高通 (QCOM) 2013 Q3 法說會逐字稿

Welcome to the Qualcomm third 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 July, 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 15022636.

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

Mr. Kneeshaw, please go ahead.

Thank you, Brian.

Good afternoon, everyone.

Today's call will include prerecorded remarks by Dr Paul Jacobs, who is not able to be on the call today, due to a long-standing family commitment.

In addition, Steve Mollenkopf and George Davis will provide their comments.

Then Derek Aberle and Don Rosenberg will join them for the question-and-answer session.

An internet presentation and audio broadcast accompany this call.

You can access them by visiting our website at www.Qualcomm.com.

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

I would also like to direct you to our 10-Q and earnings release, which were filed and furnished respectively with the SEC today and are available on our website.

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

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

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

Now, some comments from Qualcomm's Chairman and Chief Executive Officer, Dr Paul Jacobs.

Good afternoon, everyone.

I'm sorry I can't be with you live today.

But I did want to give you my comments before passing it on to the team.

We're pleased with our strong results this quarter, with revenues up 35% and non-GAAP EPS up 21% versus a year ago.

Licensing revenues were driven by strong smartphone sales in the March quarter.

Our Snapdragon and Gobi products were featured in an extensive set of flagship devices.

The tremendous success of the business puts us in a strong position to return capital to stockholders.

During the third fiscal quarter and up through today, we've returned approximately $2.2 billion.

This includes dividends paid and approximately $1.5 billion in stock repurchases made under our previously announced $5 billion stock repurchase program.

We're confident in our business outlook.

We'll continue to return capital to stockholders consistent with this view.

I would like to focus my comments today on smartphone innovation, before turning it over to Steve for a more comprehensive update on our QCT and QTL businesses.

I'm often asked about the potential slowing pace of innovation in smartphones.

I can assure you that we do not see it here at Qualcomm.

The breadth of technologies that are being developed and the demand for new features and device capabilities from our customers remains extremely strong.

There will be seven major technology areas in which significant advances are continuing to be made, including the modem, including RF, the CPU, the graphics processing unit, digital signal processing and multimedia, connectivity, sensors and displays.

Innovations such as LTE Advanced, LTE Broadcast, Multi-band RF front-ends, Ultra HD video, augmented reality, computational photography, continuous interaction user interfaces, H.265 video compression, HD Audio, sensor monitoring, 802.11ac and ah, indoor position locations, proximity-based communications, wireless charging, new display technologies, mobile payment capabilities, security features, remote device management are some of the many features that will increase the utility of 3G and 4G devices, any one of which could provide a catalyst for a smartphone user to upgrade.

Throughout the history of the industry, we've seen a series of technology advancements that have driven new innovative devices, which have fueled upgrade and replacement cycles.

This has continued over the last several years, as we've seen the introduction of many new technologies, including LTE, dual and quad core processors, improved graphics, higher resolution displays and more capable operating systems.

In the near future, we'll see the broad adoption of LTE Advanced, which doubles the peak data rate and provides higher average throughput.

That's not all.

The scale of the smartphone platform is unparalleled.

It is at the center of technology innovation.

New technologies used to be commercialized through discreet consumer electronics products, but today we see innovations moving rapidly into smartphones.

For example, the first place most consumers will see high quality Ultra HD video recording is on a Snapdragon-enabled smartphone.

Looking at this now from a regional perspective, there seems to be some concern that developed regions are becoming saturated with smartphones.

The fact is that these regions have been primarily replacement cycle driven for some time as handset penetration is already quite high.

Subscribers have already been cycling through devices and are used to doing so.

Certain large carriers routinely provide incentives for subscribers to purchase a new phone every two years.

Although, we may see different programs or replacement initiatives in the future, these types of programs are working successfully and competitive dynamics favor their continuance in the future.

Interestingly, there have been some recent plans launched by operators that could actually accelerate the replacement cycle, so we'll continue to monitor those.

In sum, our long-term plans continue to include a very modest decrease in the developed region replacement rate.

Turning to emerging regions, we view the opportunity as very significant when you consider that according to our geographic definition, approximately 80% of the world's population resides in these locations, with a relatively youthful demographic.

The GDP in emerging regions is expected to grow at an annual rate of approximately 6% over the next five years, according to consensus estimates.

According to Gartner, in these countries at the end of 2012, the average penetration rate of smartphones relative to the installed base of handsets, sits at approximately 18%, or only 10% of the total population.

As we've pointed out during the last couple years, we're seeing the rapid adoption of mobile technologies and in fact, rising average selling prices in these locations as the mix shifts to smartphone.

In these regions, there are limited fixed broadband alternatives and users are getting excellent utility from their wireless devices.

So in summary, although we expect to experience quarterly growth rate fluctuations for a variety of reasons, 3G/4G mobile computing technology and devices are still in an early stage of adoption in the majority of the world and have a very long runway of attractive growth potential.

This adoption is fueling new innovation and perpetuating that cycle.

Gartner estimates that approximately 700 million smartphones were sold in calendar 2012.

That number will grow to 1.7 billion in 2017, representing an approximately 20% compound annual growth rate versus the 2012 base.

Building off fiscal year 2012, we believe we'll experience a double-digit average annual growth rate in total reported device sales over our five-year planning period, which includes an estimated average of low single-digit percentage decline in average selling prices over this period.

