Ladies and gentlemen, thank you for standing by. Welcome to the QUALCOMM’s Second Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded April 19, 2017. The playback number for today’s call is 855-859-2056. International callers please dial 404-537-3406. The playback reservation number is 95200877. I would now like to turn the call over to John Sinnott, Vice President of Investor Relations. Mr. Sinnott, please go ahead.

Thank you, everyone 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 a slide 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 our website later today. During the call today, we will use non-GAAP financial measures, as defined in Regulation G. And you can find the related reconciliations to GAAP on our website. We will also make 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 differ materially from those projected in our 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, the comments from QUALCOMM’s Chief Executive Officer, Steve Mollenkopf.

Thank you, John, and good afternoon, everyone. We are pleased to report strong results this quarter. Fiscal second quarter non-GAAP earnings per share were $0.14 above the midpoint of our prior guidance range, reflecting a continued focus on operational performance across the businesses. Our semiconductor business continues to benefit from both a strong product roadmap, perhaps the strongest in our Company’s history as well as industry trends that bode well for our ability to further grow the semiconductor business outside of handsets. Automotive, networking and IoT were particularly strong this quarter. Several of these product lines became part of QUALCOMM largely through M&A and will be further strengthened with the upcoming addition of NXP. Our QCT business continues to deliver a broad set of industry leading products, positioning us well for the opportunities ahead. We delivered strong topline results this quarter and operating margins were ahead of expectations. Our partners are already announcing new premium tier devices based on our new Snapdragon 835 mobile platform including the Samsung Galaxy S8 and S8+, Sony Xperia XZ premium and the Xiaomi Mi 6. Additionally, the 835 is extending to new categories beyond smartphones such as the ODR or ODG AR smart glasses announced at CES. Our high and mid-tier Snapdragon 600 and 400 platform offerings continued to see high adoption, particularly in China with 200 plus devices and design in the 600-tier and 190 plus devices and design in the 400-tier worldwide. In March, we announced our 205 mobile platforms designed to bring 4G LTE connectivity and 4G services for entry level feature phones and we expect OEM devices to be announced starting this quarter. The increasing number of gigabit LTE operator launches around the world this year validates our early investment and enabling gigabit speeds across 4G networks and our modem…

Thank you, Steve and good afternoon, everyone. As Steve noted, QTL had a strong fiscal second quarter with record total reported device sales of approximately $82.6 billion, up approximately 18% year-over-year and just above the high-end of our prior guidance range. The record TRDS for the quarter reflects significantly increased year-over-year unit reporting from recent China licensing progress as well as ASP strength particularly in China and typical seasonal strength in North America. We estimate that reported 3G/4G device shipments were approximately 400 million units within ASP of approximately $207 at the midpoints. Global 3G/4G handset ASPs are tracking consistent with our prior expectations of low single-digit percentage declines year-over-year. We also continue to see healthy growth in global 3G/4G device shipments. For calendar year 2016, we have increased our estimate of global 3G/4G device shipments to reflect even stronger December quarter shipments than we previously expected led by stronger sales in China. We estimate that approximately 1.7 billion 3G/4G devices were shipped in 2016, up approximately 10% year-over-year. For calendar 2017, we are reaffirming our estimated global 3G/4G device shipments of 1.75 billion to 1.85 billion devices, up approximately 6% year-over-year at the midpoint. We believe that some of the December quarter shipments strength in China resulted in a modest build-up of inventory there, which we expect will be sold through in the first half of calendar 2017. We estimate that this will push some of the expected first half calendar 2017 shipments into the second half of the calendar year and thus into QTL’s fiscal 2018 instead of fiscal 2017. The fiscal second quarter revenue and operating profit results for QTL, which were largely in line with our prior guidance were negatively impacted by a dispute with one of our licensees. This dispute resulted in the licensee underpaying…

