Conferece call notes - Part 3
Q&A
Louis Gerhardy of Morgan Stanley
Well, congratulations on the success and financial performance. On the second half in the last 3 years, it looks as if 55% or a bit more are shipped in the second half. You mentioned your customers forecasts - is this what they’re thinking and you’re just discounting their forecasts?
BK: As Irwin noted, customer demand is higher than the forecast – that is typical – that the demand is higher than our own forecast. You are correct that the second half in prior years has tended to be higher than our first half but there are a number of factors going on, particularly with significant growth in emerging markets. All things considered – and we’ve applied the same process we applied in the past in our forecasting process – we do a top-down estimate of what we think the markets will take and all things considered we thought the forecast ..
I had a question for Dr. Irwin Jacobs. If you look outside of India and some of the other fixed wireless markets today using CDMA, can you talk about the likelihood whether they would move towards more mobility? Regulatory situation?
IJ: Yes. That situation also applies down in Brazil. I suspect over time many of the regulators will ease up on the ability for operators of wireless fixed line services to allow them to go ahead and provide more mobility. I suspect that will happen slowly and obviously will be a matter of contention between cellular and the wireless operators. We are already seeing a lot of situations with legal activities – there were some in Brazil and certainly now in India. But having said that, I think, longer term, the technology supports it; it provides more competition; it provides more services; it provides a better situation for consumers and businesses; I think that indeed is the future.
Nathaniel Cohen of Goldman Sachs
Bill, what are you assumptions for ASPs in calendar 4Q and handset shipments?
BK: Handset shipments for the fourth quarter - we don’t have definite amounts yet but our estimate is approximately 27 million, which would put the full year a couple million ahead of the 85 estimate we’ve given previously – again we don’t have final numbers there but that’s our estimate at this time.
ASPs for the last report were approximately $188? and about a 7% decline. Again, the majority of that decline was due to regional mix – less than 2% was due to outright ASP declines. That was the September quarter.
So for your 10% ASP decline in 03 is that off of a $200 ASP?
It would be off of a fiscal 02 average of approximately $193.
On chipset side, given your assumption of handsets of 27 million and 29 million chips shipped in this current quarter, is that what’s holding you back in terms of guidance?. It seems perhaps your orders would show things looking a little better than 27 million for March? Why the caution?
BK: It wasn’t really the December quarter that’s making us cautious. It’s a number of factors – it’s the worldwide economy; the fact that two of our major markets today in terms of growth (China and India) are relatively new markets.
TT: That applies to the June quarter… As Don said, the March quarter is 100% booked so it applies more to the June quarter where we have less visibility.
Would you expect June to be down sequentially as well?
TT: second half .. at this stage??? It probably would be sequentially down - that traditionally what has been happening.
TC Robillard of SalomonSmithBarney
When I looked at the increase in guidance for CDMA handset shipments and looked at that in terms of the increase in guidance on the earnings side, I am trying to reconcile the two. You increased unit shipments by roughly 5 to 7 million units. Earnings was up about 19 cents. If I adjust for the tax rate – about 4 cents, I am still having trouble making a 7 million handset unit increase equate to about a 15 cents increase in bottom line.
BK: The key factor is that our outlook now includes forecasts for the full fiscal year that QCT will have earned a greater share of the chipset market than what we had said in November. That’s the primary driver.
Is a flat ASP line sequentially a fair assumption?
BK: I think that’s reasonable.
On a go-forward basis, is it a mid-30% pretax margin in that business?
BK: I think mid-30% is about right for the March quarter.
Then, more of the bigger picture question - given Don’s announcement for retirement, is there anyone else in that room that we should be concerned about retiring anytime soon?
IJ: [Chuckling] Nobody has raised that issue at all. [Laughing] If you’re referring perhaps to the oldest member of the group, hopefully things will remain exciting and I personally will be able to continue to contribute and look forward to continued service here.
TC: That’s good to hear, Irwin. Thanks a lot.
Brian Modoff of DB Alex Brown
Don, nice working with you and I look forward to seeing you at our conference. Irwin, could you give an update on the WCDMA world?
IJ: There’s certainly lots of activity – people working very hard to get networks out there, get some handsets out there, get the testing down, get the standards stabilized – more of things we talked about in the past. But I suspect again that until one can get the handsets up – a little time running on several different networks and test them and also have the ability operate on 2G as well as 3G networks, there’s still lots of work to be done. And so I am not surprised by the push out. I think that some of the estimates given by some manufacturers have just been overly optimistic and have caused some problems to the industry. I think everybody is working very hard at this point. Again, I don’t see an advance over my previous estimates of 2004 – 2005 for substantial numbers.
Handset volumes – would you expect that as more of an 05 event?
IJ: We’ve been making very good progress with our own chips. Clearly, there’s a software issue and a testing issue. I would expect to be seeing a significant buildup by middle of 04 and so we should be seeing WCDMA coming into its own by the end of that year.
Is that the end of phase 4 testing that you …?
