Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm First Quarter Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, January 31, 2018. The playback number for today's call is 855-859-2056. International callers please dial 404-537-3406. The playback reservation number is 39466104. I would now like to turn the call over to John Sinnott, Vice President of Investor Relations. Mr. Sinnott, please go ahead.

Thank you, and good afternoon, everyone. Today's call will include prepared remarks by Steve Mollenkopf and George Davis. In addition, Cristiano Amon, Alex Rogers, 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. In addition, this call is 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 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. We have also recently provided a presentation detailing how we are creating substantial near and long-term value for our shareholders, including our fiscal 2019 financial forecast. That presentation as well as additional materials, including videos from our management team are available at qcomvalue.com. And now, the comments from Qualcomm's Chief Executive Officer, Steve Mollenkopf.

Thank you, John and good afternoon, everyone. We are pleased to report a strong set of results in our first fiscal quarter with non-GAAP earnings per share above the high end of our prior guidance range, driven by better than expected ASPs and units reported by our Chinese licensees and stronger than expected demand for MSMs. Our strong results reflect the actions we have taken to drive our strategic objectives and improve profitability. We are benefiting from our technology and product leadership in mobile and leveraging that leadership into a growing set of opportunities across RF Front End, Auto, IoT, mobile compute and networking. Our fiscal second quarter guidance reflects some higher than normal seasonality due to near-term inventory build in the handset market, consistent with what others are reporting as well as the ongoing impact of our non-paying licensees. In QCT, we expect the strong year-over-year performance to continue in our fiscal second quarter, driven by favorable mix and product cost actions. Longer-term, our outlook for our business remains unchanged as we continue to see positive trends with higher than expected global smartphone ASPs in QTL and stronger share and product trends in QCT across multiple growth areas. We made two very important announcements today that expand and strengthen our overall relationship with Samsung. In our licensing business, we announced that we have amended and expanded our long-term licensing agreement. The license remains at the device level and continues through 2023. It is important to note that the amended agreement reached with Samsung is fully consistent with brand licensing practices and is consistent with our long term model. More importantly, it provides the foundation for a long-term stable licensing relationship with Samsung following the KFTC investigation. And importantly, as part of the agreement, Samsung is withdrawing its opposition to…

Thank you, Steve and good afternoon, everyone. Fiscal first quarter non-GAAP results were very strong. Non-GAAP revenues were $6 billion, just above the midpoint of our prior guidance range and non-GAAP earnings per share were $0.98, $0.08 above the midpoint of our guidance range, reflecting strong performance in both QCT and QTL, In QCT, MSM shipments were 237 million, towards the high end of our guidance range. Overall performance in QCT was above expectations, driven primarily by the higher unit volume on a build ahead for a customer’s flagship launch. QCT's earning before tax in the first fiscal quarter was up 32% year-over-year, the seventh consecutive quarter of year-over-year growth, reflecting the strong MSM demand, improved product mix and product cost initiatives. QCT EBT margin was 21% for the quarter, above our prior guidance on the higher MSM volume and up more than 280 basis points over the same period last year. In QTL, revenues were $1.3 billion, at the high end of our prior guidance range, driven primarily by stronger than expected 3G, 4G device ASPs and units reported by OEMs in China for the September quarter. Recall that this excludes royalty revenues from Apple's products and the other licensee in dispute. QTL EBT margin was 68%, at the low end of our prior guidance. EBT margin would have been 72% or at the high end of prior guidance, if not for bad debt expense recorded in the quarter related to a licensee that is facing significant financial difficulties. This charge also accounted for the modestly higher than forecasted OpEx expense in the quarter. The GAAP loss this quarter reflected the impact of a $6 billion charge related to the enactment of US tax reform legislation and the accrual of the European Commission's $1.2 billion fine announced last week.…

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

[Operator Instructions] Our first question is from the line of Tim Long with BMO Capital Markets.

