Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm Second 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. Today's call is 8,555,592,056.
International callers, please dial 404 537-3406. The playback reservation number is 394 66,125. I would now like to turn the call over to John Sinotte, Vice President of Investor Relations. Mr. Sinotte, 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 Aman, 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. And now comments from Qualcomm's Chief Executive Officer, Steve Mollenkopf.
Thank you, John, and good afternoon, everyone. Our fiscal 2nd quarter results were strong with non GAAP earnings per share 14% above the midpoint of our guidance range, driven by continued strong performance in QCT and cost management throughout the company, which was balanced by some headwinds from weaker industry conditions and litigation costs in QTL. We returned approximately $1,000,000,000 to stockholders in the quarter, including $845,000,000 of dividends paid and $200,000,000 in stock repurchases. We also announced a 9% increase to our quarterly dividend rate in the quarter, effective for dividends starting in the June quarter. Looking ahead, we see some near term headwinds, but our longer term outlook is consistent with our fiscal 2019 targets that we shared with you in January.
Our fiscal Q3 guidance reflects some softness in global 3 gs, 4 gs device shipments, particularly in China, the impact of some changes we have made to our licensing framework, as well as the impact of increased litigation expenses in our licensing business. QCT continues to execute well with strong performance in China and growth in adjacent areas, offset by some impact of lower modem shipments. For calendar 2018, we are adjusting our growth estimate for global 3 gs, 4 gs device shipments lower. However, handset selling prices continue to be stronger than expected, which continues to be a favorable trend. As we navigate the short term industry weakness in QCT, we continue to execute well in that business and our market share remains strong.
The Snapdragon 845 platform, our latest premium tier offering, has achieved substantial commercial success with over 100 design wins already, including launched flagship devices by Samsung, Sony, Asus and Xiaomi. Our modem leadership continues. We recently announced our X24 LTE modem, which is the world's first 2 gigabit 4 gs modem and the world's first announced 7 nanometer chip. As the market transitions to 5 gs, the engineering challenges embedded in the 5 gs opportunity play directly to Qualcomm's strengths and the focused investment we have made over the last several years. We are leading the industry to 5 gs and we are pleased to see the strength of our roadmap, helping to enable the upcoming commercial launches of 5 gs networks and devices, including the 18 network operators and 20 manufacturers that have selected our X50 5 gs modem for trials and 5 gs devices.
We also recently announced the world's first 5 gs module solutions, which include highly integrated turnkey 5 gs modules, including application processor, baseband, transceiver, memory, power management, RF front end, antennas and other components that are designed to expand the ecosystem and accelerate 5 gs deployments. Our products continue to be differentiated, driven by our unique systems based approach to the complexities across wireless networks and devices. We are delivering industry leading technologies and performance, which translates into a more efficient use of spectrum for operators and a lower bill of materials for device makers, delivering attractive economics for our partners and higher device content share for us. In auto, our backlog of awarded design wins has increased to $4,000,000,000 as automakers and Tier 1 suppliers begin gearing up for 5 gs enabled cars in 2021. We continue to be the supplier of choice given our decades of wireless technology leadership.
In infotainment, we have designs with 14 of the top 25 global automaker brands, including Audi, BYD, Geely, Honda, Jaguar, Land Rover, PSA and Volkswagen. In networking, we see favorable trends with continued share gains and growth in the WiFi infrastructure opportunity across enterprise, retail and carriers. And we launched the world's first draft 802.11ax carrier gateway, which started shipping in March in KDDI and NEC. In summary, we are well positioned to grow in our adjacent opportunities of auto, IoT, networking and compute as we leverage our core competencies to gain share in these emerging areas. In November 2017, we announced a global framework for licensing Qualcomm standard essential patents at an effective rate of 3.25%, covering multimode devices inclusive of 5 gs Release 15 standards.
We also recently set the selling price cap for a handset at $400 for all licensees. This global rate is consistent with the SEP only licensing program we successfully established in China since 2015, which has resulted in over 120 agreements for 3 gs and 4 gs devices. We are now in negotiations for license extensions under the new program announced in November that include rights to our 5 gs patents and expect to conclude a number of agreements in Q3. The transparency of our worldwide SEP only licensing program, including announced rates for 5 gs Release 15, facilitates the effort to conclude agreements and extensions in 2018 early 2019, providing for a seamless transition for the launch of 5 gs devices in 2019. Longer term, we believe this SEP only licensing program enhances the stability of QTL with extended contract terms that incorporate 5 gs pricing.
