高通 (QCOM) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the QUALCOMM first-quarter conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded January 19, 2005.

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

International callers please dial 1-402-977-9140.

The playback reservation number is 21219395.

I would now like to turn the call over to Mr. Bill Davidson, Vice President of Investor Relations.

Bill, please go ahead.

Thank you, and good afternoon.

Today's call will include prepared remarks by Dr. Irwin Jacobs and Bill Keitel.

Tony Thornley, Dr. Paul Jacobs, Steve Altman and Dr. Sanjay Jha will participate during the question-and-answer period following the prepared remarks.

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

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

I would also direct you to our 10-Q and earnings release, which were filed and furnished, respectively, with the SEC today and are available on our website.

We are pleased that we achieved the high end of our prior revenue guidance and exceeded the high end of our prior guidance for diluted earnings per share, for both total QUALCOMM and QUALCOMM excluding QSI.

Following opening remarks from Dr. Jacobs and Bill Keitel, I will pose some initial questions and then open the call to your questions.

And now, it's my pleasure to introduce Dr. Irwin Jacobs, Chairman and CEO.

Thank you, Bill, and good afternoon, everyone.

We are pleased to report strong results for the first quarter, with solid growth in our chip and technology licensing businesses.

The increased deployment and expansion of third-generation CDMA networks continues to drive these businesses.

Operators in most regions of the world are now actively pursuing the transition from 2G, often TDMA, networks to 3G CDMA networks.

Over 150 million consumers and enterprises in the US, Korea, Japan and elsewhere are now using products and services enabled by third-generation CDMA networks.

Early 3G operators have demonstrated a competitive advantage, motivating 2G operators to move rapidly to offer competitive systems and devices.

We believe we are well-positioned to further increase our share of the WCDMA chipset market, with our target of 50 percent.

We continue to increase our staff and budget for research and development, focused on broad feature integration and convergence, taking advantage of our ability to amortize the R&D over both CDMA 2000 1x, IxEV-DO and WCDMA chipsets.

Our chips are being incorporated into more handset models by more manufacturers, supporting further growth of DO and WCDMA networks, a lowering of ASPs for WCDMA handsets and a growing replacement cycle enabled by DO.

In December, we welcomed the announcement of the merger of Sprint and Nextel.

Both companies have been strong QUALCOMM partners, and we're confident that the combined company will further accelerate expansion of the 3G CDMA market here in the United States.

We look forward to working closely with Sprint and Nextel in improving existing services and introducing innovative new services.

We remain focused on early commercial availability of low-latency QChat, push-to-talk and EV-DO Rev A.

Mobile multimedia is rapidly gaining traction in the United States.

Last week at the Consumer Electronics Show in Las Vegas, Nevada, senior Verizon Wireless executives announced the launch of VCAST, the nation's first 1xEV-DO wireless multimedia service for consumers.

VCAST brings high-quality video, 3-D games and music to new 3G phones, operating on Verizon's rapidly expanding 1xEV-DO network.

Starting February 1st, VCAST will support video-on-demand services, including current news, weather, sports and entertainment programming, including music videos and short programs specifically designed for mobile phones.

Operators worldwide are increasingly recognizing the importance of reasonably priced, high-speed data offerings for consumers and enterprise.

Cingular has announced plans to deploy HSDPA -- high-speed downlink packet access -- possibly by year end.

In Japan, DoCoMo is planning an early launch of HSDPA to be competitive with the expanding EV-DO services provided by KDDI.

We are working closely with operators in Europe to support their introduction of HSDPA.

QUALCOMM's experience in the development of EV-DO and of the features supported by high-speed data service positions us well to supply highly-integrated chipset solutions with HSDPA.

We successfully sampled our first HSDPA chip, the MSM6275, last quarter and are actively supporting tests with operators.

WCDMA is now available in 29 countries from 62 operators.

QCT is committed to supporting handset manufacturers through chipset integration and segmentation, and lowering the cost of all 3G handsets while expanding capabilities.

In Latin America, penetration is up, driven by strong competition and improved networks.

In Brazil, CDMA operator VIVO has expanded CDMA coverage, and continues to leverage the strength of their CDMA2000 network by offering a range of BREW applications.

They recently introduced a variety of location-based services based on QUALCOMM's gpsOne technology, from finding points of interest to providing driving directions and maps.

VIVO has also introduced compelling 1xEV-DO multimedia services such as real-time streaming video of city traffic conditions, webcam monitoring, games and premium video content for news and sports.

Although CDMA subscriber growth in India this year has been somewhat slower than we anticipated, Reliance Infocom is the largest wireless operator and has crossed the 10 million mark for CDMA subscribers.

TATA has attracted 2.4 million CDMA subscribers, and is in the final stages of a nationwide network rollout.

By March 2005, Reliance is expected to provide CDMA service in 5,000 cities, and TATA is expected to provide coverage in most Indian states.

