高通 (QCOM) 2005 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the QUALCOMM’s second quarter conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded, April 20, 2005.

The play back number for today’s call is 1-800-633-8284.

International callers, please dial 402-977-9140.

The play back reservation number is 21240100.

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

Bill, go ahead.

Thank you and good afternoon.

Today Carl will include prepared remarks by Dr. Irwin Jacobs, Dr. Paul Jacobs, and Bill Keitel.

Tony Thornley, Steve Altman, and Dr. Sanjay Jah 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 Regulation G, you can find the required reconciliations to GAAP on our website.

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

We may make forward looking statements that may differ materially from QUALCOMM’s actual results.

We’ve reviewed our SEC filings for a detailed presentation of each of our businesses and associated risks.

Proforma revenues were $1.37 billion in the fiscal quarter, up 15% year over year and down 2% sequentially.

Second fiscal quarter proforma net income was $487 million and diluted earnings per share were 29 cents, up 13% and 12% respectively, year over year, and up 3% and 4% respectively, sequentially.

Second fiscal quarter proforma and free cash flow, defined as net cash from operating activities, less capital expenditures, was $741 million, up 3% year over year, and was 54% of revenue.

I’d like to mention that QUALCOMM is hosting an Anos meeting in New York City on May 5 with detailed presentations from our executive team.

The meeting will be simulcast on our website with audio and slide presentations.

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

Thank you, Bill and good afternoon everyone.

It’s a pleasure to be with you for what will be my last quarterly conference call as CEO, although I will continue to see many of you at Anos meetings.

We’re experiencing an accelerating transition to third generation networks and devices, new services, and applications, although at a pace that does vary by region.

QUALCOMM’s second quarter and year over year results are increasingly driven by growth in third generation chip sets and royalties, preceding a 2001X, 1XEVDO, and WCDMA technologies.

Operator competition and business models are now focusing on the evolution to the higher data rates and resulting lower delivery costs of CDMA 2000 EVDO provision A, referred to as DORA, and of HSDPA and WCDMA upgrade.

With DORA we expect to move quickly to mobile voice over internet protocol, very well [inaudible] push to talk and push to media, and to multicast video and audio delivery.

Given these opportunities, QUALCOMM has increased its R&D investment in technology, chips, and software, to maintain and grow our leading position with manufacturers and operators worldwide.

AT CTIA Wireless 2005 in New Orleans in March, we held wide demonstrations showcasing the significant improvements in wireless services enabled by DORA, including high quality and capacity voice-over internet protocol services, higher forward and reverse link peak and average data rates, dual antenna capacity and quality gain, interference cancellation, and [inaudible] multi-task.

These evolutionary and backward compatible capabilities provide wireless operators an evermore capable and cost-effective means to provide compelling voice and data services tailored to segmented user needs.

As reported by the CDG, the CD made subscriber base has now reached more than 240 million subscribers.

The number of CDMA users is expanding at a rapid pace across all regions.

Hatia has surpassed the 100 million milestone, and North America is expected to follow in the first half of this year.

WCDMA is proceeding ahead well in Japan, but more slowly thus far in Europe.

Although Hutchison’s Free Service has shown impressive growth.

We expect the pace first in Europe and then the United States to accelerate over the next several quarters.

The transition from 2G to 3G services, devices, devices and application is well underway.

I would now like to turn the call over to Paul Jacobs.

Thanks Irwin and good afternoon everyone.

Our revised guidance reflects continued acceleration of WCDMA handset sales, albeit at a slower rate than we originally anticipated.

CDMA 2000 is working through a slight overbuild in the channel.

As you may recall, channel inventory in CDMA was slightly higher in the December quarter.

We are now seeing that inventory being worked down a bit, which is consistent with normal seasonality.

Looking forward, we expect increasing shipments of WCDMA chip set and increased higher tier CDMA 2000, 1F EDDO chip sets positively impact both QTL and QCT.

You have previously heard me speak on QUALCOMM’s initiatives to drive new wireless data services.

Today I want to emphasize in addition our execution on driving costs down.

To spur adoption of WCDMA we are working not only on new high end devices, but also on rapidly driving handset costs down.

To this end, we announce the on-time shipment of engineering samples of the MSM 6225, one of the chip sets in our value platform.

The cost effective, fully integrated solution that supports wireless multimedia features including a 1.3 mega pixel camera interface and video capability.

QCT‘s focus on integrations enabled features and functionality to continue their migration down the cost curve.

This is causing the market to redefine what a low end device is.

The MSM 6225 solution is QUALCOMM s fifth chip set to be provided to customers as part of the industries broadest WCDMA product roadmap available today.

Our segmentation strategy remains critical in driving down the cost of both WCDMA and CDMA 2000 handsets.

To help drive demand for 3G applications and devices we have our enhanced multimedia platform.

I will focus on two chip sets, the MSM 6275 and the MSM 6800.

