高通 (QCOM) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm second-quarter fiscal 2014 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded April 23, 2014.

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

International callers please dial 404-537-3406.

The playback reservation number is 25607511.

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

Mr. Kneeshaw, please go ahead.

Thank you, Brent, and good afternoon, everyone.

Today's call will include prepared remarks by 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'd also like to direct you to our 10-Q and earnings release, which were filed and furnished respectively with the SEC today and are available on our website.

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

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

And now I would like to introduce Qualcomm's Chief Executive Officer, Steve Mollenkopf.

Thank you, Warren, and good afternoon, everyone.

I'd like to start by congratulating Derek Aberle on his promotion to President of Qualcomm.

Derek has been instrumental in creating and growing many important areas of Qualcomm's business over his tenure, including our licensing business, as well as our platforms and services businesses.

Under his leadership, QTL has more than doubled its revenues and profits, completed key license agreements, and established Qualcomm's 4G licensing program.

I'm looking forward to continuing to work closely with Derek as we lead the next chapter of growth and success for Qualcomm.

Turning to our performance.

We delivered another solid quarter, driven by continued leadership of our multimode 3G/LTE chipset solutions and record licensing revenues.

In recognition of our strong financial position and the continued growth of our business, we recently announced a 20% increase in our dividend, as well as a new share repurchase authorization of $7.8 billion.

QTL had a record quarter from both a revenue and earnings standpoint.

Total reported device sales were also a record, but came in at the low end of expectations.

In particular, licensee shipments in China were lower than expected.

We believe consumer purchasing decisions were delayed in advance of the rollout of LTE.

And TD-SCDMA volumes were stronger than anticipated and negatively impacted sales of WCDMA and CDMA2000 units.

We believe much of this situation continued through the March period, as well as a slower than expected ramp of LTE sales in China.

Despite these near-term headwinds, we continue to forecast strong growth of 3G/4G-based device shipments in calendar 2014, albeit somewhat more backend loaded than our previous expectations.

We continue to grow our base of single mode 4G OFDMA licensees and now have over 100 globally, including more than 60 in China.

These are in addition to the over 255 CDMA-based licensees we have globally.

Qualcomm continues to invest heavily in developing the leading and most widely licensed portfolio of patented technologies applicable to 3G and 4G devices.

In addition to our industry-leading position in 3G and 4G technology, our licensed technologies include a wide variety of other technologies implemented in these same devices.

In QCT, we continue to build on our broad customer footprint as revenues and MSM shipments were up 8% and 9% year over year respectively.

MSM chip shipments were in line with expectations with a stronger mix of products in the premium tier.

QCT's strong product leadership continues.

Multiple products based on our Snapdragon 801 chipset have recently launched, including the Samsung Galaxy S5, the new HTC One M8 and the Sony Xperia Z2 smartphone and tablet.

Products based on our Snapdragon 805 and fourth-generation multimode 3G/4G modem featuring Cat 6 LTE are expected to launch later this year.

In addition, we recently announced several new products in our road map, further demonstrating our leadership position in bringing 3G/LTE modems and 64-bit CPU architectures across multiple product tiers.

Globally the momentum of Snapdragon-based devices continues to grow, with more than 525 designs in the pipeline.

In the second half of the fiscal year, we expect more than half of our MSM chip shipments to be LTE enabled.

Our Wi-Fi revenues are strong and growing and fiscal year to date Wi-Fi shipments are up more than 45% year over year.

We now have over 350 802.11ac designs, including more than 250 on our mobile solutions.

We also announced our next innovation in Wi-Fi, with a comprehensive set of products that use multiuser MIMO to make 802.11ac networks more efficient, delivering up to a 3x improvement in throughput.

Here we are able to take use of the spatial reuse techniques that we developed for cellular and use them to improve our Wi-Fi chipsets.

Looking forward, we believe LTE in unlicensed spectrum will provide further capacity enhancements and coexist nicely with Wi-Fi to help meet the expected significant increase in data demand.

We are making excellent progress with our RF360 solutions, particularly the envelope tracker.

Total shipments more than doubled this quarter and we now have over 75 designs across 15 OEMs.

Looking forward our long-term growth drivers remain intact.

Gartner forecasts approximately 1.9 billion smartphones to be shipped in 2018, while cumulative smartphone shipments between 2014 and 2018 will reach approximately 8 billion.

We continue to forecast strong 3G/4G device shipments for calendar year 2014, and the rollout of 4G in China continues to be an important near-term growth catalyst for our business.

Each of the operators in China have aggressive LTE rollout plans with China Mobile alone planning to expand its network coverage nationwide to more than 500,000 LTE base stations by the end of 2014.

We have strong LTE design momentum with the OEMs in China, which is driving significant demand for our multimode 3G/LTE chipsets.

