高通 (QCOM) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Qualcomm first quarter conference call. [Operator Instructions].

I would now like to turn the call over to Mr. Bill Davidson, vice president of investor relations.

Bill please go ahead.

Thank you.

Good afternoon.

Today's call will include comments by Dr. Irwin Jacobs, Tony Thornley, Steve Altman, Dr. Sanjay Jha and Bill Keitel.

Dr. Paul Jacobs is on foreign travel.

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.

During this conference call, if we use any non-GAAP financial measures as defined by the SEC and Regulation G, you will find the required reconciliations to GAAP on our Web site.

I would also direct you to our 10-Q and our earnings release, both of which were filed with the SEC today and are available on our Web site.

We may make forward-looking statements 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.

First quarter revenues were $1.2 billion up 37% sequentially and 13% year over year.

Net income was $352 million or $0.43 per share, up 21% and 23% sequentially and up 46% and 43% year over year respectively.

Excluding the Qualcomm's strategic initiative segments, first quarter revenues were $1.2 billion, up 39% sequentially and 13% year over year.

Net income excluding QSI was $419 million or 51 cents per share, up approximately 77% and 76% respectively compared to the prior quarter and both up 21% year over year.

Before turning the floor over to Dr. Jacobs, I would like to mention that we will be using the modified format today.

Following the opening remarks from Dr. Jacobs, the speakers will address anticipated questions for their particular discussion areas.

Bill Keitel will conclude with the summary of financial highlights for the first quarter fiscal 2004 as well as guidance metrics.

We will then open the discussion to your questions.

And now it is my pleasure to introduce Dr. Irwin Jacobs, the chairman and CEO.

Thank you Bill and good afternoon everyone.

Our fiscal first quarter 2004 results have exceeded the high end of our estimates driven by strong growth and CDMA subscribers worldwide and the popularity of color screen and camera phone.

We believe these trends will continue through the remaining three-quarters and have increased our fiscal year forecast.

I said in our mid quarter update, there were few reports received in November and early December, disclosed of licensee phone sales in the fourth fiscal quarter exceeded our earlier estimate by 5 million units.

Due to demand non-reflected MSM shipment, which drove in process and finished good CDMA inventory levels to an unexpectedly low level.

The logic unit sales at higher average selling prices resulted in royalty that we approved last quarter with the difference booked this quarter.

The low inventory proved beneficial to QCT in the December and March quarters, driving record demand for our MSMs and RF chips.

We have updated our MSM guidance reflectors demand and a higher number of phones are expected to be sold this year.

We now estimate the number of CDMA phones sold in calendar 2004 will be 138 to 146 million units, a 27% increase from last year at the mid point.

I returned this week from a trip to India and Southeast Asia.

CDMA subscribers here and in India were approximately 8 million, exceeding our estimates despite a delay in the start of prepaid CDMA service.

The introduction of unified licenses now permits CDMA operators to offer a full rather than limited mobility supporting further rapid growth this year.

I visited 4 different cities in India and each was able to make a faster than dialogue wireless virtual private network connection to Qualcomm using CDMA 2001X immediately (inaudible) the frame.

These connections held while driving through the cities and within the hotels.

It is truly an amazing world.

And perhaps the most exciting thing is what the supportable communications can do to develop economies and bring people closer together.

Southeast Asia has a number of developing countries with operators who are offering or preparing to offer CDMA service including two I visited this trip in Vietnam and Indonesia.

In Indonesia, PT Mobilage has launched a mobile CDMA 2001 X-service and again, I was able to use this service to connect my laptop to Qualcomm within office buildings or while driving to the airport.

PT telecom has launched a CDMA wire local loop service and has reached half a million subscribers.

Vietnam also provides great opportunities for wireless to extend voice communication to a larger population.

Clearly many lessons can be learned from CDMA experiences in China and India that are applicable to public developing markets.

The BREW platform continues to be widely deployed in more countries and by more operators.

In fiscal year 2002, three operators launched commercial BREW service, followed by 7 operators launches in fiscal 2003.

Already in fiscal 2004, 13 operators had commercially deployed BREW for a total of 23 wireless operators in 16 countries.

Operators clearly recognize a market opportunity for enhanced revenue and customer satisfaction from downloadable applications at an affordable price.

Thousands of developers are participating in the BREW ecosystem and many have completed applications and are sharing in the revenue stream.

Customers have made over 72 million download to BREW software applications and the usage is accelerating.

The capabilities of BREW continue to grow and we believe combined with the launch pad software on our MSM chips, BREW offers operators an evolving capability, which will drive their subscriber satisfaction and result in our BREW increases.

Perhaps the most exciting recent development and one of the major implications with the expansion of broadband global data service for individuals and enterprises in the U.S and indeed worldwide with Verizon's decision to proceed with nationwide expansion of it's 1-X-EVDO network following successful commercial trials in San Diego County and greater Washington DC.

The high speed mobile data access soon to be available over broad areas to this country, we expect to quickly see a next generation of DO capable phones and external and embedded margin to laptop computers and DDA's.

Many using our already sampled MSM 6500 and soon to be sampled MSM 65-50 multi mode chips.

DO service has proved very popular in Korea attracting over 4 million users and supporting a range of video music camera services and video telephony as well as Internet access.

DO is also an evolving platform focussed on delivering rich multimedia content of very wide subscriber base at very low cost.

Those operators who deploy DO will have a tremendous advantage and is rapidly changing part of the market.

Local number portability is now a reality in the United States and we believe will support affordable turn to CDMA operators over the next two years.

In particular, enterprises can now access company information at high data rates as well as using high quality voice while keeping existing phone numbers.

In the January 8'th interview on CNBC, Ivan Seidenberg, chairman and CEO of Verizon discussed what Verizon had experienced relative to local member portability.

Indicated that Verizon had seen more activity than they had anticipated and that when they report their earnings at the end of January, the effect will be seen in the numbers.

