高通 (QCOM) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the QUALCOMM third quarter conference call.

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

Later, we'll conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded July 25, 2007.

The playback number for today's call is 800-642-1687.

International callers please dial 706-645-9291.

The playback reservation number is 6342604.

I would now like to turn the call over to John Gilbert, Vice President of Investor and Industry Analyst Relations.

John, please go ahead.

Thank you, and good afternoon.

Today's call will include prepared remarks by Dr.

Paul Jacobs, Steve Altman, Dr.

Sanjay Jha and Bill Keitel.

In addition, Lou Lupin will be available during the question-and-answer session.

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 web site.

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 web site.

We may make forward-looking statements relating to our expectations and other future events that may differ materially from QUALCOMM's actual results.

Please review our SEC filings for a detailed presentation of each of our businesses and associated risks, and other important factors that may cause our actual results to differ from these forward-looking statements.

And now, it is my pleasure to introduce QUALCOMM's CEO, Dr.

Paul Jacobs.

Thank you, John.

Good afternoon, everyone.

We had another tremendous quarter.

But before discussing our performance and the status of the market, let me start by briefly commenting on our continuing legal issues.

Obviously, we were disappointed with the rulings on behalf of Broadcom both in the Santa Ana case and in front of the ITC.

We continue to believe that the rulings were wrong and are pursuing all avenues to reverse and to mitigate the effects of these rulings, including working with our partners who may obtain a license from Broadcom.

We have been unable to come to agreement ourselves with Broadcom because they've insisted that a comprehensive settlement include the ability for its customers to obtain royalty-free rights to significant portions of our patent portfolio which would have a material impact on our licensing business.

This business has funded R&D and innovations that we have transferred to our approximately 140 licensees.

We remain committed to defend our business model and the benefits it provides the wireless industry.

Unfortunately, given the threat of injunctions against certain of our products, the next few months represent a crucial litigation time frame and we can't predict the outcomes at this time.

Let's talk about the business.

As I said, we had another outstanding quarter at QUALCOMM.

Record CDMA-based chipsets and strong handset shipments delivered record revenue and earnings per share in the third fiscal quarter.

The worldwide 3G CDMA market is accelerating and our results demonstrate that we continue to successfully execute on our current and long-term strategic goals.

These excellent results demonstrate the commitment and execution by our employees, industry partners and licensees as they continue to deliver the most innovative technology and solutions to the global market place.

We thank them for their support.

I would now like to highlight of some our key business achievements.

QCT delivered their eighth consecutive quarterly record for MSM shipments as CDMA-based chipset shipments were up 18% year-over-year.

We continued our leadership position in wireless semiconductor process technology by powering the world's first 3G handsets based on 65-nanometer chips.

Several handset models are commercially available today and more than 40 additional models are expected to become available this year.

These leading edge chipsets enable higher speed data capabilities and advanced applications supported by 3G, while driving lower manufacturing costs and greater power efficiency.

In QW&I, our BREW business made significant strides.

The WCDMA operator Hutchinson H3G announced its plans to use BREW to enable an integrated user experience in their handsets, providing their subscribers with differentiated applications and services.

Warner Music Group will utilize our comprehensive UI1 offering to deliver personalized over-the-air downloadable artist themes to their mobile customers.

And Major League Baseball became the first customer for our BREW BrandXtend Signature Solution enabling them to provide compelling major league baseball content to baseball fans' phones directly from their web site.

In QSI, our MediaFLO USA service is now available in 32 markets in the U.S.

as we continue to expand our service footprint.

We remain excited about potential MediaFLO expansion into international markets.

MediaFLO won the best TV and video service award by the European Mobile Entertainment Forum, further validating FLO as a globally recognized open standard that provides the mass market with cost effective, high quality multimedia content.

Turning to the 3G CDMA market around the world, we're pleased to see the number of 3G CDMA-based networks and subscribers continuing to grow rapidly.

Data from the CDMA Development Group and the GSM association shows that over 380 CDMA-based 3G networks have been launched as of June 2007.

This includes more than 75 operators deploying the higher speeds of 1x EV-DO and nine operators that have deployed EV-DO revision A.

In addition, more than 115 operators have launched high-speed HSDPA networks and HSUPA commercial launches commenced in South Korea, Germany and Austria.

According to Wireless Intelligence, worldwide 3G subscribers, including CDMA2000 and WCDMA grew to approximately 484 million as of June 2007, representing an increase of approximately 32% from the year ago quarter.

Based on worldwide handset shipments reported by Strategy Analytics, CDMA-based handset shipments continue to grow faster than total worldwide handset shipments and represented an estimated 36% of the total worldwide shipments in the March quarter.

This compares to 29% of the total worldwide shipments in the year ago quarter.

I would like to now update you on what we're seeing in some of our markets around the world.

In Japan, the launch of HSDPA is further driving competition and subscriber growth of 3G CDMA.

Operators in Japan continue to launch compelling 3G CDMA devices in a very competitive market environment.

The cumulative number of 3G CDMA subscribers as of the end of June has grown to over 74 million, or 76% of wireless subscribers.

We continue to see positive wireless data trends in the United States market.

Recently, both Sprint and Verizon announced they have upgraded their EV-DO networks to EV-DO revision A.

Verizon recently noted that 50% of their growth in total service revenues were driven by data.

In addition, data revenues doubled year-over-year driven by applications such as internet access and e-mail, and Verizon subscribers downloaded over 100 million songs, videos, games, ring tones and exclusive content in their last quarter.

Similarly, AT&T noted on their recent earnings call that the number one driver behind their increase in total RPU growth was strong gains in wireless data.

AT&T also noted significant 3G handset growth as 3G subscribers reached over five million, more than double the previous quarter.