Just wanted a little more color on the Samsung arrangements here. It sounds like you extended with FRAND terms, just talk to us a little bit, I know the prior deal had an upfront payment, it had some technology IPR transfers as well, so can you just talk a little bit about how those two in the new collaboration factor into the FRAND rate discussion for Samsung? And then I have a follow-up after that.

Tim, this is Alex. So the amended and expanded agreement basically takes the prior deal and just adds some changes to it. So a lot of what was in the prior deal remains in place. So for example, the upfront payment that you talked about. The key things to keep in mind about this Samsung amended license agreement is that it's consistent with our FRAND licensing practices. It remains a license at the handset level. This is not a chipset level royalty bearing license. And so it also -- one key element also is an expansion of rights back to Qualcomm to Samsung's patent portfolio. And one of the key factors to keep in mind is that as part of this amendment and this new arrangement with Samsung, Samsung is going to be withdrawing from its intervention in the KFTC appeal, adverse to Qualcomm. So they'll no longer participate in that matter adverse to Qualcomm. And from a financial perspective, it supports the numbers that we put out for 2019 fiscal year and beyond and provides a strong foundation for Qualcomm and its relationship with Samsung through 2023.

And then just if I could just follow-up on the China business, it sounds like a lot of moving parts there. September was really strong for the device manufacturers, then weakening. Could you just talk a little bit about what you think is going on with the reason for the change in demand there and second could you talk -- it's been a pretty good market share gain region for you. Can you talk about if you still think you're taking share in the Chinese end market? Thank you.

Hi, Tim. This is Cristiano. I think we talk about a near-term weakness in the domestic China market based on the sell through data in the December quarter and that was contemplated in our guidance. I think you need to think about there was a super -- expect a super cycle and I think one of the flagships and you think that the Chinese OEMs didn't want to go ahead and most of the new products are going to launch in the Chinese New Year. So that’s one thing on the demand sell through in the December quarter. I think we will monitor the Chinese New Year data and whatever could be inventory into the quarter, we should rebalance in the first half of the year. We also see that the forecast is consistent with two things happening for QCT. I think both are strong chip share with those OEMs as well as mix improvements. So we can't really talk about the second half of the year, but the Chinese New Year launches is just ahead of us.

Our next question is from the line of Mike Walkley with Canaccord Genuity.

Cristiano, just talking about 5G, Qualcomm historically gains share with new wireless technologies. Can you just update us on how you see 5G ramping and why Qualcomm is ahead of the competition, maybe what technology areas you see the competitors might lack and then also just on the China side, also a follow up question, just can you talk about some of these RF agreement and how you see your RF business ramping over the next two years?

Yes, Mike. So let me start with 5G. We have been pretty consistent talking about a 5G acceleration in the industry and we now probably have line of sight of a number of the appointments that are going to happen of the network, of the 3GPP global 5G standard in the later part of this year and we are working with a number of OEMs to have smartphone launches in the first half of 2019. And part of that, I think we also announced in China last week a 5G Pioneer I think program of a number of OEMs of the China market, they see 5G as a discontinuity to basically enable their expansion plans to become global players, leveraging their 5G transition. So I think the motivation to have early launches in the first half of 19 is high and we’re marching towards that date. So your second question is about competitiveness of 5G. 5G brings a number of complex technologies. One is you have the foundation, which is gigabit LTE, which is we've been investing in 4G continuous to evolve the 17 smartphones in the market today with that capabilities used in a Qualcomm modem. We also have the addition of two other frequencies, sub-6 and millimeter wave and we continue to see complexities in the RF. So we're looking at our position as been a company that has been in a good position for the 4G, which continues to evolve and being supporting multiple global activities with 5G. We have announced probably trials in over the year, I think test towards all of the infrastructure vendors across all of the operators launched. So I think scale is going to be an advantage for us and we're optimistic about the prospect. Your last question is RF Front End. We announce a total of $2 billion in RF Front End purchase across four OEMs. We're starting to ramp designs. I think, it's probably a second set of announcements. The first one was CES, when we announced a number of OEMs and then Chinese OEMs was in the second wave. We also feel good about the 5G story in front end. When 5G technology gets launched, I believe the baseband in the system platform, the reference design plays a stronger role in defining RF Front End configuration. As part of the same discussion, we saw support in China for our tunable front end solution.

