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QUALCOMM, Inc.(NASDAQ:QCOM)

F1Q07 Earnings Call

January 24, 2007 4:45 pm ET

Executives

John Gilbert - VP of IR

Paul Jacobs - CEO

Steve Altman - President

Sanjay Jha - COO

Bill Keitel - CFO

Analysts

Ittai Kidron - CIBC World Markets

Ehud Gelblum - JP Morgan

John Bucher - BMO Capital Markets

Maynard Um - UBS

Paul Sagawa - Sanford Bernstein

Tim Luke - Lehman Brothers

Brian Modoff - Deutsche Bank

Tim Long - Banc of America

Tal Liani - Merrill Lynch

Presentation

Operator

Welcome to the QUALCOMM First Quarter 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 January 24, 2007. The playback number for today's call is 1800-642-1687. International callers please dial 1706-645-9291. The playback reservation number is 4455-735.

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

John Gilbert

Thank you and good afternoon. Today's call will include prepared remarks by Dr. Paul Jacobs, Steve Altman, Dr. Sanjay Jha and Bill Keitel. An Internet presentation and audio broadcast accompanies 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 in Regulation G, you can find the required reconciliations to GAAP on our website. I would also direct you to our 10-Q and earnings release which were filed and furnished respectively, with the SEC today and are available on our website.

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

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

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Paul Jacobs

Thank you, John and good afternoon everyone. Let me begin by thanking the employees of QUALCOMM for their continued focus on innovation, execution and partnership. I am pleased to report this effort has resulted in many positive achievements for the industry, our partners and our business, as the worldwide number of 3G CDMA based networks and subscribers continues to grow.

I would like to congratulate Sanjay Jha on his well deserve promotion to Chief Operating Officer. You all know Sanjay well from his great work in QCT over the years, and his promotion is a recognition of the fact, that he continues to drive our largest division to operate with world class performance and that he will take an increasing role in our new technology development.

We are also very pleased to have Len Lauer join QUALCOMM. Len was formerly President and COO of Sprint Corporation and has many years of experience in the telecommunications industry. With his proven leadership capabilities and significant operational experience, we expect Len to contribute to the business immediately. The addition of Len will also enable a number of us to focus even more closely on some very important challenges and opportunities that lie ahead.

Turning to our financial results, our pro forma revenues were up 16% year-over-year to $2.02 billion. We delivered pro forma earnings per share of $0.43, up 10% from the year ago quarter. Together with our partners and licensees, we enabled record 3G shipments for both handsets and chipsets. It's evident that the convergence of wireless communications, information technology and content, continues to accelerate the demand for wireless broadband applications. These results highlight our continued successful execution; despite the increased legal costs we are incurring to insure the long-term success of our business and partners.

I would now like to spend a few moments highlighting some of the key achievements for our businesses. QCT shipped approximately 59 million 3G chipsets in the December quarter, a sixth consecutive quarterly record. In total, chipset shipments were up 26% from the year ago quarter, with UMTS up 66% and 1xEV-DO, up 99% year-over-year. We furthered our initiative to drive higher end chip functionality to the lower end mass market by introducing the first 1xEV-DO single chip solution the QSC6075, which along with our previously announced WEDGE and HEDGE single-chip solutions will bring low cost delivery of wireless broadband and rich multimedia features to a significantly larger base of wireless subscribers. We are committed to providing the most comprehensive array of cost effective, feature rich solutions to help our partners succeed and addressing the diverse requirements of the global wireless marketplace.

Our QTL business reported approximately 76 million CDMA-based handset shipments for the September quarter, an increase of 46% over the year-ago quarter. We now have over 140 licensees, the most licensed portfolio in the industry with over 75 WCDMA, TD-SCDMA licensees, and now three OFDMA single-mode licensees at our standard rates. Our licensing program continues to promote unparalleled innovation and competition that has benefited wireless consumers, operators and manufacturers globally.

In QW&I, BREW is gaining increased traction in Europe with multiple operator deployments, such as TIM in Italy and O2 in the UK, leveraging UI1 and higher data rates for multimedia, device personalization and 3D gaming.

In the US, Sprint will be utilizing QChat, the key application driving their iDEN to CDMA migration. Sprint recently commented on the competitive advantage that QChat Push-To-Talk over CDMA provides, and that QChat testing and the deployment of EV-DO Rev. A are on or ahead of schedule.

In QSI, we are working diligently to support the upcoming commercialization of MediaFLO with our launch partner, Verizon, who announced their intention to launch in the first calendar quarter of 2007. We are excited about this upcoming launch because Mobile TV will be the next compelling application, causing upgrade cycle in phones.

At the recent 2007 Consumer Electronic Show, we announced key licensing arrangements with CBS, FOX, NBC, MTV, Comedy Central and Nickelodeon to provide some of the world's best known content. These partnerships will help unlock the true potential of mobile media by delivering consumers their choice of TV programming directly to their mobile devices when and where they want it.

I would again like to thank Chairman Martin, the other commissioners and the FCC staff for their strong support of MediaFLO USA, and we continue to have fruitful discussions with other operators around the world.

Changing topics; we continue to see increased 3G deployments across the globe as 15 new 3G networks were deployed during the quarter. HSDPA deployments began in Sweden, the Netherlands, Romania, Australia, New Zealand, Canada, Chile and Malaysia. Carriers in Japan, New Zealand, Vietnam and the United States deployed EV-DO and EV-DO Revision A networks. These networks will enable higher voice capacity and data rates, supporting increased minutes of use in data intensive applications, leading to an increased competition in the marketplace.

