Qualcomm Inc (QCOM) — Q1 2015 Earnings Call Transcript

Thank you, Brent, and good afternoon everyone. Today's call will include prepared remarks by Steve Mollenkopf, Derek Aberle, and George Davis. In addition, Cristiano Amon, 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 website at www.qualcomm.com. During this conference call, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our website. I'd also like to direct you to our 10-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 the future business or results of the Company. Actual events or results could differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, including our most recent 10-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 Chief Executive Officer, Steve Mollenkopf.

Thank you, Warren, and good afternoon everyone. We delivered a strong quarter, achieving record revenues and non-GAAP operating income. QCT shipped a record number of MSM chipsets and delivered our highest ever revenue and earnings before tax. QTL operating performance was ahead of expectations and I am pleased to report that we have resolved our previously disclosed dispute with a large Chinese licensee. We are continuing to cooperate with the NDRC, as it conducts its investigation and believe it is progressing toward a resolution. During the quarter we also returned approximately $2.4 billion to stockholders through dividends and buyback activity, consistent with our increased capital return targets. Turning to QCT, our first fiscal quarter was very strong with revenues in MSM chip shipments up 14% and 27% year-over-year respectively. MSM chip shipments were at the high end of our expectations as we saw broad strength across multiple OEMs, driven by demand in emerging regions and strong device replacement in the U.S. While our outlook for the first half of the fiscal year is ahead of our prior expectations, our QCT forecast for the second half of the fiscal year has been reduced due to a number of factors. First, we are currently seeing a shift in share among OEMs at the premium tier, which has reduced the near-term addressable opportunity for our Snapdragon processors and has skewed our product mix towards more modem chipsets in this tier. Second, we now expect that our Snapdragon 810 processor will not be in the upcoming design cycle of a large customer’s flagship device, impacting our outlook for both volume and content in that device. And thirdly, although we had a very strong competitive position exiting fiscal 2014, we are seeing heightened competition in China at the mid and high tiers. We are continuing to gain share year-over-year with OEMs based in China, but not at the pace we had previously expected. This is in part due to some product challenges with one of our chips in meeting some of the more demanding design points of those tiers. This has provided an opening to competitors who are being very aggressive in order to establish a position in the marketplace, resulting in more pricing pressure than previously expected. We have already addressed many of the initial product challenges in order to support early customer device launches in these tiers and are continuing to further enhance the performance of this chip. As a result, we continue to expect to see a broad range of devices successfully launch and drive volume with this chip. We estimate that these factors will impact our QCT revenue growth and operating margins through the near term product cycles. However, despite these near-term factors, our view of the long-term strategic environment and QCT’s leadership position remains strong. Despite this, our design momentum for the Snapdragon 810 processor remains robust, with more than 60 products in the pipeline, including the recently announced LG G Flex2 and the Xiaomi Mi Pro Note. Snapdragon 810 is performing well and we look forward to a growing number of devices to be launched by our customers throughout the year. Snapdragon 810 delivers 64-bit CPU capability using licensed technology and is fabricated in 20 nanometer. As you know, the use of internally designed custom CPUs has been a core part of our strategy that has worked well for some time. With the 810, we made a conscious decision to use licensed cores to accommodate the accelerated shift to 64-bit. The competitive landscape has underscored the importance of differentiation associated with our internal custom designs and looking ahead, our next premium processor will use our own 64-bit custom CPU architecture as well as the most advanced process node. We expect this product to sample in the latter half of calendar 2015. In China, the expanded FDD licenses increased competition between carriers, and the accelerated pace of LTE device penetration aligns with QCT’s LTE leadership. We believe we are well positioned going forward for three primary reasons. First, we expect a modem transition driven by LTE Advanced, including uplink carrier aggregation will drive a new device design cycle beginning later this year, which our roadmap anticipates. Second, we will drive our roadmap to advanced performance nodes to enable us to competitively address the opportunities ahead. And finally, we are differentiated both in terms of features and scale, which will allow us to help OEMs based in China meet the specification and deployment challenges related to expanding their businesses outside of China. For Qualcomm overall, our longer-term growth drivers remain strong, both in smartphones and adjacent areas where our mobile technologies and capabilities can bring next-generation solutions; areas such as automotive, Internet of Things, mobile computing, networking, small cells, and datacenter solutions. At the Consumer Electronics Show, it was clear that many industries looking to leverage mobile technologies into their products and businesses are looking to the leaders in mobile such as Qualcomm for support creating an Internet of Everything. We demonstrated a broad set of products and equipment that are already shipping with Qualcomm solutions inside, including the areas of automotive, smart home, smart city, networking, mobile healthcare, and wearables. On a related note, the very strong results of the AWS-3 spectrum auction here in the U.S. reinforces the need to continue to invest in cutting-edge modem technologies that provide great user experiences, while helping operators improve their return on the spectrum asset investments. We are very well positioned to enable operators and OEMs to bring new spectrum bands online as quickly and as broadly as possible with technologies such as advanced carrier aggregation. I would like to now turn the call over to Derek Aberle.

