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QUALCOMM Incorporated (NASDAQ:QCOM)

25th Annual ROTH Conference Transcript

March 19, 2013 4:30 PM ET

Executives

Bill Davidson - Senior VP and General Manager

Analysts

Krishna Shankar - ROTH Capital Partners

Krishna Shankar - ROTH Capital Partners

Good afternoon. I’m Krishna Shankar, Semiconductor Analyst at ROTH Capital Partners. And it’s my pleasure to introduce QUALCOMM, company that needs no introduction, the leader in the mobile platform and semiconductor space. And with us from QUALCOMM we have Bill Davidson, Senior VP and General Manager. So at this point, I’d like to turn it over to Bill.

Bill Davidson

Thank you very much. During today’s discussion, I may make forward-looking statements regarding future events or future results of the company. Actual events or results could differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, including our most recent Form 10-K and 10-Q, which contain important factors that could cause actual results to differ materially from those in the forward-looking statements.

Okay. I would like to take this opportunity to just -- in the introduction, do a brief reminder of this unique business model that we’ve created that, has not only lead to QUALCOMM success but the great growth that we’ve seen in our industry.

And so, if you turn back the clock, a long came QUALCOMM when the rest of the industry had largely settled on a standard to move forward to take the networks from analog to digital and it was CDMA, GSM, same basic technology.

And so a long came QUALCOMM we said, we had a better idea. And the important context is that the time no one else really believed in what we talked about. What we thought was ultimately going to be capable through CDMA.

And it’s important context because therefore we had to do all that work ourselves. The industry was well down another path of standardization and deployment of technology. We took on therefore the responsibility to give our technology the opportunity to see the light of day.

We were accused of selling vaporware. Our CEO I think was called the crackpot that this would never work. My guess is there are few companies out there today who wish maybe they hadn’t listen to that and participated earlier on, but it left it to be up to us.

So I think our founders would tell you. We’d got passed the point of people having to mortgage their homes to keep the company going. We were real risk of not seeing the light of day for our great idea when our legal department said, we have some patents we’ve been issued, approximately 50, I think was the number at the time, 50.

So maybe we could drive some licensing revenue from a couple of these patents. We could go out to the industry and license them. And it was actually those first potential licensees that said to us, we know you are the only one working on this. I frankly think they gave us very little chance of being successful. So they said, why don’t you just license us all of your patents that you have, so that we never have to deal with you again. That was the grand birth of our portfolio licensing program.

So it really was never part of a well thought out plan in terms of how to capitalize QUALCOMM and enable us to move forward. But then we did capitalize on that and took a step further to say, we’ll not only license you the patent we have today, but we’ll pick a period of time going forward under which any new innovations that we develop are automatically licensed to you for no increase costs.

What that ultimately led to is a program we have in place today where the vast majority of our licensees are on a perpetual agreement. Their agreement we use for the life of the most recently used patent. They only need while a one claim of one patent to prove the worth of the patent portfolio for us to receive our full royalty. There is on average 30 claims per patent.

So we just created this dynamic shift in the marketplace where prior to our existence it was really only large manufacturers that could support the building of infrastructure, handsets and chipsets that powered those handset, not because they were doing anything wrong, but because you need that kind of scale. So there were three very large manufacturers that largely control the marketplace at that point.

So what we came along and did was really revolutionize the use of patents. If you think our most companies used their patents. They use it as a way to protect their invention for product that they are building themselves.

What this model ultimately delivered was us licensing our patents out to enable an industry. We are in aggregation of research and development for the industry we serve and therefore rather than using our research and development on our own handsets, which we did for awhile to prove out that the technology.

We were thankfully able to exit our handset business back in 2000, our infrastructure business in ’99. We kept the chipset because we were good at it and there the path to market for innovation.

But we really created this very vibrant marketplace by virtue of passing out our intellectual properties through our licensing program. So a very revolutionary model and one that still serve us quite well today.

If you look what we’ve really always been about is being a systems company not a point solution company. We were very early on the first one to start integrating functionality into the chip that existed as separate components in the handset.

So if you remember back in time, first ring tones that we had enabled on handsets were the polygons, maybe didn’t sound so great. It was a separate chip that enabled that, while that ended up coming on chip and we’ve only continue to add the things that we provide on chip to make it easier for our OEM customers to rollout devices, faster time to market, smaller footprint, better thermal, better performance is really the hallmark.

