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Qualcomm Inc. (QCOM)

November 15, 2012 12:00 pm ET

Executives

William F. Davidson - Senior Vice President of Investor Relations and Senior Vice President of Sales & Marketing - Firethorn Mobile, Inc

Paul E. Jacobs - Chairman and Chief Executive Officer

Raj Talluri

Steven M. Mollenkopf - President and Chief Operating Officer

Derek K. Aberle - Executive Vice President and Group President

William E. Keitel - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Donald J. Rosenberg - Executive Vice President, General Counsel and Corporate Secretary

Analysts

Mark McKechnie - Evercore Partners Inc., Research Division

T. Michael Walkley - Canaccord Genuity, Research Division

Roderick B. Hall - JP Morgan Chase & Co, Research Division

Timothy Long - BMO Capital Markets U.S.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Brett Simpson - Arete Research Services LLP

Tal Liani - BofA Merrill Lynch, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Anil K. Doradla - William Blair & Company L.L.C., Research Division

Matthew Hoffman - Cowen and Company, LLC, Research Division

Brian T. Modoff - Deutsche Bank AG, Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Arnab K. Chanda - Avian Securities, LLC, Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

Edward F. Snyder - Charter Equity Research

Mark Sue - RBC Capital Markets, LLC, Research Division

James E. Faucette - Pacific Crest Securities, Inc., Research Division

Sanjay Chaurasia - Nomura Securities Co. Ltd., Research Division

Presentation

William F. Davidson

Good morning, and welcome to Qualcomm's 2012 Analyst Day. It's great to see you here in San Diego. And I'd also like to welcome those of you joining us on today's webcast. We know you have a busy schedule, and we appreciate you taking the time to be with us here today.

I'd like to just say a couple of thank yous. Thank you to the Investor Relations and other support teams for putting on today's event. And also, I'd like to thank our executive management for their ongoing commitment to investor communications.

During today's meeting, we may make some forward-looking statements related to our expectations and other future events, which may differ materially from Qualcomm's actual results. I'd refer you to our SEC filings for a description of our businesses and associated risks, which may cause our actual results to differ materially from these forward-looking statements.

In addition, if we use any non-GAAP financial measures as defined by Regulation G, you'll find the required reconciliations to GAAP on our website and in the handouts that you have in front of you. In addition, you can see a copy of our Safe Harbor statement there as well.

So today's agenda includes presentations from Paul Jacobs, Steve Mollenkopf, Derek Aberle and Bill Keitel. And then, in addition, Don Rosenberg will join the question-and-answer session. I'd also like to welcome other members of our management team who are here today. Hopefully, you'll have a chance to speak with them and get additional perspectives on our business.

With that, I'd like to turn it over to our Chairman and Chief Executive Officer, Dr. Paul Jacobs.

Paul E. Jacobs

Thanks, everybody, for being here. We're happy as a management team to have this in San Diego. Hopefully, you guys are okay coming out to San Diego. And obviously, our thoughts are still with the people who have been affected by Sandy.

So anyways, we're glad to have you here. And of course, we've all talked about the earnings already, so I don't need to go over the details of it. But I just really wanted to point out that despite it looking like it might be a little tougher year than we expected with the supply shortages that we went into, we still had records across the board. And not only that, but we're able to continue to invest heavily into technology leadership, I think growing our lead and really, really setting the bar very high for the rest of the industry. And I would also say that the trends in the industry really are going our direction, and I'm going to talk about that throughout this speech.

But before I get to that, I just wanted to make the point that we are extremely focused not only on investing in the business and research and development, but we're also focused on returning capital to shareholders. And we are doing that both through dividends and through stock repurchases. And we continue to be focused on that, that we will make sure that we return capital to shareholders. And I had a number of questions yesterday about tax impacts on our dividend strategy, and I would say, it's the board's decision. But generally, I don't see a reason that we would make substantial changes to the policy going forward. So I think we'll remain balanced with repurchases and dividends.

