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QUALCOMM Inc. (NASDAQ:QCOM)

Q1 2006 Earnings Conference Call

January 25th 2006, 2:30 PM.

Executives:

Bill Davidson, VP, IR

Paul Jacobs, Chief Executive Officer

Steve Altman, President

Sanjay Jha, EVP, President, CDMA Technologies Group

Bill Keitel, EVP, Chief Financial Officer

Analysts:

Michael Ounjian, Credit Suisse First Boston

Ittai Kidron, CIBC

Christin Armacost, SG Cowen

Hasan Imam, Thomas Weisel Partners

Inder Singh, Prudential Securities

Mark McCatchney (ph), Twin Peaks Capital

Edward Snyder, Charter Equity Research

Tim Long, Banc of America Securities

Brian Modoff, Deutsche Bank

Paul Sagawa, Sanford C. Bernstein

Brantley Thompson, Goldman Sachs

John Bucher, Harris Nesbitt

Operator

Thank you for standing by. Welcome to the QUALCOMM First Quarter Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. If you have a question, you’ll need to press “*” “1” on your telephone keypad. As a reminder this conference is being recorded today, January 25, 2006. The playback number for today's call is 800-642-1687, international callers please dial 706-645-9291. The playback reservation number is 4046245. I would now like to turn the call over to Mr. Bill Davidson, Vice President of Investor Relations. Bill, please go ahead, sir.

Bill Davidson, VP, IR

Thank you and good afternoon. Today's call will include prepared remarks by Dr. Paul Jacobs, who is joining us remotely from the World Economic Forum; Steve Altman; Dr Sanjay Jha; and Bill Keitel. An Internet presentation and audio broadcast accompanies this call and you can access it by visiting www.qualcomm.com. During this conference call, if we use any non-GAAP financial measures as defined by the SEC in Regulation-G, you can find the required reconciliations to GAAP on our website. I would also direct you to our 10-Q and earnings release which were filed and furnished respectively with the SEC today and are available on our website.

As a reminder the QUALCOMM Investor Relations website includes a thorough presentation on the many data points included in this conference call. 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.

Pro forma revenues were $1.74 billion in the first fiscal quarter, up 25% year-over-year and 12% sequentially. First quarter pro forma net income was $667 million, up 41% year-over-year and 23% sequentially. Pro forma diluted earnings per share were $0.39, up 39% year-over-year and 22% sequentially. First fiscal quarter pro forma free cash flow defined as net cash from operating activities less capital expenditures was $531 million, up 93% year-over-year and was 30% of revenue. Now it's my pleasure to introduce QUALCOMM's CEO, Dr. Paul Jacobs.

Paul Jacobs, CEO

Thank you Bill, and good afternoon everyone. I am pleased to report that we started the new fiscal year with record first quarter revenue led by strong demand for our chips. We reaffirmed our fiscal 2006 guidance, which reflects an acceleration of the CDMA market, which in turn is driving our financial projections for the year. I've been spending a lot of time on the road talking to our operator and manufacturer partners. We've been discussing our business model and the positive impacts on the industry from the healthy and competitive worldwide wireless marketplace that our business model fosters. We work closely with many wireless equipment manufacturers in all parts of the world to promote the adoption of 3G, partially because of the large number and variety of companies that we've licensed that we enable with advanced and feature-rich chipsets and software, prices for handsets and other wireless devices continue to decrease while features and functionality continue to increase. We continue to invest significantly in R&D to drive this dynamic and to build a leadership position in the wireless industry.

Our inventions enable new revenue streams for all our partners, enabling continuing investments throughout the wireless value chain. Our licensing model helps to limit royalty stacking on CDMA products, thereby reducing prices for the wireless consumer. For example, QUALCOMM has not increased its royalty rate as new technologies using QUALCOMM's patents are developed and commercialized. The cumulative number of QUALCOMM's inventions has grown substantially over the years but our royalty rate has remained the same. The resulting innovations are made available through our licensing agreement as unlike many other companies, we broadly license not only our essential patents but generally all of our patents. In addition, many of our license agreements include extremely valuable pass-through rights from which our customers of our QUALCOMM chipsets can benefit.

In November, we announced DMMX, DO multicarrier, multilink extensions, our platform for driving the EV-DO roadmap through the end of the decade. Part of our DMMX strategy is to be the leader in supporting standards based enhancements to EV-DO technology, namely revision A and revision B. At the same time, we intend to be the leader in implementing other enhancements that significantly improve system performance but don't require changes to the standards. The revisions will open the door to mobile Voice over Internet Protocol services and very low latency applications such as push to talk via DMMX, phones will operate in a concurrent multilink manner with multiple radio technologies while simultaneously receiving at multiple frequencies.

MediaFLO is a good example of DMMX because audio and video transmissions over EV-DO cellular networks are seamlessly combined with transmissions received using the FLO technology, which operates in separate spectrum. The goal is to enable operator partners to provide a superior multimedia experience at the lowest possible cost. Similarly, on the WCDMA side of 3G we're driving the roadmap via HMMX HSDPA multicarrier, multilink extensions. We continue to transfer what we learned on the CDMA2000 roadmap to support our WCDMA customers and partners, providing them with products that support higher data rates through our HSDPA and HSUPA solutions. Through these, operators are able to provide their customers enhanced multimedia and IP-based data capabilities including multicasting.