We continue to anticipate substantial growth in WCDMA subscribers in 2004 and 2005 as we projected several years ago.

Better coverage and new handsets have already attracted over 2 million subscribers in Japan and Europe.

Qualcomm is working closely with many operators and manufacturers to support rapid and reliable W-CDMA deployment and the availability of attractive and feature rich handsets and modules.

Our first and second generation MSM, WCDMA/GSM chipsets have been used to test network performance, coverage, interoperability and handoff issues including handoff between WCDMA and GSM network.

We announced probably 14 manufacturers in the launch of hands sets and devices using our MSM 6200 and 6250 chips.

Our goal is not only to achieve 50% market share in WCDMA sets but more importantly to continue to earn the respect and become trusted partners of all WCDMA operators.

Finally, often you referred to Qualcomm as a startup with greater cash flow.

The financial health of Qualcomm has never been better and our cash position enables us to have great flexibility in our business and to continue to innovate and introduce new products and services.

We believe our dividend program is an effective means to return further value to our shareholders.

The free cash flow that our business generates positions up for substantial increases and dividend program for many years to come, without at all impacting our ability to grow the business.

I will now turn the call over to Tony Thornley for the global business overview

Thank you Irwin, and good afternoon.

I will address some questions that we have been receiving regarding our global market.

The first one relates to China and what should we expect from China as it relates to the overall market, the issuance of 3G licenses.

First, China Unicom has indicated that they are balancing the decision between profitability and subscriber growth.

We appropriately reduced our handset estimates in November for China from 13 million units to 10 million units for calendar '03.

It appears that Unicom finished with approximately 12 million subscriber additions for their network for 2003.

Unicom has said they will not disclose a target for subscriber additions in '04 but they did say the number would be bigger than the additions in '03.

China is very important to us and will be a much larger addressable markets when the MII grants additional wireless licenses, which may occur late this year or early next year when China mobile upgrades to 3G.

Should the MII also decide to allow build out to CDMA in the 450 band, broad coverage could be achieved throughout China at lower costs.

Our handset estimates for China for fiscal '04 is 14 million units.

The second question relates to India.

India has been a high growth market and recent articles decided to have Qualcomm has begun to reap the benefits from focussing assets there.

What will enable the Indian market to reach our stated hand set projection of 13 million units for '04?

We see significant growth opportunities in India, as the addressable market for wireless is in the hundreds of millions.

Wireless subscribers in India have forecast to reach 56 million by the end of '04, which is a 96% growth over '03.

That's according to a new report from the Garner Group.

Extrapolating that out further, the number of wireless subscribers in India is expected to grow from approximately 28 million currently to 126 million in the second half of '06 according to the Cellular Operators Association of India.

Fast growing economy, foreign tariffs and removal of regulatory bottle mix have aided India's communications grow especially for mobile phones, which do not require long waiting periods for installing by government supplied fixed line phones.

Both Reliance and Tata trying to launch prepaid products this year.

This should expand the addressable market and Tata has applied for an additional 7 circles or states, which will give them full nation wide coverage.

The CDMA operators continue to deliver on their promise to the Regulatory Authority of India in improving tele density and we believe our forecast for hand sets in India of 13 million units is quite achievable.

Third question relates to PT mobile in Indonesia and is what prompted our recent investments in that operator?

In fact we have been working with the finders of PT Mobile-8 in Indonesia for sometime.

The company provided a unique opportunity in the Indonesian market as its very undeveloped market in terms of telecommunications.

There is a larger population is due to (inaudible) million people.

Mobile-8's deployment to the CDMA 2001-X network and is upcoming pilots of 1xCD and DO (ph) services represents a major step forward in Indonesian telecommunications.

Implied to the company in a highly strategic position within the telecommunications industry in Indonesia.

In addition to basic both voice services, Mobile-8 expects to be able to offer its customers wireless data services based on the BREW system by the end of first quarter '04.

Our investment is actually relatively small part of the total capital raised by PT Mobile-8 and in fact in the context of investment, you might have also noticed that we received early payments on the balance of our Fiagaso (ph) loan in Mexico causing it to change our forecast for net cash to be invested in our QSI segment in fiscal '04 to just 60 million.

The next question is what's been the experience of EBDO in Japan.

As Irwin mentioned, it is relatively early days because KDDI launched service on November 28, 2003.

KDDI's named for the EVDO services is CDMA 1x win.

Capitalizing on a $38 per month flat rate the company provides users with TV content called Easy channel.

In conjunction with the service launch, KDDI released 2 hand set models and one PC card.

They planned to have 90% in Japan covered with DO by March of this year.

Currently there are 18 link content services available through Easy Channel as well as an Easy Movie Service and Live Camera Services.

KDDI hosted the highest number of new subscribers in November and December among Japan's three mobile phone carriers, and we certainly think this is in no small part due to the launch of DO.

We had a net increase of 234,000 and 289,000 users respectively in those months.

The December numbers for KDDI subscriber additions compares with 115,000 in DELCOMO and 114,000 in Vodafone, Japan.

Important to remember the results from handset sales of WCDMA through Vodafone, Japan and former through DELCOMO are reflected in QTLs relative results.

Vodafone's are expected to in fact increase this year to quite significantly, helped by improved coverage and new phones and better features and battery life.

DELCOMO expects their 2 million subscribers on the former networks by the end of this March and the end of their financial year.

They originally forecast a little less than that in their full financial year.

In summary, we believe DO has further strengthened KDDI's market position in Japan and the Japan market moving to CDMA is very positive.

Next question is how significant is the management with Verizon and deployments of EVDO nationwide in the US and what impact will it have in the short-term?

We certainly waited for the Verizon management with great anticipation and we were delighted when they announced their plans to invest a billion dollars over the next two years.

It is significant for Qualcomm in many respects.

Obviously the fact that we are the only company that is currently supporting DO and it's phone chips is a strong competitive advantage.

DO will once again revolutionize the customer's experience with their wireless device.

