高通 (QCOM) 2016 Q4 法說會逐字稿

Welcome to the Qualcomm fourth-quarter and FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded November 2, 2016.

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

International callers please dial 404-537-3406.

The playback reservation number is 953-135-44.

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

Mr Sinnott, please go ahead.

Thank you, Brent.

Good afternoon, everyone.

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 accompany 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. You can find the related reconciliations to GAAP on our website.

In addition, we will be making forward-looking statements including projections and estimates of future events, business or industry trends, or our business or financial results.

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

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

Now to comments from Qualcomm's Chief Executive Officer, Steve Mollenkopf.

Thank you, John.

Good afternoon, everyone.

We delivered strong results this quarter, with better than expected earnings per share, reflecting continued disciplined execution on the strategy we outlined last year.

We had a very productive year.

QCT delivered the improved operating margin target we set last year.

QTL made additional progress on new license agreements in China.

Last week, we announced our agreement to acquire NXP, an established global leader in industrial grade computing, security, sensors, RF, and networking.

The proposed NXP acquisition accelerates our strategy in growth areas, with complementary and world-class technology, products, customer relationships and strong sales channels across automotive, IoT, security, and networking.

Our strategy and disciplined execution has put us in an excellent position to maintain our leading position in mobile and strengthen it into the next wave of growth.

We continue to invest in technology leadership.

Just as we led each mobile technology transition from 2G to 3G, 3G to 4G LTE, we are leading the way to 5G.

Further, 5G will be the communications fabric for our emerging hyper-connected world.

In our licensing business, we continue to execute well, as we enable the industry to benefit from the tremendous opportunities around the world, including in China.

We have now signed license agreements with nine of the top 10 largest Chinese OEMs according to calendar second-quarter 2016 global IDC data.

We expect to continue to sign additional licenses with Chinese OEMs and increase the level of compliance throughout FY17.

Looking ahead, we are very excited about the future.

We have spent the last 30 years interconnecting people.

We will spend the next 30 years interconnecting their worlds by building on our mobile technology leadership in advanced computing, connectivity, and communications systems.

Our priority growth segments, IoT, automotive and networking, are being transformed by mobile technologies.

Our proposed acquisition of NXP and our 5G leadership further accelerates our positions in these segments.

As evidenced by our fiscal fourth-quarter results, we continue to drive operational and financial discipline to execute on our strategy to create a competitive cost structure.

We continue to focus our investments in new growth areas.

As we've executed this strategy to drive profitable growth, we have maintained our strong balance sheet and commitment to attractive capital returns, returning $6.9 billion to stockholders this fiscal year and $21 billion over the last two years.

We believe we are on a path to build Qualcomm into the semiconductor engine for the connected world.

Turning to our QCT business, we continue to invest to lead the industry.

In the premium tier, the Snapdragon 820 is in more than 150 smartphone and tablet designs, including iconic devices such as: the Samsung Galaxy 7 and 7 Edge; the Xiaomi Mi 5; and LG G5.

This past quarter, we announced the follow-on Snapdragon 821 that was recently launched in Google's Pixel.

In October, we hosted our annual 4G/5G Summit in Hong Kong, where we announced new products in the high and mid tier segments with the Snapdragon 653, Snapdragon 626 and Snapdragon 427, designed for enhanced experiences and improved connectivity.

All three processors feature the X9 LTE modem capable of 300 megabits per second on the down-link and 150 megabits per second on the up-link.

We continue to extend our modem leadership across tiers and lead the industry to 5G.

Our Snapdragon X12 LTE modem with features such as carrier aggregation, 4x4 MIMO, and 256-QAM modulation is capable of supporting 600 megabits per second on the down-link.

Recently, T-Mobile launched the first 4x4 MIMO technology service with the Galaxy S7 and S7 Edge and has publicly talked about plans for implementing 256-QAM in the near future.

SKT and Telstra have launched similar capabilities.

We expect to soon see other operators do the same.

In February, we announced our Snapdragon X16 modem, capable of gigabit class LTE speeds.

We recently announced the world's first gigabit class LTE mobile device and gigabit ready network in collaboration with Telstra, Ericsson, and NETGEAR.

This modem also includes support for LAA, the global standard for deploying LTE in unlicensed spectrum.

The FCC recently began issuing equipment authorizations for LAA and we received the first.

We also recently announced our first 5G modem, which will support early 5G trials and deployments.

The Snapdragon X50 5G modem is designed to support peak download speeds up to 5 gigabits per second and will initially support 28-gigahertz millimeter-wave spectrum.

