QUALCOMM, Inc. (NASDAQ:QCOM) Analyst Meeting November 20, 2013 10:00 AM ET
Warren Kneeshaw - VP, IR
Paul Jacobs - CEO
Steve Mollenkopf - President and COO
Derek Aberle - EVP
George Davis - EVP and CFO
Mark McKechnie - Evercore Partners
Tim Long - BMO
Brian Modoff - Deutsche Bank
Mike Walkley - Canaccord Genuity
Kulbinder Garcha - Credit Suisse
Stacy Rasgon - Sanford Bernstein
Ehud Gelblum - Citigroup
Brett Simpson - Arete
Sanjeev Advani - Stifel
James Faucette - Pacific Crest
Chris Caso - Susquehanna
Tal Liani - Bank of America
Rob Hall - JPMorgan
Ladies and gentlemen, please welcome Qualcomm Vice President of Investor Relations, Warren Kneeshaw.
And welcome to Qualcomm’s 2013 Analyst Day. It’s great to be back here in New York and see many of you here again. I also like to welcome those of you on today’s webcast for joining us remotely. We know you all have a busy schedule and we appreciate you taking the time to be with us. I also like to thank our Investor Relations and Event teams for putting on today’s program and our Executives for their ongoing commitment to investor communications. During today’s meeting we will make forward-looking statements regarding our expectations and other future events, which may differ materially from Qualcomm’s actual results. I’d like to refer you to our SEC filings including our most recent Form 10-K for a description of our businesses, associated risk and other important factors which could cause our actual results to differ from these forward-looking statements. In addition, if we use non-GAAP financial measures as defined by Regulation G, you’ll find the required reconciliations to GAAP in the handouts and on our website at www.qualcomm.com. You'll also see a copy of our Safe-Harbor statement there.
Today’s agenda includes presentations by Dr. Paul Jacobs, Steve Mollenkopf, Derek Aberle and George Davis and then Don Rosenberg will join the question-and-answer session. Also like to welcome other members of our executive team who are with us here today. Hopefully you had a chance to meet them at the reception last night and get their additional perspective on our business. I have busy agenda here today, so I’d like to get right to it. Please join me in welcoming Paul Jacobs, Qualcomm’s Chairman and Chief Executive Officer.
Good morning everybody and we’ve got a pretty crowded house; I appreciate everybody showing up to hear what we have to say. Obviously we’re all here because mobile is doing incredible things as an industry. I mean it’s really transforming our world and its transforming not just the way we communicate but other parts of industries. And so if you look at various examples, retail for example; 84% of U.S. mobile subs used devices to shop within the past month as of the first quarter. Education, we’re expecting mobile education spending to grow by 20 times between 2012 and 2020. We're looking at how brands market themselves, how they better engage with consumers and you see all sorts of companies using mobile technologies to do that. We did some projects, for example; advertising the new Star Trek movie; we’re working with LEGO on augmented reality. I mean it’s a broad range of companies getting involved. Healthcare is an area that we’re very, very excited about. There is 97,000, more than 97,000 apps on healthcare alone; 247 million people have downloaded a healthcare app, a mobile healthcare app already.
For us we’ve seen and we’ve driven a lot of these changes. Obviously there is a lot that goes into, we have to bring people together; we have to build our own internal expertise; we have to make investments far ahead of the market; we have to -- it can take us up to eight years from the idea that we have a technology to that showing up in a device; we have to be looking out in the future quite far in order to make this all happen. But we’ve done that successfully over the years and you can see the stats from the chip business success to the licensing business success. And I think we are still absolutely in the early days of the impact that the mobile technology is going to have on the world.
Now obviously there is stuff going on in the industry and I think on the operator side it’s really exciting what’s going on. If you look at the U.S. market, you have Masa Son coming in with Softbank purchase of Sprint and he has already started to demonstrate multiple frequency bands and how they’re going to drive higher data rates, that’s going to drive movement, increase movement obviously the two leading operators, AT&T and Verizon, have been doing tremendous things in terms of new data rates but it should be very interesting to see how this competition shakes out. Obviously in Europe you have Verizon buying out the Vodafone stake and so now Vodafone’s got money, they’ll be driving mobile broadband. India, we just concluded our transfer of our spectrum in India to Bharti, so Bharti is now primed and ready to drive mobile broadband there. And of course China, really interesting story towards the end of the year that we’ve talked about. So that’s going to be a great one as well driving mobile broadband there.
On the handset side on the manufacturer side, I think what’s interesting obviously we see this concentration with Apple and Samsung doing very well compared to some of the others in the industry. Obviously at the low end you have huge numbers of very small companies using our reference designs to drive. But you have other players now. And I think one of the things that distinguishes people is business model. So you have Apple building an ecosystem getting large subsidies and marketing dollars because of the consumer demand. You see Samsung was a very vertically integrated model and spending that incremental dollars, their money on heavily-heavily marketing their product. You see an Amazon coming in where they’re going to make their money on content. You go to China you see a Xiao-Mei that does something similar where they don’t pay distribution they sell over the Internet and they make their money on content and accessories.
And obviously you have Microsoft and Nokia, and Google, and Motorola. So bunch of different business models that are coming out and I think that actually one of the big changes in the industry dynamics and we will see how the existing players that middle group of companies that we see getting squeezed right now, how they reinvent themselves in order to compete in this new business model area, because we’re delivering so much of the technology of the products now. They have to find other ways that they can differentiate themselves.
In that context I think I hope you agree and we delivered a heck of a fiscal 2013. 30% increase in revenues, 22% increase in non-GAAP EPS. QCT’s really knocked it out of the park. 716 million MSMs shipped, that was up 21% year-over-year. The total reported device sales 231 billion, up 23% year-over-year. So the numbers I think were substantial and we’re really happy. And I just want to say thanks to all the employees for pulling that one off.
But the other thing that we did was we returned capital to shareholders during that time too, and I think that was a very important thing. I know you’re all waiting to hear what our plans are there. But before I get to that, let me just brag a little. I mean this is what we’ve done since this team took over in 2005, so the market cap more than double, revenues more than quadruple, GAAP EPS more than triple, and cash and marketable securities have gone up. And since we took over, we’ve returned $23.8 billion to shareholders. So we have been focused on that already. And you can see over the period -- the entire period of the life of the company, its $26 billion that have been returned and you can see that it’s divided between dividends and stock repurchases. So we’ve been doing that. We continue to increase our cash dividend. In March we increased it for the 11th consecutive year by 40%. So we are focused, and we’ve returned $6.7 billion in form of cash dividends and buybacks in the fiscal year. So that all went well.
So where are we going from here and like I said I know everybody’s been interested in this, I am just going to hit the high points it George will get up later and give you a little bit more detail. But this is what we’re committing to right now is targeting returns of 75% of our free cash flow. We will grow our dividend in excess of earnings growth. We understand -- we still have this option bubble, we did shift RSUs but we have a few years left where there is still a fairly substantial option overhang and we will make sure that that is not anti-dilutive or that there it’s not dilutive. And in addition to that, we’ll do what we’ve done in the past, which is we’ve been opportunistic about our repurchases. And if you look at the returns based off of our repurchases they have been very good, and it’s because we choose our timing well. But at a baseline we’ll make sure that we aren’t diluting the investors through our equity comp programs.
While we’re doing this we also want to make sure that we’re in a position where we can make strategic actions, not that we have any large acquisitions inside or whatever. But what we do want to make sure is that in the tech industry I feel strongly that it is important to retain enough cash and mass so that your competitors don’t come after you because they feel like that you’re weak and they can take some strategic action. And just having to counterweight there keeps them from doing that. And so we are focused on return of capital. We will also retain some cash on balance sheet to do what we need to do, whether its investments, acquisitions or whatever, even though, like I said, that isn’t something that we have underway right now.
And we will also continue to invest heavily in research and development and I think the history of the growth of the company, last three years, 30% plus revenue increases, and that comes from the fact that we invest and as I said earlier, we have to invest on a very long time horizon with some of these technologies, but you can see a whole set of technologies that have been created by these investments, obviously $5 billion of R&D last fiscal year, and as we look forward, we are moderating the rate of growth of our OpEx but we are still continuing to increase research and development and we are also reallocating money from certain programs to other programs in order that we have certain growth opportunities, we reprioritized all of it. And Steve and George will talk little bit more about that. But we’re operating its scale, so we really can afford to do a tremendous amount of R&D on these kinds of dollars and with the growth that we have.
So lot of innovation in the past. I’m going to tell more about what’s coming. So if we look at the investment we’ve made and I used to get up here at these meetings and say here are our big bets and I think a number of them have been extremely successful. You look down the list in terms of continuing to enhance 3G and make it a better and better system for download. There is an often lot of spectrum that’s been used for 3G in the world today. So we continue to drive that.
Application processor is been a very successful investment for us. I find it, I love the fact that we have these discussions about whether Intel can make as good of a microprocessor as Qualcomm, that I feel proud about that and it really shows kind of investments that we’ve been making in application processor side.
Carrier aggregation is a very important thing right now. I’ll talk to you more about that later but that’s using multiple frequency bands to get higher and higher data rates down to the device. We made investments in connectivity, Wi-Fi, Bluetooth; we’re leading in graphics technologies these days. Obviously, LTE was a huge one and then our Snapdragon and other integration techniques that we have done in order to build better and better products that lead the market.
We clearly have a lot of projects that are under way. None of these are meant to be exhaustive lists, but obviously we’re spending a lot of effort on displays, on the internet of everything. Mobile computing is still something I’m cautiously optimistic on. Certain aspects so that I’m more cautious and less optimistic but other areas I’m much more optimistic on and we’ve had some good traction on the tablet side this year, which we’ll talk about.
We have something new, this neural computing. I think I had talked about that the end of one of the pervious analyst news. I’m going to talk to you little bit more about that. Obviously more content going into the devices. RF 360 is new radio technologies that allows us to address multiple bands. That’s early stage as well. You’ve heard us talk a lot about small cells. I’ll talk more about that today and wireless charging, it was evidence, we now put it into the talked Smartwatch, we’re getting traction on electric vehicle charging and also on device charging as well. And we’ve also taken some of the investments we’ve made and we’ve harvested them.
So, as I said earlier we completed the sale of the BWA spectrum in India. That worked our extremely well. We got in, we influenced the technology direction to go LTE TDD as opposed to WiMAX, which was important to us and we were able to then take that spectrum and sell it to Bharti which is now using it to roll out.
The flow spectrum, we’re going to start seeing that actually get used for supplemental downlink soon. So we did pretty well on that, and obviously this year we’re in the process of selling Omnitracs, which was one of our earliest businesses, one of the first machine-to-machine wireless data businesses. So, we’ve done pretty well in terms of that.
So, where we’re going, I mean what’s the growth opportunities and I think, we’ve said this before, it’s not like you come here every year and you see us change our strategy. Our strategy and our growth opportunities are pretty consistent and we’re focused on them, and as I said they take long term investments. So, clearly this opportunity was Smartphones. It continues and I know there is people who say all sorts of concerns about where the Smartphone market is going. We'll talk you a lot about that today.
The 1000x challenge, and how we drive data growth and how we accommodate data growth and where are we going to find the places where it's important that we're able to deliver substantial bandwidth to the users, given that people are doing things like uploading and downloading rich multimedia and doing things that take substantial bandwidth.
We're very focused on a set of adjacent opportunities that we'll talk to you about. We're seeing some announcements start out on these adjacent opportunities, and then I'll talk to you about our vision for the future of how we interact with our devices and with the world around as digital sixth sense.
So we're focused on a broad range of growth opportunities. I think that these are ones that will carry us for some years to come. And so let's start off by just looking at the smartphone, because this is one where there are substantial both near-term and long term opportunities. And what's going on here is the consumers are demanding a superior smartphone experience. We are seeing this continued migration from feature phones to smartphones. We are seeing people wanting to continually upgrade their devices and you see what the operators are doing; the operators are changing their plans. So they are allowing consumers to get a new phone on a more frequent basis. And so we're seeing early returns on those programs. AT&T reported they are expecting 10% of their subscribers to sign up for an early upgrade program. But all the major operators now have programs that allow their customers to upgrade in six to 12 months.
Then you see why are they going new, if you look out at the blogosphere, you are looking at gadgets -- I mean they are consumed by what phone has what stack or what processor, what benchmark it beats another one in and of course we're leading it in those areas. And really some key factors that are driving are things like LTE download bandwidth or multimedia; what kind of capabilities they have and you see that we're driving these kinds of experiences for the consumers.
And so if you look at the smartphone, it's just become this incredible part of our lives and you look at the stats up here are pretty amazing. People are looking at their phones or using apps 106 times a day, launching apps and the younger generation, 75% of people wake up and the first thing they do is look at their smartphone. People are looking for information that's local to them, they are watching videos. Video is driving a huge amount of traffic on the devices. But what's nice is that that's creating this continues upgrade cycle, because we are continuing to be able to put better and better capabilities into the devices.
And so of course there has been the speculation in what's going on in smartphone market. Let me just say the numbers are still staggering, I mean 7 billion cumulative smartphone shipments projected between 2013 and 2017, 1 billion smartphone shipments in 2013. I think the second quarter; the numbers were up 47%, 225 million smartphones shipped. So you don't go from 45% to 0% growth. We continue to see this growing very strong. In fact we see 20% CAGR across the Board between 2012 and 2017. So this obviously is very aligned with our business in terms of driving the chipset business, driving the licensing business.
And a lot of it is coming in emerging regions. So if these numbers are about the emerging regions in terms of the number of 3G and 4G connections that expected for emerging regions alone 3.4 billion. So we are going to get a lot more people onto mobile broadband systems between now and 2017 and you see the stats in terms of the percentage of handset shipments that are expected to be smartphones. So people will be using their smartphone in emerging regions to get online and that is the way they will do it, not on a computer but on your smartphone for the most part.
And the CAGRs in emerging regions are 30% between now and 2017. So they are absolutely growing rapidly. We have this tremendous shift from feature phone to smartphone. People are using them. There is all sorts of stats about what people use them for in emerging markets. So that is a very strong story for us. It's causing average selling prices to come up, because people are going from feature phones up to smartphones. So that's a really good story for us in the emerging regions.
And if we focus in on China in particular, talk a lot about LTE launching in the second half of the year. But China, it’s more like a developed market in terms of smartphone sales. 90% of handsets shipped in China are expected to be smartphones by 2017. It is the number one smartphone country in the world. 79% of the internet users use their phone to get on to the net in China. There is tremendous competition between the operators. Obviously as we said, with the LTE launching, that’s coming and that’s going to create yet another wave of competition as China Mobile really gets into the mobile broadband space now, moving to a global technology and a truly competitive technology from the data capacity sense.
Also what we’re seeing is a lot of success with local OEMs. I talked a little bit about Xiaomi as having a differentiated business model but there are other manufacturers there Oppo, Coolpad that are building just wonderful devices on our chipsets. And so that’s growing and most of those manufacturers are looking to sell outside. So you see a certain number that are focused on the domestic market but for the most part, those companies are looking to sell into the global market, and having LTE as a global technology will be a great one for them, and I think that will just create a bigger market there as well.
For us, and Steve will talk about this more later; we look at the emerging accounts sort of at that low-low end of the market. We passed a $1 billion in revenue on that low end market as well. So we are doing well in that market. We continue to service that and we have a lot roadmap ahead in terms of chipsets that are focusing on that, not low end part of the market for the Chinese opportunity.
So what’s going on in these devices is, we’re continuing to invest on innovations here and chips are coming out with more and more complexity to them. That’s really a benefit to us. But we are managing the complexity extremely well. The chips come back from the fab, and they come up very quickly because we do a lot of work ahead of time to make sure that we can go from soak and undock to carrier acceptance in a very, very short period of time. And so that innovation that we are putting in there really is not, it’s not on any single area.
So people talk about can our competitor match us on one area or another area but we try and compete across the broad range of areas, in terms of all kind of things that would go into the devices. And so you can see in here, here’s just a quick listing of all the sets of technologies that are going in there, whether it’s on a multimedia slide with image processing capability that we have been putting into the devices.
Ultra HD; your phone and your tablet is likely going to be the device that you capture Ultra HD video on. And if you haven’t seen this, it’s wonderful. It really is something that people will want. It’s that next step beyond HD and its really good stuff. So I think that, we’ll get a lot of traction with that.
We’re adding the next level of video compression. So H.265, we’re able to compress about half, cut the data rate that’s required about in half, keeping the same image quality. That’s something that Qualcomm did, a lot of the fundamental intellectual property for, the next generation, major generation of video compression. And of course, as we go to bigger and bigger resolutions like Ultra HD, that kind of video compression becomes even more important.
We’re not neglecting audio. We’re doing a 5.1 and 7.1 surround sound. We’re doing things in ways that you can hear them through headsets. So you don’t have to be in a big theatre room to hear it. You’ll actually be able to hear it just on headsets and get that sense of localized sound. Obviously we’re doing a lot of work on radio technology. So evolutions of 3G, evolutions of LTE, Carrier Aggregation, talk to you more about that.
Location is a big area. There are more and more location systems that are going up as different countries or different regions want to control their own location technology. They’ve seen that it’s quite important. There’s evolutions that are coming for better resolution, better granularity. So GPS, obviously we know of, but GLONASS, Baidu, Galileo, different ones from different regions.
And then we’re doing a lot of stuff on the RF side. So antenna tuning, envelope tracking, these kinds of technologies to allow us to serve multiple bands and do it very power efficiently. So a lot of that coming along as well. Computational photography, getting 3D, deploying 3D out of the camera images, all sorts of sensors going in there for various kinds of reasons and processing, that’s in there with sensor cores that will allow us to read those sensors on all the time. So they can monitor the environment around us and give us instant feedback on things and so things like you’re being able to talk to the phone and wake it up without having to press a button, that kind of stuff is going on right now. We are building a lot of those kinds of capabilities in there and clearly that’s all about managing the power.
So what I am going to do is show you a demo of some pretty cool new technology that I don’t think you’ve seen before. So basically what we have is a demo where we went and used a 3D camera and you can see as I move it around, you can see that it actually moves three dimensions. So it’s a video. I’m going to show it to you on the screen now. So here this one is connected and you’ll be able to see. It’s actually a video and I can look around in three dimensions, 360 degrees as I watch the video.
So this is recorded in Ultra HD and that’s why you get this wonderful quality of video, and you get it in 3D and of course I can move the tablet around to see it or I can use my finger to just look around and see, so as somebody is passing. So we did this NASCAR in Sprint. Sprint showed off this actually running over the air on their Sprint Spark system.
