高通 (QCOM) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm fourth quarter and fiscal 2008 conference call.

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

Later we will conduct a question and answer session.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded November 6, 2008.

The playback number for today's call is 800-642-1687, international callers please dial 706-645-9291.

The playback reservation number is 67351049.

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

Mr.

Gilbert, please go ahead.

Thank you, and good afternoon.

Today's call will include prepared remarks by Dr.

Paul Jacobs, Steve Mollenkopf, and Bill Keitel.

Steve Altman, Len Lauer, Don Rosenberg and Derek Aberle will join 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 website.

I would also direct you to our 10-K and Earnings Release which were filed and furnished with the SEC today and are available on our website.

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.

I would also like to remind our listeners that our New York Analyst Day is this coming Thursday, November 13.

The Analyst meeting will be webcast for those of you unable to attend and now it is my pleasure to introduce Qualcomm CEO, Dr.

Thank you, John, and good afternoon, everyone.

I'm very pleased with the performance of our business this past year, particularly the strong execution of our chipset business and our successful settlement with Nokia.

While we continued to see strong growth in 3G CDMA, the current macroeconomic conditions and potential for further economic slowdown creates an uncertain business environment for the next few quarters.

Before I comment further on our business going forward, I would like to highlight what was a very successful fiscal 2008 for Qualcomm.

We had three important transitions in our executive team this past quarter.

I'm very pleased to welcome Len Lauer as Chief Operating Officer, Steve Mollenkopf as President of QCT, and Derek Aberle as President of QTL.

We look forward to their continued contribution and leadership in these new roles.

In fiscal 2008 we achieved record pro forma revenues up 25% year-over-year, record pro forma earnings per share up 12% year-over-year, and our operating cash flow remained strong at 32% of revenues.

Our fourth fiscal quarter includes revenues and earnings per share related to our completion of the settlement and license agreements with Nokia.

In addition, the quarter also includes impairments of our marketable securities portfolio that are related to the impact of the recent disruption in the financial markets.

The GAAP year-over-year comparison is also affected by a one-time tax benefit in the fourth quarter of fiscal Year '07.

As of the end of October out of a total treasury portfolio of approximately $13 billion, we had approximately $1.3 billion in net unrealized losses on marketable securities which could result in additional impairments if financial markets do not improve.

These potential impairments are excluded from our guidance as global financial markets are too volatile to predict in the near term.

Over the last year we have consciously improved the defensive posture of our portfolio, including a significant movement from equities to short-term debt.

And in addition, the recent $2.5 billion payment from Nokia has been placed in short-term instruments.

Bill Keitel will comment in more detail on our investment strategy but we remain very well positioned with a strong balance sheet and operating cash flow.

In fact, this fiscal year, we returned a record $2.65 billion of capital to our stockholders through our dividend and stock repurchase programs and through the end of fiscal 2008, we have returned over $9.2 billion of capital to our stockholders.

Some of our key business highlights in fiscal 2008 include a record $336 million CDMA baseband chips shipped by QCT, an increase of 33% from the prior year.

QCT also achieved important product and technical milestones that Steve Mollenkopf will cover in more detail later in the call.

In our licensing business, we completed our settlement and licensing agreements with Nokia which we believe will benefit both our companies and the broader wireless industry for years to come.

We now have over 155 licensees including over 95 W-CDMA and TD-SCDMA licensees.

We also continue to make progress in signing single mode OFDMA licensees and now have eight royalty bearing single mode OFDMA licensees including with Nokia and one other major handset OEM.

We continued our technical leadership with implementation of base station interference cancellation to significantly improve the uplink performance of CDMA networks.

This innovative feature will be available in upcoming EV-DO CSM products in 2009.

Just a few weeks ago, Telstra in Australia announced it performed HSPA+ interoperability testing in their network using our HSPA+ chipset solution.

With respect to LTE our R&D efforts continue to remain on track with plans to sample our multi-mode 3G LTE chips in the second quarter of 2009.

Turning to fiscal 2009, we anticipate the challenging global economic environment will impact our business and industry, as well as many other companies around the world.

I thought it would be helpful to share how we were thinking about the business prior to the recent unprecedented events.

This past August, our internal planning process, driven by our views with the global macro environment at that time viewed our pro forma EPS target of approximately $2.60 per share for fiscal year 2009.

However since that time, and specifically during the last several weeks, we have received information from our customers and industry partners that have led us to lower our estimate substantially.

We're seeing a very significant contraction in channel inventory which is impacting demand for our chipsets.

Our chipsets shipment estimate for the first quarter of fiscal 2009 is 60 million to 65 million units down from 86 million in the previous quarter.

Now, we've incorporated a significant amount of information in our modeling efforts, including comparing the current economic environment to previous downturns, such as the downturn and resulting rebound in 2001.

Our current view is that the reduced inventory levels projected are not sustainable and therefore, we are forecasting a modest recovery of inventory levels in the second half of the year.

While we are estimating strong growth for CDMA based devices in calendar year 2009, driven by a shift to emerging markets, this growth is less than we would have forecast several weeks ago.

We're also expecting the average selling prices of CDMA base devices to drop below $200 as a result of the emerging market growth, as well as the impact of a strengthening dollar in some markets.

While we expect our operating expenses to grow in fiscal 2009, it is at a significantly lower rate than previous years and is primarily due to the carryover of resources added in fiscal year 2008.

