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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

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.

Look at sensors now. I mean, cameras, we're talking about using multi-array cameras. We're doing computational camera, we're doing post-capture refocusing when you do that. I mean, all sorts of really almost science fiction-y kind of things that will make the image that the person takes better. They don't have to know all the science behind it. They just know that this phone takes a better picture than that phone, and people care a lot about that. I mean, you talk to people just anecdotally, that's what a lot of people tell me. "Oh, well. Oh, I got this new phone, yes. The pictures are just so much, so much better."

Obviously, on the modem side, we can go on and on, on the things that we're doing on the modem side. But there are some very, very fundamentally important things, advanced receivers, the interference management, power optimization, the interoperability between local and wide area and different technologies. These are things that we're extremely good at.

And also, on the sensor side, the position location. I mean, we've led with GPS, with GLONASS. Now we're the leader in terms of indoor position location technologies using WiFi access points to actually find your location indoors, a very sophisticated technology there as well and very precise technology, under 5-meter locations indoors, which really wasn't feasible without doing something quite expensive to get those kinds of position locations.

And then just a little touch on the display business here. We talked about moving the display business to more of a licensing model, and we're focusing that business on very specific products right now. So that is obviously still a work in progress. But I will say that the key things that got us to invest in the display business are still there. You look on Android phone, for example, and it tells you what's consuming the power in your phone. Your display is, by far, on the top, and the bar is long when you look at it. So getting that display power down is really critically important to extending the battery life of these devices. And as we look at our devices more and more, it just becomes more and more critical. And as we blur digital and physical together, the ability to use it both indoors and outdoors is critical. I mean, I don't know how many of you have tried to look something up on a map while you're walking down a street in New York and you can't even see the screen. You're kind of doing all sorts of gyrations just to see it. I mean, we will solve that problem.

And so that work goes on. Obviously, we are refocusing our spend there, and we will be going into more of a licensing model going forward. So still investing in that.

But obviously, the key thing that we're focused on, the investments, is on Snapdragon. And we've been doing this for quite some time. I used to show a slide here about Snapdragon, one of our key bets going into microprocessor technology. I'll just say, I mean, it's clearly paying off. We tripled our shipments quarter-over-quarter for our 8960 chip. It's powering a lot of the recent flagship devices that are out there, and we're really trying to follow a different approach than everybody else. We're really trying to make sure that we integrate as much as possible into the chip to lower cost, size, power consumption, all the key attributes that you need for mobile. And obviously, Steve's going to get up in a little bit and talk to you a lot more about Snapdragon, but I really feel like we are in a great position. That 8960 chip is just a great chip, and now we have the next generations of those devices, the Snapdragon devices coming out.

So really, the smartphone has been a tremendous, tremendous growth vector for us. But in addition, we're also trying to create more computing opportunities. And of course, we start from the work that we did on the smartphone. I mean, the same things that people demand out of their smartphone, they are demanding out of their computing devices now.

So that means that if we need higher resolution screens here, we're going to develop higher -- better GPUs, higher memory bandwidth, those kinds of things. That then translates into the computing space. People want their device to be more responsive. That means that we build better GPUs, better CPUs, better digital signal processors, all of these things. People want to be online connected as fast as possible. We do LTE, LTE Advanced, 11ac. So we're pushing both the WiFi side and the wide area network side.

And then of course, people want this rich multimedia experience. So the graphics processor's better, the cameras, the video codecs. All of these kinds of things, they translate directly from the smartphone as we drive that capability up into the computing space. And the key thing that we've done that really is going to enable this massive change in computing is that we've really focused on putting all of those capabilities together into devices that can be thin, sleek, ultra light, have very, very long battery life. They're thermally efficient so they don't heat your lap up. I mean, we all know how that works with a laptop. So this is a big engineering challenge, getting all of that stuff put together into a chip and making it all work together and not interfere with each other, work concurrently, not create too much heat, not draw too much power. Huge engineering challenge. It's something that we've been focused on. I think it's something we've been working on for decades and really creates a leadership position for us.

So that means that these things are going to go across a wide, wide range of devices, from the smallest to the largest, from the regular smartphones up to the smart TV and stopping in the middle on all the different sizes of tablets right now. It's funny, my wife is carrying a phablet around, which is a phone -- a little bit larger phone. And she puts it down on the table. This is the biggest conversation starter of anything. People say, "Is that a phone or is that a tablet?" It's kind of like, "Okay. Well, it's in the middle." But she likes it because it's got a bigger screen, but it's very, very portable. So I think different strokes for different folks. And probably multiple, actually. People will carry multiple different devices depending on the size, the time of day, what they're doing. And so I think the opportunity really is -- it's growing. And if you look across -- I mean, we already have over 500 Snapdragon devices announced. We got over 400 designs in development now, so really across a broad, broad range of opportunities.

So it's obviously one thing to kind of talk about it, show you power points. I think the other is to actually experience how this works. And so we've got a couple of Snapdragon demos to show you to -- it's going to highlight both our audio leadership and our graphics leadership. And so I'd like to have Raj Talluri come up to the stage and do a couple of demos for you. Thanks, Raj.

Raj Talluri

Okay. So thank you all. And really, my pleasure to be here. As Paul mentioned, what I wanted to do is show you a couple of things on our latest Snapdragon processor, which is the Snapdragon S4 Pro. This is our quad-core processor that's now shipping in the new LG phone. It's also shipping in the Nexus 4 that was announced. And the HTC Droid DNA that just got announced last week, that has the same processor.

What I have here is actually a reference tablet that we built here in the Qualcomm campus. And we built this basically with the best of all components you can get, like a 13-megapixel camera, high-resolution screen and so on. And then we build them way ahead before our partners are ready to launch phones. Then we give them to all our development partners like Dolby and DTS and the game developers. And we get a lot of the technology optimized on this. And then when the phones launch, all those technologies are now available on that.

Now the S4 Pro, it's of quad-core. It uses our Krait processor, there's 4 them. And it uses our latest GPU, which is the Adreno 3 class GPU, the Adreno 320 to be precise. If you follow benchmarks and if you look at blogs and things like that, you can see that it is actually the highest performing GPU out there right now.

What I wanted to do is I wanted to show you a couple demonstrations. I have a few tablets here, the same ones connected over HDMI to the big screen. So first thing I want to do is I want to show you a little graphics demonstration. It's advanced content that we developed here. We actually have a small game studio in Qualcomm where we are able to develop advanced content, the kind of games and the kind of content that you can expect to see when products like the S4 Pro are out in the market. And many times people ask me, "What are you going to do with quad-cores, and what kind of things can be done on quad-core?" So what we did is we developed this thing called -- it's actually called Snapdragon Fortress, the name we put up to it. There's some audio playing in the background. I'll let the audio go down. So what it is, it's a piece of content that we developed, and the content is it uses techniques in graphics that are used in high-end consoles. These are the same kind of techniques that you use on your Xbox and PS3 when you play games. And I'll show you a couple of them.

Like if you look at this scene, you'll see a lot of different things going on. One thing that you see is, as I rotate around the scene, there's clearly the dragon. There's water out there. There's 2 or 3 different light sources. There's a fire down here, there's a sun in the back and the cloth that's vivid out there. What you see is this is all being calculated real time. This is real-time reflection off the water. And then you actually also see the floor, you see the refractions from the floor. So when you do this kind of -- this is why when you actually play a console class games on your PS3s and Xboxes, they look so real, because you're actually modeling the physics of the scene. And if you see the cloth, the way the cloth moves, we're modeling the cloth's physics. So if you rotate around that, you can actually see what that looks like. And then not only we see the cloth rotating and we can catch the reflections on the cloud in the water, and that's what you see, that kind of realism.

Another thing that we do is -- here is another technique that's used in graphics quite a bit. When you generate these scenes, the realism of the, let's say, the way the light is reflecting off the little dragon, it comes from what's called a full pixel phong shading. We're actually calculating the shading at every pixel using complex techniques. And that's what gives you that kind of realism.

And another technique that was recently published quite a bit in, actually, in Sigra [ph], is called God rays. And the concept of that is -- I'll turn it on here -- is when you see the sun now coming off of the dragon at the top, you see how the rays actually take the shape of the object, and you see how they reflect off the object there at the dragon's wings. Those are the kind of things that really are done in high-end consoles, but we are now able to do that on the Snapdragon processor on the S4 Pro. So -- and when we did this, what we did was we said, "Okay, let's see what kind of performance it's taking." So you can see all our 4 cores are working now. And each of the core is working at 1.5 gigahertz, but you can see the map, the cloth physics you want. And it takes a lot of computation, by the way, to get the cloth to wave like that and look realistic.

And then when you do that, you actually see that the frame rate we're getting is quite high. We're running at 22 frames per second or so. I'll turn a few things off here. And the other thing you can see is as you go up here, we can actually turn off the CPU cores one by one. And now you can see the frame rate has dropped to like 15 frames per second. So now you see why we get that realistic performance when you use all the 4 cores and the GPU. And those are just an example of the kind of applications that we expect to get as these products get out in the market more and the kind of performance that you can expect when you optimize the CPUs and the GPUs and the whole system. Because as Paul mentioned, we build our own CPU, we build our own GPU. So we have the control of the architecture so that we are able to map content like this onto the CPU and onto the GPU.

And just imagine, this is running on your phone. You can show up at home, you leave it on the desk, and you pick up a controller and it connects wirelessly to your TV, and then you start playing the game. You don't really need to have that controller box that's kind of loud and noisy sitting in the living room to get this class of experience. And those are the kind of applications that we're able to do. Now whether this Snapdragon product is on a phone or a tablet or inside the TV or in the set-top box, it doesn't really matter to us. But it's the kind of technology that we are developing here, and we hope to see a lot of these products coming out.

So that's on the graphics side. I wanted to switch gears and show you another demo, which we haven't done before. If I can cut to the -- this one here, this is actually a demonstration of some audio capability. Again, we work with a lot of our partners. In this particular case, we work with DTS and we also work with Dolby. And what we did there is if you look at Blu-rays, in Blu-rays, Blu-ray disc players, all the audio is actually encoded using the DTS technology in 5.1 surround. That's why when you play the Blu-ray at home, you get that great surround experience of how the audio really sounds. And we worked with DTS and we actually got Dolby 5.1, both encoder and decoder, working on Snapdragon. Now what that means is you can take your phone and you have a couple of microphones on the phone, when you start shooting video, you can now record the video in 5.1 surround. And when you play it back, you can get the full surround experience at a home theater, and if you're plugging a pair of speakers, you can virtual surround where you feel like you're really watching a movie. Now many times, it's kind of hard to imagine what virtual surround really looks and feels like. So what we did with DTS is we got this video clip. And I'm going to play the clip now. And the clip will play. And then a part of the clip, we will turn off the sound, so we will just play it in stereo. And there will be the parts of the clip we'll actually play in the full 5.1, and I'll let you experience it.

[Presentation]

Raj Talluri

Okay. So it's really hard to imagine that we can get that class of full HD video and audio in a phone, and this is actually in the products that are shipping today. And there's a lot of other technology like that, that we are working on, but I just start to give you a view for a couple.

Paul E. Jacobs

Thanks, Raj. So we're going to take on the 5.1 sound now for the rest of my speech or...

Obviously, another big event that happened in the computing space was Microsoft's launch and Microsoft's porting of Windows onto Snapdragon onto ARM. And we're really excited about the launch of the products that were done by our partners, Dell and Samsung. And it's definitely early days in this. There's clearly a lot of work to go on in terms of application development, new devices coming out, a lot of I think very exciting things that are coming down the road. And one key aspect of this is that we are the only partner who supports both Windows Phone and Windows RT. So that puts us in a very, very strong position, I think, going forward.

I think a lot of people picked up on my cautiously optimistic language in the earnings call. I got asked about that on a couple of TV shows. And just maybe if I parse that, the cautious part was that there was not a huge amount built into the guidance that we gave you. And the optimistic part is we're still investing a lot in R&D to make sure that we really are able to capture this opportunity because we believe in this. It's great technology. Devices are thin, light, always on. And I think it's just a matter of time to build up the app ecosystem and really drive this. But it has to happen because this is touch-based. And all those apps that exist right now, they have to both be touch-based and they also have to be built to suspend at the right time so you can get the power management that people expect, so very, very low power, long-lasting devices that can go offline and then turn on every so often just to pick up their data and synchronize. So all that stuff has got to get done. It's early days but we are very excited about the technology at this point and look forward to working and supporting Windows and Windows Phone going forward.

And so the reason why we're after this particular opportunity is because it's a big opportunity. I mean obviously the smartphone business is bigger, but these numbers are nothing to sneeze at either. So we're looking at a very, very large business for tablets and laptops going forward. And if you look at the kinds of growth rates, the growth rates on the mobile side are just dramatically, dramatically larger. And so we're really in a great position to benefit from that growth going forward.

The other thing that people talk a lot about is connectivity. How many of these devices are just WiFi only? How many of these devices are wireless WAN-enabled, 3G-, 4G-enabled? Obviously, we play on both sides. And not only that, but we play in terms of connectivity on both ARM and x86 sides as well. But we believe pretty strongly that connectivity is going to be more and more important in this space because people will just get used to the idea of having things always synchronized, not waiting to get online and so forth, not having to hassle with it. And I've been living this myself. I've been carrying around a Win RT device that's WiFi only right now. And so I have to tether it, which takes a little bit of extra steps. And that means that it's not already synchronized when I turn it on and so forth. So I'm really looking forward to getting my LTE-enabled one and really have that full experience that we expect.

And I think that's true here as well. We're seeing a doubling of the growth of shipments. Hopefully that's a conservative number, and really trying to drive this. And it's not just us that are trying to drive it. I mean the carriers are trying to drive this as well. So you see lots of different plans that are being put out to try and drive this multi-device world. And so Verizon put out their Share Everything Plan. They reported they already have 13% of their subscribers on that plan. AT&T brought up their sharing plan and had 2 million sales of that in the first 5 weeks. So that's the multi-device aspect that I think is going to make it just easier for people to have more than one device. You don't have to go and get a whole new subscription for your other device or other devices that you're carrying around.

Another really exciting thing that's going on is this notion of focusing on services. So operators, Orange and Mobily, are doing things where you have access to social networking sites or certain services on your phone or, in the case of Mobily, they have it on a USB stick, where you have unlimited access to the Google services for a fixed fee. And so those kinds of ideas where there's sort of this notion that you can go to a particular place and have that paid for or have the amount that you have to pay for it known in advance, I think, that's also going to help out a lot. And we've actually done some work. I'll talk to you later a little bit about in Brazil where the government is trying to apply this kind of an idea as well.

The whole notion of the bundled starter plan, so you buy a device, a Chromebook or a Fire, and you can -- for a certain fee, you get a certain amount of data on that. So people get used to the idea that these devices are always on and always connected and make that connection in the heads of people in the mainstream. And then you also have the on-demand plans where you can buy for a few minutes or a month or whatever, kind of pay-as-you-go. It makes sign-up much, much easier, easy to get in to mobile broadband without making a long-term commitment. Another way of just getting people to put their foot in the water and really understand what the benefit of having mobile broadband is. So a lot of stuff that's going on, a lot of creativity on the operator side to try and drive this as well.

And I would say because these opportunities are coming, we're really sitting in a very unique position. I mean the breadth and the depth of the offerings that we have, I don't think anybody has as what we have. The integrated capabilities with Snapdragon. We have been the standalone processors as well the APQ processors. On the Gobi side, as I said, we put modems both into ARM and Intel-based architecture devices. And then of course, with offload, we have the -- and WiFi-based devices, we have the connectivity solutions that are reading out of QC Atheros, too. So really a lot of opportunities there as well.

And that's going to drive into all markets, the emerging markets. This is the way. Mobile broadband is the way people get online. And so the migrations from 2G to 3G and 4G are still in their early stages there. So there's really a lot of growth that's going to come out. And you say, "Well, what's going on in those markets?" And this is I think a really surprising chart, at least for me. We did this poll with Time to sort of understand what people were using their mobile devices for. And we found something pretty interesting, that the emerging markets, so China and India, are leading in certain uses of the phones. And so you can see, whether it's surfing the Internet, because that's the way that people get online, listening to their music, searches, news, photos. It goes on and on. These are places where people are using these devices in those markets. And that's why there is strong demand for higher data rates. It's not just a lightly used device. It's something that's becoming very central to the lifestyles of people in these markets and obviously, as I said earlier, it increases digital inclusion, it provides information and empowerment for people around the world. So very excited about -- oops, I hit the wrong direction, very excited about that. And so we are seeing tremendous growth in terms of the number of connections. 2/3 of the connections in 2016 are expected to be in emerging regions. And if you -- if we look at it, there's obviously this huge growth rate that's going on.

But it's also not just connections, you look at the people behind the connections. And the GSMA just did a study looking at we're obviously in a multi-SIM, world, so how many people are there that are actually using these connections? So if you look at it from that standpoint, the growth opportunity, the roadmap ahead of us to get more and more people online, it's even larger than you would expect just looking at connections. So really, I think tremendous, tremendous opportunity in these markets going forward.

And so you look at the kind of growth rates that are projected for various parts of emerging markets. And really, the drivers are the operators are rolling out substantially more and more 3G and 4G coverage. They're driving the costs of the devices down. The data plan pricing is coming down dramatically. You also have governments understanding that these are devices and networks that will improve quality of life, and they are getting involved to help drive it as well. And so these numbers are not small. I mean when you look at India, we're talking about going from 135 million to 386 million; China, 217 to -- 753 million; EMEA, 144 million to 477 million; Latin America, traditionally we had been there when CDMA2000 went much more GSM. Now it's coming back 3G, 4G, 101 million to 412 million. So projections are for very, very large numbers of people to get online.

