Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm fourth quarter and fiscal 2018 earnings conference call. As a reminder, this conference is being recorded November 7, 2018. The playback number for today's call is 877-660-6853. International callers please dial 201-612-7415. The playback reservation number is 13684055. 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-K, which contain important factors that could cause actual results to differ materially from the forward-looking statements. And now to comments from Qualcomm's Chief Executive Officer, Steve Mollenkopf, who is speaking from our offices in China.

Thank you, John, and good afternoon, everyone. We are pleased to report a strong set of results this quarter, as we continued to execute on our strategic priorities to drive technology and product leadership, particularly in 5G, manage our operating expenses, and return capital to our stockholders. Fiscal 2018 was an extraordinary year in the history of Qualcomm. We successfully navigated through many challenges, yet remained focused on execution and the significant opportunities in front of us. I believe we enter fiscal 2019 a stronger company and extremely well-positioned for the future. Our fiscal fourth quarter results reflect continued strong performance, with non-GAAP earnings of $0.90 per share, $0.05 above the high end of our guidance range, reflecting better than expected QCT performance and lower operating expenses. The growth of our leading customers in China was a positive for the company in the fiscal fourth quarter, both on volume and improving mix of devices. We expect further growth from our China business in fiscal 2019, particularly in the second half of the fiscal year. The combined impact of Apple instructing their contract manufacturers to stop paying their contracted royalty payments and Apple's decision to use a competitor's modem for their latest device has had a significant impact to our financial performance. Notably, over 50% of the expected fiscal 2019 headwind related to Apple is reflected in our first fiscal quarter guidance and impacts our QCT business. As we progress through the year, this will become less impactful to our quarterly results. Despite this, as you can see from our results, we are continuing to execute well with our customers. Importantly, we've laid a strong foundation for growth as we differentiate through our industry-leading innovation ahead of some very big opportunities, including the launch of 3G (sic) [5G] (4:00), the ramp…

Thank you, Steve, and good afternoon, everyone. I will begin with comments on our fiscal fourth quarter and 2018 results, followed by our fiscal first quarter of 2019 guidance and some additional perspective on 2019 overall. In our fiscal fourth quarter, results were strong, with revenues of $5.8 billion, above the midpoint of our guidance range, and non-GAAP EPS of $0.90, above the high end of our prior guidance range. Revenues benefited primarily from stronger than expected demand for chips from Chinese customers. Non-GAAP EPS results exceeded the midpoint of our guidance by $0.10. $0.06 of that impact was driven by operating performance in QCT and QTL and from lower operating expenses. The remaining $0.04 was driven by favorable tax impacts and lower share count from our repurchase activity. QCT delivered revenues of $4.6 billion and an EBT margin of 17%, driven by strength in MSM chip shipments of 232 million, above the high end of our guidance range on stronger than expected demand from Chinese OEMs. In QTL, revenues were $1.14 billion, in line with the midpoint of our guidance range, and EBT margin was 65%, better than expected, reflecting lower operating expenses, largely from litigation spending. We also recognized $100 million of revenue from the other licensee in dispute under the interim agreement. In our fiscal fourth quarter, non-GAAP combined R&D and SG&A expenses were down 1% sequentially on cost reduction actions and lower than expected excess litigation expense more than offsetting the impact of an extra week of operations in the fiscal fourth quarter. Our non-GAAP tax rate was a 1% benefit in the quarter, lower than our prior expectations, reflecting a modest benefit related to tax restructuring completed in the quarter. Now, turning to fiscal 2018, non-GAAP revenues for the year were $22.7 billion and non-GAAP…

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

Thank you. Our first question is from the line of Romit Shah with Nomura. Please proceed with your question.

Yes, thank you. I was hoping you could talk about the dispute with Apple. We've noticed during the quarter that there were judgments in your favor, ITC, for example, but those judgments are coming without any injunctive relief. I'm just curious why this hasn't changed your timeline on resolution. It would seem like this dynamic would allow Apple to kick the can down the road for as long as they can.

Romit, this is Don. I think you got it a little off. So the ITC ruling that you're referring to was the recommendation of the administrative law judge. We've previously given the dates, so that was the initial determination. That now goes to a final determination before the commission. It's true that he found infringement, which we were very pleased with, but he also decided that from his perspective, there shouldn't be an exclusion order issued. We obviously disagree with that, and we have the opportunity before the commission to convince them otherwise.

