Qualcomm Incorporated F1Q09 (Qtr End 12/28/08) Earnings Call Transcript

 |  About: Qualcomm Inc. (QCOM)
by: SA Transcripts


Welcome to the Qualcomm first quarter fiscal 2009 conference call. (Operator Instructions) I would now like to turn the call over to John Gilbert, Vice President of Investor Relations. Mr. Gilbert, please go ahead.

John Gilbert

Good afternoon. Today's call will include prepared remarks by Dr. Paul Jacobs, Steve Mollenkopf and William Keitel. Dr. Jacobs and Steve Altman will be dialing into today’s call remotely. In addition, Steve Altman will be in primarily in listen mode only as he is under the weather today. Len Lauer, Don Rosenberg and Derek Aberle will also join the question-and-answer session.

An internet presentation and audio broadcast accompany this call, and you can access it by visiting www.qualcomm.com.

During this conference call, if we use any non-GAAP financial measures as defined by the SEC and Regulation G, you can find the required reconciliations to GAAP on our website. I would also direct you to our 10-Q and earnings release which were filed and furnished respectively with the SEC today and are available on our website.

We may make forward-looking statements relating to our expectations and other future events that may differ materially from Qualcomm's actual results. Please review our SEC filings for a detailed presentation of each of our businesses and associated risks and other important factors that may cause our actual results to differ from these forward-looking statements.

And now, it is my pleasure to introduce Qualcomm 's CEO, Dr. Paul Jacobs

Dr. Paul Jacobs

Thank you John and good afternoon everyone. Let me begin by saying that I am very pleased with the performance of our core operating business in this difficult environment. Our revenues were at the high end of our prior guidance, our operating profit exceeded our prior guidance and we had record operating cash flow.

The global migration to 3G CDMA continues but while we continue to see healthy growth in CDMA devices, the distress in the global financial markets continued resulting in additional impairments to our marketable securities portfolio which impacted our earnings for the quarter.

Before commenting on the business I’d like to welcome Bill Stone as Senior Vice President and President of FLO TV. Bill’s extensive background and experience in content and the wireless industry will be a great asset to Qualcomm and we are looking forward to Bill leading FLO TV to the next level.

Fiscal Q1 revenues were at the high end of our prior guidance and up 3% year-over-year. Our pro forma operating income exceeded our prior guidance and was up 4% year-over-year. Our record operating cash flow included the $2.5 billion payment from Nokia. I’m also pleased to see the benefits of our improved operating expense management as pro forma operating expenses were approximately 7% lower then the fourth quarter, significantly lower then our guidance of 1% growth.

However first quarter earnings per share were negatively by other then temporary impairments in our marketable securities portfolio. As of January 23 out of a total [inaudible] of approximately $12.9 million we had approximately $1.1 billion in net unrealized losses on marketable securities which could result in additional impairments in the future if financial markets do not improve.

Our strong balance sheet and operating cash flows provide us the ability to hold the vast majority of these securities until they recover and that is our intent. William will discuss our treasury portfolio in more detail however our investment strategy has significant benefits and we believe it is the right strategy for the business and the shareholders for the long-term.

Despite the global economic environment we remain committed to returning capital to our shareholders through our cash dividend and stock repurchase programs. As of January 23 we have returned approximately $9.8 billion of capital to shareholders since fiscal 2003. We have continued to pay cash dividends and active in our share repurchase program and we recently announced another quarterly cash dividend payable on March 27 of this year.

In QCT the CDMA channel inventory has begun its contraction as we expected. In QCT’s MSM shipments for the quarter were in line with our prior guidance. The reduced visibility in the marketplace makes forecasting future inventory levels or accurately predicting when a recovery will begin extremely challenging.

Similarly we anticipate the continued market uncertainty will impact QCT’s business. We do expect to have more clarity in the coming weeks when carrier and OEM sell-through data becomes available. Steve Mollenkopf will provide more color on QCT later in the call.

We continue to focus on managing our operating expenses while investing in key initiative such as HSPA Plus and LTE that will drive short future growth and strengthen our competitive position moving forward. HSPA Plus is a natural evolution path for HSPA. Leverages operators [inaudible] network investments, provides high peak data rates for mobile broadband access and supports greater then two times the voice capacity of release 99 resulting in increased benefits to both operators and consumers.

HSPA Plus momentum continues as several operators have announced their plans for market launches in the first half of 2009. We continue to work closely with our partners in the industry and remain on track to deliver our chipset solutions to support operator launches.

LTE, an OFDMA technology that is able to support higher data rates and more users by taking advantage of wider amounts of spectrum being planned by some operators looking to leverage new spectrum. As LTE comes to market we expect operators will deploy it as a compliment to their existing 3G networks in areas with high data needs.

OFDMA represents one of our largest research and development efforts and we remain on schedule to sample our multimode LTE chipsets in the second quarter of this calendar year. It has been and continues to be important for our industry to have options. Our development efforts on both HSPA Plus and LTE ensures that we will be there to serve our partners by offering a solution to leverage in existing investments of HSPA and also provide a path to LTE.

Looking forward it is unclear how long this difficult global economic environment will persist and when the recovery will ultimately begin. Since we guided in November the consensus economic outlook has shifted to the view that the global recession will be deeper and more severe then previously anticipated.

For example many economists now believe that positive GDP growth will not return in the US until the second half of the year and we generally concur with that view. However our growth is tied to 3G which is expanding in all geographic regions of the world including China, the largest market. Consumers are excited by the new data services on their phones such as internet browsing and GPS and their migration to 3G is continuing despite the current economic conditions.

While we continue to estimate healthy growth in the CDMA device market we have lowered our expectations for calendar year 2009. It is worth noting that recent North American operator reports on net ads are in line with our new forecasted reductions in this region.

