Qualcomm Inc. (QCOM)
Q3 2009 Earnings Call Transcript
July 22, 2009 4:45 p.m. ET

Executives

John Gilbert - VP, Investor Relations
Paul Jacobs - Chairman and Chief Executive Officer
Steve Altman - President
Bill Keitel – Executive VP and Chief Financial Officer
Len Lauer – Chief Operating Officer
Don Rosenberg – Executive VP, General Counsel and Corporate Secretary
Steve Mollenkopf – Executive VP and President of Qualcomm CDMA Technologies
Derek Aberle – Executive VP, President of Qualcomm Technology Licensing

Analysts

Maynard Um - UBS
Brian Modoff - Deutsche Bank
Tal Liani - Bank of America
Mark McKechnie - Broadpoint AmTech
Mike Walkley - Piper Jaffray
Tim Long - BMO Capital Markets
Tim Luke - Barclays Capital
Simona Jankowski - Goldman Sachs
Phil Cusick – Macquarie Research
Kulbinder Garcha - Credit Suisse
Matthew Hoffman - Cowen & Company
Anil Doradla - William Blair
James Faucette - Pacific Crest Securities
Glen Yeung - Citigroup
Adam Benjamin – Jefferies & Co
Stacy Rasgon - Sanford Bernstein
Mark Sue - RBC Capital Markets
Craig Berger - FBR Capital Markets
Tavis McCourt - Morgan Keegan

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Qualcomm third quarter fiscal 2009 conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session (Operator Instructions). If you’d like to ask a question during this time press * then the number 1 on your telephone keypad, to withdraw your question press the pound key. If you are using a speakerphone please pickup your handset before pressing the numbers. As a reminder, this conference is being recorded July 22, 2009. The playback number for today’s call is 800-642-1687. International callers, please dial 706-645-9291. The playback reservation number is 16320448. I would now like to turn the call over to John Gilbert, Vice President of Investor Relations. Mr. Gilbert, please go ahead.

John Gilbert – Vice President Investor Relations

Thank you and good afternoon. Today''s call will include prepared remarks by Dr. Paul Jacobs, Steve Mollenkopf and Bill Keitel. In addition, Steve Altman, Len Lauer, Don Rosenberg 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 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 have also furnished the SEC our financial statements and related footnotes in the extensible business reporting language XBRL format as required by the SEC. We may make forward-looking statements relating to our expectations and other future events that may differ materially from Qualcomm''s actual results. Please review our SEC filings for a detailed presentation of each our businesses and associated risks and other important factors that may cause our actual to differ from these forward-looking statements.

And now it is my pleasure introduce Qualcomm''s Chairman and CEO, Dr. Paul Jacobs.

Paul Jacobs – Chief Executive Officer

Thanks John and good afternoon everyone. I am very pleased with our strong operating performance in this uncertain economic environment. Revenues were at the high end of prior guidance. Operating income exceeded our prior guidance. And pro forma combined SG&A and R&D expenses were 5% lower year-over-year and well below our prior guidance. Worldwide demand for 3G remains robust and despite the global economic uncertainty, we anticipate another strong quarter of demand for our chipset in fiscal Q4. We are raising our fiscal 2009 revenue and operating income estimate, given the strong underlying fundamentals of our business. Before commenting further on the business, I would like to welcome Dr. Young Koo Cha as Senior Vice President of Qualcomm and President of Qualcomm Korea. Dr. Cha''s extensive experience in the high tech industry, academia in the Korean government is a great addition to our management team and we look forward to his leadership in this key region for our business.

Our business continues to generate strong operating cash flows, which enables us to return capital to our stockholders. As of June 28, we''ve returned over $10 billion of capital for shareholders since fiscal 2003. We also recently announced another quarterly cash dividend payable on September 25th of this year. While we did record additional impairments on our marketable securities this quarter, those impairments were significantly lower than previous quarters. In addition recent improvements in financial markets have greatly reduced our net unrealized losses from 898 million at March quarter end to $25 million as of June quarter end.

Turning to the business QCT shipped a record number of chipsets this quarter, an increase of approximately 9% year-over-year. We believe the CDMA inventory channel has largely stabilized, yet remains near historically lower levels consistent with our prior forecast. In addition CDMA-based device shipments by our licensees in the March quarter were at the high end of our prior guidance and increased 4% year-over-year. Worldwide 3G adoption continues to accelerate where as GSM shipments continue to decline. According to Wireless Intelligence, 3G subscribers grew 28% year-over-year to approximately 830 million as of June. In Western Europe WCDMA subscribers grew 52% year-over-year compared to an 8% decline in GSM subscribers.

In addition according to the industry analysts forecast, 3G handset shipments are expected to eclipse GSM shipments for the first time in 2010 and 3G enabled handsets are forecast to be over 60% of total handsets shipped in 2012. The 3G eco system is vibrant and consumers have an extensive choice of competitively priced feature rich devices to keep them connected informed and entertained. The GSA reports that approximately 94% of WCDMA operators have launched HSPA services and the number of HSPA devices has grown by over 120% year-over-year to more than 1,600 devices by over 180 suppliers. In addition the number of HSPA enabled notebooks has more than tripled in the same period. Also according to the GSA and operator announcements, there are now five HSPA plus commercial networks and more than 25 additional operators that have announced plans of testing, trialing or deploying HSPA plus technology.

CDMA2000 continues to be successful in both developed and emerging markets. And, according to the CDG, it is approaching half a billion global subscribers. India reached a significant milestone this past May, surpassing 100 million CDMA2000 subscribers of which approximately 50 million were added in the past two years. Globally, there are over 65 EV-DO Revision A commercial networks with over 30 additional networks in deployment. Revision B is gaining traction as several operators including China Telecom have indicated interest in Revision B to further leverage their 3G investments. China has a broad deployment of 3G CDMA and the world''s largest wireless market continues. Since January 2009, China Telecom has added more than 11 million CDMA subscribers and has announced plans to deploy EV-DO Revision A in 500 cities by the end of this month. In addition, China Unicom announced its HSPA networks covers 100 cities today and plans to deploy HSPA in a total of 284 cities by the end of this year. And, as with most new market deployments ramp up takes some time for networks to be fully deployed and for a broad portfolio of handsets to be made available to consumers. We have always believed that when licenses were issued, infrastructure deployments would occur rapidly and I''m very pleased to see the pace of these deployments.

We continue to see growing demand for 3G broadband services driven by increased consumer desire for mobile internet access and more personalized user experiences. For example, in North America multiple operators continue to report strong wireless data growth year-over-year, driven in part by smartphone competition, including those recent launch of multiple iconic devices. The trend towards connected mobile computing in the US continues as the three top operators now offer subsidized notebooks or netbook computers with embedded 3G capability. And the trend towards file computing in the mobile environment continues to evolve and it is a trend that bodes well for us.

Recent announcements such as Google''s Chrome operating system and Microsoft''s plan to offer a free online version of its office product suite will further enable to shift towards mobility. Our continued commitment to innovative research and development puts us in a unique position to benefit from the growing demand for compelling new 3G enabled devices. A comprehensive chipset portfolio to support multiple operating systems provides our OEM partners with more choice and flexibility to develop new categories of mobile computing devices that will support an increasingly mobile society. We previously demonstrated advanced interference cancellation techniques in our CDMA2000 Infrastructure Chipset Solutions that further improve system capacity. We also recently announced the collaboration in which DTE will utilize Qualcomm’s advanced Uplink Interference Cancellation technology in our next generation UMTS base stations. Using this technology, operators can boost their UMTS data throughput by up to 60% and deliver a user experience that is comparable to LTE in a similar channel bandwidth.

Turning to FLO TV; the DTV transition is enabling our expansion into key major markets such as Boston, Houston, Miami and San Francisco, as well as expanded service in Chicago, Los Angeles, New York and Washington DC. By the end of 2009, FLO TV will reach more than 100 major markets and more than 200 million potential customers. In our display business, we’ve recently announced the opening of our dedicated mirasol core display fabrication facility in Taiwan in partnership with Foxlink. This is an exciting new step towards further commercialization of our innovative mirasol technology to provide a more rewarding mobile experience by enabling extended battery life and superior outdoor viewing. You may note that we have disclosed that the Korea Fair Trade Commission is expected to issue a decision on our case shortly. Unless and until an order is issued it would be inappropriate for us to comment further on the case than what we have provided so far.