QUALCOMM Incorporated (QCOM) F3Q 2013 Earnings Conference Call July 24, 2013 4:45 PM ET
Warren Kneeshaw - Vice President, Investor Relations
Dr. Paul Jacobs - Chairman and Chief Executive Officer
Steven Mollenkopf - President and Chief Operating Officer
George Davis - Executive Vice President and Chief Financial Officer
Derek Aberle - Executive Vice President and Group President
Donald Rosenberg - Executive Vice President, General Counsel, and Corporate Secretary
Simona Jankowski - Goldman Sachs
Matt Hoffman - Cowen & Company
Tavis McCourt - Raymond James
Tim Long - BMO Capital
Mike Walkley - Canaccord Genuity
Brian Modoff - Deutsche Bank
Ehud Gelblum - Morgan Stanley
Stacy Rasgon - Sanford Bernstein
Kulbinder Garcha - Credit Suisse
Mark McKechnie - Evercore
Romit Shah - Nomura
Rod Hall - JPMorgan Securities
James Faucette - Pacific Crest
Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm Third Quarter Fiscal 2013 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded July 24, 2013. The playback number for today’s call is (855) 859-2056. International callers, please dial (404) 537-3406. The playback reservation number is 15022636.
I would now like to turn the call over to Warren Kneeshaw, Vice President of Investor Relations. Mr. Kneeshaw, please go ahead.
Thank you, Brian, and good afternoon everyone. Today’s call will include prerecorded remarks by Dr. Paul Jacobs, who was not able to be on the call today due to a longstanding family commitment. In addition, Steve Mollenkopf, and George Davis will provide their comments and then Derek Aberle and Don Rosenberg will join them for 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 to comments from Qualcomm’s Chairman and Chief Executive Officer, Dr. Paul Jacobs.
Dr. Paul Jacobs
Good afternoon everyone. I am sorry I can’t be with you live today, but I did want to give you my comments before passing it on to the team. We are pleased with our strong results this quarter with revenues up 35% and non-GAAP EPS up 21% versus a year ago. Licensing revenues were driven by strong smartphone sales in the March quarter and our Snapdragon and Gobi products were featured in an extensive set of flagship devices. The tremendous success of the business puts us in a strong position to return capital to stockholders.
During the third fiscal quarter and up through today, we returned approximately $2.2 billion. This includes dividends paid and approximately $1.5 billion in stock repurchases made under our previously announced $5 billion stock repurchase program. We’re confident in our business outlook and we will continue to return capital to stockholders consistent with this deal. I like to focus my comments today on smartphone innovation before turning it over to Steve for more comprehensive update on our QCT and QTL businesses.
I’m often asked about the potential slowing pace of innovation in smartphone. I can assure that we do not see it here at Qualcomm. The breadth of technologies that are being developed and the demand for new features and device capabilities from our customers remains extremely strong. Though we have seven major technology areas in which significant advances are continuing to be made including the modem, including RF, the CPU, the graphics processing unit, digital signal processing and multi-media, connectivity, sensors and displays. Innovation such as LTE Advanced, LTE Broadcast, multi-band RF front ends, ultra-HD video, augmented reality, computational photography, continuous interaction user interfaces, H.265 video compression, HD audio, sensor monitoring, 802.11ac (inaudible), indoor position locations, proximity based communication, wireless charging, new display technologies, mobile payment capabilities, security features, remote device management are some of the many features that will increase the utility of 3G and 4G devices any one of which could provide a catalyst for a smartphone user to upgrade.
Throughout the history of the industry we’ve a series of technology advancements that have driven new innovative devices which are fueled upgrade and replacement cycle. This has continued over the last several years as we have seen the introduction of many new technologies, including LTE, Dual and Quad Core processors, improved graphics, higher resolution displays and more capable operating system. In the near future we will see the broad adoption of LTE Advanced which doubles the peak data rate and provides higher average throughput.