And because of that, the operators are rolling out these advanced networks. They are seeing the same kind of trends in terms of data traffic growing very rapidly. You can see it in the kind of the numbers here. And right now, I'd say 60% of the operators in the emerging regions have already launched 3G, 4G networks. If you look at EV-DO Rev-A, a technology a lot of people are trying right off, it's had 73% year-over-year growth in Rev-A connections. So the latest technologies are still being adopted there. And we're seeing that the adoption of the newest technologies is also strong in the emerging markets, whether it's multi-carrier, HSPA or LTE networks rolling out in these markets. So very, very strong growth happening in the technology side as well.

So let's look a little closer at a couple of different regions. In China, 3G today is growing strongly, but it's still only 27% of the total connections. And what's going on now is that there is a lot of initiatives by the operators to drive smartphone pricing down, to open it up to more and more people. So the RMB 1,000, about $160 kind of range of devices. And we're really trying to drive those down very, very dramatically. So huge ecosystem there. If you look at the OEMs that are driving adoption there, 4 out of the 5 top OEMs are Chinese. And there's new entrants. Exciting to see companies like Chowmie [ph] come in and get people excited about innovation that's coming on their smartphones coming out of China.

Another trend that's very interesting as 3G and 4G grows is the operators are getting much more involved. So it's been traditionally a more open distribution network. Now the operators understand that if they can help spec the devices, they can help drive services, they can help drive the technology. they can make their networks more efficient. They're getting much more involved as well, and that I think is very good.

And if you look at the operators that are there, I mean obviously a huge market, great opportunity. China Telecom, #1 CDMA operator in the world over there. China Unicom's got a goal for 100 million 3G subscribers by the end of 2012. China Mobile now getting ready to launch TD-LTE networks in a trial, but of course, the trials there are what other places might call commercial networks. So a lot of opportunity there as well.

Latin America, networks are launching like crazy, HSPA networks. 60% of the operators are expecting to launch LTE between 2012 and 2013, so lots of LTE launches, lots of spectrum auctions going on. Very interesting what happened in Brazil, as I said, we worked with the government. They lowered the taxes on smartphone imports. And then they made it free for somebody with a smartphone to get to the government website. So they're actually using this for e-government reasons. And they also have a lot of OEMs. Some of the first 6 local 3G partners launched their phones during Futurecom. The other thing that's going on is we have our Qchat, our push-to-talk, rolling out down there. Nextel International just recently launched it in Mexico, they already had it running in Chile and Peru. So another area where we have a growth opportunity in Latin America.

India, growing like crazy. Smartphone shipments grew 38% year-over-year in the second quarter of '12. Really trying to drive pricing down, the operators have cut their data tariffs up to 70%. And then for us, we were involved obviously in getting spectrum there. That looks like it's gone well. We got the spectrum assigned to us. We got our full duration, and we also have Bharti Airtel working with us and looking to take over control of the entities that we have there by 2014. So India, a great story for us, really, really going well.

And so the thing that's driving it is that we really are making sure that there's affordable smartphone, we're really drive that. And we're expecting that 60% of smartphone demand is going to come from emerging markets by 2016. So the countries that -- I mean 3 of the 4 top countries for smartphones are going to be in emerging markets. And it's really about affordability, and we have been driving that, investing heavily in the low end. We have a number of OEMs now, several models out that are under USD 100. And one of the key ways that we're doing that is through our reference design program. So we're really trying to allow smaller OEMs to quickly commercialize a new product with a minimal effort on the engineering side, and really just take advantage of the portfolio of technologies and products that we have with software and firmware that's already precooked, pre-certified, ecosystem of vendors of components, ecosystem of vendors of software that can add on to these things. And you can see the kinds of adoption that we've got. It really is working well, so very happy with the reference design program.

Another area that we're excited about is this 1000x challenge. We are trying to think about how we can get 10x to 12x. And DoCoMo came in and said, "No, no, no. We need 1,000x more data on our network." And we kind of said, okay, and then we figured out how to solve that problem. And I'm going to talk to you about how we're solving it. But operators are seeing this all around. And the operators who aren't seeing it, as I said earlier, it's because their marketing departments are protecting the networks by using price elasticity, making their consumers not that happy because they're not getting as much data as they want and they're paying a lot. With the 1000x, we're not expecting revenues to go up 1000x, we're trying to drive the cost down as dramatically as we can with these technologies.

One of the ways we're going to help solve this is offload. I mean obviously WiFi is already a key component. We've been making it more efficient. We're working with the industry on this Hotspot 2.0 Passpoint thing to allow for easy discovery of hotspots, easy ability to get on the hotspot with your device. But WiFi is going to go so far. We still believe the key element is both a combination of WiFi and wireless WAN.

And the other thing we're doing is we're driving the traditional WAN network, cellular network technologies, whether it's improving voice capacity with WCDMA+ and 1X Advanced. New data capacity or multi-carrier aggregation technologies with HSPA+ and DO. LTE Advanced, really providing a heterogeneous network and range expansion and even greater carrier aggregation. And then LTE Direct allows these new service opportunities, allows peer-to-peer offloading and discovery when there are services around you that you want to have access to. So we're really spending a lot of effort on that.

Another way that we're working on it to do LTE broadcast, so that you actually dynamically go back and forth between broadcasting something if more than a handful, maybe even as little as 2 people want to watch the same piece of content, say it's a game or breaking news or something like that. And dynamically go back and forth between unicast and multicast services with this. And this is getting implemented in the chips. So unlike what we do with MediaFLO where it was over-the-top network, this is now built in to the cellular network, and the operators can go back and forth as they need to, to optimize the use of their networks.

And then of course, we're also trying to make it easier to get access to different bands of spectrum that the regulators are opening up around the world. And one of the key things to do is to make sure that we can just get the fattest pipe down that we can, use different chunks of technology wherever they might be, whether they're paired or unpaired, doing this carrier aggregation, doing supplemental downlink. We're getting great traction with the notion of supplemental downlink, which means that you add extra links from the network to the device because that's the direction we're most heavily impacted in terms of downloading videos and so forth. And so we're doing that in 700 megahertz here with AT&T. We just had in Europe, the CEPT decided to harmonize the L-Band which we own in the U.K. for supplemental downlink in Europe. So really have this opportunity to drive that new technology as well and allow you to use unpaired spectrum in a more efficient way. So -- but the real key strategy for the 1000x is extreme densification, meaning that you need to get the network and the devices closer to each other. And so small cells are going to get deployed everywhere. They'll get deployed in an ad hoc manner, which means that the deployment's going to be unplanned but the operator is still in control and coordinating the operation of this device. And that's really a critical element. In licensed band, the operator can manage how these base stations interact with each other. Now there's a lot of work to be done here. We got to get the cost and the size down. We've done some great work on that. Different backhaul. Obviously, backhaul now is not just to a cell site, it's to the carrier -- the customers' premises now. So you got to deal with that. And it creates implications about operators that have both fixed and wireless portfolios versus the ones that only have wireless portfolios.

Interference management is critical. Range extension is critical. And then, we're looking at all sorts of smart offload engines, making sure you use the right network at the right time, the right capabilities of the network at any given time. So we're really working on these very heavily. But the key thing is driving the cost of the cell site down. So that's a cell site. That's a quarter. That's a cell site. And these things, it's basically built like a phone. So -- but it doesn't have a screen, doesn't have memory, doesn't have a big battery, doesn't have a lot of the costly components. So these thing's cheaper than a phone. A cell site's cheaper than a phone. So that's going to really do a lot to the economics because if you think about what it costs all in to put a cell site in now, we're talking $100,000 plus, well these things are going to be kind of 1,000x less expensive than that to deploy. So that's where we're driving the industry to. And I fundamentally believe this is how the networks are going to get deployed going forward. We did an acquisition of Designart Networks to make sure that we could get the latest technology into the market as quickly as possible. QCA's got the channels to sell this through and the wireline technology. So really, really exciting.

And the key paradigm shift here is that the notion is that indoor cells will provide outdoor coverage. So you look at it as a way of siting yourselves in a place where you don't have the pay for the real estate. The backhaul is the backhaul that's available in that location. And in fact, what happens with these things, is that the cells actually sense the network around them. They opportunistically turn on and off, raise and lower their power to manage interference, as well as doing digital signal processing as well. So a lot of technologies are required to do this. This is something we recognize was an issue more than a decade ago. We spent the last decade working on interference management and quality of service and security technologies, all the kinds of things that you might imagine would arise from providing outdoor service from a cell site that's inside.

And if you think this is going to be a small thing, this is the example of why it's a big deal. What this talks about is how many small cells do you have in the households in a given area versus how much of the data actually gets offloaded to them. And you can see, it doesn't take much penetration before most of the traffic gets offloaded to the small cells. Now you still need the macro network. That macro network is there to provide ubiquity. This network is there to provide very, very high capacity, very, very high bandwidth, and also help save power as well.

And it's not theory. We went out and drove just looking at today's femtocells, which don't do all these interference management technology, but just to see where are the places that you would get great coverage if those femtocells that are in people's houses were actually open. Meaning that I could drive by as a stranger and use that femtocell. And you can see that in a typical subdivision, it works. And this is with just a handful of -- 7% of household penetration there, and you get that kind of coverage driving down the street. So this works.

Inside out is a technology, and it's going to work.

Now the key reason why it's important that it's in licensed bands and it is managed and coordinated is because interference management is the key to getting the 1000X. You get all these things out deployed densely, they will interfere with each other unless you manage it. And if you manage it the right way, what you can see here is that as the number of small cells go up for macro, the capacity of the network actually goes up very, very dramatically, almost linearly, maybe even more, with the number of cells that you put in. So that means that we can continue to subdivide in some sense, cell split, but it's done in a very, very different manner. It's done in an ad hoc, unplanned deployment model, and then you get those kinds of throughputs. So that's very critical.

The other thing that's really interesting, because we're looking for more spectrum, is that these can actually use higher-frequency bands where there are larger swaths of spectrum available. So they will run in those bands that people used to think were not really valuable. We talked with the SEC about the 3.5-gigahertz band being applied for small cells. And you can kind of see there are some spectrum which is great for macro. You go up higher where you can get wider swaths of spectrum, small cells. And then we even look at things like 60 gigahertz, which really only work within the room because of the way that -- the absorption and so forth. So that's 802.11ad.

And the other thing that we're doing, as we're able to open up more spectrum availability to use, we're also looking at regulatory regimes, changing the regulatory regimes. So obviously, there's going to be a lot of license spectrum. But we also have this notion of authorized shared access, which means that there is an incumbent user, say, a military user, that only uses the spectrum at certain times or in certain geographical locations. That means that in most other cases, that spectrum can be used for mobile broadband. Now it is still licensed, meaning that you can get all that interference management. You make sure that all the access points play with each other so that they all do interference management together. But if it can't -- if you can't clear it in some places but you can clear it in others, we can make use of that. So that's a very interesting technology and a new regulatory regime.

And then, of course, more on license. We're very into WiFi, as I said. That's been great as well. So we're seeing that for shared usage. But it's really not WAN and you can't guarantee that you will get the right kind of interference management in an unlicensed band.

Okay, so the other thing that we're focused on, the other initiative is Internet of Everything. And we say instead of Internet of Things, Internet of Everything because we really fundamentally believe that everything is going to be connected and controllable, and you're going to be able to use your phone to actually sit in the middle and do this.

And so whether it's cars, whether it's you going into a shopping mall, whether it's for continuous sensing of things on my body or in the environment, whether it's computing that's distributed around, you're going to have these services, applications, content available to you in a very contextual manner. And so there's a lot of things that have to be solved in order to make this happen.

And also, some of these things are going to be incredibly price sensitive, but very large volumes. Sensors that you might wear on your body that you might discard, like an intelligent bandaid. I mean, that's going to have to be a very low-cost solution in a lot of cases.

So these opportunities really exist in a wide range of areas. If you look at energy, for example, consumers' energy is getting ready to play 1.8 million smart meters for the Smart Grid, and these all have embedded cellular in them.

In the car space, certainly with EV, you're going to need the car to be part of the Smart Grid. But in any case, getting more information into the car is critical, getting traffic information and so forth into the car. We have 4 major automakers have kicked off LTE development programs, and Qualcomm chipsets have been selected for more than 30 connected car programs already.

Health care. Talked a little bit about it, but stats are phenomenal. And when we talk about the fiscal cliff and debt reduction, health care costs have to be driven down. Mobile technology is one of the ways it's going to happen. You -- there are already studies showing that mobile technology reduces mortality rates between 45% and 69%, reduces emergency room admissions between 20% and 69%, hospital readmissions go down between 44% and 73%. So huge, huge opportunities for productivity and efficiency gains. So the debate in health care is not about taking benefits away from people, it's about how we reform industry to be more cost effective.

And then in the home, I mean, just dramatic, dramatic amount of devices now in the home, increased demands on the networks in the home. A lot of content coming in. A lot of content being shared around the home. So really, you have to have high performance going into the home and high performance and range throughout the home so that devices can talk to each other, can share their content back and forth into the home.

And it's not just a few devices anymore. It used to be a router and a couple PCs were the things that were connected. And now we have gaming consoles and portable devices, tablets and smartphones, all of these kinds of things. And now as the Internet of Everything goes on, more sensors and so forth will be put into these -- into your home, too, as well.

So all this stuff comes together, but it comes together both on a wired and the wireless side. And so the fact that we have these complementary technologies, we've got on the wired side when we acquired Atheros, we got Ethernet and passive optical networking and Powerline technologies, building hybrid solutions so we can use both wireless and wireline. I mean, it really is across a broad range of devices. Having both the wireless and wireline, as I said in the small cell case, critically important now going forward. And we have those technologies as well.

And also, we just have a broad range of initiatives in this area, whether it's the technologies that I talked about in terms of Atheros and their Hy-Fi solution, which combines WiFi and Powerline so that you make sure that you have coverage anywhere you go; Gobi for precertified modems that people can apply to new applications; you have Vuforia so we can give user interface to things in the world that might not have a user interface, where you might not be able to reach them to adjust them, you use augmented reality to actually give a user interface to those things.

AllJoyn is a peer-to-peer technology, allowing these things to securely and easily pair up with each other, because if you have all this stuff distributed around your house and you have to go one by one to turn them on or reset them or reboot them or configure them, that's just not going to work for most people. So AllJoyn provides a common layer across multiple different operating systems, all different kinds of device types. Really excited about that opportunity as well.

And then the Skifta allows media sharing, whether in my home, out of my house, all over the place, wherever I want to get access to my content. I control it from my phone. I can bring my content from my house with me. So a lot of initiatives there.

And really, in the end, it's about this notion of giving ourselves another sense, an ability to sense what's around us, interact with all these devices in the world around us or with each other or with things or be able to just know what's going on and get the context, get the information about what the world is, make the entire world clickable, essentially. That -- there's a lot of momentum around these kinds of concepts going in the industry. We're going to lead those technologies.

So in the end, all these different innovations I have gone through really are focused on addressing these trends in the industry that I talked about in the beginning, help drive the industry dynamics, help put ourselves in a better and better position and create more and more separation between us. We have the technology leadership. We have the great human resources. And we certainly have the financial strength to do it. So thanks very much, everybody.

[Presentation]

Unknown Executive

Please welcome president and Chief Operating Officer, Steve Mollenkopf.

Steven M. Mollenkopf

Hi. Good morning, everyone. Good morning. I'm going to spend a little time to talk about what we're doing on the chipset side. And let's get started.

So fiscal year 2012, very good year on the chipset side. Tough year. We had a lot of things to overcome on the supply side. But that was really because I think we showed the industry a highly differentiated chip. And it really, I think, was a year that proved to me that in semiconductors, the focus, the center of mass has really transitioned to mobile. Everyone is looking for a mobile strategy. Everyone's trying to figure out how to be strong in smartphones. Of course, we had been betting on this for some number of years. And this is the year, in my mind, where it really -- it took place in the industry.

A lot of strong numbers this year, and we're really looking forward to next year. You don't need to dwell on them. I think you know them quite well. I'll try to touch a little bit on the strategy here moving forward as well.

In this case, the -- this is the performance of the last several years. I think the numbers will stand for themselves. We've been in the right industries, and we've been driving, I think, the right strategy for some time. And we're hoping that it gets harder for people to follow us versus easier moving forward with strong numbers from the team. We're actually very proud of these numbers.

So how did we get here? We -- today, because of the strength of mobile, because of the fact that we've been investing across multiple technologies, we really lead the industry in a number of different technology areas, clearly on the modem, which is -- which was the original technology that we really drove. But now, we're #1 across a number of different product areas, including computing, GPU and even the DSP. A lot of people don't realize that our devices ship with one or more custom DSPs, and those actually become important more and more in the future. I'll spend some time talking about that as well. But strong performance by the team.

A couple things that happened this year that were interesting to us. Right here, I'm showing the chart of carrier acceptances for our Snapdragon S4 platform. This is the 8960, the 8260A. These are the parts that really drove a majority of the designing activity over the last 18 months. And what's interesting for us is this is actually the fastest chip that we've had grow to 10 million units shipped. And it happened in a supply-constrained environment.

We also shipped our -- the fastest time from when we shipped our final chipset until the first product launched. This is actually the fastest we've ever done it. We've actually done it on the most complicated device. And then the ramp has just been phenomenal, as you can see.