While execution of new agreements with existing handset licensees will create some near term revenue impact in QTL, they are consistent with our assumptions that we set for fiscal year 2019 EPS targets. Looking ahead, we are focused on executing on our strategy to deliver our fiscal 2019 earnings per share targets. We have identified a number of specific strategic areas as part of that plan and we will be updating you on our ongoing progress. First, we continue to focus on closing the NXP transaction. As we announced last week, at the request of Ofcom, we withdrew and refiled our application for Chinese regulatory approval.
We also agreed with NXP to extend the purchase agreement to July 25. While we continue to work closely with the Chinese regulators and remain optimistic about getting the necessary regulatory approvals there, it is clear that the geopolitical environment and trade actions are having its impact
Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience.
On the timelines we previously discussed and should converge toward multiple important milestones later this year. In addition, our breach of contract case against Apple's contract manufacturers and our claim against Apple for interfering with those contracts is on schedule to be prepared for trial setting by the end of the year. As the legal cases progress, we continue to our direct engagement with Apple and prefer to ultimately reach a negotiated settlement. Regarding our other dispute with a large licensee, we are in discussions toward a negotiated resolution and those discussions are very active. 3rd, we are progressing on our previously announced plans to reduce our spending by $1,000,000,000 We have made good progress on this commitment, taking steps to reduce spending across SG and A and R and D.
We are also focused on spending reductions in our non core product areas. 4th, we are executing our product roadmap and continue to make the investments necessary to maintain our technology and product compute. In closing, we are pleased to report strong results this quarter, and we remain 100% focused on delivering on our fiscal 2019 commitments and creating debt value for stockholders. We look forward to continuing to update you on our progress. I now turn the call over to George.
Thank you, Steve, and good afternoon, everyone. Our fiscal second quarter results were above the midpoint of our guidance, with revenues of $5,300,000,000 and non GAAP earnings per share of $0.80 per share, dollars 0.10 above the midpoint of our guidance. The non GAAP EPS outperformance in the quarter was driven by higher MSM shipments, improved gross margins in QCT, a more favorable tax rate from lower domestic versus foreign earnings, and lower operating expenses. In QCT, MSM chip shipments were $187,000,000 towards the high end of our guidance range. QCT revenues were $3,900,000,000 in line with expectations.
As we expected, QCT results this quarter reflected the normal seasonal effects of lower demand typical in the calendar Q1, a reduction in orders sequentially from a large modem customer, and reduced demand from customers in China as they reduced inventory balances. As a result, we saw handset inventory balances in China come down in line with long term trends. While we remain conservative on demand for the second half of the year, we think the lower level of inventory is a very healthy development. QCT's earnings before tax was up 28% year over year, the 8th consecutive quarter of year over year growth. QCT EBT margin was 16%, above the high end of our guidance range, reflecting stronger than expected gross margins in mobile, primarily on product cost benefits, including some discrete benefits related to conclusion of negotiations with a supplier.
QTL fiscal 2nd quarter revenues were $1,260,000,000 slightly above the midpoint of guidance and included a modestly higher amount of out of period catch up than we anticipated, offset by lower than expected 3 gs, 4 gs units reported by licensees for the December quarter, particularly in the emerging regions. Note that these results exclude royalty revenues on Apple's products and the other licensee in dispute. It is also worth noting that in the December quarter, we continued to see strong year over year trends in global 3 gs, 4 gs handset ASPs across various price levels. We are seeing significantly higher run rate spending this year driven by litigation matters related to Apple and the FTC. In the 2nd fiscal quarter, we spent approximately $125,000,000 on these cases and expect that to ramp further in Q3.
Spending is somewhat more heavily weighted in the second half of our fiscal year, in line with broad based discovery activities and the timing of IP cases globally. We will provide information on our OpEx, both with and without excess litigation, so that the underlying cost structure changes are more visible. QTL earnings before tax was $850,000,000 or 67% of revenues, above the midpoint of expectations, or 78% if you adjust for extraordinary litigation expense. For Qualcomm overall, non GAAP combined R and D and SG and A expenses decreased approximately 2% sequentially or down 4% if you adjust extraordinary litigation expense. We began implementing our $1,000,000,000 cost plan that will accelerate in the latter part of the year.
In Q2, we booked restructuring and related charges under the cost plan of $310,000,000 or $0.18 per share. These items were excluded from non GAAP results. It is important to note that these initiatives will not impact our strong investment in 5 gs and our commitment to grow in mobile, RFFE, IoT, automotive, networking and mobile compute. Our non GAAP effective tax rate during the fiscal second quarter was 4%, favorable relative to our prior guidance due to the catch up associated with a lower estimated annual effective tax rate on lower domestic versus foreign earnings mix. We ended the quarter with cash outstanding debt.