The first 5G commercial products that will integrate the Snapdragon X50 5G modem are expected to be available during the first half of 2018.

In addition, Qualcomm is accelerating the path to 5G NR, the global 5G standard for a 5G new radio standardized by 3GPP.

5G NR is expected to not only enhance mobile broadband services, but also enable connectivity and management for the Internet of Things and new types of mission-critical services.

In January, we announced our planned joint venture with TDK to enable delivery of RF front-end modules and RF filters into fully integrated systems for mobile devices and IoT.

The joint venture will draw upon TDK's capabilities in micro acoustic RF filtering, packaging and module integration technologies and our expertise in advanced wireless technologies to serve customers with leading edge RF solutions into fully integrated systems.

In our adjacent businesses, FY16 revenues were up more than 40% year-over-year, driven by growth in auto, networking, and the addition of the CSR business.

For IoT, we are leveraging our leadership in both connectivity and computing to deliver platforms to help accelerate adoption across multiple device types.

We offer over 25 platforms that help manufacturers quickly and cost effectively deliver IoT products, including the Snapdragon VR820 virtual reality reference platform and a suite of connected camera solutions.

Smartwatches, using Snapdragon Wear processors, continue to be launched or announced.

Drones using our Snapdragon Flight platform are already commercially available in the US and China, ahead of the holiday season.

There is also an increasing trend to use LTE connectivity for IoT.

Building off the 100 plus designs we announced in June using the MDM9xO7 LTE modems, we have recent traction among many ecosystem players for the MDM9206 category M1/NB-1 modems featuring a purpose built design for IoT, with lower power consumption and longer range connectivity than previous LTE generations.

We are broadening distribution of Snapdragon processors with two announced parts: the 410E and 600E, available globally by third-party distributors.

In automotive, we expanded our design win momentum with global automakers across telematics, connectivity, and infotainment.

We maintain our position as the leading supplier of modems for telematics, benefiting from increased cellular attach rates in cars and the transition to 4G LTE vehicle solutions.

With the pending addition of the NXP business, we will have the breadth of technology and products to capture even more of the opportunity in these rapidly growing adjacent areas.

To summarize, FY16 has been a very productive year for Qualcomm.

Our strong results this quarter reflect the progress on our strategy and disciplined execution for technology leadership in mobile and new growth areas.

We are excited about the future as we continue to build Qualcomm as the semiconductor engine for the connected world.

I would now like to turn the call over to Derek.

Thank you, Steve.

Good afternoon, everyone.

As Steve noted, QTL had a strong fiscal fourth quarter.

Revenues were $1.9 billion and total reported device sales were $74.2 billion, driven primarily by the conclusion of key license agreements in China, as well as stronger than expected 3G/4G device ASPs.

QTL revenue for the fiscal fourth quarter was higher than the prior guidance, based on the timing of concluding the key new license agreement in China.

Total reported device sales in the fiscal fourth quarter were also above our prior guidance, with reported 3G/4G device shipments at a record 403 million units and ASPs at $184.

QTL continues to make good progress in China, both in terms of signing new license agreements and collecting catch-up amounts for prior-period sales.

In our fiscal fourth quarter, we completed new agreements with both VIVO and OPPO and recorded catch-up revenues related to prior-quarter sales, including a significant amount for prior-period three-mode sales.

The externally implied royalty rate in the fiscal fourth quarter was approximately 2.5%, reflecting the impact of the catch-up amounts in the quarter, which included significant royalties from three-mode device shipments and other device shipments in China.

In FY16 QTL revenues were $7.66 billion, with total reported device sales of $267.4 billion reflecting continued handset growth, particularly at Chinese OEMs and catch-up amounts for prior-period sales.

The externally implied royalty rate for FY16 was approximately 2.9% as expected.

Excluding catch-up amounts related to sales prior to FY16, the multi-year amortization from the agreement that expired after the first quarter of FY16, as well as the acceleration of the license fees for the terminated infrastructure agreement we previously disclosed, we estimate that FY16 QTL revenues would have been approximately $7.2 billion.

We estimate that we collected royalties on approximately 73% of both three-mode and non-three-mode Chinese OEM global device sales in FY16.

As discussed last quarter, we initiated litigation against Meizu in order to protect our rights and equally importantly to prevent Meizu from continuing to compete unfairly against our other licensees that are respectful of intellectual property rights and have entered into license agreements with Qualcomm consistent with the resolution we reached with the NDRC.

In June, we filed complaints against Meizu in the intellectual property courts in both Beijing and Shanghai, China.