So again, I'm sorry I can't be on the call live today, but I am pleased with our results and outlook.

Steve and George will now comment on that.

Thank you very much.

Good afternoon, everyone.

I will provide some comments on our QTL and QCT businesses, which both delivered strong financial results this quarter.

In QTL, total reported device sales by our licensees were up 18% year-over-year and above our prior expectations, driven by stronger than expected average selling prices.

Average selling prices were up $13 sequentially at the midpoint, despite $3 of foreign exchange unfavorability, reflecting an increased mix of mid tier and high tier handsets.

The quarter-over-quarter increase was driven by ASP strength in both emerging and developed regions.

As Paul noted in his comments, although the developed regions have been primarily driven by replacements and smartphone penetration is relatively high, our calendar year 2013 unit shipment estimates include year-over-year growth of approximately 6% in developed regions, well ahead of GDP estimates.

This quarter, we also continue to see an increasing mix of handsets at the mid and high tiers.

We expect this distribution to remain relatively stable going forward in developed regions.

In the emerging regions, we expect to continue to see strong unit growth and increasing average selling prices.

We also continue to grow our licensee base and now have over 240 CDMA licensees and more than 65 single-mode OFDMA licensees.

Our patent portfolio continues to be the most widely licensed in the industry.

QCT also had another strong quarter, with record revenues.

Results either met or exceeded each of our prior key guidance metrics, with revenues and earnings before tax increasing 47% and 56% year-over-year respectively.

MSM shipments were up 22% year-over-year and at the high-end of our prior guidance range.

Implied revenue per MSM was higher sequentially, as we increased our share of content in devices.

Versus expectation, we had a greater mix of shipments of mid low tier products and to Chinese emerging accounts, offsetting a bit of softness we saw from some Tier 1 OEMs.

Our scale and broad diversified customer base are key strengths to our business and allows us to deliver strong results, despite quarterly fluctuations in mix or OEM share.

Looking to the fourth fiscal quarter, we had a similar product mix shift versus prior expectation.

We expect MSM shipments to be slightly higher sequentially, driven by anticipated new device launches and the seasonality associated with this quarter.

Similar to what we have seen the last couple of years, it is important to note that our MSM volumes for each of the next two quarters are dependent on timing and success of OEM product launches for the holiday selling season.

We are encouraged by a strong pipeline of Snapdragon 800 and Snapdragon 200 products launching over the next two quarters, along with shipments for the China Mobile LTE trial beginning in September and ramping into the December quarter.

Our design traction remains strong.

We have just crossed a new milestone, with more than 1,000 designs announced or shipping with Snapdragon processors and have over 500 designs in the pipeline.

We are also seeing increased momentum in tablets, as OEMs leverage phone designs for tablets with over 40 design wins in the pipeline, including the recently announced new Nexus 7 by Google.

Our latest Snapdragon 800 processor has again raised the bar, combining the industry's most advanced mobile application processor with the industry's most advanced multi-mode LTE modem.

Designs are in process with many major OEMs for a very broad set of opportunities worldwide.

Flagship devices announced with the Snapdragon 800, include the next generation LGG smartphone, Samsung Galaxy S4 LTE Advanced and the Sony Xperia Z Ultra.

We remain confident in our LTE leadership position moving forward.

Though, LTE competition exists today and new suppliers are hoping to enter, the complexity of a multi-mode LTE modem feature set and the integration of a high performance application processor into the same solution is proving to be technically challenging for many.

The modem road map of the industry remains robust, as carriers move to LTE Advanced and utilize complicated spectrum allocations to meet the increasing data demands of mobile devices and support roaming.

We are building momentum in China.

Our emerging account shipments were up 35% sequentially in the June quarter.

We continue to add new design wins.

We expect competition for low cost solutions to remain strong.

However, we believe the expected launch of LTE in China will be a differentiator for us and enable us to gain broader access, including into China Mobile.

Further, many of the leading emerging account OEMs hope to expand their businesses internationally, which also aligns well with our tiered road map.

We won 30 new designs in the China Mobile large scale LTE trial and including increasing share of new designs in the second wave of the LTE device awards.

Our connectivity and networking products continue to do well with record revenue and unit shipments in the June quarter.

Connectivity design traction continues to be strong across the mobile networking and consumer electronics segments.

We are also pleased with the growing success of our new 802.11ac product, the WCN 3680, which was the first 11ac mobile solution in the industry to achieve Wi-Fi certification and is also featured in the Samsung Galaxy Mega.

Our RF360 front-end solution is an opportunity for us to solve further complexity at the chipset level and grow our content in the device.

The first product in this family of product is on track and currently sampling to a major Tier 1 OEM.

Though still early in the lifecycle of this new solution, we are very encouraged by early OEM interest and design traction.

Looking ahead, we see very strong trends for both QTL and QCT, with many exciting devices expected this holiday season.

That concludes my remarks.

I will now turn the call over to George.

Thank you, Steve.

Good afternoon, everyone.

We are pleased to be reporting another quarter of strong financial results, reflecting significant year-over-year growth in both QCT and QTL.

This performance also provides the basis for an increase in our financial outlook for fiscal 2013.

Fiscal third quarter revenues were a record $6.2 billion, up 35% year-over-year and 2% sequentially.

Non-GAAP operating income of $2 billion was up 18% year-over-year.