On a global basis, the deployment of overlay LTE networks continues to be a key growth driver for us, as over 270 operators have now deployed LTE, and more than 210 additional operators are planning deployments according to the GSA.

Further, they report that 48 operators are investing in carrier aggregation across 28 countries, and 7 operators have launched commercially.

The extension of mobile technologies into industries such as automotive, healthcare, smart cities, energy and other consumer electronics, wearables and other segments, is also another set of growth opportunities for us.

Looking forward, industry analysts forecast approximately 400 million 3G/4G non handset device shipments in 2017.

Our inventions provide key building blocks in solving complex issues across these different verticals.

Our strategy is to help the ecosystem use these technologies in the most innovative and effective ways.

On the mobile computing front, there have been several positive developments.

Microsoft is now offering its Office suite on non Windows-based tablets, further enhancing the utility of these devices by augmenting their productivity features.

In addition, there are continued efforts from operators to encourage wireless data usage on connected tablets.

Including T-Mobile, which recently announced an offer of up to 1.2 gigabyte of free data monthly for connected tablets as well as an offer for LTE-enabled tablets at equivalent prices to the Wi-Fi only models.

In closing, we delivered another solid quarter and we are pleased to be raising our fiscal year earnings per share guidance.

We have strong momentum with our semiconductor solutions and see significant growth ahead for 3G/4G devices, including the continued rollout of multimode 3G/LTE devices in China and elsewhere throughout the globe.

That concludes my remarks and I would now like to turn the call over to George Davis.

Thank you, Steve, and good afternoon, everyone.

We are pleased to report record non-GAAP earnings per share this quarter, driven by better than expected operating performance from our QCT business and record QTL performance, combined with strong investment gains and a lower than expected tax rate.

Fiscal second-quarter revenues were $6.4 billion, up 4% year over year.

And non-GAAP earnings per share were a record $1.31, $0.06 above the high end and $0.11 above the $1.20 midpoint of our prior guidance range.

The $0.11 improvement was driven by about $0.04 of operating items, including the combination of stronger margins in QCT and lower than expected operating expenses, partially offset by lower total reported device sales and mix effects in QTL.

Non-operating items added $0.07 from the combination of investment gains and the impact of a tax agreement.

QCT revenue and earnings before tax were above expectations, with revenues of $4.2 billion and shipments of 188 million MSM chipsets.

Implied revenue per MSM was higher sequentially on mix, contributing to a 17% QCT operating margin that was above our prior expectations.

In QTL, total reported device sales by our licensees were a record $66.5 billion, up 9% year over year, but at the low end of our guidance range, primarily reflecting lower than expected total reported device sales in China.

The estimated average selling price was $224 at the midpoint, higher sequentially reflecting a slightly higher ASP in developed regions, and estimated 3G/4G-based device shipments were 297 million at the midpoint.

With respect to reported units, we have reduced the midpoint of our calendar 2013 3G/4G device shipment estimate by approximately 17 million units to reflect the lower than expected device shipments reported for the December quarter.

The unit shortfall was driven primarily by lower sales in China and North America.

In the second quarter, non-GAAP combined R&D and SG&A expenses decreased 3% sequentially, as seasonal increases in employer taxes were more than offset by the absence of our Omni business, continued spending discipline and other employee-related cost reductions.

Year over year, OpEx in the quarter is up 1% as R&D increases are being partially offset by lower SG&A on lower employee-related costs, various cost initiatives, lower patent and legal expense and the absence of Omnitracs.

Returns on our investment portfolio reflect gains from strong investment results being recognized, as we balance risk in the portfolio in line with our increased capital return targets.

Our forecast includes continuing gain recognition over the next two fiscal quarters, although at somewhat lower levels than in Q2.

During the fiscal second quarter, we returned approximately $1.6 billion to stockholders, including $589 million of dividends paid and $1 billion in stock repurchases.

During the quarter, we announced a 20% increase in our dividend and increased our stock repurchase authorization to $7.8 billion.

Cash flow from operations was $1.8 billion, or 28% of revenues.

And we ended the fiscal quarter with cash and marketable securities of $32.1 billion.

Our tax rate was lower than expected during the quarter, as we reached agreement with the IRS on certain US tax matters relating to ongoing royalties and transfer pricing.

We now expect our non-GAAP tax rate to be approximately 16% for fiscal 2014.

On the legal front, the Company received a Wells notice from the SEC regional staff regarding their FCPA investigation.

The notice reflects the staff's preliminary determination to recommend that the SEC file a civil action against the Company.

We responded with a Wells submission expressing our belief that we have not violated the FCPA and that, therefore, no action should be taken.

We are continuing to cooperate with the investigation.

Looking ahead, our guidance for fiscal 2014 is mostly unchanged, except that we are modestly increasing our earnings per share expectations for the fiscal year to reflect the better-than-expected performance year to date.