The MSM 6275 chip set initially sampled in December of 2004, powers a hand set that completed the industry’s first end to end-to-end HSDPA calls on a commercial network.

Seven wireless device manufactures have selected the MSM 6275 chip set solution to develop devices for WCDMA, UMTS, HSDPA with support for GSM, GPRS, and edge markets worldwide.

The MSM 6800, which we think we sampled on time, is the first chip set for Dora, as Irwin said, our nick-name for the CDMA 2001 FEDDO revision A. Like the MSM 6275, the fully integrated MSM 6800 provides integrated, multimedia features to deliver increased processing capability and optimized video, audio, camera and graphics capability.

Let’s turn to some of the regions.

Operator competition is accelerating data strategies and services as one operator responds to the evolution plans of another.

This is particularly evident in South Korea, Japan and the United States.

In Latin America, penetration has increased driven by strong competition and improved networks.

In Brazil, the CDMA operator Vivo is scheduled to expand EDDO coverage to twenty markets this year, launching handsets in the second quarter of calendar 2005.

Vivo’s launched location based services using GPS1 entitled Vivo Finder, which included approximately 500,000 GPS1 enabled handsets, and as of February 2005, Vivo reported over $4 million brew downloads, demonstrating the increasing opportunity to drive data services worldwide.

In China, we anticipate 3-D wireless licenses will be granted in calendar 2005.

When those licenses are granted, we expect operators in China will be authorized to upgrade and deploy third generation CDMA based networks.

We also expect additional CDMA 450 subscribers in fiscal 2005 to contribute to the growth in the Chinese market.

Worldwide we anticipate that brew will play an increasingly important role in generating consumer demand for wireless phones.

In the quarter, we announced brew UI1, an open and flexible combination of products and services that enable customized user interfaces for mobile phones.

The brew UI1 offering is designed to increase market differentiation and revenue potential for wireless operators, decrease time to market for handset delivery, allow publishers and developers to expand into new areas of application development and to enable consumers to customize the individual look and feel of their phone.

Media [flew] group continues its work in advancing QUALCOMM’s vision for the wireless market.

Multimedia content such as streaming video and music on demand will drive the adoption of the next generation wireless devices.

However, such services are dependent on network and technologies that offer a high speed, cost effective and efficient method of delivery.

We continue our work through spectrum clearing agreement and technical trials with operators, device manufacturers, content providers and developers to ready the media flow system for deployment.

Our wireless business solutions division continue to gain momentum with the Global Tracks Construction Equipment solution, including selection by the Bobcat business unit of Ingersoll Rand Corporation has a strategic alliance partner to provide tel-managed equipment for the Bobcat lines of equipment and [Petibone], a leading supplier of material handling equipment, installed global track on its full line.

In the transportation and logistics market, CWDS extended its agreement with Swift Transportation, the largest operator of truckload carrier equipment in the United States, for the Omnitrack Suite Management Solution, and due to the commitment by Swift, we equipped its fleet of trailers with the T2 un-tethered trailer tracking system.

CWDS also announced the retirement of Chris Wolf as President of the division and Joan Waltman, formerly SVP of Engineering as his successor.

Jo has been with QUALCOMM for 15 years, 10 of those with DWBF and the last 5 years were spent leading QWBF engineering.

She has led a transformational process resulting in accelerated innovation and product development successes including Global Tracks, T2 untethered trailer tracking and the next generation Omni 2 Satellite System soon to enter customer field trials.

We wish Chris well in his many endeavors and appreciate his help in managing a smooth transition to Joan’s capable leadership.

Now, we have taken on many initiatives which support and evolve multimedia applications, high speed wireless internet access and multi-mode, multi-ban, multi-network products including CDMA 2000, 1XEBDO, WCMA, media flow and HOPPA.

Our commitment at R&D demonstrates our focus on the future.

Our goal is to continually focus on supporting, integrating, and introducing new, innovative technologies and expand the notion of what a phone can be.

As one example, QUALCOMM has been very active in the IEEE 802.11 (indiscernible) standards development, which is the next generation of local area standards development work in the IEEE standards body.

Portions of our system design are included in the leading contender for the final standard.

This technology along with digital rights management work we are doing will become increasingly important to allow phones to securely and equally share multimedia with other consumer electronics equipment such as TV displays and audio sound systems.

QUALCOMM continues to work extensively on advancing the CMA 2000 standard.

An example of this is the work we have done on a multi-carrier version of IFEBDO.

The multi-carrier version of IFEBDO will bundle multiple carriers together so that higher data rates are possible, while maintaining backward compatibility.

We have also taken a leading role in the development of standards for modules that will be used in notebook computers.

This will enable the next generation of wireless modules for laptops that will be more integrated than the current generation PCMCI card.

QUALCOMM is also leading the industry in advancing the use of receive diversity in handsets to enable a higher quality of service and significantly greater capacity for wireless systems.

This work is applicable to both PDMA 2000 and WCDMA.

