Qualcomm Inc QCOM
Q2 2013 Earnings Call Transcript
Transcript Call Date 04/24/2013

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the QUALCOMM Second Quarter Fiscal 2013 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded April 24, 2013. The playback number for today's call is 855-859-2056. International callers please dial 404-537-3406. The playback reservation number is 29888090.

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

Warren Kneeshaw - VP, IR: Thank you, Ryan, and good afternoon, everyone. Today's call will include prepared remarks by Dr. Paul Jacobs, Steve Mollenkopf and George Davis. In addition, Derek Aberle and Don Rosenberg will join the question-and-answer session. An Internet presentation and audio broadcast accompany this call and you can access them by visiting our website at www.qualcomm.com.

During this conference call, if we use non-GAAP financial measures as defined in Regulation G, you can find the related reconciliations to GAAP on our website. I'd also like to direct you to our 10-Q and earnings release, which were filed and furnished respectively with the SEC today and are available on our website.

During this conference call, we will make forward-looking statements regarding future events or results of the company. Actual events or results could differ materially from these projected in the forward-looking statements. Please refer to our SEC filings, including our most recent Form 10-K and 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements.

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

Dr. Paul E. Jacobs - Chairman and CEO: Thanks Warren and good afternoon everyone. We are pleased to report another strong quarter with record revenues up 24% versus a year ago, driven by broad-based demand for smartphones and strong semiconductor volumes.

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

In QCT we continue to drive technology and product leadership, first products announcements by our customers on our new QUALCOMM Snapdragon 600 and 800 processors. We launched our new QUALCOMM RF360 front end solution, and we extended our support of the industry's widest range of operating systems to include Mozilla's web-based Firefox OS and innovations such as Facebook Home. QUALCOMM is now ranked by revenues as the third largest semiconductor provider in the world, up from sixth last year and ninth the year before according to IHS.

Turning to QTL, total reported device sales came in towards the high end of our prior guidance range, reflecting continued global adoption of smartphones, particularly in emerging regions. This marks another record quarter of total reported device sales in QTL revenues. We also continue to grow our licensee base and now have our over 230 CMA licensees and more than 50 single mode OFDMA licensees.

Looking forward, we believe our long-term growth drivers remain intact and are increasing our calendar year 2013 3G/4G device forecast in line with this view. Smartphone adoption continues at a rapid pace. Gartner estimates that approximately 700 million smartphones were sold in calendar 2012, up 44% year-over-year. Further, they estimate that in 2017, more than 1.7 billion smartphones will be sold representing an approximate 20% compound annual growth rate versus a 2012 base.

Smartphones become more than just a technology product. It's empowering people to connect and interact with the world like never before and we're working to deliver continuous improvement for the user experience to our investments and industry-leading innovations in smartphone technologies, including the CPU, the GPU multimedia subsystems, sensors, displays connectivity and, of course last but not least, the mode. Emerging regions are experiencing the fastest growth for 3G as 3G networks mature in the breadth of affordable smartphones expand. Wireless Intelligence reports that at the end of the first calendar quarter of 2013, 3G connections including CDMA 1x emerging regions increased 34% year-over-year to approximately $1.1 billion. According to analysts, 3G connections are now more than three times the number of fixed internet connections in emerging regions, making mobile the leading and in some cases the only platform for computing and internet access. Take China as an example.

Wealth Intelligence reports that there are now more than 1.1 billion wireless connections of which only approximately one-third are 3G including 1x. There is a large remaining opportunity as consumers migrate from 2G to 3G and 3G/4G multimode.

Sino MR reports that more than six times the number of sub RMB1000 smartphone models were launched in 2012 versus 2011. By the way RMB1000 is approximately $160 U.S. All three carriers in China reported increased data traffic in revenue with China Telecom reporting a 47% year-over-year increase in data revenue for 2012. And beyond the phone, it's important to remember that we're pursuing multiple incremental growth opportunities including mobile computing and what we refer to as the internet of everything.

We're still in the early stages of mobile computing, but we believe the fundamental benefits of always on, always connected and sleek form factors will create a more compelling user experience than traditional computing devices. We're encouraged to see a diverse set of vendors experiment with different form factors and multiple operating systems as they look to address the evolving computing environment.

Further, as it relates to the internet of everything, we're leveraging our core technologies to support a range of applications for a diverse set of vertical industries which is automotive, smart energy, security, healthcare and the connected home. As an example of momentum in that space, general motors recently announced intend to put LTE connectivity into its entire fleet of 2015 Buicks, Cadillacs, Chevrolets and GMCs and that's following similar announcements from BMW and Audi.

We are investing in a variety solutions to help meet the rapidly increasing data traffic demands that these opportunities are creating. We refer to this as the 1000x Data Challenge we are making good progress with technologies such as carrier aggregation, LTE broadcast and new small cell deployment models.

Further advances in 3G network technologies such as HSPA+ and new overlay LTE networks are being deployed at significant rates and according to GSA. There are now over 160 commercial LTE networks globally. China Mobile announced plans to expand its LTE TDD trial network to include 200,000 base stations by the end of 2013 and Snapdragon and Gobi enabled LTE TDD devices are starting to achieve China Mobile's network certification.

As you obviously know George Davis has joined QUALCOMM as our Chief Financial Officer, and I'd like to welcome him to his first QUALCOMM earnings call. We are off to great start and I'm looking forward to working with George in the months and years to come.

So to conclude we've just completed another strong quarter at QUALCOMM and we are pleased to be increasing our fiscal 2013 guidance.

