高通 (QCOM) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm second quarter fiscal 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) As a reminder, this conference is being recorded April 27, 2009.

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

International callers, please dial 706-645-9291.

The playback reservation number is 96824653.

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 morning.

Today's call will include prepared remarks by Dr.

Paul Jacobs, Don Rosenberg, Steve Mollenkopf, and Bill Keitel.

In addition, Steve Altman and Derek Aberle will join the question and answer session.

An Internet presentation and 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 and Regulation G, you can find the required reconciliations to GAAP on our website.

I'd also direct you to our earnings release which was filed and furnished with the SEC today and is available on our website.

We may make forward-looking statements relating to our expectations and other future events that 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.

Now, it is my pleasure to introduce Qualcomm's CEO, Dr.

Paul Jacobs.

Thank you, John, and good morning, everyone.

Let me begin by saying I am very pleased with our strong operating performance given the current economic environment.

Our revenues were at the high end of our prior guidance, and our pro forma combined SG&A and R&D expenses were lower than our prior guidance.

Excluding the impact of the new Broadcom agreement, our operating income significantly exceeded our prior guidance, and interestingly, our operating cash flow was $1.3 billion, up 33% year-over-year.

Worldwide demand for 3G-enabled products and services remains strong, and we continue to see healthy growth in CDMA device shipments, as well as significantly increased demand for our chip sets.

Thus, we are raising our fiscal 2009 revenue guidance.

It's important to note that excluding the impact from the Broadcom agreement, our midpoint operating income estimates for the fiscal year 2009 increased 12% from prior guidance.

Now as you've seen from our announcement, we have reached a settlement and multi-year patent agreement with Broadcom that removes uncertainty and enables the industry to move forward.

We believe the agreement is positive for Qualcomm, our customers, our partners, the wireless operators, and the overall industry.

The agreement provides both companies the ability to move forward with their core businesses unencumbered and allows Qualcomm's licensing business to continue unaffected, which has always been of utmost important to us.

With the elimination of conflict between the companies, we can now direct our full attention and resources to continuing to innovate, improving our competitive position, and growing demand for wireless products and services.

Later in this call, Don Rosenberg will provide more detail on the structure of the agreement, and Bill Keitel will address the financial impact.

Despite the global economic environment, our business continues to generate strong operating cash flows, which enables us to return capital to our stockholders.

In view of this performance, our Board of Directors recently approved a 6% increase in our quarterly cash dividend.

However, the continued downturn in the global financial markets did result in our taking additional impairments to our marketable securities.

Both QCT's chip set shipments and CDMA-based device shipments by our licensees exceeded the high end of our prior quarterly guidance, driven primarily by emerging market demand for our CDMA2000 products.

While visibility of end-market demand remains somewhat limited, we believe the CDMA inventory channel has stabilized, and we are seeing some replenishment of products, driven largely by emerging markets.

An encouraging forward indicator is that our base station chip set shipments for CDMA2000 networks increased approximately 138% year-over-year.

So contrary to claims made by proponents of competing technologies, the CDMA2000 ecosystem continues to grow with expanding network deployments in China and other emerging markets.

And in addition, KDDI recently announced plans to deploy multi-carrier EVDO Rev.

A which uses core parts of the EVDO Rev.

B standard providing a cost-effective upgrade to increase data speeds.

The truth is, 3G continues to grow at the expense of 2G.

For example, according to Wireless Intelligence, in March, WCDMA subscribers in Western Europe increased 57% year-over-year compared to a 6% decline in GSM subscribers.

According to the same source, overall 3G subscribers grew 28% year-over-year.

And as of March, there were approximately 780 million 3G subscribers worldwide.

Operators continue to take advantage of the increased 3G data speeds and resulting higher subscriber ARPUs by offering a wide variety of competitively priced devices and applications to meet growing consumer demand.

Let's turn to some regional updates.

In North America, Verizon and AT&T have both noted significant year-over-year growth in data revenues.

AT&T recently announced that data revenues grew approximately 39% year-over-year, and wireless data average revenue per subscriber grew more than 25% year-over-year.

USB data card shipments continued to grow in Europe as consumers are increasingly demanding 3G broadband connectivity.

In the UK, Hutchinson's 3 group recently announced that they had sold over 1 million USB Dongles in 2008, a year-over-year increase of more than 300% in its mobile broadband user base.

In China, both China Telecom and China Unicom continue their aggressive rollouts of 3G CDMA.

China Telecom officially launched their EVDO rollout last week, targeting 120 cities with approximately 100 3G handset models.

China Unicom is also making significant progress and plans to launch WCDMA service in 55 markets by mid-May.

CDMA growth in India remains strong as operators continue to add more than 2 million new CDMA subscribers monthly.

BSNL and MTNL have already launched their 3G networks, and we look forward to the upcoming 3G spectrum auctions and increased CDMA-based competition in the world's second largest wireless market.

In the world's 13th most populous country, Vietnam, just awarded 3G licenses.

So, we're looking for increased competition in that market as well.

Now, exciting advances in wireless technologies are occurring at a rapid pace, and we continue to be at the forefront of innovation.

HSPA Plus leverages existing HSPA investments to provide cost-effective network performance enhancements for operators and improve the consumers mobile broadband experience.

HSPA Plus momentum continues as four operators have launched HSPA Plus networks with devices using our chip sets, and several other network operators and device OEMs have announced their plans to launch HSPA Plus-based offerings later this year.

