高通 (QCOM) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm first quarter fiscal 2010 conference call.

(Operator Instructions).

As a reminder, this conference is being recorded January 27, 2010.

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

International callers please dial 706-645-9291.

The playback reservation number is 50788237.

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

Mr.

Kneeshaw, please go ahead.

Thank you, and good afternoon.

Today's call will include prepared remarks by Steve Altman, Steve Mollenkopf, and Bill Keitel.

In addition, Don Rosenberg and Derek Aberle will join the question-and-answer session.

Dr.

Paul Jacobs is unavailable, as he is chairing a next-generation mobile communications working group at the World Economic Forum in Davos, Switzerland.

An internet presentation and audio broadcast accompany this call, and you can access them by visiting www.qualcomm.com.

During the conference call, if we use any non-GAAP financial measures as defined by the SEC and Regulation G, you can find find the required reconciliations to GAAP on our website.

I would also like to direct 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 event 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 President, Steve Altman.

Thank you, Warren, and good afternoon, everyone.

In the first quarter, we had continued strong operating performance, with proforma earnings per share of $0.62, exceeding the high end of our prior guidance.

Our results were driven by healthy demand for our chipsets, strong shipments of 3G devices by our licensees and lower operating expenses.

Operating cash flow was 1.2 billion for the quarter, and we had approximately 18.9 billion in cash and marketable securities at the end of the quarter.

We continued to execute on our strategic objectives, see healthy growth in 3G and are very encouraged by customer traction with our new products, including our industry leading Snapdragon Chipset, as evidenced by the many recent product launches and announcements made by our partners.

Industry analysts and trade groups report that approximately 85% of worldwide operators have now launched 3G networks, underscoring the continued migration of 2G to 3G.

According to wireless intelligence, there are now approximately 945 million 3G subscribers worldwide, an increase of more than 30% year-over-year.

Operators continue to leverage their 3G investments with improvements in their mobile broadband offerings.

With consumer demand for data services on the rise, we continue to see a growing number of innovative and exciting 3G devices.

According to Informa Telecom, smartphone shipments as a percentage of total handset shipments are expected to increase from approximately 20% in 2009 to approximately 40% in 2014.

The success of smartphones is creating an increased level of competition among traditional handset companies, as well as a new set of entrants vying to capture a piece of this fast growing segment.

The convergence of the computing, consumer electronics and wireless markets is underway.

We are seeing new, emerging 3G connected device categories such as smartbook devices and e-book readers that provide exciting opportunities for us and our partners.

The recent consumer electronic show highlighted a significant increase in the level of innovation and competition for e-book readers, with 3G connectivity becoming a critical must-have feature.

We believe that our Mirasol display technology will further drive innovation in this space by providing color and video capability while consuming much lower amounts of power than traditional displays.

We are ramping up to commercialize these capabilities in order to have Mirasol color displays for e-book readers toward the end of calendar year 2010.

Mobile data continues to be a key component of revenue growth for 3G operators around the globe.

For example, according to the industry research, in the United States, 20% of Americans are accessing the mobile web every day; and in Asia, Informa Telecom reports that the ARPU of the 3G user is generally 25% higher than that of a 2G user.

On a global level, according to analysts, service revenues from mobile broadband are expect today double from 2009 to 1213.

North America continues to be one of the leading regions for advanced 3G devices in the world.

Yesterday, Verizon announced quarterly wireless data revenue growth of greater than 26% over last year, and those data revenues now account for 31.9% of all wireless service revenues, up from 26.5% reported in the fourth quarter of 2008.

In addition, AT&T recently announced a significant initiative called [Apps to All], which aims to expand the universe of mobile applications beyond smartphones to more mobile devices.

Included in this plan is a move to our Brew Mobile Platform on AT&T's quick messaging device category, which according to AT&T is one of the Company's fastest growing categories.

Devices will begin rolling out in the second half of this year.

By the end of 2011,AT&T expects the majority of their quick messaging devices to be based on our Brew Mobile Platform.

We are also seeing more innovation in data pricing strategies, with several operators recently announcing new pricing plans aimed at spurring data usage.

In Europe, 3G growth continues despite continued economic headwind.

According to wireless intelligence, the number of European 3G subscribers exceeded 200 million during the fourth quarter of calendar 2009, representing more than a 45% year-over-year growth.

Attractive new devices continue to be introduced, and carriers remain committed to driving data usage and connectivity, as evidenced by the relatively strong demand for 3G data modems in the region.

The transition to HSPA Plus has been a bit lower than forecasted, but download speeds of 21 megabits per second supported in HSDA Plus is still expected to be the next data rate baseline according to a recent survey of operators by the Global Mobile Suppliers Association.

Emerging regions will continue to be a key growth area for 3G in the years to come.

Informa predicts that by 2012, emerging regions will account for more than 50% of 3G handset shipments.

