高通 (QCOM) 2014 Q4 法說會逐字稿

Welcome to the Qualcomm fourth-quarter FY14 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, November 5, 2014.

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

International callers, please dial (404)537-3406.

the playback reservation number is 20823606.

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, Derek Aberle, and George Davis.

In addition, Christiano Amon, Murthy Renduchintala, and Don Rosenberg will join the question and answer session.

The 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, we will use non-GAAP financial measures as defined in Regulation G. And you can find the related reconciliations to GAAP on our website.

I'd also like to direct you to our 10-K 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 the future business or results of the Company.

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

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

I would also like to remind you that our New York Analyst Day will be held on Wednesday, November 19.

To attend in person, you must be a financial analyst or institutional investor.

The analyst meeting will be webcast for those of you unable to attend in person.

Consistent with past Analyst Days, we'll be providing guidance disclosures at that time, which are in addition to those provided in our earnings release and on this call.

And now to comments from Qualcomm's Chief Executive Officer Steve Mollenkopf.

Thank you, Warren, and good afternoon, everyone.

I am pleased with Qualcomm's performance this past fiscal year.

Despite challenges in the licensing business, we delivered record revenues of $26.5 billion and record non-GAAP earnings per share, up 17% versus last year.

Total reported device sales and MSM chipset shipments also set records, as our multimode 3G LTE and related technologies continue to enable the global growth of wireless data.

And our broad range of semiconductor solutions continue to be used in leading devices across all price tiers, globally.

We increased our dividend for the 12th consecutive year and returned approximately $7.1 billion to stockholders, in the form of buybacks and cash dividends.

Looking at the fourth fiscal quarter, we shipped a record number of MSMs, driven by broad-based demand for our 3G and multimode 3G/4G chipsets, particularly in emerging regions.

We continue to benefit from our tiered roadmap and diversified customer base, as MSM chip shipments were up 24% year-over-year.

QTL was in line with expectations, as we continued to work the issues facing the licensing business.

Derek will discuss this more fully and update you on the ongoing NDRC investigation.

We made significant progress against our strategic and operational objectives this year.

First, we set out to compete effectively across all tiers in LTE, while driving the modem and AP roadmap to maintain our competitive lead.

We are very pleased with our design activity in the premium tier, including the leading flagship devices.

The Snapdragon 805 is the first mobile processor to offer system-level Ultra HD support and 4K video capture and playback.

In addition, our fourth-generation modem, the Gobi 9x35, featuring Cat 6 carrier aggregation, is now shipping.

Further, we introduced our new, lower-cost architecture that debuted in the Snapdragon 410, which is now shipping in volume.

And we recently announced the Snapdragon 210 processor, which will offer integrated multimode 3G/4G LTE and LTE dual-SIM for entry-level smartphones.

This effectively brings multimode LTE with carrier aggregation across all tiers of the roadmap.

Second, we continue to focus our investment on adjacent opportunities that adopt our core technologies, as well as technologies that address the 1000x data challenge and drive IOE adoption.

Notable milestones this past year include the extension of our Wi-Fi solutions with a comprehensive set of products that use multi-user MIMO to make 802.11 AC networks up to 3x faster and more efficient.

Our overall Wi-Fi handset related revenues grew more than 40% in FY14.

We acquired Wilocity, a leader in the development of 60 gigahertz chipsets, based on the IEEE 802.11 AD standard, which provides us with the technology to address high-bandwidth use cases.

We announced our second-generation RF360 products and now have over 225 devices launched or in design that incorporate one or more of our RF360 components.

On the automotive front, we have very strong design traction with our LTE solutions and have announced our automotive-grade infotainment chipset.

And we are now engaged with over 15 OEMs on 40 different programs.

We completed the sale of our Omnitracs business and restructured our Mirasol business.

And finally, we recently announced our offer to acquire CSR, which would complement our current offerings by adding products, channels, and customers in the important growth categories of IOE and automotive infotainment.

Third, we achieved our operating expense targets, while continuing to invest in our leading roadmap and our long-term supply chain initiatives.

We believe that we are operating at scale and have exited FY14 at a lower level of R&D and SG&A spending than last year.

And finally, we committed to significantly increase our return of capital stock to stockholders and finished the year well ahead of our target of returning 75% of free cash flow to stockholders.

Separately, as we note in the 10-K, two competition agencies have recently commenced investigations related to our licensing and/or our chipset businesses.

We are fully cooperating with these agencies and believe our practices comply with the laws of their countries.

But given that these matters are in their early stages, it is difficult to predict what, if anything, will come of them.

Looking ahead, we have clear strategic priorities for FY15.

Resolve the QTL challenges in China, maintain QCT's technology leadership across all tiers, further expand our business into adjacent and new growth opportunities, continue to manage operating expenses, and continue to return capital to stockholders.

Our FY15 guidance reflects the following.

Continued healthy growth of global 3G/4G devices, particularly in emerging regions at the mid and low tiers, which impact the financial outlook for both r both QTL and QCT.

Continued QTL challenges in China, [coupled] with increased spending on compliance and enforcement efforts by QTL.

