John Gilbert - Vice President of Investor and Industry Analysts Relations
Dr. Paul E. Jacobs - Chief Executive Officer
Steven R. Altman - President
Dr. Sanjay K. Jha – Chief Operating Officer and President, Qualcomm CDMA Technologies Group
William E. Keitel - Executive Vice President and Chief Financial Officer
James Faucette - Pacific Crest Securities
Avi Silver - Bear Stearns & Co.
Tal Liani - Merrill Lynch
Tim Long - Banc of America Securities
Mike Walkley - Piper Jaffray
Ehud Gelblum - JPMorgan
Tim Luke - Lehman Brothers
Mike Ounjian - Credit Suisse
Brant Thompson - Goldman Sachs & Co.
Maynard Um - UBS
Ed Snyder - Charter Equity Research
Qualcomm, Inc. (QCOM) F4Q07 Earnings Call November 8, 1969 10:45 PM ET
Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm fourth quarter and fiscal year-end conference call. (Operator Instructions). The playback number for today's call is 800-642-1687. International callers please dial 706-645-9291. The playback reservation number is 20553158.
I would now like to turn the call over to John Gilbert, Vice President of Investor and Industry Analyst Relations. John, please go ahead.
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 and Regulation G, you can find the required reconciliations to GAAP on our Web site. I would also direct you to our 10-K and earnings release, which were filed and furnished respectively with the SEC today and are available on our Web site.
We may make forward-looking statements relating to our expectations and other future events that may differ materially from Qualcomm's actual results. Please review our SEC filings for a detailed presentation of each of our businesses and associated risks and other important factors that may cause our actual results to differ from these forward-looking statements.
I would also like to remind you of our New York Analysts Day November 14th. And now it's my pleasure to introduce Qualcomm's CEO, Dr. Paul Jacobs.
Thank you John and good afternoon everyone. Let me begin by thanking the employees of Qualcomm and our partners worldwide for delivering another record year of performance. We continue to focus and successfully execute on our current and long-term strategies.
And these efforts are clearly reflected in our results. We're also very pleased to welcome Don Rosenberg to Qualcomm as Executive Vice President and General Counsel.
Don's extensive experience in litigation, antitrust, regulatory, and intellectual property law is a great addition to our leadership team and we are confident he will make a significant impact in our legal activities and beyond.
Turning to our financial results, in fiscal 2007 we achieved record revenues, record net income, and record operating cash flow. Our pro forma earnings per share were up 23% year-over-year and we significantly exceeded our original fiscal 2007 earnings per share guidance.
We returned a record $2.3 billion dollars of capital to our stockholders through our dividend and stock-repurchase programs. We have now returned over $7 billion dollars of capital to our stockholders to date. Our continued execution allows us to both return capital to shareholders and make significant investments in R&D to capitalize on the opportunities created by the convergence of wireless, entertainment, computing, and the internet.
I'd now like to highlight some of our key business achievements. QCT delivered their ninth consecutive quarterly record for MSM shipments as CDMA based MSM chip shipments were up 22% year-over-year. In fiscal 2007 we shipped a record 253 million baseband chips as compared to 207 million in fiscal year 2006.
We are very proud of this performance in today's complex and highly competitive global marketplace and Sanjay will give you more color on QCT's business. Our BREW business, we announced last quarter that Hutchison H3G planned to leverage BREW to offer highly integrated feature-rich applications in their WCDMA handsets.
H3G’s recently launched Skype phone is the first commercial example of this partnership. The BREW platform provides the foundation for H3G to enable mobile internet service applications such as Skype, as well as interfaced with other key handset features to provide an integrated user-friendly experience.
Continuing on the theme of partnering with the internet community, earlier this week we announced, along with Google and other leading global wireless and technology companies, our support of Android, an open platform for mobile devices and our membership in the Open Handset Alliance.
We believe this is an exciting opportunity to expand the 3G market by working with new partners to enable the growth of mobile broadband. In QSI our MediaFLO service is now available in more than 40 cities in the U.S. as we continue to expand our service footprint and conduct new trials around the world.
We continue to improve our content lineup with the addition of more than 100 live college football games and over 70 live NBA games. We look forward to a number of new MediaFLO enabled phones coming to market including leading edge touch-screen designs.
In addition, at the International Broadcast Conference earlier this year, we demonstrated live user interactivity with televised programming on MediaFLO. Convergence of mobile TV and interactivity will be an important catalyst in driving adoption of mobile TV.
Qualcomm MEMS technologies team, which is developing a new low power reflective display technology, reached an important milestone, as the first IMOD displays were made commercially available in an innovative line of Bluetooth headsets by Audiovox.
UMT also announced an agreement with Chinese handset maker Hisenseto develop mobile phones containing Qualcomm IMOD displays that will be available in 2008. IMOD's low power consumption and consistent display quality in a wide range of viewing conditions, including bright sunlight, is another example of our commitment to developing advanced technologies to make the phone a device for your eyes as well as your ears.
Turning to the 3G CDMA market around the world the number of 3G CDMA based networks and subscribers continues to grow rapidly. Data from the CDMA Development Group and the GSM Association shows that over 410 CDMA based 3G networks have been launched as of October 2007 representing approximately 40% growth year-over-year.
CDMA2000 network deployments grew 35% year-over-year and WCDMA networks grew at 48% year-over-year. This includes more than 75 operators deploying the higher speeds of 1xEV-DO and 10 operators that have deployed EV-DO Revision A.
In addition, more than 140 operators have launched high-speed HSDPA networks and 19 operators have deployed HSUPA. CDMA2000 and EV-DO are the proving to be the best performing and lowest cost technologies for bridging the digital divide by bringing broadband to the developing world.
According to the CDG over 35 new CDMA2000 operators have launched in the last year with the majority of growth in the developing markets of Africa, Middle East, and Central and Southeast Asia. The dynamic success of new EV-DO deployments in the developing world is creating the impetus for the deployment of HSPA by GSM operators in those regions as well.