We continue to work hard to serve emerging markets with great services on low-cost devices and we've made some excellent progress.

In India, Reliance announced a very significant CDMA2000 network expansion covering more than 20,000 towns, as well as a broad range of compelling devices at competitive price points including color handsets at just over $30.

QCT's single-chip solutions continue to enable cost effective competition with handsets available at both Reliance and Tata Teleservices.

In addition, BSNL announced plans to deploy the higher data rate speeds of 1xEV-DO.

India's CDMA2000 cumulative subscriber base grew to 49 million, over 26% of the total wireless market.

In Korea, CDMA-based technologies continue to drive a high level of competition in the market place as estimated handset sales during the first six months represent an increase of 35% year-over-year.

In only four months since launch, HSDPA subscribers surpassed the one million mark which compares favorably to the cumulative 22,000 WiBro subscribers since its June 2006 commercial launch.

Moving to Europe, according to our licensee reports for the period ending March 2007, we estimate WCDMA handset shipments increased 89% year-over-year.

According to Wireless Intelligence, in the first calendar quarter of 2007, GSM experienced negative net additions for the first time as consumer demand for advanced feature-rich WCDMA handsets continues to accelerate.

The increased revenue opportunities driven by 3G were also noted by Vodaphone in their recent comments as data revenue was up 32% year-over-year driven by increased penetration of 3G devices.

Vodaphone also noted that the speed advantages of HSDPA are a key factor in stimulating significant demand for mobile data connectivity.

In closing, I'm very proud that we continue to deliver excellent results to our shareholders despite various attempts to distract us.

These achievements provide market validation for the innovative products and solutions provided by the more than 11,000 employees at QUALCOMM worldwide.

We'll continue to invest in innovative technologies and bring the highest quality solutions to benefit wireless consumers and our industry partners globally, and we'll continue to defend the business model that's made all of this possible.

That concludes my comments, and I will now turn the call over to Steve Altman.

Thank you, Paul.

Good afternoon, everyone.

As Paul highlighted, there are many exciting developments throughout the industry, enabled by our technology, employees, and partners.

Although the industry and consumers have received substantial benefits from our efforts, a small group of companies continue to attack our business model.

In the most recent quarter, we have made progress in some of these battles while losing ground in others.

We were disappointed with the rulings in our disputes with Broadcom, both in the California litigation and in the ITC.

We continue to believe that the rulings were incorrect and are pursuing all avenues to reverse and mitigate the effect of these rulings, including seeking a presidential disapproval of the ITC ruling.

In the event that an injunction is issued against our business, we will seek to stay the application of such an injunction while we appeal the infringement findings.

Given the threat of injunctions against certain of our products, the next few months represent a crucial litigation time frame and the outcomes and impact of any injunction or exclusion order is uncertain for us, as well as for our customers and consumer who stand to be harmed significantly if denied access to our market-leading technology.

Regarding the ITC, last week, the Court of Appeals for the Federal Circuit denied the request for a stay of the exclusion order solely on procedural grounds.

In essence, the Court's decision was that the exclusion order is not subject to appeal until after the presidential review period.

The Court made no determination of the substantive merits of the stay request and we're free to renew our request, as are our customers, for a stay if the President does not disapprove the ITC decision.

The last day for the President to act is August 6.

Last week, Verizon Wireless and Broadcom announced a license agreement.

Although the license agreement with Broadcom appears to eliminate certain risk of not being able to import handsets using our chips for use in Verizon's network, a comprehensive settlement between us and Broadcom is unlikely for the reasons Paul mentioned earlier.

As a result, over the next few months, we'll be defending ourselves from Broadcom's attempts to obtain an injunction precluding the sale of certain of our chips sold in handsets for use in the United States other than in Verizon's network.

While we view the Verizon agreement as a positive development, it does not address the negative implications for the many other wireless carriers, subscribers, manufacturers, public safety and other organizations affected by the ITC's order.

Given these facts, we'll continue to work tirelessly with our partners to seek a presidential disapproval of the ITC's ban.

With respect to the California patent infringement case, on May 29 the jury found certain products of ours infringed three Broadcom patents and awarded Broadcom approximately $20 million in damages.

While we'll appeal the jury's verdict and believe there are compelling reasons why no injunction should be imposed, the decision remains with the judge.

Regarding next steps, in mid-August, there will be a trial before the judge regarding injunctive relief and scope.

Broadcom has proposed a running royalty in lieu of an injunction for certain existing products for a period of 18 months, and that all other products be enjoined.

We'll oppose the requested injunction and we will ask the Court to allow continued sales under a compulsory license to avoid unnecessary disruption for our customers and the carriers.

Looking forward regarding Nokia, there are some important cases that will be heard this year.

In the arbitration filed by Nokia in 2005, we expect a decision in the coming weeks.

In September, the first of our patent infringement cases against Nokia's GSM products begins in Germany, followed by the U.K.

case in November.

Just this week, we learned that Nokia's case in Germany alleging patent exhaustion as a bar to our infringement claims against Nokia's GSM products will likely be significantly delayed.

The trial of a similar case brought by Nokia in the Netherlands case is scheduled to begin in September.

In addition, the stay of our action against Nokia in the ITC has been lifted and the trial will take place in September of this year.

At our November 2006 analyst day, we disclosed that out of all of our licenses, only four licensees' WCDMA subscriber unit royalty obligations will expire during the next 10 years for the limited number of patents licensed under their capture period.

I'm pleased to report that we have successfully negotiated an extension with one of these licensees, so now there are only three licensees that will require the negotiation of an extension, one of which, as previously explained, is Nokia.

We continue to expand or broad licensing program, as we announced over five new licensees this quarter.