We are addressing these regions with products such as our QCT single chip solutions and the Brew Mobile Platform operating systems.

In China, operators have been focused on the aggressive build out of their 3G networks.

According to China's Ministry of Industry and Information Technology, China 3G carriers invested more than $20 billion in 3G infrastructure in 2009, including the deployment of 325,000 base stations.

China Telecom has been successful with their initial focus on driving subscriber growth by leveraging their 1X network.

Operator reports indicate they have added more than 28 million CDMA subscribers over the last 12 months; at the same time, they have been expanding their EVDO Rev A network, which now covers more than 340 cities.

China Unicom has also been aggressively rolling out their 3G network, and has reported that their network now covers approximately 300 cities, with HSDPA download speeds of greater than 7.2 megabit bits per second.

With mature networks in place and operators gaining 3G experience, we expect a variety of new devices and services to be introduced in calendar year 2010 that will help to continue to drive growth in China.

In India, recent reports indicate that 3G licenses are anticipated by the end of March; but this process has been delayed several times, so we will not attempt to predict exactly when licenses will be granted.

In the meantime, operator reports indicate both and [BFNL] and [MTNL] have launched HSPA services, and as of the end of December 2009, they have reached a subscriber base of just under one million.

The Indian CDMA service providers have launched EVDO mobile broadband services with strong initial traction in USB modems and (inaudible).

Latin America operators now report 65 3G networks in operation, an increase of 18% as compared to last year.

As a result, more than 50% of the population now has access to 3G services.

In addition, 3G spectrum auctions are on the horizon in Mexico and Brazil, which will provide operators with additional spectrum to support 3G data services.

Turning to the licensing business, we continue to license and enable additional companies to manufacture and sell products for the growing 3G and future 4G ecosystems.

We now have more than 100 CDMA-base licensees worldwide.

We continue to make good progress with our single mode 4G licensing program and now signed long-term 4G license agreements, which cover LT and WiMax, with the top 3 handset manufacturers in the world.

Looking forward, we are reaffirming our calendar year 2010 3G device forecast, which is an increase of approximately 21% year-over-year based on mid-point estimates.

As anticipated, we see a competitive pricing environment in chipsets this year, and we are leveraging the R&D investments we have made to offer single chip integrated solutions to target share gains in this environment.

A subdued economic recovery in developed regions, including Europe and Japan, combined with relative strength at the lower end of the market, is impacting our estimated 3G device average selling price and the chipset mix for this fiscal year.

Accordingly, as Bill will cover in more detail, we are modestly reducing our revenue estimates to reflect this near-term market situation, but are maintaining our earnings per share guidance.

The fundamentals of our business remain strong, as does the outlook for 2010 and beyond with the continuing migration of 2G to 3G and the introduction of new types of cutting edge 3G devices.

We continue to invest in innovative new products and solutions that will reinforce our leadership position and drive growth.

That concludes my comments.

I will now turn the call over to Steve Mollenkopf.

Thank you, Steve.

QCT continued our track record of strong execution, and I would like to discuss the highlights.

QCT shipped approximately 92 million chipsets in the first quarter of fiscal 2010.

This is at the high end of our most recent guidance and a 46% increase compared to the same quarter a year ago.

We generated revenue of approximately $1.6 billion, an increase of 21% year-over-year.

Our earnings before tax for the quarter was $425 million, which is more than 150% higher than the year ago quarter.

Consistent with our previous guidance, the average revenue per MSM was approximately 6% lower than the previous quarter.

As we anticipated, chipset demand increased for entry level phones and USD modems, particularly for emerging markets, and became a larger percentage of our total unit volume.

We expect this trend to continue in the near-term, indicating healthy demand for our data device chipset and relative strength at the lower end of the market in multiple regions.

In regions like China and Europe, the pace of transition to new technologies such as EVDO Revision A and HSPA Plus has been slower than expected.

Historically, the migration to new technologies have been one of the more difficult events to forecast, and in these case has been further complicated by macroeconomic conditions.

These migrations are underway, but as yet are not showing through in our product mix and average ASPs.

We remain positive about the opportunities in 3G.

We are confident in our position supporting products across all market segments.

QCT has invested in highly integrated products in recent years to specifically address the current market environment.

We are thus able to offer compelling solutions for all device tiers, while also maximizing cost efficiencies.

Our broad chipset road map has led to steady market share gains.

For example, QCT UMTS shipments this quarter grew 52% year-over-year, and our calendar 2009 UMTS shipments grew at a greater rate than overall UMTS device shipments, and we believe we continue to build share in this segment.

Adding to our confidence in our market position, QCT has seen growth in design-in activity across our entire portfolio of products over the last quarter.

As seen at the most recent Consumer Electronics Show, our first-generation Snapdragon Chipset powers some of the most compelling devices on the market today, including the Google Nexus One smartphone and the Lenovo Skylight smartbook device.