So pretty exciting kinds of things, different kinds of experiences that people haven’t even seen before and that’s actually made possible by the fact that we’re recording Ultra HD and playing back Ultra HD there. Okay so that’s about what’s going on, on the smartphone side, a bunch of new features that are coming out but really what’s going on also is that the smartphones are driving tremendous amount of demand for data.
And so what are we doing on the network side? Well, of course we’re continuing evolve the 3G technologies and there is a reason for that. There is a huge numbers of people using theses 3G technologies, huge numbers of systems out there. There is 40% year-over-year growth of HSPA connection, 1.4 billion connections. There is 145 operators that are using dual-carrier HSPA+. We have HSPA advanced now that’s coming out with supplemental downlink with antenna gains, with a technique called MultiFlow where you can actually leverage lightly used cells to increase the capacity by transmitting data from different multiple cells sites to the devices. We continue to invest in CDMA 2000, despite the fact the people like to characterize that as a dead technology. There is over 500 million people in the world that use CMDA technology. So it continues to be a good business for us.
And then of course, it’s not just about those technologies on 3G but also on 4G and on Wi-Fi as well. So let me talk to you a little bit about what’s going on, on the LTE evolution. So you can see the numbers here, the growth rates are tremendous. The number of networks that are launched already is a very large number but we’re going to see a bigger and even bigger push worldwide around LTE starting this year, next year and beyond, because the operators are investing to provide that kind of experience to their users, higher data rates, better user experience, and it is clearly one of the key drivers of demand, to get better and better data rates down to your device, so you can download the videos in better quality faster, you can surf the web and get you page to paint on the screen faster and so we have this great dynamic going, where consumers are demanding it and we’re driving the technology into the devices. And the other thing that’s going on is we have these two different flavors.
So we have the FTD flavor which is launched obviously in the United States. We have a lot of FTD here but there is 23 networks that have launched with the TDD already and so the other thing that’s happening is that as you get better capacity on the devices, operators were also seeing even more data usage on the LTE systems.
So that’s a very good sign for us. It means that there is continued demand for the technologies that we’re creating on the radio side to provide those kinds of data rates. So, there was 144 million LTE connections as of Q3 ’13, and as you see there’s 195% year-over-year increase. So growth is absolutely there.
Okay so what are we doing with the LTE roadmap. I have said to a number of you and when we’re talking before and we have this incredible roadmap of technology. In fact I would say I feel very good about the fact that we have a very long roadmap now of technologies that are in the lab and coming to commercialization, getting integrated into the chipsets, and clearly carry aggregation and the evolution of our ability to drive peak data rates is one of those. We have 150 megabit per second deployed today in Korea. We have 300 megabits per second capabilities on a chipset we announced this morning. Sprint was showing off gigabit per second using aggregation of multiple modems at the time, but that will eventually get integrated and using multiple frequency bands.
Carrier Aggregation is tremendous technology, tremendous differentiator for us right now. I’ll talk to you a little bit about that, but it includes things like Supplemental Downlink and this Multiflow technology. Beyond that, we have new services. So we learned our lessons from MediaFLO when we built broadcast technology into the cellular band with LTE Broadcast. We have LTE Direct for peer-to-peer communications. And then obviously how we’re going to build out the network, because we’ve sort of reached the limit of what we can do on any individual radio link and now it’s about the topology of the network. So optimizations for heterogeneous networks, meaning macro networks and small cell networks and inside-out networks, as opposed to outside-in where we’re transmitting from the outside and penetrating into the buildings and then something completely new for you. So I’ll talk to you about that in a second.
So in terms of carrier aggregation, I’ve explained essentially how it works, that you take different frequency bands and you combine those together and operators around the world have a very broad mix of frequency bands. There’s more than 40 different bands that have been improved for use for LTE already and it’s mixed and it can be different in different regions. And so what Carrier Aggregation does is it allows you to bind together frequency bands from different ranges and put them together in a seamless way for the consumer, for the subscriber to get very high bandwidth and that provides much higher peak data rates too.
And when you think of a thing like video, we have a buffer. You actually like to get a high peak data rate throughout the buffer and then you play out the video. So going through areas we get high peak data rates and getting on and off of the network quickly really make the network much, much more efficient.
The other thing that we’ve done and really proud of some of the work that we’ve done on Supplemental Downlink here is that we’ve recognized that there is and asymmetry, that more data comes down to the device, then goes up and therefore you can take unpaired bands and instead of using them for TDD meaning two way communication, you can use them for one way communication from the network down to the device.
And there is a lot of benefits to that. All you have to do is put a receiver in the device as opposed to also a power amplifier for the uplink and that’s a lot cheaper, a lot more power efficient. Because it’s only downlink you don’t have to close the uplink. You can actually adjust the power levels to match the propagation characteristics of other bands. So you might have to transmit more power to match the propagation characteristics of a lower frequency band if your Supplemental Downlink is at a higher frequency than your primary band, than your anchor band.
So really interesting things, but the one close thing is that we actually have some unpaired spectrum in UK, 40 megahertz that we bought a while ago for MediaFLO and we spent the last few years going out and logging in European Union to get that harmonized across Europe. So it’s in the L-band and now there has been the decision that that L-band will be harmonized for Supplemental Downlink in the European Union. That should make our spectrum more valuable obviously but it gives us a tremendous opportunity to sell chipsets with this new Supplemental Downlink feature that will provide a much, much better experience for end-users there. So very excited about that. And by the way Carrier Aggregation is applied not just to LTE, but it’s also applied to 3G as well. So we’ve done that and that continues to improve data rates on those systems as well.
So what’s going on with Carrier Aggregation is you have a huge number of operators that are investing. It’s sort of a multistage approach. You can see the numbers in terms of who’s actually done just LTE, who has already started now on Carrier Aggregation. We have the Korean already having launched with 2X Carrier Aggregation. Lot of operators have been involved. 22 operators have contributed to the standards in driving Carrier Aggregation.
AT&T is planning on using that FLO spectrum with this Carrier Aggregation technology. Sprint Spark is talking about three different bands they’ll use, everything, everywhere and UK is starting a trial with plans to deploy Carrier Aggregation in 2014. And like I said we announced 300 megabits per second supporting our new Snapdragon 805 chipset this morning. So lots of stuff going on in Carrier Aggregation and it’s because people are demanding more and more data.
Another thing as I said is just idea of broadcast and so what I think will happen in the future is that you’ll see real time video, game, sporting events, breaking news those kinds of things be broadcast out to people and other stuff be buffered and therefore be able to deal with a high variability that you’ll get when you have small cell implementations and other future implementations, as we look out to 5G and what will happen there.
But what’s interesting is it doesn’t take a lot of users in a cell site consuming the same content for it to be better, for us to use a broadcast technology within the cellular model. So not like flow, which was over the top but within the cellular model to serve up that same content and once you get past that number, then you basically, it can be as many as you want because there is no additional load on the system for an additional user and we really learned a lot of the lessons from the FLO experience and applied it to LTE broadcast.
And one of the things that we learned is that we really want to make it a dynamic system. So we’re working so that operators will actually able to shift back and forth between traditional unicast delivery of content to a broadcast delivery of content and when you think about very dense environments, sports arenas and stadiums and things like that, this kind of technology will be wonderful for giving people a better interaction into what’s going on at the game that there at or whatever it is.
So we have Verizon talking about demonstrating LTE broadcast at this upcoming SuperBowl. Tel S.p.A. is doing a trial, broadcast trial on a commercial network with us and Ericsson, KTF announced their intention at the last Mobile World Congress to deploy LTE broadcast and there is number of other operators that are looking at evaluations and trials of the technology. But I think as we see video continue to be important and certainly real time video as a differentiator for wireless operators, LTE broadcast will continue to be a great opportunity for us to build capabilities into the chipsets.
So another technology that we’re talking about is LTE direct and the idea here is that peer to peer is going to be more important but it’s going to be important because we’re going to be interacting with all these different devices and services and people that are around us and today, you turn the phone on mostly to figure out what’s around you. With LTE direct, what happens is that it looks at the very lowest levels of the hardware for certain expressions to come to it.
So, one device might be broadcasting, I’m a restaurant and I have offers for you; another might be I want Cal, Berkeley and I’m a Bears fan; another one might be saying I’m in a car and here is how you interact with me; all different devices could be broadcasting different things and you’ll on your own device say, this is what I’m interested in and at the lowest levels they’re doing comparisons and looking for the tags that you’re interested in and it only wakes the phone up when it finds something you’re interested in.
And if we think about the world as having all sorts of devices and services being offered to us all the time which is what we believe will happen, it’s really important to do that at very, very power and this technology is what does it. It does as part of the LTE system. It can coordinate data flows outside of the bands, so it doesn’t have to load down the system or operators could decide to allocate spectrum within the band. But it really opens up a the new business model for the operators, if you think about sort of proximity based advertising and things like that and so this is really designed for autonomous and always on operation of the devices, looking for things in its nearby proximity. Today we mostly use Bluetooth LE for this and that’s the technology that’s coming up right now. This will even go beyond it in terms of its capabilities.
Okay. So this is the new thing that we’re doing and we haven’t talked about this before but we’ve been working on this for a while which is, we're actually putting LTE into the unlicensed bands. So up till now Bluetooth and Wi-Fi have mostly used unlicensed bands. There is a tremendous amount of spectrum that’s been allocated around the world in unlicensed bands. There is no reasons why we shouldn’t put LTE into it. In fact there are many reasons why we should. We paid for that very sophisticated LTE receiver in the devices, it’s a better receiver than the receiver that’s been used for Wi-Fi. That means you get better capacity and better coverage out of an LTE unlicensed deployment.
And before you think that we’re doing this to step on Wi-Fi, obviously we have the big Wi-Fi business. It turns out that an LTE unlicensed base station sitting next to a Wi-Fi base station is a better neighbor. They actually work better together. So, we’re really trying to drive better converge, huge improvement, at least double improvement of this on the network and we can also do Supplemental Downlink in this. We can do TDD technology and we can do all sorts of things in this. So really, really excited about the unlicensed bands.
So what do you think? Wi-Fi, LTE? We think LTE is going to be a big benefit. It's going to drive this 1000x deployment, and we're getting more and more spectrum but like I said, there is this unlicensed spectrum that's out there, regulators around the world are putting out unlicensed spectrum as we drive it with small cells to small cells more like a Wi-Fi access point in terms of deployment. We're getting that as well and so you see a lot of companies that are looking at you getting access to spectrum and they'll be able to use both licensed and unlicensed bands with the small cell technology. So really, really excited about this.
And as I said it's a change here from going from an outside in technology where you have a macro cell sitting outside and its actually broadcasting power into the building, as it goes through the walls, entering into the building, you start to lose data rate or you lose coverage. Those things are important. When you build the network inside the building and it leaks out, you can actually show that you get tremendous gains in terms of how much capacity you can get and when you are in that given environment, you are also going to get much, much higher data rates inside.
And what's actually going to start to limit is the backhaul. So how much backhaul do you have to actually connect that small cell back into the network. In some cases we'll be doing that over fixed networks and in other cases we'll be doing that over wireless backhaul as well. And you can think if you have a fixed small cell it can do things like use higher order MIMO, so more antennas on the things that actually get higher data rates over the air on the backhaul side and then broadcast into the home or the office. And we'll be doing those kinds of things in environments like India where we don't have the backhaul network that's actually built out.
And so huge amount of work on small cells. Obviously we continue to drive improvements in the bandwidth that we can do over any radio technology but as I said we’ve hit the standing limit or very close to the standing limit in many cases. So this is extreme densification of small cell, huge opportunity for us going forward, really excited about that.
And one of ways that we're doing is with our FSM chips. So you can see this has the highest level of small cell integration, it supports all of our SON our UltraSON Self-Organizing Network technologies. It supports 3G, 4G, it supports 802.11ac on there, it’s got gigabit Ethernet on there, all sorts of technologies both in the fixed side and the wireless side that we have integrated into this FSM chip.
In addition we announced that we're collaborating with a number of manufacturers. So Alcatel-Lucent we talked about that you can see, there is a broad range of companies that we’re working with to deploy the FSM out into the small cell vision that we have and really our FMS chip is the one that has the best Self-Organizing Network technology, because we’ve been at this for quite a long time. We have built the first small cell in 2000. We built a cell site that was based on handset technology on the RF side and we realize that interference management was the critical element of this and so we spent the next decade building Self-Organizing Network technologies that allow these things to interact with each other and manage the interference.
And it’s interference between them that's the most important thing, the most important determinant of what kind of data rate you can have. The other thing that’s very cool is because these are built for capacity enhancement, as opposed to covered, we can use higher and higher frequency bands. So it used to be 2.1, people were complaining about using 2.1 gigahertz for WCDMA and its proposition characteristics and now we're looking at 2.3 gigahertz, 2.5 gigahertz and beyond. So much higher bands, 3.5, much higher bands. And as you get to these higher bands, there is more spectrum available, so we can provide better and better services to people, to consumers using the small cell technology.
So let’s look at the next area of growth, developing the adjacent opportunities. And so if you look, people have this smartphone technology and they love the kinds of things that they get out of their smartphone. But what we're able to do with the amount of R&D that we've put into the devices that are going in smartphones, now all of that technology can go out into other areas. So while the smartphone has been a point of integration, where we have taken other devices and merged them into a phone, now the phone will go out and address other devices.
So obviously smalls cells that I talked about are an adjacent opportunity for us, using technology from the smartphone and putting it into that device. So those chips will actually be quite tiered in terms of their capabilities, but also consumer electronics devices, health devices; I will talk to you about Smart Grid and obviously you know about our efforts in wearable’s, in tablets, all sorts of things, home gateways, we’re talking about what we were doing in the connected home. Automotive, we had a tremendous traction there, Smart TVs, all sorts of things.
We’re really uniquely positioned to go after these because of the amount of R&D that we’ve done and the level of integration that we’ve put. So we can deliver a very, very high performance at lower cost points; and these markets are traditionally expecting to get. And that means that we are going to see a lot of innovation happening in these markets.
And so obviously tablets had been an area that we’ve focused on a lot. And really the opportunity there is to just redefine computing. So I don’t really have to tell you that much about this. I am sure that most of you have already experienced it yourself. But what is critical is that, it is the smartphone experience going into the computing experience, which has created this opportunity and we see significant CAGRs, 3% CAGRs from 2012 to 2017. We are seeing that 50% of tablets are being used out of the house today. Less than 20% were being used out of the home two years ago. And I attribute some of that to the fact that we see smaller phone factor tablets, 7 inch instead of the 10 inch tablets. And we think more than 60% of tablets will be 7 inch or below by 2017. So more smartphone, more phablet like devices in terms of what’s coming.
And that’s very good for us. And we’ve been doing a lot of work. So we have a little bit of a slow start on the tablet side. But I think if you look at the kind of design wins that we’ve got now, the Amazon device, the new Nexus Google device, obviously Nokia and Samsung and Sony are tremendous wins for us on the tablet side. So we see the second half of the year really taking off for us with the tablets.
And the other thing that’s going on as I alluded to, earlier is that operators are focused on new price plans. So you’re already starting to see things like people giving away data to get people to put a WAN connection, a cellular connection into their tablet, buy the tablet with that connection, so then they’ll recognize that when they go outside and they leave their home, they bring their connection with them and it’s always updated and always on, always synchronized.
So you see T-Mobile doing things, you see AT&T, their success with new activations. We have different pricing plans now, as we’ve talked about in the past. But day passes, plans for introductory rates to get people on to it, all sorts of things that are going on in the operator side in order to incentivize more attach rate for cellular into the tablet. So that’s going on.
Another adjacent opportunity, obviously the internet of everything, and we’ve used this stat of 25 billion devices by 2020, that came from one of the research firms. We’ve seen other ones, where people are talking about 30 billion or 50 billion connected devices by 2020. And in the 25 billion number, half of those are handsets. So that means half of those are non-handset connected devices. And we’re really focused on how we address this internet of everything business and what are the implications, once we have a completely connected world with all the things around the sensors and devices that are all accessible and communicate to us, present services to us, present controls to us; how do we actually integrate all of these different things that will come from massive numbers of different manufacturers?
We have those technologies and we focus on because people will really want this stuff. You see that you will have a connected home or a connected car, you have connected consumer electronics. People, when you walk into a room, to the extent they want to share with you, you will know who is around you and you will know what aspects of their digital life that they want to share with you when you walk in.
Objects are going to be connected, whether it is things like light switches or light bulbs or thermostats, all these kinds of things; and then places, I talked earlier about stadiums and arenas. We will see, and we’re already doing this, where we’re rolling out technologies to make it so that as you walk into a stadium, you will be offered different things, you will be told where the shortest lines are for the bathroom or to order a beer or whatever it is you might want.
When you walk into a retail environment, as you decide that you will accept those things, you will be able to get access to offers. You will be able to check in and get loyalty points. These kinds of things will happen very, very seamlessly to us in the future. So having all these things connected is very important.
But what’s really going to make it work, because people will -- manufacturers left to their own devices, these are all deep verticals and these manufacturers, and even separate divisions within the same company will act in silos. And so in order to make this vision happen we need something that cuts across all of it and that technology is AllJoyn and AllJoyn is an open source project that we started and what it does is it allows these different devices, running on different operating systems, talking over different protocols, whether wireless or fixed, they’ll be able to discover each other, they’ll be able to authenticate to each other, they’ll be able to present notifications and controls to each other, cutting across the silos and so it’s an open framework, it’s a secured frame work.
There is all these different pool sets that we’ve provided. There is various things, different technologies, different protocols that we’ve provided into the markets. There are other companies now that are coming in. So stay tuned for an announcements of that. But the idea is here that we’re going to create this cloud of things that are near me, that I can interact with and so if you think about things like home automation, this will enable home automation to come to the masses, as opposed to being something that only very, very high end homes can have. So really exciting opportunities with this, but it cuts across all sorts of areas, all those areas that I’ve talked about earlier in terms of being connected.
And so we think about now, the connected home as a great example. Today people say there is roughly seven connected devices per home. By 2020, there is expected to be 22 connected devices per home. So a significant growth opportunity in terms of driving more devices per person and that’s another area for Qualcomm to drive future growth.
Lots of different kinds of devices will be in there. You can see sort of the list of different things. We have a lot of different technologies to address it, connectivity technologies. We announced our internet processor, which routes packets as well as does local processing. So you can build value added services and home gateways. Obviously the small cells will be there. They’ll act as gateways as well and allow us to have this mix between a public could and private cloud to download media, to control the devices that are inside our home, all sorts of things that will be there and platform. So apps can be built on these things and really open up a whole ecosystem there.