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

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

Steve Mollenkopf - President and COO: Thank you Paul and good afternoon everyone. Our QCT business had another excellent quarter with revenues and earnings before tax increasing 28% and 14% year-over-year, respectively. We shipped 173 million MSM chipsets up 14% year-over-year and at the high-end of our prior guidance range, reflecting strong demand across our portfolio including our QUALCOMM reference design solutions.

Looking forward we are expecting another record year for QCT growing revenue and earnings before tax on a strong double-digit basis year-over-year. This growth is in excess of the rate of growth of estimated industry 3G/4G device unit shipments and the year-over-year percentage increase of our expected operating expenses.

Further, the year is unfolding better than we initially expected and we are successfully increasing our share, and our share of content in devices. This strategy is delivering strong revenue and per unit dollar margin growth, year-over-year, albeit with downward pressure on the QCT gross margin on a percentage basis as expected. In total, we are pleased to be raising the Company guidance in large part due to the strength of our chip business.

Flagship devices announced this quarter that contain our chipsets include the Samsung Galaxy S4, the HTC One, the LG Optimus G Pro, the BlackBerry Z10 and the Sony XPERIA Z smartphone and tablet. Our strategy of pursuing a diversified customer base, including all the major OEMs and across all major operating systems uniquely positions us within the industry.

We also continue to grow devices targeted at mass market prices and emerging regions. Our QUALCOMM Reference Design program continues to build momentum with OEMs now shipping handsets based on our MSM8x25Q quad-core chipset. And in developing pipeline for LTE chipsets, which will support the anticipated rollout of LTE in China.

In total, there are now more than 850 Snapdragon enabled devices launched or announced, including approximately 200 devices based on our QUALCOMM Reference Designs. The pipeline of future Snapdragon enabled devices also continues to grow, and there are more than 475 additional snapdragon enabled designs in development. Devices based on the Snapdragon 600 chipsets are launching now and we expect commercial devices, based on the Snapdragon 800 chipset to launch on schedule in the middle of this year.

Carrier requirements that support the demand for growing network capacity will increase the complexity and requirements for modem and connectivity technology and represent a sizable opportunity that aligns with our key strengths. Our family of 3G/4G multimode chipsets leads the competition in mode and band support, as well as the integration of the latest Wi-Fi 802.11ac.

We are already on our third generation of LTE modems, and with the MDM 9x25 and Snapdragon 800 chipsets, while others are still working on their first generation. This quarter, we announced our new QUALCOMM RF360 product which addresses the next challenge with global LTE, OEM SKU proliferation coming our RF complexity and LTE band fragmentation. We continue to execute on the strategy, which we outlined for you in the past. We innovate across multiple technology vectors, GPU, graphics, modem and connectivity, optimize the design point for the unique requirements of mobile, integrate these technologies into a tiered chipset roadmap and deliver these chipsets at scale across multiple customers and OSs.

These technology investments enable superior performance, lower power consumption, faster time to market and continually raise the bar for competition. The success of this strategy is reflected in our growing share and the many OEM flagship devices already announced based on the Snapdragon 600 chipsets, and the increasing device pipeline of more than 200 Snapdragon 600 and 800 chipsets enabled devices.

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

That concludes my remarks. I will now turn the call over to George Davis.

George S. Davis - EVP and CFO: Thank you, Steve, and good afternoon everyone. I am delighted to have joined the QUALCOMM team, and look forward to working closely with the investor and analyst community in my new role. We are pleased to be reporting strong financial results today and to be increasing our financial outlook for fiscal 2013. Fiscal second quarter revenues were a record $6.1 billion up 24% year-over-year and 2% sequentially. Non-GAAP operating income of $2.2 billion was up 18% year-over-year and non-GAAP earnings per share of $1.17 was up 16% year-over-year.

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

As a reminder, this quarter reflects two very different seasonal periods for our main business segments. For QCT our March quarter is a period of seasonally lower demand following the retail intensive December quarter. Because QTL records royalty on subscriber device sales on a quarter lag, our fiscal second quarter results for QTL reflect the strong demand period of the December quarter.

QTL, reported strong growth in, 3G/4G device shipments by its licenses, driven particularly by smartphones in both developed and emerging regions. Total reported device sales rose to a record $61.1 billion, up 15% sequentially and 18% year-over-year.

Devices shipped by our licenses in the December quarter were estimated at 279 million to 283 million units, with an estimated average selling price of $214 to $220. QCT shipped 173 million MSM chips at the high end of our prior guidance range, driven by strong demand across our portfolio, including QRD chipsets for emerging accounts.

Revenue per MSM was relatively flat sequentially and QCT operating margin was in line with expectations at approximately 17%. Non-GAAP combined R&D and SG&A expenses grew 14% sequentially exceeding the high-end of expectations due to increased patent, legal and employee related expenses in the quarter. Operating cash flow was strong at $2.2 billion, up 17% year-over-year and 36% of revenues. During the quarter we returned $431 million of cash dividends to stockholders.

Let me now spend a few minutes on our outlook for the fiscal year and our fiscal third quarter. We are raising our guidance for fiscal 2013. We now estimate our fiscal 2013 revenues will be approximately $24 billion to $25 billion, up 28% year-over-year at the midpoint, and up $600 million from our previous guidance. We estimate our fiscal 2013 non-GAAP earnings per share will be between $4.40 and $4.55, up approximately 21% year-over-year at the midpoint and up $0.13 relative to the midpoint of our previous guidance. Our fiscal 2013 operating margin percentage estimates for QCT and QTL are unchanged. We expect combined non-GAAP R&D and SG&A expenses for fiscal 2013 to grow approximately 21% to 23% year-over-year. This is a modest increase over our prior estimate, primarily due to increased patent and legal expenses and variable employee costs.

