高通 (QCOM) 2009 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Qualcomm first quarter 2009 conference call.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

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.

Dr.

Jacobs to Steve Altman will be dialing in to today's call remotely.

In addition, Steve Altman will be primarily in listen-mode only, as he's under the weather today.

Len Lauer, Rosenberg and Derek Aberle will also join the question-and-answer session.

An internet presentation and an audio broadcast accompany 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 in Regulation G, you can find the required Reconciliations [Two] GAAP on our website.

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

We 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, and good afternoon, everyone.

Let me begin by saying that I am very pleased with the performance of our core operating business in this difficult environment.

Our revenues were at the high end of our prior guidance.

Our operating profit exceeded our prior guidance, and we had record operating cash flow.

The global migration to 3G CDMA continues, but while we continue to see healthy growth in CDMA devices, the distress in the global financial markets continued, resulting in additional impairments to our marketable securities portfolio, which impacted our earnings for the quarter.

Before commenting on the business, I'd like to welcome Bill Stone as Senior Vice President and President of FLO TV.

Bill's extensive background and experience in content and the wireless industry will be a great asset to Qualcomm, and we're looking forward to Bill leading FLO TV to the next level.

Our Fiscal Q1 revenues were at the high end of our prior guidance, and up 3% year-over-year.

Our pro forma operating income exceeded or prior guidance, and was up 4% year-over-year.

Our record operating cash flow included the $2.5 billion payment from Nokia.

I'm also pleased to see the benefits of our improved operating expense management, as pro forma operating expenses were approximately 7% lower than the fourth quarter, significantly lower than our guidance of 1% growth.

However, first quarter earnings per share were negatively impacted by other-than temporary impairments of our marketable securities portfolio.

As of January 23, out of the total treasury portfolio of approximately $12.9 billion, we had approximately $1.1 billion in net unrealized losses on marketable securities, which could result in additional impairments in the future if financial markets do not improve.

Our strong balance sheet and operating cash flows provide us the ability to hold the vast majority of these securities until they recover, and that is our intent.

Bill will discuss our treasury portfolio in more detail.

However, our investment strategy has significant benefit, and we believe it is the right strategy for the business and the shareholders for the long-term.

Despite the global economic environment, we remain committed to returning capital to our shareholders through our cash dividend and stock repurchase programs.

As of January 23, we have returned approximately $9.8 billion of capital to shareholders since Fiscal 2003.

We have continued to pay cash dividends, been active in our share repurchase program, and we recently announced another quarterly cash dividend payable on March 27 of this year.

In QCT, the CDMA channel inventory has begun its contraction as we expected.

In QCT's MSM shipments for the quarter, we're in line with our prior guidance.

The reduced visibility in the marketplace makes forecasting future inventory levels or accurately predicting when a recovery will begin, extremely challenging.

Similarly, we anticipate the continued marketing, market uncertainty will impact QCT's business.

We do expect to have more clarity in the coming weeks when carrier and OEM sell-through data becomes available.

Steve Mollenkopf will provide more color on QCT later in the call.

We continue to focus on managing our operating expenses while investing in key initiatives, such as HSPA Plus and LTE, that will drive future growth and strengthen in our competitive position moving forward.

HSPA Plus, a natural evolution path for HSPA, leverages operators' network investments, provides high peak data rates for mobile Broadband Access and supports greater than two times the voice capacity of Release 99, resulting in increased benefits to both operators and consumers.

HSPA Plus momentum continues as several operators have announced their plans for market launches in the first half of 2009.

We continue to work closely with our partners in the industry, and remain on track to deliver our chipset solutions to support operator launches.

LTE, an OFDMA technology that is able to support higher data rates and more users by taking advantage of wider amounts of spectrum, [is being planned] by some operators looking to leverage new spectrum.

As LTE comes to market, we expect operators will deploy it as a complement to their existing 3G networks in areas with high data needs.

OFDMA represents one of our largest research and development efforts, and we remain on schedule to sample our multimode LTE chip sets in the second quarter of this calendar year.

It has been, and continues to be, important for our industry to have options.

Our development efforts on both HSPA Plus and LTE ensures we will be there to serve our partners by offering a solution to leverage existing investments of HSPA, and also provide a path to LTE.

Looking forward, it is unclear how long this difficult global economic environment will persist, and when the recovery will ultimately begin.

Since we guided in November, the consensus economic outlook has shifted to the view that the global recession will be deeper and more severe than previously anticipated.

For example, many economists now believe that positive GDP growth will not return in the US until the second half of the year, and we generally concur with that view.

However, our growth is tied to 3G, which is expanding in all geographic regions of the world, including China, the largest market.

Consumers are excited by the new data services on their phone, such as internet browsing and GPS, and their migration to 3G is continuing, despite the economic condition.

While we continue to estimate healthy growth in the CDMA device market, we have lowered our expectations for calendar year 2009.

It is worth noting that recent North American operator reports on net adds are in line with our new forecasted reductions in this region.

We've also incorporated some of our contingency plans to manage our operating expenses going forward, and have substantially reduced our operating expense growth from the prior year.

It is important to highlight the excellent job our businesses have done executing to their budgets in this uncertain environment.

Based on our Q2 guidance, our revenue and operating income for the first half of the fiscal year is at or near our November budgeting guidance baseline.

However, the financial crisis has had, and may continue to have, an impact on the value of our marketable securities portfolio if market conditions do not improve.

Given this uncertainty, while we are providing revenue, operating expense, operating income and our other standard guidance, at this time we are not providing earnings per share guidance.

Despite the current market and economic volatility, the worldwide market for 3G remains vibrant, as consumers have an extensive range of competitively priced devices and services to choose from.

According to the CDG and the GSA, there are over 525 CDMA-based 3G networks that have been launched as of January 2009, and operators continue to deploy the higher data speeds of HSDPA and EVDO Revision A.

There are now over 65 HSUPA networks and over 55 EVDO Revision A networks commercially launched.

In addition, the wide variety of 3G broadband devices available to consumers continues to grow.