So we bring out these innovative technologies like CDMA and like the amount of research and development we put into LTE to be a leader there. We participate in the standardization process. We make significant contributions there, so that the technology can be broadly consumed.

We productize. We shipped 590 million chipsets last fiscal year. So something like a 1.5 million chips a day at current run rate now go out the door from QUALCOMM, just extraordinary.

And then commercialization, we work with handset manufacturers, the infrastructure vendors and the operators around the world to get these devices out on a global basis.

Thought I’d just take another moment to remind you that our stockholder meeting this year, we increased our dividend 40%. And really important that was our 12 consecutive dividend increase and we raise the dividend right through the downturn, so real demonstration of the strength in our business model that as we continue to be a growth company that not only can we pay a dividend but that we can aggressively increase it.

And then just a cumulative return to stockholders, $19.9 billion, approximately $9 billion of that is dividend. I think its $9.1 billion. The remainder has been through stock buybacks.

We pay the dividend because we believe it rewards the longer term holder. We’d been opportunistic with our buybacks. We are not looking in our buyback program to be in the market every month regardless of the price of the stock. We buyback stock when it’s accretive to the stockholders.

So that when you look back three years from now, it was a good decision and if you look at many companies, their buyback programs when you look back on them in hindsight having always been the best decisions for the stockholder. The way we approach it, is if it’s accretive at the time it’s the right thing to do, so the future stock price really is less impactful as a decision point our assumption of it.

For fiscal 2013 outlook, I won’t read the chart to you. I think the important thing to take way from this is, we once again talked about a five-year double-digit compound annual growth rate in revenue and earnings for the company.

I think that’s an extraordinary statement particularly given what remain to be somewhat challenging economic time. So, just a real sign of the tremendous opportunity that sits in front of us as a company that we are clearly capitalizing on it.

I thought I’d attack this topic head on. There has been I think a fair amount of consternation created lately by frankly one research report that discussed ASP issues. I’ve had responsibility for Investor Relations at QUALCOMM for nine years and this has been amazingly an ongoing theme for nine years. Despite if you look at that chart what has gone on with our ASP.

Now having said that, and if you look what are the reason that that ASP has stayed so stable once we got out there into about 2001 is there just been this constant path of innovation along the way that at every turn has put upward pressure on the ASP, that offsets what’s a natural downward pressure from being a technology company, right, you are trying to cost reduce all the time. But we’ve had other opposite effects that have kept it over a long period of time, fairly constant or even late increasing a bit.

So, thought I just drill in a little and say that our plan has always been for an average annual single-digit percentage decline as we do our planning. So that’s what was in the planning, when we still said we were going to have five years of double-digit compound annual growth rate in revenue and earnings. So my point is nothing changed from when we guided. So there is really -- I’ve challenges relating to that report because this is what our financial plan has been based on.

And I would say the other was looking at, I just want to go to what are the key initiatives for us for our sustained growth, why do we believe that there is these tremendous opportunity still ahead, and let’s go into smartphones first.

So some interesting statistics here for you, I will let you read the ones on the screen. My favorite one is the average person now looks at their phone once every 6.5 minutes during waking hours.

In my house that’s not a popular thing, but I confess, I’m probably somewhere close to that average, although mine is less for play and more for work, but that’s the statistic now. You can see a third of daily media interactions on a smartphone. Four-fifth of all searches are spontaneous.

I’m sure you all now have several arguments, when you are with people like, I’ll say to someone, gosh, I can’t remember the name of that actor from this movie and now thankfully, I’ve eliminated the pad of paper and a pencil from my bedside table where I would wake up at 2 o'clock in the morning and remember it. Now you can settle those arguments on the spot by searching on your smartphone.

And amazingly, half of smartphone owners use their devices while watching television. So, I think there will be tremendous opportunities that QUALCOMM and our partners take advantage of, as a result of these trends.

Another thing I would really like to dispel is that, I’m hearing of late while the smartphone trend is over. It’s known. I guess I would submit and I kind of jokingly did at one of our meetings this morning. I remember I was at the start-up in between my career at Bell Atlantic and the one I now enjoy at QUALCOMM and back in 2000, 2001, the folks I meet with in New York, I thought everybody carried a Blackberry.

And so I would just submit to you that the smartphone trend is really just getting going in certain parts of the world. We are seeing great momentum in the emerging markets and even upward pressure in some developed markets on ASP for smartphone.