In China, what do you expect? Do you think it's going to play out like it has in the U.S., or do you think there could be more punitive actions, for example?

Yeah, sorry. Your first part of your question, I think, was in China. You were asking about our actions in China?

Just the process in China and how that might compare to what we've seen so far here in the U.S.

Sure, so I think as I've said in the past, we've got over 20 patent infringement cases in multiple jurisdictions in China, where the IP courts have shown to be very good at protecting intellectual property rights and issuing in many cases injunctions. And so we continue to press those cases, and we remain optimistic about the results of those. We've also, I should say, gone through multiple reviews of the validity of our patents that are at issue in those cases, and we have won all but one, I believe, so there are many validity findings already through the CIPO, the Chinese Intellectual Property Office.

Thank you. Our next question is from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.

Great, thanks. George, I just wondered if you could walk us through some of the changes in your guidance. Earlier in the year when Broadcom was trying to buy you, you shared some financial targets for fiscal 2019. Now you've given us some startup guidance for the year that's going to be lower than those targets. Can you just maybe walk us through some of the things that might have changed, whether it's higher legal costs, a weaker smartphone market, maybe less of a buyback given the timing of NXP? Can you help us reconcile your guidance relative to the one earlier in the year? Thank you.

Hi, Mike. Let me generally characterize it for you. And as we've discussed previously, the extension of the NXP contract, first from April and then to July, and then of course the termination last quarter and then the implementation of our capital return program in August, accounts for a material part of the difference, as accretion is still the biggest single difference in the share repurchase case versus NXP, which came with accretion on day one. And under the share repurchases, we've said it's the combination of the licensing resolution and the share repurchase can actually bring higher accretion than we would have seen with NXP. I think in terms of just looking back to what we see now versus the beginning of last year, clearly we see a weaker handset market in both 2018 and 2019 than we saw at the beginning of the year, and I think that's one of the major factors. I think there's other minor factors like interest rates being higher. You've got some other factors like operating expenses related to what we were referring to as excess litigation being higher. But the key point is the same elements that drove our earnings performance at $5.25 and actually the higher range, which is really how we have discussed our performance post-dispute resolution, those things are all still in front of us, even with a weaker handset market overall. So the key thing is going to be resolution with Apple, and then of course, obviously the various implications of that resolution, whether it includes possible reengagement on products, and then of course, the ultimate accretion that comes with that. We also see, quite frankly, 5G, which ramps in 2020 and 2021, as providing further underpinning to that strong earnings potential.

Great, thank you.

Thank you. The next question is from the line of Tim Long with BMO Capital Markets. Please proceed with your question.

Thank you. If I could just go back to Don, you mentioned, or maybe Steve mentioned in the initial remarks about the FTC complaint and the initial decision and not agreeing with it. Could you just talk a little bit? Just a few of the questions I had, one, I thought Qualcomm had previously been licensing to modem suppliers since they're shipping in the market. And then second, is this potentially risking the whole license royalty rate based on system rather than chip? And then third, if you can just maybe talk about how the FTC may impact or may not impact some of the other Apple or ODM cases that are out there, that would be helpful. Thank you.

Yeah, sure. So the first – let me go back to the order. The first question was with respect to – no, the modem was the third question, wasn't it? Yeah, with respect to the ITC?

No, I think it was the FTC.

Sorry, the FTC.

Could you go ahead and repeat your question so we make sure we get the proper answer?

Sure, it was the FTC. Were you previously licensing to modem suppliers since they are selling to market, what's the impact of a potential decision on chip level versus device level? And then what's the relationship with this case potentially and anything with Apple or the other ODMs?

Sorry, I've got it now. So on modem licensing, your assumption was right. That is to say that competitive chip makers have been free to sell their chips to device makers. Our practice has been because we license to device makers that competitive chip suppliers can sell to licensed device makers and not have to pay us a license fee, and that's been the case for many, many years. There was a time long ago when we provided some non-exhaustive licenses to some chip makers, but that was in the past. So your point is well taken because there was no need for a license – there is no need for a license on the component level as long as the device makers are licensed, which the industry has practiced since the very beginning of industry practice here. The primary standards bodies have constantly reiterated device-level licensing is the norm, and every player in the industry has followed that process. So that's why I say I think the judge respectfully got it wrong here, and we're looking forward to an opportunity for a full trial later in January. I think I've answered your second question as well, so I'll pass that one. And in terms of the impact, there really is, on ODMs and other Apple situations, there's no immediate impact here. We have licenses, as you know, which remain valid. This is a partial summary judgment, which the judge decided a particular issue in this case. It's not a final judgment, and so we'll just continue advocating our position in court and continue to have multiple licenses around the world, as you know.