We’ve also incorporated some of our contingency plans to manage our operating expenses going forward and have substantially reduced our operating expense growth from the prior year. It is important to highlight the excellent job our businesses have done executing to their budgets in this uncertain environment.

Based on our Q2 guidance our revenue and operating income for the first half of the fiscal year is at or near our November budget and guidance baseline. However the financial crisis has had and may continue to have an impact on the value of our marketable securities portfolio if market conditions do not improve. Given this uncertainty while we are providing revenue, operating expense, operating income, and other standard guidance at this time we are not providing earnings per share guidance.

Despite the current market and economic volatility the worldwide market for 3G remains vibrant as consumers have an extensive range of competitively priced devices and services to choose from. According to the CDG and the GSA there are over 525 CDMA based 3G networks that have been launched as of January, 2009 and operators continue to deploy the higher data speeds of HSUPA and EVDO revision A.

There are now over 65 HSUPA networks and over 55 EVDO revision A networks commercially launched. In addition the wide variety of 3G broadband devices available to consumers continues to grow. For example over the last year the total number of HSDPA devices introduced into the market more then doubled to over 1,000. 3G subscribers grew over 25% year-over-year according to wireless intelligent. As of December there were 735 million 3G subscribers as the global migration from 2G to 3G technologies continued. In addition although total handset market grew only 6% year-over-year according to strategy analytics estimates CDMA based handset shipments grew 17% year-over-year compared to just 1% growth for GSM.

In Western Europe wireless intelligent reported that as of December end WCDMA subscribers increased 75% year-over-year compared to a 9% year-over-year decline in GSM subscribers.

We continue to see data revenues as a key growth driver for our operator partners as consumer demand for value added services increases. For example Verizon recently announced that data revenue grew 44% in 2008 and that non-messaging data revenues grew 52% in the fourth quarter and 53% for the year and AT&T announced this morning that their wireless data growth was up 51% year-over-year.

In addition we see that the shift of device subsidies to smart phones connectivity solutions such as USB modems and even to embedded 3G notebooks or netbooks continues and that will further help drive demand for 3G based devices.

Turning to FLO TV we opposed the delay of the February 17 DTV transition date which was set by the US government three years ago. Since then tremendous efforts have been made to make Americans aware of the transition date. Qualcomm has also invested hundreds of millions of dollars including over $550 million to acquire spectrum in the FCC’s 700 megahertz auction last year. This was to extend our innovative FLO TV service and to build out the network.

We have abided by the laws and regulations set by Congress and the FCC. Unlike other companies we are prepared to launch our FLO TV service and turn on 100 new transmitters across the United States immediately after the transition date. This will allow a total of more then 180 million consumers in 80 markets use our innovative wireless service.

The House of Representatives voted today on legislation on extending the date and the Bill did not pass. The opposition to the Bill included by Democrats and Republicans. We expect there will be further developments and we are continuing to request that any legislation retain the February 17 date [inaudible] in the four markets, Boston, Houston, Miami and San Francisco.

This would allow Qualcomm to offer its innovative service to an additional 40 million consumers. In China 3G licenses were issued this past quarter and operators have communicated exciting plans to deploy 3G. As part of our long-term partnership with China Qualcomm will continue to support the growth of Chinese companies and the development of 3G CDMA networks, devices and applications.

We currently have license agreements with over 30 companies based in China including 10 new agreements executed over the past 12 months. We look forward to the largest wireless market in the world having access to multiple 3G CDMA technologies driving a dynamic and competitive environment benefitting consumers, manufacturers, and operators.

The economic and market conditions we are facing today are very challenging. We will continue to focus on investing on key research and development programs to improve our technology leadership and competitive position while managing our operating expenses to address the market realities.

We are very fortunate to have a strong balance sheet and operating cash flows in these difficult times and we are committed to supporting our partners and driving the market forward. That concludes my remarks and I will now turn the call over to Steve Mollenkopf.

Steve Mollenkopf

Thank you Paul, I will now share highlights of QCT’s business in the first quarter of fiscal 2009. Consistent with our guidance QCT shipped approximately 63 million MSM chipsets this past quarter. In November we had predicted a significant inventory reduction to occur across the channel. Our shipments last quarter as well as our outlook for the current quarter are very much in line with this forecast. We continue to believe that our chipset shipments are being impacted primarily by macroeconomic conditions rather then a shift in market share.

Exiting calendar year 2008 we experienced greater then 115% increase in UMTS chipset shipments. This clearly outpaces the growth of the overall UMTS market during the same period providing us additional comfort that we are tracking to our forecasts. QCT delivered revenue of $1.3 billion in the first quarter down 15% versus the same quarter last year.

Our ASBs continue to be favorably impacted by strong product mix driven by increased shipments of higher end chipsets used in smart phones and mobile broadband devices as a percent of the total. Looking forward we expect a modest decrease in ASP as the growth of the China market and annual price setting with our customers will begin to counterbalance this strength in product mix.

Our MSM 7000 Series smart phone solutions continue to gain traction. These products are being used for devices such as RIM’s Blackberry Storm, as well as more 40 Win mobile devices and greater then 20 android devices in the pipeline. Product mix was also improved by an increase in demand for our EVDO revision A and HSPA products enabling data RPU increases in the market.

Market traction for HSPA Plus continues to be strong. Among the numerous UMTS carriers who are working toward deploying the technology, Telstar will be launching in Australia the next few weeks using devices based on our MDM 8200 chipset. We also have continued to make progress in LTE and will be sampling the industry’s first fully standard compliant multimode EVDO, HSPA, and LTE chipsets during the first half of this year.

