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Executives

Steve Mollenkopf - President and COO

Analysts

Brian Modoff - Deutsche Bank

QUALCOMM Incorporated (QCOM) Deutsche Bank Technology Conference September 10, 2013 4:10 PM ET

Brian Modoff - Deutsche Bank

Okay, going to get started on our second lunchtime keynote. I am Brian Modoff, the senior communications analyst at Deutsche Bank. With us today, Steve Mollenkopf, President and COO of QUALCOMM. We also have, George -- thank you, George, you are still (inaudible) there. George Davis, the new CFO of QUALCOMM; Warren Kneeshaw and John as well, the IR guys for QUALCOMM.

So Steve, thank you for coming again this year. Why don't we just go with the basic question to start with, how is business going, what's your thoughts on the note -- and obviously the one very concern has been, although I haven't heard that question much recently in the last three weeks, but the question around the high end, how they are rolling up in North America and around the world? So let's start with just kind of overall business trends as you see them?

Steve Mollenkopf

Sure. Let me just quick -- give a quick Safe Harbor statement of course, if you don't mind. So today's discussion, we 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 10-K and 10-Q, which contain important factors that could cause actual results to differ materially from those in the forward-looking statements.

So yeah, on the business, I think we are pretty pleased with how the business is going, and we have, I think, updated guidance a number of times throughout the year, and I think we have been very fortunate to be participating in the growth of smartphones, really worldwide, and I think we had a pretty strong quarter that we just reported on and I think a lot of the trends are going in the right direction. We have been investing pretty heavily as you know, in the business, to really grow this leadership position across multiple technologies. I think a lot of people think about us on the LTE side, which I am sure we will talk about, but we are also leading across many vectors, and it has worked well for our business, I think worldwide, which is great. We've maintained our guidance on the market and the revenue and EPS growth this year has been quite strong, really driving into those trends.

We made some statements in the last earnings call that we thought the high end, and really, we don't subscribe to the idea that the innovation is over. Matter of fact, if you look at what we have been asked to do on the chipset side, which we get I think some unique insight, because we are developing a lot of the technology that people are using to put into phones. The thirst for new technology has really increased quite a bit. The speed at which they are asking us to develop products has increased. So we think that's a positive trend.

We have been very pleased with the market reception of our newest chips, the Snapdragon 800, and of course underneath of it, there is the whole Snapdragon, there is 800, there is a 600, the S4, all the way down the line, and we have been very pleased with how that design-in activity has gone, as well as the ability for people to pull in our LTE products as well. So design-ins is going well, we will see how they sell, but we look pretty happy with how well the customers have received your products.

Brian Modoff - Deutsche Bank

And how about the Microsoft-Nokia deal? How do you see that? Any view on that?

Steve Mollenkopf

Well I mean, we work with both of those companies very strongly. We are -- from our side I would say, we already had a strong bet on Microsoft, and I think we are probably the only chipset company that's got a strong bet on Windows phone. So the two of them getting together, perhaps that increases it's probability of Nokia and the Windows phone to be successful in the market.

What we see though, when we look at the market, the reaction is that there is a real desire for third ecosystem. You get that from developers, you get it from the carriers and I think it's really a matter of time before someone takes that position. So what we've been doing is really trying to use our chipset and kind of keep ourselves in the game, no matter how that goes. So the Nokia account has been a good account for us, and perhaps there will be a better account moving forward. We are looking forward to having the ability, not only to cell phones, but also to connect that up into the tablet space, as I think it's inevitable that Microsoft will be more successful outside of their traditional PC space, but also into the tablet space. We think we are well positioned for that, should that happen.

Brian Modoff - Deutsche Bank

Yeah. So talk a little bit of tablet space. I mean, I get investors saying, so what's your forecast for tablets on QUALCOMM? It's like the same as I had for Netbooks, a zero. When do you see tablets becoming an opportunity that you actually -- where we can start modeling it in our numbers?

Steve Mollenkopf

Well, if you look at the market structure for tablets. I mean, the high end developed world is just dominated by Apple. We do participate in that, in the -- we sell modems into that, and we (inaudible) on that, that has been an interesting business. Below that, you tend to have a price tier, which is dominated by people that monetize the tablet post sales. You have like Amazon or Google tablets, and we have historically not been strong in that area, although I would say recently, we are encouraged by our progress to get design-ins for refreshes of those tablets. So we are in the new Google Nexus 7 that uses our Snapdragon product, and we think that's a difference between the past and now.