Prioritize QCT R&D investments to maintain our leadership and balance our long-term competitive roadmap with scale efficiencies to succeed across all price tiers, particularly the rapidly growing lower-cost segments in emerging regions.

A reduction and refocusing of our spend outside of QCT and QTL to a smaller number of potentially larger opportunities.

Focused efforts on our expanded set of adjacent growth opportunities.

Key mobile technologies are increasingly becoming adopted into new categories, and we are well-positioned to use our design expertise in connectivity, compute, and other technologies to address these evolving opportunities.

Fundamentally, our long-term growth drivers remain on track, and we are aligning our resources to continue to capture these opportunities.

Gartner estimates that more than 8 billion smartphones will be sold over the next five-year period, through calendar 2018.

The install base will reach approximately 4.4 billion, representing the largest technology platform on which to innovate and drive upgrade opportunities.

We believe the smartphone will be central to the growing number of connected things around us, and our focus is on aligning our resources to continue to capture these opportunities.

We will discuss the many growth opportunities that we see ahead and the strategies and actions we are pursuing to capitalize on them during our upcoming New York Analyst Day on November 19.

And I look forward to seeing many of you there.

In conclusion, I would like to thank each of our employees and partners for their dedication, inventiveness, and leadership.

Although our FY15 guidance reflects some challenges, the growth in global 3G/4G device demand remains strong, and our new opportunities are emerging.

In this environment, we remain well-positioned long-term growth, while at the same time continuing to return significant amounts of capital to stockholders, consistent with our previous expectations.

That concludes my remarks.

And I would like now like to turn the call over to Qualcomm's President, Derek Aberle.

Thank you, Steve, and good afternoon, everyone.

I would like first like to provide an update on our view of global 3G/4G device demand for the remainder of calendar 2014 and 2015.

As a reminder, global 3G/4G devices include not only those devices reported to us but also our estimates of unreported and unlicensed device sales, but excludes TD-SCDMA devices that do not implement LTE.

Prior to calendar 2014, we believe that our estimates of global 3G/4G devices and reported 3G/4G devices were not materially different.

Last quarter, however, we introduced the separate global and reported naming conventions, in light of the challenges we are experiencing in China.

We think it is important and helpful to discuss both global and reported 3G/4G device estimates so that we can separately explain our views on our overall demand trends versus the portion of that demand that we expect will be reported to us during the applicable periods.

We believe that global demand for 3G/4G devices continues to grow at a very healthy pace, particularly in the emerging regions at mid and low price tiers.

The broad availability of compelling devices at these price tiers is driving demand for and the migration to 3G/4G devices.

Although we are not increasing our calendar 2014 global 3G/4G device shipment estimate at this time, we now have a positive bias to our prior estimate of approximately 1.3 billion units, up approximately 20% year-over-year.

As we explained last quarter, several factors, primarily related to challenges in China, are creating a divergence between our estimates of the global 3G/4G device demand I just explained and what is being and what we expect to be reported to us in the near term.

We estimate that approximately 258 million 3G/4G devices were reported to us during the fourth quarter of FY14.

For calendar year 2014, we continue to estimate reported 3G/4G devices will be in the range of 1.04 billion to 1.13 billion units, which is approximately 215 million units below the global 3G/4G device estimate of approximately 1.3 billion units at the midpoint.

This is in line with our prior expectations.

Looking forward to calendar year 2015, we estimate global 3G/4G device shipments to be approximately 1.5 billion units, up approximately 15% year-over-year.

Turning to 3G/4G device ASPs, the ASP of devices reported to QTL during the fourth quarter of FY14 was $223 at the midpoint and $225 at the midpoint for the full FY14.

We estimate that the reported ASP for FY14 was approximately 6% higher than it would have been if the full global 3G/4G device demand had been reported to us during FY14, given that the ASP of the unreported units is estimated to be below the reported ASP.

We forecast that the global 3G/4G ASP will further decline by approximately 9% to 10% in FY15.

Although we forecasted a modest year-over-year decline in the global 3G/4G device ASP at the outset of FY14, the global 3G/4G device ASP decreased more than we expected in FY14, driven by accelerated migration from GSM and TD-SCDMA devices to low- and mid-priced 3G/4G smartphones in emerging regions.

As price elasticity drives strong unit growth at lower tiers, we believe the total dollar amount of global 3G/4G device sales grew by approximately 10% in FY14, despite the approximate 6% ASP decline at the midpoint.

And we forecast approximately 7% to 8% year-over-year growth of such sales again in FY15.

Beyond FY15, we expect further declines in the 3G/4G global ASP to moderate, as the weighted impact of the factors that are driving the near-term declines in ASP ease and users in emerging regions trade up as they replace their low-tier devices.

We will provide more detail on these trends during our upcoming Analyst Day in New York.

I would now like to provide an update on the four issues impacting our licensing business in China that we discussed last quarter.

We are still in discussions with the licensee regarding the dispute that has resulted in a portion of that licensee's device shipments being excluded from our results.

Like other disputes we have had in the past, we expect to resolve the situation in due course and have been making progress towards that end.

We now have signed more than 75 single-mode LTE licenses with Chinese OEMs.

Having said that, OEMs supplying a meaningful percentage of three-mode devices remain unlicensed.