We have increased our outlook for our QCT business for the remainder of fiscal 2014, driven by our strong LTE product leadership and the expected ramp of LTE in China.

We have reduced our outlook for QTL for fiscal 2014 as a result of, among other things, the softness seen in the December 2013 quarter for reported devices; a near-term spike in sales of TD-SCDMA devices in China to clear the channel for new LTE devices; a more backend loaded ramp from LTE deployment in China, which will push volumes outside of QTL's fiscal 2014; and lower revenue per unit on the impact of global OEM share mix.

We now expect fiscal 2014 non-GAAP earnings per share to be in the range of $5.05 to $5.25, up approximately 14% year over year at the midpoint relative to 2013, and up $0.05 at the midpoint from our prior guidance.

We are holding our forecast for total calendar 2014 estimated 3G/4G-based device shipments, but our forecast is now weighted more towards the second half of the calendar year reflecting our updated view of the timing of the expected LTE device ramp in China.

It is worth noting that this revised forecast results in shifting a greater portion of QTL royalty units out of fiscal 2014, which reflects reported units for the 12 months ending in June 2014 and then into our fiscal 2015.

In QCT, we continue to forecast operating margins to be 18% to 20% for fiscal 2014 and to exit the year above 20%.

For the third quarter of fiscal 2014, we estimate revenues to be in the range of approximately $6.2 billion to $6.8 billion, up approximately 4% year over year at the midpoint, and 2% sequentially.

Our estimates reflect high single-digit year-over-year revenue growth for QCT and relatively flat year-over-year growth for QTL, as unit growth is offset by lower revenue per unit on mix.

We estimate non-GAAP earnings per share in our fiscal third quarter to be approximately $1.15 to $1.25 per share, up 17% year over year at the midpoint.

We anticipate fiscal third quarter non-GAAP combined R&D and SG&A expenses will be higher, up 6% to 8% sequentially primarily driven by QCT product road map and supply chain initiatives.

In QTL, we estimate total reported device sales of $56 billion to $62 billion will be reported by our licensees in the June quarter for shipments they made in the March quarter, up approximately 4% year over year at the midpoint but lower sequentially, as compared to the seasonally higher holiday quarter shipments.

We estimate that the QTL device ASP will be relatively flat quarter over quarter, and we expect QTL's operating margin percentage to be modestly lower sequentially, primarily due to lower revenue.

In QCT, we anticipate MSM shipments of approximately 198 million to 213 million units during the quarter, up 9% at the midpoint sequentially, and up approximately 19% year over year at the midpoint.

And we expect revenue per MSM to be similar sequentially.

We expect QCT operating margin to be approximately 18% to 20% for the third quarter, higher sequentially reflecting increased MSM volume.

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.

Just a couple of questions.

The first one was on your guidance, just clarifying.

It sounds like you're raising your overall QCT guidance for the year on higher LTE expectations in China.

But at the same time you're lowering the QTL because of the -- how that falls within the fiscal versus calendar year.

So what gives you the confidence that even though the timing is pushed out, the absolute magnitude of that is going to be higher, hence driving upside in QCT?

And then the second question was on the implied royalty rate which has been now about 3.1% for three quarters in a row.

Previously it had been about 3.3% for six quarters in a row.

Is this the new rate that we should be thinking about going forward?

Thank you.

Hi Simona, it's George.

One of the things I would point to on the guidance, first off, you're right, the biggest single factor is how the LTE ramp is going to take place and you'll see it quite demonstrably in the QCT results.

And, if anything, that should give you confidence in what is coming for QTL.

But we're also seeing much more TD-SCDMA inventory drawdown going on in China right now which really QTL doesn't participate in.

And that's another factor that exacerbates the China effect.

Simona, this is Steve as well.

In terms of the confidence, what you're seeing in the QCT numbers is -- I think you're seeing strength really across the board, in fact broadly in China, across tiers and across OEMs.

And we are -- our problem now is not really a demand problem, we're actually in the near term we're actually trying to fight through some short-term supply issues because the demand has been even more than we thought.

I think we feel pretty good about the QCT numbers.

And also although it's outside of the fiscal year, I think thinking about QCT as a leading indicator for QTL is also a good way to think about the business as well.

Simona, this is Derek.

On the externally implied royalty rate that you guys calculate, we were at 3.08% last quarter and indicated we expected that to trend up in Q2.

It did come up a little bit to 3.11%, but frankly was -- we expected it to be a bit higher and it was hit by a couple of things.

One was timing of some of the cash-based payments we now have from some of the smaller licensees, a little bit of OEM mix, and then also a higher percentage of the TRDS hitting the caps with things like tablets and the strength that still remains in the ASPs in the developed regions.

As we look ahead to the year, I think we gave the range in November of 3.1% to 3.3% for the full year, full fiscal 2014.

