Qualcomm Inc.'s CEO Presents at BMO Technology, Media & Entertainment Conference (Transcript)

| About: Qualcomm Inc. (QCOM)

Qualcomm Inc. (NASDAQ:QCOM)

BMO Technology, Media & Entertainment Conference

December 11, 2013 12:30 PM ET


Paul Jacobs - Chairman and CEO


Tim Long - BMO Capital Market

Unidentified Analyst

[Abrupt Start] And on behalf of all of my colleagues here at BMO Capital Markets, it's my pleasure to welcome you this afternoon on the second day of our 2013 technology and digital media conference. We’re very excited about this conference this year and right now we're about to hit one of the highlights. Our keynote speaker today is one of the leading figures in the world of mobile communications, Paul Jacobs is the CEO and Chairman of Qualcomm and has spent the better part of the last 25 years working on wireless technology and devices. In addition to having a PhD in Electrical Engineering from Berkley, he's Chairman of the US Korea Business Council, Global e-health foundation ambassador, a member of the world economic forum's international business council and a member of the US India CEO Forum and we’re delighted to have him with us today. I'd also like to introduce our communications equipment equity research analyst, Tim Long who's going to moderate this afternoon's session. Please join me in welcoming Paul and Tim.

Tim Long - BMO Capital Market

Thank you Paul for coming and thanks everyone for attending this lunch session here today. I just want to start out with kind of more visionary question for you before we get into some of the company specifics. You talk a lot about this company initiative for the 1000x challenge, so maybe if you could describe to people in the room what that is and how you're going to accomplish that and what that means for Qualcomm as a company over the next five or so years.

Paul Jacobs

So, we’re trying to deal with this data demand and we thought okay, we'll get 10 or 12 times improvement in the capacity of the systems and that was sort of where our mindset was and then one of the operators from Asia came in and said, we really want a 1000 times, like okay, 10-12, up to a 1000, that's going to be a big challenge, and 1,000 comes from basically doubling every year for 10 years, that's sort of the notion of it, and we have been building technologies to manage interference between what we call small cells, maybe you've seen [indiscernible], a little tiny cell that you can buy and you put it in your own house to improve the coverage, and we have been building that technology to improve coverage and trying to manage the interference of those things create, and we realized that if we turn the whole thing around, that we could actually use it for capacity and build the networks out much-much more densely with the small cell technology. The small cells can be very-very inexpensive because they're basically built like a handset but doesn’t have a screen and a battery and all the memory and all the stuff, all the expensive stuff that goes into the handset.

So we said okay, well if we build this network in a different way. The way the network is built today is, I'll call it outside in, you have a big tower outside, it’s pumping out enough power that comes inside the building and you get your connectivity that way, but as the signal goes through walls and gets degraded you also lose bandwidth, you lose data transfer capability. If you build an inside out network which means that I scatter all these little small cells around and I have my connectivity inside the building will be very-very high data rates and it also turns out it leaks out onto the street as well and you drive by and you can get it and if you do that, if you put lots of these cells out there, you increase capacity dramatically.

And it turns out that it actually doesn’t require a huge penetration rate to get that to work. We’ve done things like, even at 5% penetration rate you're already getting very large multiples and I think it was like 20% you needed to get to, to get to the 1,000 times number. So numbers are -- you don’t have to get huge penetration to get that, but now we’re talking about, we can actually see the way that an operator sells their services, the way they generate the bid can be done at a much-much lower cost because 1000x is also not just about the bandwidth improvement and the capacity improvement in the network, but it’s also about cost reducing the network infrastructure.

So, because these devices, these small cells are built like handsets and are so cheap, if you compare that to the cost of a traditional cell site, where it’s not just the equipment cost but the real estate and the conditioning of the enclosure and the [backhaul] all these things, the price differential can be basically a 1000 times between one of these small cells and a traditional cell site. So that's where the 1000x challenge came from and sort of the response to it, and we’re just at the early days of that. We had an announcement with Alcatel Lucent for example. They are in a position where they're, they're sort of an insurgent now and they see this as an opportunity to really grow their business, there are certain operators who see it as a really big opportunity for them to add a much lower cost, deliver a lot of bandwidth and therefore a lot of bits to their customers, so they believe they’ll generate differentiated pricing plans, so we have this kind of rapid strategy where we see certain operators that are going to pull this technology through and then I think the rest of the industry will follow.