Compelling new service in device capabilities will encourage customers to upgrade their current device and take advantage of those new capabilities.

This goes well for ASPs on both the chip and hand set size as well as providing a direct benefit to our royalty business.

Next question is what does that mean for the remainder of the North American market in terms of a response?

At this point that remains to be seen, clearly Verizon has raised the bar significantly for consumer enterprise application.

This set out on a path that will give them increasing function and lower cost over time.

Other current CDMA operators have the option of deploying DO or DV.

The GSM operators need to move to WCDMA or alternatively they could employ DO but much more rapidly than their announced plans in our opinion.

Market forces are certainly beginning to take over in the US and it will be interesting to watch how other players in the market respond with Verizon announcement.

The last question I have is related to Latin America and why do we have renewed optimism regarding Latin America?

Well, Latin American markets have typically had a lower replacement rates compared to other markets and BREW having been launched by VIVO in Brazil, (inaudible) Bell South International and Verizon international in many markets in Latin America were optimistic, the opportunities may not just be low-end voice centric products.

We have also seen stabilization in certain instances a rebound in many of the Latin American economies.

According to the latest quarterly report from the Global Mobile Subscriber database, South American region had a 114 million subscribers at the end of September, up 20% of those reported at the same period of 2002?

VIVO continued to lead the Brazilian market that was mostly CDMA, some CDMA still to be converted to digital CDMA.

On Friday (inaudible) announced subscriber numbers for Brazil, the CDMA is gaining market share.

The total number of mobile subscribers in Brazil now totals approximately 46 million.

CDMA subscribers represent 14 million of that number attributable to VIVO mainly and continued strong results from that operator and conversion of that CDMA -- (inaudible) with the CDMA make us believe that the momentum will continue in 2004.

I will now turn over the call to Steve Altman who will talk about the QTL and Quallcomm Wireless and Internet businesses.

Thank you, Tony and good afternoon everyone.

I will address some of the questions that we have been receiving regarding the technology licensing for QTL segments and QWI segment.

First question relates to our WCDMA royalty rights and as each licensee's subscriber unit royalty rate for WCDMA the same, is that licensee's rate for CDMA-2000?

The answer is Yes.

Under all of Qualcomm's subscriber license agreement that includes CDMA-2000 end of the CDMA, a licensee's royalty rate for sales of WCDMA subscriber equipment is the same royalty rate applicable to that licensee sale of CDMA-2000 subscriber equipment.

In other words, if a licensee sells the WCDMA handset and the CDMA 2000 handset each at the same price, the royalty paid by that licensee to Qualcomm is the same for both handsets.

We have approximately 125 agreements with manufacturers for CDMA-1 and CDMA-2000 and approximately 50 agreements with manufacturers covering WCDMA and TDS-CDMA.

By the way, for those licensees whose agreements also include TDS-CDMA, their subscriber unit royalty rate is the same as their WCDMA and CDMA-2000 subscriber unit royalty rate.

Next question is, it seems that there are a number of companies claiming patents for WCDMA.

This mean that Qualcomm will ultimately have to adjust its royalty rate for WCDMA.

Qualcomm has a very broad and extensive patent portfolio with essential patents for all the proposed 3G-CDMA standards, including WCDMA.

Qualcomm's license agreements with essentially all of the world's leading wireless equipment manufacturers have created a well established market value for our patent portfolio that is no less for WCDMA than it is for CDMA-2000.

Qualcomm's license agreement are between the licensee and Qualcomm, the royalties applicable under Qualcomm's agreements are for use of Qualcomm's patents and are not reduced or otherwise impacted to the extent that others may have or claim to have patents.

I think it's also important to point out that by virtue of our license agreement we received very extensive rights including for WCDMA and CDMA 2000 under many third party's patents, which we can and we do pass on to our (inaudible) software customers.

This gives our customers very substantial protection from third party claims and greatly decreases the royalties that they might otherwise have to pay the third parties, if they do not use our (inaudible) software.

Next question is related to BREW, and what is the long-term impact of BREW for Qualcomm.

We expect BREW to have a very long-term positive impact for Qualcomm in a number of ways.

In addition to BREW carriers seeing increased data argues, carriers and application developers are also seeing increased revenue opportunities from the open end to end BREW solution that makes it quite simple to develop and sell applications to the end users.

Qualcomm's benefits from this based on our BREW business model, where we share in a percentage of the application revenue.

Unlike our QCT and QTL businesses where our CDMA hand sets represents both the one time sale of our chip set solution and a one time royalty payment, BREW will provides us as well as the carriers and application developers, a very interesting opportunity to access a long term ongoing revenue stream from each BREW phone for the life of that phone.

So if BREW continues to proliferate around the world and data is been increased and data becomes even more indispensable for the wireless users and as more and more applications are developed and downloaded the BREW business to Qualcomm has the potential to grow into a very good business in its own right.

This is why we continue to invest in product and application such as Q jet and location base services to further expand this market.

Also important to point out that BREW provides substantial benefit to the device manufacturers.

Device manufacturers using the BREW client in connection with launch pad and DMSS for products including things such as user interfaces and multi media messaging are able to drastically reduce development costs and time to market.

With BREW, a device manufacture can have common applications for all their handsets and they can reuse these applications.

This also drives the higher level of consistency from handset to handset in the testing process.

Qualcomm will continue to be a one-stop shop for hardware and software.

We believe this tight integration reduces cost for our customers in lower components count and enables creative design and more battery consumption.

Next question had to do with QWBS, and so QWBS has been a consistent business for (inaudible) and it's core.

What type of growth could we see in QWBS going forward?

We continuously look for new revenue opportunities in QWBS, that allow us to leverage the value of our technology, our messaging hub and our market position.

In that regard we work with CardioNet to deploy innovative medical products focused on mobile cardio monitoring.

We have also created new product within QWBS called Global Tracks.

This product is targeted at the construction equipment industry.

Construction equipment is a very significant market opportunity for QWBS.