We remain in discussions with many of these OEMs, but the negotiations are being delayed, at least in part, by the pending NDRC investigation.

We also believe the volume of three-mode devices that will ship during calendar 2014 has increased from our prior expectations.

Despite these near-term challenges, we do expect to collect royalties over time on substantially all LTE device shipments, including three-mode devices sold in China.

We continue to believe that some of our licensees are not reporting all of their license shipments.

We are engaged in conducting audits of these licensees and attempting to identify and resolve instances of underreporting.

Of course, if these efforts are unsuccessful we are fully prepared to enforce our rights under our license agreements.

We have also seen an increase in sales of lower-tier 3G connected tablets by a number of Chinese OEMs, and we expect sales of these devices to continue to grow.

This is a good trend from a market growth perspective, but we still need to conclude license agreements with many of these tablets suppliers in order for QTL to participate in that growth.

We are continuing to pursue licenses with this new base of potential licensees, but those discussions will take some time to complete.

And the timing may be impacted to some extent by the pending NDRC investigation.

As to the status of the NDRC investigation, we continue to meet with and are fully cooperating with the NDRC as it conducts its investigation and have discussed with the NDRC a number of proposals for addressing its concerns.

But the timing and outcome of any resolution remains uncertain, as does the potential impact on our future business in China.

We also believe that the timing of the resolution of some of our other challenges in China will be impacted by the timing of the conclusion of the investigation.

Bringing this matter to closure remains a top priority for the management team.

Given the difficulty in predicting the timing and impact of resolving our China challenges, our QTL outlook for FY15 incorporates a wide range of potential outcomes.

The low end of our guidance reflects the status quo (inaudible) [relative to] the four China issues I just covered.

In other words, no material resolution or change to these items.

And the high end of the range reflects more favorable outcomes with respect to several of the items.

Due to the uncertain timing and range of potential outcomes, the potential for higher-than-normal quarterly variation on our results is possible.

We have widened our guidance ranges as a result.

Finally, again, it is important to remember that our forecast for reported TRDS units and ASPs reflect only that (inaudible) 3G/4G device demand that we currently expect will be reported to us and will, therefore, vary from the global 3G/4G device metrics we have described.

Although QTL revenue growth may be muted to some extent, as we work to resolve the current challenges in China, and global device ASPs are expected to decline during FY15 at a faster pace than in recent years, we still expect reasonable growth in global 3G/4G device sales, driven by very strong unit growth.

That concludes my comments.

I will now turn the call over to our Chief Financial Officer, George Davis.

Thank you, Derek, and good afternoon to everyone on the call.

I will begin by covering our fiscal fourth-quarter results, followed by a summary of FY14, before discussing our outlook.

In our fiscal fourth quarter, we delivered revenues of $6.7 billion, up 3% year-over-year.

And non-GAAP operating income was $2.3 billion, up 20% year-over-year.

Non-GAAP earnings per share grew 20% year-over-year to $1.26.

In QTL, total reported device sales by our licensees were $57.4 billion above the midpoint of our guidance range.

QTL's reported ASP was $223 at the midpoint and down $8 quarter-over-quarter.

QCT had record MSM shipments in the quarter, as forecasted, although the demand related to mid-tier chipsets was somewhat below our expectations.

Implied revenue per MSM was down sequentially, reflecting an increased mix of thin-modem chipsets in the premium tier.

QCT operating margin was 22%, achieving our target to exit FY14 above 20%.

Non-GAAP combined R&D and SG&A expenses were 5% lower sequentially -- better than expected, due to spending discipline across all businesses.

During the fiscal fourth quarter, we returned $1.9 billion to stockholders, including approximately $700 million of dividends paid and $1.2 billion in stock repurchases.

As of the end of FY14, we had approximately $5.3 billion remaining on our stock repurchase authorization.

Cash flow from operations was $1.6 billion and 24% of revenues.

And we ended the quarter with cash and marketable securities of $32 billion.

Turning to our results for FY14, revenues were up 7% from last year, reflecting the stronger-than-expected QCT shipments, partially offset by the impact of QTL's challenges in China.

As a reminder, we sold our Omnitracs division in the first fiscal quarter, and the impact to the absence of this business was just over one percentage point on our growth rate on the year-over-year comparison.

Non-GAAP operating income was $8.9 billion, up 3% year-over-year, led by strong performance in QCT, partially offset by certain impairments and higher spend in our emerging businesses reported in other.

Non-GAAP earnings per share were $5.27, up 17% year-over-year, led by QCT performance, along with the benefit of gains on rebalancing of our treasury portfolio and the positive net impacts of the gain on sale of Omnitracs and the ParkerVision reversal, partially offset by the write-down of QMT assets.

QTL's FY14 revenues were flat year-over-year, as challenges in China offset strong global 3G/4G device growth.

And QTL's operating margin was 87% of revenue.

QCT's FY14 revenues were up 12% year-over-year.

And QCT's earnings before tax were up 19% year-over-year.

Operating margin was 20% and at the high end of our full-year guidance range.

Overall, a very strong year for our QCT team, where product leadership across all tiers led to stronger-than-expected top and bottom line growth in an environment where we saw increasing margin compression, particularly in the mid and low tiers.