I also like to -- this is my personal brag sheet and that for the team. Since we took over, the market cap's gone up pretty dramatically. Revenues, even more dramatically. EPS, and of course, we have a lot of cash in the bank as well. And all of these are just reflections of being in the right place as the industry grows and preparing ourselves for those opportunities. And I think being in the right place looking forward as well.

So if we do look forward, obviously -- we made a strong look at 2013. It was based on, I would say, a somewhat conservative view of global GDP. We are concerned about the macro economy, but we also think that we're -- its impacts on us are somewhat muted, more than, say, other industries because of this global adoption of smartphones and the growth of 3G really around the world. It is a global phenomenon.

We feel good about the leadership position in QCT, the new products that they're bringing out. We feel good about the road map. It spans from top to bottom, and I think that the opportunities ahead of us are really great. I mean, we all know about the computing opportunity ahead of us, but I'm going to talk about some other opportunities that we see as well. Obviously, the licensing program continues to grow strongly. We continue to sign up new licensees. That's also a good thing.

And I think the next 2 bullets about what we believe going forward, I think these are strong statements, particularly in this kind of an environment. I'm not sure you're going to see a lot of people being able to say this, and this is built up from our plan that we believe we can continue to do double-digit revenue and EPS CAGRs over the next 5 years. And I would say, that plan is based off a relatively conservative forecast for tablets, machine-to-machine and small cell. So this really is built off of the growth of smartphones and 3G and 4G around the world.

And the other thing that we've talked about in the past is the amount of R&D that we're spending on pre-revenue projects, and it's gone down a bit. We had about 30% last year, it's 27% this year. There are a number of ins and outs of that. We're still very focused on leading-edge research and development. The big step change, I would say, and one of the key drivers of that is our quad-core program going into revenue. Now that's not all of the puts and takes, but that was one of the main drivers of change there. So we're happy to see obviously that investment in quad-core now coming to fruition and generating revenue.

So obviously, one of the big stories this year was about wafer supply, and we are extremely pleased that our vendors have really stepped up. And we feel good about exiting the calendar year with the supply and demand more evenly matched. Obviously, this was due -- the shortage that we had was due to the fact that we were on the leading node, and the ramp for mobile is different from the ramp for other products.

So traditionally, the graphics guys were the leading edge or on the leading node at TSMC, for example, and we were somewhat trailing that leading edge. And the ramp for PCs is slower. When a new phone comes out with a new chip in it, the demand goes up very dramatically early on. And so really, the profile for ramping the new nodes is different. I think we somewhat underestimated that. Certainly, the supplier base did as well. But now, we got that. So the lesson is learned.

And the other thing that's going on in the fabless industry is this tremendous, tremendous competition around nodes. Obviously, Intel's out talking about having a manufacturing advantage. That is not lost on the fabless guys. They are investing heavily to drive to the next nodes. We'll see a faster transition between nodes over the next few years because of that, and I think that, that's going to put us in a very, very strong position. And the other thing is that our scale really allows us to influence that direction and help drive that direction and make sure that the new nodes are very, very well suited for mobile technology. So a lot of opportunity in this space. Obviously, we've been working very hard to make sure that the supply is there and that we drive the new technologies and really, to make sure also that we feel the capacity both on leading-edge nodes and on trailing-edge nodes as well. So I think that, that situation is working out quite well.

Obviously, the industry dynamics are changing also. You have new entrants from the high-level operating system guys coming in from the computing industry. Certainly, there's a couple of OEMs that are doing extremely well at the high end of the market. There's also a lot of activity at the low end of the market. And the middle of the market is where we see companies that are really trying to step their game up and bring out the new product first so that they can get their margins up and they can get the slots at the operators.

There's clearly a balance going on right now in the industry between the carriers, the OEM strength, the subsidies that are going on, who is leading in innovation. All sorts of things are going on here, and that's clearly affecting the way market share plays out. Some up, some down. And I think that, that will continue to play out over time. It's not like you can look at the history of the mobile industry and say somebody who's up is always up. People got to -- you've got to keep innovating. I mean, in order to stay ahead in this industry, you got to do that.