Below that, you tend to have a very cost sensitive product, primarily in China.

Brian Modoff - Deutsche Bank

Yeah, media-tech territory there?

Steve Mollenkopf

Or even below actually. And we have not participated in that product, it's not an attractive business for our company. But what are seeing, a bit more, is really this trend that we have been talking about for some time, which is if people will leverage their phone investment to create a tablet, and in particular, leveraging the mid tier products even more than the high tier product. The high tier product would have to go up against maybe a higher tier, someone who has an ecosystem advantage, and so they tend to leverage their mid-tier or high mid-tier product to produce a tablet, and we think that's going to happen more and more moving forward.

You are also going to see, I think more people trying to leverage the carrier channel as the means to go forward, and sell tablets. So we -- in all the trends that we see, it's really about -- we think leveraging the position of the smartphone to grow up into tablets. I don't think there is really a path down the other direction.

Brian Modoff - Deutsche Bank

Do you see one of the key drivers in [tableted] option or modem penetration at tablets as carrier data plans and those becoming more amenable to having one price, but multiple devices on it?

Steve Mollenkopf

Yeah I think the (inaudible) there has happened at the carrier level. But the ability to share data plans or to have an incentive to sell more subscriptions to the same family, and to may be share them across multiple devices, is something that's good for our business. It's actually something that the carriers themselves are pushing. They have made organizational changes. Their reporting to The Street is in a way that it doesn't encourage them to not do that, for example, they break out connected devices from the traditional ARPU metric. So I think you are going to see that more and more.

The other aspect that we think is a trend that is not perhaps a very close near-term trend, but we think a long term trend is that eventually, the wired network -- or the wired network, the Wi-Fi network and wireless network really emerge. We have been talking about this 1000x and carrier densification and what that's really about, is that the cellular network, in order to support the data demand, just needs to get smaller and smaller and cheaper and cheaper. We are driving that to our femtocell products and our 1000x initiative, and I think the net result is that you get I think even more proliferation of products that are derived from the smartphones. So the tablet is a good example of that would be. I think you are going to see a lot more devices on the cellular network, as that too [emerge].

Brian Modoff - Deutsche Bank

Do you see -- one of the things I have been hearing from smaller companies, you talked about are very involved in femtocells, is that because of the coverage capabilities and the throughput of LTE, they are starting to see more interest in the femto architecture over even Wi-Fi; because it covers a broader area, it's very clean signal, they control it and so they are starting to put more effort into that. Do you see any of that kind?

Steve Mollenkopf

Well if you look at Wi-Fi, one of the things that happen, as you start to add more and more users, it actually starts to degrade in terms of capacity get to a midpoint. And that doesn't happen with the technology that we are promoting for 1000x. It's essentially managing the interference and properly handling the power levels and managing the interference across the macro level and the femto level, enables you to really solve that problem. And in order to get to the cost point that I think that the -- from delivering the data to the subscriber, in order to get those cost points, you have to solve that interference problem, and so we think that's a good way to go.

The way that we think about the network eventually, is that it will be built from the inside-out as opposed from the outside-in. Today, the macro network is built on the outside, it shines in, it kind of [leaks] into the building. I think in the future, what you are going to see is that the wireless network that is on the inside, and kind of leaks out, and we have demonstrated this at our campus. If the technology works, it's just a matter of deploying it and going through the process. We think it's a powerful trend happening.

Brian Modoff - Deutsche Bank

And I guess one of the keys here is, because in LTE, you control the spectrum, you control the interference. In Wi-Fi you don't, this is an advantage to being able to do that?

Steve Mollenkopf

Correct.

Brian Modoff - Deutsche Bank

Okay. Talking about competition and then after that I am going to see if there is any questions out in the audience. There is mikes around, so if you have questions, please get them right. Let's talk a little bit about competition. We go to the case mid-August titled the Signals (inaudible) LTE Competition in 2014? And what we were talking about at the time was looking at the various vendors, and where they are at in their development? If you look at Intel, they are trying to merge their Infineon team with their Blue Wonder team, merging to Architecture together, and now they have grown a third end, with the transceiver they got from Tempe, or a little more (inaudible). So you have got that kind of -- almost if you want to call, three blind men and an elephant, trying to make an LTE modem.