Automotive and energy, we’ve done extremely well and we’ve been in the automotive space for a long time. We started working with OnStar many, many years ago but we’re -- we have over 35 programs for integration because the people ask me machine-to-machine, what’s going to be cellular, what’s going to be other technologies. It’s pretty clear that the cars are going to have their own connection. So there you have their own connections for providing services to the drivers and the passengers. They’re also going to have connections to provide maintenance information and information about the fleets of cars out there to the manufacturers and so lots of reasons for doing that. You can see some of the names there. We obviously have other programs there in terms of wireless charging to vehicles where we’re getting some very interesting traction on there as well.
In addition to automotive, obviously Smart Grid is a significant opportunity for us. Two of the top Smart Meter manufacturers have adopted 3G cellular and so we’re in already working to drive these and you can see the growth rates that are going to happen. So this is another interesting market for us as well.
Okay, let me go onto the Digital 6th Sense. And so this is an area that we have been focused on as a vision for sort of the medium and long term for the company and the idea is that all of these technologies will enhance our ability to perceive, not just the physical world around us but all the virtual things that are associated with world around us.
So obviously the Internet of everything is a fundamental component of that. The fact that there will be all these devices that will have connections around us, you want to be able to sense them, you want to be able to interact with them, you will need some way of perceiving these things, it has to be done at low power, it has to be done in an always on way, it has to be done in way that’s not too obtrusive, so it’s not annoying us all the time.
So at home, you’ll be able to control your devices, your content between things. At work you walk into the conference room and it will automatically build a network of who is in that meeting with you, so you can share content, so you can drive the screens, you can drive the video conferencing systems on the go, you walk into the retail environment and they’ll be able to give you offers and so forth. So really, it creates a tremendous number of opportunities, both of them at the software level all the way down to new radio technology that I described, things like LTE Direct as an example there.
So what happens already today though, so we have the beginnings of this because our devices today have a tremendous amount of sensors built into them. So it has location technology and it knows where we are. It has accelerometers and gyroscopes in it, so it knows how we’re moving. It’s got cameras in it, so it can sense the environment and increasing there will be 3D cameras that allow us to construct the 3D environment that’s around us.
We have devices which are always on that listening out for you to say something so they can wake up. In the future they’ll be listening for the acoustic environment that they’re in and comparing that acoustic environment to another phone’s acoustic environment and know that you’re in the same room or you’re on the same phone call with somebody and when people come in and they read, and the critical issue here is that we’ve focused a lot of effort on making these kinds of technologies always on high performance but very, very lower power consumption, so that we have this always on sensing capability.
And once we have these kinds of capabilities on the devices, the device now will tap into all sorts of nearby resources. So that’s why this AllJoyn technology is so important, that all these different devices are going to be scattered out there and there need to some common way that our phone can actually talk to all these different devices and it can be a variety of different things. There maybe things on like body, there maybe things in the environment around me, there maybe things in public cloud or in a private cloud, all sorts of stuff. But the mobile device wants to detect these things and then give me notifications about the things that are relevant and interesting to me and there is a lot of technologies that we’re building in to make this possible. And so these technologies that are creating this Digital 6th Sense -- so there is a broad range of technologies that we’ve built. Obviously Snapdragon is as a key technology there. Mirasol and Qualcomm Toq are exemplars of where we think this is going for Always On. We have our Wi-Fi technologies all jointed, broad, broad range of technologies.
And so we’re making investments in these and as we prioritize the investments that we’re making this year, we’re focused on things like these technologies that can drive the Company forward and drive this vision and pull the core businesses forward but also create new businesses for us going forward. And so the thing that I think that you’ll see in the near term is that we’re going to evolve the way that we interact with our devices to a more continuously interactive environment.
So you’ll be getting notifications to your risk, whether it’s breaking news or sports scores. Obviously you’re going to get your text and your calendar alerts and all sorts of things like that coming to your devices. But you’re also going to get controls to things that are in the environment around us. And the Toq, which we announced launched yesterday, the commercial launch of it, it’s a limited edition launch and it’s a thing that we’re doing to prove out and set the bar, set the design point for wearable devices, that the display should be Always On, that it should be very low power consumption, so it should last a very long time. And we’re making all sorts of integration with it, AllJoyn integration already, 2net integration in the future.
And so this going to be a quick demo for those of you that haven’t seen it, the technology before. So this is sitting up here and so this is in its state, the touch screen is off. So it’s sitting there in a way that I can see what time it is but there are also screens on here, so I can get different things, Qualcomm stock price and different kinds of, time of day, weather information. Then I touch the band and it will actually go into a mode, oh I guess it’s time for Steve to talk. So this is the calendar notification telling me I should get off stage. Anyways, so it’s got -- there is Qualcomm stock price -- I don’t know how that got on there. Anyways, I can do things like I can see, I can see that sort of stuff. Let me go back to that again. Weather, I can get the weather information. It’s a little warmer in San Diego, what a surprise; communications hub, I can control music from it.
But the other things that I can do, I can control things from it. So you might be wondering why is there an air conditioner on stage with me. I did need to cool down some of the hot air that’s coming out from the stage. But we worked with Haier that made this on a demonstration at IFA this year and we made it so that it actually can control and interact with the watch.
And so there is a -- I get a control sent to me. So imagine that I’m like in a room with an air conditioner that’s on and then I walk outside and all the sudden I get this thing that says, dude you forgot to turn off your AC because I walked out of the range of it and it knows that. And so now I can just go in and say ignore this or I can just shut it off and now the thing turns off. So this is actually running with our low power Wi-Fi in it and its integrated with all AllJoyn to the watch integrated through the phone. So that system will now work for all sorts of other things and you’ll be able to get notifications of stuff that’s in the world around you, whether its air conditioners or light switchers or other kinds of technologies and we see that happening but what’s interesting about it is, if you handy get those notifications on your phone, you would take your phone out of your pocket, most of you I’m sure have your screens locked. So you’d have to unlock that. Then you’d navigate to where it is and then you’d see the notification and it’s kind of doesn’t work that well. It takes too long to do that.
On the watch, I look down I see it and I swipe it away, it’s less than a second for me to look at something and interact with it right away. And that’s why I think we’re going to have this tremendous change in the way that we interact with our devices, we’re going to have this continuous interaction model.
And the other cool thing about this is with no additional programming, any Android app that generates Android notifications can be filtered to the device. So, I have for example the NBA App sending me Kings scores. Fortunately we won last night. We get Charger scores that are coming through the device. I get Breaking News alerts. I was actually -- I was doing a media tour yesterday and I was telling the reporters that if they think the news cycle is fast on the internet, when I can see that one news provider provides alerts to my wrist five minutes faster on the same news than another provider, now all of a sudden, the competition for real timeness and accuracy is just going to be that much more intense. But it’s always very cool to get Breaking News alerts to my wrist and it’s very easy to see them and just shift them away. So, that’s going ahead.
But then into the future as I said, we’re going to integrate it with this true net system, which allows medical devices to integrate into a hub using existing medical radios on one side and the cellular connection on the other side. And so we have a hub product which people, when you get diagnosed with some medical device, you take it home with you and just plug it in and its prepared and that provides a connectivity but we’ve now built software that goes in to the handset that does the same thing and it can generate AllJoyn notifications to the watch.
So if I have a glucose monitor that’s telling me that I’m going higher or low in terms of my glucose levels, I can get a notification on to the watch, I can get various other sensor notifications on the watch and in the back end of this system there’s a whole database. It’s all privacy compliant. And then on the other side of that is whole system for distributing information, whether it’s to your family or loved ones, caregivers, healthcare professions, insurers, whoever you allow access to, we can provide a mash up of data to those healthcare providers as they want it.
So we have a big commitment to healthcare. It’s in a very early days. This is our first real product there but its scenario that I’m quite excited about. And I’ll just tell you one more sort of cool thing that we’re working on, which is this neural processing. So we’ve actually built silicon brains, they’re actually based off a model for the way that the neuron works in our brains and the early results are very, very encouraging. We’re building vision systems that track objects better than traditional algorithms do and these are taught, they are not programed. Actually we show them, yes that’s good and that’s bad. So you actually teach it much like you teach a person and we will see ours phone now start to learn how to do things in the future and as they’re trying decide what to alert us about and what not to alert us about, this is a new way that we’ll do pattern recognition for those Always On sensors, we’ll do machine learning based off of what we do and how our devices should react with us.
So it’s early days on this but this is the beginning of devices that really are smart about how they can interact with as and there’s lots of different technologies that we can apply but the thing that I’ll just leave with on this, yes, it’s a far out research project but it works. It is actually working now and we’ll be building devices with sort of insect sized brains, a wasp with something like 45,000 neurons and ants like a million neurons, a cat’s like I think 8 million or something like that.
So, as time goes on we’ll build more and more sophisticated systems using these technologies and they will provide us with the lot of benefits, because the brain it’s very, very low power, highly parallel processing system and we are just using bio-mimicry to make that work.
So, lot of cool stuff into the future as well. I didn’t want to leave you with a sense that we’re managing our OpEx but we’re not investing in the future. We are investing in lots of cool things going forward and I think the kinds of things that are going on for us in 2014, obviously a little softer first half of the year than many people expected. Second half of the year I think we’ll see acceleration back and hopefully you noticed that by managing OpEx, we will be growing our bottom line faster than the growth of our top line. Obviously that has to do also with the mix of the licensing and chipset businesses, but we're going to continue to focus on these opportunities that we have. We're going to continue to focus on innovation, because that's what we're known for. It keeps us from being commoditized, it keeps us ahead of everybody else and as everybody has been interested in, we will provide strong capital returns.
And just to close with, we have said in the past that we would get double digit top and bottom line growth and over the next five years, we're looking forward to cumulative double digit revenue and EPS growth as well. So hopefully some new stuff I told you, some interesting stuff and I just want to say thanks very much for the support and thanks for being here today.
[Audio Video Presentation]
Please welcome QUALCOMM's President and Chief Operating Officer, Steve Mollenkopf.
Good morning everybody. I’m going to try to go through the highlights of primarily QCT and I’ll try to keep this back on schedule. I think I’m standing between you and lunch. So it's tough spot to be. So I’ll try to hit the highlights here. So first, 2013 great year. I think across the company QTL, QCT very, very strong growth. We also in the segments that are not part of QCT and QTL, we did some rebalancing in what we're investing in. We're continuing to invest a lot in the future, both things that cause leverage to the main businesses, but also some new opportunities as well. We mentioned on the call that we're starting to prioritize some enterprise products as well. We're excited about those in the future, and we'll talk about that in the coming years. So I think we’ve had a very, very strong ‘13 and I think we’re on a good trajectory for ’14.
Let me talk a little bit about QCT. If you look over the last several years, we’ve had tremendous growth, both in topline, bottom line, but also in the R&D engine that we have in QCT right now. And that R&D engine we think has put us on a path where I think we’re separating ourselves and we’re clearly separating ourselves in terms of our ability to deliver products, as well as making innovative products relative to the completion.
I’m going to talk a little bit about that. We had some announcements this morning which I think are further evidence of that. But very strong growth over the last several years and really strong across multiple technology vectors, which I think is really the key thing that we do well and it’s going to be probably even increasingly important moving forward.
Our position in smartphones continues to grow. I remember coming here five years ago and the debate was will we ever be strong in smartphones? Will we be able to transition from a very modem centric company to a true mobile computing company? And I think we’ve shown evidence of that and we’re quite proud of the results that we’ve been able to achieve, and I think Paul talked little bit about that as well.
The other thing is, this year in particular 2013, we were positioned very well with the leading smartphone providers. This is the list of different smartphones that use our leading edge chipsets. So in the flagship arena today, it’s really about technology leadership and we’ve shown very strong results. The result is not only across multiple OEMs, but it is actually across multiple OSs and that is an important component we think moving forward. We always look at a long-term view of the industry and how we’re positioned, as trends change in industry are very important to us and we think we are very, very well-positioned today. Beautiful devices; actually have been able to work on here over the last year or so.
The other thing that’s happened is that our scale and our speed of execution has actually increased as well. So if you look at the time to 10 million units, from when we did our first Snapdragon device about five years ago to now, which is the 800; it’s increased dramatically. Just the number of OEMs that we’re able to engage with, the speed at which we’re able to increase our execution, and actually if you were to look and look at the 800, compared to the S1, the number of different OEMs that we can engage with in a shorter period of time on a very, very, a much higher complexity device. It’s really incredible. It’s one of the things that we think is a differentiator for us, is our scale and our ability to handle complexity.
And as I’m going to talk to you, and I think as you heard through with Paul, complexity is actually not going down. It is actually increasing in terms of what’s important, in terms of being able to be a technology provider moving forward. So we are very proud of these numbers.
The other thing that’s happened is that our scale in LTE has continued to increase. I think a lot of people are figuring out how to get into their first LTE solution or they’re scheduling that the next calendar year. We are continuing to deliver multiple generations, I think, ahead of people. This is the traction on our first, second and third generation. We announced our fourth generation today. And as I’ll talk through the next couple of slides, the demand for increasing modem features is actually very, very robust and it’s primarily because people are looking to try to utilize these very, very difficult spectrum positions, but also to deliver really unlimited data into your hand and that really will create a wave of innovation that we’re very happy to be a part of.
The other thing that’s happening is that we’re driving connectivity leadership. For a number of years people have asked when are you going to get strong in 802.11? And this year, I think we saw a lot of traction actually in our 802.11 solutions. I mentioned on the call that we have 50% attach rate. That is attach rates to the units, all of the units, including devices that are not MSMs. So just thin modems as well.
If you were to just limit the number of devices to just the MSMs, really the ones that are capable of supporting our full platform play, you will see that that number, a little bit more than 70%. So it’s a strong platform attached. And even if you to whittle that down even more, you would see that in the mid-tier and below, it’s a number higher than that.
And what we started to see during 2013, which I think is a good trend, is that we started to see penetration into the flagship units as well. And that’s key for us. We think that platform play continues to be an important thing moving forward. As Paul mentioned, the importance of having Wireless LAN and Wireless WAN together will even become more important in the future. So it’d be very difficult to deliver I think an industry leading LTE feature set more, and industry leading Wireless LAN feature set, unless you can deliver the other one.
So it will really be the union of those two technologies that would be important moving forward. The other thing that occurred in 2013 was that our mix of 11ac increased as well. So all positive trends I think on connectivity. We expect that to be a very important business for us moving forward.
Okay, let me talk a little bit about the environment so you can think about, when you think about our business, you can think about in the same light that we think about it in. So when we look at the environment, we really see that the impact of the cloud is so significant into what is happening in computing, and the way to think about it is if you were to go 10 years ago, applications, they really weren’t applications, they were programs, they ran on your computer, your data was resident and your OS was primarily a file system. You had files, you’ve stored it locally on a hard drive and you ran programs.
The network really was something didn’t exist at the time. Your connectivity needs for primarily to go to a printer and then you develop the web. If you contrast that today, most of the interesting applications are not actually sitting anywhere. The data maybe in the cloud, the applications sits on the phone and the computing is very distributed, and we are actually, or the device that we provide the technology into is actually some sort of a node actually in a computing system and what’s interesting about this, two things that are interesting about that and I’ll talk about the implications to device.
But the interesting thing about that is it requires a significant amount of high reliability connectivity between the device and the cloud, because really the OS, when you look at a mobile OS, you think of it is a thin veneer to get access to your cloud based data, which means that the connectivity back has to be very, very robust, it needs to be available all the time and your needs to be connected are very high.
So an example of that would be Siri or Google Now or any of these search programs that really require connectivity all of the time. We think it’s a very, very good trend for Qualcomm. The other thing to think about is that long term, as everything gets connected, some of those things are going to be doing things that are very, very high reliability.
So the people that talk about what’s the next generation of the network, they think of it, what network would you want to have if you had to have a car drive on the drive autonomously on the basis of being connected to the network. What network would you want to have if you wanted to operate remotely on a patient? Those are going to be incredible changes to the way and the quality of the network and we look at that problem and say that’s a Qualcomm type problem. That’s going to be good for us, it’s going to be good for the way in which produce devices.
The other aspect that happens is that when the phone implements all of the Digital 6th Sense things that Paul mentioned, there will be I think a lot of innovation in terms of the UI. We have had tremendous growth in the industry based off of essentially multi-touch on the screen. It made a big change in terms of the way in which we use the device, a lot of other elements as well, but that was a fairly significant change in the UI. As the phone starts to develop a lot of data about you or about what you do, I think the innovation on the UI is very high and essentially the idea on the device is, there’s really some implications which we think are favorable to Qualcomm.
The first one is, you’re already seeing but mobile is basically the design point for computing now. If you look at where people put their innovation, where applications are, where developers eyeballs are, it’s clearly on mobile and that’s a key thing. The other one is that the CPU and the modem travel together as a pair. Primarily in the future, if the CPU is not connected to the network, it’s really not that meaningful, very, very good trend for Qualcomm, one of the reasons why we innovate across multiple vectors.
The other aspect is that connectivity is not any longer, I have connectivity to Wi-Fi. I have connectivity to Wireless WAN, I have connectivity to things like the Internet of everything. It’s actually the union of all of those pieces of connectivity or all of those networks of what’s actually going to be the table stick. So when we look at our competitive position, we look and we say well there are a lot of people trying to figure out how do to one network when we’re focused on getting multiple networks to work together.
So we look at this, all this problem and we say well, so who’s going to be the winner when all of that happens? Do we make sure that we’re investing so that can we lead across multiple technologies, because as the network gets more complex, there will be less and less folks who will be able to figure out that and it will be a better situation for Qualcomm moving forward. And that’s essentially what our strategy is and what our strategy has been for some time.
So the first element -- these are the same elements that we’ve talked about for many years, but I’ll go through them again, I think quickly. But the first thing we try to do is set the design point. So we want to be leaders, we want to set the design point and integrate. We integrate across the multiple vectors. The second thing is that we own our own technology. You can’t innovate without owning your own technology. We are the leaders I think across multiple technology vectors now. That’s what we’ve built over the last many years of growth.
And then the other thing is we execute is scale. So the ability to deliver many products across time and I’ll talk a little bit about each of these. The first one is about setting the design point and it’s setting the design point across multiple technologies, it’s not leading in one individual technology it’s leading across multiple technologies and I’ve explained this a number of times. So I just try to do it visually.
Look at a mobile chip and compare it to a chip that is maybe more focused on one element, let’s say a CPU or a memory device. In a CPU or memory device, a lot of the complexity is actually in the transistor itself, or in the elements that are at a lower level of complexity than in a mobile SSC. If you look at a mobile SSC, it always looks complicated. The die itself looks more visually appealing because there is so much complexity. We’re leading across multiple technologies. So if you can kind of see what’s in the device, you’ll see there’s just many, many different forms of technology that sit there. And the complexity actually is sitting at the system level and actually embodied in the software. Software is kind of a key component of how we deliver products. And what will be important is you’re going to abstract all of this technology.
