高通 (QCOM) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Qualcomm third-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, July 20, 2016.

The playback number for today's call is 855-859-2056.

International callers, please dial 404-537-3406.

The playback reservation number is 44801007.

I would now like turn the call over to Warren Kneeshaw, Vice President of Investor Relations.

Mr. Kneeshaw, please go ahead.

Thank you, and good afternoon.

Today's call will include prepared remarks by Steve Mollenkopf, Derek Aberle and George Davis.

In addition, Cristiano Amon and Don Rosenberg will join the question and answer session.

You can access our earnings release, and an executive presentation that accompanying this call on our Investor Relations website.

This call is also being webcast on Qualcomm.com, and a replay will be available on the website later today.

During this conference call, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our website.

As well, we will make forward-looking statements regarding future events, or the future business or results of the Company.

Actual results or results could differ materially from those projected in the forward-looking statements.

Please refer to our SEC filings, including our most recent 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements.

And now to comments from Qualcomm's Chief Executive officer, Steve Mollenkopf.

Thank you, Warren, and good afternoon, everyone.

We delivered strong results this quarter with revenues at the high end of our guidance range, and earnings per share well above the high end of our guidance range on strong operating performance and progress in licensing.

Our strong fiscal third-quarter results reflect good execution across our businesses, as we position the Company for a return to growth.

We are investing to expand our technology road map and lead in 5G, are pursuing opportunities in fast-growing areas that build on our core technologies, and are committed to operational excellence.

In QTL, we are pleased to report that we made good progress on the outstanding license negotiations this quarter, and received reports for a significant amount of prior period sales.

This is a good indication of the progress we are making, and we expect that momentum to continue into our fourth fiscal quarter.

We now have more than 110 companies that have signed licenses, consistent with the terms of the NDRC resolution.

In QCT, the favorable demand trends for our new chipsets across the mid- and high-end smartphone tiers, especially with the top 10 vendors in China are helping to deliver improved financial performance.

We are also seeing incremental demand for our lower tier chipsets in China versus our prior expectations, driven in part by our differentiated All Mode and modem leadership.

In the premium tier, our Snapdragon 820 now has more than 150 premium smartphone and tablet designs, and we have just announced the Snapdragon 821, which offers further performance enhancements, and will help set a new bar for flagship smartphones, increasingly popular mobile VR head-mounted displays and other new devices.

Our updated Snapdragon 600 and 400 product families are becoming the preferred choice for OEMs, driving growth in the high- and mid-tiers, as users seek more performance and features in these segments.

We continued to expand our presence in adjacent opportunities, including automotive, networking, mobile compute and IoT.

These industries are rapidly adopting smartphone technologies.

Our leadership across 3G, 4G, 5G, Wi-Fi, multimedia, graphics, processor and RF front-end technologies positions us well for these new growth areas.

Collectively, the addressable opportunity for these adjacent areas is expected to grow at a CAGR of 18% over the next five years from $12 billion to $29 billion according to a combination of third-party and internal estimates.

In automotive, the pace of innovation is accelerating, and we are seeing a strong alignment between the industry needs and Qualcomm's technologies.

We continued to build momentum and strengthen our position through significant design wins at global automakers.

This includes telematics where our modem leadership is well-recognized, infotainment with our Snapdragon automobile processors, and in connectivity with our Wi-Fi, Bluetooth and location products.

Our momentum in IoT continues, as customers turn to our broad offering of IoT development platforms to accelerate their product innovation.

At Computex, we introduced the Qualcomm Snapdragon Wear 1100 processor for the fast-growing targeted purpose wearable segments such as watches, fitness trackers, smart headsets and wearable accessories.

Our Snapdragon Flight platform has helped OEMs quickly commercialize new smaller, lighter drones, leveraging Qualcomm's integrated SOC, connectivity, GPS and drone software solutions.

We're also expanding our proven leadership in modem solutions into the Internet of Things, with over 100 designs from more than 60 manufacturers using our low-power LTE IoT modems.

In networking, we continue to drive the transition to the new Wave 2 11ac standard for Wi-Fi networks, and now have over 350 home and enterprise products, either in production or design across the mainstream and premium segments.

We are on track to close our TDK JV by early calendar 2017, and to deliver our next-generation gallium arsenide and CMOS PAs in 2017.

This will enable us to provide a comprehensive set of technologies and module capability for the RF front-end, positioning us well for key industry trends, complexity increases within smart phones, the proliferation of radio bands in 4G and 5G, and the growth of cellular in IoT.

We are on track to deliver operating margins of 16% or better in QCT in the fourth fiscal quarter, and it is important to note that our planning assumptions incorporate second sourcing at our large modem customer.

Looking forward, our global scale technology leadership and differentiated chipset roadmap across multiple tiers and regions, and dozens of spectrum bands continues to position us well for the future.

Our modem expertise continues to lead the industry, and as we did in both 3G and 4G, we are leading the world to 5G.

5G will make wireless broadband indistinguishable from wireline, requiring devices with ultra-high speed, ultra-low latency and ultra-reliable connectivity.

The technology roadmap required for 5G will drive significant advancements in modem and front-end features, the technologies in which Qualcomm excels.

Let me take a moment to review a few of our core strengths that will underscore our continued wireless broadband leadership.