We expect DSNL to use CDMA for its rural expansion plans.

In China, China Unicom continues to grow its CDMA subscribers base, and has introduced multi-mode GSM and CDMA products aimed at high-end users.

Unicom is conducting market trials with EV-DO in several cities, while awaiting the 3G license decision.

It now appears that that decision will be forthcoming by mid-2005, substantially increasing the market for CDMA.

Our Wireless Business Solutions business has had additional success with GlobalTRACS, its construction equipment management solution, including adoption by Ryan Incorporated Central, one of the largest US operators, specializing in site work and mass excavation.

In transportation, we announced deployment of our new T2 untethered TrailerTRACS asset management solution by Schneider National, a leading provider of transportation and logistics services.

Schneider has begun installation across its 48,000 trailer fleet.

We also introduced new features for OmniTRACS to increase security for hazardous material and high-value cargo carriers, and we expanded our OmniTRACS coverage footprint to all 50 states, including Alaska and Hawaii.

QUALCOMM Internet Services continues to drive the downloadable applications marketplace, with more than 200 million downloads of BREW applications and content as of November, 2004.

Several BREW announcements in Q1 demonstrated BREW's flexibility and value for the entire mobile marketplace, including publishers and developers, handset manufacturers and operators.

Collaborating with Opera Software, we introduced mobile users to contextual shopping capabilities, via Opera's mobile Web browser and the BREW solution.

Contextual shopping allows operators to enhance their subscribers' wireless Internet experience with a feature-rich shopping experience.

We introduced advanced firmware from Insignia Solutions and Bitfone Corporation, supporting over-the-air update capabilities via BREW.

These capabilities enable wireless operators and handset manufacturers to remotely flash a BREW-enabled device's firmware, repairing software flaws or adding new functions, eliminating the need for more costly and time-consuming in-store cable-based updates and massive device recalls.

BREW, of course, operates across air interfaces.

A number of BREW-based wireless applications first available on CDMA2000 1x can now be downloaded and run on the BenQ S80 WCDMA UMTS GSM/GPRS dual-mode handset.

To lower the cost of delivering rich multimedia to cellular devices, we recently announced Platinum Multicast, an evolution of CDMA2000 1xEV-DO and FLO, or Forward-Link Only, a new air interface.

We also announced plans for a subsidiary, MediaFLO USA, Inc., to support nationwide delivery of content to mobile devices.

MediaFLO USA is preparing to deploy and operate a mediacasting network utilizing nationwide 700 MHz spectrum for which QUALCOMM holds licenses.

This network is planned as a shared resource for US CDMA2000 and WCDMA cellular operators, enabling them to deliver mobile interactive multimedia to their wireless subscribers without the cost of network deployment and operation.

It will be based on the FLO technology, and will use the MediaFLO media distribution system for content aggregation, delivery and viewing, supporting 50 to 100 national and local content channels, including up to 15 live streaming channels and numerous clipcast and audio channels.

This content will be delivered in an easy-to-use and familiar format, at quality levels that dramatically surpass current mobile multimedia offerings through the use of QVGA video at up to 30 frames per second and high-quality stereo audio.

We expect to begin commercial operation of the new network in 2006.

There has been a great deal of media speculation regarding WiMAX and the potential for it to eventually develop into a standard for wide area wireless broadband connectivity, making it a major 3G CDMA competitor.

I believe WiMAX will be useful for backhaul and possibly some fixed and limited mobility applications, depending on spectrum availability and competition from DSL and cable-based Internet services, as well as 3G CDMA.

The WiMAX standard for mobile services is still in development, encompassing a variety of bandwidth and frequency bands, both paired and unpaired.

It does not appear to me that mobile WiMAX offers any theoretical or practical advantages compared to CDMA, will require a major investment for testing and iterations and will be late to a market well supported with a variety of 3G CDMA devices and services.

QUALCOMM continues to execute extremely well.

Clearly, we have the financial strength and other resources needed to continue supporting customers worldwide with a broad range of new technology.

Our ability to generate cash allows us to continue our growth, expand our extensive research and development programs, and to return value to stockholders.

Lastly, I'd like to point out that QUALCOMM was just named to Fortune's 100 Best Companies to Work For, for the seventh consecutive year.

I congratulate all QUALCOMM employees for creating a culture that is focused on execution and recognizes and rewards performance.

I'd now like to turn the call over to Bill Keitel, who will discuss our financial results.

Thank you, Irwin, and good afternoon, everyone.

Last quarter, I explained that effective with the September quarter, we now report royalty revenue based solely on licensee reports.

The change was made prospectively, and therefore, our fiscal 2004 GAAP results do not reflect a full year of the economic performance of the Company's licensing business.

For that reason, my remarks this afternoon will compare 2005 to 2004 as if the new method of royalty accounting had been in effect for all of fiscal 2004.