That’s not all, the scale of the smartphone platform is unparalleled and it is at the center of technology innovation. New technologies used to be commercialized through discreet consumer electronics products. Today we see innovations moving rapidly in the smartphones. For example the first place most consumers will see high-quality ultra-HD video recording, is on a Snapdragon enabled smartphone.
Looking at this now from a regional perspective, there seems to be some concern that developed regions are becoming saturated with smartphones. The fact is that these reasons have been primarily replacement cycle driven for some time as handset penetrations are already quite high. The strategies (ph) already been cycling through devices and are used to doing so. Certain large carriers routinely provide incentives for subscribers to purchase a new phone every two years, and although we may see different programs or replacement initiatives in the future. These types of programs are working successfully and competitive dynamics stay with their continuance in the future. Interestingly there has been some recent plans launched by operators that could actually accelerate the replacement cycle, so we will continue to monitor those. In some our long term plans continue to include a very modest decrease in the developed region replacement rate.
Turning to emerging regions we view the opportunity is very significant when you consider that according to our geographic definition approximately 80% of the world’s population resides in these locations with a relatively youthful demographic, and the GDP in emerging region is expected to grow at an annual rate of approximately 6% for the next five years according to consensus estimates. And according to Gartner, in these countries at the end of 2012 the average penetration rate of smartphones relatively the install base and the handsets sits at approximately 18% or only 10% of the total population.
As we pointed out during the last couple of years, we’re seeing the rapid adoption of mobile technologies and in fact rising average selling prices in these locations as a mix shift to smartphone. In these regions there are limited, fixed broadband alternatives and users are getting excellent utility from their wireless devices. So in summary although we expect to experience quarterly growth rate fluctuations for a variety of reasons, 3G, 4G mobile computing technology and device are still in an early stage of adoption in the majority of the world and have a very long runway of attractive growth potential. This adoption is feeling new innovation and perpetuating that cycle. Gartner estimates that approximately 700 million smartphones were sold in calendar 2012 and that number will grow to 1.7 billion in 2017 representing an approximately 20% compound annual growth rate. Building off fiscal year 2012, we believe we will experience a double-digit average annual growth in total reported device sales over our five-year planning period, which included an estimated average low single-digit percentage decline in average selling prices over this period.
So, again, I am sorry, I can’t be on the call live today, but I am pleased with our results and outlook. And Steve and George will now comment on that. Thank you very much.
Good afternoon, everyone. I will provide some comments on our QTL and QCT businesses, which both delivered strong financial results this quarter. In QTL, total reported device sales by our licensees were up 18% year-over-year and above our prior expectations, driven by stronger than expected average selling prices. Average selling prices were up $13 sequentially at the midpoint despite $3 of foreign exchange unfavorability, reflecting an increased mix of mid-tier and high-tier handsets. The quarter-over-quarter increase was driven by ASP strength in both emerging and developed regions.
As Paul noted in his comments, although the developed regions have been primarily driven by replacements and smartphone penetration is relatively high, our calendar year 2013 unit shipment estimates include year-over-year growth of approximately 6% in developed regions well ahead of GDP estimates. This quarter we also continue to see an increasing mix of handsets at the mid and high tiers, and we expect this distribution to remain relatively stable going forward in developed regions.
In the emerging regions, we expect to continue to see strong unit growth and increasing average selling prices. We also continued to grow our licensee base, and now have over 240 CDMA licensees and more than 65 single-mode OFDMA licensees. Our patent portfolio continues to be the most widely licensed in the industry. QCT also had another strong quarter with record revenues. Results either met or exceeded each of our prior key guidance metrics with revenues and earnings before tax increasing 47% and 56% year-over-year respectively.
MSM shipments were up 22% year-over-year and at the high end of our prior guidance range. Implied revenue per MSM was higher sequentially as we increased our share of content in devices. Versus expectations, we had a greater mix of shipments of mid, low-tier products, and to Chinese emerging accounts offsetting a bit of softness we saw from some Tier 1 OEMs. Our scale and broad diversified customer base are key strengths to our business and allows us to deliver strong results, despite quarterly fluctuations in mix or OEM share.