IJ: Right.
On China and India numbers – you’re taking China up by another 2 million and India up another million relative to your previous guidance. What are they telling you about the potential numbers this year for China and India. With regard to the overall numbers going from 100 to 105, looking more towards 105 to 112 – what other changes are you seeing out there that make you comfortable to take the range to 105 – 112?
TT: In China, what Unicom has said target is that their target is to get to 20 million subscribers by the end of 2003, which represents roughly a 13 million increase and then realize some replacements as well. That’s what’s included in our number; we’re very consistent with what they are saying. Certainly, we think it could be better than that but there’s a long way to go.
India – we’ve taken the number up. The Indian operators are talking about and planning to get more than the 7 million that we have included. But because we are going from a base of 1 million, we really are somewhat cautious there although we believe very strongly that Reliance is dong things which is going to allow them to grow the subscribers very quickly and the competition is responding equally. We expect to see very good growth there.
The other markets, as I’ve mentioned, we seeing really good progress everywhere. In the U.S. market, we see strengths and weaknesses but overall the replacement market on CDMA side is doing very well. In Latin America, the .. management by Telefonica and Portugal Telecom in Brazil, and Mexico is going well, and other parts of Latin America - BellSouth International, we really are seeing good growth in Latin America so our number there is certainly in the middle of the range so there’s room for upside.
And then finally, Japan – we haven’t changed our number and it is not growing substantially over this year but again KDDI is making great progress in the market and then at some point DoCoMo has to start increasing its subscribers somewhat and J-Phone has launched already WCDMA so we will see some growth there. So overall, Australia, Russia, etc., there are lots of other places that are positive and places for upside.
The 112 does include a little bit of WCDMA in it?
TT: Right. It does – it’s a couple of million that we have in there for WCDMA.
The silicon germanium transceiver you developed – I think it’s the 6200 series that you’ve integrated with your baseband, how is that being received by customers? When will we see that in a 1x product?
DS: The whole ZIF family is being received very well. If you look at the 6050, I think we have 16 different licensees that are developing handsets with the 6050 in it. We shipping volume production on the 6000 and 6050 and have a number of handsets being developed for the 6100. The whole transceiver ZIF has been designed in – in Japan, Korea, China - in all the marketplaces. So I think as we go into the second half of the year, we are going to see a strong ramp on the 6000 family. Right now, it’s going very well.
Tim Long of CSFB
What has changed in the last three months that you are no longer discounting what China Unicom is saying on the subscriber front? Is it chipset orders or are they more convincing in their subscriber numbers? Will the 13 million adds be all new subscribers or will there be a component that switch over from the GSM network?
IJ: Well, first of all, it’s very hard to beat performance. They gave a number. They worked very hard to optimize their network over the first several months, to bring out additional phone models, to bring down the costs, to broaden the distribution base and to get the idea of CDMA out there. And so they really worked hard and they hit their number. And so that, of course, gives them a great deal of credibility. And we can see the energy and effort they’re putting in – and they’re now coming along and doing CDMA20001x. In a sense, they have twice as much time because they did lose the first 6 months last year in just getting off the ground. So we think they certainly have a credible target.
[The slide on China also notes that the 7.48 million subscriber December 31, 2002, figure was achieved “Before CDMA2000 1X, Before many color screens, Before BREW, Before gpsOne.”]
On replacements, are you factoring in any multiple R-UIM markets so subscribers can be overstated – that’s a significant issue on GSM networks over there?
TT: Yes, we are. We do see some of that, with some subscribers have multiple UIM cards.
Is it meaningful at this point?
Not at this point but, of course, on a base of 7 million, it’s not going to be that big.
Dale Sowell of CIBC
Congratulations on the numbers and outlook. Could you give us your viewpoint on both chipset inventories and handset inventories as we ended the calendar year?
BK: Pretty much the same as we indicated in December. We have been monitoring pretty much as everybody else has and we have not identified any significant pockets of inventory. Our picture is pretty much the same as it was in the September quarter. We don’t see an inventory issue. We spending more of our time dealing with shortages - what a customer or carrier wants.
IJ: Based upon requests that we are seeing from manufacturers, they’re not seeing that situation either.
DS: .. number coming out of Samsung and overall their inventories are very low. We’re seeing strong demand – they’re pushing for the parts quickly and …. don’t have any inventory.
TT: We are shipping considerable numbers of phones already this quarter.
Estimate of ASP trends for your chipsets this year?
DS: We see it fairly flat – that’s year over year.
Mark Roberts of Wachovia
Congratulations on a good quarter. Don, in doing the math, it looks like your chipset market share in the quarter and your projections for the year are over 90%.
DS: It’s going up nicely. Definitely, as Irwin mentioned, it increased. We really don’t comment on what it exactly is but it has increased nicely. Clearly, we’re shipping 1x chips and others aren’t.
Am I correct in doing the math that it’s over 90%?
DS: It’s higher than it was. It’s going up nicely – we don’t comment. You have to do the math.