We have built a very strong research and redevelopment team and believe we can leverage our past investments to address the market opportunities ahead, while also continuing to invest to outpace our competitors.

Specifically, we put in place a cap on new resources for fiscal year 2009.

In order to manage to this cap, we've worked across the Company to prioritize our investments and move resources among projects.

Now this has been and will continue to be an ongoing process.

A highest profile example is the cancellation of our UMB commercial development and reallocation of those resources into accelerating LTE and LTE Advanced.

We will continue to make strategic investments in long term programs to capitalize on opportunities we see in new geographies, with new partners, in new devices such as mobile computing and network consumer electronics, and in new applications of wireless technologies.

As the market leader we can adapt to the changing economic conditions and make the appropriate investments to enhance our leadership in the marketplace and emerge from these challenging times in a stronger competitive position.

Despite the current economic conditions, we continue to remain positive about the future of 3G.

According to the CDG and the GSA, there are over 500 CDMA based 3G networks that have been launched as of October 2008, and operators continue to deploy HSUPA and EV-DO Revision A.

Over 800 HSDPA devices and over 525 EV-DO devices have been introduced into the market cumulatively.

In addition, nearly 100 HSUPA devices and over 90 EV-DO Revision A devices have been introduced for subscribers to utilize the latest in mobile broadband networks.

As a result of the broad 3G network deployments and wide variety of feature-rich and competitively priced devices worldwide, 3G subscribers grew 33% year-over-year according to Wireless Intelligence.

As of September, there were over 705 million 3G subscribers and it's forecasted that this number will grow to 1.6 billion by 2012.

In addition, Strategy Analytics estimates that for the December to June quarters, the total handset market grew 14% year-over-year.

And in particular, CDMA based handset unit shipments grew 27% year-over-year compared to just 9% growth for GSM.

While we are seeing some trends emerge as a result of the economic climate such as inventory contraction.

Operators re-evaluating their device subsidy strategies and lower replacement rates, there are also many positive trends.

In developed markets we continue to see strong demand for smart phones and connectivity for computing devices.

Data revenues continue to represent a key growth driver for operators, as consumers' appetite for internet access, multi- media messaging and value-added services increase.

In developing markets where 3G has been deployed, we are seeing 3G help serve unmet demand for broadband access.

The world's two largest wireless markets, China and India, represent significant growth opportunities for 3G.

Once 3G licenses are assigned and networks are deployed, we expect technology competition between operators and consumer demand for mobile broadband will benefit the industry and our business.

In the difficult economic conditions we're facing today, we will likely witness companies cut back on R&D investments or look to exit businesses to compensate for lack of scale or traction.

Our scale, solid balance sheet, and strong operating cash flow, provides us the unique ability to continue to improve our technology leadership and competitive positioning that will further drive earnings growth as we exit this downturn.

We will provide further updates and additional details at our Analyst Day in New York on Thursday, November 13th and we look forward to seeing you there.

That concludes my comments.

I will now turn the call over to Steve Mollenkopf.

Thank you, Paul.

This has been an excellent quarter and a great year for QCT.

I would like to share the highlights.

We shipped approximately 86 million chipsets in the fourth quarter of fiscal 2008, representing a 26% increase year-over-year.

For the entire fiscal year, we delivered a record 336 million chipsets which represents 33% growth from fiscal 2007.

QCT's fiscal 2008 revenues were also at record levels for the year and reflects growth of approximately 27% over fiscal 2007.

Our forecast assumes our MSM shipments for the next few quarters will be impacted by significant contraction in channel inventory.

We believe this inventory contraction is driven by the current macroeconomic conditions and not a shift of market share.

Our CDMA 2000 product portfolio continues to perform well, with the volume being helped by our high end MSM 7,000 Series chipsets.

This trend also helped QCT to maintain consistent average ASPs in a price competitive environment.

CDMA 2000 EV-DO shipments increased 8% sequentially and 19% on an annual basis for the fiscal 2007 to fiscal 2008.

Our QSC single Chip Solutions for CDMA 2000 are making strong inroads in emerging Markets.

More than 20 customers have launched over 50 handset models.

We expect our single chip customers to launch over 30 more new handset models in the near future.

Finally, we shipped a record number of CSM base station channels this past quarter which indicates the CDMA 2000 ecosystem that we expect will continue to expand.

Our UMTS products also continue to gain traction as we solidify our strong position with WCDMA, HSPA, and HSPA+ technologies.

Our UMTS shipments grew by 11% over the previous quarter and more than doubled in fiscal 2008 as compared to 2007.

Market traction for our single chip UMTS products continues to be strongly driven by worldwide migration of 2G users to 3G.

There are currently 31 handsets in design by over 10 customers based on our QSC solutions.

Our MDM8200 product for HSPA+ will be used for trials by multiple network operators around the world and we made the world's first HSPA+ data call using that chipset this past summer.

The smart phone market segment continues to grow and we are experiencing strong traction for our dual core solutions across multiple software platforms, such as Windows Mobile, Android and Linux.

This past quarter our close collaboration with the Open Handset Alliance to enable support for Android on our dual core chipsets came to fruition with the launch of the T-Mobile G1.

The G1 is the first Android based handset to become available and its based on our MSM7201 chipset.

Likewise, Sony Ericsson recently launched the Experia Windows Mobile Smart Phone in several European markets.