Last month, we filed a complaint with the United States ITC, a patent infringement action in Germany, and an infringement seizure action in France.

Regarding the Korea Fair Trade Commission investigation of our licensing practices, we have submitted an extensive response to the case team's report and are currently in the hearing phase with the commissioners.

We have been providing further responses to the case team's report.

Turning to our expectations for global 3G/4G device shipments, in calendar 2016, we estimate 1.625 billion to 1.725 billion devices will be shipped, consistent with our prior forecast, 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 drive an increasing percentage of all-mode devices across China.

We estimate that the global ASP for handsets shipped during our FY16 was approximately $185, reflecting an annual decline of approximately 6%, which is in line with our prior forecast.

As we expected, the year-over-year handset ASP erosion moderated significantly in FY16 to approximately half of the rate we experienced during FY15.

Looking ahead to calendar 2017, we expect continued year-over-year 3G/4G device shipment growth.

We estimate 1.75 billion to 1.85 billion devices will be shipped during calendar 2017, with year-over-year unit growth of approximately 7% at the midpoint.

We forecast healthy 3G/4G handset shipment growth to continue in calendar 2017, driven primarily by emerging regions, particularly in India.

We expect that the annual erosion in the ASP for handsets shipped during FY17 will further moderate as compared to FY16, driving mid single-digit year-over-year global handset sales growth.

We expect strong growth in 3G/4G connected IoT device shipments in calendar 2017, driven by the increasing demands of industrial and commercial applications within the smart cities, connected home, wearables, and consumer electronics segments.

Additionally, several of the world's largest cellular providers are expected to launch commercial operations of scalable narrow band LTE platforms in the coming year.

To summarize, we are pleased with the progress we are making in China and continue to see favorable trends for global 3G/4G device sales.

We are focused on concluding additional licensing agreements and improving compliance in FY17.

That concludes my comments.

I will now turn the call over to George.

Thank you, Derek.

Good afternoon, everyone.

I will begin with comments on our fiscal fourth quarter and 2016 results, followed by our first fiscal quarter of 2017 guidance and some perspective on 2017 overall.

In our fiscal fourth quarter, we delivered revenues of $6.2 billion and non-GAAP earnings per share of $1.28.

Our performance was strong in both QTL and QCT relative to expectations.

The incremental EPS results that were above the high end of our guidance range were largely driven by the new license agreements and related catch-up payments that Derek described along with stronger than expected performance in our investment portfolio.

In QTL, in addition to the new licenses and related catch-up, stronger than expected 3G/4G device ASPs also contributed to the above expectation TRDS results.

QCT had revenues of $4.1 billion reflecting MSM shipments, modestly above the midpoint of expectations, driven by higher demand in modems and from OEMs in China.

Revenue for MSM was modestly higher sequentially, primarily due to growth in adjacent businesses.

Non-GAAP combined R&D and SG&A expenses were down 3% sequentially, as expected, on cost controls and spending reductions under our strategic realignment plan.

During the fiscal fourth quarter, we returned $1 billion to stockholders, including approximately $780 million of dividends paid and $225 million in share repurchases.

For the full year in 2016, we returned just over 100% of free cash flow to our stockholders on share repurchases of $3.9 billion and dividends of $3 billion.

Our goals for FY16 were designed to improve our cost structure while repositioning the Company to capture the next phase of growth.

We set three primary guidance points for 2016 as a result.

First, we committed to making significant progress on signing new licenses under the approved terms in China and provided a revenue target range of $7.3 billion to $8 billion for QTL.

We executed well on that plan by signing key license agreements with leading Chinese OEMs and delivered approximately $7.66 billion in revenue in the year.

Second, we set an ambitious $1.4 billion spending reduction program, which was comprised of $1.1 billion in savings and operating expenses in engineering costs and cogs and a $300 million reduction in the annual grant of share-based compensation.

The program was fully realized by the end of FY16.

A comparison of the program reductions against the SRP baseline is found on our website in our quarterly investor deck.

Finally, we targeted to exit FY16 with a minimum of 16% or better operating margin in QCT for the fourth quarter, which was met as we reported 16.6% in that quarter.

Let's now turn to our financial outlook for the first quarter of FY17.

We estimate fiscal first quarter revenues to be in the range of approximately $5.7 billion to $6.5 billion, down approximately 1% sequentially at the midpoint.

We estimate non-GAAP earnings per share to be approximately $1.12 to $1.22 per share, down 9% sequentially at the midpoint.