Tim Long - BMO Capital Market

Maybe take that a layer down to more tangible for the company, maybe walk us through your view of ASTs for devices have positively surprised everyone for the last multiple years here, what do think the incremental bandwidth means for device pricing, number one, and number two for new end markets, you mentioned small cell, just other adjacent markets maybe in the more M2M...

Paul Jacobs

Yes, so the -- yes, I mean you have the computing market, so tablets we haven’t done as well as we'd would like on a attach rates for wireless LAN connectivity in tablet that i think that operator is putting different pricing plans in place. There is more competition coming in the high end there, probably premiums for having wireless LAN connectivity that will come down. We are doing other stuff where you're getting embedded wireless LAN into things like cars and houses and smart meters and healthcare devices and all that kind of stuff. Some of that is higher value, so potentially higher average selling prices.

But the real story still is growth of smartphones. I mean there is 7 billion smartphones that are projected to be sold between now and 2017. So it’s a huge market and a lot of it will go into the emerging markets which everybody fears that mix would degrade average selling prices. But actually what you see is that people in those emerging markets are buying up from the feature phone to a smartphone and it might be a lower priced smartphone relative to developed market smartphone but it’s significantly higher relative to the feature phone that they were doing.

So you see the average selling prices in the developed markets, roughly staying the same because they just get more features going into them and in the emerging markets you see that they are actually trending upward and so that’s why we see the average selling prices do what they do as they blow and trends and upwards, it help offset some of the mix issue as well.

So we are projecting single digit declines over the next two years. But if you look at the revenues of our licensing business it’s going to be not just smartphones but all these adjacent opportunities that I talked about as well.

Tim Long - BMO Capital Market

I want to touch on a few things from the last earnings call and Analyst Day. I have covered this stock a long time. There were a few things that seem a little different now. So number one, I wanted to just talk about the capital return program which seems a little bit more disciplined. So just walk us through the thought process on why get more aggressive now? How sustainable is that over time?

Paul Jacobs

So, basically the way that we were in the past was we were opportunistic and we thought we could get a great return after we went in hard. And I think people were getting a little frustrated with us because they saw that we had an equity comp program which was very options based and we have a few more years of that and so you kept seeing dilution even though we were buying back. So people came to us and said, you’re not -- is that really returning capital to shareholders, you’re just offsetting dilution. So we said okay, fine, we get that. We thought that we're doing a good job, with the dividend. Last increase was 40% increase to sell. Well let’s look at you relative to other guys.

It’s -- there is a wide range in the tech-industry, but the nice thing is that we can afford to give a good dividend and invest heavily in R&D, we put $5 billion in to R&D last year. So we are not skimping on R&D. And given the cash generation of the business we can do it. Now we had this onshore versus offshore cash issue and people, they pressed us around, why don't you take on a lot of debt and buyback. My feeling there is, we don’t really need to do that because we are generating a fairly large amount of onshore cash. And I don’t really think in the tech-industry it’s a great thing to be highly leveraged because your competitors will try and attack you. They will try and put you into a position of stress, and if you just project strength that’s a little bit harder for people to come after you. That way they know that you can weather ahead and come back hard. So it just deters that.

But anyway, so what we did at the analyst meeting and at the earnings call was, say we will return 75% of our worldwide cash flow. We are still going to obviously retain fairly large cash position, certainly in the offshore case. It doesn’t require us to borrow in the near term. There may be some borrowing that happens in the out term. But it depends on conditions. But the other thing that we committed to is that we'll grow the dividend faster than the earnings growth. And we actually this year, we’re projecting growing earnings faster than revenue. And the reason why that’s typically is hard is because when the chip business which is lower margin grows faster than licensing business; it just naturally causes the revenues to grow faster than the earnings.

So we'll grow the dividends and then we will guarantee that we'll offset the dilution. And we have a bubble still for the end of the option equity comp program. We've gone to RSUs for many years now but we still had some of that left. So that’s really -- if you say it's more disciplined, I guess it’s more predictable. I think we did a good job of [indiscernible] ROIs on our investments, they were pretty good, I think better than almost anybody out there.