Thank you, Derek, and good afternoon, everyone. Our fiscal second quarter was another solid quarter with non-GAAP revenues of $6 billion and non-GAAP earnings per share of $1.34, up 13% sequentially. We exceeded the midpoint of our non-GAAP earnings per share by $0.14. Better than expected performance at QCT accounted for approximately $0.05 of the upside on solid MSM demand and strong performance across auto, networking and IoT. The balance of the performance came from better than expected investment portfolio gains and a lower estimated annual tax rate. QTL was in line with expectations for the quarter despite the impact of a licensee dispute join the positive effect of licensing progress in China, strong 3G, 4G demand and a focus on costs. In QCT, MSM chip shipments were 179 million, modestly above the midpoint of our prior guidance. QCT revenues were $3.7 billion and implied revenue per MSM was up sequentially on stronger product mix consistent with our expectations. QCT operating margin was 13% above the high-end of our prior expectations, reflecting higher gross margins in mobile and better than expected operating results in auto, networking and IoT. As Steve mentioned, we were pleased to close the RF360 joint venture in February. We are consolidating the results of the JV on a one-month lag basis and it added approximately 75 million in revenue in the quarter on one-month of activity. QTL fiscal second quarter revenues were $2.2 billion in line with expectations. Total reported device sales were a record and exceeded our prior guidance range on strong ASPs offset by an estimated underpayment of more than 150 million related to a dispute with a licensee. As Derek explained, Apple suppliers reported royalties in the fiscal second quarter for sales activity in the December quarter withheld approximately $1 billion from their…

Thank you, George. Operator, we are ready for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Rod Hall with JPMorgan. Please go ahead.

Yes. Hi, guys. Thanks for taking the question. Hope you can hear me okay. I just wanted to clarify George what you guys are saying about the withholding, and Derek as well. So our understanding is the rebates, the alleged rebates were withheld for a couple of quarters, and so it sounds like what you're saying is the amount of royalty withheld is catching up for two quarter of rebate withholdings. So I just want to clarify that is in fact the case. And then I also wanted to see if you guys could give us any further color on the guidance range and are you assuming that the royalty withholdings at the midpoint would be equivalent to these rebates that are allegedly not being paid, and then how does the top and bottom end of that EPS range figure into what you're assuming on royalties? Thank you.

Hey, Rod. This is Derek. So if you think about Q2 which we had talked about last quarter in our reporting obviously for this quarter. Basically what happened is, we have a dispute with Apple as to whether we owe them about $1 billion under a cooperation agreement we have. That spans over several quarters of possible payments. What they said in their complaint and what they ended up doing as it relates to the second quarter which are sales through the end of December of 2016 is they effectively withheld payment to their contract manufacturers who then in turn withheld payment to us for royalties that were owed under the contract manufacturers agreements with us in the amount of this disputed cooperation payment, which is about $1 billion. And so that is all reflected in Q2, and as George mentioned because the amounts were reported to us and acknowledged as due, and then we have the cash that we haven't paid to Apple, effectively we took the revenue in Q2 for the amount of the four royalties that were paid net the reserve we had for the payments that are being disputed going back towards Apple. So that's the situation on Q2. On Q3, the guidance as we mentioned includes sort of a variety of possible assumptions on what may play out in terms of what gets paid to us by the contract manufacturers for Q3. I would say the high end of the guidance would be reflective of us getting paid in full, but we've got some other scenarios that are reflected in the range. The agreement itself with Apple which is where we have the dispute of what is owed to them expired at the end of 2016, so has really no relevance or impact to what the contract manufacturers would owe us for sales during the March quarter which is the guidance we’ve provided for Q3. One last point on this is what is not contemplated in the guidance range is for the contract manufacturers to pay us nothing or very low amount. If that were to happen then we would update you all.

Rod let me add one thing as well, when you look at Q2 you can look to the balance sheet and see the accounts receivable has had a fairly significant pop, not only because we've brought in RF360, but the receivable is up by the - $1 billion of that is the amount owed by the CM’s which are not disputing the fact that they have reported and are obligated to pay under the contract for this amount. So it has shown as a receivable. We are still holding the $1 billion related to the dispute from the prior quarters under current liabilities on our balance sheet.

Your next question comes from the line of Kulbinder Garcha with Credit Suisse. Please go ahead.

Thanks. Along the same subject I’m afraid and then - on the - just a clarification on your own building was withheld by the contract manufacturers, but something was paid to you, something else was paid to you above that level I assume and it’s not good lead indicator for being paid going forward, am I thinking if I wrong?

No. Yes, go ahead and ask your second question, would jump and then…

And then the other question was really more strategic about how the Apple and QUALCOMM thing plays out. The Foxconn agreement you have is that due to expire anytime soon? I assume it's not you haven't told us about device when it clarify that and it's very rare from what I can remember where you have an agreement with a party and it just stopped paying you. You had a deals expired in the past and you've had disputes perhaps and you have people that want to report on you all day, but is has ever been a scenario where you've had an agreement that last or some period of time and vendor in question just stops paying?

