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scribbles from QCOM ITC decision conference call
June 7, 2007
QUALCOMM/Broadcom ITC Decision Conference Call - Final
OPERATOR: At this time, I would like to welcome everyone to the QUALCOMM conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the call over to Mr. John Gilbert, Vice President of Investor Relations. Sir, you may begin your conference.
JOHN GILBERT, VP IR, QUALCOMM INCORPORATED: Thank you and good afternoon. Today's call will include prepared remarks from Dr. Paul Jacobs, CEO of QUALCOMM. Following his remarks, Dr. Jacobs will be joined by Steve Alton, President; Lou Lupin, General Counsel; Sanjay Jhan, COO and President of QCT; and Bill Keitel, CFO, for a question-and-answer session. It is my pleasure to introduce Dr. Paul Jacobs.
DR. PAUL JACOBS, CEO, QUALCOMM INCORPORATED: Good afternoon and thank you for joining us. I would like to take a couple of minutes to review the International Trade Commission's recent decision and outline QUALCOMM's plan for moving forward. I need to start by saying we have not seen the underlying three opinions. However, it is apparent that the Commissioners agreed the disruption in the supply of handsets creates a serious impact to the public interest and public safety. Unfortunately, a majority of the Commissioners fashioned a remedy that grandfathers in existing models but excludes future models.
As the ITC Chairman apparently agreed, this decision does not protect the public interest and public safety. We also agree with Commissioner Pinkert that the record does not support the majority decision.
We are extremely disappointed that the Commission chose to reject the recommendations of the ITC's Administrative Law Judge and the views of its own Chairman, and instead ordered a sweeping import ban that could bar the future imports of tens of millions of mobile broadband-enabled handsets incorporating QUALCOMM's EV-DO and WCDMA chips and software accused of infringing a Broadcom patent.
We believe the Commission has overstepped its statutory boundaries and has not afforded due process to manufacturers and operators. This remedy decision by the ITC was wrong.
While there is no short-term disruption to QUALCOMM, this decision immediately affects third parties who are not even permitted to appear in the infringement proceedings. If it stands, it will have a negative impact on consumers, operators, and manufacturers in the US industry overall.
It will also jeopardize America's disaster preparedness. A seamless, interoperable public safety mobile broadband is integral to the next generation of emergency response. This ban will set the clock back on the deployment of the technology necessary to respond quickly and effectively to an emergency or natural disaster, undermining much of the industry's effort to achieve a reliable high-speed communications network. The wireless industry and public safety community has been working on robust interoperable networks for first responders, and this order delays those efforts.
In short, the public injury resulting from the remedy imposed by the Commission is grossly disproportionate to any benefit flowing to Broadcom from such heavy-handed enforcement of a recently-purchased patent.
In our view, the ITC disregarded powerful presentations and testimony from FEMA, several major public safety organizations, the FCC, and various members of Congress, all of whom strongly opposed Broadcom's requested import ban and turns the decision over to the President to address the adverse impacts to the public interest.
At this time, QUALCOMM and the industry are focused on the two major legal opportunities to address this troubling ITC decision. First, QUALCOMM and the US wireless industry will seek an emergency stay from the Court of Appeals for the Federal Circuit, which we will file immediately. There are very good reasons for the court to grant a stay of this order, to avoid the irreparable harm to US consumers, the negative impact on public safety and national security, and the injury to the US economy.
Second, we will seek a presidential veto of the ITC ruling, because this broad disproportionate remedy plainly is not in the public interest. We have asked the White House to veto the decision and avoid turning this clock back on the tremendous gains that have been achieved in mobile broadband communications, disaster preparedness, and emergency response. The way for the industry, public safety, and end-users to move forward with certainty is for the President to veto this misguided order.
JOHN GILBERT: Operator, we are now ready for questions.
OPERATOR: (OPERATOR INSTRUCTIONS) Ittai Kidron.
ITTAI KIDRON, ANALYST, CIBC WORLD MARKETS: Good afternoon and thanks for making this call on short notice. Guys, can you give us a little bit more color as to exactly, to the best of your understanding, what chipsets this decision relates to?