CDMA-based handset shipments continue to grow faster than total worldwide handset shipments, and represent an estimated 29% -- the 259 million total worldwide shipments during the September quarter, as estimated by strategy analytics. This compares to 25% of the 208 million total shipments in the year ago quarter.

According to the CDMA Development Group, more than 183 operators have launched CDMA2000 1X networks and more than 51 operators have deployed 1xEV-DO higher data rates, higher data speed networks, including rollouts of EV-DO Revision A.

CDMA2000 continues to enable competition in affordable services in emerging markets. The CDMA Development Group recently noted that Indonesia has emerged as a growth area for CDMA2000 deployments with five commercial operators. CDMA2000 subscribers are benefiting from new services, such as video messaging as well as affordable devices and competitive rate plans. This competition is driven by a selection of over 100 devices in a wide range of prices.

The Global Mobile Supplier Association reports continued migration to WCDMA, as more than 144 GSM operators have migrated their networks to WCDMA, and more than 92 operators have launched commercial higher speed HSDPA networks. WCDMA handset prices declined again as sales volumes continue to increase.

Using Yankee Group estimates for total market shipments and our own royalty reports for WCDMA unit shipment, WCDMA handset sales represented 41% of total handset sales in Western Europe during the September quarter, up from 18% from the year ago quarter. And I am excited to report that manufacturers are beginning to trail the faster uplink speed of HSUPA.

I am also looking forward to executing on our expanded relationship with Motorola on UMTS. We are excited about the opportunity to partner with Motorola, to bring innovative solutions to the marketplace and grow both our respective businesses, just as we did in CDMA2000.

We are pleased that our partners continue to drive the market forward with innovative, leading-edge products and solutions for consumers and enterprises alike. The markets in Japan and the United States are good examples of this. End-users are continuing to realize increased applications and functionality at competitive prices. We are pleased to see the higher data rates and voice capacity of 3G networks continue to drive innovation and competition in the marketplace.

This past quarter, we also announced that more than 200 million mobile handsets worldwide have been shipped with our gpsOne Assisted-GPS technology. gpsOne position location technology enables new applications such as mapping and navigation with turn-by-turn voice commands and security applications.

In addition, according to the CTIA, approximately 200,000 wireless 911 calls are placed daily. We are proud of the fact that the gpsOne technology enables first responders to find and treat victims faster.

We are also very pleased that our Chinese manufactures have been gaining traction domestically and internationally in both CDMA2000 and WCDMA products. In fact if you aggregate our chip shipments of all Chinese manufacturers, the group would currently represent over 15% of all chip shipments, that's from the December quarter.

With cost effective innovative designs that meet the needs of many operators, I expect continued progress as we work together in preparation for the issuance of 3G licenses in China.

Turning to mobile broadband, our HSDPA and EV-DO chipsets are now being used in 100 commercial notebooks, from 15 manufacturers, and 16 operators worldwide. We are encouraged to see the increasing penetration in mobile broadband supporting enterprise services. And we continue to invest in research and development for higher broadband technologies, such as OFDM, and Ultra Mobile broadband. In fact, we have nearly 1000 OFDM and OFDMA patents and patent applications, as a result of our own internal development and the acquisition of Flarion. Today QUALCOMM has the only fully mobile commercial OFDMA system and we continue to build on this to deliver further broadband enhancements as we help move the market forward.

The future of wireless centers around the benefits of Convergence, where consumers will realize the best wireless experience and the flexibility to use the best technology for a particular application. Convergence will make it increasingly difficult for an unproven technology to make a compelling argument for manufacturers or consumers, whether it would be price, increased functionality or combination of both.

Before I close I would also like to touch on the situation with Nokia. Our negotiating team has yet to see anything that leads me to believe we are any closer to a resolution with the issues currently on the table. Clearly, we believe very strongly, that the intellectual property we have created is essential and that our vast licensing programs, speaks for itself in terms of fair and reasonable practices. We are committed to receiving fair value for our intellectual property as our research and development continues to try breakthrough innovations to the market.

In closing, I am pleased that we are executing successfully on our current and long-term strategic goals. I am also very proud of our ability to continue to deliver positive result to our shareholders, despite the increased legal costs to defend the various attempts to disrupt our business. It is evident that the innovation and competition our business model enables, has benefited wireless consumers, operators and manufacturers globally. I maintain steadfast in my belief that our business model has and will continue to be a positive force in the industry.

I would now like to turn the call over to Steve Altman.

Steve Altman

Thanks Paul and good afternoon everyone. We continue to see an orchestrated attack on our enabling business model by a small consortium of companies, that refer to themselves as Project Stockholm. As you all know, the Project Stockholm Group consists of six companies, including Nokia, Ericsson and TI, the number one global suppliers of wireless handsets, infrastructure and chipsets, respectively. One of the major objectives of Project Stockholm is to try and decrease the royalties that some of the group became obligated to pay us, when they voluntarily signed their agreements with us. We believe, however that their attack is motivated by more than just a desire to reduce the royalties they pay. Unlike the Project Stockholm members, QUALCOMM makes our innovation available to all of our licensees, who in turn use our innovations to compete effectively with the members of Project Stockholm.

The Project Stockholm companies hope to reduce the royalty revenue that we collect and thereby to reduce the funds available to us for reinvestment in creating new innovations that we share with their competitors.

Given the objectives of the members of the Project Stockholm, the concessions that they are demanding in order to resolve their claims and the impact to our business where do we -- where we to accept their demands, it is very clear to us that it is in our best interest to continue to vigorously defend our business against these attacks and assert our own rights.