So the first thing we do is we try to make sure that the design point for the industry is across multiple technologies. By the way I should make sure I mention this. This is kind of an artist rendition of what’s in the chip. So please don’t go try to measure how big our GPU is and everything. These are actually -- we purposely made it so that they’re wrong. So please do not make conclusions based off of the slide.
However, I will say this. The CPU is actually less than 20% of our die. That just shows you the majority of what we put in there are actually things related to many other pieces of information. So anyway, I thought I should say that. But the key thing, what makes us unique we think is that we try to lead across multiple vectors. We think that is the setting the design point and the table stakes our leadership across all of these components.
The second thing we do is actually making sure that we lead across each individual component and I’ll talk about that in some detail here. So the first one is the modem. The modem is incredibly important. It is the reason why things are mobile and what happens in the modem, there are lot of things going on in the modem -- but essentially what’s happened today, because of all of the RF complexity and all of the bands and different networks that you need to connect to, you need to have leadership both in the baseband and in the RF, if you’re going to be successful moving forward. You also need to be leaders in the connectivity. So Bluetooth, GPS location, all the location options, Wireless LAN, it’s really an enormous RF problem that exists on these devices today and we’ve been leaders in that area for some time. It continues to be an important component of why we are excited about our position moving forward.
The other aspect is there are -- it's really a worldwide modem. So if I look at the different feature sets that we create in our chipsets, I could really bin them into two bin. Both of them are important and they’re actually not isolated. So if I look in the developed world, the developed world is all about the leadership feature set. And why is that? As Paul was mentioning, you have primarily in North America, in Japan, in Korea and actually in Europe as well, you have a number of operators competing to see who can be the first one to deliver essentially unlimited data to your hand.
Now, how do they do that? They’re doing that by following all of the elements that Paul mentioned on 1000x. One of the key ones is that they buy up a lot of spectrum. When they buy up a lot of spectrum, they buy up that spectrum and it’s disjoined and it has to be put together by a lot of complexity actually in the handset.
So when we talk about Carrier Aggregation it’s a very, very complex problem. Now what happens is in the flagship units, in order to be delivered worldwide, they have to meet the union of all of those different networks in order to be meaningful that’s because phones are launched very much like movies now, there is a lot of marketing that phone launches worldwide it needs to be delivered across many networks and essentially within the same two to three week period. And it means that that one design needs to work everywhere, which is a big change to what us to exist, let’s say from what use to exist 10 years ago or even five years ago.
So the developed world it’s all about the subsidy related to the leading feature set, you’re not going to sell into the flagship design in our opinion without having this leadership feature set, that’s the first thing. Global roaming very, very complex set of requirements that effect RF.
The other aspect is in the emerging accounts. Emerging accounts with emerging regions, I think you have to have a path into LTE for China which is TD LTE, remember all of our LTE solutions included both FDD mode and TDD mode. You need to have a tiered roadmap, multi-SIM support which essentially means that you can have multiple networks going at the same time, lot of complexity there. And you have to also deal with RF. Now remember, a lot of the accounts that go into emerging regions don’t have the RF engineering capabilities. So the ability to provide a platform is very important in order to be leaders there. So, that’s one of the reasons why we do that.
The other aspect that is important is that they all want to figure out a way not only to be leaders in China, but also be leaders worldwide. And what that means is that both of these feature sets are required if you get through a certain tier. And that’s one of the things that depends our business is that the modem is important not just in the developed world but it’s important in the emerging world as well.
So just talking about LTE, this is a chart that I’ve shown many times but essentially the point here is LTE has not done, it continues to be -- have a robust feature set, it’s moving very rapidly, it’s moving to multiband support, it’s moving to a number of features that are really important. But also the 3G and CDMA feature set continues to move as well. So, it’s not staying steady, and the reasons it’s not staying steady is because of all of the complexity that’s required to deliver essentially the connectivity needs to support that cloud-based computing that I mentioned at the beginning.
Now, in the future the other that happens as Paul mentioned is that wireless WAN and wireless LAN become very, very important to be able to stitch together and that, I’ve mentioned it a number of times over the years but the, we think in the future if you’re not going to be the same way today you’re not going to be a real credible LTE supplier unless you were and have a very strong 3G solution. I think the same thing is going to exist several years from now in LTE and wireless LAN, you are not going to be a strong supplier unless you have wireless LAN leadership, wireless WAN leadership and it just becomes very, very difficult, I think to be successful unless you’re already on the train and we’re going to try to drive that very strongly across multiple tiers.
The other aspect is the complexity, this is actually sort of an artist rendition of what happens in a phone but it is really not that different from what it actually happens. If you look at a device a flagship device and I’ll call out Galaxy S4. There is a lot of complexity in the skews to try to make one device work everywhere in the world and it’s a lot of work to make that and the RF team and our ability to produce those devices we think is something that keeps us in a good position.
So we are talking about the application processor, so an application processor for us it’s fairly simple. What we try to do is lead in technology, we try to deliver that integrated which means it pushes us to use the newest nodes, it also enables us to use our scale as an advantage and then we try to control the architecture of the entire SSC, we do that on purpose because we’re trying to deliver user experience capability and unless you have the ability to control the interfaces in an out of the different blocks you just won’t be able to do that well and that’s one of the reasons why if you look everyone who is trying to lead in the higher tiers the flagship models, they all have moved to try to own their own IP, meaning that they want to own the architectural control of the SSC and we’ve touched on our strategy for some number of years and it’s critical for us in terms of joint leadership.
And I think we had joint leadership, if you look at the numbers today, I think we’re leaders in every one of the key components, we're very proud in the ones that are actually not modem related I mean things like graphics, things like CPU those were things that we had to develop over the last several years and quite proud to be able to lead them. We expect that to continue as we go into things where some of the elements that Paul mentioned become the table stakes in the device we think we have the first mover advantage as well as the highest scale.
So let me talk about the Snapdragon 800 and we're talking about it from the perspective of size. So if you look at our diet size at the high tier relative to what people compete with against us from integrating in other people’s cores or maybe they are doing it themselves so this is competitor, I won’t name but it's a competitor that we compete with in the flagship model and it's a device that doesn't have a modem.
And if you look at our Snapdragon 800 it actually has much better performance, it has lower power and we can deliver the modem plus the AP in about the same area as they just do the AP. It's a big advantage for us moving forward and why is that? That's the case because we designed it that way from the beginning and it's really incredible that that's the case. But that's actually if you look our diet size and you compare it to some of the other flagships that don't use our AP you will that coming out, and that's because our IP is actually smaller on the high-end than other folks, we think that's a long-term advantage for us moving forward.
The other thing is at least first, the leadership you can see it in the first area the number of different firsts I won't go through them all, there is actually some on the GPS and locations side where we're the first person to support some of the various new satellite constellations that's actually helped us a lot regionally as well. So I won't go through these but we have leadership across many, many elements.
You can see it in the device, so I will just pick on one device which is the new Amazon Kindle Fire HDX which is based on the Snapdragon 800. There are really a number of things that we did special, so if you look at what their marketing that device about, there is actually a number of things that we did for them to make that device unique or at least unique in this case.
One of the things we did is we worked on special display, so we do some things on the display that allow it to be both low power but also better visibility outdoors and it's just applying that mobile DNA to a particular problem we optimize that. The second thing we did was security, so if you look at this device is actually one of the few maybe the first device that allows you to download the entire content on Amazon Prime and then watch it offline, which means that the security that's required in this device is actually higher than what you would have in a device that just streams.
And we did some special things in the chip to allow that happen, we think that will continue to be an important part of what we do as more and more of your content is actually watched on a tablet or on a smartphone. So it's a key area of connectivity. And we have had I think some good reviews on what we have been doing on the 800 I won't go through them based off of time, you can read them.
But then that was last year, this year we're actually going to do -- we're upgrading a device a lot to the 805, last year you remember the 800 I think we announced in Paul's keynote at CES. This morning we announced the brand new Snapdragon 805, it's another step up in performance, we talk about setting the design point for the industry. This is now the new design point for the high-end.
It's the incredible devices, it actually includes improvements across all vectors, but one of the most significant ones is it actually allows you to forte displays. And a lot of people wonder why do you need a forte display? And once you see it and once you see what people are doing with it, I think you will be convinced that's an important thing moving forward.
It also a number of things that are optimized for the delivery of video, very, very key -- I will go through some of them but it's an incredible device. Additional innovation on the camera, one of the things that happen on the camera, very, very important component of the phone is actually camera, very difficult to sell a high-end phone without an incredible camera. So it's like one of the first things that's reviewed, and this device actually has a very, very high pixel rate, what that allows you to do is essentially focus and zoom and almost a zero lag type works with the camera.
You need that and will not only just take camera but also if you interact with your physical environment the way that Paul mentioned as well. So continued innovation there, we're delivering that as well.
Let me talk a little about the CPU, so I’ve mentioned before in CPU that essentially we do our own cores. Why do we do our own cores? We get it earlier in time. We also get a performance advantage. So if you look at our cores today, our CPU is roughly -- it’s for the same level of performance, it’s about half the power, and -- or otherwise you could also say we could do more performance at the same thermal level.
So if you look at kind of what the competitive devices are doing, a lot of competitive devices are probably somewhere in the neighborhood of 1.7GHz, sometimes you will see a benchmark. It’s around at 1.9, that’s usually written -- run just for a benchmark reasons as far as we can tell. It tend to be thermal limited as far as we can tell, somewhere in the 1.7 region. We’ve been delivering about 2.2GHz, and this morning we just came up with the 205, I think goes to 2.5GHz.
So we have significant advantage to be able to do our own architecture and it is one of the key components of what we do. By the way, contrast those numbers to what people do when they move to different nodes. It is very difficult to provide 50% improvement in anything. This is all in the same node; and just due to architecture.
The other thing we do is graphic. So in 805, we have improved the graphics once again by about 40%. If you look at the 330 which is in the 800s, that’s already better than what we have seen on the market from anyone. We’re increasing that by 40%, just incredible gains in the graphics and it will be very, very difficult to be successful in the higher display sizes without having this level of graphics expertise.
But the more important thing is that actually we did it by dropping -- we dropped the power as well while increasing the performance. So if you look at the 800 versus the 805, the 805 is actually lower power. And if you compare it to another competitor, you will see that it’s about 170% more power, and by the way performance is not even close.
So we optimize these graphics engines for mobile, really key component of why we continue to do well, and why we think we will continue to do well on the application processor moving forward. This is what we have been building with all of the investment that we have been doing over the last several years.
The other elements on the 805 is, actually the importance of having a solution that can share content across the phone, the tablet and the big screen in your phone. What you see and you’re already starting to see it is that content is just being encoded for this one incredible size. And we believe that we are going to be able to pull that everywhere across the multiple device. This is a great example of where mobile sets the design point.
Everybody, we are going to be sharing content across all of these designs and most of the time we are going to be watching it either on a tablet or snacking on it, on a phone. And we are there first. You’re going to continue to see that driving and more and more of these very-very important events like the World Cup or hopefully some of the key sports content we will take advantage of that.
Another aspect of this is well, is that we do -- we have optimized hardware to provide a very-very efficient implementation of the next generation video encoding and decoding engine. Just like Paul talked about, we’re early leaders in H.265, essentially a means by which you can deliver the same level of performance in half the bandwidth or with the same amount of bandwidth you can deliver much more bit rate. This is going to be critical to the way in which networks deliver video.
And as you know the majority or a large portion of data capacity is actually video being pushed back and forth, I think you’re going to see more and more of that even from surveillance happening in the networks, people will be at the edges of the network that will be trying to pump data back, from the network a car will be sending video back and forth. So being the leader in video compression and having optimized engines we think is going to be a key component of our strategy moving forward. You can see the improvements in power that we see with these products as well. These are very-very optimized chipsets for the delivery and in function of a video.
More on the camera; camera continues to be a very important component of what we do. We are, if you look at the leading phones, leading cameras, we are in those phones. And we have had a lot of investment there. We continue to invest in there. It’s not just important for taking pictures, but it is important in terms of UI elements moving forward as well. The 805, I think, sets a new level as well.
Okay. Let me talk a little bit about execution. One of the key, if you look at Qualcomm we’re a technology leaders but we’re also an execution engine and it’s that execution engine I want to talk a little bit about, right now.
So if you look at the scale of deployment, a lot of people ask us, why do you think you’re going to be continued to be the leaders in LTE? I understand that there are a number of different features coming forward. I understand that very much. But it seems like other folks should be able to figure out what’s going on. So we want to try to explain what actually happens in a year, so we could try to put together what we did last year in terms of the LTE.
So when we deliver a chipset, we essentially have to test that across many infrastructure vendors and we have to test that across many different network operators and then we have to deliver that with unique operator requirements often across multiple OEMs and if you just go through the numbers, it requires an enormous amount of scale in order to do that very-very well.
So if you look at what we do on a particular year, we’re delivering 1000s of devices or over a 1000s devices across 100 networks, across a modem feature set which immense it’s something like 700 plus features. I think it’s going to be very-very difficult for people to be able to replicate that scale in a short period of time. The other thing that happens is when we look at the infrastructure of vendors and we look at what they’re testing on, and we look at who they partner with in order to deliver these features, we continue to see ourselves as being in a strong position at the front-end of the pipe and so therefore we look and we say, we feel like we’re in a good position moving forward. And this is a key component of why we win is that we have this engine, this worldwide engine developed.
The other thing that we do and I think one of the things that distinguishes mobile computing from sort of the first wave of computing, the plugged in wave of computing is that the device supplier of technology delivers an enormous amount of software. When we look at what we do with our high level expert partners, we essentially are at an ability -- we are the key partner that allows them to scale. And it means that we are essentially a very large software company that no one knows about.
So we put some of the data here to show it. So what you’re seeing the first number is actually where we were in 2009 and the larger number is where we are today and what’s interesting about it is there has probably been an order of -- it's actually an order of magnitude growth in the number of lines of code that we deliver a year and we’re delivering across multiple OSs we are doing it in less time and the devices that we’re delivering them on are more complex.
If you were to look at these numbers, these numbers are probably not that different from what you would think of as very-very big software companies. We don’t know how to deliver this yet and this is one of the reasons why we look at our business and we say, okay it’s going to be very difficult for people to come and deliver a worldwide capability that competes with this and it’s a key element of why we are bullish about our future.
So let me talk a little bit about China and then kind of wrap up. So if you look at China, there is couple of things going on in China. First of all what are the China OEMs doing? If you look at the market, first of all there was a 2G market. We really didn’t play in that too much in China. There was a lot of market share moved around as essentially Nokia and a number of other OEMs traded market position and then they had to move all of those OEMs needed to move to 3G and to smartphones.
As they made that transition to 3G and to smartphones, we intercepted a number of those OEMs and they became Qualcomm customers. Those were not historically Qualcomm customers and we had to do that by building a new channel. I will talk about that on the next slide. The other thing it happened was, there was a real change in the market share in China and so you had a number of different players who became fairly strong smartphone players over the last several years but kind of the market share stabilized a little bit and a lot of them are trying to figure out how they could do two things.
One, they want to build a premium product because they want to differentiate their brand from other people that’s a good trend for Qualcomm. The other one is that they want also figure out how they can adopt LTE and use that LTE advantage in China to export into other regions as well. Those are other things that are good for Qualcomm. So essentially, we are engaged with all of those customers now and if you look at our new channel, this is a capability we didn’t have five years ago. We essentially have a new channel which is generating about a billion dollars in revenue all from these accounts that were 2G accounts now they’re 3G accounts and then all of the big OEMs were increasingly getting traction and then why we’re getting a traction in them; one, they want to become more of a premium play; the other things is that they want to be able to export and that’s a key component of why we’re happy about it.
So if you look at our units versus our revenue I think you can see that our units are probably lower than what you would see maybe from other folks, but our revenue in this area is probably higher and with fairly small amounts of investment because we’re trickling IT down from the high tier in order to we think disrupt this part of the industry.
So I listened to a number of accounts that we were engaged with all of them now and trying to figure out ways to get them to utilize more of our chipsets across tiers, but also to manage the transition to LTE as well.
Now I mentioned on the call that what is our strategy in China. Right now, what it is, is we have this new channel. We’re essentially going with the tiered play into LTE and we deliver that across both the high tier and the low tier I am giving some very high level design traction. The Snapdragon 400 would be the low tier product and the 800 of course you’re familiar with is a higher tier product.
The other thing is happening in China which is not mentioned on this slide is that a lot of the international OEMs who are not Chinese domestic OEMs but internationally OEMs are looking at the concentration that Paul mentioned in the developed world and they’re seeing China as an opportunity to exploit the transition to LTE as a way to export in. And we’ve seen I think strong traction in our design pipeline to enable that.
So we’ll see how that plays out in China. A lot of question post the call on what have we assumed, have we assumed this massive ramp in China LTE and we haven’t actually I think we have I think a fairly prudent expectation in terms of what the LTE units are. But we do believe that is happening and we think that that will be a good trend not only for us in China but will also enable us to intercept some of the export market as some of these big OEMs are looking to so called graduate from China to be an international player as well.
Okay so looking ahead, what are the growth drivers? So we talked about at a company level double-digit growth Paul just mentioned it again. Why are we confident about QCT? There is really three elements, the first one is the core business. Core business continues to be a strong business for us and I think it’s strong in two areas. One is chip ASPs we think are going to continue to be something strong for us over the next five year period.
If you look at all the innovation that we’re putting in there, there is just a tremendous amount of value that’s delivered to the OEM and we’ve reflected in the ASPs. We also think that leadership protects us in some of the key accounts.
In terms of content, we’re increasing the content in the device. You’ve seen our ability to add new technologies in the past. We’re going to be adding more in the connectivity, we’ll be adding more in the RF360 which I’ll talk a little bit about that’s an area that we think we can increase content. And there is a number of adjacent opportunities that are essentially derivatives of the smartphone leadership that we’re excited about.
First one is tablets, tablets for us I think have been bit of a disappointment over the last several years primarily because it’s been a very concentrated market. And we haven’t been terribly well positioned with some of the key I would say tablets that were related to companies that have different business models, people like Amazon or Google. And today I think we’re in some of the key tablets there and so we’re excited about that.
Long-term, I think the trend of the tablet and the phone working together and sharing the same technology I think is an undeniable trend you’re seeing that from all the leaders in the industry we think that will be something good for us.
The other one is automotive. Automotive I think is a great opportunity for Qualcomm and on the chipset division our chipset group because if you look at the car. The car tends to be today about connecting a car. In the future it’s about connecting a car and connecting a car to a whole bunch of other cars and the network and having to do a number of things. I think you’re going to see a lot of innovation not only in the infotainment and telemetry point of view but I think you’re going to see a lot of -- a lot of the camera being used to really have the phone sense what’s around its environment as well. And those are things that I think are really good for Qualcomm.