Okay, thank you.

Hey, Tim. This is Alex. I'm calling in remotely. Let me just jump in very quickly. On the royalty rate issue, one of the things I think is important to remember is that our licensing program with respect to essential patents in cellular is really properly valued at the system level and the device level. And so the value of this intellectual property is realized at that level, and that doesn't change by virtue of this particular partial summary judgment ruling. The other thing I think is important to keep in mind is that we've dealt with similar issues like this before, for example, in the TFTC matter, and we found a way to resolve it there in a way that's not disruptive to the licensing business and satisfactory to the TFTC obviously. So I just wanted to add a couple of those additional points.

Okay, thanks for the extra color.

Tim, this is Steve. Also, I would just add. In all of, I would say, the legal detail, I want to make sure the point is not lost. Really our focus here in the near term is really how do we settle the FTC case. It's been public that we've had some discussions in that regard. And that's really where the focus is right now, and there's nothing really in that order that we think complicates that or keeps us from doing that. And in the meantime, we're really not compelled to do anything differently with the business. But that's really where the focus is. Hopefully, that isn't lost in the discussion as well.

Okay, thank you.

Thank you. The next question is coming from the line of Amit Daryanani with RBC Capital Markets. Please proceed with your question.

Thank you, I have two as well. I guess first off, to get towards the high teens operating margin target for QCT, what sort of MSM unit expectations do you have on the back of this? I'm just trying to understand. To go from low teens to high teens, how much of this is going to be volume-driven versus some of the cost take-out benefits that you guys are already implementing? That would be helpful. And then the second question, I think ahead of the FTC, ahead of the judge giving you this preliminary judgment, I think Qualcomm and the FTC had asked for a 30-day deferral to reach some sort of settlement. Does the ruling by the judge in any way prevent you guys from getting to some sort of settlement with the FTC away from the courts? And is that a likely option over the next six to nine months for you guys? Thank you.

Amit, hi. This is George. I'll cover the MSM. We're seeing both benefits more from mix in our MSM outlook in the second half versus the first half, not so much a volume question, although it's good. But we're continuing to see a trend that we've seen before, which is a very strong volume move from low and mid up into the high and premium tiers, and that continues. And that also relates to the timing of launches in China, which Cristiano is probably better to comment on. Of course, we still expect to see some additional benefit from the cost program as well.

Maybe I'll just make a small comment and hand it over to I think Don on the FTC question. So, Amit, also at the very tail end of fiscal 2019, that's when we're going to start to see the ramp of some of the 5G devices. And it's meaningful volume in fiscal 2020, but the initial launches will also happen at the very end of 2019 fiscal for us. Thank you.

And I think your question was does the partial summary judgment ruling affect our continuing settlement discussions. And I think as Steve just indicated, we have ongoing settlement discussions with the FTC and we will continue those discussions with the FTC.

Thank you. The next question is coming from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question. Stacy Aaron Rasgon - Sanford C. Bernstein & Co. LLC: Hi, guys. Thanks for taking my questions. I'd like to know why you're including a discrete tax benefit in your Q1 non-GAAP earnings. Did you know it was there when you gave the guidance for 2019 last year? And does that benefit, $0.45, go toward the $5.25 EPS target that your compensation is based on? And if so, why is that there?

Hi, Stacy. The timing of the tax adjustment item relates to the timing of the tax restructuring that we've taken. And that's been a process that has been continually under review over the last several months, but it really relates and reflects the timing of the actions. In terms of the compensation, we still are very focused on delivering the numbers that we have talked about and that the board has based the compensation plan for management. And I think the one-time items are not the driving factor in delivering that business or those business results.

Thank you. Our next question is coming from the line of Brett Simpson with Arete Research. Please proceed with your question.