This device represents our first UMTS design with Sony Ericsson in commercial production.

We continue to work very closely with our handset manufacturing partners to bring additional Android and Windows Mobile handsets to market.

We are pleased with the progress we have made in gaining share in W-CDMA and our addressable market has recently expanded.

While we believe we are well positioned to win new business in the future, winning new business with manufacturers who have an entrenched chip supplier is a lengthy process.

Laptops with QCT's Gobi module, delivering embedded 3G connectivity are now commercially available to customers.

Five leading laptop manufacturers, Acer, Dell, HP, Lenovo, and Panasonic have announced their plans to use Gobi, with several models already available for purchase today.

Meanwhile, the number of network operators who have certified Gobi also continues to grow, with AT&T announcing this past quarter that they have certified Gobi notebooks for their network.

Progress continues for our Snapdragon platform.

Our expanding customer base is composed of many non-traditional wireless players who are new to QCT and new to the wireless space.

We are looking to enhance our Snapdragon road map and will provide further information on our plans for Snapdragon in the coming weeks.

Fiscal 2008 has been a very successful year for QCT and we have reached many product and business milestones.

I believe the fundamental strategies that have brought QCT this far, technology leadership, focus and scale in wireless, and investing in a product portfolio across multiple technologies, will help us continue our success in the future.

I look forward to meeting many of you next week in New York.

Thank you, and I'll turn this call over to Bill Keitel.

Thank you, Steve, and good afternoon, everyone.

I'll begin with a review of our results.

GAAP earnings for fiscal 2008 were approximately $3.2 billion and revenues increased 26% to a record $11.1 billion.

Pro forma earnings for fiscal 2008 grew 12% to a record $2.25 per share and pro forma net income grew 10% to a record $3.7 billion.

Pro forma operating income grew approximately 27% year-over-year to a record $4.6 billion.

Pro forma net investment income was $80 million for fiscal 2008, down significantly year-over-year, due to a $502 million charge in other than temporary impairments, offset by $582 million of other investment income.

$327 million of these impairments or approximately 3% of our portfolio's value occurred in the fourth fiscal quarter.

Except for approximately $95 million of impairments related to Fannie and Freddie Preferreds, Lehman and Washington Mutual Bank, all other impaired fixed income securities continue and we expect to continue paying interest in principal.

Over last year, we've increased the defensive posture of our investments by reducing equities, moving more than a billion dollars from prime money-market funds to government funds and investing our more recent significant cash flows into government funds.

Approximately 85% of our cash and marketable securities are invested in fixed income securities of which approximately 55% is in money market securities.

Our business continues to generate strong cash flows.

Operating cash flow for fiscal 2008 was $3.56 billion or approximately 32% of revenue.

During fiscal 2008 we've returned approximately $2.65 billion capital to our shareholders.

This includes the payment of $982 million in cash dividends and the repurchase of 43 million shares of our stock for $1.67 billion.

Although we have an existing stock buyback program, which we primarily execute through a 10b5-1 Plan, our interest in stock buybacks increases when domestic cash is greater than $4 billion, which in turn may cause us to reconsider the rate of repurchase as well as the size of the repurchase program.

As of last week, our domestic cash was approximately $6.5 billion.

QCT shipped a record 336 million MSMs in fiscal 2008 and recorded a 27% operating margin on the volume ramp, particularly in EV-DO and W-CDMA.

Our licensing business also performed well as QTL's operating margin was 87% for fiscal 2008.

We estimate that approximately 119 million CDMA devices shipped in the June quarter, driven primarily by sequential W-CDMA growth.

We estimate the average selling price of CDMA devices was $216 for the June quarter and $219 for the fiscal year.

Fiscal year was up approximately 2% year-over-year.

The year's average ASP of 219 was positively impacted by a weaker dollar during the year and this impact we estimate at approximately $13 average ASP.

During the fourth quarter we recognized $560 million in licensing and royalty revenue and approximately $0.20 earnings per share from the Nokia agreement, attributable to both fiscal 2008 and 2007 activity.

The agreement includes, among other things, the nonrefundable up front payment of $2.5 billion received in early October, ongoing royalties and the assignment of patents valued at $1.8 billion and recorded in intangible assets.

At the end of fiscal 2008, unearned revenue attributable to the upfront consideration of the Nokia agreement was $3.9 billion, which will be recognized over the approximate remaining 14 year term of the license agreement.

The value of the patents assigned to us last month will be amortized on a straight line basis to licensing cost of sales over their estimated useful life of approximately 15 years.

The fourth quarter of fiscal 2008 includes six quarters of revenue amortization and the resumption of royalties for the second half of fiscal 2008.

While the value attributable to the patents is recognized as revenue in the same manner as the up front cash payment, the amortization of the patent asset will not commence until the first fiscal quarter of fiscal 2009 and due to this differential in the accounting, no cost of revenue was recognized in the fourth quarter related to these patents.

The effect of this differential was a positive contribution of approximately $0.06 earnings per share for the fourth quarter and fiscal 2008.

However going forward, the recognition of revenue related to the patent value and the cost of revenues from the amortization of the patent assets will largely offset, resulting in only a moderate impact on earnings.

Turning to our forward guidance, we now anticipate fiscal 2009 pro forma earnings to be approximately $2.00 to $2.10 per share.

