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QUALCOMM Inc. (NASDAQ:QCOM)

F3Q09 (Qtr End 06/28/09) Earnings Call

July 22, 2009 4:45 pm ET

Executives

John Gilbert - VP, IR

Paul Jacobs - Chairman and CEO

Steve Altman - President

Bill Keitel - EVP and CFO

Len Lauer - COO

Don Rosenberg - EVP, General Counsel and Corporate Secretary

Steve Mollenkopf - EVP and President of Qualcomm CDMA Technologies

Derek Aberle – EVP, President of Qualcomm Technology Licensing

Analysts

Maynard Um - UBS

Brian Modoff - Deutsche Bank

Tal Liani - Bank of America/Merrill Lynch

Mark McKechnie - Broadpoint AmTech

Mike Walkley - Piper Jaffray

Tim Long - BMO Capital Markets

Tim Luke - Barclays Capital

Simona Jankowski - Goldman Sachs

Phil Cusick - Macquarie

Kulbinder Garcha - Credit Suisse

Matthew Hoffman - Cowen & Company

Anil Doradla - William Blair

James Faucette - Pacific Crest

Glen Yeung - Citi

Adam Benjamin - Jefferies

Stacy Rasgon - Sanford Bernstein

Mark Sue - RBC Capital Markets

Craig Berger - FBR Capital Markets

Tavis Mccourt - Morgan Keegan

Operator

Welcome to the Qualcomm third quarter fiscal 2009 conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded July 22, 2009. The playback number for today’s call is 800-642-1687. International callers, please dial 706-645-9291. The playback reservation number is 16320448.

I would now like to turn the call over to John Gilbert, Vice President of Investor Relations. Mr. Gilbert please go ahead.

John Gilbert

Thank you and good afternoon. Today's call will include prepared remarks by Dr. Paul Jacobs, Steve Mollenkopf and Bill Keitel. In addition, Steve Altman, Len Lauer, Don Rosenberg and Derek Aberle will join the question-and-answer session. An internet presentation and audio broadcast accompanying 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 like to 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 have also furnished the SEC our financial statements and related footnotes in the extensible business reporting language XPRL format as required by the SEC. We may make forward-looking statements relating to our expectations and other future events that may defer materially from Qualcomm's actual results.

Please review our SEC filings for a detailed presentation of each our businesses and associated risks and other important factors that may cause our actual to defer from these forward-looking statements.

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

Paul Jacobs

Thanks John and good afternoon everyone. I am very pleased with our strong operating performance in this uncertain economic environment. Revenues were at the high end of prior guidance, operating income exceeded our prior guidance. And pro forma combined SG&A and R&D expenses were 5% lower year-over-year and well below our prior guidance.

Worldwide demand for 3G remains robust and despite the global economic uncertainty we anticipate another strong quarter of demand for our chipset in fiscal Q4. We are raising our fiscal 2009 revenue and operating income estimate given the strong underlying fundamentals of our business.

Before commenting further on the business, I would like to welcome Dr. Young Koo Cha as Senior Vice President of Qualcomm and President of Qualcomm Korea. Dr. Cha's extensive experience in the high tech industry, academia in the Korean government is a great addition to our management team and we look forward to his leadership in this key region for our business.

Our business continues to generate strong operating cash flows, which enables us to return capital to our stockholders. As of June 28, we've returned over $10 billion of capital for shareholders since fiscal 2003. We also recently announced another quarterly cash dividend payable on September 25th of this year.

While we did record additional impairments on our marketable securities this quarter those impairments were significantly lower than previous quarters. In addition recent improvements in financial markets have greatly reduced our net unrealized losses from 898 million at March quarter end to $25 million as of June quarter end.

Turning to the business QCT shipped a record number of chipsets this quarter [an] increase of approximately 9% year-over-year. We believe the CDMA inventory channel has largely stabilized yet remains near historically lower levels consistent with our prior forecast. In addition CDMA based device shipments by our licensees in the March quarter were at the high end of our prior guidance and increased 4% year-over-year.

World wide 3G adoption continues to accelerate where as GSM shipments continue to decline. According to wireless intelligence 3G subscribers grew 28% year-over-year to approximately 830 million as of June. In Western Europe WCDMA subscribers grew 52% year-over-year compared to an 8% decline in GSM subscribers.

In addition according to the industry analysts forecast, 3G handset shipments are expected to eclipse GSM shipments for the first time in 2010. The 3G enabled handsets are forecast to be over 60% of total handsets shipped in 2012. The 3G echo system is vibrant and consumers have an extensive choice of competitively priced feature rich devices to keep them connected informed and entertained.

The GSA reports that approximately 94% of WCDMA operators have launched HSPA services and the number of HSPA devices has grown by over 120% year-over-year to more than 1,600 devices by over 180 suppliers. In addition the number of HSPA enabled notebooks has more than tripled in the same period. Also according to the GSA and operator announcements, there are now five HSPA plus commercial networks and more than 25 additional operators have announced plans of testing, trialing or deploying HSPA plus technology.

CDMA2000 continues to be successful in both developed and emerging markets. And, according to the CDG is approaching half a billion global subscribers. India reached a significant milestone this past May, surpassing 100 million CDMA2000 subscribers of which approximately 50 million were added in the past two years.

Globally, there are over 65 EV-DO Revision A commercial networks with over 30 additional networks in deployment. Revision B is gaining fraction as several operators including China Telecom have indicated interest in Revision B to further leverage their 3G investments.

China has a broad deployment of 3G CDMA and the world's largest wireless market continues. Since January 2009, China Telecom has added more than 11 million CDMA subscribers and has announced plans to deploy EV-DO Revision A in 500 cities by the end of this month.