Our gigabit LTE leadership with the Snapdragon X16 modem will pave the way to 5G.

Many of the technologies enabling gigabit LTE will be common to 5G: use of more antennas, use of multiple types of spectrum simultaneously, more sophisticated signal processing, et cetera.

And the mastery of these features in 4G will be essential to leadership in 5G.

Many of these features are already being trialed or commercially deployed in phones using our Snapdragon 820 processor with X12 LTE.

Qualcomm also pioneered 11 -- 802.11ad operating at 60 gigahertz, which is shipping into access points and computing devices today.

The design and commercialization of this technology into smartphones is enabling the Company to build leadership and expertise in the high bands known as millimeter-wave, to be deployed broadly in 5G.

We're also designing a new OFDM-based 5G air interface, that will not only enhance mobile broadband services, but also enable connectivity and management for the Internet of Things, and new types of mission-critical services.

Our 5G design is intended to get the most out of the wide array of spectrum available across regulatory paradigms and bands, from low bands below 1 gigahertz, to mid bands from 1 gigahertz to 6 gigahertz, to millimeter-wave.

5G devices will bring the next level of convergence, with the ability to work on licensed and shared spectrum concurrently.

We are very pleased that regulators around the world are beginning to allocate spectrum for 5G, consistent with our 5G design and development efforts.

Recent spectrum regulatory decisions and movement in the US and Europe, combined with progress on the spectrum regulatory front in China, Japan, and Korea, are good indications that the world is preparing for 5G.

We recently announced our new 5G prototype system and trial platform, operating in spectrum bands below 6 gigahertz, and showcasing multi-gigabit throughput at low latency.

We demonstrated the prototype system at Mobile World Congress Shanghai in collaboration with China Mobile.

The new prototype adds to our existing 5G millimeter-wave prototype system, operating at the 28 gigahertz millimeter wave band, and is capable of robust mobile broadband communications in non line-of-sight environments.

We are utilizing these prototype systems to test and demonstrate our innovative 5G designs to drive 3GPP 5G New Radio standardization, and enable timely 5G NR trials in anticipation of future commercial network launches.

To summarize, FY16 has been a transition year for Qualcomm, which has played out largely as expected.

Our strong results this quarter reflect the good progress we have made, positioning the Company for improved financial performance and continued technology leadership, in mobile and the many exciting new industries and products enabled by our smartphone technologies.

We are continuing to make progress in our licensing business and expect that momentum to continue, positioning us well for the future.

I will now turn the call over to Derek Aberle.

Thank you, Steve, and good afternoon, everyone.

As Steve noted, we made significant progress in the licensing business this quarter, both in terms of new agreements signed and catch-up amounts reported.

As a result, QTL had a very strong fiscal third-quarter with total reported device sales of approximately $62.6 billion and revenues of $2 billion, driven primarily by the catch-up reporting of certain prior period sales and revenue, as well as stronger than expected 3G/4G device ASPs.

As a reminder, as a result of the resolution of our dispute with LG in April, in the fiscal third quarter we recognized over $200 million in revenue for sales reported during the prior two fiscal quarters, and resumed recognizing quarterly LG revenues for sales reported in the third quarter, consistent with our prior guidance.

We continue to make steady progress in China, executing new license agreements.

In addition, we are still actively negotiating with a small number of the key remaining Chinese OEMs, and making progress in those discussions.

Based on the progress we are making, those licensees agreed to report and pay a portion of the sales and royalties they have been withholding, while we continue to negotiate their new agreements.

These amounts, plus additional catch-up payments we received from other licensees during the quarter, resulted in more than $200 million in revenues in QTL for the third fiscal quarter related to prior period activity.

QTL revenue for the quarter therefore, included a total of more than $400 million in revenue related to prior period activity, as a result of the LG resolution and these catch-up payments.

As we have said in the past, we are prepared to take action against OEMs that are not negotiating in good faith to conclude license agreements, or underreporting the royalties they owe us.

Consistent with that approach, in June, we filed complaints against Meizu in the Intellectual Property courts in both Beijing and Shanghai, China.

Regrettably, we've had to turn to litigation against Meizu in order to protect our rights, and importantly to maintain fairness and a level playing field for the companies that are respectful of intellectual property rights, and have entered into license agreements in accordance with the resolution reached by Qualcomm and the NDRC.

We are also continue to work hard on a number of fronts to improve compliance.

We are actively implementing our compliance plans, and expect them to deliver meaningful improvements over time.

Looking ahead, we continue to estimate calendar 2016 global 3G/4G device shipments of 1.625 billion to 1.725 billion devices, with year-over-year unit growth of approximately 8% at the midpoint.

We continue to see a strong 4G ramp in China, as each of the operators pursues aggressive subscriber growth targets with their 4G-plus service offerings, and design momentum continues to move rapidly towards all mode devices across China.

Other emerging regions continue to be negatively impacted by macroeconomic headwinds.

Outside of handsets, growth in automotive telematics is offsetting weaker tablet volumes.

We continue to expect low single-digit growth in global 3G/4G device sales in FY15 consistent with our prior guidance, reflecting strong unit growth partially offset by ASP declines that are consistent with our prior expectations.

We continue to expect that the rate at which handset ASPs will decline during FY16 will be about 50% of the rate of decline experienced in FY15.