So Kulbin, I'll take the first part of the question, which is what they paid to us, was simply the difference between the full amount owed under the contract minus the disputed amount. So there was some incremental payment that came in, but it was net of that $1 billion that that we described in the prepared remarks.

Yes, just to add to that - this is Derek. The cooperation agreement between QUALCOMM and Apple as I said expired at the end of 2016. So unlike Q2 there really is no basis on which to even argue that there should be a payment of something less than the full amount that the contract manufacturers owed to us. In terms of the Foxconn agreement, it's a long-term agreement. It is not set to expire any time soon. Those are again long-term agreements that are valid in binding and include the contractual obligation to pay the only thing that expired or the direct agreements between QUALCOMM and Apple and those went away at the end of 2016. And to your last point, yes it's been very rare, actually as I sit here can't think of a situation where somebody just simply stop paying us entirely under their agreement where we didn't have a dispute with them as to what they owed or some other thing going on, so that would be rare.

This is Don. Just to add one or two things. So to be clear, the excuse that the contract manufacturers used was that Apple wasn't paying them and what Apple was saying was that they are holding back payment to them to match the payments that they claim we owed them from the other agreement to BCPA, no connection to the license agreement between us and our contract manufacturers. So with this totally improper for the contract manufacturers to withhold and we now look at what they're going to do going forward and we say well even we excuse that they used before that is Apple claiming that they were making up for amounts that we didn't pay them doesn't exist anymore. So there doesn't seem to be even an arguable rational reason for anybody to withhold payments.

Your next question comes from the line of Mike Walkley with Canaccord Genuity. Please go ahead.

Great, thank you. Just staying on this topic, just trying to understand maybe the guidance in accounting ramifications, one, you have a licensee that you're dispute with and you didn't recognize $150 million in revenue and I think when you had a dispute with Nokia going back in time when they materially underpaid during that process you have withheld Nokia revenue from your guidance. So if say the contract manufacturers pay some smaller dollar amount that Apple theoretically said they should pay them, do you still recognize a portion of that revenue or do you just take out for altogether like maybe you've done with some of the licensee. Just trying to understand the accounting ramifications if there is any change from your licensee? And then my more fundamental question just on the outlook for QTL, if you can help just walk us on a sequential between seasonality of this the Apple range and then you had this licensee disputed maybe if you could help us just see the sequential decline kind of those different puts and takes that would be helpful? Thank you.

So in terms of taking revenue in the case of a dispute, typically if there's a formal dispute then we would not take revenue until the dispute is resolved and I'll let Derek or Don comment on what constitutes the formal dispute, but certainly entry into arbitration or lawsuit is one case in the past. For the customer in the second quarter, the customer reported fully and underpaid and as not filed a formal dispute and in that case we take the revenue for the amount paid while we're working on collecting the balance owed from the customer. And then do you want to add to that at all?

Yes. I think just the difference Mike - this is Derek - in the two scenarios that the situation we have the current dispute where we didn't take revenue this quarter about 150 million - little more than 150 million. That situation where we did not get paid, so typically if there's a dispute and we're not getting paid, we wouldn't take the portion that's being withheld, which is different than if we are getting paid. On your sequence question, I think really got to remember the Q2 obviously is seasonally high quarter for the year, December quarter obviously typically the high quarter for QTL, so there would normally be a sequential decline going into Q3. I think other factors to consider, I would say we're assuming as I mentioned in my remarks that this dispute will not get resolved with the licensee we mentioned in Q3. So Q2 to Q3 were both assuming an underpayment and then we have a range of possibilities in the assumptions for what we'll get paid from the contract manufacturers supplying to Apple. If I up level it to the market, the market I think is continues to be quite strong. I would say it played out just a little bit differently in terms of what came in, in Q2 versus Q3. If you look at the TRDS range, we were above the high-end slightly of the Q2 TRDS range because of the phenomena of just more sales into China with a little inventory build that we expect will get sold through in Q3, which is therefore a bit of a drag on Q3 TRDS. So I think those are sort of the main drivers to keep in mind.

Your next question comes from the line of Tim Long with BMO Capital Markets. Please go ahead.

Thank you. Just two quick ones if I could here. First, I just want to clarify the guidance for next quarter. Are you still booking the operating expenses or COGS hit that you were taking for the payment that was going back to Apple previously under that agreement. So if you can clarify if that's still hurting your EPS and reserving against it on the balance sheet and when would that change? And then secondly, the licensee with the $150 million dispute, Derek could you talk a little bit about, I know you can't get into too much of the details, but I just want to understand is this something that maybe is a by-product of other licensees seeing some of these special Apple agreements that were mentioned in their dispute in the BlackBerry arbitration and if not are you getting a lot of phone calls from other OEMs that have seen these other deals that they maybe do not have an understanding they have separate arrangements is that potentially causing any renegotiations? Thank you.