I am pleased report that first-quarter fiscal 2005 revenues were 1.4 billion and diluted earnings per share were 30 cents.

The QUALCOMM strategic initiative segment or QSI contributed 2 cents per share in the first quarter.

We recorded 51 million in net realized gains on QSI investments and 3 million in gains on derivative instruments, partially offset by 14 million in QSI operating expenses.

As previously disclosed, the QSI segment now includes the operating expenses for our new MediaFLO operator business.

Our core business revenues, which exclude QSI, were 1.4 billion for the December quarter, up 21 percent year over year and up 1 percent sequentially.

Net income of 474 million increased 21 percent year over year and decreased 5 percent sequentially.

Diluted earnings per share were 28 cents, a 17 percent increase from last year and a 7 percent decrease sequentially.

Turning to our segment results, QCT, our chip business, recorded revenues of 865 million, an increase of 15 percent year over year and an increase of 2 percent sequentially.

QCT earnings before tax were 242 million, down 8 percent year over year and down 11 percent sequentially, due primarily to our major new investments in R&D.

QCT's operating margin was 28 percent.

QCT shipped approximately 39 million MSM phone chips, tying the record of MSM phone chip shipments set in the September quarter.

Shipments of the 6000 series of MSMs increased approximately 50 percent from the September quarter, indicating excellent progress from our ZIF fab partners and high demand from our customers for the efficiency and features of our 6000 series products.

Some supply constraints did continue in the quarter, but we remain on target for resolution in the March quarter.

QUALCOMM Wireless and Internet or QWI reported revenue and earnings of 159 million and 16 million, respectively, in the December quarter.

QWI revenues increased 19 percent year over year and 3 percent sequentially, largely due to the continued expansion of BREW customers and BREW products.

QTL, our licensing business, reported first-quarter revenues of 400 million and a 90 percent operating margin.

Revenues grew 33 percent year over year and decreased 1 percent sequentially.

Of the 400 million QTL revenues, 35 million represented intracompany royalties, 16 million was license fees and 349 million was royalties from licensees.

WCDMA royalties contributed approximately 32 percent of total royalties reported by licensees in December for shipments in the September quarter, indicating WCDMA networks are continuing to expand and attract subscribers.

WCDMA royalties were approximately 26 percent of total royalties reported in the prior quarter, which represented shipments for the June quarter.

Worldwide CDMA handsets shipped in the September quarter were approximately 40 million units.

We believe total CDMA channel inventories were approximately 18 weeks at the end of December, within the normal band of 15 to 20 weeks that we have observed in the last several years.

The average selling price of CDMA phones was approximately $212 for the September quarter, in line with our guidance at the outset of the quarter.

Research and development expenses in the first quarter were $228 million, up 52 percent year over year, largely due to increased headcount related to chip development and initiatives to support multimedia applications, wireless Internet access and multimode, multiband, multinetwork products including CDMA2000 1xEV-DO, WCDMA and HSDPA.

Selling, general and administrative expenses were 148 million for the quarter, up 21 percent year over year, largely due to employee costs to support an expanding worldwide customer base, as well as professional fees related to legal, patent and audit activities.

Our effective tax rate for fiscal 2005 is estimated to be approximately 28 percent for total QUALCOMM and approximately 30 percent excluding QSI.

The effective tax rate in the first quarter of fiscal 2005 was approximately 27 percent for total QUALCOMM and 29 percent excluding QSI.

Cash, cash equivalents and marketable securities increased to approximately $8 billion at the end of December compared to 7.6 billion at the end of September.

Based on the current business outlook, we are increasing our earnings guidance for fiscal 2005.

We estimate that revenues excluding QSI will be approximately 5.8 to 6.3 billion, up approximately 16 to 26 percent year over year.

We anticipate earnings per share excluding QSI of $1.16 to $1.20, an increase of approximately 8 to 12 percent over fiscal 2004.

Our estimate for calendar 2005 CDMA handset shipments remains unchanged, at a range of 218 to 228 million units.

Based on the 223 million unit midpoint of this range, we expect shipments of approximately 55 million WCDMA handsets and 168 million CDMA2000 handsets.

We have adjusted slightly the WCDMA unit split between the Europe and Asia regions.

Our investor relations website has a detailed breakdown of this estimate by region and technology.

CDMA handset shipments for calendar year 2004 are estimated to be approximately 164 to 167 million units, reflecting actual shipments for September and our new December quarter estimate.

This revised estimate for 2004 also includes a small downward revision of previously reported handset shipments identified by one of our licensees in December.

Based on the current business outlook, we estimate that handsets ASPs will average approximately $215 for fiscal 2005, compared to approximately $205 for fiscal 2004.

Turning to the second-quarter financial guidance, we now estimate that approximately 46 to 49 million CDMA handsets will ship in the December quarter, slightly lower than our prior estimate of 48 to 52 million units.