For example, over the last year, the total number of HSDPA devices introduced into the market more than doubled to over 1000.

3G subscribers grew over 25% year-over-year according to wireless intelligence.

As of December, there were over 735 million 3G subscribers, as the global migration from 2G to 3G technologies continues.

In addition, although total handset market grew only 6% year-over-year according to Strategy Analytics' estimates, CDMA-based handset shipments grew 17% year-over-year, compared to just 1% growth for GSM.

In Western Europe, wireless intelligence reported that as of December end, WCDMA subscribers increased 75% year-over-year, compared to a 9% year-over-year decline GSM subscribers.

We continue to see data revenues as a key growth driver for our operator partners, as consumer demand for value-added services increases.

For example, Verizon recently announced that data revenue grew 44% in 2008, and that non-messaging data revenues grew 52% in the fourth quarter and 53% for the year.

And AT&T announced this morning that their wireless data growth was up 51% year-over-year.

In addition, we see that the shift of device subsidies to smart phones, connectivity solutions such as USB modems and even to embedded 3G notebooks, or net books, continues.

That will further help drive demand for 3G-based devices.

Turning to FLO TV, we opposed the delay of the February 17 DTV transition date, which was set by the US government three years ago.

Since then, tremendous efforts have been made to make Americans aware of the transition date.

Qualcomm has also invested hundreds of millions of dollars, including over $550 million to acquire spectrum in the FCC's 700 megahertz auction last year.

This was to extend our innovative FLO TV service and to build out the network.

We have abided by the laws and regulations set by Congress and the FCC.

Unlike other companies, we are prepared to launch our FLO TV service and turn on 100 new transmitters across the United States immediately after the transition date.

This will allow a total of more than 180 million consumers in 80 markets to use our innovative wireless service.

The House of Representatives voted today on legislation extending the date, and the bill did not pass.

The opposition to the bill included both Democrats and Republicans.

e expect there will be further developments, and we are continuing to request any legislation pertaining to the February 17 date for [nine] stations in four markets, Boston, Houston, Miami and San Francisco.

This would allow Qualcomm to offer its innovative service to an additional 40 million consumers.

In China, 3G licenses were issued this past quarter and operators have communicated exciting plans to deploy 3G.

As part of our long-term partnership with China, Qualcomm will continue to support the growth of Chinese companies in the development of 3G CDMA networks, devices and applications.

We currently have license agreements with over 30 companies based in China, including 10 new agreements executed over the past 12 months.

We will look forward to the largest wireless market in the world having access to multiple 3G CDMA technologies, driving a dynamic and competitive environment, benefiting consumers, manufacturers and operators.

The economic and market conditions we are facing today are very challenging.

We will continue to keep the focus on investing in key research and development programs to improve our technology leadership and competitive position, while managing our operating expenses to address the market realities.

We are very fortunate to have a strong balance sheet and operating cash flows in these difficult times.

And we are committed to supporting our partners and driving the market forward.

That concludes my remarks.

I will now turn the call over to Steve Mollenkopf.

Thank you, Paul.

I will now share highlights of QCT's business in the first quarter of Fiscal 2009.

Consistent with our guidance, QCT shipped approximately 63 million MSN chipsets this past quarter.

In November, we had predicted a significant inventory reduction to occur across the channel.

Our shipments last quarter, as well as our outlook for the current quarter, are very much in line with this forecast.

We continue to believe that our chipset shipments are being impacted primarily by macro-economic conditions rather than a shift in market share.

Exiting calendar year 2008, we experienced greater than a 115% increase in UMTS chipset shipments.

This clearly outpaces the growth of the overall USMT market during the same period, providing us additional comfort that we are tracking to our forecasts.

QCT delivered revenue of $1.3 billion in the first quarter, down 15% versus the same quarter last year.

Our ASBs continue to be favorably impacted by a strong product mix, driven by increased shipments of higher-end chipsets used in smart phones and mobile broadband devices as a percent of the total.

Looking forward, we expect a modest decrease in ASP, as the growth of the China market and annual price setting with our customers will begin to counterbalance the strength in product mix.

Our MSM 7000 series smart phone solutions continue to gain traction.

These products are being used for devices such as Rim's BlackBerry Storm, as well as more than 40 [win] mobile devices and greater than 20 Android devices in the pipeline.

P Product mix was also improved by an increase in demand for our EVDO Revision A and HSPA products, enabling data [RPU] increases in the market.

Market traction for HSPA Plus continues to be strong.

Among the numerous UMTS carriers who are working toward deploying the technology, Telstra will be launching in Australia in the next few weeks, using devices based on our MBM 8200 chipset.

We also continue to make progress in LTE, and will be sampling the industry's first fully standard compliant multimode EVDO HSPA and LTE chipsets during the first half of this year.

Looking forward, the issuing of CDMA 2000 and UMTS 3G licenses in China is a significant industry development that presents an excellent opportunity for growth.

We are working closely with our customers and carrier partners to support this market with our comprehensive portfolio of products.

On January 19, we closed an acquisition of assets that were formerly the basis of AMD's hand-held graphics business.

The technologies, strong IP and talented engineering resources that we acquired strengthened our multimedia leadership, enabling us to integrate the industry-recognized capabilities of AMD's multimedia into our system-on chip products.

This was a great opportunity to acquire significant assets that will enhance products across our entire portfolio.

Our Gobi module for embedded 3G connectivity has been adopted by seven leading OEMs, including, most recently, Sony and OQO.

These manufacturers have launched notebooks, sub-notebooks and hand-held devices that leverage Gobi to deliver 3G connectivity for internet access beyond HiFi hot spots.

As part of our continued commitment to the mobile computing market, QCT has expanded its Snapdragon road map to now include dual CPU chipsets, with two computing cores running at up to 1.5 gigahertz.

Meanwhile, our first generation Snapdragon solutions have made significant inroads among customers who are new to the wireless space.

We expect several customers to unveil their Snapdragon devices by the end of February.

QCT is also building momentum in the Bluetooth business.

Our solutions are in more than 30 hand sets that launched last year.