According to Wireless Intelligence, worldwide 3G subscribers, including CDMA2000 and WCDMA, grew to approximately 530 million as of September 2007, representing an increase of approximately 32% from the year-ago quarter.
Subscribers and operators continue to benefit from a competition in choice enabled by our business model. For example, the GSA reported that there are over 400 commercial HSDPA devices from 80 suppliers on the market. This compares to 84 commercial devices from approximately 20 suppliers just a year ago.
CDMA based handset shipments continue to grow faster than total worldwide handset shipments as reported by Strategy Analytics. CDMA based handset shipments represented an estimated 32% of total worldwide shipments in fiscal 2007, up from 28% of total worldwide shipments in fiscal 2006.
We continue to see positive wireless data trends around the world as subscribers take advantage of new applications and services enabled by the higher data speeds of 3G networks and the extensive availability of advanced wireless devices at competitive prices.
In the United States each of the leading carriers reported significant year-over-year data average revenue per user growth in their recent earnings announcements. Verizon's data ARPU grew 43% year-over-year and noted that data applications are generating significant growth. AT&T's data ARPU grew 48% year-over-year and wireless data represented more than 18% of service revenues during the quarter.
In addition, AT&T commented that the data ARPU for 3G subscribers is almost double that of the average 2G post-paid customer. Sprint's data ARPU grew 29% year-over-year and the CDMA data ARPU was $13 per subscriber.
I was just in Australia where Telstra reported a 93.5% increase in non-SMS data revenue, which now exceeds the revenue generated by their SMS service and this ARPU increase is driven by their 3G subscribers. With the widespread deployment of EV-DO and HSDPA, wireless consumers now can have broadband access to the internet and to compelling rich new media services and they're not tied to a wire or stuck in a so-called hot spot.
In Europe, according to our licensee reports for the period ending June 2007, we estimate WCDMA handset shipments increased 42% year-over-year as 3G continues to takes share from GSM. For example, 3G devices make up 50% of Telecom Italia's handset portfolio including 26 HSDPA devices and Vodafone recently announced that their Christmas handset lineup included 13 HSDPA devices.
Vodafone's data revenue growth increased 43% year-over-year driven by Vodafone live and laptop connectivity. H3G reported a 20% year-over-year growth in data revenue and Tim achieved 16% year-over-year growth. In many European markets adoption of data only devices, such as HSDPA Dongle has accelerated driven by flat rate data pricing and attractive device price points.
In Japan, where 3G CDMA subscribers have grown to approximately 79% of subscribers, both KDDI and DoCoMo report that data ARPU represents more than 30% of total ARPU. CDMA based technologies continue to drive a high level of competition in the Korean marketplace. LG Telecom launched their EV-DO Rev. A service in September and WCDMA subscribers have nearly doubled over the past three months to over $3 million.
WiBro continues to be a commercial failure. As I've said before, the current generation of WiMAX lacks true mobility, no effective support for real time services and has poor spectral efficiency. It will suffer in the face of competition from 3G CDMA and with our Gobi initiative we will drive the 3G wireless internet very hard.
In India, CDMA shipments in fiscal 2007 increased approximately 26% from fiscal 2006 and the 55 million CDMA subscribers account for 26% of the wireless market. Since, January 45 new CDMA2000 handsets were introduced into the market. CDMA continues to evolve in India and we anticipate the first EV-DO and network launch by the end of this year.
In closing, I'm very proud of the record results we've delivered to our shareholders in fiscal 2007. We will continue to make significant investments in research and development as our employees and partners continue to bring the most innovative, high-quality products to the marketplace.
Our product and intellectual property portfolios are well positioned for the continued growth in 3G convergence and next generation technologies.
That concludes my comments. I will now turn the call over to Steve Altman.
Thank you, Paul, and good afternoon, everyone. I look forward to seeing many of you next week in New York. As Paul highlighted, there continues to be substantial growth and many exciting developments throughout the industry enabled by our technology, innovation, and partners.
Despite our contributions and major investments to help expand our industry, we continue to defend our business and extensive intellectual property portfolio from those members of Project Stockholm who wish to alter our business model and pay substantially less for the use of our technology than the rest of the industry, in a transparent attempt to improve their profit margin.
While we remain firmly convinced that the validity and strength of our positions and believe that we will ultimately prevail, we recognize that the litigation and regulatory proceedings that we are involved in are numerous and complex. We are being attacked on many fronts by the Project Stockholm members and a negative outcome resulting from any of these attacks could materially impact our business.
Throughout the past year, we have attempted unsuccessfully to resolve our disputes with both Broadcom and Nokia. To meet our needs any settlement must reflect the industry recognized value of our intellectual property and permit all of our businesses, including QCT and QTL, to continue to thrive and contribute to the technological advancement and growth of the industry.
We remain steadfast in our belief that unless and until we can achieve a satisfactory settlement we will vigorously defend ourselves against these attacks and take action necessary to ensure that QCT remains well positioned to grow its business and that QTL receives fair value for licensing the company's intellectual property.
Let me take some time to update you on the status of some of our legal proceedings. I expect to go into more detail in this area at the upcoming analyst conference. Although, we previously suffered a number of setbacks in litigation with Broadcom, we have taken steps to correct these negative results and I'm pleased with the recent progress we have made in a number of areas.
The Court of Appeals for the Federal Circuit granted a stay to each of those OEM and carrier customers who have made requests for stay, allowing our customers to continue to introduce and import into the U.S. innovative and new products using our chips.
In so doing, the Appellate Court noted as a basis for granting the stay that there is a significant question of law as to whether the ITC has the statutory authority to impose a downstream remedy against OEM and carrier customers who are not named by Broadcom in the action. From the outset of this litigation we have asserted the impropriety of the downstream remedy sought by Broadcom and are pleased that the Court recognized this fact.