In terms of the outlook for QTL for the fiscal year, we now expect revenues to be between $7.4 billion and $7.8 billion.

We have narrowed the range to align with our current view of expected progress in China for the remainder of the fiscal year, including increased confidence that we will conclude additional agreements with some of the remaining key OEMs within the fiscal year.

Although we expect to continue to see quarterly fluctuations in the externally implied royalty rate, for the reasons have previously explained, we expect the rate for FY16 to be in the range of 2.9%.

With respect to the Korean Fair Trade Commission investigation of our licensing practices, we have now submitted an extensive response to the case teams report, and have entered the hearing phase with the Commissioners.

During this phase, the Commission will conduct a series of hearings over the next few months, during which we expect to have the opportunity to further present our response.

The first hearing was held earlier today in Korea, and contrary to the recent press reports, the Commission has not yet reached a decision in our case.

In conclusion, we continue to make good progress in China.

We are keenly focused on concluding agreements with the remaining OEMs, as well as improving compliance, and are working towards continued progress in the fourth fiscal quarter.

That concludes my comments, and I will turn the call over to George

Thank you, Derek, and good afternoon, everyone.

We're pleased to report a very strong fiscal third quarter.

Revenues were $6 billion, up 4% year-over-year, and non-GAAP earnings per share were $1.16, up 17% year-over-year.

We ended the quarter with cash and marketable securities of $31 billion, reflecting strong operating cash flow of approximately 30% of revenue in the quarter, and the acceleration of our share repurchase activity into the first half of the year.

Through our fiscal third quarter, we have returned approximately 120% of free cash flow, or more than $5.9 billion to stockholders this fiscal year, including the completion of the remainder of our $10 billion stock repurchase commitment.

And we are on track to achieve our targeted 75% return of free cash flow in FY16.

Our third quarter results reflect both our commitment to operational efficiency, and the strong performance of our operating businesses.

Performance above the high end of our guidance range primarily came from continued progress in our licensing business in China.

In QCT, MSM shipments were 201 million, approximately 9% above the midpoint of our prior guidance range, reflecting greater than expected demand in the low-tier particularly in China.

QCT operating margin at 9.5% was in line with our prior expectations on higher volume and cost reductions, with increased low-tier demand impacting our product mix and revenue per MSM versus expectations.

Non-GAAP combined R&D and SG&A expenses overall were lower than forecast, decreasing 2% sequentially, reflecting continued cost initiatives.

Our non-GAAP tax rate during the quarter was 19%, up modestly against expectations as a result of a higher mix of licensing revenues in the quarter.

We continue to expect our non-GAAP tax rate to be approximately 18% for FY16.

Turning to our fiscal fourth quarter, we estimate revenues to be in the range of approximately $5.4 billion to $6.2 billion, up approximately 6% year-over-year at the midpoint.

We estimate non-GAAP earnings per share in our fiscal fourth quarter to be approximately $1.05 to $1.15 per share, up approximately 21% year-over-year at the midpoint.

We expect fiscal fourth quarter non-GAAP combined R&D and SG&A expenses will be down approximately 2% to 4% sequentially, reflecting further strategic realignment planned cost actions, particularly in QCT.

In QTL, as Derek mentioned, our fiscal year revenue outlook is $7.4 billion to $7.8 billion, and we believe our recent licensing progress will continue throughout the remainder of the year.

Aligned with that view, our revenue guidance for the fourth quarter fiscal quarter assumes some additional progress in China.

However, our fourth quarter guidance does not include the full potential benefit from the completion of all license agreements under negotiation, and is consistent with the low end of the QTL range for the full fiscal year.

For the fiscal fourth quarter, we estimate total reported device sales of between $57 billion and $65 billion.

Our TRDS forecast reflects our estimate that global device sales will be lower year-over-year, reflecting a decline in the premium tier at a large OEM, partially offset by the impact of closing new licensing agreements, and resulting catch-up we expect to receive.

Like revenue guidance, this forecast includes the impact of closing some, but not all, of the remaining agreements in China.

In QCT, we anticipate MSM shipments of approximately 195 million to 215 million units, and operating margin to improve sequentially to 16% or better, consistent with our prior operating margin target.

Our QCT operating margin forecast reflects the strength of our new product cycle, our cost actions throughout the year, as well as strong demand for mid- and high-tier devices.

Now turning to FY16, we remain on track to meet the $1.4 billion reduction in spending under our strategic realignment plan, and we continue to expect more than $700 million of savings in FY16, relative to the SRP baseline, ahead of our original $600 million target.

A summary of the savings program is included in the investor presentation for this call on our website.

We continue to expect FY16 non-GAAP combined R&D and SG&A expenses to be down approximately 2% to 4% year-over-year, which includes the full-year impact of acquisition-related increases of approximately 5%.

Adjusting for M&A, estimated spending in these areas would be down 7% to 9% year-over-year.

We are committed to maintaining a strong discipline of cost management, while remaining extremely focused on the important role Qualcomm will play as the leading innovator in mobile technology solutions.

That concludes my comments.

I will now turn the call back to Warren.

Thank you, George.

Operator, we are ready for questions.

Thank you.

(Operator Instructions)

Simona Jankowski, Goldman Sachs.

Hi, thank you for breaking out the benefit to QTL from the China catch-up royalties.

Would you be able to also break out the contribution to units, and the level of ASPs for that catch-up?