We now have 20 customers for our Bluetooth solutions, with plans to double the number of hand sets launched with our Bluetooth products in 2009.

We believe our scale, breadth of products and emphasis on integration and system solutions has allowed our business to remain strong despite the difficult economic conditions.

I will now turn over this call to Bill Keitel.

Thank you, Steve.

Good afternoon, everyone.

I'll begin with the review of our first quarter results.

Operating results were strong this quarter.

Revenues of $2.5 billion were up 3% year-over-year and achieved the high end of our prior guidance.

We shipped 63 million chip sets, which was the midpoint of our prior guidance, and demand shifted favorably to our more capable and feature-rich products.

Approximately 125 million new CDMA devices were shipped by our licensees in the September quarter, which was near the high end of our prior guidance.

And the average selling price was approximately $212 per unit and above our prior estimate of $205.

Pro forma operating income was $986 million, up 4% year-over-year, and well above our prior guidance of $800 million to $900 million, reflecting a favorable mix of MSM and CDMA device shipments, as well as lower operating expenses as compared to our prior guidance.

We recorded a loss in net investment income due to a $388 million charge for other than temporary impairments of marketable securities.

This $388 million of accounting impairments represents approximately 3% of the recorded value of our cash and marketable securities as of the end of the first quarter, and consisted of approximately $206 million of equity securities and $182 million in debt securities.

Approximately 90% of our impaired fixed income securities continued to pay interest and principle, and we expect that to be the case going forward.

The $388 million of accounting impairments equates to approximately $0.21 per share.

As of January 23, we had approximately $1.1 billion in net unrealized losses, which over time could result in additional other-than-temporary accounting impairments in the future if market conditions do not improve.

For now, we expect to continue to hold these securities, and we expect their value to recover as confidence and liquidity returns to the capital markets.

At our Analyst Day in November, we presented our investment portfolio allocation, and we have now posted an updated version of that slide on our Investor Relations website.

Operating cash flow was particularly strong in the first quarter, a record $3.5 billion, driven by a $2.5 billion cash payment received in October related to our new agreements with Nokia.

Our cash and marketable securities totaled approximately $13 billion at the end of the first quarter, split almost equally between onshore and offshore.

During the first fiscal quarter, we announced dividends of $264 million, or $0.16 per share.

And we repurchased 8.9 million of our shares for $284 million.

As of December 28, our remaining stock repurchase authority was $1.7 billion.

The estimated pro forma annual tax rate of 25% is higher than our prior guidance of 20%, primarily due to the tax impact of capital losses.

Without the capital losses this quarter, our estimated pro forma annual rate would be slightly above our prior guidance.

Before turning to guidance, let me provide some additional color on this quarter's results that may be helpful to some of you on this call.

Pro forma earnings per share in the first fiscal quarter declined $0.32 sequentially.

You will recall that the prior quarter's settlement and license agreements with Nokia addressed April 2007 forward.

And approximately $0.15 cents per share in the fourth quarter was attributable to periods prior to the fourth quarter.

Channel inventory contraction in the December quarter reduced QCT earnings by approximately $0.12 per share, and larger impairments of marketable securities and net treasury losses contributed an $0.08-cent decline.

Both QTL and QWI each improved by a $0.01on volume and margins respectively.

Lower sequential operating expenses contributed $0.03 of improvement.

Now turning to our guidance, we estimate that approximately 116 million to 121 million CDMA-based devices shipped in the December quarter, for a total calendar 2008 CDMA market of approximately 468 million to 473 million new devices.

Based on the 471million midpoint of our new estimate, we estimate the 2000 CDMA market grew approximately 23% year-over-year.

Furthermore, we estimate approximately 209 million CDMA 2000 units and 262 million WCDMA units were shipped worldwide in calendar 2008.

Due to the volatility in the financial markets and the impact it has had, and may have, on our investment portfolio and net income, we are not providing an update to our estimated earnings per share guidance for the second quarter or fiscal 2009.

We are, however, providing our remaining standard guidance points to help investors model our operational performance for the remainder of the fiscal year.

For the second quarter of fiscal 2009, we estimate revenues to be in the range of approximately $2.25 billion to $2.45 billion, a 6% to 14% decrease year-over-year.

We estimate pro forma operating income for the second fiscal quarter to be approximately $750 million to $850 million, down 16% to 26% year-over-year.

We anticipate shipments of approximately 60 million to 65 million MSM chips during the March quarter.

Estimated channel inventory contraction in the December and March quarters is largely consistent with our prior expectations.

Our MSM unit shipment forecast for this March quarter reflects the continuing channel contraction.

We expect our chip set average selling price to decrease modestly on a sequential basis in the second quarter, reflecting products mix shift in the quarter, as well as annual price setting with our customers.

We estimate that new CDMA-based devices shipped in the December quarter had an average selling price of approximately $207 per unit.

We anticipate second fiscal quarter pro forma R&D and SG&A expenses combined will increase sequentially approximately 4%, reflecting normal increased seasonal expenses, primarily related to employee payroll taxes.

And includes the impact of our recent acquisition of certain hand-held graphics and multimedia assets of AMD.

Specifically, the employee-related payroll taxes will account for increase of approximately $32 million, and the addition of AMD assets will account for approximately $10 million increase, both in operating expenses.

It's worth noting that the difference between our midpoint pro forma operating income guidance of $800 million for the second quarter compared to the comparable period last year of approximately $1 billion, is primarily attributable to the current channel inventory contraction and the resultant reduction in our MSM shipments.

Turning to the full year, we now estimate the calendar 2009 CDMA market will be between 540 million and 590 million devices, a midpoint of approximately 565 million units and a 20% year-over-year increase.

We estimate that of the 565 million devices, approximately 212 million units will be CDMA 2000, and approximately 353 million units will be WCDMA.

We estimate average selling prices for CDMA 2000 and WCDMA phones combined will increase approximately 8% year-over-year, to approximately $202 per unit as compared to our prior guidance estimate for Fiscal Year 2009 of $195.