As Paul indicated in his opening remarks, in August we are targeting fiscal 2009 budget of approximately $2.60 pro forma earnings per share.

In September, based primarily on a reduced outlook for the 2009 CDMA market, our forecast had reduced to approximately $2.42 pro forma earnings per share.

In recent weeks, it's become apparent we are in the midst of a rapidly changing macroeconomic environment that is driving conservative market behavior and resulting in a significant channel inventory contraction.

We believe carriers and OEMs are reducing and we expect to see them further reduce their inventory of CDMA devices and chipsets as a defensive measure in response to the current economic slowdown.

We expect an approximate five week contraction from September 2008 through March 2009, from approximately 19 weeks of channel inventory down to approximately 14 weeks of channel inventory.

This latest forecast in inventory contraction and further weakening economic outlook has meaningfully reduced our earnings expectations for fiscal 2009 to our current guidance.

Incorporating the uncertain economic environment as well as the inventory channel contraction for calendar 2008 CDMA market we now expect approximately 475 million to 485 million CDMA base devices to be shipped, including approximately 267 million W-CDMA devices.

We estimate the replacement rate for 2008 will be approximately 42% down modestly from our prior estimate of 43%.

Based on the 480 million mid point of our estimate, worldwide CDMA device shipments for calendar 2008 are anticipated to grow approximately 26% year-over-year.

We estimate that the calendar 2009 CDMA device market will increase approximately 25% over 2008 with shipments of approximately 580 million to 620 million units.

Based on the 600 million mid point of our 2009 estimate, we anticipate shipments of approximately 230 million CDMA 2000 units and approximately 370 million W-CDMA units, and reflecting a meaningful mix shift of lower cost devices from developing markets as compared to 2008.

We estimate the CDMA replacement rate for 2009 will be approximately 40%.

Based on the current business outlook, we anticipate fiscal 2009 revenues to be in the range of approximately $10.2 billion to $10.8 billion down 3% to 8% over fiscal 2008 and we anticipate pro forma earnings per share to be in the range of $2.00 to $2.10.

We estimate fiscal 2009 pro forma operating income will be between $3.7 billion and $3.9 billion, a decrease of approximately 15% to 20% year-over-year.

For our fiscal 2009 guidance, we have excluded possible and additional impairments from securities with unrealized losses, consistent with our prior practice, and due to the inherent uncertainty in volatility in the global financial markets which makes forecasting potential future impairments very challenging.

As of last week we had approximately $1.3 billion in unrealized losses, which could result additional other than temporary impairments if market conditions do not improve.

Nevertheless, we have the intent and ability to hold a vast majority of these securities and we expect their value to recover.

We estimate average selling prices for CDMA 2000 and W-CDMA devices combined will decrease approximately 11% in fiscal 2009 to approximately $195, driven by a greater mix of lower cost devices as well as a strengthened dollar and we see the strengthened dollar driving approximately four points of the 11% decline and that four points would be about $9 of ASP.

We anticipate pro forma R&D and SG&A expenses in total to increase approximately 10% during fiscal 2009, reflecting subdued hiring levels, optimization of existing resources as well as a reduction in legal expenses.

The great majority of the estimated 10% increase represents the annualized expense rate of our employee base as of the end of fiscal 2008.

I would also note that the 10% increase is heavily weighted toward R&D.

The anticipated channel inventory reduction will distort our operating expenses of percent of revenue for the first two quarters of fiscal 2009.

We expect this to improve in the second half of the fiscal year to a more normalized level, although we'll continue to closely monitor this and press for further business efficiencies.

We have budgeted for business defense costs of approximately $200 million in fiscal 2009 as compared to well in excess of $300 million for fiscal 2008.

We anticipate our pro forma tax rate in fiscal 2009 to be approximately 20%.

We estimate our GAAP earnings per share will be approximately $1.61 to $1.71 for fiscal 2009.

This includes an estimated loss of approximately $0.14 per share attributable to QSI, as well as approximately $0.25 per share attributable to estimated share based compensation.

Turning now to the first quarter of 2009, we estimate shipments of approximately 60 to 65 million MSM phone chips during the December quarter, down sequentially reflecting the significant reduction in channel inventories.

We estimate that 121 million to 126 million CDMA base devices shipped in the September quarter at an average selling price of approximately $205.

We estimate revenues will be in the range of approximately $2.3 billion to $2.5 billion.

We estimate first quarter pro forma earnings per share to be in the range of approximately $0.46 to $0.50.

I would note that our estimate of the channel inventory contraction has an estimated earnings impact of approximately $0.14 per share in the first quarter.

We estimate the first quarter pro forma operating income will be between $800 million and $900 million.

We expect total Company pro forma R&D and SG&A expenses combined to increase sequentially approximately 1% in the first fiscal quarter.

We look forward to seeing many of you next week at our annual Analyst meeting at which time we'll share more details on our forward plans.

That concludes our remarks.

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

Thank you, Bill.

Before we go into our question and answer session, I'd like to remind our participants that our goal is to address as many questions as possible before we run out of time on this call.

Please limit your questions to one per caller.

Operator?

We are ready for questions.

(OPERATOR INSTRUCTIONS).

Maynard Um from UBS, please go ahead with your question.

Hi, thanks.

Presumably, there isn't a whole lot of visibility out there one year out and just curious when you look at the numbers now how conservative or aggressive do you think your guidance might be because you're looking for fairly good handset unit growth in 2009, but kind of implied a much weaker chipset even taking into account the inventory correction, it seems like there might be a disconnect.

