高通 (QCOM) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm third 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 will need to press the 1 followed by the 4 on your push button phone.

As a reminder this conference is being recorded July 25, 2002.

The playback number for today's call is 1-800-633-8284.

International callers, please dial 858-812-6440.

The playback reservation number is 20713120.

I would now like to turn the conference over to Julie Cunningham, Senior Vice President of Investor Relations.

Julie, please go ahead.

Thank you and good afternoon.

Joining me today are Dr. Irwin Jacobs, Chairman and CEO;

Anthony Thornley, President and COO;

Bill Keitel, Chief Financial Officer.

Dr. Paul Jacobs, Group President of Qualcomm Wireless and Internet, and Don Shrock, Group President of Qualcomm CDMA Technologies.

An Internet presentation and audio broadcast accompanies this call and you can access it by visiting www.qualcomm.com.

In addition, an audio rebroadcast will be available on our web site for approximately two weeks.

Our third quarter earnings conference call is taking place on Thursday, July 25 at 2:30 p.m.

Pacific Standard Time.

This call contains time sensitive information that is accurate only as of today's date and time.

In addition, we may make forward-looking statements during this conference call that may differ materially from Qualcomm's actual results.

Please review our most recent SEC filings for a detailed presentation of each of our businesses and associated risks.

I will begin with a brief recap of our third quarter results as detailed in our press release issued today.

So far, revenues were $721 million, an increase of 10% over the year ago period and 9% over last quarter.

Pro-forma earnings per share were 24 cents, an increase of 20%, compared to both a year ago period and last quarter.

Staff reported revenues were $71 million with a loss of 2 cents per share.

GAAP reported losses for the third fiscal quarter were primarily due to a $194 million charge related to Leap Wireless Investments.

Due to the significant decline in the market value of the Leap Wireless marketable securities during the quarter and the percentage decline relative to their costs, we transferred $167 million in cumulative charges, recorded in equity, to the earnings statements for the third quarter.

This reclassification was made in accordance with the guidelines for other than temporary losses as required by financial accounting standard, FAS 115.

We also recorded $27 million in FAS 133 losses related to Leap Wireless.

And now I would like to introduce Dr. Irwin Jacobs, Chairman and CEO of Qualcomm.

Thank you and good afternoon, everyone.

Before we begin, I would like to say that Qualcomm fully supports the certification of financial reports by corporate officers, including myself, as well as efforts to rapidly restore trust and integrity to corporate accounting and governance.

We have always taken our responsibilities seriously.

Have done and will continue to do our best to provide investors with timely, accurate and helpful information within established accounting, legal and ethical guidelines.

We have provided our certification for the third fiscal quarter results, which will be filed with our Form 10-Q within 24 hours.

I'm pleased to report that the third quarter results from our core businesses exceeded our expectations.

This strength is coming from the rapid commercial deployment of CDMA 2001 X and 1 XEVDO networks around the world.

As of the end of June, there were 13 million 1 X users worldwide and this number continues to grow.

CDMA 2001 X is the first 3G technology to market and thus occupies a unique position in today's wireless market, providing an economic means for operators to both significantly increase voice capacity and to offer attractive data services that enable much-needed new sources of revenue.

Increasingly, CDMA hand sets include accurate position location services to meet FCC mandates here in the United States.

CDMA hand set manufacturers are gaining market share due to the quality, dependability and attractiveness of CDMA 2001 X.

Our QCT business is providing those manufacturers with industry-leading chips,, and it too is gaining market share.

In the third fiscal quarter, QCT achieved record pro-forma revenues and record shipments of MSM phone chips and CSM equivalent voice channels.

Orders for the fourth quarter are strong.

The majority of our MSM shipments are now CDMA 2001 X, to support many network deployments taking place around the world.

We have seen rapid success with 1 X in South Korea and Japan and North America is on the cusp of a significant ramp.

Hand set manufacturers are being pressed to support the demand 1 X from many markets.

Several instances in advance of network launch.

The World Cup games in South Korea and Japan last month provided an excellent opportunity to showcase the capabilities of CDMA 2001 X EVDO.

South Korean operators FKT and TKF launched 1X EVDO networks in time for the games with great fanfare and with many hand sets provided to to visiting press and industry leaders.

Almost all could be seen snapping photographs with the camera-equipped phones and immediately e-mailing them around the world enjoying the rapid transmission rate of 1 X EVDO.

KQDF, which launched 1 X EVDO in May, has set a target of 800,000 subscribers by year end.

Japanese operator KDDI initiated 1 X service on April 1st and have signed up over 1 million subscribers and reduced its churn in the first three months of 1 X operation.

KDDI plans to have 7 million 1 X subscribers by March of 2003 and also plans to have its initial 1X EVDO service launched next spring with full service by the fall of 2003.

Color screen and camera phones are very popular in Japan as well as Korea and we expect will be well-received worldwide.

KDDI has also had great success with its GPS 1 based position location service called Easy Navigation.

KDDI has over 1.8 million Easy Navigation subscribers with downloadable map and navigation applications being very popular.

I believe the position location device and applications will quickly proliferate in most if not all regions of the world because of their usefulness and applicability for safety and security as well as navigation and consierge search services.

We are optimistic about growth in the U.S. market with CDMA 2001 1X deployments underway or imminent by Verizon, Sprint, Altel, U.S.