This includes another OFDMA chip license, and to date we have over five OFDMA licensees.

Our licensing model continues to provide the innovation that fuels worldwide mobile wireless broadband growth.

We remain firmly convinced of the validity of our positions and the benefits bestowed upon many by our business model.

We'll continue to vigorously defend our business, and at the same time continue to provide the world with the innovative solutions for which QUALCOMM has been and always will be known.

That concludes my comments.

I'll now turn the call over to Sanjay Jha.

Thank you, Steve.

QCT had another excellent quarter.

I would like to discuss the highlights.

We continue to maintain focus on delivering exceptional results.

The third quarter of fiscal 2007 was another record-setting quarter in terms of revenue, operating profit and shipments.

QCT generated revenue of $1.37 billion.

This was our fifth consecutive record revenue and represents a growth of 21% over the third quarter of fiscal 2006, and 9% compared to the previous quarter.

Our operating profit was 32% of revenue, an increase of 27% year-over-year and 19% quarter-over-quarter.

We shipped over 65 million MSM chipsets in the third quarter and set a record for the eighth consecutive quarter.

QCT reached an additional milestone as we shipped our cumulative one billionth MSM during the month of June.

This growth can be partially attributed to consumer demand for mobile broadband services on a global basis.

As a result, our UMTS chipset shipments increased 127% year-over-year, and 79% quarter-over-quarter.

As the estimated quarter-over-quarter growth for the UMTS market overall was just over 20%, we believe we gained market share during this time.

Meanwhile, CDMA2000 EV-DO remains strong as shipments increase 34% year-over-year.

Wireless users in developing markets such as after Africa, South America and India are driving demand for entry-tier products.

We have noticed a trend for wireless users in these markets to migrate toward more feature-rich devices, thus increasing demand for our multimedia tier of chipsets.

Demand in established markets for our higher end products is increasing, as well.

In the third fiscal quarter, QCT started volume shipments of our 7000 series convergence platform chipset.

These dual core solutions power advanced smart phones and other devices that are now available in North America and Japan.

The strong initial uptake indicates that our technologically advanced products will be an important contributor for future MSM shipments.

The combination of increasing demand for multimedia tier devices and shipment of our first convergence platform chipsets had a positive effect on our ASP.

Even in a highly competitive market place we have today, our chipset ASP was marginally higher by 2% quarter-over-quarter and year-over-year.

Yesterday, iSupply announced that QUALCOMM is now the world's top supplier of semiconductor for wireless products by revenue in the first quarter of calendar 2007.

Even during the seasonably slow first calendar quarter when the global market for wireless ICs fell by 5.5%, our revenues increased -- our revenue increases and strong performance have launched us to become the top supplier for the first time since iSupply began tracking this data in 2004.

QUALCOMM continues to accelerate the next evolution of wireless capabilities and we have reached several milestones in this area.

For example, we're now demonstrating Ultra Mobile Broadband, the next step after EV-DO revision B in San Diego in a fully mobile environment.

We also concluded an over-the-air UMB demonstration in Japan at Expo Comm last week.

Our lead in position location technology continues to grow as there are now approximately 300 million devices that have shipped featuring our GPS1 solution.

Fully integrated into our chipsets, GPS1 delivers quick and accurate location data to power the majority of location services that have been rolled out by network operators worldwide.

QCT's traditional sources of revenue remain well positioned to grow and we expect to see new sources of revenue emerge later this calendar year.

We have now sampled the first fully draft 2.0 compliant 802.11n wi-fi chipset to several customers.

QCT's Bluetooth product line has secured multiple handset design wins as part of our strategy to provide highly integrated wireless connectivity solution on our CDMA and UMTS platforms.

As a result, we have expanded our reach into new market segments, and the first commercial products should be on the market later this year.

The computing and consumer electronics segment of the industry have shown strong interest in our Snapdragon platform.

We anticipate that by the second half of 2008, there will be commercial launches of consumer electronics devices using our Snapdragon chipset to offer powerful computing and exceptionally low power consumption and always-on connectivity.

Thank you, and I will now turn this call over to Bill Keitel for an overview of our financial results.

Thank you, Sanjay.

Good afternoon, everyone.

We're pleased to report another quarter of record revenues, chipset shipments and earnings per share as 3G adoption around the world continues to accelerate.

Revenues increased 19% year-over-year to more than $2.3 billion, and pro forma earnings per share increased 31% year-over-year to $0.55.

GAAP diluted earnings for the June quarter were $0.47 per share, including a $0.04 loss in estimated share-based compensation and a $0.04 loss attributable to our QSI segment.

During the quarter, we returned $363 million in capital to our shareholders, including $234 million of cash dividends, or $0.14 a share, and $129 million to repurchase 3.1 million shares of our common stock.

Cash flow was strong in this quarter with operating cash flow of nearly $1 billion, up 21% year-over-year and pro forma free cash flow of nearly $1 billion, up 23% year-over-year.

Our fiscal 2007 pro forma effective tax rate is estimated to be 23% compared to our previous estimate of 24%.

The decrease in our estimated annual effective tax rate is primarily the result of our estimate of additional foreign earnings taxed at less than the United States federal tax rate.

Due to this change in estimate, the third quarter rate is lower than the expected annual rate.

QCT, again, had record shipments during the quarter, including strong sequential growth and demand for WCDMA chipsets.

Compared to the year ago quarter, MSM shipments and QCT earnings before tax increased 18% and 27%, respectively, as QCT continues to deliver exceptional financial results while maintaining and extending its technical leadership position.

QTL revenues increased 20% year-over-year to $766 million for royalties on handset shipments that occurred in the March quarter and were reported to us in the June quarter.