Looking to the fourth fiscal quarter, we had a similar product mix shift versus prior expectations. We expect MSM shipments to be slightly higher sequentially driven by anticipated new device launches and a seasonality associated with this quarter. Similar to what we have seen in the last couple of years, it is important to note that our MSM volumes for each of the next two quarters are depended on timing and success of OEM product launches for the holiday selling seasons. We are encouraged by a strong pipeline of Snapdragon 800 and Snapdragon 200 products launching over the next two quarters, along with shipments for the China Mobile LTE trial beginning in September and ramping into the December quarter.
Our design traction remained strong. We have just crossed a new milestone with more than 1,000 designs announced or shipping with Snapdragon processors and have over 500 designs in the pipeline. We are also seeing increased momentum in tablets as OEMs leveraged phone designs for tablets with over 40 design wins in the pipeline, including the recently announced new Nexus 7 by Google. Our latest Snapdragon 800 processor has again raised the bar combining the industry’s most advanced mobile application processor with the industry’s most advanced multi-mode LTE modems.
Designs are in process and with many major OEMs for a very broad set of opportunities worldwide. Flagship devices announced with the Snapdragon 800, include the next generation LGG smartphone, Samsung Galaxy S4 LTE advanced, and the Sony Xperia Z Ultra. We remain confident in our LTE leadership position moving forward. Though LTE competition exist today and new suppliers are hoping to enter, the complexity of a multi-mode LTE modem feature set and the integration of a high-performance application processor into the same solutions is proving to be a technically challenging for many. The modem roadmap of the industry remains robust as carriers move to LTE advanced and utilize complicated spectrum allocations to meet the increasing data demands of mobile devices and support roaming. We’re building (inaudible) in China and our emerging account shipments were up 35% sequentially in the June quarter. We continue to add new design wins. We expect competition for low cost solutions to remain strong; however we believe the expected launch of LTE in China will be a differentiator for us and enable us to gain broader access including into China Mobile.
Further many of the leading emerging account OEMs hope to expand their businesses internally which also aligns well with our tiered roadmap. We won 30 new designs in the China Mobile large scale LTE trial and including increasing share of new designs in the second way of the LTE Device Awards. Our connectivity and networking products continue to do well with record revenue and unit shipments in the June quarter. Connectivity design traction continues to be strong across the mobile networking and consumer electronics segment.
We’re also pleased with the growing success of our new 802.11ac product the WCN3680 which was the first 11ac mobile solution in the industry to achieve WiFi certification and it's also featured in the Samsung Galaxy Mega. Our RF360 Front End Solution is an opportunity for us to solve further complexity at the chipset level and grow our content in the device.
The first product in this family of product is on-track and currently sampling to a major Tier 1 OEM. Though still early in the life cycle this new solution we’re very encouraged by early OEM interest and design traction. Looking ahead we see very strong trends for both QTL and QCT with many exciting devices expected this holiday season. That concludes my remarks and I will now turn the call over to George.
Thank you Steve and good afternoon everyone. We’re pleased to be reporting another quarter of strong financial results, reflecting significant year-over-year growth in both QCT and QTL. This performance also provides the basis for an increase in our financial outlook for fiscal 2013. Fiscal third quarter revenues were a record $6.2 billion up 35% year-over-year and 2%.
Non-GAAP operating income of $2 billion was up 18% year-over-year and non-GAAP earnings per share of $1.03 was up 21% year-over-year and down 12% quarter-over-quarter. These results included a 158 million impairment charge or $0.06 per share related to QMT assets.
Without this impairment non-GAAP earnings per share would have been $1.09 well above the high end of our prior guidance range. Our major businesses performed quite well in the quarter on strong device ASPs and demand from emerging regions into QTL while higher implied revenue per MSM and strong volumes led to solid results for QCT.
