QUALCOMM Inc. F2Q06 (Quarter ending Mar 26, 2006) Earnings Conference Call Transcript (QCOM)

| About: Qualcomm Inc. (QCOM)


F2Q06 Earnings Conference Call

April 19, 2006, 4:45 p.m. EST


Bill Davidson - VP, IR

Paul Jacobs - CEO

Steve Altman - President

Sanjay Jha - EVP, President-CDMA Technologies Group

Bill Keitel - EVP, CFO

Lou Lupin - SVP, General Counsel


Tim Luke - Lehman Brothers

Tal Liani - Merrill Lynch

Daryl Armstrong - Smith Barney Citigroup

Tim Long - Banc of America

Mike Ounjian - Credit Suisse First Boston

Louis Gerhardy - Morgan Stanley

Matthew Hoffman - Cowen & Co.

Mike Walkley - Piper Jaffray

Ehud Gelblum - JP Morgan

John Bucher - Harris Nesbitt

Brian Modoff - Deutsche Bank


Welcome to the QUALCOMM second quarter conference call. (Operator Instructions) I would now like to turn the call over to Bill Davidson, Vice President of Investor Relations. Bill, please go ahead.

Bill Davidson

Thank you, and good afternoon. Today's call will include prepared remarks by Dr. Paul Jacobs, Steve Altman, Dr. Sanjay Jha, and Bill Keitel. In addition, Lou Lupin will join for the question-and-answer portion of the call. 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 $1.83 billion in the second fiscal quarter, up 34% year-over-year and 5% sequentially. Second fiscal quarter pro forma net income was $706 million, up 45% year-over-year and 6% sequentially. Pro forma diluted EPS were $0.41, up 41% year-over-year and 5% sequentially. Second quarter fiscal pro forma free cash flow, defined as net cash from operating activities less capital expenditures, was $947 million, up 28% year-over-year and was 52% of revenue.

I'd like to mention that QUALCOMM is hosting an Analyst Meeting in New York City on May 4th with detailed presentations from our executive team. The meeting will be simulcast on our website with audio and slide presentations. Now, it's my pleasure to introduce QUALCOMM's CEO, Dr. Paul Jacobs.

Paul Jacobs

Thank you, Bill. Good afternoon, everyone. I'm pleased to report that QUALCOMM had a third consecutive quarter of record revenues in chip shipments, and phone shipments hit a new quarterly record, all driven by the growing adoption of CDMA-based technologies in multiple regions around the world.

We have seen strong 3G CDMA growth continue around the world. At the conclusion of March 2006, there were more than 272 million reported 3G CDMA subscribers. As Bill Keitel will discuss in more detail we are raising our forecast for CDMA2000 and WCDMA handset shipments in 2006.

Closing out calendar 2005 we saw record shipments of phones in the December quarter. Reports from our licensees in the March quarter showed that CDMA-based handset shipments to wireless operators during the December quarter totaled approximately 67 million units, at an ASP of approximately $208.

Our markets continue to expand. The ratio of WCDMA reported royalties to total reported royalties grew to approximately 46% reported in the March quarter of 2006, from approximately 32% reported in the year-ago quarter.

In the December quarter of 2005, approximately 25% of the total wireless handsets shipped into Europe were WCDMA, an increase from 18% in the prior quarter. This helped Europe pass Japan to become the second-largest market for 3G CDMA devices.

Prices are declining due to increased competition. We reported last quarter that the worldwide average selling price of WCDMA handsets was $372. Based upon information reported by our licensees, this quarter we're happy to report that the average worldwide selling price declined 8% to $342 and the range of handsets continues to increase. We estimate that the average selling price for the lowest 10% of WCDMA handsets has decreased quarter-over-quarter from $228 to $197, a decrease of 14%. As WCDMA handset prices continue to rapidly decline, we expect to see a consistent trend of an increasing percentage of the total handsets being WCDMA as GSM share of the market declines.

While we're having great success at the high-end with both CDMA2000 and WCDMA, we still face significant competition from GSM-based products in the low-end market. The low-end market is a tough battleground, but one that is definitely important. We expect growing demand for low-end phones to continue and have invested resources for single chip solutions, which combines the base band, radio frequency and power management chips into one package.

We believe lower component counts and further integration will drive costs down and enable faster time to market to meet the increasing demand for low-end phones. We have excellent data points from both India and China for the low end. CDMA devices constituted 48% of the total device shipments into India and 49% in the sub $50 tier in the fourth calendar quarter of 2005. This growth has been helped by aggressive pricing by QUALCOMM and by handset manufacturers that in turn allows carriers to promote more aggressively.

In a recent handset analysis provided by the Yankee Group the GAAP and average selling prices between CDMA and GSM in the sub $50 tier in India had narrowed to $3 in December of 2005.

Another area where we've seen significant growth is in the use of CDMA 450 in China, which is driven by China Telecom and China Netcom's Universal Service Program aimed at providing telecom service to China's vast underserved rural areas in a cost-effective and efficient manner.

Our two major Chinese licensees, Huawei and ZTE, are the suppliers of infrastructure as well as terminals for CDMA 450. QUALCOMM recently entered into agreements with Huawei and ZTE respectively for CDMA chipset supplies valued at $600 million, and such chipset supplies do include CDMA 450 chipsets.