Looking forward the issuing of CDMA 2000 and UMTS 3G licenses in China is a significant industry development that presents an excellent opportunity for growth. We are working closely with our customers and carrier partners to support this market with our comprehensive portfolio of products. On January 19 we closed an acquisition of assets that were formerly the basis of AMDs handheld graphics business.

The technologies, strong IP and talented engineering resources that we acquired strengthen our multimedia leadership enabling us to integrate the industry recognized capabilities of AMD’s multimedia into our system on chip products. This was a great opportunity to acquire significant assets that will enhance products across our entire portfolio.

Our Gobi module for imbedded 3G connectivity has been adopted by seven leading OEM’s including most recently Sony and OQO. These manufacturers have launched notebooks, sub notebooks and handheld devices that leverage Gobi to deliver 3G connectivity for internet access beyond hi-fi hotspots. As part of our continued commitment to the mobile computing market QCT has expanded its Snapdragon roadmap to now include dual CPU chipsets with two computing cores running at up to 1.5 GHz.

Meanwhile our first generation Snapdragon solutions have made significant inroads among customers who are new to the wireless space. We expect several customers to unveil their Snapdragon devices by the end of February.

QCT is also building momentum in the Bluetooth business. Our solutions are in more then 30 handsets that launched last year. We now have 20 customers for our Bluetooth solutions with plans to double the number of handsets launched with our Bluetooth products in 2009. We believe our scale, breadth of products and emphasis on integration and system solutions has allowed our business to remain strong despite the difficult economic conditions.

I will now turn over this call to William Keitel.

William Keitel

Thank you Steve, good afternoon everyone. I’ll begin with the review of our first quarter results. Operating results were strong this quarter, revenues of $2.5 billion were up 3% year-over-year and achieved the high end of our prior guidance.

We shipped 63 million chipsets which was the mid point of our prior guidance and demand shifted favorably to our more capable and feature rich products. Approximately 125 million new CDMA devices were shipped by our licensees in the September quarter which was near the high end of our prior guidance and the average selling price was approximately $212 per unit and above our prior estimate of $205.

Pro forma operating income was $986 million, up 4% year-over-year and well above our prior guidance of $800 to $900 million reflecting a favorable mix of MSM and CDMA device shipments as well as lower operating expenses as compared to our prior guidance.

We recorded a loss in net investment income due to a $388 million charge for other then temporary impairments of marketable securities. The $388 million of accounting impairments represents approximately 3% of the recorded value of our cash and marketable securities as of the end of the first quarter and consisted of approximately $206 million of equity securities, and $182 million in debt securities.

Approximately 90% of our impaired fixed income securities continue to pay interest and principal and we expect that to be the case going forward. The $388 million of accounting impairments equates to approximately $0.21 per share. As of January 23 we had approximately $1.1 billion in net unrealized losses which over time could result in additional other then temporary accounting impairments in the future if market conditions do not [approve]. For now we expect to continue to hold these securities and we expect their value to recover as confidence and liquidity returns to the capital markets.

At our Analyst Day in November we presented our investment portfolio allocation and we have now posted an updated version of that slide on our Investor Relations website. Operating cash flow was particularly strong in the first quarter, a record $3.5 billion driven by a $2.5 billion cash payment received in October related to our new agreements with Nokia.

Our cash and marketable securities totaled approximately $13 billion at the end of the first quarter split almost equally between onshore and offshore. During the first fiscal quarter we announced dividends of $264 million or $0.16 per share. And we repurchased 8.9 million of our shares for $284 million.

As of December 28 our remaining stock repurchase authority was $1.7 billion. The estimated pro forma annual tax rate of 25% is higher then our prior guidance of 20% primarily due to the tax impact of capital losses. Without the capital losses this quarter our estimated pro forma annual rate would be slightly above our prior guidance.

Before turning to guidance let me provide some additional color on this quarter’s results that may be helpful to some of you on this call. Pro forma earnings per share in the first fiscal quarter declined $0.32 sequentially. You will recall the prior quarter’s settlement and license agreements with Nokia addressed April, 2007 forward and approximately $0.15 in the fourth quarter was attributable to periods prior to the fourth quarter.

Channel inventory contraction in the December quarter reduced QCT earnings by approximately $0.12 per share and larger impairments of marketable securities and net treasury losses contributed $0.08 decline. Both QTL and QWI each improved by $0.01 on volume and margins respectively. Lower sequential operating expenses contributed $0.03 of improvement.

Now turning to our guidance, we estimate that approximately 116 to 121 million CMA based devices shipped in the December quarter for a total calendar 2008 CDMA market of approximately 468 to 473 million new devices. Based on the 471 million midpoint of new estimate we estimate that 2000 CDMA market grew approximately 23% year-over-year.

Furthermore we estimate approximately 209 million 2000 units and 262 million WCDMA units were shipped worldwide in calendar 2008. Due to the volatility in the financial markets and the impact that it has had and may have on our investment portfolio and net income, we are not providing an update to our estimated earnings per share guidance for the second quarter or fiscal 2009.

We are however providing our remaining standard guidance points to help investors model our operational performance for the remainder of the fiscal year. For the second quarter of fiscal 2009 we estimate revenues to be in the range of approximately $2.25 million to $2.45 billion, a 6% to 14% decrease year-over-year.

We estimate pro forma operating income for the second fiscal quarter to be approximately $750 million to $850 million, down 16% to 26% year-over-year. We anticipate shipments of approximately 60 to 65 million MSM shipped chips during the March quarter. Estimated channel inventory contraction in the December and March quarters is largely consistent with our prior expectations.

Our MSM unit shipment forecast for this March quarter reflects the continuing channel contraction. We expect our chipset average selling price to decrease modestly on a sequential basis in the second quarter reflecting product mix shift in the quarter as well as annual price setting with our customers.