QUALCOMM will continue to increase market differentiation revenue potential for wireless operators by delivering a wide range of chip set solutions and products that enable a broad segmentation of wireless devises and services.

We expect ongoing growth in the overall PDMA 2000 and WCDMA market and will continue to work closely with many operators and manufacturers with both rapid and reliable WPDMA deployment and availability of WPDMA phones for an increasing multimedia features and capability.

In closing, our balance sheet positions us well and enables a significant growth process we have ahead as well as the continuing returning value to our shareholders, either in the form of dividends or in the form of share repurchases.

We remain committed to returning cash to our shareholders while retaining a significant cash position that affords us flexibility in our future growth.

This philosophy has enabled us to retain and extend our leadership position in the market through sizable investments in R&D like the ones we are making this fiscal year.

I would now like to turn the call over to Bill Keitel.

Thank you Paul.

Good afternoon everyone.

First, I will briefly recap our approach to financial reporting.

For several years we have reported our core business excluding the QSI segment and reported our revenues as if the new method of loyalty recognition had been in effect for all of 2004.

These non-GAAP, or proforma financial measures are intended to help you understand our core business.

This quarter we are introducing another proforma adjustment.

In the second fiscal quarter we recorded certain tax benefits that increased earnings per share.

A significant portion of those benefits are related to the prior year.

We have excluded the tax benefit related to 2004 in our 2005 proforma results, again, to help investors monitor our core business performance.

Now for our results.

I am please to report that QUALCOMM proforma second quarter results continued to reflect strong year-over-year gains and meet or exceed our previous guidance.

Proforma year-over-year revenues increased 15%, net income increased 14%, and diluted earnings per share were 29 cents, an increase of 12% year-over-year.

QCT shipped approximately 37 million MSM phone chips compared to approximately 32 million in the year ago quarter.

We recorded royalty revenues on approximately 52 million CDMA handsets sold world-wide in December compared to approximately 37 million units in the same period last year.

I’ll now highlight several key points in our fiscal second quarter results.

First.

We reported 31 cents diluted earnings per share on a GAAP basis, 2 cents greater than our proforma results. [inaudible] reported a loss of approximately 1 cent per share consistent with our prior guidance, and this loss is more than offset by a tax benefit of approximately 3/10th per share that relates to the prior year.

Second.

We have been actively returning capital to our shareholders.

We paid out 230 million in dividends in the March quarter, and as of market close yesterday, we have repurchased approximately 19.5 million shares for a total of investments of approximately $688 million.

We also sold a [quick] option for 5 ¾ million shares at a net price of approximately $33.75 per share.

Third.

Specific to the tax benefits I previously mentioned, during the second quarter we revised our estimated annual effective tax rate.

We now expect a lower tax rate resulting from a decrease in our estimate of R&D costs allocable to our foreign operations.

This change in estimate coincides with the renewal of five year intercompany agreement.

Our proforma results exclude a tax benefit in the second quarter of fiscal 2005 that is attributable to fiscal 2004.

The proforma of fiscal 2005 effective tax rate for our core operations is estimated to be approximately 28% compared to our prior estimate of 30%.

This reduction in the estimated tax rate will carry into future years as well.

Fourth.

Through the first half of fiscal 2005, our R&D investment has increased approximately 50% compared to the same period last year.

We are very optimistic about the future returns from our R&D programs, and by continued strong execution across our businesses.

You have seen our numerous recent product announcements highlighting our leadership in HSDPA and EVD [handheld] chipsets.

Our product integration with the world’s first single chip solution for CDMA2001X and our technology innovation with the MBD1000 chipset for flow media-cast technology.

Fifth.

CGT’s operating margin decreased to 21% in the second quarter.

Our revenues decreased sequentially and we continued our investment programs.

We saw a higher ASP mix of chip shipments in the December quarter, where as OEM demand from March shipments shifted to a lower ASP mix.

I expect we will continue to see quarterly fluctuations in mix although we anticipate a favorable mix shift in the second half as compared to March.

Sixth.

QTL, our licensing business reported a 91% operating margin.

We estimate that WCDMA royalties contributed approximately 32% of total royalties reported by licensees in March for shipments in the December quarter.

Of the $493 million in QTL revenues, $29 million represented intercompany royalties, license fees were $17 million, and royalties from licensees were $447 million.

The [over ride] CDMA handsets shipped in December quarter were approximately 52 million units, higher than our 46 to 49 million unit estimate in January in greater shipments in the lower priced regions of the world.

The additional lower priced unit shipments slightly reduced the December quarter ASP as the average stock price of CDMA phones was approximately $207 compared to $212 in the September quarter.

ASP’s region by region are tracking close to our expectations.

Notably, the ASPs for WCDMA phones sold in Europe are decreasing at a rapid pace.

Again, consistent with our expectations, but a good sign for operators and consumers.

