Qualcomm Inc. (QCOM)
Q4 2008 Earnings Call Transcript
November 6, 2008 4:45 p.m. ET

Executives

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

Analysts

Peter Karazeris - Citi
Ittai Kidron - Oppenheimer
Tim Long - Banc Of America
Mark McKechnie - AmTech
Ehud Gelblum – JP Morgan
James Faucette - Pacific Crest
David Wong – Wachovia Capital Markets
Mike Alexander - Charter Equity Research
Brian Modoff - Deutsche Bank
Kulbinder Garcha - Credit Suisse

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm fourth quarter and fiscal 2008 conference call. (Operator Instructions) At this time all participants are in a listen-only mode. Later we will 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 speaker phone please pick up your handset before pressing the numbers. As a reminder, this conference is being recorded November 6, 2008. The playback number for today''s call is 800-642-1687. International callers, please dial 706-645-9291. The playback reservation number is 67351049. 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 of Investor Relations

Thank you, and good afternoon. Today''s call will include prepared remarks by Dr. Paul Jacobs, Steve Mollenkopf and Bill Keitel. Steve Altman, Len Lauer and Don Rosenberg and Derek Aberle will join the question-and-answer session. An internet presentation and audio broadcast accompanies 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-K 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. I''d also like to remind our listeners that our New York Analyst Day is this coming Thursday, November 13. The analyst meeting will be webcast for those of you unable to attend.

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

Paul Jacobs – Chief Executive Officer

Thank you, John, and good afternoon, everyone. I am very pleased with the performance of our business this past year, particularly the strong execution of our chipset business and our successful settlement with Nokia. While we continue to see strong growth in 3G CDMA, the current macroeconomic condition and potential for further economic slowdown creates an uncertain business environment for the next few quarters. Before I comment further on our business going forward, I would like to highlight what was a very successful fiscal 2008 for Qualcomm. We had three important transitions in our executive team this past quarter. I''m very pleased to welcome Len Lauer as Chief Operating Officer, Steve Mollenkopf as President of QCT and Derek Aberle as President of QTL. We look forward to their continued contribution and leadership in these new roles.

In fiscal 2008, we achieved record pro forma revenues, up 25% year-over-year; record pro forma earnings per share, up 12% year-over-year; and our operating cash flow remained strong at 32% of revenues. Our fourth fiscal quarter includes revenues and earnings per share related to our completion of the settlement and license agreements with Nokia. In addition, the quarter also includes impairments of our marketable securities portfolio that are related to the impact of the recent disruption in the financial markets. The GAAP year-over-year comparison is also affected by a one-time tax benefit in the fourth quarter of fiscal year ''07. As of the end of October, out of a total transit portfolio of approximately $13 billion, we had approximately $1.3 billion in net unrealized losses on marketable securities, which could result in additional impairments if financial markets do not improve. These potential impairments are excluded from our guidance as global financial markets are too volatile to predict in the near term.

Over the last year, we have consciously improved the defensive posture of our portfolio, including a significant movement from equities to short-term debt and in addition, the recent $2.5 billion payment from Nokia has been placed in short-term instruments. Bill Keitel will comment in more detail on our investment strategy, but we remain very well positioned with a strong balance sheet and operating cash flow.

In fact, this fiscal year, we returned a record $2.65 billion of capital to our stockholders through our dividend and stock repurchase programs and through the end of fiscal 2008, we have returned over $9.2 billion of capital to our stockholders. Some of our key business highlights in fiscal 2008 include a record $336 million CDMA baseband chips shipped by QCT, an increase of 33% from the prior year. QCT also achieved important product and technical milestones that Steve Mollenkopf will cover in more detail later in the call.

In our licensing business, we completed our settlement and licensing agreements with Nokia which we believe will benefit both our companies and the broader wireless industry for years to come. We now have over 155 licensees, including over 95 WCDMA and TD-SCDMA licensees. We also continue to make progress in signing OFDMA licensees and now have eight royalty-bearing single-mode OFDMA licensees, including with Nokia and one other major handset OEM. We continued our technical leadership with implementation of base station interference cancellation to significantly improve the uplink performance of CDMA networks. This innovative feature will be available on upcoming EV-DO CSM products in 2009. And just a few weeks ago, Telstra in Australia announced they performed HSPA+ interoperability testing their networks using our HSPA+ chipset solution. With respect to LTE, R&D efforts continue to remain on track with plans to sample our multi-mode 3G LTE chips in the second quarter of 2009.

Turning to fiscal 2009, we anticipate the challenging global economic environment will impact our business and industry as well as many other companies around the world. I thought it would be helpful to share how we were thinking about the business prior to the recent unprecedented event. This past August, our internal planning process, driven by our views with the global macro environment at that time, viewed our pro forma EPS target of approximately $2.60 per share for fiscal year 2009. However, since that time and specifically during the last several weeks, we have received information from our customers and industry partners that have led us to lower our estimate substantially.

We''re seeing a very significant contraction in channel inventory, which is impacting demand for our chipsets. Our chipset shipment estimate for the first quarter of fiscal 2009 is 60 million to 65 million units, down from 86 million in the previous quarter. Now, we''ve incorporated a significant amount of information in our modeling efforts, including comparing the current economic environment to previous downturns, such as the downturn and resulting rebound in 2001. Our current view is that the reduced inventory levels projected are not sustainable and therefore, we are forecasting a modest recovery of inventory levels in the second half of the year. While we are estimating strong growth for CDMA-based devices in calendar year 2009, driven by a shift to emerging markets, this growth is less than we would have forecasted several weeks ago. We''re also expecting the average selling prices of CDMA-based devices to drop below $200 as a result of the emerging market growth as well as the impact of a strengthening dollar in some markets.

While we expect our operating expenses to grow in fiscal 2009, it is at a significantly lower rate than previous years and is primarily due to the carryover of resources added in fiscal year 2008. We''ve built a very strong research and development team and believe we can leverage our past investments to address the market opportunities ahead, while also continuing to invest to outpace our competitors. Specifically, we''ve put in place a cap on new resources for fiscal year 2009. In order to manage to this cap, we''ve worked across the company to prioritize our investments and move resources among projects. Now, this has been and will continue to be an ongoing process. A highest profile example is the cancellation of our UMB commercial development and reallocation of those resources into accelerating LTE and LTE-Advanced. We will continue to make strategic investments in long-term program to capitalize on opportunities we see in new geographies, with new partners, in new devices such as mobile computing and network consumer electronics, and in new applications of wireless technologies.