Qualcomm Inc. F4Q09 (Qtr End 09/27/09) Earnings Call Transcript

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


Welcome to the Qualcomm fourth quarter fiscal 2009 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded November 4th, 2009. The playback number for today’s call is 800-642-1687. International callers, please dial 706-645-9291. The playback reservation number is 35746873.

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, Derek Aberle and Bill Keitel. Steve Altman, Len Lauer, and Don Rosenberg will join in the question-and-answer session. An Internet presentation and audio broadcast accompany this call, and you can access it by viewing 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 earnings release, which was filed and furnished with the SEC today and is available on our Website.

We will have transmitted our 10-K to the SEC by close of business today and it will be available for viewing at 6 AM Eastern Standard Time, tomorrow morning. We will also transmit to the SEC our financial statements and related footnotes in the extensible business reporting language XPRL format as required by the SEC by the close of business today as well. 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. I would also like to remind our listeners that our New York Analyst Day is this coming Thursday, November 12th. The analyst meeting will be webcast for those of you unable to attend.

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

Paul Jacobs

Thank you, John, and good afternoon everyone. I am very pleased with the performance of our businesses this past year. Despite a challenging and uncertain global economic environment, our operating performance remained strong, driven by continued 3G growth, execution in our chipset business and disciplined management of operating expenses. Before I comment on our business going forward, I would like to highlight what was a very successful fiscal 2009 for Qualcomm.

Our revenues for fiscal 2009 were within 1% of the midpoint of the estimate we made at the outset of the year. And excluding charges for the Broadcom settlement and the estimated KFTC buying, our pro forma operating income was above the high end of our initial guidance. Our focus on managing operating expenses yielded excellent results as pro forma combined R&D and SG&A expenses were 1% lower than fiscal 2008, significantly lower than our initial estimate.

As of the end of fiscal 2009, our cash and marketable securities balance was approximately $17.7 billion, up from $11.2 billion at the end of fiscal 2008. I am very pleased with this performance, given the global economic conditions this past year. This fiscal year, we returned nearly $1.4 billion of capital to our stockholders, including approximately $1.1 billion of cash dividend. We also raised our quarterly dividend 6% and recently announced another quarterly cash dividend payable on December 23rd of this year.

Through the end of fiscal 2009, we have returned nearly $11 billion of capital to stockholders, and we have $1.7 billion remaining authorization for stock repurchases. QCT continued to execute while successfully navigating through the severe inventory contraction. We announced our chipset collaboration with Nokia and the world’s first multi-mode 3G/LTE integrated chipset solution for handsets. We saw the first commercial Snapdragon device launched, and we continue to expand our broad chipset portfolio to address all market tiers.

Our MSM shipments estimate for the first fiscal quarter of fiscal 2010 represents the third consecutive quarter of more normalized demand, similar to what we experienced just prior to the inventory contraction. Our licensing business now has over 175 licensees and continue to foster innovation and competition that benefits the industry and consumers worldwide. We continue to license and enable new companies large and small that contribute in the growing 3G ecosystem.

We now have license agreements with more than 45 Chinese companies, 16 of which entered into licenses since January of this year. I am also pleased to report that we have entered into a 15-year extension of our license agreement with Samsung. There are many positive aspects of this agreement, which Derek Aberle will cover in detail later in this call. In FLO TV, we are expanding our addressable market with new devices and the launch of our direct-to-consumer offerings including the FLO TV Auto Entertainment System and the FLO Personal Television, which is a new dedicated device for mobile TV viewing.

Internationally, FLO technology has recently been officially recognized in Japan by the Ministry of Internal Affairs and Communications as an authorized technology for multimedia broadcasting services for mobile terminals. We continue to make steady progress on commercializing our mirasol color display technology. We are very optimistic about this innovative technology targeted for traditional handsets as well as new device categories such as e-readers. Recently the Wall Street Journal named mirasol displays a winner of one of its 2009 Technology Innovation Awards. In QWI, TIM Brazil announced that they will launch our Plaza Retail solution, and America Movil announced that it will deploy Plaza Mobile Internet and offer their Ideas Widget platform to over 190 million subscribers.

Also announced was an agreement with Verizon Wireless to promote growth on the BREW platform. Verizon Wireless and Qualcomm will also be focused on rolling out new features, such as the recommendation engine powered by our Xiam Technologies.

Turning to 2010, consensus economic forecast indicate that the global economic environment will continue to improve. However, the improvement will likely be at a slower pace than previous recoveries. While the global economic slowdown has had an impact on our estimates for calendar year 2009 CDMA device shipments, we continue to forecast growth for 3G in 2009, despite industry forecast projecting a decline in the total handset market.

In calendar 2010, we estimate that our CDMA device midpoint will grow approximately 20% over 2009, driven by the continued global migration to 3G as well as lower average selling prices of 3G devices, as an increasing number of manufacturers launched exciting competitive devices into this growing market. We expect further consolidation and price competition in 3G chipsets, and we will continue to invest in key areas to differentiate our integrated products from those vendors offering point solutions.

We also anticipate a higher mix of our single chip solutions that will further migration to 3G and emerging markets, provide competitively priced solutions across all tiers. We continue to increase our investments in integrated software multimedia and application processors to strengthen our leadership position in higher end feature-rich devices.

Wireless Intelligence estimate that 3G subscribers will grow approximately 165% by 2013 to 2.4 billion, and we believe our investments in highly integrated devices and our broad licensing program position us well to capitalize on the secular market trend. The 3G ecosystem remains vibrant with a growing number of devices, applications, and networks. According to the GSA and CDG, more than 80% of global operators are now offering 3G services and global 3G subscribers have now reached approximately 885 million, a 29% year-over-year growth.