Let me spend a moment on calendar year 3G/4G device estimates and fiscal year device ASPs. As a baseline, we have updated our estimate of 3G/4G devices shipped in calendar year 2012 upward to a range of 928 million to 945 million devices. This represents an increase of approximately 18% year-over-year at the midpoint. This is somewhat higher than our prior estimate led by emerging regions demand and provides a strong base for the growth we expect in calendar 2013.

For calendar year 2013, 3G/ 4G device shipments, we now estimate between 1.015 billion and 1.085 billion devices will be shipped by our licensees driven by strong global smartphone demand. At the midpoint of our calendar 2013 guidance and the revised calendar 2012 range, we estimate 3G/4G device growth will be 12% year-over-year.

We estimate that the average selling price of 3G/4G devices for fiscal 2013 will be between $216 and $224, consistent with the midpoint of our prior forecast. We estimate our non-GAAP annual tax rate to be approximately 17% to 18% for fiscal 2013, consistent with our prior expectations.

Now turning to the third quarter of fiscal 2013, we estimate revenues will be in the range of approximately $5.8 billion to $6.3 million, up approximately 31% year-over-year at the midpoint. We estimate non-GAAP earnings per share for the third fiscal quarter to be between $0.97 and $1.05, up approximately 19% year-over-year at the midpoint. We anticipate that fiscal third quarter non-GAAP combined R&D and SG&A expenses will increase sequentially, approximately 2% to 4%.

In QTL, we estimate that our subscriber licensees will report total reported device sales of approximately $51 billion to $56 billion in the June quarter for shipments made in the March quarter. At the midpoint of that range we expect total reported device sales to be up approximately 12% year-over-year and down approximately 12% sequentially reflecting post holidaying seasonality.

In QCT we expect to ship between 163 million and 173 million MSM chipsets during the June quarter. We expect a stronger mix of chipsets targeted for high tier smartphones to drive revenue per MSM higher, resulting in sequential QCT revenue growth of more than 5%, despite the reduction in expected volumes. We expect QCT operating margin percentage to be relatively flat, quarter-over-quarter at approximately 17%.

That concludes my comments and will now turn the call back to one Warren.

Warren Kneeshaw - VP, IR: Thank you George. Operator, we're ready for questions.

Transcript Call Date 04/24/2013

Operator: Michael Walkley, Canaccord Genuity.

T. Michael Walkley - Canaccord Genuity: I was wondering if you could discuss the ASP trends for the total device market. It seems there was a lack of the high-end product introductions during the March quarter, but there's a lot of a high-end flagship devices ramping into the market during the June quarter can we expect QTL ASPs, maybe to increase (exiting) fiscal year relative to your guidance. And am I calculating it right that your guidance also implies an uptick in ASPs for the June quarter? Thank you.

Derek Aberle - EVP and Group President: This is Derek. I'll take that one. Yeah, I think we saw little bit of a downward trend in ASPs in Q2 although that was in line with what we expected. As we've looked back historically the last couple of years, we've seen actually ASPs kind of trend down in Q2. But then they've tended to trend up in Q3 and Q4. So as we look out at the back half of the year, we are expecting a rebound in ASPs as compared to the Q2 ASP and that's including offsetting effect from FX. So I do think both in the March and the June quarter we should see some improvement in the ASP compared to Q2.

George S. Davis - EVP and CFO: As a reminder, again, our range for the full year is still – we've narrowed it a little bit, but it still has a midpoint at (220).

T. Michael Walkley - Canaccord Genuity: Then Derek, just on the FX, if there was any impact to FX in the short-term or any impact from the yen in particular, and then just longer-term with the stronger mix from low-end markets, how do you see the ASP trend, is it still kind of single-digit annual decline, is a good way to think about it?

George S. Davis - EVP and CFO: This is George. I'll cover the near-term impact and maybe Derek you can cover your views on the longer-term impact. Actually we did experience some impact from the yen in the second quarter and really for the full year. But in both Q2 and Q3 the net effect has been minimal in Q2 in particular because of the favorable impact from other currencies. So, for the full year we see FX being about a dollar impact on ASP, so not much of an impact and virtually no impact in Q2.

Derek Aberle - EVP and Group President: So back on the longer-term trends. I think really the trends that we've been seeing and that we highlighted back at the Analyst Day in November, two quarters in are really holding, and we see them remaining intact. In particular, in the emerging regions, the ASPs have continued to increase and in fact when we talk about sort of the tiers, the interesting thing is, although the volume is continuing to grow there, the percentage of the units coming from the mid and high-tier has kind of been holding, and so I think both of those trends are consistent with what we expected at the beginning of year and will continue. But as you said, over the long-term, as more volume shift to emerging regions, you know in terms of our internal plans, we've got baked in assumptions that will be single-digit declines in ASPs over the longer term.

Operator: Tim Long, BMO Capital Markets.

Tim Long - BMO Capital Markets: I just wanted to go a little further into the detail into the QCT gross margin. Steve, you mentioned it down as expected. I just want to put that together with a few things. First, last quarter Bill had mentioned a positive contribution of gross margin from QCT. So, I think it went up 2 or 3 points, doing the math. It's looking like it went down about 6 points or so, 5 or 6 points this quarter into March. So, it seems like a little bit of a reversal there, and you are seeing as expected, I'm curious what that means? And what do we think about from the market drivers for this changing gross margin, meaning, is it QRD and MediaTek competition, is it new LTE devices from competitors finally starting to hit the market, and at some point do we start to see a floor in this gross margin number for QCT? Thank you.