Non-GAAP earnings per share of $1.03 was up 21% year-over-year and down 12% quarter-over-quarter.

These results included a $158 million impairment charge or $0.06 per share, related to QMT assets.

Without this impairment, non-GAAP earnings per share would have been $1.09, well above the high-end of our prior guidance range.

Our major businesses performed quite well in the quarter, on strong device ASPs and demand from emerging regions in QTL, while higher implied revenue per MSM and strong volumes led to solid results for QCT.

In QTL, total reported device sales by our licensees were $56.5 billion, above the high-end of our prior guidance range.

We estimate that 244 to 248 million 3G/4G base devices were shipped by our licensees in the March quarter, at an average selling price of $227 to $233, up approximately $13 sequentially at the midpoint.

QCT had record revenues in the quarter and MSM shipments were 172 million units, towards the high-end of our prior guidance range.

Implied revenue per MSM was $24.55, which was higher sequentially as expected.

Fiscal third quarter QCT operating margin was 17%, in line with our prior expectations.

Non-GAAP combined R&D and SG&A expenses grew 1% sequentially, slightly below our prior expectations.

As Paul mentioned, during the third fiscal quarter and the first few weeks of this current quarter, we returned approximately $2.15 billion to stockholders, including $600 million of dividends paid and $1.55 billion in stock repurchases.

We now have just under $3.5 billion remaining on our $5 billion authorization as a result of these activities.

Cash flow from operations was strong at 33% of revenues.

We ended the quarter with cash and marketable securities of $30.4 billion.

In other balance sheet matters, I am pleased to report that we have taken another step forward in our partnership with Bharti in India.

Consistent with our previous plans, Bharti funded repayment of $492 million in debt that Qualcomm had previously guaranteed.

The remaining $484 million in debt guaranteed by Qualcomm was deconsolidated, due to a change in control of the joint venture, which included Bharti subscribing to additional shares.

We expect the remaining guarantee to be released prior to the end of this fiscal year.

Now, turning to our guidance.

We are raising our financial outlook for fiscal 2013.

We estimate fiscal 2013 revenues to be in the range of approximately $24.3 billion to $25 billion, up approximately 29% year-over-year at the midpoint.

We expect fiscal 2013 non-GAAP earnings per share to be in the range of $4.48 to $4.56, up approximately 22% year-over-year at the midpoint.

We are increasing our forecast for the fiscal 2013 QTL average selling price to approximately $223 to $229, which is $6 above our prior $220 midpoint estimate, reflecting higher handset prices in multiple regions.

For calendar 2013 global 3G/4G base device shipments, we continue to estimate that between 1.015 and 1.085 billion devices will be shipped by our licensees, up approximately 12% year-over-year at the midpoint.

While our calendar year range is unchanged, we are more upwardly biased in our outlook than we were previously.

Consistent with our prior expectations, we estimate fiscal 2013 QTL operating margins to be 85.5% to 87.5% and QCT operating margins to be 18.5% to 20.5%.

We expect combined non-GAAP R&D and SG&A expense to grow approximately 22% to 23% year-over-year.

Now, turning to the fourth fiscal quarter, we estimate revenues to be in the range of approximately $5.9 billion to $6.6 billion, up approximately 28% year-over-year at the midpoint.

Our estimates reflect continued strength in QTL and QCT, balanced by higher operating expenses and some uncertainty around the timing and success of product launches.

As Steve mentioned, we are very confident in our positioning in these leading edge devices.

It is more a matter of timing.

We estimate non-GAAP earnings per share in our fourth fiscal quarter to be approximately $1.02 to $1.10 per share, up approximately 19% year-over-year at the midpoint.

We anticipate fourth fiscal quarter non-GAAP combined R&D and SG&A expenses will increase sequentially, approximately 4% to 6%, reflecting increased patent expense in QTL and R&D expense in QCT.

In QTL, we estimate that total reported device sales of $55 billion to $60 billion will be reported by our licensees in the September quarter for shipments they made in the June quarter, up approximately 24% year-over-year at the midpoint.

In QCT, we anticipate MSM shipments of approximately 171 to 181 million units during the September quarter and QCT operating margin to be approximately 16% to 17%.

We expect implied revenue per MSM to be flat to slightly down, off a strong third quarter.

Consistent with our prior view, we estimate that the 3G/4G channel inventory will decline further in the September quarter, as OEMs and operators prepare for new product launches for the holiday season though we continue to expect it to remain within the normal 11 to 16-week range.

That concludes my comments.

I will now turn the call back to Warren.

Thank you, George.

Operator, we are ready for questions.

(Operator Instructions)

Simona Jankowski, Goldman Sachs.

George, I wanted to ask you a question first on your capital allocation strategy.

That was one of the highlights in Paul's prepared remarks as well.

Obviously, you've stepped up the buybacks quite significantly here.

Is your strategy here to basically continue to buy opportunistically?

Especially when there's pull-backs in the stock, like we've seen recently?

Or is there any thought at the Board level or in your office about something that is a little bit more structured and more significant and perhaps including levering the balance sheet?

Then a question for Steve on chipset margins.

It seems like we continue to be in the high teens there, even though you are gaining quite significant content share and also volumes are coming up nicely in the next quarter.

Can you just go through the puts and takes of why we are not seeing that move higher?