Tim Long - BMO Capital Markets

Okay, great. And now, one of the other aspects that investors sometimes push back on is spending and OpEx, so obviously to keep the innovation engine going there is -- you mentioned $5 billion in R&D, that’s needed. But I have never heard that we’re making decisions on projects that we’re going to do or not do. So it seems like a much more prudent approach to OpEx.

So first of all how difficult is that for the Company where it’s really hasn’t been in place to that level at least that we’ve seen from the outside, number one and number two, if you do start to see an acceleration in revenue, do you think we’re at kind of a more normalized OpEx growth or does that discipline maybe go away a little if you’re starting to see more revenue growth and that will be reinvested?

Paul Jacobs

I don’t think it was that hard for the company because we do reprioritization often. It was just in this case in the chip business we basically looked at the chip roadmap. And this year we had a case where our cadence was a little too fast for our customers to absorb and we said that’s probably not the way we ought to be spending our money. So we just reprioritize from certain chip families into some new opportunities and some around the enterprise, some around computing and some other stuff small cell and so forth. And I think that’s the right thing. I mean those are good growth opportunities for the future.

We had a bunch of smaller projects around that we said okay, well we’re just going to -- when you’re growing at 30% a year somebody comes in and says [look at and] one or two heads, there is a part of me like me okay that’s probably not that big of a deal. But now it’s, we’re still projecting double digit growth but lower than 30%. So okay well let’s look a little bit more carefully at these things. And so we’ve done a number of things review or shutdown projects, we sold out some things, we carved out some things. I mean it’s a mixture of things and it’s really just a focus on where we think the biggest growth opportunity is and where we think we actually need to make the investment instead of finding some partners or something like that that can make the investment.

Really would we invest a little more if the revenues grew dramatically? The answer is probably yes because we have -- we actually prioritize the projects. We go down and we look at returns and we rank them in certain ways and we just then set a line and we say okay these ones we're doing, these ones still stay in the back burner. And you can move that line a little bit and generate some other opportunities for the future. So -- but I don’t think we -- it's not like we go hard wild and spend it all. So that won’t happen.

I think we feel like we’re at scale. We feel like that we have the degree of investment that we make we can keep our competitors on their back foot always having to react to the new things we’re doing whether it’s on the radio side or the microprocessor or graphics, connectivity, internet. And we have a large number of opportunities that we can push large number of fronts that we can compete on.

Yes, so I think we feel good about the amount that we’re investing and we are still increasing R&D. I mean the R&D run rate out of the chip business will be lower existing ’14 than it was existing ’13, so that's come down a little bit because of reprioritization. But if you look companywide there still is a reasonable amount of growth. And we took down SG&A to offset some increases in R&D.

So don’t worry, I mean we’re still generating a lot of great new technologies.

Tim Long - BMO Capital Markets

Okay, great. No one complains when you have a three year LTE lease. It doesn’t come for free, right. You mentioned the 10% growth for revenues and earnings not a…

Paul Jacobs

It’s double digit…

Tim Long - BMO Capital Markets

Double digit, yes, more than 10, we’ll call it 10 or more, so just curious, this first year out of the gate here midpoint is kind of high single digit. So how do you -- what do you think of the factors that over the years two through five can help I guess potentially a slight acceleration of growth. Is it just emerging market smartphones or what else are you factoring in? Are you thinking about being able to deliver on that pretty strong statement?

Paul Jacobs

Yes, I mean there is a bunch of things that -- if you just look at the first half to the second half of the year where we had sort of this mismatch and we had some customers on previous generation parts, that will revolve itself towards the second half of the year. You’ll see more and more markets going LTE. I mean obviously China just issued its LTE licenses and that’s going to help drive growth in the second half of the year. We’ll get our -- on the bottom line we’ll get our cost down for the low tier market. We have a -- we're basically taking a mid-tier architecture and pushing it into the low end and we will have a specific low tier architecture going forward.