In fact a great deal of construction equipment at least is more difficult be on with this equipment and nowhere it is and just service and bill for it correctly.

Global tracks address the value propositions and more.

In addition, we continue on our work to make army tracks with the factors standard comminutions and how is that targeted?

With increased sales in Europe and Brazil, as well as the initially sales of CardioNet and Global track units, the results in QWBS continue to be strong, and we believe that QWBS has many opportunities to become a higher growth business.

With that I'll turn the call over to Sanjay Jha for the QCT report review.

Thanks Steve.

First I would like to review a few key highlights of our first fiscal quarter and then discuss some recently announced initiatives without speculations going forward.

During the December quarter QCT shipped a record 32 million MSM phone chips up from 29 million a year ago quarter and up sequentially from 20 million shipped in the September quarter.

This volume milestone comes as we see unprecedented demand in all market for our product supporting entries, mid and ITA devices.

Revenues of QCT in the first quarter came in at a record 752 million, up 49% sequentially and an increase of 6% year-over-year.

Earnings before tax were 261 million up 114% sequentially and down 10% year-over-year.

In the December quarter we shipped CSM infrastructure chips supporting a record 4.6 million equivalent in voice channel for 3D CDMA 2000 base station.

Network expansions in India, China and 1xEVDO video launches in Japan and US are the primary contributors.

To attract new customers and also to offer more choices for our existing customer base, we continue with our aggressive drive to A, garden our product offering to support many new device segments, B, reduce costs in order to extend our leading position in opting the most integrated cost competitive chip set solution to address entry level device peers for mature and emerging market.

C, signed up new customers targeting CDMA 2000 and wide band CDMA market opportunities and finally D, deliver economical quick time to market solutions for bank multimedia and positioning devices.

Reflecting these priorities there are a number of initiatives from the December quarter that I would like to highlight.

We announced broad adoption of our 6,000 series CDMA 2000 entry made in ITA chip for solution, today more than 100 new devices addressing many new segments have been launched commercially or in our development.

We confirmed our leading position in supporting the launch of wide band CDMA network and new devices around the globe.

We announced our chip set solutions have been adopted by 14-device manufacturers, more than any of our competitors and established ourselves as the only company to verify these wide band CDMA solutions for voice circuit and packet data with all 13 of available infrastructure vendors.

In September we sampled the MSM 6025 chip set solution that supports data capability for entry-level devices.

Since then a number of our largest customers have adopted 6025 to deliver entry-level phones in India, Latin America, China and South East Asia.

In States a competitive offering.

We announced new steps to drive down the cost of 3D CDMA devices with the development of the first CDMA 2000 1X chip sets to use cost competitive C-Mark process technology for our chips.

This initiative in conjunction with 6025 allowed us to support the creation of many new cost effective handsets for China, India, and Latin America.

We feel strong career in customer involvement for our CMX multi media, QTV video and GPS 1 positioning solution.

These solutions integrated into our chip sets provide cost reduced multimedia and position solutions without the need for companion chips.

We announced that the speed capacity Radio 1 (inaudible) intermediate frequency of this are about 65,000 device.

This new solution for CDMA 2000 1X and 1xEVDO devices enable to improve signal reception to support higher data through put and the consistent increase in network capacity without any change in the overhead cost.

And finally we launched radio and (inaudible) support for CDMA 2000 1X at 450 (inaudible) megahertz frequency band.

We expect to see growing demand for 450 both within Eastern Europe as well as in Asia in the coming years.

In light of last year's successful data for 1xEV-DO in South Korea, KDDI is EVDO launch and KDDI's EVDO launch at the end of the year and the recent announcement by Verizon in wireless of its planned EVDO expansion nationwide.

Let me highlight our competitive advantage in this technology.

To date, we have announced 4 chip sets supporting high speed one at EVDO, a strong competitive advantage for us.

In December quarter, we shipped over 2.6 million EVDO chips.

There are greater than 40 commercial DO hand sets and data card selling today based on (inaudible) 500 chip sets and we expect to see new, anything 6500 based devices from multiple customers in the coming quarters.

As we look ahead and in reflecting the broad demand for our solutions across all regions, we expect the shift between 29 and 31 million chip sets in the March quarter.

Let me take a moment to address a few anticipated questions.

First of all, QCT operating margin for December quarter came in at 35%.

You are previously forecasted an operating margin of 26% for fiscal 2004.

In light of the first quarter, how should this outlook we will consider?

We expect a sequential decline in operating margin the March quarter as we continued to increase our engineering program in support of UMTS and high speed EVDO DV and HPTPA (ph) development.

We will also see an increase in SG&A driven by specific market activities as we expand our address market.

Backing in the higher than expected December quarter, operating margin and a clear view of our plan for the remainder of the year, we now anticipate approximately 200 basic point improvement to our prior guidance for the fiscal year.

Second question, what quarter will that conversion chips, the 6,000 has become the majority of chips shift.

At the end of this fiscal year, we expect a significant majority of our volume to be 6,000 (inaudible) product.

As we see today with strong demand from a mature and emerging market we still expect growth at the high as well as the low end.

Question, is there a potential buildup in inventory of the channel?

We expect we will ship a greater potential of our phone chips in the first half of this fiscal year compared with second in typical activities.

However, there are a number of catalysts for growth which could minimize the lower second half trend, namely intermediate progress has been in India, China Unicom CDMA build up to support greater subscriber capacity, continued anticipated favorable results for CDMA carriers in North America as a result of number portability program.

Strengths in both Japan and Korea domestic market driven by number portability in Korea and KDD market share growth in Japan.

And South America's continued growth including positive figure has felt from CDMA migration.

We could also see an acceleration of EVDO in South Korea and Japan.

Question, what has been the impact and what is the response to recent competitive chip set announcement?

Competition is nothing new for us.

In the face of numerous competitive programs in the past, we have been very successful in meeting the needs of our customers.