Consumer demand remains strong for advanced 3G services and CDMA is enabling strong wireless data revenue growth for operators. According to Informa, the average revenue per user of the 3G subscriber is approximately 25% higher than that of a 2G subscriber. In addition, 3G CDMA growth continues to extend beyond traditional handsets, as demand for connected solutions for notebooks, smartbooks and other consumer electronics devices accelerate, such as the recent popularity of connected e-book readers.

The GSA reports that approximately 95% of WCDMA operators have now launched high-speed HSPA data services and the number of HSPA devices has grown more than 80% year-over-year. In addition, there are now over 25 HSPA Plus commercial networks deployed in 19 countries, and more than 25 additional operators have committed to deploy HSPA Plus in the future. CDMA2000 reached a significant milestone this year. According to the CDG, the subscriber base using the CDMA2000 family of technologies including wireless local loop surpassed the 0.5 billion mark.

EV-DO Revision A network deployments continue to increase as well. The CDG reports greater than 85% year-over-year growth in Revision A networks, with more than 35 additional operators currently deploying Revision A. This momentum has resulted in an approximately 200% increase in the number of EV-DO Rev A subscribers from this time last year.

I think 2009 will be remembered as a year of the smartphones. The value proposition for smartphones continues to be validated by operators, OEMs, and consumers worldwide. Informa estimates that annual smartphone shipments will exceed 0.5 billion in 2013, representing a growth of more than 150% over the expected shipments in 2009. These projected growth rates are attracting new entrants into the 3G smartphone segment, including several top notebook PC manufacturers.

Smartphone segment is also growing increasingly competitive. According to ABI, 45% of smartphones will be priced below $200 in 2014 compared to just 27% in 2009, providing a cumulatively-priced complete chipset systems solution remains the priority and we continue to invest aggressively in integrated solutions with support for high-level operating system.

We recently established a separate wholly-owned subsidiary that will focus on optimizing open source software with Qualcomm Technology for operating systems such as Symbian, Android and Chrome. These investments continue to strengthen our competitive position in the market, as our integrated and optimized solutions enable our partners to get to market quickly with feature-rich devices. Emerging markets continue to be a key growth driver as 3G connects the unconnected. Our investments in a diverse and growing portfolio of low-cost single chip solution enable OEMs to develop innovative cost-effective 3G devices for emerging markets, but it is expected that many consumers will experience the Internet for the first time on a 3G device.

Now, the availability of license spectrum remains an important issue as worldwide demand for mobile broadband applications and services continues to accelerate. We support the FCC’s efforts to increase the amount of license spectrum available for mobile broadband to meet the increasing consumer demand in the United States.

So, in closing, Qualcomm had a very successful year despite the challenging global economic environment. I would like to thank our employees and partners for their continued focus and execution to deliver the most innovative and highest quality products, applications and solutions to wireless consumers worldwide. We see significant opportunities in 3G next-generation wireless technologies and new non-traditional product services in the market. We will continue to make the key investments in research and development required to drive future revenue and earnings growth, and we will provide further updates and additional details at our Analyst Day in New York on Thursday, November 12th, and we look forward to seeing you there.

That concludes my comments and I will turn the call over to Steve Mollenkopf.

Steve Mollenkopf

Thank you, Paul. Despite the challenges that our industry faced this year, QCT continued to execute and I would like to review the highlights. Looking at fiscal year 2009, we shipped approximately 317 million chipsets. Our fiscal fourth quarter shipments of approximately 91 million chipsets represents an increase of 6% from our fourth quarter a year-ago. Overall, fiscal 2009 was marked by a challenging start, but a strong finish as handset inventories have stabilized.

QCT revenue for the quarter came in at $1.7 billion, a decrease of approximately 4% versus Q4 last year. Our revenue for fiscal 2009 was $6.1 billion, driven by the launch of more than 700 devices based on our solutions over the course of the year. QCT’s earnings before tax for the fourth quarter of fiscal 2009 was $508 million, which is a 13% increase versus the same quarter of fiscal 2008.

The introduction of new market leading products during the year enabled our weighted average revenue per MSM to have only a modest decline in fiscal 2009. Looking forward, competitive pricing pressures, combined with increasing demand from developed markets for entry-level products plus rising shipments of data-centric devices, which results in greater-than-normal downward pressure on our average revenue per MSM. This will continue to be somewhat mitigated by the ongoing strength of our high end product portfolio.

Market traction for both CDMA2000 and UMTS single chip products is strong as emerging markets continue their migration from 2G to 3G. More than 100 handset models based on our second generation, CDMA2000 single chip solutions launched in 2009 alone, while our UMTS single chip products are powering approximately 55 commercial handset designs launched at six carriers worldwide, with over 75 more handsets in design. We continue to see strong demand for our mobile broadband products, including our EV-DO Revision A and HSPA chipsets. We expect to see the initial deployments of EV-DO Rev B this calendar year, continuing into 2010 as operators respond to consumers’ demand for richer services on their mobile devices.

Our broad UMTS portfolio continues to gain widespread acceptance within the industry and our fiscal 2009 UMTS chipset shipments were up 24% year-over-year. Looking forward HSPA Plus and LTE present an important upgrade path for operators around the world, and QCT is unique in its ability to offer multi-mode solutions for these technologies. We are now sampling the MDM8220, which supports dual-carrier HSPA Plus and the MDM9600, the industry’s first multi-mode 3G/LTE chipset.

We remain on track to enable commercial device launches before the end of calendar 2010. Demand for our integrated smartphone solutions remained strong, as devices with high-level operating systems expand beyond the enterprise base to become increasingly mass market. We are pleased with our leading position in the smartphone segment as the vast majority of Android and Windows smartphones available today use our chipsets. As we stated previously, we are also working closely with Nokia to bring advanced devices based on Symbian to market, further broadening our ability to power smartphones running any leading mobile operating system.