Other Snapdragon-enabled products introduced to the market include the Lenovo IdeaPad U1 hybrid, Sony Ericsson's XPERIA X10, HTC's HD2 and LG's eXpo.

The fact that the new devices are based on a variety of different high level operating systems underscores the breadth of our software capabilities.

QCT's chipsets power the vast majority of smartphones in the market today running Android and Windows, and we continue to expand our support for other high-level operating systems such as Symbian and Chrome.

As these products begin to ship in volume and additional devices launch over the next few quarters, we expect the industry momentum behind our integrated product offering will continue to grow.

For mass market device categories beyond smartphones, Qualcomm's Brew Mobile Platform is being adopted by AT&T for their fast-growing Quick Messaging category as part of the Apps for All initiative.

Brew Mobile Platform will enable carriers like AT&T to expand the capabilities offered by their mass market device and provide an enhanced data experience.

For the most cost-sensitive segments of the market, our QSC single chip solutions are enabling affordable yet fully featured devices.

[Waway] recently launched launched a handset in Indonesia and South America based on our QSC1110 solution that features a QWERTY keyboard and a strong emphasis on access to social networks.

Our cost-effective integrated solutions position us well for the emerging geographies where open markets dominate the distribution channels.

We recently announced that we are working on 28-nanometer process geometry with both TSCM and GlobalFoundries.

QCT's emphasis on integration allow us to take full advantage of this technology.

Our fundamental approach of offering as much functionality as possible in one chip allows us to reap the technology and cost-saving benefits of investing in the 28-nanometer node.

Discreet solutions will not gain the same benefit from the smaller geometrics.

QCT is leading and collaborating with our diverse base of foundry partners to drive the fabless industry toward commercialization of 28-nanometer.

As seen over the past several quarters and most recently at CES, the merger of the consumer electronics and wireless industries is taking shape.

QCT is well-positioned to lead this trend, and there is an increasing breadth of customers, many from outside the traditional wireless industry, who are relying on us to help them succeed in this converged marketplace.

With our technology leadership and broad chipset road map, we view the current competitive market environment as an opportunity to further leverage our strengths and to target gain share.

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

Thank you, Steve, and good afternoon, everyone.

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

Revenues of $2.67 billion were up 6% year-over-year, and better than the mid-point of our prior guidance.

Proforma operating income was $1.1 billion, up 15% year-over-year.

Proforma earnings per share were $0.62, exceeding the high end of our prior guidance.

Proforma combined R&D and SG&A expenses decreased by approximately 5% compared to the prior quarter and were modestly better than our guidance.

We shipped 92 million MSM chips during the quarter, and average revenue per MSM declined sequentially, consistent with our estimates.

We estimate that our licensees shipped approximately 133 million new CDMA devices in the September 2009 quarter, slightly above the mid-point of our prior guidance.

We estimate the average selling price of CDMA devices was approximately $184 per unit in the September quarter, below our prior estimate of approximately $198.

This reflected greater than expected price erosion within certain developed regions, including Europe and Japan, as well as greater overall mix of lower tier device shipments, including data cards.

During the quarter, we finalized the accounting treatment of the Samsung license renewal, including the non-refundable lump sum payment totaling $1.3 billion, and an estimated fair value of $136 million in intangible assets for the patents assigned as part of the agreement.

Revenue will be recognized over the 15 year life of the agreement on a straight line basis effective January 2009, and the intangible asset value is being amortized to cost to sales beginning from the date the patents were assigned.

As such, our fiscal first quarter results include $71 million in revenue attributable to fiscal 2009.

Operating cash flow was approximately $1.2 billion.

Cash and marketable securities grew to a total of $18.9 billion at the end of the first quarter, including $8.6 billion onshore and $10.3 billion offshore.

During the first fiscal quarter, we paid dividends of $284 million or $0.17 per share, and on January 7, we announced another cash dividend of $0.17 per share payable on March 26.

Turning now to our guidance, we estimate that approximately 144 to 149 million CDMA-based devices shipped in the December quarter, and that calendar 2009 CDMA device shipments were approximately 515 to 520 million new devices.

Based on the mid-point of this new estimate, 2009 CDMA device shipments grew approximately 8% year-over-year.

Furthermore, we estimate approximately 210 million CDMA 2000 unit and 308 million WCDMA units were shipped worldwide in calendar 2009.

We are reaffirming our estimate that calendar 2010 CDMA device shipments will be between 600 and 650 million devices, an increase of approximately 16 to 25% year-over-year.

We estimate that of the 625 million device mid-point, approximately 231 million units will be CDMA 2000 and approximately 394 million will be WCDMA.

We anticipate average selling prices for CDMA 2000 and WCDMA devices combined would decrease approximately 9.5% year-over-year to approximately $181 for fiscal 2010.