We estimate new handset shipments during the March quarter were approximately 88 million units at an average selling price of approximately $217.

For the first time, WCDMA was the largest contributor of royalty revenues representing approximately 51% of total royalties reported this quarter.

And QTL's operating margin increased to 87%, up from 83% in the March quarter.

Based on our recent checks and estimates, we believe the channel inventory levels remain within the historical norm of approximately 15 to 20 weeks.

Last quarter, we reported favorable arbitration decision related to Ericsson's and Sony Ericsson's underpayment of royalties per the terms of their license agreement.

In the fiscal third quarter, we recorded $30 million of royalty revenue for a payment received from Sony Ericsson related to the time period covered by the arbitration ruling and as ordered by the arbitrator.

We have not yet received a report from Sony Ericsson for the March quarter, and an audit process is underway to ensure the arbitrator's decision is applied appropriately to all prior periods.

Turning to our guidance, I'll first remind everyone that we face a period of increased uncertainty given the threat of injunctions.

The following guidance is based on unconstrained importation of our chipset products.

Furthermore, our guidance provides for substantial legal costs which are reasonably consistent with our experience over the past year, but does not include any provision for the consequences of injunctions or significant damages or costs related to litigation matters, including support we may agree to provide to our customers.

We're increasing our estimate for the calendar year 2007 CDMA-based handset market.

We now estimate shipments of approximately 378 million to 398 million units in calendar 2007, an increase of 26% to 32% over calendar 2006.

Based on the 388 million midpoint of this estimate for calendar 2007, we're reaffirming our prior estimate for approximately 208 million CDMA2000 units.

We are increasing our estimate for WCDMA by five million units to approximately 180 million WCDMA handsets, reflecting stronger growth in Asia and the rest of the world.

Our regional summary of the updated handset forecast can be found on our Investor Relations web site.

We're also increasing our guidance for fiscal 2007 revenue and earnings per share.

We now expect fiscal 2007 revenues to be in the range of approximately $8.72 billion to $8.82 billion, an increase of 16% to 17% over fiscal 2006.

We anticipate pro forma diluted earnings per share to be in the range of $1.95 to $1.97, an increase of 19% to 20% year-over-year.

We now estimate the fiscal 2007 average selling price for CDMA2000 and WCDMA phones combined will increase modestly year-over-year to approximately $216 as WCDMA handsets become a larger portion of the total market and demand remains strong for increased handset functionality and wireless data capabilities.

We expect the combination of pro forma R&D and SG&A expense for fiscal 2007 to increase approximately 30% to 31% year-over-year.

Turning to our guidance for the fiscal fourth quarter of 2007, we estimate revenues to be in the range of approximately $2.15 billion to $2.25 billion dollars, an 8% to 13% increase year-over-year.

We estimate fourth quarter pro forma diluted earnings per share to be approximately $0.48 to $0.50, a 14% to 19% increase year-over-year.

This estimate includes shipments of approximately 65 million to 68 million MSM chipsets during the September quarter.

We continue to see strong demand across multiple product segments including CDMA2000 EV-DO, WCDMA and HSDPA.

We estimate approximately 90 million to 94 million CDMA-based handsets shipped in the June quarter, a 29% to 34% increase year-over-year.

Our unit forecasts reflect sequential growth for unit shipments in Europe, North America, Korea, and lower sequential shipments in Japan, China and India.

We estimate the average selling price at approximately $222.

We anticipate fourth quarter pro forma R&D and SG&A expenses combined to decrease between 5% and 8% as compared to the third quarter.

As a reminder, our financial guidance does not include an estimated $0.05 earnings per share and related revenue, which we estimate will be owed by Nokia for the fourth fiscal quarter of this year, though our CDMA-based handset forecast does include estimates for unreported activity.

Also in July, we concluded the sale of a manufacturing building that we have no future use for and will record an approximately $40 million gain on sale in our September results, which will be reflected in our fourth quarter operating expenses.

In closing, it has been another strong quarter of record financial results driven by the growing adoption of 3G CDMA technology around the world and continued strong execution in our business units.

That concludes my comments.

I'll now turn the call back to John Gilbert.

Thank you, 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.

Operator, we're ready for questions.

(OPERATOR INSTRUCTIONS) One moment, please, for the first question.

Mike Walkley from Piper Jaffray, please go ahead with your question.

Thank you very much.

First question is for Sanjay.

If you look at your historic range of guidance for your operating margins, you've hit the high end of the range.

How should we think about that going forward, if you could help us on the margin side of your business?

Mike, we have certainly had a very, very good quarter this quarter.

The range that we have established before, which is 25% to 32%, continues to be the operating range in which we plan -- we hope to bring our operating income.

I certainly won't apologize if we exceed that.

But our plan is to, again, stay in that 25% to 32% range.

Okay, great.

If I can ask a follow-up question for Bill.

A lot of moving parts here in the first quarter without Nokia and the injunction.

Can you walk us through with you taking up your macro guidance, and you say Nokia is a $0.05 impact how we go from the $0.55 this quarter to your $0.48 to $0.55 range?

Sure, Mike.

If we take the midpoint of that fourth quarter guidance, $0.49, and we walk $0.55 down to $0.49, $0.06 differential, number one, the major component is Nokia.

Obviously, we're anticipating that Nokia will not report for the fourth fiscal quarter.

So, that's $0.05.

The remaining $0.01 is tax.

Let me explain that.

We lowered our estimated effective tax rate for the year effective with the third quarter.

That added to the third quarter $0.02 of extra earnings.

So, without that improved tax rate, our results would have been $0.53, $0.01 above our guidance based on hitting the high end of our MSN guidance and royalty reports coming in a bit stronger.