In FY14, we generated $8.9 billion in cash flow from operations, or 34% of revenues.

We exceeded our 75% of free cash flow commitment, returning approximately $7.1 billion, or 93% of free cash flow, to stockholders during the fiscal year.

Now, turning to our guidance for FY15.

We estimate total Qualcomm FY15 revenues to be in the range of approximately $26.8 billion to $28.8 billion, up 1% to 9% year-over-year.

We expect QCT segment revenues to be in the range of $19.3 billion to $20.3 billion, up 6% year-over-year at the midpoint.

And QTL segment revenues are expected to be in the range of $7.3 billion to $8.3 billion, up 3% year-over-year at the midpoint.

Our range for QTL is relatively wide, as it is difficult to forecast the timing and potential outcomes in China.

We expect 2015 non-GAAP operating income to be in the range of $9.2 billion to $10 billion, up 7.5% year-over-year at the midpoint.

Overall non-GAAP operating profit is expected to rise -- grow modestly as a percent of revenue.

We estimate FY15 QTL operating margins will be approximately 85% to 86%.

Consistent with the guidance provided over the past year, we estimate 2015 QCT operating margins will be in the range of 18% to 20%.

We expect FY15 non-GAAP earnings per share to be in the range of $5.05 to $5.35, down modestly at the midpoint versus FY14.

Non-GAAP year-over-year EPS growth is expected to be impacted by the continuing challenges in QTL, lower QCT revenue per MSM and margin flow-through, lower investment gains in our treasury portfolio, and to a lesser extent, negative foreign exchange impacts.

Our estimate is that revenue per MSM will be modestly lower year-over-year, down 3% to 5%, as a result of continuing pricing pressure, product mix, and increasing competitive dynamics.

Combined non-GAAP R&D and SG&A expenses are expected to grow approximately 3% to 5% year-over-year, driven by continued investment in our multi-tiered chip roadmap and increasing compliance and enforcement initiatives in QTL.

We estimate our FY15 non-GAAP tax rate to be approximately 17%, higher year-over-year, due to business mix, the absence of the federal R&D tax credit, and other unique items in 2014.

The impact from the potential CSR acquisition has been excluded from our FY15 forecast.

For the first quarter of FY15, we estimate revenues to be in the range of approximately $6.6 billion to $7.2 billion, up approximately 4% year-over-year at the midpoint.

We estimate non-GAAP earnings per share in our fiscal first quarter to be approximately $1.18 to $1.30 per share, down 2% year-over-year at the midpoint, as stronger chip performance is more than offset by the absence of favorable one-time items and lower licensing revenues related to China.

We anticipate first-fiscal-quarter non-GAAP combined R&D and SG&A expenses will be up 5% to 6% sequentially, reflecting increased investment in QCT's product roadmap.

In QTL, we estimate total reported device sales for the quarter will be in the range of $53 billion to $59 billion, as reported by our licensees in the December quarter for shipments they made in the September quarter.

QTL's reported ASP is estimated to be sequentially lower, reflecting competitive dynamics at the premium and high tier and an increased mix of lower-priced handsets in emerging regions.

In QCT we anticipate MSM shipments of approximately 250 million to 270 million units during the December quarter, up approximately 22% year-over-year at the midpoint and 10% sequentially.

We expect fiscal-first-quarter implied revenue per MSM to be down approximately 5% quarter-over-quarter and down approximately 10% year-over-year, reflecting a greater mix of thin modems and chipsets for lower-cost smartphones.

That concludes my comments.

I look forward to seeing many of you at the Analyst Day in New York, where we'll provide further details supporting our financial outlook for FY15 and beyond.

I'll now turn the call back to Warren.

Thank you, George.

Operator, we're ready for questions.

(Operator Instructions)

Tim Long, BMO Capital.

Derek, a clarification here.

There's a discussion of a prior period catch up in the numbers for QTL this year.

If you'd just let us know what that is.

And then, for the whole team here, just curious, as we enter a new fiscal year, the previous guidance of 10% top- and bottom-line growth looks like, for guidance, will be the second year that we don't hit that.

Could you just readdress that?

And maybe if you X-out China, do you think those targets are still realistic?

Thank you.

Tim, this is Derek.

I'm a little bit confused on what you're referring to on the prior period catch up.

In terms of our guidance for FY15, as George mentioned, we have a relatively wide range on the QTL guidance, given just the uncertainty on what's going on in China.

And I would say that sort of at the low end of that, we're assuming probably more or less a status quo scenario on the four items that we discussed last quarter and updated you on today.

And then, towards the high-end of the range, would anticipate that we actually reach resolution at various points in the year on several of those items.

And certainly, part of that could include things like catch-up payments.

But that's sort of a probability-adjusted set of assumptions that got us to this range.

Tim, hi.

It's George.

On your question about the longer-term outlook, that's certainly going to be the focus of a lot of our discussion in New York.

But I do think as you look at 2014, clearly, our top line was impacted by what QTL experienced.

They were flat year-over-year, as opposed to growing with the market.

And with 2015, again, I think we'll -- we're continuing to see the impacts of China.

But we'll talk longer-term about the things that we think will add to the growth rate for the Company overall when we can go into more detail.