Sanjay, maybe you can give us a little bit more color as to your efforts to produce workarounds around this technology. How quickly can that be available to OEMs? Not only that, how quickly do you think OEMs can incorporate that in working models?
LOU LUPIN, EVP, GENERAL COUNSEL, QUALCOMM INCORPORATED: It's Lou Lupin, I will take the first part of that question, and then I will pass to Sanjay. The order is really focused on handset models, frankly, rather than in chipsets. So what the order says is any handset models that have, as of this date, been imported for commercial sale in the US may continue to be imported and sold in the US; and that anything that doesn't meet that description can't come in.
Now they have to be models that include what the ALJ found to be the infringing combination of certain of our chips with a certain version of software. So in that regard, it is chip and software specific. But much more, this order is much more focused on the question of existing handset models versus future handset models.
SANJAY JHA, COO & PRESIDENT, QUALCOMM CDMA TECHNOLOGIES GROUP: This is Sanjay. In terms of what efforts we made with regards to workarounds, we are looking at opportunities to design and implement new software. But the acceptability of any new software is subject to operator and manufacturer acceptance, as well as legal challenges. The way for the industry, public safety, and end-users to move forward with certainty is for the President to veto this order.
ITTAI KIDRON: Does that imply that there will not necessarily be a technological solution near-term for this issue?
SANJAY JHA: This is Sanjay. As I say, we are looking, we have been looking for a period of time at opportunities to design and implement new software, which potentially does not violate some of the patents in question. But the commercial and operator and manufacturer acceptance is a process, and we will have to get those acceptances before we understand if they are commercially viable or not.
ITTAI KIDRON: Lou, can I just follow up on what is, in your opinion, the definition of a model? What variation needs to exist from one handset to another for it to be considered a different model?
LOU LUPIN: Yes, the order spells that out pretty clearly. Existing models in addition to being those that have been imported for sale versus new models. New models would be those that have specifications, functionality, etc., that differs from existing models. So the order is pretty specific in that regard.
ITTAI KIDRON: Thank you.
OPERATOR: Tim Long.
TIM LONG, ANALYST, BANC OF AMERICA SECURITIES: Thank you. If I could just follow up on some of the definitions as you see them. Just back to that models question, does that mean like is a RAZR the model? Or is it more granular than that? Do the handset companies have leeway in what they call models?
Secondly, could you give us a little color on the definition of in the market? Does this mean the phone has to be at a company store right now? Could it be in their lab being tested, as long as it has been imported into the US? Could you just give us a little color on what kind of visibility we would have to units that are not at full volume yet?
LOU LUPIN: Right. So as to the last question, we are really going to need to see the detailed opinions which we will be getting tomorrow to be able to definitively answer that. The summary language of the order itself probably isn't sufficient to answer you with the precision that is required.
As to the model question, again the order is really quite specific. What it talks about are identifying models by numbers, by feature sets, and by specifications. So any phone that matches along those parameters an existing model would be a phone that could continue to be imported. If it deviates along those parameters, then presumably it would be a phone that could not be imported under this exemption.
TIM LONG: Okay, thank you.
OPERATOR: Tim Luke.
TIM LUKE, ANALYST, LEHMAN BROTHERS: Thanks so much. I was wondering, Sanjay or Bill, if you could give us any color on how you perceive this judgment to impact the order outlook? Inasmuch as with, for example, in the WCDMA market, do you think that there will be OEM handset vendors who might look to select chipsets where there are no restrictions, for example, on the importation? And what sort of timelines you might see?
Lou, separately, it might be helpful if you could just give us some sense of the appeals process. I think you mentioned 60 days, and you will seek a stay. Thank you very much.
SANJAY JHA: Tim, this is Sanjay. When AT&T intervened in this case, they said in their submission that they did not believe that there were many other viable chipset solutions in the marketplace. And we take them at their face value. We will continue to support all of our OEMs.
We believe that in the short term, there are probably minimal -- there is probably minimum impact. In the long term, I think it will depend on what happens with the presidential veto and if there are any technical solutions that we find to the issues. But I am not at this present time anticipating any short-term impact on our shipments as a result of this order.