But on the growth end, there is a lot of things that are going on. I mean there is the whole computing -- first of all, smartphones are going to grow. I mean the 7 billion smartphones between now and 2017 I mean that’s a great market, so that’s going to grow. Computing I think will get better attach rates on the computing devices, and we will grow computing sort of the addressable market of computing for mobile technologies. We’ll have the small cell chipsets coming out and I think that’s a great opportunity. We’re going to take more and more content in the devices. So the current initiative right now is around the RF front end, so more content share there. But we have initiatives on the display side for very low power displays. We have initiatives around sensors, those kinds of things.

Then you have the other adjacent markets, so you have the automotive market, energy, health. I mean yes there is a whole set of new markets that will generate some growth in the out-years. And so there is a broad range of things, it’s not -- there is no like okay this is the grand slam, the one thing we have to do. There is a whole set of them. Some of them are nicely scaled to the existing business like increasing the content, other ones are ones where there is a little bit more heavy lifting to do like you go out and say okay well how big will the market and connected healthcare be in five years, that’s -- there is a lot of uncertainty to that one. But as there is more uncertainty we factor that less into our forward planning.

Tim Long - BMO Capital Markets

Okay, great. I did want to ask about China. I don’t want to get too much into the NDRC I’m sure the statement is you don’t know much about it. But I was there for my tech colleagues last week with the license issuance in China. Maybe talk to us about what your perception is on how the rollout will be there and how meaningful the largest carrier going from a pretty poor 3G network to global standard for 4G network. How do you think that will go over and what do you think that means for kind of Qualcomm’s business in China?

Paul Jacobs

[I think] to be a very big impact. We worked with China Mobile a lot in the past but didn’t sell much in the China Mobile and now we have the opportunity to sell a lot more. We weren’t aggressive on TD-SCDMA, numbers look relatively small for a long time. And now we have TD-SCDMA in the chipsets but I think they’re going to go hard on LTEs. They’ve -- the dynamics in that market is that people buy phones with multiple SIMs in them because they want to keep their China Mobile voice number but they want to get their data services from one of the other networks. And I think China Mobile sees that and they don’t like that, they want to try and pull some of that back.

So there is going to be a big I think battle around bandwidth and pricing plans and all those kinds of things. Those dynamics that you see when there is people are trying to gain share or maintain share and so that should be good and should be good from a device side in a sense that, that will create replacement cycle demand, they’ll create pressure for higher feature content in the devices so that you actually use this bandwidth that’s being generated. Obviously we just announced a chip with Ultra HD video capture in it. I mean like camcorders don’t even have this and your phone and your tablet will be able to capture Ultra HD and if you haven’t seen it Ultra HD is extremely cool. I mean it definitely it will be a good feature.

So there are other things that are coming that will generate more demand for bandwidth and obviously video is a critical aspect of that. So I think you will see that in China. Most people in China get on the internet through their phone, not on a PC, so that would just -- it just gives us this opportunity to expand pretty dramatically there. On the investigation side, we really don’t know, we don’t know much yet. We’ve been through other government investigations in the past and basically you learn as you go and you try and organize your friends to help support you and you try and make your counter arguments, and then we’ll see how it goes.

But this happened in the past in other industries, it even happens with domestic Chinese companies too. So look, I mean our goal is to be a good partner in China. I think we’ve done that in the past, we’ve certainly done it in many markets where we’ve gone in and work with companies and help build them up into global brands. We’ve done that in China as well. We’re also -- we buy Silicon from FMIC, so we’re part of the semiconductor value chain there and we really -- I think we do a lot to be a good player in China. So I’m hopeful that will turn out well but it’s early days and we still got a sort of martial our resources.

Tim Long - BMO Capital Markets

Okay, I want to get into the chipset side of the business, but I am going to leave in a question from the audience here as a segway. So how do you think about the handset supplier consolidation? So obviously Apple and Samsung really dominant market share right now. How do you like this, how would you like to see the market evolve and what’s kind of been the impact of that consolidation on Qualcomm?

Paul Jacobs

Yes, so we’re -- I mean we -- our model has been a horizontal model, so for us we like to have lots of customers. But I mean we love working with the big guys and will drive technology with them, it’s still happening, they’re still strong pull for new features and so forth. So I think that’s -- we can work with it, however it shapes out. I think what’s really happening and I talked about this at the Analyst Day is that it’s kind of a business model shift almost for the handset guys.

