Qualcomm Incorporated (QCOM)
Q1 2009 Earnings Call Transcript
January 28, 2009 4:45 p.m. ET

Executives

John Gilbert – Vice President Investor Relations
Dr. Paul Jacobs – Chief Executive Officer
William Keitel – Executive Vice President & Chief Financial Officer
Steve Mollenkopf – Executive Vice President

Analysts

Brian Modoff - Deutsche Bank
Glen Young – Citigroup
Michael Walkley – Piper Jaffray
Maynard Um – UBS
Mark McKechnie – Broadpoint AmTech
Tim Luke – Barclays Capital
Tal Leoni – Banc of America, Merrill Lynch
James Faucette - Pacific Crest Securities
Simona Jankowski – Goldman Sachs
Anil Doradla – William Blair & Co
Ittai Kidron – Oppenheimer & Co
Ehud Gelblum – JP Morgan
William Pitkin – GE Asset Management
Kulbinder Garcha - Credit Suisse
Adam Benjamin – Jeffries & Co
Mike Burton – Think Equity

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Qualcomm first quarter fiscal 2009 conference call. (Operator Instructions) At this time, all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session. 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 January 28th 2009. The contact number for today’s call is 800-642-1687. International callers please dial 706-645-9291. The playback reservation number is 80271812. 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. Dr. Jacobs and Steve Altman will be dialing into today’s call remotely. In addition, Steve Altman will be primarily in listen mode only as he is under the weather today. Len Lauer, Don Rosenberg and Derek Aberle will also 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 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 events that may differ materially from Qualcomm''s actual results. Please review our SEC filings for a detailed presentation of each of our businesses and associated risks and other important factors that may cause our actual results to differ from these forward-looking statements.

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

Dr. Paul Jacobs – Chief Executive Officer

Thank you John and good afternoon everyone. Let me begin by saying that I am very pleased with the performance of our core operating business in this difficult environment. Our revenues were at the high end of our prior guidance, our operating profit exceeded our prior guidance and we had record operating cash flow. The global migration to 3G CDMA continues but while we continue to see healthy growth in CDMA devices, the distress in the global financial markets continued resulting in additional impairments to our marketable securities portfolio which impacted our earnings for the quarter.

Before commenting on the business I’d like to welcome Bill Stone as Senior Vice President and President of FLO TV. Bill’s extensive background and experience in content and the wireless industry will be a great asset to Qualcomm and we are looking forward to Bill leading FLO TV to the next level. Fiscal Q1 revenues were at the high end of our prior guidance and up 3% year-over-year. Our pro forma operating income exceeded our prior guidance and was up 4% year-over-year. Our record operating cash flow included the $2.5 billion payment from Nokia. I’m also pleased to see the benefits of our improved operating expense management as pro forma operating expenses were approximately 7% lower than the fourth quarter, significantly lower than our guidance of 1% growth. However first quarter earnings per share were negatively impacted by other than temporary impairments to our marketable securities portfolio. As of January 23 out of a total treasury portfolio of approximately $12.9 billion we had approximately $1.1 billion in net unrealized losses on marketable securities which could result in additional impairments in the future if financial markets do not improve.

Our strong balance sheet and operating cash flows provide us the ability to hold the vast majority of these securities until they recover and that is our intent. Bill will discuss our treasury portfolio in more detail. However our investment strategy has significant benefits and we believe it is the right strategy for the business and the shareholders for the long-term. Despite the global economic environment, we remain committed to returning capital to our shareholders through our cash dividend and stock repurchase programs. As of January 23rd, we have returned approximately $9.8 billion of capital to shareholders since fiscal 2003. We have continued to pay cash dividends and are active in our share repurchase program and we recently announced another quarterly cash dividend payable on March 27th of this year.

In QCT the CDMA channel inventory has begun its contraction as we expected. In QCT’s MSM shipments for the quarter were in line with our prior guidance. The reduced visibility in the marketplace makes forecasting future inventory levels or accurately predicting when a recovery will begin, extremely challenging. Similarly we anticipate the continued market uncertainty will impact QCT’s business. We do expect to have more clarity in the coming weeks when carrier and OEM sell-through data becomes available. Steve Mollenkopf will provide more color on QCT later in the call.

We continue to focus on managing our operating expenses while investing in key initiative such as HSPA Plus and LTE that will drive future growth and strengthen our competitive position moving forward. HSPA Plus is a national evolution path for HSPA. Leverages, operators, mobile network investments, provides high peak data rates for mobile broadband access and supports greater than two times the voice capacity of release 99 resulting in increased benefits to both operators and consumers. HSPA Plus momentum continues as several operators have announced their plans for market launches in the first half of 2009. We continue to work closely with our partners in the industry and remain on track to deliver our chipset solutions to support operator launches. LTE, an OFDMA technology that is able to support higher data rates and more users by taking advantage of wider amounts of spectrum is being planned by some operators looking to leverage new spectrum. As LTE comes to market we expect operators will deploy it as a compliment to their existing 3G networks in areas with high data needs.

OFDMA represents one of our largest research and development efforts and we remain on schedule to sample our multimode LTE chipsets in the second quarter of this calendar year. It has been and continues to be important for our industry to have options. Our development efforts on both HSPA Plus and LTE ensures we will be there to serve our partners by offering a solution to leverage the existing investments of HSPA and also provide a path to LTE. Looking forward it is unclear how long this difficult global economic environment will persist and when the recovery will ultimately begin. Since we guided in November the consensus economic outlook has shifted to the view that the global recession will be deeper and more severe than previously anticipated. For example many economists now believe that positive GDP growth will not return in the US until the second half of the year and we generally concur with that view.

However our growth is tied to 3G which is expanding in all geographic regions of the world including China, the largest market. Consumers are excited by the new data services on their phones such as internet browsing and GPS and their migration to 3G is continuing despite the current economic conditions. While we continue to estimate healthy growth in the CDMA device market, we have lowered our expectations for calendar year 2009. It is worth noting that recent North American operator reports on net ads are in line with our new forecasted reductions in this region. We’ve also incorporated some of our contingency plans to manage our operating expenses going forward and have substantially reduced our operating expense growth from the prior year. It is important to highlight the excellent job our businesses have done executing to their budgets in this uncertain environment.