Some of our competitors are trying to spread misinformation about the role of QUALCOMM in the development of WCDMA. The fundamentals of CDMA technology underpin all of WCDMA. In addition QUALCOMM has contributed substantially to the development of HSDPA, which improves the downlink, HSUPA, which improves the uplink, and MBMS, which provides multicast service. QUALCOMM is working to stabilize and deploy these capabilities and to further enhance WCDMA by proactively contributing to many areas of indiscernible. 3GPP has also embarked on a long-term evolution to which QUALCOMM has substantially contributed. For both 2004 and 2005 QUALCOMM has made more contributions than any other company to the physical layer group in 3GPP. We're enhancing both 3GPP and 3GPP2 based standards, providing a strong technology roadmap for both CDMA2000 and WCDMA operators.

QCT continues to be unmatched in execution on their product roadmaps. The same strategies of integration, on-time delivery and technical leadership that we established in CDMA2000 are driving our success in WCDMA. Over the past quarter we announced a new entry level WCDMA chipset and we reinforced our leadership standing in HSDPA technology with the sampling of an HSDPA solution towards data rates of up to 7.2 megabits per second, surpassing the speeds of many wired broadband connections.

We've worked closely with numerous industry partners to help lead the rollout of 3G UMTS networks and commercialization of devices. Our WCDMA roadmap now includes solution for all market tiers from low end to highly advanced, features the integration of multimedia capabilities and will help drive the adoption of 3G technology. Our integration strategy delivers significant benefits to device manufacturers and enables the slim form factors for WCDMA devices that are in great demand by wireless users. I also believe there's a strong growth opportunity in developing markets and we're focused on providing very low-end CDMA2000 solutions. We work closely with our partners to hit exceptionally competitive price points and bring the benefits of CDMA technology to the world's next billion wireless subscribers. We believe that CDMA technology provides significant advantages to emerging markets because subscribers can use their low-end handset for data services as well as voice calls and SMS, advantages that positively impact local economies and bridge digital divides. Our goal is to bring these benefits to all developing markets.

In December 2005, we announced plans to work with Verizon wireless to bring its customers real-time mobile video over the MediaFLO multicasting network in the United States. Verizon wireless intends to be the first service provider to use the MediaFLO USA network to deliver mobile TV services once the network begins planned commercial operation. Specific timing of service launches will of course be determined by the wireless operators but we continue to make excellent progress towards commercialization of MediaFLO. In January 2006 we connected live over the air demonstrations of FLO technology with LG Electronics and Samsung Electronics during the 2006 International Consumer Electronics show in Las Vegas. The demonstrations were the first featuring FLO technology on handsets from major device manufacturers.

Great strides have also been made in achieving the global standardization of FLO technology. This past quarter the FLO Forum, an organization of 25 member companies which is driving the standardization efforts of FLO technology ratified the FLO air interface specifications and submitted it as a contribution for standardization to the telecommunications industry and sub-committee ER-47.1. Last call I made the point that QUALCOMM is more than a CDMA company. MediaFLO is one aspect of our diversification. The recent closure of the Flarion acquisition enhances QUALCOMMs strong position in OFDMA and demonstrates our commitment to add to our intellectual property portfolio through both internal R&D and acquisitions. Intellectual property is available to our existing licensees for use in CDMA multimode equipment without an increase to standard CDMA royalty rates. While CDMA remains the optimal technology to provide broadband spectro efficient mobile wide area wireless networks for the foreseeable future, both DMAs low complexity at wide signal bandwidth makes it a potential alternative where large blocks of spectrum can be dedicated.

Beyond the Flarion acquisition we've been working in the IEEE working group 802.20 traditionally confirmed a draft specification for the next generation of mobile broadband wireless access. This draft specification will now enter the 802.20 ballot process. 802.20 draft specifications consist of frequency division duplex and time division duplex components that can be deployed in bandwidths up to 20 megahertz. The bandwidth can flexibly be adjusted based on available spectrum. The draft specification leverages the technical strength of CDMA and OFDMA by using OFDMA on the forward link and a combination of CDMA and OFDMA on the reverse link. These techniques increase the coverage, capacity, and hope to maintain the quality of service for wireless systems. We believe that this solution significantly exceeds capabilities of other proposed systems.

Turning to wireless LAN, IEEE or 802.11n confirmed to draft specification for the next generation of wireless LAN with QUALCOMM's active involvement. Our leading edge MIMO transmit beam forming and link adaptation technologies have been included in the draft specification. These technologies greatly improve the range, data rates, and performance stability of wireless LAN which we've demonstrated at QUALCOMMs research center in New England. The 802.11n standard should deliver nearly four times performance of existing 802.11g networks and will be instrumental in supporting the digital wireless home and office of the future. The announcement of our Scorpion processor at the end of last year supports the market's next generation of data centric devices based upon the proven ARM architecture. Scorpion's processing power enables mobile handsets to feature many of the capabilities only found on personal computers. This is done in combination with significantly reduced power demands in order to ensure adequate battery life for wireless devices.

I'm very pleased that we are executing well financially and that our results for the first quarter ended a bit higher than we had originally guided at the outset of the quarter, and we continue to be excited by the opportunities ahead of us. I'd like to now turn the call over to Steve Altman.

Steve Altman, President

Thanks Paul and good afternoon everyone. I'm going to start by highlighting some important facts and trends that we're seeing in CDMA2000 and WCDMA around the world. Over the past decade QUALCOMMs licensees have commercialized more than 1,000 CDMA phone models. Today there are approximately 50 manufacturers supplying CDMA2000 devices at a wide variety of prices ranging from the very high end to the very low end. In the low end we now have at least three licensees that have supplied at manufacturer prices below $50. We're also aware of manufacturer prices being quoted for CDMA2000 handsets in the Indian market of approximately $40. We believe that all price tiers of handsets are important to help grow our business and we will therefore continue to work closely with our customers to help allow all of these different tiers to remain competitive.