You see on Apple with that sort of built the whole ecosystem around their devices, that’s gotten them to be able to get additional marketing support from the operators’ additional subsidy support from the operators. You’ve got a Samsung which has a certain degree of verticalization. They then spend that incremental money on extra marketing, so they out-market everybody else, you look at the size of their budget, so that’s their model -- that's their differentiated model. You look in China at the Xiaomi or U.S. at an Amazon where they sell their devices closer to cost, but they make it up on content and peripherals and other kinds of things.

So that’s a different model. You’ve got Microsoft, Nokia and Google and Motorola, they have their own model to try and sell their online services and support their operating system businesses. And then you got a bunch of other people who sort of have a traditional model and try and sell in the traditional way better features at -- for a certain value you drive and that model’s hard and so you have seen a number of those companies have difficulties in terms of their financials, some of which have been very good partners with us for a long time and those companies I think are out now trying to determine, okay what’s their pivot, how do they shift the business into a business model. I think there is a number of possibilities for them.

But what the impact to us was, when you get a little bit of more concentration there is a little bit more pressure, so the first half of this year definitely reflected some lower benefits from having higher concentration. But I think as time goes on you just kind of take that and then you move from there in terms of growth. And we feel good about our ability to drive content into those big guys and of course some of those -- in that whole market at the low-end that sort of chaotic thing that’s going on down there which we are also participating and so.

Tim Long - BMO Capital Markets

Okay. And then just looking at the model for the chipset business over the last several years it has kind have been on a steady decline if you back into gross margins, so the gross margins have definitely come down so some of the new businesses have been at more competitive markets than say the traditional base being. So just maybe walk us through the philosophy going forward, kind of the growth versus margin trade off in that business. I think there is obviously going to be decisions to be made for design wins and writing off so just what is the overall thesis there?

Paul Jacobs

I mean we believe that to get scale a business that can have scale relatively easily is the idea of just extending our content share in the devices. And some of those have come at lower margins. And part of the reason of that is that in certain cases some of those -- there is some degree of substitutability, so when we do the application processor business, even though our application processors are better and we get market share because of that we’re still competing against a core that somebody might get from ARM trade and then do an integration.

And in particular you look at a Samsung for example which is a big customer, they have an internal effort and we have to go beat that internal effort. And so that puts pressure more than people might have thought given the performance advantage that we have, but that’s actually how we maintain and win the share with that. But there are other things, I mean there are front-end stuff I think that’s quite differentiated we will sell -- we will allow the manufacturer to actually pull some cost out of other components in the device or rollout and to make a single SKU so their logistics cost will be better. So we are creating value with some of these things we will harvest some of that value.

And then we have this investment in low power displays and to the extent that we are successful with those and we have I think very promising things that are going on there. That gives us another opportunity, but in addition to the display because the displays are MEMS space they also give us an interesting opportunity in sensor integration as well. So we see sort of a few layers, as you look at kind of the potential outcomes there is a few key things there okay if I succeeded at this that opens up a few more opportunities here.

And we’ll go for those, I mean I think it makes sense for us. You are not going to see us selling batteries or memories sort of those high value components, but I think most of the other stuff in the phone from an electronic standpoint we would look at and say hey that’s potentially interesting to us.

Unidentified Company Representative

Yes the Company’s had a pretty successful run in a lot of these other parts of the phones, so it’s been a nice increase in dollar content.

Paul Jacobs

And actually functionality too, I mean if you look at the -- like these things with the always-on sensors, so you talk to your -- your phone is off and you say, hey wake up so it’s such and such. I mean that came about because we did all this integration so that the audio codec can be on at very low power and it can be -- the DSP can be on doing whatever processing it needs to do to do that word sporting without running the battery down. So this integration that we have is, it creates new sort of unintended feature benefits to the consumer as well. So I think it’s a great model for that in addition to creating value there on the financial side.

Tim Long - BMO Capital Markets

And related to that topic and competition so is there a risk that obviously you are not going to have 95% or whatever the number of the LTE market share forever and I would assume that higher value, higher margin type business. So what’s your view of the change and the pace of change in the competitive landscape for 4G, a media type will probably ready mid next year in the low-end and Broadcom Intel talk a lot, but what’s your view on when you’ll see a real change to that?