James Faucette, Morgan Stanley.

I just wanted to ask one more clarification from you, Derek.

As far as resolution getting to the high-end of your range, I think you said that's probability-weighted.

So if I'm understanding that correctly, that would mean that if it were in fact to happen, that you could actually exceed the high-end of the range.

Just a little clarification on how you're formulating that would, I think, be helpful.

And then back on QCT -- maybe broader question for the team -- just wondering if the issues with the NDRC in particular are impacting -- how that's impacting the demand for chips in China with your Chinese customers, if it's impacting relationship there and margins, et al there.

And finally last question, if you'd just -- couple comments on the new EC and FTC investigations might be useful as well.

Thank you.

James, this is Derek.

Just let me clarify on the range.

What I was saying is the low end of the range, really, basically assumes no resolution of the items that we've discussed.

And also that things like unreported activity wouldn't get worse.

So it's sort of what we've seen now, one quarter in, of reports and also the estimates on the September quarter sales.

As I mentioned in my comments, we feel like we're tracking in-line with what we expected, meaning the underreporting isn't getting worse.

So assuming that holds, and we don't resolve things, that would get you to the low end of the range.

The high-end of the range basically includes assumptions that several of the items would either be resolved or get better for us.

And to be clear, the midpoint is basically a probability-adjusted version of several different scenarios that puts you in the middle.

Jay, this is Steve.

With respect to the chipset question, I don't think the investigation helps the situation.

But I think the team has done has done a good job really separating the issues between the product side and the licensing side.

And I would characterize the demand in China as been fairly robust.

It's probably a little bit more three-mode than five-mode, compared to -- which is really a mix statement -- relative to what we would have thought, let's say, a year ago.

But it continues to be a significant part of the growth of the business moving forward, and we're [going to be] pleased to be participating in it.

This is Don.

With respect to the investigation at the EU and the FTC, basically we've said in the K what we can say.

They're both very early-stage.

The EU relates to -- as far as we can tell -- the chip business, and the FTC relates to -- as far as we can tell -- the licensing business.

But important to note that these are very preliminary.

They're in the information gathering stages in both cases.

Mike Walkley, Canaccord Genuity.

Derek, just a little more clarification.

What's embedded in your guidance on QTL, maybe on the ASP front, one, on the high-end, high-tier market with Apple and a strong product cycle -- and our surveys and work show them taking share from high-end Android.

How much does that impact your ASP outlook?

And then second, let's assume that a lower mix of these emerging market units for the underreporting -- that could help ASP's.

And then third, we have some FX headwinds that could hurt Qualcomm.

So how much of those factors may be impacting your ASP outlook, or is it more just the mix that is leading to the ASP outlook?

Thank you.

Yes.

Mike, this is Derek.

I would say elements of all of those things are embedded in our guidance.

You probably noticed that, unlike prior years where we gave a fiscal-year ASP range, this year we decided to just give a new metric, which is the all-in TRDS.

Because given the uncertainty in the timing of some of these resolutions and -- in addition to the normal market dynamics that we need to forecast -- trying to give a meaningful range on the ASP was pretty difficult.

For example, if we get the dispute resolved and some of these underreporting issues resolved, and that comes with it catch-up units that are at lower ASP's, that's going to have a distortive effect on the quarterly profile.

So we'll take you through that as the year progresses, depending on what comes out.

But yes.

Certainly, as OEM share shifts around at the high tier, that can impact the ASP as well.

And we've got a set of assumptions in there.

And we do anticipate, both from a reported and a global market dynamic, that the emerging market units will be an increasing portion of the units sold in 2015 compared to 2014.

Mike, I think you asked about FX as well.

And I think it will have a modest impact, driven by what we're seeing with the yen and the euro.

Blayne Curtis, Barclays.

Just first on QTL.

The step-off in the device ASPs -- how much of it did the three-mode have to do with that?

And any expectation on the mix between five-mode and three-mode next year?

And then George, just on the OpEx clicking up, you had said that you're investing in the products.

This is kind of a change from trying to keep it more flattish.

So what's driving that change, as the top line, seemingly, is a little weaker?

Blayne, this is Derek.

Let me hit the first one.

Yes.

So if you look at what we refer to as the global ASP -- if all the units have been reported to us this year -- really, a big part of the year-over-year decline is driven by growth in China, and in particular, three-mode and Chinese OEMs, I think, gaining share over non-Chinese OEMs.

So that's a big part, coupled with strong unit growth in other emerging regions as well.

I think we see similar dynamics playing out as we go from 2014 to 2015.

Throughout the course of this year, the percentage of three-mode devices on China Mobile's network, compared to five-mode, has really continued to shift over time to more three-mode.

And we expect that will probably continue, at least into 2015, as well.

Yes.

On OpEx, we are slowing the growth of OpEx.

Last year, we had forecasted 6% growth.

We brought it at 5%.

This year, we're forecasting 4% at the midpoint.

Really what you're seeing is continued investment in the QCT roadmap.

What's maybe having a little bit higher effect than we would expect on an ongoing run rate is, we are investing more in the enforcement side for QTL, so we've embedded that growth, year-over-year.

But you'll see, again, moderate growth in QCT.