Expectations for a subdued economic recovery in developed region such as Europe and Japan, increasing price competition in the smartphone segment and relative strength of the lower end of the market are decreasing our estimated 3G device average selling price for this fiscal year.

Our fiscal year guidance continues to include revenue from the potential resolution of the two licensee disputes we disclosed in November.

One licensee continues to pay, but we are deferring revenue recognition and proceeding with arbitration.

The second licensee is underpaying.

Accordingly, our fiscal first quarter results and second quarter guidance reflect less licensing revenues than we believe we truly earned because of these disputes.

If these disputes are favorably revolved in fiscal 2010, the associated revenue benefit will be in the range of approximately $200 million.

There is the potential that one or both of these disputes will not be concluded this fiscal year.

We also continue estimates that the average QTL royalty rate for fiscal 2010, as you calculated with the information we provide, and excluding revenue related to the two licensees disputes, to be approximately equal to the rate of our fourth fiscal quarter 2009.

As we mentioned in November, QCT is proactively addressing the competitive dynamics in their market.

We've made investments in recent years focused on single chip products, and these chipsets enable us to offer compelling lower price solutions while maintaining gross margin percentages through manufacturing cost reductions.

Although we expect our chipset average selling price to decrease more this fiscal year than in prior years as we ship a greater mix of single chip products and lower end products, we are targeting market share gains and leveraging our technology in integration leadership.

Based on the current business outlook, we are refining our fiscal 2010 revenue guidance.

We now expect fiscal 2010 revenues to be in the range of approximately 10.4 to $11 billion as compared to our prior estimate of 10.5 to $11.3 billion.

We are reaffirming our fiscal 2010 earnings per share guidance.

We anticipate proforma earnings per share to be in the range of $2.10 to $2.30, an increase of 60 to 76% year-over-year.

We expect the combination of proforma R&D and SG&A expenses to increase approximately 3% year-over-year, lower than our prior guidance of approximately 4% growth.

We estimate our proforma annual tax rate to be between 21 to 22%, consistent with our prior expectations.

For the second quarter of fiscal 2010, we estimate revenues to be in the range of approximately 2.4 to $2.6 billion.

We estimate proforma earnings per share for the second fiscal quarter to be approximately $0.49 to $0.53.

We anticipate shipments of approximately 88 to 92 million MSM chips during the March quarter, and our estimate for CDMA channel inventory is consistent with our prior expectations and remaining at the low end of the historical range.

We estimate that new CDMA-based devices shipped in the December quarter at an average selling price of approximately $179 per unit.

We anticipate second fiscal quarter proforma R&D SG&A expenses combined will increase sequentially approximately 8%, reflecting normal seasonality as well as increased investment in select R&D programs and increased patent filings.

That concludes my comments.

I will now turn the call back to Warren Kneeshaw.

Thank you, Bill.

Before we go into our question and answer session, I'd 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 are ready for questions.

(Operator Instructions).

Tim Long from Bank of Montreal, please go ahead with your question.

Thank you.

Bill, if I could just get back to the ASP numbers here.

Just curious, a few things here.

Obviously, a big miss for what you were expecting, the 198 to 184.

You did give your guidance about a month -- a little over a month after the quarter.

So could you just talk a little bit about the surprise there?

And was it -- you gave some of the high level impacts there, but what does it tell you about the forecasting as well?

And also if you can just talk, in this generally pretty price-elastic market, how come we didn't really see any unit upside based on almost 10% miss in average selling prices?

Thank you.

Tim, yes, it was -- given our past accuracy -- a relatively large miss for us.

So we've spent more time on it.

obviously.

I think the -- we think the bulk of the miss was just a pure ASP erosion, although there was a substantial regional mix in and product mix impact as well.

But the bulk of it, we think, was ASP erosion.

Our digging in so far is telling us that there was a fair amount of unloading of feature phones from inventory, and we think there was a little more stocking up of high end there.

Recall, though, although we gave that guidance in November, as of that time we really essentially had no licensee reports.

So it was just a pure estimate, and then the licensee reports came in subsequent to that.

We did see some trends that I think we'll use going forward; namely that we see some markets that we think it is showing a trend of unloading some phones in this quarter -- this will be the September quarter that we are speaking of now -- in preparation for the December quarter.

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

For Steve, can you talk about kind of some of the design activity you had last year in Barcelona, which has been almost a year that you announced an agreement with Nokia.

Can you give us an update how that is progressing?

And can you talk about activities with other vendors for your base (inaudible) that you currently aren't shipping into?

So we are pretty happy with design-in activity and -- design-in activity share and actually new customer activity.

We really don't have anything additional to say, but I'd say we are feeling pretty good about that.

With regards to the OEM that you've mentioned -- Nokia, which we talked about last year -- things are going the way that we want it to go.

It's -- in all cases, we are monitoring how the different OEMs are doing in the various markets and waiting for how that's going to play out for us.