BILL KEITEL, EVP, CFO, QUALCOMM INCORPORATED: This is Bill. Just to add to what Sanjay said, to some degree we will have to be working with the operators and the OEMs to interpret the full details of the order when we get that, hopefully tomorrow.
Having said that, though, we are pretty far through this quarter, and orders to date, firm orders on the books, licensee reports, are all quite strong. We are not to the point where we were ready to update our estimates for the quarter, if we do a prerelease.
But the underlying business this quarter has been going very well, a bit stronger than what I had expected at the outset.
LOU LUPIN: This is Lou. The two appellate processes, so to speak, will proceed in parallel. The first is the opportunity for presidential review. The President has up to 60 days to decide whether to veto this order. That time period essentially begins running today; and the White House can, if it wants to take action, do so anytime within the 60-day period. If the White House doesn't act within the 60 days, then the opportunity for veto is expired and there is no further action the President can take.
At the same time and in parallel, we will be applying essentially immediately -- I mean, we have obviously got to take a careful look at the full orders when we get them tomorrow. But as quickly as we can we will be applying to the Federal Circuit Court of Appeals for an emergency stay of enforcement of the ITC's order, while it considers our appeal on the merits of the various mistakes that we believe have been made in this process, including the very serious question of whether this patent is valid at all.
That process of seeking the emergency stay, as I said, will commence essentially immediately. I would expect that the Federal Circuit will act one way or the other on that request fairly promptly. Difficult to predict with precision, but I think we are talking about a time frame expressed on the order of days to weeks as opposed to months.
OPERATOR: Tal Liani.
TAL LIANI, ANALYST, MERRILL LYNCH: I have a broader question, so I understand the emergency acts you can take, whether it is emergency stay to avoid the harm to consumers or whether it is the veto. But these are all temporary solutions, in the sense that eventually there is a decision by the ITC. Eventually there are other infringements that Broadcom (inaudible) is claiming. You lost another case in [Anaheim] and it just is a snowball. We are dealing here with a few patents, and you may have eventually a workaround solution. But if there are other patents that you found that you are infringing, then you will have to once again do a workaround around the other patents.
The question is, just to understand the longer term, why is it so difficult to get to an agreement with Broadcom? What prevented it so far? Broadcom just put a press release out, and the last sentence is -- we want to be compensated etc., but we are open to an agreement with QUALCOMM. I want to understand why isn't it solved in a more proper way?
STEVE ALTMAN, PRESIDENT, QUALCOMM INCORPORATED: This is Steve Altman. (technical difficulty)
DR. PAUL JACOBS: Steve, you're not coming in very well. Steve? You are breaking up. Okay, you know what? We will let Lou answer.
LOU LUPIN: This is Lou. One thing I wanted to say, Tal, is that there is sort of a premise in your question that is not quite correct. If the President vetoes this remedy, then there is no enforcement of the ITC order, ever. Similarly, if the Federal Circuit stays the order pending appeal and we prevail on appeal, again there will never be any enforcement of this order. So it is not temporary in that sense.
But to go to the thrust of your question, which is why it is so difficult to reach agreement with Broadcom, as we have said in the past, we are obviously constrained from talking about the details of our discussions with Broadcom. We have a confidentiality agreement; we intend to honor that.
But what we can say is that it has been the case since day one of our discussions with Broadcom, which are becoming rather lengthy at this stage, that what they have been seeking are terms that would be destructive to our business model. Those are terms that we just cannot accept. As long as that is the prevailing situation in our negotiations, it is not going to be possible to reach agreement.
OPERATOR: Ehud Gelblum.
EHUD GELBLUM, ANALYST, JPMORGAN: It's Ehud Gelblum; and Tal before me is Israeli, not Italian. But that is beside the point. A couple questions, guys.
Lou, on the precedent for getting a stay, I know it sounds you applied for a stay immediately. But do you have information on prior cases that have tried -- ITC cases that have tried to get a stay? And in addition, and what the success rate on those were?
Also, when you do have some sort of a workaround, (inaudible) if you can update us on what you think, Sanjay, if you think about the timing. I would imagine that when you do have something, the ITC would probably have to approve it in some way, to confirm that in fact it does workaround the Broadcom patent. Can you just go over what the process is? I would imagine no one at the ITC can do it themselves. I wonder, do they subcontract it out, and how does that work? Give us a sense of the timing.