And in our other segment, you're seeing OpEx coming down in that area.

Brian Modoff, Deutsche Bank.

Couple questions for you.

First on the -- back to the growth rate, long-term growth rate.

Obviously with QTL, you are the market there.

So single-digit growth there is probably a given.

But on the QCT side, you've got a combination of things.

You obviously have lower ASP products growing in number faster than higher ASP.

But you've also got integration functionality like Wi-Fi and RF360.

So how do those two things play into the overall growth rate of QCT?

Second, Steve, if you could talk about LTE competition -- how you see that evolving, as we move into next year.

And then finally, given you have a couple of investigations going on, what are you assuming in your guidance, relative to legal expense?

Is it the mid-range, or is it high or low?

Can you give us some measure of that?

That would be great.

Thank you.

Hi, Brian.

This is Steve.

I think on the QCT model, I don't really see anything that's different than our long-term model.

We had a very strong 2014.

I think we're seeing a little bit of a mix issue now in 2015, but still consistent with our long-term.

Remember, we had a really strong 2014, I think, is important to remember.

Long-term, I think all of the growth vectors that we talked about that you mentioned -- integration; a bunch of adjacent markets; just continual, actually, even improvement of our cost structure, which we continue focus on -- contribute to that.

So I think we don't see really anything different in the QCT outlook.

Albeit, it's a little bit weaker market from a mix perspective, here, sequentially in 2015.

And I think some of our OpEx discipline that we've had over the years has helped us actually maintain that.

With respect to LTE competition, it's there.

It's been there for some time.

We feel fairly good about our competitive positioning right now.

Most of that is because, I think, we're stronger across tiers.

We are assuming that there is LTE competition in the way in which we are pricing our chipsets and the way in which we're defending our share.

But you've seen us do that in the past.

I don't think that's a real change, in terms of our strategy.

Maybe George could talk a little bit about the legal expense.

Sure.

On the legal side, we're definitely increasing the -- we expect to spend more this year, not only for China, but for these other items that we talked about.

But that's all in the forecast.

Ehud Gelblum, Citigroup.

Couple questions, if I could.

One is the concept of three-mode versus five-mode comes up a lot in conversation.

And you mentioned it today as well.

Can you give us a sense -- in both modes, you have LTE.

And in three-mode, you have TD-LTE.

And five-mode, you have both TD- and FD-LTE.

For you, is there a distinction between the two?

Is there any reason that we should be seeing a distinction between the two?

Have any vendors or any carriers or anyone [been able to] make a distinction between the two that you can discern?

Is there a reason that the royalties you eventually get on three-mode would be different from five-mode, other than -- as a percentage -- other than the fact that three-mode phones would most likely have a lower ASP?

If we can just understand -- I was always under the impression that LTE was LTE was LTE, so if you can clarify that a little bit.

As well as this large licensee that seems to be making a distinction between a portion of its devices that they're not willing to pay royalties on.

Is that the distinction between three-mode and five-mode?

And then, I just want to get clarification.

When you said the 9% to 10% ASP, that was including China, I assumed, and the 1.5 billion units.

If we exclude China, what is your estimate on ASP declines for QTL in the TRDS that we're, right now, going to be looking at, going forward, as opposed to hoping this thing gets resolved issue?

Hey, Ehud.

This is Derek.

Let me kind of tick through these.

So the three-mode versus five-mode question -- just to clarify.

Three-mode, when we use that term, refers to devices that have GSM, TD-SCDMA, and TD-LTE.

And five-mode is both flavors of LTE as well as GSM and WCDMA.

And so when you think about the five-mode devices, those are essentially covered by what we refer to as our 3G agreement.

So there's no need to go out for us and sign up new agreements to cover those products.

The three-mode -- the reason that we've drawn a distention between those is, in many cases, either companies did not take licenses for TD-SCDMA or, as we've talked about in the past, we've had challenges in China collecting on TD-SCDMA.

So as they roll those TD-SCDMA devices to include LTE, we believe that really puts us in the position to collect royalties on all of the formerly TD-SCDMA volume.

So in many cases, that requires us to actually negotiate and sign new license agreements.

And those are the agreements that you'll hear us refer to as LTE-only or single-mode LTE agreements.

Really, from an OEM perspective, we did have some concerns a while back about the issue of whether we're going to have challenges collecting on LTE TDD, similar to TD-SCDMA.

We're not really seeing that to be a big issue.

It's more around just getting the agreements in place.

And as I've talked about, we were making very good progress on that up until recently.

And I think we're experiencing some delays in those negotiations, primarily around the timing of the NDRC resolution.

The dispute we have with the licensee -- we really haven't characterized that in too much detail, other than say it is, really, the underreporting aspect of that is not necessarily related to a particular technology.

It's really a different kind of dispute, similar to what we've had in the past, where we just have companies taking position under the agreement, in terms of what they have to pay, and we have to work through that.

And we've continued to be engaged with that particular licensee and are trying to make progress towards a resolution.

On the ASP, what we talked about -- when I referred to the 9% to 10% estimated year-over-year decline, that was referring to the global ASP, which is sort of the all-in number.

It would include China.

Yes.

If you extracted out China, we would expect that ASP to be higher.

