The world is filled with dots. Let's connect to fear. Let's connect the guy who stuck a fork in the gaslight industry, to the dude who brought music to the masses, to the woman who, 70 years ago, taught computers how to understand English and still had time to be an admiral in the Navy. How gangster is that? That's right.
We just said gangster about an inventor. Because the real bad boys and girls of this world aren't bikers or sharp tongue supervillains or renegades who play by their own rules. They're everyone who jams a thumb in the eye of the status quo and goes out and wizards up to something new. Every act of invention, by definition, is an act of insurrection. Necessity may be invention's baby mama, but rebellion is its restless dad.
The world is filled with dots. Connecting them is how everything gets invented, how this one thing we all share keeps getting reinvented. So buckle your seatbelts, because Qualcomm is leading the world to 5 gs, and 5 gs is going to make those dots multiply exponentially. And what in the name of Leonardo is going to happen next? You tell us.
You're the genius, you're the insurgent, insubordinate, insurrectionary, inventor and your time is at hand. Hell, a whole huge invention revolution is at hand. You are not about to shine, boys and girls. You're about to monster this moment. Because the company that changed everything about the phone is now making the things that are going to change everything about everything else.
Also, you can shock and scare and dare this world into becoming a finer and more excellent place. Hey, Thor, your hammer is
Ladies and gentlemen, please welcome Qualcomm's Executive Chairman, Paul Jacobs.
Good morning, everyone. While that video is about an insurrection, we're looking for no insurrection today, at least during this meeting. Good morning, everyone. I'm Paul Jacobs, Chairman of Directors of Qualcomm Incorporated. Welcome to Qualcomm's 2017 Annual Meeting of Stockholders.
Before I call the meeting to order, I would like to introduce the other members of our Board of Directors who are with us this morning. Barbara Alexander, Geoffrey Henderson, Thomas Horton, Ann Livermore, Harish Mamwani, Mark McLaughlin, Steve Mollenkopf, Ambassador Clark Grant Jr, Doctor. Francisco Ross and Anthony Vincicara. Also here is Co Founder and Director Emeritus, Adelia Kaufman. I also want to acknowledge Doctor.
Irwin Jacobs, who is in attendance today. And somehow it's not in my script, but I want to acknowledge my mother as well, Joan Jacobs. Scored those points. I would now like to introduce our executives who are present today. Steve Mollenkopf, Chief Executive Officer Derek Aberwey, President Cristiano Amon, Executive Vice President, Qualcomm Technologies Inc, or QTI and President of QCT.
You have a long title. George Davis, Executive Vice President and Chief Financial Officer Matt Grob, Executive Vice President, QTI and Chief Technology Officer Brian Modoff, Executive Vice President, Strategy and Mergers and Acquisitions Alex Rogers, Executive Vice President and President, QTL Don Rosenberg, Executive Vice President, General Counsel and Corporate Secretary Michelle Sterling, Executive Vice President, Human Resources and Doctor. James Thompson, Executive Vice President, Engineering QTI. Also present are Jay Raines of the law firm DLA Piper, the company's outside corporate legal counsel and Michael Brammeier of the accounting firm of PricewaterhouseCoopers LLP, the company's independent public accountants. Mr.
Brandmeier will be available to answer any questions concerning PricewaterhouseCoopers and its services to the company. Qualcomm's 2017 Annual Meeting of Stockholders will now come to order. I will act as Chairman of this meeting and Don Rosenberg will act as Secretary. Will the Secretary please report with respect to the stockholders list and the distribution of the notice of the meeting?
Yes, Mr. Chairman. I have at this meeting a complete list of the stockholders of record of the company's common stock on January 9, 2017, the record date for this meeting. I also have with me an affidavit certifying that on January 19, 2017, a notice of the 2017 Annual Meeting of Stockholders was distributed to stockholders of record as of the close of business on the record date. The affidavit of distribution will be attached to the minutes of this meeting.
Stockholders who have voted by mail or by proxy need not cast ballots today unless they wish to change their vote. Prior to opening the polls for voting, we would like to distribute ballots to anyone who did not pick 1 up at the registration table and would like 1. Please note that any shares held with your stockbroker cannot be voted at this meeting without a legal proxy. A legal proxy is an authorization issued in your name from your broker. Please raise your hand if you would like a ballot.
At this time, I appoint Mr. Peter Daskovich to act as Inspector of Election at this meeting. Mr. Descovich has taken and subscribed to the customary oath of office to execute his duties with strict impartiality. This oath will be attached to the minutes of this meeting.
Mr. Daskovich's function is to decide upon the qualification of voters, accept their votes and when balloting is complete to tally the final votes. Will the Secretary please report with respect to the existence of a quorum?
Yes, Mr. Chairman. I have been informed by the Inspector of Election that proxies have been received for approximately 1,300,000,000 shares of the approximately 1,500,000,000 shares of the company's common stock outstanding on the record date, which represents approximately 90% of such outstanding shares. This constitutes a quorum for the transaction of business. Since the requirements for calling this meeting have been duly observed and
there are represented here more than the necessary number of shares of the outstanding common stock of the company to constitute a quorum, I hereby declare this meeting to be duly constituted for the transaction of all business. The formal business of this meeting is listed in the notice of the annual meeting and proxy statement that was provided to stockholders. There are several proposals to be considered by stockholders at this meeting. We'll now place each of the proposals before the meeting. And following the formal business of the meeting, we will adjourn and Steve Mollenkopf will make a few remarks on company developments over the past year and then we'll take questions.