In addition, China Unicom announced its HSPA networks covers 100 cities today and plans to deploy HSPA in a total of 284 cities by the end of this year. And, as with most new market deployments ramp up takes some time for networks to be fully deployed and for a broad portfolio of handsets to be made available to consumers. We have always believed that when licenses were issued infrastructure deployments would occur rapidly and I'm very pleased to see the pace of these deployments.

We continue to see growing demand for 3G broadband services driven by increased consumer desire for mobile internet access and more personalized user experiences. For example, in North America multiple operators continue to report strong wireless data growth year-over-year. Driven in part by smartphone competition, including those recent launch of multiple iconic devices.

The trend towards connected mobile computing in the US continues as the three top operators now offer subsidized notebooks or netbook computers with embedded 3G capability. And the trend towards file computing in the mobile environment continues to evolve and it is a trend that bodes well for us.

Recent announcements such as Google's Chrome operating system and Microsoft's plan to offer a free online version of its office product suite will further enable to shift towards mobility. Our continued commitment to innovative research and development put us in a unique position to benefit from the growing demand for compelling new 3G enabled devices.

A comprehensive chipset portfolio towards multiple operating systems provides our OEM partners with more choice and flexibility to develop new categories of mobile computing devices that will support an increasingly mobile society.

We previously demonstrated advanced interference cancellation techniques in our CDMA2000 Infrastructure Chipset Solutions that further improve system capacity. We also recently announced the collaboration in which DTE will utilize Qualcomm’s advanced Uplink Interference Cancellation technologies in our next generation UMTS base stations. Using this technology operators can boost their UMTS data throughput by up to 60% and deliver a user experience that is comparable to LTE in a similar channel bandwidth.

Turning to FLO TV; the DTV transition is enabling our expansion into key major markets such as Boston, Houston, Miami and San Francisco, as well as expanded service in Chicago, Los Angeles, New York and Washington DC. By the end of 2009, FLO TV will reach more than 100 major markets and more than 200 million potential customers.

In our display business, we recently announced the opening of our dedicated mirasol display fabrication facility in Taiwan in partnership with Foxlink. This is an exciting new step towards further commercialization of our innovative mirasol technology to provide a more rewarding mobile experience, enabling extended battery life and superior outdoor viewing.

You may not that we have disclosed that the Korea Fair Trade Commission is expected to issue a decision on our case shortly. Unless and until an order is issued it would inappropriate for us to comment further on the case than what we have provided so far.

So while the global economic environment remains uncertain we will continue to investment strategically in key research and development programs, to improve our technology leadership competitive position that drives shareholder value while closely managing our SG&A expenses.

There are many exciting new growth opportunities in wireless today and we are fortunate to have a strong balance sheet and operating cash flow to execute on our strategic objective. We are well positioned to drive innovation and growth in 3G and next generation wireless technologies. That conclude my comments, and I'll now turn the call over to Steve Mollenkopf.

Steve Mollenkopf

Thank you, Paul. QCT continued our track record of strong execution in the third quarter and I would like to highlight the results. We shipped approximately 94 million chipsets this quarter, a record shipment level for QCT. This represents a 36% increase quarter-over-quarter and a 9% over the same period last year.

We generated record revenue of approximately $1.8 billion and delivered record earnings before taxes of $548 million for the third fiscal quarter in 2009. We are encouraged by the strong Q3 result and remain focused on cost reduction efforts within this current economic climate.

Our average revenue per MSM remains consistent with the previous quarter at approximately $19. Driven by a greater and expected mix of chipsets that enabled advance data devices combined with a stabilization of inventory levels in developed markets.

EV-DO shipments increased 83% and UMTS shipments increased 54% over the previous quarter. While we expect ASP to trend marginally lower in the fourth quarter, we anticipate a similarly healthy product mix.

Now turning to product milestones, commercial devices enabled by the QSC 6240 and 6270, the industries first single chip products for UMTS. Launched this past quarter as scheduled and are now available in stores. We continue to believe our single chip solutions for cost effective UMTS devices are helping to accelerate the migration of GSM users to 3G.

Our Snapdragon products are making strong progress as well. In May Toshiba's TG01 the first commercial device enabled by Snapdragon launched in several markets across Europe. Consistent with our prior statements we anticipate that numerous additional commercial Snapdragon enabled devices would be announced throughout the year.

At the Computech show in June we announced an extension of the Snapdragon road map with the QSD 8650 A. The 8650 A offers a 1.3 gigahertz core for 30% greater processing capability and enhanced graphics while leveraging 45 nanometer technology for 30% lower power consumption.

HSPA plus also continues to progress as scheduled, with over 25 operators now planning to launch service this year. We had more than eight device manufacturers designing products based in our industry leading MDM 8200 chipset solutions for HSPA plus, with Huawei already having launched their data cards into multiple markets.

This technology allows carriers to evolve their network capabilities, making it a very compelling upgrade option especially in today’s challenging economic environment. We continue to diversify our product portfolio in order to enable the next generation wireless experience. This past quarter we announced two wireless LAN products that take us into new markets that compliment our core cellular business.

Our N-Stream WCN1320 chip supports performance up to 600 megabits per second. It is designed to enable the wireless distribution of multiple simultaneous streams of high definition video, voice, and data throughout the home. As part of our N-to-N wireless LAN solution, we also announced the WCN1312 chip and 802.11n solution for handsets and mobile devices supporting data rates of up to 72 megabits per second. Both products are sampling now.

QCT has continued to execute successfully despite an uncertain economic climate and the results are evidenced in our financial performance this past quarter. We remained focused on meeting our customers needs, as well as expanding to win new business in new markets with new partners.

Thank you. And I will now turn this call over to Bill Keitel.

Bill Keitel

Thank you, Steve and good afternoon everyone. I'll begin with highlights of our third quarter results. Revenues of $2.8 billion were at the high end of prior estimate as 3G device shipments grew approximately 4% year-over-year in the March quarter. And, our chipset shipments grew approximately 9% year-over-year in the June quarter. Pro forma operating income of $1.12 billion also exceeded our prior estimate.