QCT's execution and integration strategy is redefining what a low-end handset can be by cost effectively enabling features like data capability and camera support. While it remains important to have an entry level price point in developing markets it is clear that consumers the world over will use advance networks and features provided that they can be delivered cost effectively.

We believe that the strong growth in 3G CDMA is attributable to a number of factors including the availability of a wide variety of attractive handsets at lower prices, continued optimization and coverage of 3G networks, and an increased usage of 3G applications. Carriers are seeing the benefits of 3G technology through increased capacity in their networks and increased revenue from compelling applications such as, music and video downloads, location-based services, gaming and Internet connectivity.

It's been reported that mobile music sales in Japan have exceeded $1 billion per year. KDDI has also seen 5.5 million e-Book downloads in 19 months. With more than 40 3D games available through VCast, Verizon Wireless has seen a 36% increase in gaming downloads since introducing premium 3D games as part of the V Cast service enabled by EVDO.

In India, Tata has quickly risen to become one of the top 10 operators worldwide for revenue generating BREW downloads. We're very encouraged by the positive discussions we have had with European operators regarding their HSDPA rollout plans, many of which are expected to begin throughout the course of this year. I believe that we are well-positioned to take advantage of this market dynamic by virtue of our leadership position in chipsets for HSDPA.

In QCT our execution on the R&D investments that we have made is clearly paying off. We have established first market technology leadership in EVDO, DO Revision A, HSDPA, and HSUPA. QCT's integration strategy combined with technology leadership is driving more features into handsets and enabling extremely compelling designs, like the Thin Phones that are now available in both CDMA2000 and WCDMA.

Turning to MediaFLO, we provided citywide coverage of FLO Technology and conducted live over-the-air MediaFLO demonstrations at CTIA Wireless 2006 in Las Vegas. These included live video and audio on attractive phones from leading handset manufacturers. There were eight models from six manufacturers including Samsung, LG Electronics, Pantech, Kyocera, Motorola, and Sharp. These included a Samsung WCDMA phone with FLO integrated which concretely makes the point that FLO goes just as well with WCDMA as it does with CDMA2000.

In addition to audio and video, we also showcased data casting with two BREW applications that interface to the FLO system to get continuous updates. One was from Major League Baseball's Advanced Media Game Day application showing stats and game progress for every major league game that was underway. The other was a stock portfolio tracker application which kept a continuously updated portfolio. I know a number of you saw these applications and the response we got from people who saw them confirms that the potential for the wireless multimedia user experience extends far beyond mobile television and video.

The FLO Air Interface continues to make strides in the area of global standardization. In March the FLO Forum announced the ratification of several key technical specifications developed by its test and certification committee. The technical and performance requirements captured in the document assure interoperability and compatibility for FLO-based terrestrial mobile multimedia, multicast devices and transmitters. The specifications are companion documents to the previously ratified FLO Air Interface specification. The FLO Forum continues to grow as the floforum.org website now lists 37 companies as members.

While we continue to work with individual broadcasters to clear Channel 55, the United States Congress approved a statutory definitive end date for the nation's television broadcasters to transition to digital television spectrum, which will clear significant spectrum in the 700-MHz band. This spectrum will then be used not only to enable new broadcast multimedia services like those offered by QUALCOMM's MediaFLO USA subsidiary, but also to support public safety communications and provide additional broadband wireless access to urban and rural areas. This spectrum provides us with new opportunities to innovate.

The future holds many exciting opportunities for QUALCOMM and I'm confident that we are investing in the appropriate areas and at the appropriate levels to capitalize on these opportunities. QCT has established a leadership position in both CDMA2000 and WCDMA chipsets. Our business model in QTL of aggregating R&D for the wireless industry has fostered innovation and competition.

Both businesses combine to drive growth in the 3G CDMA market. The addressable market for both businesses is substantial and is increasing as handset prices continue to decline rapidly.

As we continue to execute across our different businesses the Company is positioned well for the future. This is reflected in our updated financial guidance as we are increasing our fiscal 2006 revenue and earnings estimates, as well as increasing our estimates for CDMA handset shipments in calendar 2006. I'd now like to turn the call over to Steve Altman.

Steve Altman

Thanks, Paul. Good afternoon, everyone. As we look at 3G deployments around the globe we see signs of strong 3G growth in virtually every market. In Japan during this last quarter, the number of 3G subscribers surpassed the number of 2G subscribers for the first time. 53% of Japan's over 91 million wireless users now subscribe to 3G services. WCDMA handsets shipped to Japan increased approximately 33% quarter-over-quarter.

In February 2006, KDDI and NTT DoCoMo launched a combined 12 new handset models. Features on these new handsets include mobile wallet, a 4-gigabyte hard disk drive; mobile TV broadcast receiver; and a location-based service device focused on child safety.

In the U.S., Verizon, Sprint, Nextel, and Cingular have deployed 3G CDMA systems, are actively promoting their high-speed networks, and are offering a wide variety of 3G handsets, as well as data cards for laptops. These carriers are actively selling phones with enhanced capabilities, including music and video downloads, games, position location, and other useful multimedia applications.