We are lowering our revenue guidance for Fiscal 2009 consistent with this new market forecast.

We now expect Fiscal 2009 revenues to be in the range of approximately $9.3 billion to $9.8 billion, a decrease of approximately 12% to 16% over Fiscal 2008.

We anticipate pro forma operating income for Fiscal 2009 to be in the range of $3.2 billion to $3.5 billion, a year-over-year decrease of 24 to 30%.

Our guidance for the second half of Fiscal 2009 includes an assumption that we will conclude one of the remaining WCDMA license extensions that we have previously discussed.

And that [license] extension will include multiple elements of value to Qualcomm, including a substantial lump sum payment and ongoing royalties.

We expect a combination of pro forma R&D and SG&A expense to increase approximately 3% year-over-year, including our recent acquisition.

This is significantly below our prior guidance of 10%, as a result of cost-saving initiatives.

Excluding our recent acquisition, we expect operating expenses to grow less than 2% year-over-year.

As mentioned previously, we are continuously making workforce adjustments to match the Company's forward needs.

The rate of these adjustments has increased in recent months.

Looking forward, we are focused on continuing to reduce our operating expense run rate.

However, we are nearing the juncture in the fiscal year where cost to implement certain expense reductions equals or exceeds the end-year benefit, and is therefore not evident -- will not be evident in our guidance until we guide Fiscal 2010 operating expenses.

While we are mindful of the potential impact on short-term earnings, as always, any decisions we make will be with the long-term interests of the Business and our stockholders, and given paramount importance.

We still intend to invest -- to address opportunities to drive rapid adoption of CDMA in key developing markets, support new CDMA market entrance and to extend our important technology partnerships in 3G and 4G.

We believe carefully selected investments today will position us very well for the long term.

In closing, in this challenging economic environment, we are pleased that our first quarter operating results and second quarter outlook demonstrate our ability to anticipate and execute in a very challenging environment.

Our first quarter actual results, combined with the midpoint of our fiscal second quarter guidance, will place revenue in line and operating income favorable as compared to our first half fiscal 2009 budget that we finalized end of October.

That concludes my comments.

I will 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 this call.

I would encourage you to please limit your questions to one per caller.

Operator, we are ready for questions.

(Operator Instructions).

Brian Modoff from Deutsche Bank, please go ahead with your question.

Hi, guys.

Question for Bill.

Bill, looking at your operating number in terms of your operating income and in your Q1 results and your Q2 guidance are essentially in line with our numbers and your handset forecast for the year are slightly above our numbers.

Yet your back half operating income numbers are below our numbers.

We're at $1.87 for EPS.

What are you seeing in the back half that causes you to be more conservative?

Are you perhaps expecting not the snap back after the inventory workdown?

Is it ASP trends?

Is it this deal you're negotiating?

What is it that gives you a little more caution on the back half of the year?

Sure, Brian.

Let me first speak to the part of your -- the answer to your question that speaks to our market estimate.

A couple data points that I would give that I think would help you model into our estimates.

Our current guidance midpoint on the market of 565 million units.

Inherent in that projection right now, we've got an ending inventory estimate of approximately 14 weeks at the end of the calendar year.

If you recall, back in November, we had disclosed our estimate back then was 17 weeks.

So we are projecting a -- at this time, a slower ramp in channel inventory after we hit a low point later this year.

I would add that 38% replacement rate is within that guidance.

We think we ended 2008 at about a 41% replacement rate.

So we have brought down our replacement rate forecast for 2009 modestly in these new estimates to about 38%.

So that's one.

Two, I would add also, yes, the -- in the second half of the year, to your point, we have provided in our estimates an assumption of a new license agreement with a new license extension, I should say.

And then as well, Brian, we always have a mix shift in chip sets between regions, between customers.

At this point, with the ramp we see forthcoming in China, our optimism for the developed world, we are expecting a lighter mix of chip sets in the second half of the year as compared to the first half of the year.

I think those are the primary factors.

Thanks.

Our next question is from the line of Glen Yeung from Citi.

Please go ahead with your question.

Question relates just to clarify that last point you're making, Bill.

So basically if I were to think about MSM units -- I know you're not giving guidance for the back half of the year, but it sounds like you're basically suggesting kind of flattish progression from the [60 to 65] range basically for the rest of the fiscal year?

Obviously we've given a pretty wide range, Glenn, here to our estimates, and I think it's reflective of the increased difficulty of pinpointing a single point estimate here.

You know, I think we're optimistic that we'll see some increase in the MSM demand going into the second half, but we do think the markets are going to be the primary drivers here are going to be looking for lower-end product than on average, what we're expecting here for the first half of the fiscal year.

And just as a follow-up on a different topic, just in looking at your securities portfolio, can you just help us walk through the mechanics of that.

I understand on the web there's a list of what's in there, but what are the elements that are going to force you to take the losses there or not?

Or do you think the the entire $1.1 billion in losses is something you can write off -- there's no reason you need to ever book those losses?

I -- Glenn, it's primarily -- as the way we're applying the judgment as prescribed, it's primarily a function of time and magnitude of decrease.

So there clearly is risk of more impairments if the markets don't improve from the current levels.

But I would just say that's primarily a function of time and degree of a decrease that we've seen.

I would just also note, though, again, as I said in my remarks, of the fixed income accounting impairments we've taken, we feel pretty good that we're going to see approximately 90% of that value eventually come back over time as the interest and principal amounts continue to be paid.

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

Great.

Thank you.

Bill, just maybe building a little bit on those questions also, in terms of the higher ASP outlook, can you walk us through how we should think about the volatile currency markets, how that's impacting ASPs?

And also does that ASP assume a different mix?

Are you seeing a higher mix of smart phones now versus emerging markets?

Thanks.

Sure, Mike.

We are -- based on our outlook now for the fiscal year, the ASP forecast that we updated here for approximately $202 per handset average, that actually has a slight [detriment] based on the regional mix that we now anticipate.

As I said, we're seeing some good strength in China and in the developing world.

Within the regions themselves, we are seeing a little more price strength.