We continue to see the benefits of our broad initiatives to reduce certain operating expenses. The combination of pro forma R&D and SG&A expenses decreased approximately 5% year-over-year, including a 20% decrease in SG&A expenses. R&D expenses grew approximately 6% year-over-year as we have increased our investment in select key projects.

Operating cash flow was strong in the third quarter approximately $1 billion or 39% of revenues. Approximately 111million new CDMA devices were shipped by our licensees in the March quarter at the high-end of our prior estimate. The average selling price of CDMA devices shipped in the March quarter was approximately $191, consistent with our prior guidance and down 5% sequentially.

We shipped a record 94 million MSM chipsets consistent with our prior guidance and up 36% sequentially as a significant contraction in the CDMA inventory channel has now stabilized.

Pro-forma net investment income was $79 million in the third quarter compared to a net investment loss of $67 million in the second quarter. It includes our adoption of new FSP FAS 115-2, covering debt security impairments. Investment impairments also decreased. For the third fiscal quarter, we recorded $112 million in net other than temporary impairment on marketable securities, which equates to approximately 1% of our cash, cash equivalents and marketable securities.

Net unrealized loses on our investment portfolio decreased substantially in the third quarter, down to $25 million at the end of fiscal June as compared to $898 million at the end of last quarter. Our total cash and marketable securities grew to approximately $15.7 billion at the end of the third quarter with approximately $7 billion onshore and $8.7 billion offshore. During the third quarter, we paid $282 million of cash dividends or $0.17 per share.

Now, turning to our full year guidance; we are 565 million mid point of our prior calendar 2009 CDMA device shipment forecast. We estimate that between 540 million and 590 million CDMA devices will be shipped in 2009. The 565 million mid point represents an 18% year-over-year increase and we estimate that approximately 217 million units will be CDMA2000 and approximately 348 million units will be WCDMA.

We are reaffirming our prior estimates of average selling prices for CDMA2000 and WCDMA devices. We continue to expect average selling prices would decrease approximately 9% year-over-year to approximately $199 million per unit in fiscal 2009.

We believe that the significant CDMA inventory channel contraction observed in the first and second fiscal quarter has ended. Looking forward and consistent with our prior estimates we expect the CDMA inventory channel will remain relatively low at approximately 14 to 15 weeks for the remainder of calendar 2009.

We are raising our revenue and operating income guidance for this fiscal year. We now expect fiscal 2009 revenues to be in the range of approximately $10.25 billion to $10.45 billion, an increase of approximately $200 million to $400 million of our prior estimates

We estimate pro forma operating income for fiscal 2009 to be in the range of $3.3 billion to $3.4 billion, an increase of approximately $250 million to $350 million above our prior estimates. This updated financial guidance reflects continued strength in 3G device shipments around the world, as well as a favorable mix of more data capable chipsets for our QCT business.

We expect the combination of pro forma R&D and SG&A expenses to be flat year-over-year, reflecting successful SG&A expense reduction combined with thoughtful investment in select R&D projects. Our estimated pro forma fiscal 2009 tax rate is approximately 29%. Excluding investment impairments and the litigation settlement charge our underlying pro forma tax rate is estimated to be approximately 21% for fiscal 2009.

Turning to the fourth fiscal quarter we estimate revenues to be in the range of approximately $2.55 billion to $2.75 billion. We estimate pro forma operating income for the fourth fiscal quarter to be approximately $950 million to $1.05 billion. We anticipate shipments of approximately 88 million to 92 million MSM chipsets during the September quarter. This reflects continued healthy demand up approximately 2% to 7% over the same quarter last year.

We estimate that approximately 127 million to 132 million new CDMA based devices shipped in the June quarter up approximately 14% to 19% sequentially and reflecting our expectation for strong growth across multiple regions including WCDMA in developed markets.

We estimate the average selling price was approximately $189 per unit. And we anticipate fourth fiscal quarter pro forma R&D and SG&A expenses combined will increase sequentially approximately 4%.

That concludes my comments I will now turn the call back to John Gilbert.

John Gilbert

Thank you, Bill. Before we go into our question and answer session I would like to remind our participants that our goal in this call is to address as many questions as possible before we run out of time. I would encourage you to limit your questions to one per caller. Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). One moment please for the first question. Maynard Um from UBS. Please go ahead with your question.

Maynard Um - UBS

Thanks. Just a question on your guidance, your handset guidance assumes a ramp in the back half of the year. Now, would have assumed to be, would have actually seen an acceleration of chipset units ahead of that given low levels of inventory. So, your chip guidance is actually down slightly sequentially. Can you just talk about the disconnect there and if you can market share and those types of things? Thanks.

Bill Keitel

Maynard, this is Bill. I'll give you my inputs here. The 94 million chips we shipped in the June quarter as compared to the mid point of our estimate for the September quarter of 90 million. This is very much inline with what we were seeing approximately three months ago. We had a couple major operator launches occurring in the June quarter. We expect that there would a product build in advance of that launch as we've seen so many times in other operator launches. And so, seeing a slight decrease here in the June quarter is consistent with our prior estimates.

And then yes, you are correct. We are expecting a ramp in units in the second half of the calendar year. Obviously, there is a one quarter lag between our royalty units and shipping and the time we recognize the revenues. We are expecting a ramp in the second half for the year. You know, in terms of chipsets we are an important ingredient of that market. We'd like more share but certainly there are other parties shipping into this robust market as well.

Maynard Um - UBS

Okay. Great. And, then just quickly can you offer any feedback with your customers in Korea and kind of discussions there relative to the KFTC. That’s with me. Thanks.

Don Rosenberg

Discussions with our customers. This is Don Rosenberg. We of course have quite good relationships with our customers in Korea, and we think that largely they have been supportive of us. And so, but beyond that as we say as Paul said earlier, we don’t want to talk about the deliberations of the KFTC at this point.

