Qualcomm Inc. (QCOM) F4Q 2013 Earnings Conference Call November 6, 2013 4:45 PM ET
Warren Kneeshaw – Vice President-Investor Relations
Paul E. Jacobs – Chairman and Chief Executive Officer
Steve Mollenkopf – President and Chief Operating Officer
George S. Davis – Executive Vice President and Chief Financial Officer
Derek Aberle – Executive Vice President and Group President
Mike Walkley – Canaccord Genuity, Inc.
Simona K. Jankowski – Goldman Sachs & Co.
Brian Modoff – Deutsche Bank Securities, Inc.
James E. Faucette – Pacific Crest Securities LLC
Tim Long – BMO Capital Markets
Rod Hall – JPMorgan Securities
Stacy Aaron Rasgon – Sanford C. Bernstein & Co. LLC
Alex D. Gauna – JMP Securities LLC
Kulbinder S. Garcha – Credit Suisse Securities LLC
Tavis C. McCourt – Raymond James & Associates, Inc.
Mark McKechnie – Evercore Partners
Romit J. Shah – Nomura Securities International, Inc.
Vijay R. Rakesh – Sterne, Agee & Leach, Inc.
Srini R. Pajjuri – CLSA Americas LLC
Mark Sue – RBC Capital Markets LLC
Blayne Curtis – Barclays Capital, Inc.
Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm Fourth Quarter and Fiscal 2013 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded November 6, 2013. The playback number for today’s call is (855) 859-2056. International callers, please dial (404) 537-3406. The playback reservation number is 87075999.
I’d 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 Dr. Paul Jacobs, Steve Mollenkopf, and George Davis. In addition Derek Aberle and Don Rosenberg will join in the question-and-answer session. An Internet presentation and audio broadcast accompanying 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, 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 these 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’d like to remind our listeners that our New York Analyst Day will be held on Wednesday November 20. 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 will be providing guidance disclosures at that time that are an addition to those provided in our earning release on this call.
And now to comments from Qualcomm’s Chairman and Chief Executive Officer, Dr. Paul Jacobs.
Paul E. Jacobs
Thank you, Warren and good afternoon everyone. I’m very pleased with Qualcomm’s performance this past fiscal year. We delivered record revenues of $25 billion up 30% versus last year. Earnings, total reported device sales and MSM chipset shipments also set records, as our technologies continued to underpin the global growth of wireless data and our semiconductor solutions are used across the industries flagship smartphones.
We increased our dividend for the 11 th consecutive year and returned approximately $6.7 billion to the stockholders in the form of buybacks and cash dividends in fiscal year 2013.
Looking at the fourth fiscal quarter, we also delivered record revenues which came in near the high-end of our guidance due to strength in both our licensing and semiconductor businesses.
Earnings would have been well ahead of guidance if not for a legal charge we recorded in the fourth quarter. We are pursuing post trial motions in the district court and we will pursue all options on appeal as necessary and remain confident in our positions.
We made excellent strategic and operational progress this year. We delivered our industry leading third generation 3G/LTE multi-mode modem, grew our share of semiconductor content in a wide array of devices, and expanded our licensing program. Further, our strategy to support the LTE TDD migration path for the wireless operators in India was successfully executed. We just completed the final step in transferring full ownership of the Indian BWA entity that holds to the 4G spectrum we won in the 2010 spectrum auction to Bharti.
We also announced the planned divestiture of OmniTRACS. As you know OmniTRACS was one of our first businesses and help fund our investment in CDMA.
Now I’d really like to thank all the employees, suppliers, and customers who contributed to the more than 25 year success of the business. We really look forward to hearing about your future accomplishments.
We expect that transaction to be completed during our first fiscal quarter of 2014, but we haven’t included the estimated $0.22 to $0.25 per share gain on the sale in either our first fiscal quarter or annual guidance.
Looking at fiscal 2014, we’re expecting solid growth, but at a lower rate than what we delivered in the last two years. This is partially due to the exceptionally strong year we just completed which included share gains and content share gains in QCT.
In fiscal 2014, we’re facing some mix and demand factor which we currently expect will moderate our QCT growth. In light of this, we are taking near-term actions company wise to prioritize investments, stay focused on growth, but also control expenses in order to deliver operating profit growth in excess of revenue growth.