We expect to see strong replacement sales in Korea, not only because of its rollout of broadcast mobile TV, but also because the Korean wireless operators are now permitted to offer subsidies to subscribers who have maintained their service with the same carrier longer than 18 months. We understand that operators can provide subsidies of up to $200, which in the past has resulted in an increasing percentage of higher-end phones being sold in the market.

In India, network operators who offer CDMA-based services saw a dramatic growth in their subscriber bases with the number of CDMA subscribers growing by 65% in 2005 and reaching 25 million in December. With average monthly net additions of 1.4 million in the first calendar quarter of 2006, CDMA reached a cumulative base of 29.5 million subscribers in March 2006 with Reliance Infocom at 18.3 million and Tata at 8.5 million.

Quarter-over-quarter WCDMA handsets shipped to Europe increased approximately 73% while average selling prices for WCDMA handsets in Europe declined at a rate of approximately 10%. The increased variety of attractive WCDMA handsets at reduced pricing is, as Paul pointed out, increasing the share of WCDMA versus GSM in Europe and is a trend that we expect to continue.

In addition to the increased activity that we are seeing around CDMA 450 in China we are continuing to closely monitor the timing of China's 3G license issuance. We are encouraged to see recent public reports from the USTR on their agreement with the Chinese Government at the Joint Commission on Commerce and Trade Meeting in Washington, D.C., where the Chinese Government reconfirmed its commitment to adopt a policy of technology neutrality in connection with its issuance of 3G licenses and to allow Chinese operators freedom in choosing technology standards for their 3G services.

As we have previously disclosed, our license agreements generally license certain patents of ours that were applied for during an agreed upon capture period. From time to time, we have needed to extend existing agreements to include patents that fall outside of the licensees capture period. We have entered into many extensions over time with a substantial number of licensees, who have needed access to our expanding patent portfolio and in each case we have done so without negatively impacting our licensing program in any material way.

Many of you have approached us speculating whether Nokia will need an extension. Our policy is not to talk specifically about particular license agreements, and so we have neither confirmed nor denied this speculation. However, based on an agreement reached with Nokia, we have today disclosed information in our 10-Q to the following effect:

QUALCOMM has a license with Nokia, which in part expires on April 9, 2007. QUALCOMM and Nokia have been in discussions to conclude an extension or a new license agreement beyond that time period and I expect discussions to continue. However, there is no certainty as to when the parties will be able to conclude an agreement or the terms of any such agreement.

There is also a possibility that the parties will not be able to conclude a new or extended agreement by April 2007. In that event, after April 9, 2007 unless and until the existing agreement is extended or a new agreement is concluded, Nokia's right to sell subscriber products under most of QUALCOMM's patents, including many that we have declared as essential to CDMA, WCDMA, and other standards, and therefore, Nokia's obligation to pay QUALCOMM's royalties will both cease under the terms of the current agreement. Likewise, unless and until the existing agreement is extended or a new agreement is concluded QUALCOMM's rights to sell integrated circuits under Nokia's patents will cease on April 9, 2007 under the terms of the current agreement.

By agreement with Nokia we are limiting our comments to the foregoing at this time. Please bear in mind, however, that any company that makes or sells products without a license under the applicable patents of another company would be exposed to a patent infringement litigation by such other company. I would also like to make clear that if we are unable to reach agreement with Nokia and they become unlicensed to sell subscriber products after April 2007 this will have no material impact under our other license agreements.

I'd also like to talk about a release that was recently issued in Korea. Nextreaming Corporation, a Korean company, issued a press release announcing that it has filed a formal complaint against QUALCOMM with the Korean Fair Trade Commission. This is the same Korean company that QUALCOMM mentioned without identifying specifically in our April 5th press release regarding the Korean Fair Trade Commission's visit to the offices of QUALCOMM Korea and several other manufacturers.

Nextreaming had been using the threat of a complaint to the KFTC in an attempt to extract inappropriate commercial concessions from QUALCOMM. We have refused to yield to Nextreaming's demands with the result that Nextreaming is apparently now filed its threatened complaint.

Although we have not yet seen the complaint we believe that QUALCOMM's activities in Korea have been lawful and pro competitive and that Nextreaming's complaint has been filed for an improper purpose. I'd now like to turn the call over to Sanjay Jha.

Sanjay Jha

Good afternoon. I'd like to go over some key highlights for QCT's business. We shipped approximately 49 million MSMs in the second fiscal quarter. This was the third consecutive record quarter for MSM shipments and an all-time high booking quarter. In comparison, 47 million MSMs were shipped during the first quarter of fiscal 2006 and 37 million chips in the same quarter of fiscal 2005. The 32% increase year-over-year is driven by low-end shipment doubling due to strong CDMA demand in emerging markets.

In addition, we saw a four-fold increase in our EVDO shipments, primarily driven by strong demand in the U.S. year-over-year. Our UMTS shipments increased fivefold compared to same quarter last year as well. This growth is also supported by continued diversification of our customer base worldwide.

Our revenues again exceeded $1 billion for the quarter, in spite of this typically being a seasonally lower quarter. This compares to $746 million the second quarter of fiscal 2005, an increase of 36% year-over-year. Our operating profits increased nearly 60% versus this same quarter last year. While our average selling price was sequentially lower for the quarter driven by strong unit growth in CDMA2000 low-end products, this was partially offset by an increase in our mix of higher-end multimedia and enhanced multimedia chips as mentioned previously.