Cellular, Leap and other CDMA carriers.

Over half of Verizon's footprint or 132 million POPs is now covered by 1X.

Sprint said last week that it already has sold 1.8 million 3G capable devices into their customer base even before the commercial 1X launch this summer.

Sprint also commented that it expects 3G to be a catalyst for its business in the future.

Indeed, we believe 1X that the combination of 1X networks and BREW applications is a powerful one, enabling operators to attract customers for personal use and increasingly for business enterprises.

To raise average revenues per user and retain new and existing customers with high quality voice and highly reliable data supporting a broad range of applications.

During the third quarter, we reached the 1 million mark for end users who have purchased and activated through enabled hand sets.

There were also a number of positive carriers announcements for blue, including Verizon's nationwide launch last month, which Paul will discuss later in the call.

With 1X service rapidly expanding and with 1X EVDO entering service, standards activity on CDMA 2000 have focused on the evolution of 1X to 1X EVDV, with significant progress in incorporating the standard as part of the I D.U. third generation family.

As in previous evolution of CDMA 1 and CDMA 2000, the approach here is to utilize measurements and performance results from each fielded version to determine areas for improvements in voice and data quality and capacity while maintaining full backwards compatibility and a common radio frequency bandwidth.

Two improvements to be fielded within the existing standard are a new variable rate SMV or Vocoder that can provide even great voice quality with no change in capacity but will most often be used to provide today's excellent voice quality with a significant capacity increase over 1X.

Together with an introduction of hand set antenna diversity, another doubling of voice capacity over 1X's anticipated with no standards change.

Unlike GSM, aTDMA technology, CDMA immediately translates any reduction in average decoder rate to a corresponding capacity increase, which is one reason that all companies are basing their third generation offerings on CDMA.

When attempting capacity improvements in existing TDMA networks, proven for example with a GSM AMR voc-coder, is limited, since time lot duration and the number of time slots per second cannot be changed nor can more than one voice call be placed in a time slot.

Work has also progressed on GSM 1X which allows existing GSM operators to introduce any of the CDMA 2000 family while reusing GSM back office network equipment.

The same GSM equipment reuse capability that has been offered with UMTS, which can be applied in existing or new spectrum with now well-proven commercial radio technology.

Qualcomm will continue to actively support all 3G CDMA technologies with standards efforts, chip and software development, and test platforms and test activity to enable each to reach market as early as possible with high voice and data performance and desirable low-cost hand sets.

GSM 1X provides operators with a now well-proven alternative path to 3G.

I will now turn the call over to Tony Thornley, who will provide an overview of our global business developments.

Thanks Irwin and good afternoon to everybody.

I would first like to address Qualcomm's strategic initiatives segment which reported significant losses in the third fiscal quarter.

We have been making strategic investments in many ways for a long period of time.

All of these investments have been made with the goal of driving our business growth and profitability, as well as generating a financial return on each investment.

We believe that our investments have in fact been an important factor in creating new markets for our CDMA products technology and services.

We expect that these new markets will become significant CDMA markets in the near future as the networks continue to be built out and subscribers add.

However, while we did record significant accounting losses this quarter relating to Leap and also at the time of restructuring of Vesper almost a year ago, we expect our investment program will generate a reasonable financial return over time.

Albeit that we have work in progress to realize a positive return to on our total operator investment portfolio.

We are, however, taking a cautious approach to any new commitments to financing, given the market circumstances.

Turning now to the CDMA market.

The results for the June quarter and the orders received for the fourth fiscal quarter confirm to us the 82 to 85 million market estimates for calendar 2002 we have made in the past.

I know many of you have lower estimates, but we believe the replacement sales are higher than the consensus.

On a regional basis, I'll begin with South Korea, during our last earnings call in April, we discussed the subsidy ban introduced by the South Korean government effective finish April.

Our view at that time is that the ban was not likely to stall the market as the previous subsidy ban had two years ago.

As it turned out the ban did impact the month of April, but the market rebounded in May and continues to get quite strong.

We key drivers for South Korea are 1X color screen phones and data applications with the notable success of BREW for [INAUDIBLE] retail.

At the current rate, 50% of all subscribers in South Korea will be on 1X networks by the end of the year.

We believe that the next driver for device sales will be camera phones and new services built for the higher data rates enabled by 1X EVDO as Irwin already mentioned.

In North America, Verizon has launched its 1X express based network in most major markets in the U.S. and expects to launch all remaining markets by the end of this year.

Verizon has also launched Brew, which Paul will also discuss.

Sprint plans to launch its nationwide 1X network this summer and has also launched its mobile virtual network with Virgin.

With plans for nationwide service by the end of this month.

Altel plans to launch its nationwide 1X network soon.

The U.S.

Cellular plans to begin converting its former TDM market to 1X later this year.

Two CDMA have launched their commercial 1X networks.

The North American market in summary remains good.

Despite some disappointing numbers from some carriers in the June quarter.

The replacement market driven by churn and new phone models is translating into strong growth and demand for our chips.

Turning to Unicom - announced that it has continued to grow it's CDMA subscribers and by the end of June had reached 936,000.

However, this is only a a part of the total Unicom network so extrapolating by overall POPs covered, would translate to approximately 1.4 million total subscribers.