And so we think that share will move around, continue to move around, but we're definitely here to sort of support everybody. I mean, that's our model. We're not changing our strategy at all. We're going to lead in innovation. We're going to be the enabler. We're going to do as broad of a job as we can in supporting multiple partners and trying to scale the technology as rapidly as we can.

And I would say that the trends that are on our side are that data demand is creating a huge demand for new modem advancements, a lot of complexity in the phones, a lot of frequency bands that are being supported, particularly as we go to LTE. A lot of ups and downs between the high-level operating systems. We're, I think, supporting the broadest range of high-level operating systems and really feel like we have the full package, that our competitors may have some piece here or there. But we really span the whole range that you need for mobile. And so if you have that, plus you have a tiered road map so we can address the highest end, all the way down to the very low end, I think that puts us in a very good position going forward.

And that's really because we're a systems company. I mean, we look at the problem from the very beginning. We try and look out ahead and anticipate the trends and build the technologies years and years and years before other people do. We can afford to do that. The Licensing business helps us so that we are out in front of the new technology trend, building not just the technology but also the intellectual property position that we can later license. We also translate those innovations into the chip business. The chip business then brings those innovations to market. Obviously, we also bring the innovations to market through the standardization of technologies, which we are -- we're one of the leaders now in terms of driving new standards. And then obviously, we work with the entire ecosystem to commercialize these. So across every player in the ecosystem, we have excellent relationships now. And really, I think we are seen as a very good partner to everyone in the industry at this point.

Okay. So there's a bunch of trends that are really, I think, on the top of our mind and really what's driving the industry. And one obvious one, everybody knows about, is computing is massively changing. Whether it's to smartphones or tablets, the whole way that we do computing is changing. And certainly, around the world, it's changing even more.

The other thing is that you really need to have, for the traditional computing model, the same kinds of things that the smartphone has. Always on, instant on, long battery life, always synchronized, all these kinds of things are coming to computing. And so we're seeing great new devices come out. I think there's been more innovation in form factors in this -- in the computing industry in the last year than there's been in the last decade. So really exciting there. Data demand going up dramatically, dramatically around the world. Everybody wants to be connected all the time. They want to stream their videos. It's just -- that data demand is growing. And I think that we'll see some dynamics also around how pricing goes. Because right now, I would argue that the carriers are using pricing in order to hold demand on their networks down. We want to break that free and allow them to deliver the services that consumers and enterprises want at the price they want to pay.

And then what we call digital sixth sense. Maybe many other people talk about machine-to-machine, the blurring of digital and physical space, the fact that your phone is with you and it has this interface, and it also knows where it is, it knows its context. But also, the notion that there will be sensors that would be connected around this. All the devices around us will be connected. So all of these things sort of add together. There's a lot of trends that create tremendous opportunities for us, and I'll kind of go and touch on all of those.

Now we have a number of key initiatives to really drive our growth, and I'm going to touch on each one of these. So I'm not going to spend too much time on this slide, but each one of these is an area in which we see an opportunity we're investing in. And we think we have the opportunity to lead in these areas. So if we start off with the smartphone, obviously, this is a key driver right now, one of the most important things that's going on in the industry right now. And if we look at it, it is the most important device that people have now. I mean, it's the most personal device. This is a vision that we've seen probably for 15, 20 years now, about how the phone could take that position in people's lives. And if you look at the kind of sales, over 300 million smartphones were sold in the first half of this year. That's a 45% increase year-over-year. It's 2/3 higher than the total PC shipments. So it -- this is the device.

Now the other thing is, smartphone, I think we all recognize it outperforms our PCs in many ways that we care about fundamentally. We want to have the connectivity all the time, not have to wait to get online. We want to have the portability. We want to be able to touch and slide and interact with our data really easily. We want to have the context. We want our location, our motion sensing go along. We want to have it last for a very long time. And everybody expects these devices to be very, very affordable.

The other thing is just a huge amount of Internet traffic is going. We also, for a long time, believed that the wireless Internet would have a more profound impact on the world than the wired Internet, and that is clearly going on right now. I mean, it's -- we're in that trend where already, 1/3 of web searches are done on mobile devices. 4/5 of searches on smartphones are spontaneous. So you're in the bar having an argument, and you can look up so you don't get into a fight. You can just resolve it right there. It's much more than goes on, on a PC because you have to go to your PC as opposed to just having it in your pocket and pull it out of your pocket.