Of the 5 manufacturers who have selected Qualcomm for their WCDMA chipsets, were you competing against someone else?
DS: We have made public at least three of them and that’s Sanyo, Samsung and LG and naturally in all of those accounts we were competing – and we won every one of them. And that’s not only for just straight WCDMA single mode but also WCDMA/GPRS/GSM dual mode in all three cases.
Have you competed for design slots at manufacturers where you have lost?
Not to my knowledge.
Datang commented that they would not license with Qualcomm for TD-SCDMA and that they would reimburse any manufacturers for any royalty liability? What is the status of license negotiations with Datang? Is this something that would fit under the existing umbrella license in China?
IJ: The umbrella did not cover WCDMA nor TD-SCDMA - it was CDMA2000 and was just an overall framework really for negotiating with individual manufacturing. We have not had any negotiating sessions with Chinese manufacturers on licenses for WCDMA nor for TD-SCDMA at this point. With respect to TD-SCDMA, there have been claims that there were discussions but to my knowledge there have not been any and until it gets closer to an issue of manufacture, it’s not critical from our point of view.
Tim Luke of Lehman
How is June shaping up?
DS: We are fully booked for 27 million for the March quarter so now and so we are booking for the April quarter; and it’s coming along nicely - orders filling in well. We are hopeful that it’s going to be a very good quarter for us as well.
So it could it be twice [???] on the unit number?
DS: I think that’s a little high.
Color on timing of your decision?
I’ll be here with Qualcomm through July to make sure the transition to Sanjay is very clean and, of course, I’ll be available if needed after that. We have a great team in place in QCT and all the functional areas. Sanjay is a very experienced person – QCT – having worked through 5 different MSM generations – leading those generations. He’s coming in now at a great time – we’re at the top of our game, doing very well. He’s a great person to take over because he has a tremendous technical background, a passion for the business and he’s a strong driver. So he’s a good person to come in now, take over and take it to the next round.
John Buford of DKM
ASPs – what percentage of total MSM chipset volume will be low-end MSM6000 series chipsets?
DS: Clearly, you also give price decreases and Q1 in October was the start of that and you have that impact that goes through the calendar year as you lower price to customers because of volume. At the same time, we are seeing more and more of a trend toward the higher fully featured MSMs, which have a better ASP. So therefore, if you combine those two factors (decreasing prices on chips as you higher in volume and increased functionality in a chip), that’s what gives us 2003 to 2002 a little bit of an increase in … throughout the year.
What percentage of overall volume will be entry level chipsets?
DS: It’s a good question. It will become an ever increasing number. I think right now its going to be in the low 15…
TT: China, India and 5105 ... but we’re not seeing that big an increase at the ultra low end. We are developing a product so that they will be able to compete effectively at the whole range against GSM.
IJ: Clearly in both those countries and in Latin America, there will be an increasing growth at that low end so we are trying to factor that into our planning.
Mike Wikley of RBC Capital Markets
7 million in India? More than half in the March quarter or is that too aggressive?
That would be aggressive. They are building an inventory stock for the launch. But I suspect that the launch will progress over time.
IJ: Also, the manufacturers supplying them have to appropriately ramp up and prepare for a continuing growth and all of this has taken a little time.
Massam Imam of Thomas Weisel Partners
On the chipset business - significant margin expansion mostly volume driven – what do we expect going forward?
BK: for March 34-35% range is a reasonable expectation and for the full fiscal year 32-33%.
TT: And that is heavily volume driven so that’s based upon assumptions of revenue.
On the BREW side, margins going forward?
BK: The positive is for the whole QWI segment - BREW did help contribute to that improvement but so did the other businesses in that segment. Our plan, as in November, we’re still forecasting good progress through the year and we’re still expecting BREW to turn into the black before the end of the year.
On TTL, how much was from third parties and how much from licensing fees?
BK: For the December quarter, of a total of $255 million: $30 million was inter-segment – so within the company; $14 million was license fees; and $212 million was third party royalties.
Concluding Remarks of Dr. Irwin Jacobs.
We are very pleased with the quarter. We are very pleased with the outlook looking forward. We think now with 3G CDMA phones becoming more and more available, that more and more data applications will become popular with both users and businesses, and that the BREW activity should indeed have very interesting growth on the data side. Position location, I think, is going to become increasingly important, certainly here in U.S. with e911. We’re well positioned to support that and continue to grow that market. We expect to see a number of location based services come into active use over the year.
I’ve been playing a little bit with video phones that are running on 1x-EV-DO. And I must say that they do certainly capture your attention and everybody’s attention around you. And so it’s going to be interesting to watch that expansion as we go forward.
And finally before the end of this year, we’ll see world phones – our multi-mode phones. [I thought it was mid-2003] And I think that’s going to make a really substantial difference in the way people view the wireless business – that really it isn’t a business segmented among regions but indeed is one that supports customers no matter where they may go. I think all of this is going to contribute to wireless industry in general and the CDMA portion of it through the rest of this year. |