But in terms of the development and how we are progressing with those activities kind of upstream of the sell through, we are pretty pleased about that.

As you have seen in the past, we've announced a number of new OEMs or strength in certain OEMs really being accelerated by the smartphone transition.

So if you see -- as people have been going to smartphone, I think it's been playing toward our integrated solution quite a bit.

And you are starting to see that with Palm and you're starting to see that with Sony Ericsson as well.

So we are pretty happy with how that is playing out right now.

Okay.

Thank you.

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

Okay, thanks.

Yes, Steve, just maybe building on that question, too.

Can you just talk a little bit about this Brew OS and how you size up that market opportunity?

And if Brew OS has any impact on kind of slowing the development of 3G smartphone, as it gives another leg to the feature phone market?

Sure, Mike.

It's a very similar view as you described.

The high end smartphone market is moving mass market.

It's moving toward our integrated solution, but there's also a market tier underneath of that, which I think AT&T really described well, which was the Quick Messaging tier, and that tier also is looking to go toward -- more toward using data and taking advantage of some of the same capabilities as you get in a smartphone but at a different price point, and we are supporting that through mobile platform.

We also think that that technology will be useful for us in order to go after the open market.

We think that that tier of device is also going to be looking for an [App] store or data usage capability, and it sizes up well for us.

So very much a barbell a strategy for us in the chipset and the OS side.

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

Thanks so much.

Just some clarifications, Bill, on the way you guided.

With respect to first just the handset ASP, for the year going forward, I think you are saying it is going to be at 181, and for the coming quarter you're somewhat below that at 179, having seen a fairly significant decline from 196 in the June period.

What is your expectation in terms of what you think is going toi happen that will add ASP higher as you move through the year to get to that 181 average?

And then, Steve, clearly, the mix in terms of your ASP is lower.

Can you just give us some framework for thinking about how you look for it to progress through the year should this rate of broad slippage in the ASP be continued through the fiscal year?

And it looks -- well, you've guided the OpEx, but are you going to see significant savings, Bill, in OpEx in the back half of the year given what you said about sustaining the EPS?

Thank you.

Okay, on the handsets, Tim, we are looking for -- after this next quarter, we are looking for improvements in both regional mix and product mix.

So those are the key drivers to the ASP question you had there.

Steve, do you want to take that next one?

Sure.

On the chipset side, it's obviously the same story.

What we've seen is really two phenomenons.

In the developed world, we are seeing a bit more of the low end chipsets being sold, and I think that's consistent with some of the carrier reports you have seen as well.

We think that is a near-term phenomenon.

We think that that is something that will correct itself over the fiscal year .

And then the second event is really the delay in some of the emerging markets going to new technology .

And again, we think that is going to correct itself, but it's a little bit later than what we had thought.

If you look at understanding sort of our operating profit guidance and our ASPs, we are not changing that outlook that we gave in November.

So you are going to see us exit the fiscal year a bit more in the range that you are used to.

But during this near-term issue, you are going to see a little bit of an characteristic number there

So similar, Tim, then your question on operating expenses and how we exit the year, we think we'll grow total OP expense 3% year-over-year.

We are looking for a similar modest Q3 as we are expecting here for Q2, and then stronger pick up in Q4 in both revenues and operating margins.

Tal Liani from Banc of America Merrill Lynch, go ahead with your question.

I want to go back to the ASP question.

This is ASP relating to the September quarter and China.

Shipments of 3G in China didn't start much until after that.

And the plan was, if you look at the number 3 million and 5 million for WCDMA and the plan next year is 40 million together.

So first, what happens to ASP when you think about TDS?

Is TDS in your general total market size?

Does it impact ASP?

If it grows, does it bring down the ASP or doesn't have an impact?

How do you take care of TDS?

And second what happens after that?

How do you think about ASP going forward -- just even directionally, because the explanation you give here about erosion is about feature phones -- but we all think that feature phones will be replaced by smartphones, which are more expensive.

Are you expecting a U shape?

Do you expect it to go up, or do you think that there are other factors that we need to take into account later in the year and into 2011, et cetera?

In ChinaTel, we think the predominant 3G sales today are low end CDMA 2000 and low end WCDMA.

We are looking for improvement as the year goes on and the operators leverage their more advanced data networks and get the product and the offering such that they can start getting the data ARPU uplift that we're seeing most everywhere else around the world -- everywhere else around the world.

But right now, we think it's primarily low end.

On TDS CDMA, it's -- we have a small amount in our estimates for the calendar year -- but it's just that, a small amount.

Visibility in there for us, we think, is relatively low.

We are getting reports and payments on TDS CDMA, but nonetheless is still relatively low visibility.

So it's a very small component of our forecast at this time.

Matthew Hoffman of Cowen & Company, please go ahead with your question.

Thanks.