Unicom has made steady progress in improving its hand set supply and optimizing its IS 95 A network.

Most recently promotions on lower priced phones have been appearing in the market.

We are providing substantial support to Unicom to increase the differentiation of their service offering.

Particularly when they upgrade to 1X.

CDMA 2000 1X trial systems are operational now in seven cities with orders expected shortly to upgrade the existing CDMA 1 network.

We believe that our prior subscriber estimate of 3 to 4 million for the calendar year is quite achievable.

In India, progress on development of limited mobility proceeds quite satisfactorilly.

Reliance, our partner in India, plans to soft launch its network this year.

We expect additional contracts, including infrastructure for Reliance to be announced with network build-out commencing this summer.

Reliance continues to aim for a very aggressive growth over the next three years.

Other operators in India are also expanding their networks so momentum is building and we expect to see India as a substantial growth market in 2003.

In Southeast Asia, several 1X deployments are under way including Vietnam, New Zealand, Thailand and Indonesia.

Just recently in fact, Telecom New Zealand and announced the commercial start of its 1X services under the brand name Jetstream.

Turning now to Latin America, during the quarter we announced telephonic [INAUDIBLE] agreed to acquire 65% of Pagasso's equity, subject to certain closing conditions, including regulatory approvals.

I'm glad to say that two out of the three required approvals have already been received and we expect the third relatively soon.

Under the agreements, the interim secured financing being provided by Qualcomm is to be repaid in full approximately 30 days after the transaction closes.

Our secured debt in Pegaso, exclusive of this interim secured financing will be reduced in excess of 200 million as a result of cash payments we expect to receive approximately 60 days after the transaction closes.

Telephonica is recognized as one of the world's leading wireless operators and putting its considerable strength and operations expertise behind Pegaso to achieve a successful nationwide CDMA network in Mexico.

For the Latin and South American region in particular, we continue to drive the low cost CDMA hand set for these regions because we believe the sub-100 hand set - the sub $100 hand set is crucial to restart growth in those markets.

Hardest hit by the economic downturn.

Nortel announced a contract award to overlay BellSouth's existing CDMA network in Ecuador for the complete CDMA 2000 1X solution.

BellSouth joins [INAUDIBLE] Telephonica as leading 3G CDMA 1X mobile operators in South America.

In Brazil the fixed and mobile market is converging which owns up new opportunities for vVsper.

We expect that Vesper will have the regulatory ability to acquire PCS mobility license later this year.

During June quarter, Vesper continued to make progress in refining its customer base by exchanging lower paying subscribers for higher RPU prepaid customers.

At the end of June, Vesper had approximately 450,000 subscribers and Vesper portable continues to sell well.

As additional retail points of presence are added in the Vesper network, we expect to see monthly sales totals for this product increase.

Vesper expects subscriber growth to resume in in subsequent quarters as well as continued improvement in EBITDA and net income.

Momentum is building in all markets, perhaps with the exception of Latin America today.

This is reflected in our outlook for the fourth fiscal quarter, which Bill will talk about a little later.

We continue to focus on cost control and on growing our businesses.

There are very many positive signs from all areas of our business that make us quite optimistic about the future for Qualcomm and CDMA operators.

I'll turn the call over to Paul Jacobs who will cover our Wireless and Internet groups.

Thanks, Tony.

We are discussing the performance of the specific divisions within the wireless and Internet group.

I would like to focus on the real-life impacts of data enabled applications which support our belief that applications will be the growth drivers of the wireless industry.

Voice is still the killer application of wireless.

An the most aggressive idea-oriented operator, [Kikif] retail, is predicting that 25% of their revenue will come from data in 2005.

Which means voice will continue to generate 75% of their revenue.

This does not mean that data is less important.

In fact, what we see is that data applications are today driving consumer choices in carrier market share and economics.

This is because when a consumer buys a phone, they expect it to provide voice, service which is increasingly seen as a commodity.

This commoditization, is less a concern about the business model of the wireless industry.

Because of the financial markets believe that wireless operators are stuck in a utility-like commoditized business with high level of us debt in some cases, they are restricting access to capital, therefore liquidity of carriers is at issue.

Commoditization of voice impacts all the key carriers metrics.

Since a commodity is sold on price, voice average revenue per user is under pressure.

Cost per gross ad, or CPGA, is increasing due to the heavy marketing of commoditized service and the need to continue to subsidize undifferentiated devices.

Given that consumers perceive little difference between voice providers, they are more willing to churn between providers.

Fortunately we have real examples of how applications and services are driving consumer behavior that is based on differentiation and not commoditization.

This is already having an impact on those carrier metrics.

KPF, has reported a six-fold increase in data RPU for its' 1X and Brew subscribers.

Verizon's upcoming line-up of color screen phones illustrates their view that hand set subsidies and CPGA can be reduced because the high end phones need lower subsidies since the consumer is willing to pay for additional value.

In Japan, KDDI has built market share and reduced churn 20% through its camera phone and GPS 1 applications.

Both of which depend on data services, not voice.

By the way, KDDI's marketing of the camera phones illustrate the way that 3G will be sold to consumers.

They were able to offer a camera phone which takes better quality images because their 1X system can transmit more bits over the air than their competitors.

Did they sell bandwidth to consumers?

No, they sold a better camera.

