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QUALCOMM, Inc. (NASDAQ:QCOM)

F2Q07 Earnings Call

April 25, 2007 4:45 pm ET

Executives

John Gilbert - VP, IR and IAR

Paul Jacobs - CEO

Sanjay Jha - COO

Bill Keitel - CFO and EVP

Lou Lupin - SVP, General Counsel

Analysts

Tim Long - Banc of America

Matthew Hoffman - Cowen & Company

Ittai Kidron - CIBC World Markets

Maynard Um - UBS

Hasan Imam - Thomas Weisel Partners

Daryl Armstrong - Citigroup

Brian Modoff - Deutsche Bank

John Lau - Jefferies & Company

Satya Chillara - Pacific Growth Equities

David Wong - A.G. Edwards

Brantley Thompson - Goldman Sachs

Mark McKecney - Twin Pix Capital

Larry Harris - Oppenheimer

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the QUALCOMM Second 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 April 25, 2007. The playback number for today's call is 800-642-1687. International callers please dial 706-645-9291. The playback reservation number is 148-68-59.

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

John Gilbert

Thank you, and good afternoon. Today's call will include prepared remarks by Dr. Paul Jacobs, Dr. Sanjay Jha and Bill Keitel. Steve Altman will not be joining the call today due to previously scheduled business travel. However, Lou Lupin will be available during the question-and-answer session.

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 highlighting a very successful second fiscal quarter at QUALCOMM. Record CDMA based chipsets and handsets delivered record revenue and earnings per share. We continue to see a strong 3G CDMA market worldwide, now therefore increasing our full year financial guidance for fiscal year 2007.

I would like to thank the employees of QUALCOMM, our industry partners and our licensees for continuing to achieve excellent results through an unwavering focus on execution. This effort has resulted in many positive accomplishments for the industry despite the attempts by a small number of competitors to disrupt our business.

I would now like to highlight some of our key achievements.

QCT delivered their seventh consecutive quarterly record for MSM shipment and CDMA based chipset shipments were up 24% year-over-year. We continue the expansion of our single chip product family by introducing the first 1xEV-DO Rev. A single chip, the QSC6085. This increased level of integration will lower the cost of mobile broadband devices providing greater than 10x increase in uplink speed of 1xEV-DO Release 0. Thus enabling user generated content such as pictures and videos to be economically and rapidly uploaded from the phone.

We announced the early sampling of our Universal Broadcast Modem or UBM chip, which supports three mobile television standards, FLO, DVB-H and ISDB-T in a single chip. The flexibility provided by the UBM chip allows handset manufacturers to address three of the world's leading standards with one solution, thereby enabling global mass market adoption of mobile TV.

QTL licensees reported a record number of CDMA-based handset shipments for the December quarter, which was an increase of 36% year-over-year. A broad licensing program continues to fund the innovation that fuels mobile wireless broadband growth. Our portfolio is the most licensed in the industry, and we have recently received a favorable arbitration decision related to Ericsson's royalty obligations to QUALCOMM. The arbitrator agreed that QUALCOMM had been underpaid by Ericsson for more than two years and Bill will cover this later in more detail.

In QW&I, the BREW developer community surpassed $1 billion in cumulative payments generated from the BREW applications and services. This is another example of how QUALCOMM's innovative business model in combination with the creativity of the wireless developer community enabled a new value proposition that has become broadly successful throughout the wireless ecosystem.

Our MediaFLO USA service which brings brand name TV entertainment to the wireless handset was launched by Verizon on March 1st, and is commercially available in 27 markets in the U.S.

In addition, AT&T/Cingular announced their plan to launch the MediaFLO service later this year. We are also excited about potential MediaFLO expansion into international market. Together with KDDI, we announced that in an extensive consumer study for the Japanese market 83% of the users who trialed the MediaFLO service intended to use the service.

We also announced the successful completion of a second technical trial with BSkyB in the United Kingdom, where the MediaFLO system demonstrated considerable technical advantages over the competition.

Turning to the 3G CDMA market around the world; we are pleased to see the number of 3G CDMA-based networks and subscribers continuing to grow rapidly. Data from the CDMA Development Group and the GSM Association shows that over 340 CDMA-based 3G networks have been launched as of April 2007. This includes more than 56 operators deploying the higher speeds of 1xEV-DO including EV-DO Revision A launches in the United States, Japan, South Korea, and New Zealand among others.