In QTL total reported device sales by our licensees were $56.5 billion above the high end of our prior guidance range. We estimate that 244 million to 248 million 3G, 4G based devices were shipped by our licensees in the March quarter at an average selling price of $227 to $233 up approximately $13 sequentially at the midpoint. QCT had record revenues in the quarter, and MSM shipments were 172 million units towards the high end of our prior guidance range implied revenue per MSM was $24.55 which was higher sequentially as expected.
Fiscal third quarter QCT operating margin was 17% in line with our prior expectations, non-GAAP combined R&D and SG&A expenses grew 1% sequentially, slightly below our prior expectations. As Paul mentioned during the third fiscal quarter in the first few weeks of this current quarter, we returned approximately $2.15 billion to stockholders including $600 million of dividends paid and $1.55 billion in stock repurchases. We now have just under $3.5 billion two remaining on $5 billion authorization as a result of these activities.
Cash flow from operations was strong at 33% of revenues and we ended the quarter with cash and marketable securities of $30.4 billion. In other balance sheet matters I’m pleased to report that we have taken another step forward in our partnership with Bharti in India. Consistent with our previous plans, Bharti funded repayment of $492 million in debt that QUALCOMM had previously guaranteed. The remaining $484 million in debt guaranteed by QUALCOMM was deconsolidated due to a change in control of the joint venture, which included Bharti subscribing to additional shares. We expect the remaining guarantee to be released prior to the end of this fiscal year.
Now, turning to our guidance, we are raising our financial outlook for fiscal 2013. We estimate fiscal 2013 revenues to be in the range of approximately $24.3 billion to $25 billion, up approximately 29% year-over-year at the midpoint. We expect fiscal 2013 non-GAAP earnings per share to be in the range of $4.48 to $4.56, up approximately 22% year-over-year at the midpoint. We are increasing our forecast for this fiscal 2013 QTL average selling price to approximately $223 to $229, which is $6 above our prior $220 midpoint estimate reflecting higher handset prices in multiple regions. For calendar 2013 global 3G/4G based device shipments, we continue to estimate that between 1.015 and 1.085 billion devices will be shipped by our licensees, up approximately 12% year-over-year at the midpoint. While our calendar year range is unchanged, we are more upwardly biased in our outlook than we were previously. Consistent with our prior expectations, we estimate fiscal 2013 QTL operating margins to be 85.5% to 87.5% and QCT operating margins to be 18.5% to 20.5%. We expect combined non-GAAP R&D and SG&A expense to grow approximately 22% to 23% year-over-year.
Now, turning to the fourth fiscal quarter, we estimate revenues to be in the range of approximately $5.9 billion to $6.6 billion, up approximately 28% year-over-year at the midpoint. Our estimates reflect continued strength in QTL and QCT balanced by higher operating expenses and some uncertainty around the timing and success of product launches. As Steve mentioned, we are very confident in our positioning in these leading edge devices, it is more a matter of timing. We estimate non-GAAP earnings per share in our fourth fiscal quarter to be approximately $1.02 to $1.10 per share, up approximately 19% year-over-year at the midpoint. We anticipate fourth fiscal quarter non-GAAP combined R&D and SG&A expenses will increase sequentially approximately 4% to 6% reflecting increased patent expense in QTL and R&D expense in QCT.
In QTL, we estimate that total reported device sales of $55 billion to $60 billion will be reported by our licensees in the September quarter for shipments they made in the June quarter, up approximately 24% year-over-year at the midpoint. In QCT, we anticipate MSM shipments of approximately 171 million to 181 million units during the September quarter and QCT operating margin to be approximately 16% to 17%. We expect implied revenue per MSM to be flat to slightly down of a strong third quarter. Consistent with our prior view, we estimate that the 3G/4G channel inventory will decline further in the September quarter as OEMs and operators prepare for new product launches for the holiday season though we continue to expect it to remain within the normal 11 to 16 week range. That concludes my comment.
I will now turn the call back to Warren.
Thank you, George. Operator, we are ready for questions.
Earnings Call Part 2: