Conference call notes Part 2
Paul Jacobs
TTL
I’ll begin with our technology licensing business, reported in the TTL segment. .. We signed 8 licenses in the first fiscal quarter, including 4 new licenses and 4 extensions to existing licenses. It is interesting to note that 27 subscriber licensees and 12 infrastructure licensees reported sales of CDMA2000 1x products in the September 2002 quarter and 7 subscriber and 7 infrastructure licensees reported sales of WCDMA products in the same period. At this point the WCDMA royalties are not significant in comparison to CDMAOne and CDMA2000 but we look forward to growth in the WCDMA area as those deployments get under way.
QWI
In the QWI segment, … OmniTracs product shipments during the first fiscal quarter totaled 10,600 units, down sequentially from 15,000 units due to seasonality but up year-over-year from 9,400 units. Once again the top customer shipments are the private fleet customers, which is a new market area for QWI. We also signed contracts ..
Turning to the QWI Homeland Security Initiative, in September we kicked off the federal safety administration operational tests of technology to improve the security in transporting hazardous materials. The first phase, … risk assessment, has been completed and we are defining.. the operational phase. We had great participation from the leading premier shippers and carriers. Product development work is proceeding very well … panic buttons and onboard computer.
Digital media division – continue to work with studios to get our compression technology accepted by the industry.
Selling products to the Government…
Speaking of QChat, QIS now has trial agreements with 2 CDMA carriers in addition to Nextel.
BREW
This was the first full quarter of Verizon’s Get-It-Now service, which is based on BREW. So over 3.2 million active BREW users worldwide as of the end of December 2002 and the momentum continues to grow. We have seen nearly 20 million individual downloads globally and more than 6 million of those downloads occurred in the December quarter… We cannot break out the percentages for individual operators.
Nothing motivates developers more than a growing market in which they can actually make money. We have seen rapid growth in the amount of money that developers have been making. In the month of December alone, Qualcomm paid developers more than $1 million for new applications sold through our channels. As the embedded base of BREW users grows, along with the number of carriers in full commercial launch, we expect to see these payments continue their rapid growth.
We are seeing developer excitement in China too. We co-hosted the China BREW applications developers meeting with China Unicom last month. This meeting attracted 100s of developers and manufacturers. We know there is great interest in getting BREW applications to market as rapidly as possible in China; in fact, applications developed in China have already been commercially launched on some operators’ networks…
We also extended the BREW contract with KTFreetel in South Korea. KTFreetel now has 26 handset models which support its BREW-based Magic and Multipath service.
And finally, I can confirm something that has been rumored for some time: we have signed a definitive agreement with Telesp, the largest carrier in Brazil, to employ BREW services. I would note that this agreement covers areas that belong to the Telesp/Telefonica joint venture. We are very excited about this opportunity.
Don Schrock
[Introduction re transition … team well position .. confident of Jha’s leadership…Thanks, Irwin.]
QCP
Now it is my pleasure to report that QCP continued to grow its market share in the December quarter. We achieved our 3rd consecutive quarterly record for MSM chip shipments with approximately 29 million MSM units in the first fiscal quarter, up from approximately 20 million last quarter and approximately 15 million in the year-ago quarter. Just to put that in context, that’s a 45% sequential increase and a 93% increase in unit shipments over the year-ago quarter. We shipped 23 million CDMA20001x chips or 80% of the total MSM shipments during the quarter. The cumulative total of 3G chips shipped has now reached nearly 70 million.
We shipped CSM infrastructure chips to support approximately 2.2 million equivalent voice channels in the first fiscal quarter. This is slightly lower than last quarter but more than double the 1 million equivalent voice channels shipped in the year-ago quarter.
MSM6000 family
During the December quarter, we continued to build the customer base for our MSM6000-family of multi-mode chips. We delivered volume production quantities of our MSM6000 and MSM6050, with their companion ZIF RF chips, on time for customer product launches in early 2003. We also have all major customers developing MSM6100-based phones, driven by the adoption of camera phones, video on demand, and camcorder applications. We also continued our ZIF RF product segmentation strategy by sampling the RF6120 …-transmit chip and the RFR6125 – cellular plus gps-receive chip, for even lower cost solutions throughout the world.
MSM6250 and MSM6500
We also announced two key products in the MSM roadmap during the quarter. The MSM6250 upgrade to our MSM6200 offers complete multi-media and position location integration for WCDMA/GPRS/GSM wireless devices combined with more powerful microprocessors and DSPs. The MSM6500 supports the CDMA2000 1x/1x-EV-DO and GSM/GPRS. Both of these developments are on schedule.
WCDMA
Our WCDMA/GSM product development programs remain steady on track. We signed a new customer for MSM6200 and expanded our interoperability testing to include all major European operators and their respective suppliers. 5 wireless device manufacturers to date have selected Qualcomm chipset solutions for UMTS designs.
Position Location
On the position location front, there are more than 5 million gpsOne enabled devices now in commercial use in Japan, South Korea and the U.S.A. This makes gpsOne the most widely deployed position location technology commercially available for mobile devices. There are more than 30 gpsOne phone models commercially available now with over 100 position location applications. Now our first ZIF-based gpsOne chip, the MSM6050, is coming to market in phones soon. We believe that this will clearly increase the adoption of gpsOne as this chip is the most cost-effective solution available. We are also pleased to announce that China Unicom has moved forward with our gpsOne technology for position location based services. China Unicom and Qualcomm co-hosted the very successful gpsOne applications developers’ conference in December and we participated in Unicom’s live gpsOne demo for the Peoples Congress in Beijing.
Outlook for march Quarter
Finally, let me review our outlook for the March quarter 2003. We are fully booked to ship approximately 27 million MSM chips in March [quarter], with approximately 86% of those expected to be 3G chips.
Bill Keitel
Simplification in reporting
At the Qualcomm analysts meeting in London two months ago, … we said that a reporting simplification in fiscal 2003 was made possible by the application of FAS 142, which eliminates the amortization of goodwill. We will now report GAAP results and results excluding our QSI business segment. .. a detailed description of this reporting simplification will post on our website within the next 24 hours which describes the new method.
QSI
Now I’ll begin with the QSI results. We now list strategic investments on a different basis than on our core operations. That’s why we segment report QSI. QSI segment includes strategic investments in wireless carriers, primarily Vesper, realized gains and losses, unrealized losses and Qualcomm’s share of income or losses from consolidated subsidiaries.
QSI losses before taxes were $133 million in the first fiscal quarter, which includes $30 million for our portion of Vesper losses and $33 million for our equity in losses of investees, including Inquam and Velocom. QSI also recorded a $66 million charge to reflect reductions in the estimated market value of several investment.
Core Segments
Turning to our core [segment] results .. We exceeded the high end of our previous guidance for the first quarter by 4 cents per share, primarily due to QCT and higher demand for MSM shipments. Overall each of our business units exceeded their first quarter earnings targets.
R&D/SG&A
R&D/SG&A expenses were $217 million for the first quarter, a $7 million sequential increase. Combined R&D and SG&A expenses were 20% of revenue versus 25% in the prior quarter and 28% in the year ago quarter.
Investment income
Investment income, comprised primarily of interest income on corporate cash and marketable debt securities, was $26 million compared to $16 million in the previous quarter. Investment income was lower in the prior quarter due to other-than-temporary losses on certain marketable securities.
QCT Market Share Growth
… In addition to growth in the CDMA market, QCT has increased its market share and improved average selling prices. QCT operating margins increased to 41% compared to 33% in the previous quarter and 24% in the year-ago period; it realized excellent operating leverage and a strong return on our R&D investment over the last couple of years.
TTL
TTL .. Sequentially the revenue percentage growth may seem low but you’ll recall that there was a $14 million payment last quarter for underreported royalties from one licensee. Also, we saw a decline of approximately 7% in average phone selling prices, based upon royalty reports for the September quarter. Most of this ASP decline was due to higher sales in low ASP regions. Looking at it region by region, ASPs were knocked down less than 2%. Compared to the year ago quarter, average phone selling prices are down only 3%. Earnings before taxes at TTL were $229 million up 4% sequentially and 22% from the year-ago quarter and the operating margin was 90%.
QWI
Qualcomm Wireless Internet … Each of our 3 businesses within the QWI segment exceeded their earnings target for the first quarter.
Cash
Corporate cash and marketable securities (excluding QSI) increased approximately $700 million to $3.7 billion. In the first quarter of fiscal 2003, our ongoing operations generated more than $300 million of cash flow and we received approximately $390 million in payments from Pegaso. We invested $77 million in capital expenditures, including $36 million for the purchase of a San Diego facility we previously had been leasing. And we invested $70 million additional cash into QSI, primarily for Vesper and Inquam.
Other financial information
Our significant revenue growth has increased our receivables and inventory. Days-sales-outstanding held constant at 53 to 54 days and we averaged 32 days from billing to collection. We continue to hold less than 30 days of inventory.
Our estimated GAAP effective tax rate for fiscal 2003 is 38%; excluding QSI, we estimate an effective tax rate of 34%. Vesper operating losses and cumulative capital losses in excess of expected capital gains account for this difference.
Guidance for March quarter and for 2003
I will now provide our guidance for 2003 – for both the March quarter and the full fiscal year. We anticipate the March quarter revenues (excluding the QSI segment) will increase by approximately 50% year-over-year; this represents a decrease of 7% sequentially compared to the first quarter of fiscal 03. We anticipate that our earnings per share excluding QSI will be approximately 34 to 35 cents in the second fiscal quarter, a 75% increase year-over-year. This estimate is based upon shipment of approximately 27 million MSM phone chips during the March quarter of which approximately 86% are expected to be 3G 1x or 1x-EV-DO MSM phone chips.
We anticipate a sequential increase in R&D and SG&A expenses of approximately 15% in the March quarter due to seasonality of certain expenses. Our March quarter expenses have increased sequentially for a couple of years now due to resumption of employee payroll taxes and public company expenses. We are increasing our commitment forward based as well, particularly engineering resources and QCT.
Based on our CDMA market forecast of 105 to 112 million new phones in calendar year 2003, we now anticipate revenue growth (excluding QSI) would be approximately 28 to 33% and earnings per share to be $1.34 to $1.39 for fiscal 2003, up 37.2% from fiscal 2002. For the full fiscal year, we are planning for a decline in average selling prices of CDMA phones of approximately 10%. We estimate fiscal year 2003 effective tax rates for operations (excluding QSI) to be 34% compared to 35% in fiscal 2002.
As Irwin noted, fiscal 2003 estimates do not include the same level of growth for the second half as we are expecting for the first half. In the current environment and in our anticipation of significant growth in emerging markets, we believe it is best to be cautious. However, we are planning for additional chipset capacity in the event that orders prove to be higher. We also expect to make approximately $350 million net investment into QSI strategic initiatives this fiscal year. This is lower than the $400 million estimate we gave you in November and a significant reduction from fiscal 2002. |