Thank you Steve and good afternoon everyone. QTL delivered a strong quarter with revenue and earnings ahead of expectations and total reported device sales of $56.4 billion, which was slightly above the midpoint of our prior guidance. I am also pleased to report that we have resolved the dispute with a major Chinese licensee that we previously disclosed. Importantly, we were able to successfully resolve this dispute despite the pending NDRC investigation. In addition to the licensee agreeing to report and pay royalties on past unreported sales, the resolution includes an expansion of the existing license agreement to include royalty-bearing licenses for 4G-only products, including 3-mode LTE smartphones sold for use in China. We believe the licensee has fully reported its September quarter shipments in our first fiscal quarter and we expect the licensee to report in our second fiscal quarter a catch-up for units that were sold in periods prior to the September quarter but were not previously reported due to the dispute. We continue to believe that some of our Chinese licensees are not reporting all of their sales of licensed products. We have increased the number of audits that we are conducting of these licensees and are attempting to resolve the instances of under-reporting. While we always prefer to resolve these types of issues amicably with our licensees, we are of course prepared to enforce our rights under our license agreements if that becomes necessary. Although we continue to sign new 4G-only and other license agreements, including in China, and the recent resolution of the licensee dispute gives us even greater confidence that we'll be able to collect royalties over time on substantially all LTE device shipments, including 3-mode devices in China and other currently unlicensed products. OEMs supplying a meaningful portion of 3-mode devices and lower Tier 3G connected tablets remained unlicensed. We are in discussions with many of these OEMs and are making progress, but we expect it will take some time to conclude all of the negotiations. As to the NDRC investigation, we are continuing to engage and fully cooperate with the NDRC as it conducts its investigation. We have discussed with the NDRC a number of proposals for addressing its concerns and we believe we are making progress towards a potential resolution. Having said that, the timing and outcome of any potential resolution remains uncertain as does the potential impact on our future business in China. Now let me provide an update of our view of global 3G/4G device demand. We’re seeing demand for global 3G/4G devices continue to grow at a very healthy pace and we have increased our calendar global 3G/4G device shipment estimate to approximately 1.35 billion units, up approximately 25% year-over-year. As a reminder, this includes those devices we expect to be reported to us through the first calendar quarter of 2015 as well as our estimates of unreported and unlicensed device sales, but excludes TD-SCDMA devices that do not implement LTE. The broad availability of compelling devices at the mid and low price tiers in emerging regions is driving strong demand for and migration to 3G/4G devices. We’re also seeing an increase in the replacement rate of devices in the United States. Looking forward, we are also increasing our estimate for calendar 2015 global 3G/4G device shipments. We now expect approximately 1.5 billion to 1.6 billion units to be shipped during 2015, up approximately 11% to 19% year-over-year, with a bias towards the high end of the range driven by continued positive upgrade trends in the United States and accelerating migrations to 3G/4G devices in China and other emerging regions. As we explained last quarter, several factors primarily related to challenges in China are currently causing shipments reported by our licensees to be less than the global 3G/4G unit shipments I just explained. For calendar year 2014, we are increasing our estimate of reported 3G/4G devices to between 1.135 billion and 1.175 billion units, which is approximately 200 million units below the global 3G/4G device estimate of approximately 1.35 billion units at the midpoint. This represents our current view of unreported and unlicensed activity for calendar year 2014, and after adjusting for the resolution of the dispute, is in line with our prior expectation of the percentage of global device shipments that we expect to be unreported or unlicensed. Turning to estimated 3G/4G device ASPs, the ASP of devices reported to QTL during the first quarter of fiscal 2015 was approximately $197 at the midpoint. The sequential decline in the reported ASP was primarily driven by a weaker premium tier in the September quarter, ahead of new flagship launches, heavier price reductions of certain handset models, additional reported units from the Chinese licensee whose dispute we resolved and foreign exchange effects. In the second fiscal quarter, we expect both the global and reported ASPs to be higher sequentially as the strong holiday season at the mid and high tiers more than offset some additional foreign exchange headwinds. We expect the reported ASP will be significantly impacted by the dilutive effects of catch-up units sold during several prior periods that we expect to be reported in the second quarter as a result of the resolution of a licensee dispute. We are now forecasting global 3G/4G device ASPs to decline approximately 12% to 13% year-over-year in fiscal 2015 instead of our previous estimate of 9% to 10%. With the delta being driven by stronger than expected unit growth in emerging regions, the September quarter pause in the premium tier, increased OEM competition and mix shifts and negative effects of foreign exchange, which alone contributes approximately $2 of the ASP decline. Within this overall view, we are seeing relative stability in developed region ASPs as well as increasing ASPs from Chinese-based OEMs. In total, we expect global 3G/4G device sales in fiscal 2015 to be up approximately 6% to 9% over fiscal 2014 global 3G/4G device sales, which is in line with previous expectations as the growth in volume from an increase in the replacement rates in the U.S. and accelerated emerging region migration offsets moderately increased ASP declines, including the expected impact of foreign exchange headwinds. To conclude, we continue to see strong 3G/4G device demand from both higher replacement rates and faster 2G to 3G/4G migration. We are pleased to have resolved the previously disclosed dispute with the major Chinese licensee, and we remain focused on resolving our remaining challenges in China. That concludes my comments. I will now turn the call over to George Davis.