Again, just a little bit more trends towards more feature-rich phones.

And then based on where FX rates here have been for the last month or so, our forecast includes several dollars of FX improvement relative to our prior guidance.

Thank you.

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

Hi, thanks.

I think you've previously said that there wasn't a vendor coming up for renewal for another five years or at least the Tier 1 vendor.

Can you just expand on this new license extension?

Was that driven by the Nokia agreement where a vendor came in and offered similar 3G and 4G essential IP in exchange for lower rate?

Can you just provide any details there?

I'll try and recount what we've said in the past.

It was maybe Steve or Derek's here as well and will want to chime in.

But what we said probably two or three years ago was that we had, I think we said four remaining license extensions over the next number of years.

And since that time, we've obviously -- we have a license extension agreement with Nokia and then we had another license extension that we worked out last year.

So that would -- that leaves two remaining based on what we previously said.

Okay.

And then I guess just separately on the ITC, they recently rescinded the limited exclusion order and the cease and desist order.

Can you just talk about what the process is there, what [debts] are going to happen going forward and what we can expect?

This is Don.

You're right.

They recently reversed that, and they remanded it to the ALJ for further proceedings there, so there will have to be some further proceedings in the ALJ.

But of course the -- a principle ruling there was that the limited exclusion order cannot have the downstream effect that it had originally had, according to the original order.

So we're very pleased with that ruling by the Court of Appeals.

Mark McKechnie from Broadpoint AmTech please go ahead with your question.

Great, thanks.

I was trying to get a sense for how much more channel drag you have built into that.

I understand that you don't have the inventory snap back built into that last half of the year, but do you have end of the drag built into maybe in September?

Or how do you think about that, Bill?

Sure.

Again, Mark, I would first caveat that we put a broader range to our guidance, given the environment which it makes it a little more difficult to pinpoint these numbers.

I think for the December quarter, I think we're pretty much in line with what we expected coming down from a like a 19-week level of channel inventory to maybe 17 weeks or so.

By the end of March, we think we're looking to be down in the 15-week range and then before we get to September, we think it could get down to 13 weeks or so.

But finish up September maybe in a 14-week kind of range and then hold at 14 weeks through December.

Again, those are --I ought to put a lot of plus-minuses around that, but if we were talking single-point estimates that would be indicative of what a single-point estimate would be.

Got you.

And then just -- thanks, Bill, for that.

But then in terms of bookkeeping and a sense of what the pro forma tax rate going forward, you said on the result it was 25%, but that had the charges built in.

So is the real number maybe 20%, 21% going forward?

Well, if you exclude the capital charges, which basically we didn't take any tax provision for them, which is what bumped the rate up.

But excluding that, we're at about 22%.

Three months ago, we had estimated 20%.

The difference between 20% and 22% is simply the mix of our business that made that change, our new estimate of our business mix.

Tim Luke from Barclays Capital, please go ahead with your question.

Couple quick clarifications, Bill, just in lowering the forecast for hand sets from 600 to 565.

Could you give some color on where you're lowering that in the CDMA 2000 and WCDMA in terms of the regions.

Separately, in saying that you think the chip sets are going to be moving to a lower-end mix in the second half of the calendar year, what's your assumption then for chip set ASPs just as a framework?

And it looked like in the quarter that you're guiding, your average selling price assumption for hand sets is a little higher than you previously guided, but by the same token, are you assuming that it sees some pressure in the second half of the year?

Thanks.

Okay.

Tim, on -- I'll just try and give you a quick summary of our -- that 565 estimate, the midpoint compared to our 600 midpoint estimate three months ago.

I would just add that we do have some information on our website for those that want to go to that.

But just here, I'll give you a quick rundown.

We think WCDMA Europe, we're looking for the midpoint about 11 million units less than what we had previously forecasted.

Asia, really not much change in our WCDMA estimate.

A slight reduction in WCDMA rest of world, and I would add that that decrease is more concentrated in the Latin America piece of what we included in rest of world.

On CDMA 2000 in the Americas, a midpoint, we've gone down by about four million units to 98.

And CMA for China and India, we brought that down by about eight million units, just seeing a lower baseline trend in India.

And then for CDMA 2000 rest of world, about six million units, but more of a channel inventory impact there.

In summary, again, I take it back.

We're bringing the replacement estimate down to about 38% for the year.

And ending the year at about 14 weeks of channel inventory.

So again, below the rate that we've historically seen as a norm, that being 15 to 20.

So that's just a summary to your question, Tim, on the markets.

Chip set ASPs, we're expecting a modest decrease the second quarter as opposed to the first quarter with the new price resets.

The price resets obviously will have a full year effect, but it's the mix with the -- Steve, I don't know if you want to add anything, but we're seeing a lot of low-end demand latter part of the year with the developing market accelerating.

Maybe if I could just add, this is Steve, just a few comments.

The quarter, the December quarter was fairly strong on ASP, and one of the reasons was because we really had not started to see the effect of China.

So China will start to ramp this quarter and become fairly significant, and I think that's really the big effect you'll see on ASP.

So I wouldn't project the same ASP moving forward as really the point we're trying to make moving forward.

Tal Liani from Bank of America, please go ahead with your question.

Hello.

I have a few clarifications and then a question.

First, what's the tax rate we should model for the rest of the year?

Second, I know you answered these from various angles during the call, but I still find it hard to model it.

This quarter you are at $2.5 billion and next quarter midpoint is$2.35.

You are guiding for the year about sequential, flat sequential declines for the rest of the quarters, but everything else is supposed to be up because channel inventories are supposed to be out of the way.

And I just have a difficult time to reconcile your guidance with kind of normal seasonality and inventory cycles, etcetera.

And the last point I wanted to ask was about expenses.

In case you have to come on a call again next quarter and review the guidance again for whatever reason, the world economy goes down again, what are your views about expenses?

Where could you cut expenses and where do you think you don't want to cut expenses?

Tal, on the tax rate with the capital loss that we recorded in the first quarter, I expect we'll continue to report a 25% tax rate going forward for the year.