Are you overly conservative on the chipset side or how comfortable or how much visibility do you have to the handset side?

Thanks.

Maynard, these estimates we've given are our best estimates.

We aren't attempting to be conservative here.

The inventory contraction will have a significant impact on MSM shipments.

We expect that will be largely limited to the first two quarters of fiscal 2009.

In terms of fiscal 2010, I would add that under Paul's direction and his caps on our headcount and resource growth that we first took a careful look at 2010 and updated that outlook in line with the goal of targeting our R&D programs so that we end up where we want to be two and three years from now, and not overly focus on an inventory contraction here for the first two quarters.

Glen Yeung from Citi, please go ahead with your question.

Hi.

So this is Peter Karazeris for Glen Yeung.

Your 2009 handset ASP assumption of $195 down 10.5%, can you give us a sense of kind of the run rate of how that would come through the year?

In other words, is it a relatively steep decline in the beginning and then we kind of flatten out or is there a way that or does that decline somewhat steadily.

And I guess really in the same vein, as we began this year, you'd guided to $199 and had upside to the year.

Can you give us some of the puts and takes around that ASP number, what would be upside and what would be downside?

Thanks.

Okay, Peter.

So we think we're coming off of fiscal Q4 at about a $216 ASP and our estimate for the first fiscal quarter is $205.

I'll share with you that the $216 to the $205, we estimate approximately $9 of that is due to the stronger dollar and I would add I think we have pretty good visibility on that given that the exchange rates with our licensees was set at the end of September.

So we're coming up, I think we're starting the fiscal year, the handset ASP of $205.

From there, there will be puts and takes from quarter to quarter but in general, what we do see is a greater growth in developing world relative to developed world as compared to what we were expecting just recently.

And that developing world obviously, they're looking for a less expensive handset and of course, that's fulfilled largely with our lower end chipsets as well.

So I would say we did have a favorable ASP for fiscal 2008 relative to the expectations at the outset of the year.

A large element of that was the weaker dollar which at the outset of the year we hadn't anticipated and then number two, a pretty strong trend much stronger than we expected to smart phones.

I think that the run rate we've got here and the interest in smart phones, I think we've got that pretty well sized.

I hope there's upside but I have to say I think these are our best estimates at this time.

Thank you.

Ittai Kidron from Oppenheimer, please go ahead.

Thank you very much.

First a question for you Bill, taking the high end of your operating income guidance for the first quarter and your EPS range, does that mean you expect a strong rebound in interest income, and the second question is to Steve, on the chipset side.

Can you give us more color on first of all how do you expect chipset ASPs to behave through '09?

I assume that the operating margin QCT is going to get significantly contracted just given the inventory correction but if you can clarify on the inventory correction whether this is a pure chipset inventory or you also see a strong handset inventory.

It wasn't clear in the commentary whether this is something that your customers need to correct or something that you need to correct with your new customers.

Okay, I'll start, this is Bill Keitel.

I'll offer my perspectives on both your questions and let anybody else here chime in.

On the investment income for fiscal Q1, the guidance does include, I think a rational rate of investment income and as compared to the fiscal 2004 actuals, I'll try and be, I'll try and be extra clear.

In fiscal 2004 actuals we had a $327 million charge for other than temporary impairments and in the guidance for the first fiscal quarter, I have not included an estimate of impairments as traditionally I never have.

I wish I could have better visibility on that to give some kind of indication but the volatility in the market is such I just don't feel capable of doing so.

So there is a risk of less investment income than what is contained in that EPS guidance, but we're just going to have to see how the quarter progresses.

I would add that then on the, on your question on the inventory, I'll take the first stab at that.

Our estimate of channel inventory is from a time an MSM ships to the time a handset is in the hands of a subscriber.

So it covers the OEM cycle, the carrier cycle, the distributor cycle.

So what we believe we're seeing is everybody in the chain to one degree or another trying to reduce the amount of inventory they're holding given the uncertain economic environment.

We see them all taking a defensive posture.

So that reverberates back into our chipset business because to some degree carriers and/or distributors are looking to reduce their inventories which puts pressure on the OEMs, the OEMs as well we think are trying to reduce their inventories so it gets magnified into our chipset business.

And for the ASPs?

I think with regard to ASP, the first quarter I think we expect to see a similar trend to what we saw in the fourth quarter of last year which was a continued strong movement toward the higher end mix, as we said in our prepared remarks.

I think in the second half of the year consistent with what Bill said, it's fairly difficult for us I think to predict what the mix is going to be, and I think that's something that we really don't have as much visibility into at this point.

Our next question is from the line of Tim Long from Banc of America.

Please go ahead with your question.

Thank you.

Just a two-parter here on Nokia and the impact.

Thanks for breaking out the splits of the one-time payment.

Just curious when you look at the impact of Nokia on the fiscal '09 estimates compared to the range that you gave the day of the announcement, did that change at all?

In other words did that change given better visibility into their units and ASPs.

And then the second part, Bill, could you just discuss for us a little bit how we should think about the effective royalty rate on the business if we're going to exclude out the amortization of the $3.9 billion.

How should we think about the effective royalty rate on ongoing CDMA W-CDMA shipments?

Thank you.

Okay, Tim.