So we believe there is really gas left in the tank there. And I guess the point here is we’ve averaged a couple of analyst reports to show a 24% CAGR through 2016. So company that can say that they are targeting double-digit growth for five years in revenue and earnings and this kind of opportunity, I don’t see many of them.

So why are we successful at doing what we do? Well, there is always innovation now that’s going on in the smartphone and so that’s why I believe the opportunity for innovation is not over. It’s really just getting started.

And this is meant to be an iChart, but this is everything that we have to do and all not inclusive, but many of the things we have to do in each of those categories and be very good at. And so, obviously, we believe that there is plenty of room left for innovation, including on the modem side of the business. It’s been one of our key hallmarks.

We loved it when computing industry was saying that the modem is a commoditized peripheral in the apps processors where the action is. That’s great for us, because in wireless, the modem is anything but a commoditized peripheral. It’s where a lot of the complexity resides and it’s where we do particularly well in solving it.

Our leading chipsets, Snapdragon that is helping address that smartphone market and other connected devices in computing and even televisions now. But over 85 manufacturers shipping devices based on Snapdragon, 770 individual designs in the market and other 550 coming.

So showing the tremendous scale of the business now and this was one of our big investments going back five or six years ago, so really good result from the investment we made in research and development leading to market traction for our solutions.

And I guess back to the ASP point again. I think it’s really important to understand that when you look at our ASP, even though I mentioned we plan for average annual decline, that so much of it to date has been more mix related when we see movement in the ASP, all right.

So price erosion with no elasticity of demand, bad thing. Creating new tiers of chipsets to enable lower priced smartphones for emerging markets, good thing, more dollars to the company. I think there is a bit of laziness around ASP that people hear lower ASP and they think it equals bad.

We’ve seen actually no material cannibalization of the high-end smartphone market by virtue of lower end models coming in. It really is this tiering of the overall marketplace, so that low-end devices actually have similar functionality to high-end devices. But you might not have as good a camera or your multimedia capability may not be quite as good. But I believe every phone eventually will be what we define as a smartphone today. Every phone will eventually have that functionality. It will just be at different tiers.

And by the way, we are actively driving that opportunity. So it’s not like this is a competitive thing hitting us. We’ve been driving these lower tiers, because when we see somebody in the market that has traditionally been 2G, our competition isn’t just with other chip providers, it’s that subscriber getting another 2G handset. So we want to make sure that there are products available in the market at the lowest prices possible, so that when that person upgrades their device, it’s to a 3G device next time, not 2G.

And mobile is really now driving computing. If you look at shipment forecast and growth rate, it’s all about mobile, software development now is happening around mobile first. That is really what's driving the computing market.

I joke when I speak that, if QUALCOMM and our partners do our job right, we are going to be enabling you to refund that square footage in your house, you call home office. I think our kids are going to look at us and say, what do you mean you need to place in your house to go and use a computer? You just, you use it everywhere. So, hopefully, we can, help to turn it back into a diner or something else.

Mobile computing growth opportunities, the tablet market is a great opportunity. If you look at 41% CAGR between now and 2016, I think the equivalent for laptops is somewhere around 11% or 12%, and if you added in desktops it drops to around 9%. So just dramatically showing where the growth in the computing opportunity lies.

Moving to emerging regions, that’s my point of -- we are really just seeing the beginnings of not only the 2G to 3G conversion in many emerging regions, but this adoption of smartphones.

And if you think about it, it’s not just about playing games. You look at there was this push for so long in India about getting the low cost computer and our view is the miss with that was you need connectivity with it, because I don't think it benefits to somebody in a rural part of an emerging region to have outlook or exchange on a computer.

It’s getting access to the Internet, getting access to information and communicating with each other and that is just a dramatic change that mobile is creating for not only companies, but societies around the world. Think about the Arab Spring being largely coordinated through Facebook on mobile devices, it’s extraordinary.

Another program we have, QUALCOMM reference design. This is really to attack the segment of the handset industry that wants to very rapidly move product out and into the marketplace, really just wrapping plastic around existing technology and having a very quick distribution model. In the end of 2011, we talked about the factor and aggregate. Our emerging accounts now equal one of our large OEM customers.

Recently, our President, Steven Mollenkopf, indicated we’ve seen a doubling of that. So, now tricky math is up a little base. It’s actually become a very meaningful and important part of our business. So over a 170 devices launched on this platform from more than 40 OEMs across 13 countries. Again trying to get those price points down and expand our customer base.