We estimate that new CDMA based devices shipped in the December quarter had an average selling price of approximately $207 per unit. We anticipate second fiscal quarter pro forma R&D and SG&A expenses combined will increase sequentially approximately 4% reflecting normal increased seasonal expenses primarily related to employee payroll taxes and includes the impact of our recent acquisition of certain handheld graphics and multimedia assets of AMD.

Specifically the employee related payroll taxes will account for an increase of approximately $32 million and the addition of AMD assets will account for approximately $10 million increase both in operating expenses.

Its worth noting that the difference between our midpoint pro forma operating income guidance of $800 million for the second quarter compared to the comparable period last year of approximately $1 billion is primarily attributable to the current channel inventory contraction and the result in the reduction in our MSM shipments.

Turning to the full year, we now estimate that calendar 2009 CMA market will be between 540 and 590 million devices, a midpoint of approximately 565 million units and a 20% year-over-year increase. We estimate that of the 565 million devices approximately 212 million units will be CDMA 2000 and approximately 353 million units will be WCDMA.

We estimate average selling prices for CDMA 2000 and WCDMA phones combined will increase approximately 8% year-over-year to approximately $202 per unit as compared to our prior guidance estimate for fiscal 2009 of $195.

We are lowering our revenue guidance for fiscal 2009 consistent with this new market forecast. We now expect fiscal 2009 revenues to be in the range of approximately $9.3 billion to $9.8 billion, a decrease of approximately 12% to 16% over fiscal 2008.

We anticipate pro forma operating income for fiscal 2009 to be in the range of $3.2 billion to $3.5 billion, a year-over-year decrease of 24% to 30%. Our guidance for the second half fiscal 2009 includes an assumption that we will conclude one of the remaining WCDMA license extensions that we have previously discussed. And that such extension will include multiple elements of value to Qualcomm including a substantial lump sum payment and ongoing royalties.

We expect the combination of pro forma R&D and SG&A expense to increase approximately 3% year-over-year including our recent acquisition. This is significantly below our prior guidance of 10% as a result of cost saving initiatives. Excluding our recent acquisition we expect operating expenses to grow less then 2% year-over-year.

As mentioned previously we are continuously making workforce adjustments to match the company’s forward needs. The rate of these adjustments has increased in recent months. Looking forward we are focused on continuing to reduce our operating expense run rate. However, we are nearing the juncture in the fiscal year where cost to implement certain expense reductions equals or exceeds the in year benefit and is therefore will not be evident in our guidance until we guide fiscal 2010 operating expenses.

While we are mindful of the potential impact on short-term earnings, as always any decisions we make will be with the long-term interest of the business and our stockholders and given paramount importance. We still intend to invest to address opportunities to drive rapid adoption of CDMA in key developing markets, support new CDMA market entrance, and to extend our important technology partnerships in 3G and 4G.

We believe carefully selected investments today will position us very well for the long-term. In closing in this challenging economic environment we are pleased with our first quarter operating results and second quarter outlook demonstrate our ability to anticipate and execute in a very challenging environment.

Our first quarter actual results combined with the midpoint of our fiscal second quarter guidance will place revenue in line and operating income favorable as compared to our first half fiscal 2009 budget that we finalized end of October. That concludes my comments.

We are now ready to take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Brian Modoff - Deutsche Bank

Brian Modoff - Deutsche Bank

Looking at your operating number in terms of your operating income, your Q1 results and your Q2 guidance, are essentially in line with our numbers and your handset forecast for the year are slightly above our numbers, yet your back half operating income numbers are below our numbers and we’re at a $1.87 for EPS, what are you seeing in the back half that causes you to be more conservative, are you perhaps expecting not the snap back after the inventory work down, is it ASP trends, is it this deal you’re negotiating, what is it that gives you more caution on the back half of the year?

William Keitel

A couple of data points I would give I think would help you model into our estimates, our current guidance midpoint on the market of 565 million units, inherent in that projection right now we’ve got an ending inventory estimate of approximately 14 weeks at the end of the calendar year. If you recall back in November we had disclosed our estimate back then was 17 weeks so we are projecting at this time a slower ramp in channel inventory after we hit a low point later this year.

I would add that 38% replacement rate is within that guidance. We think we ended 2008 at about a 41% replacement rate. So we have brought down our replacement rate forecast for 2009 modestly in these new estimates to about 38%. I would add also, yes, in the second half of the year to your point, we have provided in our estimates an assumption of a new license extension, and then as well we always have a mix shift in chipsets between regions, between customers, at this point with the ramp we see forthcoming in China, our optimism for the developed world we are expecting a lighter mix of chipsets in the second half of the year as compared to the first half of the year.

I think those are the primary factors.


Your next question comes from the line of Glen Young – Citi

Glen Young – Citi

So basically if I were to think about MSM units, it sounds like you’re basically suggesting flattish progression from the 60 to 65 range, basically for the rest of the fiscal year?

William Keitel

Obviously we’ve given a pretty wide range to our estimates and I think its reflective of the increased difficulty of pinpointing a single point estimate here. I think we’re optimistic that we’ll see some increase in the MSM demand going into the second half but albeit we do think the markets that are going to be the primary drivers there are going to be looking for lower end product then on average what we’re expecting here for the first half of the fiscal year.

Glen Young – Citi

In looking at your securities portfolio can you just walk through the mechanics of that, what are the elements that are going to force you to take the losses there or not or do you think the entire 1.1 [inaudible] in losses is something you can [write up], there’s not reason that you need to ever book those losses.