Thank you, Derek, and good afternoon everyone. Our first-quarter results came in above expectations on better than expected operating performance from both QCT and QTL. Fiscal first-quarter revenues were a record $7.1 billion, up 7% year-over-year and non-GAAP earnings per share were $1.34, up 6% year-over-year. Non-GAAP earnings per share were $0.10 above the $1.24 mid-point of our prior guidance range. QCT accounted for approximately half of the upside on strong MSM demand and lower operating expenses, with the balance coming from improved total reported device sales, lower operating expenses in QTL and other businesses, as well as the restatement of the R&D tax credit. In QTL, total reported device sales by our licensees were $56.4 billion, slightly above the mid-point of our guidance range, with an average selling price of $197 at the mid-point and reported shipments of 286 million 3G/4G based devices at the mid-point. QCT achieved a number of records in this quarter including shipments of 270 million MSMs, revenues of $5.2 billion and earnings before tax of $1.1 billion. Revenue for MSM was lower sequentially as expected, reflecting a greater mix of modems. QCT operating margin was 22% in the fiscal first quarter, reflecting strong MSM shipments and lower operating expenses. For the Company overall, non-GAAP combined R&D and SG&A expenses were lower than our expectations, decreasing 3% sequentially, reflecting timing of certain program spending and cost initiatives in the quarter. Turning to capital structure, during the fiscal first quarter, we returned approximately $2.4 billion to stockholders, or 112% of free cash flow, including approximately $700 million of dividends paid and approximately $1.7 billion in stock repurchases. As of the end of the first fiscal quarter, we had approximately $3.6 billion remaining of our stock repurchase authorization. Additionally, since the end of the fiscal first quarter, we have repurchased an additional 6.8 million shares for approximately $500 million. Cash flow from operations was approximately $2.4 billion or 33% of revenues and we ended the fiscal first quarter with cash and marketable securities of $31.6 billion. Our non-GAAP tax rate was 18% in the fiscal first quarter and we now estimate that our fiscal 2015 non-GAAP tax rate will be approximately 18%, slightly higher than our original estimates on business mix. Now turning to our guidance for fiscal 2015, our revised financial guidance for the fiscal year reflects a reduced outlook for the QCT business in the second half of the fiscal year. We now expect 2015 total Qualcomm revenue to be in the range of $26 billion to $28 billion, up approximately 2% year-over-year at the midpoint and lower than our previous guidance midpoint by $800 million. We now expect 2015 non-GAAP earnings per share to be in the range of $4.75 to $5.05, down approximately 7% year-over-year at the midpoint and down 6% from our previous full-year guidance midpoint. We estimate fiscal 2015 QCT operating margins will now be in the range of 16% to 18%, which reflects a reduction of about 200 basis points at the midpoint. Our QTL forecast for the fiscal year is modestly improved, driven by an improved TRDS outlook, partially offset by a modest increase in the impact of foreign exchange. We continue to expect that fiscal 2015 QTL operating margins will be approximately 85% to 86%. Combined non-GAAP, R&D and SG&A expenses are expected to grow approximately 3% to 5% year-over-year, in line with prior expectations. As a reminder, we continue to expect lower investment income in fiscal 2015 as compared to the strong investment gains supported in fiscal 2014 as we rebalance the risk levels in our investment portfolio. Looking to our guidance for the second quarter of fiscal 2015, we estimate revenues to be in the range of approximately $6.5 billion to $7.1 billion, up approximately 7% year-over-year at the midpoint. We estimate non-GAAP earnings per share in our second fiscal quarter to be approximately $1.28 to $1.40 per share, up approximately 2% year-over-year at the midpoint. We anticipate second fiscal quarter non-GAAP combined R&D and SG&A expenses will be up 6% to 8% sequentially, reflecting normal increased seasonal expenses primarily related to employee payroll taxes. In QTL, we estimate total reported device sales of $69.5 billion to $75.5 billion will be reported by our licensees in the March quarter for shipments they made in the December quarter, up approximately 9% year-over-year at the midpoint, reflecting the busy holiday season. We also expect to see a benefit from previously uncollected royalties for prior period sales related to the resolution of a customer dispute in China. In QCT, we anticipate MSM shipments of approximately 220 million to 240 million units during the March quarter, down approximately 15% at the midpoint sequentially coming off the busy holiday quarter and up approximately 22% year-over-year at the midpoint. We expect revenue per MSM to be relatively flat quarter-over-quarter. We expect QCT operating margin to be approximately 16% to 17% in the fiscal second quarter, lower sequentially, reflecting the impact of lower seasonal volumes. That concludes my comments. I will now turn the call back to Warren.