With respect to the California patent infringement case in Santa Ana, where a jury found that we willfully infringed claims of three of Broadcom's patents, the Court has issued a tentative ruling vacating the willfulness verdict based on the Seagate case, which substantially changed the law in proving willful infringement.
The Court also tentatively vacated its enhanced damages award, exceptional case finding and attorneys' fees award as well as the underlying verdict for inducement of infringements. In its tentative ruling, the Court indicated that it will provide Broadcom with the option of accepting a new trial on all matters in lieu of accepting the reduced verdict.
The Court is still considering its final ruling in light of additional argument and briefing. We anticipate a final ruling in the near future. This past April, Broadcom commenced litigation in the California Superior Court alleging our conduct in industry standards organizations violated California law.
We are pleased that the judge granted our motion to stay this case in light of the pending federal case in New Jersey. We do not expect that the New Jersey case filed by Broadcom is likely to reach trial until at least 2009.
As I mentioned, we have tried numerous times to resolve our dispute with Broadcom. Although we cannot get into the details of confidential settlement discussions between us, we can tell you that while Broadcom attacks the royalty rates that we have charged for licensing our entire patent portfolio as being excessive, Broadcom has demanded that we pay them a flat $6 per chip in exchange for licensing a single Broadcom patent.
Let me now turn to Nokia. Although we continue to have settlement discussions with Nokia, I unfortunately have nothing new to report to you in terms of progress in these discussions. There have been, however, several encouraging developments in our legal battle with Nokia over the past year.
In August, Nokia filed an ITC action against certain chips and products sold by us. Last month the administrative law judge in the ITC granted our motion to dismiss Nokia's actions and terminate the investigation in light of the pending 3G contract arbitration.
In Nokia's case in Germany alleging patent exhaustion, the Mannheim Court dismissed Nokia's claim as inadmissible. In addition, we prevailed in the Nokia GSM arbitration filed in 2005 by Nokia where Nokia asserted that we could not bring GSM, GPRS and Edge patent actions against them as a result of our CDMA, WCDMA subscriber unit license agreement.
The arbitrator ruled in our favor and our GSM actions are proceeding against Nokia. There are several key dates regarding our actions with Nokia coming up in the near future. The ruling in Nokia's patent exhaustion case in the Netherlands, a similar case to the German case, has been postponed and we anticipate a ruling in the coming weeks. We believe these claims of patent exhaustion are without merit.
Our patent infringement claims against Nokia's GSM based products in the U.K. is still on schedule to begin in November. In addition, we have similar claims against Nokia GSM products in Germany, France, Italy, and China that we expect to be heard in the coming year.
In our ITC case against Nokia, the evidentiary hearing has been completed and we believe we presented a strong case. We now expect the administrative law judge's initial decision in mid-December with the commission's review and final decision expected to be completed in April 2008.
During the past quarter, we continued to expand our broad licensing program as we’ve announced five new license agreements. We added another OFDMA chip license and to date we have six OFDMA licenses. With over 145 total licensees including 80 WCDMA and TD-SCDMA licensees, our portfolio is the most licensed portfolio in the industry and continues to promote innovation and competition that benefits consumers and the industry worldwide.
We continue to invest aggressively in R&D to drive the expansion of 3G as well as next generation technologies. Our comprehensive license agreements provide our partners the ability to development 3G products as well as multimode 3G products, such as 3G MediaFLO devices or a 3G OFDMA product with no increase in our royalty rate.
The competitive advantage enabled by our unique business model provides our partners with the technology leadership to meet the broad needs of the wireless marketplace today and in the future.
I'll now turn the call over to Sanjay Jha.
Thank you, Steve. QCT had an excellent quarter and an excellent year and I'd like to discuss the highlights. QCT generated revenue of over $1.4 billion dollars this past quarter. This was our sixth consecutive quarter of record revenue and represents growth of 24% compared to the year-ago quarter.
Our fiscal 2007 annual revenue of approximately $5.3 billion dollars represents growth of 22% over fiscal 2006. We shipped approximately 68 million chipsets, which represents our ninth consecutive record quarter. For total fiscal 2007, we delivered approximately 253 million chipsets, which is a growth of 22% from fiscal 2006.
Earlier this year we celebrated our cumulative one billionth baseband and 3 billionth basic chip shipped and the growth curve continues to accelerate. QCT generated strong earnings, as our earnings before tax were $424 million, or 30% of revenue for fiscal fourth quarter.
QCT profit for fiscal 2007 of more than $1.5 billion was 19% greater than the previous year. QCT's CDMA2000 product continues to achieve success across all market segment. Our CDMA2001 1X chipsets are bringing wireless connectivity to many developing markets around the world.
Shipments of higher end EV-DO chipsets increased 45% from fiscal 2006 to fiscal 2007 due to strong consumer demand for higher speed data services, especially in markets such as North America, Japan, and Korea.
In the fiscal fourth quarter QCT continued to see strong growth in UMTS with a three times increase in shipments compared to the fiscal fourth quarter, fourth quarter of fiscal 2006. In contrast, during this same period our data indicates that UMTS market as a whole grew at a rate of two times reflecting an increase in market share over the past year.
We anticipate UMTS will continue to do very well for us as we push forward in both the high end HSPA, and HSPA plus products and the new single-chip solution for wideband CDMA and HSPPA. Our convergence platform dual core chipsets are now experiencing strong market traction with more than 30 commercial devices and 75 additional models and designs, based on our 7000 series chipsets.
We look forward to helping grow the overall smart phone market with our next generation dual core solution. The MSM 7525, and MSM 7225 was sampled this past quarter, will expand smart phones beyond enterprise customers into mass-market segments. Our single-chip QSC products for entry-level segments are enjoying wide market adoption.