Fundamentally, we believe our long term growth drivers remain very much intact and we are aligning our resources to continue to capture those opportunities. We continue to see smartphone adoption grow at a rapid pace across the globe.
According to Gartner, approximately 225 million smartphones were shipped in the second quarter of calendar 2013, representing 47% year-over-year increase. This is especially true in emerging regions where smartphone demand is being driven impart by the migration from 2G to 3G. Looking forward, Gartner is now expecting 1.8 billion smartphones will be shipped in 2017.
In the September quarter, we saw the launch of new devices with expanded capabilities based on QUALCOMM products. Some of these new capabilities include the launch of ultra HD video, LTE carrier aggregation and support for additional frequency bands for global roaming.
We will continue to focus on expanding our share of content and devices. We are making good progress with our WiFi and RF front end solutions. We see multimode 3G LTE as a catalyst for growth in network enhancements and smartphone demand.
According to GSMA Intelligence, approximately 100 million new LTE connections are expected to be added in calendar year 2013, representing a 57% year-over-year increase from 2012 and it’s approximately 22% of total net new connections. China remains an important opportunity for smartphones. With the upcoming launch of LTE, we expect increased demand for smartphones across many tiers of the license. It's not just about smartphones, impact of mobile on other industries cannot be overstated. The mobile ecosystem is driving innovations in healthcare, automotive, education and of course computing, which is creating new opportunities for QUALCOMM from both a chipset and the licensing perspective.
Smartphone experiences are driving tablet designs as evidenced by the increased innovation and demand for 7-inch including Snapdragon based tablets Google and Amazon announced this quarter. In addition, several operators have recently introduced new data plans that could be a positive catalyst for 3G, 4G adoption in tablets and other consumer electronics devices.
Now all these trends are helping to drive better demand globally. And in order to address the growth in data, operators continue to revolve their 3G networks, upgrade to LTE, evaluate new spectrum opportunities and evolve network topologies to include the introduction of small cells. This past June we announced our FSM solution that integrates our 3G and 4G technologies with advanced 802.1ac in WiFi to enable fully featured low-cost model smart cells that are designed to provide superior performance with greater power efficiency.
We will discuss the many growth opportunities we see ahead and the strategies and actions we’re pursuing to capitalize on them during our upcoming New York Analyst Event. I look forward to seeing many of you there.
So to wrap up we’ve completed another outstanding year at QUALCOMM. I'd once again like to thank all of our employees and partners for their commitment, innovation and leadership. We have tremendous opportunities ahead and we are positioning the company to capitalize on these while carefully managing our cost structure.
And overall QUALCOMM remains well positioned for continued growth. We have grown revenues at a compound annual rate of more than 30% over the last three years and building after this very strong fiscal 2013 days here, going forward for the next five years, we expect that revenues and earnings per share will grow at double-digit compound annual growth rates. We expect to return significant amounts of capital to stockholders consistent with this outlook.
I will now turn the call over to QUALCOMM'S President and Chief Operating Officer Steve Mollenkopf.
Thanks Paul and good afternoon everyone. I will provide some comments on both QTL and QCT businesses. In fiscal 2013, QTL delivered record revenues and earnings up 19% and 18% year-over-year respectively driven by greater than expected 3G, 4G device shipments and increased ASPs reported by our license fees. We now have over 250 royalty bearing 3G licenses.
Over 90 single-mode OFDM licenses and we believe our 3G and 4G portfolios are the most widely licensed in the industry. Through our broad licensing program we continue to foster innovation and enable a large and growing ecosystem that benefits wireless consumers worldwide.
QCT also grew significantly in fiscal 2013 delivering record revenues and earnings up 38% and 39% year-over-year respectively, driven by successful share in content gains. During the year we continue to lead in LTE with our integrated modem solutions and delivered significant product enhancements across all key technology vectors including the modem, processor, graphics and connectivity with unmatched world-class integration.
For 2014, we are forecasting another year of strong growth in QTL. We expect 3G, 4G device shipments by our licensees to grow 15% at the midpoint in calendar 2014 and our fiscal 2014 3G, 4G device ASPs are estimated to be between $216 and $230 down slightly by $3 or 1% year-over-year at the midpoint.