Turning to our financial guidance for the fiscal Q3, we estimate revenues to be in the range of approximately $4,800,000,000 to 5 $600,000,000 and non GAAP earnings per share to be in the range of approximately $0.65 to $0.75 per share. Our guidance incorporates a relatively balanced mix of positive and negative factors in the quarter, with tax benefits related to potential restructuring opportunities under tax reform offsetting the impacts of initial planned changes in our licensing program, higher litigation costs in the quarter and approximately $0.03 of expected ZTE order effects across the company. In QTL, we are expecting QTL fiscal 3rd quarter revenues of approximately $950,000,000 at the midpoint, down sequentially approximately $300,000,000 This outlook reflects 3 primary issues. First, about half of the sequential decline reflects the combined impact of a seasonally low quarter, along with generally weak industry conditions, along with approximately $40,000,000 in higher one time catch up payments in Q2 relative to our outlook for Q3. 2nd, we have begun to recognize this quarter the impact related to the recent amendments to our Samsung licensing agreement, including the effects of the expanded cross license agreement.
And third, we are seeing the initial run rate impact of the licensing SCP only framework, including 5 gs that Steve described earlier. Slightly less than half of the sequential impact on revenue is from the changes to the Samsung agreement and other licensing program terms. I should note that we have also implemented a voluntary revised cap in which the maximum net selling price of a handset on which the royalty is based will be capped at $400 per device, down from $500 per device. This will be broadly implemented in fiscal Q4 and we do not expect a material impact overall. We expect QTL EBT margin to be approximately 50% to 54% in the fiscal third quarter, down sequentially at the midpoint on lower revenues and increased litigation costs.
Without the extraordinary litigation expenses, QTL EBT margin expectations would be approximately 65% to 69%. Turning to QCT, we anticipate MSM shipments of approximately 185,000,000 to 205,000,000 units during the June quarter, higher sequentially at the midpoint on increased demand in China as inventory improved in the last 2 months of the fiscal 2nd quarter. We expect QCT's fiscal be approximately 13% to 15%, down sequentially primarily due to seasonally weaker product mix, including lower thin modem shipments and the absence of the discrete product cost benefit in Q2. We expect fiscal 3rd quarter non GAAP combined R and D and SG and A expenses will be roughly flat to up approximately 2% sequentially, primarily due to increased litigation expenses as we continue to defend our business model, somewhat mitigated by the impacts of our cost efforts. Excluding the elevated litigation costs, we estimate that our non GAAP combined R and D and SG and A expenses would otherwise be down approximately 1%.
Non GAAP interest expense, net of investment income, in the fiscal Q3 is expected to be roughly flat sequentially. Turning to tax matters. As a result of the recent tax legislation enacted in the U. S, we anticipate implementing certain restructuring options that will reduce our current year tax rate and have been factored into our fiscal Q3 guidance. As a result, we expect our non GAAP effective tax rate for the fiscal third quarter to be a benefit of approximately 20% to 25%, which we expect to provide a benefit to non GAAP EPS of $0.10 to $0.15 per share.
Regarding our 3 gs, 4 gs device shipment forecast, we are updating our unit estimates for calendar year global device shipments for both 2017 2018. For calendar year 2017, we now estimate approximately 1,755,000,000 global 3 gs4 gs devices shipped, up approximately 3% year over year at the low end of our prior estimates, primarily due to lengthening replacement rates in North America and China in the 4th calendar quarter. For calendar year 2018, we now estimate approximately 1,800,000,000 to 1,900,000,000 global 3 gs4 gs device shipments, or growth of approximately 5% year over year. This is lower from our prior estimate by 50,000,000 units at the midpoint, reflecting a lower 2017 base as well as reduced demand expected in China. Within this population, handset growth is expected to be approximately 3% year over year.
With respect to global 3 gsfour gs device sales for fiscal 2018, we now expect growth of approximately 10% year over year at the midpoint, as the reduction in our estimate of global 3 gs4 gs units in the year expected to be more than offset by strength in ASPs. Within this population, 3gs4gs global handset sales are expected to grow a similar percentage in fiscal 2018, driven primarily by strength in handset ASPs year over year. I will provide some additional color on our committed 2019 targets. As I noted earlier, we are making good progress on the $1,000,000,000 cost plan. This is a critical element of our $5.25 non GAAP EPS target, along with closing NXP or, alternatively, moving ahead with our option to repurchase stock.