On a regional basis, we estimate some softness in China and India as well as Korea, though Korea and India appear to have picked up somewhat very recently.

Softness in these regions is expected to be offset by strength in Japan, North America and Latin America, in addition to growing WCDMA volumes in Western Europe.

We expect second-quarter revenues to be approximately 1.35 to 1.45 billion, and diluted earnings per share excluding QSI to be approximately 25 to 27 cents.

These estimates are based on shipments of approximately 35 to 37 million MSM phone chips during the March quarter, a slight decrease sequentially, although consistent with the seasonality we've often seen historically.

We estimate that total operating expenses in the March quarter will grow approximately 14 to 17 percent sequentially, driven by continued investment in our chip business and to support wireless data applications, products and services, as well as increased resources for our growing customer base around the world.

As well, you will recall that QUALCOMM operating expenses increased in our second fiscal quarter, due to seasonal factors including employee-related payroll taxes.

For handsets that shipped in the December quarter, we now estimate the average selling price will be approximately $214, driven by increased handset functionality and features in 3G networks.

In closing, I'm pleased by our first-quarter results, and I'm encouraged by increased confidence in our fiscal 2005 outlook.

That concludes my comments.

I will now turn the call over to Bill Davidson to facilitate some initial questions.

Thank you, Bill.

I'd like to begin by asking some of the more common questions we have receiving from analysts and investors, and I'll start with a question for Tony.

What are the markets to watch in calendar year 2005 that could positively impact QUALCOMM's business?

Well, I think both Irwin and Bill have spoken significantly about the markets around the world.

So I'll just summarize by saying that I feel the momentum in most of the markets is strong, positive, and that we will certainly be looking at growth in the second half of the year over the first half of the year in 2005 -- particularly, the US, with EV-DO really beginning to take off in the handset market;

Europe, with WCDMA taking off;

Japan, with DoCoMo and Vodafone focusing very much on transition from the PDC networks to WCDMA, driven by competition from KDDI.

And then, in the emerging markets, certainly, the 3G licensing decision in China has got to be a strong positive for us in the second half, if only for Unicom, given that they are already in the market but also, I think, beginning for the others.

And then in India, we have already said that we see strengthening in all of the operators there, and I would add Southeast Asia, which is a market that is growing significantly, although from a low base.

Thank you, Tony.

And now, a question for you, Paul.

QUALCOMM issued a number of press releases last year discussing various iterations of airlink advances in DO and the introduction of FLO technology.

Can you describe the significance of these advances and what an operator's migration path will be along this technology curve?

Sure, Bill.

The technologies that we are developing now on the radio side are really not just about providing higher throughput, but we are really trying to optimize these technologies for specific applications.

So, in the case of DO Rev A or DORA, as we like to call it, we have higher data rates, but we especially have higher data rates on the reverse link, which reflects the fact that there's cameras and video being built into the phones, and so the phones are actually generating more data now that wants to be shared over the network.

In addition, we have lower latency built in for things like multiplayer gaming and push-to-talk and voice-over-IP type applications.

Fundamentally, as we look forward, we are really continuing to drive down the cost per bit, particularly for multimedia applications.

One application that we saw happen in Korea that was very popular was sending broadcast video over the phone, and what we saw there is that consumers readily adopted it when it was a flat rate service, but really didn't adopt it when it was a per-packet service, meaning that the more video they watched, the more it cost them.

And if you think about it from an operator's standpoint, the economics are kind of -- don't work out that well.

Voice service they sell for -- you know, it's a 4 kbps service; they sell it for 10 to 15 cents a minute.

And here we have customers wanting multimedia services that take 16 to 100 times more data throughput for flat rate.

So we had to find a way to fix those economics, and one of the things we did to start off with was over the existing DO networks, we built the MediaFLO Content Distribution System, which essentially lifted the video out of the peak time and took advantage of the fact that the memory cost is one of the fastest dropping cost components in the phone.

But then we said, okay, how can we fix things to make it even better?

And so we brought out the DO Gold and DO Platinum Multicast systems.

And what happens with multicast is that you go from having, say, 100 people watching the same piece of video content being streamed -- well, in standard DO, 100 channels have to be brought up.

In a multicast system, one channel gets brought up and 100 people can receive it simultaneously.

The difference between Gold and Platinum is an increase in performance capabilities, and Platinum takes advantage of the way that DO is structured to allow us to enhance the air interface or the radio interface, and still remain backward-compatible with the existing systems.

Then we said, well, how can we even make it better than that?

And that's where we came up with the FLO technology, where we use high-powered transmitters, tall towers, a different layout than a cellular layout, and do the same kind of multicasting to lots of handsets at the same time.

Now, how an operator would roll these things out together is that we have actually integrated, particularly in the MediaFLO client, the way to combine the 3G cellular network along with the FLO network.