And I think just given the way the year is playing out we've seen for instance a little bit higher deductions from some of the price discounting that went on in the early part of the year before some of the iconic phones we expect to come out here in the back half.

We've also again, as I said, had a higher percentage of things hitting caps.

So I think we're now looking at it and assuming for the year we're likely to be towards the low end of the 3.1% to 3.3% range for fiscal 2014.

Tavis McCourt, Raymond James.

Steve, you mentioned the MSM business potentially being a leading indicator for the royalty business.

I guess the premise there is that ultimately these LTE chip builds result in sales in China, but I'm wondering how much visibility do you have on promotional activity, given the lack of demand so far?

And then secondly on the MSM ASPs, can you talk about what drove those up sequentially relative to last quarter?

Thanks.

Sure.

So on the QCT side I think you -- if you look at the QCT numbers, obviously it's a really a quarter prior to the same units hitting QTL.

So we feel pretty good about what's happening there and how it leads into the QTL side.

On the chip shipments, the -- probably the best indicator is we're just seeing a lot of design pipeline and request for chips.

It's a bit as if it's -- you almost have like a spring that's wound and they're waiting for the official start to happen.

But we're really, I think, pleased with how that ramp has been happening so far.

Now, as we've said in previous reports, it's very difficult to predict the exact timing on the start of the ramp and in particular one that has so much intensity around it.

But we're working like crazy to get chipsets into multiple OEMs to support it.

And so I think we tend to have a reasonable confidence based off what we're seeing in QCT.

And I'm sorry, you had a second question which -- MSM ASPs.

Really we had a strong mix actually if you look at what happened in the March quarter is the mix was pretty strong.

In particular, some of the devices that had been launching worldwide, that continues to be something that's good for us.

Mike Walkley, Canaccord Genuity.

Steve, just building on the revenue per MSM, I think you guys talked about on the call 50% plus of your shipments would be LTE in the second half of the year.

So would that mix shift to expect the revenue per MSM to increase throughout the remainder of the year?

And then also with OpEx up a bit sequentially in R&D, just update on the cost optimization program and how that trending versus your 20%-plus operating margin target exiting the fiscal year.

Thank you.

Maybe on the second one first.

I think we feel pretty good actually about how the cost discipline in QCT has been transpiring throughout the year.

So I think that's headed in a good direction.

Same thing with the supply chain.

If -- now in terms of your first question about mix, I think George gave some indications about what it would be sequentially which I think was roughly flat.

I think if I look at your -- the comments that he just made.

The one thing to remember about the launch of LTE and in particular our strategy to support that launch is that this will be a launch across multiple tiers.

So we are -- we're going to be launching at the high tier with products in the 800 class as well as the 400 and 200 class.

And then we're going to be refreshing those portfolios as well as we go into 2015.

So I think it's going to be a broad-based launch.

And the way to think about that, at least way we think about it, is you're adding a new tier which is the premium LTE tier but also replacing the tier which is now sitting at TD-SCDMA.

So those blended numbers may not produce the premium uplift that you're thinking about but I think that's a good trend for us broadly as a business.

Brian Modoff, Deutsche Bank.

Yes, a couple questions.

So with regard to LTE, talking about that 50% of volumes in the back half, what are you seeing through [sample]?

How do you see that demand playing out from what you just talked about, low to high end?

What are you seeing competitively from other vendors in terms of any volume shipments, do you expect to see any of the other vendors in any volume this year?

And then with regards to the Wells notice, what have you guys seen historically as a what we could expect from the Government from the standpoint of any disciplinary rulings?

What are typical outcomes that you see where companies do actually end up having to settle with the SEC on things like this?

Thanks.

Brian, this is Steve.

On your question about the competitive environment, we -- it's obviously a very competitive market.

A lot of people are going after the market, but we feel good about our leadership position.

And actually I would say it's a leadership position across tiers and across multiple technologies in the tiers.

For example, we have been launching -- we announced and are now ramping the 64-bit products across tiers that go along with LTE.

And we think that's going to be an important component of how we compete and continue to compete moving forward, being ahead of people and being ahead of them across tiers.

I also think that that will be very important outside of China as well, which is you build a strong position in LTE across tiers, then you use that to convert the emerging markets as well.

So we feel pretty good about where that sits right now from what we're seeing in the accounts.

Brian, it's Don Rosenberg.

On your Wells question, you and everybody else can do the same research we do.

You can look at the historical record on these kinds of things.

But I should say that as we say in our Q, keep in mind that the Wells notice is a reflection of the staff's -- regional staff's preliminary recommendation.

We've responded we think with our good arguments as to why we don't think there's an FCPA violation here.

This is going to continue in terms of discussions.

So at this point I wouldn't want to say anything that sounds like any kind of prediction.

But in terms of how these things have played out in the past, as I said, you can take a look yourself.

Tim Long, BMO Capital Markets.

Yes, I wanted to go back to the units for the December quarter.