For our licensing business, the 5 gs royalty rates, the reduced NSP cap, and the effects of the amended long term Samsung license agreement were all factored into our fiscal 2019 guidance. Taking into consideration these items and the expectation of continued growth in global 3 gs, 4 gs handset sales in fiscal 2019, we expect QTL quarterly revenues in the near and medium term to be in the range of $1,000,000,000 to $1,100,000,000 on average, excluding the royalties from Apple's products and the other licensee in dispute. Of course, the amount in any one quarter will be subject to seasonal fluctuations, OEM mix, out of period catch up amounts, and continued progress on the licensing and compliance front, among other factors. In QCT, we expect that fiscal 2019 performance will benefit from continued handset growth, particularly in emerging regions continued strength in our China share in the mid, high and premium tiers and growth in adjacent opportunities, including automotive, IoT, networking and mobile compute. That concludes my comments.
I will now turn the call back to John.
Thank you, George. Operator, we are ready for questions.
Our first question is from Tal Liani with Bank of America Merrill Lynch. Please go ahead with your question.
Sorry, I was on mute. Can you hear me?
Hello? Yes, we can hear you, Tal. Go ahead.
All good.
Can you repeat the reasons for the weak QTL guidance for next quarter? And how does it change going forward, especially what happens with Release 15 licensing? What I didn't understand is so far and maybe it's just my understanding. So far, your license covered all the patents and clients had to pay regardless of what patent you're using, does it mean that LTE licensing is separate? And is the royalty rate for LTE licensing different lower than the general licensing rate?
So what I'll do, Tal, this is George. I'll cover the questions on the bridge and then maybe Alex can talk a little bit about the structure of the SEP only program. So if you look at the sequential bridge, the prime we said that it's down about $300,000,000 Some of that is the normal seasonal drop off that we get because this remember we're reporting on a lag. So this is calendar Q1 activities. This is where we saw the significant pullback in demand across for devices in general.
So we have a weak market. We also have the pullback from a that's just natural with Q1. The other piece is we also had some higher one time amounts in Q2 than we're reporting in Q3. So that's about a little more than half of the $300,000,000 The other half is the changes that we talked about reflecting both the amendment to the Samsung agreement, which among other things includes the cross license rights that are quite extensive and the changes that we anticipate to see in the quarter to contracts for licensees that will take an SEP only license, which has a number of favorable characteristics that I'm sure Alex will cover.
So this is Alex. Picking up where George left off, just a little bit of context I think is helpful. Since 2015, we established a very successful licensing program in China for SEP licenses for 3 gs and 4 gs through Release 11 at a set of rates that came out of the resolution of the China matter. And what we've done, what we announced in November of 2017 is that we are extending that set of rates to a worldwide program for SEP only licensing for 3 gs and 4 gs through the remaining releases, also to include the first release of 5 gs where the standard, the specification was finalized in December of last year. That is our SEP only licensing program going forward.
Of course, we still have a portfolio wide licensing program at the standard rate of 5%. But we expect, on a go forward basis, that there will be a number of licensees who are interested in extensions and renewals, who may want to have SEP only license agreements. And of course, we'll negotiate those sorts of agreements and we expect that there will be a few of those agreements being reached even in this quarter. So the program is rooted in a very successful program that came out of China with over 120 license agreements. We expect this program to be successful and to facilitate a very good transition to 5 gs in the second half of twenty nineteen.
We expect there'll be a number of licensees who want to maintain portfolio wide agreements worldwide, but there will also be licensees who want to have SEP only agreements on a worldwide basis and that is, of course, something that we can accommodate on a case by case basis.
And I apologize if it sounds but would you mind to discuss what does it mean, SCP only?
No problem. Standard essential patents, so our standard essential patents that have been declared for 3 gs, 4 gs and the first 5 gs standard, those patents as distinguished from non essential patents, implementation patents, other patents that are relevant to other standards other than cellular standards. So when we refer to SEPs, we're referring generally to cellular standard essential patents for the technology generations that we all understand to be 3, 4 and 5 gs.
Our next question is from Chris Caso with Raymond James. Please go ahead with your question.
Yes, thank you. Just a follow-up on the previous discussion a little bit. With regard to the fiscal 2019 guidance, you talked about that this new licensing scheme was included in that. Could you walk us through a bit of how you get to that fiscal 'nineteen EPS guidance? What are the puts and takes there?
And how this new licensing scheme falls into that as well?
Yes. This is George, Chris. The $5.25 base, as we said, included approximately $1.50 from NXP accretion. It included the benefit of $1,000,000,000 in the year of OpEx reduction. And then it had the underlying run rate of the business absent the Apple license payments, new Apple business that we presume would be held up as part of the process of the litigation.