We continue to execute on our broad integrated roadmap for smartphones. The first device is based on our new MSM7227 mass market solution are now entering the market with the introduction of Palm’s Pixi smartphones. We are now sampling the MSM7x 30 [ph] family of products, which feature the processor from our Snapdragon platform and upgrade to our mid-tier smartphone solutions.

Qualcomm is powering the highest performing smartphones with the Snapdragon platform. There are now four high-end smartphones on the market with our Snapdragon chipset, with several more anticipated to launch before the end of the year. The Snapdragon platform is also targeted at smartbooks, a new category of devices that scale up the smartphone experience to a larger display form factor. We expect that the first smartbooks will be announced before the end of this year, with 2010 expected to be the year that Snapdragon-powered smartbooks ramp the volume production.

QCT’s products are diversifying into numerous markets beyond the core handset segment. For example, IREX launched an e-book reader this past quarter, which leverages our embedded Gobi module for connectivity in both the US and Europe. Another example is our inGeo solution, which is powering the Little Buddy child tracker, available now at Best Buy as a customizable device providing real-time location updates via cellular and GPS.

QCT’s product portfolio also includes complementary technologies that enable us to broaden the products we offer to our customers. There are now over 40 customers using our Bluetooth solutions, with nearly 100 handset models in the market with our Bluetooth chips and over 140 more in design. Our overall Bluetooth product shipments in fiscal 2009 more than doubled compared to fiscal 2008.

Fiscal 2009 was a challenging year, but QCT has maintained its strong business operations and continues to execute. As a result, we believe we have finished the year in an even better competitive position than where we started. We have taken the opportunity to streamline our operations and reduce costs, while continuing to execute and meet our customers’ needs. We have a strong growth path for the future and look forward to doing what we do best.

Thank you and I will now turn this call over to Derek Aberle.

Derek Aberle

Thank you, Steve. As Paul said, we have entered into a 15-year extension and expansion of our license agreement with Samsung, one of our earlier licensees. Under the terms of the agreement, we have granted Samsung a license under our patents for their subscribing units and infrastructure equipment. In exchange for the license, Samsung will make non-refundable payments to us, totaling $1.3 billion and will also pay us ongoing royalties for among other things, sales of its subscriber units that implement CDMA-based standards, including CDMA2000, WCDMA and TD-SCDMA, as well as OFDMA-based standards including LTEs and WiMAX.

Samsung also has agreed not to resort its patents against us for our chipsets and agreed not to resort its patents that are essential to GSM, CDMA-based and OFDMA-based standards against our customers for use of our chipsets in their cellular products. In addition, Samsung has agreed to assign ownership to us of approximately 55 patent families, comprising about 300 patents and pending applications, many of which Samsung has declared as potential essential to WCDMA or OFDMA-based standards.

Although there are additional items of value being provided by Samsung under the agreement, the remainder of the terms are confidential, and we will therefore not be able to provide any further details. We believe this is a very positive agreement for both Qualcomm and for Samsung, and one that provides a solid platform for the companies to continue to expand their partnership for many years into the future.

Several years ago, we indicated that we had four licensees whose WCDMA subscriber unit royalty obligations needed to be extended before 2017. With this Samsung extension behind us, we have now concluded three of the four extensions. Further, we have now signed royalty-bearing license agreements, covering single-mode OFDMA subscriber units 9 companies, including Nokia, Samsung and another major handset OEM, which establishes the applicability and value of Qualcomm’s strong patent portfolio to OFDMA-based products. We are very pleased with the progress we have made so far and concluding an important single-mode OFDMA licenses and we will continue to focus on this area of our licensing program as we move forward.

That concludes my comments, and I will now turn the call over to Bill Keitel.

Bill Keitel

Thank you, Derek, and good afternoon everyone. We are pleased to report strong operating performance and execution this fiscal year, despite the challenging global economic environment. Revenues were $10.4 billion, within 1% of the midpoint of our original revenue guidance at the outset of fiscal 2009.

GAAP earnings for fiscal 2009 were $1.6 billion, and included a $155 million tax benefit, or $0.09 in earnings per share related to prior years and resulting from recent tax audits. Consistent with prior practice, we excluded this tax benefit from our pro forma results. Pro forma operating income was $3.2 billion and pro forma earnings for fiscal 2009 were $2.2 billion or $1.31 in earnings per share.

Our pro forma results included two unusual items. First, a $783 million Broadcom litigation settlement charge or $0.45 earnings per share, including $35 million taken in the fourth fiscal quarter, and secondly, a $230 million charge or $0.14 per share recorded in the fourth fiscal quarter, related to an estimated fine expected to be levied by the Korea Free Trade Commission, which we intend to appeal.

The $35 million Broadcom litigation settlement charge in the fiscal fourth quarter resulted from the write-off assets were initially capitalized. We recently reconsidered the accounting for these assets and concluded that the transaction is best treated as a single element for accounting purposes, and recorded in a manner consistent with this predominant benefit which was litigation settlement. If you exclude the Broadcom and Korea Free Trade Commission charges, fiscal 2009 pro forma diluted earnings per share would have been $1.89.

Our business continues to generate strong cash flow. Operating cash flow for fiscal 2009 was $7.2 billion, including the $2.5 billion cash payment from Nokia in October of 2008. Excluding this payment, operating cash flow was approximately 45% of revenue, and up 31% year-over-year. During the fiscal year, we returned approximately $1.4 billion of capital to our shareholders; this includes cash dividends of $1.1 billion and the repurchase of 8.9 million shares for $284 million.