In addition more than 103 operators have launched high-speed HSDPA networks. According to Wireless Intelligence, worldwide 3G subscribers including CDMA2000 and WCDMA grew to approximately 460 million as of March 2007.

Looking at the success of 3G, an interesting reference point is to compare the 460 million 3G subscribers against the approximately 350 million estimated worldwide cable TV subscribers and we are still in the early stage of deploying 3G. The stat also highlights the opportunity for mobile TV and Multimedia. According to Strategy Analytics, CDMA-based handset shipments continue to grow faster than total worldwide handset shipments and represented an estimated 31% of total worldwide shipments in the December quarter. This compares to 27% of the total worldwide shipments in the year ago quarter.

I would now like to update you on what we are seeing in some of our markets around the world. In Japan, multiple CDMA-based 3G networks and mobile number portability continues to drive competition in 3G subscriber growth. The cumulative number of 3G subscribers reported at the end of March has grown to over 69 million or approximately 72% of total cellular subscribers.

The U.S. market also experienced solid subscriber growth in both CDMA 2000 and WCDMA. Sprint, Verizon and AT&T/Cingular recently noted significant year-over-year increases in data related average revenue per subscriber. In addition, AT&T/Cingular recently commented that their UMTS/HSDPA coverage is in 165 cities and is on schedule to cover virtually all of the top 100 U.S. markets this year.

CDMA growth in India continues as over 20 million of the cumulative 47 million CDMA subscribers have been added in the last 12-months. QCT's chipset solutions continue to enable cost effective competition as Tata Teleservices launched the Motofone F3c based on our QSC6010 single chip family and Rose Telecom introduced a sub $30 CDMA handset.

As an indication that the Indian market is broadening and almost completely focused on low price we're seeing multiple operator command campaign promoting color screen and more feature rich devices to consumers. In Korea competition has intensified with the launch of HSDPA, driving increased CDMA-based handset sale. In addition, over 40% of the CDMA subscribers in Korea are now using the broadband benefit of 1xEV-DO.

Moving to Europe, according to our licensee reports for the periods ending December 2006, we estimate WCDMA handset shipments increased over 75% year-over-year, while the estimated WCDMA ASP continues to decline. Furthering our goal to enable 3G devices for the mass market, the GSM Association selected LG's-KU250 handset powered by QUALCOMM chipset as the 3G for all winners to enable feature-rich WCMDA handsets at lower prices. This set a new price benchmark for the marketplace enabling affordable 3G devices for the mass market. We're pleased to see the continued positive effects of our business model as our partners provide innovative and competitive devices and services for the European marketplace.

And we continue to innovate and focus on improving the capability of wireless systems using both CDMA and other technologies. We demonstrated Voice-over-Internet Protocol Technology resulting in significant capacity gains providing up to 114 simultaneous calls in a single isolated sector and roughly 68 calls in an embedded sector which is more representative of the commercial deployment scenario. In addition, we have shown 1xEV-DO Revision D enabling flexible allocation of bandwidth for both high performance and low cost computing and communications devices.

Earlier this year, we announced the expansion of our chipset product roadmap to include HSPA+, which will deliver broadband mobility and a high-quality user experience for application such as Internet browsing, real time location services and multimedia sharing for WCDMA operators.

Our Research and Development investments in new broadband technologies such as OFDM, UMB, LTE and FLO remain key initiatives for QUALCOMM as we continue to deliver enhanced capabilities to meet current and future market requirement. We demonstrated the first ever over-the-air Ultra Mobile Broadband or UMB demonstration at the CTIA industry conference this year.

UMB technology incorporates the benefits of OFDMA and CDMA with MIMO and advanced Internet technologies, to offer features such as support for broadband speed, greater capacity in coverage and an enhanced user experience for potential future mobile services.

In addition to UMB, our engineering teams are also working hard on another future OFDM based technology, LTE. We will continue to invest in these technologies to enable further broadband capabilities and compliment operators' 3G offerings as needed.

Before I close, I would like to touch briefly on two legal items. Important to note that, recently there has been a lot of public information regarding the legal actions we are involved in. Accordingly, the majority of my remarks have been focused on the state of the business which we are very pleased with.

We are happy to answer legal questions during the question-and-answer session. But regarding the Broadcom ITC case, the full commission's decision on the scope of any potential exclusion order is currently due no later than May 25th. The commission can reject, adopt or modify the ALJ's recommendation.