Our next question is from the line of Amit Daryanani with RBC Capital Markets.

Couple from me as well. Could you maybe help us understand how much of an impact are you seeing in your revenue line from the China inventories that you guys talked about and do you think this is something that gets worked through the March quarter or could it persist through the June quarter as well?

Clearly, I think two major factors when we think about Q2 is, one is the China weakness really impacted customers that felt they were going to have a stronger sell through at the end of December. And so as Cristiano said, we're going to be watching very closely the Chinese New Year sales to see how much of that gets absorbed in the second quarter. So we don't know yet. There may be some activity that carries on beyond that. But for our revenue overall in the second quarter, there are some other factors that are also at play. One in the licensing business, normally, obviously, this is the very strong quarter for licensing, but it also happens to have usually a very heavy weighting of Apple because their flagship launch tends to take place as you know in the fourth calendar quarter, which is the second fiscal quarter for our licensing business. The absence of that, we're not seeing as much of a seasonal pick up as we would normally see there plus the licensing estimates reflect the lower sell through that we ended up seeing in December that really didn't impact the chip business.

And I guess if I could follow up, the OpEx guide that you guys have for March quarter, if my math is working correctly, the implication is OpEx as a percent of sales will be something north of 35%, and I realize there are some one-time variables there, but should we talk about what are these one-time variables, what’s the right way to think about OpEx as a percentage of revenues and when do you get to realize all the $1 billion cost takeout benefits you talked about.

Yeah. I think the OpEx as a percent of revenue, it certainly had a little bit of a bounce, but that was more in Q1 relative to the bad debt charge. When I think about OpEx for the company, I think you've seen really since the strategic realignment plan, the major drivers of any pick up have either been our investment in pre-commercial 5G or the increase that you've seen in SG&A to support the higher litigation and model defense spending that we have. We think under the $1 billion plan, we can absorb the 5G costs that you've seen. We think as we move our focus further into these new sort of available markets we've talked about, we're going to be able to reprioritize our investment portfolio and take an additional cost out, but really the biggest savings are going to come out of SG&A, which has been a big driver of our growth in OpEx over the last four or five years. In particular, in the licensing area and in this model defense and we think we have a clear path to -- by ’19 to getting some of those costs taken back out. Of course, we'll have a real focus on overhead cost as well as part of the SG&A.

Our next question is from the line of Stacy Rasgon with Bernstein Research.

I had a question on the 2019 guidance. So you're talking a lot about 5G ramping and everything else, which sounds great. But it seems like if I take a look at that guide, 525 without fixing licensing, 375 without the buyback, if I take out the 1 billion cost cut that isn't really in numbers right now, it's more like 315, which seems to be quite a bit worse than where the street is and I would say inconsistent with some of your commentary on some of the good things coming down the pipe. So I guess can we talk a little bit more about what's actually in that guide, what are you assuming is getting worse between now and then. You mentioned Samsung's new royalty payment line with your numbers, are those getting worse versus where they are now, what you assuming for Apple share and any color you can give us on that would be helpful? And then I have a follow up.

Sure, Stacy. This is George. I think your math is generally good, but what we – I think what's missing is we’ve said we're going to put some conservative assumptions into the numbers that quite frankly if you did the math based on a run rate today, you would say would be a lower run rate than we're experiencing today and that is by taking out Apple, all Apple revenue related to new products, including both the modem and the front end and saying if for whatever reason, we're still litigating or pursuing an agreement with Apple and haven't reached it and they decide to take the decision to carve us out completely, what does that look like? So again the purpose of that estimate was really to provide stockholders with a high confidence based number before resolution of the licensing. So as they consider alternatives that they can understand what does the kind of core earnings look like on a conservative basis, but you're right, it would be below the run rate today and it was purposefully conservative. We also have some tax impact in the 525 number. Tax reform for us is a little higher tax on offshore earnings, lower earnings on onshore. Net-net, it's slightly positive, but when you break it out the way we did in that analysis, it's negative in the 525 and it's positive on the resolution basis.