QCT shipped 317 million MSMs in fiscal 2009, including 91 million MSMs in the fourth fiscal quarter, and the CDMA inventory channel is clearly stabilized in the second half of this last fiscal year. QCT’s operating margin was 23% for fiscal 2009 and 30% for the fiscal fourth quarter.

QTL’s operating margin was 85% for fiscal 2009 and 83% for the fiscal fourth quarter. We estimate that approximately 127 million CDMA devices shipped in the June quarter, driven primarily by sequential growth for CDMA2000 in North America as well as WCMDA growth in Europe and emerging markets. It is important to note that the terms of this Samsung license renewal addressed our third fiscal quarter of 2009 and our accounting in that quarter was consistent with the final contract.

We estimate the average selling price for CDMA devices was $196 for the June quarter and $200 for fiscal 2009. Pro forma R&D and SG&A combined expenses declined approximately 1% in fiscal 2009, including 7% growth in R&D spending, offset by 12% reduction in SG&A expenses. We are very pleased to see a $1.6 billion improvement in the value of our marketable securities portfolio during the second half of fiscal 2009, primarily as a result of appreciation in our fixed income securities.

We ended the fiscal year with a strong cash position of $17.7 billion, essentially no debt, and $674 million in net unrealized gains on marketable securities. I thought it would be helpful to provide you a summary of our earnings per share in fiscal 2009 fourth quarter as compared to the same quarter last year.

Pro forma earnings for fiscal fourth quarter 2009 were $0.48 per share compared to $0.63 in the same quarter last year. If you recall, the fiscal fourth quarter of 2008 including $0.15 of earnings per share related to Nokia from prior periods, and that was largely offset by approximately $0.14 of impairments on our investment portfolio. The fourth quarter of fiscal 2009 includes $0.16 of expense related to the KFTC fine and the Broadcom charge. If you were to exclude these, both quarters would have pro forma diluted earnings per share in the range of $0.62 to $0.64.

We are reducing our estimate for calendar 2009 CDMA device shipments. We now expect approximately 515 million to 530 million CDMA-based devices to be shipped, including approximately 310 million WCDMA devices and 213 [ph] million CDMA2000 devices. Based on the 523 million midpoint of our estimate, worldwide CDMA handset device shipments for calendar 2009 are now anticipated to grow approximately 9% year-over-year, whereas industry analysts are projecting a decline in the total handset market.

Our forecast reflects reduced expectations for worldwide WCDMA shipments, as well as CDMA2000 in India, Japan, Korea and rest of the world. A breakdown of our calendar 2009 device forecast is available on our Website. It is worth noting that although our forecast for 2009 total CDMA units has decreased, our chipset units forecast has held, indicating we are doing a bit better on chipset share.

Turning to our forward guidance, I will now begin with 2010. We estimate calendar 2010 CDMA device shipments will increase approximately 15% to 24% over our 2009 estimate. We are shipping through approximately 600 million to 650 million units. Based on the 625 million midpoint of our 2010 estimate, we anticipate shipments of approximately 231 million CDMA2000 units and approximately 394 million WCDMA units. Based on the current business outlook, we anticipate fiscal 2010 pro forma revenues to be in the range of approximately $10.5 billion to $11.3 billion, an increase of 1% to 9% over fiscal 2009.

QTL revenues will be somewhat depressed for parts or all of fiscal 2010, as they were in the fourth quarter of fiscal 2009 due to two licensee disputes. One licensee has continued to pay, but we are in arbitration and differing revenue recognition, and other licensee is underpaying. We are optimistic we will successfully conclude these disputes and if concluded in fiscal 2010, the associated revenue benefit is in the range of $200 million. There is the potential that one or both of these disputes will not be concluded in fiscal 2010 and the associated revenue would not be recognized until fiscal 2011.

With respect to the QTL royalty rate, as you would calculate it with the information we provide, our estimate for fiscal 2010 is in the range of our fourth fiscal quarter 2009, with upside potential when we resolve the two disputes. We expect a larger-than-normal decline in chipset average selling price in fiscal 2010, as we respond to 3G component suppliers trying to win sockets through aggressive pricing. We anticipate increased shipments of our lower-priced data-centric devices, as well as a greater mix of QSC integrated single chip products, which enable both lower cost entry-level devices for emerging markets and affordable feature-rich mid-tier feature phones for more developed markets.

We expect QCT gross margins to be largely in line with fiscal 2009, and we expect QCT operating margin to be in the range of 22% to 24% for fiscal 2010. However, the operating margin will fluctuate from quarter-to-quarter consistent with prior years. We anticipate pro forma operating income to be in the range of approximately $4 billion to $4.5 billion, an increase of 27% to 43% over fiscal 2009.

Given an increased stability in financial markets, we are reintroducing earnings per share guidance for fiscal 2010. We anticipate pro forma earnings per share to be in the range of $2.10 to $2.30, an increase of 60% to 70% year-over-year. Excluding the KFTC and Broadcom expense items in fiscal 2009, pro forma fiscal 2010 operating income is expected to be in the range of down 4% to up 8% year-over-year. Earnings per share are expected to be in the range of 11% to 22% increase year-over-year.

We estimate average selling prices for CDMA2000 and WCDMA device shipments combined to decrease approximately 6% for fiscal 2010 to approximately $189 as new 3G operators expand in emerging markets and 3G continues to take share from GSM.

We anticipate pro forma R&D and SG&A expenses combined to increase approximately 4% year-over-year, with the majority of this growth occurring in R&D. We anticipate our pro forma tax rate in fiscal 2010 to be approximately 21% to 22%. This is not included in the potential for our federal R&D tax credit extension by the US Congress. We estimate our GAAP earnings per share will be approximately $1.56 to $1.76 for fiscal 2010. This includes an estimated loss of approximately $0.19 per share attributable to QSI, approximately $0.28 per share attributable to estimated share-based compensation, as well as $0.07 per share attributable to certain tax items.