We also continue to see quite healthy growth in WCDMA. Based on royalty reports received in the December quarter of 2005 our shipments in the September quarter of 2005 there was 24% volume growth quarter-over-quarter in shipments of WCDMA units mainly due to 51% growth in Europe based on these reports the number of manufacturers selling WCDMA devices increased quarter-over-quarter to 17 from 13. And we are now seeing a wide range of competitive handsets being made available. As the WCDMA market grows, as increased price competition occurs, and as a wider variety of high, middle, and lower end handsets become available from more of our licensees entering the WCDMA market we have seen and expect to continue to see the rapid decline of the ASP for WCDMA devices as well as a broadening of the range between the highest and lowest prices. We now estimate that the world ASP, the worldwide ASP for WCDMA devices to be $372, which represents a decline of approximately 10% quarter-over-quarter.

At our London analyst conference, we shared with you the lowest wholesale pricing, we have seen for WCDMA handsets in quantities of approximately 50,000 units. We now estimate that this WCDMA low end pricing dropped from $217 in the September quarter of 2005 to $141 for the December quarter.

As I'm sure you noted we for the first time provided you with specific ASP information for WCDMA. Although I think you may find this information is interesting, it is important to understand that particularly at this early stage of WCDMA deployment a number of factors can significantly impact WCDMA ASPs, including the geographic mix of the sales, as well as the shifting market shares amongst the various manufacturers, because as you might expect some manufacturers are charging significantly higher prices for their WCDMA devices than other manufacturers.

Now let me briefly discuss some of our other markets around the world. In India, the CDMA subscriber base reached 25.1 million units resulting in approximately 30% market share for CDMA. 32 CDMA based devices were launched in December quarter. We expect continued growth in this market with continued emphasis on the low cost handset. In China, you may have seen a number of articles surfacing recently related to third-generation wireless licenses. We no longer speculate on when these 3G licenses will be issued. Once these licenses are issued, however, we believe that China will rapidly deploy CDMA 3G products increasing overall volumes and decreasing ASPs, and we believe that our licensed Chinese manufacturers as well as other licensees will participate in a major way.

In Europe we continue to be encouraged by the rollout of WCDMA services. Paul, Sanjay, and I have met with a number of the European operators. They all appear to be very committed to WCDMA and we expect volumes to continue to ramp as ASPs decrease and the number and variety of available handsets increase. We have allocated significant resources to Europe and have received a very warm reception from the operators. As we have and continue to do with CDMA2000 operators we are working with many of the European operators hand-in-hand to help them optimize their WCDMA networks and services. We remain committed to working closely with European operators during their ongoing WCDMA and HSDPA network deployments. In North America, Japan, and Korea, we continue to see increased demand for EV-DO products.

Although neither Sprint, Nextel and Verizon have yet announced their results for the December quarter, Verizon wireless recently announced fourth quarter 2005 net wireless customer additions of two million – and industry record to-date. Verizon has also stated that they're continuing to see increased data ARPU and continue to achieve record low churn. Samsung, Kyocera, and Motorola as well as other manufacturers have announced new handsets supporting EV-DO networks in these regions. In the U.S Cingular, announced Cingular Broadband Connect based on HSDPA technology. We are extremely pleased that our chipset customers were able to support this launch as QCT was first to market with a solution for HSDPA. NTT DoCoMo reported strong 3G subscriber figures for December with net adds of 1 5 million up 53% month-over-month. KDDI also posted strong net adds in December and finished the year over 21.5 million subscribers, of which 6.75 million are DO.

Turning to QTL, in the first quarter of 2006, three new licensees entered into CDMA subscriber equipment license agreements. One of the three agreements was with a WCDMA licensing in China bringing the total number of WCDMA agreements with Chinese manufacturers to 7 all at our standard worldwide royalty rates.

Finally, let me briefly update you on the complaints that were filed against us by six companies with the European Commission. Of the six complaints that were filed we up to date received a redacted version of just one of the complaints. We continue to believe the allegations contained in the complaint are without merit. We have not yet received the other complaints. As to the investigation by the EC, its status is confidential and there's little further that we can say at this time. We have and we’ll continue to cooperate with the EC to explain and demonstrate that all of QUALCOMM's activities are lawful and in fact foster healthy competition. Although we see articles or press releases from time-to-time attempting to attribute the higher ASPs of WCDMA devices to QUALCOMM's licensing terms or alleging that WCDMA is rolling out slowly as a result of IPR costs we see no evidence of any of this being true, and in fact believe the opposite is true.

Our licensing program has fostered healthy competition amongst the WCDMA handset suppliers leading to the rapid declines in ASPs mentioned earlier. Royalties paid to us by our licensees are very small component of the cost and price of the handset. As I mentioned earlier WCDMA handset ASPs are coming down rapidly, primarily driven by our chipset customers who benefit not only from our intellectual property licenses and past due rights, but also our competitive chipsets and software. For example, in Europe where a complaint has been filed alleging that QUALCOMM's activities are responsible for higher WCDMA handset ASPs we estimate that the ASP of WCDMA handsets sold by licensees using our chip is, are substantially lower than the ASP of WCDMA handsets sold by licensees that do not use our chip. We are seeing strong growth in volumes of WCDMA handsets and WCDMA handset ASPs will continue to decline as volumes continue to increase. I'd now like the turn the call over to Sanjay Jha.