Of that $0.02 improvement, approximately $0.01 related to a catch up for Q1 and Q2 as we lowered the effective tax rate estimate effective the third quarter.

$0.01 was for the third quarter alone.

Now, that $0.01 catch up in the third quarter from Q1 and Q2, obviously, that's not going to be in the fourth quarter.

So that basically walks you through that $0.06 differential; $0.05 to Nokia, $0.01of tax.

Thank you very much.

Edward Snyder from Charter Equity Research.

Please go ahead with your question.

I have a question for Paul.

Paul, how long do you expect the period of more intense litigation to last once you have (inaudible.) Also, have there been or do you anticipate any discussions regarding compensation for customers like Verizon incurring costs or payout in a settlement to Broadcom on this issue?

We have a number of things that are going on that could lead to continued litigation, whether it is the Nokia situation, which we've talked about their option period and which could possibly even extend beyond the option period.

Broadcom right now, we have one other case that has not yet commenced.

And then there's still the stuff going on relative to antitrust, and then, of course, the continuing things we've talked about already.

So, essentially, those things can -- could last over some reasonable period of time.

In discussing in terms of higher expenses, are you talking a quarter, two quarters, now that you're getting to the more difficult period?

Say that again?

You're referring to higher expenses or at least the exposure to higher litigation costs and uncertainties in that more intense period.

You're obviously referring to what's going on with the ITC case, what's going on with Broadcom, some of the settlements with your carrier customers.

You see that lasting through the end of the year or well into 2008?

I'm not looking for a resolution of all issues.

Of course there is a lot of outstanding, but in this period of more intense litigation, is that something that's going to happen through the rest of this year or do you expect it to go into '08?

There are different components to it.

So, for example, some our costs on the legal side have actually decreased.

But it can ebb and flow depending on how the litigation goes.

So, it is a little bit hard to predict.

It is also hard to predict because as these litigations -- as you get results, it also impacts the decisions made both by us and by the companies who are initiating the litigation where they would want to increase or decrease.

As an example, some of the things that we did on the Nokia side where we went into arbitration, I think that led to less litigation than we had anticipated or that other people had anticipated.

And so these various decisions can impact those costs in one way or another.

Now, clearly, you had asked about the carrier, our discussions with carriers.

We are here to work with our partners to try and minimize the impact to their businesses, but any of those discussions that we've been having are very preliminary at this point.

And so we're working through that over a period of time.

Clearly, we also continue to focus on things like workarounds and so forth, and so that could also impact a period of time over which, if we made some support to a carrier partner, it would impact the amount of time that that would happen.

Tim Long From Banc of America.

Please go ahead with your question.

Thank you.

A question for Paul and Steve, and then I might have a quick one for Bill after that.

Could you talk a little bit about the -- what you think the implications are from the various Broadcom decisions in Santa Ana and with the ITC as it relates to what's going to be coming down the pike with Nokia?

In other words, do you think the hard line that's been taken favors QUALCOMM relative to some of the GSM action against Nokia in the U.S., and what do you think the relationship is to any actions that Nokia may take against QUALCOMM on the CDMA side?

Yes -- this is Steve.

I think it clearly impacts our thinking and I think would -- should impact Nokia's thinking in terms of the potential downside of these various patent litigations.

The types of royalties that Broadcom is asking for for even one patent, I think, justifies and validates how reasonable our licensing program is.

And gives us, I think, greater strength of continuing that aspect of it.

But clearly, there's -- as with litigation, in any case, there is downsides for both companies and continued negotiations and discussions occur with Nokia.

There is still no significant progress that I can report to you.

But I think that our belief is that as we continue down our path with Nokia, certain things are going to happen in the litigation process that will cause the companies to get closer and closer together on a deal.

And I believe that as both of us kind of look to see how this litigation with Broadcom transpires, I think that impacts the various thinking.

Okay.

If I could just, for Bill, my preliminary math here shows that kind of the effective royalty rate, if you look at just the royalties as a percentage, did pick up in the June quarter.

If you could just let us know if that's the case, and how we should look at that royalty rate going forward and if it is moving up, what are the pieces, is it Sony Ericsson, is it less market development funds?

If you could just clarify that, that would be great?

Yes, Tim, it did tick up in the June quarter, at least based on the information we disclosed.

There are a couple of other variables in there we don't disclose.

But it did tick up from about 3.8% to 3.9%.

One of the factors in there was the $30 million payment from Sony Ericsson.

Looking into the September quarter, you do have a diversion there in terms of what we got -- what we disclose and now we're giving revenue guidance with -- without an assumption that Nokia will not report or pay.

Just based purely on the numbers we disclose, one would calculate a decrease in that effective royalty rate.

But if you take that $0.05 estimate, what Nokia owes us, and factor that up into revenue and royalties, you would find that the effective royalty rate we're expecting to stay constant into the September quarter relative to the June quarter, Nokia aside.

Tim Luke from Lehman Brothers.

Please go ahead with your question.

Thanks, very much.

Just a couple of clarifications then a question.

Bill, I was wondering if you might be able to give a sense of where the inventory was and where you see the channel inventory and what you may be targeting going forward?

And then for Steve or Paul, with following the Verizon/Broadcom arrangement, should we think about it being fairly logical, obviously, you perceived that in your release to be somewhat positive for the industry, should we perceive that other carriers may be likely to follow that structure?

And in the Verizon commentary, they suggested that beyond the current sort of issues at hand, there may be other suits pending and I was just wondering if you might have provided any color on what you felt they may be alluding to?

Was it just the Santa Ana process that Steve talked of or not?

Those were the couple of questions.

Thank you.

Tim, it is Bill.

First, on your inventory question.