And then, is there much left, in terms of the already signed agreement that is yet to be recognized?

Simona, hey, it's Derek.

Yes, I think we're not in a position today to breakout the split of TRDS kind of units and ASP that came in through the catch-up payments in Q3.

I think if you look at it -- you sort of look at it for the year, you will be able to see, that we're making progress and closing the gap.

And if we continue to make progress and close these key remaining agreements -- we talked at the Analyst Day of being in a position to capture about 75% of the global sales from the Chinese OEMs.

I think we will actually, sort of an exit rate basis, if we can close these remaining deals, we'll be better than that.

So I think it's just a continued story of progress, and you're starting to see the results roll through this quarter.

And Simona, in terms of the upside to guidance, as we indicated, our Q4 guidance is really set at the low end of the full year range for QTL.

So the upside would be the agreements in addition to the ones that we expect to sign that we put into the guidance, there's still $400 million of revenue upside that is possible for the quarter, and not in our guidance.

Mike Walkley, Canaccord Genuity.

Thank you.

Derek, just another question on QTL.

With the progress in China, certainly encouraging, and as you continue to make progress with a few of these other large Chinese OEMs, how should we maybe think about the exit rate basis, in terms of maybe units you believe are being underreported entering FY17?

Do think it's still more than maybe 10% of the market underreporting, are you getting close to those levels?

And then, just overall high level, how is this progress as you exit the year relative to your expectations, towards your longer-term $10 billion in QTL revenue by 2020?

Thank you.

Yes, Mike, this is Derek.

So I think the way to think about it is sort of, if I bridge back to the answer I was just giving to Simona's question.

We continue to believe that if we can close these remaining agreements, that the exit rate actually on the China portion of the global sales, Chinese OEM portion will now be north of 75%.

And I think if you look at that also, in terms of then the global sales, it would be less than 10% on a run rate basis going forward.

And what we've seen actually is some of these key Chinese OEMs have actually been gaining share.

And as so, we'll get even larger benefit on a run rate basis, if we can close out the remaining couple of agreements we have here.

Second question?

Oh yes, and I would say, basically we're -- I think the progress we're making in China, and the view on the market we see is consistent with what we talked about in terms of the $10 billion target.

Tim Long, BMO Capital Markets.

Thank you.

Just sticking on the same topic, sorry to beat it too much.

It looks like, Derek, the [March] units were only down about 4% sequential.

So I'm assuming that's some prior period catch-up.

So if you were to normalize the full year 8% growth, would that be lower because of those aren't in there?

And maybe if you could just give us a sense -- I don't know if that's breaking out those numbers too much?

And then, just on the chip side, I think I just wanted to hit on gross margin.

I guess, was it mix that caused it to be down, even though ASPs were up in the quarter?

And what's kind of the outlook for the next few quarters on the gross margin line for QCT?

Thank you.

Hey, Tim, this is Derek.

So on the first question, yes, the units in Q3 would have included some amount of catch-up, which rolled into the catch-up number that we talked about.

If we look back, you'll see we've effectively held our unit call for calendar 2016, which is about -- like you said about an 8% year-over-year growth.

Obviously, that has quarterly fluctuations given seasonality and other variability.

I would say largely, from a market standpoint, things are tracking in line with what we would've expected last quarter.

We talked about China being stronger, some softness in the premium tier, and a little bit of weakness in some of the emerging markets.

But the net-net, still giving us confidence that the 8% forecast was good.

You may have seen China reported numbers out recently, probably stronger than most people had expected, and largely in line with what we thought would happen there.

Hey, Tim, it's George.

I think, we don't break out the gross margin, but I think your point is on revenue from MSM, and yes it was a little softer in the quarter than we had expected on mix.

Obviously, the unit story was quite good, and in particular, we saw a lot of strength in the low tier.

Gross margin is going to be a good story for us, as you look into the end of the year.

You're going to see the impact of, not only a very strong set of new products, starting to get the lift in the marketplace in Q4, but the adjacent business continues to do well.

Our adjacent businesses are continuing to do well.

And, of course, we reiterated the 16% Op margin for QCT, and that being said, it will also benefit from the OpEx actions that we're taking in the quarter as well.

So a good story overall for QCT.

James Faucette, Morgan Stanley.

Thanks.

I just wanted to ask a follow up question, as it relates to the collections that you guys are doing, or the payments, et cetera?

Derek, maybe you can just talk a little bit about, how we should think about both timing, but also what maybe the long-term implications are?

I guess, just a little more color on anything that you could say, as to why the negotiations went off, and the outstanding licensees are still there?

And at what point, do you feel like you end up having to do something along the lines of filing suit with Meizu?

Thank you.

Yes, James, this is Derek.

I think the way to look at it is, we had this small group of licensees that were withholding their reports and payments, while they continued to negotiate.

And that was inconsistent with what a lot of the other companies did.

And I think the way to look at that is, given the progress that we've made within the last quarter with those companies towards closing agreements -- which aren't yet closed, but we are making progress towards that -- it sort of put them in a position to feel the right thing to do, was to go ahead and report a portion of the prior period sales, which is what rolled through in the quarter.

Taking that up a level if, as I said for the year, at the Analyst Day, we talked about if we could close these key deals, we would basically be sort of on a run rate basis, collecting on about 75% of the total sales by the Chinese OEMs.

