Earnings Labs

QUALCOMM Incorporated (QCOM)

Q4 2005 Earnings Call· Wed, Nov 16, 2005

$150.55

+0.20%

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Transcript

Operator

Operator

Welcome to the QUALCOMM fourth quarter and fiscal 2005 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Operator Instructions As a reminder, this conference is being recorded November 2nd, 2005. The playback number for today's call is 1-800-633-8284. International callers please dial area code 402-977-9140. The playback reservation number is 21245580. I would now like to turn the call over to Bill Davidson, Vice President of Investor Relations. Bill, please go ahead.

Bill Davidson

Analyst

Thank you. Good afternoon. Today's call will include prepared remarks by Dr. Paul Jacobs, Steve Altman, Dr. Sanjay Jha, and Bill Keitel. An internet presentation and audio broadcast accompanies this call, and you can access it by visiting www.qualcomm.com. During this conference call, if we use any non-GAAP financial measures as defined by the SEC in regulation G, you can find the required reconciliations to GAAP on our website. I would also direct you to our 10-K and earnings release which were filed and furnished respectively with the SEC today and are also available on our website. We may make forward-looking statements relating to our expectations and other future events that may differ materially from QUALCOMM's actual results. Please review our SEC filings for a detailed presentation of each of our businesses and associated risks and other important factors that may cause our actual results to differ from these forward-looking statements. Pro forma revenues were $1.56 billion in the fourth fiscal quarter, up 14% year-over-year and 15% sequentially. Fourth fiscal quarter pro forma net income was $543 million, up 9% year-over-year and 17% sequentially. Diluted earnings per share were $0.32, up 7% year-over-year and 14% sequentially. Fourth quarter fiscal pro forma free cash flow, defined as net cash from operating activities less capital expenditures, was $838 million up 31% year-over-year and was 54% of revenue. Before I turn the call over to Dr. Jacobs, I'd like to mention that we're hosting an analyst meeting on November 8th in London. The meeting will be simulcast on our website with audio and slide presentations. Questions from our webcast participants can be submitted prior to the meeting by going to QUALCOMM's Investor Relations website at www.qualcomm.com and following the links to our London webcast. Now it's my pleasure to introduce QUALCOMM's CEO, Dr. Paul Jacobs

Paul Jacobs

Analyst

Thank you, Bill. Good afternoon, everyone. I'm pleased to report we posted record results for the fourth quarter and full fiscal year. I'd like to thank QUALCOMM employees around the world for their dedication, commitment and focus on innovation, execution and partnerships. Our fiscal 2006 guidance reflects continued acceleration of CDMA throughout the world. We estimate that CDMA hand-based shipments will grow approximately 30% during calendar 2006 as compared to 2005. We plan to aggressively increase our R&D investments in fiscal 2006 to capture the many opportunities ahead and maintain or extend our position of leadership in the market. Together with many partners in the wireless industry, we have established a exceptional track record of helping to bring exciting and innovative wireless solutions to market. QUALCOMM has put a great deal of focus on ensuring the success of 3-D CDMA network roll-outs in Europe by working closely together with European operators, infrastructure manufacturers and device manufacturers. By now I'll sure you're all well aware of the release that was issued by multiple parties late last week, alleging that QUALCOMM is violating European Union Competition Law and failing to meet commitments that QUALCOMM made to international standards bodies around the world that would license its technology on fair, responsible and nondiscriminatory terms. As we have throughout our history, QUALCOMM remains committed to licensing on fair and reasonable terms. The WCDMA market enjoys healthy competition among many handset suppliers including companies from Korea, Japan, China, the United States and Europe, As a result of QUALCOMM's proactive licensing of its substantial R&D investments, the availability of chip sets and software from QUALCOMM and its licensees. QUALCOMM's extensive licensing program has fostered the wide-spread adoption of leading edge technologies, promoted by the competition through the wireless industry, encouraging innovation and technological advancement. I want…