Yes, thanks very much, a question for George. I think earlier this year during the Broadcom situation, you guided on adjacency revenue for fiscal 2019 at $7 billion to $8 billion from QCT. Can you give us an update on this? Just give us some sense as to what the December quarter looks like for adjacencies and how you see fiscal 2019 now playing out. And maybe, George, can you give us some insight in terms of QCT sales overall for fiscal 2019? Just now you've given some guidance for December quarter, why we can't get a revenue guide overall for fiscal 2019 for QCT. Thank you.

So adjacencies, when we look at the previous forecast, probably the biggest difference is we've seen slower adjacent growth in 2018 than we had forecasted. We start to see recovery to that growth rate in 2019. We also have seen our RF front-end business, which had an Apple component, which was in that forecast, all of that business has moved away from our front-end group. Despite that, absent that, there's been strong growth outside of Apple. In terms of the mix, though, as we've seen some of the favorable business trends that Steve talked about, not only in the win area but in the IoT and in auto, we're actually seeing far less margin EBT impact from the slower growth than what we had forecasted as opposed to what we saw in 2018. With respect to guidance on revenue, our practice, consistent with really what the rest of the industry does, is to give it a quarter out.

And maybe just to confirm, can you give us any sense as to – you said $7 billion or $8 billion earlier this year. Can you give us a range or any insights on adjacencies for fiscal 2019 now? I understand it's slower growth. And maybe just a separate question for Cristiano. On 5G, when you talk about Snapdragon 800 wins and the RF opportunity as well, can you maybe just frame? What is the revenue opportunity per 5G phone when you're selling a Snapdragon 800 and the RF, the complete RF front end for 5G? Thank you.

Again, we're not providing an updated guide against the $7 billion to $8 billion. The biggest difference between the range and what we see today is really slower growth in IoT and the impact of the Apple change in our front-end business. But from – again, when I look at the EBT impact relative to our expectation to get to the earnings potential that we talked about, it's a very minor impact overall.

Hi, Brett. This is Cristiano. On 5G, we expect 5G to be a significant expansion, even on existing units, both in revenue and earnings for QCT, but also likely to be an expansion of share. And we see two drivers. One is we have a lot more content in the device. Besides the performance of a premium-tier application processor and the 5G modem, we also have high traction on the RF front-end design, including the incremental value you get from millimeter wave modules, which is going to be very important. Certain markets, for example, the United States, will require millimeter wave. Thank you.

Thank you. Our next question is coming from the line of Tal Liani with Bank of America. Please proceed with your questions.

Hi, guys. You gave guidance before for expense cuts of $1 billion. Can you discuss the linearity? Should we expect a drop in expenses early in the year, or is it going to be even throughout the year? That's for modeling purpose. Second, your guidance for next quarter for MSM shipments was lower than expectations, I believe, that are in line with the Street. Can you discuss the areas of strength and the areas of weakness as you see it next quarter? And how do you refer to the reports about global weakness in demand for smartphones? Thanks.

Great. So on the operating expense linearity, we expect to continue to see operating expenses coming down over the year and more in the back half than we would normally see in a cost reduction program just because of the timing of some of the divestitures that are a part of it but not a key and driving part of it. The other part is just the timing of some roadmap items and when it made sense to take certain actions. So overall, we're very confident that we're on track for that. In terms of the MSM share, maybe I'll just comment on the big deltas. I think the year-over-year is, in some ways, most instructive because that's where you really see the Apple effect. And we're down in the first quarter 55 million units versus where we were last year in the same quarter with Apple, and that's really the effect of zero share. One of the things that I think has made the impact of that harder to see is that, in 2018, we saw very strong demand increase in China, and at the same time, the mix of that demand improved in the high and premium tier. And so the impact of going from 100% to 50% share last year was really addressed by the growth of the non-Apple business. Obviously, this quarter we don't have that same benefit. So you're seeing a front-loaded – which is how Apple ordered last year – so comparatively, a front-loaded Apple environment that we're not participating in.

Maybe I'm just going to add one thing. This is Cristiano, Tal. So if you remove the Apple effect, the seasonality we see in 2019 is very similar to what we saw in 2018. And I think as George outlined, when you look on the MSM shipments versus Street, if you look at it – because, as George said, Apple front-loaded 50 million to 55 million units, you see the strength for the MSM is still with the growth on the non-Apple business. And that's why we're going to continue to see that as we go to the second half when we don't have that Apple impact anymore.