We estimate CDMA handset shipments for calendar year 2004 were approximately 170 million units including approximately 22 million WCDMA units reflecting shipments reported by our licensees to the end of the December quarter.

Lastly, we believe total CDMA channel inventories grew an additional approximate two weeks in the December quarter compared to our estimate as of January as operators built seasonal inventory.

Based on our inquiries into the channel, we estimate in the March quarter total CDMA channel inventories decreased somewhat as operators’ reduced seasonal inventories from December.

We expect inventories to continue to move lower prior to the December 2005 quarter remaining within the normal band of approximately 15 to 20 weeks that we have observed in the last several years.

I will now turn to our guidance.

For the third quarter, we now estimate that licensees will ship approximately 40 to 42 million CDMA handsets in the March quarter, which will in turn be the basis for our June quarter royalty revenues.

We estimate that North America, Latin America, and WCDMA’s shipments in Europe will be slightly lower sequentially offset by some unit strength in Korea.

We expect third quarter proforma revenues to be approximately 1.26 to 1.36 billion, and proforma diluted earnings per share of approximately 24 to 26 cents.

We anticipate shipments of approximately 34 to 36 million MSN phone chips during the June quarter compared to 37 million units shipped in the March quarter.

A slight decrease reflecting lower CDMA2000 MSN shipments partially offset increasing shipments of our WCDMA MSM’s.

We estimate operating expenses, excluding cost of equipment and services revenue for the second half of fiscal year 2005, will grow approximately 11 to 14% compared to the first half of our fiscal year.

This is driven by carry-over from our first half employee growth, primarily engineering resources, and a reduced pace of new-hires in the second half.

Of the handsets that shipped in the March quarter, we estimate that the average selling price will be approximately $215 per unit driven by the mix of increased functionality and features.

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

We estimate that proforma revenues will be approximately 5.5 to 5.7 billion, up approximately 9 to 13% year over year.

We anticipate proforma diluted earnings per share of $1.10 to $1.14, an increase of approximately 3 to 7% over fiscal 2004.

We estimate calendar 2005 CDMA handset shipments of 208 to 218 million units.

Using the mid point of 213 million units, we can break it down to approximately 50 million WCDMA handsets and approximately 163 million CDMA2000 handsets.

Our current guidance compared to our prior fiscal year 2005 guidance reflects a slightly lower acceleration of WCDMA handset sales than previously forecast as operators optimize their WCDMA networks, anticipate lower handset prices, and settle upon successful pricing and marketing strategies of 3G voice and data services.

We are reducing our calendar 2005 handset estimate by approximately 4% due to somewhat lower handset unit expectations in Western Europe, Latin America, and Southeast Asia.

Our Investor Relations website has a detailed breakdown of this estimate by region and technology.

Based on the current business outlook, we estimate that handset ASPs will average approximately $211 for fiscal 2005 compared to approximately $205 for fiscal 2004.

This is modestly lower than our prior estimate of approximately $215 for fiscal 2005 reflecting a slight shift in regional expectations.

In closing, we remain very optimistic about our future, and feel our company is well positioned looking towards 2006.

Our results reflect some seasonality in our March quarter chip business as well as in our June quarter revenues based on estimated March quarter shipments of CDMA handsets, however, looking towards to the September quarter and beyond, we our encouraged of the significant investments in R&D that we have made will position us well to take advantage of the growing 3G marketplace.

That concludes my comments.

I will now turn the call back to Bill Davidson.

Thanks very much, Bill.

Before we go into our question and answer session, I would like to remind our participants that our goal is to address as many questions as possible before we run out of time on the call, therefore, I’d like to ask our participants to limit their questions to one per caller.

Operator, please go ahead.

We’re ready for questions.

Thank you, sir.

Ladies and gentlemen, we will now begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Hasan Imam at Thomas Weisel Partners; please proceed with your question.

I’m trying to understand the assumptions behind your WCDMA estimates.

When we look at your plan with Japan, one (indiscernible) , and even if you add on on top of that a very (indiscernible) replacement run rate you can’t really get through something above 40 million (indiscernible) .

So I’m wondering if you’re assuming a very aggressive (indiscernible) second half of ’05, and could you elaborate on what we will be the [factors] of that.

Thank you.

We do see an increasing acceleration as we proceed through the year.

I would say that our guidance we just shared with you has a stronger second half of 2005 than what we previously were forecasting.

We did revise our Europe estimate of CDMA down to 24 million units, which is a reduction of 4, and we reduced our Asia forecast down to 23, a reduction of 2 – the key 2.

The key drivers, I think Hasan, are that we see the price of WCDMA handsets in Europe coming down at a very fast pace and we expect operators are holding back to some degree on their marketing and waiting for those lower priced handsets which we think they’re contracting for today.

On top of that we expect that the data, the content application plans behind those offerings, are improving here as we go along and towards the end of the year, latter part of the year, I expect to see more aggressive marketing and better applications and content going behind the UMTS offering.

Our next question comes from [inaudible] at JP Morgan.