As the first handsets based on first and second generation QST solutions launched in markets such as China and India, we are seeing the handset price differences between CDMA and GSM become less or even disappear completely. With the expansion of our QSE products to now include EV-DO and EV-DO Revision A and HSPPA, this family of products will be targeted at mass-market devices and will increase our addressable market.
QCT's segmented road map with tailored solutions for every market tier is giving us a significant advantage and helping us deliver the right product mix to the industry. Even as we reach emerging markets with our QST solutions, the demand for our higher end markets is also growing due to the increasing use of wireless data that Paul talked about in his conversation.
Our platform approach and comprehensive market coverage has helped our ASP’s remain consistent from fiscal 2006 to fiscal 2007. QCT's software strategy has always been to meet the needs of our customers and support any application platforms that are in demand by our customers and the industry. Recently, Google announced the Open Handset Alliance of which we are a founding member.
As part of the OHA, Qualcomm is committing R&D efforts to towards optimizing the performance of the OHA platform named Android, on our chipsets. This is another platform, which we will support for our customers similar to our ongoing effort with Windows Mobile and various versions of Linux. We also have several other promising product lines that extend us into new market segments.
QCT is making strong progress with Snapdragon platform, a new family of chipsets for product segments beyond traditional wireless handsets. We sampled the first two products from that platform in September to numerous customers. Both of these products offer a 1-gigahertz CPU core for sixth generation BSP core and industry-leading low power performance that will change the landscape of consumer electronics.
With the first devices expected to be commercially available in the second half of 2008, the Snapdragon platform will be a crucial part of our product portfolio for many years to come. The Snapdragon platform is just one area where QCT is expanding its reach and pursuing new growth opportunities.
We're also making strong inroads into notebook PC market with our embedded wide area wireless solution where we partnering with data cards and modular manufacturers. Today over 180 laptop models feature either our EV-DO or HSPA solution. We introduced our new Gobi solution, which offers multimode HSPA and EV-DO Revision A in one device as well as GPS, to take embedded connectivity for notebooks to the next level.
Gobi's available today and we anticipate the first commercial notebooks with Gobi solution to be available in early part of second quarter next year. Our ability to lead the fabless industry in process technology advancements remain strong and even as the first handset based on our 65-nanometer chipsets began launching around the world we recently taped out our first chips in 45-nanometer process technology.
Smaller process geometries deliver numerous benefits to both the industry and to the end users and our very close foundry relationships have given us a significant advantage in this area. As we look forward to the early part of fiscal 2008, our demand continues to accelerate significantly across multiple product tiers.
Upside beyond our guidance of 74 million to 78 million chipset shipment in fiscal first quarter 2008 is limited by the availability of certain trailing edge technology silicon capacity, which impacts our ability to ship certain products. We expect to be able to increase our shipment in fiscal second quarter as we improve the supply situation and given our current view of the full demand.
We expect to be able to meet market requirements by fiscal third quarter of 2008. Finally, iSuppli recently announced that Qualcomm remains the top supplier of wireless semiconductor for the second quarter of 2007. This past year we have retained a significant technology and market lead that offers our customers a strong competitive advantage. We're also expanding into other market segments where our wireless expertise can bring new value to mobile products. We look forward to another very strong year.
Thank you. And I'll now turn this call over to Bill Keitel for an overview of our financial results.
Thank you Sanjay and good afternoon everyone. We're very pleased to report another year of record revenues, earnings per share, and operating cash flow driven by our successful R&D investments and the continued acceleration of 3G adoptions around the world.
GAAP earnings for fiscal 2007 grew 35% year-over-year to a record $1.95 per share and revenues increased 18% to a record $8.87 billion. We recorded net tax benefits related to prior years of $331 million, or $0.20 per share, as a result of the conclusion of recent tax audits.
Pro forma earnings for fiscal 2007 grew 23% to a record $2.01 per share and pro forma net income grew 21% to $3.41 billion. As you'll recall, pro forma earnings exclude share-based compensation, our QSI segment, acquired in process R&D and benefits from tax audits related to prior years.
Our business continues to generate strong cash flows. Operating cash flow for fiscal 2007 was $3.81 billion, up 17% year-over-year and a healthy 43% of revenue. During the fiscal year we returned approximately $2.34 billion of capital to our shareholders. This includes cash dividends paid of $862 million and 37 million shares repurchased for $1.48 billion.
In addition, from October 1st through November 7th, we repurchased and retired an additional 13 million shares for approximately $525 million dollars. With this recent share repurchase activity our remaining repurchase authority is now $940 million dollars.
QCT shipped a record 253 million MSMs in fiscal 2007 and recorded an impressive 29% operating margin as volume ramped, particularly in EV-DO and WCDMA MSM’s. QTL's operating margin was 84% for fiscal 2007 and 83% for the fiscal fourth quarter and this decrease was attributable to not recognizing Nokia royalties for most of the quarter.
Pro forma R&D increased 24% year-over-year, as we continued to invest in integrated circuit products, next generation CDMA and OFDMA technologies and other new initiatives that compliment advanced 3G networks.
As a result of licensee audits, we determined during the fourth quarter that our estimate of total handset shipments and average selling prices needed to be slightly adjusted for 2006 and 2007. These adjustments have no revenue impact.
A quarterly summary of these changes is available on our Investor Relations Web site. Our prior guidance for June quarter shipments was 92 million units compared to the estimated 89 million units, we reported today.
If not for the information learned from licensee audits during the quarter, the reported shipments for June would have been consistent with our prior 92 million unit guidance. In other words, we have confidence in our forecasting methodology, but we'll true up the forecast based upon information, which may become available to us through licensee audits.
June quarter estimated handset shipments increased sequentially driven primarily by WCDMA growth. The estimated average selling price of CDMA based handsets was $218 for the June quarter and $214 for the fiscal year.