Thank you.

Hi, Simona.

Thanks for your question.

Yes.

I think what you're seeing is definitely a step-up in the return of capital for the quarter.

Actually, for the full year, as you may have seen, we've returned $3.3 billion in buyback and dividends.

We just feel at the levels of the stock today and the strength of the balance sheet and quite frankly, the strength of the businesses, that it's a good time to be buying.

You can see that we continued to buy through the end of the quarter, up about $500 million on top of the $1 billion that we did in the quarter.

We have about $3.5 billion remaining on the current authorization.

We're really not in a position at this point to make any broader statement about a change in capital policy.

We've always been supportive of returning capital to shareholders.

We have had a bias and will continue to have a bias to step-up more heavily when the markets provide a good opportunity.

Simona, this is Steve.

On your second question, I think it was really -- if you think about the mix, it was a little bit -- look at the June quarter, probably a little weaker on the premium tier and was offset by some strength at the emerging accounts tier.

We have forecasted a similar trend going into September, which is essentially a little bit less premium.

Of course, it's always -- that's always a weird quarter to predict sometimes because of the importance of flagship launches.

So I think you're probably seeing a little bit of just the, maybe a lull before we see flagship devices launch.

Now, we do have a fair bit of investment in the business, as George mentioned.

We continue to invest quite heavily actually in the modem and in those areas of innovation that Paul mentioned in his prepared remarks.

We think we're actually very well-positioned at the premium tier moving forward.

We consider ourselves to be really differentiated there.

So we're continuing to drive that in the business.

We think it will pay off long-term.

Great.

Thank you.

Matt Hoffman, Cowen.

Steve, strong ASPs were certainly one of the positives here in the quarter.

So since the Company highlighted the Snapdragon 800 in the release, can we assume that's the product, which is really driving those chip ASPs up so sharply?

I guess it was up 8% sequentially in the June quarter.

Also, if you could comment on mix moving forward?

Thanks.

Sure.

With the chip ASPs, really the 800 is -- really hasn't launched yet actually.

So we're anticipating over the next two quarters to start to see some exciting devices come out of the 800.

But that really hasn't started launching yet.

What we saw in the June quarter was really more of a mix toward -- relative to our expectation.

As I said, a little bit less premium, a little bit more emerging markets.

We did have some improvements in gross margin, primarily in the cost area.

Okay.

So as you start to bring your mix back toward more thin modems of some of the high-end smartphone guys, bringing their shipments back up in the back half of the calendar year, do ASPs continue to move up?

Well, I think we forecasted, as George mentioned, that to be flat.

Really, what you see in our product line, because there's such a big mix difference, or there's a big difference in ASP between the premium devices and the mid tier and low tier devices -- that can change a lot actually based on the mix moving forward.

Now, in the holiday season, as I think is behind your question, you tend to see more flagship launches.

You tend to see more premium devices launch as well.

Same thing following Mobile World Congress in the first half of the calendar year as well.

So, we'll see how that plays out.

But we think we're well-positioned in terms of design wins.

It's just a question of what happens.

Tavis McCourt, Raymond James.

A couple of questions.

First, on the licensed ASP reported this quarter of roughly $230 million at the midpoint.

I guess it's a little surprising to me that we're talking about a March quarter here, which I would think would have a lower mix of flagship smartphones relative to a December quarter.

Yet the ASP was up quite a bit.

Is it just that the China low-end or emerging market low-end market was so strong in that December quarter that it caused your ASPs to come down that $10 or so when you reported March?

So I think -- this is Derek.

I think we highlighted during the last call that we're starting to see a little more volatility in the quarter-over-quarter ASP changes.

We indicated our belief was that we were going to see an upward movement in the ASP this quarter, which is in line with what happened.

It was actually a little stronger than what we expected.

But really, that came from strength in both developed and emerging regions, as Steve noted in his remarks.

In developed, I think we started to see an increasing mix this quarter of devices at the mid and high tier while at the same time, the prices within those tiers remaining relatively stable.

There were actually some new launches within the quarter -- the March quarter.

Then in emerging regions, I think it's much of the same story in developed, meaning we have an increasing percentage of devices going into the mid and high tier.

But also, I think an acceleration more so than we expected of feature phones moving over to smartphones.

As we pointed out in the past, the ASP uplift when moving from feature phones even to the lower tier smartphones is quite meaningful.

So we're continuing to see upward movement in the emerging region ASPs.

So really, all of those things came together to get us where we ended up this quarter.

Tim Long, BMO Capital.

Two related ones on chips here.

First, I think, Steve, you mentioned that the gross margin was up a little in the June quarter, due to some cost savings there.

Just give us a sense on kind of what's the strategy for pricing?

We still see some pretty aggressive competition in Asia, given that gross margins for this business have come down meaningfully in the last two years.

Do we think we're bumping along a level where we're not likely to see gross margins any lower?

Then, Steve, a second one.

Just maybe you could just talk a little bit about -- there's a lot out there lately on benchmarking of different chips.

It's been a pretty controversial topic, so would just love your take on how we should look at kind of comparing a lot of these new chips and new features out there?

What's the best way for us to look at how companies will be successful?

Thanks.

Okay.

Tim, so on the pricing side, as I mentioned in my remarks, we saw some, I think some sequential strength in the emerging accounts.