But as I mentioned before, we decided not to provide guidance at this point on the fiscal year reported ASP.

Instead, we gave you the TRDS range for FY15.

Kulbinder Garcha, Credit Suisse.

I have a couple of questions.

Probably both aimed at -- one at Derek, and one at Steve.

Derek, on the issues in China, we previously implied that this 200 million odd shortfall --

Kulbinder?

We're having a hard time hearing you.

Could you speak up?

Can you hear me now?

Yes.

That's better.

Okay.

So I've got a couple of questions -- one for Derek; one for Steve.

For Derek, on the unit numbers -- the 210 million shortfall -- you'd previously implied that the shortfall was a significant part was just this one licensee, and the rest of it was a bunch of underreporting.

My question is on that -- what [other] remedies are possible for the licensee that you had?

Because you had -- you obviously have or had an agreement with them, and they've just suddenly stopped paying.

And I would have thought there were levers there to bring that to some sort of growth close quite quickly.

And while I was thinking of it, these other underreporting vendors is just much more complicated.

Is that the right way to of thinking of it, or is this whole thing very uncertain?

Then for Steve, my question is, despite the cash that you guys did pay out, you obviously ended the year with more cash than last year.

And I'm not sure that you'd even agree that you need [say you have $1 billion] on your balance sheet.

So if you are confident of Qualcomm's LTE position and the chip position, which it sounds like you are, isn't this the time to step up the shareholder returns?

Thanks.

Kulbinder, this is Derek.

Let me try to step through this.

The -- remember, we gave a range last quarter -- it was relatively wide -- of potential units that would not be reported to us for calendar 2014.

And the midpoint of that estimate was about 215 million units.

And as we explained, that was made up of four elements.

One of them was the dispute that you mentioned.

Another one was underreporting by licensees.

A third was the unlicensed three-mode activity in China, and the fourth where these white box tablets.

And the white box tablets, although also meaningful, probably the smallest out of the three -- I'm sorry, out of the four.

We didn't otherwise characterize the composition of what made up the 215 million, so I wanted to clarify that.

The dispute that we have currently with a licensee does involve a company that has an existing license agreement.

And so our typical process when we have these types of disputes, as you probably recall from years earlier, is our first and preferred approach is to try to engage with the licensee and resolve it amicably through negotiation.

And that's the process that we're going through right now.

We've had a lot of success doing that in the past.

But from time to time, that doesn't work.

And if that doesn't work, then you need to take the next step, which is typically seeking to enforce your rights under the agreement, which would either be in litigation or in arbitration.

And you might recall, for instance, the arbitration that we had with Panasonic a few years back.

That resolved quite favorably for us.

So I would say we're sort of in the pre-dispute resolution procedures, meaning we're continuing to be engaged with the licensee.

And I think we're making some progress towards a resolution.

But there's no guarantee that will ultimately happen without the need for some other mechanism to resolve it.

But those do take some time.

It's not -- even when you resort to the contract remedies, that's a period of time as well.

So it's not something you can just do overnight.

Kulbinder, this is Steve.

I think the way you characterize our view of the business is consistent with our view.

That being said, I think we talked about, last fiscal year, about how we increased our capital structure commitment to return 75% of free cash flow to the shareholders.

Given our split of offshore and onshore balances and the future view of what might happen with tax reform, we think that's probably the right split right now.

But I'm sure that we will hear a lot about that and also provide our own perspective of that, again, in New York.

Tal Liani, Bank of America Merrill Lynch.

I have three questions.

First is on the royalties.

I'm here in China this week, and I'm getting confused with the information because there are going to be about 70 million to 80 million 4G subscribers in China this year.

And you're guiding to 215 million.

And the majority of these 80 million, 90 million handsets will be paying royalties just because they're five-mode or they're the other technologies that are supposed to pay royalties.

So the dispute seems to be going -- it's not about TD or local technology.

It's more about the Chinese not willing to pay you, period.

And it has nothing to do with -- there is something to do with technology -- but it cuts across all technologies, and it's also for the exports, not just for the imports.

So can you discuss this?

What suddenly prompts this, after they paid for so many years, according to the plan?

And the second question is about R&D.

You referred to OpEx before, but R&D -- if I look at the last five, six quarters, R&D had been, the growth rate, had been constantly down from 36% year-over-year to 11% the previous two quarters.

And this quarter, it's only 1%.

What is the outlook for R&D?

And what are the projects?

How do you manage to maintain the leadership with R&D only growing 1% year-over-year?

Thanks.

Tal, this is Derek.

Let me take your first question.

Just to clear up, maybe, the potential confusion there.

So last quarter, when we described this, it's really -- the issue of unlicensed activity and underreporting is really one that's unique to Chinese OEMs at this point.

But it is not limited to a particular technology.

So I think we were pretty clear that the three-mode was sort of a unique issue.

That was a combination of, probably, underreporting and unlicensed activity.

But that the underreporting itself, given the magnitude of the 215 million unit midpoint we talked about, included more than just LTE.

It was across 3G as well, and it wasn't limited to even sales in China.

But it would likely include sales by Chinese OEMs that would be for export outside of China to some of the other emerging regions.