By the way, scale and dependability of delivery is very important in that market and we think we have distinguished ourselves in that area.
The other one is connective home, if you look at things like our strength in our TCA business and things like the TV and SIM to cell business, we think those are interesting opportunities as well.
Okay. So, this morning we talked on -- go through some product announcements very quickly, we announced our first -- our fourth generation LTE product, couple of interesting things about that. It’s carrier aggregation, two times -- it basically generated two times the speed, it’s our second carrier aggregation product, it’s our first in 20 nanometer so there is some improvements in size as well as power consumption and it’s a very, very robust design that we’re happy to have there and start up delivering.
The other thing we did is we combined it with the WTR3925 and very long name but essentially you should think of it as this is a first single chip RF solution for carrier aggregation. So what we tend to do our strategy is leading features, that make it a table sticks for all the tiers. This is one of the key components about that which is this RF chip. It provides a lot of the ability to abstract all of that complexity that I showed in those charts earlier.
Now RF360, a lot of question you can ask about the RF360, it’s really four components, they come out in a series of different releases here over the 2014 period, we’ve already have some in traction or in production today at the end of ’13 and really ample of trackers already in a number of designs, the intend of matching is also I think there has been a tiered down recently and that you’ll start to see pick the PA and the RF pop coming out in the ’14 as well.
If you look at our current pipeline we have about 50 different designs across 15 OEMs that use one or several of the components and we think that will build, we’ve always talked about this will be something that builds overtime and its going, it’s on track and we’re excited about of it actually.
Connective home, as we announced our Internet processor today, you should think of the Internet processor as the first of I think many steps where smartphone technology and the network technology bleed together. So, you look at things like femto cell and you look at things like the Internet processor you’re starting to see Qualcomm’s mobile DNA starting to come into some you might think as non-traditional areas and this is a product as Paul mentioned, essentially enables you to route a lot of different packets around the network but it also allows you to do things like run applications on the design, on the device as well.
It’s probably surprising to see the same processor that we would use in a mobile solution in an Internet processor but actually power is important in this market as well. If you look at the amount of power that’s used over a period of time, it’s actually one of the key selling points of the product. So you are going to start to see more and more of that from us as you start to see Qualcomm’s vision for everything being connected happen over the next several years.
Okay. Our final slide from me, I’m going to talk a little bit about expense management. So, what did we do in ’14 a lot of questions on the call about this -- essentially what we did, number one, we’re still investing in both the core business and new business opportunities, we are just at a point now where we have developed a scale and we’re going to operate along a mode of, we’re still going to grow but we’re going to grow at a more moderate rate relative to what we’ve done historically.
Essentially what we did, was if you look at our business, we have technology teams which creates the IP and it sort of their independent of a number chips we do and then we have groups where we do certain number of chips.
We still have a significant amount of innovation on the IP side and we decided to do was to do a little bit less chips a year a smaller number of chips a year versus what we would have done historically. We’re still pushing a number of chips out through the front-end of the year but then we’re going to thin the roadmap down a little bit coming now where do we thin it down? We thinned it down in some of the areas that the market really is not doing so if you look today, the market is very much a barbell where the high tier is very much about feature leadership and the lower tier is about delivering across the channel and trying to bridge that gap. And so we have thinned out probably the middle of the roadmap a little bit, but still focusing a lot on innovation but we’re just doing it more of scale than what we would have been when we were building scale.
So with that I will just summarize, I think I am almost exactly on time and -- but it's been a great year, and we're looking forward to 2014, hopefully you got to meet some of our new leads last night and we're excited to see them more and more at these type of events and as Paul said thanks for your support and we look forward to a good 2014. Thank you.
Please welcome Qualcomm Executive Vice President and Group President, Derek Aberle.
Hello everybody. So just going to spend just a few minutes talking about some of the emerging businesses and hit some of the highlights that we got to the last year. Paul and Steve had covered some of the technology trends that really expecting to drive adoption of some of these new businesses. But I wanted to hit some kind of more the execution and the operational highlights.
Obviously, we don’t talk that much about some of emerging opportunities that we have but the teams have really been executing quite well over the last couple of year, driving some of these new opportunities for the Company.
On the display side, we now have two different MEM Space display technologies and we saw some really good execution and traction over the last year in both of them. Paul talked about obviously Mirasol a bit. We just announced the commercial availability of the Qualcomm Talk which includes obviously the Mirasol display, but on the top of that we’re also launching another commercial product with a partner -- our partner is launching a product with Mirasol, and it’s one of the leading smartwatch suppliers in China.
And so as of the end of this year we now have two commercial smartwatches shipping with Mirasol. So obviously it’s been a long road, a lot of investment there but pretty excited to have commercial products in the market in a space that we think is kind of ideally suited for the attributes of Mirasol and as a result of kind of showcasing the user experience there we’re really getting the tremendous amount of traction from a large number of partners and I think will be an exciting year coming up.
On top of that, the group is really doing a good job executing on what we referred to as the next generation of Mirasol which has a dramatic improvement in the image quality and color gamut. So again I think we’re pretty excited about the prospects there.
Pixtronix about a year ago, we announced an expanded partnership with Sharp and we made an investment in Sharp and the two teams there have been working together to commercialize the Pixtronix display technology. And that’s been very-very and I think we’re very excited about the future prospects there. Sharp actually demoed a 7-inch tablet sized Pixtronix display probably about a month and a half ago it sort of the equivalence of CES in Japan and received an innovation award for at least early on getting good reviews and we hope in the next year or so we will see something out commercially there.
Paul talked a bit about 2Net. We launched the 2Net platform a couple of years ago, still kind of early days the healthcare industry is an industry that doesn’t move quite as quick as the mobile industry. But we’re starting to see a lot of good traction, a lot of good deep customer engagement and really we expect hopefully over the next year to start seeing some scale in that business. We also launched in Europe and really grew that this past year. And then as Paul talked about we have brought sort of the 2Net platform now to the phone and so instead having to utilize the hub that we started with connect to these smartphone as the hub.
AllJoyn good traction there as well, we’re actually going to have products shipping later this year and early next year, televisions and wireless speakers with AllJoyn and the team has been working very hard to really build out in alliance that’s a global alliance across the number of industry players and we’ll be making some announcement shortly around that.
And then Qualcomm Halo is also -- that's our wireless charging technology for electric vehicles. We’ve had our -- we signed our first two license agreements. We’re really pursuing this business as one of the licensing opportunities within the Company. And we’re working closely with the auto OEMs to interest them in the technology and then our plan is to license the Tier 1 suppliers to provide the technical solutions. So we signed our first couple of licensees, we’re getting really good traction with a broad set of auto OEMs. And although the EV market is still kind of nascent really the prospects for wireless charging within that market as this starts to grow I think are quite exciting.
So with that let me kind of turn over to the QTL business. As Paul and Steve mentioned we had a really another phenomenal year, record revenues, earnings, total reported device sales and unit shipped, really all metrics we performed -- the business performed better than we expected at the outset of last year, which has kind of been a trend we’ve seen over the last couple of years. In particular, we were forecasting ASPs at the beginning of last year to be flat to slightly down and they ended up coming in quite a bit stronger about 3% up year-over-year, so again another solid year for the business and we -- real confident in the future ahead as well.
So I’m going to spend just a few minutes kind of -- for some of you probably a refresher, for others maybe some of this will be new. But we now have more than 250 license agreements signed on 3G. At this time last year we were I think around 20. And I think even more impressively we are now over 90 what we refer to as single-mode LTE licenses. And all of those agreements include both the TDD and FDD modes in the products.
And so we’ve continued to really build that licensing base early on as I’ll talk about later. We don’t see meaningful volumes at least on the handset segment of single-mode 4G for quite some time yet. We’ve been very successful and I think position ourselves as the leading portfolio once again in 4G as we are in 3G.
And in particular we now have more than 55 companies in China signed up to LTE licenses including both TDD and FDD modes. And given our patent position there and sort of the technology attributes that I’ll talk about later, the royalty rates in those agreements are actually the same whether the licensee deploys TDD, FDD or the most likely scenario is many of the devices will implement both technologies.
So one question that I get fairly frequently is, what’s going to happen to the growth of the licensing business when -- if the world shifts more quickly to single mode LTE or 4G devices? And so we went back and we try to think looking at people ask me about the rate all the time and we obviously can’t talk about the terms of specific agreements. And so we have to be careful how we answer that. But we went back and we did some analysis, I want to share a couple of data points with you.
One is, if you take the companies that already have signed 4G LTE license agreements with us and you look at fiscal year ’13, those companies actually sold devices that represented almost 60% of the total reported device sales of the business. So again at a time where we think that the volumes are kind of way off into the future, we’ve got a very meaningful amount of the licensee base covered with these new agreements.
And then we looked at that and said, of the companies that have 3G deals but also have single-mode 4G deals, if we were to apply the terms of their 4G deals basically to everything they sold in fiscal year ’13, what would be the difference and the royalty revenue that we would have collected in the business and it was actually less than 5%. And so, again I think, we’ve tried to message that folks shouldn’t be assuming long-term that we have a massive step off the cliff as we go into the LTE world. And so, looking at analysis we thought we would just share that with you.
This was actually the primary, I was going to give you a little bit on sort of the structure of the business, like I said, I think there are some new folks that maybe haven’t following the companies as well or as long. One of the things that’s probably really unique about our program as compared to some others as we’ve been successful in establishing long-term agreements with our licensees and in many cases the patents that are licensed under those agreements are basically all of our essential patents. And then usually we will also license non-essential patents and the essential patent portfolio sort of is consistently refreshing based on our investments and so what that does it has the effect of extending out the terms of the agreements because typically licensees are required to pay royalties for the life of the patents that are licensed under the agreement.
So, the structure that is step up is one that really is a long-term structure, we obviously have some other agreements that we’ve talked about here, different structures even those tended to be 15 year type arrangements. So again I think we feel good about sort of the stability in the agreements that we have. And as I said, we tend to license which is a bit different than some companies both our essential or non-essential portfolio which really gives our licensees access to the full range of technologies that we’re developing as we reinvest our royalty revenue into the R&D.
And then as part of these agreements and we license out our portfolio, we will get rights back to the licensees patents that protect our chip business and in some cases or in many cases those rights will also benefit our customers who buy those chips.
On the financial side, we tend to have really two elements of consideration, financial consideration and a sort of the either a lump sum fee upfront or usually it’s a lump sum fee upfront plus running royalties. And really we derive in kind of our normal or standard agreements most of the revenue there is driven off of the running royalty component which is a percentage of the wholesale selling price to the advice.
And I’ll come back to that because I think when we get into a little bit discussion on the implied rate that some of you have calculate based on the revenue and market data that we provide, there are some things that are important to keep in mind there.
We also have talked about it and I’ll cover this in the next slide here. We do have, what we have referred to as royalty caps in the program as well as minimum royalty. So, on the complete device when we license the complete device like a smartphone or a tablet or phablet, again it’s -- the royalty structure is generally a percentage of the selling price. But kind of from the inception of the program, we’ve had these royalty caps in place which really were designed to kind of cap the royalty on the sort of the highest price devices that we would see, cellular technology going into.
And then a few years ago, we also implemented some voluntary caps on laptops and then we’ve extended them to certain kinds of tablets. Again, from our perspective really designed to spur adoption of cellular into the tablet and laptop space and those are at lower level than sort of the general caps that we have.
And then we do have a modular licensing program so we do have a group of licensees that are able to sell modules and they can pay royalty on the module but we were careful at the beginning of this to make sure we weren’t cannibalizing the royalties that we would get on the complete device. So, in those cases we’ve gotten minimum royalties that would be payable by the module licensee to really try to affect or proximate what we would get paid on the complete device that it's going into.
So on the rate, we get questions on this from time-to-time, I think I have been up here probably for the last three or four years telling you, well we know you have models and we know that you have used this to model the business. It really is not the best indicator of trying to model the business going forward just given the amount of complexity that goes into the rate calculation that you will make.
So I want to talk about a few other factors that can impact this. We obviously see quarterly fluctuations that can come in and out based on a variety of factors, and then we have seen some trends. I think at the outset of last year we expected the implied rate for the business to be higher than what it came in at, but we're cautioned. Listen if the market ends up growing faster than we expected that's great we're going to have higher revenue and earnings. But it will probably put some pressure on the rate.
And the reason for that is because we have done a few deals where we have gotten very large upfront guaranteed payments and those are basically amortized on a straight line basis over the term of the agreement. And so in other words they are not growing with the market. And so basically as the market grows those become a little bit of a drag on the rate because they are not growing with the market.
Similarly we have a component of revenue that is infrastructure royalties and those go up and down overtime, but have tend to grow much slower than the subscriber component of the royalty base. So those types of things where we have fixed elements of revenue that roll through in a growing market will actually put downward pressure on the rate.
Another one that is really one that affects more of the quarterly fluctuations or things like audit recoveries, so if we get a meaningful audit recovery in a quarter it can move the rate up. Similarly often we'll go into audit companies and they'll try to make over payment claims which ultimately at the end of day get sorted out in almost every instance where there is a net payment to Qualcomm. But given how the accounting works, you could only book the upside when it's agreed but you have to take the hit whenever somebody makes a claim.
So you will see those types of things move through the rate on a quarterly basis as well. And we do have a kind of a growing segment of the licensee base that are smaller companies in particular in China that are on cash basis instead of an as reported basis for revenue recognition. And so, even timing as to those payments that can slip in or out of quarters can cause fluctuation.
And then OEM mix shouldn't be much of a surprise as I said the couple of deals that we have done with companies that have paid large amounts upfront, you would expect that their running royalty structure is going to be lower than somebody who didn't pay several billion dollars to you upfront.
So changes in market share among the companies that have paid the fixed fees versus the ones that haven't can have an impact positive or negative on the rate as well. And then product mix that's one that is probably have been more of a driver over the last couple of years and probably is going to be a driver going forward as well. And that really comes back to the cap discussion that I just went through.
And obviously we have seen a lot of great trends which I will talk more about in a few minutes about the high-end of the market, ASPs have gone up and so we have seen more devices, more volume or TODS percentage overtime hitting these high caps. So that can actually, that's going to have an impact as well on the rate. Because what we do when we report total reported device sales we provided as reported by the licensee and so they will report the gross price.
And when you think about what the royalty is paid on, they take certain deductions from that to get to a net price that the royalty is applied to which is why the rates are always going to be less than 5% when you think about it as a percentage of the gross, but then the cap does that as well. The caps have the impact of a higher ASP comes through, but effectively it looks like you are getting paid on something less than the full selling price, which is with the cap effects.
And so as we go forward we have an estimate in our plan for the year on attach rates for tablets for instance. If those start to go on a positive direction which we think there actually is a lot of momentum right now that could push them up. That’s going to push the implied royalty down because you will have a maybe a high ASP tablet coming through but the royalty itself gets cap.
So those are the types of things that are hard to predict. So again from the best view that we have as we sit here today which can change based on all the factors I just mentioned. We think that the rate for fiscal ’14 is probably going to be somewhere in the range of 31 to 33. And again if we see an uptick in the tablet attach rates, then that will push it down potentially. Or if we see even stronger ASPs at the high-end in some of the developed regions with things like phablets taking more share, that could have a negative impact on that. But again it will drive higher revenue growth.
So Paul talked a bit about 3G. We continue to invest significantly in the evolution of 3G and enhancements to the 3G systems. Obviously there is a lot of discussion in the industry and we’re leading very strongly in LTE, but there are many places in the world where 3G is still quite new in their deployments, the networks are still being built out. And so I think -- we believe there is still quite a long runway for 3G. And therefore we continue to invest in both CDMA and WCDMA and we continue to roll out enhancements to the market.
And as LTE gets deployed, it’s important to the operators also to not -- to minimize as much as possible the difference that consumers experienced when they move from 4G to 3G based on the coverage that’s available. And so we still see quite an appetite in the industry to try to evolve 3G in a way that makes it as close to possible as the experience that you get on 4G.
There is a lot going on here in this chart. But let me try to distill it to the fundamental point. Obviously everybody knows that we’ve led consistently in terms of our chip offerings with LTE. We are now in the third generation. And one thing I think we don’t talk that much about is, we have established a value for the portfolio through the 90 plus agreements we’ve signed with the industry and we continue to believe that that is the best indicator of the strength and value of the portfolio, because obviously sophisticated companies don’t sign agreements and agree to pay you money if you don’t have a strong position.
But I thought it was worth, just kind of reminding people that we’ve been investing in kind of the core technologies underline LTE for more than a decade. And we had some of the earliest investments in the industry and then through the acquisition of Flarion brought in both IP and technology that was fundamental and early to the standards.
And then if you look at the future, there has been a number of companies that have either scaled backed our investment, in cellular or completely sort of been removed from the landscape that had invested historically. And so actually our contribution and our position within the LTE standards developed has really grown over the last few years to even much more of a leadership position than we had before.
So as I look forward, and we see thing like LTEU and LTED and all of the advancements on carrier aggregation, Qualcomm is going to continue to have a strong leading position there and I think we will service well into the future.
And of course what comes out of those investments and those contributions, we project that invention, is a very-very strong patent position. And one of the ways in addition to looking at market value which again we think is the most important one. There is many ways that people try to look at value of patents. But one way to think about how fundamental or important your invention is. Is how often does it actually get sighted by other people when they’re filing patents in the future.
Because they will have to refer to it as something called prior art that they then have to say why is our invention different than what Qualcomm did before, what is it built on, in some incremental way. And we actually have the most widely forward sighted patent portfolio in the industry. And again it’s just another indicator, the fundamental nature of our IP and the strength of our position.
So on top of cellular which obviously is really important to us, as you have heard from both Paul and Steve, we have a tremendous amount of investment in other technologies that are key to the device. We continue to believe that the kind of the key value driver in the device is the cellular technology. But there is a lot of stuff now wrapped around that, to drive the user experience and whether it is displays or video compression, H.265, advanced Wi-Fi. A number of these areas, we have invested ourselves very heavily or through acquisition acquired a very strong IP position that’s much broader than just sort of the 3G, 4G heritage that people know us for.
Okay, so the market, you guys have seen this. We obviously came off of a year with very nice unit growth, last year I think when we stood up here and gave you our estimate probably last year from a unit perspective wasn’t too far off from where we’re this year at 15% as the midpoint and the market came in stronger than that, so we’ll see what happens next year. We have very strong views that there and I’ll go through that in the next couple of slides that there is tremendous growth opportunity ahead.
You will see the split here between emerging and developed, I think one thing that’s worth pointing out although we do expect to see faster growth in the emerging regions. We still will see growth in the developed region, so it’s not like the developed regions have stopped growing. They’re obviously now growing at a slower pace from a unit perspective but there still is meaningful growth there.