Turning to the first quarter of 2010, we estimate pro forma revenues to be in the range of approximately $2.55 billion to $2.75 billion, an increase of 2% to 10% year-over-year. We estimate pro forma earnings per share to be in the range of approximately $0.54 to $0.58, an increase of 74% to 87% year-over-year. This estimate includes shipments of approximately 89 million to 92 million MSM phone chips during the December quarter, and 130 million to 135 million CDMA-based devices shipped in the September quarter at an average selling price of approximately $198.

We believe channel inventory levels continue at the lower bands of the historical 15 to 20 week band, as we have observed for the last couple of quarters. We expect total company pro forma R&D and SG&A expenses combined to decrease sequentially approximately 3% and we expect our fiscal first quarter pro forma tax rate to be similar to our estimated fiscal 2010 rates. The Qualcomm Investor Relations Website includes an extensive slide presentation on the many data points included in this conference call, and we look forward to sharing with you additional data points regarding our fiscal 2010 guidance, including regional device shipment estimates at our New York Analyst Meeting on November 12th. The Analyst Meeting will be webcast for those of you not able to attend.

That concludes our remarks, and I will now hand the call back to John Gilbert.

John Gilbert

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

Question-and-Answer Session


(Operator instructions) Mike Walkley with Piper Jaffray, please go ahead with your question.

Mike Walkley – Piper Jaffray

Great, thank you. Maybe just start with changing your macro guidance, a couple of things, could you help us walk maybe through some of the regional changes and have you seen any mix shift from WCDMA back to GSM given some competitive pricing environment, and then also it just relates to your outlook, are you assuming that inventory stay at the same low levels in the next year or are you assuming somewhat of inventory recovery? Thank you.

Bill Keitel

Hi, Mike; Bill Keitel here. On the macro CDMA device market, so our midpoint estimate, we guided back in July was 565 million units for calendar year 2009, and our current midpoint estimate is approximately 523 million units. If you break that down, you will see on our Website, WCDMA Europe, we are estimating that to be down about 22 million from the 565 million midpoint breakdown, and then CDMA Japan, Korea, Southeast Asia, rest of the world combined to be down about 9 million. In both cases, those markets relate to what we are seeing a slower rebound and we have seen in prior recessions.

If you look at WCDMA Asia, down about 7 million units midpoint to midpoint. We think that’s a combination of 3G licenses and a bit slower ramp on 3G launches. For that WCDMA rest of the world, we are estimating that midpoint down about 9 million units. We think that’s more – the primary driver there is a little slow to market on the number of phone models and the price points is what we are expecting previously, but we see that coming along pretty well now. On the Americas, CDMA Americas, we increased our midpoint estimates there.

We think the primary driver behind our forecast there is just the operator of success and the consumer adoption of smartphones, and I think that about covers that. I would just also add, Mike, that we have incorporated all of these lessons learned as best as we can into our calendar year 2010 guidance and as you might imagine, our internal estimates came down from what we were previously working relative to the guidance we just gave here today. In terms of the inventory, correct, we are expecting the full calendar 2010 to be continued tightness as we have seen here over the last couple of quarters and as we are expecting here in the December quarter.


Our next question is from the line of Tim Luke with Barclays Capital. Please go ahead with your question.

Tim Luke – Barclays Capital

Thanks so much. Just a clarification and a question. Bill, you alluded to the ASPs moving somewhat in the chipset arena as you face some more price competition from some players, could you possibly give us the sense of the range of decline that you might expect, obviously for the handset side, you gave a very clear 5.5% to 6% decline, could you give us some sense of what magnitude we might be expecting and perhaps if you could give some color on where that is coming from? Is it from new players entering the market or from established players who are under pressure and being more aggressive?

And then secondly, in alluding to the non-payment licensees, could you give us some feel for when that period of non-payment began on that side? And just lastly, if I may, to clarify on the guidance, the coming quarter for the fiscal year is $0.56, just normalizing that through the year would imply somewhat higher than perhaps to me of your fiscal year guidance, how should we think about the shape of the year, are you expecting a very seasonal March for example? Thank you.

Bill Keitel

Hi, Tim; it’s Bill. I will try and take some of your points here. On the – we are expecting the average selling price of chipsets to decrease this year. We haven’t given a specific number to that. I would just say that as you probably know over the last several years, we probably averaged about in the range of about 3% decline per year. We are expecting it be substantially higher than that in this coming year. I would also note though, I said it in my prepared comments that we are expecting the gross margin in the QCT segment to largely hold with the results of fiscal ’09. So although, we are expecting a higher-than-normal price decline in our average selling price, the investments we have made in single chip solutions is proving out, and hence we think our gross margin percentage will largely hold.

Your question on the two licensees, I would just say that – I want to make clear, one of those licensees is paying and we are deferring the revenue. One licensee is underpaying and that started with the fiscal fourth quarter. So, we did not record those revenues, the respective revenues for the fourth fiscal quarter. For the coming quarter, yes, you are correct. If you analyzed our guidance for the first fiscal quarter, you would come to a higher number for the full fiscal year of 2010. We are expecting greater price declines as the year progresses relative to the first fiscal quarter.


Tal Liani from Banc of America, please go ahead with your next question.