Paul Jacobs

I think we are going to keep our lead pretty -- and we just announced our fourth generation modem with 300 megabits per second and multiple carrier aggregation and there is still other carrier aggregation tricks to play, plus then there is RF front-end which will allow you to deal with all -- there is 41 bands for LTE now and that is just a headache for all the manufacturers and operators to figure out how you are going to do roaming and so forth.

So I think that those things in addition to new functionality that’s going into the radio, those things will help maintain share.

Carrier aggregation is the current thing we’re doing, there’s LTE Broadcast coming up, the LTE Direct coming up, there’s LTE in the unlicensed band that we just announced that’s coming up. There’s all the integration with the small cells and interference management and so there’s a broad range of new technologies that are coming out that I think will allow us to maintain our lead for some time in the future.

And the timeframe for these things are long. So when you hear us starting to talk about certain technologies and we’ve been working on them for years. It’s like eight years from when we have the idea for a new technology to when it shows up in a chip, so when you start hearing us talking about it, it means that -- okay our competitors aren’t going to have to go through that whole process because they’re not having to have to run the standards body process again all the other stuff. But they have to catch up and so we keep them behind by continually moving the bar and as long as there is consumer demand for data, more data, more capacity which seems pretty much insatiable at this point, 1,000 acts, I think that gives us great market to grow into.

Tim Long - BMO Capital Markets

Okay. Another one from the audience here, see there is someone near the front or someone with very good eyesight, they see wearing you talk. And just to talk a little bit about what you see in wearable tech products and how Qualcomm will fit into that picture?

Paul Jacobs

Yes, so we did this product as a limited edition because we wanted to set the design point. I mean to me a smartwatch is not a smartphone strapped to your wrist. We knew how to do that long time ago and that model I don’t think is the best model. I really wanted something that was sunlight visible, that was always on so the screen is always on, you can glance at it. You get your notifications on it. It has very long batter life so you charge it once a day.

We put wireless charging into it as well so that you just put it down on the charger and it charges. You don’t to fiddle with plugs into and so forth. So it was really as a way to sort of drive to development of Mirasol and the wireless charging technology and actually we got a radio technology then in the process didn’t quite pan out. But that was really the impetus.

And then that grew into this notion of sort of a continuous interaction with your phone, what you’re seeing with things like live tiles and Facebook Home and Google Now and all these things with -- the device is kind of always on. But if think about interacting with your device constantly and it means I got to pull the phone out of my pocket unlock the screen and then I finally get to a notification that actually starts taking a lot of time and people talk about 150, 170 times a day you look at your phone. If you I’m not going to look at it twice as much because I’m getting notifications to it all the time, that’s going to start to consume an enormous amount of your day.

So what’s cool about this is breaking news shows up, so any app that creates an Android notification can get filtered to the watch, so I get USA TODAY and New York Times to it, CNBC to it. I get NFL scores, NBA scores, baseball, hockey whatever all the sport stuff. WhatsApp, I mean any Facebook, I mean anything that generates a notification can come here and I just -- my wrist buzzes, nobody in the room has to know that I’m looking at something. I can just kind look at it relatively suspiciously and I just flick it away like that, so it’s like less than a second for me to get a notification and deal with it.

And then you start thinking about the future of -- okay I am going to walk into the room and that’s going to be the Internet of everything so all these things are going to be connected, and let the offered service that I can attach to, content that might come to me. I might walk into a retail space and I get offers for checking in, so some loyalty program or some discounts or whatever.

Now you don’t want to be overwhelmed by this so we’re also building certain machine intelligence systems that sort of help you decide that what to filter and filter more intelligently. But no matter what, I mean the thing that all of us who have been wearing these things notice is that it’s very easy and you get addicted to the notion that stuff just comes to you in real time and you see it and flick it away.

And so -- okay so what’s the business model? I mean the business model is not selling watches, it’s selling the components to watch manufacturers. We don’t want to go build all the distribution and we’re not going to build every kind of watch that’s out there. So we’re talking to companies from very high-end watch manufacturers down to sort of the cheapest low-end ones, I just got a notification by the way.