So this really makes a couple of points; one is, if you look at 2013 although there has been about a lot of discussion about sort of the smartphone segment is saturated and it’s going to slowdown. We’re really silly at the end of 2013, we expect to be less than 40% penetrated in terms of the installed base of handsets worldwide. And so there is still a tremendous opportunity here for growth and on top of that you see the percentage of the devices that are shipping each quarter that our smartphones continuous to go up.
So it’s really just an accelerating theme that we’re seeing but it’s a big opportunity that’s available to us going forward. So the market is really far from saturated. If you look at developed regions versus emerging region obviously the 3G, 4G penetration in the emerging regions is much lower than developed that’s not a surprise, but it just highlights that again there is a huge opportunity there going forward and then in the developed regions, we do anticipate, there would be many drives for replacement rates as well as multiple devices per person that can drive growth in the developed regions as well.
So we kind of sliced this a little bit differently this year and when we have given our replacement rate in the past, we’ve sort of looked at it on an all-device perspective and we now really did try to slice that off and take a more peer-review on handsets I think that’s really what people are focused on in terms of replacement rates. And so if you look at what we have kind of baked into our calendar ’14 estimates, it’s about a 30% worldwide replacement rate and obviously we seen replacement rates accelerating in the emerging regions and been relatively stable in the developed regions.
So I think we feel pretty good that this is a reasonable kind of stable environment for replacement rates. Yes just I will talk about in a few minutes. We do think there are some catalysts that could drive this higher. Another concern I think we hear from time-to-time is on the ASPs in emerging regions, our people -- we have this long tail to move from 2G to 3G or 4G in the emerging regions and are those kind of come at low ASPs and there is two really good trends here actually three that -- or actually three that we are seeing; one is, that the ability for people in BRIC countries to actually afford a smartphone at various tiers is forecasted to double between now and 2018.
On top of that people are actually willing to spend more of their disposable income on their cellular devices on their handsets. They are just that important and they continue to become an increasingly important component of our lives, so you have this phenomenon where people can afford more and they’re willing to spend more and so we’ve actually went out and commissioned some market research and pretty interesting fact not that surprising but it did confirm at least to what we expect to see in the future and that is off the people that either have a feature phone and are anticipating they’re going to a smartphone or that are going to replace their replace their smartphone.
Virtually everybody said that they were planning to spend more on their next smartphone or feature phone than the one that they had currently. And so it really reinforces that as an emerging region a lot of times the first device that they get when they come over to smartphone will be at a lower tier but then they will start to move up tier just like we’ve seen in the developed regions.
The other I think significant opportunity again I think even in the developed regions we are getting to the point where there is high penetration of smartphones but there is still a lot of room for LTE migration. And so I think a lot of good things happening here, Europe starting to roll out their networks. And I want to be clear about this I think we anticipate that LTE networks will continue to roll out rapidly across the world and that will create opportunities for replacement of multimode 3G, 4G devices. But as we look at the environment, we still believe that given frequency allocation issues or coverage issues that the amount of single mode 4G devices will still be quite low for the next five years.
And then tablets. Tablets obviously 2013 I think is forecast to be a year where tablets ship more than PCs. So I don’t think anybody really struggles with the size of this opportunity, it’s just really a question how much 3G or 4G attached is going to happen in the tablet realm. And as Steve mentioned we’ve been a bit underwhelmed with the pace of adoption there. And so we’ve got kind of baked into our plan going forward something in the mid to high 20% attached as an assumption but we’ve seen a lot of great moves by the operators which I continue to believe has been the impediment to adoption of the data plans.
In the last few months things like T-Mobile’s plan that Paul talked about where you get 200 megabytes free a months and then more session based pricing. And so we do think there is an opportunity through a variety of factors in terms of who is supplying those devices and the data plan opportunity improvement that could drive to a bigger opportunity for us in tablets than we currently have baked in.
We’re pretty much kind of where we were last year on the growth in the new connected space and part of that’s dependent on the assumptions we’ve made around tablet attached. But in terms of other types of connected devices, we still believe that there is a 20% CAGR. We’ve always kind of viewed this as an incremental growth opportunity on top of the core smartphone business. And we do believe that that will show up over the next five years.
So I am overtime so I’m going to try to speed up a little bit. So ASPs, let me talk a little bit about what we saw in ’13 and kind of what we expect to see in ’14. Most of the trends that we expected at the beginning of last year really came through. And in some ways came through stronger than even we anticipated. But really in the developed markets we have seen remarkable stability in the selling prices over the last four years. While continued increase of penetration in smartphones the ASPs really have been very stable. Part of what drove the ASP uplift last year from what we expected at the outset of the year was we saw two things and most of them in the high tier.
One of them was actually a higher percentage of the devices being sold in developed regions came from the high tier versus the prior year. On top of that the selling prices in that high tier -- high and mid-tier actually went up. And so we had two very favorable trends at work there. And we believe that that’s largely going to continue. There is still an opportunity at the low-end to move people over but then through the upgrade cycles and people increasing kind of the tiers that they play in overtime as we looked out into ’14 we believe that these trends will continue and that we’re going to have pretty stable environment in the developed regions on ASPs.
So in the emerging regions couple of data points here I think that are important. We’ve seen a very, very strong shift to smartphones over the last couple of years that’s again I think something that people expected. But on top of that, we’ve actually seen the ASPs go up in these regions for a variety of factors. And so even last year in ’13 in pretty much all of the sub-regions when you breakdown what’s in the emerging bucket. ASPs were either flat or they were up year-over-year. And that’s with -- that's despite a very, very large 30% volume growth. So you would expect as more volume drive stuff comes in at the low tier and that actually drives pricing down but the favorable trends of people moving up and willing to spend more actually offset that. And so we saw a very stable environment there.
I think the other thing that we’ve emphasized a couple of times is the difference between a feature phone price and even the lowest end smartphone is meaningful. And so in the last year we’ve seen something like a 2x delta even to the lowest end smartphone versus feature phones are doing. But I think probably the most important thing is if you look at the delta so the blue line on the bottom is the average selling price in all the emerging regions and the green line is the average selling price overall from the licensing business. So last year it was 226 is where we exited and in fiscal ’13 the average selling price across all the emerging regions was a little more than $190.
So again I think people have been assuming that as we get more volume moving over to the emerging regions that the price point is a lot lower and therefore will be a bigger drag on the ASP. But because of these favorable trends, the difference really is not as great I think as many believed.
Going forward into ’14 again I think much like the developed region s we expect to see some of these similar trends continue. I won’t spend too much time on this other than to point out that although for quite a while we’ve been forecasting longer term declines in ASP the ASPs been remarkably stable over a really, really long period of time. And in fact over the last three years have gone up. But there is always sort of industry trends that have kicked in and they have kind of stabilized the ASP and although again but we’ve modeled into our plan is a low single-digit decline annually. There is opportunity ahead for things to offset that.
Okay, China. So this has been covered to some extent but I just wanted to highlight a couple of things. One is that although there has been tremendous growth in China over the last few years 3G penetration is still less than 40%. And so back to my earlier point there is still a large opportunity of growth in China as well as the emerging other emerging regions. And the growth in smartphones has been across all tiers so you saw videos actually from some of the emerging Chinese suppliers that are not supplying at the low-end they’re actually supplying very, very compelling devices at the high tiers as well as in some of the non-Chinese brands coming in. So you have devices kind of at all tiers and again the stuff coming in at the high-end is really helpful.
On top of that the last year to two years we’ve seen a large amount of growth in China Mobile of TD-SCDMA. And as you know we’ve had some challenges collecting royalties from some of the suppliers of Td-SCDMA and so effectively that’s been a drag on the growth of the business versus the overall market. As China Mobile starts to migrate to LTE I think we see a couple of opportunities there. One is that there will be continue to be a segment at the high tier at China Mobile and I think it will grow as LTE comes in that includes 3G, that’s not TD-SCDMA. So things like WCDMA for global roaming.
And it’s going to depend where that breakpoint comes in the portfolio but that will be a meaningful amount of volume. On top of that as LTE goes into more and more devices we do believe that we’re going to have a royalty opportunity there that’s different than what we experienced in TD-SCDMA and we also believe that the volume is going to probably fairly rapidly transition to include LTE assuming that the licenses come through as expected and China mobile continues to push the technology, which we think they will. So that will -- that should therefore end up being a catalyst or a positive growth driver for us going forward.
So I’ve gotten a number of questions I think over the last few months about our ability to monetize our portfolio in China I think we have covered the number of companies that are already signed to license agreements in the earlier part of the presentation but there has been lingering concerns about whether certain people are going to try to position LTE TDD as a Chinese technology or an evolution of TS-SCDMA and we’ve been -- that's been on our radar for quite some time and so we’ve been thinking about those issues and I think the messaging in the industry now is quite clear and I think there is a pretty broad-based consensus and that's because it's based on fact and if you look at how the 3G standards were developed. The TDD versions of UMTS were quite different than FDD and what that resulted in is basically operators that had unfair spectrum sort of ended up with stranded spectrum, because an ecosystem never really developed or supporting the TDD mode.
So when LTE was being developed it was critical to the industry and the operators in particular that they wanted to make the TDD and FDD versions of LTE as similar as possible. So there really is an effort to minimize the differences between TDD and FDD. And so when you look at the contributions that were made within the standards of development very, very high percentage of them were applicable to both modes of the standard and there was really a relatively small amount of development around the TDD mode in particular.
So not only was the standard developed by an international group of companies around the world through 3GPP but there is such a high amount of commonality between both the TDD and FDD mode, it's quite obvious that they are from the same family as part of the same international standard.
And as a result of that when you think about our IP position most of our patent portfolio that's applicable to LTE applies to both modes because the technology is so similar. And that also allowed us in our first chipset from the very beginning to implement both FDD and TDD in the same chip. And so we have had that strategy all along. We also expect that there are number of operators around the world that have both paired and unpaired spectrum. And we believe that they will end up rolling out both variants so they can utilize all of their spectrum available. And therefore the devices are going to support both TDD and FDD in large scale.
This real quickly just shows that there is obviously been a lot of deployment of TDD LTE around the world, I think there is something like 23 networks commercially launched in 18 countries and so really this is an internationally deployed technology.
Okay I am going to try to end on this, so the last area I think we have been getting some questions about is again focused on China and our ability to continue to collect royalties in China.
We have -- this has been an important issue for us from the very beginning of our licensing program in China. And I think we have a tremendous team built up both with resources in the U.S. and in China and we have kind of a very robust compliance program. So when we get reports on licensees every quarter we're scrutinizing those, we're reaching out to the companies to make sure that their questions, we're pushing back that they know that we're carefully monitoring this area.
We're also spending a fair amount of money on third-party research and investigation to make sure we have a very good grasp of who is supplying what to whom at what quantities within China, and that allows us really to prioritize where we think we might have issues and then go in and aggressively conduct audits, which are authorized by the agreements that we have.
And so again I think it's a fair amount of work, but we feel good that processes that we have in place are going to allow us to continue to collect what people have agreed to pay under their agreements going forward.
With that I am going to wrap up. I think we feel really good about the prospects ahead, not only the technology leadership the positions that we have with our agreements and then the market prospects that we see ahead. I think we're really very comfortable that we're going to grow this business in a meaningful way.
And then we have the new future, the future licensing opportunities some of which I talked about at the beginning that we hope over the next few years will start contributing additional revenue on top of the core business. And we're going to continue to look for other areas to take the expertise that we have in the licensing business and really make that applicable to these new opportunities.
I'll let George get into the margins; I think they speak for themselves with that I am going to step down. Thanks very much.
Please welcome Qualcomm Executive Vice President and Chief Financial Officer, George Davis.
Good afternoon. My clock just told me that my talk ends in 10 minutes. So I will try and catch this up a little bit here. But one of the first -- I also welcome everybody who is joining us online. I know that they’re listening to this from a distance, and you missed out on a fabulous box lunch today. But thank you for being with us. I am going to quickly cover four topics today. I will give a little bit of perspective on ’13, talk about ’14 on some of the things that you have told me are things that you struggled with a little bit compared to the original forecast for the year, maybe talk about that a little bit more.
You’ve heard throughout the day, a lot of the foundations for our growth outlook and so we will spend some time just kind of summarizing that and pulling them altogether. And then finally I will talk about capital structure over the next five years. And then we will go to M&A. So let’s start with ’13, pardon?
Q&A, you said M&A.
Oh sorry Q&A, did I say M&A, sorry Q&A. Well, we are buying you all a drink later. So thank you for that clarification. ’13 was a strong year. You heard it from a lot of different dimensions, just wanted to add mine. A really outsized growth year for QCT, 38% on the top-line and 39% in operating margin, really reflected not only of the kind of growth that we say in the industry growth year but the growth in share in the right place. And QTL also had a very strong year, growing 19% on the top-line and 18%. So terrific on the bottom-line, terrific performance throughout and there was a year that just kept getting better. We ended up 8 points above our initial guide for earnings per share growth, 7 points above the initial guide on the revenue line. Many of you have been reminding me of that constantly and we really believe the ’14 we presented to you is our best outlook at this time.
R&D spending throughout the year really drove OpEx above the levels that we fought for the year and this led to a lot of discussions. I will spend some time on the ’14 outlook and put in perspective in a minute, but I think one of the things that when you look at ’13 it’s really the combination of a three-year journey of extraordinary growth for the Company and one of the things we don’t spend a lot of time doing is looking back. This is a group that really looks forward into and tries to stay many years out ahead in technology, but if you look at the S&P 500 and you say, how many companies grew ’11 through ’13 and doubled their top-line. There is 25 companies that did it.
And if you take that number down to companies that had 10 billion in revenues in 2010, how many of those companies were able to double their revenue over this time period and you’re down to six overall and three others along with Qualcomm were intact in that including Google, Amazon and Apple. So really extraordinary three years, a tremendous amount of growth to manage as a team and really great positioning for ’14 and for our five-year outlook.
So let’s go to ’14, so if you look at the outlook for 2014 up 5% to 11%, I think that’s the first part that everybody focused on revenue. If our long-term outlook is double-digits top and bottom-line growth, why is the first year not in line and we’ll talk a little bit -- we have talked a little bit about on the call but just as a reminder, we really are seeing elements in the first half of this year, that are impacting both the top-line and the bottom-line in terms of growth year-over-year heavily weighted towards concentration and product mix with that we are about -- if you look at the top five customers we’re about 3 to 5 points more concentrated in ’14.
Or we believe we will be 3 to 5 points more concentrated than we were in ’13 and ’13 was more concentrated than ’12, as you know. We have also are very close to closing the sale of Omnitracs that takes a little over a point of revenue growth year-over-year out, so a couple of structural issues but the fundamentals remain very strong, if you take anything away the 3G, 4G device growth even in ’14 a range of 11% to 18%, 15% of the midpoint, share at the OEMs, I think Steve did a great job of summarizing, how strong our position is in the leading phones.
LTE acceleration, we think the second half actually will see some lift out of that again we will just see how that plays but it’s a positive. And finally stable replacement rates in ASPs these are all great foundations for growth in the year.
EPS leverage, this is one of the things that you’ve been talking to us about and really as we’re navigating a lot of growth making sure that we caught the growth inflexions was the number one point. I will talk a little a bit about how some of the earnings leverage that you are seeing in ’14. First the shape of ’14 one of the things that made it very hard to forecast this year was actually the revenue in the first half and the second half was reasonably similar to the pattern that you saw in ’13 so where the hard call was is that the pattern of first half second half earnings per share is actually quite different almost an inverse of what we saw on ’13.
So that’s one of the things when I see people models very good overall on hitting the full year outlook but the first half versus the second half was an area. And again second affects that we have talked about are not only we expect a help on the product cost side obviously the OpEx actions, we get more traction in the second half of the year we’ve talked about LTE, there was some n minus one product mix as Steve has talked about and again we’ll get a little bit help from device ASPs as you look at how the full year plays out.
Also the cumulative effect of buybacks was committed to do a minimum of 4 billion of buybacks this year so we have got all the benefits this year from last year’s activity but you will get more second half benefit from that. So operating expense two quarters ago most of the questions were can’t you guys control your rate of growth in OpEx as you are growing a little bit more so we can get a little bit more flow-through.
And then for the last two weeks it’s been I think you guys have overdone it on pulling back on OpEx because it’s such a -- it's a big shift in the growth rate and have you really -- are you just overreacting.
And I can assure you that we feel very good about the level of spending and you can see here quite frankly R&D is continuing to grow above what we’re saying the growth rate for the year is and part of that is the contribution that SG&A is making not only from very tight controls around functional spending and discretionary spending, we get a benefit from the sale of Omnitracs. We’ve spent a tremendous amount of time prioritizing R&D projects at all levels. Because three years of growth you step back and you say to yourself is there something now as we see that direction is changing a little bit is there something where we may have overinvested as we think about what the next five years look like for that opportunity.
We went through virtually every project in the Company and made those judgments. So and that is why the team is so confident that we are growing at the right level and we are not compromising future growth. So I want to spend a little bit of time just reinforcing some of the things that give us confident in making what some of you believe is a bull call of double-digit top and top-line growth and EPS growth. First off the share and technology position that we have today is exceptionally strong and whether you looked at the dynamics within QTL or QCT we’re starting from the right position, really the pole position if you think about competing for the next five years.
And still the number one factor as you look at the growth the support for the growth is end markets device growth. That is a tremendous underpinning for the growth rate. And I’ll spend a little bit more time on the device growth in a minute.
All the other fundamentals in terms of replacement rates and ASPs we’ve already talked about are quite strong. Adjacent markets you saw a number of adjacent markets that are going to be that are already reasonably sized markets that are becoming important markets that are really fundamentally tied to our capabilities today and the types of technologies that we plan to deliver over the next five years. So we’re not -- this forecast doesn’t rely on the Company taking wild bets on technology that doesn’t exist today. This is building off of our core capability and the increasing Internet of things effect on devices requiring our technology.
So let’s take a little bit look at device shipments and really I think about this is as my QTL page, this is a little different cut at some of the networks that you’ve seen for the future. And you may remind me George hey five years is actually 18 not 17 actually 17 is as far out as third-party data goes and we wanted to give you a composite of what third-parties are saying. And what we’re seeing is both -- and this is quite frankly on the conservative end when we mix it. But we thought it was reasonably instructive. The blue bars are internal forecast you see the ’13 actual estimate and then what we have forecasted for ’14.