Please proceed with your question.

In terms of looking at the pace of the CDMA for the rest of the year, we’ve definitely seen a number of things happen from the carriers in Europe and how they’re looking at it.

What is your impression as to what will actually get CDMA moving, in terms of getting the volumes going -- what gives you confidence that you’ll be able to actually be large order shipments following the same quota for the end of the year.

How is China factoring into that and kind of a dynamic as to what is going on in Europe right now, if you could kind of elaborate on that a little bit?

This is Dr. Sanjay.

I think that there are a single 2 or 3things which will drive wide band CDMA.

Bill touched on the decline in handset pricing and we see a pretty dramatic decline coming in handset pricing for wide band CDMA and we see some contracts now being signed at the end of the year at $200 or slightly below and we expect that the handset prices will come down dramatically and some of the operators will begin to move some of the higher end customers to wide band CDMA.

That’s one.

The second one is that for the first time in the wireless industry we have the 2G broadband networks which actually can be used by enterprises for connecting to the internet and we see, particularly with HSDPA [inaudible], [inaudible], Cingular, and through the next years in Europe and Japan that we will see greater deployment of safer devices than laptops.

The revenues there are healthy revenues which are going to find instrumental to the voice revenues that they already have.

Apparently I think in continuous [inaudible] [Delkimo], [KDDI], [Voticon], [inaudible], have shown that there is a significant revenue opportunity in both audio as well as video download services.

We see that as becoming a pretty compelling application going forward.

So a combination of those things and then finally, the approach which [Hutchinson] is taking, providing significantly lower segment cost for voice.

A combination of all of these things I think will drive wide band CDNA.

Finally, if you’re an operator and you want to make a decision about where you put your tax dollars, is this enough [inaudible] to justify putting those dollars into GTRS.

More and more of those dollars are now going into UPS network and as a result of that I think there is greater incentives on the part of operators around the world to use tax expenditures they’ve already made and they’re making now to deliver lower cost per minute voice services.

In Japan and the US, and then as licenses are granted in China, the competitive dynamic is going to be a very important factor in driving wide band CDMA.

We see Cingular getting extremely aggressive and in fact, it is arguable that they are today perhaps the most aggressive NMT in the world.

They have committed to deploying multiple cities within the United States with HSDPA].

We see [Delkimo] and [inaudible] being very aggressive with [UNCS] in Japan and as licenses are granted in China we see the Chinese market accelerating quickly because of the competitive dynamics that it expends

So again, all those factors drive wide band CDMA.

Indeed if you look at the history, certainly when introducing DO in South Korea it started more slowly than we anticipated and then picked up quite a bit of momentum.

In Japan, there the WCDMA certainly started earlier than elsewhere but it did take a while before it began to take off so we think again that as the operators understand the technology, how to sell it, how to price it, then in fact it will be moving ahead well.

Can I get some quick clarification?

Bill, you said that the [inaudible] inventory only went up 2 weeks in the December quarter or in the March quarter.

To clarify, back in January I estimated that the December quarter was approximately 18 weeks.

In March I said that based on the greater handset shipments I thought it was going to be slightly greater.

Our channel checks since then time have indicated to me I think it’s approximately 20 weeks today.

Since today or since December?

My estimate is 20 weeks as of December.

And I think it’s come down slightly since December into March.

You’re comfortable where it is right now because you’re within 15-20?

Yes, I think it’s within that normal band of 15-20 now.

Yes.

Our next question comes from Tim Luke from Lehman Brothers.

Please proceed with your question.

Thank you.

For clarification, Bill, did you say that the WCDMA shipments you expected to be sequentially lower in June and then for Sanjay, if you could give any color on the percentage bookings for the June period usually around 9-10 books or something, and then how you see the transition moving into the fiscal fourth quarter of September, how you see the order building for that period?

What kind of shape we might see to the wrap in September?

Thanks.

Tim, first in the June shipments, I am expecting WCDMA to decrease along with the CDMA 2000.

I expect we’re going from a 52 million level of shipment down to 41, 40-42, 41 being the midpoint.

So I think WCDMA is declining along with CDMA 2000 as we see is an adjustment to inventories.

That’s it for March inventories.

Yes, this is March activity, June revenue.

Tim, with regard to the order for this quarter, we typically don’t guide you to exact percentage that’s booked, but I have a great deal of comfort that we will execute to the range that we’ve guided you which is 34-36 million units.

With regards to your question about the September quarter, we have definitely seen an acceleration in our order activity.

Our book-to-bill ratio, which we don’t recount specifically, is definitely increasing as we go forward, and we expect a significant increase in our shipments from June to September quarter.

Thank you.

Our next questions comes from the line of Louis Gerhardy of Morgan Stanley.

Your question...

Good afternoon, I didn’t catch the end of the comment there I think there might have been some technical problems.

I just wanted to reconcile one item.

Bill I think you mentioned the handset at ASP was 207 in the December and then you are looking for 215 in March.