Steve Mollenkopf - President and COO: In Q1, excuse me, Q2 from Q1. Couple of things happen one if you get the normal calendar year price reset which hits in this quarter. We also had a bit of weaker mix from the prospective of more units coming in from emerging markets versus developed markets. The December quarter tends to be pretty heavy in terms of buildup in the developed, you probably saw a little regional mix move away from the developed world. We also mentioned on the last call that we were in the middle of doing some, we also think about how we do our pricing strategy, which I think comprehends not just short-term, but also long-term views of the competitive landscape. One thing that I should mention we really are not seeing significant, competitive threat in the LTE areas as you mentioned. I think it's just more of a mix issue and some of the calendar items that you've probably seen over your past years as well.

Tim Long - BMO Capital Markets: Forgive me, but I thought ASP looks pretty much flat December to March, so the mix couldn't have been that better, flat…

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

George S. Davis - EVP and CFO: I would just add when we look at Q2 even though the volumes of MSMs were up relative to our expectations. The mix issue did have an impact of kind of neutralizing the benefit of those higher volumes and so the outperformance in Q2 was more of a QTL story.

Operator: Simona Jankowski, Goldman Sachs.

Simona Jankowski - Goldman Sachs & Co.: I just had a question on the chipset side and then one the royalty side. Starting with chipset, can you just go over the puts and takes of the volumes expected in the June quarter, considering there are some significant major launches that you are participating in the June quarter. I would have thought you'd see some better sequential performance there than what you are guiding for?

Steve Mollenkopf - President and COO: Simona, this is Steve. I try not to get into kind of the mix of different customers. But one thing that I would say is that, throughout the year we're probably a little bit diversified from big changes in the customer base and we are seeing kind of a customer mix change move around and you see that in our numbers and probably in our mix a little bit. But I don't think that quarter is traditionally been the strongest quarter relative to some of the other ones that we've had. I don't know if there's anything ominous in there that you should be able to pick up or think about picking up.

Simona Jankowski - Goldman Sachs & Co.: So you're not assuming any kind of inventory correction or anything like that?

Steve Mollenkopf - President and COO: No. If anything, I think you'd probably see little bit about increase in our inventories, which probably you should think of as confidence in shipping some of the higher end chipset into the market.

Simona Jankowski - Goldman Sachs & Co.: Then on the royalty side, the question there. So your ASPs declined about 4% sequentially and that's despite the fact that in the December quarter volumes in North America and other mature markets were actually quite strong and I would have thought that with that being the higher ASP region that would have helped the mix for QTL. Then conversely we are now seeing and what was reported by AT&T, Verizon and others that North America volumes should really come down quite significantly in the March quarter, which is being offset by substantial growth in emerging markets around the Lunar New Year. And so forth and so that would have suggested to me that the mix actually would get better and benefit your ASPs in the royalty segment in the March quarter for you to report in June. So, could you just kind of dig a little bit more in why that logic is not playing out?

Derek Aberle - EVP and Group President: This is Derek. So, I think, so I was trying to explain before. We have seen actually more volatility I would say in the quarter ASPs with more kind of iconic high-end devices and the timing of the launches what we've seen is actually the ASPs moving around quite a bit, like if you look last year, you know we were slightly down in Q2, but then ASPs jumped up by like $15 in Q3. So, we are seeing more volatility. I think you know the December quarter is obviously very competitive dynamic. A lot of things going on in pricing and it's a quarter where we have less volume coming from some of the higher ASP regions like Japan. But as I said, as we look out and we have a certain amount of information already from our licensees and then based on publicly available data, we do expect ASPs to increase in Q3. And then as you suggested, there are number of new higher end products launching that should have a positive impact on the Q4 ASP as well.

Operator: Brian Modoff, Deutsche Bank.

Brian Modoff - Deutsche Bank: I've got couple of question. So, one on the QCT margins, you are kind of guiding again at 17% in the quarter. Can you comment or walk through a little bit, and I know obviously volumes on this, but you had some of your expenses, you typically incurred in Q1 done. Are there in calendar Q1, are there incremental expenses tape-outs et cetera? And then can you also talk about you mentioned a couple of times higher deal expenses. Can you talk about there has been a shift in litigation or is there some event occurring that outside of perhaps that smaller case in Florida, that you are dealing with and then last question just around S800 you are talking about launch mid-year. How the design traction on that's going and how do you see that affecting your overall mix and ASPs in QCT? Thanks.

George S. Davis - EVP and CFO: On the QCT margins. We said for the full year as you may recall that we saw 18.5% to 20.5% margins for QCT throughout the year. We are seeing spending increase into the last half of the year. So 17% at Q3 is still going to be consistent with that outlook and in fact we recommitted to the margin outlook. So I don't think we really changed our view at all, I do think we are certainly seeing strength in ASPs for QCT in the second half of the year. That will help, but we also seeing some ramping in spending.

Steve Mollenkopf - President and COO: This is Steve, little bit on the 800 status, it's actually doing well. If you look at the uptick in the second half, and the second half does look quite a bit better than what we would have thought in the January timeframe a lot of that is this higher mix product that we have been investing in for some time. I think you are going to see good growth year-over-year and I think some accretion to the business as a result of those higher-end products coming in and I think that's really responsible for some of the guidance movement.