A question for Steve.

The Company has now has flat to down chip units each of the last three quarters, while sell through of CDMA-based handsets have increased in each of those periods.

You indicated in your prepared remarks you were gaining share in UMTS, but is there a segment out there -- like high end HSPA or low end CDMA -- where you are worried about your positioning?

And specifically, are you seeing share losses in those segments?

And then finally, is any of the ASP pressure you are seeing in chips related to an effort to regain share in those segments?

Thanks.

Sure.

This is Steve.

Maybe two part answer.

On the first side, I don't think we are concerned about share.

In fact, we think we are building share, particularly as the smartphone transition occurs.

Consistent with what we've said in previous quarters and in New York in November, we are seeing price competition in these tiers, but I think we are able to defend that reasonably well; and things are going, with respect to the pricing, pretty much the way that we thought it would go.

But I think we definitely feel good about the share position.

In fact, we feel good about not just share but also new customer acquisition.

So I don't think that's really the issue as much as a -- kind of a change in mix here over the near-term.

Ehud Gelblum from Morgan Stanley, please go ahead with your question.

Hi, thank you very much.

First of all, when I do the math on comparing this quarter to last -- your guidance for fiscal Q2 versus the quarter you just reported -- and I do a walk-through from the EPS of $0.62 to your new guidance -- this quarter, you had roughly about $0.04 versus my model of below the line, and maybe the tax rate -- maybe half a penny or so.

But normalizing for that, you are still sequentially dropping maybe $0.07 or $0.08 from your Q1 to your Q2.

Your chip number is basically the same -- 92 million -- 89 to 92 million for next quarter.

Your handset ASP is down clearly for next quarter, but handset units are up.

There seems to be a lot of things that are sort of canceling each other out.

Are you -- can you give us a sense as to what the assumptions are that get us down to that lower EPS?

The only thing that is left is chip ASP, and is that the only difference in the difference in the $0.07 to $0.08 between this quarter and next quarter?

And then in a separate thing that is related, did your -- in terms of the handset, have any of the contracts that you signed, whether it's Nokia, Samsung or any of the other ones, did they have any clauses that perhaps put new caps on the highest level of ASP that you could collect a royalty on, and so what used to be a royalty on a $400 or $500 phone would now be only royalty on a $300 phone because they're capped?

Or is there something like that that could be causing some of what we're seeing on the handset ASP?

Thank you.

I'll take the -- this is Bill, Ehud.

I'll take the first part.

Our Q1 to Q2 sequential change is primarily threefold.

One, you had the pick up in Samsung the past three quarters brought into this quarter because the proper amortization was from last January.

So we are not going to have that in the March quarter, number one.

Number two, our guidance is holding for the year, and we are saying that chipset prices are coming down.

We are shipping more of our single chip solutions.

The gross margin percentage is holding, but revenue per chip and gross margin dollars per chip is coming down.

And then number three, we are forecasting a modest decrease in ASPs, which will have its impact on QTL Q1 to Q2.

Those three combined drive the difference.

This is Derek.

Let me just answer the second question.

There really hasn't been any changes across the licensing program or agreements to change the landscape on caps for high end, high price devices.

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

Mr.

Benjamin, your line is open.

We are moving on to the next question.

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

Hi.

Thank you so much.

I just wanted to follow up on the prior question in terms of the royalty first.

So it sounds like the December quarter was positively impacted by catch of (inaudible) Samsung.

But Bill, I think I heard you say that looking forward for the rest of the year, the royalty is going to be at this slightly higher rate as well.

So can you just comment on why that would remain at a slightly higher rate even though that was positively impacted in the December quarter from Samsung?

And then on the chipset unit guidance, which is flat to down slightly, your normal seasonality is up slightly in the March quarter, and obviously inventories are pretty low and demand is generally improving.

So can you just comment why this would be a worse quarter than typical, especially since you don't think you are losing share?

On your first question, what I said about the royalty rate -- again, royalty rate as you would calculate it based on the information we disclosed -- that we ended fiscal 2009 -- going out of fiscal 2009, the rate was approximately 3.4%.

For all of fiscal 2010, we expect it to average about that same rate -- approximately the same rate -- not including the 71 million of Samsung revenues that were earned last year but properly accounted for in the first quarter, and not including the upside potential from resolution of the two licensee disputes.

The quarter MSMs -- Steve, you want to --

Sure, so on the quarter to quarter, I think what we have seen in the past is there's always been some mild seasonality.

It's been kind of sitting underneath of new carrier launches, and right now I think there are less in the grand total of things -- less new carrier launches that are pushing the units, so we are seeing a little bit of what I would think is normal seasonality.

But in the second half of the yea,r you are starting to see some of that come back.

So from year to year it's not exactly growing linearly, but I think we are still confident in our share projections.

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

Great, thanks.