The time is 9:39 a. M. And the polls are now open for voting on all matters to be presented. The meeting will now proceed to first item of business, the election of 11 directors to serve until next year's Annual Meeting of Stockholders. The Board has nominated the following persons for election as directors of the company: Barbara Alexander, Geoffrey Henderson, Thomas Horton, Doctor.
Paul Jacobs, Anne Livermore, Harish Mawani, Mark McLaughlin, Steve Mollenkopf, Clark Grant Jr, Doctor. Francisco Ross and Anthony Vincaquerra. Those nominations need no second. Since no other director nominations were received prior to the deadline specified in our bylaws and stated in last year's proxy materials, the nominations are closed. Is there any discussion?
The next item of business is a ratification of the selection of Pricewaterhouse Coopers LLP as the company's independent public accountants for our fiscal year ending September 24, 2017. Is there any discussion? The next item of business is the advisory vote approval of the company's executive compensation. Is there any discussion? Pursuant to the company's bylaws, only business that has been properly brought before this meeting can be conducted at this meeting.
Stockholders who wish to bring any matter of business before this meeting must give company timely notice, be a stockholder of the company, appear in person or through a representative and otherwise comply with the requirements of the company's bylaws and the federal securities laws. The company received a notice from James McRitchie that he intended to submit a proposal requesting that the Board of Directors amend the proxy access provision in our bylaws as set forth in our proxy statement. I understand that Ms. Jill Harton has been designated to present the stockholder proposal. Ms.
Harton, if you are present, please go to the nearest microphone. We will recognize you for a period of 2 minutes to present the proposal.
Good morning. Thank you. Shareholders I'm sorry, Shareholder Proxy Access Amendment sponsored by James McRitchie of Elk Grove, California. Shareholders ask our Board of Directors to adopt and present for shareholder approval an enhancement amendment for our company's current shareholder proxy access. Shareholder proxy access enables shareholders to put their own director candidates on our ballot to see if they can get more votes than management's director candidates.
A competitive election is good for everyone. 2 enhancement items are specified in the full text of this proposal and the annual meeting proxy. The most important point is to lift the current limitation of 20 shareholder participants in making use of shareholder proxy access. It is unnecessarily difficult to marshal together from only 20 shareholders the backing of 3% of $80,000,000,000 of company stock that in turn must be held non stop for 3 full years. Please vote yes for the shareholder proxy access amendments proposal 4.
Thank you.
Thank you. The stockholder proposal requesting that the Board of Directors amend the proxy access provision in our bylaws consistent with the proposal is now before the meeting. The Board of Directors recommends a vote against this proposal for the reasons set forth in the proxy statement. Is there any discussion? That concludes the proposals for today's meeting.
If you wish to vote by ballot on these matters, please hold up your ballot so that an usher may collect it. We're ready to continue. Have all ballots been executed and delivered?
Yes, Mr. Chairman.
The time is now 9:44 a. M, and I declare the polls closed. Has the Inspector of Election completed the tally? Yes, Mr. Chairman.
Please report on the results of the voting.
Mr. Chairman, based on the proxies and ballots received, I can report that all nominees for director have been elected. The selection of PricewaterhouseCoopers LLP as the company's independent public accountants for the fiscal year ending September 24, 2017 was ratified. The advisory vote for approval of the company's executive compensation passed. The stockholder proposal did not pass.
The full voting reports results will be published on our website and reported within 4 business days on Form 8 ks, which will be filed with the Securities and Exchange Commission. This concludes the formal business of our meeting. Is there a motion to adjourn the meeting? Is there a second? It has been moved and seconded that this meeting be adjourned.
Hearing no objection, this meeting is adjourned. On behalf of Qualcomm's Board and Executive Committee, I'd like thank Ray Didimore, who is concluding his service on the Board at this meeting for his leadership, expertise and strategic guidance that he has provided over the last 14 years. Without a question, we're a better company as a result of his dedication to Qualcomm and his service to our stockholders. We'd like to acknowledge him by making a donation in his honor to the endowment of a scholarship fund at the San Diego State University Lambda School of Accounting, a contribution consistent with Qualcomm's philosophy of supporting global educational initiatives. I would now like to turn the meeting over to Steve Mollenkopf for the business update and overview.
Thank you. Well, good morning, everyone. So I'll spend a short period of time to go through a little bit of a business update. There's been a lot going on. I'm sure you'll have some questions, and we'll get to that as well.
So before I begin, let me just remind you, I may make forward looking statements and just refer you to our SEC filings on our website for reconciliation and additional information about the risks. So if you look at 2016, I know it may seem like it was a long time ago, but it was a short period ago. It was actually a very important year for the company. We executed really on our strategy to reposition the company to leverage the strength of mobile but also to expand into new markets at the time when the mobile road map is very much becoming more relevant in adjacent industries. And we did that while delivering, we think, strong results for the business, about $7,500,000,000 $7,400,000,000 in operating cash flows and $3.81 a share.