Today we continue to gain new customers and more design wins even as the competition announces their product and plan.

There are a number of important factors that support this confidence.

Our segment at product line, our focused cost reduction efforts and our proven ability to deliver products on time to address all CD wireless standards.

We remain extremely bullish about our competitive position and indeed have recently signed new commitments, which many of our largest customers to provide our full product line.

Thank you for the time and I will now turn the call over to Bill Keitel for further financial guidance.

Thanks Sanjay and good afternoon everyone.

I will begin with a brief review of three significant positive events that occurred this quarter at QSI, our strategic investment segment.

First, we global sale of (inaudible) as expected.

We incurred 7 million of operating losses prior to the sale and recorded a 52 million net loss on the sale, including 46 million cumulative translation losses, which was consistent with our prior guidance.

As a part of this transaction, Qualcomm retained ownership and control of thus per's existing communication towers and towers sight property leases.

The second major event was, we received 193 million in cash for all outstanding loans and accrued interest, wooed under equipment loans facility (inaudible).

We recognize 10 million in deferred interest income as a result of this loan prepayment.

The third noteworthy event in QSI this quarter was 327 million decreases in un-funded commitment.

Un-funded commitment stood at 284 million at the end of December.

Decrease was primarily due to the expiration of a 346 million financing commitment to co fund CDMA networks sold by Ericsson CDMA devices with the development of the first CDMA 2001 as a chip sets to use cost competitive C-Mark process technology for our chips.

This initiative in conjunction with 6025 allowed us to support the creation of many new custom effective handsets for China, India, and Latin America.

We feel strong career in customer endorsement for our CMX multi media QTV video and GPS one positioning solution.

These solutions integrated into our chip sets provide cost reduced multimedia and position solutions without the need for companion chips.

We announced that the speed capacity Radio 10 intermediate frequency of this are about 6500 device.

This new solution for CDMA 2001 (inaudible) devices enables improved signal reception to support higher data through forth and the mis (inaudible) increase in network capacity without any change in the overhead (inaudible).

And finally, we launched radio and this support for CDMA 2001 has been 450-megahertz frequency band.

We expect to see growing demand for 450 both within the Eastern Europe as well as in Asia in the coming years.

In light of last year's successful data for 1xEVDO in south Korea, KVDI's EVDO launched and KVDI EVDO launch at the end of the year and the recent announcement by Verizon wireless of its planned EV-DO expansion nationwide.

Let me highlight our competitive advantage in this technology.

To date, we have announced 4 chipsets supporting high speed one at CVDO, a strong tech competitive advantage for us.

In December quarter, we shipped over 2.6 million EVDO chips.

There are greater than 40 commercial DO hand sets and basic card selling today based on (inaudible) 500 chipsets and we expect to see new and upon 6500 based devices from multiple customers in the coming quarters.

As we look ahead and in reflecting the broad demand for our solutions across all regions, we expect the ship between 29 and 31 million chipsets in the March quarter.

Let me take a moment to address a few anticipated questions.

First of all, Q-50 operating margin for December quarter came in at 35%.

You are previously forecast an operating margin of 26% for fiscal 2004.

In light of the first quarter, how should this outlook will consider?

We expect a sequential decline in operating margin the March quarter as we continue to increase our engineering programs in support of UMTS and high speed EVDO, DV and HSPTA (ph) development.

We will also see an increase in SG&A driven by specific market activities as we expand our address market.

Backing in the higher than expected December quarter, operating margin and a clear view of our plan for the remainder of the year, we now anticipate approximately 200 basis points improvement to our prior guidance for the fiscal year.

Second question, what quarter will direct conversion chips, the 6,000 feet has become the majority of chips shipped.

At the end of this fiscal year, we expect a significant majority of our volume to be 6,000 series become the majority of chips shipped. as we have seen today with strong demand from mature and emerging market, we expect growth at the high as well as the low end.

Question.

Is there a potential buildup in inventory of the channel?

We expect we will ship a greater potential with our phone chips in the first half of this fiscal year compared with second into typical activities.

However, there are a number of catalysts for growth which could minimize the lower second half trend, namely inter mute progress we have seen in India, China Unicom CDMA build up to support greater subscriber capacity, continued anticipated favorable results for CDMA carriers in North America as a result of number of portability program.

Strengths in both Japan and Korea domestic market driven by number of portability in Korea and KDD market share growth in Japan.

And South America's continued growth including positive figures fails from CDMA migration.

We could also see an acceleration of EVDO in South Korea and Japan.

Question.

What has been the impact and what is your response to recent for best chip set announcement?

Competition is nothing new for us.

In the face of numerous competitive programs in the past, we have been very successful in meeting the needs of our customers.

Today we continue to gain new customers and more design wins even as the competition announcement of their products and plans.

There are a number of important factors that support this confidence.

Our segment and product line, our focused cost reduction effort and our proven ability to deliver products on time to address all CD wireless standards.

We remain extremely bullish about our competitive position and indeed have recently signed new commitments which many of our largest customers to provide our full product line.

Thank you for the time and I will now turn the call over to Bill Keitel for further financial guidance.

Thanks Sanjay and good afternoon everyone.

I will begin with a brief review of three significant positive events that occurred this quarter at QSI, our strategic investment segment.

First, we close the sale of (inaudible) as expected.

We incurred 7 million of operating losses prior to the sale and recorded a 52 million net loss on the sale, including 46 million cumulative translation losses, which was consistent with our prior guidance.

With a part of this transaction, Qualcomm retained ownership and control of thus per's existing communication towers and towers sight property leases.

The second major event was, we received 193 million in cash for all outstanding loans and accrued interest, wowed under equipment loans facility to (inaudible).

We recognize 10 million in deferred interest income as a result of this loan prepayment.

The third noteworthy event in QSI this quarter was a 327 million decrease in un-funded commitments.

Un-funded commitments stood at 284 million at the end of December.

Decrease was primarily due to the expiration of a 346 million financing commitment to co fund CDMA networks (inaudible) by Ericsson.