But it's really the ability to deploy products across a number of different carriers is just amazing. If you look at the month of October alone, I think in Japan, they mentioned there were 27 different devices announced from the Japanese carriers. We were in 24 of them. Snapdragon was in 24 of them. Over -- I think in Samsung, we helped them launch I think in 3 different carriers in a week. In Nokia, I think we did 20 -- or Windows phones, excuse me, think we did 12 different launches in 1 week. Just incredible scale that we've been able to build up over the last several years. It's really showing now in the deployment of these very complex technologies.

LTE as well. If you look at our LTE modem deployment, this is an example of the number of devices launched. Clearly, in the modem space, the number of the different types of devices is much wider, consistent with what Paul was talking about. But you can see that the pace and the rate at which we're launching devices on LTE is increasing. And by the way, when we say LTE, we're referring to multimode LTE, and I'll talk a bit about what that really means to the chipset here in the next couple of minutes.

But you can see, in addition to just ramping the launch velocity, we're also ramping across multiple devices. We're on our third device before many people have a -- are actually on their first. So it just continues to drive technology innovation at scale into the industry is really what's driving our business.

Some other things of note this year. We have over 70-plus manufacturers. There's 400 different designs-plus in development. And we have 500 different Snapdragon devices launched. I think last year at this time, I think that 500 number was probably 300. So I think that's somewhere in the neighborhood of 60% year-over-year growth. So strong deployment and strong market acceptance of the Snapdragon platform.

So let me talk a little bit about strategy. What -- How did we get here? What did we do? How are we differentiated? How do we think about the business? And I'll keep it very brief. But really, our strategy, in one sentence, is essentially to try to set the bar of the industry. And we try to set what the table stakes are at a particular tier and then deploy that at scale.

There are a couple of tenets of that, that we think are important. The first one is that it's important that we own the key technology blocks. What that means is we need to make sure that we have the ability to make architectural trade-offs across different technology vectors but, more importantly, be able to bring them together and make technology trade-offs across the combination of those technology vectors. So, for example, we design our CPU road map for a particular reason. I'll tell you why. We do our GPO -- GPU road map for a particular reason. We have access to DSPs for a particular reason. We do all of those things so that we can put it together in a package that would be very, very difficult for someone to replicate. But more importantly, we can do that across multiple tiers.

The other thing that we do is we believe in integration strongly. If you look at what the vision that Paul was laying out on what devices we'll do in the future, there are so many different types of technologies that require to be in a device or a base station in order to support that vision. Very difficult from the perspective of putting things together in a coherent system design to do that across multiple companies. More importantly, it's very difficult to get to the price points that are required to drive that vision without integrating designs. And you've seen that over the years. We've seen, I think, many examples of people who bet against integration having a very difficult time in the industry. In fact, most of them either figure out a way to acquire the assets that they're missing or they moved on to another market because it's very difficult to win in this market without being integrated.

The other thing that we have is scale. And scale to us means 2 different things. It means the ability to deploy worldwide which I showed you some data points on. And then the second one is it gives us an ability to invest ahead of the market, very important particularly when you're driving leadership at a time when technology is changing rapidly. That's essentially what we do at a very high level.

Let me talk a little bit about some of the key technologies and where, I think, we're differentiated. First and foremost, I think we're differentiated at the portfolio level. If you look at the portfolio of technologies that we can bring to bear in a particular chipset, I think it's unmatched, at least as far as our read of the competitive environment. And what's interesting is people will come at it with one particular vector, and they'll quickly find that you need to have a combination to really be successful. But the most important one, actually the hardest one to drive, is actually -- is the modem. Mobility is all about the modem. It's increasingly about the modem and connectivity. And then you have to have the other things to really be able to drive value. And I think it's a key point. You need to be strong in the modem if you're going to be strong anywhere else.

So let me talk about industry trends. Paul talked a lot about what's going to happen in the market. And obviously, we all are driving toward that in the company. But I'm going to try to provide a quick perspective on what that means to the chipsets.

The first one is a perspective on what's happening with high-level OS software. If you look at what's driving mobile computing, what's driving mobile computing is everyone wants to take the smartphone ecosystem and they want to drive it into some adjacent market. It can either be the home, it could be the car, it can be the tablet space. And there's essentially a big battle going on to see who's going to win that software and ecosystem battle.

What's interesting from the phone side is if you're going to play in that ecosystem, you have to have cloud assets. And more and more, the design or the phone, the device, whatever the device is, really needs to be connected in some way, some reliable way, to the cloud.

And in the past, we're moving -- really today, particularly the PC space -- from a design environment where the OS was designed before the Internet existed actually. And actually, the things like the browser were add-on applications. If you look at what happens in the phone, connectivity is assumed. The browser -- or the phone assumes that the Internet is there all the time. In fact, you can't even log on, in many cases, to the device without connectivity. And you can't do anything really interesting without having a connection to the cloud.

So connectivity will drive or will be -- the connectivity attached will actually become a larger and larger proportion of what will happen in these devices. We think that pulls the market even more to our strengths.

So number one, the OS demands that connectivity becomes a higher and higher portion of what the device is doing.

The second one is the one that I find myself surprised that I read alternative views of the market. But the technology velocity is increasing substantially. There's a view that technology -- the phone is as good as it can ever be. And that is not what we're seeing from the chipset side. What we're seeing from the chipset side really is the phone has now -- the life cycle of a product is much shorter. It's much more intense. It's worldwide in terms of the way it launches. But it turns over very rapidly. And I've -- you've heard me say before that I liken it a lot to the way movie launches occur. You have a lot of marketing. You have a worldwide movie launch. There's a lot of buzz. There's a lot of volume over a short period of time. And then they're on to the next movie. Well, the thing that defines movie N from N+1 is some big jump in technology. And that's what we're seeing. So if you look at things like the iPhone 5 to iPhone 4S, big jumps in technology. And those are technologies that the industry needs to keep pace with if they want to play at the high end where a lot of the value is. Those technology jumps are very good for our business.

And just to give you a quick sense of how things have been transitioning. If you look at the beginning part of our year, we had a lot of discussion about how can we get 8960 launches out as quickly as possible. The second half of the year, we continued to have strong growth in 8960, but we had more and more OEMs saying, "I want to take advantage of your tiered road map, go up to the 8064 and maybe down to the 8930." What that means is even in our road map, OEMs have decided that they wanted to make technology jumps even within 1 year. That's really the nature of the way technology is for us. It means that those people that can drive technology will continue to be, I think, in an increasingly better position to deliver technology and value to the OEM partners.

And of course, all of this is being set by the smartphone, the most complicated device, the device that's driving the technology design point. The semiconductor industry today is -- everyone is trying to figure out how they can keep up with the smartphone. And it's -- our leadership position in smartphones, we think, gives us a strong position to drive, not only continue to drive the smartphone market but also to drive into some adjacent markets while this transition is occurring.

And then a quick perspective on small cells. It's a very interesting opportunity for Qualcomm across-the-board. But it is an example of where the -- it brings to us a number of different ecosystems because they all come together. If you look at it from a chipset side, what it means is instead of -- today, we make chipsets. They primarily work in a phone environment, they offload, they do things at home through wireless LAN. But as the broadband provider, the wireless network provider blur, the technologies that are required to do a device blur as well. And they tend to all be wanting to use smartphone technology to work. That's being driven by the fact that all of the ecosystem partners, the high-level OS providers, are all trying to drive their ecosystem from a position of strength in the phone to a number of adjacent markets. We think that is a great opportunity for us to transition our business not only from phones but also into other markets eventually as that transition occurs. Small cell is the opportunity to really occur -- to have that happen. It's exciting opportunity for us.

Okay, let me talk about Windows 8. I know Paul mentioned it as well, but Windows 8 is actually a great example of that happening. And if you look at the phone, you look at the Xbox, you look at the Windows devices, they all share the same user interface. They're all going to share the same ecosystem. But more importantly, they're going to share the same technology over and over more and more. And we think that's going to happen.

What's interesting for us is that if you look at what defines Windows 8 from Windows 7, all of that functionality is available to Windows RT. So we think long term the Windows ecosystem will transition to something that is completely open to our chipsets. And so long term, we think that's going to be a fantastic opportunity. Now it may take some time for that to occur, which is why we have the position that we took with the budget. But we think long term, it'll be a very strong opportunity for us, and we're very happy to be in a position to drive that from the smartphone position of strength.

Okay, I'm going to talk a little bit about some of the key technologies. I'm not going to touch on all of them, but I will touch on some of the key ones. The first and foremost is the modem. The modem, there's a lot of things about the modem. I'll try to make it very simple. But the short story is in our view, the modem is getting harder to do, not easier. And the need to do modems has actually gone up. And I'll try to bring that a little bit.

So what's happened in modems? First and foremost, they're becoming very complex. It's getting much harder to do a modem than it was in the old days. Integration is very important, and the ability to have coexistence not only across 2G, 4G or 3G and 4G but also across things like connectivity, across wireless GPS and a number of what we hope to be successful peer-to-peer technologies moving forward. So coexistence and a basket of modem technologies is actually important.

The third one is we feel we're at least 2 generations ahead from our competitors on LTE, and I'll talk a little bit about that here in the next couple of slides.

Okay. So modem technology leadership, not something that's new to us. This has been our -- the cornerstone of our strategy as a company for some time. I'm just going to put a period of time on here. We can go back much further and show enormous jumps in terms of modem leadership.

But from a chipset perspective, today if you look at -- this is just sort of some of our firsts starting, from the first HSDPA to HSUPA to HSPA+, Dual-Carrier HSPA+. We've had this consistent strategy of essentially being the first one to a modem, a modem transition, and then spreading it out across tiers and basically do it again, do it again, do it again, do it again. And we think that's been a great way to drive our business. We think there's even more need to do that in the future. And why is that?

If you were to go back to 2004, which is where the first HSDPA chip is -- and by the way, that HSDPA chip was really the chip that allowed us to really separate ourselves from the WCDMA competition at the time, including competitors that -- OEMs that designed their own chips for their own phones. And it feels the same way today as it did back then in terms of the way the technology is migrating and the way in which we're trying to separate ourselves. But today, what's different about then and now is today, there is a lot of demand for data. If you go back and you talk to people, what did people talk about when they talked about 3G in 2004? A lot of them said, "Well, what are we going to do with 3G?" "I don't know what we're going to do with 3G." "Maybe we'll do video telephony." And there was always this question of what we could actually do. Today, I think it's -- it will be a very, very quaint notion to argue that there is no need for demand, an increasing demand for data. So in our mind, it's actually the market is actually pulling us more toward advanced features than they did probably back in the early times of WCDMA.

Okay, let me talk a little bit about LTE. And so if you look at LTE today, a lot of people probably say they use LTE to refer to a number of different things. When we refer to LTE, we're referring to every technology on this chart. I don't know if that's the case for all our competitors. But the key to delivering an LTE solution that has the proper scale is to deliver all of the technologies. And I'll just give you a sense for how complex it is.

We tried to show what actually has to happen in a cartoon way. But essentially, there's a lot of different handovers. You have to support handover to multi-different -- many, many different networks. And from a chipset perspective, because what happens in AT&T is different than what happens in Verizon, it's different than what happens in Korea, different what happens in Japan or in Europe, the handoff requirements that you have to support from a chipset perspective is actually the union of all of them. And what that means, essentially, is that if you're an LTE provider, you have to have been a strong 3G provider in order to have this capability. And it's one of the reasons why, I think, we were able to separate ourselves from the pack a bit. We are also working very hard to not only provide this functionality at one tier but to provide it across multiple tiers. So typically, what happens is someone knows this. They have to put together all this functionality. And then they quickly get to the point where they have to compete against us across multiple tiers and not just in a point solution.

But the story gets actually harder when you include the radio bands. So if you look at the radio bands, one of the difficulties of providing solutions moving forward is that you need to be able to take the radio frequencies and to support them in one chip or in, at least, a small number of configurations. It's a very difficult problem to do. Our RF expertise and our ability to support a coherent design all the way up and down the RF chain is a unique advantage that we think will continue to drive value for us as a business.

And then you have to layer on top. Well, I have to do all the things that Paul talked about. I need to be able to communicate with the PAN network. I got to communicate with the WAN network. I have to be able to do location. So it becomes very, very complicated over time. We view this actually as an opportunity for the business. The people that can solve this really become differentiated in terms of their capabilities.

So that's essentially what we're doing. Now from an OEM's perspective, what do we do? What's the benefit of working with Qualcomm? The benefit is you get a single SKU we hand over for you, and we can do voice and data simultaneously and abstract a lot of that complication for them. The other thing we're able to do, because we have access to a lot of different technologies, is that our footprint tends to be smaller. So if you look at what we get graded on from customers, they really want a lot of this complexity abstracted from them, but they want to do that in a way that they don't have to pay a footprint penalty. And that's actually one of the benefits for us to having all of these different technologies in-house. We can take the VLSI technology that you have to drive in order to be successful in the application processor, and we can apply that immediately to the modem. And you may have seen over last year or so, we time our modem and leading-edge AP on the same clock, so we can take advantage of the application -- of the VLSI advantage, not only in the AP space but also in the modem space.

Okay. So if you look at it moving forward, okay, that's great. What's going to happen moving forward? Moving forward, there's a very rich road map of things that you have to work on. There are enormous amounts of complication still to be solved by the industry as you start to go to small cells, as you start to go to higher bandwidths, as you start to look at the spectrum situations that occur across the world. And we show this chart as a means of kind of giving our sense to it, but this is actually the cartoon chart. This is the chart that we show to make ourselves feel like we can solve it. But if you look at it from an engineering perspective, it's actually this chart over the next 2 years.

It's an enormous amount of features that you have to put in there. This is why we are putting out newer and newer devices on LTE. It is to drive that leadership position across multiple tiers and in to the industry. So very, I think, robust roadmap in terms of features for LTE and 3G. Also our strategy will be to drive those technologies not only on LTE feature set but across the board. And so we will continue to drive multimode products across all tiers as a fundamental differentiator, we think, for our business.

The other thing that we do, and I get asked this question a lot, how are you doing on wireless LAN? What are you doing on wireless LAN? And we're actually quite happy with how we're doing. There are -- what we did starting in the S4 class of product is we started to integrate wireless LAN in to the MSM. Now for many, many years, for more than a decade, we've had GPS functionality integrated in with the MSM. And as you know, the GPS attach is probably virtually 100% on our devices. Because it's so necessary to have GPS and the wireless WAN, the cellular system work together, there's a lot of benefits for doing that. If you look at WiFi, same thing exists. It benefits purely from integration, but more and more coexistence becomes an important component. So what we do is if you look at our architecture with 8960 and the entire S4 class of products, is we integrate the digital portion of wireless LAN on to the chip. It benefits from Moore's law because it's attached to a larger die that can continue to move down the cost curve without being pad limited. But more importantly, it has a stand-alone RF chip. We've had -- I talked about having the vast majority of those designs using our wireless LAN. There's about 300 of them actually in development. And it's well north of 80% of our wireless LAN -- of our S4 products include our QCA wireless LAN, and that number is actually growing. In addition, we provide a very, very clean upgrade to 11ac. So if you look at our chipsets, the 3660 is actually what ships today. It's not AC compatible. But there is a pin for pin compatible chip that you pop right off and you can put the 3680 on, and that enables you to have AC. So this entire -- for the entire designed-in base of our S4 family, it's very easy for them to migrate to 11ac. That actually -- that chip, the 3680, is now in production. It's shipping commercially. And we're now in the point of -- we'll see that ramping, I think, over designs that are coming out. And I think that's probably about the same time as the WiFi alliance will certify 11ac as well. So we have very strong design end traction, and we're happy to see that pathway to AC working as well.

By the way, this is not a new strategy for us, driving technology leadership extends just like it does in the modem. It extends the same thing to wireless LAN. We're happy to be able to do that as a platform.

But it's not just on the phone. We prioritized our AC traction on the phone. But in addition, we have an end-to-end portfolio across all of the different segments, all the different channels that we have now with QCA. The first routers on our 11ac will be shipping in calendar Q1. And so we're happy to see that across multiple customers, we're happy to see that end-to-end functionality go out as well. So pretty happy about how that's going.

Location historically have been a very strong part. We're now taking the trends, the location capability and moving it indoors, as Paul talked about. We did a release this morning with Cisco and a number of other partners about how we can really drive indoor location as an ability for us to extend our business. It's also, I think, significant to note that this capability gives us access to a whole mix of new partners. So if you go back several years ago, we probably didn't have the ability to interface to a Cisco or to a traditional networking partner. And this is really the first of what, I think, will be many opportunities for us to extend our partners, not only into the -- more and more in to the cellular space but also in to the traditional networking space. And as the small cell vision happens, I think, more and more of those spaces get blurred. So we're happy to see that and see new partners coming in to our business.

Let me talk a little bit about application processor. I'll spend a little time on 3 different technologies. But broadly, what differentiates our application processor? We think we have the best IP road map, meaning that our individual vectors of innovation, so be it CPU, graphics, DSP, multimedia, we think that they're leading. But more importantly, we can put that together in a coherent way and really deal with the real tough problems that you have to solve, systems problems that occur in mobile.

The other thing that we're doing is we are essentially trying to use our scale to drive a performance level that would be very difficult to follow, unless you were able to follow us through the nodes. What I think that does essentially is it creates a situation where if you're not already a large AP player and have access to a lot of volume to offset the cost of investing in further nodes, it will be harder and harder to meet the performance requirements that we will be setting as we move forward. So we're going to continue to use that, I think, as a competitive advantage for us, and I think it's a key part of our strategy. I've mentioned on the last several earnings calls that the rate at which we're going through nodes in forward looking is actually larger than we have in the past. That's really the -- why we're doing that, is in order to set the design point above what we think other folks will be able to do with us.