We're probably up 35% quarter-over-quarter there.

Those products for us really fall into two buckets.

We do quite well from a margin, as well as a units perspective, kind of at the performance tier of the emerging accounts.

I think one of the misconceptions is that's all just at the bottom.

It's not.

A lot of the OEMs, they are trying to build both a brand, as well as volume.

Now, in the very low tier, it is a very, very aggressive time period.

It's really the 2G to 3G conversion market.

It's quite aggressive.

We are continuing to price aggressively there.

Quite frankly, we don't have the best cost structure at that time.

We're working to improve that.

So we hope that will improve over time.

But we're pleased because we think although our units are growing, they still have further to go.

My guess is that our revenue share is probably pretty strong certainly stronger than our unit share in that area.

Remember, too, that we don't participate really in China Mobile yet, which is the largest carrier in the region, certainly, the largest carrier in the world.

So, we look at that and we say there is an opportunity there for us to grow the business.

We look forward to it.

That being said, very competitive market, as you know.

With respect to benchmarks, a good question.

Actually, I'm glad you asked.

What's interesting about it is, I think there's probably a little bit -- I don't know the right word, but basically I think it's a little bit dubious the way that some of those benchmarks have led to certain conclusions and then other conclusions.

But at the end, when we look at the results, we conclude that we're definitely in the lead there.

More importantly, though, when we look at our position at the OEM base and in the near term or even the midterm, we're quite confident about how we sit.

I think it comes down from the fact that we think we have the best technology across all the vectors that matter, but most importantly, we have it together.

We have the ability to put multiple things into one SoC.

I think that's served us quite well.

We expect that to serve us quite well moving forward.

So we have a tough time understanding all the anxiety that people have regarding the conclusions people make from those benchmarks.

We just don't see that in our customer base.

Mike Walkley, Canaccord.

I just want to go back to the margins.

Clearly, there's some high-end platforms at uncertain timing, you're ramping some R&D ahead of that.

But maybe on an intermediate term basis, you've grown content share with some chips that aren't MSM related, helping you grow your content.

They tended to be lower margins also.

Can you just share with us kind of an intermediate term, how we should think about the margins as you invest for more content share opportunities versus maybe a longer term operating margin plan you want to execute against?

Sure.

Maybe I can provide a little bit of color.

Then George I think probably could also jump in here as well.

We look at our business right now and we definitely don't subscribe to the view that the high tier is going away in terms of innovation.

In fact, if you look at the speed at which we're being asked to cycle through chipsets, I would argue that it's actually accelerating in terms of feature velocity.

So, we're driving that.

We think that's a competitive strength for us.

We also believe that moving forward over the next couple of years, that will be really the thing that determines profitability, is driving that tier.

We think we have the ability to do that.

That being said, today, we're -- I would say we're probably at a point where we have some additional R&D because we're moving through the process notes faster than is traditional in our business.

The complexity of doing that is actually increased and -- but we think that scale is actually a differentiator for us.

We're continuing to do that.

We'll probably -- you'll see us over the years, not have to do that.

We hope that makes it easier for us from a business perspective.

But maybe George can comment a little bit on the other questions.

Yes.

Mike, hi.

The outlook for the margin is -- for the full year obviously, is in right in line with where we started the year overall.

So the concern about something having changed in the marketplace that is driving a change in our outlook is I think exacerbated a little bit by the fact that we're looking at seasonal quarters here in terms of margin.

So we'll update the longer-term outlook at the November meeting.

Again, I think concerns about further erosion in margin are really overplayed.

Brian Modoff, Deutsche Bank.

Steve, a couple questions.

One, just if you can elaborate a little bit on what you think your share is in the China market?

When you see the impact?

You've had TTD/LTE in your devices for a little bit of time.

So, when do you start seeing the impact from that?

Then can you talk a little bit about your mid range LTE chips coming into the market?

The timing on that?

How you see kind of a more mid range lineup of LTE devices impacting overall LTE volumes as we move into next year?

Particularly as some of your competitors try to bring competing products to the market, albeit later than they may have thought?

Okay, Brian.

Yes.

On the share side of the China market, it's interesting.

When we look at where we really compete -- we really compete -- we don't support an edge product.

We don't support a low tier TD-SCDMA product, we think that -- by the time that we would have that out, that market will transition to LTE and really intercept with the rest of our product line.

So if you just look at kind of where we compete, we're quite pleased actually with how we've been able to develop what is essentially a new channel for us.

All of those units that I mentioned that were sequentially strong, those are new customers, customers that we wouldn't normally deal with.

I think we're intercepting those customers, but at the same time that we're also getting I think the premium SKUs that are coming in that market.

So we're actually fairly pleased with how we're doing there from a share perspective.

Probably more pleased from a revenue dollars perspective.

But the part that we're most excited about is that when that business -- when the China market starts to go toward LTE, which we think will start at the second half of this calendar year with the start of the trial.

We'll be positioned even better, because that will really intercept our tiered road map from the 800 all the way down to some new products that we haven't announced, but we're clearly working on in that tier.

So we look at that as a disrupter for us.

The other aspect, which we think will be a good thing for us, that a lot of the big OEMs that have started to build their name through the transition to smartphones in China, domestic OEMs, are looking to go international.

We have, we think, a good on-ramp for them to drive their international business.