Thank you, George. Brent, we are ready for questions.

I want to focus on operating margins for QCT. Can you provide some insight into what is driving them down this year, such as the need for additional funding or spending versus just pricing pressure? Additionally, can you discuss your plans for the medium to long term to regain lost market share and reinforce your position in the most pressured markets? Thank you.

This is George. Really the out margin effect in the near term that we're talking about is really typical seasonal, coming off of a very strong December quarter. For the full year, the reduction of the 200 basis points we talked about is really a function of the change in outlook for the year, which is being driven by impacts at the premium tier and so that’s having margin pressure. You're also seeing some of the OpEx benefit we saw in the first half was really timing of programs, and so that will be in the second half of the year, impacting margins as well.

And this is Steve. Regarding the medium tier, long tier, or long-term, I think it's more related to the product cycle than anything else. One of the biggest challenges for us is predicting the product mix, whether we will sell a lot of thin modems or Snapdragon processors. The most significant impact on the outlook change is really the product mix. As I mentioned earlier, the 810 is performing quite well. Any concerns about the 810 in terms of design traction are likely limited to one OEM. In the low tier in China, competition is tough right now due to several new entrants trying to gain market share. We expect a modem transition in the second half of this year and believe that will be a good strategy. However, in the long term, we don't foresee a change in the competitive landscape or in the strategies of specific customers. This appears to be more of a product issue.

Steve, off that last statement you made in terms of modem transition in the back half of the year, can you give us more color around this? Is this still 20 nanometer? Is it going to be more of a 16? How is it going to be different? And then what you're seeing competitively in China? Are you seeing competitors coming with something more than a 3-mode solution? Are you seeing something more advanced than that? And then on George, the question, or Derek, this licensee that you settled with in China, can you give us an idea of what the rates are for that licensee? Is it around your corporate average and does include single mode LTE as well, and an ability to collect on that as well as collect on multimode that includes TD-SCDMA.

So Brian, in China, we're not seeing anything different than really 3-mode in China. We're not seeing much ability for the competitors to go outside of China. And we have anticipated that carrier aggression would be important in China across tiers and we think that that will happen here sometime in the second half of the year. It’s always difficult to time transitions in China, but as you're aware, it’s a pretty fast-moving situation there. If you look at really kind of year-over-year, we're still going to see share move up in China in these tiers. We just anticipated that it would grow even more. And that’s exacerbated by the pricing pressures as I mentioned. And so we're looking forward to seeing a modem transition. We will follow that up with FinFET products. Eventually we are going to transition our existing products to move advanced nodes but I'll try to keep some of that proprietary for us right now.

Brian, this is Derek. Yes, we can’t talk too specifically about the terms in the agreement, including the rates, but I guess I'll just say that we're pleased with the resolution of the dispute. As I said, we believe that in this quarter the licensee has now reported sort of the full volume that they were supposed to report under their agreement. They will also we expect be reporting a catch up amount for prior period sales next quarter. That will benefit us. And then we were able to extend the scope of the agreement to your question, to include LTE only licenses. This particular licensee was already licensed for 3G, but we've now extended that to include 4G-only, including the 3-mode devices sold on China mobile network. So all-in-all, we feel very good about the result.

I have a follow-up question. Could you provide more details about the $800 million reduction in revenue and the $0.30 impact on earnings? It seems like there is a significant margin change implied. Can you explain how this revenue mix leads to such a substantial impact? Additionally, I'd like to hear your thoughts on the Xiaomi-Ericsson deal in India. What implications do you see for the chipset business regarding Chinese exports, and does it have any significance for the licensing business or potential talks with the NDRC? Thank you.