The other thing that's important for us on the application side is that we have control of the SoC, meaning the architecture of the SoC. And more and more for IP providers, so people that license IP, they're finding that it's very difficult to create the graphics engine without having the ability to also provide trade-offs on the CPU or to have the ability to put certain amounts of computational loads on a DSP or to put them on a GPU. So you have to be able to design these things together in order to make what is really required by the device. We have the ability to do that because of our access to that technology.

So CPU. Why do we do our own CPU? Primarily because of the schedule and our ability to set a cost and performance level that you couldn't do unless you did it yourself. That's why we do it. The 8960 is a perfect example of why we do it. Had we not done our own CPU, we would not have been able to take the performance level that we needed and put it alongside an integrated LTE solution. We had a lot of discussion about this time last year. People would come up to me and say, well, I don't think your 2 cores will beat other people's 4 cores. And we said yes, we think it will. And I think the evidence is pretty clear that we've been able to do that. Then later in the year, we came out with a quad-core solution. The design flexibility that it gives us by doing our own CPU allows us to make those trade-offs and we can do right thing for the market. And we've been able to show that that's, I think, been the right thing for the business.

Some details around that, a little bit about the firsts. If you look at setting the design point, we've actually done that a couple times. If you go back to 2008, that was when the original Snapdragon product came out. We were the first folks to put a gigahertz processor in a phone. It really -- from the day that we launched those early devices and in particular, the day that we launched, along with Google, the original Nexus One, you couldn't do a smartphone without, at the high end, without a gigahertz processor. You move forward, we bumped it up. We added integrated GPS and GLONASS. We added the ability to independently clock cores at different rates to save power and to adjust the load. And then in 2012, we launched products that had the first integrated 3G/4G. But more importantly, on the CPU side, we came out with the first CPU that took advantage of the new microarchitectures that you'll see coming from competitors. Our advantage there at that time, I had talked about how our advantage is probably between 3 and 6 months. We have yet to see a phone based off of that same microarchitecture category of products. We haven't seen that come on to the market yet even though we've launched 8960, as I said, throughout the year. So we think our schedule advantage and our performance advantage have really paid off.

Now we're not staying still. We have, since the beginning of the year, we have upgraded and we will continue to upgrade the multimedia feature set within 1 year to try to continue to lead the market. So we've got a number of new improvements that we continually put in to these processors moving forward. That's why you'll see our benchmark performance moving up over time even on the same product, because we're continually improving it and with new revs.

So how are we doing? If you look at the performance today, we put some charts in here. I think the key component is really over to the right, which is that for the same performance level, we're essentially half the power. That's very, very unusual to do. Now the thing to remember, we're half the power and we're not using the latest technology. So the white line is actually, I think, the first device that we've seen in the same class. It's actually not a mobile device. I think it probably doesn't have the thermal capability in a mobile today. And you'll see that there's a pretty big gap in terms of performance, but you'll also see that they are actually at a leading node. They are at a High-K Metal Gate node. We're actually leading them in performance, both performance and power, and we're at a planar node of 28-nanometer. You're going to see us over the next year take these designs and move them from the planar process to some more advanced geography or geometries. That will cause the performance advantage that we have to increase. So we're very, very happy with how our CPU is going.

Over last 2 years, we've added an additional CPU team to the team. That enables us to essentially improve our pace. So instead of having one team, we essentially have 2 teams. And they could do today and tomorrow, a team essentially that move in that fashion. That's one of the reasons why you've seen us invest in CPU is be able to do that moving forward. So we're quite happy with how the CPU looks. These are single-core numbers and not dual-core numbers. If you add multiple-cores, the thermal problem even becomes more of an issue.

Okay. And the results have been quite good. These are some design reviews or press coverage of some of the most recent launches. If you look at the -- and it's across the board. I mean, you've got the HTC Droid DNA, I think, was launched Tuesday of this week. The LG Nexus 4 and the Google Nexus 4, I think LG Optimus G is the name that LG uses for their product, very strong reviews on that. Xiaomi is another Chinese manufacturer, doing a great job producing designs. I encourage you to take a look at those as well, as well as all of the Lumia phones. So very strong reviews coming out of the product line. We couldn't be more happy with how the quad-core products have been launching.

GPU. Paul talked a lot about GPU. You saw some notes from Raj. I won't spend a whole lot of time on that. But essentially, we make our own GPU. We do it because the mobile environment is different than what you would have from other sides. And we have the ability to design the GPU, the rest of the chip and in particular, the CPU together to share the workload in a way that's most efficient for mobile. That's essentially why we do it. We've been investing over the last 5-plus years and it's transitioned into leadership.

Here's some reviews of the Adreno 320, the same one that Raj showed you earlier, it's the same one as in all the devices with the exception of Lumia devices that I showed in the previous page. And this was probably -- this was probably about a month ago, a couple months ago and it just talks about how much better, from a performance perspective, the new Adreno 3 class of product is versus our old 200 class, as well as the competitors. This is an on-tech performance chart. And then what's really important though is not the chart on the right -- excuse me, the chart on the left. The chart on the right is the one that's important, which is how much performance you can get per milliwatt? And that's what we're showing essentially, what we do, we optimize our performance so that you can run these things in a mobile environment. It's a very different environment than what you would do if you were coming at the problem from the workstation space or from the laptop space. That's why we're differentiated.

Now since this design came out, I think, you've seen things come out like the iPhone 5, and -- which essentially what they tend to do is they tend to throw more silicon at it, and they set a design point for the rest of the industry that eventually now everybody has to do. We look at that as a very, very strong cycle for us. What that does is it moves the leadership or it moves the design point. Everyone's fighting for who's going to have the best graphics, who's going to have the best CPU. That's a great environment for us to be in because technology matters in that environment. So over time, you start to see people challenge each other on these performance metrics. That just plays into what we think is our strength, and we're going to continue to drive that as part of our strategy.

Okay. So if I look at the Adreno 225, and Raj showed it, it essentially -- very good processor, very, very strong. It was in the original 8960. We've upgraded the 8960 to actually include the new graphics. And what it essentially does is it allows you to support a much more complex scene. But more importantly, it allows you to support the pixel and the screen size requirements for all of these next-generation computing devices that aren't phones, so things like tablets people rendering to screens. And what's interesting is if you look at the pixel requirements, if you look at the capability that's required in order to drive graphics from the smartphone to all of these different designs, it's much higher than what existed in the laptop space only just a few years ago. And in fact today, the tablet itself is probably the most challenging graphics environment. And we're actually supporting that from the phone space. We think that's what everyone's going to be doing because it's all about mobile in those computing environments. So the future, we think, of graphics will be coming from the mobile space.

Can we talk about DSP? Very quickly, we do our own DSPs. A lot of people don't know that, our DSP actually supports the modem in the new generations. We do that because it allows us to support the work load with the lowest possible power performance. We optimize the machine to run for the load that is required. Now more and more, what happens is as your phone is being used very much as your digital life companion or whatever the right term is, it's processing a lot of signals, realtime signals, signals, video signals, audio signals, camera loads. And it's trying to figure out what's going on and it's trying to provide data back to you. That's essentially why we have a DSP. The DSP is a custom DSP we make. It's optimized for mobile. It allows us to drive these use cases that Paul talked about in a way that you wouldn't be able to do if you just had a more general-purpose processor. And so we do that to enable our customers. What we've done over the last several years is that we've opened up this capability to some of our customers. We're going to continue to do that more and more and build the ecosystem, because the ability to have people innovate around our processor and our DSP is something we think is going to yield some pretty interesting products down the road.

Okay. I'll talk a little bit about emerging accounts. Paul mentioned it as well. If you look at emerging accounts to us, emerging accounts you should think of as all of the folks who are in -- that provide smartphones or they provide 2G phones worldwide. How do we service them? How do we get them to use our chipsets? And more importantly, how do we accelerate the demand for 3G worldwide? So one of the things that we did several years ago, I think, starting in 2009, early 2010, is that we started to invest in developing a new channel in China that would enable them to -- or would enable this channel to take our smartphone chipsets, at the same time that 3G and smartphone penetration would start to happen in these geographies. And these are geographies that we really don't participate in today from a chipset perspective. And how do we develop the new channel? So we've been developing that for some time. I'll talk about how that's going. We look at that as an increment opportunity. This is different than our traditional customer base but it requires a different type of product.

So let me talk a little bit about that. So if you look at the opportunity for growth, as I said, there are a lot of connections. We really don't service them too much today in terms of the chipset side. There are a lot of new OEMs. So the problem that we had going back to 2010 is how do we take our product line, which is optimized for big OEMs, and how do we scale that and how we create that in a way that will enable us to have a company that has 30 people to go to market with a smartphone? So we started to produce a reference design and we started to do -- change the way that we really ran our business in China. So what we've been investing in is really the middle thing, which is the product where it takes our chipset and creates a bit more of a phone that enables us to quickly get new types of customers to market. We've been pretty pleased. It's been a couple of years. We've been able to ramp a number of new OEMs. We have about 40-plus OEMs. We've done 100-plus launches just this year. We've got 100-plus in design. And we've been able to take the number of days that they can go from start to finish. We've made that very short, lower than 60 days. We're not done, actually. We are now at the point where we can service the large OEMs, but we're not -- we're still investing in maturing the process so we can support the small OEMs. And even with that though, we're pretty pleased with how we've been able to drive a new class of customer in to the business at the same time that smartphones are really ramping in the emerging markets.

So here are the names of some of the ones that we're working with. I think they're probably recognizable to folks that are familiar with this channel. These are also, in many cases, the strong 2G partners. And what's happening is the 2G partners, 2G sellers of smartphones, are trying to figure out how do they migrate to 3G. And we've been very pleased with the ability of our team to really open up a new channel for us with this new class of customer for a new class of product.

Okay. So a little bit about the QRD portfolio. We've invested really only in a couple of designs here at the beginning of '11 and '12. We're now accelerating the tiering of that. We've come out with the quad-core. There's really a fast-paced innovation or a fast feature-based innovation that's occurring in this marketplace. We think that actually plays to our strength because we can react to that very quickly, given our IP position in terms of the amount of different designs that we have in-house. But more importantly, we can do things like we're doing with the 8x30, which is that we can take technology that we develop for the developing world or the developed world and we can scale that down and set a different performance bar. We've been doing that. We've been responding to a lot of the market forces, but we're still working on scaling the local team to be able to support even more and more customers, smaller and smaller customers.

Now what's interesting is in addition to selling the key MSM and RF platforms and the like, the connectivity attach, which is the amount of these programs that go out supporting our wireless LAN solution. It's actually been quite impressive. It's actually over 75% of those QRD designs include our connectivity. So we're pretty pleased with how that's going. We think that the ability to have the platform and drive a platform solution is actually even more rewarded in this marketplace because people just want to get the thing out. So we're working on that. It's working. We're pleased with the early results, but we're just getting started there as well.

There will be a transition that occurs. I want to leave you with 2 things that will happen here over the next year or so. The first one is there will be a transition at some point in China where TD-LTE will become part of the requirements in order to deliver a solution there. All of our LTE solutions include that mode as well. And so we can actually use that transition as an opportunity for us to create some separation. But in addition, it opens up, that transition opens up the largest carrier in the world to our chipsets. Today, we really -- if you look at China, we really don't sell an appreciable amount of chipsets outside of China Telecom and China Unicom. But as that transition occurs in China Mobile and we start to ramp our TD-SCDMA solution, we now open up what is the newest and the largest opportunity in China for us. So that will happen, and I think that will be a new part of our business as well.

Very briefly on the fabless model. There were number of questions about this last night. One of the things that we hear a lot and, I think, we have a different view is the fabless model, I don't believe is fundamentally broken. What you're seeing is it's adjusting a bit because the huge market of mobile is now taking the -- taking advantage of the leading node. And we've had to change our processes a bit, as well as our foundry partners. And we feel that we're in a position now of understanding how to ramp at the beginning part of a node. But more importantly, the amount of capital that can be deployed in the fabless industry to support innovation is very high relative to what you would be able to do if you did it yourself. And there's been a number of comments made about, well, will the fabless industry be able to respond? And we feel pretty firmly that the investment level is there, and they're very focused on driving innovation even at that transistor level.

So I'll just wrap up here with a quick perspective on our road map. We have a tiered road map. We're going to continue to move very hard on that. We have stopped -- you may have noticed, we have stopped talking about our forward-looking road map by and large. And one of the reasons is we think that we're in a leadership position. And as the leader, we don't want to telegraph a lot of the ways that we're going. But we're going to continue to drive a tiered road map. We're go to continue to drive modem leadership. And we have been for last year or so transitioning our products on to new levels of innovation at the IP level but also at the architecture level.

So with that, I'll just end by saying we've got something coming. You'll hear about in a little bit. It's this chip right here. It's so small, I thought I was going to lose it actually. But it's -- you're going to hear more about this one. This is our newest one. It's in the labs. It's actually been sampling. And we're pretty happy about how it's been received. And I look forward to talking about that more and more. But we're real excited about what's going to happen here in to the future, as well as what we did this year as well. So with that, I'll just end by saying we had a strong outlook for fiscal year 2013. We think it's even more the case where mobile is going to set the pace of semiconductors in the industry. We're happy to be in the leadership position on that, and we look forward to a strong year. Thank you.

[Presentation]

Unknown Executive

We will now take a 30-minute lunch break. The next session will begin promptly at 11:40. Thank you.

[Break]

[Presentation]

Unknown Executive

Please welcome Executive Vice President and Group President, Derek Aberle.

Derek K. Aberle

Hello, everybody. I'm glad to be up here again in front of you coming in with another great year for QTL. I know you've seen most of these numbers by this point, but I wanted to just emphasize a few things as we look ahead and reflect a little bit on 2012. Revenues came in about $6.3 billion, 17% growth year-over-year. One thing to remember in that growth is that's coming off a very strong fiscal '11, which also included some catch-up payments that applied to prior periods because we are able to settle last year some of the licensee disputes we had. So even though we didn't adjust for that, we still saw a tremendous growth in that business last year. Obviously, really strong earnings that flowed through there. I think at the beginning of the year we said we expected to have operating margins in the range of 86% to 88%, and we way came in at the high end of the range there.

Total reported device sales were up really nicely, again year-over-year with about 25% growth. That was driven by a combination of unit growth and some increase in ASP. I think we went from about $206 midpoint in fiscal 2011 to $219 in fiscal '12. And that was driven -- not unexpected. I think as we said last year, there were a lot of favorable trends across the industry, many of which Paul and Steve have already hit on, that we expect will continue actually into '13 and beyond. And so some of those trends came in bit more favorable for us than we even expected, which drove ASPs up through the year.

Also continuing to grow are our base of licensees, added about another 20 licensees in China. So this is now the third consecutive year where we've had about 20 new licensees in China. So that licensing base continue to grow with the tremendous growth in that region. We also started to see more traction in Latin America. And in Brazil in particular, we've now signed a couple of large consumer electronic companies down there as licensees, and we expect to see some additional growth next year from new licensees in that area.

We've also continued to work hard to get out in front of the single mode licensing base. That's devices that will have 4G but not 3G. And we continue to make good progress there, even though we continue to expect that really material volume growth in that device segment will be shifted out a few years.

So one thing I think is worth reminding, and I still get this question from time to time. So as we roll now, obviously we're seeing a lot of traction of multimode, 3G/4G devices out in the market. And that's good for us from an ASP perspective, it's good for us given our leadership position on LTE from a chip perspective. But the one thing to remember there is the existing 220-plus 3G deals cover those products. So we don't need to go out and negotiate and sign new agreements to pick up royalties on that part of the market as it grows. And as we've said in the past, the licensing or the contract base there is in a very stable position. We had a number of extensions that we had to get through. And as of last year, had sort of completed the near-term ones of those. And so we continue to have a very solid base there to work from going forward.

And then as I've said, we've continued to work hard this year in expanding the base of single mode LTE and 4G licensees. And we now have, in addition to LG, Nokia, Pantech and Samsung, we've added Sony mobile and ZTE. And those agreements cover LTE broadly. So they cover both flavors or modes of LTE, including TDD as well as FTD.

And we've also continued to invest very heavily in our technology roadmap, which drives from there the IP portfolio that we license out to the industry. And as Paul and Steve have gone through, there's just a tremendous amount of innovation going on throughout the company that we think not only leverages a lot of the things that we've done historically but positions us extremely well going forward. Small cells is obviously a big opportunity that everybody's focused on. And to me as I look back on the history of Qualcomm, it feels very much like the transition from analog to digital, where there was a need for more capacity on voice and we're facing many of the same issues around data. Solutions will obviously be much different. But we're the company that's best positioned to capitalize and move forward off of those opportunities.

You've obviously heard there's been quite a bit of stuff around the press and elsewhere about essential patents and the value of essential patents, and obviously a lot of disputes going on within the industry, which are pretty common and will ultimately get resolved. And we feel that we're in a much different position than and the folks that are fighting those battles given our historical position, the agreements that we have in place and really the value of the technology that we've brought to the industry. Yes, we're continuing to invest very heavily in evolution of 3G and 4G. And our portfolio there is very deep and very strong. And it includes not only essential patents, but it includes very valuable nonessential patents that really need to be used to implement effectively those technologies. And although there's a tremendous amount of innovation and new technology going into the devices, we fundamentally believe that one of, if not the primary value of driver to device is the 3G/4G technology.