Steve Mollenkopf

You have got Broadcom, who has acknowledged that the BCM acquisition wasn't sufficient. They scrapped that and went out and bought Renaissance, which was for sale, fueled Nokia modem [game]. They were for sale for over a year. They finally bought that asset, they are going to try to do something with it, but this was a product that Renaissance was going to fixate with it. We had it for sale. Now they are buying, and supposedly they are going to make that competitive.

MediaTek, the one that we respect the most has their own issues. They are a little fun, have a single mode out early next year, but their multi-mode, this will be the truly competitive product. Maybe midyear, maybe, but they have got a lot of development effort underway there. So -- and if you look at, if that's when you are sampling your chip to your customers, and you are dealing with a nine month design-in stock, well typically, maybe it's six months for MediaTek as they are faster. But their nine month design-in cycle, are you really looking at phones showing up in 2015? How do you view competition next year in LTEs?

Steve Mollenkopf

We always had a healthy respect for competition, as you know. But if you look at what -- my general view of what's happening in the market is that, people are trying to come up with their first generation, while we are on our third generation. And the environment that they are operating in is the environment where we are trying to move the feature set very-very rapidly. So the feature set that we are delivering this year, which people are still trying to deliver on for next year, we are going to evolve that again next year. So it's a moving target in terms of what you are doing. Now why is it a moving target and then what makes it so difficult?

The first one is, you need to be a strong 3G player to be a strong LTE player, because you have to connect those things, but yet you have to have multi-mode. That's one of the things that a lot of people have difficulty with.

The other one is, the band proliferation is quite large. So if you are not a strong RF company, and you have the ability to manage all these 41 plus bands and all the roaming complications that occur, as you try to get that to work, it's very difficult to make that work.

The other aspect is, let's say you get that feature set. To compete, you really have to couple it with a very strong world class application processor. Though most people are having difficulty getting them to LTE feature set moving, but then they have difficult time putting it together on one guy with everything else. Now moving forward, I think it actually continues to get harder for people. One is, we are going to move the feature set forward, but the other thing that happens is, next year you are going to have to do career aggregation, which is one of many LTE advanced features. So you have to go from zero to LTE advanced and solve the RF problem. Then you have to be able to have TD-LTE or LTE-TDD, which is yet another mode of LTE, which we had in our first generation chipsets and we are testing worldwide, as well as it's one of the chipsets being used to help -- trying to mobile deploy. So we feel we have a strong advancement there.

Then a couple of years down the road, what you are going to end up with, is in order to solve this densification problem, you are going to have to manage wireless LAN and LTE together, and I don't think you are going to do that, unless you have all those assets and (inaudible) do it properly, and we certainly have those assets, and we don't know if everybody else does.

So the bar is going to keep moving, if you are already not in the game, you are going to have run probably as twice to catch-up if we do our job right, and we got a history of knowing how to do that, so we are going to drive it pretty hard. So we say never-say-never, but we are going to control the parts that we know how to do, which is we are going to continue to drive the future set very-very aggressively.

Now what we really like about this is, this is not for the feature set for the features sake. The carriers are pushing us very hard for these future sets, because they are going to bind in some respect, they have this big disconnect between the amount of data that the subscriber wants them to deliver, and the amount that they can deliver. Some of them have very complicated spectrum position, and how do they drive that moving forward?

In North America, I think they are going to see some disruption as Sprint, SoftBank, they enter the market. I think there is going to be a little bit of a technology race that exists there in North America. The Europe, with the Vodafone-Verizon deal. Vodafone now has I think a very different balance sheet in order to drive technology. So we have looked worldwide, and we think it's set up well to have a strong modem position.

Brian Modoff - Deutsche Bank

One of the questions, people will say, okay, we have basic LTE. If you looked at 2G and 3G that were auctioned to kind of move up, okay, I will sell the basic stuff, and then I will over time get the edge and then just go from basic WCDMA to HSPA, HSPA+ blah blah blah. In LTE, the difference here is -- in other words, our carrier is going to want just the basic LTE functionality, is that going to be good enough in some used cases like for lower end, or are they going to want to start having some of the more sophisticated elements of LTE, even in their lower end products from a capacity management standpoints? How's your view on that?