First, on Nokia, back in July when we announced our fiscal Q3 as well as announced that early stage we were at on an agreement with Nokia.

At that time, we had estimated that fiscal 2008 would improve EPS improvement would be in a range of $0.07 to $0.13 and then we estimated fiscal 09 in a range of $0.20 to $0.28.

Fiscal '08, obviously as I just stated, came in at $0.20, so not only do we hit the high end but we went above, and that was largely due to the accounting of the patents that we received from Nokia.

Within our current guidance right now, for fiscal '09, given the results of the Nokia agreement, we're now at the lower end of that prior guidance, so we exceeded, well exceeded the range for our guidance on fiscal '08.

We're at the low end of our prior guidance for fiscal 2009.

Okay, and what brings you down there, Bill?

It was really sizing the forward royalties and then to this patent cost, the $1.8 billion, revenue and cost for the full 15 year period will both equal $1.8 billion.

The accounting required the revenue to start earlier than the cost, and so we had that $0.06 pick up in fiscal '08.

That $0.06 pick up will now over the next 15 years be amortized, will revert back, and so part of that is impacted, is bringing down the FY '09 estimate.

I would also add, Tim, I think everybody recognizes that it was -- we had a very short interval back in July to get through the agreement and our estimates.

And it was very preliminary at that time, and then as well, of course, we're now looking at a very significantly smaller market than what we were back in that July time frame.

As I said in the August time frame, we were looking at earnings per share target for fiscal '09 in the $2.60 range and here we are looking at $2.00 to $2.10 so I think the smaller market is probably one of the

Mark McKechnie from Am Tech.

Please go ahead with your question.

Great.

Thanks.

I appreciate it.

I wanted to ask about the chipset kind of recovery.

It seems like you're dropping off.

You're getting hit by inventory, but do you expect chipsets to bounce back up in kind of the 70 million level there in the June quarter or the September quarter or how do you see them bouncing back?

Thanks.

We've looked carefully at the times in the past when we have seen inventory corrections and we've reached out to a lot of our contacts within the total chain to get our best handle on what we think is going to happen in this contraction.

We think this is going to be a much faster contraction.

It's going to happen a lot quicker than what we've seen in the past, and I think we have -- I feel like we got pretty good insight on that, so we see this happening over the next two quarters.

As I said, we think it's going to drop just a little bit below the historical normal average of 15 weeks to 20 weeks.

Then, from there, we're projecting a modest increase in that channel inventory coming out of the fiscal year in the range of about 17 weeks, so a little difficult to say for sure but I feel reasonably good about that estimate at this time.

So once that inventory channel stops contracting, then I think we see a more normalized MSM shipment level.

I don't think we want at this time to get into unit estimates out in that time frame.

We will be sharing more about our forward plans next week in New York.

But I would just point you back to what I said in my prepared comments that operating expenses we think are going to be distorted as a percent of revenue here for the next two quarters and based on our plans, we see a more normalized level.

That is, operating expense as a percent of revenue in fiscal Q3 and fiscal Q4.

And that's because you're expecting a pretty big bounce back in fiscal Q3 I'm assuming in revenues, right?

It's not because you're going to cut expenses.

Once the inventory contraction stops, then I think we'll see our chip shipments getting back to a more normalized level pretty quickly.

Got it.

Thanks.

We will obviously we're going to watch this, these are all projections based off of models that we had from previous years.

We don't think the inventory levels are sustainable over the long term.

But of course, we'll watch and we have contingency plans if we don't see the recovery happen.

If it takes an extra quarter or something like that, we will look at other ways of reducing costs and we're going to continue to do that throughout the year.

Ehud Gelblum from JPMorgan.

Please go ahead with your question.

Thank you very much, guys.

Clarification on a couple things, Bill, first.

The 10% uptick in OpEx you're expecting for '09, does that include the amortization of the $1.8 billion Nokia patent or which is three quarters of that would be about $100 million or is that in COGS and not in part of the OpEx uptick.

And then was that $1.8 billion that you paid to Nokia, did you actually pay that, was that a cash payment so on a net basis you got $700 million, I'm just trying to understand how that works.

Okay, yes, Ehud, in terms of the OpEx, that does not include patent amortization.

The patent amortization is in cost of sales, and there was not a cash transfer with the patent transfer.

So a $2.5 billion payment to Qualcomm.

Okay, that's actually very helpful.

And then a more fundamental question.

When you're talking about going from 19 weeks of inventory in the channel to 14 weeks, would the 19 weeks based on your prior shipment record of about 86 million per quarter which translates to about 6.5 million chips per week or is it based on the new level of 60 million to 65 million which is $4.5 million to $5 million a week or is the 19 based on the higher number and 14 based on the lower number?

Just trying to get a sense of how many chips were sucking out of the channel in the next couple quarters.

Yes, the 19 is based on take our current estimate for the CDMA unit market for the latter part of calendar 2008.

Divide by 52 and that's what we see as a week's equivalent.

And then for the 14 weeks, again, that would be now our calendar 2009 unit estimate, divide by 52 and that would be a week's equivalent.

And our MSMs are just a piece of that total channel.

James Faucette from Pacific Crest.

Please go ahead with your question.

Thank you very much.

Looking at your unit forecasts for next year, I was wondering if the growth that you have built in there, if that anticipates now the granting of 3G licenses.

I didn't see where those had been specifically excluded for China, the granting of those licenses.