And so we said to help people model, we indicated in my script that for modeling the levels of licensing revenue excluding Apple and the other licensee, you can plan on average between $1,000,000,000 $1,100,000,000 per quarter. Obviously, that can fluctuate a little bit depending on some of the one time items that show up or the strength of the market overall changing. We think that's a reasonable number. The balance of that then is going to be driven by fundamentally the performance of the QCT mobile business and the adjacent business as part of that. And I think the $525,000,000 is consistent with the basic position we have in QCT today and continued growth in the adjacencies.
Our next question is from the line of Mike Walkley with Canaccord Genuity. Please go ahead with your question.
Great. Thank you. Just for the $525,000,000 in guidance for that out year, can you walk us through maybe what you expect for QCT in terms of margin targets that you expect to hit as the cost reductions come out of the business model implied in that guidance? And then also for the $525,000,000 what is management's plans? Should China continue to block NXP?
When do you finally just pull the plug? And is the buyback really the best thing to do with that cash to get to that $525,000,000 Thank you.
Yes, we haven't put out margin targets for QCT. Obviously, we've said that we expect to get to our long term margin target of greater than 20% over time. And certainly, you would expect to see that as part of the kind of recovery case that the $675,000,000 to $750,000,000 envisions where we start to get some product business back that was taken away and also probably additional RF front end business as part of that. So I think overall, the 525 is really just a continuation for QCT of their current position strength in China, strength in the premium tier, which has been a positive relative to what we've seen with the fall off in the thin modem business, and then growth in the adjacents.
Mike, this is Steve. Maybe on your question related to NXP, there was probably a point said was that we continue to work closely with China. The environment is obviously quite difficult from a The environment is obviously quite difficult from a geopolitical point of view, at least right now. However, we expect to ultimately receive approval. And I just remind folks that we have 8 of 9 jurisdictions that have already ruled on it.
So, although we remain committed to it and we think it's going to get done. However, if it does not get done, as you mentioned, we think we have the ability to move very rapidly on a buyback as we communicated earlier in the January timeframe. I'll just remind everyone that we did a 90 day extension to the merger agreement and we're going to work very hard to get that done. And if it doesn't get done, we're going to move on to another approach. So hopefully that answers the question.
Our next question is from the line of Amit Daryani with RBC Capital Markets. Please go ahead with your question.
Thanks a lot for taking my question guys. I guess Steve, maybe just to follow-up on the line you had earlier. Is July 25 sort of the drop dead deadline where if this is not done by then, you will move to Plan B, I. E. Buybacks?
Or would you just extend the merger agreement further? And then any sense on what the MofCOM issues are, what remedies they want about and beyond what you've agreed to in other jurisdictions?
Well, I'd say, Amit, with respect to the agreement, yes, we have just extended it by 90 days. So I think both companies are moving toward that timeline and we certainly have other ability and avenues to drive value. And that's sort of how we're thinking about the issue. Of course, things can always change as we move through the process, but that's the way that it's set up right now. With respect to to Mofcom and Remedies, our evaluation of the environment is such that really, I think the issue is probably more related to the higher level discussions between the countries as opposed to any individual issue related to MasTOM.
Of course, we continue to work with the regulators and work through any issues that pop up. But I think the environmental issues between the countries are probably more the situation today than anything else. But obviously, we work closely with the regulator.
Our next question is from the line of Tim Long with BMO Capital Markets. Please go ahead with your question.
Thank you. Just wanted to close out one more on the QTL part and then a question on the QCT piece. So Alex, I just want to make sure I understand this. So the impact of the SEP only and 5 gs licenses, that's hitting revenues. Is that because those deals will have a lower rate structure?
Or is it because there's some kind of one time impact of non payment as those deals are being negotiated? And then on the QCT side, units are holding up very well. I think you mentioned some ZTE hit in the quarter. You mentioned inventory reductions, but it's a pretty weak market in China. And I guess we got a new set of iPhones coming out and you guys have intimated that you potentially could do a little bit worse there or you're at least planning that you might not have as much share in that win.
So could you just maybe is this predominantly market share that you think is keeping your numbers better, I'd say, than the end market for the last few quarters? That'd be helpful. Thank you.
Hey, Tim, this is George. Maybe I'll take the point on what is the impact that we're seeing from these changes. Again, what we said is a little less than half of the $300,000,000 is related to the what we're I would call the run rate changes associated with the amendments to the Samsung agreement that we announced last quarter and also the SEP only expected impacts that we expect to be in the run rate this quarter. So they it would be effectively a lower effective rate for those licensees than if they'd had a portfolio license prior to that time. This is Alex.
So I think it's important to note that, again, some licensees may choose to have an SEP only agreement, including the 5 gs IP rights going forward, and they may choose to expand on that basis. But others will prefer a portfolio wide agreement for obvious reasons. They enjoy the benefits of the entire portfolio and protected under the entire portfolio. And these are going to be determined on a case by case basis as we get into these negotiations, but we do believe that some licensees will choose SEP only on a worldwide basis.