So my follow-up, you mentioned a lot of the 1 billion coming out of SG&A and obviously have a lot of accelerated litigation and other costs there. Is it imperative that you actually do sell out licensing in time for 2019 in order to realize that full 1 billion.

No. We think there's some contribution but that's not the primary driver. We’ll be -- again we’ve grown SG&A within the licensing business beyond that as part of the process of addressing the many other challenges leading up to this. We think we have some opportunities there. We certainly believe that as we look at our roadmap that we had to reduce overhead related SG&A over time, we’ll take the steps necessary to accelerate that. So we're not highly dependent solely on a piece dividend to get this number. We think we'll be able to deliver the number.

Our next question is from the line of Romit Shah with Nomura Equity.

I had two. George, just on the tax rate. There's a lot there. Could you just tell us within the fiscal ’19 EPS guide, what's the tax rate that you're assuming? And then the other question I had was just on NXPI. It would seem that closing this deal in a timely manner would be an important part of your value creation story. And so assuming you close or you get regulatory approval from China, could you give us a feel for what the timeline would look like from there to the actual closure of the deal?

So on tax, we've guided the tax rate this year for non-GAAP at 8%. Obviously with the impact of tax reform and the fine, which is not tax deductible, the GAAP number doesn't really hold a lot of information. For ’19, we would, as I said, long term, we expect the tax rate to be somewhat accretive relative to our history. We have not guided, but we were in the midteens before in our tax rate and I would be closer to that number than I would to the guide for ’18. And then on NXP, not a lot we can say at this time other than we're very focused on working with MOFCOM to secure the final approval. Shortly after regulatory approval, the tender process will begin and then within -- depending on, there's two tender processes anticipated depending on how that process goes and you could close within say three weeks of the approval of regulatory.

Our next question is from the line of Srini Pajjuri with Macquarie Securities.

Cristiano, just a question on the RF strategy. It looks like you're winning a lot of designs out there. If I look at the landscape out there, the margin profile in that business is quite strong at least at the operating margin level. As you expand your footprint, how should we think about QCT margins? Do you see an expansion potential here or are you being a little bit aggressive on the pricing side, given that you're starting very early?

We talk about in our 2019 projections, I think this could contribute $2 billion to $3 billion in revenue and I think we're starting to, as we have the complete portfolio and particularly the ones that have higher value such as the PA and the high filter content modules, we see as an opportunity for us to grow faster than the market because we attach an existing MSM and an expansion of margin contribution in the device and I think that's consistent with the strategy we have pursued of diversifying and growing in other areas, leveraging our existing channel.

Our next question is from the line of James Faucette with Morgan Stanley.

I had a couple of quick follow-up questions. I guess the first one for Cristiano, you talked about bringing to market a mobile device 5G in 2019. At the same time, we've heard a range of comments from carriers on their own outlook for 5G. So maybe you can help us understand kind of their circumstances and the geographies where 5G starts to make first -- makes sense first and then where we would sit it develop from there. And then I guess my second follow-up question is just on the cost containment or reduction program, what are the things that would allow you to expand that further and further reduce expenses versus what are the competing elements that may limit it to that roughly $1 billion target? Thank you very much.