Steve Mollenkopf

Well, I think the low end feature set is still pretty robust, and it's robust for people trying to add -- so basically trying to add a new band, they essentially bring complexity to the chipset. You need to have complexity, because of the RF complexity, or you have the RF complexity plus a new modem band that you have to get working together, or see a new modem mode that you have to get working.

The other aspect that happens on the low tier, is that because of multi-SIM, in those markets, the feature set is to have multiple SIMs in the same phone. That creates a fairly large number of combinations that you have to support, when you say, this carrier has this frequency band, has this technology, LTE, FDD, or CDD or CDMA-2000, or its WCDMA; and then you have another carrier which typically -- this is a combinatorial problem, which you have to solve at the low end, which people don't realize there is a lot of complexity down there.

So we think the modem continues to be an area of strength for us for the differentiator, and we are going to -- if we do our jobs right, it's going to continue that way.

Brian Modoff - Deutsche Bank

That's what's so difficult for your competitor to afford.

Steve Mollenkopf

So let's talk a little bit about LTE demand, especially going into next year. So you have got Vodafone as you noted earlier. They have got billions of dollars now. They have made note that they were planning to get aggressive in their LTE deployment. China Mobile, who has been trialing TDD-LTE. There are two vendors certified to deliver chips for the TDD-LTE yourselves and [high sense], which are really captive to Huawei. No one else has gotten to that point that's certified. So they are in pre-commercial launch, but as you know, their pre-commercial launches could be pretty large.

Brian Modoff - Deutsche Bank

How do you see LTE volumes -- how do you see them through the end of this year, and then how do you see LTE volumes next year? Do you see a continued ramp-up? We saw a pretty good growth this year from last year so far year-to-date. But how do you see those volumes, do you see them accelerating?

Steve Mollenkopf

China is always difficult to predict what's going to happen and at the rate at what it's going to happen. What we are encouraged by, that we are seeing happen at the end of this year, which is the start of this process, definitely happening. How that will ramp, really kind of too early to tell. But I would say this, when we look at the China market, LTE-TDD is the opportunity for QUALCOMM to finally get access to the largest carrier in the world, and certainly the largest carrier in the region. And why is that significant even outside of the numbers is, it allows us the platform in China. When we platform in China today, we have a disadvantage, because typically someone has to use another chipset to go into China Mobile, because we have historically not supported across all the tiers, the technology that they would drive -- drive towards that end. So that changes with TD-LTE, and we are pleased with that actually, how that works.

The other thing to remember is that, all of our LTE solutions, all of the tiers of our LTE solutions support TD-LTE. Now they also support TD-SCDMA. They also supports DO, it also supports WCDMA and its all integrated into one package, so it's -- we have been planning for this for some time.

Brian Modoff - Deutsche Bank

So how do you see the volumes next year on LTE, do you see that accelerate?

Steve Mollenkopf

Well we hope so, it looks like an area of strength for us. And I think it's going to be an area of strength in two areas. It will be an area where we will have access to domestic OEMs that may be wouldn't have used us in that period, the Chinese OEM. But even more importantly, I think you are going to see worldwide OEMs using that transition as an opportunity to build that or to cement their share in China Mobile, and so we think that's a good trend.

Brian Modoff - Deutsche Bank

Question from the audience, anyone out there? I will keep going, and if you get some, just raise your hand. The LTE Advanced, how is carrier demand for LTE Advanced progressing? Obviously you have got the U.S. operators kind of insisting on it, and then what's beyond LTE Advanced, what are you guys thinking? I mean, you had Huawei make comments about what they think 5G is, what's your view?

Steve Mollenkopf

It's not even -- it sounds (inaudible) North America. So North America, Japan, Korea, really the developed world LTE Advanced tends to be what they are pushing for and it's -- the part that we -- that's interesting about the modem is, it's much more digital than you might have in a performance aspect of the AT. You either have the feature set or you don't have the feature set. If you don't have the feature set, it's very difficult to build a position there. Unlike in some areas where you are participating and you are competing on performance, you can always sell down, or you can get yourself in.

The modem feature set today that they are pushing, is really an LTE Advanced feature set, and there are a number of features in LTE Advanced, but the one that everyone talks about is carrier aggregation, which is essentially taking just similar spectrum allocations and plugging them together. It stresses your ability to do the baseband, but more importantly it makes it very-very important to have RF competency. And so one of the reasons that we did our RF360 product, was we thought it was important for us to be able to solve that problem on a worldwide QUALCOMM scale level, in order to continue to drive the market forward. And the carriers have these spectrum allocations that, that's really what they want in their network. Otherwise they just can't take advantage of these massive investments that they make.