So as you may know, if you look at our product lines, one of the big advantages we have is that we have all of the band support.

That enables you to design a product in China and use that other places in the world, which we think is going to be something that's good for us to be able to intersect a number of the other OEMs that we haven't been strong in heretofore.

Ehud Gelblum, Morgan Stanley.

I appreciate it.

Thanks.

First just a clarification.

George, did I hear you correctly that at the end there, that the QCT out margin, you're guiding to 16% to 17%, so down in the fiscal fourth quarter?

I just wanted to make sure, just a clarification that I heard that right.

That's correct.

Okay.

That has to do with mix.

Correct.

Then, the lull before flagship, the way Steve talked about it.

Okay.

Exactly.

Steve, on -- maybe this is actually a combination between the two of you.

What's the time between when you recognize revenue on a chip and you call in an actual shipment and the time that the phone ends up in a store?

So if I say, a phone is going to -- I walk into a store and that phone shows up there for the first time tomorrow, when did you actually ship that chip?

I'm just trying to get a sense as to the timing with respect to the difference from there.

Then I ask this every quarter.

But is there any way that you can give us a sense as to the chips that you ship into phones that are LTE phones -- used with LTE phones versus ones that are non-LTE phones?

If you can take the 172 million chips and give us a sense as to what percent of the modems on those 172 are used for LTE?

Although probably many of them are -- more of them are capable of LTE, but how many of them are actually in the LTE phones versus not?

The same thing for Snapdragon versus thin modem?

Give us a sense of the ASP differential between those two, so we can kind of in our head, model out what we think may happen with MSM revenue per -- ASP per MSM chip?

Ehud, this is Steve.

On the timing question, it's pretty difficult.

It varies from customer to customer.

I apologize, I actually don't know even the range.

But with some customers, they have the ability to move very, very rapidly.

Other customers through their manufacturing, they may have a more complicated manufacturing process -- other subcontractors, what have you.

It may take them longer.

So, I don't have a great sense as to what -- how long that would take for them to have sell-through.

Maybe some of my other colleagues could -- perhaps could comment.

But on the LTE mix, I also don't have that mix right now.

I think we could probably provide some color in New York about that.

I would say directionally, we're doing quite well in LTE.

It's clearly moving very rapidly throughout our portfolio.

But we're also selling -- allowing customers or enabling customers to sell that same device in non-LTE markets as well.

I just don't know the mix between those two.

Stacy Rasgon, Sanford Bernstein.

I have two quick ones.

Firstly, around your guidance for next quarter, you said that there was uncertainty around the timing of the flagship devices in there.

Can you give us some feeling of what is actually baked into the guidance in terms of how conservative or not you might be on that timing?

Second question around, again, the capital allocation and the buybacks.

So you've bought more than $10 billion in stock back over the last five years.

Your share count's actually up over that time.

You said you're waiting for the markets to provide a good opportunity.

Your valuation right now is lower than it ever has been.

Why is right now not the best opportunity to do maybe a much bigger buyback than you've done historically?

So let's start with Q4 first.

I think what you're seeing with Q4 is -- even though we're calling for MSMs to be up, if you look at our view of pricing, it's suggesting that mix is going to be impacted by some of the emerging market volumes more than the flagship volumes.

So I think that's what we're talking about in terms of conservatism.

So -- but if you think about where we came in on MSMs in Q3, which was well ahead of our guidance.

Q3 and Q4 together look actually quite good.

Q4 is very similar, overall in terms of the business for both QTL and QCT.

It's really some of the higher spending eroding a little bit of the strong performance that we saw in Q3.

But still very strong performance overall.

On the capital allocation front -- now, we do agree it's a good time to be buying stock.

That's why we are -- we have ramped significantly the repurchase activity.

It's continuing into Q4.

As I've said, we have $3.5 billion outstanding.

We don't forecast our share repurchase activity, but as Paul said, in his own quote, we're confident in the business.

We'll continue to return capital consistent with that view.

So we'll stay in contact on that.

Kulbinder Garcha, Credit Suisse.

A question for Steve, I guess.

Steve, a lot of things have gone right this year so far in QCT, whether it's -- flagship high-end share gains; your LTE position is definitely coming through; your ASPs are very high in the QCT business; and there are lots of reasons you've given, but -- and I understand them in terms of pricing and whatnot.

But there's just no leverage in QCT.

So, I'm curious, as you look out over the next medium term, would you think this is an acceptable level of margin for that business?

I'm just curious how you see it, because I would have thought this year of all years, especially with the revenue growth you saw, there would have been a bit more leverage.

It seems that there's basically not.

So, could you speak a little bit about that dynamic?

Then a question for Derek, I guess.

On the licensing business, it's quite clear in this last quarter especially that MediaTek and Spreadtrum and the like, have seen very strong sequential and year-on-year volume increases, selling chips to the extreme low end of the smartphone market, I would say.

Is the -- is your ability to license them there?

If so, your volume number for the overall addressable market just seems a little bit conservative.

So I'm just kind of curious as to how you would reconcile that dynamic?

Thanks.

Kulbinder, this is Steve.

A quick answer to your question on op margin target -- now, we actually would expect that business to do better.

Our plans are to make that happen.

I think one of the things that when I listen to people talk about the competitive environment, that probably is a difference between our outlook and what other people see, is that today, it's already very competitive.