Turning to QCT, our outlook for fiscal 2014 builds of significant successes of fiscal 2013. Our leadership across key technologies required for modems and SoC’s for smartphones and mobile computing continues to position us well across flagship designs and key customers. We expect fiscal 2014 QCT year-over-year growth to moderate somewhat compared to recent years, including the very strong growth we delivered in fiscal 2013.
Our position as the high-tier and with the OEMs that’s strong driven by modem and application processor leadership and is expected to remain strong through 2014. The high-tier continues to be increasingly concentrated however which impacts our product mix, as well as our revenue and related operating margins.
We also expect strong growth in the low and mid-tiers driven by emerging regions including the anticipated launch of LTE in China in the second half of the fiscal year. We continue to see growth in China across all smartphone tiers and what we refer to as our EA or Emerging Accounts exceeded $1 billion in revenue in fiscal 2013. Our participation in the RMB 1,500 and above smartphone tier is strong, enabled by both Chinese and multinational OEMs.
Fiscal 2014 is shaping up to be another favorable year with Chinese OEMs as we build on our strength in the high-tier, enabling OEMs to drive LTE solutions in the mid and low tiers during 2014 in China and other emerging regions. We expect the launch of LTE in China to change the dynamics there as international OEMs leverage there worldwide LTE leadership to increase their positions and Chinese domestic OEMs move up tier and leverage their LTE position in China to export internationally.
Both of these expected trends are beneficial to QCT’s positioned as all of our LTE chipsets include both the FDD and the TDD mode. We are currently shipping integrated chipsets across multiple tiers to support initial volume expected to start around the Chinese New Year.
In light of our near-term outlook moderating following a strong 2013, we are slowing the growth rate of our spending. We believe we are now operating the QCT business at scale and with our expense management initiative this year we forecast that we will exit fiscal 2014 at a lower operating expense run rate than we exited fiscal 2013.
In addition to operating expense initiatives, we have projects underway to improve product costs within QCT including driving supply-chain efficiencies and designing cost optimized solutions for the very price competitive low tier.
It is important to note that we expect 2014 quarterly QCT operating margins to trend differently this year as compared to previous years and in particular we expect them to strengthen in the second half of fiscal 2014. This reflects the quarterly demand profile and product mix we expect including the growth of LTE in China, as well as the anticipated customer device launches throughout the year.
In addition, the cumulative effect of the product cost and operating expense initiatives we are undertaking improved the margin profile over time. Accordingly, we expect to exit the fiscal year at a high point, above 20% operating margin instead of peeking in the first fiscal quarter as in prior years.
Looking ahead, we believe we continue to be well-positioned versus our competition. In fiscal year 2013, we delivered our third-generation LTE solution well ahead of the competition. It features LTE carrier aggregation with Category 4, supports all major standards in voice and data mobility scenarios and is available on a standalone or integrated basis.
Our LTE solutions now span the high-end to the volume tier and are well-positioned globally across FDD and TDD opportunities. The LTE feature sets required to be successful will continue to evolve at a fast pace, driven by competitive dynamics in the United States and Asia, compounded by the number of RF bands required to deliver the higher data rates and capacity to the consumers.
We continue to lead in mobile optimized application processors and this continues to be an area of investment for us as in the past. We have successfully grown our tablet design pipeline including such notable designs as the Amazon Kindle HDX, the Google Nexus 7, the LG G Pad, Sony Xperia Z and multiple tablets with Samsung and Nokia.
We see strong traction and a broad design pipeline for RF360 Front End products, which include the envelope tracker and antenna tuner, PA with integrated switch and RF POP. The envelope tracker has shipped commercially in handsets in September and the remainder of the solutions are scheduled to launch as expected throughout the fiscal year.
We also continue to make great progress with our mobile Wi-Fi and connectivity solutions building off our successful acquisition of Atheros. Our 802.11ac product continues to have strong design traction with over 150 smartphone design wins including many with top-tier OEMs. Overall, our Wi-Fi attach rate on a unit basis is over 50% and we expect it to continue to growth throughout fiscal 2014.
To conclude, we see significant growth opportunities ahead for our business and we are managing our resources to maintain our technology leadership and best position ourselves for the future. I look forward to discussing this with many of you at the upcoming Analyst Day.