Despite that, we're also innovating in a multitude of areas. And I think as I said, Paul and Steve have covered a number of these. But just to highlight a few, one area that we've been very active and I think have a significantly increased position is in the video codec H.265. Although we had a position into 264, we do believe in the next couple of years, people are going to move pretty quickly to H.265 and we've been one of the leading contributors to that technology.

Also there's been some discussion today about the evolution of Wi-Fi in 802.11ac. That's another place where we expect about 3x gains in data rates, and we were leading and continue to be a leading driver of that technology as well. And then there's a number of other areas, including displays, including other multimedia technologies, gesture technologies that allow you to control the device and the user experience without necessarily touching the screen. So there's a bunch of different ways that we're kind of expanding our footprint of technology and IP that applies to the device that's beyond sort of where people have seen us in the past, most strong 3G and 4G. And we're going to continue to make those investments going forward.

So I'll talk a little bit about China. China continues to be a really big opportunity for Qualcomm and the rest of the industry. As I said, we continue to see strong growth in the base of licensees, which is a good thing. We had some concerns when the market started to first develop whether we were going to get companies -- whether it's going to be difficult to get some of the mid and smaller companies to sign license agreements and pay royalties. And generally, that has gone very well for us and we continue to expand the number of licensees. As Paul mentioned, the 3G penetration is still, relatively speaking, on the low side in China, so quite a large opportunity there for us going forward, and we continue to see a lot of growth in smartphones. And the operator competition across Unicom and Mobile and Telecom has really done a lot t drive that in the last year, 1.5 years and we expect that will continue. Sino MR is a public source that I think reported last quarter more than 200 models of new smartphones were launched in China. So just a tremendous amount of activity there that will serve us well.

We've talked a bit in the past about TD-SCDMA. I think as many of you know, we've had some challenges within China given the way that the technology has been positioned and some of the political sensitivities there, with getting compliance with some of the companies in China on TD-SCDMA. And I expect that's going to continue to be a challenge going forward. We're going to actively work that. We're also working on other strategies too that will I think will help capture more of the volume in the Chinese market, whether it's 2G or TD-SCDMA today. One of those is it's pretty widely expected that there will be large-scale LTE/TDD trials in China by China Mobile starting next year. And we don't expect to have the same types of issues around LTE as we have in TD-SCDMA. So that's an opportunity for us. Also, we're driving very hard. And I think our plans are aligned with China Mobile, at least at the higher end parts of their portfolio where people want roaming outside of China, driving multimode that have UMTS with TD-SCDMA. And of course, those we would collect royalties on as well. So the number of strategies underway to continue to grow the revenue from China.

I think this is a slide you've probably seen us used in the past, really just a way to illustrate the amount of growth that is left in the long runway we have for growth across the industry just in sort of the core areas. Paul mentioned a little bit about some of the analysis around connection rates that they actually may be a bit lower than this even. But even assuming the Wireless Intelligence report penetration rates, we still have a long runway of growth even in developed regions where 3G as of last year was only about 62% penetration. And obviously, if you look at the emerging regions, an even larger growth story in terms of the penetration levels, and as more and more devices come down tier as we've seen in places like China and India and also Latin America. We're going to continue to see that shift of subscriber base go from 2G to 3G and drive growth in those regions.

I think there's been some concern. I read about that -- are we getting saturated on the smartphone front? And I think some of the trends that have already been covered here today, I think emphasize that, that's not the case. And if you look at some of the available public projections, we're still looking at a growing market and a growing percentage of those units transitioning to smartphones at various tiers. And even recent reports out of the U.S., I think last quarter, Verizon said something like 79% of their postpaid sales were smartphones. And AT&T is projecting about 90% of their postpaid base to have smartphones by about 2015. So continuing to see strong growth over the coming years in the smartphone area.

Okay, so a little bit about ASPs. I'm going to focus first on handset trends, and I'll talk a little bit about what we've seen in fiscal 2012 and then a bit about what we expect to see going forward. Obviously, we saw a nice uptick in ASP this year as I talked about at the beginning, and our guidance for the year is slightly up for fiscal '13. So that's despite that if you look at the volume projections that we have, we are expecting an increasing mix to emerging regions going forward from a volume perspective. And so many have asked, "Well then, why aren't you going to expect more decline in ASP?" And I think as Bill will cover in his presentation in a bit, longer term, I do believe we will see kind of the low-single-digit declines that we've talked about as more and more volume moves to the emerging regions. But a lot of that has been offset currently by some favorable trends moving in the other direction. So if you take the developed regions for instance, some great things going on there. I mean, as we expected, we continued to see smartphones kind of come down tier and continue to pull people over from feature phones to smartphones. But within those tiers, what we've been observing is there's relative stability. So in other words, we're not seeing, as phones come down into the mid and low tiers, that affecting or pulling down the price of the high tier. In fact, we've actually seen just the opposite. With increasing functionality and capability in the devices, we're actually seeing an upward tick on ASPs in the highest tier. And that's something actually I think we believe will continue going into next year as well.

So one of the fears that people had again in the developed region was when you started to see devices come down tier, is that going to cannibalize the high-tier volume. And we haven't seen that happen either, and we don't expect that to happen going forward into '13. So I think we feel like the ASP situation looks pretty good, pretty stable going forward into '13. When I shift over to emerging regions, a couple points I want to emphasize here. One is that, again, we've seen a strong shift of smartphones moving down tier, which was very much needed in order to drive the volume and pull people over from feature phones. So I think one thing that people need to keep in mind is when you think about the emerging regions, it's not just an ASP story. Remember that the Licensing business is driven off of total reported device sales, which is a combination of unit growth and ASP. So as you start seeing ASPs come down tier in the emerging regions, we expect that to pull through really nice volume growth. So the overall TRDS from those regions is going to grow nicely.

The other thing I think is important to remember is the delta or the difference between even the lowest-end smartphone today and the low-end kind of 3G feature phone is still quite significant. So when people move over from a feature phone to a smartphone, it provides a nice uplift in ASP. And so that's why we've been saying for the last couple of years, and I think we expect it to continue, that within the emerging regions, the overall ASP will continue to trend up over time. So again, I think very positive trends there as well.

So again, I think some of this has already been covered in earlier presentations. But I think we had hoped in the prior couple of years to see more growth out of the connected devices, which we kind of have referred to as incremental to the core handset base. And I think some of the pieces are now starting to fall into place that we hope will really start to drive more accelerated growth. And probably one of the bigger things is, we see movement now out of the operators with more flexible data plans, and Paul covered that in some detail. And we really believe that those are the types of breakthroughs that I think you're going to -- combined with the fact that the cost to add 3G or 4G to these devices is continuing to come down. So the economics are really lining up in a more favorable way.

As we look ahead, we've started to see people already put 3G/4G in the gaming devices. Sony did it with the Vita last year. We recently saw Samsung announce the launch of the GALAXY camera, which they're going to probably sell through the operator channel, will be connected. So I think you're starting to see more of these new device categories come online, and we hope to see an acceleration of that. And certainly, third-party data suggests that we're going to see some pretty meaningful growth over the next few years. On top of that, there are some other good trends that are moving the needle on things like Telematics and M2M. Some of the solutions out there where 2G has been strong historically, I think the price points on 3G in particular coming down to really be able to drive the transition there, coupled with the fact that operators are starting to want to move off of their 2G networks and really push people away from those network, so they can shut them down and refarm the spectrum. So hopefully some of those trends will carry through and help drive some of these new segments as well.

So a couple years ago, I had gone through a little bit about some of the factors that drive the implied royalty rate. And also how we have licensed and how our licensing program might apply to some of these new connected device areas given how the technology maybe implemented. And the way that, that plays out down the road has an impact both on ASP, which is not necessarily reflective of what's happening in the handset segment. But that's all -- when we give you the number, it's all rolled in.

And so I want to make sure, folks, this is just kind of a refresher, understand sort of the different ways that this could play out. So if you take tablets and embedded-wan laptops, we had put in place a royalty capping program a number of years back to try to help kind of do our part to promote adoption of 3G into those device categories. And so what happens is if -- and those caps are at a lower level than what kind of we are general caps that are through the program. And so if the technology is implemented by somebody who sells a complete device, they will report to us in the royalty reports the selling price of the tablet, for instance. But we're not collecting the royalty in that case on the full selling price of the tablet in most cases, because we've set the cap at a lower level. From a royalty perspective, whether it gets implemented that way or gets implemented through a module, we're roughly collecting similar a amount. But from an implied rate perspective, what rolls through the TRDS that you folks used to calculate the rate will be that tablet's selling price. But we will only be getting the royalty on, basically, think of it as a piece of that price. So that has -- that will put downward pressure on the implied rate, as more of those devices come into the market and more of them hit the caps.

On the flip side, we have situations where we do allow module suppliers to pay the royalty when they sell the module. But in most cases, when they're going into a larger device, we generally have minimum royalties that apply. So in that case, the module royalty will get reported to us. But also the selling price of the module itself is what will roll through the royalty reports. And so that will then cause -- basically it will look like to you a royalty that is higher on the selling price of that device than if it had come through as a complete tablet. So depending on how some of the new connected segments grow and how the technology is implemented and who's supplying it, really it could have some effect over time on moving the implied rate. That really is independent of any changes to our existing deals.

The other thing I think as I talked about, a good trend that we're seeing is we're seeing increasing ASPs at the high tier. And so I think it's certainly possible going forward that we'll have a higher percentage devices or the TRDS revenue that are subject to caps. And again, that's good because those tend to be expensive products that drive ASP up but can have an impact on the implied rate as well.

I think we did get some questions on the call about implied rate, sort of what we expect to see going forward. We ended last year, fiscal '12, at about 3.38%. And although we've really cautioned everyone to be careful about relying too heavily on that for all the reasons I just explained. As we look forward today based on our guidance, I think we're roughly expecting the implied rate for fiscal '13 to sort of be in line with where we ended fiscal '12. Although if the market grows faster than we expect, given some of the fixed components in the royalty revenue such as the license fees and infrastructure that tends to grow a bit slower, that could put some downward pressure. And then as I said, if tablets or other devices grow at a quicker pace than we expect that are subject to caps, that could put some pressure on that as well. But roughly speaking, I think we sort of feel like we're going to stay in line.

So we talked a lot about -- earlier about the small cell opportunity. And so I won't spend a whole lot of time on that other than to say it's a tremendous opportunity across the company. It's obviously a place where we feel that we have the ability to lead. It's going to be an opportunity for the chip business. It's also going to be an interesting growth opportunity for the Licensing business as well. And so that's something that I think will start to come in to the revenue stream as that develops.

Paul talked a little bit about displays. So our licensing program historically has really been focused around 3G/4G products. For several years, we've been investing in various technologies that we believe given the strength we have and the expertise we have around the company in the licensing area, that we can leverage those skills to go into new technology segments and license there as well. A couple of them, one is our MEMS-based display technologies. And as we've said recently, we've sort of revisited the business plan there. We're going to shift our next-gen Mirasol display technology more to a licensing partner model. We are going to continue to commercialize the current generation products. We've kind of down selected to a smaller set of those products, but we're going to aggressively go into the market and continue to try to prove out what we believe very strongly in is an always on display experience. And we think the technology we would have is very differentiated, but we're going to look to do more of a licensing play going forward. For that reason, I do expect that we will have a decrease, year-over-year decrease in sort of the spend in QMT. And we'll continue to evaluate some different alternatives around the fab facility that we have in Taiwan.

The other area I'll just highlight quickly is wireless charging. There's a couple areas that we've been very active in wireless charging. One is around consumer electronic devices, and we've continued to invest in that area. We believe it's an important technology as we think about the suite of things that can help everybody continue to have longer battery life and better user experiences with their devices. We're one of the founding members of the A4WP, Alliance for Wireless Power, along with Samsung, and we're going to continue to try to drive that technology. And that will be primarily, at least, in the initial stages a licensing play as well.

And then on the wireless charging for electric vehicles, I think something Paul might have touched on briefly last year, we're continuing to invest in that opportunity. We believe that electric vehicles are going to be an important growth driver in the auto industry going forward. And then as they roll out, that wireless charging is a natural fit. We acquired a smaller company that was a spin-out of the University of Auckland last year called Halo, and really helped leapfrog our position. And our technology was actually selected to be part of a trial, multi-year trial in London that's starting in 2013. So that one's out a bit. But you'll notice that we're continuing to invest in some new technology vectors that can drive future growth for the Licensing business.

So let me just end with -- we continue to believe that we're tremendously well positioned to capitalize on the great trends across the industry. We're continuing to add licensees to the licensing base. We see all these great trends that are going to help drive growth in ASPs and really just really excited about the opportunity ahead. Thanks.

[Presentation]

Unknown Executive

Please welcome Executive Vice President and Chief Financial Officer, Bill Keitel.

William E. Keitel

Good afternoon, everybody. I'm going to do a very brief recap on fiscal 2012, spend most of the time going over guidance points, adding a few extra guidance points for fiscal '13 and finish up with a little perspective on capital allocation.

So I assume most everybody has seen the results, but just in case somebody hasn't and good news deserves to be said twice. So for 2012, a number of new records, 28% growth on revenues, 17% growth on non-GAAP operating income and 16% growth on the non-GAAP EPS. GAAP EPS was substantially higher growth primarily due to the gain we realized on the sale of the FLO spectrum.

So a good year for 2012, and to put that in a little perspective, what I did was looked at the S&P 500, the nonfinancial companies in the S&P 500, and put in perspective a couple key financial indicators as to where we would rank among that group of companies. Revenue and earnings growth, the growth rates we have for fiscal '12, there was only 1% of that group of companies that had a higher rate of growth than what we demonstrated. And putting that in a 2-year perspective, still only a 1%. Operating margin, operating cash flow, we're well into the 90 percentile. And very, very importantly, return on invested capital 2-year ranking, only 5% of the non-financial S&P 500 had a higher return on invested capital in Qualcomm. So it's always good to have strong revenue growth and strong earnings growth, but delivering it with a strong return on invested capital is what I think really drives value for the shareholder.

Okay. Let's turn to guidance. Start off with worldwide GDP estimate. I think everybody's aware we found some good correlations over the year between total mobile devices that are sold into the world market and the correlation between world GDP. For 2013, we aligned with consensus economists, except in the case of, we thought they were a little aggressive in a couple of areas. And I think we've all seen the consensus economists trying to keep pace with the -- what's actually happened in the world economy. And we've seen somewhat of a steady decline in consensus for 2013. Hence, it caused us to be maybe a little more critical than otherwise when we developed our plan.

So our concern is really more in the developed world. That concern amounts to about 0.4 point of GDP growth. So the midpoint of our estimate is based on a 3% world GDP growth. Consensus economists, last I looked, were at 3.4.

Paul mentioned we also -- we've been considering the fiscal cliff as so many others are. Consensus economists are not baking it in. It's really a risk. We've done some preliminary work. If we do go over the cliff we want to be as prepared as we can. But I don't think it's going to have as much of an impact on Qualcomm as what it might have on some other companies.

And if you go back to 2009, I don't know if people remember this. But in 2009, the growth of total 3G units over 2008 was an 11% growth. So as dire of a situation as we all went through in 2009, the consumer appetite and the transition from 2G to 3G continued at a strong pace.

So leveraging off that baseline economic forecast, we updated our estimates for 2012. It was already a reiteration of what we have previously forecasted, although we changed the regional mix a little bit. And we're seeing good strength in Latin America and in the China, India segment that's identified on the slide in front of you, primarily China. So both Latin America and China, we're seeing good upside and that largely is offset. In North America, we're seeing the retention rate of consumers holding on to their devices just a little bit longer, bringing down that growth for 2012 in North America. Still a good strong range of growth there, 11% to 17% on devices. And as Derek said, that's with a bit stronger ASP. So TRDS is a little bit stronger than that.

Then for 2013, last week, we introduced guidance of about a 10% to 18% growth, a midpoint of about 14%. And we're sharing here today our regional breakout of those estimates. As you can see, the emerging market, we expect obviously to grow at a stronger pace than developed. I'll give you a little more color here momentarily on the driver in the developed. But in the emerging economies, continued, really very optimistic and pleased with the kind of growth we've been seeing and expect to see. Latin America, China, particularly India going strong and then a number of other emerging markets as well.

Developed. Still continuing strong, tends to have a much higher ASP than the emerging, so still very important and rich market for Qualcomm.

So what's the factors driving the total units? I mean other than the global economy, what we tend to then focus in on is the replacement rate. Worldwide, we think calendar '12 is going to be about a 33% replacement rate. So about worldwide consumers with a 3G/4G device are changing out their device. Typically, it's an upgrade when they change out, change it out about every 3 years. And then you can see that our estimate for calendar '13 is that will come down to about 30%.

Then over on the right, you can see that's driven largely by the developed markets, where carriers are having some success hanging on to a subscriber a bit longer before they re-up for a new device.

Whereas the emerging markets, with the emergence of cell phones, it's, in many places, a primary access to the Internet. We're seeing some uptick in the replacement rate.

Spend just a little bit of time on the 3G/4G channel inventory and putting it kind of here in a big picture perspective, but I'll drop down and give some specifics on the near-term quarterly outlook. But first from a bigger perspective, I think many people recall for many years up through 2011, we pretty consistently saw channel inventory. And again, we measure it from the time we ship the chipset to the time a consumer buys the device.

And that channel, we saw averaging in a 15- to 20-week band of channel inventory. So that's a combination of the OEM, carrier, retail -- retailer.