Sanjay Jha, EVP, President

Good afternoon. I'd like to go over some key highlights of the QCT business. This was a record setting quarter for QCT in terms of shipments, revenues, and profit. We shipped approximately 47 million MSM to our customers around the world, had quarterly revenues of more than $1 billion and record operating profit of more than $300 million. In comparison, we shipped approximately 39 million MSM units in the first quarter of fiscal 2005 and 40 million units last quarter. In the first quarter of fiscal 2005 our quarterly revenues were $865 million and our operating profit was $242 million. ASP this quarter was down approximately 3% from the previous quarter, primarily due to normal price erosion combined with an increase in the shipment of our lower tier chipsets. As Steve and Paul mentioned we have been focused on meeting the needs of cost sensitive subscribers and enabling the growth of emerging CDMA markets like India, Latin America, Southeast Asia, and China.

QCT has worked hard enabling our partners to be more competitive in cost sensitive markets with our 6000 -- MSM6000 and RF CMOS based handsets. We have hit highly aggressive price points driving volume and enabling competitive entry-level handsets in these emerging markets. As a result we saw a significant increase in the demand of our MSM6000 chipset as a growing number of subscriber select CDMA solutions to meet their communication needs and we anticipate that this trend will continue in following quarters. We have seen increasing traction of our EV-DO portfolio. We now count 154 devices commercially available with 56 of them having launched in the past quarter and an additional 65 handsets in design. All based on our multimedia rich MSM6500 and MSM 6550 solutions for EV-DO networks. We experienced 128% increase in shipment of these chipsets during the quarter compared to the same quarter last year.

With more than 30 customers who have 120 handsets either in design or commercially available based on our UMTS and HSDPA products we've been actively contributing to wideband CDMA and HSDPA network deployments around the world. For example we supported the world's first HSDPA rollout launched by Cingular wireless by working with leading device manufacturers to develop and validate multiple mobile devices based on our MSM6275 chipset. QCT saw 48% growth in UMTS MSM shipment versus the previous quarter. This follows two successive quarters, which grew by 120 and 41% respectively in our UMTS chipset shipment.

QCT is the first to market with solutions for HSDPA and we have continued to make great progress in this area. We sampled our second-generation MSM6280 HSDPA solution and we're the first to achieve data rates of 2.6 megabits per second using MSM6280 based terminals in cooperation with numerous industry partners. Data cards and embedded modules are an increasingly important segment of our business and we have seen significant success in this market. QCT has had several customers announcing the commercial launch of numerous data cards and embedded modules based on our MSM solutions over the past quarter.

We are on track to sample the first 65-nanometer MSM6245 chipset for entry-level wideband CDMA markets in the second quarter of 2006. We are aggressively migrating our roadmap to 65-nanometer process technology to enable cost competitive ultra thin form factor handsets in demand by wireless users today. We're also on track to sample the convergence platform, MSM7200 for HSUPA and MBMS networks in this upcoming quarter, extending our leadership in the next evolution of UMTS. Our acquisition of Berkana Wireless, a fabulous semiconductor provider of CMOS RFICs expanded our RF capabilities and reinforces our leadership in this area. The addition of their RF CMOS IP design portfolio and engineering experience will help us bring new integrated advanced RF CMOS products to market faster. Thank you. I'll now turn the call over to Bill Keitel.

Bill Keitel, EVP, CFO

Thank you, Sanjay, and good afternoon, everyone. We are very pleased to report record revenues and earnings per share again this quarter driven by continued growth in demand for CDMA based products and services around the globe. Consistent with our prior practice we continue to provide both GAAP and pro forma financial results. Our pro forma results exclude the QUALCOMM Strategic Initiatives or QSI segment, tax gains related to prior years and with the advent of stock option expensing non-cash stock option expenses. We believe pro forma results provide investors with meaningful information about the Company's ongoing core operating businesses and are useful in evaluating performance on a basis that is consistent, comparable with prior periods.

I'll now highlight a number of key items in our first quarter fiscal 2006 results. First, GAAP earnings for the first quarter fiscal 2006 were $0.36 per share, including $0.05 in estimated stock option expense, $0.03 in tax gains related to prior years, and $0.01 loss attributable to QSI. Revenues increased 25% year-over-year to $1.7 billion, and pro forma earnings per share increased 39% year-over-year $0.39 per share.

Second. Our business model continues to generate strong cash flow. Operating cash flow was $596 million for the first fiscal quarter up 50% year-over-year. Pro forma free cash flow was $531 million, up 93% year-over-year. Cash flows are the primary driver of long-term shareholder value and are unchanged with the advent of a theoretical stock option expense. During the quarter we announced dividends totaling $148 million or $0.09 per share, which were paid on January 4, 2006.

Third, our tax rate for total QUALCOMM was 16% for the quarter. Lower than our prior estimate as a result of tax audits completed during the quarter. Our pro forma tax rate for the quarter was 26% consistent with our estimated 2006 full year rate.

Fourth, QCT had record revenues in MSM shipments during the quarter. Revenues increased 19% year-over-year to $1.03 billion on the strength of 47 million MSM shipped a 22% increase year-over-year. QCTs operating margin was 29% unchanged quarter-over-quarter as we continue to grow R&D investments in new chip development. Chip ASPs decreased sequentially driven by some product mix shift to lower tier MSMs in the quarter as well as planned price erosion.

Fifth, QTL earned record revenues of $564 million this quarter as licensees reported approximately 52 million new handset units shipped with an average selling price of approximately $215 per handset. As you recall these shipments occurred in the September quarter and were reported to us by our licensees in the December quarter. The licensees reports are the basis of our royalty revenue recognition. Unit shipments of these new handsets appear to have been notably strong in North America, Europe, and Japan during the September quarter. WCDMA average wholesale handset prices continued to decrease at a rapid pace and the range of prices continues to increase. Consistent with our expectation and encouraging for future unit growth.