This past quarter we made significant strides in broadening our product portfolio. QCT sampled the first generation of QUALCOMM Single-Chip, or QSC product, that enable more efficient, cost efficient and attractive CDMA handsets for emerging markets. We have enjoyed a very high level of interest in the QSC products with more than five leading manufacturers already receiving shipments. The first commercial handsets based on this solution are expected to launch by the end of 2006 calendar year.

Demand for our existing EVDO portfolio continues to grow. There are now over 250 devices based on our chipsets either commercially launched or in design. This past quarter, QCT sampled MSM6800, our first EVDO Revision A solution and our first 65nm commercial chipset. A full two months ahead of schedule. We expect the first devices based on EVDO Revision A to be available before the end of 2006.

Furthermore, we shared with the industry our expectation that commercial data card products based on EVDO Revision B will be available by the end of 2007. Revision B delivers up to 14.7 Mb on the downlink and 5 MHz bandwidth to enable ubiquitous broadband data experience.

In UMTS, QCT is working with more than 30 manufacturing partners who collectively have launched or are designing over 120 devices based on our chipsets. QCT was first to market with an HSDPA solution and we continue to be a technology leader in the UMTS market with the first solution for HSUPA. At the end of March we sampled our MSM7200 chipset, which supports HSUPA and MBMS technologies for broadcasting over UMTS networks.

Our global focus extends to cooperation with partners around the world and QCT has continued to build key relationships. Together with TechFaith of China, we established a new company, TechSoft, which will develop application software for our 3G CDMA devices. The long-term goal of TechSoft is to develop solutions that will enable handset manufacturers to dramatically reduce the time to market of a new fully featured 3G handsets.

This is a continuation of the Company's commitment to supporting entrepreneurship and local innovation, as well as to the Chinese industry as an area of tremendous opportunity and growth. I will now turn this call over to Bill Keitel for an overview of our financial results.

Bill Keitel

Thank you, Sanjay. Good afternoon, everyone. We are pleased to report record revenues and earnings per share again this quarter driven by growth in CDMA-based products and services around the globe and continued strong execution by our business units. I'll highlight a number of key items in our second quarter fiscal 2006 results, which reflect the Flarion and Berkana acquisitions completed this quarter.

First, GAAP earnings for the March quarter were $0.34 per share. Our pro forma earnings were $0.41 per share, excluding $0.05 in estimated stock option expense, $0.01 loss attributable to acquired in-process R&D, and $0.01 loss attributable to the QSI segment. Revenues increased 34% year-over-year to $1.8 billion. Our pro forma earnings per share increased 41% year-over-year.

Second, our business continues to generate strong cash flow. Operating cash flow was $889 million for the second fiscal quarter, up 8% year-over-year. Pro forma free cash flow was $947 million, up 28% year-over-year. Cash flows are the primary driver of long-term shareholder value and are unchanged by the accounting for a theoretical stock option expense.

During the quarter we paid $298 million in cash dividends and announced a 33% dividend increase from $0.09 to $0.12 per share effective for quarterly dividends payable after March 24, 2006.

Third, our fiscal second quarter tax rates for total QUALCOMM and pro forma were 25% and 27% respectively. Our pro forma estimated tax rate for fiscal 2006 is now 27% as compared to our prior estimate of 26%.

Fourth, QCT again had record MSM shipments during the quarter. QCT's second quarter revenues increased 36% year-over-year to $1.02 billion on the strength of 49 million MSM shipped, a 32% increase year-over-year. QCT's operating margin was 25%, an anticipated quarter-over-quarter decrease reflecting continued growth of R&D investments and new chip development and modest sequential chip ASP decrease.

Fifth, QTL earned record revenues of $679 million this quarter as licensees reported a record high of approximately 67 million new handset units shipped with an ASP of approximately $208 per handset. These shipments occurred in the December quarter and were reported to us by our licensees in the March quarter. Licensee reports are the basis of our royalty revenue recognition.

We are pleased to report that CDMA is experiencing strong growth around the world. Sequential growth was particularly strong for WCMA shipments in Europe and Japan, and CDMA2000 shipments in China, Latin America, India, and North America during the December quarter.

The average ASP for all WCDMA handsets decreased approximately 8% from the prior quarter. Of the $679 million in total QTL revenues $40 million represented enter segment royalties, $12 million were amortized license fees, and $627 million were royalties from third-party licensees. WCDMA royalties were approximately 46% of third-party royalties reported this quarter and QTL's operating margin was 92%.

For the calendar 2005 CDMA market, with the receipt of all licensee reports, we now estimate that CDMA handset shipments were approximately 210 million units, including approximately 160 million CDMA2000 units, and approximately 50 million WCDMA units. Lastly, we believe total CDMA channel inventories remain in the historically normal band of 15 to 20 weeks.

Now turning to our guidance. We are increasing our estimate for the calendar year 2006 CDMA-based handset market. We now estimate shipments of approximately 275 to 290 million units in calendar 2006, an increase 31% to 38% over our estimate for calendar 2005. Based on the 283 million midpoint of this estimate for calendar 2006 we anticipate shipments of approximately 187 million CMA2000 units, and approximately 96 million WCDMA units. The regional breakdown of our market estimate is available on our website.