And that allows carriers to differentiate their services by running both interactive applications or other content that they have acquired themselves over their DO network and seamlessly integrate it, from a user's point of view, into the handset and into the service.

A FLO is a Forward-Link Only service, and therefore we do depend on the DO network, the cellular network, for the reverse link and for interactivity.

That brings me to the MediaFLO USA, Inc., which is an operator business that we set up as a subsidiary, really to speed the deployment of this technology in the United States, as Irwin said, in spectrum that we own nationwide.

Now, QUALCOMM's intent over the long term is not to be an operator, and so we are actively considering spinning that business off in the future.

One thing that's a piece of recent news is that we just appointed Rich Sulpizio as Interim President for MediaFLO.

And he's going to be in charge of both MediaFLO USA and the technology development for MediaFLO.

And for those of you who don't know Rich, Rich is currently a member of our Board of Directors.

He retired in August of 2001 as our company's President and Chief Operating Officer, and has helped us recently, including playing leadership roles in the development of our China and European organizations.

So, in the role that Rich will be playing here, he'll have responsibility for developing and deploying the technology for wholesaling the content delivery services to US wireless operators to deploy the network nationwide, including the operation of the network operating center and clearing the spectrum, doing the acquisition and aggregation of multimedia content and working with our licensees to make sure that the handsets are available.

We are extremely excited to have Rich onboard, and look forward to him making MediaFLO a great success.

Thanks, Paul.

Next, a question for Steve.

Steve, QUALCOMM issued a press release regarding the recent injunction issued against Maxim.

What does this mean for both Maxim and QUALCOMM?

Well, first, we were very pleased with the outcome of this.

At a very early stage in the hearing, the court concluded that we have shown by a preponderance of the evidence that we will succeed on the merits improving that Maxim has misappropriated QUALCOMM's trade secrets in violation of California law.

They also concluded that Maxim's actions were predatory.

As a result of this, the court issued an injunction against Maxim from continuing current and future acts of misappropriation of QUALCOMM's trade secrets.

Now, although Maxim can continue to sell the chips, the RF chips that they have been selling, they do so at a great deal of risk because, if the court later concludes that those chips in fact contain the trade secrets that have been misappropriated from us, in addition to damages to QUALCOMM, Maxim -- as well as their individual officers, directors and employees -- risk civil and potentially criminal contempt remedies.

Maxim is also required to deliver a copy of the judge's order to all of its customers of these chips.

So we are very pleased with the result.

We continue to fight vigorously to protect our chip trade secrets and our proprietary technology from infringement, and we take it very seriously, and we only do so when we feel that our actions are justified.

Also, I think it's been pointed out you can actually find a copy of the judge's order on our website, for those that are interested in reading the entirety of it.

Sanjay, two questions for you, if I may.

The first one -- QCT found its -- or can you please describe recent trends in both the CDMA2000 and WCDMA markets?

Sure, Bill.

I think we are very well-positioned with our product, in terms of performance and segmentation and pricing in the marketplace, and I'd like to take some of our product lines and describe them to you in terms of the traction we are getting in the marketplace.

Using our 6000 chipset, as well as 6025 chipset, and combining that with our low-cost RF CMOS solution, we believe that we are driving now the marketplace in India, Brazil, Southeast Asia and China, with very low-cost handsets which enable for operators there to compete against the GSM operators in their local markets and drive the growth of CDMA.

In the United States and Korea and Japan, we have seen our 6100 chipset, which has the integrated microprocessor and significant multimedia functionality, being very successful in driving up to 20 handsets in the marketplace, and has been received very well by the consumer base in each of these marketplaces.

6500 DO chipset -- based on 6500, we are now beginning to see handsets becoming available in the United States and Korea and Japan, and we are very hopeful that as Verizon migrates, as they indicated in their public announcements, to DO-based handsets being the majority of the handsets being shipped, that 6500-based handsets and 6550, which has yet further level of integration and high level of multimedia functionality.

So the handsets based on 6500 and 6550 will become available in the United States and elsewhere to deliver multimedia on-demand services around the world.

We have had up to 40 design wins based on our multimedia for integrated services, things like QT&V, things like Qcamcorders, things like audio processing, as well as our camera interface and based, again, on 6100, 6500, 6250 and 6550 chip sets.

We are also driving DO Revision A. We sampled, as Irwin mentioned, CSM 6800 in December last year, and in March, we'll sample the MSM 6800 to support the development, interop testing and then eventually deployment of DO Revision A. DO Revision A, you may recall, has 3.1 Mbps of peak data rates in the forward-link, and it has support for 1.8 Mbps of reverse-link data and supports latencies down to 30 to 40 milliseconds -- so much so, in fact, that we believe it will be capable of supporting voice-over-IP services.