We feel strongly that the right result in this case is further commissioned to agree with the ALJ's recommendation against the so called downstream remedy. The Commission's decision is subject to presidential review and appeal; presidential review, if any, must be completed 60 days from the Commission’s review.

Regarding Nokia, there is really nothing new to discuss. As you know, we commenced arbitration a few weeks ago to resolve certain issues under our existing agreement. Our patent infringement cases against Nokia's GSM product outside the United States and our new cases against Nokia’s GSM products in the United States are under way.

In closing the record results we have delivered, demonstrate that our business is executing successfully on both current and long-term strategic goal. I am very proud that we continue to deliver positive results to our shareholders despite various attempts to distract us. And we will continue to invest in innovative technologies and bring the highest quality solutions to benefit wireless consumers and our industry partners globally.

That concludes my comments. I will now turn the call over to Dr. Sanjay Jha.

Sanjay Jha

Thank you, Paul. QCT had a strong second quarter in fiscal 2007. I would like to highlight some of our accomplishments. In the second fiscal quarter, QCT generated revenue of $1.26 billion. It was our fourth consecutive quarter of record revenue. Year-over-year this represents a growth of 24%.

We shipped approximately 61 million MSM chipsets in the second fiscal quarter. This is the seventh consecutive record for shipments during the seasonally low quarter for mobile handset. Year-over-year, this represents a growth of 25%.

A year ago, we committed to executing on new products that will lower the price of NTT handset segment to enable CDMA carriers to be competitive in emerging marketplace. Today, CDMA 2000 handsets have broken the $30 price barrier in many developing markets, and are now at price parity with 2G GSM handsets.

More than 10 handset manufacturers are launching over 35 models of stylish and affordable devices based in our QSC family of single chip product.

Emerging market handset affordability and a dramatic growth in shipment of CDMA Cell Site Modem solutions destined for developing markets over the past four quarters are encouraging signs that CDMA is growing and will compete effectively in this market.

Finally, as Paul mentioned, LG's KU250, the handset offering QUALCOMM's UMTS chipset that was selected for the 3G for all initiative is expected to start shipping in volume by June of this year.

As data-rich mobile services become increasingly popular with consumers, QCT's portfolio is well positioned to enable these services. Year-over-year, our shipment of EV-DO chipsets increased 66% and contributed to the 21% growth year-over-year of our overall CDMA2000 MSM shipment.

QCT's UMTS/MSM shipment also increased 56% year-over-year, driven by HSPA-enabled chipset, which now par over 70 HSPA devices that are either launched or in design.

Starting in a year ago quarter of fiscal 2006, we saw significant acceleration in the shipment of our EV-DO Revision A capable Cell Site Modem solution. They constitute over half of our total channel element shipped for the past year.

In North America, Japan, and Korea, we are now seeing the infrastructure deployment and device traction that historically follows an increase in CSM demand. To further support the trend of mobile broadband becoming available to mass market, we expanded the QSC family this past quarter to include Revision A. This new solution will help accelerate the growth of mobile user generated content, social networking around the world.

Looking at our current product portfolio, we introduced two new chipsets to expand EV-DO and HSPA smart phones beyond the enterprise segment into mass market tier. The MSM 7225 and 7525 will support multiple third-party operating systems as well as mobile broadband connectivity.

QCT continue to expand its roadmap for the future introducing complete solution for a number of next-generation wireless technology. We introduce device and base station chipset for EV-DO Revision B on the 3GPP2 path and HSPA on the 3GPP path. We also announced an end-to-end solution for Ultra Mobile Broadband or UMB, which is the next stage of 3GPP2 evolution after EV-DO Revision B.

We continue to make stride in supporting new advance services such as mobile TV. This quarter, we announced the early sampling of our Universal Broadcast Modem, which supports the multiple leading mobile TV standards. We were also the first to demonstrate MBMS technology, which uses existing UMTS network to deliver mobile TV.

Expanding beyond the core wireless device market, QCT remains on track to sample our first Snapdragon solution in the third quarter of this year. We see strong demand for the type of devices that Snapdragon products will enable, which we call Pocket and Docket. Snapdragon par devices will be small enough to fit into a pocket than wirelessly dock into a TV or monitor in the home or office.

Snapdragon technology delivers mobile devices with the ability to run applications that PCs run today and support services such as navigation in mobile TV, all with constant connectivity and up to 12 hours of active use. QCT anticipates this type of device will hit the market by sometime next year.