ASPs for WCDMA handsets decreased approximately 10% from the prior quarter with wholesale price points as low as $120 for low-end models. Of the $564 million in total QTL revenue $39 million represented intersegment royalties $11 million were license fees and $514 million were royalties from third-party licensees. WCDMA royalties were approximately 40% of third party royalties reported this quarter and QTLs operating margin was 91%.

Turning to our guidance, for the calendar 2005 CDMA market, we now estimate that shipments were approximately 202 to 204 million new handsets. Based on the 203 million midpoint of this estimate we anticipate approximately 158 million CDMA2000 units and 45 million WCDMA units were shipped worldwide in calendar 2005. Our estimate for the calendar year 2006 handset market has not changed. We continue to expect shipments of approximately 255 to 270 million units in calendar 2006, an increase of 26% to 33% over our midpoint estimate for calendar 2005. Based on the 262 million midpoint of this estimate for calendar 2006, we anticipate shipments of approximately 176 million CDMA2000 units and approximately 86 million WCDMA units. We are reaffirming our guidance for fiscal 2006 revenue and earnings per share. We expect fiscal 2006 revenues to be in the range of approximately $6.7 billion to $7.1 billion, an increase of 18% to 25% over fiscal 2005. Although we're seeing early signs of increased revenue strength in low-tier products, such strength is judged to be within our stated range of revenue estimates. We believe it is too early in the year to raise the midpoint of that revenue guidance.

We anticipate pro forma diluted earnings per share to be in the range of $1.43 to $1.47, an increase of 23% to 27% year-over-year, inclusive of $0.02 dilution from the recent Berkana and Flarion acquisitions but excluding $0.01 of one-time in-process R&D charges related to these acquisitions. We estimate average selling prices for CDMA2000 and WCDMA phones combined will decrease 2% in fiscal 2006 to approximately $210 consistent with our prior guidance. We expect the combination of pro forma R&D and SG&A expense to increase approximately 22% to 27% year-over-year with the greater growth occurring in R&D as we continue to invest in the evolution of the CDMA2000 technology roadmap, WCDMA chip development, multimedia chip functionality, single chip low cost solutions, and longer-term technology enhancements including OFDMA.

We anticipate our pro forma tax rate for fiscal 2006 to improve to approximately 26% compared to our prior estimate of 27%. Primarily as a result of increased foreign income taxed at lower rates. We estimate GAAP earnings per share will be approximately $1.19 to $1.23 for fiscal 2006. This estimate includes a loss of approximately $0.06 per share attributable to QSI, a loss of approximately $0. 20 per share for estimated non-cash share-based compensation, a gain of $0.03 per share attributable to tax benefits related to prior years, and a $0.01 loss attributable to in process R&D from completed acquisitions.

Turning to the second quarter of 2006 we estimate revenues to be in the range of approximately $1.63 billion to $1.73 billion, a 19% to 27% increase year-over-year. We estimate second quarter pro forma diluted earnings per share to be approximately $0.35 to $0.37, a 21% to 28% increase year-over-year. This estimate includes shipments of approximately 44 million to 46 million MSM phone chips during the March quarter, a slight decrease sequentially, which is consistent with the seasonality we've often seen historically. We expect chip ASPs to decrease modestly as we sell proportionately more low-tier MSMs. We estimate that approximately 59 million to 61 million CDMA-based handsets shipped in the December quarter at an average selling price of approximately $209, driven by increased sequential shipments in multiple regions around the world notably WCDMA in Europe and Japan and CDMA2000 in the U.S and India.

As of the end of December we estimate that channel inventories remain within the 15 to 20 week historical band. We anticipate second quarter pro forma R&D and SG&A expenses combined to increase sequentially approximately 10% to 13% driven by our continued investment in new products and service, the acquisitions of Flarion and Berkana, and second quarter seasonal expenses such as employee related payroll taxes. Our guidance for the fiscal year anticipates modestly lower earnings the second half as compared to the first half. Although we're at an early juncture of the fiscal year, at this time we anticipate continued R&D investment growth, including our acquisitions of Flarion and Berkana, and proportionately more growth in the low tier markets as CDMA continues to grow in lower income regions of the world.

In closing, I see QUALCOMM and the broader CDMA market off to an excellent start for 2006. I'm pleased we've met or exceeded our fiscal first quarter guidance and reaffirmed our expectation for strong revenue and earnings growth in fiscal 2006 while continuing our growing investments to capture the significant opportunities we see ahead. That concludes my comments. I will now turn the call back over to Bill Davidson.

Bill Davidson, VP, IR

Thank you, Bill. Before we go into our question and answer session, I'd 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. Therefore I would like to ask our participants to limit their questions to one per caller. If you ask more than one question we will select the one to answer. Operator, we're ready for questions.

Question-and-Answer Session

Operator

Ladies and gentleman, we will not begin the question and answer session. To queue a question press “*’ “1” to retract the question press “*” “2”, if you are using a speaker phone please pick up your handset before pressing the numbers, one moment please for the first question. Your first question comes from Mike Ounjian with Credit Suisse First Boston.

Q - Michael Ounjian

Great, thank you very much. Sanjay, could you, I know Bill said that MSM ASP should be down sequentially in the March quarter but could you speak a little more about what you -- we should expect in terms of trends? Is it similar to the 3% we saw this quarter? And if it's in that range, Bill, if you could expand on why we're seeing revenue guidance down as much as it is given a very small decrease in chipset shipments and a fairly healthy increase in handset shipments. Is there something else we're missing there in terms of the revenue guidance going into the March quarter?