And while we believe LTE is still in the early stages of evaluation and deployment planning, we continue to develop innovative, multi-mode chip set solutions that will enable operators to seamlessly deploy LTE as a compliment to their existing 3G networks.

As mobile data penetration and usage continues to increase, operators are looking at different options to enhance network performance, including new network topologies with the use of [themto] cells.

At the Mobile World Congress, we announced plans to develop the first HSPA Plus and EVDO integrated [themto] cell chip set, that will include some of the interference management techniques we have innovated here within Qualcomm.

Our focus on technology continues to provide new opportunities for our customers and the industry.

When subscribers are increasingly demanding innovative feature-rich devices that drive higher data revenues for operators.

According to industry analysts, smart phones are projected to gain an increasing portion of the overall annual handset shipments.

We believe QCT's robust product portfolio, including QSC Single Chip products for lower cost smart phones, is well positioned to support this fast growing segment of the market.

Together with Nokia, we recently announced the two companies have plans to work together to develop advanced UMTS mobile devices initially for North America.

These devices would be based on our MSM7000 and 8000 series products and will support Symbian.

The first mobile devices based on this collaboration are targeted to launch in mid-2010.

Another exciting development is the new INQ1 prepaid phone, which integrates social networking applications such as Facebook and Skype.

This low-cost device uses both our chip sets and the BREW platform, and it won its category as best mobile handset or device at this year's Mobile World Congress conducted by the GSMA.

Turning to FLO TV, we continue to address the four key growth drivers for success.

These drivers are increasing the coverage of FLO TV to provide service to more consumers, improving the content offering, both in the number of channels supported and with new, compelling programming, expanding the operating of competitively priced handsets.

And finally, expanding the distribution of FLO TV to non-handset devices.

With combination of compelling content and competitively priced handsets, we have experienced a substantial increase in the number of FLO TV subscribers.

We continue to see positive viewership and consumer demand for major sporting events with our innovative FLO TV service.

AT&T had four dedicated FLO TV channels with live access to every game of the men's college basketball championship tournament, and those channels ranked as second most watched for this period.

On the first day of the tournament, FLO TV experienced a 48% increase in the average minutes per user from the prior month.

AT&T also had three dedicated channels which aired portions of the Masters golf tournament, and those also ranked second in total viewership on April 10th.

Now, positive trends in mobile computing continue.

The dynamics are in place to drive increased momentum.

The high speed 3G networks are deployed.

Device capabilities continue to advance.

Applications in the cloud are a reality, and operators continue to provide competitive pricing plans and to subsidize mobile computing platforms.

Our continued investments in this area put Qualcomm in a strong position to capitalize on the growing trends with Snapdragon as the core mobile computing and connectivity platform, and Gobi to provide connectivity for solutions based on X86 architectures.

So while the economic and market conditions we are facing remain challenging, we continue to execute on our strategic objectives.

The 3G market remains vibrant and competitive, and we are fortunate to have a solid balance sheet and very strong operating cash flows as we continue to support our customers and partners through innovation and technology leadership.

That concludes my comments.

I will now turn the call over to Don Rosenberg.

Thank you, Paul, and good morning to all of you on the call.

Qualcomm has been open to finding a mutually acceptable agreement with Broadcom for quite some time, as long as it did not negatively impact our business model.

Both companies worked hard to find common ground to get this deal done in a way that allows both companies to continue to pursue each respective business model.

The agreement involved various gives and takes by both companies.

I'll walk you through some of the key aspects of the agreement.

Under this multi-year patent agreement, the companies have granted certain rights to each other under their respective patent portfolios.

The agreement does not, however, impact Qualcomm's 3G and 4G licensing business.

Qualcomm and Broadcom have agreed not to assert patents against each other for their respective integrated circuit products and certain other products and services.

Broadcom has agreed not to assert its patents against our customers for our integrated circuit products incorporated into cellular products.

We have agreed not to assert our patents against Broadcom's customers for Broadcom's integrated circuit products incorporated in non-cellular products.

Broadcom customers do not receive rights to any of our patents with respect to Broadcom integrated circuit products incorporated into cellular products and equipment.

In other words, Qualcomm did not grant pass-through rights to Broadcom.

The agreement will result in the dismissal of all outstanding litigation between the companies, including the patent infringement claims made in the International Trade Commission and US District Court in Santa Ana, anti-trust claims in US District Court in San Diego, as well as the withdrawal by Broadcom of its complaints to the European Commission and the Korean Fair Trade Commission.

Qualcomm will pay to Broadcom a total of $891 million in cash over a four-year period, of which $200 million will be paid in the quarter ending June 30, 2009.

With the rest to be paid in equal quarterly installments beginning in August 2009 and ending in April 2013.

The agreement does not provide for any other scheduled payments between the parties.

Litigation between the companies has gone on, as you know, for four years with successes and failures on both sides.

We are proud that Qualcomm has continued to meet the needs of its customers throughout this lengthy and sometimes difficult period.

However, the litigation has been expensive, both in terms of legal fees and employee time spent on workarounds and has created uncertainty for both parties and for the industry.

This agreement now allows our engineering teams freedom in driving innovation without the need for continuing workaround efforts and without the uncertainty that has concerned both Qualcomm and many of our customers.

In addition and more recently, Qualcomm had become increasingly troubled that the courts ruling in the 467 case threatened to broaden the effect of the injunction beyond what was granted after trial.

While we have appealed these rulings, the pace of the appeal process is not rapid enough to ensure a review soon enough to prevent possible disruption to our business and our customers.

Preventing disruption to our customers is central to Qualcomm's business philosophy.