I'll take the first one and I’ll ask George to answer the second question. So on 5G, I think 5G as it becomes a significant contributor of volumes are really looking at the fiscal 2020, but early launches in ’19 are very important and particularly, for our position in the chipset, I think early launches and ability to cover that globally define your competitive position and the ability to have a mature product, so you can ramp volumes in premier devices through fiscal ‘20. As you think about the launches in geographies, we see activity across all the developed markets, we see activity in the United States with at least two of the four carriers that is consistent with the timeline of starting to have the devices launching in the first half of ’19. We see in Europe, at least three operators. You should expect in markets such as the UK and markets such as Germany, you’re going to see a high degree activity. Many of those operators, we had announced trial activities and the timeline is the same as the first half of the 2019. Of course, you have Korea with all of the operators driving o the timeframe. You do have a technology race there. You have Australia in the same timeframe and you have Japan towards the second half of ’19, beginning of 2020. The most significant data point is the one that I’m providing last, which is China Mobile. In an event that we had in China last week, I think the executive management of China Mobile made a presentation together with Qualcomm talking about a very large scale activity in the second half of ’19. The reason China is important because China, it's a very technology focus and harder focus market and as you look at the position that the Chinese OEMs have in the market, that enables an acceleration of the scale for the smartphone market. So China is likely going to be a significant development in the second half of ’19.

On OpEx, I think the -- if you think about our R&D, we're always going to be focused on making the level of R&D investment that is necessary to keep us ahead in things like generation transistors and where you’ve seen today. So the ramp -- one of the ramps, the biggest part of the ramp and spending over the last couple years has really been tied to 5G. I’'s absolutely critical not only to the ability of the chip business to come out very strong in a leadership position in the early phase of the generation, but it's also why the value of our licensing program remains strong throughout the ecosystem. So you're going to see us take actions that are consistent with maintaining a strong level of R&D to preserve that position over time. We do think that SG&A has been inflated by a number of the challenges that we've seen over time. We think we have the opportunity to take that down, something on the order of 200 to 300 basis points on a stabilized basis. And we will look very strong within the industry with SG&A at that level. It'll look like a very appropriate cost structure, but we’ll always have a little more focus on R&D because quite frankly we have the channels to get a return on that R&D, not only from the chip business and the licensing business but we're now seeing an even greater return on R&D as we expand in to automotive, IoT, networking, mobile compute, all of these markets are looking to the technologies that we lead in mobile as part of their next roadmap. And so we think that's ahead of us. We think that's part of the growth and we think anything we do on this billion dollar OpEx action will be consistent with that outlook.

Our next question is from the line of Brett Simpson with Arete.

I just had a question about the margin structure in QCT long term. I guess when you look at leadership franchises in semiconductor, you’ve seen margins structurally rise over the last few years, typically leadership franchises that are returning 40% or so operating margins. And if I look at your QCT PBT margins, they have been really disappointing in the 4G era. So I was just wondering when you look to 5G and you believe you have a competitive advantage, a structural competitive advantage in this market and you're going to be selling more platform into RF and baseband and RF has been a much higher returns business than QCT over the years, is it a path where you see the QCT margin starting to inflect and you can reflect the returns of a real leadership franchise long term? Thank you.

This is George. As we said, we expect QCT margins to continue to improve over time and rise above the 20% level. But one of the things I would point out, we've said that the growth in adjacencies has been a positive in that respect and it's certainly growing. It is accretive to the margin profile and I think it is getting us into markets where the structure -- the margin structure is more attractive over time. And so we'll continue to push hard on margin expansion and I should point out as the 2019 performance that we put out for the company doesn't include the margin benefit that we would expect to see as we enter the 5G era where we get both improvements in share and improvements in ASPs in the new devices and that's part of even in the core business where we're going to see expansion of margin.

And maybe just a follow-up on the Samsung arrangement that you announced, does it have any bearing on how you think about foundry relationships long term. I think in the last couple of years, you've been exclusively using Samsung LSI at 14-nanometer and I'm wondering whether that's something you think will continue as you move to 7 or particularly with this recent agreement with Samsung or will you be multi-sourcing leading edge going forward? Thank you.