Is it correct to believe that if everything was done in the US right now, as opposed to in Asia, that we wouldn't be having these problems right now? Are there any fabs or manufacturing facilities in the US that could perhaps manufacture phones using your chips that do not therefore run afoul of the ITC's decision?
LOU LUPIN: It's Lou. I will try to take those in order. First of all, with respect to past experiences, either with parties seeking presidential veto or seeking stays, it is correct that -- it is true that it has rarely been the case that the White House has granted a presidential veto over an ITC decision. Slightly more than a handful over more than a decade.
Having said that, I think it is also rarely the case, if ever, that the White House has been presented with a case like this one, where the rights of third parties who were denied their due process opportunity to defend themselves, had been so clearly and detrimentally impacted by a decision by the Commission in a way that is also unquestionably detrimental to public safety, the public interest, and consumers.
There is no disagreement even among the Commissioners that any downstream remedy will have these very serious and negative impacts. You can see that even the majority tried to fashion something that would mitigate that, although in our view they failed pretty seriously.
Similarly, with respect to the Federal Circuit granting stays, the Federal Circuit has shown an increasingly willingness over recent years to stay enforcement of decisions of District Courts in patent infringement cases. It has been presented with far fewer opportunities to do so with respect to the ITC. So it is a bit difficult to extrapolate whether that trend might apply to the willingness of the Federal Circuit to intervene in this way on an emergency or expedited basis with respect to the ITC.
Having said that, the Federal Circuit has shown no reluctance in the past to correct the ITC on the merits when the Federal Circuit has felt that the ITC has gotten it wrong. The Federal Circuit is at the end of the day the appellate court in the US specifically tasked with determining patent law issues, and has amassed extraordinary expertise and experience over the last 20-plus years in which it has been doing that. So they do have the final say and they are not reluctant to step in and correct errors.
As to US versus Asia, as a theoretical matter, the ITC's power only extends to product that is being imported into the US. So it is true, as a technical matter, that if everything were manufactured in the US there would not even be a basis for invoking the ITC jurisdiction.
As to whether that is a practical solution, I think I will probably defer to Sanjay. But I think as most everybody knows, it is the case that the vast majority of our manufacturing is done overseas.
Finally, in terms of again addressing the workaround process, I think it is very important to continue to emphasize that workaround, new replacement design, whatever you want to call it, it is subject to the same commercial constraints, if you will, the same commercial factors that the introduction of any new rev of software, any new product, any new functionality is.
That is, one, you've got to get the manufacturers to accept it. Then two, you have got to get the carriers to accept it, to bless it, to test, to make sure it interoperates with the rest of their network.
Then that ordinary scenario is complicated in our case by the fact that, no matter what we do, I think we can rest assured that Broadcom will try to challenge it legally. Your question was, well, what does that process look like? There are in fact a couple of ways that that can go.
If we were to implement some kind of new design, and again, this is -- we are speaking hypothetically and theoretically now, with the caveats that I just gave you. But if and when that happens, if Broadcom wants to challenge that then the burden is on Broadcom to go before the Commission, for example, and challenge any new design on the basis that it continues to infringe.
There is also a process by which an accused importer could go in affirmatively and seek the Commission's blessing, if you will, of a new product or a new design. But the importer is not obligated to do that. The importer is not required to do that. If the importer doesn't do that, then the burden is on the patent holder to go institute that process.
OPERATOR: Brian Modoff.
BRIAN MODOFF, ANALYST, DEUTSCHE BANK: Let's take kind of the other end of the spectrum on the questioning. If Broadcom is able to get this kind of ruling against you on a patent they acquired from [Intermac] that was built originally for WiFi and then stretched to cellular, what does that mean for your patent portfolio in GSM vis-a-vis your arguments with Nokia? Then what does it mean for your patent portfolio vis-a-vis Broadcom getting a license from you to sell WCDMA chipsets? Don't they still need a license from you to sell WCDMA chipsets?