But at the same time you are also talking about the chip-set mix moving to lower-end products and I just wanted to understand how those two comments reconciled.

It is a different timing Louis for one.

The time between your chip-set and then turning into phones, and then also with approximately 20 weeks of inventory in the channel at the end of December has finally left into March.

What Sanjay and I are talking about is what is shipping into that channel and then the handsets coming out are into the carrier.

So, I think it is primarily timing Louis.

Our next question comes from the line of Edward Snyder at Charter Equity Research; please proceed with your question.

Excludes its operating earning and ships dropped substantially, I think it is down to 21%.

Is that due to price erosion or is it more of an operating expense that drove that down.

Also, you mentioned that operating expenses would increase 11 to 14% for the second half fiscal year.

Is that year-over-year basis or are we talking about sequentially the first half of the year?

As far as the operating process for the March quarter [inaudible] is down to 21% this quarter.

There were perhaps three factors there, one with lower AFP driven by products and customer mix which I think we guided you to earlier, sequential increase in R&D spending, which we have also guided you to and those two things primarily drove our reduced operating profits.

Earlier in the year, we guided you through 26% operating profit, 26-27% operating profit for the year.

We believe we are still on track for that operating profit.

In the first quarter, we had operating profit of 28% and we believe that 26-27% for this year is a reasonable target for us.

To the question on the op expense guidance, again op expense as I am defining is a combination of R&D and SG&A, and the 11-14% guidance was for the second half of fiscal ’05 relative to the first half of fiscal ’05.

Thank you, our next question comes from the line of Tim Long of Banc of America Securities; please proceed with your question.

Thank you, I just want to touch on some of your changes in unit estimates.

It looked like you took the Latin America up a little bit last year yet taking it down this year.

I took some of you channel commentary to mean Latin America, and North America, so if you could just give us some clarification on why North America still remains consistent in your estimates, yet Latin America comes down.

Is there something other than channel going on in that theater that you think is going to cause the overall units to be down this year, thanks.

Yeah I mentioned North America in the context of the March and June quarter but for the full calendar year, I see North America tracking very close to our prior expectation, approximately 70 million new handsets in the calendar year.

The Latin America, we did bring down the estimate for the full year by approximately 3 million units.

We see a little less attention to the real deep low-end market for the CD and mid carriers, a little more attention to the mid to higher tier market.

So, that is why we are bringing down that estimate.

Our next question comes from the line of [Voytex Villovich] at Bear Stearns; please proceed with your question.

One is, just want to clarify something from your earlier comments.

In terms of your royalty rates will likely to go up higher because there’s two licenses, or at least there is going to be more sharing of the licenses.

Can you just clarify is the both for WCDMA and CDMA 2000 going into next year.

Also, second, just want to clarify in terms of ASPs this quarter it sounds like you do expect, you mentioned a couple of times, they’ll be up sequentially.

But if we do look at most of the vendors already LG, Samsung [Report], [Quetell], and Motorola, and they are indicating that their ASPs were down in Q1 for the CDMA portion of the business, as well as WCDMA that carriers a much higher ASPs.

Are you — what level of confidence do you have that the ASPs are higher or is that still some potential for adjustment in the next quarter.

So, there were just two questions if you could maybe comment on that.

On the first question with respect to the termination of royalty sharing that would have an equal impact for WCDMA as it would for CDMA 2000.

Voytex on the ASPs what I am looking at is the total CDMA market in terms of that ASP estimate, and yeah like Sanjay said he feels pretty comfortable with his MSM guidance.

I feel pretty comfortable with the ASP guidance as well.

Our next question comes from the line of Christine Armacost at SG Cowan; please proceed with your question.

Wanted to ask a question about inventory in the channel, obviously you are guiding down in terms of the shipments into the June quarter, so alleviating some of the inventory, but can you give us some contacts for the inventory bill that you saw in the December quarter, WCDMA, versus CDMA.

And wondered if Sanjay would be willing to comment on ASP trends on the MSM chip-set shipments as we go through the year, thank you.

On the inventory, I feel pretty good about our picture on the total inventory channel but breaking that down by region I tend to find that it can be problematic.

So, in terms of that 20-week estimate I feel pretty confident of that number but breaking it down by region or technology I think is a little more difficult.

We did do extensive channel checks in these last few weeks and feel like that channel has come down somewhat, particularly at the carriers OEM level, and total is probably a little bit higher at the end of March.

Then I am looking for decrease into June, a further decrease into September, next December I expect it will come back up again for the Christmas season.

With regards to the ASP trend at the beginning we guided you to the ASP year-over-year this year in either flat margin higher and during the December quarter you saw, driven by products mix that our ASP actually was higher in the December quarter than the September quarter.

As we discussed here today, driven by product mix, as well as greater demand, because of greater demand for our lower-end products, our ASP is indeed lower this quarter.

We expect going forward through the next 2 quarters we will see sequential increases in ASP.