Hi Tim, this is George. So on the flow-through issue, which is essentially seeing $0.30 off for the full year on what we’re looking at, what you’re really seeing is the fact that while we describe kind of three themes in terms of impacting the second half of the year for QCT, it’s really the themes that impact the premium tier that are driving the impact. And so the margin flow-through impact on that revenue is in line with the adjustment that we’re talking about. So it’s really driven by the fact that the impact is happening at a place where we have strong operating margins.

Tim, this is Derek. So I think we’ve consistently said that we believe that we’re uniquely positioned to help the Chinese OEMs build their businesses outside China. That comes obviously both from a product perspective, in terms of our scale and ability to do that, as well as the cross-license rights that we’ve obtained as we've negotiated agreements over the years and I think you're seeing some of that play out now in India. On the licensing side, I wouldn’t draw any direct correlation to the NDRC, but what I would say is we’ve talked from time to time about tools that we have at our disposal to deal with companies that are not complying with their agreements or not signing licenses, and I think you can look at what’s going on in India as just one example of the tools that are available.

Just for Steve, going back to the QCT guidance, can you update us on expectations for revenue per MSM that’s implied in your guidance with the mix shift? And also just longer term, on a bigger picture view, which Qualcomm's long-term business model really has been about increasing dollar content or revenue per MSM over time. After this product cycle, some of the misses do you think this metric can return to growth in fiscal 2016? Thank you.

Mike, this is George. On the outlook for the year, we haven’t guided but effectively what we did say it will be relatively flat quarter-over-quarter. For the full year in the second half, again pointing to the premium tier waiting of some of these issues, it will have a dampening effect but we’ll just leave it at that.

Mike, this is Steve. Also in the longer term I would say I’m not sure we see a difference in terms of what the market is looking for. In fact, I would suggest that even though our mix is probably more in modem versus Snapdragon based, the overall market appears to be absorbing new technology quite rapidly, even to the point where it appears that perhaps even in certain tiers, the replacement rate is improving, because people are upgrading to a larger screen and what have you. And we think that’s a good trend for our business both on a licensing side as well as the chip side eventually. I want to be clear. I think the 810, we think is going to be quite strong in terms of design traction, and they will be in a lot of devices. As I said, it will be over 60 devices. And it will be interesting to see how it sells through. But we’re definitely getting the sense that you still have to provide leadership technology in order to win.

I have a couple of questions. Let's address the issues with the 810, especially with the recent media coverage about overheating. Can you clarify whether you believe the challenges with the flagship device stem from a compatibility issue between the 810 and that device specifically, and that other devices will not experience these problems? A bit more detail on this would help us understand if the 810 itself is not at fault, but rather its particular pairing with that device. George or Derek, now that you have secured that licensee, could you provide insight into how significant the catch-up will be next quarter and whether that will be included in your guidance? This way, we can get a clearer picture of the guidance for the next quarter excluding that catch-up. Additionally, your updated figures for recognized volume in 2014 indicate a 20 million increase. The difference between recognized and unrecognized TRDSs is now 195 million, compared to the previous 215 million. I'm curious if this 20 million improvement is entirely attributed to this one licensee. Thank you.

Ehud, this is Steve. On the 810, let me be very clear. The device is working the way that we expected it work and we have design traction that reflects that. If you look at the number of designs, it's over 60. It's essentially won all the premium designs across multiple ecosystems in China, Windows Mobile, as well as Android. So we’re quite pleased with how that is performing. There is a concern. As you mentioned it's related to one OEM, and I don’t think you should extend that to imply that something has changed fundamentally between us and that OEM. And of course that OEM has a number of different models that we feel well positioned across our entire product tiers. So I think that’s going to be a great product for us. We are going to follow that up as I mentioned in my script with a device that returns to our internally developed CPU with integrated modem and are going at the latest node. So, I don’t think we see any change in strategy, and we’re quite pleased with that device. We just wish it had won one more design.

Ehud, it's Derek. You might remember that when we previously provided guidance, we offered a wide range due to the various issues at hand and the uncertainty about when each would be resolved. We indicated that to achieve the higher end of that range, we needed to resolve or make progress on several matters. Essentially, the resolution of the dispute was already factored into our guidance. The catch-up payment is also included in the guidance we shared for Q2. Regarding the mathematical breakdown, I anticipated someone might ask this question, so let me explain it. We provided a broad estimate of the under-reported or unreported amount due to the uncertainty surrounding it. Many have focused on the midpoint of 215 as a reference point, although we don't have more confidence in that number than in other parts of the range. The 215 figure is derived by assuming no resolution with a specific licensee at the low end of the range and full resolution at the high end. The midpoint is simply an average of those extremes. Dismantling the math further makes it complex, but essentially the bottom line is that the resolution of the dispute leads to fewer under-reported units. Additionally, we anticipate that the overall end market will grow faster than in our previous guidance. While the percentage of units we expect to be unreported remains consistent with our prior expectations, the actual number of units would have increased without the resolution. Overall, this results in a decrease, but we cannot directly link the change to just the dispute resolution.