CDMA carriers should continue to continue to post strong results because unlike their competitors they are truly able to deliver the services and applications that consumers are buying.

Turning to the division, technology licensing business reported under the QTL segment grew revenues over the year-ago period and second fiscal quarter, a 10% and 3% increase respectively.

Higher volume shipments of phones and positive trends in average selling prices contributed to the June quarter results, those trends are expected to continue in the September quarter.

Shortly after the end of the quarter we signed royalty bearing agreements with Alcatel and NEC for WCDMA and TDS CDMA.

In our digital media division, we continue to work on obtaining industry acceptance for our digital cinema core technology working in conjunction with the studio consortium in the industry standard body.

Eight movies have been released in our format so far with others on the way.

Turning to our wireless business solutions division, we shipped approximately 12,000 Omni track and related products in the quarter, up from 11,000 in the year-ago period and 9,500 in last quarter.

This brings the cumulative total of Omni tracks and related units shipped to more than 435,000 worldwide.

We acquired the equity interests of CNR the exclusive distributor of the company's Omni track product in Mexico, $24 million during the third quarter.

This acquisition increased our equity ownership in CNR to approximately 97%.

It serves the strategic priority of expanding our QWVS business in the NAFDA -wide market.

We also announced Safeway stores in the United Kingdom will deploy UDAL tracks throughout its entire fleet.

In addition, we incorporated new security enhancements for the Omni track system.

Including driver authentication, tamper detection and wireless panic button features.

We demonstrated the security features on Capitol Hill last month in an effort to show congressional leaders and the department of transportation that proven technologies like Omni tracks utilized in the transportation and tracking of hazardous materials.

Our Internet services division is a year and a half old and I'm happy to say that many important milestones have already been achieved.

As Irwin said, we reached roughly 1.3 million Brew users worldwide.

And here are some additional data points.

Brew users to date have downloaded 8 million Brew application over the air.

Roughly 300 Brew application are on sale to consumers today.

And we have issued digital signatures for over 2,000 applications under development in trial or currently on sale.

These applications are running on 19 commercial Brew hand sets from seven manufacturers.

In addition, over 50 Brew enabled hand sets are currently in development from various manufacturers.

We have signed detinafive agreements with four operators and launched three commercial Brew networks in three different countries and expect to conclude additional definitive agreements as a result of trials we are currently conducting or planning to conduct in the next quarter.

We have hosted several Brew developers' conferences around the world.

Of course there's a lot more to do, but I think the fact that the Brew solution has been recognized and accepted so rapidly clearly illustrates the need for an end to end wireless data platform.

During the third quarter there were several Brew carrier developments.

Verizon, the largest wireless carrier in the United States, launched Brew nationwide in June.

By year-end Verizon plans to offer seven different Brew handsets.

Also in the United States we signed an agreement with Altell to provide the Brew platform with service plans for select markets by the end of 2002.

Of the almost 300 Brew applications KTF retail is currently offering as part of its Magic and Multi-packs service, over half are network applications.

This is significant because KTF realized early on that driving a ratio of network applications would help them more fully utilize their network and drive average revenues per user.

KTF is selling 16 different BREW enabled handsets.

And we signed an agreement with Telef Cellular in Brazil to conduct a Brew user trial of downloadable application on its 1X network.

Plus they have been trialing video streaming, games, E-mail instant mileaging and personal productivity applications.

We also announced our second major release of the Brew client software and Brew software development kit.

At least 2.0 incorporates increased security features for M commerce applications, new browser components, new SMS capabilities and richer multi-media and graphics.

We have also been active with CDMA carriers and their enterprise sales effort.

We think this is a great opportunity for these operators to leverage their CDMA 2000 1X and Brew capabilities over their competitors.

Now I'll turn the call over to Don Shrock.

Thanks Paul and hello everyone.

For the third fiscal quarter Qualcomm CMA technologies set a new record by shipping well over 16 million MSM chips compared to 14 million in the year-ago period and 14 million last quarter.

Through the end of June, we have shipped a cumulative total of 31 million third generation 1X chip sets.

Our analog chip sales were also at record levels.

On the network side, we shipped CSM 1X and 1X EVDO infrastructure chips to support a record-setting 4 million equivalent voice channels during the third quarter.

That is a significant increase from the approximately 3 million equivalent channels shipping in the year-ago period and 2 1/2 million channels shipped last quarter.

Clearly, the growth for both MSM's and CSMs is coming from 1X rollouts worldwide.

I am pleased to say orders are very strong for the September quarter.

We expect to ship between 18 and 19 million MSM chips for our fiscal Q4 as we gain CMA chip set market share and 1X rollouts continue.

We are more than 95% booked to achieve this new record. 1X MSM shipments are expected to increase from 11 million units in Q3 to over 15 million units in Q4.

Now I'd like to highlight a few third quarter developments.

In addition to record-setting levels of MSM units and CSM equivalant channels, we are seeing a strong transition to GPS 1 position location enabled devices.

Our 1X MSM 5100 with integrated position location, [INAUDIBLE] and multi media became our highest volume device in Q3.

Many handset models using our MSM 5100 have been rolled out to drive Japan's KDDI 1X launch and its GPS 1 and multi media services.

The MSM 5100 is the key device supporting the North America carriers 1X rollout with GPS 1 to meet the FCC E9-1-1 mandate.