Steve Altman

Analyst

Thanks, Paul. Good afternoon, everyone. Let me first address the complaints that were filed by multiple parties late last week with the European commission. I expect to address this issue in more detail at our upcoming analyst conference in London. While QUALCOMM has not yet been provided with copies of the complaints, as we indicated in our press release, the reported allegations of the complaint are without merit. We plan to meet with the commission very soon to begin the process of providing the facts that disprove the complaints. And we look forward to cooperating with the commission to establish that QUALCOMM's activities are lawful, and in fact foster competition. The claim that QUALCOMM has not lived up to its committment to license it's essential patents on fair and reasonable terms, is the lie by the license agreements that QUALCOMM has entered to with 130 different companies, over 60 of which include WCDMA. Indeed our patent portfolio is the most widely and extensively licensed portfolio in the industry. Achieved through bilateral, arm's length negotiations and the operation of free market forces, the large number of QUALCOMM license agreements have well established the value of QUALCOMM's patent portfolio for 3G standards. That established value is the same for the CDMA 2000 family of standards as it is for the WCDMA family of standards. It is hard for me to imagine that each of these 130 companies, including the world's leading telecommunications companies, would have signed our license agreements if our terms were not fair, reasonable and reflective of the value of our technology. Through their coordinated PR campaign attack, these complaintants make a poor attempt to rewrite history by suggesting that if they had known what QUALCOMM's license terms were going to be, they would not have supported adoption of an…

Sanjay Jha

Analyst

Thank you, Steve. Good afternoon, everyone. It is my pleasure to report on some of the results of superb execution at QCT this past quarter and the fiscal year. We shipped a record 40 million MSM this quarter. For fiscal 2004 -- 2005, our cumulative total is also a record with 151 million MSM record shipments. These record shipments in turn led to record revenues for the quarter and for the year. Only three years ago we were shipping at the rate of 16 million MSM's per quarter. This quarter we expect to ship approximately three times that amount, between 46 to 48 million MSM's. Our revenues were driven by continued demand for CDMA 2000 products, including a 95% increase in EV-DO volume quarter-over-quarter, driven by accelerating DO demand at Verizon, KDDI, SKT and Sprint. Our wideband CDMA shipments increased 43% quarter-over-quarter. Predictions of stronger second half UMDS demand in Europe appeared to be materializing. We see Vodafone, EXi 3G, Tims and O2 being particularly aggressive this Christmas with their 3G offerings. We also saw significant increase in demand for our value tier platform driving CDMA in India, Latin America, southeast Asia, and to a lesser extent, China. We intend to compete for low-end consumers in all of these regions. QCT's average selling price increased marginally from fiscal quarter '04 -- fourth fiscal quarter '04 to fourth fiscal quarter '05. In addition, average selling price showed a slight increase over the previous quarter due to a continued shift in product mix to 6500, 6550 and MSM 6250. Our operating profit margin was up 29% of revenue in the quarter, an increase from 24% versus the previous quarter. QCT operating profit for the fiscal year was 26%. Despite a substantial increase in R&D expenditure this year in HSUPA, multimedia, process and…

Bill Keitel

Analyst

Thank you, Sanjay. Good afternoon, everyone. As Bill Davidson mentioned, we filed our Form 10-K report today continuing our standard practice of filing our SEC report in tandem with our earnings release. In addition, our Form 10-K report includes a certification from our outside auditors in accordance with Sarbanes-Oxley Act, section 404. We are pleased to report another year of record revenues, earnings per share and operating cash flow. We achieved these strong financial results during a year of increased R&D investments to expand our engineering base and develop new products for the future. I'll begin with a brief definition of our pro forma reporting. Pro forma results exclude the QUALCOMM strategy initiative segment for all periods presented, as well as one time tax benefits. And provides a comparison to 2004 as if the 2005 method of recording royalty revenue had been in effect for all of 2004. In fiscal 2006, pro forma results will exclude share-based compensation under FAS 123R. I'll now highlight for you a number of key items in our fiscal 2005 results. First, GAAP earnings for fiscal 2005 were a record $1.26 per share, including approximately $0.05 per share attributable to tax benefits arising from our ability to utilize additional capital loss carry-forwards, $0.04 per share from one time tax benefits attributable to fiscal 2004, and approximately $0.01 per share from QSI. Pro forma revenues increased 13% year-over-year to $5.67 billion and pro forma earnings per share increased 8% to $1.16. Second, and as Paul mentioned, during the year we returned approximately $1.5 billion in capital to our shareholders through stock repurchases and our growing dividend program. Our business model continues to generate strong cash flows. Operating cash flow for fiscal 2005 was $2.7 billion, up 8% year-over-year and a healthy 47% of revenue. Third, our…