These are used more than any other device for media interaction. So that's kind of interesting. And even when you are looking at other media, say, you're watching TV, half of the smartphone -- half of the U.S. smartphone owners are using their smartphone while they're watching TV and bringing up very interesting opportunities for this multiscreen experience that all the content companies are so excited about. So lots and lots of opportunities there as well.

And the momentum really continues. I mean, if you look at the adoption rates, they're really stronger than any other devices in the past. It's 5.6x the pace of PC adoption in the '80s. It's double the adoption rate of the Internet in the '90s. It just continues to grow. We see smartphone shipments are going to pass feature phones in 2014, and we are seeing numbers like 5 billion cumulative sales between 2012 and 2016. And the interesting thing is how these phones are being sold. I mean, they're being sold now to increasingly younger people and increasingly older people. So we're not anymore obviously in that early-adopter phase. We're well into the mainstream.

And the thing that we're very happy about also is the fact that the technology has spread so widely around the world. It's really not just for communications anymore. It's really helping to bring people online, bridge the digital divide around the world, improve people's lives, improve standards of living. And that's an area that really we feel good about being able to participate in.

And I will tell you, it's -- one thing, if I get up in front of our all-hands meeting with the employees and you say, "You have the opportunity with your ideas to change the world to improve people's lives." I mean, that's a mission people get behind. And it -- I don't think it's an overstatement. The platform that we have and the industry has -- to do this is a really fulfilling thing, and really excited about that.

The other thing is that this idea that the phone is going to take the place of all these other devices that you used to interact with, that you used to carry. I mean, if you look at it, there's many devices. I mean, it -- all sorts of devices out there that you might have used. But there's some really kind of interesting statistics. So if you go look at Flickr, for example, you see what cameras took pictures on Flickr, the 5 most popular Samsung devices on Flickr for taking pictures, they were smartphones. So if you look at it, there's a survey done, 70% of people said that they preferred to use a smartphone to take pictures every day. Why? Because that's the camera that you have with you.

If you look at people in developed and developing markets, 70% of the people use their phones to take photos and videos. And if you look at gaming, 78% of people around the world use their smartphones to play games on it, which maybe is not so surprising. Anybody not play games on their phones? I suspect we all do.

And the thing that's great about this is it's really causing replacement cycles, because everybody wants the phone to work a little bit better. In all these different categories, people want it to do something more. And so it gives us an opportunity to innovate across a large number of vectors. And so we really are very focused on where are the areas that we can continue to drive the innovation in smartphones? And this gives us other ways to take our R&D dollars and invest them into areas to create separation between us and the competition. And so it's across a broad range of things, whether it's microprocessors or graphics processors, signal processors. On the radio side, we have it on both wireless WAN and local area networks. Obviously, sensors. We're doing a lot of work around display technologies to drive the costs down. So if you look at it -- I mean, there is just a lot of stuff that is getting done in every one of these categories to help drive that. And we do a lot of work in terms of building our own proprietary technology so that we are not waiting for somebody else to hand us a block, an IP block, to put into a chip. Now we want to be out in front and drive this -- all of these different vectors. And so just -- I'm not going to go through every one of these things, but take some examples. If you look at the CPU side, we're focused on optimizing that CPU for mobile, and we created this asymmetrical multiprocessing technology so that we can turn on and off the cores at different rates. We can speed them up and slow them down. So they are very well matched to the task that each individual core is running, and that is incredibly important for power consumption and for thermal management. You look at graphics -- I mean, we're the #1 shipper of graphics processors now for mobile, and we're building specific technology there as well. The Adreno 300 series has this new flex render technology. And what we can do, also, we can do multiple different modes of how we write the rendered scene. We can write it directly to the frame buffer, we can write it in tiles. Most other competition does one or the other. We do both modes so that we get the best, best performance out of our graphics processors.

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