Operator

The next question is from Brian Modoff from Deutsche Bank. Please go ahead with your question.

Brian Modoff - Deutsche Bank

Yes, just following up on the guidance. Recent discussion with MediaTek, they’re looking at 90 million units for Q3 and actually that number maybe higher than that. So they are seeing good demand in China. LG's numbers last night were well above the expectations and the Samsung is out tonight and we expect some decent results there.

Given that you guided kind of an 89 to 92 or 88 to 92 in the quarter previous and then doing above that. Looking, given we are not seeing a lot of indications are weakened or weaker demand in Asia in particular and WCDMA continues to track well, but you are being conservative here with what you’re saying on your [ASIC] shipment forecast relative to the quarter. And now you inferring on Q4 by making a full year guidance and implying a ramp there in the back half.

Steve Mollenkopf

Brain this is Steve. I’ll just comment very briefly on the MediaTek numbers. I think it’s little difficult to correlate them to our markets as we play in such different markets today. In terms of our guidance, we are pretty confident with the number that we’ve given out. As you know, we have in the face of new carriers watching us as we have talked we tend to, I think one observe the eco system a little bit before we understand them. And what's going on, so we have pretty good visibility into what's happening over the next quarter.

As we've said in June we have seen the developed markets really respond back to normal levels of inventory, so we have much greater visibility into to what I think a majority of chipsets are going to be now.

Brian Modoff - Deutsche Bank

Can you talk a little bit about what you are doing on the, your R&D continuous to be strong relative to your other expenses and you are doing a lot of work in process technologies in terms bringing down your diameters. Can you talk a little bit about what you're planning to do going into next year relative to performance and cost on some of your chips and should we see several more product launches in over the next several quarters as you would work through as your R&D starts to turn into parts.

Steve Mollenkopf

Sure, if you look, we have been investing in processor technology both the SP processor and microprocessor technology for the last five years and we are really starting to see the fruits of that in the market. It started very much on the Snapdragon product line, but as you know we are moving that through the entire product line, that core and the core technology through the entire product line.

We have recently announced really two products that meet the theme of what your question was. Number one, we announced dual core products which we think is an important differentiator for us moving forward as well as new geometry. Both of those advancements I think moving away that helps us. The other aspect that I should mention is as we go to the lower geometries we think that our advantage of having integrated solution becomes larger.

Primarily what happens is that the products become limited by their IO and not by their dye size. So I think we have fundamental advantage given our strategy moving forward should those things play out the way we think they will.

Operator

Tal Liani from Bank of America/Merrill Lynch. Please go ahead with your question.

Tal Liani - Bank of America/Merrill Lynch

I am afraid I have a question on the same topic and then one more question on Tesra. If you look at chip shipments over the last quarter it went up from roughly 70 to 95 and we saw that a lot of it is attributed to China. Can you forecast what could happen in China first of all just concern the sources for the growth the sequential we have seen this quarter and may be give us some color on how much of it is related to data cards, how much of it is related to China and give us some more color there.

And second, you are guiding again to the same neighborhood if we add some conservatism to your guidance, it means that roughly its going to be flat to slightly down and the question is wouldn’t you think that China is going to start slowing down. This is what we seen in the last quarter or may be you have a different forecast for China, so just to get some color on chip shipment.

Second question not related. It seems like Tessera today said that Amkor is not licensee see that it is in good standing currently and I am just wondering what are the implications on you if at all? Thank you.

Bill Keitel

Tal this is Bill Keitel I will try and take your first one here. At the offset of this quarter we had expected a significant portion of this quarters demand to be targeted developing world and as we progressed through the quarter there was a good ramp there, but some of that demand shifted to the developed, shifted from developing to developed and I think you could see that in our up tick in revenues kind of which you would calculate as the average selling price of our chipsets. So there was that that shift there. We have even seen a bit of that continuing into our demands here for the September quarter.

Don Rosenberg

This is Don. I'll take the Tessera question. Amkor is the licensee of Tessera; Tessera has acknowledged that on several occasions. We understand that recently Tessera alleged that Amkor's payments are not appropriate under the terms of their license. Amkor has assured us that they are in any case as far as we are concerned, there seems to be yet another dispute over their license agreement and what the appropriate level of payment is, which has in the past will be resolved under the terms of that agreement, which we understand have a dispute resolution procedures. But none of that should impact us, we are still purchasing from a licensee Amkor and it shouldn't have an impact on us with respect to the limited exclusion order from the ITC.

Operator

Mark McKechnie from Broadpoint AmTech. Please go ahead with your question. And, Mr. Mckechnie your line is open.

Mark McKechnie - Broadpoint AmTech

First question is, how do you account for this the Broadcom settlement. Is that a one time loss I guess in this quarter or how are you going to account for that going forward?

Bill Keitel

Mark, the we took, the only accounting for this quarter is fairly modest in this quarter it's an amortization of some of the patents that we acquired as well as some imputed interest on the extended payments. So, the bulk of the charge occurred last quarter and this quarter was fairly minimal as we will be going forward.

Mark McKechnie - Broadpoint AmTech

And then second, this is probably for Steve. On Android for the second half of ’09, is that Steve, I don’t know, maybe you could discuss your expectations for that and let us know it. It seems like you have pretty good share on the Android designs? Thanks.

Steve Altman

Mark the, you know we are putting up (inaudible) without Android, we’ve had a number of customers choose Android on our 7,000 and 8,000 device or devices, and you’ve seen a number of them come out so even the first half primarily from HTC, but we are looking forward to that having a bit more broad adoption. As then Paul as mentioned in his text, I think the cloud based computing some of the initiatives that Google has in terms of where the data is going to reside or actually be beneficial to us outside of the handset space and into the smartbook space as well.

Operator

Mike Walkley from Piper Jaffray. Please go ahead with your question.

