Conference Call Notes - Part 1
Conference Call
The presentation slides used in the conference call deal with the financial numbers and the guidance for the current quarter and for all of fiscal 2003. They were available yesterday on the Qualcomm website along with the webcast link: qualcomm.com. But when I tried to check to see if they had changed the slide regarding China, the link took me to the earnings release.
Julie Cunningham started off with a quick summary of the financial results, which are contained in the press release. Several of the other speakers went over the same numbers and I have also omitted most of that discussion since they are mostly in the press release. The headings below are mine.
Dr. Irwin Jacobs, CEO
[Dr. Jacobs led off with a tribute to Don Schrock who is retiring effective August 1st. Sanjay Jha will be involved in the New York Analysts meeting on May 22nd.]
QCT
QCT nearly doubled its revenues... First fiscal quarter shipments of MSM phone chips nearly doubled from the year ago quarter from 15 million to approximately 29 million. QCT continued to grow market share in the December quarter. We believe that more than 85 million CDMA phones were sold in calendar 2002 and will confirm the actual number when all royalty reports are received for the December quarter. This continued strength along with order input and demand forecast from our customers, ongoing dialog with CDMA operators and our careful internal forecast process have caused us to increase our 2003 guidance from the previous range of $1.15 to $1.20, based upon the sale of 100 to 105 million CDMA phones in calendar year 2003, to $1.34 to $1.39 based upon 105 to 112 million CDMA phones in calendar 2003.
At this early stage the estimates do not assume the same growth for the full year as we expect in the first two quarters. We believe it is best to be cautious, given the current environment and given our anticipation of significant growth in emerging markets. Our customers, however, are forecasting a higher demand for our chips than we have included in this forecast and we are planning for greater chipset capacity should these forecasts become orders. We will update our outlook if we see a material change as our visibility improves.
Since our last conference call in early November, new commercial CDMA2000 1x networks were launched by 14 operators and one new WCDMA network was launched in Japan. This brings the total number of commercial 3G CDMA networks to 35 in 17 countries….
China
CDMA in China continues its steady growth as China Unicom exceeded its goal of 7 million total subscribers by the end of 2002. Of that 7 million, approximately 4.5 million are in those provinces where China Unicom reports publicly. China Unicom has certified 58 CDMA phone models for use on its network, including 51 models for IS95A and 7 models for CDMA2000 1x. China Unicom plans to have 30 cities upgraded to 1x by end of February.
India
In India, Tata and Reliance launched their CDMA-based limited mobility networks during the December quarter. The Tata network covers 5 circles, including Delhi. Reliance has deployed its nationwide CDMA2000 1x network in 673 cities and towns across India, covering more than 65% of the population. Reliance has soft-launched its CDMA service under the Reliance India Mobile brand name and announced that it began signing up subscribers on January 15th, offering CDMA2000 1x phones from Samsung and LG. The Indian Supreme Court heard the Cellular Operators Association appeal and remitted the case back to the Telecom Regulatory Authority of India – TRAI. We remain optimistic about the outcome given continuing deployment and service offerings and given the Indian Government stated objective to provide broad access to wireless services to people throughout India.
[The slide on India says that Reliance Infocomm has hired 100,000 agents with 200,000 planned in total. Its network capacity is 10 million subscribers.]
1x-EV-DO
CDMA2000 1x-EV-DO is gaining momentum in the market. We shipped approximately 700,000 EV-DO chips in the December quarter and have received orders for increasing quantities for delivery in the March quarter. South Korean operators estimate that over 4 million subscribers EV-DO will be added this year. And KDDI in Japan is on tract to launch commercial services in October. In addition, EV-DO trials are under way with operators in the U.S. and Latin America.
GSM1x
Plans to trial GSM1x with a major GSM carrier are progressing and we would expect to launch that trial and provide more details in the spring.
Next month at the GSM World Congress in Cannes, France, we plan to demonstrate GSM1x with a dual mode handset, GSM and WCDMA voice and data using our chips, and BREW over GPRS.
Tony Thornley
[Thornley slurs a lot and I had trouble making out some of the words – I have am hearing impaired but could hear every word of Dr. J. TT needs to work on his diction! I have put … in where I had trouble or made deletions (such as repeats of the financial numbers)]
Congratulations to Don and Sanjay, with whom I have worked very closely over the last three years, ….
December Quarter
Overall the December quarter results were very strong, not only because we achieved record revenues and earnings but also because I believe we strengthened the organization across the company. We further developed key customer relationships which are critical to our success.
Operating expenses grew only marginally on a sequential basis – … seasonal factors such as the holidays and … benefit costs... We continue to strengthen the organization and grow our business; we expect higher operating expenses in the March quarter but still below our target expense/revenue ratio. The QSI segment results included a significant net cash receipt of approximately $390 million during the first fiscal quarter related to the Pegaso transaction.
Vesper
During the first fiscal quarter, losses from Vesper in Brazil, net of minority interest, were $30 million - $12 million sequential improvement and the lowest quarterly loss since we began consolidation. However, Vesper did not reach the break even target due to changes to its limited mobility offering, which were approved by ANATEL, the Brazilian regulatory authority, which slowed subscriber growth substantially; it ended the year with approximately 475,000 subscribers.
In November, the Vesper company won bids to acquire new mobile licenses in the State of San Paolo (excluding San Paolo city), the State of Minas Gerais and in the northeast region of Brazil. These licenses cover areas with a combined population of in excess of 64 million people at a very low cost of approximately US$1.36 per pop. The total costs of the licenses was $82 million; however, only $8 million was due on issuance of the licenses, with balance due over six years through the year 2006. We continue to explore strategic alliances for Vesper to take advantage of its large CDMA footprint in Brazil.