Mounting of vigorous defense and asserting counter claims is expensive, but necessary. As Bill will discuss in more detail, we are significantly increasing our estimate of the legal expenses for the year. Litigation costs by their nature can be difficult to predict accurately. Predicting litigation costs in our current environment is even more challenging, given the large number of litigation regulatory matters in which we are participating.

Certain costs of the litigation are not in our control and could be impacted by actions taken by the opposing party or decisions rendered by the court or tribunal, responsible for determining the scope, timing and outcome of a particular matter. For example, in one of our cases against Broadcom, the court decided to divide the case into five discrete trials, each with a separate jury. This procedural development will increase the cost of the trial. Typically the most expensive phase of the case, many fold. Thus despite our best efforts to forecast legal expenses, variations from forecast will occur. The effect on these variations can be significant when there are many cases proceeding simultaneously. Nonetheless, we have refined our processes and redoubled our efforts to insure we are anticipating these significant expenses going forward as best as we can.

Although the legal expenses we now forecast for the year are more than we previously estimated, these attacks go to the heart of our business model and we feel quite strongly that is money well spent. I think it is important to share with you that we are thus far, very pleased with the results we have achieved since Project Stockholm first began their attacks. In our view, there have been three major [subset of] decisions rendered to date in the numerous cases ongoing with Broadcom and Nokia. We feel that each of these decisions have resulted in favorable ruling for us, and significant losses for our adversaries.

First, the antitrust claim that Broadcom filed against us in New Jersey were similarly dismissed in their entirety, which demonstrated to the industry that our licensing and business practices do not violet any Antitrust laws in the US. Although, Broadcom is appealing the court's ruling, we expect that other jurisdictions will pay careful attention to this decision. The decision also undercuts any similar claims that other member of Project Stockholm may have tried to make. Perhaps in recognition of that fact; Nokia, Ericsson and TI have collaborated to file a joint brief with the appellate court in support of Broadcom's appeal to decision.

Second, Broadcom files an action with the ITC asserting three patents against our MSM chips. Broadcom's clear and expressed objective in filing the ITC action was to obtain a remedy in joining our licensees from shipping handsets with our MSM chips into the US. Although still subject to review by the full commission, the administrative law judge who presided over the ITC action has recommended against providing Broadcom with the remedy at site.

Third, as many of know, Nokia filed an action against us in Delaware, asking the court among other things, to rule that a company who commits to license on fair and reasonable terms free from unfair discrimination, or what you will commonly hear referred to as friend, is not entitled to an injunction. The court has ruled that it will not precede with Nokia's claims as they relate to GSM, and has instructed Nokia that to precede with its case on WCDMA; Nokia, must first admit that it will infringe specific, identified, essential QUALCOMM patents for WCDMA. As a result of the Delaware court's ruling, Nokia's main objective in filing this action which was to attempt to prohibit us from seeking injunctions in our GSM cases has failed.

As we look ahead there are some important cases that will be heard this year, that I am sure many of you will be following closely. In the ITC, our claims against Nokia's GSM handsets are currently scheduled for trial in March. Our patent infringement cases against Nokia's GSM products are scheduled to occur in the UK in July and in Germany in September. We have a series of trial with Broadcom in the coming months. The first trial which involves infringement by Broadcom's chips of our patents related to high definition video began about two weeks ago, and will conclude in a few days.

The remaining cases include our claims for patent infringement by Broadcom's GSM and WiFi products, and for Broadcom's misappropriation of certain of our trade secrets as well as infringement claims by Broadcom's against our CDMA chipset.

I am often asked that the current cost we are incurring to defend our business model should be expected to continue long-term as a normal course of business. While it is difficult to predict, I can't say that the current environment represents an unprecedented level of attacks on our business. Whatever your assumptions are for the ultimate outcome, we believe that when these disputes are ultimately resolved, there will be a substantial reduction in the amount of money spent on legal fees going forward.

Let me turn now to the status of our discussions with Nokia regarding extending their CDMA agreement by April 9, 2007. Although we have had discussions with them during the quarter, we have not made any significant progress and continue to feel it is unlikely that we will conclude such an extension by the April deadline. In July 2001, we entered into an extension with Nokia. Under that 2001 extension, Nokia agreed to pay royalties on WCDMA at the same rate as they pay CDMA2000. They also insisted upon and received an option to extend that 2001 agreement beyond 2007. If Nokia does not exercise its options by the April deadline, then we will have a 140 companies licensed under our intellectual property and paying us royalties, and we will have one company, Nokia that is unlicensed and infringing. Nokia will need a license under our patents in order to participate long-term in the CDMA market.

We are excited about the continued ramp of CDMA products and have forecast a significant growth year-over-year of WCDMA handsets. We have worked hard to enable existing licensees and new licensees that enter this growing market with access not only to our chipsets, software and intellectual property, but also to third party's intellectual property as a result of the chip and software licenses that we have obtained, that enable our customers to avoid paying royalties to many other patent holders.

In this regard, we recently signed agreements with two companies, licensing our chip and software products under those companies' essential WCDMA, CDMA2000 and GSM patents, which included the ability to pass-through those patent rights to our chipset customers. We believe that these additional rights that we acquired provide substantial value to our chipset customers. In fact prior to our acquisition of these rights, the significant number of our chipset customers were paying royalties for licensees under some of these third parties essential patents and as a result of our expanded rights well in the future be relieved from continue to pay such third party royalties on sale of their subscriber units to use our chipsets and software.