And I’ll turn the call now over to George.
George S. Davis
Thank you, Steve, and good afternoon everyone. We are pleased to be reporting strong financial results for both this quarter and the full fiscal year. Fiscal fourth quarter revenues were a record, up 32% year-over-year and non-GAAP operating income was up 20% year-over-year.
Non-GAAP earnings per share of $1.05 was up 18% year-over-year. Our non-GAAP result this quarter included $173 million or $0.10 per share litigation expense related to the recent ParkerVision verdict, which was not included in our fiscal fourth quarter guidance. Excluding this $0.10 charge our non-GAAP EPS would have been $1.15 per share or $0.09 above the midpoint of our prior guidance range and up 29% year-over-year.
In addition to strong operating results the impact of certain tax items, share repurchases and investment portfolio performance accounted for approximately $0.06 per share in the quarter.
QTL, total reported device sales by our licensees were $60.2 billion, just above the high-end of our guidance range with the average selling price in line with last quarter consistent with our expectations.
QCT had record revenues and MSMs in the quarter and implied revenue per MSM was down sequentially, reflecting increased low-tier shipments relative to expectations. QCT operating margin was 16% at the low end of our guidance, also reflecting the low-tier product mix. Non-GAAP combined R&D and SG&A expenses grew 6% sequentially consistent with expectations.
During the fourth fiscal quarter we returned approximately $3.9 billion to stockholders including approximately $600 million of dividends paid and $3.3 billion in stock repurchases. As of the end of fiscal 2013 we had used $150 million of our new $5 billion stock repurchase program announced in September.
Cash flow from operations was very strong at 39% of revenues, reflecting solid working capital performance, particularly inventory drawdown. We ended the quarter with cash and marketable securities of $29.4 billion. Our fiscal fourth quarter non-GAAP tax rate was 16%.
Turning to our results for fiscal year 2013, revenues were a record, up 30% from last year on strengthening QCT share at the high-tier, strong 3G/4G device growth and increasing ASPs in the QTL business. Non-GAAP operating income was a record $8.66 billion and non-GAAP earnings per share were a record $4.51, both up 22% year-over-year.
QTL’s 2013 revenues were a record, up 19% year-over-year with operating margin of 87% towards the high end of our prior guidance range. We estimate that the fiscal 2013 3G/4G device average selling price was $226 at the midpoint, up $7 or 3% year-over-year.
QCT’s fiscal 2013 revenues were also a record, up 38% year-over-year. Earnings before tax was up 39% year-over-year and operating margin was 19% for QCT, in line with our full-year guidance.
Fiscal 2013 cash flow from operations was $8.8 billion at 35% of revenues. We returned approximately $6.7 billion or 86% of free cash flow to stockholders during fiscal 2013, paying $2.1 billion of cash dividends and repurchasing $4.6 billion of our shares.
We are increasing our forecast for 3G/4G device shipments in calendar 2013 to between 1.075 billion to 1.125 billion units, up 15% to 20% year-over-year, driven by strength in emerging regions, particularly China.
Now turning to our guidance for fiscal 2014, we estimate fiscal 2014 revenues to be in the range of approximately $26 billion to $27.5 billion, up 5% to 11% year-over-year. We expect QTL top and bottom line growth to remain strong, driven by continued strength in 3G/4G, device demand, stable replacement rates and ASPs in developed regions, 2G to 3G migration in emerging regions as well as LTE deployments in China and elsewhere.
We are forecasting a modest ASP decline in fiscal 2014, down $3 at the midpoint or 1% to $223. We expect QCT to continue to benefit from technology leadership and modems and our Snapdragon family of products. We expect QCT growth in fiscal 2014 to reflect strong end-market demand somewhat mitigated by the effects of OEM concentration at the high-tier.
QCT has successfully established strong positions across all of the key top-tier OEMs and much of the medium-tier smartphone accounts. QCT growth in fiscal 2014 is aligned with the growth trends in these tiers. In addition, we are seeing continued high OEM share concentration particularly at the high-tier and this impacts our product mix as well as our revenues and related operating margin.