Now that mark was feature phones-centric, and it was largely the distribution channel was through the operator, very limited turnkey volume. Today, we think that range is more operating in a 13- to 18-week band. And the transition is such that we're -- we, the industry combined, are driving more efficiency into that channel. You're going more to an open market versus a carrier-centric market. And Qualcomm has been shortening our delivery interval, and I think others are shortening theirs as well.

But looking out into the future, looking out next 3 to 5 years, we expect that channel is going to shrink, and it's going to increasingly become more like a PC-type channel. PCs, I think you probably realize, average like a 10- to 12-week type of band. I think it's going to take a few years before we're into that kind of band, but I expect it to be transitioning in that direction.

Now that's a little bit broader picture. Near term, we think we ended September, channel inventory came down pretty much in line with our estimates, got to a pretty low level about a 13-week equivalent. And at the midpoint of our estimates here going into the December quarter is that we'll see a couple of week increase in that channel. That's our midpoint estimate. There is obviously going to be some deviation around that in all likelihood. But our midpoint -- midpoint of our guidance is based on a couple week increase in that channel. And that's pretty consistent with what we've seen in a number of prior years.

Okay. Turning to the ASP of the wholesale device, key driver of our royalty revenues. Derek gave a good perspective there. I'll share a little bit more here. Looking back, all the way back to '96, '97, what I have in front of you is a learning curve of what we've seen with ASPs and really 4 periods of transition that was -- proved to be a major driver in that ASP. The early part of this history here was a voice-centric device. Very fast learning curve as every doubling in volume was driving in the range of a 15% decrease in cost. Then we got into the voice data transition. And that brought more functionality into the device, and the learning curve leveled off at about a 96% rate. So for every doubling in volume, we have about a 4% decrease in the wholesale price.

And then we got into a period of enhanced data, DO-Rev. A, HSPA+, capability is driving much more capability of data consumers, take rate of data grew significantly. And you could see that learning curve ebbed even more as more and more functionality was coming into the device.

And now I think we're into what I would call the smartphone phase. And the push for better display capabilities, memory, processor, the improving camera functionality has been the major driver on what has been pleasantly an actual rise in the ASP that we've seen here over the last couple of years.

Then another perspective to it, kind of a high level of how we look at it as to whether the ASP will go up or go down. And you've got multiple forces at hand, some driving the ASP up, others driving it down. And I've depicted there a breakout between developed world ASP and emerging world ASP.

First, on those 2 points, you can see in the developed world, there has been an uptick in recent years. And that again is that smartphone phenomena we're seeing. But I think you've heard us say, and Derek elaborated on it, where in the emerging markets as a consumer, a mobile consumer is going from a feature phone to as smartphone, the functionality, the capability of that phone and hence the cost of that phone has been driving an upward trajectory of the average selling price in the emerging markets.

So what's the key drivers? What's driving it up is the capabilities within a smartphone, the feature set within a smartphone. Smartphone penetration is going nicely. We still got a good amount of roadway ahead. But nonetheless, it has increased nicely. And then feature phone is in decline, lower-priced device being supplanted by that smartphone.

On the other hand, competition is a continual driver to bring that cost down. Every operator, every OEM, every consumer, if they can pay a few dollars less for a device and get the same functionality, they're going to do it, so the competition continues to be a key driver.

And then the other downward pressure is that emerging regions are going faster on a unit basis than developed regions. Having said that, the drag on total worldwide average ASP is less than, I think, what many would otherwise expect because that emerging market ASP has been on the rise.

So that kind of covers the handsets. Those are the things that we analyze and debate before we agree on our forecast for handset ASPs. And then for non-handsets, the big driver here for 2012, 2013 has been a mix shift from dongles to tablets. And that's been an upward pressure on the non-handset average ASP.

Qualcomm continues, in its long-term plan, our 5-year plan, we continue to use, over a 5-year period, an average of a single-digit decline in the average ASP. There's going to be fluctuations year-to-year. We think it's a very reasonable forecast looking out over 5 years to have that forecast. We will see fluctuations. Certainly, we're going to see them on a quarterly basis and, to some degree, we'll see them on an annual as well. But we still think that's a good baseline forecast to be working off of.

So turning to 2013. For the full year, we're looking for revenue increase, midpoint estimate to grow about 23%. On the R&D and SG&A combined, we're looking for an increase of a midpoint of 19%. That will be much more R&D than SG&A. R&D within that, we expect to grow much faster than SG&A. The composite of the 2 brings it to a midpoint estimate of about 19%. Operating income in the range of 14% to 21%, and earnings per share in the range of 11% to 16%.

On that operating income, because the Licensing business, we think, for fiscal '13 is going to grow double digit but at a slower double-digit rate than what the chip will grow at, is the single driver as to why our operating income is not growing at the same rate as revenues. There's little changes in, as you'll see, in our segment margins. But the driver is the fact that we think the chipset business, which obviously operates in a lower operating margin, is going to grow much faster than the Licensing business, albeit both of them grow double digit.

Then for the first quarter, obviously, the results for fiscal '12 were very pleasing. But I think among the exec team, what we're most excited about is the position we think it's put us in here for fiscal '13 and beyond. And I think that's showing through in our fiscal '13 guidance.

Revenues, midpoint estimate, we're looking at about a 25% increase in revenue. And then on the non-GAAP EPS, a range of 11% to 20%.

The -- obviously, in the first quarter, because of the way we report licenses in chips, there's a 1-quarter lag on the licensing revenue. We are expecting a very significant increase in the rate of new 3G/4G devices that ship into the market. We're looking for about a 25% sequential increase, similar to what we saw last year at this time. And that is going to be -- that's a strong lever point for the QCT business in the first fiscal quarter and should equally be a strong lever for the licensing business in our second fiscal quarter of 2013.

So turning a little bit to capital allocation. If you look at our cash flow, and this is kind of a unique measure of cash flow, it's cash flow proceeds before R&D, so cash flow from operations before R&D. Over the last 10 years, Qualcomm has generated approximately $70 billion total cash flow. And you can see, on the left-hand side of the slide, about $10 billion of it is from stock and debt, but the great majority is from operations.

On the right-hand side, you can see how that cash has been deployed. And the biggest element on that slide is R&D, over that 10-year period, $20 billion investment in R&D. The second one is $19 billion returned to stockholders, both dividends and stock repurchases.

And then of course, we have purchases of marketable securities. I think the understanding of this is pretty widespread today relative to, say, just a year or 2 ago. And I think that understanding is much stronger in Washington too.

Our corporate tax system in the U.S. creates this incentive, the economics for Qualcomm, to hold on to that amount of cash and just be patient looking for opportunities deployed in the business outside of the U.S. So hopefully, we'll see some change in that corporate taxation here over the next couple of years so that we can be a little more efficient, both for the benefit of the U.S. and for our stockholders.

Acquisitions and then capital spending, you can see make up the smaller amounts there.

So a little bit deeper dive into the almost $20 billion that we've returned to our stockholders since we started a cash dividend and stock repurchases back in 2003. Almost $11 billion in stock repurchases, almost $19 billion in tax -- in dividends paid. And you can see that over that 10-year period, we increased the cash dividend every year. Whereas stock repurchases, we tend to be more opportunistic.

The goal of the stock repurchase for Qualcomm is to drive a good return for the stockholder. It doesn't have anything to do with trying to offset dilution from employee equity. That money, we can give in a form of cash dividend. And if we buy back stock with it, our mission is to drive a good return and, certainly, a return that exceeds our cost to capital.

Over that 10-year period of stock repurchases, the IRR on those stock repurchases today stands at 12%. So we are accomplishing the goal of exceeding our cost to capital.

Now on stock repurchases. We're announcing today that we now have a new program in addition to our opportunistic program. So again, the opportunistic program, it's targeted at what we think are advantageous price levels in consideration of how much excess domestic cash we have. And again, our long-term performance target, the goal of those stock buybacks is to equal or exceed Qualcomm's cost of capital.

Now the new program that we're announcing today, we have it in place today. The program will ramp, over time, as more RSUs are granted. We have a new program that we're hoping will offset the issuance, RSU issuance, for employee equity. And our single goal for that program, which we think we can achieve, is in the range of a 5% to 10% discount off of the prices which are issued to employees.

So 2 programs, 2 different goals, this new RSU offset program will be ramping over the next periods as we grant RSUs. And so it will take some time to kick in, but we feel pretty good that we're going to largely offset the RSU issuance and achieve it at a range of a 5% to 10% discount.

Okay. Some additional metrics that give you maybe a deeper understanding of how we model the business and if you have a deeper understanding of how we model the business. I assume that helps you then to critique it and decide your own model. QCT operating margin, we're looking for a midpoint for the year of about 19.5%. But at this point, I'd say it's reasonable to assume there is about a 1% either side that we could realize through the full year for that. Same for QTL, about a 1% plus or minus, a midpoint of about 86.5% operating margin for QTL. QCT revenue per MSM, we are looking at a significant increase in average revenue per MSM over what we experienced for 2011. And -- but going into here fiscal Q1, we are expecting a sequential increase in average revenue per MSM over fiscal Q4 of 2012.

We did adjust operating expenses in our segment reporting. If you recall, we implemented a new entity within Qualcomm, Qualcomm Technologies, Inc., and the key part of that new entity was that all the patents are now owned by Qualcomm Inc. With the ownership of the patents vested in Qualcomm Inc., the cost of filing, maintaining those patents, is equally now totally in Qualcomm Inc.

So that results in about $15 million of operating expenses that -- it's an increase on the QTL segment for fiscal '13 and a decrease on the QCT segment.

Then for combined R&D and SG&A, a midpoint estimate of about 19% year-over-year growth. But again, R&D may be the major driver. I think we're going to see good leverage, operating leverage on our SG&A expenses as we have for the last couple of years.

Pre-revenue R&D, 27%, as Paul mentioned, last year, the number was about 30% and the major change is that here in fiscal '13, the quad-core R&D investment, we expect to be driving first revenues.

Tax rate both for the Q1 and fiscal year in the range of 18% to 19%. So hopefully, those additional data points are helpful to you to understand the baseline guidance that we have shared with you.

Just one more perspective on our cash and marketable securities. Onshore, as of the end of fiscal 2012, we had just under $10 billion of onshore cash. So we're in a position where our 10b5-1 can be executing. And in fact, with last week's report, we did indicate that, that 10b5-1 was executing. There's about $17 billion hold by our offshore entities.

And so when it comes to capital allocation, you really have to look at Qualcomm as 2 entities. There's domestic entity and the offshore entity. And the reason is that, that offshore entity, for its cash to be used in the U.S., there's a big penalty to be paid. So capital allocation really starts with looking at the 2 entities separately. And often, that drives our stock buyback and dividend decisions.

So the onshore business, very high marginal tax rate, cash flow primarily driven by QTL. Offshore, very low marginal tax rate, cash driven by the -- primarily by the QCT business.

So okay, I'm going to close up with a little more perspective on the data point that Paul showed. And he spoke about in his presentation that in our long-term planning, we continue to have a double-digit revenue and earnings per share CAGR over the next 5 years. That's our own internal plans that the management team is signed up to.

A little perspective, 2 points I want to share on that. We started sharing this internal goal, I think it was 3 years ago. We're very pleased to see that in each of those last couple of years, we exceeded the first year of that 5-year plan. And yet although the first year exceeded when we reset that plan, we still continued to see the opportunity ahead that we can execute to, to deliver a double-digit revenue and EPS CAGR. So that's number one.

Number two, when I look at our long-term planning, for some time now, I've been measuring how we end up against the third year of the 5-year plan. I picked the third year because I can get more history more readily. And over the last 7 years, to the revenue and operating income target, the 7-year history of a 5-year plan that we set each year, against that third year, revenue alone, we are at 0 average deviation. There were some minuses or pluses. Pluses were about 4 years of plus, there are 3 years of minus. They netted out, 0 deviation to the 3-year plan, to the 3-year forecast.

If we take the absolute, it's about a 14% band. So always want to do better in that planning. But having said that, I think that's a pretty good indicator that -- and by the way, the operating income is pretty much in that same band, low single-digit when you take a simple average and about a 14% plus/minus when you look at the absolute.

So my point is there that I think we have a good understanding of our business, the vision has been pretty constant, the strategy -- we tweak it a little bit every year, but nonetheless it's still relatively constant. It's been executing well. I think it's an enviable business model. And the result of that is it -- looking back over 7 years, it has driven, I think, a good degree of credibility into our long year -- long-term plan. So hopefully, we can keep that going.

So thank you very much. I think we now have a video and then go to Q&A.

[Presentation]

Question-and-Answer Session

Unknown Executive

At this time, we will do a question-and-answer session.

Paul E. Jacobs

Yes?

Mark McKechnie - Evercore Partners Inc., Research Division

It's Mark McKechnie here from Evercore Partners. I appreciate the Analyst Day as usual. So my question is it's really about the chip business and with a focus on the margins. I know that, that would come up given where you guided here. But given your competitive position and the 2-year lead that Steve talked about, I wanted to understand what you think the long-term margin profile may be? And maybe for Bill, if you could give me a sense of is the pressure coming from more OpEx ahead of the new programs, for instance on Win RT, or of gross margins and the mix between gross margins and op margins?

William E. Keitel

Okay. On the pressure, I think it's more on the gross margin. And it's a combination of us being aggressive to drive our position and our lead, number one. But number two, the competition comes pretty quickly behind, at least on the price points. So we're still in a position of having to be careful on our pricing that we not give more than is fair, given the value we're delivering. But I think it's more on the gross margin side.

Mark McKechnie - Evercore Partners Inc., Research Division

And long-term, Bill?

William E. Keitel

Long term? We stand by our prior statements that in the outer years of our 5-year plan, we think we can deliver an improved operating margin, both QCT and QTL.

T. Michael Walkley - Canaccord Genuity, Research Division

Mike Walkley with Canaccord Genuity. A question for you, Derek, just with the discussion today in some of your longer-term growth drivers such as small cells and M2M, how should we think about the royalty and model for these opportunities? I mean, is M2M paid on the module basis? And would small cell actually be a royalty right on the small cell ASP?

Derek K. Aberle

So on the M2M, we have made kind of some categorical exceptions where we generally have minimum royalties on the module. But, like a smart meter for instance, we've tended to either reduce those minimums or charge a lower amount, something closer maybe to the module-based royalty. But they're pretty narrowly defined categories of M2M. When you get in more to the consumer electronics space, we haven't gone that route. And we've used these lower caps, which are higher than what you would pay on a module. Small cell, I think, again, I think there'll be a mix of different -- depending on how the products evolve. I think it will likely be a percentage-based model of the cell.

Paul E. Jacobs

If you think about small cell, I mean, I the opportunity is for a small cell to be embedded into other devices and also other functionality to be embedded into the small cell as well. So there's -- it's going to be a wide range of products in which that technology gets deployed.

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

It's Rod Hall with JPMorgan. I just wanted to ask on China. Maybe, Steve, if you could talk a little bit more, and Derek you as well, about the TD LTE opportunity at China Mobile, the timing of that? It sounds like it's a second half of next year sort of a story. But if you could give some idea when you expect to see that potentially coming through? And then on China as well, just as we talk about it, can you talk about this idea of royalty leakage in China as that opportunity develops even before then? Maybe Don can address that and Steve. There's been people talking about, for instance MediaTek chips being shipped and then people not turning on the 3G modem and then -- or reporting it that way. Anyway, not paying royalties of use. If you can just give us an update on how you're controlling the leakage of royalties would be helpful.

Steven M. Mollenkopf

So why don't I take the first part of that, on the timing. Timing in China is always difficult to guess. We do know that there is some significant deployment of base stations that are capable of supporting a timing like you mentioned. We don't know exactly when it will turn on. For us, our strategy has been to make it very easy for people to migrate technologies. So for example, all of our LTE and actually and more and more of our chipsets include TD LTE capability in there as well. So when it does turn on, I think we're going to be ready to move forward. We are preparing for timing not unlike what you said, but I think it's really outside of our control obviously.

Derek K. Aberle

I can take the royalty leakage question. So China has obviously always come from a place where there's a fair amount of gray market activity around 2G. We haven't seen as much of that in 3G, I think for a variety of reasons. But we have a very kind of robust and active program with a lot of different vectoring to make sure we're capturing as much. Can I say that there's no leakage? No, I'm sure there's some, relatively small amount, I hope, of leakage there. But what we do -- I mean, we audit very extensively. We get royalty reports in from our licensees every quarter. We do market-based research. We actually do product buys very frequently in market to look at what chips are in the devices and figure out who manufactured it and trace that back to the manufacturing base and confirm that they're licensed. You might recall we also announced a few years ago that we have an agreement with MediaTek, under which they've agreed to sell only to our licensees. And we have certain mechanisms in that agreement that also help us with the MediaTek volume. We have heard the rumor of this subsequent enablement of 3G. And we've done a lot of market-based checking and haven't found anything there. So...

Timothy Long - BMO Capital Markets U.S.

It's Tim Long at BMO. Bill, one clarification for you and then one for Steve. Your comments about the TRDS in the December quarter similar to last year, up 25%, also coming off a much better sequential growth rate in September. So I'm just curious what gives you the confidence? Are you concerned maybe that if that's right, it's some kind of channel build? Or if you could just give us a little view on your clarity there. And then secondly for Steve, looking at the MSM ASP increase this past year and what you're expecting for next year, is there any way you could break down for us how much of that is a pure ASP increase on the modem and how much of that is due to the increased content of app processors or connectivity or whatever else? If you could give us a sense of how much of the growth is increased in the TAM and how much is just a higher ASP on modems.