So I think when you go back and maybe look at your numbers in that context, hopefully things will make a little more sense.

In terms of timing, really, I think you can think about this from a couple different perspectives.

One is the unlicensed activity, I think, a lot of -- it's not atypical to have a situation where a product begins to ship before you can finally get agreements in place.

So they come usually closer to the time of shipment.

So that's why the three-mode is a bit bigger issue for us right now than the five-mode or other 3G devices.

But I think there's also an element of, given the uncertainty in China right now with the pending NDRC investigation, which we're, obviously, working very hard to resolve, there's a little bit of licensees pushing the envelope.

And we -- it's not, really, a situation of companies just saying generally they're not going to pay us.

But I think that they're pushing the envelope, in terms of thinking that they can get away with not reporting all of the activity that they're undertaking.

And we are preparing to respond to that.

And I think that's something we've had to deal with in the past, and I think we've had a pretty good track record of resolving it.

We're probably approaching the problem a little bit differently than we have in the past, just given where we are in our current discussions on the investigation.

But once that's behind us or we get a little further down the line, I think you'll see our stance on those types of things change.

On the R&D, I think you're referring to the quarter number, which had more modest growth than we've seen for couple quarters.

And some of that is just timing of certain activities within the programs.

But if you look at the full-year 2014, where we had a little more front-end loading, we grew R&D at about three points higher than the top line rate of the Company.

If you look back over five years, R&D as a percent of revenue is about 18%, and that's the same level that we would expect to see in 2015.

Stacy Rasgon, Sanford Bernstein.

I have three quick ones.

The first one -- you're talking about, I guess, issues with China impacting the guide next quarter.

But let's talk about the rest of the business.

You're guiding at the low end of your TRDS.

That assumes China doesn't come back, but that also implies TRDS goes down your view, which implies something must be going on in the rest of the business.

So can you tell us about how you see the rest of the business trending, ex-China?

Secondly, you're guiding your TRDS up 4.5%.

You're guiding your QTL revenues up 3%, which implies royalty rate degradation next year.

What's driving that?

Thirdly, with the issues signing these China guys three-mode licenses, I guess currently, they're not in violation of anything yet because they don't have agreements.

So if they continue to refuse to sign, what are your options?

Do you have to go into China and make the explicit decision to sue them for patent infringement?

Thank you.

This is Derek.

I'll take a crack at some of the TRDS questions.

Maybe George can jump in, if I miss something.

I think the first question was from a reported TRDS year-over-year, when you look at the numbers, that appears to be down.

I think, actually, the midpoint is -- would be up year-over-year, about 5%.

So you should probably take a look at that one.

Not sure I fully caught the second part of that.

Although, I think that your point was that the growth rate for QTL -- I mean, it's one of the reasons why we gave a range of what the top line for QTL would be.

But if you just took the midpoint of that, it would be up 3%.

And we're saying TRDS up 5% on FY15 guidance.

So we're not -- again, I would say, to draw a straight line between that and saying that there's a specific royalty rate issue, I think there's so many moving pieces in the forecast right now, that I wouldn't draw quite that straight a line.

And then, I guess, on the last question about three-mode.

Yes.

Really, I think that's the question.

There are some companies that have already -- we have, I think, 75 plus companies that have already signed agreements for three-mode in China.

So obviously, the way that we would ensure payment and compliance on those companies would be different than the companies that don't yet have agreements.

So I think there's a lot of factors involved, in terms of if we run into problems getting companies to actually sign agreements for three-mode.

And one of the potential actions would be to assert patents against them in China.

There certainly are other avenues that are at our disposal as well, in particular, as these companies continue to grow their businesses and their aspirations outside of China as well.

Tim Arcuri, Cowen and Company.

Two.

First of all for me, the guidance takes into account the issues in China.

But can you assess the potential for the new FTC and the EU investigations to maybe add some risk to the low end of the guidance?

And then secondly are the new FTC and EU investigations -- are they fully independent from the NDRC issues?

Because it seems like, in some other situations, that the various global agencies are working together on stuff like this.

So I'm wondering if one can be resolved totally separately from the other two.

Thanks.

So this is Don.

The first question was, in terms of the impact.

Look, these are investigations that, as I said, are very preliminary.

As you know from our experience and other experiences in the past, these take some time.

As I said, these are informational at the moment.

So there's going to be a lot of interaction and discussion before this leads anywhere, frankly.

So I don't think we can predict with any degree of certainty where it's going to go, and it's certainly not going to be a short-term kind of impact.

And the second question -- somebody's got to remind me.

Yes.

Let me have a -- this is Derek.

Let me jump in there.

I think, if you look back historically, we obviously had an investigation Europe and in Korea previously.

The European investigation went on for four years and ultimately resulted in no findings or actual complaints against us.

Korea -- that was a multi-year process as well.

I think, in our experience, it's not uncommon that if there's a high-profile investigation by one competition agency, that potentially, others might become interested and ask for information.

But the regulatory regimes and the legal processes in each country are quite different, and in particular, quite different than China.

I see we've run out of time.

We look forward to picking up this conversation that the Analyst Day in a couple of weeks.

And I'll turn it back to the operator.

Thank you.

This concludes today's conference call.

You may now disconnect.