In Korea, carriers handset models are my grating from our MSM 5000 to the MSM 5100 for position location, multi media and high data rate services.

The world demand picture definitely favors GPS 1 capable devices, such as our MSM 5100, our MSM 5500, 1X EVDO device, and our new MSM 6050 chipset, our first radio 1 or 0 IF chip set, we started sampling in March 2002.

By the way, we have signed more than 14 MSM 6050 development agreements already.

Our snap track subsidiary continues to win position location server software business in Japan, U.S.A. and Korea.

With SK Telecom in Korea launching its position location service in June using the snap track software.

While Sprint and Verizon continue their E911 rollouts, other U.S.A. carriers such as Altel and QWest are expected to deploy E911 services in 2002 using snap track software.

During the quarter we signed an agreement with TCS to set up a service bureau to provide E911 solutions to the smaller remaining CDMA carriers.

CDMA carriers continue to be on track to comply with the FCC E911 mandate using the Qualcomm and snap track GPS 1 technology end to end solutions.

We remain on track with our aggressive MSM 6XX new product development roadmap to provide global wireless solutions.

In June we started sampling our MSM 6200 WCDMA GSM multi mode chipset and software a full quarter ahead of schedule.

Due to successful interop testing with infrastructure providers in Europe and Japan, and successful completion of WCDMA and GSM voice calls using our new WCDMA, GSM 0IFR chips with completely integrated GSM transceivers for the smallest, most intigrated WCDMA, GSM dual mode chipset solution in the industry.

During the September quarter, we are also on target to sample our leading edge MSM 6100 1X chipset with multi media leading features.

Such as a more powerful R9 microprocessor, a more powerful DSP, a JAVA hardware accelerator, 2D and 3-D hardware graphics accelerator, on chip MPEG decoder and low rate encoder, on chip camera interface, and the new SMV vo-coder for even further network capacity improvements for 1X carriers.

We will also start early customer sampling and engagement on our MSM 6300 the industry's first 1X GSM dual mode chip set and software solutions that can truly enable a phone that can operate anywhere in the world.

In summary, the QCT team is very pleased with our third quarter results and we are working hard to continue to lead the industry in wireless technology solutions and to achieve new record shipments in the September quarter.

And now I introduce Bill Keitel.

Thanks, Don, good afternoon, everyone.

I would like to explain the two key differences between our GAAP and pro forma financials.

Firstly, good will amortization and secondly QSI, our Qualcomm strategic initiative segment.

Goodwill amortization stems primarily from our acquisition of snap track.

It will cease in the December quarter in accordance with FAS 142.

QSI consists of various investments to grow the CDMA market.

We report the QSI segment separately to provide greater visibility to this aspect of our business and allow for valuations of this business to be derived separately from core operations.

Earnings or losses from the QSI segment relate to a number of things such as realized or unrealized changes in the value of investments and Qualcomm's share of income or losses from consolidated subsidiaries and investments under the equity method of accounting.

The ultimate mesh of success will be its continued positive influence on growing CDMA and the cash realized versus cash invested.

QSI -- I'll turn to a review of QSI and then move on to pro forma.

QSI losses before tax for the fiscal third quarter were $285 million compared to $119 million loss in the march quarter, an increase of $166 million.

This happened because of the significant decline in the market value of Leap Wireless investments during the June quarter.

We transferred $167 million of cumulative unrealized losses recorded in equity to the earnings statement in accordance with the guidelines of FAS 115.

We also recorded $27 million in FAS 133 losses related to Leap Wireless warrants as compared to the $49 million loss in the second fiscal quarter.

Our share of Vesper losses this quarter was $41 million an $11 million improvement from the second fiscal quarter due to increased revenue and continued improvements in operations.

We expect Vesper to require approximately $25 to $35 million in funding in this current quarter.

We recorded $19 million of losses for our share of [Inqalm] and Wireless Knowledge compared to $16 million of losses in the prior quarter.

The higher loss is due to [Inqalm]'s expanded efforts to introduce CDMA 2000 1X services in Europe.

We also wrote off our remaining WinCast assets and continued to adjust remaining investments in accordance with market valuations.

Although with the exception of FAS 133 for Leap warrants, in no case are gains recorded in earnings until realized.

Now I will discuss our pro forma results.

Pro forma includes results of the three core operating segments.

Qualcomm CDMA technologies or QCT, Qualcomm technology licensing or QTL, and Qualcomm wireless and Internet or QWI.

I'm very pleased to report that pro forma earnings of 24 cents per share, up 4 cents per share sequentially and historically.

We exceeded the high end of our April guidance by a penny per share.

Pro forma revenues for the third quarter were $721 million, up 10% from the year ago period and up 9% sequentially on the strength of 3G CDMA 2000 commercial deployments and strong subscriber uptake of compelling 3G data capabilities and color screen phones.

Pro forma gross margin was 67% consistent with the second fiscal quarter and up 200 basis points from the year-ago quarter due to improved gross margins in our QCT business.

R&D and SG&A expenses decreased to 30% of revenue in the third quarter from 32% in both the second fiscal quarter and the year-ago quarter.

Total employment decreased slightly for the third consecutive quarter, despite filling critical positions in our growing QCT and QIS businesses.

The pro forma annual effective tax rate for fiscal 2002 continues to be estimated at 35%.