With the dismissal of the outstanding litigation, our legal expenses related to Broadcom will cease.

As is customary, there will be a wind down period while the cases are being dismissed and other related actions are taken.

Due to confidentiality with Broadcom, we will not be able to provide any more details on the elements of this agreement.

We are pleased that we have reached resolution, and believe this agreement is positive for Qualcomm, for Broadcom, and for all our customers, partners, and the industry.

Thank you, and I will now turn the call over to Steve Mollenkopf.

Thank you, Don.

QCT continues to execute well in this challenging economic environment, and I would like to share our highlights.

We shipped approximately 69 million MSMs during the second quarter of 2009, exceeding our previous guidance.

This is an increase of approximately 10% quarter-over-quarter.

Multiple factors contribute to this increase in shipments, including acceleration of 3G deployment in China, demand for USB mobile, broadband devices, and a stabilization of inventory levels across the channel.

We expect these positive trends to continue and anticipate shipments in the range of 87 to 92 million MSMs for the June quarter.

As expected, we saw a greater mix of products shipped to emerging markets which impacted our ASP.

We expect this trend to continue as handset demand in China and India accelerates.

Longer term, we believe the migration to wireless data services, in both developed and emerging markets, will have a positive impact on our product mix.

This past quarter, we shipped a record number of CSM channels.

Nearly double the previous quarter, driven by network deployments in China and emerging markets.

As one leading indicator of future handset demand, this trend bodes well for shipments across all tiers of CDMA2000 devices, as we see that the infrastructure being deployed today is capable of EVDO Revision A.

Also during the quarter, we announced the industry's first, multi-mode 3G LTE smartphone chip set.

The MSM 8960 delivers support for EVDO Revision B, multi-carrier HSPA Plus and LTE, along with an evolved version of the processor in Snapdragon, running up to 1.2 gigaHertz.

Carriers choosing to deploy LTE will be able to take advantage of the MSM8960's multi-mode capabilities to ensure seamless backward compatibility with their existing 3G networks.

In fiscal Q2, we also announced a collaboration with Nokia to develop advanced mobile devices, based on our MSM7000 and MSM8000 series chip sets running Symbian Series 60.

This collaboration represents significant growth opportunities for both our companies.

In February, Toshiba announced the first commercial device based on our Snapdragon platform, the TGO1 smartphone.

The TGO1 is expected to launch commercially in Europe this summer.

Consistent with our prior statements, we anticipate numerous that additional commercial Snapdragon-enabled devices will be announced throughout this year.

QCT continues to be a leader in providing solutions for the most advanced smartphone designs and mobile computing devices.

Along with Snapdragon, our MSM7000 Series chip sets support all major, high-level operating systems, integrated multimedia, and has been the basis for numerous innovative smartphones launched over the past year.

It has been three months since our acquisition of the mobile, multimedia assets from AMD.

The team is now an integral part of our effort to further enhance our multimedia portfolio, enabling us to deliver best-in-class user experiences.

We announced the next generation Gobi 2000 module, which delivers expanded capabilities, including additional frequency bands and assisted GPS.

Our Gobi-embedded module continues to gain momentum in the market with over 40 Notebooks from nine OEMs commercial today.

This past quarter, Sony announced the integration of Gobi as a standard feature into several of their laptop product lines, including the sub-compact P Series targeted at the consumer segment.

QCT continues to build momentum in the Bluetooth business.

We currently have 30 customers with over 150 designs using our solution.

As Bluetooth technology becomes more ubiquitous in markets around the world, we see that our solutions are attaching to all handset tiers, underscoring the strong growth opportunity this represents for QCT.

Our quarterly results reflect a strong focus on controlling the growth in our operating expenses without sacrificing the strategic investments that will help us maintain our competitive advantages.

We will continue to enhance our position in multimedia applications, LTE technologies, and broad support for high level OS platforms.

QCT's core strength of innovation and execution, coupled with our industry-leading product road map, will make us more competitive as we exit this current economic environment.

Thank you.

I will now turn this call over to Bill Keitel.

Thank you, Steve, and good morning, everyone.

I'll begin with a review of our second quarter results.

Revenues of $2.5 billion were at the high end of our prior guidance, and pro forma operating income was $214 million.

Excluding the litigation settlement charge related to the Broadcom agreement, pro forma operating income for the second quarter would have been $962 million, more than $100 million above the high end of our prior guidance.

We reported better than expected business performance in multiple areas.

The CDMA market was stronger than expected, with greater licensee device shipments in Europe and China.

QCT also performed significantly better than expected, driven by increased chip set shipments for emerging markets.

And lastly, our initiatives to reduce spending, particularly SG&A, proved very successful.

Operating cash flow was also strong in the second quarter, approximately $1.3 billion and 51% of revenue.

Our second quarter results include a litigation settlement charge of $741 million related to the new Broadcom agreement, and I thought it would be helpful to walk you through the accounting of the total $891 million agreement.

Included in the $891 million is $38 million for certain assets, which will be amortized over future periods.

Also included is $60 million accrued in prior periods, as well as $45 million of imputed interest over the four years of payments.

And the remaining $748 million is for litigation settlement.

The $748 million charge reduced second quarter earnings per share by $0.43.

We expect the majority of the settlement payments to be made with offshore cash.

The combination of pro forma R&D and SG&A expenses were lower this quarter by approximately 3% sequentially and 1% year-over-year, reflecting a number of broad cost savings initiatives.