For the calendar 2007 CDMA market, we now expect approximately 385 million to 395 million CDMA based handsets to be shipped, including approximately 182 million WCDMA handsets.
Based on the 390 million midpoint of our estimate, worldwide CDMA handset shipments for calendar 2007 are anticipated to grow approximately 31% year-over-year. Our new estimate for calendar 2007 shipments is an increase of 2 million units over our prior estimate and incorporates the unit restatement previously mentioned.
I'll now highlight our guidance for fiscal 2008. We've excluded from our guidance estimated $0.25 to $0.30 earnings per share; we expect Nokia will owe us for fiscal 2008. We've also excluded potential upside from 3G licenses in China.
Finally, as you'll recall, litigation expenses in fiscal 2007 were disclosed to be more than $200 million dollars in defense of our business model. Although, we expect litigation expenses to decrease modestly in fiscal 2008, we have assumed our total business defense costs to increase approximately $0.04 per share.
This includes legal expenses as well as costs that we may agree to incur to support our partners and minimize any disruption that they may incur as a result of the litigation.
We estimate the calendar 2008 CDMA phone market, will increase approximately 26% to 34% over 2007, with shipments of approximately 492 million to 522 million units. Based on the 507 million midpoint of our 2008 estimate, we anticipate shipments of approximately 223 million CDMA2000 units and approximately 284 million WCDMA units.
Based on the current business outlook, we anticipate fiscal 2008 revenues to be in the range of approximately $9.5 to $9.9 billion dollars, an increase of 7% to 12% over fiscal 2007. And we anticipate pro formula diluted earnings per share to be in the range of $2.03 to $2.09.
For comparison purposes, if we were to include our estimate for Nokia's royalty obligation in both Q4 fiscal '07, and fiscal 2008, pro forma earnings per share estimates for fiscal 2008 would be $2.28 to $2.39 a share, up 11% to 16% over fiscal 2007.
We estimate that pro formula gross margin will decrease in fiscal 2008 to approximately 69%, driven by a higher mix of QCT revenues relative to QTL revenues.
We estimate average selling prices for CDMA2000 and WCDMA phones combined to decrease approximately 7% in fiscal 2008 to approximately $199, driven by expected aggressive pricing in Europe to introduce phone models for the prepay market and a mix shift in CDMA2000 higher growth Asia-Pacific markets.
We anticipate pro forma R&D and SG&A expenses in total to increase approximately 12% with the majority of this growth occurring in R&D.
Fiscal year 2008, we plan to increase our investment in the services business of the QWI segment. We see a number of key areas where Qualcomm can build new revenue opportunities including mobile commerce and further extensions of the BREW platform.
We anticipate our pro forma tax rate in fiscal 2008 to be approximately 21%. We estimate our GAAP diluted earnings per share will be approximately $1.68 to $1.74 for fiscal 2008.
This includes an estimated loss of approximately $0.14 per share attributable to QSI as well as approximately $0.21 per share attributable to estimated share-based compensation.
Turning to the first quarter of 2008, we estimate revenues will be in the range of approximately $2.3 to $2.4 billion dollars, an increase of 14% to 19% year-over-year. We estimate first quarter pro forma diluted earnings per share to be in the range of approximately $0.50 to $0.52, an increase of 16% to 21% year-over-year.
This estimate includes the shipments of approximately 74 to 78 million MSM phone chips, during the December quarter, and 95 to 98 million CDMA based handsets shipped in the September quarter at an average selling price of approximately $212.
We believe channel inventory levels continue at the upper bands of the historical 15 to 20-week band, as we've observed for the last few quarters. We expect a normal seasonal trend in the December quarter, as we enter the busy holiday selling season.
As you know, beginning in the fourth quarter of 2007 and continuing, until an arbitrator or a court awards damages or the disputes are otherwise resolved by agreement, we are not recognizing royalties due from Nokia.
Therefore, our implied royalty rate will be lower compared to prior periods, as our reported handset units do contain estimates for unit shipments by Nokia. We expect total company pro forma R&D and SG&A expenses combined to increase sequentially approximately 13% in the first fiscal quarter.
Qualcomm Investor Relations website includes an extensive slide presentation on the many data points included in this conference call. We look forward to sharing with you additional data points regarding our fiscal 2008 guidance and plans including regional handset shipment estimates at our New York analyst meeting on November 14th.
The analyst meeting will be webcast for those of you unable to attend. That concludes our remarks. I'll now hand the call back to John Gilbert.
Thank you, Bill. Before we go to 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.
Operator, we are now ready for questions.
(Operator Instructions) James Faucette from Pacific Crest, please go ahead with your question.
James Faucette - Pacific Crest Securities
Thank you. I wanted to ask a question, two questions. First of all, just a catch-up that wasn't mentioned in this quarterly report about Sony Ericsson. In a previous quarter you had excluded them because of ongoing audits of their reports and the like.
Can you just give us an update as to where Sony Ericsson is and in terms of the audit process?
James, its Bill, on the catch-up, you're correct a quarter ago we did not receive a report from Sony Ericsson. We did get two payments from them, so they caught up for one quarter and paid an amount for the fourth quarter.
But having said that, those payments we think are substantially below what the license agreement requires, so the arbitration is proceeding and, Steve, do you want to comment?
We expect a decision from the arbitrators shortly.
James Faucette - Pacific Crest Securities
And so, as far as your forward guidance into fiscal year 2008, I guess, have you included Sony Ericsson at what you believe to be the correct royalty rate going forward?
For the full fiscal year, I've included a, what I think, what we interpret to be a correct royalty rate as well as a catch-up.
James Faucette - Pacific Crest Securities
That's great. Thank you.
Avi Silver from Bear Stearns, please go ahead with your question.
