Source: Seeking Alpha
Qualcomm Inc. (NASDAQ:QCOM)
F3Q 2014 Earnings Conference Call
July 23, 2014 5:45 PM ET
Warren Kneeshaw – Investor Relations
Steve Mollenkopf – CEO
Derek Aberle – President
George Davis – EVP and CFO
Mike Walkley – Canaccord Genuity
Tim Long – BMO Capital Markets
Brian Modoff – Deutsche Bank
Kulbinder Garcha – Credit Suisse
Simona Jankowski – Goldman Sachs
Ehud Gelblum – Citigroup
James Faucette – Morgan Stanley
Stacy Rasgon – Sanford Bernstein
Romit Shah – Nomura
Timothy Arcuri – Cowen and Company
Tal Liani – Bank of America Merrill Lynch
Mark Sue – RBC Capital Markets
Rod Hall – JP Morgan
Anil Doradla – William Blair
Welcome to the Qualcomm Third Quarter Fiscal 2014 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 23, 2014. The playback number for today’s call is 855-859-2056. International callers, please dial 404-537-3406. The playback reservation number is 63935250.
I would now like to turn the call over to Warren Kneeshaw, Vice President of Investor Relations. Mr. Kneeshaw, please go ahead.
Warren Kneeshaw – Investor Relations
Thank you, Brent, and good afternoon everyone. Today’s call will include prepared remarks by Steve Mollenkopf, Derek Aberle, and George Davis. Steve is joining us from Beijing, where he is attending the U.S.-China CEO dialog, co-convened by the U.S. Chamber of Commerce and the China Center for Economic Exchanges. Murthy Renduchintala and Don Rosenberg will join the question-and-answer session.
An Internet presentation and audio broadcast is accompanying this call and you can access them by visiting our web site 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 web site.
During this conference call, we will make forward-looking statements regarding future events or company results. Actual events or results could differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, including our most recent Form 10-Q, which contains important factors that could cause actual results to differ materially from the forward-looking statements.
And now, I would like to introduce Qualcomm’s Chief Executive Officer, Steve Mollenkopf.
Steve Mollenkopf – CEO
Thank you, Warren, and good afternoon everyone. We are pleased to report another very strong quarter, with record revenues and earnings per share, driven by broad-based demand for our 3G and multimode 3G/4G chipsets. In QCT, we shipped a record 225 million MSM chipsets, well ahead of expectations, driven primarily by strength in emerging regions.
We continue to benefit from our tiered roadmap and diversified customer base, as revenues in MSM chip shipments were up 17% and 31% year-over-year respectively. Total 3G/4G device demand in the March quarter, was stronger than our expectations. However, QTL total reported device sales and revenues were down from our prior guidance expectations, as a result of a dispute with the licensee. Under reporting by certain licensees, in China, and sales of certain unlicensed devices in China. Derek will discuss this more fully, including the actions we are taking to address this situation. We will also give a brief update on the ongoing NDRC investigation.
We began the year with several key objectives; first, we set out to compete effectively across all tiers in the LTE rollout in China, while driving the modem and AP roadmap to maintain our competitive lead. Second, we have developed plans to focus our investments on adjacent opportunities, that adopt our core technologies, as well as technologies that address the 1000X data challenge, and drive IOE adoption.
Third, we set challenging OpEx targets to achieve greater operating leverage from our scale, and finally, we committed to materially increase our return of capital. As I will explain further, I am very pleased with our results to date on all of these elements.
I will begin with the operational front, where we are executing against our initiatives to drive productivity. We remain committed to exiting our fiscal year at an overall operating expense run rate lower than our exit from last year. Our team is executing to this, while making critical investments in our roadmap and supply chain initiatives. We also continue to make progress on our efforts to focus our new business initiatives across the company.
As part of that effort, we are accelerating our transition from the current generation Mirasol display technology to the licensing of the next generation, with a focus on wearable devices. However, we will continue to make and sell the current generation Mirasol displays, to support certain existing customer requirements.
As a result of this new plan, we expect a significantly lower spend in our QMT division in fiscal 2015, providing an expected annualized savings of more than $125 million. The actions related to these changes resulted in an impairment to the QMT business this quarter, which George will cover in more detail.
Adding to our portfolio of important technologies, we recently completed a few noteworthy acquisitions. First, we acquired Velocity, a leader in the development of 60-GHZ chipsets based on the IEEE, 802.11ad standard, also known as WiGig. We have been working closely with this team for many years, and see this technology as important to the new high bandwidth used cases we expect.
The Black Sand acquisition supplements our RF team, and expands our RF 360 roadmap. And finally, we acquired leading digital still camera technology from CSR, which further enhances our differentiation in the important area of image processing.
On the product front, the first device based on our Snapdragon 805 and fourth generation multimode 3G/4G modem was launched. The Samsung Galaxy S5 broadband LTE-A. The Snapdragon 805 processor is the first mobile processor to offer system level Ultra HD support, 4K video capture and playback and when coupled with our industry-leading Gobi modems, enables users to stream and watch 4K content over LTE.
The fourth generation Qualcomm Gobi 9×35, is the first 3G LTE modem to commercially ship in smartphones, that’s the port’s global carrier aggregation deployment, up to 40-MHZ with both LTE TDD and FDD Category 6.
QCT has seen very strong design traction across its peers, with the emerging China customers. It is worth nothing that our success to-date in China is based on chipsets that were launched last year, and we are on track this quarter to commercialize our new low cost architecture with our Snapdragon 410. We believe the launch of the Snapdragon 410 and our follow-on LTE chipsets, raised the competitive benchmark and improve product costs.
With our Wi-Fi and RF360 solutions, we continue to pursue growing our share of content in devices. Both product lines continue to ramp, with our overall Wi-Fi unit volumes on track to grow more than 40% this fiscal year, as our attach rate in mobile continues to grow significantly. We now have over 100 devices launched or in design incorporating RF360, including the first launch of the device to feature the Envelope tracker, antenna tuner and power amplifier.
Looking forward, the continued roll-out and growth of multimode 3G LTE has a significant opportunity for the company. According to the GSA, 300 operators have deployed LTE and more than 200 more have committed to deploy LTE. In addition, over 55 operators have or are planning to deploy LTE Advanced services, including carrier aggregation.
We are now positioned to help enable this opportunity with our LTE Leadership position, including chipsets across multiple product tiers, and we expect to launch the Snapdragon 810, the world’s first premium tier integrated SoC with Category 6 for smartphones, later this calendar year. To-date, over 2,000 multimode 3G LTE devices have now either been launched or are in design, based on our chipset solutions. The LTE feature set continues to evolve, with features such as LTE Broadcast and LTE Direct. LTE Broadcast has been commercialized in Korea, and has been demonstrated in the U.S., Europe and Australia. We have also announced an LTE Direct trial in Germany, in collaboration with Deutsche Telekom.