Take out the capital loss, it would be 22%.

But I expect next quarter on the call, I would be talking about a 25% tax rate in total, okay?

So that was one.

Two, on first half/second half, again I would -- I would describe it in this kind of summary terms.

From a chip set standpoint, we're optimistic we'll see a little unit growth second half of the fiscal year versus the first half of the fiscal year.

But on average, we're expecting it to be lower-end product than what we expect to ship in the first half.

So one is about offsetting the other.

So that's on that side.

On the QTL side, the licensing side of the business, we do have a projection of ASPs decreasing in the second half of the year as opposed to the first half to match out to our full-year estimate of $202.

So you're going to get some effect there.

On the -- and then on the market side of it, we're projecting maybe getting to a low sometime in the second half of the fiscal year of down to maybe 13 weeks of inventory.

But all told, if we're -- as I said, our single point estimate, if we end the March quarter at 15 weeks and end the September quarter at 14 weeks, obviously you do have more -- that end market is continuing to be satisfied to some degree by the channel inventory.

Expenses Bill?

Oh, yes, and expenses.

The -- as -- well one, I think hopefully people are pleased that our prior guidance of 10% is now, excluding the acquisition, we're sub-2%.

So there's obviously been a lot of attention, and I think we feel good there's a lot of understanding throughout the organization.

The spending and the operating expense improvement that we saw in the first quarter that we reported in our results is widespread across the business units and across the corporate function.

So I'm encouraged by that.

I think we always like to have a team here that's focused, got a common focus, and I think we have that across the Management team and the entire employee base, number one.

Number two, we do have more areas we're targeting.

The -- but as I said, as you get a couple more months here and certain expense actions, we aren't going to see an end-year benefit.

The cost to implement, you just won't see it be accretive before the fiscal year is out.

So our target at this point is push hard this year, and we want to be right sized going into fiscal '10.

Paul, if you want to add anything to that?

Yes, I think as we've said, we're looking at R&D projects very carefully, prioritizing those as much as possible.

Bill talked about head count.

We are still not looking at widespread layoffs, but of course if there's targeted areas where we can do some restructuring, we're looking at things like our contingent work force, looking at things like managing payroll increases, expenses, service levels in corporate functions, things like that.

So there's a pretty wide range of opportunity.

And we are being, let's say, very aggressive and specific about the programs that we have and making sure that those are the programs that we want to spend our resources on.

James Faucette from Pacific Crest, please go ahead with your question.

Thanks very much.

I actually wanted to look forward a little more, and maybe this is a question best for Paul.

But I know that we've talked about Snapdragon for the last year, year and a half, and it seems like it has potential to be an exciting product.

At the same time, we've seen Microsoft, for example, bring down the cost of licensing their OS and that seems to be more attractive now in the net book category for the Intel-based products.So I'm just wondering from a product and market development standpoint, how we're thinking about Snapdragon now.

And if you could also talk about the issues related to software, and I guess ultimately when we could start to think about Snapdragon being a meaningful contributor.

Thanks.

Okay.

So I can take part of that and maybe Steve Mollenkopf can talk to it, too.

I think we're very excited about the ab dragon product.

As I've said in the past, it's really a question of us getting the software strategy right for snap dragon as Intel works to get its power consumption and integration right for its processers.

I think the key differentiatorred is we're excited about our always-on connectivity, location aware capability, having essentially instant on so that you don't have long boot-up times, things like that.

We're spending a lot of effort in the [Linux] area to make sure that wide suite of applications and full compatibility with web standards is going to be implemented on these devices, and we're looking at a couple of different approaches.

One is, you know, the initial Linux, which will be more like a Windows environment.

But most of the manufacturers are looking to do something very differentiated with both more factors and user interfaces.

I think there's a tremendous opportunity.

And then finally I think, just as convergence of having cloud computing, having the high speed networks and having very, very low power devices, so all day, much lighter and smaller devices, you know, I think all of these things coming together at a very low price point, coming through the operator channel with the sub Sid Dees going to make snap dragon a very compelling product line for us.

Steve, I don't know whether you want to add anything to that.

I might just pick up the part about timing on contribution.

I think as we said all along, we really don't expect Snapdragon to significantly contribute this fiscal year, but it will start to ramp during this fiscal year and start to build into the next fiscal year.

And I think really the size of the market will be very much determined by -- will this, will the software enable a new computing paradigm.

I think very much it was what Paul said, very much in line with what Paul said, the existing devices are very much a cost play,

I think, on a laptop paradigm.

And we're looking to really pull some of the best parts of a smart phone over into that form factor.And I think as the ecosystem starts to be built around that, the market will determine whether that's new class of device or not.

And I think if it is, it has the potential to be a very interesting product.

And I think just to touch on one thing that Paul mentioned as well, which is we believe with our integration strategy, we have the ability to create phone level cost points with these products, and I think that enables a go-to-market strategy much more with our traditional partners, vis-a-vis the operators.

Simona Jankowski from Goldman Sachs, please go ahead with your question.

Just was wondering following TI's announcement from this week that they are exiting the 3G merchant business, how do you think that affects you and over what time line?

Yes, this is Steve.

I think -- I'm not sure if that was that unanticipated an announcement actually.

They had made a similar announcement earlier, and I think really in terms of the impact to the OEM's design cycle, design-in cycles, it was probably more significant, the earlier announcement versus the one that was this week.

But I think as we've said a number of times, the chip set business is becoming very much a systems business, and we anticipate folks that don't have that scale across multiple technologies to reevaluate their business.

And it's probably an example of that, that we saw.

So that's something that you think should start helping in terms of market share even this year, based on that earlier announcement?

I think this year's pretty difficult to influence in terms of the design cycles.

But I think in terms of decisions that will be made for next year, it's probably more significant.

But I think we'll have to monitor that and see how that goes.

[Aneal Drodlove] from William Blair, please go ahead with your question.

This is for Bill.

On the inventory levels, is there a possibility that even when the macro outlook looks better, our channel inventory levels remain in the midteens?