Let me now briefly update you on what we are seeing in some of our markets around the world. In Japan 3G competition continued to DoCoMo launched HSDPA in August. Softbank launched HSDPA in October; and KDDI launched EV-DO Rev A in December. Local number portability came into effect on October 24 and early report shows strong 3G performance as a number of 3G subscribers reached $63 million or 66% of total cellular subscribers. The U.S. market again experienced solid subscriber growth as consumers migrate to higher end devices and take advantage of data intensive applications such as multimedia and downloadable navigation.

Sprint entered the calendar year exceeding its coverage goal of $40 million profits for EV-DO Rev A. We are also pleased to see the very positive progress with 3G and Cingular and as mentioned earlier Verizon has announced that its Vcast TV service using our MediaFLO technology will be available in the first calendar quarter.

According to our licensee reports for the period ending September 2006, CDMA2000 handsets in India increased approximately 48% from the prior reporting period. As of December 2006, India now has a cumulative base of over 44 million subscribers an increase of 15% from September 2006. In Korea total subscribers reached the 40 million mark of which 96% are CDMA2000 subscribers. In addition over 35% of the CDMA subscribers in Korea are now utilizing the broadband benefits of EV-DO.

Moving to Europe, we are starting to see early positive results of the higher-speed data applications that HSDPA enables. Vodafone reported that the third quarter 2006 data revenues increased 29% year-over-year. We are optimistic that the positive market response to the higher data speed HSDPA delivers will continue to grow just as they did with EV-DO in the U.S. The 3G for all initiative will also be a positive event for the marketplace as the prices for 3G devices will become more affordable enabling 3G devices to continue to take share from GSM.

I would now like to turn the call over to Sanjay Jha.

Sanjay Jha

Thank you, Steve. QCT had a very good start to fiscal 2007. I would like review our results with you. In the first fiscal quarter, QCT generated revenue of $1.23 billion this was our third consecutive quarter of record revenue, year-over-year this represents growth of 19%. We shipped approximately 59 million MSM chipsets in the first fiscal quarter and as Paul noted this is the sixth consecutive record setting quarter for our shipment.

Compared to the previous quarter, this represents growth of 5% and a year-over-year growth of 26%. QCT record performance can be partially attributed to the doubling of CDMA2000 and EV-DO chipset shipments year-over-year. This was driven by increased demand in North America and Asia for our products that enable devices which deliver mobile broadband services. We also enjoyed strong growth and demand for our CDMA2000 1X product led by the emerging market. Along with the continued growth in CDMA2000 1X we also saw continued growth in diversification of our key customer base.

UMTS chipset shipments increased 66% year-over-year, we anticipate continued strong growth due imparts to the strong portfolio of our current customers as going into the new year based on their HSDPA and HSUPA leadership and to the expansion of our relationship with Motorola to collaborate with us on UMTS. Motorola's approval of MSM's for use in the UMTS devices was first announced this past November and our teams are working closely together to bring commercial products to the market.

With 140% year-over-year increase QCT continues to set record numbers of CDMA2000 cell site-to-modem voice equivalent channel element shipment indicating that CDMA2000 EV-DO and EV-DO Revision A networks have been deployed across the world at an accelerating rate. The growth in demand for channel elements is also a leading indicator of future increase and demand for handsets based on DO and DO Revision A chipset. With an eye towards future growth QCT introduced our new Snapdragon platform. The Snapdragon products will expand QCT's capabilities beyond our core mobile handset market and allows us to target consumer electronics and computing devices. Products based on Snapdragon chipset will leverage our 1 Gigahertz low pass Scorpion microprocessor and have mobile broadband connectivity. Our technology leadership in high speed mobile data allows us to focus on bringing 3G to mass market tiers.

QCT expanded the QUALCOMM Single Chip products family by introducing the QSC6240 and QSC6270 to now support wideband CDMA and HSDPA in a single chip. Mobile broadband can now be accessible to our wider base of wireless users with the cost saving and slim form factor that QSC delivers.

QUALCOMM acquired Airgo Networks and Bluetooth business of RF Micro Devices in the first quarter of fiscal 2007. Airgo brings us 802.11n MIMO technology for next generation WiFi capabilities to support HDTV streaming and other very high speed data application. RFMD's Bluetooth Group gives us advanced Bluetooth capabilities, and enables us to offer our customers an even more integrated solution. The technologies from these two acquisitions compliment our current technology portfolio, and will help us to bring to market anytime, anywhere connected experience.

As we expect our volumes to increase significantly overtime, QCT is strengthening our relationship with leading wafer foundries and advanced technology partners, TSMC and UMC. We also announced this past quarter, that we are working with a common platform to produce our chipsets. The common platform foundries are IBM, Samsung and Chartered, are sourcing to common platform as part of our overall integrated fabless manufacturing business model, which involves working with numerous supply partners to support our growing business, while enhancing efficiency.

QCT and corporate R&D are now much more closely integrated, which allows us to maintain our leading edge in HSPA plus UMB and LTE technology. As an example the corporate R&D team will be conducting demonstrations of free Ultra Mobile Broadband or UMB Technologies beginning this March. We will be setting up a full mobility network with three cell sites in San Diego as a test bed for quality of service, network migration, applications and services to drive superior wireless broadband technologies for the future.

I will now turn this call over to Bill Keitel for an overview of our financial results.