So, we continue to see the total inventory channel for CDMA technology products to be continuing within the 15 to 20-week band.

Our most current estimates still have us at higher end of the band where we've been for now -- we think we've been for a few quarters.

Our estimates are based on a slight decrease in that channel in -- looking out into the current quarter.

But having said that, honestly, we're having some discussions here and the analysis going in as to whether there is just a -- the fact that there are so many more models and variety of handsets into the market, the range from high end to low end and the variety in between has grown so significantly that we're wondering if the 15 to 20-week band is going to continue to be a relevant guide looking forward.

So, we haven't completed or concluded that analysis, but there is reason to believe that what was normal in the past is -- could have ticked up a bit going forward.

In terms of the Verizon deal, obviously, we haven't seen that deal ourselves.

But it wouldn't be illogical for us to expect that other operators might talk to Broadcom, and in fact, I think Broadcom made some statements about how they were open to making similar type offers to others.

So, that's certainly possible and if you look at the history of the way licensing traditionally has been done, these kinds of things have happened upstream of the chip manufacturer.

In terms of comments about beyond the current issues, it is not clear to us exactly what they were talking about, but we think that they were talking about existing patent litigation outside of the ITC.

And so that would account for those statements.

Tal Liani from Merrill Lynch.

Please go ahead with your question.

Thank you.

I have one question and another question.

So, let's count it as one, on the same subject.

First, is when you speak with handset makers on workaround solution which is one of the ways for you to bypass, or to sort of resolve the ITC case, then you get very different views depending on who you speak with.

On one hand, the Samsung and Sprints of the world are telling you piece of cake, it is in the works.

It is coming.

It has already been and lapsed.

On the other hand, Verizon is clearly voting against it by signing this kind of deal because they're willing to shell $200 million to resolve it.

Can you take us through the process?

I understand you have nothing currently to say about it.

But can you take us through the process of the workaround solution?

What does it mean?

How long does it take to implement it?

Where is it in the process and a little bit more color on this issue?

Thank you.

Hi, Tal.

It is Lou Lupin.

I'll tackle that one or at least give it a shot.

When we talk about the ITC in particular and the patent involved in the ITC, I think as you've seen from a variety of comments made by us and others, that potential workarounds are, in fact, at different stages of acceptance and deployment with different manufacturers and different carriers.

And we have been emphasizing that there are -- there are commercial uncertainties, as well as legal uncertainties, with respect to a workaround and that's one of the very important reasons that we think the President should disapprove this it order because, although we may feel very strongly that a particular new design does not infringe, it is a question of acceptance by the manufacturers, by the carriers and then ultimately, there will be some kind of a process, no doubt in which that new design will face some is kind of a challenge.

Broadcom has made it very clear what their intentions are.

We think it is very, very likely that any new design that we propose would be subject to that challenge.

And I think as we've touched on the pass that that kind of a legal challenge for workaround can play itself out in a couple of places.

One would be at the Customs service which is charged with enforcing the order of the Commission, and in fact, has the authority in the first instance not only to enforce the order but to determine which handsets are within the scope of the order and which handsets and other products are outside the scope of the order.

And then if Customs is unable to resolve it, or if a party chooses to pursue a different path, the International Trade Commission itself can also consider that question.

So, there are multiple possible paths, timing is different depending on which path you're talking about, and in fact, depending upon when proceedings get initiated and who brings them and what happens.

So, it is a bit unpredictable in terms of trying to map out the expected time frames for a process.

And on the same subject, assuming the worst case scenario happens in the Court case, on the other patents or the other dispute with Broadcom and the Court case bans the importation of chips to the U.S.

that are based on your patent -- sorry, Broadcom patents, what are the implications?

Here we're not dealing with handsets, we're dealing with chips.

So what are the implications then if you would not be able to import any handsets, including to yourself, or to your customers to the U.S.?

If any?

This is Lou again.

Again, it is a fairly complex question because we don't have in hand any order from that Court and the question of whether an injunction should even issue is still open and then even if one should issue, what's the scope.

That Court will have to carefully consider the impact on others besides QUALCOMM.

QUALCOMM is the only party before that Court and any release that the Court could order would have to flow through QUALCOMM and be directed primarily at QUALCOMM and the only way others really get directly affected by the order is if, in legal terms, the legal terms are if they're acting in concert with QUALCOMM and there are a lot of requirements before you can find that some third party that was never present, never had an opportunity to defend itself meets that definition of acting in concert.

So, I think, to make a long story short, I think there is an awful lot of complexity here that has to sort itself out over the next few weeks and months as we move through the process in that case of having the judge consider whether an injunction is appropriate, and there will be an opportunity in the course of that process to better understand Broadcom's position to put our position out there and then ultimately get a ruling from the judge at the end of the day which we will then consider.

We'll certainly comply, but we'll also consider what alternatives, like alternative design, that leaves for us.

I should just add that in that case though, Broadcom -- shipments to Verizon should not be impacted.

It's our understanding.

Brian Modoff from Deutsche Bank.

Please go ahead with your question.

Yes, a couple of questions.

Is there any precedence from the Broadcom agreement with Verizon relative to your case, relative to fair and reasonable terms and what they're asking of you versus what they were willing to give to Verizon for that amount of money?

And then, Sanjay, any indication of what you think your 3G WCDMA market share is exiting the last quarter, thanks?

It's Lou.

U.S.

law is very focused on actual arm's length deals between patent holders and licensees for helping to determine what the fair value of patents are.

It is the primary factor that courts look at under cases going back for decades.

So, we believe that the true economics of the Verizon deal are very important to help gauge whether the previous offers that Broadcom had made to us were reasonable.

Clearly, they're unreasonable by any measure and, in particular, in light of the actual economics of the Verizon deal.