We are also increasing our guidance for fiscal 2006 revenue and earnings per share. We now expect fiscal 2006 revenues to be in the range of approximately 7.1 to $7.4 billion. An increase of 25 to 30% over fiscal 2005. We anticipate pro forma diluted earnings per share to be in the range of $1.53 to $1.57, an increase of 32% to 35% year-over-year. We now estimate the average selling price for CDMA2000 and WCDMA phones combined will decrease approximately 4% in fiscal 2006 to approximately $207.

We are particularly pleased with the ASP trends we are seeing for WCDMA handsets, which continue to decrease at a rapid pace consistent with our expectations and encouraging for future market growth. We expect the combination of pro forma R&D and SG&A expense for fiscal 2006 to increase approximately 26% to 29% year-over-year, driven by growth in R&D as we continue to invest in the evolution of CDMA2000 and WCDMA multimedia functionality, single chip low-cost solutions, and longer term technology enhancements including OFDMA.

We estimate GAAP earnings per share will be approximately $1.31 to $1.35 for fiscal 2006. This estimate includes a loss of approximately $0.20 per share for estimated share-based compensation, a loss of approximately $0.04 per share attributable to QSI, a gain of $0.03 attributable to tax benefits related to prior years, and a $0.01 loss attributable to in-process R&D from completed acquisitions.

Turning to our guidance for the fiscal third quarter of 2006, we estimate revenues to be in the range of approximately $1.77 to $1.87 billion, a 30 to 38% increase year-over-year. We estimate third quarter pro forma diluted earnings per share to be approximately $0.36 to $0.38, a 29 to 36% increase year-over-year. This estimate includes the shipments of approximately 50 to 53 million MSM phone chips during the June quarter reflecting growth across multiple product segments including CDMA2000 low-end, EV-DO, WCDMA, and HSDPA. We expect chip ASPs to decrease modestly as we continue to sell a greater proportion of low tier MSMs for emerging markets, in addition to planned price erosion across our broad product offerings. We estimate approximately 62 to 64 million CDMA-based handsets shipped in the March quarter at an average selling price of approximately $203. Our unit forecast reflects seasonally lower post-holiday shipments across most regions when compared to the strong December quarter, though still a very healthy 44% to 49% higher than the 43 million handsets reported by licensees for the March quarter last year.

We anticipate the third fiscal quarter pro forma R&D and SG&A expenses combined to increase sequentially approximately 6 to 8% driven by our continued investment in new products and services.

In closing, we are very pleased with how our Company is executing across all business groups. The growing adoption of CDMA-based 3G technology across many consumer segments and regions around the world continues to drive strong financial results for our stockholders. That concludes my comments. I will now turn the call back to Bill Davidson.

Bill Davidson

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. Operator, please go ahead.

Question-and-Answer Session


(Operator Instructions) Your first question is from Tim Luke with Lehman Brothers. Please go ahead and ask your question, sir.

Tim Luke - Lehman Brothers

Thank you very much. Congratulations on the quarter. A clarification and a question. The clarification just relates to Steve's comments around your current and ongoing negotiations with Nokia. You seemed to comment on the situations that happen if you don't conclude an agreement by April the 9th.

If you could provide any further clarity around what you said with respect to your chip business and your chip shipments if you haven't formalized anything? What are the implications with respect to their payments to you if they were to ship WCDMA phones without an extension of the royalty agreement?

The question was simply, as you raised your guidance with respect to the phone market both for WCDMA and for CDMA for the full year, where is that upside as you move from 86 to 96 coming from in WCDMA regionally and similarly in the CDMA area? Thank you so much.

Steve Altman

So Tim, it's Steve. As for Nokia, if we do not conclude an agreement by April 9, 2007, then the rights under most of our patents for them to sell subscriber products they would not be licensed, and so they would be infringing on our patents. Likewise, at that point in time, we would have no rights to sell our chips under their patents. So we would be in a situation where we believe they would be infringing our patents and we would not have rights under their patents.

Tim Luke - Lehman Brothers

Okay. Thanks for clarifying that.

Bill Keitel

On the WCMA market, we raised our estimates in Europe from 40 million to 51 million, that's an increase of 11 million obviously. And we decreased just by a million a modest amount for what we call rest of world. So that's everything but Europe and Asia for WCDMA. So Europe is the increase.

Tim Luke - Lehman Brothers

The CDMA2000 side, you also increased that?

Bill Keitel

In CDMA2000 we raised our estimate for North America from 80 to 85. We increased China from 12 to 15. We increased India from 16 to 21. In the Americas, primarily Latin America, we decreased by one. The combination of Korea, Japan, Southeast Asia, rest of world, we decreased by one. There is a table on our website that gives those numbers as well.


Your next question comes from Tal Liani with Merrill Lynch.

Tal Liani - Merrill Lynch

Hi, guys. I have a question which has two parts but they are related. What happens if you do not get to an agreement with Nokia and you still sell the chips? Just hypothetically speaking, can Nokia go to Samsung let's say that buys your chip and say, "Okay, now you owe us royalty rate or royalty fee? What happens in this situation?

Second, which is related to that, about five years ago you failed an S-1 to break off the chip business from the licensing business. I think you called it Spinco. Will a breakup of QUALCOMM into chips and licenses resolve this issue and will you consider this? Thank you.