And then, there would be additional compliance work, we would need to do to kind of close the gap on the remainder.

I would say now, as we look at that picture, if we accomplish the same goal this year, meaning that closing new agreements, the exit rate will actually be north of that 75%.

And then, of course, we're already actively moving on a number of fronts to improve the compliance in the other areas.

So I think that's largely tracking in line with our plans.

And as you can see, if there are companies that we believe we're not making progress with, and we won't conclude agreements with, because they're not negotiating in good faith, we will take action against them.

And that's what we did against Meizu.

We don't feel like at the moment we're there with other companies, but of course, that could change in the future.

Our current view though is, we are making progress, and we have higher confidence now than maybe we did a quarter ago, that we'll be able to close those deals within the year.

Kulbinder Garcha, Credit Suisse.

Thanks.

Just a couple of quick ones.

Derek, for you, just a clarification on the licensing side.

So it sounds like it was $400 million worth catch-up payments from Samsung and from the Chinese OEMs.

There's going to be some catch-up payments already included in your Q4 guidance, [in terms of] QTL I assume.

And eventually those catch-up payments tail off to zero, because [you get] ongoing run rate.

[I just] want to clarify if that the way it works?

And the second part of the QTL part, is that this move from 75% compliance, to move towards say 100%, is it -- as you exit this year, is that more about getting your existing licensees that are reporting to you to 100% comply, and report all of their new units?

Or is it signing up still further new major vendors?

Thanks.

Kulbinder, this is Derek.

Yes, on the -- we basically said, the combined catch-up amounts across -- it's actually LG not Samsung -- LG and the companies that then reported some prior period activity, was in the quarter north of $400 million.

If you think about Q4, as George mentioned, the way we've looked at that, kind of throughout the year, we've had a little bit of a difference in the way we treated guidance.

Meaning the QTL full-year revenue guidance has always included revenues associated with closing new deals.

But that, when we were just guiding one quarter out, we have been cautious, and not including the benefit of what would be required to close those deals within the quarter.

Now as we get towards the end of the year, with just Q4 remaining, and we look at the progress we're making, we've effectively narrowed the range, brought up the low end of the range.

And as George said, what -- we've included some amount of benefit from closing new deals, but not the full benefit.

So what's rolling through our Q4 guidance is really consistent with the low end of the full-year QTL revenue guidance.

And then, there is incremental revenue that would come from closing additional deals in the quarter, which we believe is possible.

Which is why we've continued to have a higher range for the full-year on QTL.

Going forward, I think the way to think about the run rate is, again if we get that done, we will be north of probably 75% of the Chinese OEM sales on a run rate basis, which would mean sort of the underreporting percentage of total global sales would be less than 10%.

And then, really to close the gap on that, is going to be combination of, I would say, signing up some of the smaller players, as well as obviously have the dispute with Meizu.

And then driving higher compliance from some of the companies that are already licensed, and just not reporting their full sales.

So it will be kind of a combination of a few different elements there.

Rod Hall, JPMorgan.

Yes, hi, thanks for taking the question.

I just wanted to come back to QTL, and the midpoint.

Your midpoint guidance on the QTL is down $0.5 billion.

And so, I get all the commentary around the puts and takes.

I'm just trying to understand what caused that shift down in the midpoint?

Is it demand, is it ASPs, is it that the catch-up payments aren't quite as much as you thought?

Can you help me understand what's going on there?

And then, I have one follow-up on that as well.

Yes, hi, Rod, it's George.

So yes, the midpoint, if you do the $7.3 billion to $8 billion, versus $7.4 to $8 billion, yes, it's down $500 million.

I really wouldn't read anything into it.

There is a number of agreements that were put within that space.

We've tried to every quarter, give an update on where we think the range is going.

And even last quarter we said, it looks because of the market and some other issues, the range has probably had little more downside, but we held the low end of the range based on progress.

So we're constantly adjusting, to make sure that we reflect what's possible.

You've also seen us take some litigation action, which actually puts things outside the -- potentially outside the window for the year.

But there's a number of factors that went into the range.

And so, I wouldn't over read a [$50 million] change.

And again, we are guiding to the low end of the range, which means we have significant upside to that, if we're able to sign with agreements.

Okay.

And then, I just also wanted to ask you, the 16% exit rate, you had said that's now -- it's sounds like a minimum -- and I just wonder how conservative is that margin exit rate, now that you know more about market share changes, et cetera in the back end of this year?

Can you just comment a little bit about, do you feel like that's a very conservative number now?

Or is as conservative as when you started out with that 16% exit rate, just give us an idea there?

We're pleased with what we've seen in the marketplace.

As you know, the year probably overall has been a little softer in the premium tier than we would have thought, so.

But we've also made good progress on both market share, and on the -- our cost efforts relative to expectations going in.

So I think overall, we feel comfortable reiterating, but I really don't want to characterize it beyond that.

Timothy Arcuri, Cowen and Company.

Thank you.

I had two questions.

I guess, the first one, Derek, I'm still trying to maybe get at what some people are asking about the pro forma royalty rate.

So maybe, can you pro forma out for us with the royalty rate was, net of all the catch-up payments in June?

And then, maybe what the pro forma royalty rate will be for September as well?

Yes, Tim, this is Derek.