So mobile data traffic, key issue for us to solve, we’ve been doing it along the way but we’re actually now are preparing for what is 1000 times growth over the next decade in traffic across the networks. So how are we going to address that.

Well, if you’ve seen LTE get deployed, beginning to get deployed in developed regions and I think eventually in emerging. Clearly, we purchased spectrum in India to enable that to happen. But this explosion in data usage is a real challenge for the industry.

I remember my father telling me a story. He was -- when he got out of the navy, a student engineer in the phone company. And he was sitting in a meeting and remembers clearly somebody saying, we could probably hang a tape recorder on a phone line so that no call went unanswered and there was a big gasp in the room. And everyone said how we can handle the capacity in the infrastructure to handle every call being completed. Fast forward we now all have an answering machine and some of them are network based.

We’re facing somewhat of the same issue. It took 100 years for data traffic to surpass voice traffic in the wireline network. We knew it was never going to take that long in wireless because people already knew what to do, right, with the internet there and lots of things, driving both content creation and consumption. So LTE has been a way to solve that. Wider spectrum bands being allocated, enabling higher data rates that helped a bit.

Now, the unique advantage that we have is in handling all these different air wings that have come out. Number one, we support them all. Many competitors might only support two or three. So you have EV-DO, GSM and EDGE Radio access network, CDMA, UMTS or WCDMA, TD-SCDMA for China and then LTE.

And then your challenge becomes, how do you make those interoperate with each other. And then how do you handle all the different spectrum bands that exist around the world. So that you can create a device that your handset partner can take and ship all over the world, give them better reach and better economics for the solutions they’re trying to create for their partners.

That is the complexity we saw. That is not an easy thing to do. So therefore anybody that’s coming into the chipset space to try to compete, we try to set the design point for the industry. So if you think about an LTE, we announced our third generation of chipsets at Mobile World Congress this year. Most of their companies are only on their first. And to be good in LTE, you need to add a 3G solution because it’s about all this working together in a single package, very difficult to do and it is what we do best.

We -- just before Mobile World Congress this year in February, we announced this RF Front End Solution. Sure, many of you heard about this band complexity that’s been created in LTE and have fragmented this spectrum allocations have been around the world.

The real aim of this and our President says the phone is largely becoming an antenna phone. And so the idea behind this solution is to remove that complexity simplified a bit and really enables this global capability on LTE and devices.

Last point on this is that, for years now we’ve used the traditional model of network deployment. The operators put a big pole and they broadcast average and they do it in such a way that it penetrates indoor.

And we have to add more sales not because we need the coverage but because we need to put them to allow for more capacity as more of us use multiple devices, not only a phone but connectivity in my car through answer. And I have a laptop that’s equipped. I have a tablet that’s equipped.

So we’re looking at how do we handle this 1000 times data challenge. Well, the model is going to be more of a small cell model. And we think that we can actually reduce the cost of a sell side to something that’s 1000 time less than it is today.

So what you see there is an actual quarter next to sell side we’ve designed. And the biggest component on it, you see a lot of green board space left to optimize the biggest component is spot for the RJ-jack to plug in.

But the idea is yield deploy on the sell side in your home or an urban environment and rather than trying to broadcast coverage in. You have a very low power device that not only covers your environment but might broadcast coverage out. That combined with lower -- use of spectrum bands. For example, the coastguard owns nationwide spectrum.

Do you think they use it in the middle of the country, no. So we think that there is an opportunity to have a secondary user of the spectrum. So you have the incumbent. But let’s utilize that spectrum in the center of the country that the coastguard isn’t taking advantage of or there are military applications where the spectrum is only used part of the time. So we think there is a much more intelligent way to use the existing spectrum that’s out there as well.

And then finally, it’s going to be about the internet of everything, right. The opportunities that lie in front of us, we’re sitting here today with approximately 1.9 billion users on 3G that represents about 29% of the total available wireless connections in the world.

So again back to my point. Even if that remaining two-thirds plus came over at half the ASP, we’ve enjoyed to date on handsets and chipsets. We still doubled the size of our business.

So again it’s a pretty amazing opportunity that’s really there for us to go get. We don’t even have to convince somebody to get another device and we have that kind of growth profile ahead of us.

We’re also working on other opportunities. We want to look for ways to get wireless connectivity into many other devices that we use from healthcare to education, in vehicle, to starting to integrate it into our electrical grid.