Brian Modoff - Deutsche Bank

Let's talk a little bit about -- you mentioned RF360. So one of the things that we have seen with QUALCOMM over the years, and I have covered you guys since almost since your IPO, so almost 20 years, one of the things we have seen you do over the years is to continue to integrate incremental functionality into your chips, that allow you to keep -- actually if you look at your ASPs over the last three years, they have actually gone up sequentially, and you are on here for three years now. You look at RF360, you look at 802.11ac, can you talk a little bit about some of the integration work that you are doing, and how you see that impacting your ASP trends, and obviously if you can grow ASPs and gain share, obviously there is a leverage on your revenue growth rate? So can you talk a little bit about that?

Steve Mollenkopf

Sure. In general, we believe that you don't bet against integration in the mobile space. Everyone who has done that, had a difficult time staying in the market. Things like wireless LAN, we don't view them as being any different from GPS or Bluetooth or Multi-Media or application processor. The best way to deliver that is in one complete coherent system design, often on the same chip. So we really view that as the best way to deliver those things for the customer, for power consumption for costs, it's really an integrated technology. So we think we are starting to see that happening on the wireless LAN level.

And then if you look at the RF side, the RF, what's important on the RF, and it started with a transceiver, but I think it also includes front end as well. So it's important to have one system design that you can ramp around, not only the transceiver, but also the front end. And as you are pushing, many-many different types of carrier interfaces through the same electronics, the ability to pre-condition a signal or to do things like envelope tracking, I think you just saw recently in the GALAXY Note 3, that was our first envelope tracking product that came out. Those system features are best done and delivered in a kind of a coherent system design. So we think integration really plays well and continues to play well, as the complexity of the product continues to go up.

Brian Modoff - Deutsche Bank

So how do you -- so you think you are gaining share in 802.11, and then how do you see these trends as -- well just answer that question, then I want to ask you about RF360 a little bit?

Steve Mollenkopf

Yeah I mean see, if you look at -- there was some excitement I think around our earnings call, because we have always been strong in the mid and low tier, in terms of our wireless LAN [attached], and I think there was some misconception about whether we had a leading feature set on the ac side or not, and we essentially have an 802.11ac product, which is pin-for-pin with our end product, and we started to see for the first time that we had cracked some of the big Tier-1, not only on the end side, but also on the ac side. So they are actually planting forward our view that you start with end, and then you do a pin-for-pin replacement into ac.

And I think what people were excited about, it takes a while to get a new technology from your -- from our team into the big Tier-1s, I started to see the first evidence of that. But long term, our view is that, you should delivering those things in an integrated fashion, that's the best way to do it. And I think it's even more important, as you have to do coexistence between the wireless WAN radio and the wireless LAN radio, which is really the future of where the things are going?

Brian Modoff - Deutsche Bank

So you actually see share gains?

Steve Mollenkopf

Yeah we will. I think we are.

Brian Modoff - Deutsche Bank

Okay. Then on the RF360, you have announced the product and the first comments I heard from the like -- industry contacts was it's not that good. Then I kind of remind them well the first transceiver wasn't that good, and five years later, every one of your modems ships with the transceiver. Are we looking in a similar kind of time horizon on RF360, where the first iterations are, they are -- what are you still learning, even though you are now producing it commercially, you are still learning. And three to five years then, RF360 is going to pretty dominant as kind of; yes, I'd buy all of it from them. What's your view on that?

Steve Mollenkopf

Well, I mean, I go back to what we said on the earnings call, which is that, it's on track. You will see it on the Tier-1 later this year, I think you saw that last week. So we are pleased with how the development is going, and it's going pretty much the way that we said. We always said that we would -- it's not going to build as a step function, we are going to build it as a ramp, and part of that is that, we want to make sure that we are -- we know what we are doing before we -- we want to walk before we run. It's also important for us to manage our relationships even with our partners that deliver products today, elsewhere.

Now, what happens as the product becomes more and more complex, two things happen. One, the advantage to be able to have, to wrap the system design around the antenna, goes up and the complexity goes up. The other thing is, a lot of customers are looking at -- they don't really have the engineering resources to do a lot of RF optimization, and so if you look at the low tier and you look at the 2G to 3G conversion tier, they will commit to a product, sell that product well inside our leadtime. So any ability for us to provide a pre-tested reference design, easy to move forward, they [take that] and that is a pretty powerful force within.