LOU LUPIN: Brian, it's Lou. Yes, unquestionably, Broadcom still needs a license from us to sell WCDMA chipsets. You know, candidly that is really what all of this is all about. All of this litigation was instituted by Broadcom in an effort to try to get negotiating leverage to get that license. In the course of that, as I mentioned earlier, they had been insisting on terms that are just not acceptable to us, as being fundamentally inconsistent with our business model.
I think unfortunately we do have the occurrence sometimes in the patent litigation process, whether that is in front of jury trials, whether that is in front of an agency like the ITC, sometimes even when it is in front of a District Court sitting as a trier of fact, that patents are complex. Motivated parties can take patents, and they can stretch them, and they can distort them, and they can sometimes get at least interim results that are favorable to them.
We have a lot of faith in the Federal Circuit, which as I mentioned before is a specialized body and generally does correct these errors and does get things right.
The difference we think between these kind of patents and that kind of process is our portfolio was developed from research that was done specifically targeted to wireless industry. I mean, we have been the pioneers of the wireless industry. We were the pioneers of CDMA. We were the pioneers of WCDMA.
Even with respect to GSM and particularly GPRS and EDGE as those technologies have evolved to keep pace with the technical advances in CDMA and WCDMA, they have had to borrow and adopt a lot of technology that was developed in the context of CDMA and WCDMA for purposes of spectral efficiency, robustness, more effective VO coding. Lots and lots of things that first found their way into CDMA systems and now have been adapted and borrowed into GSM and GPRS and EDGE systems.
When that borrowing occurred, it is not surprising that that has caused some of what is going on in GSM, GPRS, and EDGE to read on our patents and to be derivative of innovations that we made primarily in the CDMA context.
OPERATOR: Mike Ounjian.
MIKE OUNJIAN, ANALYST, CREDIT SUISSE: Great, thank you. Lou, could you just review where we are in terms of other litigation and actions with Broadcom?
Then, just broadly with Nokia, just to stay on that topic, there's another situation, obviously, where it seems there has been difficulty for some time in coming to an agreement. What are the first legal actions we should look for to potentially move forward in that situation that could, I guess, change the landscape there?
LOU LUPIN: Sure. This is Lou, Mike. With respect to Broadcom now, the pending items apart from today's news are the recently-decided jury verdict in the patent infringement case in Federal Court in Santa Ana, which will now be proceeding into the post-trial stages where the judge has to make a number of additional decisions.
At present, the only firm date we have is a June 18 date in which he is simply going to set the schedule for the rest of the things that have to happen, including our post-trial motions to try to overturn what the jury has done, as well as undoubtedly Broadcom's request for injunctive relief if any of the infringement and validity findings stand. So we will have a better idea of what that case looks like going forward after the June 18 hearing.
There is another District Court case involving the same patents that were in front of the ITC. That has been stayed and will remain stayed and inactive until the absolute completion of the ITC process, all the way through appeal. So nothing is likely to happen there for quite some time.
You will recall that there was an antitrust case filed by Broadcom in federal court in New Jersey. That was summarily dismissed by that court on our motion to dismiss. Broadcom has appealed that dismissal. There is a hearing scheduled on that appeal in late June, with a decision by the Third Circuit Court of Appeals, who will be hearing that appeal, anticipated later this year. But we can't say precisely what that timing might be.
I guess last but not least, Broadcom recently filed in state court in Orange County, California, a case that overlaps in many respects with its dismissed antitrust case. That case is just in the very early stages. We have not even responded to the complaint yet. Our time for doing so is coming up soon here in the next few weeks. So that case is just getting underway.
I don't want to spend too much time on Nokia because this is sort of a Broadcom-centric call and I know there are other questions. But just by way of very quick review, the things that are most close to possible dispositioning with respect to Nokia are a couple of GSM cases that we have been prosecuting in Europe, one in the United Kingdom and the other in Germany.
The UK case had been sent for trial on infringement and validity issues for July. But that trial date was just postponed by the judge, and we are not sure what the new date might be. We are still hoping that that will go later this year.
Then there is a similar case pending in Germany. That is set for trial in September of this year, with two more cases in Europe set for later.