Tal Liani – Banc of America

Hi. I had two questions that are related. The first one is what’s the accounting treatment of the upfront payment of Samsung, if you can provide us some details on the amortization schedule? And second, if you look at fourth quarter of last year and you look at fourth quarter of this year, then there is substantial growth in EPS, about 29% and that’s after I take out the $0.15 [ph] last year and head back to $0.14 this year, and I just don’t understand why would you guide EPS up next year only 5% or 4% in a year where everything needs to be better, and maybe it’s related to a decline in royalty rates related to Samsung, and I am just trying to speculate here? So, I understand the impact of lower pricing, but the question is whether there is something else which is related to other factors that you are baking in? Thanks.

Bill Keitel

Tal, it’s Bill. In terms of the accounting for the Samsung, we recently completed that deal. So, we haven’t worked through all of the accounting. We haven’t fully done an evaluation on the patent portfolio we are getting. So, we are still working through that. I expect we will share some detail next week in Europe, but I would say at this early stage, we think we got it pretty well covered in our guidance here we just shared for this year.

In terms of your question on trying to triangulate our fourth quarter results and our first quarter guidance relative to the full fiscal year guidance, you have alluded to maybe it’s in the royalty rate, the royalty rate as you would calculate it based on our disclosures for the fourth quarter of fiscal 2009 that we just reported is approximately equal to what we expect for as our, I would call it our baseline forecast for fiscal 2010. And there is some healthy upside to that if the two disputes we are working through will get resolved. So, it really does relate more towards the overall pricing on the chipsets, number one.

And number two, remember too, that the Samsung renewal, we have about a half year effective that in fiscal 2009. Then on the lump sum, again I would say we are still working through the accounting of that for the Samsung and expect we will share more on that next week in New York.


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

Tim Long – BMO Capital

Thank you. Just two related questions here. Could you just talk a little about if your outlook has changed for some of the broadband wireless, modems/dongles, embedded that type of thing and related to that in some of those companies are easing competitors? Just curious on the licensing side, how you expect to deal with in the GSM world, is a very large component of great market handsets out there that don’t pay royalties and our brand infringing, what do you expect to do as via and maybe MediaTek get into the CDMA and WCDMA worlds, what do you expect to do as far as making sure that you get paid by all of their customers that may not pay royalties in other technologies? Thanks.

Steve Mollenkopf

Tim, this is Steve Mollenkopf. I will take the first part and I think Derek will take the second part. With regard to the data market or the data-centric market, we continue to see that as being strong. It tends to be a market that favors new technology and takes it and consumes technology a little bit faster than some of the other markets. So, that continues to grow strong. As you probably heard from other calls, we see a similar trend where even though the handset market in particular areas, Europe would be a good example, the data market tends to be growing faster than that. So, we see that trend continuing as well. And then with regards to the license issue, I think Derek will take that.

Derek Aberle

It’s Derek. So, as of today, I think we believe that we are collecting royalties on most if not all of the CDMA volumes in China. We have in some of our ASIC agreement certain provisions that help us protect against the gray market type activity and to the extent we enter into new agreements in the future with other ASIC suppliers, we would expect to get similar provisions in those agreements, and think we have also been pretty public this year about the number of new Chinese companies that will become licensees. I think we are now up to something like 45 companies licensed and we have signed 10 to 15 – I don’t have the number right in front of me, 16 this year since January.

So, we are seeing a large number of companies take licenses, not just the large companies but a number of the mid and small companies as well. And so, although we are going to be very vigilant and we have got a number of strategies in place to try to guard against this gray market activity, and as we sit here today, we feel pretty good about our position there.


Maynard Um with UBS, please go ahead with your question.

Maynard Um – UBS

Hi. I had just a question on your WCDMA industry unit. Just a question on the unit elasticity to lower handset pricing, you know, at the midpoint of your WCDMA industry guidance, you are looking for an increase of incrementally 84 million year-over-year in 2010. 2009, you saw 46 million and in 2008, you saw 91 million. If I look at the market, you have got more operators globally, more handsets with ASPs coming down and other opportunities like notebooks. Are you layering in conservatism or lower replacements into the outlook because of the economy or are there other variables you are taking into account? And then secondly, if you could just provide on European Commission, I think people were expecting an initial ruling, maybe by October 25th? Thanks.

Bill Keitel

Maynard, it’s Bill Keitel. I will take the first part of your question. In terms of the WCDMA, we are modeling in a modestly lower replacement rate for 2010 as compared to 2009. We will get into a little more detail of that in New York, but it’s consistent with how we typically have been giving our guidance at the outset of the year. We are typically expecting a modest decline in the replacement rate, and this year’s guidance isn’t any different. In terms of beyond that, the market dynamics, we think WCDMA in developed world has done very nicely, penetrating the high and mid tiers, and now we are starting to see some price points that we think can work us stronger into the lower-tier market. So, and then, operator launches have been relatively strong and the upgrades have been strong. So, we are fairly optimistic on WCDMA looking into 2010. Does any of you – Don?


One moment please.

Don Rosenberg

Hi. Can you hear me?

Maynard Um – UBS


Don Rosenberg

Yes, this is Don. With respect to your question upon the EU, there was no specific date that was set for any kind of ruling. We have not heard yet one way or the other whether or not the EU will or will not bring a statement of objections where we are still cooperating with them and obviously we will let you know as soon as we know.


Brian Modoff with Deutsche Bank, please go ahead with your question. Mr. Modoff, your line is open; please go ahead with your question.

Brian Modoff – Deutsche Bank

Can you hear me now?


Yes sir.

Brian Modoff – Deutsche Bank

All right. With regard to the Samsung license, if you assume that they were paying around the average of 4% for WCDMA, with this 15-year extension, will there be a discount for adding LTE to the list in the near term or will that apply, if there is one, apply overtime as LTE becomes more significant in terms of the volumes. And then, a question for you, Steve, you mentioned Nokia, from our checks, you have two design wins there and you are targeting their platforms across the low end 40, 60 and then minimal, are things – is your relationship there improving, are there more design wins than you have been well aware of, and then looking at your chip business overall into next year, you have primarily garnered about 36% of the WCDMA market, shipping primarily into Samsung and LG in the top five. You know, how design wins was all five of the top five. How do you see that working into your business next year? Thanks.