And so we have a lot of companies that we’re interacting with on that and I think that’s the right model. We want to be an enabling technology company. We don’t need to be out there competing. I mean, it was the case that Samsung launched the Gear on the same day as we launch Toq, but it was not because we chose to do that and it was nice we were happy to see that we got a lot of media attention for it because we really wanted to make the point that this is the way we think smartwatches should be designed. But it’s going to be partnered and they’re going to take it forward and that’s how we’re going to interact, so.

Question-and-Answer Session

Tim Long - BMO Capital Markets

Okay another question from the audience on, you could check the stock price there whatever you are going? The question comes in on gesture recognition so maybe you talk about some futuristic applications maybe touch on your view there we’re starting to see it another devices. And when do you think that will come onto handsets and maybe any other features that you think we’ll be talking about over the next few years and becoming added to phones which again will support the ASP of these devices?

Paul Jacobs

Yes I mean so gesture recognition, well we’ve done a bunch of stuff around gestures through different sensors, camera, ultrasound all these different things. I think that there is some value to that. There are certain gestures which are interesting. We did a demonstration one day where we put up screens and it was like about moving content from one place to the other and the gesture was, let’s say there's two screens here, I go like that from this one and go like that to that one and it's bizarre, in your head you're like okay, I have that thing in my hand.

I mean it’s, so there are gestures that work, obviously you know Microsoft's made a business around connect and so forth, so I think it's going to be matching the application to the gesture technology, there's a lot of interest in it in the automotive space, people wanting it, or that you don’t have to actually go to the device and where is that button, there it'll be I'll change the channels on the radio or whatever, on my media player by just gesturing, there's a lot of interest in that, I think, you know some of the smart TV stuff will happen with that.

But I think some of the things that are cool that are coming is all this proximity stuff, it’s really like, I walk into the room and at very low power I can detect something of interest about that area and you saw, we made an announcement around our Gimbal beaconing product so that's the kind of thing where we're doing this at stadiums, you walk into the stadium okay, here is where you hit the beer line is less, go here for your seats, here's some offer to you when you're leaving the stadium, you know take this route instead of that route, the traffic's better here than there.

We’re always seeing really interesting stuff around proximity, but proximity will even take another step so we have the full notion of sharing the content that you have with screens around you, using the user interface devices, microphone, speakers, cameras and the environment around you and it's kind of the data rates at which you and latencies at which you can connect with those things, so there's very high speed data coming, gigabits per second in the local area so I'll be able to walk into the room and upload my content to my home-server, download my content to whatever show I watch, instantly while I walk in and out of the room that like my living room or whatever or I walk into a meeting at work and boom, everybody now gets updated with the latest presentation.

We can all share it across each other, so lots of things around the sort of proximity notion and then I think as we improve the always-on screen to be able to have it on the quality that's required for a tablet and a smartphone, then the notion that the screen will be always on, because it always bugs me that I put my phone down on the table and it looks like it's off because the screen's off but in fact it's in there interacting with the network, it's downloading stuff and it could be notifying me of things if it was sitting there and I actually lived through that because we had built an e-reader with Mirasol in it and it was really was an android tablet, so I used to get my email, I'd sit it down on the table while I was in a meeting and the emails would just kind of roll down and when you saw one that was interesting you tap on that, but you weren't always on your device sort of ignoring what was going on in the meeting because you were looking to see did something come up.

So I think those kinds of always-on continuous interaction and then just the whole interaction between the stuff that's in your house, it's like home automation, media automation all these kinds of things, in my house like I've spent a huge amount of money getting somebody to come in and do all the stuff custom, now it's pretty much just going to, you’re going to put it in the house, stuff's going to just detect each other they're going to connect and you're going to be able to control stuff and we just announced this thing where we donated some code we built for kind of connecting across the silos of the Internet of everything, donated that to the Linux foundation, so there's this thing called the All Seen Alliance and what it does is, it allows all kinds of stuff to talk to each other.