I think the way to think about is, we, in my script we included a statement for the full fiscal year, that we believe for the full year will be around the 2.9% level.

I think if you try to kind of normalize Q3 to adjust for the prior period activity, things like the LG resolution which pushed the rate up, I think it would be in that range as well for the quarter.

Q4, we believe will be down sequentially.

But it's really hard to give you a forecast on that, just because it will be fairly dependent on how many of the deals we get resolved within the quarter, and how much catch-up comes in.

As you might remember, some of the guys that we're still negotiating with were larger -- historically larger 3 mode players, and the rate on 3 mode devices is lower than other devices.

And so, that could have -- within the quarter, when that catch-up comes in, could have a dilutive effect.

But we're still comfortable with the longer-term view on the rate that we talked about in February, and also for the year that I mentioned today.

Got it, thanks.

And then, I guess, just my follow-up is really for Steve and the team.

Can you talk a little more about 5G, and you guys are talking more about this every call?

So I guess, the question is really about timing and your position in the standards?

And sort of when they'll be finalized, and what's your IP position will be for 5G, relative to what it's been for 3G/4G?

Thanks.

Sure.

So Tim, it's Steve.

The -- in general, we're obviously trying to drive 5G as quickly as we can.

It's an area which we think, to be a strong player in 5G, you have to be a strong player in 4G, 3G and Wi-Fi.

And consequentially, we think that we will maintain a very strong IP position moving forward.

The standards bodies are working on that right now.

So I think we have a lot of visibility into the strength of our submissions, as well as to how the industry is unfolding.

I think in general, if you were to ask me that question a year ago, I would have said that it would have happened closer to 2020.

The -- certainly over the last year, and accelerating here over the last quarter, there's been a real pull to push that in -- or pull that in closer to the 2018, 2019 time frame, depending what the deployment is.

And, of course, we're going to support that with our products, and with our standards submissions, and all the R&D that we're doing.

And as you would expect, we're accelerating, as well as protecting that R&D, as we're repositioning the Company for growth.

And I think it will be a good story for Qualcomm here over the next decade.

Blayne Curtis, Barclays.

Hey, guys.

Thanks for taking my question.

Just a couple on QCT.

If you can -- you talked about upside from the China market.

There's been a lot of concerns about maybe some overbuilds.

You have the best perspective, knowing what you shipped in, versus what's selling through.

Just some -- your perspective on China, maybe seasonality as you get into December?

And then, you said you factored in some second sourcing at a marquee phone.

Do you think that share that you will have ultimately on this generation is sustainable?

Okay, this is Cristiano.

Thank you for your question.

First, maybe addressing China, I think as we said, in addition to seeing strong demand for high- and mid- and even low-tier units, and it also gives us a higher unit in the quarter, I think we are seeing significant traction within our new product families.

Not only the Snapdragon 800, but more important, the 600 and 400 tiers.

And we see that the market in China is moving up.

We spoke earlier in other calls about things, such as all mode and carrier aggregation.

We see that is materializing, all mode is becoming the preferred configuration, which is a multi-mode solution across all the carriers in China.

And I think here, China is actually moving faster to higher speeds.

So we see that as [actually] a positive trend for Qualcomm, in particular as the market in China moving up.

We, with regards to how we view about second sourcing and one large customer, I think we said very, very clearly, that's our planning assumption, and we're still -- we stayed -- driving towards to meet our commitments in 2016.

And I think that has no impact on our 16% projection of operating margin for QCT.

Stacy Rasgon, Bernstein Research.

Hi, guys.

Thanks for taking my questions.

First, I was wondering if you could give us an indication of where you saw a revenue [for MSM] trending in Q4?

And secondly, I wanted to get your thoughts on operating margins as we go into next year?

Do you think 16% in Q4 will be the trough for operating margins, as we go through 2017, they should never drop below that?

Hey, Stacy, it's George.

Again, we would expect to see strong revenue for MSM again in the fourth quarter.

So we're not giving a specific guide, but if you look at the product mix, and you look at where we're seeing an uptake, and our -- the positioning of our new products, it's all consistent with improved revenue for MSM.

Also, of course, the adjacent businesses contribute to that, as well as they did in the third quarter.

We're not going to guide 2017 at this time, and but we're pleased with the progress that we're making on the cost program, and we think that will certainly carry into 2017.

But we're not going to forecast margins at this time.

Romit Shah, Nomura.

Yes, thank you.

Just on the second sourcing, with the key customer.

I was just wondering if you guys can give us some feel for, whether you're able to retain the majority share?

And looking into next year, you talked a little bit about gigabit LTE that you're going to have with the X16 Snapdragon.

Is that an important factor, as you all think about your design wins in 2017?

I think the feedback from some of the competition is, that while it's ahead, 1 gigabit download speeds will be fairly rare in practice, and not really a variable when it comes to design wins.

Hi, Romit.

Thanks for the question.

This is Cristiano.

So I'll try to address -- in fact, it's very difficult for us to comment specifically about our customer plans, with regards to volume and share.

I think, what I can say is, we always had second sourcing in our business in QCT throughout the years.

And I think we always rely on the strength of our product roadmap and technology transitions to drive value and volume from our solutions.

That, I think that leads into your second question.

I believe the gigabit LTE transition, it is going to get a lot of traction across all the developed markets.

