Qualcomm Conference Call, Part VI - Q&A and Closing Remarks
Q&A
Guidance for QCT margins? Can we get operating margins above 30% in September quarter?
BK: chip operating margins in the September should largely be in line with the June quarter. If we come in at the 18 million unit shipments range, I expect a very slight decrease in operating margins; if we hit the 19 million range, I expect to be about flat at 29%.
QTL margins trending down – comment?
BK: QTL margins bounce around a little bit. There is corporate R&D in there and also our legal expenses for defending our patent position. But as a whole, I expect the QTL margins to be in that range of 88 to 90 percent.
Pegaso details?
TT: We invested $140 million for interim financing, which is part of the Telefonica deal – through June, $58 million. We will get that, plus any additional interim financing that we provide through closing, 30 days after closing. In addition, 60 days after the closing, we will receive in excess of net $200 million in cash. The balance of debt will remain in Pegaso but, of course, with the ownership of Telefonica, as part of that, secured debt. [Comment: The cash balance at the end of September could exceed $3 billion.]
95% booked for this quarter – what does December quarter look like – growth, flat – any color you could give would be helpful?
DS: This quarter is looking very strong and the bookings show that. We do expect, as Sprint and Verizon continue to drive their rollouts of 1x through the balance of the year and with a good Christmas season, we are hopeful that we will see a quarter to quarter increase in the December quarter versus the September quarter.
Breakout of 80-85 million – is first half roughly in line with prior guidance?
TT: Yes, I don’t think we have changed any of our estimates, perhaps the shades of difference - Latin America would be a little lighter and other markets generally just a little better but pretty close to what we have said before.
Handset ASPs this quarter and for balance of the year?
BK: Handset ASPs – we have very good knowledge for the March quarter because we received those royalty reports and the ASPs came in at just under $200. ASPs are holding up fairly well because of the increased functionality in those phones. 5-10% decline in ASPs for calendar year and 5-7% for the fiscal year.
China, LA and India – any QCOM investments to help get some of those markets going.
TT: In China, there has been steady progress by Unicom. The reason we feel good about the 3 to 4 million for the calendar year relate to Unicom’s actions on pricing – taking more aggressive actions, the fact that their network is improving all the time, they are getting the distribution channels more organized and phone availability is much better. So for this year, those will be the key things. Beyond 02, the implementation of 1x - upgrade to 1x - combined with gpsOne, BREW and other services will really differentiate Unicom’s network from its competitors.
In Latin America, we certainly see the economy having the most significant impact there of all the world markets. But the emphasis on the low-cost phone – not necessarily the low cost chipset but what we are focusing on is lowering the total cost of building the CDMA phone. We are working with a number of manufacturers on that. One of the key things is the introduction of the MSM6000, which sampled in March and so it is beginning to be designed into phones for introduction at the end of this year or early next year, which will allow for much lower priced phones to come into the market.
In India, Reliance is the pacing driver although other operators are actually deploying - growing their networks. It is looking to be a pretty competitive market place with a number of CDMA operators, with Reliance looking nationwide and being extremely aggressive – that, I think, looks very good.
If we assume the low-end for the year of 80 million units and the low end for the September quarter – it would look like 18 million – about a 90% market share. NOK share and MOT 2G share?
TT: The March quarter is about 18 million; the June quarter: we don’t have royalty reports yet but we would guess around 20 million, which puts us at 38 million. This means 42 million for the second half of the year to get to the lower end of our range. With the 18 to 19 million chipsets we are shipping, we are looking at 20 to 22+ million in the September quarter and perhaps more than that in the December quarter. So I think that’s the breakdown sequentially that gets you to 80-85 million. And I think the key thing that is being missed in the consensus is the impact of replacement phone sales. Korea is the prime example of that; Japan is a terrific example of that. It may not be as evident in the U.S. but it really is a big factor here as well.
Could you remind us of the breakdown between new subs and replacement?
TT: Well, certainly it is well in excess of 50%. I’d say it is a little more like 70% between replacement share and upgrades. Overall we are looking at new subscriber adds being in the 30% range.
Congrats on the chipset margins. On the September quarter 95% booking, could you provide some linearity? Is it a fairly uniform quarter or backend loaded?
DS: It’s an extremely uniform quarter.
QSI losses – how much of it was cash?
TT: the QSI losses were essentially all unrealized losses – Leap was $194 million total and was unrealized. The equity investment in Vesper is a consolidation of operating losses; the cash we are investing is in the order of $25 to $35 million per quarter.
What is the status of the unfunded commitment to Reliance?
TT: Reliance did not meet certain conditions under our agreement which means that we are not obligated – we don’t have a firm commitment to invest that $200 million. That does not mean, however, that we will not invest the $200 million. We are still working very closely with Reliance and expect them to launch and there is a very high probability that we will invest.
China 1x full deployment by end of the year?
TT: We are expecting contracts for 1x upgrades and, yes, we see upgrade taking place between now and the end of the year.
In talking to with your customers for chips, what are the average lead times you are quoting to them right now?. How many weeks of normal chip inventory do they keep in their raw materials pool?
DS: In terms of our lead times, it normally runs in order of 12-14 weeks from end to end. Sometimes it is less, sometimes more, but typically we quote somewhere between 12 and 14 weeks total. Once we ship it, we assume that there’s about half of it carried in the handset manufacturing base and another half in the carrier channel.
Handsets shipped in each region in 1H? Pricing trends on chipsets? Loss for doubtful accounts for accounts receivable and finance receivables?
TT: We do not know the shipments by region specifically. We have not received royalty reports but even those do not show where chips end up so that’s a difficult question to answer.
DS: on the chipset ASP side, with a higher percentage of 1x and now with position location in more and more chips, we are continuing to see that the ASP is increasing and we expect it in the September quarter to go up a little more.
BK: No significant change in our allowance for doubtful accounts during the quarter. And I would add that our average collection period – the time of the invoice to the time we collect it - is about 49 days. The receivable portfolio is performing very well. On the inventory side, again no significant change in inventory reserves and inventory turns are going very well – we are turning about 15 times a year. Finance receivables – we did increase our reserves during the quarter and you saw that reflected in our QSI results.
TT: If you look at our cash flow statement, you do see a significant increase in working capital in the quarter and that is largely associated with the fact that our royalties are paid - generally anyway - every six months. And so every other quarter you see a build in receivables and that gets reduced in the following quarter.
Expected trends in R&D and SG&A?
BK: I expect a combination of R&D and SG&A in the quarter to be about the same dollar amount as we incurred in the June quarter. We are watching those expenses very closely so I do not expect an increase in those dollars.
Congratulations on results and the execution behind the results. CSM outlook up or down from 4 million channel equivalents and what regions would be taking those part?
DS: CSM will be down slightly from this record-setting quarter – as we mentioned this 4 million shipment was a barn-beater so I think it’s going to be down slightly from that. Clearly now we expect things may come on stronger and we may see some turn-on to that.
10% customers in quarter – did you have any?
BK: in terms of our most significant customers, there is no significant change from the prior quarter or two.
Dr. Jacobs’ Concluding Remarks
We are quite pleased with quarter. We are particularly pleased with the strong demand we are now seeing for chipsets in the present quarter. And we are looking forward to launches of 1x service expanding here in the U.S. - continuing in Japan and Korea. We think we will be seeing some significant improvements in China and we are looking forward to things happening in India. So, right now – a lot of activity and hopefully it’s going to show up in our results. |