Our pro forma tax rate was 131% in the second fiscal quarter, and we estimate our pro forma annual tax rate will be 31% for fiscal 2009, an increase of 600 basis points over our prior estimate of 25% driven by the Broadcom litigation settlement charge.

Excluding the litigation settlement charge, our estimated pro forma rate would have remained at 25% for the fiscal year.

Our second quarter results reflect a healthy CDMA market.

Approximately 128 million new CDMA devices were shipped by our licensees in the December quarter, a 14% year-over-year increase and above the high end of our prior guidance.

For calendar 2008, we now estimate that approximately 480 million CDMA devices shipped, a 26% year-over-year increase and includes 216 million CDMA2000 and 264 million WCDMA devices.

The average selling price of CDMA devices shipped in the December quarter was approximately $201 per unit, down 5% sequentially, driven by a greater mix of lower priced devices in emerging markets.

We shipped 69 million MSM chip sets, greater than our prior guidance and driven by increased demand in emerging markets, primarily China.

Our investment loss includes $204 million in other than temporary impairments of marketable securities.

The impairments were approximately 1% of our recorded value of our cash and marketable securities.

For accounting purposes, they reduce our cost basis.

But we expect most of these securities to recover in value over time.

For example, the vast majority, approximately 90% of our impaired fixed income securities continue to pay interest and principal.

Our cash and marketable securities grew to approximately $14 billion at the end of the second quarter, with approximately $6.3 billion onshore and $7.7 billion offshore.

During the second fiscal quarter, we paid $528 million of cash dividends or $0.32 per share, relating to dividends declared in the first and second fiscal quarters.

On April 8th, we increased our quarterly cash dividend to $0.17 per share payable in June.

Now, turning to our full year guidance.

We continue to see healthy growth in the global 3G market, and we are reaffirming our prior 2009 CDMA device shipment forecast.

We estimate that between 540 million and 590 million CDMA devices will be shipped in 2009 with a midpoint of approximately 565 million units, representing 18% year-over-year increase.

We estimate that of the 565 million midpoint forecast, approximately 217 million units will be CDMA2000 and approximately 348 million units will be WCDMA.

This represents a 5 million CDMA2000 unit increase and a 5 million WCDMA unit decrease as compared to our prior estimates.

We estimate average selling prices for CDMA2000 and WCDMA devices combined will decrease approximately 9% year-over-year to approximately $199 per unit in fiscal 2009, as compared to our prior estimate of $202.

We believe the CDMA inventory channel contracted from December levels exiting the March quarter at approximately 14 weeks and largely consistent with our forecast at the outset of this quarter.

Looking forward, we see some indications of stability and pockets of replenishment in the channel, particularly for some emerging markets and notably China.

Our estimate is that CDMA channel will remain at approximately 14 weeks for the remainder of calendar 2009, and we estimate the replacement rate for CDMA devices in calendar 2009 will be approximately 38%, consistent with our prior guidance.

Due to the continued growth in expansion of 3G networks and greater demand for our chip sets, we are raising our revenue guidance for this fiscal year.

We expect fiscal 2009 revenues to be in the range of approximately $9.85 billion to $10.25 billion, an increase of approximately $450 million to $550 million above our prior estimates.

We estimate pro forma operating income for fiscal 2009 to be in the range of $2.95 billion to $3.15 billion, which includes the impact of the Broadcom agreement in the second fiscal quarter.

Excluding the impact of the Broadcom agreement, our pro forma operating income guidance would be an increase of approximately $350 million to $450 million above our prior estimates.

This updated financial guidance reflects a greater mix of QCT MSM shipments and CDMA device shipments by our licensees of products for emerging markets in the second half of our fiscal year, and this is consistent with our prior expectations.

Our guidance again includes the assumptions that we will conclude one of the remaining WCDMA license extensions in the second half of this fiscal year.

We expect the combination of pro forma R&D and SG&A expenses to grow approximately 1% year-over-year, reflecting continued SG&A cost management initiatives, combined with careful selection of increased R&D investments.

Turning to the third quarter for fiscal 2009, we estimate revenues to be in the range of approximately $2.4 billion to $2.6 billion.

We estimate pro forma operating income for the third fiscal quarter to be approximately $800 million to $900 million.

We anticipate shipments of approximately 87 million to 92 million MSM chip sets during the June quarter, and we expect a greater proportion of lower end chip set shipments in the quarter, consistent with our prior expectations.

We estimate that approximately 107 to 112 million new CDMA base devices shipped in the March quarter, down sequentially, reflecting some normal post-holiday seasonality.

And we estimate the average selling price was approximately $196 per unit.

We anticipate third fiscal quarter pro forma R&D and SG&A expenses combined will increase sequentially approximately 6%, reflecting a full-quarter effective acquisitions completed in the second fiscal quarter and an expected significant increase in new patent applications.

Lastly, we will adopt the new FASB guidance on impairments and fair value of marketable securities in our third fiscal quarter.

In closing, we're very pleased to see the global CDMA market growing consistent with our prior estimates.

We are raising our revenue guidance for the fiscal year and, excluding the Broadcom agreement, to be raising our pro forma operating income guidance for the year.

That concludes my comments, and 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 in this call is to address as many questions as possible before we run out of time.

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

Operator, we're ready for questions.

(Operator Instructions) Brian Modoff from Deutsche Bank.

Please go ahead with your question.

Good morning.

A couple questions.

First, on the ASIC shipments for the quarter, can you give me a little bit more granularity around where the demand is coming from?

Is this mainly on CDMA, and can we look at it on a more regional basis?