We anticipate fiscal first quarter non-GAAP combined R&D and SG&A expenses to be approximately flat sequentially.

In QTL, we expect total reported device sales of approximately $58 billion to $66 billion in the first quarter, down approximately 16% sequentially at the midpoint, primarily as a result of the timing of signing new license agreements and related catch-up payments recorded in the FY16 fourth quarter.

In QCT, we expect approximately $205 million to $225 million MSM chip shipments for the fiscal first quarter, up 2% sequentially and reflecting seasonally strong demand, primarily from OEMs in China across a broad range of products.

Share loss at a large thin modem customer is expected to moderate the normally strong seasonal MSM shipment trend in the December quarter.

We expect QCT's operating margin percentage to be within approximately 100 basis points of the fourth fiscal quarter.

Both of our businesses are seeing a modest impact in their outlook for the quarter as a result of a major customer's product launch challenges.

Turning to 2017, we are providing selective guidance points for the year.

We are estimating mid single-digit percentage growth for global 3G/4G handset sales for FY17 and 7% growth at the midpoint in calendar year 2017 3G/4G global device shipments, as Derek described.

Consistent with last fiscal year and aligned with our semiconductor and large cap tech peers, we are not providing fiscal year revenue or earnings per share guidance.

We estimate our non-GAAP FY17 tax rate to be approximately 18%.

As we discussed last week, when we announced the proposed acquisition of NXP, we are modifying our capital return program ahead of the expected close of the transaction later in calendar 2017.

However, we remain firmly committed to our current dividend program and to continuing to grow our dividend in the future.

We are also committed to share repurchases at a level that at least offsets dilution.

Depending on the level of stock option exercises by our employees, we could return close to 75% of free cash flow to shareholders during FY17 as our outstanding stock options have approximately two years, on average, remaining on their lives.

We expect to delever quickly after the NXP transaction is closed, providing a strong foundation for future capital returns and enabling us to approach our pre-transaction leverage ratios within two years of transaction close.

That concludes my comments.

I will now turn the call back to John.

Thank you, George.

Operator, we are ready for questions.

(Operator Instructions)

Mike Walkley, Canaccord Genuity.

I guess I'll focus the question on the QCT segment, with a nice increase in the revenue per MSM, is this mainly just stepping up a higher mix within the Chinese smartphone market?

Then can you help us model into Q1 2017, given the Samsung Note recall and the better mix of the iPhone?

How should we think about revenue per MSM on a sequential basis?

Thank you.

Mike, it's George.

I will take this and then maybe Cristiano will want jump in.

So, if you look at Q4, I would say you saw some benefit from mix for sure.

I would also add that you saw the impact of the adjacent businesses, which had a strong quarter both quarter-over-quarter and year-over-year.

Going into Q1, it's definitely the fact that you're seeing real strength in the high and mid tier that's helping offset what might be some of the other impacts that we're seeing in the quarter.

Also you are seeing some lower low tier, which helps the overall picture there.

Mike, this is Cristiano Amon.

Just to add a comment, why we don't provide guidance for the year, I think within 2017, we expect to see the introduction of our new premium tier Snapdragon at 10-nanometer at a flagship.

We'll also expect to continue to have growth in adjacent business.

That's going to have a positive impact and offset some seasonality we saw with OEM mix.

James Faucette, Morgan Stanley.

I also wanted to ask a couple of questions related to QCT.

Steve, you talked about the performance advantages of your modems, but yet in the last couple of years, we have seen a couple of the highest profile phones opt, at least in some regions, to use modems that were somewhat inferior in performance.

Can you talk a bit about what you can do to encourage and make sure that at least the best phones are using the best modems and really playing to your advantage?

Then my second question is that, George, you talked a little bit about -- or your expectation that QCT margins should be within about 100 bps of what you put up for the September quarter, in the December quarter.

But how should we think about QCT margins on a more medium to long-term basis?

Are we kind of at a new low?

Or is this a new baseline?

Should we expect some volatility both up and down from current levels?

Thanks.

James, this is Steve.

I'll handle the first piece of it.

I think it also depends on where you are looking in the world.

If you look in China, for example, I think the migration to up-link carrier aggregation in the 4G plus has really been helping the business, actually.

So I think that's an area where feature leadership in the modem has certainly been able to be highly correlated, actually, with the success.

But you're right, in some areas we have seen people either de-feature or go with a less advanced modem.

Now, the way we think about that is that the networks themselves are moving.

That's not a sustainable long-term position to be in.

When we look at tear downs or we look at comparisons between competitors' parts, the tear downs are very consistent with our view in terms of modem leadership.