But in -- also you're going to see that as pre-deployment ahead of 5G.

I think the ability to drive gigabit LTE technology with 4G, using advanced RF techniques is going to be key to drive a transition to 5G.

And I think in addition to that, we see both the Wi-Fi and the LTE evolving at the same time across licensed and unlicensed spectrum.

As unlicensed spectrum with 3GPP is standard, it's called [LAA].

Unlicensed spectrum becomes available, that's going to give many operators worldwide the ability to get gigabit speeds.

And we're very confident about the ability to do that with our roadmap.

And this is Steve.

The only thing I would add, I think, betting against feature leadership at the modem level has never been a good way to build a sustainable business.

We think it continues to be a defensible franchise.

And in fact, if you look at the strength that we are seeing in the business today in China, I think it's good proof that you do not want to be on the wrong side of a modem feature leadership.

And we think that becomes -- continues to be important, and becomes even more important as the industry transitions to 5G.

So we feel like we are in a good spot to maintain a strong position on the modem franchise.

Tal Liani, Bank of America.

Hi, guys.

Is there any impact, any impact on pricing on the competition with Intel?

And second about QCT, when should we see the bulk of the 820 ramp hitting the numbers?

I'm trying to model this properly, since the ASP is so much higher than the average.

And I don't know if you expect -- you expect it to hit at a certain time, or more moderate growth kind of across many quarters?

Thanks.

Tal, obviously, we can't specifically talk about any one customer's pricing, But I can tell you, and I'll reiterate what I said about going Q3 to Q4.

Part of how we're going to be getting the operating margin to 16%, is strength at both the gross margin level, and across our product suite.

So I think we feel very good about the positioning of our products, and the ASP implications of that.

I think, Tal, a comment on the 820 ramp.

I think we will continue to see 820 launches throughout the year.

I think you have the normal seasonality of the holiday season, but also you have now different seasonalities in China as well.

So I think we'll continue to see 820 launches throughout the year; and when we get into 2017, you're going to start to see launches with our next generation platform.

C.J. Muse, Evercore ISI.

Yes, good afternoon.

Thank you for taking my questions.

I guess, two quick ones.

First one, can you share what the dollar value of catch-up payments is embedded in your September Q revenue guide?

And then secondly, if I look at your EPS guide and your QCT operating margin guide, it seems to suggest a PVT margin for QTL closer to 74% versus 86% last Q. Curious, if you could walk through what's driving that downtick?

Thank you

Yes, on the -- so for QTL, we would expect obviously, we're coming down quarter-over-quarter relative to the -- because of the amount of out-of-period items that were in Q3.

Spending staying flat will impact operating margin, not as much as certainly, what you're forecasting.

We haven't guided the amount of licensing that we anticipate assigning, but it's not a material amount, but there is some included in our guidance forecast.

Tavis McCourt, Raymond James.

Hey, guys.

Thanks for taking my question.

Derek, I wonder if -- you gave us the catch-up payments for the fiscal third quarter embedded in the $7.4 billion to $7.8 billion guidance for QTL, can you give us the full-year estimates, or if it's a range of catch-up payments?

And then secondly, Steve, on the gigabit LTE, I missed it before.

Was that in the roadmap for next year's modem, have you said that specifically?

And if so, what level of carrier aggregation would be needed for that?

Thanks

Tavis, this is Derek.

So we're not going to break out specifically what's in the -- how much catch-up is in sort of in the range.

The way to think about it though is, the sort of the two of the larger companies that we've been negotiating with and have been withholding payments, this quarter reported, and we recognized more than $200 million of catch-up payments related to them.

That's not the entirety of the catch-up amount, but it's obviously a significant portion.

And then, as you think about what catch-up means, there's obviously some 2015 activity, but now we're halfway -- essentially halfway through 2016.

So there will be additional catch-up.

So you will have in-quarter activity, plus catch-up payments related to those agreements when they get signed.

And if that happens in the fourth quarter, they would roll through there.

But it's pretty hard for us to give more color than that, just given the timing uncertainty of when they will get done, and how much will roll through in the quarter.

Hey, Tavis, this is Cristiano.

To your question on gigabit LTE, gigabit LTE, I think we already sampled some of the first products of gigabit LTE.

You're gong to see this in products throughout next calendar year, maybe some of the early products could come as early as this calendar year.

And you need three or four carrier aggregation to be able to do this.

One important thing is, you have a lot of carriers today doing three carrier aggregations today.

I think that, plus four carrier aggregation, you can get to gigabit speeds.

Brett Simpson, Arete.

Yes, thanks very much.

First question for Derek on QTL.

So just looking at the China license agreement you're signing of late, my understanding is they don't include implementation patents anymore.

And you have an outlook for $10 billion of QTL revenue by 2020.

Can you talk about how you might monetize your non standard essential patents, your implementation patents in the future?

Should we expect Qualcomm to consider separating implementation patents, as a separate license agreement with your customers as you move towards, let's say 5G?

Hey, Brett, this is Derek.

Yes, you're correct as it relates to China.

So as part of the NDRC resolution, we committed to offer licenses to -- actually not even the entirety of our essential patent portfolio, but the 3G/4G standard essential patents in China.

And so, in a sense, that has resulted in us doing something different in China than we've done historically, which is a disaggregation of the portfolio.