Derek, just on that point about the increase in the TAM for 2014 and then also 2015, can you talk about what regions that that’s coming from and maybe what portion of that is China? And then as a follow up for George, just on capital return, the stock is down now sort of into the mid-60s here post-market. You bought back $500 million during January, which is sort of the same run rate that you bought back during the entirety of calendar Q4. Yet it doesn’t even really scratch the surface on really what you could do. Is the thinking around more capital return just China and getting that resolved?

Tim, its Derek. So I think on your first question, really the growth in the market is primarily coming from a stronger view on emerging regions, which includes China, but it’s not entirely China. So other regions such as India, the Middle East and Africa and some others are contributing to that as well.

Tim, on capital return, obviously we increased our program in this area substantially starting last year. And this quarter we talked about returning over 112%, our minimum commitment being 75% return of capital. So we’re pleased to be increasing in this environment. But we’ll continue to focus on shareholder returns but we’re again not going to forecast our future repurchases other than we’re committed to the return of capital commitments that we made in our program announcement last year.

I would like to address your point about the unit total addressable market increasing. While it seems the unit total addressable market is rising for the global market, you have significantly lowered your global average selling prices, revising them from a decrease of 9 to 10 to now 12 to 13. It seems you haven’t adjusted your estimate for the overall market value upward at all. Therefore, while more units are being sold, they are at a lower average selling price, resulting in no revenue growth compared to your previous projections. How should we consider the effect of elasticity relating to unit sales and growth, and how do we view market growth going forward? Additionally, I'm curious about your efforts to assist China OEMs in expanding beyond China. Do you see this as a positive development? Reflecting back on the first question, what implications might there be for the long-term business as these China OEMs gain market share outside of China, particularly in developed markets where their prices are likely much lower than what you currently experience?

Stacy, its Derek. On the market growth, effectively when we think back to the discussion we had in New York, really what we said is about 6% to 9% global TRDS growth, and we had a view on what ASPs would do throughout the calendar year. But we also made the point that in 2014 and ’15, we really view this fundamentally as an elasticity of demand exercise, and as ASPs come down, that units would go up. So even if there was an increasing pressure or decline on the ASP in the next year or so, that would drive higher units and essentially that’s what we're seeing. So those two dynamics are playing out. The growth in the market overall from a TRDS perspective is in line with what we expected in New York earlier in the year, but it’s just a little different mix in terms of units versus ASP. And you might recall we did talk about a number of factors, which we think long-term cause the ASP declines to moderate. And I think that also applies to your comment on the Chinese OEMs. I think a couple of things we expect will happen over time. One is that there is going to be consolidation among the Chinese OEM base. There's just really too many players to sustain themselves long-term. And if that happens, as well as they become more successful outside of China, invest in building their brand, and invest more in R&D, that there is no reason that their pricing profile would not become more in line with what we're seeing from some of the other OEMs today. And actually, we commented on that today in the scripts, that we actually are starting to see Chinese OEM ASPs increase.

Stacy, it's Steve. I think also you should think about the Chinese OEMs really as being multiple tiers. We see a grouping that in many ways is filling in some of the gaps that are being left because some handset manufacturers that historically have been in the United States and Northern Europe or even in Japan have exited portions of the world, and they've been filled in largely by some of the higher tier Chinese OEMs and they have strong ambitions and they're really developing the assets to be able to do that. In addition, there's a lower tier product which I think is being used really to drive the migration from 2G to 3G/4G and both of those trends we think are good for our business.

Steve, two for you. Just to clarify on your answer to Ehud’s question on the large OEM, is that a product line that you'll be selling a thin modem into or no chipset at all? And then secondly you mentioned or I guess hinted at a modem transition in China later this year. I suspect that’s carrier aggression. Do you have any sense of your lead against your major competitor there on getting a carrier aggression chip in that market? Thanks.