We are getting feedback from operators that they do want to upgrade their modems.

Actually that includes their end market devices.

The pressure to go to gigabit class modems as well as 5G, we think set up a good environment for us.

We like the position of having modem leadership in the future.

We think we're going to be able to maintain that.

We did, as you know, have to make some changes to our cost structure to make sure that we can sustain an environment where maybe that isn't always the case at any particular moment.

But we still think that is a strong strategic ground to hold.

James, it's George.

On QCT margins, as we said, we will be within -- we expect to be within 100 basis points of where we finished the year.

I think that's at a time, too, when we are dealing with the impact of the share loss at the modem customer.

So I think that's a -- it's a positive sign.

It shows a couple things.

One, the strength of our position in China and how that's been impacting us overall.

The strength of the product portfolio coming out in the second half of the year of 2016.

In terms of looking forward, clearly, we'll be up year-over-year in our expectations.

We haven't guided what we think that will be for margin.

But there is still going to be seasonality.

Obviously, there is usually a big movement seasonally between our Q1 and Q2 for QCT and then strength in the second half of the year.

I don't know, Cristiano, was there anything else you wanted to add?

I just wanted to add that when we look forward to 2017, we feel comfortable right now with the product road map and traction across our broad customer base.

I think China definitely one to highlight.

I think we expect to repeat in 2017 the success we had in China in 2016.

We are going to be upgrading all tiers across thin modems, the premium tier MSM and the mid tier MSM, while we maintain the operating discipline implemented through our strategic realignment plan.

Simona Jankowski, Goldman Sachs.

I wanted to shift the focus to QTL.

I think last quarter, you had suggested about $400 million in catch-up royalties that you had expected, which was basically the delta between the $7.4 billion and $7.8 billion in your full-year revenue guidance for QTL.

It looks like you recognized about half of that in Q4.

So, is it fair to assume that there is another $200 million of catch-ups left?

Or is that amount larger?

By when do you expect to collect all of the catch-up payments?

Simona, this is Derek.

Actually, what we said was last quarter in Q3, we had about -- we had north of $400 million in out of period revenue in QTL.

Part of that was from the resolution of our dispute with LG and the other chunk of it, about $200 million-ish, was from licensees that we were still negotiating with began reporting some of the royalties even ahead of signing agreements.

That was all in Q3.

It was reflected in the $7.4 billion to $7.8 billion annual fiscal-year guidance.

When you fast forward into Q4, we've got some additional catch-up payments, as I noted in my remarks, north of $200 million additional coming in, in Q4, which gets us to -- if you might recall from last time, we guided some additional progress with license negotiations in Q4, but not all of it.

We kind of over delivered on that in terms of concluding additional deals, which brought us above our Q4 guide and right around the midpoint of the annual fiscal-year guidance.

I would just add, we had said going into the fourth quarter that there was more risk to meeting the midpoint of our guide because the market had been softer than we would have thought at the time when we came up with the $7.3 billion to the $8.0 billion.

But we felt we were making enough progress that we could make the guide that we did.

It turns out we made even more progress.

Rod Hall, JPMorgan.

I kind of want to follow-up on that last question.

So, your underlying royalty rate calculated, as I think Derek had called out or one of you guys had called out, was 2.5%.

You're talking about a couple hundred million of catch-up payments.

Were those -- can you give us any idea what the underlying royalty rate here was, ex the catch-up payments?

Are we talking about rates as we look forward that are similar to the average for the full year?

Or are we talking about something else, just to help us think about what the underlying rates look like here?

Then the other question I had for you is related to the overall market demand.

It's kind of hard because there is so many moving parts in terms of your TRDS, et cetera.

It's a little bit hard to understand what's happening with the end market.

So I just wonder if you could help us understand what you have seen in this last quarter with respect to end market demand?

How you think that's trending as we look into next year?

Thanks.

Rod, this is Derek.

As we pointed out at the outset of the year, this year and probably even going forward into FY17, the externally implied rate is going to fluctuate quite a bit quarter-over-quarter.

If you look back in Q3, we were north of 3.2%.

Then this quarter it swings down to 2.5%.

Really, the main driver in this quarter was the amount of catch-up that came in within the quarter, both -- all of it really coming from Chinese OEMs, a combination of folks reporting under the NDRC terms, but also a significant portion of that under the lower rates that apply to 3-mode.

So we think that's largely sort of a historical thing.

If you look at the projections for 3-mode in China, they are expected to be below 30% of the volume at China Mobile by the end of 2016 -- end of calendar 2016.