Pro forma interest income on corporate cash and marketable securities was $28 million compared to $23 million in the second fiscal quarter and $25 million in the year-ago quarter.

Now I'll highlight individual segment results.

QCT, our chip division, posted revenues of $404 million in the third fiscal quarter compared to $344 million in the prior quarter and $333 million one year ago.

Revenues grew 18% sequentially and 21% from the year-ago quarter to a new high based on record shipments of MSM phone chips and CSM equivalent voice channels.

3G CDMA 2000 1X chip shipments increased 3 million units or 38% to approximately 11 million units up from the approximately 8 million units in the previous quarter.

This exceeded our previous guidance by approximately 1 million chips.

Total MSM shipments increased to over 16 million units in the third quarter compared to 14 million in the second fiscal and year-ago quarter.

We expect to establish another new record in the 4th fiscal quarter by shipping approximately 18 to 19 million MSM chips.

QCT's operating margin increased to 29% of revenues, up from 23% in the second fiscal quarter and 21% in the year-ago quarter.

QTL reported revenues of $199 million of which $182 million came from third party license fees and royalties.

This compares to $180 million in revenues during the year-ago period of which $167 million came from third party licensees, a 90% increase over the year-ago period.

Pro forma earnings before taxes for QTL were $174 million.

Up 2% sequentially and 14% from the year-ago quarter.

Operating margin continues to be just under the 90% range.

Qualcomm wireless and Internet or QWI comprised of internet services, wireless business solutions and digital media generated revenues of $110 million in the convert about equal to the second fiscal quarter and up 6% over the year-ago period.

QWI pro forma loss before taxes was $3 million compared to a profit of $5 million a year ago due to primarily development of Brew products and services supporting carrier Brew deployments.

Our corporate cash, which excludes QSI, totalled approximately $2.6 billion with essentially no debt.

In the third quarter of fiscal 2002, we generated $238 million of cash flow from operations and employee stock purchase programs.

We invested $57 million in capital expenditures and acquisitions and $139 million in transfers to QSI during the third quarter.

Primarily for Vesper, Pagasso interim financing and additional [Inqualm] investments.

That summarizes our results for the third quarter and I will provide our guidance for the fourth quarter and full fiscal year.

As Tony mentioned, we have updated our forecast for CDMA phone sales and continue to expect 80 to 85 million CDMA phones sold this calendar year.

We do not see an inventory build-up problem.

Our fiscal year revenue and earnings guidance is based very largely upon existing orders.

Again, we are more than 95% booked for this quarter in our chip business.

And visibility in our other businesses is good.

We expect fourth fiscal quarter pro forma revenues to increase by 10 to 13% compared to the third quarter of fiscal 2002.

We expect fourth fiscal quarter pro forma earnings per share to be approximately 26 to 27 cents.

This estimate assumes shipments of approximately 18 to 19 million MSM phone chips during the quarter, including approximately 15 million 3G CDMA 2000 1X MSM phone chips.

For the full fiscal year, which is now less than ten weeks away, we expect revenue growth for fiscal 2002 to be approximately 7% to 8% up from our previous range of 4% to 8%.

And we expect pro forma earnings per share to be in the range of 93 to 94 cents.

That concludes our remarks.

Operator, we're ready for questions.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session.

If you have a question, press 1-4.

To to retract a question, press 1-3.

If you are using a speaker phone, please pick up your handset before pressing the numbers.

One moment, please, for the first question.

T.C.

Robilan with Solomon Smith Barney, please go ahead.

Great.

Thank you.

Just a couple questions if I may.

Bill or actually even Don.

Can you give us some guidance with the trajectory for the margins for the QCT business, obviously another big quarter expected.

Can we get operating margins above 30% in the fiscal 4th quarter and also on the QTL margins, kind of trending down over the last couple of quarters.

Is this is trend we should expect or is this is trough level these may level out at.

I'm assuming this is partially due to the increased R&D investments.

And then Tony, if you could just go over real quick the Pagasso details again, I apologize, I didn't catch those when you were going over those.

Thank you.

T.C., I'll speak to your two margin questions.

In the case of Don's chip business, for the fourth quarter I expect the operating margins to be largely in line with what we did in the June quarter.

If we come in at the 18 million unit range, I expect a very slight decrease in the operating margin.

If we hit the $19 million range, I expect it to be about flat at 29%.

In the case of the QTL margins, they do bounce around a little bit.

You're correct, there is corporate R&D in there, but there's also our legal expenses in there to defend our patent position.

As a whole I expect the QTL margins to be in that range of 88 to 90%.

And then the Pagasso details, we -- we invested the $140 million commitment for interim financing.

Which was part of the Telephonica deal through June, $58 million.

So we will get that plus any additional interim financing that we provide through closing, 30 days after the closing.

In addition, 60 days after the closing, we will receive in excess of net of $200 million in cash.

The balance of our debt will remain in Pagasso but of course with the ownership of Telephonica as part of that secured debt.

Great, thank you.

Daniel Cohen with Goldman Sachs, go ahead with your question.

Don, I was wondering, you talked about 95% booked for this quarter and I'm sure you don't have too much firm bookings yet or backlog for December.

I was wondering if you could just qualitatively talk about what you think will happen in the December quarter.

Do you expect chip set shipments to grow or would they flatten out or just any color you could give would be helpful?