Bill Keitel

Thank you Sanjay and good afternoon everyone. We are pleased to reaffirm our calendar year 2007 CDMA-based handset forecast, as well as our most recent fiscal 2007 revenue and pro forma earnings per share guidance, reflecting continued healthy demand for CDMA-based products and services around the world. Our guidance includes the estimated $0.04 dilution from our recently announced acquisitions of Airgo and the Bluetooth business of RFMD. I'll now highlight a number of key items in our first quarter fiscal 2007 results.

GAAP earnings for the first quarter fiscal 2007 was $0.38 per diluted share including $0.05 in estimated share-based compensation, $0.02 in tax benefits related to prior years, and a $0.01 loss attributable to QSI. Revenues increased 16% year-over-year, to $2.02 billion, and pro forma earnings per diluted share increased 10% year-over-year to $0.43 per share. QCT achieved new records for revenues in MSM shipments. Year-over-year revenues increased 19% to $1.23 billion and MSM shipments increased 26% to 59 million units.

QCT's operating margin was 26%, down sequentially as we continue to grow R&D investments in new chip development, as well as increased legal expenses. QTL reported revenues of $600 million this quarter. We are deferring royalty revenue recognition for our licensee, Pantech. And for the foreseeable future we will record revenues on a cash basis, while they work through their debt restructuring plans.

Our licensees reported approximately 76 million new handset units shipped in the September quarter. We estimate the average selling price was approximately $210 per handset, with WCDMA royalties representing approximately 44% of reported royalties. We believe WCDMA unit sales in Japan decreased sequentially as subscribers reduced new phone upgrades in advance of number portability.

Estimated handset shipments increased sequentially for North America, Europe, South Korea and India during the September quarter. Inline with our expectation, worldwide ASPs for WCDMA handsets decreased approximately 6% from the prior quarter with wholesale price points as low as a $124 for low end models.

The ratio of QTL revenues to new handsets shipped decreased this quarter due to a number of factors including Pantech revenue deferral, a recent transaction where by we acquired valuable additional pass-through rights, changes in market share of licensees, as well as continued market development funds. QTL's operating margin was 82%, down from 89% in the fourth fiscal quarter based on the previously noted factors as well as reserves for bad debt expense related to Pantech and increased legal fees.

QWI segment revenues and operating profit increased 5% and 18% year-over-year, respectively, on the strength of our QIS business. In our QSI segment, MediaFLO USA's network build out is proceeding on scheduled to support the first commercial service launch later this quarter. We will be expanding network coverage as the year progresses.

The tax rate for total QUALCOMM was 17% for the quarter primarily reflecting Congress's decision direct to retroactively extend the Federal R&D tax credit program. Our pro forma tax rate for the quarter was 24% and this rate excludes the R&D tax credit attributable to fiscal 2006. Operating cash flow continued strong at $789 million for the first fiscal quarter, up 32% year-over-year. Pro forma free cash flow was $544 million, 27% of revenue.

During the quarter we announced dividends of $198 million or $0.12 per share which were paid on January 4, 2007. In addition we repurchased $96 million of our common stock.

Although our share repurchase activity was limited again this quarter, we continue to believe that our stock is undervalued. From time-to-time, we make judgments that due to dependency of potential significant events, for example, earnings announcements, litigation, major contracts or acquisitions, it would be inappropriate for us to be in the market for our stock until such events have been concluded and disclosed. Fortunately, we have a lot of exciting things happening at QUALCOMM, unfortunately from time-to-time that impedes our ability to execute on the stock buyback program at the pace we would otherwise choose.

Lastly, we consolidated our satellite equipment business into our QWBS division, which is reported in the QW&I segment. And we eliminated the intersegment royalty charge to QCT by QTL. You can find a supplementary scheduled on our Investor Relations website, summarizing our historical segment results including both the segment change and the intersegment royalty elimination.

Turing to our guidance; for the calendar 2006 CDMA market, we now estimate that shipments were approximately 294 million to 298 million new handsets, a 2 million unit increase in the midpoint as compared to our prior estimates. Based on the 296 million midpoint of our new estimate, we anticipate approximately 198 million CDMA2000 units and 98 million WCDMA units were shipped worldwide in calendar 2006. As of the end of December we estimate that channel inventory levels remain within the 15 to 20 week historical band.

For the second quarter of fiscal 2007, we estimate revenues to be in the range of approximately $2 billion to $2.1 billion, a 9% to 15% increase year-over-year.

In November, we guided second fiscal quarter pro forma earnings per share of approximately $0.42 to $0.44, a 2% to 7% increase year-over-year. We are reaffirming that estimate as we now anticipate greater second quarter revenues and improved operations will offset higher legal expenses and acquisition related earnings dilution.

We anticipate shipments are approximately 55 million to 57 million MSM phone chips during the March quarter, a slight decrease sequentially, which is consistent with historical seasonality. We expect chip ASPs to decrease modestly on a sequential basis due to the normal price erosion. We estimate that approximately 82 million to 86 million CDMA based handset shipped in the December quarter at an average selling price of approximately $217, driven by increased sequential shipments in multiple regions around the world, notably WCDMA in Europe and Japan and CDMA2000 in the U.S. and China. We anticipate second quarter pro forma R&D and SG&A expenses combined will increase sequentially approximately 1% to 4%.

Turning to the full year, we are reaffirming our estimate for the calendar year 2007 handset market and we continue to exclude a forecast for 3G licensees in China. We expect total shipments of approximately 368 million to 388 million units in calendar 2007, an increase of 24% to 31% over our midpoint estimate for calendar 2006.