Hey, Tim, let me add one more thing, I think, before Cristiano comes in on some of the demand environment for QCT. As I look at Q3, one of the difficult stories is because of we're seeing some this is the quarter where QCT is seeing some of the weakness in reports that we talked about because they report a month lag. So that what those are the weakness that QCT saw in Q2, but is seeing recovery in Q3. But we continue to see an underlying growth in the licensing market when you look at units and ASPs, if we just looked back to Q3 2017 and we looked at the market as for the licensees that are paying today and we look at today, the market has grown to the point where essentially the cost of these changes in the program on a run rate basis is being covered by the growth in the market because of the strength of both units and in particular ASPs. Christiano, do you want to?
Yes. Hi, Tim. So on QCT, it's actually a simple story. Q2 has been a great quarter for us, particularly if you look compared to year over year. I think we saw continued strength in our product portfolio.
As we look forward, and that's I think George said that we chose to take a conservative approach. However, we do see that the inventory levels came down back to normal in China. So it's a story that we still we look at the units, we still think there is overall the drivers of our strength in China business continue. I think we see an improvement of mix. We see an improvement of handset ASPs.
We have some interesting transitions ahead of us such as China Mobile recently got a license for FDD. We have 5 gs coming in 2019. So I think the story is good. We're dealing with how we think about the overall industry is in the second half and we have seen a decline in Fin modems probably consistent with everybody else in the industry.
Our next question is from the line of Stacy Rasgon with Bernstein Research. Please go ahead with your question.
Guys, thanks for taking my questions. I just want to make sure I have this straight. So basically, you're folding 5 gs now into the licensing model and you're getting paid less for it and you're talking about it like it's a good thing. Why is this a good thing? Is this being proactive to halt the spread of other disputes or like what's the driving force behind doing this?
Stacy, this is Alex. We're including 5 gs in the SEP only licensing model. We're not getting paid less for it. I think the best way to think about this is building a foundation for long term stability in QTL. The current program that we've announced for SEPs that we announced back in November has tremendous consistency with the program that we successfully established in China coming out of the China investigation.
We actually now have over 150 SEP only licensees through the 3 gs and 4 gs program there. And in addition, with the announcement in November, ahead of the adoption of the first release of 5 gs, we have tremendous transparency for the program going forward. And so what we've done is we've purposely built the program to facilitate a transition to 5 gs in a way that's successful and enables us to bring on new licensees and extender agreements for longer terms. And so this creates tremendous stability. Now we do expect that a number of licensees will want to have portfolio wide licenses.
And so there's going to be a mix. But the effect of all of this has been considered in our FY 2019 numbers. So we've looked at this and purposely built this program for stability long term.
Our next question is from the line of James Faucette with Morgan Stanley. Please go ahead with your question.
Thank you very much. I wanted to, I guess, follow-up on that question or at least as it pertains to the unnamed licensee. I guess, with the new structure, how should we expect the impact to compliance and ability to assure compliance first ly? And secondly, I guess I'm wondering a little bit, why anybody would offer a portfolio wide license, especially when from the time that you introduced the standard essential patent licensing program in China, you had indicated that negotiations around non essential ID would be done separately, but I don't think we've really seen any movement there. So it seems like you're moving towards a standard essential patent only licensing program.
And I'm wondering how we should expect you to be able to collect on non essential IP and how this move may impact bringing the non complying unnamed licensee into compliance? Thank you.
So with respect to the unnamed licensee, having a consistent program that's widely adopted is a very good thing from a comp perspective. So, it actually creates an environment that enables us to essentially engage in the ongoing negotiations with that licensee from a position of strength, essentially saying that this is a widely adopted program. So, that unnamed licensee is an outlier. In terms of SEP only and the rest of the portfolio, there are a number of licensees that still have portfolio wide agreements and we'll continue with those portfolio wide agreements and we expect that to happen. As I said, it will be a mix.
The rest of the portfolio is still valuable. It's a very large portfolio, as you know, 130 patents and pending applications. 130,000 patents and pending applications. The value and strength of that portfolio, I think, is demonstrated in the assertions that we've had when we've had to have them, including against a company in China that signed up to a license. And the assertions that we're making now in our litigation were over 40 non essential excuse me, over 50 non essential patents are being asserted.
So the rest of the portfolio is still valuable and licensees will still want to have portfolio wide protection. In fact, we have many portfolio wide agreements that will continue. It will be a mix.
Our next question is from the line of Ross Seymore with Deutsche Bank. Please go ahead with your question.