I mean, if you look at the market structure, we essentially compete in Samsung, against Samsung, and that -- we do quite well.

So I don't think there's a much more competitive dynamic than that dynamic.

We do, I think, quite well in that environment.

That being said, we believe that the investments that we're making -- really, it is our level of spending that I think is probably the easiest lever to deal with.

That level of spending, we think is creating technology distance between what our road map is providing and what I think other people can get by doing their own chipsets.

If you just look at, over the last several years, how much we started to, at least in our minds, move ahead from the competition, both on an integrated scale, but also individual technology vectors.

We think that will play well to our strengths moving forward.

There will be more leverage in the business moving forward.

We are also not seeing additional markets in -- most of it being tablet market, in the revenue line, but it's clearly in the cost line.

Now, I think it's too early to make a call on that.

But your outlook on that business, I think also has a big lever in terms of what will happen long-term.

Kulbinder, this is Derek.

Yes.

On your second question, I think we've been pretty transparent that we're continuing to grow the licensing base.

I think we went up another 10 licensees this quarter.

Most of that growth has continued to come from China.

So we feel very confident that we are collecting under our agreements and that we have the main customers of MediaTek and Spreadtrum and others, as well as even the mid and smaller customers licensed and paying.

The one exception that we have discussed a number of times is TD-SCDMA.

I think that may be driving a little bit of the difference in the numbers that you're seeing versus the numbers that we're reporting to you as royalty bearing units.

As you know, we've had some difficulties collecting on TD-SCDMA in China.

This year, in particular, we've seen pretty meaningful growth in TD-SCDMA units in China.

So as we go forward, that's having sort of a muted impact on the growth, overall of the units reported to us.

But as I look ahead, our expectation is, though, as China Mobile launches LTE, that a significant portion of that volume will start to, fairly quickly, transition over to, including LTE and/or UMTS.

That will provide a basis for us to collect royalties on those devices, hopefully without the same types of challenges that we've had historically around TD-SCDMA.

So that would drive kind of accelerated growth year-over-year, when you start looking out into 2014 and 2015 from a unit standpoint.

Mark McKechnie, Evercore.

A couple questions.

One for Steve.

How big has your connectivity business grown to?

Maybe if you could talk a bit about the attach rates of MSMs versus how many stand-alone connectivity solutions you have?

Sure, Mark.

If you look at our business, the connectivity business -- I mentioned earlier that it was actually a record quarter in June for it.

Now it's also not just a cellular connectivity business, it includes consumer electronics, there's networking in that as well.

So, it's actually a little bit more diversified than probably what people think.

Now, that being said, on the phone side, we've been -- I think, done a good job in terms of getting pull-through for our connectivity solutions, either through integrated or through stand-alone on our mid tier and low tier platforms.

I gave some comments last year actually about how strong that was in terms of attach rate.

What we're starting to see and one of the things we're excited about is that, now we're starting to see Tier 1s start to use the products.

We think that's an on-ramp, one of the necessary or first steps to getting us into the flagship devices as well.

That will be -- I think, it's a long road to -- ahead of us on that.

But we see the first signs of success there.

We also believe that our integration story, which has served us well with RF, power management, bluetooth and GPS will also serve us well in the connectivity space as well.

So we're continuing to invest in that area.

We're bullish about it long-term.

Romit Shah, Nomura.

Steve, you mentioned that your share of content improved in the quarter.

The factor driving chipset ASPs up.

I know that it's coming down a little bit here in the September period.

But can you just give us more color on what's driving that?

Would you expect chipset ASPs to continue to grind higher after this period?

I also -- I just wanted to also ask about LTE competition.

Broadcom indicated yesterday that their LTE solution would be pushed out to the second half of next year.

So your assessment of the competitive landscape?

How big of a lead do you think you have today?

Then just finally, for George.

You mentioned on the buyback that you were going to be opportunistic -- you guys were being opportunistic here in July.

The stock price feels like it's been out of favor for most of the year.

So, I'm just curious, what was it?

Or what are you seeing here in July, that pushed you to be more opportunistic with the share buyback?

Thank you.

Romit, maybe I'll start with the LTE question first.

Yes.

I think that's probably an accurate view of what we're seeing.

If we look at our feedback from the OEMs, it seems like we don't see anyone sort of knocking on the door -- in the near term door, kind of with the feature set that we're already delivering.

As you know, we are on our third generation.

We're going to continue to move that forward into next year.

So, it looks like people are having trouble ramping this year or last year's feature set.

We're going to be delivering next year's feature set next year.

We think we're continuing to be strong in the LTE space.

I would point to people -- to the importance of an SoC strategy in LTE.

It's essentially this -- in the flagship tier, you need to be able to deliver solutions in the developed world.

The developed world, because of spectrum constraints really needs to embrace LTE Advanced next year.

Should you be able to produce a product like that and compete with us on the modem space, you will also need to do that in an integrated SoC, which means that you need to make sure that you have a world class application processor in connectivity and graphics.

We think we're differentiated across all of those vectors.

Certainly, if you put them together, we feel quite strong.

On the first question, I actually forgot what it was.

Could you remind me, please?

Share of content (inaudible).

Share of content.

Yes, thank you.

On share of content, essentially what's happened, we're growing our position in the phone.

As I've mentioned on previous calls, sometimes that comes at less gross margin percentage than our traditional modem business.