So, we think this is just going to be the fluctuation that we pointed out would happen as we signed agreements and brought in catch-up.

For the year, we came pretty close to the 2.9% longer term kind of normalized rate we talked about in February at the Analyst Day.

I expect we are going so see continued fluctuations through 2017, but structurally in terms of how we see the future unfolding, I think you can -- you sort of think of that normalized 2.9% as a good longer-term metric.

We do expect next quarter we will be up because, even if we conclude some additional deals that we are making progress on, the amount of the prior period catch-up will be -- will likely be smaller.

Then on the end market, really, let me try to unpack it a couple of different ways.

We are continuing to see good growth in units.

So we're holding our guide for calendar 2016, which is about 8% year-over-year growth.

We put out a guide now for 2017, which is 7% year-over-year growth.

Then the story that we really highlighted maybe three years ago is playing out very, very accurately to what we expected.

The ASPs have continued to moderate in terms of erosion.

2016 came in about where we called it at the beginning of the year, around 6% year-over-year erosion.

We expect to that to further moderate into FY17.

One of the guideposts we set out in my remarks is if you look at the unit growth and the expected ASP erosion, we think the handset piece of the market in FY17 will grow about mid single-digit.

Then of course, on top of that you have the non-handset piece as well as some continued improvement that we expect to drive in compliance, which means we expect to grow the business, the QTL business, at or above the handset growth in the market.

Tim Long, BMO Capital Markets.

Derek, just a quick clarification and a question.

On the catch-ups, I am assuming you're saying that VIVO and OPPO, the things that have passed, those catch-ups are done and anything next year in the future will be from new deals.

Then I just wanted to talk about that 5% to 11% for this year.

Thanks for the color on the 2017 number.

But IDC and others -- IDC, I think, just lowered their number for smartphones from 3% to 1.5% for the year.

So I've got this 5% to 11% range, could you help us out a little bit?

Is it more of the non-handset stuff in there that's driving it higher?

Or do you think there is some misunderstanding about China?

Related to that, the QTL long-term goal of $10 billion, I think by FY20, it sounded like normalized was about $7.2 billion.

So maybe just walk us through the unit ASP or new markets that will get us to that longer-term number.

Thank you.

Tim, this is Derek.

Yes, the catch-up that came in over the last two quarters related to the signing of new deals, that's basically largely baked in and behind us.

We have signed nine of the top 10 Chinese OEMs now.

So great progress throughout the year.

We do have another one that we're continuing to negotiate with and continuing to make progress, as well as we have noted the litigation against Meizu, which we are hopeful will drive to an agreement at some point.

So there will be some continued fluctuation in the revenue in QTL based on catch-up, both on a combination of new deals as well as driving compliance resolutions.

But the ones that we have talked about from the announced deals are, I think, basically behind us.

In terms of the market, there is -- I think if you look at the way the market has developed throughout the year, a number of industry analysts have been more pessimistic on handset growth than we were at the outset, but at least so far I would say the market is trending more in line with our view than with what they set out.

China continues to be strong.

We saw another good quarter in the September quarter of 4G adds.

Going forward, we are expecting some pretty meaningful growth in 2017 coming from India and Southeast Asia, Middle East.

So there is definitely big markets where we see the opportunity for a lot of continued growth.

On top of that, we do see a lot of good trends with operators focusing more attention on things like narrow band, LTE, and more of the industrial and in addition to consumer launches of IoT devices.

So that will be a growth opportunity as well.

The handset -- underlying handset growth that we called for 2017, mid single-digit, I think is something we feel very comfortable with.

We're not going to update the sort of the $10 billion call that we gave in February.

But, I guess what I can say there is, in terms of the new agreements that we have signed and the way that the market is playing out between -- since February, there is nothing really that would change the long-term view for the business.

Romit Shah, Nomura.

Just could you help us understand what's driving the moderation of ASPs in 2017, Derek?

You mentioned a higher mix of emerging markets.

I would just think India, Southeast Asia would put more downward pressure on ASP.

So if you could talk about that?

Then the timing of the NXPI deal closure for late 2017 seems conservative when you consider the complementary nature of the asset.

If we look at other deals in the space over the last year or two, they have been closing within eight to nine months.

So, I am just wondering if there is potential for this deal to close earlier than what you guys communicated a week ago?

This is Derek.

So on the first question, it's really nothing new.

We have been talking about the trends that we expected to play out in the handset market, like I said, for the last few years.

We expected to see some pretty accelerated erosion in ASPs for a couple of years and then start to moderate.