And as I've said in the past, we do believe there's opportunity to monetize the remainder of the portfolio.

Our focus has been really sort of a sequenced approach, meaning try to get through the -- all of the key deals covering the 3G/4G portfolio, and I think we're getting towards the finish line on that.

And then once we do that, I think there's a number of different opportunities and ways that we're thinking through, monetizing the remainder of the portfolio.

And as you may recall that, we mentioned that wasn't built in even to the $10 billion number that we had talked about in February.

So we do think there's an opportunity there over time.

Ed Snyder, Charter Equity Research.

Thanks a lot.

Steve.

You mentioned that to be strong in 5G, you really have to be strong in 4G, given the legacy standard.

Isn't that also the case to some extent with 4G, that you had to be fairly strong in 3G?

And how has that impacted the second sourcing in some your larger customers?

Is this one of the things that's keeping you in the majority share, and do you think it's going to play out that way for the rest of the 4G, and then into 5G too?

It's been the case -- a lot of folks that in the modem business with great plans, and almost all of them have fallen away.

And it seems to be, most of it is done because they don't have legacy software to do all the hand-offs on the corner cases that Qualcomm does.

So just trying to figure out how that applies to some of marquee phones that are playing out now.

And then, into 5G, do you see that being a big factor?

Or do we got to go so far off the reservation, like IoT and all that, that legacy stuff [isn't] going to be as big of a deal?

Thanks

Ed, I actually agree with the way that you characterized it.

It's been very difficult to build, I would say, a high quality modem business without having the ability to handle all the modes that come up.

This becomes increasingly important, when you're looking to get into SKUs that are sold, let's say worldwide, because essentially you get the entire world feature set, come into your product.

And so, what you tend to see, is that people might split their products, and go with one region with a particular solution.

But it's difficult to get the lion's share, and certainly difficult, I think over time to protect that -- those designs wins.

And we've seen that over a number of generations.

And I would say one of the reasons that we were successful in 4G, besides just being ahead on 4G, was the ability to make it very easy for multi-mode to occur at the chipset.

Really, all the multi-mode work tends to be abstracted to the user by the chipset.

That continues to be important, and I would add in Wi-Fi and many different bands when you go to 5G.

So we think that's going to continue to be an important component of our business moving forward, and one of the reasons why we think it's important to invest, not only in the modem, but in the RF, and all of the technologies that make that very easy to occur.

With IoT, it even becomes more important in my opinion, because the SKU that goes into these industrial applications, you're really trying to make it easy for someone to go and access cellular, without having to learn about all the complications that cellular provides.

So we think that's not only a defensible strategy for cellular products, but also for the Internet of Things and the franchise moving forward

David Wong, Wells Fargo.

Thanks very much.

I had a question, and a follow-up.

The first one is that, if you look at your royalty business, what is your -- your license business in China, what's your attitude to capturing all of the license business?

Will you, in every case, you can't come to agreement, seek a legal remedy?

Or will there be many cases, in which it's not worth the cost?

The business in China obviously, is pretty diverse.

And I think we've approached it in the right way which is, we have kind of a staged plan.

The first is to get the key agreements done.

I think we're making good progress, as you've seen on that front.

There's a number of in-country in-China compliance initiatives we have ongoing with existing licensees, including active audit, and other efforts to make sure we really have a clear understanding of the market landscape, and who's doing what.

There will be, I think a piece of the market that is sort of the long-tail piece, that tends to be lower ASP, low-cost, lower feature devices.

That might be a little bit harder to get after, than some of the other pieces.

But we're seeing consolidation across the OEMs, both in terms of share, and also even some early M&A activity.

So the number of players, we believe will reduce overtime.

Beyond that -- so obviously, legal proceedings will be an element of our compliance efforts, and you've seen that with Meizu.

But there are many, many other things we're doing as well, both in China.

And I talked about some of the some length at our Analyst Day in February.

But there's a lot of activity we're also doing outside of China, in a lot of the other regions in the world, that we think have the ability to impact and change behavior for some of the players that have been less compliant in the past.

So litigation will be one tool, but it's not going to be the only tool.

And there's other things that are less costly, that we think we can do to drive higher compliance over time, and a big area of focus obviously for the business right now.

Okay, great.

And for leading edge chip manufacturing technology in the future, do you plan to use a single foundry for any given [advanced] mode, or might you split your business between foundries?

Or when do you expect to tapeout 10 nanometers and have the sampling?

Well, I think in general, we tend to have a multi-sourcing strategy, and that includes the leading node.

We have already taped out 10 nanometer, and sampled it to customers.

So our focus tends to be on the leading node, even beyond 10 nanometers.

And because our business is so diverse, we tend to use everything from the leading node, all the way down to analog processes.

So it's -- multi-sourcing tends to be one of the tenets of how we operate the business so.

Thank you.

This ends our allotted time for questions and answers.

Mr. Mollenkopf, do you have anything further to add before adjourning the call?

Thank you.

I just want to thank everyone for attending the call today.

We had a stronger than expected quarter, and are executing well on our plans to position the Company for the next phase of profitable growth.

We continue to make good progress on the licensing business in China, and have favorable new product momentum in QCT.

Lastly, I want to thank all the Qualcomm employees for their hard work, for the strong quarter, and we look forward to the many exciting opportunities ahead.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.