The 370 million midpoint of this estimate is comprised of approximately 203 million CDMA2000 units and approximately 175 WCDMA units for calendar 2007. We are reaffirming our most recent revenue and pro forma earnings guidance for fiscal 2007. We expect fiscal 2007 revenues to be in range of approximately $8.1 billion to $8.6 billion, an increase of 8% to 14% over fiscal 2006.

We anticipate pro forma diluted earning per shares to be in the range of $1.72 to a $1.77, an increase of 5% to 8% year-over-year, consistent with our prior guidance. We estimate average selling prices for CDMA2000 and WCDMA phones combined, would decrease 2% in fiscal 2007, to approximately $210. This is modestly above our prior estimate due to greater demand for data features.

We expect QTL's operating margin to be approximately 86% and QCT's operating margin to be approximately 26% for fiscal 2007. We now anticipate our pro forma effective tax rate for fiscal 2007 to be approximately 25%. We expect the combination of pro forma R&D and SG&A expense to increase approximately 22% to 30% year-over-year. This estimate incorporates operating expenses for the acquisitions we completed in the first quarter, and adds a further increase for legal expenses.

We have previously disclosed that legal fees increased approximately $100 million in fiscal 2006. For fiscal 2007, our plans now include more than $200 million in legal expenses to vigorously defend our business model in multiple significant cases. For fiscal 2007, we expect greater operating efficiencies will offset our forecast for increased legal fees.

We estimate GAAP earnings per share will be approximately $1.44 to $1.49 for fiscal 2007. This estimate includes a loss for approximately $0.10 per share attributable to QSI, a loss of approximately $0.20 per share for estimated share-based compensation, and a benefit of $0.02 per share for certain tax adjustments related to prior years.

As a reminder, our full year fiscal 2007 guidance assumes the renewal of Nokia's license agreement prior to April 2007. If we are unable to resolve the licensing issues, our earnings are at risk for an estimated amount of $0.04 to $0.06 per diluted share in fiscal 2007.

In closing we see QUALCOMM in the broader CDMA market are off to a good start for 2007, with new products and services and greater competition, fueling the increased adoption of 3G CDMA around the world. We are pleased with our business execution, our R&D investments, and the many opportunities ahead. As well we remain steadfast in a vigorous defense against those attempting legal avenues to challenge our successful and pro-competitive business model.

That concludes my comments. I will now turn the call back over 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 is to address as many questions as possible before we run out of time on this call. Therefore, I would like to ask our participants to limit their questions to one per caller. Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ittai Kidron.

Ittai Kidron - CIBC World Markets

Hi guys, couple of question from me. First, with regards to the chipset business. Can you give us little bit more color on how should we think about ASP erosion, given the mix of handsets and the continued decline in introduction of lowest cost or lower price WCDMA handsets, and second there was some discussion in the past about possibly you and Nokia are going into arbitration, is that a possibility?

Sanjay Jha

This is Sanjay, may be I could take the chipset ASP question. We anticipate year-over-year less than 5% decline in ASP of our chipsets. This is driven by two factors, one, increase in EV-DO and DO Revision A and wideband CDMA chipsets. And that is offset by increase in low-end CDMA2000 and also now increasingly low-end wideband CDMA chipset shipment. Both of these low-end products are clearly in our strategic interest, and we are very motivated to drive both of those to marketplaces. But, a combination of these factors lead to around 5% or actually less than 5% decline in our ASP year-over-year.

Paul Jacobs

As for the arbitration comment, this is Paul, since I was quoted on that. What actually happened in that interview was, I told the reporter that I thought the negotiations were not going anywhere, and therefore it seemed likely that some external event, whether it was deadlines or some judicial thing or some other external event might be the impetus that would cause things to move along. The reporter herself took that to be arbitration, although I specifically told her that, that wasn't the case necessarily and so that's where that came from.

Operator

Your next question comes from the line of Ehud Gelblum.

Ehud Gelblum - JP Morgan

Hi thank you very much. Quick question vis-à-vis the December 21st announcement and the restatement of that numbers, of your expectations. Bill, the difference between when -- then when you said the high you would end up with revenue in the high-end of the range that was because of the 2.07 -- 2.08 and today we end up with 2.02. You had already known that Pantech would not be in the numbers and my guess is that some of the acquisitions you have made and some of the share shifts were probably known to you. Can you give us a sense as to what the differences were between what you thought on December 21 in terms of revenue and how we ended up today. And also if you could just give us little explanation in the interest income line which seemed very strong this quarter and partially down just a little bit?

Bill Keitel

Sure Ehud, on your first point on the new segment results, of course, it had no impact on our revenue. At December -- mid-December, I did think we are going to come at the high end; we came in slightly lower than that. There were few transactions that could have finished up the year-end that were a little less favorable than what I had hoped for. But nonetheless, I think it was a good revenue quarter, a strong quarter at that. On our investment income line, the team has been doing a good job there and quite notable as well, Cap gains are tax free to QUALCOMM because we are still consuming a capital loss carry forward. So I think the monies are prudently invested, but invested well nonetheless and so we are showing good returns there.

Operator

Your next question comes from the line of John Bucher.

John Bucher - BMO Capital Markets

Thank you. In the 10-Q you've mentioned the legal and bad debt expenses for the 82% operating margin in QTL, and then Bill, in your commentary you also mentioned that there were some expenses associated with the obtainment of some pass-through rights and some MDS. I am just wondering if there is anyway you can quantify or give us a feel for what percentage Pantech was versus the other things that depressed the operating margins and since you indicated that for fiscal 2007, you are expecting 86% margins, which of those are likely to be going away? Thank you.

