the scale.

So that is what you are really seeing in the business, a bit of an investment period.

But we are still producing growth during that investment period.

Tal Liani from Bank of America.

Please go ahead with your question.

Hello, thank you.

Just one clarification on the question.

The TD-SCDMA, you don't get paid on single-mode, but what about TD LTE?

Has this been decided already, or do you still argue with the locals?

Second question, is to understand the transition to the next node.

First, what are your plans when it comes to the next node, whether it is 29 or 16 nano?

How do you manage the transition, both on capacity and margin?

And do you expect the same margin decline when you transition, similar to what you have had with 28 nano?

Thanks.

This is Derek.

On the follow-up on China is, just to clarify, I mean, I think, we have agreements in place with a number of companies.

It is really just trying to work some of the issues and trying to get compliance.

We are also getting -- still paid royalties from some companies outside of China.

So I think that is a little bit of a dynamic, can't quite say we not are getting anything on TD-SCDMA, and that is shifting over time.

Our current expectation is that we have got more than 50 companies licensed now for LTE, including both TDD and FTDD modes of LTE.

And a significant number of those companies are Chinese companies, including ZTE.

So currently our expectation is that we will not have the same type of challenges around the LTE that we have experienced in China on TD-SCDMA.

And on top of that, we do think that many of the devices at China Mobile at least in the near-term that include LTE will also include UMTS.

And for that reason, would also be a trigger for royalty payments under our agreements.

And Tal, on the node transitions, we are -- you are going to see us consistent with earlier comments and our OpEx profile, really try to move through the nodes as rapidly as we can.

Our view is that, that put us in the best position to drive technology.

And to really, I think set the design point more than folks who cannot do that.

Now I would say, I don't know if I would make a conclusion that a new node or the 28 nanometer node in particular was associated with a lower gross margin.

It was probably more the mix of products versus anything else.

Today I think the general view is that the 28 nanometer mode is likely to be the node that exists for a long time, and will probably be sort of the mass-market node for some time.

We kind of felt that we got on that earlier than anybody else.

That being said, you probably heard some timing in the market about when companies will go to 20 -- 20 nanometer.

And our product roadmap is consistent with that timing.

We are going to be moving rapidly through nodes, and across different nodes at the same time, as we have done in the past.

So our general strategy is to make sure that we, at the low end we might use the most cost-effective node.

And at the high-end performance tier, we are going to use the leading-edge.

Mark Sue from RBC Capital Markets.

Please go ahead with your question.

Derek, just to clarify, a clarification, much, much longer term, if we go into the world of single-mode LTE, get just your thoughts on the impact there on the royalties.

And then also on tablets, is there something that we revisit, in terms of the royalty rates as it stands today?

Anything that proactively we can do, to kind of think about improving the attachments rates there?

Sure.

Let me -- so the first question on -- sort of on longer-term impact of single-mode LTE.

Obviously, there has been a certain amount of chatter around the industry about the timing of some of the early launches of single-mode LTE devices.

And I think there is some room for debate on that.

But we still believe that in terms of meaningful volume is shifted out a ways.

You may recall that we made a public statement several years ago at the time, based on sort of our current patent position which, frankly, I think has improved over time that we expected to charge about 3.25% for single-mode LTE, just for the essential patent portfolio.

And as you know, we generally license, generally our whole portfolio, and not just the essential portfolio.

So that 3.25% was just for the essential patents.

So while it is possible over time, we can see little bit of a step down in the rate as we transition to more single-mode LTE, I think we feel very good about the position that we are in, in terms of the agreements that we have signed, and the potential impact of that.

There are obviously other things in the agreements that could have somewhat of an offsetting effect in that as well, in terms of the total royalties paid.

But we will have to see how that plays out over time.

But sort of the big picture is, we still believe that it is out in time a ways, and that we feel good that we are establishing a value for the portfolio that everybody should be pretty happy with.

Got it.

Any thoughts on tablets?

Anything that we could do proactively there?

Yes.

So on tablets I think I mentioned last -- on the last call that the attach rates, obviously been not as high as we had expected.

They have been trending down a little bit over time.

I do think we are seeing some signs that the trend could be starting to reverse itself going forward.