Mike Walkley - Piper Jaffray

Bill, just a question for you on the overall ASP, how we should think about that for calculating royalties obviously you've got low in CDMA growing in emerging markets, and then you have a higher mix of smartphones. So do you see any seasonal patterns with kind of March quarter more slanted towards emerging markets in the back half of the year more towards material markets, or do we just expect ASPs to steadily decline overtime and then also just a quick clarification question with a little lower operating income margin in the QTL business. Are there any other charge run in Q2 that was unusual this quarter?

Bill Keitel

So, first on the ASPs. You get a little regional variation in the ASPs below for this year in total. We don't think that's going to be too big of a variable. FX for the full year is a bit of reduction sorry about the $5 range. So the bulk of it has just been outright increasing the average selling price. I think that's really been driven by WCDMA with a significant volume round about -- volume and time is what enables the price to come down effectively and but then we are seeing the benefits of that (inaudible) great and expanded markets see [GSM] declining at a faster rate. I think technologies are growing at a faster rate.

So I think all in all that's been healthy but then you are on to the key point then after that. The demand for data capabilities data features has been growing nicely and so that has been an offset to some degree and I expect it will continue to be so.

And the second question, QTL off margin. Nothing is really significant this quarter, you get some, it tends to you'll get some gyrations from quarter-to-quarter that tends to be a function more so of relative infrastructure royalties to handset royalties and from time to time we complete the audits and there can be a recovery there. But nothing noteworthy I think at this point to be drawing out. You will just see some fluctuations from quarter-to-quarter.

Operator

Tim Long from BMO Capital Markets, please go ahead with your question.

Tim Long - BMO Capital Markets

Two somewhat related questions if I could. Bill, looks like the blended royalty rate did tick up a little bit in the quarter. Was there anything there other than you had mentioned that there was a little bit of shift in the quarter towards the developed world. Is that what helped it or was there anything else going on there.

And then secondly just back to the overall unit guidance, we are three months later than your last report and you saw it's a pretty wide range. So, you should have much better visibility now, but you chose not to tighten that range. So how should we read into that and what would you say are the big secular issues that are going to move you one way or other in that range. Is it (inaudible) and are there other drivers there? Thank you.

Bill Keitel

Tim on the royalty rate we did mention, I would just point out we did mention last quarter that we had a very large quarter in terms of shipments of our CSM chips the infrastructure chips and we had a fairly good quarter also on infrastructural royalties in the quarter we just reported, you know with all the network build up that's has been going on in a number of regions.

So but other than that the driver tends to be as I said it's a mix of customers reporting licensees and then the mix of the combination of subscriber royalties versus infrastructural royalties versus royalties that end up as a result of our audits.

On the unit guidance, yes, we had a good discussion on the range. We went through our normal processes and it was good to see we are still vectored on the mid point of our estimate but we decided that it is best to leave the range as it was one; you know the economic situation, although it's improving certainly. There is uncertainty ahead. And then number two is that you know, we think we are at a very low level of total channel inventory for CDMA product. And, so we thought we best let that go another quarter or so before we would consider narrowing that range.

Operator

Tim Luke from Barclays Capital. Please go ahead with your question.

Tim Luke - Barclays Capital

Bill, maybe Steve. As you just think about that the calendar year for the chip side. Could you just remind us how we should think about seasonality as we head into the calendar fourth quarter, as the market ramps, should we usually expect the chip business to see some sequential improvement or are there factors as you build ahead of a slower March quarter, that might mitigate a sequential improvement in the chip number in the calendar fourth quarter.

And Bill, you are reiterating your sense that you are feel 14 to 15 weeks is the level now for the channel. Do you feel that that’s the level that is sustainable going forward or do you ultimately believe that there will be some further restocking required?

Lastly just for Don, maybe you could give us some sense of the EC update, if there is any past coordinate with the Korea update? Thanks so much, guys.

Bill Keitel

Tim, this is bill. On the first two questions, I'm looking at the chips on the calendar year. I think the most pertinent point here is that you know, we have reiterated our 565 million unit forecast for the calendar year and, so we are expecting good growth in unit shipments of new devices into that market here for the next two quarters. And I think that bodes well for our chipset business. I think, overall we have been doing steadily well on shares, steadily improving on shares. I hope that that should bode well for us on the chipset side.

On the 14 to 15 weeks, we would like to believe that’s sustainable, but I would say we are suspect of that. We think at the 14 to 15 weeks, it's a pretty tight level especially when you consider the wide variety of devices that are out in the market on 3G technology and the range of offerings that operators and consumers and available cell phones. I think that’s pretty tight. I wouldn’t be surprised if over the next couple of years we see that up tick a bit.

Operator

Simona Jankowski from Goldman Sachs. Please go ahead with your question.

Simona Jankowski - Goldman Sachs

The first one is just if you can give us an update on the license and renegotiations with one of your WCDMA licensees and if you are still expecting that to be completed by September. Then just secondly within your overall commentary on inventory in the channel having stabilized just by region, is that still the case in China or do you see China still bleeding down, and if you can just give us the context of what percent you think of your end demand comes from China?

Derek Aberle

This is Derek. Let me go ahead and take the first one. I think really not much more of an update since the last call. Our negotiations are continuing. I think we are making good progress and I think we still anticipate concluding the extension within the timeframe that we’ve talked about before.

Bill Keitel

On the inventory channel stabilization, when we speak of that inventory channel, we are speaking of it on a worldwide basis. There is always ebbs and flows on regional basis. As we mentioned earlier that we think there are couple of major operator launches in China and as is typical as we have seen many times in our past there is a little pre build for that. So we are logical to see that happen, but I would just add that we are maintaining our 565 million mid point for the market and we haven't deviated our regional estimates.