Hi, guys. Thanks for letting me ask a question. Just one question and one follow-up. So I guess two questions here. Just to wrap up the QTL side of things, embedded in the $525,000,000 base and then the road towards $7,000,000 etcetera in your 2019 goal, do you believe that the implied royalty rate that we had before of roughly 2.9% will be higher or lower given all the moving parts that you've described in today's call?
And then the second question more for George specifically on the OpEx cuts and the $1,000,000,000 number. Can you talk a little bit about the linearity of that? When are we going to start to see some of those absolute dollars come out? And how important is that litigation that's currently elevated going back to some normalized level? How important is that in getting to the $1,000,000,000 annualized savings?
Thank you.
Yes. Hi, Ross. This is George. So on the implied royalty rate, obviously, there's a lot of moving parts when you have 2 major licensees, one of which is reporting, one of which is not reporting. So it's really not a very meaningful number, which is why we have stopped guiding total reported device sales and some of these other items.
We think the rates that are embedded in the SCP only licenses are fully consistent, as we said, in the run rate that we had factored into the FY 2019 numbers. As you remember, we actually announced the 5 gs program in last November. Also, they as a if you apply them to the volumes, these same standards to the volumes of the nonpaying licensees, you would very easily get to our $675,000,000 to $750,000,000 range. So I think that's a key point. And with respect to litigation normalization, the cost reduction program expects to take out $1,000,000,000 in the run rate without relying on a change in the litigation run rate of the company, I would describe that as a piece dividend that would flow through post the resolution of the litigation matters.
Our next question is from the line of rahmit shah with Nomura Equity. Please go ahead with your question.
Yes. Thank you, guys. I had two questions. 1, George, just the litigation costs rising a little bit in June. Should we assume this level for litigation for the foreseeable future?
That's the first question. The second question, I just wanted to ask about just the smartphone market overall and unit growth. You guys mentioned in your monologue that replacement rates are going out. When we saw this happen with PCs, unit growth actually went negative. And today, we're seeing weakness in smartphones that, for the most part seems fairly broad based.
And I guess my question is what makes you confident that this weakness we're seeing is just temporary and that the market overall can grow from here? Thank you.
So on the litigation pattern, we're in a period during this quarter, Q3, where we have very, very significant discovery processes and active preparation for multiple cases. So I would like to believe that this represents kind of a high watermark, but of course, it's very important that we get this right. So we're going to spend what we need to spend as we see necessary to protect our licensing program. But I would say the second half is going to be heavier in the fiscal year 2018 than the first half. But we're kind of at a level now where we're supporting a lot of activity on multiple fronts.
So I don't expect it to be significantly higher on a run rate basis, but it could be sustained at this level for a little period of time. In terms of the handset market and units, what you're really seeing is the impact of replacement rates has really slowed growth in the developed markets. You're getting a little bit of growth in Europe. But the emerging markets continue to be a positive source of growth. And in particular, in India, in Southeast Asia, in Middle East Africa, we're continuing to still see healthy mid to high well, you've seen double digit growth in India mid to high single digit growth in some of these other areas.
So I think that remains a positive. Also, we think in 2019, you're starting to see the first 5 gs phones come into the marketplace. And as you go in 2019 and into 2020, you could start to see a replacement cycle just really driven people wanting to take advantage of the capabilities that 5 gs brings.
Our next question is from the line of Timothy Arcuri with UBS. Please go ahead with your question.
Thank you, George. I actually had two questions. The first is, I'm wondering how you handicapped for the fiscal 2019 guidance, how you handicap the potential for the trade issues to broaden. Obviously, there's news now that Huawei is being looked at as well. So I'm wondering how you handicap that in your guidance, number 1.
And then number 2, the guidance for the June quarter, if I read your comments right, are you basically saying that the normalized earnings guidance if you assume that 8% tax rate that you had said previously would be like $0.50 Thanks.
Tim, so on the first, obviously the trade talks are current and it's very hard to forecast. Those were not part of our thinking. And we've seen, even in China, some pretty big swings in demand intra quarter. So it's there's always going to be market fluctuations, but we think the fundamentals, if we think about the licensing business, the fundamentals, particularly on ASPs are a real tailwind for that business going into 2019. We also like the growth that we're seeing in our adjacent businesses, and we like our position overall in China.
But we'll have to see. The trade issues are an intangible. We'll have to see how that plays out. In terms of the June quarter, what I would say is, if you back out simply the tax items, which to me are really fundamentally offsetting what is a weaker market, also clearly, ZTE is coming out of there. We have the absence of some one time items that were in our Q2 that are not in the Q3.
So I think it would be wrong to draw a line to $0.50 which is what I think your question was.