Steve, can you tell us a bit about -- whatever you can share with us in terms of your market share of 3G chips?

And then I also wanted to ask if -- is China ramping up -- (inaudible) up to actually have an impact on the royalty ASPs and -- royalty rate?

Thanks.

Mark, this is Steve.

Maybe I'll take the first part of the second question just to talk about chipsets, and maybe one of my colleagues can take the ASP side.

In terms of share, as you may know, we don't tend to talk about share in terms of WCDMA other than sort of broadly with respect to how our chipset shipments are going kind of in aggregate; although I would say that we feel that that is going well, both with share inside of existing customers and also acquisition of new customers.

Within China on the chipset side, it's ramping in terms of units, but those units have been a bit on the lower end relative to what we had thought.

We had been looking a little bit more at units coming in at the higher data rates than what we are seeing right now.

We think those will happen, but near-term we are seeing a little bit of a softening in terms of the mix, not the units.

And Mark, this is Bill.

On the China ramp, we think China is ramping well.

We expect that to continue through the year.

Near-term, we are seeing more of a low-end CDMA 2000, low end WCDMA focus, than what we had hoped for, but we do expect improvement to the higher end devices as the year progresses.

So it is a positive to the business, including the licensing business.

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

Thanks.

Do you guys have any opinion about handset inventories that are out in the channel right now, and whether or not you think that is impacting some of your sales?

And then the second part is actually looking backwards.

On the chipset side, what is the status on the capacity to make those chips today, and how do you think that looks as you look through the rest of the year?

Glen, this is Bill.

On your first question, handset inventories, we continue to think the channel is quite lean, averaging in the low end of a -- very low end of a normal band.

We continue to see people being cautious, and so our forecast for the year is -- our forecast assumes that that channel continues to stay very lean throughout our fiscal 2010.

This is Steve.

On the capacity question, I think we feel pretty prepared to deal with any uptick, so I don't see that as a big issue at this point.

Craig Berger from FBR Capital Markets, please go ahead with your question.

Hey, guys, thanks for taking my question.

Can you just help us think about how to understand the timing and magnitude of some of these Snapdragon programs?

How big are smartbooks going to be -- you've got the HP win -- any other color or detail you can provide?

Thank you.

Sure, this is Steve.

For Snapdragon, you should really think as Snapdragon as being sold into two markets -- into the handset market and into this incremental market, which we call smartbooks.

And I think on the handset side, the move to smartphones clearly has been something that's been moving in the direction that I think benefits us.

This new category, the smartbooks, it's a bit too early to say how they will sell through and sort of how you should model them, whether they should be modeled as a PC type unit volume or it should be a phone type unit volume.

We tend to view those products as something that looks like -- that tends to act like a big phone.

So we are encouraged actually by the category, seems to be developing in terms of consumer's views quite a bit.

There's pretty innovative product coming out and being announced.

But it's a little bit too early to see how the customers are going to react to them -- and then also how the new OS's that will be used in that market segment, how they are received by the consumer.

But in general, we are pretty happy with how smart -- our how Snapdragon has been looking in terms of meeting the proper design point, and I think the integration play and the combination of multimedia 3G and the custom processor has been something, I think, that's been working for us.

Phi Cusick from Macquarie, please go ahead with your question.

Guys, can you hear me?

Mr.

Cusick, your line is open.

Please go ahead.

Guys, can you hear me?

Yes, we can.

All right.

Sorry about that.

So sort of on the same vein, can you remind of the portion of non-voice devices that are in your 3G forecast and the licensing model there?

And then second of all, since nobody else is going to ask it, I'll ask.

We do see a 3G radio in the Apple tablet.

Can you tell us if that is yours or whether that isn't?

Thanks.

Non-voice devices in our licensing program?

I think the foremost there is data modules, both embedded and what we call dongles.

Last year we came out and stated that we thought that market was in a range of about 40 to 50 million for 2009.

We haven't updated that estimate.

Industry analysts have it growing at a good rate this year, and we see it growing at a strong rate as well.

Other than that, you've got a growing e-book market -- the Amazon device being the clear example there, but a lot of new devices coming along.

Machine-to-machine is in an early stage, but seeing a growing interest there.

Telemax is the obvious one, there but a growing interest there.

I think there is going to be a lot of new areas coming along.

The big one today, though, is embedded and dongles for laptops.

But no update on what you think that market looks like?

No, we have not given an update on our estimate.

We see a number of industry analysts out there with their estimates and they -- after ours last year, they seemed to combine around more -- a little more consensus in what the industry guys were doing.

Mark Sue from RBC Capital Markets, please go ahead with your question.

Thank you.

If we saw an inventory unwind which impacted ASPs, are there proof point that the rewind or restock is with higher ASP products or for higher ASP regions?

Is that just conjecture at this point?

And would the -- if as this happens, would that just be one-time positive events, or how can we kind of assure investors that a lot of that is just one time?