Tim on the - in terms of the accruals that we've taken, those stopped as the contract expires at the end of the calendar year with the last period that that would be reported in - for us was in fiscal Q2.

And just to be - just a reminder, we didn't characterize sort of where those - were accruing on the P&L and that’s I don't want to make it seem like we're validating your description of them. On the second point, I think the way to think about that is the licensee with, which we have a dispute now, those discussions with the licensee I would say have been ongoing for some time and predated the filing in any of the litigation between us and Apple. A lot of times these discussions will go for a period of time before they escalate into a dispute and so that the timing is what it is, but I think it's important to note that the discussions leading up to dispute predated into the BlackBerry or the Apple litigation. And I don't really see a connection to that if you think about the BlackBerry decision. It really is an isolated agreement. And as I mentioned in my remarks even after we make the refund, the amount that BlackBerry paid per unit during that time period was basically consistent with the caps that we have for premium tier devices. So I don't anticipate really any impact from that decision on what other licensees would claim in terms of what it means to their agreements. The Apple situation as we mentioned in a lot of detail in our response, the terms under those agreements I think were grossly mischaracterized in Apple submission. So, yes we've had to have some discussions with licensees to try to clarify what it is and isn't. But I would say that's sort of normal course discussions we would typically have with companies.

Tim, I would add that as I said in my prepared remarks that the disputed amounts under the cooperation agreement were accrued as a reduction to revenues in the P&L. So we can give that level of commentary.

Your next question comes from the line of James Faucette with Morgan Stanley. Please go ahead.

Thank you very much. Just a couple of questions, first on that the topic of royalties from the contract manufacturers, have you received any payments sense that the original lawsuit was filed and is that part of the reason that you feel comfortable assuming that at least some royalties will be paid and in the June quarter? And then I did want to touch quickly on the NXPI acquisition. Any update on timing of other regulatory body approvals? And can you give us a rough outline yet as to what the financing cost for that portion will be or what the interest rates may look like et cetera if and as that deal closes? Thank you very much.

Jim, this is Derek. On your first question about the contract manufacturers. So yes for Q2 what was reported and owed to us by the contract manufacturers actually exceeded the amount that's in dispute between QUALCOMM and Apple under the cooperation agreement. So we did receive payments under those licenses for the difference as George mentioned between what those companies owed and basically the disputed amount that Apple withheld. And for the Q3, basically we've already received royalty reports from most of the contract manufacturer suppliers to Apple and believe there is a clear and binding payment obligation as it relates to those payments and there is no dispute about other money that is owed from QUALCOMM to Apple. So again if these licensees are operating in accordance with the terms of the agreement they should pay and they should pay the full amount, but again more - a little cautious until we actually get the payment in hand and so that's reflected in the guidance as well as just pointing out that the situation where there's zero payment is not reflected in our range today.

This is Don. On the NXP question. So yes, we're pretty much moving as expected as Steve mentioned, we have past the HSR process in the U.S. We should be filing very shortly in Europe and we filed in China already that has not yet been doctored by China, but it's there. And we would anticipate filing in the other jurisdiction very quickly after we’ve completed filing in Europe. So we believe we’re still on track, and we're moving forward.

On the financing front, we expect to be in the market in the second half, we have not put out an estimate yet on the financing costs. No material change in our expected sizing, which was between $10 billion and $12 billion of acquisition debt. But the form of that debt, the term and the tenor will all have an impact on estimated cost and we're not locked down on those yet.

Your next question comes from the line of Simona Jankowski with Goldman Sachs. Please go ahead.

Hi. Thank you very much. First, I just wanted to clarify if the payments to Apple under the BCPA were previously reported as comes from revenues in QCT or in QTL. And then the question on the new licensee that was underpaying in the quarter, did they still pay the majority of what they owed you or what’s the $150 million that they underpaid in fact the majority of what they owed you? And then along the same lines, your accounts receivable increased by about $2 billion of which you commented that $1 billion was due to the Apple withholding and then some of that was the TDK joint venture, but in the filing - in the Q, you also say that some of the increase was due to the delayed payments of other licensees. So I was just curious if there are other potential disputes that contributed to that or if that's just purely timing?