Clearly as we mentioned, this quarter is looking very strong and booking - booked business shows that.

We do expect clearly, as Sprint and Verizon continue to drive their rollouts of 1X through the balance of the year with a good Christmas season, I think we are hopeful we can again see quarter to quarter increase in our Q1 versus our Q4.

Tony, last quarter you talked about the expectations of 80 to 85 million and how that broke out just through the first half of this year, can you just talk to -- are there any deviations from that expectations or are they coming in roughly in line somewhere in that range in terms of geographic representation?

Yes.

I don't think we have really changed substantially any of our estimates.

Perhaps the shades of difference would be Latin America a little lighter, and the other markets generally just a little bit better, but pretty close to what we said before.

Okay, great.

Just last question, Bill, could you just talk about what you think -- what were handset ASPs this quarter and what your expectations are for the balance of the year.

The handset ASPs, we have very good knowledge for the March quarter because we receive those royalty reports and ASPs just came in just under $200.

As we have been discussing here year to date, ASPs are holding up very well because of the increased functionality in those phones.

So you would expect similar as you guided before in terms of the down 5 to 10%?

I would say 5 to 10% for the calendar year.

I would say 5 to 7% for the fiscal year.

Okay, great, thank you.

Kim Wong with Credit Suisse First Boston, please go ahead with your question.

Thank you.

Two questions if I could.

Tony, if we could just talk a little bit about the Chinese market and maybe the Latin America and Indian market.

Obviously you have low-cost chipsets coming out.

Could you let us know if there's any other incentive programs or investments that could be made by Qualcomm to help get some of those markets going?

And then secondly, let me talk a little bit about the units.

If we assumed kind of the low end for the full year of 80 million and the low end for the September quarter, just chopping into September, it would look like maybe 18 million out of 20 million, about a 90% share.

Could you go through that math if we look at what Nokia's share is and what Motorola's 2G share is, and help us under how there might not potentially be an inventory build going there.

Thank you.

Okay.

The market situations.

Certainly in China, there's been steady progress by Unicom.

And the positive signs that really make us feel good about the 3 to 4 million for the calendar year relate to the Unicom's actions on pricing, taking more aggressive actions.

The fact that their network is improving all the time, they are getting their distribution channels more organized and phone availability is much better.

So for this year those will be the key things.

Then beyond '02.

The implementation of 1X, the upgrade to 1X combined with GPS 1, Brew and other services, I think, will really differentiate Unicom's network services to their competitors.

In Latin America, we have certainly seen the economy having the most significant impact there of all the world markets.

But the emphasis on the low-cost phone, we are not so much at the low-cost chipset, per se, but what we are focused on is lowering the total cost of building a CDMA phone.

And we are working with a number of manufacturers on that, and I think one of the key things is the introduction of the MSM 6000 which was sampled in March and so is beginning to be designed into the phones for introduction probably the end of this year or into early next year, which will allow for much lower priced phones to come into the market at the low end.

India, as I mentioned, I think, Reliance is the pacing driver of the market.

Although other operators are actually deploying and growing their networks, and it's looking to be a pretty competitive marketplace, with a number of CDMA operators, but with Reliance looking nationwide and being extremely aggressive and so that, I think, looks very good.

In terms of the units by quarter.

We would have seen the March quarter of about 18 million, the June quarter we don't have -- as Bill mentioned we don't have royalty reports yet and don't know exactly what the units shipped were in the June quarter, but we would guess around 20 million, which puts us at 38, which takes you into the 42 in the second half to get to the low end of our range.

With the 18 to 19 million chips that we're shipping, we would certainly be looking at in excess of 20 million, 22 million, plus, in the September quarter and perhaps more than that in the December quarter.

So I think that's kind of the breakdown sequentially that gets to the 80 to 85.

doI think the key thing that is being missed in the consensus is the impact of replacement phone sets.

That really obviously -- Korea is the prime example of that.

Japan is a terrific example of that, but not maybe so evident in the U.S. but really is a big factor here as well.

Thanks.

Tony, if you could just remind us of what the split of the phones between new, sub, and replacement would be, thank you.

Well, it's certainly overall well in excess of 50% when you combine -- I would say something more like 70% between replacement and upgrades.

Differing by different markets, but overall, we're looking at new subscriber ads being 30% kind of range.

Thank you.

Ladies and gentlemen, due to time restraints, we ask that you limit yourself to one question.

Mark McKechnie, Bank of America, please go ahead.

I got limited right there.

I just missed the cut there.

First off, Don, congrats on the chipset margins.

Thank you.

I wanted to ask you, on September you said 95% booked there.

Comment on the linearity there Don, with the 1X ramps going and what have you.

This fairly uniform quarter or any way shape or form back-end loaded given the summer season?

No.

It's an extremely uniform quarter.

Thank you. [Pause]

Obviously impossible for analysts to only ask one question. [laughter]

Ed Schneider with JP Morgan, please go ahead.

Hi.

This is [INAUDIBLE] for Ed Schneider.

Could you comment on QSI, the losses, how much of it was cash and could you comment on the status of Alliance with your unfunded commitment you have removed from the QSI balance sheet.

Right.

The QSI losses are essentially all unrealized losses.

The Leap piece is still described as $194 million total is unrealized.

The equity investments in Vesper investments and consolidation of operating losses.