William Keitel

Its primarily, as the way we’re applying the judgment as prescribed, its primarily a function of time and magnitude of decrease. So there clearly is risk of more impairments if the markets don’t improve from the current levels. But I would just say that’s primarily a function of time and degree of decrease that we’ve seen.

I would also note again as I’ve said in my remarks, of the fixed income accounting impairments we’ve taken we feel pretty good that we’re going to see approximately 90% of that value eventually come back over time as the interest and principal amounts continue to be paid.


Your next question comes from the line of Mike Walkley – Piper Jaffray

Mike Walkley – Piper Jaffray

In terms of the higher ASP outlook can you walk us through how we should think about the currency markets, how that’s impacting ASPs and also does that ASP assume a different mix, are you seeing a higher mix of smart phones now versus emerging markets.

William Keitel

Based on our outlook now for the fiscal year the ASP forecast that we updated here for approximately $202 per handset average that actually has slight decrement based on the regional mix that we now anticipate. As I said we’re seeing some good strength in China and in developing world. Within the regions themselves, we are seeing a little more price strength, again just a little bit more trends towards more feature rich phones and then based on where FX rates here have been for the last month or so, our forecast includes several dollars of FX improvement relative to our prior guidance.


Your next question comes from the line of Maynard Um – UBS

Maynard Um – UBS

I think you’ve previously said that there wasn’t a vendor coming up for renewal for another five years or at least a Tier 1 vendor, can you just expand on this new license extension, was that driven by the Nokia agreement where a vendor came in an offered similar 3G and 4G essential IP in exchange for a lower rate, can you provide any details there?

William Keitel

What we said probably two, three years ago was that we had I think we said four remaining license extensions over the next number of years and since that time we’ve obviously, we have a license extension agreement with Nokia and then we had another license extension that we worked out last year so that leaves two remaining based on what we previously said.

Maynard Um – UBS

On the ITC, the recently rescinded the limited exclusion order and the cease and desist order, can you just talk about what the process is there, what steps are going to happen going forward and what we can expect.

Don Rosenberg

You’re right, they recently reversed that and they remanded it to the ALJ for further proceedings there so there will have to be some further proceedings in the ALJ but of course a principal ruling there was that the limited exclusion order cannot have the down stream effect that it had originally had according to the original order. So we’re very pleased with that ruling by the Court of Appeals.


Your next question comes from the line of Mark McKechnie – AmTech

Mark McKechnie – AmTech

On the new guide, I was trying to get a sense for how much more channel drag you have built into that. I understand that you don’t have the inventory snap back built into that last half of the year but do you have the end of the drag built into maybe September or how do you think about that.

William Keitel

I’d first caveat it with that we put a broader range to our guidance given the environment which it makes it I think a little more difficult to pinpoint these numbers, I think for the December quarter I think we’re pretty much in line with what we expected coming down from a 19 week level of channel inventory to a maybe 17 weeks or so. By the end of March we think we’re looking to be down in the 15 week range and then before we get to September we think it could get down to 13 weeks or so but finish up September maybe in a 14 week kind of range and then hold at 14 weeks through December.

Again those are, I ought to put a lot of plus minuses around that but if we were talking single point estimates that would be indicative of what a single point estimate would be.

Mark McKechnie – AmTech

In terms of bookkeeping a sense of what the pro forma tax rate going forward, you said on the result it was 25% but that had the charges built in so is the real number maybe 20, 21% going forward.

William Keitel

If you exclude the capital charges which basically we didn’t take any tax provision for which is what bumped the rate up, but excluding that we’re at about 22%. Three months ago we had estimated 20%, the difference between 20 and 22 is simply the mix of our business that made that change, our new estimate of our business mix.


Your next question comes from the line of Tim Luke – Barclays Capital

Tim Luke – Barclays Capital

Just in lowering the forecast for handsets from 600 to 565, could you give some color on where you’re lowering that in the CDMA 2000 and the WCDMA in terms of the regions. Separately in saying that you think that the chipsets are going to be moving to a lower end mix in the second half of the calendar year, what’s your assumption then for chipset ASPs just as a framework and it looked like in the quarter that your guiding, your average selling price assumption for handsets is a little higher then you previously guided, but by the same token are you assuming that it sees some pressure in the second half of the year.

William Keitel

I would just say that we do have some information on our website for those that want to go to that, but just I’ll give you a quick rundown. We think WCDMA Europe, we’re looking for the midpoint about 11 million units less then what we had previously forecasted. Asia really not much change in our WCDMA estimate. A slight reduction in WCDMA in rest of world and I would add that that decrease is more concentrated in Latin America piece of what we include in rest of world.

On CDMA 2000 in the Americas a midpoint we’ve gone down by about four million units to 98 and CDMA for China and India we brought that down by about eight million units just seeing a lower base line trend in India. And then CDMA 2000 rest of world about six million units, more of a channel inventory impact there.

In summary again I’d take it back we’re bringing the replacement estimate down to about 38% for the year and ending the year at about 14 weeks of channel inventory. So again below the rate that we’ve historically seen as a norm, that being 15 to 20. That’s just a summary on the markets.

The chipset ASPs we’re expecting a modest decrease the second quarter as opposed to the first quarter with the new price resets, the price resets obviously will have a full year effect but it’s the mix with the, we’re seeing a lot of low end demand in the latter part of the year with the developing market accelerating.

Steve Mollenkopf

The December quarter was fairly strong on ASP and one of the reasons was because we really had not started to see the effect of China, so China will start to ramp this quarter and become fairly significant and I think that’s really the big effect that you’ll see on ASP. I wouldn’t project the same ASP moving forward is really the point that we’re trying to make moving forward.