Now turning to our core business, which excludes QSI, revenues for the December quarter were 1.2 billion, earnings before tax were 607 million and EPS were 51 cents.

QCT, our chip business shipped 32 million MSM phone chips, up 60% sequentially and 10% year-over-year.

QCT generated revenues of 752 million, up 49% sequentially and 6% year-over-year.

QCT earnings before tax were 261 million with an operating margin of 35%.

Qualcomm Wireless Internet or QWI reported revenue an earnings of a 133 million and 5 million in the December quarter respectively versus 143 million and 11 million in the prior quarter.

The sequential revenue decrease is primarily due to gains from the sale of our equity interest in the technic color digital cinema joint venture in the fourth fiscal quarter.

QTL our licensing business reported first quarter revenues of 353 million and a 91% operating margin.

Of the 353 million in revenues, 32 million represents inter company royalties, 15 million is license fees and 307 million, royalties for license fee.

Based on royalty reports from our licensees, world wide CDMA handsets shipped in the September quarter were approximately 31 million units versus our expectation at the outset of the quarter of 26 million units.

We believe, total CDMA channel inventories decreased to near record low level in the September quarter.

As we previously explained, QTL royalty revenues earned in the quarter in which licensees sell their products, even though licensees report royalties to the company one quarter in arrears.

Royalty revenues from licensees of 307 million includes 57 million in royalty revenue, which is the difference between our accrual estimate of 151 million for the September quarter and the 208 million in actual royalties reported by the licensees for which royalties are estimated.

Our royalty accrual estimates for December quarter shipment is $205 million.

The average selling price of CDMA phones was approximately $194 for both the September quarter and full fiscal, 2003.

Sales of high end CDMA handsets and an increasing penetration of color screens, cameras, extra memory and other features into mid tier CDMA handsets have offset the average selling price impact of the substantial and growing shipment of low end CDMA phones.

For the December quarter, we expect CDMA handset ASP's to decrease sequentially by slightly more than 2%.

Cash, cash equivalent marketable securities totaled 5.9 billion at the end of December, an increase of 479 million for the quarter.

Excluding QSI, free cash flow in the current quarter of 394 million was 112% of GAAP net income and 32% of revenue.

These free cash flow metrics continue to set us apart from the other companies in the semi conductor and wireless equipment sectors.

Our GAAP affected tax rate for fiscal 2004 is estimated to be 33%.

The effective tax rate in the first fiscal quarter of 2004 with approximately 35% and was higher than the expected annual effective tax rate due to the tax impact of the sale of the (inaudible) for operating company.

Excluding QSI, our fiscal 2004 tax rate is now estimated to be 31%.

Looking ahead, we expect to ship approximately 29 to 31 million MSM phone chips in the March quarter.

We anticipate that March quarter revenues, excluding QSI will decrease sequentially by approximately 6 to 13%, although that level of revenues will represent an increase of 3 to 11% year-over-year.

We anticipate the EPS excluding QSI will be approximately 38 to 41 cents in the March quarter.

For calendar 2004, we expect approximately 138 to 146 million CDMA handsets to be shipped, based upon 142 million mid point of this estimate.

Calendar 2004 CDMA world wide handset shipments are expected to increase by approximately 27% year-over-year.

We have increased our guidance for the India region by 2 million phones, a primary catalyst being unified licensing.

Also we have seen good strength in new CDMA subscriber ads and increased handset replacement rates impacting the Americas both prominently in North America and partly driven by number portability.

We continue to expect approximately 15 million WCDMA handsets to be shipped in calendar 2004.

Other regions have had minor adjustments to our estimates based on latest information available.

And now for fiscal 2004 guidance.

We anticipate revenues excluding QSI will increase for the full fiscal year by approximately 8 to 12% and we anticipate that EPS excluding QSI will be in the range of $1.56 to $1.61.

For 2004, we are expecting our core businesses to have a lower rate of revenue growth relative to the CDMA market due to increase competition because, we are estimating a decrease of approximately 7%, an average selling prices for CDMA handsets in fiscal 2004.

We continue to focus carefully on managing new QSI investments.

We anticipate the net reduction in QSI of approximately only $60 million in fiscal 2004.

We anticipate QSI to record a loss of 15 cents per share for fiscal 2004 and I would note that approximately, 50% of that estimated loss occurred in the first fiscal quarter.

That concludes our remarks and operator, we are ready for additional questions.

As a reminder, I would ask everybody to please limit themselves to one question.

[OPERATOR INSTRUCTIONS].

Our first question comes from Tim Luke with Lehman Brothers.

Please proceed with your question.

Thank you.

Congratulations on the quarter.

If you could clarify what the new CDMA handset guidance is for calendar '04 by region -- I think you gave some of the numbers by region?

Sure, Tim.

And I would refer to everybody to our Web site.

You will find an accounting numbers by region.

But let me summarize here for everybody.

Based on the estimate, the mid point estimate of 142 million, we're expecting 31 million units to be sold in combination of South Korea, Japan and Southeast Asia.

And Tim, as you probably recall, that's consistent with our guidance of about months ago.

In the case of China, we're estimating now 14 million units.

It's a very slight decrease, a million units decrease from our prior guidance.

In India we noted the estimate of 13, which is a good increase from our prior estimate, about 2 million units net increase.

We also spoke to the strength we are seeing in North America and so in North America we are now estimating 53 million units to sell in, to ship in calendar 2004.

Latin America raised that estimate to 13 million units.

And then WCDMA I mentioned we're holding steady at an estimate of 15 million and the split that we gave last time between Europe and rest of the world where Europe we estimated 6, rest of the world we estimated 9, we're holding constant with that as well.

And then the last item to add up to the 142 is rest of the world.

And it's -- we estimate that to be 3 million units.

Our next question comes from the line of Fauna Fetendez (ph) with ThinkEquity.

Please go ahead with your question.

Yes.