I mean could it be possible that the industry settles down with this new level of inventory level?

And also, how many employees did you have this quarter, and how many do you expect to have by the end of next quarter?

Aneal, on the, on the channel inventory, I guess that's possible.

But based on what we've seen in the last several years, the -- all participants that play into that channel would have to improve the efficiencies of anticipating needs and cycling through that channel much more efficiently than what we've had in the last several years.

So I wouldn't say that that's not possible, but to some degree we're going to have to wait and see here.

On the employee level, I'm not going to speak to our year-end number.

As I said, we're aggressively going after cost reduction, and we'll report that number as we move along.

But I think we're focused on narrowing in on our R&D programs that are going to most -- are most important to improving our competitive position through these difficult times.

So I think that's a number we'll just report as we go along.

Can you give us some sense of how many people came on board with the AMD acquisition?

I think -- we didn't disclose it, but -- this is Steve.

We're just trying to remember whether we had disclosed it in the press release or not, so I apologize for the confusion.

The -- we estimated -- we're going to have a number pretty close to about 200, 250 people eventually that come on from AMD.

Ittai Kidron from Oppenheimer, please go ahead with your question.

First on the license renewal negotiations that you are going through right now, so that leaves two that you haven't renewed with.

You said one this year.

Can you tell us more specifically when the other is coming and can you tell us are any of those two top five OEMs, and what is the risk that they turn out to be what Nokia was for you?

This is Derek.

Just to reiterate what Bill said, what we have said a number of times publicly, including in November I think at our analyst conference, that we have two WCDMA license extensions that we need to get completed before 2017.

Haven't really got specific as to when those need to be done.

We're obviously looking to be proactive and get them done early.

At this point, I don't think we have any expectation or anticipation of running up against another Nokia situation.

Are they material customers to you and are they -- when you give your guidance and your outlook for the year, is the assumption that they renew?

I think we've commented on the size or the identities of the licensees.

And in the guidance for the year, as we said, we built into our forecast an assumption of an extension, and we describe just some high level characteristics of what that -- what an extension might be.

Ehud Gelblum from JPMorgan, please go ahead with your question.

Hi, thank you very much, guys.

Got a couple of questions on some previous things.

If we look again at this license agreement, Bill and Steve, Steve, I remember back in 2006 you said that other than Nokia, the earliest next license agreement that would expire was 2011 and then in the following year, in 2007, you said there are only two licensees expiring prior to November 2017.

That was one in 2011, one in 2017.

Can you give us a sense as to why?

Who initiated the extension process now, and when that is complete, will that impact both UMTS, as well as LTE?

Or is that just for the extension that gives you LTE?

I guess the main thing there is does it impact UMTS?

And then, Bill, if you can give a sense as to -- you said there were several issues in the new lower revenue numbers.

How -- this being one of them.

How much of that percentage wise roughly, that $1 billion, is because of this?

So we can get a sense of a run rate going forward, what that royalty kind of looks like.

And then do you anticipate inventories staying at 14 weeks after September going forward into 2010 and on?

Or do you expect them to snap back up to your 17 weeks that you've been thinking about before?

Thank you.

This is Derek.

Let me take the first question.

Again, as we said we have at this point two WCDMA extensions to get done before 2017.

I do believe in the past we said the earliest one of those would come in 2011.

We haven't otherwise characterized sort of the timing of the remaining one.

I think other than the information that Bill provided in the script about a substantial lump sum payment and ongoing royalties, it's probably too early to really get into any more detail on the terms and conditions of that potential deal.

It's material if it actually could impact UMTS as well as LTE.

Would you expect that to be true?

Ehud, we'll have to see as we go.

It's -- we're letting you know that we've provisioned for this possibility, but we're -- I think as Derek said, it's really too early to go into much -- any more detail than what we've provided.

On the outlook for the year, I would first add that the new level of revenue and operating income guidance as compared to what we gave three months ago is primarily related, a great majority is related to our new estimate of the market and then the regions, and hence the mix of products that we expect the market will be demanding.

So on the license renewal relative to what we gave back in November versus what we're giving today, it's -- there's really not a material difference related to that.

And I said several.

There's a lot of little things that go on.

We had a -- we have audit recoveries that come and go.

First half of the fiscal year, we're looking at more audit recovery dollars than what we see in the second half.

Infrastructure royalties is at, over the years have tended to be lumpy.

We think there's a little more infrastructure royalty revenue in the first half as compared to the second half.

I said there are several items, but i really spoke to the material ones in my prior answer.

then was there one -- ehud, was there one more?

oh yes, sorry, the channel inventory, pardon me.

i did say that our baseline estimate of 565 for the market has -- that's based on a 14-week ending channel inventory at the end of the calendar year, which will be the first quarter of fiscal '10.

beyond that, we've not put any forecast together for fiscal '10.

Our sense is unless the total of all the participants, the major participants in the channel can really improve their efficiencies on significantly in this year as compared to prior years, that we think the channel's going to be strained to contain it down to a 14-week as if the demand continues at the rate we see it continuing at.

William Pitkin from GE Asset Management, please go ahead with your question.

Yes, thanks.

I just wanted to clarify with regards to the new forecast on device shipment.

What was included in the prior forecast with respect to China?

And what is included in the current forecast with respect to China since the 3G licenses have been sent out?

Sure, William.

This is Bill Keitel.

We've not made a significant change in our China estimates from what we -- the guidance we gave in November to what we're giving right now.

We don't break out China individually.

You have one CDMA 2000 operator.

You got one WCDMA operator, and we just don't want to be -- we don't think it's appropriate for us to be directly inputting publicly on how we view their own stated forecasts.

So there's not a significant change.

The China Unicom transitioning business to transition to China Telecom, that slowed down the market a little bit more than what we had anticipated in the first quarter.

But having said that, we're pretty optimistic on China Telecom's capabilities here going forward.

Thank you.

Kulbinder Garcha from Credit Suisse, please go ahead with your question.

This is pretty much a question for Steve.

With respect to your -- you mentioned [on November 15] t he WCDMA MSN volumes.