Your next question comes from the line of Tal Leoni – Banc of America

Tal Leoni – Banc of America

What’s the tax rate we should model for the rest of the year? I still find it hard to model, this quarter you are 2.5 billion and next quarter midpoint is 2.35, and you’re guiding for the year a flat or sequential declines for the rest of the quarters but everything else is supposed to be up because channel inventory is supposed to be out of the way and I just have difficult time to reconcile your guidance with normal seasonality and inventory cycles, etc. and then about expenses, in case you have to come on the call again next quarter and reduce the guidance again, for whatever reason, the world economy goes down again, what is your view about expenses, where could you cut expenses and where you think you don’t want to cut expenses.

William Keitel

On the tax rate with the capital loss that we recorded in the first quarter I expect we’ll continue to report a 25% tax rate going forward for the year. Take out the capital loss it would be 22% but I expect next quarter on the call I would be talking about a 25% tax rate in total.

On first half second half again I would describe it in this summary terms, from a chipset standpoint we’re optimistic we’ll see a little unit growth second half of the fiscal year versus the first half of the fiscal year but on average we’re expecting that to be lower end product then what we expected to ship in the first half.

One is about offsetting the other. On the QTL side, the licensing side of the business we do have a projection of ASPs decreasing in the second half of the year as opposed to the first half to match out to our full year estimate of $202. So you’re going to get some effect there. On the market side of it we’re projecting maybe getting to a low sometime in the second half of the fiscal year of down to maybe 13 weeks of inventory but all told if we’re, our single point estimate if we end the March quarter at 15 weeks and end the September quarter at 14 weeks, obviously you do have more, that end market is continuing to be satisfied to some degree by the channel inventory.

I think hopefully people are pleased that our prior guidance of 10% is now excluding the acquisition we’re up 2%, so there’s obviously been a lot of attention and I think we feel good there’s a lot of understanding throughout the organization. The spending, the operating expense improvement that we saw in the first quarter that we reported in our results is wide spread across the business units and across the corporate function so I’m encouraged by that.

I think we always like to have a team here that’s focused, has a common focus and I think we have that across the management team and the entire employee base, number one. Number two, we do have more areas we’re targeting, but as I said as you get a couple more months here and certain expense actions we aren’t going to see any near benefit. The cost to implement you just won’t see it be accretive before the fiscal year is out. So our target at this point is push hard this year and we want to be right sized going into fiscal 2010.

Dr. Paul Jacobs

I think as we’ve said we’re looking at R&D projects very carefully, prioritizing those as much as possible. We talked about headcount, we are still not looking at widespread layoffs but of course if there is targeted areas where we can do some restructuring, we’re looking at things like our contingent workforce, looking at things managing payroll increases, expenses, service levels and corporate functions, things like that.

So there’s a pretty wide range of opportunities and we are being let’s say very aggressive and specific about the programs that we have in R&D and making sure that those are the programs that we want to spend our resources on.


Your next question comes from the line of James Faucette - Pacific Crest

James Faucette - Pacific Crest

I wanted to look forward a little more and I know that we’ve talked about Snapdragon for the last year, year and a half and it seems like it has the potential to be an exciting product, at the same time we’ve seen Microsoft for example bring down the cost of licensing their OS and that seems to be more attractive now in the netbook category for the Intel based products, so I’m wondering from a product and market development standpoint how we’re thinking about Snapdragon now and if you could also talk about the issues related to software and ultimately when we could start to think about Snapdragon being a meaningful contributor.

Dr. Paul Jacobs

I think we’re very excited about the Snapdragon product. As I’ve said in the past its really a question of us getting the software strategy right for Snapdragon as Intel works to get its power consumption and integration right for its processors. I think the key differentiator is that we’re excited about our its always on connectivity, location aware capability, having essentially instant on so that you don’t have long boot up times, things like that.

We’re spending a lot of effort in the Linux area to make sure that the wide suite of applications and full compatibility with web standards is going to be implemented on these devices and we’re looking at a couple of different approaches. One is the initial Linux which will be more like a Windows environment but most of the manufacturers are looking to do something very differentiated with both form factors and user interfaces. I think there’s a tremendous opportunity and then finally I think just this convergence of having cloud computing, having the high-speed networks and having very very low power devices so all day much lighter and smaller devices.

I think all of these things coming together at a very low price point coming through their operator channel with the subsidies is going to make Snapdragon a very compelling product line for us.

Steve Mollenkopf

I think as we’ve said all along we really don’t expect Snapdragon to significantly contribute this fiscal year but it will start to ramp during this fiscal year and start to build into the next fiscal year and I think really the size of the market will be very much determined by will the software enable a new computing paradigm. I think very much with what Paul said, the existing devices are very much a cost play I think on a laptop paradigm and we’re looking to really pull some of the best parts of a smart phone over into that form factor and I think as the ecosystem starts to be built around that, the market will determine whether that’s a new class of device or not and I think if it is, it has the potential to be a very interesting product.

And as well we believe with our integration strategy we have the ability to create phone level cost points with these products and I think that enables a go to market strategy much more with our traditional partners vis-a-vie the operators.


Your next question comes from the line of Simona Jankowski – Goldman Sachs

Simona Jankowski – Goldman Sachs

Just was wondering, following TI’s announcement from this week that they’re exiting the 3G merchant business how do you think that effects you and over what time line.

Steve Mollenkopf

I think I’m not sure if that was that unanticipated an announcement, actually they had made a similar announcement earlier and I think really in terms of the impact to the OEM design cycles, it was probably more significant the earlier announcement versus the one that was this week. But I think as we’ve said a number of times, the chipset business is becoming very much a systems business and we anticipate folks that don’t have that scale across multiple technologies to reevaluate their business and its probably an example of that that we saw.

Simona Jankowski – Goldman Sachs

So that’s something that you think should start helping in terms of market share even this year based on that earlier announcement?