But what we are seeing in the emerging markets, although most of the growth going forward is coming from the emerging markets, it's the same trends that we had talked about, we're continuing to see play out.

The Chinese OEMs are continuing to kind of move up tier as they gain share.

Cristiano mentioned some of that in response to an earlier question.

That's really been a good story.

A lot of growth in China and then across the Chinese OEMs even outside of China in the mid-to-high tier.

That volume is not just coming in at the low tier.

Part of that is being driven by the replacement rate story that we expected as people started to replace their phones and move up tier.

We believe those trends are playing out and they will continue to play out as we go through 2017.

Interestingly, if you look at the reported ASP in the business for FY16, it was down less than the global.

So, even though, we are pulling in some of the catch-up amounts for prior period and some of that stuff tended to be at the lower tiers, there has still been some good stability across the ASP picture.

Let me comment on -- this is George, I will comment on the NXP closing date.

We totally agree with your comment that is a highly complementary deal and the industrial logic for customers is quite attractive.

So we didn't pick an outside date because we thought there would be a lot of regulatory push back.

It was just designed to recognize that at the outside it would be by the end of the calendar year.

But it could certainly be well before that depending on the regulatory reviews.

Timothy Arcuri, Cowen and Company.

I guess I had two questions on QTL.

First of all, Derek, I think you had said that the gap in terms of dollars between TDS and TRDS exiting FY16 would be less than 10%.

Obviously, that gap is coming down.

But can you give us a milepost in terms of where that gap will be exiting FY17?

Could it be only 5%, for example?

Tim, so we have given a couple of guideposts.

One is that as we continue to negotiate and close what we called the key Chinese license agreements that were remaining, that if we could get those done, we believed we would be around 75% of their global sales that would be reported.

We are not quite there yet.

We have got a lot of good progress, and certainly the largest player is done.

But we are still in negotiations with one more of those.

So as I mentioned in my remarks, we are kind of at the 73% mark now.

We need to make some more progress to get closer to the 75%.

But I do think that we are on track to get there.

Then from there, we will have to drive some additional signings and some compliance improvements to get that number up.

The 75%, we last gave it, it aligned with around a little less than 10% global sales that would be unreported.

I am really not in a position today to guide where we end up in 2017, other than to say we have been making steady progress.

We have got a number of initiatives underway in addition to just negotiating closing new agreements to drive the compliance in a more favorable picture for us.

We are going to be working hard on that throughout FY17 and hope to continue to narrow that gap.

Stacy Rasgon, Bernstein Research.

I had one and then a follow-up to it.

The first, Derek's comments on OPPO and VIVO, what appeared to be catch-up in Q3, your comments that you just made seemed to suggest that wasn't catch-up, that was actually run rate revenue they decided to report while they were negotiating.

Can you clarify, is that in fact true?

Were OPPO and VIVO actually in the run rate of revenues in Q3 -- starting in Q3 and obviously going forward from now?

To that end, how do I get to your QTL guidance for next quarter?

The midpoint is $62 billion, that's only up about 2% year-over-year.

A year ago, you should have been having very serious collection issues in China, much better than you're having now.

Yet you're only guiding it up 2% in year-over-year.

So I guess are those two issues related?

Can you clarify on both of those, please?

Stacy, this is Derek.

Yes, so the catch-up situation is a bit complicated.

I guess the way -- the best way I can lay it out for you is, we got some catch-up in from the licensees that we closed on in Q4 into Q3 that were for prior-period sales.

They were not in the run rate in Q3.

We closed the deals in Q4, which brought in additional catch-up for prior periods, but then also brought them into the run rate into Q4.

So it's a blend of the two.

George, if you want to take the next one?

Yes, in terms of trying to then guide to how you get to the outlook for Q1, which I believe what your second question was, it's really just fundamentally the step-down in TRDS quarter-over-quarter.

Otherwise, it's a fairly strong guide.

If you blend the two quarters, I think you're right on top of it.

David Wong, Wells Fargo.

Can you -- are you still on track for closing the joint venture arrangement with TDK as expected?

Does it look like this will be a March 2017 event?

This is Cristiano.

I think we are still on track.

We see some of the regulatory approvals getting near completion.

We are on track to close this towards the end of the year, beginning of 2017.

Edward Snyder, Charter Equity Research.

You mentioned that some of the offset to your QCT business was because of share loss in thin modems.

You made comments on the premium that Qualcomm has enjoyed and still enjoys in modem performance isn't as valued by some of your OEM customers as it has been in the past.