Derek Aberle

This is Derek. I will go ahead and take the first piece of that. Obviously the structure of the new Samsung agreement is different than what they had historically, given the upfront payment they had. We are not today going to get into any disclosure of the level of the running royalties. But again, overall, we got multiple elements of value that we think we are very happy with, with the overall package, including the lump sum and the running royalty rate structure.

Steve Mollenkopf

So Brian –

Brian Modoff – Deutsche Bank

And the second part of the question?

Steve Mollenkopf

Yes, this is Steve. So, with Nokia, of course we don’t comment with individual design wins, but right now, the Nokia situation is really a matter of execution and we are continuing to make progress. You probably saw in the last week or so that we announced that we joined the Symbian foundation, which is again another milestone along the way. We continue to still a lot of resources in that area and still be a strong believer in that new account. And I think that’s off to a broad account where I think we bring a number of key technologies for the high end of their portfolio, particularly as they are moving out of being more of a vertical player to being more horizontal. I think that’s probably plays to our strength. You mentioned a little about share in WCDMA, I mentioned in my remarks that we thought that our chipset shipments in WCDMA were growing at a rate that was little faster than we talked about in terms of the overall market. So, I think that is an area where we feel pretty good about our share situation. So, right now, we are making a lot of investments in the smartphone area, trying to continue to grow those unique assets that we have, and we feel pretty optimistic about how that’s playing out.


Mark McKechnie with Broadpoint AmTech, please go ahead with your question.

Mark McKechnie – Broadpoint AmTech

Okay. Thanks, appreciate it. So, I wanted to ask you about, I guess about your chipset business, you had a pretty big June quarter, sort of flattened out at the 90 level here for a couple of quarters. Can you talk a little bit about what’s going on there and could you expect the March quarter to be up sequential, you know, you know, the Chinese New Year and maybe the end of some inventory turns or how should we look at that? Thanks.

Derek Aberle

Mark, I think what we saw over the last several quarters was really a big inventory correction as you know and I think during the quarter, we saw I would say pockets of replenishment, and then as Bill mentioned, we see kind of looking forward a much more stable or much more static inventory curves. I think the shipments now are probably more in alignment with the overall market, which is good. In terms of March, still early to talk about March, still at the point where we are looking at the December quarter, but other than the inventory comments that we made, I really don’t have much more to talk about in terms of the overall chipset market beyond December.


David Wong with Wells Fargo, please go ahead with your question.

David Wong – Wells Fargo

Thank you very much. Just a clarification of your answer to Tal’s question, the Samsung 1.3 billion, although you are not telling us quite how it’s recognized, does your guidance for the next fiscal year include that or if it’s anything that you recognize on top of your guidance?

Bill Keitel

David, we have attempted to include that. We will be refining it. As I said, we just concluded the Samsung agreement, so now we are working through all of the accounting, but I don’t expect a significant variation in our guidance when – as we get to New York next week.

David Wong – Wells Fargo

Okay. Thanks very much.


Simona Jankowski with Goldman Sachs, please go ahead with your question.

Simona Jankowski – Goldman Sachs

Hi, thank you very much. First, just a clarification, when I back into your royalty rate for the September quarter, we get about 3.4% [ph], which was a step-down from 3.8% in the prior quarter. And so, just to understand what developed that step-down, is that been your Samsung term or is that the two licensees deferring and/or underpaying the rate? And then the second question is as far as the two licensees and dispute, can we just put a little context around that in terms of how common is it for you guys to see this kind of disputes from licensees, what drove them to dispute the license terms, and then finally, how meaningful or material are they as a percent of your royalty business?

Derek Aberle

This is Derek. Let me try to take the first part of that question at least. As Bill pointed out in his remarks and I think one of his comments, basically the Samsung terms were effective both for Q3 and Q4 fiscal ’09. So, the delta between the implied rate that you are calculating for Q3 and Q4 would not be attributable to the Samsung deal. I think there’s a number of factors in it, including this deferred revenue that Bill talked about for Q4 as well as the underpaid amount for Q4, and obviously we always have some lumpiness quarter-to-quarter with things like infrastructure, royalties and order recoveries. So, I think there’s a number of factors that play there.


Kulbinder Garcha with Credit Suisse, please go ahead with your question.

Kulbinder Garcha – Credit Suisse

Thanks, and with just two clarifications really. The first one was for the new Samsung rate that you are experiencing already into your September quarter, is that correct, just wanted to be clear on that? And the second question was, on the QCT margins, did I hear right that you said that the QCT margins next drop to 22% to 24%, and I am just wondering what’s driving that? Is that just a mix shift? Are you investing them all, or what’s causing the margin decline after two quarters of 30% and what type of margins in QCT? Thanks.

Bill Keitel

Sure. First, to clarify on the Samsung rate, so we concluded – signed the agreement just really, days ago, but the agreement we accounted for it, we accounted for an estimate in our fiscal Q3 and as well as our guidance for fiscal Q4 of 2009. And so, now the agreement is finalized. Our fiscal Q3 was accurate, no need to change, so the terms are exactly consistent with what we expected when we gave guidance for Q3 and reported Q3 and it’s right in line with what we expected for fiscal Q4. So, some of the variations, differences people are looking to explain, it’s not related to the Samsung renewal.