So we think thus far the market is performing pretty much to our expectation. We are monitoring closely, but we are not really seeing surprises on our end here. And in terms of the China specific to our business, we used to disclose that and we have drawn back from that for a number reasons. So, I don't think we will be getting back into disclosing this.

Operator

Phil Cusick from Macquarie. Please go ahead with your question.

Phil Cusick - Macquarie

I wonder if we can talk first about cost cuts. How much has really come through versus your expectations and versus what you are going to see in the fourth quarter. And then will those be fully baked by the fourth quarter or should we look for some in early next year. And then second of all, if you could just give us an update on what you expect from MediaFLO devices later this year. Thanks.

Bill Keitel

On the cost cuts, there are some implementation costs we are incurring this year. We've declined to break those out. I know others do so we prefer not to we are making select and small adjustments in our workforce. I expect on the programs would be largely done going out of this here, but I think some programs will have some momentum that will carry on into some improvements for fiscal '10 as well.

So I think the program has gone well. It has been very broad and we are seeing improvements across every organization every business unit in the company and so we feel it has been well and green by our approximately 16,000 employees and largely complete into this year, but I think still some benefits to show through in fiscal 2010.

Len Lauer

Phil this Len Lauer. On your question about MediaFLO devices where as we move through the year and really get into the fourth quarter of the calendar year we are excited on a number of fronts, one is well absolute feature phones out through our operator partners that are also entering the smartphone marketplace with a smartphone device.

We are also in partner with Audiovox. In the fourth quarter we will be launching into dealers and going into the rear end displays in cars in the US that will be aftermarket in the dealers, but also launching accessory capabilities to go out to existing devices to have the flow capabilities. So you will see an expansion of the devices both in handsets and also accessories that we will really start to I think establish us into being strong where the operators and more distribution channels with the consumers.

Operator

Kulbinder Garcha from Credit Suisse. Please go ahead with your question.

Kulbinder Garcha - Credit Suisse

Thanks and just a couple of questions, first of all for Bill just a clarification. Do you mention that though you could have further OpEx savings into 2010. And we then see OpEx could continue to grow slower pace and sales going forward for a few quarters after the clarification.

And, the second question is on the license renegotiation that was mentioned about six months ago. Qualcomm has been expecting to [accrued] that this fiscal year and can you give us any update in terms of how that deal might look in terms of upfront payment or not and any kind of idea on timing really. Many thanks.

Bill Keitel

I'll just try and to clarify on the cost side. Yes, we do expect some benefits to carry on into next year. And, I would say, yes, we are definitely planning at this stage that our operating expenses would grow at a slower rate than our revenues would for fiscal '10.

Derek Aberle

On the license extension, this is Derek. Again as I said, I think we are still confident that we will conclude this extension kind of in the timeframe that we have previously discussed. Again you know we have been so what cautious in terms of getting too much into the details. We do continue to believe that the agreement will include a lump sum component to it, as well as a number of other terms and conditions. So, I think that is also consistent with what we have said in the past.

Operator

Matthew Hoffman from Cowen & Company. Please go ahead with your question.

Matthew Hoffman - Cowen & Company

Quick review here on the infrastructure side. You have mentioned the royalties are little bit better on QTL. Can you go through of the OEMs, where you have, are there certain OEMs, where you see better royalty rates than others? Is there a mix issue on that front or is it just the overall infrastructure spending was better in the quarter? Thanks.

Don Rosenberg

Matt. Our infrastructure royalties over the years that I have described -- we have described a couple of times is lumpy, it's really more a function of network build outs and the timing of those. That’s been the nature of our infrastructure royalties for many years here.

Matthew Hoffman - Cowen & Company

As you look into the 4G roadmap here especially on the chipset side, I guess as you look at what’s going on with LTE. Can you update us on the chipset front there, and are you on target to hit all your milestones on LTE chips. Thanks.

Steve Mollenkopf

On LTE, we’ve announced the two products. We announced product about a little bit over a year ago or about a year-and-a-half ago, which was a data centric product that came in really three flavors, all of them multimode because we believe that the initial deployment in fact for some period of time. The deployments will require both the backward compatibility mode and a 4G mode as well.

That product is on track and doing well. We’ve also augmented our product line this February by announcing a smartphone as well which combines the processing power from our Snapdragon product with the modem of the product that I just mentioned, the LTE modem that just talked about. So, we have a fairly robust portfolio of products for LTE and I’d expect thus to do the similar thing to what we’ve done with the HSDPA or with DO, which is that we will move that through the portfolio as the market requires it.

Operator

Anil Doradla from William Blair. Please go ahead with your question.

Anil Doradla - William Blair

My question was regarding India and 3G options out there. Second half ‘09 has the options get completed. How should we be viewing the impact of that on QUALCOMM? Can we start seeing a blip a quarter or two from now just as we’ve seen with stronger demand in China and have you accounted that in your Q4 guidance going forward?

Paul Jacobs

So there still a little bit of uncertainty about the exact date of the auction. There are some reports coming out of India, talking about whether or not the government in a hurry to have those auctions. So, it’s not clear yet exactly when that's going to happen. It's likely that major impact of that would not be in this calendar year though. With that said, we continue to see a good growth in India, they passed the 100 million mark in CDMA. So, that was the nice milestone to pass.

Anil Doradla - William Blair

So, typically if the auctions are done, say on a certain date typically do the handset vendors start ordering chips a quarter or two before or what is the time difference between the auctions and their ordering chipsets from folks like you?

Paul Jacobs

In this case if the operators don't know whether or not they’re going to get a spectrum they won't be pre-building. So, it will take them some time probably the latter part of a year to build their networks out. They may have some early launches. So, you see that ramp happened and then often what happens in the new market is that multiple vendors will triumph or think that they’re going to get the same orders. So, we have to actually judge what the end demand is. You can see what's going on in the ramp with say China Unicom the good proxy here. We are seeing demand, but it's still little slow, as they continue to roll their network out.