Maybe for you, Derek, just looking overall for -- first on the China piece, I'm just curious, do you think there's -- that some of the OEMs have reported numbers for the December quarter and it didn't really look that bad?

So just curious if you think other than the mix shift TD-SCDMA whatever, do you think you're getting paid less by licensees in China now?

And if so, or if not, does government and all the US, China issues have anything to do with that?

Second part of it, the $6 million that you took out of developed for the year 2013, I'm assuming that's all Q4, that's a pretty meaningful number.

So you mentioned North America, but what do you think is going on there and do you think the upgrade programs will help that?

And then just last, even if you just give normal seasonality over the last few years, it looks to me like you're still probably 25 million, 30 million phones light.

So is there something else going on more broadly that you think impacted the December and now the March quarters?

Thank you.

Tim, this is Derek.

Let me try to -- I'll take those one by one.

Maybe I'll jump into North America first, actually.

So I think this was pretty widely, I think, seen across a number of the OEMs.

Really in North America in particular is where we saw the softness in the developed regions in the December quarter.

And I think it was a combination of a couple things, but one of the key drivers was that many of the operators appear to have really more stringently enforced the two-year upgrade cycles versus their historical practice, I think in an effort to try to move more people to the early upgrade programs.

And at least initially in the December quarter, the net net of that was negative and we saw a slowdown in the replacement cycle.

I don't know if you caught, but AT&T reported just in the last day or so and it looks like they had a pretty interesting shift in Q1 of replacements going to the early upgrade program.

So what we've done for the calendar 2014 year is assume -- we already had a reduction in the replacement rate factored in to our calendar 2014 numbers and we've taken a little bit further reduction on that in North America.

But there are at least some early signs that more people are embracing the early upgrade programs and so we'll have to wait and see how that plays out in terms of driving the replacement rate in developed regions.

In China, I think again the approximately 11 million units that we were down in the December quarter were primarily from China, although there's some impact in a couple other regions as well.

Really it's again consistent with the data that I think that has come out of the China market in terms of a slowdown before the LTE launch.

And I think what got reported to us I think is largely consistent with what people expected after the reporting came in for the December quarter.

So again, I think more of a market dynamic in terms of a slowdown before the LTE launch.

And then, as George pointed out earlier, what we saw coming into the March quarter is really I think the -- it's very clear to the OEMs that the subsidy will be shifting from 3G to 4G devices in the near future.

And so I think an effort really to bleed the channel of TD-SCDMA, which is having a negative impact on us from a QTL standpoint in the March quarter.

Again we continue to be very vigilant in our compliance activities in China, and as I've said in the past, there's always a certain amount of leakage there.

But we continue to do all the things that we think have worked well for us in the past and we're going to continue to stay on top of that.

But I think really you're seeing a lot of market dynamics driving the results there.

Timothy Arcuri, Cowen and Company.

I had a couple.

First of all, can you talk a little bit about the pricing environment for LTE?

Particularly there was a very large semiconductor company that now has segmented out how much money that they're losing in their mobile business.

So can you talk a little bit about the pricing environment in LTE, number one?

And then number two, can you update us on the pace of the ramp for LTE in China and maybe speak to how long it will take until LTE unit volumes in China cross over with TD-SCDMA?

Thanks.

This is Steve.

I'll hit the first part.

I don't have the answer to the second one, maybe my colleagues work on that while I'm answering the first part.

On LTE, that's actually one of our premium areas that we tend to have -- that tends to be an area, a good area for us in terms of pricing.

As I previously mentioned, we are, in addition to supporting that in the premium tier, we also support that across tiers.

And part of the purpose of doing that is to accelerate the transition globally to multimode 3G/4G.

So therefore we actually do have chipsets specifically designed to hit the price points of mass market smartphones and even to transition things like the TD-SCDMA volume into TD-LTE volume as well.

So it's really a mix.

And today the majority, actually the vast majority of our chipsets support LTE and as we've -- as been our practice, we support it across tiers.

So it's really very much a mix.

Now because we have a leadership position and we think we can maintain a leadership position because we're really several generations ahead of folks, we have been able to -- that has been good for the business and we're endeavoring to keep that going.

This is Derek.

On the shift from TD-SCDMA to LTE again I think what we're seeing is in the March quarter I think in anticipation of the shift in subsidy from 3G to LTE devices that's coming, really the OEMs pretty aggressively trying to burn through the inventory there.

So we saw pretty -- a meaningful increase in sales in the March quarter and that also had the effect of cannibalizing to some extent the WCDMA and CDMA volumes in China.

And as Steve has commented on, we really are seeing the supply chain, the OEM base really aggressively prepare for the launch and growth of LTE devices.

So I think we'll continue to see some amount of TD-SCDMA sales.

We believe they'll really be pushed to the very lowest tiers of devices.

LTE is already starting to come in the low tier as well.