George S. Davis - EVP and CFO: And just back to your second question on the legal expenses and other items that really was to explain the delta from our forecast of up 10% to 12% to 14% to – the 14% growth that we saw in Q2. Litigation and patent are both up in the quarter. Some on settlements, some of the patents obviously there was the adoption of the first to file rule and so there was a lot of accelerated spending on patent filings in the quarter as well. So it's more of an increase. So obviously the big increases year-over-year and also on an absolute basis the increase in spending is still coming out of the core business.

Operator: Kulbinder Garcha, Credit Suisse.

Kulbinder Garcha - Credit Suisse: Couple of questions. I just want to revisit the QCT margin question again and maybe more for the full year for Steve. With the growth that you are seeing and the market share that you are gaining and the mix improvement that you are seeing in LTE, I'm just surprised that there's just not more leverage in that business especially this year, of all years. And even in the near-term you think you are seeing a higher mix of higher end chips going into the next quarter, but margins aren't going up. So, is something just competitive that you are trying to do or you are thinking to try and block sockets for the long-term. Could you speak out why there isn't more leverage this period, this year? Then for Derek, one of the debates we've had over the years with you is about your ability to license the significant 3G markets. Smartphone market is developing out of the MediaTek world if you like. Is the increase to this year's addressable market number that you are seeing now, any function of your confidence and the ability to license on that or is it end demand driven? Many thanks.

George S. Davis - EVP and CFO: This is George. Let me just give some perspective on the full year on the margin, because – and I think it's hard to see it for a couple reasons. Number one, the margin performance for QCT be loaded in the second half of the year and so you'll see more of that impact into Q3 and Q4, and we already talked about the fact that even on falling volume, we're going to see revenue and operating margin up in our expectation in Q3. But if you look at – just step back and look year-over-year, QCT revenue will be up say more than 35% year-over-year. Operating margin, we think will be up more than 40% and that's on – again OpEx is, really it's driving the OpEx growth of the Company year-over-year, but it's still at a lower percentage than its revenue growth rate. So, we're seeing – we are seeing some leverage in the margin.

Derek Aberle - EVP and Group President: Kulbinder, this is Derek. Really, the short answer is its end-demand driven. As I have explained in the past, we're continuing to grow our licensee base in China, and our license agreements require payment of royalties irrespective of whose chip is included in the device. I think I have taken folks through a few times the robust process we have in place of monitoring the market in China and really trying to drive compliance with our agreement. So, no change there, really a demand driven story.

Operator: Ehud Gelblum, Morgan Stanley.

Ehud Gelblum - Morgan Stanley: You visited a couple of the issues, and we went over already. I may have missed something, so I apologize if I am rehashing some concepts. But on the QCT gross margin around 17% plus, it's where you had guided it last quarter. Can you give us a sense as to how much of that decline from last quarter's 26% was gross margin related and how much was OpEx to the extent that there was any gross margin decline in the business, how does that make sense? Just help us get our arms around it given that the QCT, the shipment ASP was flat. So maybe there was no gross margin decline it was all out, I especially want to understand that. And going back to the previous question, if it is all OpEx why wouldn't that improve as you get to the year, but to just understand that mix. And then on the QCT ASP itself I think you mentioned that it was flat because of the mix, offsetting a higher end chips that we know you shipped last quarter, there are also a bunch of lower end ones that kind of kept it in step. I think in the last conference call Bill had mentioned that he expected it to up. So what I'm asking is vis-�-vis your expectations. What geographically happened was the U.S. not as strong as you'd expect it to be versus your expectations and was china just stronger. And if that's the case you are gaining more share in China then you though you are going to.

George S. Davis - EVP and CFO: On the gross margin and OpEx we don't guide that by – at the segment level, but I will say they are in line with Steve's comments about the mix of business. There was some both gross margin and OpEx impact to get to that 17% number.

Ehud Gelblum - Morgan Stanley: The next one for guidance, can you just give us reflection from last quarter is the ASPs of the chips were actually the same, how would gross margin have gotten impacted.

George S. Davis - EVP and CFO: It's the dilutive effect of the additional volumes.

Ehud Gelblum - Morgan Stanley: So additional volumes is bad for gross margin.

George S. Davis - EVP and CFO: Those additional volumes were bad for gross margin.

Ehud Gelblum - Morgan Stanley: So your lower end chips have lower gross margins even higher end ones do.

Steve Mollenkopf - President and COO: That's correct in fact I think what you saw between what we would have guided at the beginning of the quarter and the end of the quarter is probably a little bit stronger units and more units coming out of the developing regions versus the developed regions. So, I think that those things do move around and we've talked about ebb and flowing between developed world and emerging world and this is one that's probably little heavy on the emerging world side.

Ehud Gelblum - Morgan Stanley: Then finally, do you expect that when you model going forward and you are looking especially the royalty side as well as the chip side. With China going very soon heading TD-LTE and ramping on the 3G side, I would have expected more higher end than lower end coming out of China, but is that relative to what is going on. Now you are seeing a stagnation perhaps in the developed world as China gets coming, is that kind of what the story that we are looking at going forward?

Steve Mollenkopf - President and COO: I don't know. I'll give – this is Steve. I'll give my view on it, which is, I don't think we are seeing anything in terms of stagnation. You are probably a little early in the ramp of LTE-TDD and you are still seeing I think a significant transition from 2G to 3G, which we are seeing in the low-end chipsets. The developed world tends to be peaky, meaning, that it's dominated in many cases by flagship models and concentrated volumes in particular quarters. I don't know if Derek or anyone else has any other view.

Operator: Rod Hall, JPMorgan.