Our next question comes from the line of Mike [Wadley] of Piper Jaffray; please proceed with your question.

You talked about the pricing on WCD handset starting to fall that could drive demand.

Can you touch a little bit maybe on the pricing for your WCDMA chip-set that you are seeing out there.

And also can you just touch on, you talked about improving your market share within WCDMA chip-set market.

Can you maybe give us a little color on the progression you are seeing in that market for you solution.

We have the segmented load map with 5225 driving the low-end of the handsets.

We expect handsets, based on 6225 to be available in the market place towards the end of this year.

We think that it is extremely cost effective handsets above [inaudible] today, in fact based on 5250 handsets, and in fact based on 6250 handsets we are seeing pricing coming down quite dramatically.

So I think that the progression in wide band CDMA market development driven by 5250 [inaudible] chip-sets is proceeding very well.

In terms of our market share in wide band CDMA we have never guided you to specific numbers.

I could say that our shipments in wide band CDMA did go up to doubles over the quarter last quarter shipment and we expect sequential increases going forward in 2 quarters for this fiscal year.

Our next question comes from the line of Brian Modoff at Deutsche Bank; please proceed with your question.

Yes, I just wanted to clarify what you just said.

So, you are saying your WCDMA shipments were doubled in the quarter we just reported and you expect them to be up again sequentially in this quarter.

Exactly right, and then also then again in the September quarter.

You commented earlier you expect a significant increase in shipments in September from the June quarter.

What are the key drives for that are these going to be WCDMA and EBDO.

And in terms of commenting on your visibility is this coming out of new phone launches like with [inaudible] and Vodafone for WCDMA.

What are the drives on the outlook on the June quarter.

The comments about significant increase pertaining to the September quarter and the drivers, there are two drivers I think.

One is clearly increasing our number of handsets based on our solution of being launched on multiple different carriers around the world.

Samsung has announced 5 models, their LG models, and all of these are getting launched at a broad range number of carriers.

We expect in third quarter this year to have handsets available affecting on Vodafone but potentially also an H3G network, and possibly even on Yocomo network.

So getting more wide band CDMA handsets being launched is definitely going to drive our volume.

Additionally, there are two other drivers.

There is the EBDO volume beginning to increase in United States driven by Verizon's service launches, HMDO, (indiscernible), then KDDI is also accelerating their push and they have been very successful with audio download services, and also with KT and KTS we have seen significant traction in video.

So (indiscernible) finally, our 6,625 low end chip set in combination RFC model will drive volume into the emerging market places, so those are the 3 drivers for volume increase in September.

Our next question comes from the line of John [Buker] at Harrison and [Miterard]; please proceed with your question.

A lot of discussion on WCDMA and new network launches.

I am just wondering on replacement demand, Paul touched on the availability of receive diversity.

How far away are we from the installed based of EDVO handsets, and even some of the CDMA 1X handsets, where the carriers have an incentive to replace the installed base with some of their receive diversity capable chip sets you see that being a catalyst in replacement demand any time the 2nd half of this year, early next year.

Thank you.

[CBDF] has already mandated received diversity in all their [yohan] sets, so (indiscernible) diversity is already shipping in volume.

We had done one additional thing, which I think will be very significant in driving this diversity.

We used a sample, a device called [RFX] 6500, which has both received chains for (indiscernible) integrated into a single chip.

Additional technical breaks that we have done is 90% of that, both received chain being active, would actually compute about the same current as a single receive chain.

As a result of that, the current [con] function issue with having two receiver chains have been overcome, and we expect that next year we will see acceleration in availability of receive diversity handset, and that there will be significant incentives certainly on the part of carriers to move to receive diversity handsets because it reduces their cost for being delivered.

It is interesting, we have already seen now the transition on the plug in cards to the dual antennas and the improved performance that is being achieved there, and operators have been following very carefully, our results on the dual antennas on the handsets, so it is certainly something everyone has been looking forward to, and as with all these things, the transitions take some time, but there is certainly a very good payoff.

Our next question from the line of Michael Ounjian at Credit Suisse First Boston; please proceed with your question.

Sanjay, I just wanted to follow up on comments you made about the operating margins and you know 26% or 27% target for the full year.

Looking beyond this fiscal year, do you get a feeling for what the target launch on operating margin would look like?

Is it realistic to get back to the low 30s or just given the competition as you move in WCDMA, is high 20s really, or mid to high 20s really how we should be thinking about this business, and if it is proform or what are some of the drivers to get that towards the 30s?

Our operating profits last year was 34%.

This year we guided you to 26% to 27%.

In the long-term, I have indicated that I try to manage the service to an operating margin within 25% and 32%.

One of the drivers, I think the biggest driver for us, not perhaps surprisingly, is the percentage of marketship that we are able to garner in wide band CDMA.