Of course at the same time we are investing cash into the Vesper, so the cash that we are investing is in the order of $25 to $35 million per quarter.

In terms of Reliance, there, yes, we -- they did not meet certain conditions under our agreement, which means that we are not obligated, we don't have a firm commitment to invest that $200 million.

That does not, however, mean that we will not invest that $200 million.

From a legal point of view, that commitment is not firm at this point, but we are still obviously working very closely with reliance and expect them to launch and there's very high probability I think that we will investment.

Thank you.

Unicom, are you expecting 1X full deployment in China by the end of the year.

We are expecting contracts for 1X upgrades to be issued fairly soon and I think, yes, you should see that upgrade taking place between now and the end of the year.

Thanks.

Mark Roberts with Wachovia Securities, please go ahead.

Thank you.

I have a number of questions.

I guess I can only ask one.

Don, in talking with your customers for the chips, what is the average lead times that you're quoting to them right now, and also to the best of your knowledge, what -- how many weeks of normal chip inventory do they keep in the raw materials pool?

In terms of our lead times, it typically runs, fairly normal in order of 12 to 14 weeks as a normal lead time from end to end.

Sometimes it's less, sometimes it's more, but typically we quote somewhere around 12 to 14 weeks total.

And the second part of your question I guess has to do with what they carry.

And again, I think we discussed that before, that once we ship it, we assume that there's about half of it carried and then turned into a handset in the handset manufacturing base and of course roughly another half in the carrier channel.

So you're assuming that about half of the 12 to 14 week lead time would be -- they would be holding it in inventory for anticipated production?

Roughly half.

Some less, some more, but that's a good approximation.

Thank you.

Brian Monoff with Deutsche Bank Alex Brown.

Please go ahead

Yeah.

Just a question.

Handsets shipped, can you talk through how many units you think were shipped into each region in the first half of the year.

The just a couple of housekeepings.

Don, talk about pricing on trans ASP's on your chipset business and then also could you give us quickly allowance for doubtful accounts, for your accounts receivable and finance receivables, please.

Brian, I think the shipments by region, we do not know specifically for the June quarter.

As I mentioned, we haven't got royalty reports.

Even those don't tell us where the phones end up exactly.

So for that, it's a difficult question to answer.

And so, Don, if you could --

Sure.

On the chipset ASP side, clearly as we mentioned before with the advent of a higher percentage of 1X chips and of course now as I mentioned with the position location - integrated position location being in more and more chips, we are continuing to see that the ASP is increasing and we expect that end Q4 we'll actually go up a little more.

Brian, this is Bill Keitel on the - your reserve - your receivable question, inventory question.

No significant change in our allowance for doubtful accounts during the quarter.

I would add our average collection period from the time we invoice to the time we collect stands at about 49 days.

The receivable portfolio I think is performing very well.

On the inventory side, again, no significant change in inventory reserves and as well inventory turns are going very well.

We are turning about 15 times a year.

Financial receivables.

Financial receivables, please.

Finance receivables, we did increase our reserves during the quarter, and you saw that reflected in our QSI results.

Thank you.

Yeah.

I would just add if you look in the press release the cash flow statement that you do see a significant increase in working capital in the quarter.

That's largely associated with the fact that our royalties are paid generally every six months and so you see every other quarter you will see a build in receivables and that gets reduced in the following quarter.

Thanks, guys.

Freedman, WR Hamert and Company.

Please go ahead with your question.

Can you guys talk about expected trends in R&D and SG&A.

I expect our combination of R&D and SG&A in the next quarter to be about the same dollar amount as we incurred in the June quarter.

As Tony mentioned, and I as well mentioned, we are watching the expenses very closely so I do not expect an increase in those dollars.

Great, thanks.

Due to time restraints, we have time for one more question.

That question will come from Louis [Gherrarty], Morgan Stanley.

Please go ahead, sir.

Congratulations on the result and the execution behind the results.

Question on the CFM outlook next quarter and do you expect it to be up or down from the 4 million channel equivalents and what regions will be taking those parts.

Last question would be if you could name the 10% customers.

Thank you.

Don, would you like me to handle that?

I'm sorry, Tony.

On the CSM outlook for the next quarter?

Yes.

I think Louis, right now we see it probably will be down slightly from this record-setting quarter.

Again, as we mentioned, this one with 4 million equivalent channels shipped was a barn-beater so I think it will be down slightly from that.

Clearly now as we expected, we need to come on stronger, we may see some turn-on to that.

Louis, could you repeat your 10% question, what exactly are you asking.

The 10% customers in the quarter, if you had any, if you could tell us who they were.

It's, in terms of our most significant customers, Louis, I would say there's no significant change from the prior quarter or two.

Thank you.

Do you have anything further to add before we adjourn the conference.

I would like to thank everybody for participating.

We are also quite pleased with the quarter.

We are particularly pleased with the strong demand that we are now seeing for chipsets in the present quarter, and we are looking forward to the launches of 1X service expanding here in the U.S., continuing in Japan, Korea.

We think that we will be seeing some significant improvements in China and we are looking forward to things happening in India.

So right now a lot of activity and hopefully going to show up in our results.

Thank you all very much for your attendance.

Ladies and gentlemen, that does conclude your conference for today.

You may all disconnect and thank you for participating.