We are also seeing a tiering of products by these large customers that is leading to a higher utilization of previous-generation MSM in their overall mix of products. We see this effect mostly limited to QCT’s product mix in the first half of fiscal 2014.
As Steve mentioned, we forecast improving trends in the second half of our fiscal year versus the first half. We expect higher device ASPs for QTL and a better mix of leading parts in QCT, including the impact of LTE in China. We also forecast lower operating expenses and product costs, contributing to a stronger second half.
We expect fiscal 2014 non-GAAP earnings per share to be in the range of $4.95 to $5.15, up approximately 12% year-over-year at the midpoint. As Paul mentioned, we have not included the estimated gain on the sale of Omnitracs in our guidance, if this gain was included our fiscal 2014 non-GAAP earnings per share estimate would be up 17% year-over-year at the midpoint.
For calendar 2014 global 3G/4G based device shipments, we estimate that between 1.22 billion and 1.3 billion devices will be shipped by our licensees, up approximately a 11% to 18% year-over-year, reflecting increased shipments around the world, particularly in emerging regions. We estimate fiscal 2014 QTL operating margins will be 87% to 89% and QCT operating margins will be 18% to 20%, both stable year-over-year. We expect our non-GAAP tax rate to be 17% to 19% from fiscal 2014.
As Paul and Steve noted, we are slowing our level of operating expense growth in fiscal 2014. We expect combined non-GAAP R&D and SG&A expense to grow approximately 5% to 7% year-over-year in contrast to more than 20% annual growth over the past three years.
We are reducing a number of R&D process expenses in order to operate more efficiently and focus more fully on growing our investments in key areas including modem technology, low cost chip designs, CPU and VPU, RF360, connectivity and integrated SoCs as well as longer term initiatives like displays, small cells and enterprise products.
This reduced expense growth is well below recent years and aligns with the expected top line growth and our requirements to drive the critical elements of our roadmap and new technology initiatives.
We also expect to continue at an accelerated pace of return of capital to our shareholders. In fiscal 2014, we currently expect to repurchase a minimum of $4 billion of stock and we have included this repurchase activity in our guidance. We will provide further details of our capital return metrics at our New York Analyst Day in two weeks.
For the first quarter of fiscal 2014, we estimate revenues to be in the range of approximately $6.3 billion to $6.9 billion, up approximately 10% year-over-year at the midpoint. We estimate non-GAAP earnings per share in our first fiscal quarter to be approximately $1.10 to $1.20 per share, down 9% year-over-year at the midpoint.
Versus the year ago quarter, we are expecting increased shipments of thin modems and low and mid-tier products in QCT as well as the impact to longer term pricing initiatives that were not in place in the first quarter of fiscal 2013 and the impact of higher operating expenses.
As you will recall, our first quarter results in fiscal 2013 were very strong with the resolution of our 28-nanometer supply constraints, favorable product cost and low relative operating expenses.
We anticipate first quarter non-GAAP combined R&D and SG&A expenses will be flat sequentially with modest growth in R&D, offset by lower spending in SG&A.
In QTL, we estimate that total reported device sales of $57.5 billion to $63.5 billion will be reported by our licensees in the December quarter for shipments they made in the September quarter for approximately 14% year-over-year at the midpoint. We estimate the QTL ASP to be down in our first fiscal quarter versus the prior quarter consistent with the increased quarterly fluctuations we have seen during the last couple of years related to regional, OEM and product mix. We expect the ASP for our fiscal second quarter to be flat to up quarter-over-quarter.
In QCT, we anticipate MSM shipments of approximately 195 million to 210 million units during the December quarter, up approximately 11% year-over-year at the midpoint. We expect revenue for MSM to be lower quarter-over-quarter reflecting a greater mix of lower-priced modems. We expect QCT operating margin to be up sequentially and in the range of 17% to 19%.
We see the first fiscal quarter trend is being reflective of the first half of fiscal 2014 overall. We expect more favorable top line trends as well as cost and expense improvements in the second half of the fiscal year.
That concludes my comments. I look forward to seeing many of you at our Analyst Day on the 20th in New York, where we will provide further details and guidance points supporting our financial outlook for fiscal 2014 and beyond.
I will now turn the call back to Warren.
Thank you, George. Operator we are ready for questions.
Earnings Call Part 2:
- Company Earnings