Rod Hall - JPMorgan Securities: I just wanted to – I want to ask one question, Steve, on the ASP. I know there has been a bunch, but you talked about ASP volatility increasing, which is obviously been the case and we know that that's due to a bunch of other different things going on in the mix, upgrades from feature phones to smartphones et cetera. But I wonder if you could talk about – what I noticed is that your range of guidance on the ASP really – it's not changed that much, it wasn't wide enough that much until a year ago, even though the volatility seems like it is increasing. So, could you talk about whether you think the current range of guidance is appropriate given this increased volatility, and also maybe talk a little bit about things like tablet, how they affect us, just how predictable you think that ASP is at this point? Then the other thing that I wanted to ask you guys if RF360 chip, you know pretty interesting product. Just could you give us an update on where you are with designs and shipments on products for that and so on, just what the time line is looking like I mean has it changed at all since you guys announced the product? Thanks a lot.

Steve Mollenkopf - President and COO: Rob, this is Steve. I'm assuming you are referring to the licensing business guidance versus the chip guidance, is that correct?

Rod Hall - JPMorgan Securities: Yeah, I'm sorry, Steve. Yeah, I am referring to that.

Derek Aberle - EVP and Group President: So, this is Derek, let me take a crack. I'll see if anybody else wants to chime in. But – you know obviously, trying to estimate ASPs is a difficult process, although we get probably more information than most to help us in that process. I think our feeling is that the range that we have set out is an appropriate range, and when we think about the fiscal year ASP, we usually start out the beginning of the year like some of our other guidance with a wider range and then as we get closer, we go through the year and get closer to the of the year. We'll tend to narrow it up a little bit, because we can feel like we have a little more. Some of years is already under belt, so we have less to forecast. But again, I think we feel like we have a robust process in place and we're doing a pretty good job for instance. This quarter, we had a relatively significant drop in ASP quarter-over-quarter. It was in line with what we expected and consistent with the full year 220 midpoint that we had last quarter and we still see that as consistent with the guidance for the year. So, I'm pretty comfortable with the process that we have in place.

Rod Hall - JPMorgan Securities: And you think volatility is increasing Derek, I mean just that…

Derek Aberle - EVP and Group President: I think quarterly volatility has been increasing partially for the reason Steve mentioned which is as we get more of these iconic devices launching and they are launching at sort of peaky times throughout the year. It has the effect of moving the ASP around more than it did in the past.

Rod Hall - JPMorgan Securities: Thanks.

Derek Aberle - EVP and Group President: Then on RF360 we're pretty pleased with it. It's something that you should see in the second half of this year. I would say, as I've said before we're not going -- expect us to sort of walk before we run in this product area. This is a new product area for us and I think we probably have a lot to learn in terms of ramping up a bunch of customers very rapidly and of course we have very large volumes now. So we'll probably take that one slow in terms of how we ramp it, but pleased with how it's going so far.

Operator: Stacy Rasgon, Sanford C. Bernstein & Co., LLC

Stacy Rasgon - Sanford C. Bernstein & Co., LLC: I had a question on the OpEx. So the annual guide going forward from this point you took it up about $160 million on a pro forma basis versus where you were last quarter. It's (indiscernible) from your description actually a lot of it is not R&D it's legal and some of this other stuff can you give us some sort of an idea of how much of a split of this OpEx increase is actually coming from the SG&A and legal side versus the R&D and can we consider or think about those increases on the legal front and patents and everything else is more one time are or those recurring.

Donald J. Rosenberg - EVP, General Counsel and Corporate Secretary: This is Don Rosenberg. On the legal side of George said earlier one of those is a settlement, which is not material but it clearly is a settlement that's one-time. And as George had accurately described before, as you know, with the new America's Invents Act, which was the modification to our patent laws that was the first to file modification put in, and some companies took advantage of making sure that that they filed a lot of applications in a timely way due to certain timing issues associated with that. We did a very good job, as always, of filing patents so that we could get the kind of protection we want and that was a one-time event in order to meet those deadlines.

Stacy Rasgon - Sanford C. Bernstein & Co., LLC: How much was that? I guess of doing this I'm trying to get some feeling for how much of this increase is, I guess, an increase on sort of core investment in the Company versus comp increases versus like one-time charges?

George S. Davis - EVP and CFO: Sure. I think in terms of the increase, you still have a meaningful piece of that that is in the core business. Maybe it's easier just to step back and look at the full year-over-year. Still when you think about a 21% to 23% increase year-over-year, about 95% of that, not to be too specific, but in that area is really related to spending increases in QCT and QTL. So, this is really about investment in the core business.

Stacy Rasgon - Sanford C. Bernstein & Co., LLC: Got it. I get that, but given the amount of revenue upside you are showing, you are really not showing the kind of EPS leverage that one would expect, at least we would expect from the kind of revenue upside that's showing and the OpEx increase here, this is probably $0.07 or $0.08 of that EPS that's going away. So, again I'm just trying to get some feeling for how much of this is recurring, how much of this actually is going forward from here that they can actually drive further growth beyond the 35% or 40% that we're seeing this year trying to look as in terms of what it can drive into next year and beyond?

George S. Davis - EVP and CFO: The non-recurring piece would not be a material impact on the year-over-year.

Operator: James Faucette, Pacific Crest Securities.

James Faucette - Pacific Crest Securities: I wanted to go back to question on licensing in China and we've talked about, I mean, there have been mention of faster growth in the market there and in some of the other emerging markets. I'm wondering if we can get a sense for from you Derek, as far as where we feel like the coverages on collecting royalties from producers in that region in particular, and I'm just trying to get a sense for potential upside in growth as you improved the coverage there and add more licensees is kind of my first question. Second question is for Steve Mollenkopf as we look over the medium to long-term, I think we've talked a lot about how there has been some mix that has impacted margins, but yet, ASP has been relatively stable. How should we think about the ASP development on the chipsets over the long run particularly as you start to roll into more of component, et cetera, can we remain stable or should we expect those chipset ASPs to decline at about the same rate the handset ASPs are anticipated to?