Our next question is from the line of Chris Danley with Citigroup. Please go ahead with your question.
Hey, thanks guys. Just a question on Plan B if NXP does not happen. Can you give us any color on what the potential size and timing of a buyback would be? And then if this does not go through, does this necessarily sort of end any M and A potential for you guys? Or would you look at doing something else?
So on Plan B, it would be a large, very large program. It would be in the $20,000,000,000 to $30,000,000,000 range. Obviously, at these prices, we think the stock price is quite attractive. We don't think M and A would necessarily be closed off to the company. We think these are pretty unusual circumstances that we're seeing today.
So we will continue to look at opportunities to add to the portfolio over time. We will generate the kind of cash flow that will allow us to consider other options down the road.
Our next question is from the line of Srini Pajjuri with Macquarie Securities. Please go ahead with your question.
Thank you. I just have a clarification, I guess. Alex, can you talk about where we are in the SEP only transition in terms of how long will it take? And then I guess the real question is you're guiding for 950,000,000 dollars in QTL revenue for Q2 or the next quarter. And then you also said that that run rate will come back to $1,000,000,000 to $1,100,000,000 So I'm just trying to understand what will drive that incremental growth?
So this is George. Maybe I'll take the second question first and then Alex can jump in. So remember that our Q3 is the very weak calendar Q1 quarter for QTL. So you're seeing some seasonal elements there. That being said, we believe, in addition to some of the other moving parts that I talked about, not to mention just the general the broader market weakness and the seasonal elements, the lower out of period, you factor all of those elements in and also we're continuing to see very strong ASPs and ASP growth in the marketplace, that all moves you towards the $1,000,000,000 to $1,100,000,000
number. And then with respect to the first part of the question, the chronology is that in November, when we announced the 5 gs program, the SEP program, including 5 gs Release 15, We're anticipating devices coming to market in second half of twenty nineteen. So we've got close to a 2 year window. And there are a number of agreements that will extend through this entire timeframe. Those agreements there are a number of agreements that will simply remain in place, but there are other agreements that will come up for extensions and renewals.
And so the timing of the announcement was to essentially provide transparency before the release, the specification was adopted, but also to facilitate a transition to negotiating these agreements, these extensions and renewals, during this current timeframe. And we expect that to happen with significant pace. So we do expect a number of agreements to be reached or renewals and extensions to be reached even in this quarter and in the following quarters, both on an SEP only basis, but also, on a portfolio wide basis.
Our next question is from the line of Brett Simpson with Arete Research. Please go ahead with your question.
Thanks very much. I have a question for Alex and a follow-up for Cristiano. Alex, I just wanted to talk about the non SEP part of the portfolio. So you said there was a transition where you'll be offering SEP only licenses. Can you talk about the non standard essential portfolio and how you plan to monetize the patents here from a licensing perspective?
What royalty rates do you think can be achieved here? And how many deals have you signed already for non SAP only deals thus far?
So the history of the licensing business is that most licensees have wanted full portfolio agreements. That's the most efficient and most cost efficient way to take a license to this portfolio. And so the commercialization of the non SAPs has always been in the context of full portfolio agreements. It is very rare that a company asks us for a separate license to non steps only. So typically, a company will want a full portfolio agreement if they want full protection.
Again, that has happened historically the majority of the time. We don't have a separate distinct program at this point in time for nonceps. Again, our primary commercial objective is to license the full portfolio. But we do have a number of aspects to the portfolio, for example, in multimedia and position location and in other areas where if we decide to do it, we can license them on a disaggregated basis. But that's really all that I can say about that at this point.
And so you have not licensed any company who have taken SEP only. There's a whole raft of nonessential patents that you have not licensed to these companies that are taking SEP only deals. Is there a plan to monetize that out with doing platform deals, getting trading up to a platform deal, so to speak?
Again, I think I'll go back to what I said before. I apologize if it wasn't clear. But the licensees have typically wanted overwhelmingly wanted full portfolio agreements. SAP only licensing has been primarily a function of the program that we laid out in China and very successfully established in China since 2015. And we do expect that on a go forward basis, even though we've offered CEP only in the past, on a go forward basis, there will be more companies that want SEP only to include 5 gs.
But the primary commercialization of the rest of the portfolio will be in the context of full portfolio licensing.
This ends our allotted time for questions and answers. Mr. Mollenkopf, do you have anything further to add before adjourning the call?
Yes. Thank you. I just want to thank everyone for joining us on the call today. Also want to thank the employees for their hard work. And I just want to say that the management team and the company will continue to focus on executing toward our fiscal year 'nineteen targets and we look forward to updating you next quarter on our progress.
Thank you everyone.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.