And then separately, that the Apple iPad make you less inclined to continue your investment in Marisol?

Okay, I'll take the first one Mark.

What we are seeing is actually quite logical that it's having an impact on channel inventory.

We are seeing a greater proportion of lower end products, and so we -- what we are seeing is the channel adjusting to that and -- for the developing part of the world.

On the developed side, we are seeing a bit of the opposite, and I think the trends there were -- everybody on this call is familiar with -- with the growing interest in smartphones.

So developing world growing on the low end inventory and developed world easing up on low end inventory.

Then this is Steve.

The question with regards to Mirasol, I think we are actually very happy with the response that we've had from customers about the value proposition from Mirasol.

It's really the combination of color, video and the low power that they are used to in that existing technology that we are pretty excited about.

I think if anything, a product that defines that category, I think the whole category itself will grow, and I think that our technology is going to be a differentiator in the long-term as well.

So we actually feel quite good about it, and I think we talked about it a little bit in November that the first product is based off of our new display -- our larger display, which has color -- will launch at the end of this calendar year.

So very much excited about that category.

Stacy Rasgon from Sanford Bernstein, please go ahead with your question.

Hi guys.

Can you hear me?

Hello?

Yes, we can.

Great, thank you.

Just to get back to the guidance again, so you've got revenue guidance down.

You held your EPS guidance.

This is an environment now where, I mean, you have got device ASPs which are way down -- which obviously takes the royalty revenue down commensurately at higher margins.

The new ASP guidance on devices still seems to imply an uplift in the second half.

I mean, can you just be a little clearer on what's actually going on on the chipset side or the OpEx side that gives you confidence in maintaining that EPS guidance in the face of what obviously are some headwinds on the royalty business where the margins typically are much higher?

I mean, we're -- if you step back from it, what we are saying here is we are essentially holding our forecast.

We brought down the range on our revenues a very small low single digit difference.

We are holding our earnings per share guidance.

So the view we had as of November is we are saying we are largely holding to that for the year.

There are some puts and takes to that.

We are seeing the ASPs a bit lower.

We are seeing volume a bit stronger on MSMs.

We are seeing operating expenses, we expect to be a bit lower.

So there's puts and takes, but step back from it and we are essentially seeing the year, we expect to unfold largely in line with what we said back in November.

But I mean, even with that, it looks like the OpEx was down a bit beyond the guidance this quarter, but it looks like it's stepping up again next quarter and you talked about going up again into the second half.

We have got a device -- ASPs -- your new guidance has been down -- whatever it is -- 4%, again, dependent on ASPs increasing in the second half in order to reach that.

We have got chipset ASPs which are still -- fell 6% this quarter and that potentially is going to continue going forward.

It's just -- I guess where I just wonder a little bit is on the -- maybe on the licensing side, if that stuff has like 85% operating margins and that's the area where you seem to be under a lot of pressure, just what's -- I'm still just a little unclear what happens or what needs to happen in the rest of the business in order to kind of maintain the same sort of an ASP of -- or same sort of EPS range, given that the areas where you are having pressure tend to be at kind of higher margin than some of the others.

Well, the pressure isn't necessarily on the higher margin stuff.

But let's just back up here quickly.

Operating expenses -- we forecasted an increase in operating expenses 4%.

So I don't relate to your point about what's going to happen first quarter to second quarter.

What is happening to operating expenses is exactly what we said.

We expect for the full year instead of growing 4% we are going to grow 3%.

In terms of average ASP per MSM, we are spot on right now to where we thought we were going to be, and we continue to expect the year to unfold as we expected back in November.

ASPs on the royalty devices we think is a bit lower.

There are some offsets to that, as I said, in our picture of the year, and part of that is we do expect to ship a bit more MSMs in this fiscal year than what we had expected back in November.

Thank you.

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

I'll now turn the call back over to Steve Altman for closing comments.

Thank you, everyone.

I'm not sure if you saw the press release this past week noting that Qualcomm was ranked in the top ten of Fortune Magazine's 100 Best Companies to Work for in America.

This is our 12th consecutive year of recognition, an accomplishment that few companies achieve, and we are all very grateful to our employees for their hard work and their continued efforts in making Qualcomm such a great place to work.

I am pleased with our results in the first quarter and our continued execution by our business units on their strategic objectives.

We are seeing good traction with products like Snapdragon and Brew Mobile Platform.

Subsequent to the CES show, we are seeing strong interest from companies in our Mirasol displays.

We passed some important milestones in our licensing business, and the growth of 3G continues that pace.

Although we are still feeling some effects from the overall macroeconomic environment, we continue to invest in order to build our competitive position, grow our share, and create new and exciting business opportunities.

We are excited about the opportunity ahead and our ability to capitalize on it.

Thank you.

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

We thank you for your participation.

You may now disconnect.