William E. Keitel

So on the 3G/4G units, the 25% sequential increase was units. If I said TRDS when I was speaking, that was an error. It was units. But with stability in ASPs, TRDS should be in that kind of range. The -- we've seen this now for a couple years where the December quarter of the calendar year, about 30% of a total year's volume ships in that quarter. And it's a major holiday effect, but a number of OEMs seem to be targeting new devices for that holiday season. So I think it's between the consumer, their interest in smartphones and getting a smartphone, giving a smartphone for the holiday season and then the new devices that OEMs bring behind that is what's been driving that 30% factor. So that's kind of our base line. Obviously, there's some inventory build in that. Our midpoint estimate is that there'll be about a 2-week build in inventory channel.

Steven M. Mollenkopf

And on the mix question, the -- if you look this year, I think we've reported we shipped -- exiting the year, we exited at about 1/3 of our shipments on a run rate basis are LTE enabled. And we really -- the ASP growth has really been positively impacted because of that. And we really do it in 2 ways. One is we sell a stand-alone modem, and the other is we sell a stand-alone -- - or we sell a modem along with a high-end AP. Both of those are accretive to the ASP. In terms of which mix, I don't believe we have that breakdown, but both of them are good programs to us with respect to ASP.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Just a couple questions. One -- oh, this is Simona Jankowski, Goldman Sachs. One is for Bill. When you talk about exiting the December quarter at about 15 weeks of inventory and then looking at next year's normal range at 11 to 16 would imply that you're going to be coming into the year with -- being at the high end of that range. Does that imply that we should be looking forward to a chipset decline in the March quarter then, as we burn through some of that inventory? And then for Steve, you talked about being #1 in a number of the major technology blocks, GPU, CPU, DSP and RF. Obviously connectivity is not up there yet. Is that a strategic priority for you? And what would it take to get there and when do you think you'll get there?

William E. Keitel

On the inventory channel, our estimate is going to be a little more similar to what we've seen here in 2012, where there wasn't a major decline in the channel in the March quarter. And where we saw the decline was June and September, where I think OEMs, retailers, et cetera, are looking to have their shelves ready with new devices and they bring down the old devices. So that's our base line estimate for 2013 as well. So not much of a decline in the channel in the March quarter.

Steven M. Mollenkopf

And on connectivity, depending on which technology you're talking to, I'm assuming you're referring to wireless LAN, not -- GPS, for example, do quite well. On wireless LAN, if you go back a year, I think we were nowhere. Today, we're vast majority of the products. I believe that it will follow the same trajectory as most every other technology where being integrated is really the key thing. So for us it is actually a strategic objective. As I mentioned in my remarks, the importance of having connectivity and having that connectivity work alongside the modem, the strategic insignificance of that will actually increase as these networks become more complicated. And we also, I think, have a very good story for our existing customers how we migrate them to 11ac. So we have some positive views on doing that. Today, I will give you a little -- a small perspective on this, which is our problem is actually not design-ins, our problem is actually fan out. How do we actually deal with the large number of design-ins that occurred really over this year because the strategy, I think, is quite good. So we're working very hard on doing that. It's clearly a strategic objective of ours, and we hope be able to add something to the list here pretty soon.

William E. Keitel

Simona, can I -- one other thing I want to say back on the inventory channel, as I explained, we're looking out over the next 3 to 5 years for that channel to wane down even further. For 2013, we're looking for that channel to be a little more efficient than it was in 2012. The pattern of the weeks is similar, but we're looking for that channel to be a little more efficient than otherwise. The other thing I just want to add too is I didn't say it in my presentation, I meant to say it, as this channel comes down, I think what we're seeing is we get whipsawed a bit more on the demand because we're becoming more and more of the inventory holder for much of the channel. The result of that shrinking channel, it's good for us. It's good for the industry as a whole. But on a quarterly basis, expect more deviation, our results versus our estimates. It's coming. We widened the estimates, the range of estimates that we gave for fiscal '13. But people should assume that, that's going to be somewhat of a trend. Over the next few years, there's more.

Brett Simpson - Arete Research Services LLP

It's Brett Simpson at Arete. I had a question for Paul actually on cellular attach rates and tablets, so clearly a big opportunity long term for Qualcomm. But if I take a look at some of the latest tablets like the iPad mini, the cellular option costs 40% more than the device. And it seemed that, that's freezing your opportunity long term. So what can -- is a strategy Qualcomm has to really drive down the cost to the consumer? And how do you really get this market firing up from an attach rate perspective?

Paul E. Jacobs

Yes. I think the operators see that as well. They're interested in driving up the attach rates. You see some of the pricing plans that I talked about that they're doing, but also looking at whether there's viable subsidy models there as well. And of course, we're going to try and drive that down as much as possible. The other thing, competition will take care of some of it too, because sometimes, people are trying to get a little bit extra margin for that step-up to the wireless LAN. So I think a combination of all those things together will drive it. But the thing that will really cause it to happen is mainstream consumers just getting used to the idea that, that device is always synchronized. And as Steve said, that it's always connected to the cloud and you're always uploading, downloading things. And I definitely have noticed it myself. I think that it will happen as more people live through this kind of experience, just it's a little bit early days right now.

Brett Simpson - Arete Research Services LLP

Maybe just a quick follow-up for Derek. So a year ago in New York, you presented the 5-year plan for nonmobile devices. I think the growth was 40% CAGR over the 5-year period. And today, you mentioned 20%. Can you perhaps just talk about the delta? Why are we seeing a different growth rate when you look at the '11 to '16 period versus the '10 to '15 period?

Derek K. Aberle

I think part of that is that we had a sort of a higher jumping off point growth from '10 to '11. But I think also, the growth itself, I think, is a little bit slower uptake than what we expected a couple of years ago. And hopefully the pieces, as Paul said, are falling into place now that with more flexible data plans, I think I agree that competition is going to drive that delta down. And we see that accelerate. But I do think some of the projections have gotten a little less aggressive than they were couple years ago.

Tal Liani - BofA Merrill Lynch, Research Division

Tal Liani from Bank of America. I have 3 questions. Maybe I'll start just with the 2 related ones. The first one is the -- there's a risk that, just a long-term risk that Samsung and Apple being such big customers will try to integrate more things in-house and maybe move away from your modem side? Or how do you mitigate the risk and what do you think about the risk? Second question is related and off related. You spoke about driving new geometries, and is it a 2013 phenomena? Are you going to -- after working so hard in 28 nanos, 2013, you're still going to try and drive to new geometries? Or are you going to to work on flavors or recipes of 28 nano? How do you view 2013 specifically?

Paul E. Jacobs

So on the Samsung and Apple question, I mean, it's very similar to things that we've experienced in the past where we had various companies doing in-house development of baseband. And the way that we won there and the way that we're going to win here is by continuing to drive the technology forward rapidly. And it's not dissimilar also on back in the days when we really had to get the operators to kind of leapfrog and drive technology out into the market. So there is a competitive dynamic there. The fact that there is a good roadmap of technology and strong demand for data, which increases the demand for the technology, means that we have a good roadmap there. And I think we'll continue to be able to drive technical leadership for quite some time into the future.

Steven M. Mollenkopf

And then on the technology roadmap for '13, you'll see us do both.We'll be migrating 2 different variants of 28 as well as moving to other nodes as well. As I've mentioned probably over the last several calls, we have a little bit more, I would say, pure VLSI operating expense right now because we're transitioning through nodes faster. So there's actually a little bit more overlap than you would have historically. That's because we're moving through faster. And you're going to see us have, in some cases, multiple nodes running at the same time. What happened this year actually did not cause us to think that we shouldn't be going to nodes faster. In fact, it said it validated our strategy and we just needed to sharpen the execution on how we get the initial ramps to work. So we're very much committed toward moving that forward in terms of how we push through the nodes.

Paul E. Jacobs

Yes, 8960 did just a wonderful job of getting design wins. And then when the supply was shorter, I mean, that -- it had a disproportionate impact. But it was clear that being on the leading edge definitely cause us design wins, so we definitely will live on that leading edge.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

It's Chris Caso from Susquehanna. Paul, you'd mentioned on the Windows RT market the cautious optimism. I wonder if you could revisit that a little bit. How much of that is Qualcomm's market position as opposed to the RT market itself? And what do you think needs to happen to really kind of get the RT market going? Obviously, there's a little bit of conflict there with Microsoft itself being in the market. Do you think that's having an effect on the uptake of the market overall?

Paul E. Jacobs

No. I mean, so people look at the number of RT devices out there and they say, "Why were there so few?" And that was actually a conscious decision by Microsoft because they wanted to manage their resources. We had very strong demand from other manufacturers and also to run on our devices. I mean, you're obviously making reference to the fact that we're not in the first Surface device. And that really came about because we just -- we didn't have the chip at the time that they were making the decision to launch. We hadn't shipped 8960 at that point, and so they couldn't really make a decision for us. I think and we feel very well positioned going forward. And I think right now, the market should probably -- it's like any new technology, starts off slow, and then it gains traction. And I think that will happen here. Key things are going to be more devices out there, more knowledge that there really is a big differentiator between the ARM-based and the Intel-based devices. And then just the app developers coming along and porting to a more touch-based, more apps that are able to be suspended and all of things that we're really looking for to get the good battery life and good performance. So it takes a little bit of time. Obviously Microsoft has gone out and done a lot of work, a lot of evangelism with app developers. We've done our part of the evangelism with app developers. I think we'll be in a very strong position because if you look at the kind of capabilities that the chipsets have that Steve showed earlier, I think we'll win more than our fair share of the Win RT market.

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

This is Anil Doradla from William Blair. Derek, I had a question on the audit process. Can you walk us through a little bit more in detail what Qualcomm does, especially in emerging countries like China? How do you actually get the audit process kicked in? I mean, do you have like hundreds of people walking the stores and taking inventory? So how does this thing work out? And over the last couple of years, what have been the results in terms of -- the results of your audit process? Has the -- have you gotten back to your customers as often? Or things have improved over the past couple of years?

Derek K. Aberle

So I'll try to give without killing you with detail. I'll try to just give you a high-level view of that. As I said, we kind of do this from multiple vectors. We have a team and people that looks at the reports that we get from our licensees every quarter. Also at the same time, they're doing market-based research, both here and in China, to try to see if things are missing. We have arrangements where -- we have agreements with chip suppliers, so we have some sense of where the chips are going and then matching up whether the product is getting reported to us. But then we actively go in, sometimes ourselves with our own team and other times with a third-party firm that we use to do the audits. And we spend multi-day trips in reviewing the books and records of the companies, matching that up with all the analysis we've done before we arrive there. We have consistently sort of increased the number of audits that we do every year as the number of companies reporting has increased. And there's been a pretty healthy increase in the number of licensees reporting royalties over the last 3 to 4 years. And we believe that, that's a good investment. I think -- actually, a view of success on the program is a decreasing amount of recoveries, right? Because that means people are complying on the front end. But that doesn't then mean that you can stop going back as frequently. So we have a method to the madness where we prioritize which companies we're going to audit each year, and it ranges from big to small. And obviously, quite a lot of focus being put on the front end with new licensees in China to make sure they understand the agreements, they understand the process and we get them going in the right direction. And we have recoveries very frequently. It's a chunk of the revenue that comes through. And from time to time, we even talk about it, causing some lumpiness in the revenue.

Matthew Hoffman - Cowen and Company, LLC, Research Division

Matt Hoffman with Cowen and Company for Paul. Wanted to drill down on your comments on interference management in small cells. Do you see managing that interference as a network software function? Or is it a type of feature that would be embedded in a Qualcomm-based product? And then whether Qualcomm's -- whether there's a Qualcomm invention in there somewhere, something that would become part of the standard?

Paul E. Jacobs

Yes. So it's obviously a combination of both. There is -- there are things that happened in the network. The cells have to talk to each other in some cases. But there's a lot of innovation that's actually gone into the techniques that go directly into the small cell as well. And so that, there are inventions there as well. I think I might have mentioned, we've been at this for a long time. We actually built the first, what I'd call, a small cell that was basically the size of a laptop probably in, what, 2000, was it? Something like that. And we thought -- it was kind of a femtocell model. "Okay, we're going to deploy these in enterprises and so forth." And we realized pretty quickly that you created this pretty significant interference problem. And we've basically been working on that issue for a decade or more actually, more now. And so we've built a pretty good intellectual property. And some of that, yes, goes into the standards and some of it is stuff that we make our things work better with. So there's a combination, some standards and some outside of standards.

Brian T. Modoff - Deutsche Bank AG, Research Division

Brian Modoff, Deutsche Bank. Paul, so can you -- you're talking about machine to machine for a while and small cell architectures, can you quantify how those affect your revenues over time? I mean, these are -- you've highlighted smartphones and the growth in where we're at in those markets. But what does this mean to you from a standpoint of growth over time? Steve, can you talk a little bit about TD-SCDMA in terms of your shipments this quarter commerically in phones in China? Are we talking about that? And then LTE competition, when do you expect to see other merchant vendors on the market with their products?

Paul E. Jacobs

So as I mentioned, when I first talked about the double-digit growth, we really have only put a relatively small amount of tablets, small cells and M2M in those models. So they are mostly upside at this point. Now, there's, I would say, internal discussion about how big, how fast these markets happen. I'm probably one that's more bullish that it will happen sooner. But I think we've been well served by being a bit cautious when we do our projections to say, "Okay, when will this exact market take off?" When it comes to small cells, I'm completely convinced that this is the way that the networks are going to get rolled out over the next -- in 5 years, that's just going to be the massive way that the data traffic gets handled. So that means a lot of small cells will have to get sold during that timeframe. But it will also probably be different in different geographies. And it's going to have a lot to do with who's got a good wired infrastructure to support it as well. And what we can do in places where -- in developing places where there's not such a good wired infrastructure, what we can do on the wireless side as well. Machine to machine, it's so different on different components. I talked we've all gotten some decent wins on smart grid. But still, those numbers are small relative to the numbers of smartphones. So then the question is, "Does it go into every lightbulb? Is that going to be a cellular connection?" Clearly not, but it's going to be some kind of connectivity. Health, I think, we're seeing the beginnings of mobile health. But when is it that everybody's wearing sensors on their body? And those things are numbering in the hundreds of millions. I think that's going to take some time. I kind of look at that as probably a 10-year sort of time frame for the health aspect of it. And then cars, cars are going to come soon, but that's not such a big market either relative to smartphone. So really it's a question of kind of the things that are embedded in the world around us that are going to generate the large volumes. And that's probably somewhere between the 5- and 10-year kind of time frames.

Steven M. Mollenkopf

And then on TD-SCDMA, we're still on track from last time we spoke about this on the call. Really end of the year, Chinese New Year, it's really where the first market window for us is there. And your question was on TD or on LTE?

Brian T. Modoff - Deutsche Bank AG, Research Division

LTE in regards t merchant competition.

Steven M. Mollenkopf

Yes. Merchant competition on LTE. We think we're a couple of generations ahead of other folks. We are -- if you go back a year or so, there were probably -- there was probably a couple of spot solutions, which I think we've been able to actually displace because we've been moving probably a little bit faster. You do hear rumors, but we haven't seen as much today. But it will be coming, I'm sure. The -- our strategy, of course, is when people have their first generation, we'll have our third generation. The third-generation, in many cases, is picking up the new feature set or is more highly integrated in terms of footprint or power or what have you. So we think that, that -- that's a good place to be sitting right now.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Dale Pfau from Cantor Fitzgerald. And Paul, this is another question on your small cells. The forecast out there for small cells are kind of ranged all over the map. But clearly, yours have to be toward the higher end and the higher ASP for this to even move the needle compared to the rest of your businesses. So could you talk a little bit about your view of that size of the market? And is this really going to move the needle for any of us in terms of revenues or operating profits?

Paul E. Jacobs

Yes. So the reason why I think it moves the needle is if you look at a traditional femtocell sort of filling coverage in. Then you'll say, "Okay, those -- that's a relatively small business." If you look at it as something that's carrying the vast majority of the traffic and in order to do that means that they're massively deployed. And in order to be massively deployed, that means that there are sort of the cost points of a phone. Then, you can start thinking that the volumes can be maybe not the same order of magnitude as phone, maybe one order of magnitude less or somewhere in between there. But the numbers can be quite, quite large, I think. And so that's the way that we see it. That you'll be able to get a dongle that you plug into the wall, and you'll have a few of them in your house, and then they'll all network together and they're all interference managed together and they all provide coverage both in the house and outside of the house. And so effectively, the place where you start limiting the traffic capacity that it gives you is when you have, literally, a cell-serving a phone. And those of you who have bought early LTE phones and were probably the only person on the cell site at the time, no, that's a great user experience. So we're going to provide that user experience to essentially as many places as you can. It's going to be mostly limited by back haul, but I think that it's going to be similar somewhere size of phones or some -- an order magnitude less, maybe 10 to the size of phones going into the future. Now we don't have anything near that in our projections at this point. And so really the world has to adopt that. But it's like the wireless Internet, we made the right call. We were prepared for that to happen. I think it's the only way that you're going to solve the data demand problem and really solve the problem that the operators have, which is customers don't like paying them as much as they're paying and getting what they're getting. And that's why they do so much offload. The price elasticity is set, such that the person who uses just as much as they can possibly stand to pay for it and no more, even though they want to use more. You give people 1000x. Wireless operators are going to have very delighted customers because they're going to be able to use as much as they want for a reasonable price, and that's because we're going to drive the cost of providing those bits over the air down. So the opportunity is very large. When it really hits is a question. I mean, I'm putting 5 years. I think we'll see networks really be deployed this way. But when it's -- when the volumes are massive and its global and every operator is doing it everywhere, that remains to be seen and a little hard to predict that exactly.