But it comes at more dollars.

It's I think a good growth business for us, as you've seen in the year-over-year numbers.

So you're seeing some of that.

We also, from time-to-time, are able to collect essentially value-added software fees for additional functionality that we can sell alongside the chip.

You start to see that sometimes move around from quarter-to-quarter.

All in all, I think a strong story for us, although from a dollar perspective, but not at the traditional gross margin percentages that you saw in the traditional modem business, but a good business for us.

Let me just cover your question on -- again, on share buyback.

What I talked about when I was using the term opportunistic, it was really in response to the question that the Company has valued an opportunistic strategy over time.

I still believe that to be the case.

The decision to start purchasing in Q3 was clearly coming out of the earnings call.

The stock reacted and came down.

We felt it was an extremely attractive time to start buying back shares.

So it kind of goes beyond opportunistic and really a view of valuation.

Again, I think you can see from the outlook and from the performance in the quarter, that the Company is performing strongly.

We think it's a good time to be buying.

Rod Hall, JPMorgan.

Just a couple questions.

So I wanted to see, Steve, if you could comment again -- a question was asked earlier on Wi-Fi.

There have been some various blog reports and so on, suggesting that you have had some pretty good sized Wi-Fi wins for stand-alone chips on -- with some big vendors.

I just wonder if you could comment on whether there's been anything -- I think the basic situation has been that the underlying driver software, favored another large vendor that kind of dominates that space.

That's why we hadn't seen as much attach.

I wonder if you could comment on whether there's been any change there?

Do you think that there are more software support now that might enable people to use the on-board Snapdragon connectivity solution as we move forward more?

So I would just be curious to get your comment on that.

Then the other thing that I would like to get you to comment on is, we've got these new replacement programs coming out from US carriers.

There's a lot of speculation over whether that means people will replace less or replace more.

I just wonder if you could comment on your thinking there?

Do you think it would impact consumer behavior at all?

If so, how does it impact it?

Thanks.

Rod, this is Steve.

On the connectivity piece, essentially, we've been working quite hard to bring both the maturity and the feature set of our wireless land solution up to what is -- would be considered a leadership position.

We think we're at that point now.

We've been able to also exploit one of the benefits of our platform, which essentially is that we've had the 11ac -- or 11n solution, which is the 3660 and it's pin-for-pin compatible with the 3680.

I think it's been somewhat of misunderstood.

But we're actually at the lead in terms of mobile AC.

It's a very easy migration for people to have.

So, we do, I think, quite well at the mid tier in terms of design win percentages.

I think that's a great on-ramp to convince people that -- at the flagship tier can be used as well.

As I said earlier, those things won't switch overnight.

But I think the integration story is quite strong on this technology, as it is with many technologies.

It's just the right thing to move the customer in that direction.

The other thing to remember as well, is that eventually the modem -- the wireless WAN modem and the wireless LAN modem actually have to coordinate to manage interference and manage off load in a very, in a very coordinated way.

That particularly becomes important as networks get more dense.

So over time, the good technical reasons of integration are augmented by just -- that's the way the system's going to need to work to be successful.

So that's a good trend for us.

Rod, this is Derek.

Obviously, it's early days.

We'll have to see how some of these new programs play out.

But I think our view is generally positive that they should have a positive impact on replacement cycles.

There's been some concern about whether operators are going to step back a bit from subsidies.

Given the smartphone penetration that is in some of the developed regions and I think we're going to see, I believe we'll continue to see a number of different kinds of programs that will help drive replacement.

If you look at AT&T, I think they just announced results.

They said 35% of their smartphone users are on LTE, which is still relatively low.

Yet they are seeing higher data usage across the LTE subscribers.

So, you would think that the operators will continue to be motivated, even with smartphone penetration where it is to drive replacement cycles.

So we'll see how these play out, but I think generally, a positive development.

James Faucette, Pacific Crest.

One quick question and more a elaborate question I guess on China.

First quick question is that you mentioned you had expect channel inventories to come down during the course of the September quarter, even though you expect them to remain in their typical range.

Can you just talk about quickly, where you think channel inventories -- or how you think channel inventories developed during the June quarter?

Then on China.

You mention that you expect to start to ramp into China Mobile for their testing later this quarter and through the end of this year.

How are you thinking about the actual activation of the commercial network for TD-LTE and its timing?

What about the other carriers and their eventual move to 4G?

How you think about the chipset share opportunity on those migrations?

Thank you very much.

So on channel inventory, the channel inventory peaked in our second fiscal quarter or the first calendar quarter, in the 15 to 16-week range.

We saw it come down about a week in our fiscal third quarter.

We think it will come down at least another 1.5 weeks or so in our fourth fiscal quarter.

So, a pretty continuous decline since the peak of Q2.

With respect to LTE in China, we're being driven quite hard to start supporting what are, I think, very large scale trials at the end of this year.

Also, as I understand it, the spectrum situation and from the government perspective, has been a lot more clarity given over the last month or so with respect to that.

So we expect that to start in the second half of this year.

Then I would expect the other carriers to follow.

I think it will start in LTE-TDD in China Mobile, and then follow in the other carriers.

But, again, it's very difficult to predict what happens in China.

But we are being pushed hard in that direction.

We have no further questions at this time.

This does conclude today's conference call.

You may now disconnect.