Thank you. And 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. I will begin by highlighting the number of key items and our second fiscal quarter results. Revenues increased 21% year-over-year to more than $2.2 billion and pro forma earnings increased 22% year-over-year to $0.50 per share.

GAAP diluted earnings for the second fiscal quarter were $0.43 per share including a $0.05 loss for estimated share-based compensation, $0.01 loss for acquired in process R&D and $0.01 loss attributable to the QSI segment.

Operating cash flow was almost $1 billion for the second fiscal quarter, up 11% year-over-year. Pro forma free cash flow was more than $1 billion and 49% of revenues.

During the quarter we returned approximately $440 million of capital to our shareholders, including just under $400 million of cash dividends and $40 million to repurchase 1 million shares of our common stock. We continue to believe in the repurchase program. We were again limited by a closed trading window for most of the quarter. However, we are prepared to repurchase additional shares as appropriate.

Our pro forma estimated tax rate for fiscal 2007 is now 24% compared to our prior estimate of 25%, primarily due to a change in the relative proportion of foreign versus domestic earning.

QCT again had record MSM shipments and revenue during the quarter. QCT's second quarter revenues increased 24% year-over-year to almost $1.3 billion on the strength of 61 million MSM shipped, also a 24% increase year-over-year. QCT's operating margin increased to 29% from 26% in the first fiscal quarter. QTL earned record revenues of $759 million this quarter as licensees reported a record of approximately 91 million new handset units shipped, with an average selling price of approximately $214 per handset. These shipments occurred in the December quarter and were reported to us by our licensees in the March quarter.

We are pleased that CDMA is contained to experience strong growth around the world, including sequential strength of WCDMA shipments in Europe, Japan and North America, as well as CDMA 2000 shipments in North America, China and Japan during the December quarter. WCDMA royalties were approximately 49% of total royalties reported this quarter, QTL's operating margin was 83% compared to 82% in the prior quarter.

In recent quarters, we've commented on some of our special incentive programs to help drive the adoption of CDMA products and services around the world. We are seeing positive early results from these programs, positive both for our partners and for our own business. We received cash payment from Pantech for the new royalty obligations they incurred during the second fiscal quarter, nonetheless based on certain events, we fully reserved our remaining Pantech receivables of approximately $22 million in the second quarter. For the calendar 2006 CDMA market with the receipt of all licensee reports, we now estimate that CDMA handset shipments were approximately 301 million unit including approximately 200 million CDMA2000 units, and approximately 111 million WCDMA units.

Turning to our guidance; we are raising our estimates for both revenue and earnings per share for fiscal 2007. We want to be clear that our increased guidance does not include $0.04 to $0.05 earnings per share in related revenue, which we estimate will be owned by Nokia for the fourth fiscal quarter of this year.

We expect fiscal 2007 revenues to be in the range of approximately $8.4 billion to $8.7 billion, an increase of 12% to 16% over fiscal 2006. We anticipate pro forma earnings per share to be in the range of $1.84 to $1.88, an increase of 12% to 15% year-over-year.

As a reminder, our fiscal 2007 guidance also includes $0.04 earnings per share dilution related to the acquisitions we announced during the first fiscal quarter. We are increasing our estimate for the calendar year 2007 CDMA based handset market. We now estimate shipments of approximately 373 million to 393 million units in calendar 2007, an increase of 24% to 31% over our estimate for calendar 2006 shipments.

Based on the 383 million mid-point of this estimate for calendar 2007, we estimate shipments of approximately 208 million CDMA 2000 units, and approximately 175 million WCDMA units.

The regional breakdown of this market estimate is available on our website. We now estimate the average selling price for CDMA2000 and WCDMA phones combined will decrease approximately 3% in fiscal 2007 to approximately $208 per unit. We are encouraged by the ASP trends we are seeing for WCDMA handsets, which continue to decline largely consistent with our expectation, but encouraging for future market growth.

We expect the combination of pro forma, R&D and SG&A expense for fiscal 2007 to increase approximately 29% to 32% year-over-year, driven by our continued investment in new products and services for our partners, as well as increased legal expense to defend our business.

We estimate GAAP diluted earnings per share will be approximately $1.57 to $1.61 for fiscal 2007. This estimate includes a loss of approximately $0.20 per share for estimated share based compensation, a loss of approximately $0.09 per share attributable to QSI, $0.01 loss for acquired in-process R&D, and a gain of $0.02 attributable to tax benefits related to prior years.