Steve Mollenkopf

I think this year is pretty difficult to influence in terms of the design cycles, but I think in terms of decisions that will be made for next year, its probably more significant. But I think we’ll have to monitor that and see how that goes.


Your next question comes from the line of Anil Doradla – William Blair

Anil Doradla – William Blair

On the inventory levels is there a possibility that even when the macro outlook looks better, our channel inventory levels remain in the mid-teens, could it be possible that the industry settles down with this new level of inventory levels and also how many employees did you have this quarter and how many do you expect to have by the end of next quarter.

William Keitel

On the channel inventory, I guess that’s possible but based on what we’ve seen in the last several years, all participants that play into that channel would have to improve the efficiencies of anticipating needs and cycling through that channel much more efficiently then what we’ve had in the last several years. So I wouldn’t say that that’s not possible but to some degree we’re going to have to wait and see.

On the employee level I’m not going to speak to our year-end number as I said, we’re aggressively going after cost reduction and we’ll report that number as we move along. But I think you know we’re focused on narrowing in on our R&D programs that are most important to improving our competitive position through these difficult times. So I think that’s a number we’ll just report as we go along.

Anil Doradla – William Blair

Can you give us a sense of how many people came on board with the AMD acquisition.

Steve Mollenkopf

We didn’t disclose it. We estimated, we’re going to have a number pretty close to about 200, 250 people that come on eventually from AMD.


Your next question comes from the line of Ittai Kidron - Oppenheimer

Ittai Kidron - Oppenheimer

On the license renewal negotiations that you’re going through right now, so that leaves two then you haven’t renewed with. You said one this year, can you tell us more specifically when the other is coming and can you tell us are any of those two top five OEMs and what is the risk would they turn out to be what Nokia was for you.

Derek Aberle

What we have said a number of times publically including in November I think at our analyst conference is that we have two WCDMA license extensions that we need to get completed before 2017. Haven’t really got specific as to when those need to be done. We’re obviously looking to be proactive and get them done early. At this point I don’t think we have any expectation or anticipation of running up against another Nokia situation.

Ittai Kidron - Oppenheimer

Are they material customers to you and are they, when you give your guidance and your outlook for the year is the assumption that they renew.

Derek Aberle

I think we’ve commented on the size or the identities of the licensees.

William Keitel

And then the guidance for the year as we said we built into our forecast an assumption of an extension and we described some high level characteristics of what an extension might be.


Your next question comes from the line of Ehud Gelblum - JPMorgan

Ehud Gelblum - JPMorgan

If we look again at this license agreement I remember back in 2006 you said that other then Nokia the earliest next license agreement that would expire was 2011 and then in the following year in 2007 you said there are only two licensees expiring prior to November 2017, can you give us a sense as to why, who initiated the extension process now and when that is complete will that impact both UMTS as well as LTE or is that just for the extension that gives you LTE. And then if you can give a sense as to, you said there were several issues in the new low revenue numbers, how much of that percentage wise roughly that billion is because of this, so we can get a sense of a run rate going forward what that royalty looks like. And then do you anticipate inventory staying at 14 weeks after September going forward into 2010 and on or do you expect them to snap back up to your 17 weeks that you’ve been thinking about before?

Derek Aberle

Again as we said we have at this point to WCDMA extensions to get done before 2017. I do believe in the past we said the earliest one of those would come in 2011, we haven’t otherwise characterized the timing of the remaining one. I think other then the information that we provided in the script about a substantial lump sum payment and ongoing royalties its probably too early to get into any more detail on that terms of conditions of that potential deal.

Ehud Gelblum - JPMorgan

Its material if it could actually impact UMTS as well as LTE, would you expect that to be true?

William Keitel

We’ll have to see as we go. We’re letting you know that we’ve provisioned for this possibility but I think as we said its really too early to go into any more detail then we’ve provided. On the outlook for the year I would first add that the new level of revenue and operating income guidance as compared to what we gave three months ago is primarily related to our new estimate of the market and then the regions and hence the mix of product that we expect the market will be demanding.

So on the license renewal relative to what we gave back in November versus what we’re giving today its, there’s really not a material difference related to that. There’s a lot of little things that go on. We have audit recoveries that come and go. First half of the fiscal year we’re looking at more audit recovery dollars then what we see in the second half. The infrastructure royalties is, over the years have tended to be lumpy. We think there’s a little more infrastructure royalty revenue in the first half as compared to the second half.

I said there are several items but I really spoke to the material ones in my prior answer. I did say that our base line estimate of 565 for the market, that’s based on a 14 week ending channel inventory at the end of the calendar year which would be the first quarter of fiscal 2010. Beyond that we’ve not put any forecast together for fiscal 2010. Our sense is unless the total, all the major participants in the channel can really improve their efficiencies significantly in this year as compared to prior years we think the channel is going to be strained to contain it down to a 14 week if the demand continues at the rate we see it continuing at.


Your next question comes from the line of William Pitkin – GE Asset Management

William Pitkin – GE Asset Management

I just wanted to clarify with regards to the new forecast on device shipment what was included in the prior forecast with respect to China and what is included in the current forecast with respect to China since the 3G licenses have been announced.

William Keitel

We’ve not made a significant change in our China estimates from the guidance we gave in November to what we’re giving right now. We don’t break out China individually. You have one CDMA 2000 operator, you’ve got on WCDMA operator and we just don’t want to be, we don’t think its appropriate for us to be directly inputting publically on how we view their own stated forecasts.

There’s not a significant change, the China Unicom transitioning business to transition to China Telecom, that slowed down the market a bit more then what we anticipated in the first quarter but having said that we’re pretty optimistic on China Telecom’s capabilities going forward.