As you look out to 17 using third-party data and this is strategy analytics IDC on the handset side and on the non-handset side we do a mix of a number of players to get to that but again all third-party data and what you see is still very strong device growth that is the foundation of our growth overall. And interestingly enough we want to breakout non-handsets so we haven’t done in the past. And quite frankly in five years growing at probably five points or more, faster than the handset growth it is starting to widen out to something that we should probably spend more time on. And you can see the real drivers there being many of the items that we talked about throughout the day.
Obviously, QCT is going to benefit from these trends as well but this is a great underpinning in our licensing business. So if you looked at the QCT growth drivers this is the slide that Steve ended on in his presentation. So within the core business we’re going to get all of the participation and the device growth but we’re continuing to expand our footprint. RF360 is a great and growing opportunity for the Company. Increasing connectivity particularly in the premium tier of the device market is an important growth area.
And the same time you’re going to see very large markets expanding tablets, obviously the largest but automotive is becoming a very important driver for technology and for the machine and machine capability of devices going forward.
So this is -- anyway connected home and infrastructure you also saw some other items there. But overall, the fundamental growth drivers we feel quite confident in and you don’t have to take wild bets on us having to create new technology. We’re already leading in these areas.
Okay, capital structure wouldn’t be CFO presentation, without a capital structure discussion, we’ll jump right in. I think the Company has shown an ability even as it is growing to generate significant cash flow overtime. It initiated a dividend and share repurchase in 2003, I think another case of being an early adopter. We’ve seen very consistent and ratable growth of the dividend averaging over 30% CAGR, since initiation and at the same time we’ve built a strong balance sheet consistent with industry leader.
The tax rate that the Company has below 20% again is a contributor to the cash flow, the tax rate is a contributor to the cash flow overall. You can see from this slide that we started accelerating the dividend and share repurchase at the end of 2013 raising the dividend 40% during the year and obviously $4.6 billion in share repurchase.
So, before I get into the a little bit deeper on the five year outlook, one of the things I want to talk about is M&A, I really want to talk about M&A. So, if you look at the roughly the 49 deals that the Company has done in the past five years and for us a deal would be a Company acquisition, an asset acquisition, a team acquisition, a IP purchase, or a portfolio of IP.
So these are things that we spend most of our inorganic time focusing on and as you can see, 75% or more are 50 million or below. The only one that was above 350 million, now we jumped a little bit, 3.1billion was Atheros but that was really accelerating our entry with a strong player in connectivity. And so when we look at M&A in general, we think going forward this is the world that will primarily continue to be but we think as an industry leader you need to retain the capacity to do more significant strategic actions in a fast growing, highly concentrated industry and so we preserve some balance sheet for that activity.
But I think as you look at our history and you can take this pack much further. We have a very good history, very much focused and it’s actually within these even though they are smaller deals there is a lot of discipline around cash and cash returns and focus and how we’re going to make these work.
Alright, so capital structure update Paul did a great job summarizing this. So, maybe I’ll just put a little bit of my perspective on it as well which is one of the things that we heard very clearly is you wanted more predictability. And that even though our opportunistic program was had a very good ROI on it, it was very hard as you thought about the valuation of the Company and particularly over the longer term could you relay on return of capital as a key ingredient.
And the other piece was for the last three years share growth became a very difficult conversation with portfolio managers around that country and clearly we’ve had an option bubble that we’re going through. We think it’s got about another two and a half years of legs to it and again but these were options that were granted a long time ago, we’re all RF using now in terms of our stock comp and so it’s a bubble we’re getting through.
But our base line is going to be, at a minimum you should count on anti-dilution but 75% of free cash flow will generate excess cash above anti-dilution and we think at the end of the period we will be down 5% to 10% in terms of shares outstanding. And again, that has a lot of price assumptions with it but we think that’s a conservative view. We do think it makes sense to continue opportunistic repurchases with the access cash flow within that and the amount of that will obviously be dictated by business results.
So the Company has been a strong cash generator. I want to just remind you where the cash flow is and how it's used. We have approximately $8 billion onshore, $21 billion offshore. The onshore number, you may have noticed has been coming down. Quite frankly at 75% between the uses of cash onshore, between the cash balance that we have, we will be putting debt on the balance sheet to support the 75% commitment. That will be in the later part of the period. We can certainly the first few years out of existing cash flow and our existing U.S. cash.
But we believe that our cash requirement -- prudent cash requirements is about $3 billion to $4 billion onshore. That's maybe $1 billion to $2 billion lower than we have said before and that really reflects the growing debt capacity that the company has and also the ability to generate strong cash flows onshore.
That being said, we still have trapped cash offshore and we are actively joining a number of companies and continuing to lobby Washington. That hasn’t been terribly productive for the last year or so, but it's something, that obviously would impact how we would manage our capital structure going forward if there was a repatriation obviously like many others would bring a lot of that cash back.
So where does this take us? It says that over the next five years, given double digit growth and given cash flow in the range of 30% to 34%, which is within the conservative range of operating cash flow, within the range that we have been in the past, with capital expenditures of about 3% to 4%, you end up with free cash flow in the 28% to 30% range. And you apply that to what we believe the performance of the company will be in that - we’ll easily see two times the return of capital over the next five years than was returned over the previous five years. So we think it's an attractive, predictable, appropriately balanced program between accelerating return to capital and also maintaining the kind of strategic flexibility that we think is appropriate as a leader.
And with that hopefully I have gotten us little closer to being back on time. This slide is kind of my elevator pitch on the takeaways from this meeting and also the foundation for a very strong growth outlook over the next five years. So with that I’m going to wrap up and we'll get the group up here after a couple of videos for Q&A. So thank you very much.
[Audio Video Presentation]
At this time, we will begin our question and answer session. If anybody in the audience that has a question, please let us know and we will bring you a microphone to ask the question and answer promptly.
Mark McKechnie - Evercore Partners
This is Mark McKechnie, Evercore Partners. Paul you brought up the industry, concentrated nature of the industry at the high end smartphones space. And one of the players you said was getting more vertically integrated. I wanted to ask you and maybe also Steve, big driver QCT growth in 2013 was share gains there, right? And I don’t know if you could ask or answer; do you feel you won the war relative to the internal chip designs there or are we going to see every year when new flagship comes out, potential risk to your positioning. From everything you said, it sounds like you feel very well positioned for leadership positions at key handset players. But I wanted to ask you how we are going to see that play out in the next Mobile World Congress, the Galaxy S5, all of those types of coming events.
You are looking for upcoming product announcements.
Mark McKechnie - Evercore Partners
It’s the world.
No. I wouldn’t say the war, to the extent that I would even characterize it as a war is over. It is going to continue to be a case that we need to drive the technology forward and that’s why we gave you the sense that there really is this tremendous road map that we have and also that we are ahead in number of performance metrics and it is a broad range of things that you have to be good at in order to see it. And it’s those reasons that we continue to build a leadership position. But we’ve seen this over the history of the company, there had been a number of internal efforts always going along trying and challenge our position from the outside.
Maybe along the same lines, you know I think the flagship design, it’s so important that that is consistent with what the developed world wants to have in terms of what they want to subsidize. And a lot of what they’re subsidizing moving forward is the key modem features because that’s how they have to actually produce the growth and so the modem position is very, very important there in terms of an area.
Then the other issue is that I think we have distinguished ourselves as the big, we think we are creating differentiated technology from what you can get if you are just licensing thesis from people. And we did that on purpose and I think in the premium tier in particular, that’s an area where people look at differentiated technology and they’re willing to pay for it.
So as long as we’re ahead, we feel pretty good about where we are and we feel that we’re continuing to build a lead there. And I remind you too, if you just looked at the trajectory of particular accounts, generation to generation, I think both our share has increased, connecting system with that same trend. And then the areas, the geographical areas where we’re being used tends to increase, which I think is consistent with the modem rollout that I mentioned. So we have a pretty simple game plan. It’s just sort of hard to execute on but it is the technology leadership and certain accounts pay for that.
Tim Long - BMO
It’s Tim Long at BMO here. A few for Derek, really three here. Number one, thanks for clarifying the LTE impact, that 5%. Are we safe to assume, take that off the 3.2%, so we’re talking a 15 to 20 basis point impact for a single mode LTE longer term? Second, talking about the 55 LTE licensees in China, could you just gave us a sense of the top 10 that we talked about as having 80% share. Are they in that number and were they all TD-SCDMA licensees as well? I just want to get a sense of how from a vendor side it is different? And then the third one, looking at the royalty rate long term, is there a potential for upside or at least offset as Chinese vendors who have less intellectual property and therefore probably pay a higher rate, gain share globally? So is there an opportunity that that is something helps the royalty rate move in the other direction somewhat?
So many questions, I forgot the first one already now. So we didn’t really look at in terms of rate. Really we took the total revenue that was paid by the licensees that have 4G licenses today under their 3G deals in fiscal ’13 and then sort of applied, if you took that with same sales and applies the 4G rates, it was about less than 5% delta. So we didn’t think about in terms of the rate. We thought about it in terms of total dollars.
On the second question, it’s a mixed bag. We have several of the companies that are in that sort of the top 10, including ZTE licensed already for LTE. I think we announced them a year or two ago. At least so far the situation feels pretty different to me than TD-SCDMA. Some of those companies did not have -- never signed licenses for TD-SDMA. Others had signed and then we had some issues around that. So little bit of a mix bag. And as to the ones that haven’t yet signed, we’ve got active negotiations going on with a number of them. So at this point I think we’re hopeful that we’ll get those done not too far off.
Tim Long - BMO
And then just with the Chinese gaining share globally, could we assume that because there is less IPR at those companies, would that have a net positive effect on the royalty rate? Thanks.
So, OEM mix obviously is one thing we have highlighted in terms of things that could move that around. We traditionally have not, we have not used adjustments in the royalty rate that people pay sort of as a nob to turn to deal with somebody as IP position. We’ve looked for other ways to address that terms of the scope of the rights that come back or other ways. But yes, there are couple of large OEMs who have different deals and to the extent, some of the Chinese suppliers or anybody else for that matter would take share, that could be a net positive for us.
Brian Modoff - Deutsche Bank
It’s Brian Modoff from Deutsche Bank. So just two questions, Steve, in terms of the Chinese MediaTek in particular, how do you see, you talked about this year having higher revenues and I assume you’re talking on MediaTek and them having higher units. Do you see with LTE in China next year perhaps having also higher units, in other words gaining more share in that market and have you effectively dealt with kind of the marketing campaigns, like using the Octacores and core work kind of augment then over there versus your Krait processors. And then Paul, on LTE over Wi-Fi, given that’s really it’s an unlicensed spectrum, there’s enough standard issues to deal with, there is really in adoption issued with getting other vendors to support to you in this area. What are you doing to get the ecosystem in general to adopt kind of an unlicensed LTE product and develop platforms to really leverage this in Krait, kind of in a Femto architecture that is anonymous relative to the carriers that might be able to use it? Thanks.
So Brian on your first question, so we think LTE will be a good thing actually in China. We are going to go at it with the tiered roadmap right from the beginning and I think you’re going to see it transition, we hope actually fairly quickly into China Mobile. For us, as you know, we really sell nothing into China Mobile. That’s probably some small number of devices that get sold in there, just because they’re iconic designs, but we really don’t have what I would consider, the largest carrier in the world, we really don’t deal with and that’s a good path for us to get in there.
I think it’s likely to go at the high tier first and then transition to the lower tier but we are setting up an engagement with the OEMs so that we can drive that even at the low tier right out of the gate. I talked about on the call that we had initial designs preparing to go. The first design is preparing to go as early as Chinese New Year. Of course it depends on two factors, how quickly the Chinese government releases the license and of course the maturity of the network. We are working very hard on the maturity of the networks and I would say it’s consistent with that, with that launch schedule. So I think we’re taking care of the parts that we know about.
The other thing I want to make sure that we talk about is that it’s not just all about LTE for us in China. We do have a tiered roadmap that we’re supporting through our OEM partners and through the Reference Design program. However, you’ll find a lot of units but not a lot of margin dollars in that business. And so we think that the transition to LTE will be very good.
The other thing I’d just highlight is that the international OEMs are also looking at this transition to LTE as an opportunity to come back into China and we do expect that to be a positive trend for us as well. I don’t think the concern about the -- I’ll call it -- there is some sort of lose marketing that sometimes happens in that part of the world on things where they might take a product attribute and attribute more performance to it than is actually real.
I think our brand is actually fairly strong there. For example, if you look at recent benchmarking data on, I think it was the tablet that came out with one of these multi-core designs, that probably was architect in a different way than we would. And I think the performance was probably something that we would be in our bottom tier type product. So what we tend to do is we take the AP, it’s better than what somebody else has at a lower tier, then we put a better modem next to it and then we sell it together. We’re doing that moving forward.
On the LTE unlicense; so I wouldn’t characterize it as LTE over Wi-Fi. The unlicensed bands support a bunch of technologies. So it’s really LTE that goes into those bands, the 5 gigahertz band that Wi-Fi does run in. And one nice thing is, going forward basically it’s just another frequency band to support that goes into the baseband, that will do both the cellular modems and Wi-Fi modems. And one nice benefit of that of course that, now you’ll need to be a leader in both LTE and Wi-Fi to sell Wi-Fi even. So that’s a big benefit for us.
There are two phases to it. The first phase is essentially Wi-Fi as it stands just in a new band, there is standard work though to do some modifications that adapt LTE even better for certain regulatory regimes that require listen before talk modes and that also gives us some other benefits, some interesting benefits going forward.
One of the benefits that you mentioned is that being in the unlicensed band, we can have access points that are either generic to operators or operator specific and they can coexist due to the interference management techniques that we’ve built into our Self-Organizing Network technologies and stuff that we’re building into the standards modifications that will make the LTE.
So lot of really interesting opportunities there with LTEU. I think both Wi-Fi and LTE will coexist in the band as I said earlier, actually an LTEU base station is a better neighbor to a Wi-Fi access point than another Wi-Fi access point. And then we take advantage of the better radio. So we’re going to get much better performance and much better coverage out of LTEU than you see out of Wi-Fi today.
Mike Walkley - Canaccord Genuity
It’s Mike Walkley with Canaccord Genuity. Question for maybe George or Derek. Just going to be slide, we show these 16% CAGR on devices for QTO through 2017. If you look at 2017, 20% of those devices are non-handsets related. Can you give us some baseline of maybe what’s included in 2014 that might be non-handset and then the mechanics as you get into things like small cells and M2M, what is that license opportunities relative to a smartphone or handset and how might that effect how we look at royalty rates in ASPs?
So I mean I think it’s really -- we didn’t breakout each specific piece but it was the things that were listed on the slide, tablets, small cell, e-readers, I don’t remember what else was on the list, gaming devices, dongles. So it’s a variety of sort of non-handset devices, like we’ve seen historically just bigger number.
And really the royalty structure is going to depend on what the product is. I think you guys understand the situation on tablets, and small cells, it’s pretty nascent but I think as I said last year, it’s going to depend a bit on sort of how they ultimately evolve. But we would probably look to implement something like a percentage of the ASP type model.
Some of the M2M stuff, that gets enabled through modules, some of which have minimum, some of which have different minimum. So it’s really hard to give you a direct answer because there are so many variables.
What we tried to do on my slide was to rank order in the way that we thought in terms of the impact on the performance of the Company, starting obviously with tablets and working our way down.
We started about 15 minutes late on Q&A. So we’ll go 15 minutes over and people need to leave, we apologize for being behind schedule. It’s not normal for us to be behind schedule.
Kulbinder Garcha - Credit Suisse
Kulbinder from Credit Suisse. Couple of questions, first of all for Steve and George, I guess. On the QCT model, I’m trying to understand how you factored in a few potential negative hits going forward. One of them could just be -- the handset industry as you’ve mentioned is very concentrated, your own revenues are getting more concentrated and it sounds like you have to give some sort of concession on pricing to a major customer, which surprised us in the first half of this year for margins. Why isn’t that continues pressure, unless the handset industry becomes a lot more balanced, which realistically, it might not and how have you factored that in?
Then the second thing related on QCT margins is that you’ve gone LTE share this year, which is probably about 90% or 95%. It’s very, very high. It’s going to be probably come down, you probably agree with I think hopefully. And so as it does, how do the economics around that change and how do you check that into account or is that a major risk when you’re thinking about your QCT module recovery from the first half of this year onwards?
And then my question for Derek is somewhat different. I think previously you’ve said that -- used to say, you had two major license negotiations pre-2007, one was Nokia, one was Samsung. I think both of those got done. Do you have any major license renegotiations due in the next five or six years? Is there just nothing significant that you can think of on just from a vendor by vendor prospective?
So maybe you want to jump in on one of the -- maybe fill in as we go. So when we talked about the pricing incentive, it was really in the context of an incentive that exists now that didn’t exist in the first quarter of last year. So as we’re doing year-over-year comparisons, that will not be a factor going forward in terms of the year-over-year comparisons but it does obviously impact margin.
In terms of near term versus long term, we feel quite good and the reason why we’ve used the term near term, 18 to 20 is what we said for ’14. We think the move to 20 nanometer, which is also taking place in ’15 will have some pressure there that we can operate completely within the near term range and then we see margin expansion coming out of that.
Just to add, I think our outlook does assume the concentration that exist today will continue, which I think is a key component. The other aspect because I think there will be some competition in LTE. The timing is when. And then also just remember that I think the feature set is rolling over. So the value, the real premium high margin section tends to be associated with that developed world feature set that I said was moving very rapidly and one that I think we’re probably several generations ahead. You are starting to see people do, I think very early stages at LTE and I would say it’s not really being used in a mobile context. It really is being used more as a Wi-Fi replacement in many respects when we look at the products. So, I think we feel pretty good actually about our LTE position moving forward. But in our long term plans, we always assume that -- we don’t assume that we can maintain this level of strength forever.
So I think we said several years ago now that there were four or five extensions that we have had to get done during that time frame and sort of knocked them out over time. We haven’t updated that and I’m not prepared to do that today. As I said, we give you some color on the nature of the agreements we have, the long term major generally of the agreements we have. And if I look back, there are obviously questions raised four, five years ago on what people thought we should be charging around WCDMA and we went through that process and think it turned out pretty well and those questions were largely answered. So even to the extent we needed to deal with something, I think we feel like we’re in a good spot.
Stacy Rasgon - Sanford Bernstein
Stacy Rasgon, Sanford Bernstein. I have three quick questions for you. First on your vision growth targets, no new technology developed that you said but there is some adjacent markets that you talked about. Can you reach your double digit top line and bottom line growth without those adjacent markets or are they a component of your forecast?
Secondly around, you talked about raising a bit of debt. Maybe in a few years you can support the buy-back on your current cash balance for now. Why not raise debt earlier, given you could borrow at nothing rates today and you’ve got $21 billion trapped. Why not do it today, and do something bigger today? Thirdly, just quickly around your thoughts on your foundry ecosystem that you depend on and what’s the long term viability of that, given even Intel is having some problems now at 14 nanometers?