And then this license renegotiation that you have for the back half of the year, can you give us an update on how that's going?

Last time, you'd indicated you were making good progress there.

Can you please give us some further details on that?

Thanks.

Sure.

Brian, it's Steve.

I'll answer the question about the ASIC shipments.

In terms of the quarter we're reporting on today, so the Q2, we saw pretty strong demand in China.

And as we said and then looking forward, I think we're seeing demand across-the-board.

Increasing obviously, with our numbers going up by the amount that they did.

It's pretty broad-based demand.

I would say we're continuing to remain strong in China as we said, but I think we're pretty pleased with the outlook right now.

This is Derek.

I'll take the second question.

We remain in discussions with the licensee whose extension we're negotiating.

At this point, I don't think we really have much to update versus what we disclosed in the last call.

I think we remain on track with that negotiation and continue to expect it will get done in a timeframe that reflects the numbers we have in our guidance.

Derek, can you give us any detail though around this licensee?

Do you expect a material change in the previous negotiation that you had with this licensee?

Or previous rate you had with this licensee, sorry.

I think at this point we're really not in a position to say much more than we did previously.

We're looking at a number of different terms and conditions in the agreement, and I think we mentioned last time that we expect at this point that the extension will include a substantial upfront fee component.

But I think at this point we prefer to just defer really a discussion of the details until we get it done.

Our next question is from the line of Mike Walkley with Piper Jaffray.

Please go ahead with your question.

Great.

Thank you.

Bill, obviously a lot of moving parts with your updated guidance and the Broadcom settlement.

Just a couple of clarifications.

Maybe you could help us reconcile your updated guidance as how it would have compared to your previous guidance excluding the Broadcom settlement.

Also, with the mix of lower CDMA MSMs, can you provide the anticipated QCT operating margin target inherent in your updated guidance.

And then finally, can you help us just with the pro forma tax rate for the second half of fiscal '09?

Sure, Mike.

First, on the new guidance, if we take out the Broadcom settlement agreement in the chart we took for it, our operating income guidance for the fiscal year is up by a significant amount in the range.

More than $350 million for the fiscal year, and that reflects both our results we've been seeing in our cost savings initiatives, number one.

But as well, significant increased uplift in demand on our chip set business, and we think that in turn is driven largely by growth in developing world but also the inventory channel seems to be settling down.

And we're actually seeing pockets of backfill into that channel.

On the tax rate, last quarter, we had estimated a 25% pro forma tax rate for the full fiscal year.

If you'll recall last quarter, we had some changes in our deferred tax assets that increased that rate from what we previously had been expecting to be 22%.

Excluding that change for this year's deferred tax asset accounting, we had expected last quarter that the year would have otherwise continued at 22%.

That's still the same situation for this quarter.

The other ingredient we obviously brought into this quarter was the Broadcom settlement charge, because we expect to pay Broadcom largely with our offshore cash, that magnifies the tax rate impact.

But excluding that settlement charge, excluding the valuation -- the change in our deferred asset valuation -- we would still be forecasting 25% for the fiscal year and an underlying rate really of 22%.

On the QCT operating margin, I would just say at this point, we see it continuing to improve this fiscal year, and exiting the year a rate that is more consistent with what we've seen in our past for the chip set business.

Ehud Gelblum from JPMorgan.

Please go ahead with your question.

Hi, thank you very much.

A couple quick things.

First of all, now that the Broadcom settlement appears to be complete and you have a global agreement between the two of you, the issue of the agreement that Broadcom made with Verizon some time ago after the 983 case in the ITC seems to be a standout.

I know it's more of a Verizon issue, but it seems to be related with you.

Was part of the agreement with Broadcom that somehow that Verizon agreement gets reversed?

Because it seems either Verizon is out roughly $200 million, or if you had helped them out at some point and you may be out the $200 million in addition?

Was that somehow wrapped into this and somehow reversed because that whole agreement seems to be at this point somewhat mute.

And the other thing is, Bill, could you give us, or Steve, a sense as to how Gobi is doing in the MSM -- total MSM number that you have?

Is it 5% of MSM?

2% of MSM?

Anything you can give us to get a sense as to how Gobi is growing?

And then finally on inventories.

We're at 14 weeks.

The numbers you gave for guidance, a very strong 87 million to 92 million for next quarter.

Do you think that keeps us at 14 weeks?

At what point do you think it starts moving you up to 15 weeks or beyond?

Or do you think 14 weeks is something the industry can actually survive right now?

Thanks.

Good morning, Ehud.

This is Don.

I'll take the first part of the question.

We can't talk about details of the agreement, which as I said are confidential beyond what we've already said in the discussion here.

And this is Steve.

I'll just answer quickly the question about Gobi.

At this point, I think Gobi really is a very small number in terms of our overall shipments.

So in terms of percentage, it's quite small.

I think we'll see that build over the year.

But in the results that we just came out with, it's quite small.

Ehud, this is Bill.

On the channel inventory question, we think we ended the March quarter at approximately 14 weeks, and our guidance is based on the channel staying at about the 14 week level.

We think that's the most likely case at this point.

We have a little ebb and flow in our forecast going forward, but it's plus or minus a couple tenths of a point in terms of the equivalent weeks.

Demand, obviously is very strong in emerging markets, and we think that's helped stabilize the inventory channel relative to what we're seeing in the past.

But we're encouraged by this, but we think overall, OEMs and operators are continuing to be cautious, and so we expect it to stay at the 14 week level for the remainder of this calendar year.