So, certainly, development of DO Revision A provides yet another competitive advantage to DO operators.

So those are the CDMA2000 chipsets.

In wideband CDMA, we see the deployments accelerating, and certainly, the results coming from Hutchison of 86.8 million subscribers were very encouraging.

We had outlined a 55 million subscriber handset shipment this year, and we believe that the market is tracking to those numbers.

There already have been a number of handset launches based on 6250.

Irwin mentioned the BenQ handset, and the Sanyo handset was launched on Orange network.

We believe there will be maybe as many as 10 more devices launched based on our 6250 handsets in the course of first two quarters this year.

Speaking of HSDPA, we sampled -- we believe we have the most integrated and first solution of HSDPA in the marketplace, and we sampled that in December last year.

We have already been able to do some testing, and we have demonstrated mobile calls at between 1 and 1.2 Mbps, sustained for as long as 20 minutes.

So we think that we are ahead in the level of integration now with the level of interoperability testing.

We think that we are ahead of others improving out (ph) the system and helping operators, UMTS operators worldwide, in deploying HSDPA on an aggressive schedule.

Great.

Now for my second question.

QCT found itself supply-constrained throughout fiscal 2004.

Can you tell us the progress you've made in eliminating the constraint, and what you've done to prevent this from happening again in the future?

Well, consistent with our guidance to the street in our November analyst meeting in London and our last conference call here, we believe that we will be out of any supply constraints starting from February this year.

We will have no supply constraints on our MSM or our RF or our VAR management devices.

So, having been in this constraint, I want to thank all of our partners -- IBM, TSMC, Motorola or Freescale now and Atmel, UMC -- in supporting us through a dramatic increase in our demand, demand which increased last year from 99 million to 137 million.

So we want to thank them.

And we now believe that, with the forecast that we have from our customers of demand for the rest of the year, that we will be fully able to meet all the demands that they have.

In terms of what we're doing to make sure that this doesn't occur again, we have already put in place some long-term supply agreements with our customers, and we have also, as a result of acquisition of our Spike team in India, been able to second-source more of our chipsets to more of the fabs to make sure that we have increased capacity available to us.

So, again, I think we have made tremendous progress.

Thanks, Sanjay.

That concludes my questions.

Operator, we are ready for questions from the call participants.

(OPERATOR INSTRUCTIONS).

Tim Luke, Lehman Brothers.

I was wondering, Bill, if in switching the EPS guidance for the full year, if you could have given us a sense of why the EPS, with an unchanged revenue and ASP picture, may have gone up slightly for the full year.

I was also wondering whether you could give us a sense of how you see your channel inventories in some of the different regions.

And as part of that, obviously, you were suggesting that in the December quarter, the market size was slightly lower than you had anticipated, given China, India and Korea are slightly softer.

How do you see that for March?

In terms of the full year and increasing our earnings guidance, I do see revenues a tad higher, but it rounded off within the billion levels that I guided to.

So you are not seeing that; it's a small number.

Within the business, we're seeing -- I see a slightly improved margin going forward.

Sanjay spoke to the rapid movement to the ZIF product line, so we're seeing a little bit of improvement there.

I am seeing also a little better picture on our investment income going forward.

But I think, Tim, from my perspective, as I look through the year, the most encouraging thing to me is the penny increase is nice, but we did a thorough review of the markets and the business and came right back to the space we were at three months ago.

So I think that's encouraging, that I feel a bit better now about the guidance for the year than what I did just a couple months ago.

On the channel, last time we were on the call, I thought the channel had moved up to approximately 17 weeks.

And if you recall, a normal band going back several years is in the range of 15 to 20 weeks.

Our estimate for the December quarter is that channel has moved up to approximately 18 weeks, so still well within what is a historical norm.

Our visibility to divide that channel up by region of the world is pretty difficult.

At any given time, you're going to have a distributor or a handset guy probably with a bit more inventory than they want, but for us to pinpoint that around the world is pretty difficult.

With respect to your expenses going forward, then, your expenses in the December quarter appeared to come in slightly below some of the expectation.

How should we think about the expense profile for the March period?

Expenses did come in a bit lower.

I think it's timing.

I don't see it as a net positive for the year.

In fact, I'll share with you that we added more than 600 employees to our base in the December quarter.

So we are approximately 8,400 employees at the end of December.

So we are pretty much on target to be bringing in these extra primarily R&D resources for the programs that we've got lined up ahead.

So I do think it's timing, and I think for the March quarter, we'll see an increase of op expenses in the range of 14 to 17 percent.

Lastly, one clarification.

I think you mentioned that there was a vendor who adjusted their shipment number to you.

Could give us any further detail on that?

It's a very rare circumstance, but a licensee did identify and was able to provide the evidence to us that in fact they had double-counted some CDMA phone shipments.

So they identified that to us in the December quarter.

We refunded the money.