And then the second question that I had was if you could just give a little color as to the last few weeks.

How the cuts and indications of inventory reduction have been communicated to you -- has it been all at once, by all of your customers or has it been in specific geographies and any color you can give on the nature of those cuts recently would be very helpful.

Thank you.

We've put some units in for China, we're basing it off of some estimates that operators have made.

We are anticipating that 3G licenses will be granted relatively soon so we did make the decision this year to put some units in for China that we had not in the past.

And this is Steve.

With regard to your question about the change in customer behavior related to the inventory contraction.

It's really something that started happening, I would say, in the last several weeks and consistent with our belief that this is highly dependent on what the OEM is thinking of and how they want to manage the economic environment.

It varies a bit across customers, so we have seen some variation across customers and certainly accelerating over the last several weeks.

Recently, and when I say recently, meaning over the last several days, I think we've seen a reduction in the rate of change of that forecast and consistent with our guidance.

We've actually opened up the number of units to allow for a little bit more uncertainty than normal, but I think we have a lot of confidence actually that what we gave is a reasonable outlook.

Tim Luke from Barclays Capital.

Please go ahead with your question.

Thanks so much.

Bill, Steve, with respect to the guidance then, the chip units came down 30% and the W-CDMA forecast is up like almost 40% for the year.

Can you give us some color on regionally, where you're seeing biggest delta in terms of this substantial change in channel inventory that you outlined?

And then can you give us some flavor of to get to that $370, what you're assuming in terms of the regional change in the W-CDMA market, and I guess there's a question on seasonality, as part of that.

Is this, Steve, you think sort of the low in the chip number and then March is slightly up from here?

Thanks.

Tim, this is Bill.

I'll try and take part of those questions here.

First, we have provided an update on the calendar 2008.

I just did a summary in my remarks but on our website, we've updated it by region of the world.

And as I said we brought down our estimate of the replacement rate just slightly.

Previously we had been looking for a 43% replacement rate for 2008.

We've updated that now down to 42%.

But then as we always do, we've got a pretty thorough process of trying to check region by region on net adds and -- as well as new subs and we brought down Europe modestly, you'll see that on our website, we brought down also the Americas by just a couple units.

China, I think we've all seen that on an interim basis here that with the transition coming up here from China Unicom CDMA to China Telecom.

There's been a de-focus on growing that CDMA base, so we brought down China a bit.

India, we brought down slightly as well as the greater Asia Pacific.

Each of those, again, are detailed on our website so you'll be able to get that.

In terms of the W-CDMA market growing and our chipset forecast here for Q1 having a fairly significant decrease, it's simply that right now, the market, be it operators and/or OEMs, they think they've got enough chipsets to satisfy a lot of their needs and they are looking to reduce those.

So our rate of flow into the OEMs we think, is going to reduce here for relative to the past for the next two quarters.

So it's a little difficult to exactly trace our estimated shipments into the end market when you've got -- if we're right here that this inventory contraction is pretty severe it's going to curve for the next two quarters.

Mike Walkley from Piper Jaffrey.

Please go ahead with your question.

Great.

Thank you.

Bill, just another question kind of on the trajectory of the recovery.

Should we assume in the back half of '09 back to normal builds that QCT margins would be within that historical 25% and a little bit higher range that is embedded in your guidance?

Can you just help clarify that?

I think that obviously for the first fiscal quarter here, our forecast is an abnormally low operating margin for QCT.

We do see our best estimate at this time is the second half of the fiscal year returns to what I think we would consider a more normalized level.

Thanks, and then in terms of not losing share, could you guys discuss some areas or OEM?

[Do you see] potential share gains over the next year or two?

Sure, this is Steve.

I think we had a number of positive moves in the last year, adding Sony Ericsson as a customer for a portion of the portfolio.

We started to add some volume out of Motorola, and I think as we've discussed on previous calls, we think that the addressable market to the chipset business is actually increased primarily as a result of the settlement of the Nokia licensing deal between the two companies.

I think it's much too early to make a statement with regard to how that's going to impact our financials.

But we definitely see a difference in terms of the way we look at the market after that event.

David Wong from Wachovia, please go ahead with your question.

Thank you very much.

Can you give us some idea as to how the pattern of chipset shipments will affect your gross margins, presumably your gross margins are better in the first half of the fiscal year because of lower chipset shipments and then they get pulled down in the second half because your chipset shipments rebound or does something else also impact margins?

It's primarily just, David, that in the first half of the year, there's just a sudden reduction here in the run rate on our revenues as to relative to what we expect in the second half of the fiscal year.

As we explained, we've carefully gone through our resource levels of the programs we're investing in, and our op expenses are really, we tried to carefully target them to where we want to be two, three years from now, so the operating expenses continue.

The revenues have a sudden decrease for the next two quarters and hence, the operating margins for the next two quarters will be abnormally low.

Yes, but I'm referring to the blended gross margin.

Does that get that benefit from a lower mix of chipsets, does it?

The mix of licensing revenue to chip revenue will certainly adjust here for the next two quarters and yes, that would favorably impact the gross margin for the next two quarters.

Ed Snyder from Charter Equity Research, please go ahead with your question.

This is Mike Alexander in for Ed Snyder.

I wanted to ask if you could give a little more color on the replacement rate for 2009?