Lou Lupin

I'll try to answer the first part of your question. Whether Nokia could approach Samsung or any other handset manufacturer would depend upon the existence or nonexistence of agreements between those companies. Each of the handset suppliers has the ability to enter into license arrangements and other arrangements with Nokia or with other third parties as it sees fit. So that really would be a matter for Nokia and Samsung.

Tal Liani - Merrill Lynch

Right, but right now there is a pass-through of the patents, right, which ends with the contract?

Lou Lupin

We have not commented specifically on pass-through rights with respect to particular companies and so I can't comment on the situation as it relates to Nokia or any other specific company with respect to pass-through rights.

Paul Jacobs

In terms of potentially restructuring the Company, we're willing to consider any option in order to maintain and enhance shareholder value. I would say that the particular structure that we considered in the past is probably not what we would do if we were going to do a restructuring. But some kind of restructuring to protect those two businesses is possible. We expect that we'll actually come to agreement before such thing would happen.


Your next question comes from Daryl Armstrong with Smith Barney Citigroup.

Daryl Armstrong - Smith Barney Citigroup

Thank you very much. Going back again relative to the Nokia patent issue, the question I have is that for a chipset you guys sell to your customers before the expiration of the royalty or the licensing agreement -- what happens to those chips if they're still in inventory at your customers? Can they still use them within their handsets or are they precluded from using them after April 9th? Thanks.

Steve Altman

Yes, this is Steve. The answer to your question really pertains to whether or not there's pass-through rights and as Lou mentioned we can't go into that. But what I can say is that with respect to our sales, their ability to assert their patents against us with respect to our sales prior to April 9th, that's covered under the agreement. So it would only be with respect to our sales after April 9th that they could assert their patents.


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

Tim Long - Banc of America

Thank you. Maybe if we could just switch over to the chipset business for a second. Sanjay, I don't know if you gave a number on ASP decline in the quarter, but if you could just clarify that. How do you think things are progressing on the WCDMA side? You said up fourfold year-over-year. What's your sense of your market share there and potential movements? Some of the customers have had pretty good quarters, some have had pretty poor quarters in WCDMA; so if you could just update us on your market share thinking there?

Sanjay Jha

Tim, the ASP decline is approximately 5%, and really driven by incredible growth in our low-end business. As Paul mentioned in his commentary, we have taken a strategic decision to make sure that our carriers in emerging marketplaces are competitive in offering services and phones with their GSM counterparts. So we made a very good stride, I think, and as you would see, the difference between GSM and CDMA handsets are coming down dramatically. So that's really what drove it.

The increase on the other hand that was offset by increase in DO shipments and, therefore, a slightly richer mix of higher-end handsets, but the growth in CDMA2000 low-end really has been pretty dramatic and that drove ASP.

Thinking about wide band CDMA business, we feel pretty well-positioned, as I noted in my comments, 30 customers. A clear leadership in HSDPA. We believe that most of the handsets launching this year with Samsung, LG, Novatel, Sierra, Option, and other of our customers based on HSDPA will give us leadership.

We also believe that we have leadership in the low-end. We have been working as you know with Huawei, and Huawei has been accepted by Vodafone for delivering handsets to them. Similarly, Amoi and ZTE have been successful, not just in producing CDMA handsets, but also exporting wideband CDMA handsets based on our solution. That has been a strong factor.

Samsung I think has one of the best phone lineups in wideband CDMA today, so that gives us a great deal of confidence that they will continue to drive growth in wideband CDMA for our chipset shipment. LG has been very successful with U880 and then recently launched U890. At DoCoMo we just had launches from LG, from Sanyo the second phone was launched, and I expect that there will be two more phones launched on DoCoMo's network.

So as I look going forward this year, I feel pretty comfortable with our position in wideband CDMA and as Bill has said we updated our guidance on wideband CDMA shipment from 86 million, I believe, to 96 million units. And as we do that that clearly increases the total volume that we think we can address.


Your next question comes from Mike Ounjian with Credit Suisse First Boston.

Mike Ounjian - Credit Suisse First Boston

Great, thank you. I just wanted to talk about a little bit about the increased guidance for CDMA handset shipments in China this year and just what's giving you the confidence there? Is CDMA 450 the primary driver of that increase of 3 million units or is there something beyond that that you are seeing with China Unicom?

On the U.S. and the increase, just wanted to get a sense of what you are seeing in terms of the EVDO mix within the North America shipments?

Bill Keitel

In terms of China we do see China Unicom continuing at a good steady pace, but as Paul noted the CDMA 450 market appears to be pretty active, and the bigger part of that increase for China we think is CDMA 450.

In terms of North America, the 5 million units for the calendar year, we think that the mix within that 85 million is shifting well to EVDO.


Your next question comes from Louis Gerhardy with Morgan Stanley.

Louis Gerhardy - Morgan Stanley

Yes, good afternoon. Just following up on the Nokia issue. First for Sanjay, how do you expect your customers to react if there's some uncertainty out there about the availability of chipsets? I'm just trying to get at why won't they build up some safety inventory?

And then to Steve, just on the pass-through rights, why won't they change if your Nokia agreement expires? I just need a little help there. Thanks.

Sanjay Jha

Louis, in terms of how our customers would react, there have been, as Steve has noted, a number of times in the course of this industry where there has been uncertainty on those matters and I think we will work with our customers to try to find solutions for them as effectively as we can.