On the QCT margins, the 22% to 24% guidance was for our operating margins. And the primary driver there would be the average revenue decline on the chipset. I would note that our gross margin percentage again, we expect to be largely in line for fiscal ’10 as compared to fiscal ’09. It’s just smaller revenue dollars, because of the, for example the single chip solutions, we are going to be seeing more, greater majority of chips shipped being as single chip solutions. And then there is another modest impact to that margin in terms that we are continuing to, as you know, we are growing, we are forecasted to grow our R&D for fiscal ’10, and then that is somewhat concentrated in our chip business.


Stacy Rasgon with Sanford Bernstein, please go ahead with your question.

Stacy Rasgon – Sanford Bernstein

Hi, can you hear me?

Bill Keitel

Great, sorry.

Stacy Rasgon – Sanford Bernstein

I had a question on device ASPs. So, it looks like the chipset ASPs might be coming under a little bit of pressure, but it looks like the device ASP environment both this quarter and maybe even looking forward is better than you thought originally. I am wondering or just a little curious what is actually driving that and how sustainable that might be going forward?

Bill Keitel

The device ASP, we are forecasting a decline for 2010 relative to 2009. But it’s not a large decline at that. We are forecasting a little bit of foreign exchange rate benefit there, it’s about $6 of foreign exchange rate benefit that we are forecasting. We think that’s pretty well locked in. But yes, I think that we are seeing some abatement in the rate of decline. The average selling price of WCDMA still remains a premium to CDMA2000, but that, that difference is significantly less than it was a year ago or two years ago.

So, there’s less of a change being driven there. And CDMA2000 is well down the learning curve, and with the upgrades that are occurring on the networks and the consumer appetite for smartphones and ever-increasing better phones, there is a higher degree in technology going into these devices, too. So, we are seeing the benefits of that.

Stacy Rasgon – Sanford Bernstein

Got it, thank you.


Mark Sue with RBC, please go ahead with your question.

Mark Sue – RBC

Thank you. Maybe we can switch gears and talk about Gobi and Snapdragon, are you finding that process to competitors (inaudible) which has limited your attraction, any thoughts on Qualcomm’s initiative to kind of accelerate design wins for Gobi and Snapdragon and any customer feedback so far will be great. Thank you.

Steve Mollenkopf

This is Steve. So, on Gobi, we continue to see strong adoption to that. I think the area that we are waiting to see a little bit of change in the market is actually how the data plans work. So, we continue to see the OEMs take on the designs. I think we have 50 plus notebooks models in the market today, and I think we have 100 plus that are actually launching with Windows 7 either in Q4 of this year or Q1 of next year. So, a strong design in traction, but I think the issue now that is being worked by the industry is really customer adoption.

With regard to Snapdragon, I think it’s probably two-part question really is, I think we are seeing more of a push really to integrate it than disintegrate it in terms of how we see devices unfolding, primarily because of some strong price pressure, and we think the only way to get there is really through integrated designs. The second part of the question really refers to how well the new device category, which we would call smartbook develops and that’s really going to depend I think on how the software rolls out, and I think there are a number of OS’ that are being used now in smartphones that will be pulled up into that device category, but it’s a little bit too early to tell how the consumers are going to react to that. We will find that out during 2010.


James Faucette with Pacific Crest, please go ahead with your question.

James Faucette – Pacific Crest

Thanks very much. I actually just wanted to follow up on the questions really in the chipset business, you have indicated in Qs, the good traction in market share gains from your design wins and you are also seeing some new integrated license. At the same time, talking about increased pricing pressure in the chipset business, should we anticipate it for next fiscal year? Can you just talk about the dynamics there and where you are seeing the pressure and the nature of that pressure, and I guess kind of walk through the impact and why it would impact your ASPs for next year, much more than as in previous years?

Steve Mollenkopf

This is Steve Mollenkopf. Really two effects, one is that there is a greater mix of emerging markets or very low end now going into our – for our demand versus what you have seen in the past, or at least the last quarter or so. That’s one effect. The other issue is really with the pricing pressure that’s going up, more of our customers are moving toward our single chip or our integrated single chip solutions, that enables us to react to the pricing pressure, but at the same time meet the same gross margin. I think these are investments that we made years ago, where we were moving toward having a single chip solutions, and as Bill referred to that a little bit in his remarks and we are seeing a mix of those two things.

Moving forward, I think we are going to see a similar effect to occur where the smartphone market is going to go through a, I think a bit of a consolidation in terms of suppliers, and the ability to react to those pricing pressures in which I think all of us as we those, you know, your ability to have the integrated solution, I think will determine whether you can do that or not. So, we are investing in that today, and you are seeing sort of the results in terms of our operating profit guidance.


And ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Dr. Jacobs, do you have any final comments you would like to make?

Paul Jacobs

Yes, I think fiscal 2009 was obviously a tough year, but I think we executed extremely well in all facets of the business. We really kept this innovation and product pipeline strong, built new relationships and we strengthened the existing partnerships. And if I look at the Samsung agreement as an example, we are really getting that done and extending out into not just 3G but into 4G as well I think, you know, very, very significant.

I am excited about the new Snapdragon devices that we are going to see next year and the fact that we are getting them from both existing partners and new partners who are entering the business, and then I also think that some significance that we spent year, trying to prep ourselves from a cost standpoint for tough competition in the chip business. We thought coming out of a downturn, that there would be players who are going to be quite aggressive as they try to maintain their businesses. And so, we prepped ourselves for that.

If I look forward, I am really excited by the amount of energy that’s going into the wireless space right now, and I think Qualcomm is really the best-positioned company to provide enabling technology to as many players as possible who are getting into this mobile broadband revolution. So, look forward to talking more about that to you in New York, and hope to see you there, and thanks everybody for participating today.


Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.

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