Mark McKechnie with Broadpoint AmTech Securities, please go ahead with your question.

Thanks, and congrats on a strong quarter there.

On the chips, we're talking about a pretty big June.

Three questions related to your chip business.

One is, you were talking about stability in end-markets -- or in your chip business.

I'm guessing that's just no more inventory burns, so it's a little easier to see.

But if you could tell us what your visibility there is going into the quarter on those numbers.

Is that fully booked, or is there any turns related to that?

And then second, is with those strong numbers, are you seeing any other industry components tightening up that could cause a problem in a ramp?

It sounds like a crazy question.

And then finally anything you can tell us on your share in the WCDMA space, and maybe when you see Nokia kicking in?

Thanks much.

Appreciate it.

Mark, this is Steve.

In terms of visibility into the quarter, I think we're pretty confident in the number that we gave just a few minutes ago.

As you are probably aware with a mew market ramping like China, I think there is some time for it to get to the same maturity in terms of the sophistication of the ordering in the market.

But I think we've actually judged down that demand in order to get to the numbers that we reported.

So we feel pretty good about those numbers.

With regards to other groups affecting our ability to ramp, there's really not a whole lot I can comment on that.

I think we're aware of what happened a couple years ago, or at least a year and a half ago with regards to some of the components.

I'm not aware of a situation like that right now, but it's hard for me to talk about the entire phone.

In terms of share for WCDMA, I think we really don't try to give out our share numbers.

I think we're encouraged by some of the reports that OEMs that traditionally use our devices are continuing to be strong.

And I think at this point, it's a bit too early for us to make any prediction with regards to Nokia.

Matthew Hoffman from Cowen and Company.

Please go ahead with your question.

Steve, I hate to ask you another question here on the chip guidance, but most of your customers have talked about the market being flat to up here in the June quarter.

Is the guidance really a read-through into the back half of the year and Chinese OEMs especially getting optimistic about calendar 3Q and 4Q.

Or is this really just a restocking phenomenon going on with very little read-through and improved demand outside of China?

Thanks.

Yes, I think there's a couple of factors.

One is, as Bill said, I think there are pockets of restocking.

Certainly, I think that's happening with the launch of 3G in China, for both WCDMA and CDMA2000.

As I said, we've actually -- in giving our guidance -- we've actually judged our demand down so that we can take into account I think the initial ramp of 3G in China.

So I think we were reasonably confident in the number that we see.

In terms of end demand -- end-market demand, I think we're keeping our midpoint the same.

We're shifting as Bill said, shifting the ratio of WCDMA to CDMA, but I don't think there's a significant shift there.

I would just add again to what Steve said that reaffirming our guidance here for that end-market forecast of 540 to 590 million units.

There was a lot of work put on to that this quarter, and we're really pleased to see -- continue to see the market growing at the midpoint being about 565 million units.

I think that equates to about an 18% year-over-year growth in units.

So here we are three months later, and we're feeling even better about that end-market forecast.

Tim Luke with Barclays Capital.

Please go ahead with your question.

Thanks so much.

So Don, you referred in your remarks to the 467 case that was coming up.

Could you just remind us what that related to, and provide any other color on why you felt that that prompted some urgency around the settlement?

And more broadly, perhaps, maybe Paul would like to just comment, just in terms of the licensing in prior periods in doing licensing deals you had received payments from others for your IP.

What do you feel was so different that beyond settling the patent disputes that were outstanding relative to other licensing deals that Qualcomm has done, this was one way you were paying out almost $900 million in order.

And what were the key goals that you sense that you were achieving in terms of access to assets of Broadcom's?

And with respect to the broader WCDMA market, it looks as if it was somewhat slower first calendar quarter seasonally at 107.

But you anticipate still pretty good ramp in the second half.

Could you just talk about some of the seasonality elements there?

Thank you.

Tim, this is Don.

I'll take the first part of the question.

The 467 case had involved several patents.

One of which, you may recall, was 686.

We ultimately got dismissed.

The particular patent that I was referring to here was a patent that affected our EVDO chip, and I want to clarify as I've said, there were many factors.

This is one of them.

This is not, as I think you said, some urgency.

This was a factor in our thinking and what motivated us to continue to try to resolve these differences.

And what had happened there, we had an injunction, as you recall, we've had some rulings from the court which we were concerned -- seemed to be broadening the effect of that injunction.

So that was one of the elements that we considered as we discussed this settlement.

This is Paul.

So Tim, you asked about the fact that we paid money here.

It's true that in the past, we've also made some purchases of rights for intellectual property bought, IP and so forth.

And it's part of our goal to provide as much coverage as we can and to eliminate concerns in the industry about things like royalty stacking and so forth.

So I would say in this particular settlement, obviously the key goals were to maintain the business model.

We very much wanted to eliminate the distraction it was having on management and also on the engineers that were focused on designing workarounds and so forth.

We wanted to get them much more focused on continuing to innovate.

As Don said, we very much wanted to avoid any potential expansion of the injunction, and we wanted to make sure that our customers in the industry was unfettered to move forward.

It was really important to us to make sure that our chip customers and the wireless operators businesses would not be impacted by further litigation, and that was always a possibility that things would go the other direction.

So I think there were just a number of things that led us to decide that this was the right thing to do.

We had been in discussions with them on and off over a fairly long period of time.

And finally we were able to get to a solution that worked.

Tim, let me just add one thing.

This is Derek.

I think as you know, more than 90% of our licensing revenue comes from royalties on handsets.