A - Bill Keitel

Do you want me to go first, Sanjay. So, first on the revenue guidance, if you recall, we're expecting ASPs on worldwide phones to decrease to approximately $209. And then other than that, it's a sequential decline in MSM units as we typically see and a modest decline in the average ASP. Other than that there's nothing really abnormal, Mike.

A - Sanjay Jha

Mike, in terms of the ASP decline of the chipsets, there are two or three things going on. Typically, the first calendar quarter is seasonally the lowest quarter for our ASP over multiple previous years. Secondly, we have made a pretty dramatic move in our low end chipset pricing to drive the emerging marketplace, and that has had two effects. Clearly it affects ASP. And secondly, it's actually driven the demand quite dramatically higher in the MSM6000 RF CMOS chipset. So I think those are two factors that impact our ASP. In terms of the range, without being precise, it's a marginal decrease, single digit decrease in the ASP.

Operator

Your next question comes from the line of Ittai Kidron with CIBC.

Q - Ittai Kidron

Hi, guys, congratulations on a good quarter. Steve, can you give us a little bit more color and updates on where do you stand with royalty agreements with Chinese OEMs on TDS CDMA and with non-Chinese OEMs given that 3G is hopefully finally around the corner?

A - Steve Altman

Well, we have, I think we've announced previously we have a number of agreements with on the non-Chinese manufacture side with all the major manufacturers that cover TDS CDMA, cover WCDMA, cover CDMA2000. There are still agreements that will need to be entered into with respect to TDS CDMA and the Chinese manufacturers. Our position right now is we're continuing to kind of watch that market. It's not clear to us at this point how and when and to what extent TDS CDMA will be deployed in China although it certainly appears that it will have some share there. But at this point we do have TDS CDMA agreements. I think our portfolio has been recognized by many major manufacturers in that regard, but we still have some work to do on the TDS CDMA side with Chinese manufacturers.

Operator

Your next question comes from Christin Armacost with SG Cowen.

Q - Christin Armacost

I think you, Bill, I wanted to go back to your guidance about earnings in the second half of the year and wondered if there are any major changes well, first of all, why would the earnings in the second half of the year be lower than the first half? And are we looking at any changes in the assumptions for the QCT operating margins that were supposed to increase I think to a little over 30% exiting '06? Thank you.

A - Bill Keitel

Yes, first what the guidance back in November for QCT operating margin was in the mid 20 percentile, closer to 25% in fact. So that must have been an older data point, Christin. On second half what we're seeing at this early stage is we continue to expect to grow our resources here, primarily R&D resources. We'll have full quarter effects of the Flarion and Berkana acquisitions on board with their engineering teams, and then as well, we're expecting -- we are seeing a stronger, expecting a stronger shift proportionately to the lower tier markets as these you know the India's, the China's, et cetera, we expect to see some good growth into those markets.

Operator

Your next question comes from Hasan Imam with Thomas Weisel.

Q - Hasan Imam

Thank you. I just had basically a follow-up on Christin's question. I was wondering, Bill, if you could comment on the margin trajectory for '06? As you mentioned with 3G handset ASPs coming down, makeshift toward lower tier chipset are we likely to see gross margin pressures through the year, and then with OpEx up, operating margins are also likely to have a down trajectory, or will revenue growth be enough to compensate? Thanks.

A - Bill Keitel

Okay. Hasan, couple of perspectives there first, we are reiterating our guidance. We did a thorough, as usual, bottoms-up review, and we saw a few minor adjustments, as I said, some indications that revenue might be a little bit higher, but too early in the year to really count. And it was within our prior you know the revenue range we stated. So what I am seeing is a slightly lower tax rate, and a slightly lower gross margin relative to what I saw a couple months ago. But net-net, that's the view overall is holding well, our regional guidance you'll see is holding pretty much as we had previously stated it. So no surprise here on our end for what we're looking into the second half of the year just a bit proportionally more in the second half relative to the first half of the lower income regions of the world where the low end chipsets are more popular. As Steve indicated, we've got indications of $40 wholesale phones selling into India recently, and that chipset is lower revenue than and there's lower royalty than a phone that sells into at $300 wholesale into other areas of the world.

Operator

Your next question comes from Inder Singh with Prudential.

Q - Inder Singh

Yeah thanks very much. Bill, I just wanted to follow-up on that and ask about sort of how you view the price elasticity of WCDMA units and ASPs, particularly in some of the emerging markets where you're focusing and what that means for your revenue growth and your market share gains over the next year or two?

A - Bill Davidson

I'm very encouraged by that I think the elasticity will be strong. Hard to predict that elasticity quarter-to-quarter, but extend that out over a little longer period and I think that will be very favorable. It's been our strategy all along. We've certainly seen it in the CDMA2000 arena as well as, is very important, is the broad segmentation of handsets, so that operator has got the high, the mid, the low tier to sell into their customer base. So I'm very optimistic on that, and with these lower ASPs, I think it's going to quicken the interest of GSM operators elsewhere around the world to overlay a CDMA platform.

A - Paul Jacobs

As we bring the ASPs down, we also break into a new range of handset models. And so one of the things we're looking for is bringing the WCDMA pricing down so that the mid-tier phone is not a GSM only phone, but is actually a WCDMA/GSM phone and that will make a big difference in volumes.

Operator

Your next question comes from the line of Mark McCatchney with Twin Peaks Capital.