I was wondering on the channel inventory you said that there were record lows in September quarter.

But in the December quarter your inventories came down a little further.

Can you talk a little bit about the inventory situation you're seeing now?

Yes.

Our estimate for the channel inventory is attained in a new record low.

That was as of September.

And by the way, we tracked that reference to a new record low goes back for a period of five years.

Then our own inventory in QUALCOMM reduced substantially.

That was primarily in the chip business.

That reflects also the fairly hectic pace that new orders were coming in and significant activity we have done to respond to it.

Our inventory decreased substantially.

I would add that it decreased to a level that we're not happy with.

We would like to see a bit more inventory there.

So in summary, there are two different points, our own inventory decrease reflecting the substantial increase in market demand, but the channel inventory, the total CDMA channel we think hit about a new record low in the -- at the end of September.

And probably I think increase a little bit in December?

Our next question comes from the line of Ava Jobro (ph) with J.P. Morgan.

Please go ahead with your question.

Hi, thank you very much.

Bill, when you were going over the 307 million-royalty numbers for the quarter, did you talk about the number of hand sets that you were estimating for this quarter, that kind of built up to that and how the ASP in the December quarter, I need to have exact number but the estimate that you used come up to that 307 number, how that trended from the prior?

Sure.

First, for the December quarter we're estimating an average ASP decline of just over 2%.

So September ended at approximately 194, so we expect to be between 190 and 189 average when we get all royalty reports in this quarter.

For the March quarter, our estimated number of phone shipments that are built into our guidance is 32 million.

So we're expecting March quarter phone shipments to about equal what we're estimating the December quarter to be, 32 million each quarter.

Our next question comes from the line of Terry Hart with Credit Suisse First Boston.

Please go ahead with your question.

Hi.

Good afternoon.

I was just wondering if I could get longer term outlook for your margins both on the licensing as well as the chip set side though.

You know, they came in at 91% this quarter, higher than we were expecting, but if you could just give us some -- your take on the outlook for those two businesses that would be appreciated.

Thanks.

In the case of the licensing business, there was a significant uptake this quarter and that added a little leverage to the operating margin.

The QTL for sometime now have been fluctuating in 89 to 90% range and that's my best visibility at this point going out.

And then Sanjay spoke to -- in the chip business what we are looking there for our segment earnings as percent of revenues and we had guided 26%, 3 months ago and based on the greater market and some other improvements in the business, we are now expecting that to be in the 28% range for the full fiscal year.

Our next question comes from the line of Christian Amacost with SG Cowen.

Please proceed with your question.

Thank you.

I wanted to follow up on the guidance for the QCT margins and just try to help me get a little bit of color.

If you look at this year and last year both in the first quarter, you had a pretty significant spike in the QCT margins yet from my understanding the margins are heavily volume dependent but the volume in chip sets isn't really changing significantly from December to March to have a big drop off.

So my question is, are you accruing some of your investments beginning in the March quarter then have a true-up in December which gives you that type of leverage or is there anything from a seasonal basis that would drive a spike in fiscal Q1?

Thank you.

The spike in fiscal Q1 is really, it's pretty much operating leverage.

There is volume did spike very significantly.

If you recall, QCT shipped approximately 20 million MSMs in the September quarter and here we are at approximately 32 million.

So that's about - 60% increase sequentially, so that you really see that being reflected in the margins.

In the March quarter as Sanjay indicated we're expecting a sequential decline, a couple of drivers there.

We do expect a little less volume on the MSMs, we are expecting 29 to 31 million units whereas December was approximately 32 million.

So slight decline there.

As we mentioned we're continuing to invest pretty heavily in engineering resources and we're expecting our customer base to broaden so we're investing in SG&A as well.

And a lot of that investment is in Sanjay's business, QCT.

I would just add that we always have in the March quarter a seasonal impact of increased expenses, just by virtue of payroll taxes and FICA starting out which we don't have generally in the December quarter.

That's a good point, Tony.

I would point people that want to look -- last year from December to March our operating expenses grew approximately 30 million for those reasons Tony spoke to.

So I expect a similar pattern this March quarter.

Our next question comes from the line of Mike Walkee (ph) with RBC Capital Markets.

Please go ahead with your question.

Thanks.

I just missed the EVDO shipment numbers in the December quarter if you can help me there and also just want you to guess update, on maybe the product line of Flextronics still in low-end markets.

So for December quarter, we shipped 2.6 million EVDO chip sets.

Going forward in 2004, we expect that we will over cumulative 2003, double our volume shipment in EVDO in 2004, for that EVDO and the second part of the question was -Flextronics.

Flextronics is indeed now shipping products in India, Latin America and China, so that is proceeding well.

There have been initial shortcomings in some parts but I believe they have been overcome and now the shipments are proceeding.

Our next question comes from the line of Tim Long with Bank of America.

Please proceed with your question.

Thank you.

If I could just touch back on to the royalty line here, Bill, could you just explain for us where the discrepancy that 31 million units versus 26, you know, about a 20% upside surprise there.

Could you give us a sense where geographically that was and what type of customers?

Were those the customers that accrue in the quarter or the customers that are on a cash basis?

Thank you.

Sure.

Tim, first the 5 million unit higher shipments that were reported --predominantly the customers that we accrue -- the customers that we accrue for obviously we keep constant quarter to quarter but they do represent the majority of the phone market.

On the - where we were thinking, you know, our best insight on the regional source of that increase, it's hard for us to pinpoint that, but clearly as you have seen in our updated guidance for the year, we've seen that the North American market stronger now than what we had 3 months ago.

And we think North America as we see operated results here over the next coming weeks will -- I expect we'll see that December was quite strong in North America.

And then as well, we noticed Latin America picking up here recently.

And Tony spoke to some of the results, the early results that we're hearing out of Brazil.

Our next question comes from the line of Peter Friedman with WR Hambrecht.

Please go ahead with your question.

Mr. Friedman, we are having difficulty hearing your question.