And it was in the range of about a million units for 2004.

Did that affect the quarterly market size in handsets or not?

The quarterly size of handsets -- I expect to see in the range of 46 to 49 handsets shipped in the December quarter.

In the March quarter -- within that range.

I'm not going to give a specific number, but we're within that range.

So I do expect the channel inventory to decrease a bit by the end of the March quarter.

Satya Chillara, RBC Capital Markets.

Ms. Chillara, your line is open.

You may now proceed.

It appears that she is not available.

Louis Gerhardy, Morgan Stanley.

A question for Bill and then one for Sanjay.

Just back to the operating expenses, Bill -- I thought I heard you say you added 600 heads in the December quarter, but operating expenses were only up 3 percent sequentially.

And the second to Sanjay was, it looks like the MSM had a nice increase in average selling price, and can you just provide some more color?

Was that due to a mix of WCDMA or a higher attach rate for radioOne -- or maybe you could weight the issues that drove that increase?

I'll take your first question on the operating expenses.

Yes, we grew our headcount substantially -- a little more weighted toward the end of the quarter than early in the quarter, number one.

Number two, employees drive the bulk of our expenses, but there are other items that can be lumpy from time to time.

And the December quarter proved to be quite low for those type of expenses.

But I think we're on track here.

I think we got in a very strong base of good employees in December, and I expect us to be pretty much on track to the guidance for operating expenses that I gave three months ago.

And as you mentioned, Bill, the payroll taxes is always favorable in the December quarter.

Yes.

It kicks up in January, but the most favorable quarter is December.

Louis, in response to your question about ASP of MSM (indiscernible) MSM ASP was marginally higher in this quarter.

There are two reasons, really.

One was that the migration, of course, to 6000 series, which are the radioOne chipset, our RF attach rate goes up.

So that helps us.

But I think a bigger reason is that we're seeing tremendous success of the 6100, 6250 and 6500 chipsets, which are slightly higher ASP chipsets, because of the level of multimedia and microprocessor integration there.

Do you have a cumulative WCDMA number that you have shipped, Sanjay, in QCT?

I don't believe that we have broken that out so far.

How about an outlook for CSM in the March quarter?

We have not provided that outlook, though our expectation at present time is that significant network upgrades have occurred in the second half of last year, and that the CSM volume will be down sequentially.

Brian Modoff, Deutsche Bank.

First, a clarification or just some further explanation on the guidance, and then a couple of questions -- one for Irwin and then one for Sanjay.

On QTL revenues, what are you expecting in your guidance for your fiscal Q2?

What are you expecting QTL revenues to be, in what range?

I'm expecting an increase, Louis, in the QTL revenues.

I don't break up the segments in our guidance specifically, but I am expecting the handsets to grow from approximately 40 million to up to approximately 46 to 49.

And as I indicated, I expect the ASPs to increase a couple dollars.

So we should see a pretty good revenue increase in QTL for the March quarter.

And, Irwin, you talked about the drivers kind of for the back half of the year.

What do you see as your drivers in the front half of the year?

What kind of sequential unit volume increase are you expecting in WCDMA handsets?

And what are the drivers you see out there?

What markets do you see as providing strength in the first half of this year?

Well, with WCDMA, we've seen some good growth over in Japan, and DoCoMo continues to focus on bringing out new models and growing that.

In Europe, there have been a number of announcements of new models.

There have been some good purchases by Hutchison, and apparently good sale-through (ph).

So I think Europe will continue to grow.

Now, how that times out over a quarter is always a little bit harder to project, but we think that in fact, this is the year that WCDMA is going to move toward significant volumes, and that's why we've got that in our estimate.

Do you expect WCDMA unit volumes to be up sequentially from Q4 for the industry overall?

Again, I think it probably is still a little bit too early to tell.

And in terms of the other markets, where do you see opportunities in CDMA for growth in the first half of the year?

Well, we are quite excited about DO, now that the DO phones, for example, are here in the US, first one.

And I expect there will be additional ones shortly, and with new capabilities that I think will prove to be quite exciting -- new services coming along, as well.

So I think that we will be seeing the growth here.

And then, Sanjay, in terms of the -- can you talk a little bit about WCDMA competition?

And also, I noticed on the operating margin it dropped down a little, to 28 percent in the quarter, something you had commented on earlier that you thought it might come into that range.

Do you expect it to kind of stay in this range?

I'm taking the operating margin question first.

We, at the beginning of the year -- in fact, in November analyst meeting, we guided to 26 to 27 percent operating margin for the whole year.

I expect that in the coming quarter, we'll have a sequential decline in our operating margin, but I think we're definitely on track to meet or exceed the 26 to 27 guidance that we provided for the year.

In terms of competition in wideband CDMA, I think the names are the familiar ones.

I think EMP has been quite successful at Hutchison.