Avi Silver - Bear Stearns
Yes, hi. So when I look at the midpoint of your earnings guidance for the next quarter and the full-year it basically implies if you just flat line those numbers for the three quarters after fiscal Q1, it basically implies zero growth in earnings as the year progresses.
And I'm just wondering if you have any commentary on that? But also last year when you gave earnings guidance initially it implied about 5%, year-on-year earnings growth and, I guess, the comment that management had given me at the time were not a 5% earnings growth company, but that will grow in the out years. How should we think about that going forward?
Avi, Bill Keitel here. I'm planning to get a little more expansive on the profile year. I'm not going to get into a lot of comments here on this call. But I think one of the keys, Avi, is we are looking to continue to invest in R&D.
We've got, this is still a very exciting market, and there are a lot of opportunities in innovations that we've got planned in front of us on. That's number one.
Number two, I did point out that our guidance includes an increase in what we are planning to spend or being prepared to spend in defense of our business model. We do have an increase there.
And then, lastly, do recall if Nokia were included, for what we think they lost for fiscal 2008, you'd have strong double-digit growth numbers. Having said that, last couple years we've given guidance and then proved we executed well and exceeded that.
But, again, this isn't, as always, we try and give you an honest assessment of what we see ahead. But at the same time then we try and get our whole employee base energized to do better than those plans and we'll see what we can do.
Avi Silver - Bear Stearns
Tal Liani from Merrill Lynch, please go ahead with your question.
Tal Liani - Merrill Lynch
Hi. I have a question. I'll just -- I don't know whether you can help me but I think most investors will benefit from it. There is confusion about how to build the model with and without Nokia and therefore your guidance appears to be weak, weaker than consensus, but then once you add back the $0.25 to $0.30 in Nokia it looks like you exceeded the consensus.
I'm wondering if at least we can get an understanding whether this quarter numbers are actually reflective of the royalty rate going forward, so if I calculate the implied royalty rate is about 3.1%, is this the right number. If I work back, this is actually the one number that can determine the model. So is this quarter kind of components of P&L reflective of the next year when it comes to ex Nokia P&L?
And then just one comment you made on Nokia, it looks like you have some discussions, like a ray of hope. So if you can elaborate more on where does it stand when it comes to the discussions? Thanks.
So just on in terms of trying to correlate your model to our guidance here, in the quarter that we just reported, if you recall, our license agreement there is an option period that started on April 9th or 10th, I forget which exact date, but the 9th or the 10th, but anyway, there was a partial period for the quarter that Nokia did pay us royalties for.
So you're not getting a, what I would call a full quarter effect in the results we just reported for Nokia not reporting. Having said that, I gave you I don't always give gross margin guidance here but I just gave you the midpoint of what we're expecting for next year, 69%. So, I think I think that can help you triangulate pretty well.
The only other thing I would add to it, I mean, I got in front of me, I often follow what a lot of sell-side folks are projecting. I don't necessarily have everybody's in front of me here, but I took any number of your guys' models and I was at a 218 average, which equaled the Street, and based on the several models I pulled analysts were expecting the market to be about 20 million units greater than what we just suggested.
ASP pretty close, but just our guidance just a not below that, then on the business model defense, I think I just gave a $0.04 point that I didn't see in anybody's model, operating expenses, pretty close. What seemed to bid out was on the gross margins, which is why I'm giving you that midpoint estimate of 69%.
The other difference basically in the tax rates, so I gave you my tax rate guidance there. So, hopefully that's helpful.
On the question about Nokia and whether there's a ray of sunshine there, no, I would say that while we continue to speak with them on a fairly regular basis, there really has been no progress we're pretty far apart on being able to resolve our differences.
Both sides continue to work it and will continue to do so, but I would not characterize it as a ray of sunshine at this point.
Tim Long from Banc of America, please go ahead with your question.
Tim Long - Banc of America Securities
Thank you. If I can just drill down on the ASP’s a little bit, Bill, you mentioned may be a little below what some of the analysts were thinking about. Could you just give us a little more clarity about how you think your visibility is into ASP’s, particularly out more than one quarter?
And if you could also just talk about the impact of this line on, with regards to Nokia, obviously, a much bigger player in the WCDMA piece with higher ASP’s. Is there any color you can give us on ASP’s for the reported businesses?
Okay, Tim. I mean, if I look back at our track record of forecasting ASP’s, I think quarter-to-quarter we've done quite well. Looking back, though, several years, we typically do our forecast, I think as you're aware, using learning curves, and it's been a pretty good indicator, at least when CDMA2000 first started and initially here with WCDMA.
The difficult part to forecast is all of these, the data demands and the extra features that operators and subscribers have been wanting in these phones, and hence looking back, I think we've been a little too negative in terms of what we've been forecasting for ASP’s because I think every year they've ended up being a little bit better than what we projected at the outset of the year.
Again, having said that, that 199 figure is what I consider to be our best estimate. We're looking at a, that learning curve to continue on. The unknown's going to be really the data features and whether there's going to be a greater demand for that than what we're forecasting.
Obviously, the data ARPU operators are reporting are encouraging for that. On the other hand, we're working aggressively to expand this market. We want to see it expand, WCDMA expand into prepay in Europe and there's still a lot of opportunity in the developing world for high growth in CDMA2000. So that's kind of how I would assess it there.
Tim Luke. Please go ahead with your question. One moment, let me check and make sure that that line is open. Please hold. And that line is open. Please go ahead with your question, sir. If your question has been withdrawn, I'll move on to the next question. Mike Walkley from Piper Jaffray, please go ahead with your question.
Mike Walkley - Piper Jaffray
Hi. Thank you. I was wondering if we could also dig in a little bit to ASP’s outlook for the chipset side. Sounds like you had a flattish year-over-year but now that you've had a good mix of EV-DO and WCDMA should we expect kind of normal declines?
And also for Sanjay, I was wondering if you could just mention on the WCDMA side if you've seen any change in the competitive environment over the last quarter?