Can you -- is there a process you can engage in now to bring that into some of the legal proceedings?

I'm sorry.

Could you repeat your question?

Is there a process now that you can engage in to bring that agreement or that arrangement into the legal proceedings between yourselves and Broadcom?

It will certainly be a very important factor that the Court considers in the Santa Ana case as to whether an injunction should issue, for example, because I think Broadcom has demonstrated by agreeing to a license that includes a payment that when the caps are properly taken into account, it is probably a dollar or maybe even less than a dollar a unit.

They've shown not only what they think is an acceptable amount, but that they're not going to be irreparably injured, that they can be compensated by money.

And that's one of the very important tests as to whether an injunction should issue.

One of the primary things you have to show to get an injunction is one, that you'll be irreparably injured, and, two, that you can't be adequately compensated by money.

I think the Verizon deal cuts very sharply against both of those factors when you consider what they've done.

So, yes, we absolutely have the opportunity to introduce that evidence, and we think it should be an important consideration.

Brian, this is Sanjay.

With regards to my best understanding of Broadcom's market share and the UMTC chipset, I think, if I just go back to the iSupply numbers, they're in wireless at least not in the top five chipset providers, provider.

And I -- to the best of my knowledge, they're not shipping large volume as of right now.

I believe that there are some design activities that they have ongoing with some customers, but in terms of volume, my best understanding is that they're shipping extremely limited volume.

If I compare ourselves and our position in the market place in contrast, I think we're shipping high volume products in every single market place with a large number of customers, and maintaining our technology leadership both in terms of modem technology, as well as application process technology, as well as multimedia technology, and now with the introduction of Bluetooth and wireless LAN, and peripheral wireless connectivity also.

So, I believe that we're very well-positioned to, one, increase our market share and, secondly, increase our -- increasingly capture more of the silicon in the handsets.

So, I can't, with precision comment on their market share.

I don't see today that they're my top competitor.

But I think we're very well-positioned.

Mike Ounjian from Credit Suisse.

Please go ahead with your question.

Great.

Thank you very much.

First, Lou, you went through a number of the cases with Nokia, but I believe we got an update on the arbitration demands you brought earlier this year.

If we could just get an update on that process, and then, Paul, would be interested in your thoughts on some of the discussions in the EU about creating a mobile TV standard.

Seems to be going in the direction of DVBH and where you see that process today, and what that might mean for the future of MediaFLO outside the U.S.?

With respect to the Nokia arbitration, we have now arrived at a process for selecting arbitrators and that process is underway and we expect to have the arbitration panel in place in fairly short order.

And then once the panel is in place, we think that the procedure will start moving forward substantively.

The panel will set a schedule and, of course, we'll be pushing for a pretty aggressive schedule.

I suspect Nokia will be pushing for a delayed schedule and we won't know what kind of schedule we get, obviously, until the arbitrators order it.

That would be the next step.

With respect to the discussions in the EU on the mobile TV standard, obviously, we've all been watching those comments and also the responses to those comments.

And so I think that that is not firm and, in fact, there's discussions between EU authority over that and national regulators and I've had some discussions with various national regulators about those issues.

So, I think that the opportunity still exists for MediaFLO, and I think the fact that we've demonstrated substantially better performance of the MediaFLO system with third parties helps a lot, and you can see that there are other trials that are going on around the world.

So, in my opinion, the international momentum for MediaFLO continues to grow, and will we'll continue to follow these developments in the EU and hopefully they go in the right direction.

Great.

Thank you.

Mark McKechnie from American Technology Research.

Please go ahead with your question.

Yes, thanks.

Congrats on a good, solid quarter.

It looks like 3G is finally really starting to accelerate after a long period here.

So, good job.

I just want to get these numbers right here.

You said UMTS was up 78% quarter-on-quarter and 128% year-on-year.

Was that your chip shipments, Sanjay?

127% year-over-year.

79% quarter-over-quarter.

Those are chipset shipments, yes.

Wow.

And, I mean, with that kind of shipment, did you have some falloff -- I mean was there a weak part of your business at all or was this -- or what offset some of that strength?

I think, if you look at our operating profit, this was a record that we've hit in probably the last six to eight quarters, so as I look at our chipset portfolio, I'm extremely pleased with where we stand, and I would just like to point out that we're delivering these numbers with record investment in next generation technologies.

So, Mark, I think I'm very delighted with the execution that the team is delivering right now.

I'm just trying to find something wrong and I can't.

On the chip ASPs and margins were pretty strong, as well.

I mean is that -- on the ASP, I would guess a mixed shift toward UMTS or is this QSC ramping up or what's -- how should we look at the ASP uptick?

There are three things that go on which govern ASP.

One, is that in our business, there is a volume-based decline in pricing that we deliver to our customers.

Secondly, then it depends on the mix of low end, medium, and high end chipsets.

In that mix, there are two factors.

One, is whether it is DO chipset or whether it is low end 1x chipset, or whether it's high end UMTS chipset or low end.

The second one is the multimedia and application processor, so whether it's 7000 series or low end 6000 series.

The third thing that contributes to the mix is customer mix.

If we have a large customer shipping a lot of volume, then that tends to depress our ASP a little bit because they tend to get to higher volumes and lower prices faster.

But I would say a combination of all of these factors right now is looking pretty good for us and as a result of the success of 7000 series, we feel pretty comfortable that our ASP will remain relatively in a narrow band looking forward.

James Faucette from Pacific Crest.

Please go ahead with your question.

Thank you.

I had a couple of questions related to the accounting and the like, as well as the handset ASP.

The handset ASP on which you're able to calculate your royalties has remained amazingly stable for the last year.