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

Arnab Chanda, Avian. Question either for Steve or maybe Bill. So this year, you are supply constrained in 20 nanometer all year. You are the only game in town for LTE. There's -- everybody except Apple and Samsung are trying to gain market share, shipping into the channel. You're assuming a 2-week increase in inventories going into a seasonally slow part of the year. When you give guidance, did you take -- judge down some of their -- everybody wants to be 15% of the market? Or is there any kind of risk that when we go into the end of the year and you just find out everybody wanted more because they couldn't get anything?

William E. Keitel

The forecast -- that 3G/4G unit forecast that you're speaking to, it's a combination of top-down and bottoms-up. And the bottoms-up inputs for that forecast, we tend to pay a bit more attention to the carrier than the OEM. I agree, add up all OEMs and you're going to have more than 100% of the end-market demand. But maybe I misunderstood you, but going into a traditionally slow time of the year, we're going in -- this is typically one of the most active quarters of the year, the December quarter of the year. The reason that we think channel inventory builds is that parties put so much investment into the devices, the cellular market in those devices, the advertising in those devices that they don't want to lose that investment opportunity or to grab that little extra better out of it because they're short product. So it's traditional, looking back, it hasn't every year, but most years, you see a little bit of inventory build as of the end of the December quarter. Unless I misunderstood your question.

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

Oh, I was asking about the semiconductor site too, that's where usually you get double orders when there's shortages and no alternatives.

William E. Keitel

Oh, yes, yes, and then our own planning. Yes, it's -- traditionally, we assume that the demand on us is a bit greater than what the OEM will actually want. You have to play that very carefully because our job is to make them all happy. So -- but I think over the years, you've seen our guidance generally has a pretty strong level of integrity to it. So our processes are much the same, and we're always trying to improve just a bit.

Steven M. Mollenkopf

Maybe I can add a few things. We also -- we've had a history of doing this, and we'll continue to do this. We do triangulate as best we can through the carrier and then through the OEMs. And the net of that is that we do, in some cases, judge down in terms of from overall demand to the ship estimate, obviously. And I think we've built up a lot of history as to how we do that, as Bill said. And I think we've been fairly accurate. Now that being said, some of these devices, some of these big manufacturers have different types of terms and different types of supply relationships. And as a result, the visibility into some of them is less than it has been historically as you had some things moving around, I think Bill referred to that earlier as well. So you do have that in the business. And as a result, some of the visibility is smaller, as well as you should expect some lumpiness as a result of our inability to predict that, consistent with what Bill said earlier.

Ian Ing - Lazard Capital Markets LLC, Research Division

It's Ian Ing, Lazard Capital Markets. Two questions for Bill. First of all, could you talk about this long-term transition to the ODM model, how that plays out, how much of the market makes that transition? And perhaps is that a readthrough on innovation, I mean, PC ODMs are known for thin margins and they didn't really create these new classes of devices. And the second question is for device estimates for '13. Looks like Europe, you've got outpacing North America and Japan. Could you talk more about that relative optimism?

William E. Keitel

First on the ODM. We're starting to see that this year. There are a number of OEMs that have really seem have to fine-tuned their processes and their delivery interval is -- we see stark differences in the OEMs -- OEM base. And that's a competitive advantage. So we think it's one that ultimately is going to be driven across the base, number one. Number two, the other element is the program, Steve spoke in length about, QRD. We're less than 60 days now from start to delivery of a device with that base of customers. And that's a program that we think, looking over the next 5 years, is going to grow. And do you want to add anything to that?

Paul E. Jacobs

I think it's fine.

William E. Keitel

I think those are 2 clear examples of that channel is going to be shrinking. It's going to end up with really more pressure on us. But our processes are good. We're going to try to get them better and that should yield competitive advantage for us as well.

Paul E. Jacobs

I think maybe at the leading edge, you'll still have companies that really want to be the leader. They figure they're going to get more margin when they get out there earlier, and so we see that still. Even as the trends that Bill said are going on, you also have some that are continuing to invest in their engineering team and they can sustain that as long as they can drive the margins with earlier product coming out with a new technology. So it may also be that there's a segmentation of the manufacturers over time. We're not trying to drive that model. We aren't trying to get it so that all manufacturers just come to us for everything. That's -- our goal is to enable sort of any of the models that our partners want. So if it goes that way, we're there to support it. If it doesn't go that way and people want very deep partnership and working together to bring out a brand-new product, brand-new technology, we're also -- we're going to drive that as well.

Unknown Analyst

[indiscernible]

William E. Keitel

Oh, yes, Europe. What we have in Europe is Eastern Europe. So Europe is a totality of Western and Eastern Europe. Eastern Europe, we think, is going to grow markedly stronger than Western. But then the other factor is, is that even in Western Europe, we've been relatively, pleasantly surprised that despite the tough GDP scenario there, that the take rate on mobile devices continues to be pretty strong. I think we've seen -- I think we're -- if we're not there now, we're certainly moving in that space. A mobile device isn't a consumer discretionary item anymore. It's more of a consumer staple.

Edward F. Snyder - Charter Equity Research

Ed Snyder, Charter. This one's for Bill. Bill, you're kind of on top of the heap now in terms of no competition in LTE. Things are all -- you've got all the major OEMs. And your R&D is going up significantly because you've got so many investments to make and as you've pointed out today. In your 5-year plan, what are you assuming for the next 3 years in terms of, sooner or later, if Intel keeps up, they're going to come out with a product, and it could very well be at a lower node than your dealing with TSMC. Does your R&D forecast -- your long-term R&D forecast consider this? And is it likely that if competition picks up that we're going to see any kind of slowdown in OpEx growth in the off periods?

William E. Keitel

Well, the heart of our business is really R&D, right? It's semiconductor. It's a game of you've got to project the technology the market is going to demand, get it in there faster and better than your competition. And it's just -- it's a continual race. On the intellectual property side, it's much the same. First to market with the invention is going to grab the stronger and better intellectual property. So the 2 businesses are very complementary in that respect. And both of them, it's just -- it's an all-out race. And then with such a rich road map ahead of opportunities, it's really exciting for us in the respect of the value that we can -- we think we can capture, and what it can be -- come through in terms of revenue and earnings for our shareholders. In the context of one competitor or another, over the years, we've looked at who's going to come at us from the low end? And how strong is our low-end position? And who's going to come at us at the top end? And how strong is our top position? So once saw guys try and come in at the middle, but they don't tend to last that long with the breadth of our portfolio and the speed which we move it. So I think it's just -- we're going to push hard on the high end, push hard on the low end, and I think that's the best competitive front we can be on.

Paul E. Jacobs

And I wouldn't just concede the manufacturing advantage either. The fabless guys are investing rapidly. You heard Steve talk about rapid node transitions. And also there is just this effect that as we're getting to newer and newer nodes, the economic benefits of those new nodes are diminishing. And so that means that there's going to be a compression, unless some new techniques get invented. And so I don't see that manufacturing advantage necessarily being a significant advantage over the next few years and -- or after the next few years. And we've been going through a time when we already had a transistor disadvantage and we have a significant architecture advantage. And so that battle is still to be fought. I wouldn't concede anything there. And we're very focused on making sure that we have extremely competitive and market-leading products.

Mark Sue - RBC Capital Markets, LLC, Research Division

It's Mark Sue, RBC. Gentlemen, we recognize that it's a velocity game, and R&D spending has to increase in order longer the margins will improve. Can you talk about the things that you're doing internally to drive R&D efficiency, so that $1 in is a credit and $1 out across the organization?

And then a question for you, Paul. It seems 2 vendors just really dominate the landscape right now with over 50% market share. Historically, we see a lot of changes, but because of the ecosystem, it might seem like those 2 will be dominant for the near term for quite some time. Do you see that change? And how do you kind of see that develop over the next several years because clearly you want more people to succeed?

Paul E. Jacobs

Who wants to talk about that R&D efficiency?

Steven M. Mollenkopf

I can do that. So I think if you look at some things that we've done, I'd say, over the last 4 years or so, we've really focused a lot on improving our software and the means in which we -- a lot of our team is delivering software today. And if you look at the number of releases they make, if you look at the number of customers we serve, it's -- the ratios have actually -- they have improved the efficiencies substantially. We've also been able to get more chips out of the team than we have historically, and those chips are much more complex. So there's actually been a pretty -- we're pretty proud of how efficiently we've been able to get the work done. We have also expanded our horizons and expanded the complication of the devices as well. Those things tend to work against each other in some cases.

The other thing that we're doing in R&D as well is that we firmly believe that we're in a period of time where you can set a bar, which very few people can follow. And if you can do that, then you can put yourself in a very strong position on the other side, particularly when most of the market is moving toward some technology that's coming from the smartphone. So we look at this as sort of once-in-a-lifetime opportunity to prepare ourselves for a pretty big shift in the industry. So we're a little higher, I think, than historical in terms of our R&D spend. But we look at what's on the other side, and we think it's pretty attractive.

Paul E. Jacobs

Now on the corporate side, we do -- on the long-term R&D, we have a pretty good gate process. We try and fail-fast on little things, so we have a lot of stuff going on, and then only a few major projects that we take to the next level and the next level and so forth. So we're pretty cognizant of it. We're certainly -- there are times when we've allowed more flowers to bloom, and then we prune back a little bit. And right now, there's -- we've got a decent field of flowers, so we're watching it as time goes on.

On the other question, I mean, it comes down to, yes, there's no question on that Samsung and Apple are doing an incredibly good job innovating very well, building their ecosystems around their products. But that will also require they continue to innovate and continue to lead, and that's been a trend in the industry. Certainly, it's a big enough industry that a lot of other people are willing to make investments on the come and really continue to try and drive hard and take share.

And then there's also the other aspect, which is the operator and their ability through subsidies to direct customers to one product or another. And so there's a lot of dynamics, that it's not just a direct-to-consumer issue. There are other things that go on. And so I'm not saying those companies aren't going to be strong for years into the future. I suspect they will continue to be strong and continue to innovate. But there's certainly other dynamics that can play, that can allow somebody else to take some share as well. So I don't find it as a static situation at all. And we've lived through enough of these cycles now where you could have said at any given time, "This company has this particular advantage," and, "Wow, how is anybody going to beat that?" And then few years later, somebody figures it out. So there's just a lot of innovation in the industry. I mean, that's what I love about the industry. There's so much going on right now, and so many different approaches that people are trying now. And they see who wins, and some kind of follow that lead. And some say, "Well, that's one way to do it. I'm going to try it the other way." So I think we'll see a lot of stuff and consumers are going to benefit a lot over the next few years, too, from that.

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

This is James Faucette from Pacific Crest. Wanted to follow up on Mark's questions with a couple more ecosystem-related questions. First, maybe for Steve or Paul. As we see an increasing number of subsidized -- what appear to be subsidized devices coming from ecosystem sponsors, et cetera, and that change in the business model from what we've historically seen, how does that impact your business from a product development standpoint and customer relationship standpoint, first?

And also, I guess I didn't want to make -- let Don escape speechless today. So a follow up also with the question, what should we take from the IP battles that are going on between the ecosystems and what's happened so far? And once again, how and under what conditions can Qualcomm operate? Or does it get sucked in? Or have there been developments that you actually see as being good for Qualcomm?

Steven M. Mollenkopf

Well, with the change in the ecosystem partners creating direct hardware. First and foremost, it's someone that we go after pretty hard now to win. The other thing that happens for us is that some of the things that they do is they may, in some cases, because they're monetizing in a different way, they may actually introduce technology into the market at a different cost point. So one of the things it does oddly is it actually causes the pace of innovation, in some cases, to roll over faster. Because then now the mid-tier has to do something, which was a high-tier feature. You see that occasionally.

But my own personal view is that, there are a lot of different types of devices that will be created. There'll be created -- some will be created directly by ecosystem partners, and some will be created by our traditional customers, and we're hoping to add new customers. So I don't know if it's a huge fundamental shift in the business. However, we are very focused on working closely with those people that want to use our chipsets either directly through an ecosystem partner or through a customer.

Donald J. Rosenberg

Although, as I hope you all are, I'm very excited about what I hear here every time we do this. I'm actually very glad you asked the question, because this is an audience that needs to kind of add their voices to the voices of sanity, which we're trying to lead. In terms of all the nonsense you hear and the hyperbole you hear about how these so-called smartphone wars and patent wars are somehow going to stifle innovation, you more than anybody else know that this industry is just a perfect example of how well competition works and how innovation has been produced by the very thing that people are concerned about, which is intellectual property rights and the ability to enforce those intellectual property rights. So there's nothing really new about these so-called smartphone wars, patent wars, this litigation. There's been litigation around disruptive inventions, in particular, patent litigations since way before any of us were alive. There were sewing machine wars in the 1850s. There were 600 patent lawsuits surrounding Alexander Graham Bell's invention. And I can tell you a few more. That -- this happens. It's a natural process of competition and commercial advantage trying to take hold. And one vehicle for that is who's going to be able to point to their innovations as the key to the marketplace. But the marketplace that we're in has been thriving for a long time. It continues to thrive. Innovation happens all around us. Competitors come and competitors go. Some were in the lead 5 years ago, and those companies are not in the lead anymore. Some companies weren't even in the business 6 years ago, and they're in the lead now. That's good, healthy competition. So we're trying to get the message out, and you can help us with this, that this is all just kind of the natural order of things. We have to continue to protect innovation. We have to continue to protect intellectual property rights because it spurs innovation. Nobody is going to invest the kind of money that we and others invest in R&D if they can't protect the successes that they reach when they do those investments and regain the costs that they put into it and make a little profit, which is what we're all in business to do. So I wouldn't get all concerned about it. As you see, some of these are resolving, and they all will resolve eventually. There will be maybe some winners, maybe some losers. Maybe it will work it out, so that everybody can play fairly in the marketplace. But focus, if you will, please, on the need to make sure that this attempt to try to look at this activity in the marketplace and turn it upside down, to say that it somehow indicates that there is a problem with innovation is totally inaccurate. It's just, literally, as I said, turning the process upside down. We've got to continue to support intellectual property development and continue to make sure people continue to invest in this innovation economy, this knowledge-based economy we're all in.

Paul E. Jacobs

I think the other point, as long as we're on our soapboxes, the notion that FRAND and standards of central patent, somehow FRAND means that they're worth less is strange to me, that the concept that you invent something, you spend a huge amount of money investing in research and development, and then you agree to share that with the industry, somehow that devalues that intellectual property, I find extremely strange. And seems like it's another one of those things where people have tried to turn it exactly upside down from what actually should be right. The fact that you're out there investing and enabling an entire industry is a good thing, and I think arguably is what created the smartphone and mobile broadband world that we live in so.

Derek K. Aberle

I'll add one more thing. And of course, the company is making argument that these enabling technologies should be worth less for the ones that didn't invest in those technologies but are profiting pretty handsomely from them. So like Don said, much of this is really commercial dispute, and one front of the competition is fighting in the courtrooms with patents. As I said in my presentation, I think we're really well positioned, going forward, even if we have those types of fights, which thankfully we don't have right now, because of the value that we've already established for the portfolio that many of these other companies haven't, and the fact that we have such a broad portfolio that includes both essential and nonessential patents, which even the companies that are attacking essential patents are claiming that their nonessential patents are extremely valuable. So I think this stuff will settle out over time, just as some of our litigation in the past has. But I think we're pretty well positioned in a way.

Donald J. Rosenberg

And I'd add one more thing, which is, think about the source of the argument every time you hear the argument. Because different companies have different business models. And it's always good if a company has to pay lower input costs. Of course, they want to be able to pay less for componentry. They want to be able to pay less for intellectual property rights. But that's a short-term thought process because if you continued to push those kinds of inputs down and devalue them, as Paul says, then they're not going to be produced in the future, and we're going to have a long-term impact -- negative impact on our ability to innovate.

Paul E. Jacobs

So I think we have time for one more question, then we have a closing video.

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

This Sanjay at Nomura. Bill, question for you. You're guiding QTL operating margin lower for FY '13. could you tell us the drivers behind that? And then I have a question on replacement rates.

William E. Keitel

There's 2 drivers. One was the -- because we created that entity Qualcomm Technologies, Inc. and all the patents are owned by Qualcomm Inc., we moved. QCT previously was -- had an allocation of some patent expense that is now fully on the QTL segments. That's one. And then two, Derek's got some interesting investments -- the major ones being that wireless charging that he spoke about.

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

And a quick question on replacement rates. In developed markets, replacement rates are about 30%. And if you compare that to PC, 25%, one would tend to think that they should converge because as new smartphones become more incremental, operators reduce subsidies. What is your view on replacement rates in developed markets beyond FY '13?

William E. Keitel

Our long-term plan has, for many years and continues to have it, is a very modest decrease in the developed world replacement rate. I'm not sure it gets down to the PC level because the utility and the cost of a smartphone relative to a PC, I think it could end up at a higher rate than PC, higher replacement rate.

Paul E. Jacobs

Great. Well I want to say thanks to everybody for being here again. I know it was, for many people, a bit longer trip than the trip down to Battery Park. And we look forward to being back in New York again next year. And hopefully we will deliver what we said, and we're going to work hard at it. So thanks, everybody, for being here. We've got one closing video, so take care everybody.

[Presentation]

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