Our point of view that we believe that the investing in R&D is the right strategy for us to succeed in this market, and if we are able to turn that investment into a reasonable market share in wide band CDMA, I expect that we have a greater chance of delivering well for our shareholders.

We have actually been holding up quite well in the sense that our investments on the WCDMA side plus a number of the advance services have been very heavy, and yet the percentage of chips going into that part of the market is still much lower than CDMA 2000.

The R&D does benefit both, but we have really stepped up the R&D.

I think we are getting close to the peak though of our R&D as a percent of revenues.

Our next question comes from the line of James Faucette at Pacific Crest Portland; please proceed with your question.

Hi, just, most of my questions have been answered, but would like to know a little bit more input into your changes on your geographical forecast, specifically on Latin America, and Southeast Asia.

In Latin America, 3 million unit production, is that purely to mix and your prices changes.

I'm not sure we implied that you had already taken into account (indiscernible) shutting down (indiscernible) main networks in Latin America or transitioning away from those, or did that have an impact on that (indiscernible)?

And on Southeast Asia, can you just give us a little more information as to what region maybe was a little bit weaker than you thought.

And then, finally, you increased your rest of the world WCDMA by a million units; can you just give us a little insight were you seeing a little bit more or a little (indiscernible) early outlook for that?

Thank you.

James, on the Latin America, telephonic is direction with the Bell South properties, is, I would say largely not a surprise to us.

Pretty much consistent in what we were expecting.

The changes that you are seeing in our forecast, is that we see CDMA operators in Latin America looking to focus a little more on the hide and mid tier, a little less on the very low end voice centric type of services, so it is a little richer business I think for them, and hopefully for us as well.

On the Asia front, we were reduced by 3 million.

About a million of that was Korea.

We have all seen it has been a pretty slow market there, but some recent pickup seen by the Korean operators here in the last, just recent past.

But net/net we see that market just being a nod lower than what we previously expected.

The rest of that Asia decrease is -- there are a lot of launches occurring across (indiscernible) and occurring across Thailand, (indiscernible), Malaysia, Vietnam, and we've just reduced slightly our total growth we are expecting into those areas.

On the rest of the world, for WCMA, we are seeing data modules going nicely, and then we still think there is some chance of some WCDMA launches outside of Japan and Europe yet this year.

Our next question comes from the line of Bill Benton of William Blair, please proceed with your question.

Good afternoon.

I think Sanjay you said there is a $200 WCDMA handsets at the end of the year, and I know you said it is declining rapidly.

What do you actually expect your average WCDMA (indiscernible) decline could be from the beginning of the year on a percentage basis; the beginning of the year to the end of year, and has your view really changed at all.

And then I was wondering if somebody could comment, I'm sure the noise, on why (indiscernible) is likely to increase a bit here?

Are you seeing or anticipate a near turn impact on customer investment plans on the [Wi-Max] (indiscernible).

I will take the WCMA SP question.

It was about 6 months ago I showed you that our forecast for WCDMA SPs were 2,005 equated to an 88% learning curve.

If I break out Japan from that forecast, I see us on a path to an 88% learning curve, inclusive of a low end $200 wholesale price in Europe by the end of this year.

But Japan, the future demands seem to be extensive and rapid, and I am not expecting the same level of learning curve for WCDMA in Japan, as I expect into Europe.

On the Wi-Max side, there clearly is certainly a lot of discussion about Wi-Max, and announcements of some services aimed at the nonmobile part of the market.

The mobile standards still in development.

With operators, I think that there is pressure on operators in Korea to be introducing some [Wygrow] although that will be taking some time.

But, overall I remain very confident that the services being provided by DO [Ravay] by HSTPA, will in fact, fill mobile services early to market, wide range devices will in fact be the major way in which data is delivered to the mobile user, and because of the cost being absorbed, often to the fixed user.

We haven't seen fixed wireless systems be tremendously successful in the past.

If you look from the voice side, typically wireless local news systems only became popular when limited mobility was implemented, meaning that they could use cellular handsets.

So we always see that there is a premium for mobility.

The central efficiency of Wi-Max is not (indiscernible) at this point, and in fact does not look particularly efficient, and then the question is what spectrum will that technology go into?

There are a number of unanswered questions even on the fixed side for Wi-Max, and as Irwin said, the mobile standard is the (indiscernible), so it really is not impacting operator division at this point.

Thank you.

That was the final question for today's call.

Dr. Jacobs do you have anything you would like to add before we adjourn sir?

Well again, thank you all for participating.

This quarter was a very good quarter, but we are all disappointed in the market situation causing us to have to make a downward revision in some of our estimates.

Having said that, I think the future looks exceedingly bright.

I think there will be some major new markets opening up to 3G, certainly one in China.

Looking hopefully into early next year, a spread of HSDPA, the coming of DO Ravay and all the capabilities that it brings along.

And so, we will be continuing our efforts on R&D because we do see that there is a great payoff for these efforts.

Again, thank you all for participating.

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

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

Thank you, and have a good day.