Brian Modoff - Deutsche Bank

So to beat their time to market, you essentially, if you think about on lower end, you are taking all that testing integration work out of the equation, so they buy your chip, it's already done for them. So their assembly time, their materials time, the amount of materials they need to have, and their -- I am sorry, the costs go down?

Steve Mollenkopf

I think also, not a lot of them, the expertise required to do RF, it just doesn't exist in the industry the same way that it existed 15 years ago for example, and so there is an advantage that companies that bring that platform expertise, the customers really appreciate that.

Brian Modoff - Deutsche Bank

So you see -- we look at [ROM] costs on front ends is kind of $4 to $6 and 3G anywhere between $8 and $10, or $8 and $12 in 4G, as kind of for that front end piece that you are targeting. If you agree with that, and do we see over time, given the -- obviously the Snapdragon, the apps processor integration, 802.11 integration, now front-end integration, is there any reason to think why ASPs won't still be rising over the next few years on an annualized basis?

Steve Mollenkopf

We haven't given individual breakout on the front-end, although there are benchmarks that you can kind of use. But we do think the trend of growing content in the phone, in the RF area for certain, we think in the application processor space, multimedia, sensor, things like that, and even the capability of the chipset, it really should be compared, in some sense to the PC space, versus the traditional CS-voice space for now. And so, it's a tremendous amount of performance that is being provided across multiple technology vectors. So we look at that as an opportunity to grow our content of the device.

Brian Modoff - Deutsche Bank

And obviously for competitors, incrementally more R&D spend to kind of keep up with you?

Steve Mollenkopf

I think that is -- the other aspect is, you need to have -- to win in SOCs, you have to have expertise across multiple technology vectors, and then, let's say you have that, then you have to be able to integrate that together and deliver that across multiple customers. And that's something that we have developed, it took us a long time to develop that expertise. But now we have it across multiple technologies, all optimized for mobile and we think that's something that puts us in a difficult position to compete with, we try to make it that way.

Brian Modoff - Deutsche Bank

What's your annual R&D budget?

Steve Mollenkopf

It's a big number for sure. You can dig it out, you know what the number is. It's a big number, but it's -- and it's probably an area right now that we are maybe super invested, because we are working through areas where we are trying to really use our R&D scale, as well as our complexity advantage to drive strong points into the market, but I would say it's quite a bit higher than what other people are doing, but I think we are also capturing a good portion of the market as well.

Brian Modoff - Deutsche Bank

Is there a question out there? Anyone? A gentlemen over here. I will come to this afterwards.

Question-and-Answer Session

Unidentified Analyst

Steve hi. Just wanted to jump back to the small cells piece. We have heard a lot about small cell potential license, small cell potential. And I am just wondering when you believe we will start to see meaningful revenues from this space?

Steve Mollenkopf

Yeah I think you should think of -- you should think of small cell, when we talk about it. You should think about it from two aspects. Aspect number one is, it's an interesting business in and of itself, because we can sell chipsets into new products. And that's something that we are already starting to sell, you are starting to see revenue on that in the near future. However, probably the bigger aspect of it is that, it causes the modem feature set and the technology in the devices to turn over. So that really helps our licensing business obviously, it helps the chip business. So a lot of the QUALCOMM investment is there, so that the technology -- we tried to offload the industry of a lot of the R&D burden that they wouldn't be able to do by itself. So small cell is a perfect example of that. We know there is a gap between the amount of data that people want to get, and the economics of delivering data, and we think there is an ability for us to bring phone scale to the infrastructure business, in order to keep it healthy.

And whilst we do that, we think that it turns -- that causes the modem feature set to turn over and the phone to turn over, which has a lot of leverage with our big franchise.

Brian Modoff - Deutsche Bank

Well, one of the things you are talking about is actually synchronization between the handset modem and the basic modem collaboration, like with other (inaudible)?

Steve Mollenkopf

I think the -- gone are the days when networks don't cooperate with each other, or devices don't do something without having context of what's happening around them. That's going to happen at the base station side, it happens with the phone, as it starts to walk into an environment with a lot of different devices that are advertising services to it. So the complexity goes up a lot when that happens, but we can deal with that.