It's Steve. I’ll avoid discussing the specific design dynamics of a particular OEM, as it’s still unclear how that will unfold, and we generally do not disclose such details. However, we feel it’s important to share how it has affected our financials regarding the 810. In terms of carrier aggression and the LTE feature set, we believe we are in a robust position, especially at the high tier, and we have successfully extended our carrier presence down through the tiers. Similar to our previous shift to 4G, where we ensured we were present for that transition in China, we expect feature updates to take place there as well. Additionally, we recognize the necessity of offering international markets to Chinese OEMs, which relates to the earlier question. This leads to the need for adding new bands to support features like VoLTE and SRVCC, both of which demand a strong modem feature set. We feel confident in our leading position, though we are beginning to observe 3-mode competition entering the market, but we do not anticipate it will significantly alter our assessment of the competitive landscape.

My first question for Steve is about the transition with major OEMs. I understand you've secured numerous design wins for the 810, which is a positive sign. However, it's evident that in the high-end market there are primarily two vendors, and one of them is not utilizing your Snapdragon, which seems to be downplaying its importance. Given this situation, if it continues, you're seeing increased market share in the high-end, which has been challenging to monitor. What assurance do you have that the 810 will lead to a better product mix in the coming quarters? I’m trying to grasp the dynamics of whether there’s real confidence that it could benefit your QCT business. And for Derek, my question relates to the resolution you've achieved with a licensee in China. The lower end of your TDRS range has only increased by $5 billion, while the high-end has not seen similar growth. You might expect improvements on that front. I'm trying to understand if the outlook for your licensing opportunities in 2015 reflects this resolution or aspects like forex, ASPs, or product mix. Is this the correct way to approach it considering this resolution?

Kulbinder, it's Steve. In the long term, we believe that the market will not consolidate to just two OEMs. In fact, we anticipate that more than two ecosystems will thrive in the mobile computing sector. If you examine a market like China and how market shares have shifted over time, you'll notice various OEMs gaining traction in the premium segment. While these brands may not yet be well-known in the U.S. or developed countries, we see potential for that to change. Furthermore, we haven't yet seen a clear settling of how the different ecosystems will evolve over the coming years. Our past predictions about which OEM would come out on top have made us cautious about making definitive bets or strategies based on that. Our experiences with companies like Nokia and RIM have reinforced this caution. Instead, we focus on driving technology and ensuring it is a central concern for us. However, as the market opportunity becomes tighter due to advancements in specific modems compared to others, we need to carefully monitor our investment spending and aim to do so wisely.

Kulbinder, this is Derek. On the second question, really if you look at, like you said, we kept the high end of the reported TRDS range the same, but brought up the bottom into the range by about $5 billion which would actually shift the midpoint up. And there is a bunch of puts and takes in that. Obviously the resolution of the dispute would push it up but there's also some offsetting factors with FX, ASP and unit. So you can’t necessarily triangulate the 5 billion just to the licensee dispute, but the net-net of that is actually probably a more positive not negative picture and I would say kind of incrementally we’re feeling more positive about the outlook for the business in the fiscal year than in November even.

I have questions about your cash position, U.S. cash position. It declined year-over-year substantially from $8.7 billion to $4.1 billion if my numbers are right. And that means that you will run out of domestic cash in the next nine months or so if you burn the amount of cash. So it also declined substantially sequentially. What are the puts and takes in the cash burn? Is there anything else outside of dividends and buybacks that we need to consider? Then the second question is assuming you’re going to have access to more capital, whether it’s through debt raising or repatriation even, whatever it is, what are going to be the uses of cash? Are you going to increase the dividend substantially or do you have any agenda on the right dividends if you have more access to capital? Thanks.

So consistent with what we’ve said, the step up and our return of capital is going to drive down our domestic cash balance and that’s really what you've seen. We indicated either on the last call or at the Analyst Meeting, I believe it was on the last call, we would actually be in the market raising debt in our second fiscal quarter, which we still believe we will do, and again really to try and maintain a cash balance in the $2 billion to $4 billion range at all times domestically for flexibility. But as you’ve seen, in ‘14 we returned capital ahead of our minimum commitment of 75%, closer to 100% and we’re ahead of that in the first quarter, having returned 112%. So it’s really returning capital more aggressively in the form of share repurchase, plus the last two dividend increases where 40% and 20%. So significant increase in our divided outlays as well, all part of our program that we talked about last year and are executing to.

Thank you for taking my question. You've discussed the Snapdragon and the redesign details, but I’d like to ask about the second half of the year and the outlook for the baseband and thin modem businesses. Do you anticipate maintaining your market share in the latter half of the year, or could it slip as new competitors enter the market? Can you share your views on how you expect market share to evolve throughout the year? Additionally, regarding market growth, our model suggests a further slowdown in unit volumes for 2016. Looking ahead, do you believe that the anticipated ASP declines this year will continue into the next? Should we expect a year with even slower growth in total market value? I realize that this is quite a long-term outlook, but I’d appreciate your thoughts on ASPs.