So I think there's going to be a pretty accelerated transition as LTE takes off.

Ehud Gelblum, Citi.

Couple things.

In the past you guys have mentioned that the caps on tablets were voluntary.

Just wondering if there's a strategy at some point to take those caps off?

You don't have to tell me a date, but is that something that's still out there, that's something you could possibly consider and how should we be looking at that down the road?

And, George, you talked about exiting the year on the QTC operating margin above 20%.

How do we look at that then going forward?

Are we still looking at the low 20%s going forward in out years or is the -- are we going to get some sort of escape velocity that gets to 21%, 22% on average as we get into next year and beyond?

Third question is China Mobile obviously in the first calendar quarter of the year was still under a three-mode requirement, by June they'll have moved to a five-mode requirement.

Do you see that impacting at all here your success on the QCT side?

And have you factored that into what you're telling us?

And then finally, anything else about -- I saw the 10-Q comments -- commentary on the Wells notice.

But, Don, looking for some more detail on specifically what were the instances that are in question and what are they alleging aside from this overall allegation?

Is there something specific that you can tell us as to what they're specifically saying and what you're rebutting or is it completely secretive?

Ehud, this is Derek.

On the tablet caps, yes, you're right, we put that in as a voluntary program.

And I have to say, obviously we've been a little bit disappointed with the uptake on the connected attach rates for tablets.

But the good news is I think we're starting to finally see some positive signs both in terms of the way that the operators are approaching data plans and some of the incentives that are being provided to drive more WAN connected tablets.

And then also the on-ramp in some of the emerging regions where Wi-Fi is less established than in the developed regions.

So I feel like we're a bit at an inflection point and this would not be the right time to look at altering the licensing model around tablets.

But we'll continue to monitor the market and see where things go.

On the QCT operating margin, yes, we do expect it to be above 20% at the end of the year.

As we said in our guidance coming out of the analyst meeting that we see 20% to 22% being -- moving from an 18% to 20% regime to more of the 20% to 22% type operating margin.

We might not get there in 2015 as we indicated on -- at that time because the dynamics around the supply chain for 20 nanometer devices.

So we'll see how that plays out.

We're still confident we can be within the 18% to 20% range, but we haven't taken 2015 up yet in line with our long-term view.

And this is Steve.

On the three-mode, five-mode we actually supported -- we have designs on both and we actually have the ability to do it on the same chip.

So we're prepared whichever way that goes.

And then Ehud, this is Don.

You've actually -- I think this is the first time you've hit all -- you're the only one who's hit all four of us in one question.

So I think you know the answer, I can't give you more detail than is included in our Q. We've done that.

And you can see over the time that this has been a subject of the Q, we've been fairly consistent with what we've described and that continues until this day.

And again read the Q, you'll get a sense there.

But we're still obviously in the middle of this process, so I'm unable to give you any more detail than what we've included there.

Stacy Rasgon, Sanford Bernstein.

I think I have three.

So the first one I'm trying to wrap my head around the shortfall again in December from a push at an LTE.

I can buy it in March maybe, but in December, unless you had a sizable amount of LTE phones in China in your guidance or there's a significant amount of cannibalization of TD-SCDMA aiding in the WCDMA, I'm not quite sure how the logic holds.

Given the timing of subscribers, 4G subscribers in China I don't know why you would have had a large amount of 4G phones in your guidance for December quarter shipments.

And I'm not sure how a bunch more TD-SCDMA shipments on China Mobile cannibalizes into China Unicom and Telecom.

Unless they're -- I'm having a hard time seeing how subscribers are moving over in mass in front of what would eventually be the 4G launch, why wouldn't they just stay where they were?

Second question, you talked about an upward bias originally to unit forecasting, now it sounds like you're taking that off the table, at least you're pushing it into 2015.

I think the impression you had given before was that your baseline was conservative and then you had that potential upward bias and it doesn't sound like that; it sounds like where China's coming in so far is actually below where your baseline was.

So any commentary you give on that would be helpful.

And then finally on OpEx, this is the second quarter in a row you have pushed OpEx out.

And that's great but effectively, though, it takes EPS guidance down for the back half.

How much room is there to have continued control on OpEx and can those cuts be permanent?

Does that OpEx eventually have to get spent and does it get pushed into the back half?

Thank you.

Stacy, this is Derek, let me try your first question.

Really -- let me try to break it into quarters.

So I think there's a few different dynamics which are playing out over different periods of time in China.

In the December quarter, again, which I think this is pretty consistent with the data that's come out of China since December, really we believe it was more of a slowdown of the 3G device sales, a pause in the purchase cycle from folks that anticipated LTE launching a little bit earlier than it did in 2014.

And so there was that slowdown at that point.

And then when you shift over into maybe at the tail end of the December quarter, but really in earnest in the March quarter, I think the realization that the subsidy dollars were going to go away as it related to the TD-SCDMA devices.