So many opportunities remain ahead. And as our guidance fits today, we’ve been very cautious in terms of including any of these other opportunities in there. It’s largely based on the existing device forecast and 3G, 4G growth, not machine to machine and these other kinds of capabilities. So they are longer term opportunities to develop for continued growth.

And then finally, the real goal we have is that we’re going to make the physical and digital world blend so that the world becomes clickable. So that you’ll hold your phone up and you’re going to see information in the environment around you or my phone in this room might have discovered the projectors. So that I didn’t this laptop, my phone would have just started communicating with it.

As we say make the world clickable, so that when I go off the plane in Tokyo and I’m not fluent in Japanese other than how to order a beer, I can hold my phone up to street sign and see the English bobbing in front of the Japanese language.

So our real goal is to take the phone because it’s always with you. And the phone is this digital sixth sense for you. It can see, it can hear, it knows where it is. It knows if it’s moving and how can we use that to do just incredible things in technology.

So just to sum up, those are the areas for our keys to sustain long-term growth. I think there has been some consternation cause about how much more growth is there in the smartphone market and where do we sit with ASPs. From where we sit, it’s still a tremendous opportunity for growth ahead of us based on the worldwide market that already exists of wireless connections.

I think population is estimated now at 7.1 billion globally and there are low 6 billion connections that obviously represent somebody like me having four. So there are people left to connect and there are plenty of things left to connect out there in the world.

With that, I’m happy to handle your questions.

Question-and-Answer Session

Krishna Shankar - ROTH Capital Partners

Question?

Unidentified Analyst

I was told that all the computer companies and the communications media companies were all running to get biometrics on their devices and I gather that Apple has got a device coming out in June with the fingerprint identification on the iPhone? What are you guys doing in that area or can you say anything about that?

Bill Davidson

Sure. It’s an area that’s been look at for long time which is, how do I authenticate with my device that I’m me. I think the thing that we’ve always look at those, biometrics clearly are interesting, but by using biometrics you immediately taking that biodata and converting it into one and zeros. So now if somebody steals those ones and zeros that are on my fingerprint, I have no way to recreate that.

So I still fundamentally believe that it will be a combination of techniques not any one that secures the phone to know that I’m the one trying to use it, and so when you think about the phone always knowing where it is, it can better know that it’s me, because the phone going to learn about my habits, it’s knows that I go to this coffee shop every morning and it can see that it was in my office and it can see that I was at my house with my family over the weekend and therefore, I also have some sort of biometrics capability.

The information we are going to gather in aggregate but obviously protect from a privacy standpoint for you to keep on your device is what will I think authenticate a user, it’s not, no one thing to me is the silver bullet but it will be a combination of those things in aggregate.

Krishna Shankar - ROTH Capital Partners

Sure.

Unidentified Analyst

How do you see the topline playing out this year, seasonally speaking versus what you would consider normal historically and versus the last couple of years?

Bill Davidson

Yeah. Well, I -- we always have this first half second half phenomenon and its going to develop now, where Q1 is the seasonally strong quarter for QCT coming into the holiday selling season and that’s fiscal Q1 for us calendar Q4, fiscal Q2 for QTL, the licensing business reflecting the licensing revenue that was earned from that seasonally strong quarter of the December quarter, and then a bit more muted second half and so that’s what we’ve talked about for this year fairly standard pattern that way.

Krishna Shankar - ROTH Capital Partners

Go ahead.

Bill Davidson

And of course on topline growth we have their estimates last quarter by I think $400 million for revenue and took earnings up $0.13 for the year.

Unidentified Analyst

I understand you have your own venture capital fund, what sorts of things are you looking at, and how is that synergistic with your current business?

Bill Davidson

Yeah. Yeah. We do. So we do have our own venture capital fund. Obviously, as any venture fund you’d like to able to make money there. But I would say that our investments tend to be in the low single-digit millions, we’re not taking big aggressive positions.

And that it’s, we really look for opportunities that in some ways are tangential to our business but can be helpful. So we’ve had investments in battery companies, right, because battery technology has been iterating as fast as other technology in the phone. We’ve had investments in display companies, one of which we actually bought out of our own venture portfolio to focus them toward wireless.

So I would think in terms of anything that we view could be helpful to either solving problems with the fiscal device itself or looking for new opportunities in healthcare and how do we get wireless use there, other sorts of opportunities that -- that we look for.

Krishna Shankar - ROTH Capital Partners

Thank you. With that, I think we are out of time. Thanks a lot.

Bill Davidson

Thank you.

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