Turning to our guidance for the fiscal third quarter of 2007, we estimate revenues to be in the range of approximately $2.2 billion to $2.3 billion, a 13% to 18% increase year-over-year. We estimate third quarter, pro forma earnings per share to be approximately $0.50 to $0.52, a 19% to 24% increase year-over-year. This estimate includes shipments of approximately 62 million to 65 million MSM phone chips during the third fiscal quarter reflecting growth across multiple product segments including EV-DO and WCDMA.

We expect chip ASP’s to modestly decrease over the second half of the year due to planned pricing and anticipated mix changes across our broad product offering.

We estimate that approximately 81 million to 85 million CDMA based handsets shipped in the March quarter, at an average selling price of approximately $213. Our handset unit forecast reflects seasonally lower post-holiday shipment. Those still are very healthy 23% to 29% higher than the 66 million handsets reported by licensees for the March quarter last year.

Paul mentioned the recent favorable arbitration decision related to Ericsson and Sony Ericsson’s royalty obligation under the license agreement. By mid-June, Ericsson, Sony Ericsson must report their full obligation for prior under payment. Our forward guidance has appropriately and favorably been adjusted, including a one-time catch-up in our third fiscal quarter. We expect our third quarter pro forma gross margin to be approximately 73% and the combination of pro forma, R&D and SG&A expenses to be in the range of 1% decrease to 2% increase as compared to the March quarter. We believe total CDMA channel inventories are within the historically normal band of 15 to 20 weeks. We do believe that they are at the upper end of that band.

In closing, we are very pleased with the continued strong financial results and improved outlook.

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

John Gilbert

Thank you, Bill. Before we go into our question-and-answer session, I would like to remind our participants that our goal is to address as many questions as possible before we run out of time on the call today. Therefore, I would like to ask our participants to limit their questions to one per caller. We are ready for calls.

Question-and-Answer Session

Operator

(Operator Instructions). Tim Long from Banc of America. Please go ahead with your question.

Tim Long - Banc of America

Thank you. Just a question related to some of the legal matters here. Just from a higher level, you have the arbitration with Ericsson and Sony Ericsson where you were successful. We have seen press releases from you and Nokia with different understandings of the royalty rate. Could you talk to us a little bit about how it's possible that there are two different perceptions of that royalty rate? And then related to that, do you think there is anything to learn from the, is it a similar type of dynamic that happened or may have happened in the Sony Ericsson case that you think positions you better for a positive outcome and potentially some back payment from Nokia? Thank you.

Lou Lupin

Tim, its Lou Lupin. With respect to the different statements regarding the royalty rates, we can only tell you about that from QUALCOMM's perspective, and as we said publicly, the rate is not as Nokia has portrayed it. There is a rate that’s forced in the agreement. There is the way of calculating it. And as far as we understand, Nokia has been paying us in accordance with the agreement and in accordance with the rate that’s set forth there, and that's not consistent with their public statement. So, I don't want to speculate on how they get to their number.

Tim Long - Banc of America

Okay. And then just relationship between the two potential arbitrations?

Lou Lupin

So, there really is no relationship between the two potential arbitrations. The Ericsson arbitration was the disagreement over calculation of the royalties in certain ways for certain products. The Nokia arbitration that we have recently commenced has to do with the question of whether Nokia can continue to use our patents without paying us the royalty rate that set forth in the agreement, and without abiding by the other obligations that they go along with Nokia's use of our patents. And in the Nokia arbitration, we are asking the arbitrator to determinate that in fact they are using our patents. There are obligations that come along with it, most importantly the obligation to pay royalties at the contractual rate as well as the continuing obligation to another rights, they have granted us under their patent.

Tim Long - Banc of America

Okay, thank you.

Operator

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

Matthew Hoffman - Cowen & Company

Yeah, thanks. I am going to drill down and ask you another question on royalty rates here, Lou. Is it possible to some of the answer here is in the denominator i.e. that Nokia is calculating the rate from a different base, is there some sort of cap on WCDMA handsets that Nokia thinks there might be in the higher ASP categories? Thanks.

Lou Lupin

Again I can't really tell you what Nokia is doing. Is it possible that they are using some different gross numbers; sure, I guess it's possible, but we have no insight into how they have got into the number that they have described. So, I am sorry I really can't be more helpful on that. We don’t think that as between QUALCOMM and Nokia there is any dispute over how royalties should be calculated. Again, as I said before we think they have been paying us in accordance with the agreement.