There was this window in which the OEMs really decided to aggressively push the TD-SCDMA devices.

And those tend to be -- they're a broad portfolio, but they certainly create quite a bit of competition against China Unicom, China Telecom in the mid to low tier.

And so when TD-SCDMA does well, it does have an impact on the volumes by the other operators in China.

And so it's really the two effects there.

And then again I think most of us expected the ramp to move a bit more quickly on LTE, and for a variety of reasons that's pushed out a bit, yet again all indications from the supply chain are that everybody's aggressively getting ready for that to happen very shortly.

So on the units guide, yes, we said last quarter that we thought there was some upside to that and really what we're saying is that with the pushout in timing that really it's more backend loaded.

So we'd probably be a little more cautious in our view but we are holding guidance.

In terms of OpEx, the teams have done a very good job of looking for opportunities to defer, reduce wherever we can.

We do have some things that we know we're going to have to get to on the product road map and also on some supply chain initiatives and just some general cost escalations.

So we will be coming up a little bit.

But I would say that we're going to be still meeting our objective of only being up 6% year over year and exiting the year at a lower run rate in OpEx coming out of 2014 than we had going into 2014.

And also -- and that's for the whole Company and for QCT.

Maybe I'll -- this is Steve.

One more note really on the units is that if you look at the units in QCT, they're probably up actually relative to what it would have been a quarter ago.

And I think that's indicative of some strength across different OEMs as the mix is moved around a bit.

So they're up and actually I think it's been reasonably strong and that gives us some confidence also to make the statements that we made with respect to the full-year calendar numbers, which is really where George's comments went to.

So we are seeing an uplift on units in the semiconductor business.

Tal Liani, Bank of America.

I have three quick questions.

First, if I'm right, then the tax rate goes down from 18% to 15% on a permanent basis, if you can clarify it?

Second, have you seen any impact of China litigation on your discussions for QCT business in China?

Do -- is there any correlation between the two or not at all, if you can discuss the puts and takes.

And the last part is going back to a comment about the QCT margin.

You spoke about -- you said you hope you can maintain 18% to 20%.

What are the projects that will bring your QCT margins or what are the investments that you may need to make that will bring the QCT margins below the current target and what are the projects or the conditions that will bring it above so we have the full range?

Thanks.

So on the tax rate, and now it's 15% actually in the quarter but that includes a catch-up from the agreement for the first quarter.

I would say the baseline run rate that we're seeing today based on the agreement would come down about 1%.

And we had forecasted 17.7% -- roughly 17% to 19%, so just under 18% for the year.

That's coming down now to 16%, but some of that is the effect of the one-time element.

Now I'll remind you that does not include any benefit for the R&D tax credit which would have an effect when and if it is renewed.

And we're also seeing a little bit benefit this year from the mix effects on the tax rate because we're seeing a little bit more revenue in QCT relative to QTL for all the reasons we discussed earlier on the call.

And that has a positive impact on the tax rate for the year.

So 16% is the baseline run rate for the year, a little below that in the second quarter.

And with respect to the China litigation, it's -- I would say, it's hard to say really.

I think there's -- technology leadership tends to trump most concerns actually and that's what we're seeing.

In fact if anything, in that market we're seeing probably more concern about our ability to be able to supply as much as we have and we're probably fighting more demand than less demand, I guess, and trying to make sure that we can at least supply given how quickly the people are ramping up the desire to get chipsets, which is helpful.

On the QCT margin, I think the main thing to take away is it's going to way that the plan we laid out.

In fact, very pleased with the organization being able to shift and be able to do that.

Things that are applying pressure, we do see the opportunity to work on our supply chain, both from a supply assurance but also from a cost perspective, and we are interested in making sure that those things happen.

But the main thing is we are -- I think we have good visibility into how that's going to lay out and it's going according to plan.

Rod Hall, JPMorgan.

This is Ashwin on behalf of Rod.

Steve, I think my question are primarily aimed at you.

The first one is on baseband.

In light of recent reports that many major vendors are trying to protect their own basebands, it would be interesting to know how willing are you to -- how open are you to license your baseband designs for probably lower price but better margins?

Do you think that will be a good long-term business opportunity for you?

Also it would be interesting to get your comments on the performance of Snapdragon 808 or 810 versus like an Intel i5 chip that primarily goes into laptop.

If you could provide any color on where we are with more ARM chips shipping into laptops that would be great.

Sure.

So on the baseband side, it's actually not a new trend for people to kick off their own baseband designs.

The history of that is that they tend not to be successful and in particular are not terribly successful at the leading technology peer.

And that's really where the majority of the margin is and we've been able to maintain that.

And I would submit that it's actually probably harder to do that today than it would have been in the past, just because technology is moving and it's moving across multiple modes.

So I don't know if I see that as the biggest concern right now.