Do you see that reverting back to mean in any of the product roadmap in the next year or two that you looking at?

I know there's a lot of these phones are white-boarded three years in advance that suggests that there will be an increase on a premium for performance at some of those OEMs?

Or is this going to be state of the industry for some time on both competitors' solutions, let's say, like Intel but also in internal solutions?

So if could get a feeling for that?

Then in terms of Note 7, I know the cancellation, how much of an impact did that have on the quarter?

I know there was probably some forecast for that into the March period, is it all in now?

Or do you think you will have a little bit more out in the first calendar quarter next year?

Thanks.

Yes, this is Steve.

I will take the first piece, and maybe George can jump in on the end.

Yes, what I meant to say earlier was, I think there is maybe points in time where you can get away with not the leading quality -- or the leading edge feature set.

But I don't think that's good strategic ground to hold.

Our view of where our roadmap is going, the speed at which the industry is moving, meaning the networks that are in the operators -- what their plans are to upgrade the networks.

We feel very good about where our modem roadmap and modem business is going.

I gave a couple of data points about people launching some of the more advanced either MIMO or 256-QAM networks.

We see that happening.

We see things like license assisted access happening, particularly in the United States, being a positive thing.

The upgrade to 802.11ax and the interconnection or the simultaneous operation between that and cellular being a good thing.

Then just the general pressure on OEMs from other OEMs to use, let's say, things like gigabit class modems, we think is creating a positive design win -- good feedback from our customers in terms of how that sets up.

So, the individual -- how that relates to an individual model and such and timing of that, I think is really a better question for the OEMs.

But we like where the modem business is headed, particularly as 5G happens and things like narrow band IoT come into the networks as well.

I think that's where we are.

Quickly, maybe on the Note 7 and other devices, I think we did comprehend a little bit of impact from that in the forward guide.

I think you should think of that as if there is kind of a momentary hole in the market and we have a view as to how that's going to fill in.

It may fill in, maybe not perhaps in the entire first quarter, but it will fill in.

We feel like we are well positioned for almost any scenario that you can think of.

A lot of different OEMs could fill it in, including just a product transition within the OEM that we're talking about.

So we feel like we are well positioned in any of those scenarios.

We did comprehend some impact of that in the first-quarter guide.

Tal Liani, Bank of America.

This is Dan Bartus on for Tal.

I wanted to understand the QCT opportunities for next year a little bit more.

When we look to next year, the growth is mainly coming from India.

I wonder if you could discuss the strategy there?

How can you differentiate in such a low ASP market?

Then just separately, I was wondering if the share loss at that key thin modem customer was greater than you had originally baked into your QCT planning and margin assumptions?

Thanks.

Hi, Dan, this is Cristiano.

Let me just start talking about the growth.

I think one of the things we had said priorly was that we have been quite successful with our product line in China.

We see a lot of the Chinese OEMs and particularly in the market in China you see some of the larger OEMs in China consolidating their volume.

They look to export that into growth opportunities in emerging markets.

That is actually a differentiating position of QCT.

I think the more that the Chinese customer base exports outside China, I think actually helps our position both within China as well as the growth opportunities.

Specifically to India, we are actually excited about it.

There has been a very large-scale LTE launch with Reliance that is moving the market towards -- from feature phone accelerated path towards smartphone with 4G and technology such as voice over LTE.

All of the concepts of all-mode that has been successful in China.

It can also be a driver in India.

So I think that's how we feel good about basically the ability to generate growth in those markets as well.

I think your second question -- you want to take the second question?

Sure, I'd be happy to.

We had talked actually the previous quarter about the fact that we had contemplated the impact of second sourcing in our full-year guidance in terms of where we thought QCT would come out on margin.

Actually, if you look back on the year, QCT not only exceeded the minimum margin target that we set, but they did it in a year where, quite frankly, the market itself was weaker, particularly in the thin modem area.

It required us to recapture an important slot in the premium tier, which they did.

But also rolled out a series of products across the low, mid, and high tiers, where we saw much stronger traction in China than we expected going in.

So, I think overall, it's a very strong year.

Our planning assumptions with respect to the second sourcing were always a part of that.

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 and reiterate how excited we are about the future.

We're executing on our strategy to maintain our leadership in mobile and grow in adjacent opportunities with disciplined execution.

With the pending additions of TDK JV and the NXP business, we are in an excellent position to grow our businesses.

Lastly, I want to thank all of our employees for their hard work and dedication though this evolution of our business model.

We look forward to the many exciting opportunities ahead.

Thank you.

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

You may now disconnect.