We have an action pending in the ITC against Nokia, as you know, which was stayed earlier this year. We are hoping to get that unstayed as soon as we possibly can. But as of yet, we don't have any definite time frame in which it might be unstayed and in which we might get a new trial date. That had been set for trial; it was going to go to trial earlier this year, but when it got stayed we lost that trial date at the ITC.
Just by way of where we stand on discussions with Nokia, as we have said we continue to have an ongoing dialogue with Nokia. I think both sides are continuing to try to work to resolve our differences. As we have said in the past, we are not optimistic that there will be a near-term resolution.
The issues that are separating us there are pretty significant. Nokia, as it has made very plain, is looking for a substantial reduction in the royalties that they pay us. As we have talked about in the past, they view that I'm sure as a cost input, and they would like to reduce costs.
Secondarily, I think they also would like to attack our business model. Because that model really promotes competition, and in particular it creates and promotes competitors to them. So if they can undermine our defectiveness in creating and assisting competitors to them, certainly they would like to do that.
So we do have these serious differences, but we are hoping to find a framework in which there is a win-win solution for both sides. Clearly, we've both got to continue to coexist in this industry for many years to come. So at some fundamental level it is in our mutual interest to find a resolution.
OPERATOR: [Ishwar Kurshman].
ISHWAR KURSHMAN, ANALYST: Lou, can you maybe just comment on why KSR was not even considered in this case and why the staff attorney chose to essentially say it didn't even apply? Also, especially in the context of the [NTC] (inaudible) ruling and sort of subsequent events in that case.
My sense, from the Supreme Court ruling on the case (inaudible) this was precisely the sort of situation that we would need to prevent from happening, where the industry was essentially held hostage by essentially (inaudible) of people who held one or two patents. (technical difficulty) Can you please talk about why KSR was not upheld?
LOU LUPIN: I have to say, not surprisingly, we sort of agree with your views about the applicability of KSR. We were a bit disappointed that it doesn't appear to have impacted the Commission's decision at this stage. We do, however, think the Federal Circuit will care about it quite a lot. It is one of the reasons that we believe an application to the Federal Circuit is appropriate and has a very good chance of being seriously considered.
I can't really speculate on the Commission's thought process and decision process, other than to say perhaps they viewed KSR as coming somewhat late in the game. They may have concluded it would be best to leave that to the Federal Circuit Court of Appeals to determine whether it should impact the substantive outcome. But of course that is just speculation on my part.
OPERATOR: John Lau.
JOHN LAU, ANALYST, JEFFERIES & CO.: Great, thank you. I understand the old models have been grandfathered and your appeal options that you have laid out. But going forward I just want to get, in terms of a macro sense, how many models in the design phase have this infringement issue? Does the order cover the basic software for almost all the models, just CDMA, CDMA 2000, or WCDMA?
Can you help us try to get some sort of scope has to the breadth of how many of your products on a going-forward basis could be impacted by this? Thank you.
SANJAY JHA: Again, we have not seen the opinion, the detailed opinion. Anything that we say is based on the brief reading of the summary judgment. The order, to the best of our understanding, applies to both CDMA and wideband CDMA phones. I beg your pardon; EV-DO and wideband CDMA phones; it does not apply to 1X phones.
In terms of how many devices there are in the pipeline, I don't have a precise number. But I would imagine for Christmas all the carriers have set out their plans to launch large number of models. I think that they would be extremely keen to find a way to make sure that their plans for the growth of wireless industry for the second half of this year is not impacted and not impeded.
I think the best way to insure that right now with -- for all of us to implore the President to veto this order.
DR. PAUL JACOBS: Let me just close by saying -- by thanking everybody for being with us today. We are disappointed with this ruling, but there is no short-term disruption to the business. We are going to focus on getting a presidential veto and appealing to the Federal Circuit Court of Appeals.
We are also going to continue to work closely with our partners who have been attacked by Broadcom in this action. For us, we are going to continue to focus on execution that we have -- think been doing very well.
The CDMA market continues to grow, the WCDMA market continues to grow. It is our view that our competitors want to fight us in court because we are beating them badly in the marketplace, and we are going to continue to do so. So thanks everybody for being with us.
OPERATOR: This concludes today's QUALCOMM conference call. You may now disconnect. |