We have not entertained a licensing model so far and it's actually quite difficult to do with the modem, unlike something like an ARM core or CPU or graphics, because there's so much technology and so much field work that you have to do to make sure that those things work globally.

In fact, that's one of areas that helps us is just our global scale is very difficult for people to repeat even if they're a large OEM.

So that's one of the things that complicates doing a licensing model.

It has not been really one of our strategies moving forward on the baseband.

In terms of performance relative to some of the others on the tablet side, we feel very good about that actually.

If you look at our power performance, we feel good.

But then also the name of the game there is really performance and feature set across a wide range of technologies.

So you have to look at things across the entire multimedia, camera, graphics, modem, connectivity and CPU.

And people tend to compete with us on one or two of those vectors, usually just one, but not across all of them.

And that's really what's important in the phone space and important in the tablet space.

And one of the things that we are hopeful for down the road, and it's consistent with my remarks, is that with Microsoft putting Office suite on OSs other than Windows, that really opens up, I think, the tablet device to be more than just a media consumption device.

And it becomes much more of a productivity device.

So we're anxiously awaiting the results of how the market accepts that.

So we tend to think of our position from the smartphone as being the place to attack the tablet market versus the other way around when we look at it.

So we feel pretty good actually about where our product family looks at -- or looks relative to those aspects.

Blayne Curtis, Barclays.

Three quick questions.

First on the supply constraints that you mentioned, does that clear up in the quarter and if you could just provide any color if possible on where you're seeing the constraints?

And then you talked about 50% LTE adoption, only seven carriers on carrier aggregation so I'm assuming those volumes are small.

Do you see any material uptick this calendar year there?

If you could talk about how much that adds in terms of additional silicon content and whether that's accretive to margins?

And then finally the comments on Wi-Fi, of those 250 wins, if you could give any color approximate how many are shipping today.

Thanks.

Sure.

So on supply constraints, I really mentioned it's something that does clear up actually in this quarter and we're, I think, well ahead of it now.

But I really mentioned it to provide color as to the demand picture in China.

We are seeing significant ramp of demand.

And the way the China market works, it tends to have a little bit less headway or lead time relative to the rest of the -- some of the other markets.

And it's also the way that new product launches or intense technology launches work.

So I mention that not to highlight a problem, but more to highlight the intensity of the demand picture in LTE.

But that does get cleared up in the quarter, as I said.

So in terms of carrier aggregation, it really is the key feature set this year.

And although I only -- you only mentioned seven carriers, they tend to be the carriers that push, number one, a lot of volume, they also push the key design wins.

So North America, Korea, Japan and Europe are dealing with very complicated spectrum allocation pictures and they tend to be the places that determine where key designs are won or lost.

And so the number of carriers are growing but also the significance of those carriers is actually probably more than just one on a scale of one.

So we tend to do well.

And that tends to be, like any new modem feature, something that helps our margins and we have a whole list of them that are coming out.

So we feel -- that's really what we've been good at doing.

On Wi-Fi, a lot of them are shipping.

If you think about our Wi-Fi business, it's really an extension of our platform business.

So if you look at the tiers, from the low tiers moving up, we have been steadily increasing the attach rate of our Wi-Fi.

And, in fact, with the exception of a small number of flagship devices, I think we're closing that -- even that window as well.

So pretty pleased with what's happening with Wi-Fi.

I think long term you're going to see Wi-Fi move as a triplet where you're going to have the high-end AP, the high-end modem feature set and the high-end connectivity feature set traveling together as a triplet.

And we feel like we're in a unique position to provide that.

Mark McKechnie, Evercore.

First question for Derek, on China can you comment what percentages of royalties do you get from China, just high level?

Sorry, Mark, I'm not sure I fully understood the question.

You're saying what is our -- what is the royalty rate in our deals with Chinese?

No, no, no, no.

What's the mix of your overall revenue base to China?

Ballpark, is it -- I'm curious to get a sense for how much of an impact that had on your outlook.

Yes, we haven't really got into a disclosure of a breakdown of revenue by region, I think for QTL specifically.

I think you have decent sense of where the selling prices are in the region and the units and probably can try to back calculate where that ends up.

But we haven't provided that specific guidance point in the past.

This ends our allotted time for questions and answers.

Mr. Mollenkopf, do you have anything further to add before adjourning the call?

Well, I just want to thank everybody for being on the call today.

And I know it's probably been a little bit different shape of the year 2014 and the mix of QTL and QCT, but I think we tend to be very enthusiastic about the future.

And we're doing, I think, the things that we need to do to position the business broadly into what is, I think, a unique set of opportunities if you look at the growth of smartphones in China and LTE in China and really the growth of those same technologies into adjacent markets as well.

We feel like we're really being -- doing the right things to be well positioned.

So I appreciate everybody being on the call and we will talk to you again next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.