Derek Aberle - EVP and Group President: James, this is Derek. So, on China licensing, I think, I could probably break it into two parts. I think generally, we feel very good as I said that we're continuing to add license fees to the base and grow the number of licensee in China. I feel very good about the compliance efforts we have there. So, I think we are confident we're collecting reasonably well on the sales there. The one exception that's pretty well understood I think is we have had some struggles with local Chinese companies necessarily paying all the royalties they owe on TD-SCDMA units and although we have a large number of companies licensed for TD-SCDMA given the political sensitivities there, that continues to be an issue for us. We've got a number of strategies in place to try to address it. But as the TD-SCDMA volumes grow at China Mobile, there could be a gap there between or there will be a gap to some extent between what we're collecting on and maybe some of the numbers you are seeing coming out of China unless and until we are able to resolve the situation. Having said that I think there are some trends that should help reduce the size of the issue one of them is we do believe that the higher end of the portfolio is going to have a combination of UMTS and LTE or at least UMTS, for global roaming and other reason. So as to products that include those technologies in addition, to TD-SCDMA we don't anticipate having the same issues that we're experiencing on TD-SCDMA. So again if this has shifted over time I think where the volumes were quite a bit smaller historically, and the mix of the supply base in China has also shifted over time to probably favor more of the of the local Chinese companies that have been a bit of a struggle. But we are going to work hard to see what we can do to solve it.

Steve Mollenkopf - President and COO: On your question about obviously kind of growing content and what does the trajectory look like. If you step back and kind of look at the business what I think you're seeing is as the mix shifts kind of the historical mix in our businesses has been very modem centric and it's had a particular gross margin associated with it. As we go into getting more and more content in the phone, which is – first it's coming in the form of application processor and adding in that functionality. What you are seeing is, I think, a growth in the raw dollars and the gross margin for MSM, but a reduction in the traditional gross margin percentage. Now, we're still seeing significant growth as a result and clearly it's been accretive thing for the Company as you look back. So, I think that's what you are seeing and I think that's what people are trying to figure out. And as a particular quarter as the mix between modem, and application processor or different geographies, such as the last quarter, you tend to see that move around little bit and that's probably what you are seeing. Now, our view is this is actually a very good business for us. We are able to produce a business that grows faster than the market and now that it's at scale it's growing faster than our rate of growth of the operating expenses. We think that's a very good business. And also I think provides the springboard to go into some additional markets, such as the tablet market, which we really have not participated in a great way primarily because the OS that we put our biggest bet on has yet to sort of develop, but we think it will. So, we look at this as a build scale in the smartphone space and use that to go into some adjacent markets as well. We also think to be successful. You have to have the scale. So, that's what you are really seeing in the business, a bit of an investment period, but we're still producing growth during that investment period.

Operator: Tal Liani, Bank of America.

Tal Liani - Bank of America-Merrill Lynch: Just one clarification in the question. TD-SCDMA you don't get paid on a single-mode, but what about TD-LTE, has this been decided already or do you still argue with the locals. Second question is to understand the transition to the next node. First, what are your plans when it comes to the next node whether it's 20-nano or 16-nano. How do you manage the transition both on capacity and margin, and do you expect the same margin decline when you transition similar to what you had with 28-nano?

Derek Aberle - EVP and Group President: This is Derek. On the follow-up on China, it's to clarify, I mean I think we have agreements in place with the number of companies and it's really just trying to work some of the issues and trying to get compliance. We're also getting – still paid some royalties from companies outside of China. So, I think you know that's a little bit of a dynamic. You can't quite say we're not getting anything on TD-SCDMA and that's shifting over time. Our current expectation is we've got more than 50 companies licensed now for LTE including both TDD and FDD modes of LTE and a significant number of those companies are Chinese companies, including ZTE. So, currently, our expectation is that we will not have the same type of challenges around LTE that we've experienced in China on TD-SCDMA, and on top of that, we do think many of the devices at China Mobile at least in the near term that include LTE will also include UMTS and for that reason would also be a trigger for royalty payments under our agreements. On the node transitions, you're going to see us consistent with earlier comments and our OpEx both are really trying to move through the nodes as rapidly as we can. Our view is that, that puts us in the best position to drive technology and to really I think set the design point more than folks who can't do that. Now I would say I don't know if I would make a conclusion that a new node or the 28-nanometer node in particular was associated with the lower gross margin. It was probably more the mix of products versus anything else. Today I think the general view is that the 28-nanometer node is likely to be the node that exists for a long time and will probably be sort of the mass market node for some time. We kind of felt that we got on that earlier than anybody else. That being said, you probably heard from some timing in the market about when companies will go to 20-nanometer. And our product roadmap is consistent with that timing we are going to be moving rapidly through nodes and across different nodes at the same time, as we've done in the past. So our general strategy is to make sure that we at the low-end we might use the most cost-effective node and at the high-end performance Tier we are going to use the leading edge.

Operator: Mark Sue, RBC Capital Markets.

Mark Sue - RBC Capital Markets: Derek, just to clarify, much, much longer term if we go into the world of single mode LTE can you just give your thoughts on the impact there on the royalties and then also on tablets. Is that something that we revisit in terms of the royalty rates as it stands today. Anything that proactively can do to kind of think about improving the attachments there?