Mike, this is Sanjay. We've seen acceleration in demand for our UMTS products, so we're very pleased with that. I think a lot of that is being driven, as Bill was saying, with the ASP of handsets coming down and lot of carriers actually are going to ship more than 50% of the shipments in Europe, are going to be 3G, so we see an acceleration in 3G certainly. In terms of competitive environment, I haven't seen a significant change in the competitive environment over the last quarter.
Mike Walkley - Piper Jaffray
Great, and maybe just while you're talking on that, in terms of you talked about some shortages on other silicon areas. Can you give us an idea of what kind, is it 5% more you could do this quarter if there weren't the shortages?
We've, the only guidance I think we can provide you, Mike, is what our forecast is we cannot characterize the demand any more granularly than that. I do think that where we had more demand we could ship more. I won't characterize how much more beyond that. We do think that we will improve our supply situation next quarter and ship more next quarter.
Ehud Gelblum from JPMorgan, please go ahead with your question.
Ehud Gelblum - JPMorgan
Hi. Thank you very much, Bill, just a clarification and then a broader question. You made a statement about your guidance including some payments you might be making to partners to help them with their legal patterns and struggles.
I'm wondering if that would include that you're including in the guidance payments perhaps to companies like Verizon in the agreement that they have with Broadcom which I believe is $40 million a quarter so they may be paying somewhat in the vicinity of $160 million. Is that included in your guidance and perhaps one of the reasons that the EPS is lower than most people are expecting?
And then my other question is to dig a little bit deeper into the restatements that you've done over the last, it looks like the last seven quarters beginning with March of '06. Correct me if I'm wrong, but I was looking at the material you have on the website and just wondering if you can go into a little more detail as to how, it sounds like the revenue did not change.
We'd understand that the volume that you reported and the ASP’s that you reported, in fact ended up being higher than they were so that therefore the actual royalty rates that you were receiving on during those quarters from March of '06 was actually higher than we thought yes, was actually higher than we thought and the volumes were lower, if you can just go into a little more detail.
I thought people report to you what they do so how can they have not reported the right number and just understanding that a little bit more. Thank you.
Ehud, on your question on the payments, and you said is that potentially a difference in between our guidance here and what maybe one element of what people are expecting. I think that is the case. I think I just said that when I looked at several models, it was a clear difference. So I do think there's about a $0.04 difference in our estimates here.
We're not getting into who we provided that contingency for. It's a contingency for the fiscal year, and, but obviously Verizon is a key partner. We consider them a key partner. So that's one potential. In terms of the restatements, we did give a detail going back two fiscal years based on the information we got out of an audit, and as I said, it did not affect revenue.
It was only the detail that became available from the licensee in terms of units, and then a modest, it was a slight adjustment going back two fiscal years and then a slight adjustment to the ASP. So, you know, sometimes those things come up in an audit, and we get the numbers straightened out. And once in a while it's something that we provide a true up to you guys with. So that's what we're doing here.
Tim Luke from Lehman Brothers, please go ahead with your question.
Tim Luke - Lehman Brothers
Thank you. Can you hear me, Bill? Can you hear me, Bill?
Yes, Tim, go ahead.
Tim Luke - Lehman Brothers
Thank you. Just with respect to the part of payment then so you think its $0.04 for the whole year, just as clarification?
To be clear, I think you're aware that last year we disclosed our litigation expenses, we stated were more than $200 million dollars. And I'm disclosing extra information here for everybody today, saying that for fiscal 2008 we expect litigation expenses to continue to be more than $200 million dollars, albeit a modest decrease from fiscal 2007.
But, if you take the totality of expenses that I would put in the bucket of defending our business model, legal expenses, being one major one, and we're now adding this potential for support of our customers, the combination…
Tim Luke - Lehman Brothers
That's in the guidance, then? It is in the three to nine?
In the combination of all of that year-over-year is an increase of approximately $0.04.
Tim Luke - Lehman Brothers
Just with respect to Nokia I mean.
And just with respect, I'm sorry? Did you say just with respect to Nokia, Tim?
One moment sir, let's check to see if that line's still open. Hold on. Our next question is from the line of Mike Ounjian with Credit Suisse.
Mike Ounjian - Credit Suisse
Great, thanks. Sanjay, could you give us some thoughts in terms of what's sort of baked into the guidance for the next year in terms of your UMTS market share? And give us an update, as well, on to where you are with single-chip UMTS product.
Obviously, one or a few of the competitors are out there making some aggressive claims as to where they are on a relative basis. So I'd appreciate any updates you can give on that and sort of where you think that fits in, in the competitive landscape.
Mike, we are proceeding very, very well with the development of our single-chip solution. We're engaged with some of our key customers, and we remain on track, I believe, to deliver handsets in the marketplace based on single-chip solution in the second half of next year.
So we're very proud of what's going on there, the part consumption on the integration, the cost point that I think we can enable. That is one of the reasons why we believe the migration from 2G to 3G will accelerate next year. So I think we remain very well positioned there.
As I noted in my script, I think we lead the industry today in being able to deliver 45-nanometer devices and I think that delivers to us cost structure as well as VAR consumption benefits, which will further strengthen our competitive position.
In terms of our market share I've never guided you to a number there, but we continue to see very strong demand for our chipsets in UMTS and for our 7000 series chipsets. So I remain hopeful that that will continue to drive our earnings.
Paul, one other area that people don't tend to focus on is that we're seeing very strong demand on the UMTS side in particular for USB data modems and data cards and it's one of the things that's really driving us hard towards this Gobi initiative that Sanjay mentioned earlier.
Brant Thompson from Goldman Sachs, please go ahead with your question.
Brant Thompson - Goldman Sachs
I guess two things. The last couple of quarters you've put up some very strong operating margins in your chip business. If you could just talk a little bit about some of the investments that you're making there and how should we think about that going forward.