Brian Modoff - Deutsche Bank

Coming back to the point you made earlier, you are starting to talk about some of the development you do. One of the questions we get about long term is operating margins in your business, and one of the questions I get is, are we at a peak intensity level in R&D, and if you think about what you are doing, you have got -- you had your 802.11ac, you brought out low energy 802.11. You've got the RF360 developments. You have been pushing 28 nanometer RF, which is another area you're developing. You have got 20 nanometer coming next year. You have got 14 and 16 nanometer coming the year after, which means you are doing tapeouts next year. So you have got a huge amount of intensity of product developments in modems, in application processors, in sensors and all the other things around the radio. Is that intensity abnormally high, and as you ease some of that off, there should be some benefit to the operating margin? Or are we at a point where we are just going to keep pushing forward and trying to drive as much advancement you can, and just maybe how hard (inaudible) to be able to stay in?

Steve Mollenkopf

We are in a position now where we believe that our ability to invest in technology and our ability to differentiate our products from other people is very-very important in order to position us well for the future. If you look at the future, our view is that, there will be a position from the wired internet into the wireless internet. There will be a proliferation of products that will be -- the phone will be the center of, but there will be a lot of products derived from that. And there will be kind of the winner takes most -- there will be a leader. Someone will be a winner at the end of that, and we want to be that person. So we are investing very heavy in the areas that are required in order to lead there. Modem, application processor connectivity, some of the things that I would broadly call digital sixth sense, with the ability of the phone to talk to other devices (inaudible).

Now we are trying to balance that, which we think is a great strategic setup for a company that has the assets that we have and the expertise that we have. We are trying to balance that and still get double digit growth for our shareholders, and we have been able to do that, and even this year, I mean, we got even that tremendous growth this year in a very-very competitive environment.

We believe in the future, and we think there is still some time where we are going, I am going to call it super-invested, meaning that we are going through nodes at a faster rate. But we are also, we think, distancing ourselves from our traditional competitors, and I think at some point, those things probably get better balanced. And we will talk a bit more about that at our analyst meeting in November, a lot of people ask this question, (inaudible). Kind of how we think about that, we will be happy to explain at that time.

Brian Modoff - Deutsche Bank

So essentially, kind of laying more of a long term target for your operating margins in the business, say at November?

Steve Mollenkopf

That's right. We are trying to balance business that we are very-very excited about, and we think we are in a unique position with giving growth to our shareholders at the same time.

Brian Modoff - Deutsche Bank

Yeah, it is a very interesting time right now when we think about all the opportunities and changes that are occurring. Another question from the audience? Let's talk a little bit about -- is there one over here? Okay. Let's talk about where -- so you guys launched a watch, just getting back into consumer electronics and on top of that, kind of what is your view on wearable technology? How do you think that affects you if it takes off? How do you leverage it, and may be talk a little bit about one of Paul Jacob's fondest subjects, mobile health.

Steve Mollenkopf

Sure. If you look at wearables, wearables in and in of everything, we think are good growth drivers for QUALCOMM. That's one of the reasons why we bought the Atheros asset, in addition to the ability to leverage it to go into the femtocell, as well as just being able to grow content in the devices, as you know. But wearables is another interesting area. There aren't many businesses that are as big and grow as fast as the smartphone business. But we look at that area as an area that can grow from the smartphone business, and enable us not only to create a new interesting business which is close to it, but I think it also causes turnover in the main franchise as well. We announced a watch, and I will be very clear, it's really -- we did that really to showcase Mirasol, which is the display technology in some of our wireless charging and Bluetooth assets. We wanted to showcase those assets. We are not going back into the consumer electronics business. I mean, we have learned over many-many years that, I think we are kind of behind the scenes partner, and we feel very good about being a part of many devices, but that next level we have always let -- when we have done our best work, we have let that go to our partners.

But I think you should look at that as a technology demonstration and capability demonstration versus QUALCOMM into the consumer electronic space.

Brian Modoff - Deutsche Bank

One of the other questions we get a lot about is on process node technology, and I guess, well Intel is going to push forward on their 14 nanometer stuff and they have got that advantage over you, and you are working with TSMC on their 16 nanometer. Samsung is working on 14 nanometer. How do you view that process node -- how important is it to the competitive advantage and then how do you kind of keep up with or try to close the gap with Intel on that one part where may be you have a little advantage?