Inquam
Equity losses for Inquam were $21 million in the first fiscal quarter. Their operation in Romania continues to grow, with a high quality subscriber base – up 67,000 at the end of 2002. Improvements in the operations…were achieved in the quarter.
Inquam will require additional funding for operations beyond March 2003. We are currently working with investors to raise the necessary funding for the balance of 2003. Qualcomm and another current investor are considering investing as part of this financing round and may provide limited bridge financing to enable Inquam to achieve its longer term financing objectives.
Balance of QSI
The balance of the losses in QSI comes mainly from non-cash write-downs of investments under accounting rules for other-than-temporary losses relating to the market value of investments, the largest of which was KTFreetel. We still are holding all of our original investment in KTFreetel because we believe the market is undervaluing the company at the present time. The total cash outlay in the December quarter was $70 million, primarily relating to Vesper and Inquam.
Global CDMA Subscriber Forecast for 2003
In the global marketplace, Irwin has already covered China and India so I will provide regional highlights from the other global CDMA markets. Let me begin by updating our regional estimates for 2003 which we gave at our analysts meeting in November.
Using 108 million as the midpoint of our 105 to 112 million range: the Asia region [South Korea, Japan, China, India, SE Asia per slide] would be 49 million, including 15 million in China and 7 million in India; the North American region remains at 43 million; and Latin America [Brazil, Mexico, South America countries per slide] is 10 million and the rest of the world [Australia, New Zealand, Israel per slide], including WCDMA and other wireless devices, remains at 6 million. The web presentation on the chart shows the current and previous estimates for 2003 as well as historical figures for 02 and 01.
[I guess the Qualcomm slide has a mistake in it. Rather than say 15 million for China, it says “China Unicom’s goal is to add 20M subscribers in 2003.” I have a printout of the slide but, as noted at the outset, was unable to find it on the Qualcomm site a day later]
South Korea
The South Korean market finished calendar 02 with total CDMA subscribers of 32.35 million, a penetration rate of nearly 68%. Over 80% of all phones sold in South Korea are color screens 1x and 1x-EV-DO phones. The South Korean Government restrictions on attracting new subscribers imposed on all three wireless operators during the December quarter … [pushed?] the migration to 1x as operators focused on selling 3G 1x and 1x-EV-DO phones to their existing subscribers. As a result the impact of these restrictions on our business was minimal.
By the end of 2002, the number of 3G CDMA users was 15.5 million – approximately 50% of the total subscriber base. The next phase in growth in Korea should be aided by the rollout of many 1x and 1x-EV-DO devices and services. It is also very encouraging to know that the early indications from the operators are that data ARPUs have risen substantially with subscribers with DO phones.
Japan - KDDI
In Japan, KDDI continues to sell CDMA20001x aggressively with a total of 4.7 million subscribers out of their total of 13.3 million subscriber base at the end of December – up from 2.65 million at the end of September. Camera phones are continuing to be immensely popular among subscribers. The leading 1x suppliers in Japan are Kyocera, Sanyo and Sony Ericsson.
Australia and New Zealand
Telstra in Australia launched CDMA2000 1x services and is initially focused on business customers but later they will also focus on consumers. Telstra operates both CDMA and GSM networks but they have chosen to focus their wireless data offerings on 1x.
Telefon New Zealand also has had considerable success with its 1x launch.
Latin America
In Latin America, Brazil saw a joint venture between Telefonica Moviles and Portugal Telecom agreed to purchase a Brazilian operation, TCO. This agreement, once approved by Brazilian regulators, would give Brazil Cell, a CDMA/TDMA operator today, approximately 16.8 million users and a market share in excess of 50% in Brazil. The joint venture indicated its intention to deploy CDMA in the TCO territory as well as in its own existing TDMA regions.
BellSouth International has also launched CDMA service in Ecuador, previously a TDMA territory. They are also trialing 1x-EV-DO in a number of markets.
CDMA subscribers in Mexico and Central America are also growing. We have made good progress on the introduction of low cost phones in the Latin American market. The best of these is shipped … BSI – BellSouth International. We are close to completion of a phone … incorporating the MSM6000 which will result in a further reduction in prices. This will allow CDMA operators to more effectively compete with low ARPU customers as well as at the higher end of the market with data capabilities and the quality of CDMA phones.
North America
We believe that the North American market ended calendar 03 with over 65 million subscribers, representing 46% of the market.
During the December quarter Verizon launched its nationwide Get It Now service based upon BREW and aggressively marketed color screen 1x phones, including the MSM5100-based Motorola T720. Verizon expects to sell only 1x phones throughout its markets by mid-03 and is targeting the enterprise market for wireless data services.
Sprint is the second largest CDMA carrier in the U.S. with an 11% market share continues to roll out its Vision 1x services. More than 70% of Sprint’s new customers and 50% of existing customers are signing up for PCS Vision data services. Sprint launched its first camera phone also during the quarter.
Both Verizon and Sprint along with their affiliates are accelerating introduction of phone models based upon the MSM5100 with integrated gpsOne position location capabilities to meet e911 requirements.
Summary
To summarize, CDMA operators around the world are driving their migration to CDMA2000 1x and 1x-EV-DO. Those operators that have chose BREW recognize a competitive differentiation and revenue potential which useful and efficient wireless data applications would provide.
The outlook for financial results in 03 is excellent – as evidenced in our increased estimates for revenues and earnings. We are in an excellent position as CDMA penetration grows in many markets. China and India are the best examples of where the story is just beginning to unfold. Further the potential to grow revenues in Europe in 04 and beyond, in addition to the ongoing growth in the Americas and Asia, is very positive. |