Matthew Hoffman - Cowen & Company

Okay. Shifting gears back to Paul, and Paul and Bill, it looks like the combined quarterly ASPs were up in calendar 4Q '06 and fiscal 1Q '07. I was hoping you could describe some of the trends behind that. Is it CDMA with the launch of Rev A or is it WCDMA that was driving the increase on phone side? Thanks.

Bill Keitel

Matt, we think data has been going very strong both DO and WCDMA. So, we think that is driving a richer handset across many markets. Other than that, so I think ASP’s went pretty much in line with our expectation, there are minor deviations, but pretty much as we expected.

Operator

Ittai Kidron from CIBC. Please go ahead with your question.

Ittai Kidron - CIBC World Markets

Thank you. Good afternoon gentlemen. Bill, I had a couple of questions for you. I was trying to figure out and think about some of the metrics you provide on a quarterly basis, how they would look like without Nokia into picture, how should we think about, are your average ASPs and Nokia is not included, how should we think about your tax rate given then? I would assume they are paying in certain regions and what's the impact from that on tax rates? Can you give us, you gave us the magnitude of the potential impact on EPS, could you give us a little bit more on the math behind it and how should we think about that going forward?

Bill Keitel

First on the tax rate, I have updated the tax rate forecast from 25% previously down to 24%, that reflects the number of shifts in the business but obviously one of the changes that we made was, we took out a forecast that Nokia would pay us for the fourth fiscal quarter. So, I think that's one change in the outlook amongst several others that's incorporated in that tax rate forecast I gave you. On ASP’s we'll just have to wait till we get to the fourth quarter, I'm still hopeful that they would pay, I'm not optimistic they will, but I'm hopeful will and so we'll just have to wait till we get to that quarter and see how we report ASPs at that time. I'll certainly, we will all continue to do the best job we can to disclose what you need to understand what's happening within our business.

Operator

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

Maynard Um - UBS

Hi, thank you. It looks like revenues and margins in the QTL segment were little bit lighter than what I expected. Can you just help us reconcile the numbers or specifically, what is the greatest impact between kind of the mix shift maybe because of Sony Ericsson, the Pantech, bad debt expense or any carrier marketing cost? And if it's the latter, should we assume that these run at those higher levels through the year?

Bill Keitel

The one item that I mentioned in my comments was we reserved our remaining exposure to the Pantech Group. We took a reserve of $22 million and that's reported in SG&A. So that will be number one. Number two, if you just take QTL revenues, use the items I disclosed, I mentioned last quarter that one could calculate an implicit royalty rate after that at 3.6%, it's not the true royalty rate but it's based on what we disclose, it's what you could calculate and using that same basis this quarter the royalty rate would be 3.8%. I do expect that rate to continue to increase in the next couple of quarters.

Operator

Hasan Imam from Thomas Weisel Partners. Please go ahead with your question.

Hasan Imam - Thomas Weisel Partners

Yeah, thank you. Congrats on the strong results. I have a question on the WCDMA estimates, if you look at the top five handset vendors in terms of their comments on the WCDMA market this quarter, it kind of seems to be a bit weak versus you seem to have taken quite a positive stance on it still. So, I am just wondering has it got something to do with vendors outside of the top five gaining share in that particular segment. Thank you.

Bill Keitel

Hasan this is Bill. One, of course, we are reporting in our QTL segment, we are reporting what’s shipped in the fourth quarter, and recent reports obviously our people reporting what they shipped in the March quarter. So, there could be a bit of a timing difference.

I am expecting total phone units to decrease into the March quarter, which may synch a little bit better with others, but having said that, with all our licensees, as they report, I tend not to look at the numbers until they are essentially all in, because the shift of share one quarter to another between the players can be pretty significant.

Hasan Imam - Thomas Weisel Partners

Now in the past you have commented on, for example, Huawei taking some share which uses your chipset, so my question was more related to kind of your full year stance on WCDMA.

Bill Keitel

Well, as Sanjay mentioned, our WCDMA chipsets are growing at a very fast pace. And, so hopefully that's going to show through with our customers doing better in the market. But, thus, we let them come through with their reports and not us jumping ahead of where they might want to report.

Operator

Daryl Armstrong from Citigroup, please go ahead with your question.