And we -- the royalties from ASIC suppliers are a very minimal part of our program.

So that might help answer one of the questions you had, and we are very comfortable and confident that the deal we structured with Broadcom will continue to allow us to collect royalties on the devices that generate most of our revenue including ones that incorporate Broadcom components.

Maynard Um from UBS.

Please go ahead with your question.

There has been some press recently about chip set shortages from Qualcomm.

Can you just talk about the shortages you are seeing?

Of when you think you might be able to resolve those?

And then if you could just clarify your comments on the Broadcom OpEx savings.

Based on your previous comments, presumably maybe around $50 million to $75 million a year.

Is that ballpark?

And then lastly, can you just talk about now that the Broadcom resolution is done.

and some of the other guys who have been the key components of the anti-trust reviews in Europe and Korea and Japan.

How that might change the situation now that you have this resolution?

Thanks.

This is Steve, I'll address the first question about the chip set side.

Any time you get a situation like we have now, where you're ramping very rapidly coming out of this correction that we had in the first half.

You do put a lot of pressure on the supply chain, and I think we've seen some small amounts of cases where we've had to push out some orders.

But I think that's really very small thing at the moment, and in fact, we wouldn't anticipate that to be something that would exist beyond the quarter that we're in.

This is Don.

With respect to the question you asked about the regulatory bodies.

As we've announced, Broadcom has agreed to withdraw its complaint to both the European Commission and the Korean Fair Trade Commission.

And of course, those bodies are not bound to stop any investigation.

They can certainly continue their investigation.

What we hope is that they will factor into their deliberations the fact that we've now settled with two companies.

Two of the primary complainants, both of whom have agreed to withdraw their complaints.

We think that reflects a lot, including the fact that as we've often said, these were commercial disputes, and commercial disputes are best resolved between the parties.

We've demonstrated that that can be done, and we're hopeful that will be a factor in the considerations in all the competition authorities who have been looking at this.

And Maynard, on the operating expenses.

In the schedules provided on the website, you'll see a little reconciliation for operating income, and it shows that the net of the Broadcom charge in the second quarter was approximately $700 million versus the $748 million number that I spoke to.

And there's some rounding in that number, but the major component that rounds it down to approximately $700 million is an expectation of lower operating expenses related to our outside legal fees.

Having said that just recall that as Don did say, there will be some amount of wind-down in our third fiscal quarter.

And so the full effect really doesn't come about until the fourth fiscal quarter.

But with the closure of this case, our outside legal fees going out of the year for these more extraordinary cases, we expect to be quite minimal.

Tal Liani from Banc of America.

Please go ahead with your question.

Hi, thank you.

First, just clarification.

When you say $48 million for legal expenses, and given your just last comment.

I assume that on an annual basis it's about $120 million or $110 million.

The $48 million is really just between now and year-end, so we need to annualize it.

If you can clarify this.

Second, about this charge.

Is the decline already built into your expectations or not?

Into your guidance or not?

And third, where should we account for it?

Is it going to be part of the operating margin of licensing or semis?

And going forward -- this is a bigger question -- going forward, can you speak about actually the leverage in licensing once you pass this Broadcom charge decline.

How will gross margin or operating margin in licensing could look like -- what are the puts and takes in this margin level?

Thanks.

Okay.

Let me just go back over, Tal, my prior comments.

So the charge this quarter related to Broadcom settlement is $748 million, and the reconciliation schedules provided on our website, it rounds down to $700 million.

And I said that the major ingredient that rounds it down to $700 million is a reduction in forecast of our legal expenses.

But a partial -- only a partial effect in our third fiscal quarter or full year effect -- a full quarter effect I should say -- in our fourth fiscal quarter.

So going out of this fiscal 2009, the extraordinary outside legal fees we've been incurring here for the last few years, we expect to be at a fairly minimal level.

And that is incorporated into the operating expense guidance that we just gave here this morning.

The accounting of the charge -- the settlement charge has its own line item on the P&L.

So that one stands out pretty clearly from a segment basis.

It's included in the reconciling items.

It's not included in the QTL or QCT segment.

For the ongoing expenses, outside the $748 million.

That level will be fairly small, about $6 million per quarter.

And the bulk of that is in other interest and expense -- other income and representing the imputed interest on the forward payments we'll be making.

In terms of leverage and licensing, our outside legal fees -- we have carefully in the past, allocated those largely between the chip set business and the licensing business.

And so you've been seeing some leverage come through as those expenses have been coming down a bit, and we'll see a little bit more here in the coming quarters.

I'm not going to comment or give specific guidance on our gross margins here for the licensing business.

But going out of this year, we'll have a little bit of improvement, certainly relative to the third fiscal quarter.

Brett Simpson with Arete Research.

Please go ahead with your question.

Thanks very much.

A couple questions.

First of all for Steve, can you talk a little bit about the demand uplift you're seeing today for USB or modules?

Where it's most prevalent, and whether it's been boosted by China already?

And I'm also interested from a licensing perspective whether there's a difference between the royalties you collect for modules and from USB?

Where the ones coming from a percentage of royalties and another coming from an absolute dollar amount.

And then second question, from a licensing perspective, your agreement with EMP.

Now it's folding into a new joint venture with STMicro.

Does that change the licenses, or is there any renegotiation that needs to take place there?

There's also some talk about Mediatech acquiring a chip license from you.

I'm just interested in what rights these guys need, and whether that drives an incremental licensing revenue from your perspective?

Sure.

This is Steve.

I'll take the first part about USB demand.