Bill Keitel

Sure John. So -- of the factors I mentioned, there were a number that are contra revenue. Pantech was contra revenue, doing market development with customer is contra revenue and then there was a transaction, we mentioned where we acquired pass-through rights, that accounting will extend out over many years, but for the quarter alone a piece of that was contra revenue. Then the bad debt expense and extra legal expenses, those obviously are in the operating costs. The greater impact to the margins was the contra revenues as a whole. At 83% for the quarter I am expecting a good rebound into the second quarter and holding that pretty well throughout the year.

Operator

Your next question comes from the line of Maynard Um.

Maynard Um - UBS

Hi, thank you. If I could, kind of a bigger picture for Sanjay. When you look at what's happening in the industry and the consolidation around the top five handset vendors. How do you feel about the level of competition on the chipset side? Do you expect to see further consolidation here and do you think that might ease ASP or any margin pressure in your business? Thanks.

Sanjay Jha

Maynard, we certainly see the consolidation occurring in the handset space right now and my expectation, as I have indicated before is most likely there will be between 3 and 4 -- 3 or 5 chipset manufacturers, who will have the ability going forward to invest in R&D at the level that's necessary to stay competitive. And as you know today, I believe that I have counted 20 competitors and more are joining the queue rather than getting out. There has, of course, been some consolidation already, but as I say again more people are joining the 3G chipset supplier queue, than perhaps in the long-term can be justified.

I see that there has to be consolidation, how that consolidation occurs is just not clear at the moment and I think that's one of the uncertainties going forward in wideband CDMA chipset business. We have indicated that we will participate if we [thought] its meaningful for us in that consolidation process. But I would also say that we view ourselves as one of the better positioned companies in terms of various different assets from a point of view of RF, power management, baseband, the protocol stack, multimedia capability, DSP capability, 3D graphics capability, processor capability. We view ourselves as well positioned with all the assets necessary to compete in that marketplace. So I think that the consolidation occurs, we will participate if it is meaningful for us.

Operator

Your next question comes from the line of Paul Sagawa.

Paul Sagawa - Sanford Bernstein

Hi, thanks guys. So far, over the course of the last month, we have had a decidedly mixed commentary of the WCDMA market with one of your major competitors being quite cautious about their chipset WCDMA chipset business. Motorola, suggesting that the strength in 3G, in cheap 3G started to bud against its higher price 2G offerings. You guys actually sort of have, sort of a clean picture on the attractive WCDMA market that's growing. And I was just sort of curious as to how you place your generally positive forecast about the progression of the market into 2007 with more cautious tone sounded by Texan and Motorola's suggestion that perhaps the price points in WCDMA are coming down very quickly?

Bill Keitel

Paul, its Bill Keitel. I'll try and answer your question. Relative to one company's reports of weakness, actually I think what we are seeing in the market sinks pretty well with that, where in the case of Japan, the three major carriers there are having different results and quarter-to-quarter of different results as well. We saw a slowdown in WCDMA in the September quarter. We are expecting a good pickup in the December quarter. So I think that correlates with another company's report, but obviously I don't think that other company is selling into the CDMA2000 side, which has continued to do well for QUALCOMM. So that's in one respect, and then elsewhere on the -- you are saying that the price is coming down. I think Sanjay's business in many respects is leading that charge, and I think we are benefiting nicely from it. So we play across all ends of that market. I think other players are either just in the low-end or just in the high-end, and so their results can may be fluctuate a bit more than what ours will.

Sanjay Jha

May be if I can -- Bill add a point to that one. One, is that we are actually seeing a positive order flow for us in UMTS in this quarter, and that generally for us means that some of our customers had good fourth quarter, because this is a seasonally variable quarter depending very strongly and how the sell-through for our customers played out in December quarter. So being able to see a better order flow this quarter is a positive sign for us. So, that is one reason why we are optimistic, both in CDMA2000 driven by DO and wideband CDMA. And the other thing I would say is that, the price coming down as Bill mentioned, with initiatives like GSMA and 3G for all, which is beginning to reset the price point for the low-end of 3G, and lots of carriers now are saying that from the middle and the high-end, they really want 3G phones rather than 2G phones. I think both of those two things, we see as positive trends and we feel we'll benefit from that.

Operator

Your next question comes from the line of Tim Luke.

Tim Luke - Lehman Brothers

Thanks. Bill, just as a clarification, it looked like in the other income line you had a gain on the investments, 63 million that took it up sequentially from 114 to 204. Can you just clarify where that gain came from, that would be helpful? And may be in addition as well -- in changing the accounting for royalty payments for QCT to QTL. Could you just give us what the revenues on the operating margin would have been for the segment just as once in this quarter, if you haven't changed them and you would just draw comparisons in -- for this quarter using the [authorized] system? Just what the QTL revenue would have been and the same for QCT?

Bill Keitel

Tim, I think I can answer that second one pretty succinctly.

Tim Luke - Lehman Brothers

Thanks.

Bill Keitel

Without that -- had we not -- the intercompany accounting change we made brought down QCT's -- sorry increased QCT's operating margin about 400 basis points, and it decreased QTL's operating margin about a 100 basis points.

Tim Luke - Lehman Brothers

And was it about -- what sort of revenue range would it have been and just for that [matter to work]?

Bill Keitel

You will find all those numbers by quarter going back and by year going back on our website.

Tim Luke - Lehman Brothers

Okay.

Bill Keitel

So there is a very thorough listing of a restated history for anybody that wants it on our website.

Tim Luke - Lehman Brothers

Very helpful.