So when you have the Internet of things what you worry about is you get a manufacturer that makes I don’t know the screens, don't talk to the guys who make the light bulbs and the switches and washing machine and whatever it is in your house that you might want to connect, so we just gave him them this layer that runs off on any operating system over any hardware, you know, physical layer, whatever radio protocol you want and they just allows things to discover each other, authenticate and talk to each other and I think that's going to be a really cool feature that's coming in the future too, I have a lot to say about that Tom, but I’ll stop there.

Tim Long - BMO Capital Markets

Outstanding, let's just see if there's any questions from anyone in the audience that hasn’t submitted them via the app, anyone? No, okay, then keep going in. Maybe if we go back to the emerging markets, I think you gave the $190 ASP at your Analyst Day which was a pleasant surprise to most people probably higher than most would have, and higher than I would have expected.

What do you think drives that number, I'm assuming some of these things that you're talking about a more developed markets, is it camera, is it more bread and butter smartphone features that you think drives the emerging market dynamics over the next few years, or do you see the whole impact of technology there.

Paul Jacobs

I think the impact of technology will happen in the emerging markets, I mean take healthcare as an example, I have a pretty strong belief that a lot of the healthcare applications will happen in the emerging markets and then boomerang back to developed markets because the regulatory burden in the developed markets is so high and the entrance interests are so big, so things like sensors that you might wear on your body or things that can monitor at a low cost or that a lower skilled healthcare professional can provide. I think those kinds of things can go into the emerging market and drive benefits, but the basic notion of going from 2G to 3G and 4G from feature phone to smartphone, already that's just going to drive a lot of the uplift in ASP so you got this nice tailwind.

And then these other things are incremental on top of it and some of the things will be important, so I think there is going to be a lot of Ultra HD screens sold in emerging markets well not in the near-term. I mean when those things come down the cost curve yes that will be the thing everybody buys, but will that be the driver in the near-term? Probably not, but cameras for sure, I mean I think camera and certain amounts of video and the better you do it the better the quality of it, yes more likely that happens. Multimedia, I mean multimedia the better you do your multimedia the less bandwidth it takes to get the video down to the device therefore it can be more affordable for people yes those things will -- that would drive demand.

We have plenty things right now where people just they’ll go oh, I’m going to buy a four-core instead of two-core or the number is kind of thing that there is a little bit of that going on right now. And if that’s the game then we’ll do that game too but.

Tim Long - BMO Capital Markets

Okay great. I think oh here is one question from Erica.

Unidentified Analyst


Paul Jacobs

Yes. So the question was around foundries strategy sort of the Moore’s Law, the economics of Moore’s Law slowing in terms of are we getting lower cost per transistor now. And we hope we can turn that down again a little bit it may not be as fast as it has been in the past. But I think what we’ll do is we’ll actually see different partitioning in the chipsets so that you’ll have some of the parts of the chip be done in the leading edge technology and much of the chip be done in a trailing edge just from a cost standpoint, so packing technology will end up being more important.

The other part of the question was about Intel what do we see about Intel as a potential source for foundry and I mean we’re certainly open to it, it’s -- there they have expressed interest in going that way obviously TFMC and the other fabless guys have a different model right now for how they build their fabs they’re very flexible. They can run multiple different products through them simultaneously and it’s all software controlled where the cartridge of wafer go and Intel is famous we have been known for having a copy exact model, so they need very large volumes of a particular chip to run through that.

But I mean people change and so forth, so I mean it’s certainly interesting I mean I am glad to hear that their interested in going that way and we’ll see how that plays out. But right now I mean the fundamental of that in the foundry is that typically these leading edge chips go into a set of iconic phones an iconic phone is like a -- it’s almost like a movie launch. Things happen in the first small period of time, so you have to ramp incredibly fast, build a lot of capacity on the frontend which means that after that those first wave has passed through that now there is a lot of foundry capacity leftover.

And the fabless model have to be there in order for other people to absorb that coming later, the later waves to absorb that. So I think the fabless model is very well suited to the mobile space and to these kind of leading edge designs and so I think it’s sort of necessary as a way of participating in the market.

Tim Long - BMO Capital Market

Okay I think we need to wrap it up there. So thank you so much Paul. Really appreciate the time here today.

Paul Jacobs

Great thanks Tim.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!