Okay, I’ll cover this. So on the double digit growth, adjacent is an important part of that. The core obviously today -- the businesses we’re in today account for the lion’s share of it, but there is meaningful revenue growth in the adjacencies. The point wasn’t that there was no new technology. It’s just that the technologies that will drive these adjacencies are in our core capabilities today and the things that we’re working on today. So we feel it’s not a big step out, but the engineers would take an objection to saying no new technology to support those adjacencies, lot of work to be done.
On the foundry ecosystem side, if you look at advanced nodes, there are at least three players right now that we depend on, which essentially is Samsung, TSMC and GlobalFoundries. We think that they will be viable moving forward. We look at their technology roadmap that it looks quite strong actually, if you will look at the nodes, when they get down to the 10 and sub 10 nodes, we still think there will be multiple players in the game at that time as well. And I think the window closes between kind of the fabless industry and more the IDM industry as well at that time.
So I think that's going to remain healthy. There are I think a lot of moving parts in the industry now, because essentially what's happened is because mobile is such a big portion of the volume, the mobile players and people that have I think high visibility into being able to commit to or at least have high visibility into their wafer volume moving forward, I think are probably in a stronger position than they have been historically just because of the concentration of the fabless industry toward their important mobile industry. So I think we're probably becoming a bigger player in the industry, than we would have been five years ago and certainly more than 10 years ago. And I think we're getting what we need out of the fabless industry as a result.
So then back to the question of why not borrow now; if we see debt coming on to the balance sheet over time because of low interest rates today. Our view is, first off we have the ability to significantly accelerate return of capital with the cash that we have onshore and also the cash that we'll generate over time. The other piece is we want to retain debt capacity. Compared to some of the other companies that have been borrowing, I think our growth rate looks quite attractive, our industry, there is still a lot to happen over the next five years and we believe a balance between taking a significant piece of our global cash flow, which is the commitment, and returning it, but retaining in the near term the right level of capacity for strategic action, even though as you can see from our M&A practices, we don't sit around and make large acquisitions on a frequent basis or any other strategic moves on a regular basis. But retaining that capacity as a leader in the industry we believe this is the right tradeoff at this time.
Ehud Gelblum - Citigroup
Thanks guys. It's Ehud from Citigroup. Couple of questions, Derek I wanted to go back to the 5% comment you made. I’m over here. sorry.
It's really hard to see you, oh there you are.
Ehud Gelblum - Citigroup
So Derek, on the 5% comment that you made that Tim asked about before, parts exactly what you said, you said if you take the licensees that you have, that have single mode LTE licenses, and you would apply that single mode license royalty rate to their entire 3G unit volume, you would have gotten a 5% impact to your total QTL revenue.
So my question on that is, is that A, because the licenses you have that have single mode licenses are just a very small part of unit volume. So if it actually went to 0% royalty rate, when we impact by 6%, or is it because the delta between their single mode rate and the multimode rate is so slight.
And then as we do get to the end of a four, five year period you are talking about where single mode LTE licenses or single mode LTE might be a bigger deal in general, we then to sign up a lot more guys with single mode LTE and at what rates would we be looking at that, because it sounds as though the number of people you have signed up for single mode LTE in a small percentage of your total licenses. So that's one question.
Paul, as you go do LTE on the unlicensed bands, for Wi-Fi vendors that have access points that don't know anything about cellular, [indiscernible] Ciscos et cetera out there, don't your carriers start looking like just white noise to them and so wouldn’t it degrade the quality of the Wi-Fi networks out there already that have no idea. I can imagine that you can work with the noise back and forth, being on both sides but wouldn’t it start degrading Wi-Fi networks out there in general by adding an LTE carrier?
So we have not more than -- sorry let me kind of break this down. We have more than 90 companies already signed up to the single mode LTE agreements. And then the other set that I gave you was, it you take the companies that are already licensed for 4G and you look at what percentage of TRDS during fiscal '13 as their sales represented, it was almost 60%. So not a small fraction. No, of the total 3G. So I am basically saying look at what got reported to us, the TRDS that we reported and almost 60% of that was reported to us and sold by companies during fiscal ’13 that already have signed 4G licenses. Yes, single mode 4G licensees.
And then I said if we took those companies and you apply the relative terms, there is less than a 5% delta between what they would have paid. I don’t remember if I highlighted this, but when we look at it in our five year plan, even out in 2018, our assumption is that on the handset segment, still more than north of 90%, more than 95% maybe devices are continue to be multimode during that timeframe. So we still think we have a long runway of multimode but when we get to the single mode we feel pretty good. And of course the agreements we signed so far will become, and have become sort of the baseline for what we would expect to sign with others down the road that haven’t yet signed agreements.
On the LTE license, so Wi-Fi access points obviously generate traffic that another W-Fi access point sees and when you use LTE at the better bit rates, you get on and off faster and other characteristics of the signal mean that if you put an LTE unlicensed access point next to a Wi-Fi access point, it’s actually the case that there is less interference that Wi-Fi access point then comes from, if you’d just put another Wi-Fi access point in its place. So LTE unlicensed is actually a better neighbor than a Wi-Fi access point.
Brett Simpson - Arete
Brett Simpson with Arete just over here, next to where Ehud was. I just had a question on for Steve on the 64 bit CPU. So obviously Apple started to ramp up their platforms on 64 bit, and we haven’t seen anything yet from the Android camp or other operating systems but I just want to get your perspective, what do you think 64 bit brings to market? And do you think it can open up new compute form factors for application processors? And when might we see Qualcomm’s 64 bit road map commercially start to ship?
So if you look at 64 bit, I think it is a good example of that trend that I was talking about where the tablet and the phone and the phone becomes the center of computing and one of the things you’d want to do in that case is essentially have the same ecosystem of apps across the tablet and the phone, and that’s really what you’re seeing and it’s my view, what you are seeing in the Apple camp. They have the ability to do that a little bit faster than Android because they control both ends of the link as hardware and software for example.
But I think that trend of connecting it and essentially the mobile ecosystem covers not just the phone but also increasingly the spot that is occupied today by the PC, is the trend that we believe as well. So we look at that as kind of a validation of the macro strategy that we have.
Now in Android, they are not quite ready to take advantage of that, but you will see that same trend occur in Android and you will see from us 64 bit products. They are coming. And we expect to be the leader there as well. And you will see us show leadership across tiers, not just on one product. So it’s kind of consistent with our strategy.
The one thing I would mention to you is it is an important feature but it is one of many features that you see in the CPU. But that macro trend of the phone being the center of computing and this big volume growth occurring from the phone and in the tablet in connecting that one ecosystem together is, I think a very strong trend.
Brett Simpson - Arete
Maybe just a quick follow up. If I look at your average ASP revenue per MSN since 2011, it’s up about 30% - 35%. I guess part of this was at Feros and the LTE factor as well. But how do you see this structurally playing out over the next couple of years. Do you think the ASPs continue to rise? And then maybe on the same threat, when we’re thinking about future chip prices, how do we think about [indiscernible] challenges and is this going to be a natural cost inflation, which drives up chip prices anyway because things are getting more expensive and leading edge.
Yes, a lot there. So let me try to address it. You have seen growth in our ASPs. A lot of that is actually in the core business because you are seeing us capture value in the form of the application processor, which comes -- one of the reasons that we have had such great dollar growth over the last several years is because we have been capturing that silicon. We’re also capturing things like the bocoader [ph] and the audio pieces and a number of other things in the power management and RF, kind of consistent with the strategy.
So you’ll continue to see that. You’re also seeing in the phone, the phone is really being compared I think less to the traditional voice and data text phone. People refer to that as the feature phone, it’s really been compared to the computer in many respects, and the amount of complexity, the amount of processing power that’s in a phone today is incredible, actually.
And so you’re starting to see the ASPs creep up and I think you’re going to see in our premium tier you’ll continue to see it. It’s one of the things I was trying to say in our growth factors, is that we think that we’re capturing more and more value of the phone, as well as the silicon that we provide is more valuable because it’s been compared in the computing vein versus just the communication vein. So I think that trend will continue. You also get blends across the world in as much volume we have as well. So just the premium tier is not enough to lift it up entirely.
On Moore’s [ph] Law, George mentioned a bit which is, we transition to node quicker, it helps long term, but early on in the nodes, we have to fight both the cost of that node and also the yield impact of an early node to the extent you will sometimes see that impacting the gross margin percentage while we’re ramping a new node. But our strategy is such that we think that our ability to go to these nodes and our ability to handle that level of investment and product these differentiated products is helping us a lot in share. You can see that in the numbers over the last several years.
And there will be some architectural changes to deal with the fact. If the pace of decreasing cost goes lower will partition the chip in different ways, do some stuff in trailing edge and some in leading edge and deal with cost impacts that way also.
Yes, and I think one of the advantages of us having so many pieces of technology is we then have the ability to make those architectural trades off where if it’s two or three companies trying to put together a coherent design, it’s very difficult to make those tradeoffs and so we view ourselves as being much different position than someone who would be trying to put together something in a different way.
Sanjeev Advani -- Stifel
Sanjeev Advani at Stifel. Two questions; one is, can you talk about the emerging markets and when should we be seeing a cost optimized Snapdragon platform for emerging markets. And then second you announced Gobi on 22-nanometer today. When should we expect Snapdragon to move to a 22-nanometer? Thanks.
So on emerging market, it’s really a process that you go through. What we have been doing until recently was that we would take our high end devices and we would essentially remove features out of them. You get to a certain point though when you do that where you get to an asymptote and you just can’t take any more cost out. You do have more features in the chip but for the tier, it may not be meaningful.
So what we decided to do actually over the last year 18 months is that we decided to put our own optimized low tier architecture in play. The first versions of that, you’re starting to see are the 8x10 family but that’s really a baby step. We’re taking further steps cost optimize those products. Those are not really in the ’14 view but the engineering is right now. So you will continue to see that from us.
And what you’re basically going to see from our roadmap is you’ll have really two different architectural roadmaps that share a common IP roadmap and that allows us to leverage the investment that we have on the high tier to differentiate on the low tier, but we don’t have to pay the cost penalty which we decided to embark upon.
And there was another question. On 20 nanometer, essentially what we did is the first product that we’ve announced on 20 nanometer and consistent with what we said for a number of years, we’re just might rating the premium tier and that’s modem and Snapdragon to the newer nodes and there are some advantages from a product perspective, there is some advantages from footprint and we’re just starting with the modem here, at least in terms of what we’ve announced. And one of the reasons why you might do that is a modem a smaller die relative to the application processor. Therefore it’s easier to yield in the volumes that we need them right out of the gate.
James Faucette - Pacific Crest
James Faucette of Pacific Crest. First a follow-up question for George and Derek to Mike’s question. On non-handset applications, I know that there are a lot of potentials structures around royalties but how should we think about that as roughly a royalty as a per unit basis. I think right now you’re running about $7.5 to $8 for planning purposes. Do you expect that to be significantly different, greater or lower on non-handset applications.
And then a question for Paul. Paul, what have been your conversations with carriers et cetera in terms of their pricing schemes on data to make sure that the way things were bucketed now that that doesn’t end up being an inhibitor to Carrier Aggregation products, et cetera? Thanks a lot.
So James, its Derek. I'm sorry, I can’t really give you much more color than I did. We have, those two issues really, its’ a mix of units among sort of the non-handset volumes and they do have a wide variety of royalties that could apply because we’ve done some things to say we believe the technology in a mirror reader is very different than in the tablet which might be different than in a smartphone. And so the royalty structures around some of these non-handset applications can diverge quite a bit and so I can’t really get in more specific than what I’ve said. Sorry about that.
And some of the operators obviously are going to go very aggressively, the ones that have big spectrum positions. Certainly Sprint has been pretty public about their Unlimited for Life and they have a large spectrum position. I think that will drive reactions in the industry. And so those operators that have it will drive I think good pricing plans that will actually drive more attach rate and then the others, everybody is going to happy to see things like LTE unlicensed where they’ll be able to actually capture additional spectrum out there and haven’t really been able to leverage as well. So I think it’s all positive actually.
Chris Caso - Susquehanna
Chris Caso from Susquehanna. Just a follow up on the Carrier Aggregation question. Perhaps you can give some metrics for as you look into next year, perhaps how much of your product lineup will be supporting Carrier Aggregation, what’s the penetration rate perhaps do you see at the carriers themselves? And I guess as a follow up to that, for the 300 megabit per second part the 9x35, I assume is that a 2015 event in terms of getting that into customers hands?
On the last one, we’re essentially on a yearly cadence on products and on the modem products and so it’s probably little quicker than perhaps, but it’s just depends on how fast they take it. Different customers have different rates in which they absorb new technology. The first question is about the mix of Carrier Aggregation. In the developed world I think it’s going to difficult to actually to get new designs particularly at the premium tier without Carrier Aggregation capability.
Tal Liani - Bank of America
Tal Liani from Bank of America. I have three quick questions. The first one is for Derek. What happens if emerging markets grow fast? Is it going to increase or decrease the average royalty rate that we see, we calculate, given that the prices are lower maybe they’re not getting the comps, et cetera? Second question is just an update on Mirasol, CapEx and OpEx requirements and what are your plans? We didn’t get an update today? And the third one is actually an important one that you mentioned on the call, you mentioned begin today but it’s on computing. You mentioned on the call that you’re looking at it, then you mentioned it again today but you didn’t provide any color. Thanks.
Let me take the first one. I mean I think it’s possible that if more volume transitions to emerging regions at lower selling prices, although within the emerging regions, there is a segment significant segment even at the high end there as well. But if there is less devices hitting the cap then that would have an upward bias on rate. It also might imply some different OEM mix depending on the region that you’re talking about that could impact it as well.
So on Mirasol, I think we’ve talked about it a couple of times over last year in terms of altering the strategy to shift longer term to a licensing model. Now we’re currently producing the displays that are in the talk watch and some of the other watches that are launching now. So we’re continuing to manufacture those ourselves. I think we’re actually making some nice improvements there. We have reduced spend in the business over the last two years pretty significantly. There is still a meaningful amount of investment in the technology, but we have been pairing back the spend there. And then really the kind of the final piece is we have been trying to pursue some strategic alternatives around the larger fab facility that we have in Taiwan and that’s still in the process.
And there is not a lot of CapEx.
Right, the CapEx is quite low.
Tal Liani - Bank of America
I didn’t understand the question actually.
Tal Liani - Bank of America
Are we cautious or optimistic or cautiously optimistic or?
No, I don’t know if you’re referring to [indiscernible].
Tal Liani - Bank of America
On the call I think there was -- I think you actually mentioned it Steve, on the call someone asked what is the next step after smartphones looking many years down the road and you mentioned computing and you mentioned -- someone mentioned it began today. I think you Steve mentioned it. But can you elaborate on this?
Well, we definitely are believe that the tablet market will be an important market for us, which I don’t know if that’s what you’re referring to. But we also have started to looking are there means for us to participate more broadly in the enterprise market.
Tal Liani - Bank of America
That’s the question.
Yes, if you look at the trends, the technology that you need to develop to be a significant player in mobile computing, you have technology assets that you can use in other places. And we’ve done some reprioritization of the R&D outside of QTL and QCT in order to put some of those things in early stages of that in place but we’re really not at a point where we can talk about products or things other than to say we’ve done a little bit of I would say replanting of the garden and that’s one area that we think might harvest someday.
Rob Hall - JPMorgan
It’s Rob Hall with J.P. Morgan. So I’ve got one for George, one for Derek, one for Paul, maybe Steve split. I’ll let you guys decide. I wanted to start with you. You’re showing third party unit data when you talk about your longer term model, your double digit growth mode. Are you guys, when you internally think about that model using third party data or using your own internal models? That’s the one for you.
Derek, can you just clarify on the 5% differential in the royalty rate, are you -- so that does not include non-essentially patents and if the answer is -- well, can you answer whether it does or doesn’t? If it doesn’t, can you talk about what the potential impact of non-essential patents on that might be, and hope to close the gap?
And then the one for Paul and Steve would be, there is always all this NSA stuff going on -- is obviously giving the Chinese an excuse not to buy some networking equipment. We haven’t really heard you talk that much with regards to handsets in that market. Do you think that there is a potential -- Apple and Google have both been implicated in this whole debacle now. Do you think there is a potential for it the impact western vendors’ ability to ship handsets into China with the advantage Chinese vendors and does that have any impact on you whatsoever?
Right, so I’ll go with number one. Obviously we look at third party data but we develop our own models and forecasts.
So I am assuming you’re referring to the 5% difference in the revenue that I talked about, right?
Rob Hall - JPMorgan
So again I wasn’t referring to the rate specifically because agreements have many terms in addition to rate that drive the royalties that get paid. So what I was saying is we’ve already signed a number of agreements that have the terms in those agreements. And if you take the sales that were made of 3G equipment during fiscal ’13 by the companies who have already signed single mode 4G deals okay, and you compare that to what they actually paid us under the 3G deal, that’s the delta I was talking about. So I was just talking about the total royalties. I wasn’t talking about the rate in particular. And so the agreements, generally when we license, not every agreement the same but we tend to license more broadly than just essential patents.
So we’ve seen, I would say from the Stone [ph] affair that biggest impact has been right now on cross-border data flow concerns and that can impact some of these future opportunities like mobile health and telemedicine and things like that, finance. There is bunch of areas that cross-border data flows are an issue.
In terms of in the hardware itself we haven’t seen that at this point. There is pressure just generally in China on multinationals and so we do see pressure but I wouldn’t necessarily say those two were correlated to each other. They are I would say probably correlated to desires of -- to have a bigger semiconductor industry there and we obviously do build chips there as well. So we are part of Chinese semiconductor industry in that sense.
And then the other thing I would say is that we run a system with a high level operating system; they are very complex systems and the ability to find zero day exploits and find ways to crack those -- it's going to be like PCs and any other complex system, there is always a cat and mouse game of finding holes and closing holes up. And so to me it's sort of independent of that. People will find ways into these systems just like they find ways into people’s datacenters and into other things, just by more traditional means of exploits.
So what that really means is that we're going to continue to build more and more secure hardware, work with operating system vendors to make sure that those things are more and more robust but it's like every complex system and it's a cat and mouse game, and I think that's probably more likely the area that people focus on than it is that somebody would build a back door into some system or not, but it does remain to be seen.
So I think we have time for one more question. So don't know who has the microphone now. Oh that was our last question? I guess we don't have time for one more question. Well anyways thanks everybody. We appreciate you taking the time for being with us. Hopefully we gave you a sense of where we think the industry is going, where we think our opportunities are and we're excited and hopefully you guys are too. So thanks a lot.
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