Bill Keitel

And then on the investment income line, yes you will find it and it is in our queue as always $63 million of capital gains, up nicely from approximately $30 million the quarter before, and a couple of quarters before that was about $35 million. So I think many people are aware, markets have been going strongly and we are trying -- working very hard to use up our capital loss carry forward before it expires.

Operator

Your next question comes in the line of Tal Liani.

Tal Liani - Merrill Lynch

Hi. I have a clarification and a question. The clarification is something you said, Bill, about contra revenues. If I looked at the implied royalty rates, which is just your reported revenues divided by ASP times unit shipment, which you provided all these numbers. Then your implied royalty revenues -- sorry, your implied royalty rate went down from 4.6% to 3.7% in the last four quarters. That's a substantial decline. So I assume that royalty rate itself didn't go down, you probably have a lot of marketing participation programs or something like it that explain it and for this quarter alone for example which in excess of $100 million, [to adjust] its difference. So would you mind to clarify this, what are you doing there that sort of reduces the rate, that's my question. Thank you.

Bill Keitel

Sure. Yeah, I looked at how a lot of people calculate it and using our ASP information and our units and then using our royalty, and always there is a report that I expect most of you would have modeled about a 4.1% royalty rate last quarter and a 3.6% this quarter, so about a 50 basis point decline. First let me say, in no case have we reduced our royalty rates. We have said that last quarter and the quarter before that and that absolutely continues to be the case. So, the factors, as I mentioned are, number one Pantech, we are continuing to report the units and continue to report the ASP's as they give it to us, but I am not recognizing the revenue. We will recognize that revenue on a cash basis, as we receive it.

Number two, you have a mix of licensees -- the mix of what each licensee sells every quarter can change. There are slight differences in the royalty rates, one that we have noted publicly, some years ago it was Ericsson, negotiated a favorable royalty rate when they purchased our infrastructure business and I think everybody knows that the Sony Ericsson, business seems to be doing quite well here of late. And then as well I mentioned the deal where we acquired, I think very valuable pass-through rights and as a part of that transaction, some of the accounting fell into Q1 contra revenue to QTL.

Operator

Your next question comes from the line of Brian Modoff.

Brian Modoff - Deutsche Bank

Yeah, a couple of questions. First on those pass-through rights, can you talk about perhaps where you got them from and what kind of patents they are? And then Sanjay, you mentioned middle and high-end -- some of the carriers were wanting perhaps 3G phones rather than EDGE phones. Can you kind of talk about how your chipsets are helping to enable that, specifically when you have got some single chip architectures coming in Q3, what does that do to your margins, what does that do in terms of helping them on a [triple-bond] cast on their phones and where do you think your market share is in WCDMA chipsets at this point?

Paul Jacobs

Let me speak a little bit about the pass-through rights we acquired. I can't say too much because we have confidentiality requirements, but I will say that they consist of patents that these companies claim are essential to WCDMA, essential to CDMA2000 and essential to GSM and they have a fairly significant portfolio and they have licensed quite a few companies under those patents.

Sanjay Jha

Brian, the answer to your question about 3G replacing 2G in mid to high-end, I think there are two things that are going on, which are interesting; one is a significant number of carriers have set a fairly low price point above which they will only buy 3G and we believe that our MSM6245 and the single-chip RF transceiver chipsets will help drive that kind of price points and those kind of requirements from the carrier. Second thing that's going on is that lot of OEM's are now designing handsets based on wideband CDMA EDGE products, but are actually shipping it to carriers who have not even deployed wideband CDMA as EDGE-only products. There comes a point for them where it's not worth their designing EDGE phone, but rather designing a middle to high-end WEDGE -- Wideband CDMA EDGE device and shipping it to some markets as an EDGE device, even though those carriers have not deployed wideband CDMA.

To the last point about our single-chip solution, I think that, that further drives these strengths, we expect that the price point at which carriers start to mandate 3G handsets as a requirement, 3G capability as a requirement will begin to come down and our single chip solution will enable that to come down still further, and I think that increasing voice capacity and increasing data revenue, you heard Vodafone talks about 29% increase in their data revenues. I think these two factors combine in driving this strength.

Operator

You next question comes from the line of Tim Long.

Tim Long - Banc of America

Thank you. Just a question Bill if I could on your unit expectations of the December quarter, 82 to 86, looks like about 8% to 13% growth sequentially. A lot of language about how strong India --

Bill Keitel

Tim, are you still there?

Operator

Ladies and gentlemen we have reached the time allotted for questions and answers. Mr. Jacobs are there any closing remarks.

Paul Jacobs

Thanks. I think we are going to take one more question. Okay. Let's just wrap it up we were trying to get one last question in because, the last question disconnected. But, instead of waiting let me just wrap this up. So, just wanted to say we are very happy with the great quarter we just had and looking forward, I am extremely excited about the quarter we are in right now, with our MediaFLO launch coming up, demonstration of new technology with our pre-UMB trials. We have some new products, new partnerships.

Obviously, we continue to fight these very expensive legal battles. But I have to say that I am very pleased with the results today, and of course we feel very strongly that our business model is the right business model for the industry that we reinvest to drive the industry forward with new and exciting applications and technologies and innovations working with all of our partners. And we will not be distracted by this. This business continues to execute extremely well, and that's what continues to keep us in a leadership position. So, thank you very much, and hope you will look forward to hearing about what we have in store for you next quarter.

Operator

This concludes the QUALCOMM first quarter conference call. We thank you for your participation. You may disconnect at this time.

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