Q - Mark McCatchney

Great, thank you. Hopefully you can hear me, okay. I wanted to kind of just clarify your guidance for the second half of the year. Are you saying that EPS will be lower than the first half? Or are you saying that growth will be lower? Thank you.

A - Bill Keitel

We expect greater revenues in the second half of the year relative to the first half but with $0.39 pro forma first quarter, a midpoint estimate of $0.36 in the second quarter, that's $0.75. So if we execute on that, our full-year guidance is $1.43 to $1.47, is where one conclude that we're expecting a slightly lower second half earnings relative to the first half.

Operator

Your next question comes from Edward Snyder with Charter Equity.

Q - Edward Snyder

Thank you. In terms of wideband CDMA handsets worldwide you're seeing growth and I expect unit volumes are looking to double this year and we've heard Vodafone a couple of days ago talking about difficult competitive environment, prices are already dropping there, but it looks like they're having more difficulty than I guess they expected and seeing an uptake in the service. Is it just pricing that's going to be driving demand? Is that what your model looks for? Or is there some other metric like size or other features? Or what else can drive traction of handsets at this point?

A - Steve Altman

I think there's a couple of things that can do it. Clearly the price allows us to get into these other tiers as I talked about but we are starting to see the very slim style handsets coming out, so the fact that our advanced chipsets are enabling those kind of form factors I think will also cause consumers to move to 3G.

A - Paul Jacobs

I add to that, as we've always expected, that the operator economics are going to be very key to this, and thus far the reports we've been seeing from CDMA, WCDMA operators that are reporting it, we're seeing ARPU uplifts both on data and on voice. So long as they're getting that ARPU uplift I think it's going to be a very interesting market that they're going to want to push harder on. So that would be one and two is that, it's competition. It takes, doesn't take much more than one or two major operators in a given region of the world to see the success or the promise of that success push hard for it and then the others that may have been a little more hesitant will follow.

Operator

Your next question comes from Tim Long with Banc of America Securities.

Q - Tim Long

Thank you. Bill, if we could, I'd love to drill into that assumption of 59 million to 61 million phones in the quarter. I'd just love to get your sense of a confidence on that, understanding you guys changed from the accrual basis to the cash basis a few years ago, yet we still had two over the last three-quarters or so with a pretty big under-estimation. So my particular question relates to WCDMA where you don't have as high of market share as you do in CDMA. So if you could just give us a sense as to your confidence in that number and what type of swing factor could we see in it, what kind of royalty reports do you get, or monthly data do you get to that number, that would be helpful. Thanks.

A - Bill Keitel

Sure. So at this point, Tim, we have very few royalty reports we received, but there is

quite an active exchange with our licensees as to what they've seen in the December quarter. Not all licensees but many of them. We've had that practice going on now for some time and we think we get pretty good visibility through that avenue. We like you are monitoring operator reports that they've been, generally been quite positive but we're a little cautious, as one operator reports a positive result that if there's another CDMA operator in that region, that hasn't yet reported, we'll tend to be a little cautious until we know what that other operator has reported so we have a better idea that it isn't just a share change. So a few more reports yet to come that I think are significant from operators around the world, and then in a couple months time we will have all the licensee reports in hand. But I would say at this point, Tim that the visibility on that 50 to 60, 59 million to 61 million is similar to where we were last quarter when we guided 52 to 53, I think was the number. With the one exception, it is a Christmas season, and so Christmas in some markets leads to a little more variability than otherwise I think at -- in that forecast. But all in all, I feel pretty good about it.

Operator

Your next question comes from Brian Modoff with Deutsche Bank.

Q - Brian Modoff

Yes, just one point of clarification and then a question on units. Isn't your guidance somewhat also a reflection of the fact that you had Christmas chip sales plus royalty collections in the front half of the year and you don't have those in the second half of the year? Then the question is, how many WCDMA units do you think shipped in the December quarter? Did we hit around that 44 million or 45 million unit number for the year? How comfortable are you with that?

A - Bill Keitel

Yes, Brian. Good point. On the royalty business, the royalty business for our fiscal year, it's a July through June period out in the market given our one quarter lag. To your point there, the seasonality of our royalty business is different than the seasonality in the chip business. On the WCDMA units, the reports we've seen thus far and estimates that licensees have shared with us, we feel pretty good about that 2005 WCDMA estimate of approximately 45 million units.

Operator

Your next question comes from Paul Sagawa with Sanford Bernstein.

Q - Paul Sagawa

Hi, it's really kind of a question for Sanjay. If I look at the WCDMA market going forward, a number of the biggest handset makers in the world seem to have sort of incumbent chipset suppliers and you are incumbent at a number of the major handset vendors as well. At this point how much likelihood is there for there to be share shifts with those big handset makers? What other switching costs are we looking at? What kind of discussions do you have with non customers, and how receptive are they to think about switching with any associated costs that come along with that? So as we think about going forward, what's the opportunity for that share shift to happen?

A - Sanjay Jha

Paul this is Sanjay. I think I've indicated a number of times that I believe that most non vertically integrated providers, and I would call Sony, Ericsson, and Nokia vertically integrated today. Most nonintegrated vertical handset providers are actually looking at multiple sources. We are quite entrenched I think today at Samsung and LG but I'm confident that they are evaluating all their options. But similarly I think that other handset manufacturers are also evaluating how to get second sources to get leverage. One on their primary source, but secondly to leverage any technology leadership that might exist elsewhere in the value chain. And I believe today, in HSDPA, in low cost, in HSUP and MBMS we have technology leadership so we feel comfortable that most folks are looking at our solution carefully and evaluating how they can take advantage of that.