And in particular, as we start seeing more volume in some of the smaller screen form factors, like a 7 or 8 inch that people will end up carrying with them more often, I think there is more desire to have sort of the ubiquitous coverage of cellular.

Also I think recently, I have seen some more subsidies coming in from the operator channel on the tablet products, which really have not -- they have not been pushing too much in the past.

And then, of course, I think in the last six months or so, we have seen many of the operators around the world make moves on their pricing plans that are more conducive to driving adoption.

So I think some things are coming together, which we hope will start to improve the picture.

From a royalties standpoint at this point, we are -- we think that we have done our part and that there is not really a need for additional changes there to help stimulate the market

Ian Ing from Lazard Capital Markets.

Please go ahead with your question.

Yes, thanks for fitting me in.

In terms of these questions on QCT margins and some spending increases, is there any product road map adjustments driving that?

I mean, intra-quarter we did see -- we did see TSMC pull in their schedule on 16 nanometer finFETs which was a low-power process, and obviously might have had some hand in driving that.

You saw us come out with the RF360 during the quarter.

And -- but, and we continue to invest heavily both in the modem and in the GPU, CPU and the [VLSi] side.

But we think we are one of the folks driving finFet into the mobile space.

So that is pretty consistent with our current plan and our previous statement.

Okay.

And then Steve, maybe you could highlight for the Snapdragon family, how you are going to differentiate low tier versus the high-tier?

If you look at the low tier, there is offerings out there from MediaTek et cetera, a dual core a quad core, et cetera.

Would it be graphics, will you differentiate at the high-end or some other areas?

The low tier is pretty difficult to differentiate in many cases, with the exception of -- I think two areas.

One is you need to have the scale, customer scale essentially to be able to engage with a number of different customers.

And what we have been building over the last year or two years or so, is the ability to engage with a nontraditional customers.

Nontraditional in this sense, means a customer that needs a bit more of a complete solution.

That means that, from the product side, you need to create something like the reference design that we have talked about.

But you also need to expand in the region, the sales activity.

So for us, in China, what you are seeing is, we are building the sales activity to sell into a customer that is not, let's say a -- the traditional multi-national customer that we have serviced.

And we are -- it takes a while to build that alternative channel.

We also think over time, that our IP roadmap from the top tier tends to be meaningful in the low tier as well.

And you can see that in customers that try to differentiate from their low tier competitors, by producing a high tier phone and trying to offset their brand.

You see that.

And that tiered roadmap we think is important long-term.

The other aspect that is happening here, we think over the next several quarters is, as China transitions to multimode 4G that you get a transition, a real turnover in the modem feature set, which we think plays towards our traditional strengths.

So long-winded answer, but essentially, I think you have to have customer scale.

And you can use we think, the IP roadmap from the top, in order to differentiate long-term.

But there are a lot of people who are competing on price right now, and that needs to settle out.

This concludes the question and answer session.

Dr. Jacobs, you may proceed with closing remarks.

Well, thanks everybody for joining us this afternoon.

Obviously, we are really pleased with the record revenues, and our growth really is continuing strongly with the increased guidance we put out for the year.

If you go back and look at fiscal '10 through fiscal '13, we have gone from $11 billion to $15 billion to $19 billion.

And then, we are guiding, midpoint $24.5 billion for this fiscal year.

And that really strong growth is due to our ability to drive the market with the new technologies.

And that is based on our past R&D investments that really capitalize on opportunities that we see.

And we are going to continue doing that, and we will do that also in a very profitable way.

We look forward to the guidance next quarter.

In one of the generally seasonally softer quarters, we are projecting 31% year-over-year EPS growth.

So we feel pretty good about that.

We are able to do that, because we are putting our competitors farther and farther behind.

And it is not just the modem, although everybody is quite focused on that.

But it is also we are putting them behind on other areas, graphics, microprocessor design.

And that is evidenced by the number of design wins we have, 850 designs launched or announced, 475 more currently in design as Steve said.

We have got some great products coming from our partners.

We have some great products that we are developing, great technologies to come, and a lot of opportunity ahead.

So we expect to be able to continue the kind of growth that we have had.

Thanks very much.

Sorry, I meant to say 31% revenue growth, not EPS growth.

This concludes today's conference call.

You may now disconnect.