Daryl Armstrong - Citigroup

Thank you very much. First of all in terms of the revision of the Nokia royalty impact, you talked a little bit about the factors that caused that change, assuming any change in industry’s market share or above the factors made in sets. And then second of all, there is a full in part that Nokia by attempting to make partial payments reduce your ability to be able to tax their extension option not from a legal standpoint.

Could you explain why this probably would not be the case? Thanks.

Paul Jacobs

Daryl, I will take your first question. I think what you were referring to is in the last two quarters we've been estimating an impact if Nokia didn’t pay in the fourth fiscal quarter, an impact of between $0.04 and $0.06 per share, and this quarter we have tightened that up to say we now estimate it between $0.04 and $0.05 per share. We are just using the best information we can, both reports that we have from all our licensees and trying just to narrow in a little bit more on what we think that impact could be if they don’t pay. So, I don’t regard it as a major shift in our forecast, I would just say it’s fine tuning what we previously gave you and narrowing it down, which I feel comfortable with at this stage of the year.

Lou Lupin

This is Lou, and I will try to answer the second part of the question. We don’t think that the payments tendered by Nokia, which I think you all know we rejected, impacts in anyway our ability to press our claims in arbitration that if they fail to abide by the terms of the agreement that they are in violation, they are in breach including, breach of their right to extend the agreement. That's so for a couple of reasons. The payment for one thing was not tendered as a payment under the agreement. It was tendered as a payment offered with three pages of new and additional terms and conditions attached to it that we were going to be asked to accept in connection with accepting the payments. So, that's one problem.

The other problem is as we have mentioned clearly from a financial perspective, it's likely that that amounted to $20 million is a small fraction of what they will, in fact at the end of the quarter, and that's of course not a novice decision until the end of the quarter, but if you assume they track anything along the lines of their current trends that payment will hardly come close to fulfilling your obligation. So, there is nothing about that payment. That would immunize them for many claims.

Operator

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

Brian Modoff - Deutsche Bank

Yeah, guys. Can you talk on the chipset side? Can you talk a little bit about market share? You had some good numbers and guidance on that. From our checks it looks like you are pretty much dominating the Korean market in LG and Samsung. Can you talk about market share gains perhaps at Motorola where do you see that perhaps kicking in and any other vendors that you see on your side that are doing well on the chipset side that would account for your strength?

Bill Keitel

Brain, I think on CDMA side, we see the strength in EV-DO driving our numbers strongly. Especially I think in the United States the strength that Verizon and the migration that we see at Sprint towards DO Rev. A. I think those two things are certainly the key to our driving the numbers that we have driven this quarter. If we look at the Korean marketplace, we certainly see a vast majority of handset shipments being in CDMA there of course, and LG and Samsung really driving that market also.

In terms of UMTS again I think we believe that we have gained some market share from the lows of the third quarter of 2006 that we saw would have increased our market share both the last quarter as well as this quarter. And that has been on the back of our Korean customers doing better in Europe. I think that's fundamentally the most important thing. And second I think is that both Samsung and LG are doing extremely well on Cingular's network. The Blackjack phone and some other phones are doing extremely well there. Those two things are driving growth in our market share also.

Operator

John Lau from Jefferies & Company. Please go ahead with your question.

John Lau - Jefferies & Company

Thank you. I wanted to go back to the litigation issue, and I was wondering if you can clarify something on a more macro basis. You mentioned that you are going into litigation with Nokia, I mean arbitration with Nokia sorry. How long do you think this can continue whereby the royalties are not being paid, but that they continue shipment? And I know that you have accounted that for the fiscal of Q4, but can I continue for the rest of the account year or beyond, or is that decision now on shipments and royalty in the hands of the arbitration and the clock stop there? Thank you.

Bill Keitel

We don't know for certain that there won't be payment, although all the indications are that they don't plan to pass. But as Bill mentioned, we really won't know for sure until the payment date arrives and we see whether or not there is payment. If in fact there is non-payment, then we will have to take that fact into account in terms of our future plans, and it would be premature now I think to speculate about what we might or might not do in light of an event that might or might not take place.

Operator

Satya Chillara from Pacific Growth Equities. Please go ahead with your question.

Satya Chillara - Pacific Growth Equities

Yeah hi. This question is for Sanjay. Sanjay, you commented on some WCDMA market share. I know you guys usually don’t talk about market share numbers. But, qualitatively can you talk about how much increase you had from the Q3 to Q1 of, right now from the March quarter? How many phone percentage points have increased the market share?