Operator

James Faucette from Pacific Crest. Please go ahead with your question.

James Faucette - Pacific Crest

I wanted to quickly touch on chipsets, primarily both from a strategic perspective and also from a current market perspective, from a strategic perspective on Snapdragon. So, far we really only seen that product announced into smartphones. Can you talk just quickly about why you think that is and what point we will likely start to see that move more aggressively into other foreign factors and segments?

The second question is, you talked a little bit about pricing coming down, some going forward, and you seem to allude to that being primarily mixed driven. Can you talk about what type of pricing or competitive pressures you maybe seeing on the different segments of your chip businesses?

Paul Jacobs

On both of those questions, the first one on Snapdragon, what we did was we invested in this technology really for two markets, it’s a two market segments. The first one is really high-end smartphone, which the first one you’ve seen was the Toshiba TG01 as well as devices that we think crossover between a smartphone and a laptop the term that we could refer to as a smartbook.

We’ve talked a number of times about how the first of that second category meaning the smartbook phones will start to come out in the fourth calendar quarter of this year. We still remain confident in those launches. We do expect that market to develop over time paced primarily by how the software gets developed across the various players. There are a number of traditional software providers in the cellular space that are trying to pull that user experience up into this new class of devices. We are excited about supporting them and I think that will build through next year as well.

With regards to pricing, which was your second question? What we said was that we would see a marginal downtick in pricing pretty consistent with what we would see in our cases in cellular, which is that there is an ASP erosion. If you would have think about next quarter versus the quarter we just reported on, similar type of mix in terms of strong demand for the products that used data. So, we feel pretty good about how our ASP is going to hold up, given the normal trends that are in cellular. So, I think it's more of a strong story than perhaps your thinking.

Operator

Glen Yeung from Citi. Please go ahead with your question.

Glen Yeung - Citi

I just want to follow actually in the last question with respect to ASPs. I think part of what we’re seeing obviously the mix shift downward that’s likely being exacerbated by the economy. I wonder, if you can give us your thoughts on, what if any impact there maybe on ASPs to the extent the economies are getting better next year?

Paul Jacobs

On ASPs for next year, it’s a little too difficult to tell. One of the reasons is really that's what impact and what size will the China market see. We talked a bit about how difficult it is to predict new market launches and it tend to be lumpy in terms of demand, but in terms of the developed market, which we are starting to see, as we said the inventory stabilize, we feel pretty good about how the ASPs are holding up there.

Glen Yeung - Citi

Just one other question, the comment was made that the CSM business was actually very strong up until now. Is that being guided down for third quarter and went it well, even if it is or isn’t and what's your thought about calendar Q4 is there a potential for that business to change course?

Steve Altman

On the CSMs, we announced last quarter that we had a record shipments primarily DO Revision A and B capable. A similar type of shipment level this quarter not at the record level, but still very, very strong. We expect that to be to continue consistent with new carriers launching. I’d say though that from the perspective of our broader business, the CSM business tends not to be as financially significant, but it does indicate mix shift in the future, meaning that the fact that the carriers deploying DO Revision B capable infrastructure means that we expect reasonable demand for the handset in the future.

Operator

Adam Benjamin from Jefferies. Please go ahead with your question.

Adam Benjamin - Jefferies

I was just interested in asking some follow-up questions on the wireless LAN. You guys introduced the product there after quite some time, the Airgo acquisition. Just curious if you can elaborate on the strategy there going forward you partnered with (inaudible). If you could elaborate on that partnership going forward as well as your own solutions that would be helpful.

Steve Altman

Maybe two vectors there. On the very high-end, I think we have a vision of connected home are certainly devices in the home distributing a much higher data rates. I think those devices will tend to be connected more with cellular network than they have been in the past. So, you can envision our Femtocell product in our high day rate wireless LAN product perhaps coming together in a format that maybe very easy for the market to take.

So, in the high-end, I think we have a strategy to run that in the connected home. In terms of the more standard products and I mentioned that WCN1312, that’s really an extension of our existing integration strategy, where we think it’s important the attach rate goes up in the handset devices that we start to integrate those more tightly with our solution. So, really both of those vectors were driving now and as we have mentioned in previous call that really augment our existing Bluetooth capability as well.

Adam Benjamin – Jefferies

When do you expect to be shipping your own WiFi solution either it [combed] with somebody else's Bluetooth or standalone?

Paul Jacobs

We have been shipping Bluetooth for the last year and we expect the end of this calendar year to start to ship our wireless LAN solution.

Operator

Stacy Rasgon from Sanford Bernstein. Please go ahead with your question.

Stacy Rasgon - Sanford Bernstein

I just wanted to revisit again the device guidance for next year. So, I know historically, typically it have maybe 55% or a little bit more or little bit less of a shipment in the back end. I mean it’s obviously you've got a bit more of a ramp this time. It doesn't sound like its re-stocking, I’m just curious if you can give me a little more color on what actually is driving that ramp. Is the demand pickup, is it something else is going in the channel or what is it?

Bill Keitel

We think its demand pickup. We expect the channel law to be holding in this 14 to 15 week band. So, we do think it's a demand pickup. We have seen continued success with demand by the end consumer for advanced data services.

We continue to see operators doing well with data ARPU, its seems to be a healthy competition out there for enabling good affordable prices for the enduser and you add a large number of network launches and network upgrades. So, we think a little bit better improving economy as well. So, we think that the foundations there and we are hopeful of seeing will come true.

Stacy Rasgon - Sanford Bernstein

Can you give me any color on how much of that might be driven by handset demand versus demand for other devices that I guess non-handset demand that are also 3G?

Bill Keitel

We have indicated in the past that the data only devices market has been quite strong. We gave some estimates on that about 9 months ago. I was just to say that we continue to see that to be a very healthy market growing at a very strong rate stronger than the market as a whole.