Steve Mollenkopf

Well, we are working very hard with our, you know, [site] partners, or foundry partners, to move as quickly as we can through the nodes. But I would say that our -- we don't view this market as being defined by the transistor. It's actually defined by the feature sets and the SOC capability. So basically, your feature set across multiple technologies, versus the performance at any one transistor. And actually, because we have the ability to do partitioning across multiple technology, we can actually pick the best combination of different technologies, depending on what the application is, which is very different from the traditional, the way a memory supplier would view the node transition, or the way a pure CPU supplier or graphics supplier would view the transition.

So for us in mobile, it tends not to be defined by the transition, it tends to be defined by the SOC, and software and dealing with the carrier and lighting up a bunch of customers across the world, and even in our past, we have not selected the most high performance transistor that we had even available from our partners, because it really wasn't the right combination of power and performance that we wanted at a particular time. So I don't know, when we talk to our customer base, they still seem pretty excited about our products and our product roadmap moving forward, and we are investing pretty heavily to make sure we closed any window that may be open.

Brian Modoff - Deutsche Bank

Couple more questions, then we will wrap up. One of the things that we think gets really underappreciated within investors, with regards to difference between yourselves and your competitors is network interoperability. What you have gone through and qualified your chips on, any variance or frequency on any carrier's network, any flavor protocol, so that your chips work anywhere on any operator's network anywhere in the world. How hard is that to build that book of interoperability, test qualifications? How much work is that for another vendor to involve themselves in, I think certainly with MediaTek, one of the challenge that they have had is, they work well in China, but not always outside. How much of a barrier is that?

Steve Mollenkopf

Well, it's a tremendous strategic advantage that we have. I mean, not only the scale at which we do it, but just how you organize yourself in order to handle those issues or -- I would consider to be one of our -- a piece of our secret sauce for example. But the thing to remember is that we -- it's not just that we are organized to test something worldwide, we are driving the feature set into the standards body, into our carrier part, into our infrastructure vendors, and we are actually developing those things. We are part of their test program. So when a feature set is -- we hope originated, and then follow it all the way through, and that's one of the reasons why we are in the lead, because we can drive those things forward, and by the time it comes out, we would have already tested it, because we are already part of the development that hasn't been -- so what happens is, you sometimes see people that have a strong position regionally, but going internationally and testing with a bunch of different infrastructure vendors, it's essentially an area where people have difficulties.

Brian Modoff - Deutsche Bank

Then the last question is, so one of the things that obviously you've talked about is that -- when our competitors finally get this element at a standard rate, we are pushing off into the next one, and so we are continuing to try to keep the ball moving forward, the second (inaudible) moving forward, so it's hard for anyone to ever close the gap. So what's next? I mean, how do we -- what do you see as kind of the next step beyond LTE Advanced with regard to carrier aggregation in both, you have to keep pushing that forward, and what's the adoption timeframe on the carrier side for that.

Steve Mollenkopf

Well in the modem side you have a couple of waves of carrier aggregation and LTE Advanced. You have got additional modes and bands that come in, when you start to introduce LTE-TDD. You follow that up with a roadmap towards either 1000x or coexistence with wireless LAN. That's just a modem. CPU is at a transition, which is the same, it's a long roadmap, and the same thing in graphics, and the same thing actually even in positioning. If you look at our -- we were very strong in GPS and GLONASS. We are supporting -- there are a number of other international standards we are positioning, that we are including in our chipsets as well. So we are trying to evolve each one of these technology (inaudible). We are trying to be on the leadership position, and then assuming that somebody could catch up with one of those vectors, we try to put them all together, so you have to compete against all of them. And that's what the customers want. The customers actually want us to abstract all of that complexity for them.

So there is a pretty robust roadmap moving forward. But I think I would stress is, you can't pick one of those vectors and say I am only going to focus on that one, because integration is going to force you to do all of them together, and that's really the way -- integration is really the way to win in mobile.

Brian Modoff - Deutsche Bank

And it has proven itself over time for sure.

Steve Mollenkopf

Yeah.

Brian Modoff - Deutsche Bank

Okay. All right. Well thank you very much Steve. Thank you for your time.

Steve Mollenkopf

Thanks Brian.

Brian Modoff - Deutsche Bank

Thanks everyone for attending.

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