We will continue with the question from the line of Voitec Iselevich (ph) with Bear Stearns.

Please go ahead with your question.

Thank you.

Couple questions.

One is if you could give us a sense, just to clarify on the royalties that it's the same rate, is this gross rate or a net rate?

It doesn't really matter.

You mentioned that some other people have also royalties.

So is there cross licensing going on or is it pretty much the same rate we should use in our analysis for everything?

And second, what was the Korean Won being stronger and also the Japanese yen, any sense what was the current impact on the revenues or earnings during the quarter?

I just wanted to make sure I fully understand your first question as to the royalty rate.

Could you just repeat that, please?

Yes.

When you mentioned the royalty rate is the same regardless of flavor of technology, you also mentioned there's some other licenses that hold patents.

I was just curious, there's a growth and net royalty rate.

Is there a difference between -

There's no difference.

So regardless which vendor, what kind of royalties--patents they have, you receive the net same month?

There are some differences from, -- there are some differences in terms of the rates from licensee to licensee.

For example, we announced in China some of the Chinese licensees have favorable rates.

But my point is that a licensee's rate is the same rate, they have the same rate for CDMA 2000 as they do for WCDMA and as they do for TDS CDMA.

And then you don't pay, like electric (ph) Texas instrument or Nokia or somebody, you do not pay them back any royalties, not specific names but -

I won't comment specifically on any particular license agreement.

But as I said, the net and the gross, there's no difference

OK.

Thank you.

And then to your question on the foreign exchange impacts, there's a direct and an indirect.

The more significant is the indirect and with the lower dollar it's made it I think easier for a lot of our customers to be buying our chip sets.

And but then in terms of the direct impact on our P and L foreign exchange impact, the two major currencies are the yen and the won and it wasn't more than just a couple million dollars, very small.

Our next question comes from the line of Peter Friedman from WR Hambrecht.

Please go ahead with your question.

If you could talk about the expected growth in Opex (ph) for fiscal '04 and then talk about the strength in CSM shipments during the quarter and what we should expect for the rest of the year?

In terms of Opex we continue to invest heavily in DO, DV and HFDPA.

In fact, we are ahead in making investments on HPCPA, relative to most other folks.

We are also investing heavily in multimedia, integrated multimedia and also investing very heavily in cost reducing our devices.

So we will be able to drive CDMA much faster into the marketplace.

So though the R&D and engineering expenses and then SG&A we are investing heavily to get a market presence in Europe and expanding our market presence in China, and Southeast Asia and Latin America.

Those are the Alsec (ph) expenses and in terms of CSM we had therefore we - as I mentioned earlier 4.6 million equivalent channels shipped this quarter.

Looking forward, we see continuing demand driven by the DO deployment in US and elsewhere and also increased filling in of networks and include new network deployment in CDMA 2001.

Peter, it's Bill Keitel.

As we said the majority of our Opex growth is in QCT.

And Sanjay just spoke to that.

For total QUALCOMM (ph) my estimate is still the same as it was three months ago where I expect total Opex to grow in the 20% or just a bit higher year-over-year.

Our next question comes the line of Hasan Imam from Thomas Weisel Partners.

Please go ahead with your question.

Yes, thank you.

I was wondering if you could comment on ASP pressures both on hand sets and chip sets in China and India, two of your biggest markets and also if you could address the dynamic in China CDMA that seems to be merging where market shares consolidating into the hands of the big players.

Wouldn't that impact chip sets ASPs negatively?

Thank you.

We have guided to decline in our chips set year-over-year and the chips that decline that we saw in this quarter was consistent with that chip set decline.

And part of the reason why our chip sets ASP decline has mitigated is because of the product mix as Deodex (ph) deployed, they are higher end devices as more multimedia capable and devices deployed.

We gone to hire ASP and because of our having an integrated device we are beginning to capture the greater percentage of silicon in a phone.

So that mitigated against greater low-end volume certainly I think the balance is slightly decline in our ASP but not quite as dramatic as one would imagine.

One only addresses one segment of the marketplace.

With relative to India and China, clearly buyers in India particularly are to work lower end handsets right now.

We are beginning to see some uptake of higher hand sets even in India and as they can deploy more (inaudible) devices being deployed particularly since data deployment in India may well be a wireless data deployment.

But in China, I think the SP pressure is not quite as heavy for us as it is in India.

Not from a chip set perspective but from the ASP overall hand set perspective.

I will also add as Sanjay mentioned before that we are also focussed very much on cost reduction so while ASP is going down, costs go down as well.

Our final question comes from the line of Louis Gerhardy with Morgan Stanley.

Please go head with your question.

Good afternoon.

Great quarter.

First chip set question Sanjay, perhaps you could just summarize what the blended MSM ASP did sequentially in the December quarter in your expectations from March and then my last question would just be on a W CDMA was 10% of royalties last quarter.

I think you said it was 12% this quarter and are you comfortable now to say that it's going to likely follow a linear upward trajectory from here?

I will take the ASP question with relative to December quarter, our ASP was very marginally down in the first quarter but as we said we have guided to an ASP decline over the year.

So our ASP this quarter was actually seasonally slightly above than we expected.

That's my part of the answer.

On W CDMA, we continued to see some growth in that market as Bill pointed out for the '04 year, we are looking at about 15 million units and so I think ASPs are going to start to come down, but I think in about that range is about -- with some growth each quarter.

-- specific to the December quarter W CDMA was approximately 12% of our royalty reports-total royalty.

And it came up just a bit, it was 10% in the prior quarter.

Ladies and gentlemen, that is all we have time for question-and-answer session.

Dr. Jacobs is there anything you would like to add before adjourning the conference call.

I would like to thank you everybody for their attendance and for their very good and detailed questions.

It has been indeed a great quarter from our point of view and with many of the developments with DO, with W CDMA, with growth in emerging markets; we're looking forward to further excitement in the remainder of the year.

Thank you again for your attention.