Can you give us an idea where your WCDMA market share might be now?

And also what your assumptions for that as we enter 2009, especially given it seems that [some the larger customers you've got some that are performing quite well and there seems to be new customers.

What sense do you make for market share for WCDMA in 2009?]

This is Steve.

I think we have not disclosed our WCDMA market share externally, but I will give you some comments related to -- I think as I said, we're happy about what's happened over the last 12 months and I think we did a good job building share in smart phones and I would say high-end modems, or the advanced modems.

We see those two trends continuing.

I mentioned the road map into HSPA Plus, and obviously smart phones will continue to be important.

And we think the lower price of smart phones plays into our integration strategy.

So I don't think we anticipate a large shift in share moving forward.

But as to the absolute number, I'm not sure that's something we've shared.

Just one follow-up [on this.] On the QCT margins, they are now at I think the lowest level we've seen and I understand that we're going to be weak in this December quarter, and even weak into forecasting down at 12.5.

or so percent.

What is the key to recovery.

Is it demands of the [coverage] you need, or is it just high levels of investment [you're doing] there?

Have we [reached a trough there,] or does it get worse from here?.

I think we talked a little bit about ASP and how we thought that we were strong in smart phones and I think -- and were delayed a little bit in terms of the launch of China.

This is referring to the quarter that we're reporting on right now, the December quarter.

As we start to ramp in China, we'll start to see really the addition of China-caused ASPs to come down.

But clearly with the level of MSMs that we now have, the scale of the business or the leverage of the business is different than it was at [86 million] MSM.

So you're seeing some of that as well.

As Bill said, we're actively looking at how we can control our operating side as well and try to rationalize some of the growth that we've had over the last couple of years.

I think it's okay to -- suffice to say that we're more optimistic on the second half operating margin in the chip business than what we're looking here at the first half.

Yes, maybe I should be more clear on that.

The first half of the year really is unfolding the way that we thought it would unfold in November when we talked with you.

The question's really what happens in the second half of the year.

And in the second half of the year, we had -- we had forecast fairly sharp rebound or snap back with the inventories.

And as Bill mentioned in his guidance, we don't expect to see as big of a snap back, pretty much tempered by the macro-economic situation that we all see.

So I think what you're going to see -- we're clearly during that trough, our operating margins are not close to what they have been historically.

And I think we're going to start to see recovery in the fourth quarter, but not quite up to the level of our historical values yet.

Adam Benjamin from Jefferies, please go ahead with your question.

Yes, thanks.

I'm just going back to your forecast for the market and embedded in your forecast for the fiscal year.

Can you talk a little bit about what assumptions you're making on your share?

You talked a little bit about not giving out your share in WCDMA, but can you give some view into whether you expect to continue the trend of gaining share?

I think there are two components of our share.

One is how well our existing customer base does against the customers that are not using our devices and there have been a couple of positive trends on that looking back over the last 12 months.

Some of the things that help our customer base is really the move toward more -- the importance of data, I guess, in the operator's mind and so that's really driving a demand for these higher end modems.

So I think that's helping some of our traditional customers take share in North America and in Europe.

But in terms of making bigger moves in share it, really comes down to winning some new accounts in addition to that other effect.

And as we've talked about in the past, we're actively working on a number of accounts, trying to -- trying to really leverage, in some cases, our platform capability and in other cases, really the -- I think we have a broad range of technologies that as the Company looks out long-term, they will see that I think the number of people who can do system on chip products is diminishing.

And I think that's creating a trend where people are coming toward us.

But we really have nothing more significant to announce than what we talked about in November.

But just to clarify, embedded in your guidance --

I do apologize, our final question is from the line of Mike Burton with ThinkEquity.

Please go ahead with your question.

Just to follow up on the QCT margins.

As we do see Gobi, and eventually Snapdragon next year come in, what effect is that going to have longer term on chip ASPs?

And more importantly, is there going to be a similar or opposite effect as this product ramps on your margins?

And is there a new target margin for QCT at a more normalized run rate now?

I think in terms of Gobi and Snapdragon -- you should think of Gobi as a product very similar to our advanced modem products that we have ramping today.

So I don't expect a significant shift in margin in terms of that.

Snapdragon is something that's really something that's more like our high-end smart phone products in terms of its tiering, so we clearly have --from the top end we have Snapdragon moving all the way down into our system, [just to] single chip solutions as well.

So I think you should think of those, the Snapdragon as really being the replacement for our 7000 chip in terms of its positioning in our road map.

I would just add that in the past we've talked about -- we think a -- if we execute on our strategy, as we have in the past, we ought to be, -- our operating margin in the chip business ought to be in the range of 25%, 28% kind of level, and that hasn't changed.

We're -- we think we're in an abnormal period here with the channel contracting.

As I outlined for you in my remarks, that the year-over-year delta in operating income for our -- based on our second quarter forecast as compared to second quarter of last year is primarily the channel inventory contraction.

So we're still in that space.

We think if we execute well, we ought to be 25% kind of operating margin and maybe a little north of that.

And ladies and gentlemen, we have reached the end of the allotted time for questions and answers today.

Dr.

Jacobs, do you have any final comments you would like to make?

Just wanted to thank everybody for being on the call today and obviously our earnings were impacted by the impairments.

Interesting that in the same quarter we had record cash flow.

And I would say despite the economy, we remain optimistic because consumer demands towards 3G data services and high-end smart phones, all these things are continuing.

And we feel like we're very well positioned to support these trends with our new high data rate technologies and with our chip set products.

I particularly am looking forward to seeing the snap dragon devices come out.

Also, very happy to finally have 3G launches in China so I don't have to predict it anymore.

And as we've said, we are really looking forward to seeing how the mix works out in China.

So the businesses really do continue to operate well.

We are focused on expense management, as we've said.

And we really feel like we're in a leadership position, and expect to exit this economic downturn in a much stronger competitive position.

So thanks, everybody, for being with us.

And we'll look forward to talking to you again soon.

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

We would like to thank you for your participation, and you are now free to disconnect.