The second thing to think about in terms of our market share is, we certainly think that our customers today are growing their market share. If you look in fourth quarter, we had 48% quarter-over-quarter increase in our shipment, and I don't believe that overall markets grew by quite 48%. So we think in fourth quarter we increased our market share a little bit. When we have final numbers I think we'll have clarity on that, but I think with the customers that we have we're growing our market share, and I think with the technology leadership that we have we certainly make a very good argument to other OEMs to look at our solution carefully. We talk to all of them all of the time but nothing to report more specific than that at this point.

Operator

Your next question comes from Brantley Thompson with Goldman Sachs.

Q - Brantley Thompson

Hi. I was wondering if you could give us a little bit more color on the handset ASP forecast for fiscal year '06 or, you know, the sequential guidance you gave for 2.10. It was pretty much unchanged but at the same time there's a lot of rhetoric in the call about much bigger demand from the low-end phones and at the same time a lot of things that are very positive for 3G adoption could you just give -- those things seem incrementally new. Could you just talk about that in terms of that 3G versus low end balance and how we should think about how that might impact ASP going forward?

A - Bill Keitel

Sure. Brantley, it's Bill Keitel. I'll take a, maybe a stab here and then maybe some other people want to join in. At that 2.10, we do see the low end market accelerate at a good pace this year. But likewise, the feature content and the size of the mid to high-tier market we think is going to grow nicely. We're expecting continual growth each quarter here on WCDMA phones shipping as we progress through this year, and much a similar picture on the DO front. So with the North American market as an example, moving aggressively on to DO, HSDPA, one carrier is pushing pretty hard there, it's very robust market, I think, and the ARPUs are justifying it for the carriers. I think that there's good optimism. We'll start to see that in Europe this year, and certainly Japan is pushing very hard on that front, given how KDDI is doing so well on their DO platform. So I think it's a very robust high end market, and at the low end, yes, they are very feature-less phones, very voice centric, but I expect as we've seen in the last several years, as low end grows, the interest in more feature content, more capabilities in the phones has largely held the ASP on CDMA as a whole pretty constant.

A - Paul Jacobs

Even as we drive the low end phone, or the very low end phone, I should say, what a lot of the operators find is that that still isn't that huge a part of their market. They have to have that as a piece of the market, but then people tend to step up a bit to the next phone, so all of these initiatives that you've heard about on the GSM side at the very low end, the volumes really aren't as great as the rhetoric might make it appear. The other point is that, to amplify Bill, the high end prices can be as much as 10X, the very low end price. So as we see growth in these upper ends, that provides a nice trend for us on ASPs.

Operator

Your next question comes from the line of John Bucher with Harris Nesbitt.

Q - John Bucher

Thank you. A question for Paul, some of the comments he made on standards efforts, and seeing if there's any correlation with some of the EC complaints. I'm wondering if you're seeing any indication that QUALCOMM might be become less influential in some of these standardization efforts since you're dealing with so many different standards bodies that are not necessarily TOCO centric in trying to bring your innovations to market as you look at your long-term technology roadmap?

A - Paul Jacobs

Yes, I actually think the opposite is true. I think we're actually becoming more influential in a number of these other you know we talked about the IEEE standards bodies having a couple of nice milestones passed there. And I think it's because of this partnering strategy that we're on to reach out more broadly than just the telecommunications industry. So, for example, the IEEE 802.11n stuff was driven in large part by consumer electronics manufacturers who want to ship multimedia around the house, they want multiple HD streams of video, and they see that our enhancements made that possible. So I think it really is reaching out to a lot of partners more broadly, people who are outside of some of these, I don't know, battles that we're going through again. That's actually helping us have more influence. And then within the telecom industry, like I said, we really are doing a lot to lead the development of the follow-on generations on both the CDMA2000 and the WCDMA path. And I think the technical excellence is helping. And we're making our way into the community better. We have a guy on the SE Board now as an example so I actually think that's tending to improve over time.

A - Steve Altman

I would add to that, that we also have, I think, economic incentives from the standpoint as we pointed out, we have a well established CDMA licensing program, and as Paul clarified, when we, when additional technology that we contribute are added in the CDMA multimode environment, their license to our existing licensees at our standard rates. So there's no incremental royalty to those licensees by incorporating new technologies that we propose.

Operator

Ladies and gentlemen, we have reached the allotted time for questions and answers. Dr. Jacobs, do you have any closing remarks before we adjourn the call today?

Paul Jacobs, CEO

Yes, I'm very happy by the CDMA2000 growth that we're seeing, both at the high and mid-tier in the developed market and at the low end in the developing markets. I am also very happy to see WCDMA continues to grow, and Europe is doing very well, and that was an area where people had some question. We talked about a number of new technology initiatives. We're making great progress there. We're passing milestones, we're getting progress and standardization across those. So that's going well as well.

And like I said, I've been doing a lot of visiting with customers, and I find that the reception of customers, to the contrary of what some of the rhetoric might make you think, the reception by our customers is very warm, and they see the benefits we bring. They're very excited to work with us to help us, or us to help them get their networks up and running, and optimize those networks and start to generate revenue. So I feel like our business model is working extremely well to drive 3G. We're excited about the opportunities ahead of us. And thanks, everybody, for joining us today.

Operator

Ladies and gentlemen, this does conclude our QUALCOMM First Quarter Conference Call. You may now disconnect.

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Source: QUALCOMM F1Q06 (Qtr Ending Dec 25, 2005) Earnings Conference Call Transcript (QCOM)
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