Rod, this is Steve. So on share, I think what you're really seeing is a change in mix versus a fundamental share picture in QCT. You tend to see more thin modems versus Snapdragon processors. And as everybody is working through changing their portfolio to respond I think to a very strong player in the premium tier that’s changed the mix of products. And then in addition I would say in China, we’re going to see share gains year-over-year but not as much as we had expected. It’s pretty competitive in terms of the environment there. But it’s really more a mix story versus a share story.

Rod, this is Derek. Let me recap some of what we discussed in New York. We provided insights on average selling prices for 2014 and 2015, mentioning that we expect them to stabilize or moderate in the longer term. We haven't extended our guidance into 2016 yet, but we see several drivers affecting the long-term outlook. Currently, the accelerated growth in emerging regions' volume is a key factor, which we believe will moderate compared to developed markets over time. Additionally, there will be a replacement cycle in developing regions. We also shared statistics in New York regarding increased affordability and disposable income spent on mobile devices, supported by a recent Boston Consulting Group report. In India, around 45% of disposable income goes toward mobile devices, while China is in a similar range, perhaps slightly lower. We envision a long-term scenario where increased affordability and consumers moving into smartphone tiers will help stabilize or even raise selling prices in emerging regions. As we discussed regarding Chinese OEMs, there’s a shift in market share from non-Chinese players to Chinese OEMs both in China and internationally. Currently, this transition is occurring at a lower average selling price, but we expect it to stabilize over the long term as these companies consolidate and strengthen their market positions.

Derek, you may have seen that Apple and Ericsson are currently involved in a licensing dispute, with Apple asserting that the royalty should be based on the price of the baseband chip. This has raised concerns about potential spillover effects from China into other regions. I would appreciate your insights on this matter. Additionally, could you provide an update on when we might see some significant contract renewals?

I will avoid commenting specifically on the litigation between Apple and Ericsson since they are both partners and customers. However, I can address the topic of baseband chip licensing. There have been arguments made for several years regarding the appropriate royalty base, suggesting that it should be the chip rather than the full device. Those arguments have never succeeded in any context. Additionally, damages in the U.S. are not aligned with that perspective when considering portfolio-based licensing. We'll need to monitor the situation going forward. The standard in our industry has been consistent with our historical licensing approach, and we believe there are strong reasons to support this model in the long term. I also prefer not to comment too specifically on China, considering the various rumors circulating in the press. Even among Chinese OEMs that have revealed their IP licensing strategies, they emphasize licensing at the handset level rather than the chip level. Decisions from China's legal system have also aligned with this approach. While arguments will likely continue to surface due to various incentives, based on the current legal framework, we feel confident in the structure of our licensing program.

In the early stages of the smartphone market, it was really about getting your phones out to market, velocity of market, getting it out there. And so that favored the integrated solutions. Now with this concentrated market share and the increased choice of components, local competition in China and as the market further matures, is this part of a broader trend to kind of unbundle and disintegrate components in flagship devices? How we should be thinking about it over the longer term?

Mark, this is Steve. I would argue against that conclusion when we assess the accounts and the competitive landscape. Every competitive solution is aiming for integration. To compete effectively in the market, it's essential to operate within certain areas and cost targets, which is extremely challenging without integration. There’s really only one OEM that excels without this approach, and they operate at a high tier, affording them more leeway. However, most units globally do not have that flexibility, leading to a trend of companies pursuing integrated solutions.

Just on QCT, the high-end, the situation with the 810 share loss, is this really focused on one launched device with this OEM or will it something that you see impacting other flagship launch devices with this OEM throughout the year? And just as a follow-up on QCT, I wanted to square this relationship you have with Samsung LSI. So, on hand, you are competing with Samsung LSI’s Exynos chip and on the other, you are partnering with Samsung LSI on the foundry side for FinFET. So can you help us make sense of this and how this isn’t a dangerous position for Qualcomm? Why are you so confident this is good for the Company?

Sure, Brett. Regarding the 810 and a specific account, I believe it is limited to that one account and part of their portfolio. I can't speculate on future outcomes; that's a better question for them. Overall, in the industry, we are quite satisfied with the design success and would like to see them gain more market share compared to others. Growth in the premium tier for that product would be excellent as well. As for our relationship with Samsung LSI and Samsung overall, it remains unchanged. We have a long-standing partnership with Samsung involving licensing, product business, foundry, and collaboration across mobile and other devices. Our relationship is broad and hasn't altered; it's not a new relationship. I’ve noted several times that Samsung having a leading node is beneficial for Qualcomm, enabling us to compete with other players in the market. Therefore, we maintain a complex but positive relationship with Samsung.

Thank you everyone. Brent, please wrap-up the call.