Thank you. Our next question is from the line of Timothy Arcuri with UBS. Please proceed with your question.

Hi. I had two. George, so just going back to the guidance for fiscal 2019, so is the apples-to-apples number now $4.80 versus the original $5.25 baseline? Is that right?

So, Tim, we're not re-guiding 2019 against the numbers. Again, the largest delta as I look at where we are versus – and again, it depends on whether you're looking at a $5.25 case that had NXP coming in on day one or how do we get to the higher range that we talked about back in January of 2018. It comes down to, again, the largest part of that being the timing effect of when the share repurchase activity started, and also the impact of getting the accretion that comes with a resolution, which then I think we're in a much stronger position. Otherwise, the biggest difference is really the market is a little bit weaker than we had expected before, and the balance being things like, such as I said, the slower growth in adjacents, actually a little bit higher interest rates having an impact, and slightly higher tax rates having an impact.

Okay, George. Thanks. And then there's a lot of moving parts obviously with Apple, but it seems like every call we hear more about a potential for an injunction in China. Maybe that's why they don't want to talk about units anymore, but I'm wondering. What is the catalyst for you to get an injunction? Is it a single one of these infringement cases going your way, which sounds like it might happen this quarter? So I guess the question is could you get an injunction before the end of this year? Thanks.

Hi, this is Don. Yes, as I mentioned, there are over 20 cases that we've filed in various jurisdictions within China. And the vehicle for an injunction is we request an injunction as part of the case. China, unlike some other countries, actually will issue even preliminary injunctions and not wait through a full trial for permanent injunction. But as I said earlier too, they also have a parallel process where the patent office reviews patents for validity, and we've been very successful so far there. So as soon as we get an infringement judgment in our favor, there is a real chance of injunctive relief there.

Thank you. The next question is from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks for letting me ask a question. I had two. First on the MSM side dropping 20%, George, you've said there were a number of things, Apple, extra week, et cetera. Can you just talk about – even if I took the Apple out, on a year-over-year basis it looks like the MSMs are flat to very slightly up. Given the dynamics of taking share in China, I'm surprised that it's not a little bit better than that, so any color on that. And the second unrelated question is on your tax commentary, not for the quarter, but you indicated it would be 15%, I think, for the rest of the fiscal year after fiscal 1Q. Is that correct? And how does that tax rate of 15% change after you resolve the two outstanding disputes?

So let me – maybe I'll start with the tax rate first. You're correct. It's 15% on the remaining quarters, which gets you at roughly 3% to 4% for the full year given the tax benefit in the first quarter. Effectively, the tax restructuring is bringing our offshore revenue onshore, and most of that revenue is going to be subject to the FDII rate, the foreign-derived income rate, which is 13% as opposed to the statutory rate of 21%. And so I think, as we said, I think the mid-teens is still a good number to think about in terms of modeling because of that. The 15% you get pulled up a little bit because not everything falls into that bucket, and so you get pulled up a little on rate from the FDII rate. In terms of the MSMs, I want to make sure I understand. Are you talking about sequential or year over year? Because it's a very different story as we look at sequential versus year over year.

On year-over-year you're guiding to 185 million units at the midpoint. And if my model is right, I think you did 237 million in the same quarter a year ago. So if I just did the math of taking the 50 million to 55 million units that you said from Apple out of the equation, it seems like you're still only talking 180 million – 182 million units.

Now I've got your question. So the difference – one of the differences, we're seeing some lower demand in China. As we said Q4, part of our outperformance in Q4 was high and premium tier devices in China. And so we're seeing that come down a little bit as sell-through for some of our customers was below expectations. So there's a little bit of a digestion period, and I think that's part of why it looks like we're not getting as much pickup year over year potentially from the growth in China. And by the way, Q1 last year was not a bad quarter for China units either.

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

Thanks. I just wanted to thank everybody for joining us on the call today. We're on the cusp of I think some very big industry transitions that we're well-positioned for' 5G, the ramp of our RF front-end business, and of course, the ramp of the design-in pipeline, particularly in auto. I just want to thank the teams for their hard work. They never took their eye off the ball this year, and I think we're really well positioned as a result going into 5G. Thank you, everyone. We'll talk to you next quarter.

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