Sanjay Jha

Yeah, we have not discussed the number with any precision. I can tell you that our shipments quarter-over-quarter increasing at a rate higher than when we see the market overall growing. I think that's really what gives us a level of confidence that our market share is increasing. Beyond that, especially as we look through the current quarter, it's difficult with precision to say what our market share is, though we know what the market was and that usually takes a little longer to gather that information. So, I can only tell you that, we feel comfortable that we're increasing our market share right now. I can't really provide any more precision around that.

Operator

David Wong from A.G. Edwards. Please go ahead with your question.

David Wong - A.G. Edwards

Thank you very much. On the subject of the arbitration you have with Nokia. Is this mutually agreed to binding arbitration or not?

Bill Keitel

Yes, it is. It's an arbitration relating to the existing agreement and that agreement specifies that any disputes about the agreement have to be arbitrated in a particular place under the rules of the American Arbitration Association.

Operator

Brantley Thompson from Goldman Sachs. Please go ahead with your question.

Brantley Thompson - Goldman Sachs

Hi, I was wondering if you could give us a little color on how we should think about operating margins from the chip business as we go over the next year, clearly had a nice step up sequential this quarter. And as Motorola ultimately ramps more and more production, I'm assuming that should also be a significant contributor but should investors be thinking about this as something that gets into the low-30s or mid-30s or how should we think about the long-term target there? Thanks.

Sanjay Jha

Brantley, I think the guidance that I provided over the last probably two and a half years, that in the long-term our objective is to drag this business to an operating profit range at somewhere between 25% and 32%. Clearly, last quarter we had an operating profit of 26% and we stepped it up nicely. I think on back of good volume and good mix to 29%, our guidance for next year, by next quarter, shipment is 62 million to 65 million units, we see that as a strong volume also, and so as long as we continue to increase our volume I suspect that we will continue to deliver good operating profit but our long-term objective is to deliver in the range of 25% to 32%. The days of delivering high 30% are difficult to recapture but obviously we will try our best.

Operator

[Mark McKecney] from [Twin Pix Capital], please go ahead with your question.

Mark McKecney - Twin Pix Capital

No, my questions have been answered, thank you.

Operator

Larry Harris from Oppenheimer, please go ahead with your question.

Larry Harris - Oppenheimer

Yes, thank you. A clarification with respect to EV-DO Rev. A there, are you starting to see the impact of the next year's deployment of QChat, as Sprint in your numbers or is this just the impact of data cards? And also, could we see the impact maybe in the quarter or two from the deployment of MediaFLO at AT&T Cingular? Thank you.

Bill Keitel

In terms of EV-DO, I think the point that I made in my script was that we are seeing a very strong growth in the EV-DO Revision A, GSM Cell Site Modem shipment, and typically that is a leading indicator of demand in that technology.

We are beginning to see that even in emerging marketplaces, a lot of the operators are building base stations which are capable of 1xEV-DO and DO Revision A so that they can switch to any of the three technologies at their option. So, I think that we see is a very positive thing for us in emerging marketplace, and of course here in United States both Sprint and Verizon have publicly indicated that they are building EV-DO Revision A network.

So, we see this as a positive indication. We also think that the QChat migration by Sprint from their traditional Nextel system is going to be an attractive driver of our growth, particularly the dual mode handset that they brought to the marketplace.

Paul Jacobs

Yeah, just to add to that, the plan of record for Sprint for QChat deployment is the first calendar quarter of '08. So, that's when we ought to see that impact, although as Sanjay said, we are all already seeing the impact of the dual mode item CDMA handset.

Operator

And ladies and gentlemen, we have reached the end of the allotted time for just question-and-answers. Dr. Jacobs do you have any closing remarks?

Paul Jacobs

I wanted to thank everybody for being with us today. I am extremely pleased with the quarterly performance of our team, and I am very happy that we were able to raise our yearly guidance factoring in all of these other impacts such as legal expenses, acquisitions and Nokia's statements that they would not be paying us royalties.

Even though there is a lot of focus in your questions, in the market about litigation and all of that surrounds it, I think it’s pretty clearly from our results that our team is very focused on innovation and execution, and our engineers are continuing to focus on breakthrough new technologies and services. So, we continue to see the tremendous opportunity ahead of us, and we expect to continue to execute through that opportunity. Thanks very much.

Operator

This concludes today's conference call. You may now disconnect.

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