Hi, Simona. This is Derek. Maybe I'll take the first two and then George can take the last one. Yes, the amounts that are in dispute between us and Apple as we mentioned last quarter have been fully accounted for and run through the P&L in prior quarters. We did not specify sort of where in the P&L, the various payments were flowing and I think at this time are going to continue on that path. As to the dispute with the licensee, I'm not sure I can characterize majority versus minority, but they did pay a significant amount of royalties to us and didn't withhold - they withheld only a portion of what they owed not the entire payment.

So on the accounts receivable outside of the Apple related $1 billion and the RF360 amounts, what you had was growth in receivables related to QCT, which was just a timing issue or payment relative to when shipments were made. And then on the QTL piece that is really just the timing of payments that are being made on some of the catch up payments where they're spread out over a short period of time just to allow customers to get caught up in addition to fully paying at their new run rate.

Your next question comes from the line of Stacy Rasgon with Bernstein. Please go ahead.

Hi, guys. Thanks for taking my questions. First, I know you're making the point that the contract manufacturers are under obligation to pay no matter what they're getting from Apple, but let's be honest they're going to pay you whatever they get from Apple given presumably. So given what you know at this point of Apple's intentions, how can we assess that risks just the fact that you're - you aren't contemplating Apple completely ceasing their payments, so I just think you judge their risk of that happen to be lower, it's just not a scenario that you want to contemplate at this point? And on the revenue recognition, you give us some good color on kind of what constitutes a deferral versus not, but let's just say hypothetically next quarter the contract manufacturers were to pay you 50% of what you believe they owe you for Q3. Would you be able to recognize all that 50% or would you have to defer at that point and send an arbitration and call it zero? How do we think about revenue recognition depending on what's coming in?

Stacy, this is Don. Maybe a couple of us who would want to respond to the first question, but yes, to start what you said, I understand it’s a figure of speech, let's be honest. We are being honest and what is a good thing to think about is I disagree with you that it's a foregone conclusion. As I said earlier, Apple's claimed in its case against us is that they would held the specific amount of money in payments to their contract manufacturers because they said it's an offset against money that they claim, we withheld from them improperly in another contract. While we disagree with that claim obviously, the rationale for that no longer applies. As Derek said earlier, that BCPA contract is expired. So they're no more moneys even arguably due from us to them and therefore no basis or rationale to continue withholding from the contract manufacturers. And as Derek also said the contract manufacturers have valid binding contracts with us and our expectation is that they will abide by those obligations and pay us the amount they owe us, which they reported for the quarter.

Stacy, this is Derek. I think on your second question, I think probably the best way to think about it is, we’d have to wait and see all of the circumstances under which the revenue got reported and paid to us to sort of make a final judgment on that, but at a high level I would say we have binding valid agreements with them if they reported half of what they owe and paid that to us. I think the most likely scenario is as long as we're not in litigation with them that we would recognize that revenue within the quarter that is paid.

Your next question comes from the line of Tavis McCourt with Raymond James. Please go ahead.

Hey, thanks for taking my questions. The $150 million or so license payments that have been withheld in the second quarter, was that contemplated in your second quarter guidance or is that something that happened after the last report? And then, so just to be clear on the contract manufacturers payments for your third quarter guidance, the high end of the guidance would presume they pay in full, but there's no presumption of, obviously, the cooperation agreement payments from you towards Apple with that guidance? Is that correct?

Let me start with your first question which was - we did not contemplate the underpayment in the Q2 guidance. It’s one of the reasons why we made the point that actually if you factor that out it was a strong quarter for QTL, they were able to come in at expectation despite that, and you saw that in the strength of the market and also the strength in ASP's, they also worked hard to manage the cost. In terms of our guidance for Q3, again we’ve looked at a variety of scenarios, I’m not going to lay out every one of the scenarios, but the things that we thought could happen. We are anticipating in our guidance that we have not resolved the dispute with the one customer that made the underpayment in Q2, so that is factored into our guidance. And then there's a variety of scenarios for the Apple contract manufacturers and also just the normal range of uncertainties that we have when we give guidance.

This ends our allotted time for questions and answers. Mr. Mollenkopf, do you have anything further to add before adjourning the call?

Well, I just want to thank everyone for joining us today. I also want to thank the employees for delivering a great quarter and particular the folks who are delivering on the new businesses. It was really a strong quarter and I appreciate all the hard work. We'll talk to everybody next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.