Nokia is out there with two, I believe, solutions.

Motorola has been quite successful with their one-euro (ph) phone, or at least Vodafone is advertising that as one-euro phone, and Vodafone will push that phone quite hard in the December quarter.

So I think that those are the main competitive threats that we see for us right now.

James Faucette, Pacific Crest.

I just wanted to ask a clarifying question on the number of handsets you estimate were shipped in the December quarter.

I know you said 47 to 49 million, but I wasn't clear if the 1 million adjustment was included in that 47 to 49 cents -- if there hadn't been the adjustment, that it would have been 48 to 50?

Sure, James.

The one million adjustment that a licensee identified was from earlier in calendar 2004.

So the 46 to 49 is a couple units less than what we had previously estimated for the December quarter.

We had estimated most recently 48 to 52.

So it's a direct comparable to the points we spoke of.

We think South Korea, India and China are a bit softer than what we expected.

But then recent data at the end of the quarter was positive for a couple of those markets.

That's great.

That helps a lot.

And then, as far as channel inventories and so on, I know you say you are at 18 weeks.

Is that what you're seeing for both CDMA and WCDMA combined?

And if so, can you kind of talk about how we should expect that to develop over time, especially if you are going to see a rapid ramp in WCDMA shipments that may not match the sell-through?

I think over time, WCDMA will come to mirror CDMA2000, but with all the launches that are occurring on WCDMA, it's a little -- it's still going through somewhat of an initiation phase, as I would call it.

But I think over time, I would expect CDMA2000 and WCDMA to be very similar.

But right now, that 18 weeks includes both WCDMA and CDMA?

That's correct, James.

And finally, the last question.

And I guess this is more a question with regards to forecasting.

This is the second kind of quarter where the actual handset shipments came in a little bit lighter then maybe your initial forecast.

How do you feel going forward?

I know you indicated that things seemed to pick up late in the December quarter, but do you feel like your forecasts maybe are more conservative now, or are you taking very much the same approach as you have in the past?

Well, any time we miss a forecast, we're looking back to see what could we have done differently to improve our process.

That's just a regular thing we do.

But from time to time, you are going to see the results be a bit above or a bit below our forecast.

But as a whole, I think we've done quite well, and I look at what other companies do in forecasting the handset market, and I feel we're doing better than most.

But, James, any time we miss, we take it seriously.

And we are looking back hard at our process.

John Bucher, Harris Nesbitt Gerard.

A question for Sanjay regarding HSDPA.

There's been some speculation in the press about the possibility that some carriers would go directly to HSDPA.

I'm just wondering how would Sanjay view such a trend, from the standpoint of making his business unit more or less competitive in that environment?

I would view that as a very positive thing for our business unit.

We believe that we're ahead of most everyone in HSDPA and in the level integration, as well as proving out the solution in-field and to help the deployment of HSDPA.

I do think, though, that most people are taking a path to HSDPA through UMTS -- first of all, people like Cingular, people like Vodafone, people like DoCoMo, people like Orange, people like T-Mobile.

But there have been some players who have not, so far, deployed in the UMTS network are considering going directly to HSDPA, and we would be very pleased to support such deployments as we're doing throughout the industry.

Do you see the potential for that happening any other place beside the one instance you mentioned in North America?

In North America, it's my view that they will probably go to UMTS first of all, and then migrate very, very rapidly to HSDPA.

But I don't see explicit instances of folks going directly to HSDPA, though within the next six to nine months, that will begin to happen.

I think the voice market will be an important part of the 3G and a part of WCDMA, but I think everybody is seeing that data is contributing significantly to revenues, that it is better both from a user experience to have the higher data rates, but also because it lowers the cost of data and puts less stress on their infrastructure and spectrum usage.

And so the sooner you can move to HSDPA, the better.

I think you'll also find that most operators and manufacturers are going to want to move to the uplink higher-speed capabilities, as well.

And then there will be yet another step beyond that, as they try to reduce latency on the WCDMA side.

So it's very important to get as good a user experience as early as possible, and be able to offer that at an effective price, in order to rapidly grow the business.

Just to add, also, that in response to your question, I think that most people will deploy network first and upgrade it to HSDPA, but in terms of requirement for handsets, I think the requirement -- HSDPA will become a requirement for handsets very, very quickly, I believe.

And to your point, I think that will be a net positive for QUALCOMM.

Well, thank you all for joining us this afternoon.

Again, we are very pleased with our Q1.

We are pleased with the way that the 3G is moving ahead throughout the world.

We expect that there will be a number of additional exciting developments over these next several quarters.

The new chips are coming out, the new software to support those chips, new networks.

And so I think we are all going to be keeping quite busy, to make sure that these are well-received and that there is good revenue coming back for the operators as well as, hopefully, manufacturers and ourselves.

Thank you again very much.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation, and ask that you please disconnect your lines.