Derek Aberle - EVP and Group President: So the first question on longer-term impacts of single mode LTE obviously there has been a certain amount of chatter around the industry about the timing of some of the early launches of single mode LTE devices and I think there is some room for debate on that. But we still believe that in terms of meaningful volume is shifted out of ways. You may recall that we made a public statement several years ago at the time based on sort of our current patent position, which frankly I think is improved over time that we expected to charge about 3.25% for single mode LTE just for the essential patent portfolio. And as you know, we generally license generally our whole portfolio, not just the essential portfolio, so that 3.25% was just for the essential patents. So while it's possible over time, we could see a bit of a step down in the rate as we transition to more single mode LTE. I think we feel very good about the position that we are in, in terms of the agreements we've signed and the potential impact of that. There's obviously other things in the agreements that could have somewhat of an offsetting effect in that as well in terms of the total royalties paid, but we'll have to see how that plays out over time. But sort of the big picture is, we still believe it's out in time, the ways, and we feel good that we are establishing a value for the portfolio that everybody should be pretty happy with.

Mark Sue - RBC Capital Markets: Your thoughts on tablets, anything that we can do proactively there?

Derek Aberle - EVP and Group President: Yeah, so on tablets, I think I mentioned on the last call that the attach rates obviously been not as high as we had expected, but trending down a little bit over time. I do think we're seeing some signs that the trend could be starting to reverse itself going forward and in particular as we start seeing more volume in some of the smaller screen form factors like 7 or 8 inch, that people will end up carrying with them more often, I think there is more desire to have sort of the ubiquitous coverage of cellular. Also, I think recently as I have seen some more subsidies coming in from the have operator channel on the tablet products which really haven't, they haven't been pushing too much in the past, and then of course, I think in the last six months or so, we have seen many of the operators around the world make moves on their pricing plans that are more conducive to driving adoption. So, I think some things are coming together which we hope will start to improve the picture. From royalty standpoint at this point, we think we have done our part and there is not really need for additional changes there to help stimulate the market.

Operator: Ian Ing, Lazard Capital Markets.

Ian Ing - Lazard Capital Markets: In terms of these questions on QCT margins and some spending increases, is there any product roadmap adjustments driving that, I mean inter-quarter we did see TSMC pull in their schedule on 16-nanomenter FinFET which is a low power process and obviously you might have had some hand in driving that?

Derek Aberle - EVP and Group President: You saw what going on with the RF360 during the quarter and we continue to invest heavily both in the modem and in the GPU, CPU and VLSI side. But, we think we're one of the folks driving FinFET into the mobile space. So, that's pretty consistent with our plan and our previous statement.

Ian Ing - Lazard Capital Markets: And then Steve, maybe you could highlight for the Snapdragon family, how you are going to differentiate low tier versus high tier, if you look at the low tier there's offerings out there from MediaTek, et cetera, dual-core or quad-core et cetera would it be graphically differentiated at the high-end or some other areas.

Steve Mollenkopf - President and COO: The low tier its pretty difficult to differentiate in many cases with the exception of I think two areas one is you need to have the customer scale essentially to be able to engage with a number of different customers and what we've been building over the last year or two years or so is the ability to engage with nontraditional customer, nontraditional in this sense means a customer that needs a bit more of a complete solution that means that from the product side you need to create something like the reference design that we've talked about, but you also need to expand in the region of the sales activities. So for us in China what you're seeing is we're building the sales activity to sell into a customer that is not let's say the traditional multinational customer that we've serviced and we're it takes a while to build that alternative channel. We also think over time that our IP roadmap from the top tier tends to be meaningful in the low tier as well and you can see that in customers that try to differentiate from their low tier competitors by producing a high tier phone and trying to offset their brand, you see that and that tiered roadmap we think is important long-term. The other aspect that's happening here, we think over the next several quarters is as China transitions to multimode 4G that you get a transition a real turn over in the modem feature set, which we think plays toward our traditional strengths. So long winded answer, but essentially I think you have to have customer scale and you can use we think the IP roadmap from the top in order to differentiate long-term, but there are lot of people who are competing on price right now and that needs to settle out.

Operator: This concludes the question-and-answer session. Dr. Jacobs, you may proceed with closing remarks.

Dr. Paul E. Jacobs - Chairman and CEO: Well, thanks everybody for joining us this afternoon. Obviously, we're really pleased with the record revenues. Our growth really is continuing strongly with increased guidance we put out for the year. If you go back and look at fiscal '10 through fiscal '13, we've gone from $11 billion to $15 billion to $19 billion and then we're guiding a midpoint $24.5 billion for this fiscal year and that really strong growth is due to our ability to drive the market with the new technologies and that's based on our past R&D investments to really capitalize on the opportunities that we see and we are going to continue doing that. We'll do that also in a very profitable way. We look forward to the guidance next quarter, in one of the generally seasonally softer quarters we're projecting 31% year-over-year (revenue) growth. So, we feel pretty good about that. We are able to do that because we are putting our competitors farther and farther behind and it's not just the modem, although everybody's quite focused on that, but it's also, we're putting them behind on other areas; graphics, microprocessor design and that is evidenced by the number of design wins we have, 850 designs launched or announced, 475 more currently in design as Steve said. We got some great products coming from our partners. We have some great products that we are developing, great technologies to come and a lot of opportunity ahead. So, we expect to be able to continue the kind of growth that we've had. Thanks very much. Sorry, I wanted to say 31% revenue growth, not EPS growth.

Operator: This does conclude today's conference. You may now disconnect.