Do you have any geographic idea where replacements are going to be falling and maybe some idea of the mix of new subscribers into the developing world?

Thank you.

Mike?

At this point we're planning to give more color on replacement rates next week in New York.

So there are regional differences and quite significant and we thought it best to share that when we get to New York.

Paul, do you want to add anything?

I think that I [teed] this one up on CNBC.

I'll make a comment.

One of the things we see happening, for example, in Japan is that the operators are moving to installment programs which have proved to be extremely popular with consumers.

And that's causing people to hold the handsets a little bit longer, and the interesting offsetting fact though is, it looks like people are willing to buy a slightly higher priced handset for that, so there's some puts and takes relative to that but we are seeing some impact there.

I'd say it's less the macroeconomic conditions than it's been just a different business model by the operators.

Great.

Thanks.

Brian Modoff from Deutsche Bank.

Please go ahead with your question.

Hi, guys, a couple questions.

So just understanding, Bill, on this accounting for the one-time payment and the amortization of the patents, and those canceling each other out.

Does that necessarily mean we are factoring in the ongoing payment as a net incremental gain to your numbers going forward?

And then Paul, on the regional basis, have you've seen a material change in demand from some of the emerging markets in the last few weeks that have created more concern for you?

And then finally, Steve, what percentage of your units are -- give us an idea of what you think you'll have in terms of designs in '09 for Snapdragon and the 7,000 series platform.

Thanks.

So Brian, it's Bill.

To your question on the Nokia amortization, you're correct.

The amortization of the $2.5 billion is what will positively contribute to earnings.

The amortization of the patent intangible will not contribute to earnings going forward.

Yes, I think obviously, there's a question a little bit in India, but we are -- and also just the timing of the transition and the sort of re-energization in China of sales of CDMA.

But as we look forward into the next year, we're seeing more trend towards emerging markets as opposed to away from emerging markets.

Brian, this is Steve.

On the 7,000 platform and Snapdragon platform, in terms of customer traction, let me just start with the 8,000 first, or the Snapdragon platform first.

We're still on track for first devices in mid-year next year, and starting to build throughout the year.

It won't be a significant number in terms of next year but it definitely is consistent with what we see with the launch of a new chipset family.

As I mentioned earlier, we're starting to see traction in the OEM base or in customer base outside of our traditional customers, which we're pleased with and we're going to talk a little bit more about that next week.

On the 7,000 platform, we continue to believe that integration strategy is really the key to driving mass market open OS phones into the market and we're seeing I think, traction consistent with that.

It's really driven primarily by our close association with some of the software houses as well.

So we've had a significant amount of interest in the Android platform as well as continued interest with our Win mobile devices.

Kulbinder Garcha from Credit Suisse.

Please go ahead with your question.

Just two very quick questions.

On the inventory level, by the (inaudible) end of this depreciation, am I understanding that it's the lowest levels they've been of the last three or five years?

That's my first question I guess for Bill.

And then for Paul, with respect to the lack of visibility within the macroeconomic uncertainty, revenues are expected to decline.

I understand why you -- the annualized in the run rate at the end of '08, I'm kind of surprised that more meaningful action is not being taken to have OpEx rise 10% but for it to be flat or even down, and I'm wondering how you think about if things do worsen from here, whether if you could take a more meaningful approach towards this cost base?

Thanks.

First, on the inventory weeks, there was a time in just a specific segment of the market, not the worldwide market as we forecast now, that we did see a dip below 14 weeks.

But the variety of devices that the market was demanding at that time was significantly different than what it is today.

So in our analysis, we didn't -- we used it but the comparability wasn't that direct.

Overall, I would say 14 weeks is abnormally low, but we've seen when people try and correct inventories as we see many trying to do, they often get to a bit of an abnormal level, so we thought it was the prudent forecast to use.

In terms of expense management, obviously we are very focused on that and definitely, are adapting to the current environment and essentially shutting down headcount growth.

And there are a lot of opportunities ahead of us with a number of new technologies coming to market, so we think that we're making the right investments.

We generally would have added headcount to go after those, so we are making hard decisions to shut some projects down and reallocate resources.

Clearly, if conditions worsen from here, we have contingency plans and we have gone through and prioritized projects.

We'll continue that process and so I think that we'll be able to adapt.

I don't feel like looking at a two quarter impact because of inventory contraction and then potentially damaging our ability to react coming out of the downturn because we feel like, as a market leader, we actually are well positioned to have a better competitive position coming out of the downturn.

But with that said, we're very focused on expense management over the past few years.

We know that we've grown fairly rapidly into the opportunities and we're looking for much more leverage this year while still addressing these very significant opportunities ahead of us.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Dr.

Jacobs, do you have any closing remarks you'd like to make?

Just to follow on to that, while these macroeconomic conditions are impacting the business looking forward, I feel like we are adapting and positioning ourselves for future growth.

And we have this very strong balance sheet and very strong operating cash flows and that is allowing us to address a bunch of opportunities that are in front of us, the market for 3G CDMA continues to grow and I might add, at the expense of 2G, and we're continuing to expand the functionality of wireless devices and the uses of wireless technology.

So I really do feel that in challenging times, market leaders can strengthen their position.

We intend to do that in these times.

I look forward to seeing everybody next week in New York and thanks very much for being on the call today.

And ladies and gentlemen, this does conclude today's conference call.

We would like to thank you for your participation, and ask that you now disconnect.