Operator

Mark Sue from RBC Capital Markets. Please go ahead with your question.

Mark Sue - RBC Capital Markets

Just the over asked question in a different way, is there any share loss going on the chipset side perhaps at China Telecom. Then separately as it relates to Snapdragon any rough estimates on smartbook units next year and whether or not we should be worried about cannibalization with smartphones?

Paul Jacobs

The share as you are probably aware we actually don’t talk about that in terms of the quantitative numbers. As bill mentioned we feel pretty good about our share position at the moment and as exiting the fiscal year as well.

With regards to the Snapdragon and how it may cannibalize different markets. I think our view is that, that is a very much incremental market relative to the smartphone market. I think you will start to see and is evidenced in our customer base a lot of customers, which will cross over, but from the perspective of a handset person looking at this market it would look incremental.

Bill Keitel

I do want to just also come back to the point the question was asked on data devices. There has been some press reports on various markets notably some developing world markets and we just know, we’ve seen this in the past that as the some perhaps would tend to report a market. They often they don’t count a subscriber, who has a voice centric device and a data-only device. They don’t count that as two subscribers, obviously we do. So, you might be seeing some anomalies in terms of how you are picking up numbers from various sources versus what we're seeing here simply because of these data devices and subscribers having multiple subscriptions.

Operator

Craig Berger from FBR Capital Markets. Please go ahead with your question.

Craig Berger - FBR Capital Markets

Just help me understand a little bit more on the mirasol business meaningful (inaudible) here and what type of devices. Then separate is it the LTE, do we see the same type of royalty rate on LTE that you said on 3G chipset first.

Don Rosenberg

Just to clarify, you’re asking about a status in the mirasol business, your phone line was kind of breaken up.

Craig Berger - FBR Capital Markets

Some kind of what's the revenue part of this type of devices timeframe.

Paul Jacobs

We haven't started to project revenues for the mirasol display business. Yes, we’ve just launched the first fab it's coming up to speed and we are pleased with the traction that we are getting with customers obviously the first customers are going to be relatively small opportunity that we launch the technology into the market. From a technology standpoint as we look out, we have some nice demonstrations we have done on larger displays for motion video and enhance the color gamut. I think the roadmap looks good for us.

Derek Aberle

Let me take the LTE question. I think, as you all know, the multimode devices that have CDMA and WCDMA as well as LTE will continue to be covered under our existing CDMA, WCDMA agreement. We’ve also now signed eight, what we call single mode OFDMA subscriber agreement, meaning, one that do not include CDMA or WCDMA including with Nokia. We’ve stated publically as well as on our external website that we expect at this time based on our patent position in the standard during the LTE that we would expect to charge 3.25% for license to our essentials patent portfolio for the single mode OFDMA devices.

Steve Altman

This is Steve. I think it’s important to know is that, we believe strongly that as LTE rolls out, it will be rolled out in a multimode fashion. So, for a significant period of time our existing CDMA agreements will cover that.

Operator

Tavis Mccourt from Morgan Keegan. Please go ahead with your question.

Tavis Mccourt - Morgan Keegan

Two of them, first on in the QCT business, it looks like operating margins were as good as they’ve been in quite a while. I’m just wondering, is there a point, where it’s more difficult to continue expand margins in that business you have to keep on reinvesting over this something that we can expect margin to continue to expand as revenues ramp in the chip business

Second, not that it seems like you’ve got the spectrum, your ramping products would be with the FLO TV. Can you explain us a little bit how financially this will work in terms of added OpEx or CapEx of the next few quarters?

Steve Altman

I’ll take the first question. Yes, on this quarter we actually did have very strong profit percentage driven primarily by the leverage coming from the top line. So, I think it's a fact in this business that you have continue to invest in order to maintain your leadership position and that will be true moving forward.

We have seen and we expect this calendar or this fiscal year to exit that year or exit this year in a range that's more consistent with our historical level. So, we are pleased that the business is really return to the point, where we said it was going to be about two quarters ago, when we said that, when the orders return that we restore the leverage so.

Len Lauer

Then this is Len Lauer in here. Question about MediaFLO. We are close to finishing that the majority of the build out of the network, a lot of it was built out waiting for the DTV transition, we won’t limit key market, as Paul mentioned earlier.

Now we are pretty much in implementation mode of going out expanding, we said earlier the number of devices and also enhancing with our distribution partners. So, I said it's pretty steady state, you [shouldn't] have already expecting increases and what we have been doing and now we just looking forward to executing with the strong national network and hopefully having in better service out there.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for questions-and-answers. Dr. Jacobs, do you have any final or closing comments you like to make.

Paul Jacobs

I like to thank everybody for being on the call today. I was particularly happy to see the chipset shipments back to record level this quarter. It's nice to see that followed our projections, as we went into the downturn and to come out the way that we projected.

Also like seeing the uptick in the treasury portfolio we didn't spend too much time on that today, but I just want to say that our team there did a exceptionally good job this quarter. I’m also pleased by the fact that we have been managing the OpEx as well as we have particularly SG&A because, we have continued to able to grow R&D and we think there are a lot of exciting opportunities to address with our research and development.

Obviously we talked a lot about the trend towards smartphones and we are very excited by the smartbook opportunity with some exciting new partnerships as well as our strong existing partners. Then as we look forward we discuss these new geographies opening up and clearly this is the strong 2G to 3G transition, which is continuing is nice to see. We really happy after all these years to see that we are going to have the majority of the shipments the 3G devices going forward.

So, we are very happy with our competitive position. I think we have some great new products and great new technologies coming out over the next year and hopefully that will continue to show in our performance. So, thanks very much everyone.

Operator

Ladies and gentlemen this does conclude today’s conference call. We would like to thank you for your participation. You may now disconnect.

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Source: QUALCOMM Inc. F3Q09 (Qtr End 06/28/09) Earnings Call Transcript
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