For the quarter that we just reported on, we had a pretty strong numbers with regards to USB.

Both CDMA and WCDMA or HSPA or HSUPA USB data devices.

And then moving forward, we continue to see that demand accelerate.

I think it's obviously happening in China, but we also see strong USB demand in the developing world, in particular.

Europe as well.

So that continues to be a high spot for the chip business.

This is Derek.

Let me go ahead and try to address the licensing questions.

On modules, it's probably not really a straightforward answer.

There are a variety of terms that apply to our modules, and they differ from product to product.

In some cases, we do collect a royalty on the end-user consumer modules, much like we do on the handset where it's a percentage of the selling price.

For embedded modules, we have somewhat different terms where we have minimum royalties and things like that built in.

And we've done some unique things to address the Notebook space, so I think it's kind of a number of different terms depending on the kind of module.

Your question on EMP.

I think we've said historically we don't have an agreement in place today that covers any EMP chip sales.

So I don't see really a difference going forward to the extent that there's a combination through the JV.

James Faucette with Pacific Crest.

Please go ahead with your question.

Thank you very much.

I wanted to, just again quickly, to get into the timing of demand as it has progressed during the course of the March quarter and the early part of the June quarter.

First of all from a chip set perspective, obviously, your outlook for the June quarter and even what you shipped in the March quarter was a bit better than you had anticipated back in January.

Can you talk a little bit about how that progressed and brought us to the point we are?

Similarly for end-market demand, can you talk about how in the first quarter, units compared to your initial forecast even though you're not changing the full year.

And maybe how you saw that shifting taking place?

And then finally on the settlement with Broadcom, when you talk about non-cellular products, I'm hoping to get a little bit of clarification about how we should think about those?

Whether that is any products that do not have any type of cellular wireless connectivity?

Or should we be thinking about these products as ones that traditionally would not have been considered cellular, but in the future may have those?

I'm just trying to get a better handle on whether we should be thinking about Notebooks and wireless connected PNDs, etc., as non-cellular products or cellular products?

Thank you very much.

This is Steve.

I'll take the first part about chip sets.

If you look at the first half, pretty much unfolded the way we thought it would unfold with the exception of we did have some pleasant -- pleasant surprises with regards to increased demand in China.

In terms of how the demand started to look over the quarter for the June quarter, we've continued to see increases week-over-week, trying to be careful in terms of how we interpret those increases.

I think particularly with such a large component coming from a new carrier or a new region ramping, we've been pretty interested in making sure that the demand is real.

And so we spent a lot of time trying to vet that.

But we've seen increased demand week-over-week and trying to make sure that we validate that.

James, on the end-market, this quarter that we just reported here came in stronger and those of course were shipments that occurred in the December quarter, and we recognize the royalties of one quarter in arrears.

And we saw better strength than expected for both the China market and the European market.

European market, we think was more module-based for data modems.

And then looking forward, our forecast for the June quarter on the end-market, we expect some ebbing coming off the Christmas season as is normal.

And then going into the June quarter, of course that June quarter end-market will be September quarter for our licensing business revenues.

We're looking for a healthy uptick, probably at a rate greater than we've seen in the last few quarters and then continuing on into the December quarter as well.

This is Derek.

Let me address your question on Broadcom.

I think as Don pointed out, the agreement includes broad-based protection between the companies, and then more specific set of rights to the various customers.

When we speak about cellular, Qualcomm did not grant any rights to Broadcom's customers with respect to any products that include cellular interfaces.

So that would include Mids and Notebooks and Netbooks.

And the reverse is also true that to the extent we sell chips into those types of products we would receive rights under Broadcom's patents for our customers.

Adam Benjamin with Jeffries.

Please go ahead with your question.

Thanks, guys.

Clearly, China is driving significant upside in the quarter.

Can you talk a little bit about the manufacturing is difficult to get a sense of where the exact volumes are?

But can you talk about domestic China as a percentage of your unit volume and break that out just roughly for us?

Thanks.

We don't break out China specifically anymore.

As we mentioned I think it was last quarter, we're a little concerned that we don't want to be -- there's one CDMA2000 carrier today and one WCDMA carrier in China.

And we don't want to be publicly disagreeing with their forecast.

So we don't break those out like we had in the past.

We're seeing a good uplift in China for both CDMA2000 and WCDMA.

We see this at a growing trend.

As Steve said, we're being a little cautious there as new operator launches historically have been one of the more difficult areas for us to forecast accurately.

But that aside, we're pretty optimistic on continued growth in the China market for both CDMA2000 and WCDMA.

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'd like to make?

Yes.

Thanks, everybody for joining us.

I have to say despite what the EPS says, I think we had a strong quarter as evidenced by the operating cash flow, and we're feeling more comfortable looking forward.

Obviously, getting the settlement with Broadcom behind us, really eliminates a lot of distraction and makes things a lot better for the industry.

I really want to thank the teams that worked extremely, extremely hard on this, getting this deal done.

And we're happy to see the chip demand up.

We're happy to see the inventory stabilizing, reaffirming the device demand.

We have very strong operating cash flows as I said, very strong balance sheet.

We're also, I think, doing a good job on holding down operating expenses while we're still making investments on the R&D side.

And so, I think we have the right products and technologies for today.

I think you'll see over the next year that we have some very exciting initiatives underway.

So thanks, everybody, and we'll look forward to talking to you again soon.

This does conclude the Qualcomm second quarter fiscal 2009 conference call.

We would like to thank you for your participation.

You may now disconnect.