It's important to note that the uncertainty will be there for not just our chipset shipment, but also Nokia's handset shipments. So I think that certainly both parties will be strongly motivated to resolve this issue in the interest of each of our shareholders, but also in the interest of the industry.

So I see this as a disclosure that is right and appropriate for us to make, but I don't think that this is something that our customers are particularly concerned about at this stage.

Steve Altman

No, I would add to that that, again, we have done many extensions over the course of our licensing program. This is not a unique situation in terms of what we've had to do in the past and so I also expect that we'll eventually work things out. But having said that, in answer to your question on the pass-through rights again whether they'll change or not, that would require me to answer whether or not there are pass-through and as we said, we can't get into that detail.


Your next question comes from Matthew Hoffman with Cowen & Co.

Matthew Hoffman - Cowen & Co.

First, Sanjay, let's drill down on the earlier question on WCDMA chip share. You've seen a substantial increase in WCDMA handsets in Western Europe over the calendar fourth quarter. You've got a pretty substantial share of the chip market worldwide. What is your WCDMA chip share within Western Europe, and hoping you could give us some color on the progress you're making there? Thanks.

Sanjay Jha

Matthew, we've not broken out our chip share worldwide or for any particular region, so allow me to refrain on that. But I can give you color as to what progress we're making with each of the carriers. We have handsets at the moment in Europe I think Vodafone and H3G are two of the big drivers of growth in wideband CDMA shipments. We feel particularly well-positioned with both of these carriers in terms of handsets that they're shipping and the volume that they're shipping with Samsung being very well-positioned at Vodafone; Toshiba being positioned at Vodafone; Huawei being positioned at Vodafone; Novatel, Option, and Sierra being positioned at Vodafone.

If I look at H3G then LG is a big driver of the growth in LG shipments. We feel that the best handset that H3G offered last year was U880 through the Christmas season. I think the update of that phone, U890 will drive some growth for us. We also see a number of other handset providers working pretty closely with H3G based on our solutions to offer chipsets there. We have worked with T-Mobile, with Telecom Italian Mobile, we believe that we are very well-positioned also. Samsung has a very good portfolio there. HTC actually is delivering some very compelling data devices now to Europe based on our solution right now in UMTS and very quickly based on HSDPA.

So I think in terms of our positioning, in terms of launching handsets, we are very well-positioned. Now volume, the drivers will be a different matter.

Now we have seen a thrust from Nokia at the low-end, and as you know they commented that they will have a very large market share. We see that driving growth in the UMTS marketplace and enabling our handset manufacturers to come in below where Nokia is in the pricing today.

We're very motivated and very focused in enabling that through our chipset pricing, through enabling for these handset phones to launch, through enabling application software integration support, through testing support, through an inter-op testing support, so we think we're very well-positioned. As we say again we see growth towards the last two quarters of this year coming in wideband CDMA, and for that I think the number of handset launches we feel give us some confidence.


Your next question comes from Mike Walkley with Piper Jaffray.

Mike Walkley - Piper Jaffray

Great, thanks. Just another question on the chipset side. On the ASPs, I think you said they would be down a little bit sequentially, but how should we maybe think about the trajectory in the back half, should we start shipping better mix of HSDPA and with the recent pick up in the Korea market on the high-end phones falling subsidies? How should we maybe think about the trajectory of ASPs maybe into the back half of the calendar year?

Sanjay Jha

We have not provided any guidance but I expect that that would be flat. And depending on how that ticks up there's a possibility of some uptick. But I expect to the back half our ASP is likely to be flat.


Your next question comes from Ehud Gelblum with JP Morgan.

Ehud Gelblum - JP Morgan

Hi, can you hear me? Hello?

Sanjay Jha

Yes, we can hear you.

Ehud Gelblum - JP Morgan

Okay, great. Thank you. Two very quick questions. One is, I want to talk to you about your estimate on the ASP for handsets next quarter of $203, Bill. Last year in the June quarter you had a huge $231 ASP that was driven by a very strong Japan handset shipment quarter in March. Looking at the Japanese subscriber numbers in the past three months, basically January, February, March, you had a similar phenomena with Japan about the KDDI site, and the DoCoMo side being very, very strong.

I'm a little surprised to see the guidance there for ASP down to $203. I would have thought it to be at least flat if not up. I understand that there's lower end things in there. Can you give a little color around that?

Paul, if you can give us a little update on -- we know that Verizon on MediaFLO and some of the other types of technology that you're getting kind of more into; we know obviously Verizon's doing MediaFLO. What's the progress with perhaps Cingular or Sprint doing MediaFLO?

Any update you can tell us about what Sprint might do with the their 2.5 GHz licenses and any part that you may plan that would be helpful too?

Bill Keitel

So Ehud on the 203 ASP forecast, and on your point specifically to Japan, we are expecting greater sequential shipments of phones in Japan, shipments in March, which of course would be June revenue relative to shipments in the December quarter. But likewise we're also expecting growth in the India market, in the China market, and in the Korea market. In Europe and Latin America and North America, we're expecting those three markets to be down slightly consistent with the seasonal effect that we've often seen in the past.