Brett, it’s Steve. In terms of sourcing agreements, I would say we make them on an individual basis depending on what node and the details of a node. So it really just depends on the generation in terms of where we go. Now that being said, I think it is advantageous for us to have a broader set of assets in the company to be able to resolve issues with companies. And so we view our wafer volume and the fact that we have wafer volume from RF to the leading node as being a strategic asset for us. It's actually proven to be that way over the last several years. So I won't talk about where we're going, but I do think it is something that helps us strategically.

Our next question is from the line of Ross Seymore with Deutsche Bank.

Two quick questions here. First on the QTL side, when you put your fiscal ’19 earnings targets out there, it looks like you have a high level of confidence that the licensing issues will be resolved. So my first question is what gives you that confidence? And then the second question that's somewhat related is I wondered if we could get an update if any on the unnamed dispute that's going on and I assume given the arrangements today and agreement that that second dispute is not with Samsung? So those are the two questions.

Ross, well maybe I'll start and I’ll kick it to Don to provide some detail here, but on the disputes, a couple of things. I think there are a number of legal milestones that occur this year that are helpful typically in a licensing dispute, legal milestones provide an opportunity and a forcing function for the parties to sit down and to finally work things out. We've seen that in the case of our past history, both recently and over the last decade, which I think is helpful. Don can – with any follow up can answer that pretty well. I'm sorry you had another question toward the end.

So on the unnamed other licensee, our practice has been that while we still believe there is -- it's productive to continue with negotiations that we don't name the licensee in a dispute. t's only when we get to the point where we feel like we've exhausted all practical activities there and so you should take that as we're still negotiating to see if we can resolve the dispute.

And I would say also, this is Steve again. I think that the significance of the agreements that we announced today with Samsung I think are -- I think they're pretty evident, but we're quite pleased with those agreements. They're consistent with what we have done in the past in our forward looking plan and I think they also provide a good benchmark or reference point for our general licensing program moving forward as well. So I think those things to us provide good indicators that I think we're headed in the right direction as a business.

Our next question is from the line of John Pitzer with Credit Suisse.

I guess my first question is for Cristiano. Cristiano, I was wondering to make sure I understand the RF market opportunity. To what extent can you guys drive revenue on the 4G node versus the 5G node and I guess as you think about 5G and it sounds like your value proposition goes up significantly at 5G. How are you guys thinking about sort of the dollar capture potential per phone -- the incremental dollar capture?

Hi, John. Thank you for the question. In 4G, we have been in the process to complete our product portfolio. We have been players within the antenna tuner and the envelope tracker and I think now we add into the portfolio starting to have designs and get ready to ship with our PAs in filters and actually going after the higher value segment, which is the multimode PA and the payment modules. And I think you're going to start that traction -- starting to happen within the second half of the year. That's the reason we talk about China in the China announcement with our OEMs. I think the China nature of the market, they look more of a system solution. I think as we establish our business there, we see a power off our MSM platform and be able to actually have a complete platform and so it's natural that you see that reaction coming from the China OEMs and that's how it's going to start building the business in 4G. As you said, 5G changes the landscape significantly because it changes giving a little bit more voice to the system solution provider and the baseband provider about what is the technology and they are at design that goes in the technology launch configuration as well as the opportunity for innovation with the tunable front end. And as we said earlier, I think we expect that to be an expansion of margins and allow us to grow faster than the market.

George, maybe as my follow-up, in your comments around the chipset guidance being below seasonal for March, you called out both in modems and China, I’m just kind of curious of the two which ones are the bigger driver of the below seasonal for the March quarter on the chipset business?

Yeah. I would say from a below seasonal, China certainly is a factor, because the drop off at the end of December was more significant than expected. I would say sequentially, clearly, the big pullback by the modem customer is an important factor as I look sequentially for the chip business.

That concludes today's question-and-answer session. Mr. Mollenkopf, do you have anything further to add before adjourning the call?

Thank you. Yes. I would just want to thank the employees for their hard work and for the good quarter, for the hard work in terms of not only delivering across the expectations, but also for the number of announcements that have gone out here over the last quarter or so. So keep up the good work. I really appreciate it. Thank you. We’ll see you all next time.

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