And then second just a follow-up on the competitive landscape in the chip business, we've seen a number of announcements at Motorola about their chip strategy, becoming much broader, I guess, with the number of suppliers that we would have expected they would work with over time, same thing with Nokia.
So clearly, there's a lot of capital going into a number of these competitors.
Could you just talk about how you're addressing those risks longer-term? And I know you haven't given a number on market share, but I'm, is it correct to assume that you expect your market share to continue to increase into this next year for 3G chips? Thanks.
Just talking about margins, you're right to say that 2007 was very strong margin year for us. We anticipate a modest decrease in our margin going forward. And in term of places where we're making investments, really, I think we've led in HSCPA developments fairly significantly.
We're investing heavily in HSPA Plus developments. We think we will be, again, the first to sample an HSPA Plus device in the industry, which will enable data rates up to 28-megabits per second. We're also investing heavily in third party operating systems.
We're investing in our Snapdragon platform and hoping to expand our reach beyond just handset devices. We're also investing in peripheral wireless technologies because we believe that integration of those technologies will strengthen our wireless platform. So those are the places we're investing in.
In terms of the competitive environment, I think that we've heard a lot of announcements from a lot of folks on what may or may not occur over a period of time. I think from my perspective the jury is still out as to how that will transpire in the real marketplaces.
And we remain very, very competitive in the marketplace. It's a very competitive marketplace. I believe we have 20 competitors here, but we have, because on the basis of our leadership technology leadership, our cost leadership, I think we remain very competitive.
Maynard Um from UBS, please go ahead with your question.
Maynard Um - UBS
Hi. Thanks. On your QWI business, just looking at that was stronger in the quarter. Is that something seasonal? Should we expect that on a go-forward basis or is this just a massive ramp that we're starting to see in your BREW business?
And then if I could just, on the WCDMA unit side you're obviously expecting strong growth there. What's driving that and should we expect to see the quarterly run rate of WCDMA units to exceed those of CDMA units this calendar year? Thanks.
Maynard, on QWI, in the fourth quarter we did very well, particularly in our QChat business. Looking into the 2008, we're expecting our earnings in QWI to decrease year-over-year.
In the context of total Qualcomm I wouldn't call it significant but in the context of QWI, fairly significant.
And it's to this point that we mention that we see some good investment opportunities there to expand the BREW business opportunities and as well some mobile commerce opportunities we see.
And so that was your first question. In terms of our shipment in UMTS and the relationship of the volume shipment of UMTS and CDMA2000 shipments, I think that while we're seeing pretty good growth, very good growth, in fact, in UMTS shipment, we're equally seeing very good growth in the low end CDMA2000 shipment and its actually my anticipation that we will not outstrip UMTS shipment in this fiscal year.
In fiscal 2008 CDMA2000 shipments will continue to be greater than UMTS shipment. But certainly, I think that there is a very good trend there in terms of increased UMTS shipment.
Ed Snyder from Charter Equity Research, please go ahead with your question.
Ed Snyder - Charter Equity Research
Thank you very much. To that very point, Sanjay, we saw a big increase in LG shipments of low-end CDMA phones and we're seeing a trend towards the lot of OEMs, including Samsung to try and push into that market.
And I know you're well positioned from a chip point of view here, but the blend of phone ASP’s is clearly going to be dropping in the low-end CDMA, we see in dropping in wideband CDMA, as you pointed out in Europe as carriers try to their get costs or subsidies out of the market.
Do you expect this trend I mean we're starting to see it this year. Is it going to accelerate in '08 and what does that do to your royalty stream? Your rates stay the same but the calculation on royalties, are you going to see a commensurate increase in unit volumes to offset that, I mean, what's your feeling per se end of fiscal year '08 maybe into '09?
I think you're right to characterize the trends there, but I think one thing that's important is that the data features are becoming very, very important. And Paul talked about the Hutchison phone launch, which includes significant number of internet capabilities in the low end and we're beginning to see that, and as a result of that, in fact, we see broad-based acceleration of data usage at carriers.
So actually what is interesting is that I think these features will, in my opinion, keep, and create a new tier of devices which keeps the ASP from being, from going down as much as the low end of trend would seem to indicate. I think that there's a balance between the data features and the low-end handset costs and my expectation in 2007 had been that that would impact our ASP.
As you know, that our ASP remains roughly flat in chipset side and I think Bill could comment a little bit on the handset side. But that's a trend, which is likely to be positive for us.
And the handsets had been pretty much the same. We've been, last several years just surprised on the upside with the amount of data features that carriers and subscribers want in the handsets.
At this point our best outlook is for about a 7% decline year-over-year in the average ASP’s, but we'll have to see how that goes in terms of the growth of the voice-only, the voice-centric developing world versus the, the more feature-rich developed world, and, again, those data ARPU numbers that are coming out here recently are encouraging for the more feature-rich handsets.
And ladies and gentlemen, we've reached the end of the allotted times for questions and answers. Dr. Jacobs, do you have any closing comments?
Thanks, everybody, for joining us. I think we showed very strong growth last year, I'm very proud of the execution that we were able to do. And as the stock price hasn't necessarily reflected that performance, we've really taken that as an ability to repurchase our shares at attractive prices.
I'm happy with the new products that we've been introducing. Sanjay was explaining, we're certainly gaining traction, and I'm happy with the new partnerships that we've been able to achieve in the entertainment industry, in the computing and the internet industry, and throughout the world. We've also been able to strengthen our legal team and I think the recent results are certainly improved.
So as we look forward, there's lots of opportunity ahead of us. I think we'll continue to stay focused and execute well and given all the convergence that's happening and the products and technologies we're bringing to market, the opportunities are extremely exciting. So thanks very much, everyone.
This concludes the Qualcomm fourth quarter and fiscal year-end conference call. You may now disconnect.