So, now, if this forecast proves to be wrong and Japan does much better than we expect that would be positive on the ASP, but that's not my best expectation at this time.

Paul Jacobs

Sorry. In terms of discussions on MediaFLO, we continue to be in discussions with all of the major operators. I don't have any particular announcements to make at this point although I would highlight when you highlight Cingular that Samsung did show a WCDMA FLO phone at the CTIA, so I think that was positive at least in terms of our ability to address Cingular as a potential customer.

In terms of Sprint in the 2.5GHz band we continue to be in discussions with them as well. We have a number of technologies that could be very good for that band including Rev B, Rev B with flex duplex which allows asymmetrical, downlink, and broadcast capabilities within the band. Also as you know Nextel had been looking at the Flash technology. We continue to discuss evolutions of that as well and the 802.20 and Rev C technology is out at 3GPP.

So we've actually gone to them with a pretty broad technology road map, depending on the kinds of applications that they're interested in for that band. We think that we can provide them with very compelling solution along with a great ecosystem and along with the fact that when QUALCOMM says that they are going to bring out a technology we bring it out on time and we bring it out with very high performance. I think that's compelling to them as well.


And your next question comes from John Bucher with Harris Nesbitt.

John Bucher - Harris Nesbitt

Thank you. Question for Paul. Actually it's a nice segue. With looking beyond the current fiscal year, there's a lot of other spectrum besides Sprint and MDS band that's likely to get deployed, the air-to-ground auction, AWS, some of the ATC spectrum. I'm just wondering, Paul, whether you see a significant incremental opportunity for growth looking out beyond the fiscal year there or do you think that that's largely just going to be in-line with what normal cellular wireless equipment deployment would be? Thank you.

Paul Jacobs

I think it depends on who ends up with the spectrum. I'm sure there will be additional deployments. The question is, do those then turn into incremental device sells and subscribers because of increased competition?

Air-to-ground I think is very interesting. We have nice technology for air-to-ground and we've been working with people on that segment for awhile. The AWS is also going to be interesting. I think getting that cleared, getting an option, action, getting it cleared and so forth certainly provides incremental opportunity, particularly when you think about the operators who really are looking for additional spectrum assets.

ATC is also good for us in terms of the ability to innovate and integrate additional radio capabilities because there's the satellite segment that has to be satisfied there as well. One of the things that we've been looking at is how to build the right radio link so that you can integrate the satellite capability into a standard phone so that you get the ATC capability or the authority for ATC through the Safe Harbor that SEC set-up. So, yes, I believe there's a lot of opportunity both for innovation and for incremental device sales.


Your next question comes from Brian Modoff with Deutsche Bank.

Brian Modoff - Deutsche Bank

Hi, real quick, a couple of things, Sanjay, on HSDPA, what do you think your technology lead is right now in terms of your competitor's ability to start delivering HSDPA products? And what do you think your market share is in chipsets design or in terms of WCDMA phone design activity? In other words, what percent of the new designs do you think you have in the market? Finally, any estimate on how many MediaFLO chips, or phones you might ship this year with MediaFLO inside?

Sanjay Jha

Brian on HSDPA it's difficult for me to be precise on what an advantage we have, but I can tell you where we are and you can determine for yourself where the others are. We delivered the first sample of HSDPA in December of 2004 and we did interrupt testing with every single network and you saw Samsung produce a very, very slim forum factor commercial device, which they will start shipping in a couple of months. The HSDPA data cards have been available from three vendors based on our solution.

So I think that we have seen with UMTS, with CDMA2000, and now with HSDPA making lab calls to producing and delivering commercial forum factor devices for high data speed terminals actually takes a significant amount of expertise and essentially time. I think that we have seen that figure to be around six months for sure, so I'm comfortable with that number. I believe that Nokia is not too far behind us and a few other people lining up behind that. But I do think that we have an advantage, certainly in chip vendors we have a pretty good advantage, and all of our customers realize that and are taking advantage of that.

In terms of handset designs, again, it's difficult for me to say exactly what the overall design activity is that we don't have visibility to. But as we said we believe that around 120 phone designs based on our chipset have either already been launched or will be launched in short order. So that gives you the scale of activities that we are supporting with our application support. Our hope is that that leads to increased volume shipments for us.

Paul Jacobs

This is Paul. In terms of MediaFLO, we aren't even projecting a launch of the network this fiscal year. So the number of handset shipments would be relatively low. Also Verizon will make the final decision about the actual service launch date and they have not yet committed to a launch date. They have a lot of things that they have to do to get ready, including marketing and channel filling and all of those kinds of things. So it's a little bit indeterminate on the front end, but I think that once it comes out -- the demonstrations that we did showed that the application is extremely compelling to people and I think that it will be very successful.


And at this time I would like to turn the call back over to Dr. Jacobs. Sir, do you have anything further to add before adjourning the call?

Paul Jacobs

I'm very proud of the execution of the Company. I think with the record phone chip and revenue marks it's showing that the growth of 3G is really happening, and I think that as we look forward there's an awful lot of opportunities for us to innovate, to execute, and to partner with many companies in the wireless value chain. So I'm excited by the future. I think we've done well and it seems like it's only going to continue to get better. Thank you.


Ladies and gentlemen, we do appreciate your joining us today. This does conclude our QUALCOMM second quarter conference call. You may now disconnect.

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