Your next question comes from the line of Kulbinder Garcha - Credit Suisse

Kulbinder Garcha - Credit Suisse

With respect to your, you mentioned 115% growth in your WCDMA MSM volumes, can you give us an idea of where your WCDMA market share might be now and also what your assumptions for that as we enter 2009 especially given it seems that some of the larger customers are performing quite well and there seems to be new customers opening up for you, what assumptions are you making for that market share in WCDMA in 2009.

Steve Mollenkopf

I think we have not disclosed our WCDMA market share externally but I will comment, as I said we’re happy about what has happened over the last 12 months and I think we did a good job building share particularly in smart phones and I would say high-end modems or the advanced modems. We see those two trends continuing. I mentioned the roadmap into HSPA Plus and obviously smart phones will continue to be important and we think that the lower price of smart phones plays in to our integration strategy.

So I don’t think we anticipate a large shift in share moving forward but as to the absolute number I’m not sure that’s something that we’ve shared.

Kulbinder Garcha - Credit Suisse

On the QCT margins I think the lowest level was [inaudible] and I understand that they were going to be weak in the December quarter, down 12.5% what’s the key to recovery, just the demand, or it is just high levels of investment you’re doing there and how [inaudible] or does it get worse from here.

Steve Mollenkopf

I think we talked a bit about ASP, and how we thought that we were strong in smart phones and we were delayed a bit in terms of the launch of China, referring to the December quarter. As we start to ramp and China, and really the addition of China caused ASPs to come down. But clearly with the level of MSMs that we now have, the scale of the business or leverage of the business is different then it was at 86 million MSM so you’re seeing some of that as well.

We’re actively looking at how we can control our operating side as well and try to rationalize some of the growth over the last couple of years.

William Keitel

Suffice it to say we’re up, we’re more optimistic on the second half operating margin in the chip business then what we’re looking here at the first half.

Steve Mollenkopf

The first half of the year really is unfolding the way that we thought it would unfold in November when we talked. The question is really what happens in the second half of the year and in the second half of the year we had forecast a fairly sharp rebound or snap back with the inventories and as we mentioned in our guidance we don’t expect to see as big of a snap back, pretty much tempered by the macroeconomic situation that we all see.

So I think what you’re going to see, we’re clearly during that trough, our operating margins are not close to what they have been historically and I think we’re going to start to see recovery in the fourth quarter but not quite up to the level of our historical values yet.


Your next question comes from the line of Adam Benjamin – Jeffries

Adam Benjamin – Jeffries

I’m just going back to your forecast for the market and imbedded in your forecast for the fiscal year can you talk a bit about what assumptions you’re making on your share. You talked a bit about not giving out your share in WCDMA but can you give some view into whether you expect to continue the trend of gaining share?

Steve Mollenkopf

I think there are two components of our share, one is how well our existing customer base, against the customers that are not using our devices, and there have been a couple of positive trends on that looking back over the last 12 months. Some of the things that help our customer base is really the move toward more, the importance of data in the operators’ mind and so that’s really driving a demand for these higher end modems. So I think that’s helping some of our traditional customers take share in North America and in Europe.

But in terms of making bigger moves in share it really comes down to winning some new accounts in addition to that other effect and as we’ve talked about in the past we’re actively working on a number of accounts trying to really leverage in some cases our platform capability and in other cases really the, I think we have a broad range of technologies that if the company looks out long-term they’ll see that, I think the number of people who can do a system on chip products is diminishing and I think that’s creating a trend where people are coming toward us.

But we really have nothing more significant to announce then what we talked about in November.


Your next question comes from the line of Mike Burden – Think Equity

Mike Burden – Think Equity

As we do see Gobi and eventually Snapdragon next year come in, what effect is that going to have longer term on chip ASPs and more importantly is there going to be a similar or opposite effect as those products ramp on your margins and is there a new target margin for QCT at a more normalized run rate now?

Steve Mollenkopf

I think in terms of Gobi and Snapdragon you should think of Gobi as a product very similar to our advanced modem products that we have ramping today. So I don’t expect a significant shift in margin in terms of that. Snapdragon is something that’s really, more like our high end smart phone products in terms of its [tiering], so we clearly have from the top end we have Snapdragon moving all the way down into our system on chip, single chip solutions as well.

So I think you should think of those, Snapdragon as really being the replacement for our 7000 chip in terms of its positioning in our roadmap.

William Keitel

I would just add that in the past we’ve talked about we think if we execute on our strategy as we have in the past we ought to be, our operating margin in the chip business ought to be in the range of 25%, 28% kind of level and that hasn’t changed. We think we’re in an abnormal period here with the channel contracting. As I outlined for you that the year-over-year delta in operating income for our, based on our second quarter forecast as compared to second quarter of last year is primarily the channel inventory contraction.

We’re still in that space and we think if we execute well we ought to be 25% operating margin and maybe a little north of that.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Dr. Paul Jacobs

I just wanted to thank everybody for being on the call today and obviously though our earnings were impacted by the impairments, interesting that in the same quarter we had record cash flow and I’d say despite the economy we remain optimistic because consumer demands for 3G data services and high end smart phones, all these things are continuing and we feel like we’re very well positioned to support these trends with our new high data rate technologies and with our chipset products.

Particularly I’m looking forward to seeing the Snapdragon devices come out. Also very happy to finally have 3G launches in China so I don’t have to predict it any more and as we’ve said, we’re really looking forward to seeing how the mix works out in China. So the businesses really do continue to operate well. We are focused on expense management as we said and we really feel like we’re in a leadership position and expect to exit this economic downturn in a much stronger competitive position.

Thanks everybody for being with us and we’ll look forward to talking to you again soon.

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