I'm just wondering if you have any idea what that ASP might look like in constant currency, or constant dollar terms?

James, it is Bill Keitel.

We have had some favorable FX improvements in the last year or so.

The number is in single-digit percentage, though, in terms of the FX advantage that we've enjoyed here.

So, the stability is really more of a -- an increase in demand for handset functionality and data capabilities, number one.

And number two, the higher growth of the WCDMA market.

And then the question for Sanjay.

Sanjay, you indicated that you're, obviously, spending more on R&D now than really at any time in the past.

And I'm just wondering with the continued growth and strength of the chip business, if you are seeing opportunities for investment that are currently underfunded, or not funded at all such that you could further increase the R&D budget beyond maybe what -- beyond what you traditionally would have been able to -- as we go into next year?

This is Paul.

Sanjay always sees opportunity for additional R&D investment.

(laughter)

I don't know how to respond to that except to say that I'm very comfortable with the level of investment that we're making in our business, and what I have committed to you, to the investors, is that we will not increase our R&D faster than our revenue.

That we have a number of -- a large number of opportunities in front of us to grow our revenues and with the execution that we're seeing, we can certainly -- we could certainly invest in a number of other areas, but we're not intending to grow our R&D faster than our revenue in coming quarters and years.

John Lau from Jefferies & Co.

Please go ahead with your question.

Great, thank you.

You had mentioned that you hadn't seen the Verizon agreement.

In terms of the Verizon comments, it was clear to imply they'll probably be seeking the $6 from you.

My questions are, what is your position on that $6, and second part is did Verizon discuss this with you before they answered that agreement with Broadcom?

And, finally, I guess, this is the most difficult point is what is the legal implication or your liability/responsibility to someone that is probably two degrees removed from your customer base?

Thank you.

So, as I said earlier, we've had some preliminary discussions, but I just want to point out that if you look at the caps and the expected volumes over the time period, that deal is nowhere near a $6 per device deal.

And so while we've had some preliminary discussions, and I can't -- I couldn't put any numbers around any financial support we might be willing to give, $6 is not the right number.

Your final question comes from Ehud Gelblum from JPMorgan.

Hi.

Thank you very much.

Couple of quick questions, if I could.

One, is the three patents that were in the Santa Ana case, do you have workarounds pending for those patents, too, just in case as kind of a backup or have you looked at that in the backup scenario?

In addition, Lou, I think you mentioned that the -- that the offers that Broadcom had made to you for the ITC case were not reasonable and that the offer they made to Verizon sounded a lot more reasonable.

Are they under obligation for that patent to be reasonable at all?

I don't know if actually they have a [fran] commitment on that patent or not.

Bill, when you look at the tax rate, the incredibly shrinking tax rate, not just with you guys but a lot of companies in our sector, how low can that go?

Does it stay down at that rate?

You mentioned it was from a mix of international revenues.

How should we look at that and is it a 20%, does it break through 20%?

What other kind of moving parts on taxes going forward?

Ehud, hi, it is Lou.

I'll take the first two questions.

We look at all of our options whenever we're confronted with any claim of patent infringement and, obviously, as the claims either become more serious, or in this case, are vindicated at least at the trial court level.

We increase the level of effort that we put into all avenues.

So certainly we're very carefully looking at alternative designs with respect to all of those patents just like we did with respect to the ITC case.

Again, the same complexities are associated with implementing workarounds, including commercial acceptance, technical acceptance and continuing legal uncertainty about acceptability.

But having said that, yes, we're certainly putting very significant effort into pursuing all avenues and that would include workarounds as well as alternatives.

With respect to the second question, the particular patent in the ITC has never been declared by Broadcom or any of the predecessor owners as essential to any standards body.

However, the way in which they construed it and attempted to read it on our products in the litigation actually raises a very interesting question about whether, in fact, they do consider it to be essential and, therefore, failed to declare it and did not live up to their obligations to the relevant standards bodies.

And it is quite possible that that will be a subject of future litigation and it is not an issue that was raised in the ITC, however.

So, it would not necessarily be right now under a [fran] commitment but you think you could perhaps interpret it to be under a [fran] commitment?

If, in fact, it is essential and at least, again, with respect to some of the products in the ITC, they attempted to read it on the standard.

If, in fact, it is essential, it would be subject to a [fran] commitment whether they've made the declaration to the relevant standards body or not, but, frankly, that's an open issue presently because they have not made a declaration.

So, we would have to proceed through some legal channel to establish that, in fact, they had an obligation and, indeed, if they had an obligation and they didn't fulfill it and it was a knowing failure to fulfill, that might, in fact, affect the enforceability of the patent.

But these issues are not currently pending in the ITC case.

Ladies and gentlemen, we've reached the end of our time.

Excuse me, operator, one more question very quickly.

The tax question, Ehud, I think you're aware, QUALCOMM, we have an offshore operation and then a domestic operation.

A simple way to think of it is the chip business is primarily offshore, taxed at a fairly low rate and the onshore operation is essentially the licensing business taxed at a full rate.

So, the relative mix of the two net income of the two is what is a major driver on the tax rate.

Business mix aside, there is a modest further opportunity to improve the tax rate, but I would say it is fairly modest.

And we have now reached the end of the allotted time for questions and answers.

Dr.

Jacobs, do you have any closing comments?

Yes.

I am very proud of the results that we delivered this quarter.

And while it is true that increased uncertainty has been introduced into our future business results by the legal issues, fundamentally, our businesses continue to execute extremely well, and I would say that we're even more focused on working closely with our partners going forward to ensure that we can bring the best technology to the wireless market and the best possible results to our shareholders.

So, thank you, everyone.

Ladies and gentlemen, this does conclude today's conference.

You may now disconnect.