We also importantly made important progress in our licensing business in China. We ended the year, I think, with a position I think a lot of people didn't think we were going to be in a couple of years ago, and I think it's a strong testament to the hard work of the team to get that in position. We're quite proud of those results. In particular, if you look at both big businesses in the licensing business, a very substantial business with $7,700,000,000 in revenues, building off of a tremendously large and continuing to grow base of handset sales over $260,000,000,000 in reported device sales. Semiconductor business reported $15,400,000,000 in revenues and $842,000,000 MSM chip shipments, so a strong year.
More importantly, I think both of those businesses ended the year in a stronger position than they began with good momentum moving into 2017. Also occurring in 2016 was a real repositioning, as I said, of the cost structure of the business to really do 2 things. 1 was to make it make the business more able to generate stable cash flows in the mobile segment, but also allow us to continue to invest for 5 gs, a number of growth opportunities, which I'll talk through. And we continue to also improve and enhance the overall governance of the business as well, and we're happy to have so many representatives of that with us here in the audience. In addition, since the end of the fiscal year, we obviously have had a number of items related to our legal and or related to legal and regulatory.
I'm sure there'll be a lot of questions in the shareholder piece. But let me just give a perspective here on this. I've been in the company for 22 years. The company is, as you know, is 30 years. We've been very happy to have a number of people who have been here the entire time.
And the perspective, I think, is important for those of us who have been around for a long time. First of all, the technologies that we work on, the technologies that we invent are only more important today than they were 10 years ago than they were 20 years ago. We continue to work on more relevant technologies and more relevant to new industries, which we think is the key component of us being able to continue to grow the business. The second one is from time to time, we are challenged in terms of our business model, and we always take a long term perspective in making sure that we're doing the right thing for the business, not just next quarter, but out in time. And I think sometimes that can come in conflict with the near term, but I will tell you that I think we have confidence that we can get through these issues.
And I think it's important also to think about those issues really the way they are, which is that they're commercial disputes over the price of IP. And that IP is very important to not only Industry of Mobile but also a number of new industries, and it's important for us to make sure that we can monetize that IP. I'm sure we'll have other perspectives in the question and answer, but I thought I'd provide that quick perspective now. Also, I'm sure you're looking for some perspective on how we view Apple and the and our customer relationship. It's very clear.
We continue to view Apple as a very important customer. We're going to continue to be a great supplier. We think that our basket of technologies and our basket of products are even more important to them. We expect and we hope that we will be a strong strategic partner for them for many years to come as we work through this issue.
So let
me talk a little
bit about our strategy. I mentioned it very briefly. So if you look at the company, we have this tremendous ability to deliver technology at scale. The first place that we're doing that is in the area of mobile. So if you look at our Snapdragon products, you look at the innovation that we share with the industry through the standards bodies, you look at our connectivity products, you look at the number of technologies that we can put into 1 chip, it's a tremendous capability that the company has.
And we're now structured in a place where we think we can deliver much more stable and predictable cash flows in that mobile business based on the work that we've done in the last couple of years. But we think that road map, the road map of mobile is very important to allow us to extend our business into a number of new opportunities that are growing alongside the mobile business. So if you look at the automobile, you look at the Internet of Things, you look at the security at the edge of the Internet, these are areas that require the scale complexity and the ability to deliver technology in a way that we think we're well positioned to do. And we think those opportunities are not just small opportunities. They actually grow the addressable market of the company by a significant amount.
So our challenge and what the strategy is, is how do we continue to participate in the mobile business but then allow us to deliver new products and enable new partners in new industries at the time when they are being disrupted by being connected to the Internet. It's a great opportunity. We think we're one of the few companies in the world that has both the scale, the operational expertise and the opportunity in front of it based on the portfolio of technologies that are in house. I think it's a very exciting time actually to be part of Qualcomm.
We want to be able
to do that while also delivering shareholder value. And it's a combination of top line, bottom line. And I think something that we talked through today, which is our commitment to capital returns. So today, we were pleased to increase our dividend by 7.5%. We made some commitments at the time when we announced the acquisition of NXP about how our capital structure and our capital commitments are something that we're very committed to doing.
Hopefully, you see evidence of that, and hopefully, you're welcoming that move. So we're pleased to be able to provide that today. We also expect our combined cash flow from the NXP business coming into Qualcomm as being something that also we have a good amount of confidence in, and hopefully, you see that in our capital structure. Speaking of our capital structure, if you look at the last since 2003, we've delivered back to shareholders over about $55,000,000,000 about $20,000,000,000 in dividends and the rest in share repurchases. And it's a big component of the capital structure, as you know.
Let me talk a little bit sustainability. I think yesterday, we delivered our sustainability report and goals. We think that it's important not only for our business, but also for the shareholders that we do a number of things. One is the way in the products that we work on, the way in which we design the products, the supply chains that we work in, our ability to attract and encourage a wide range of people and a diverse group of folks to come into the company is very important not only to us on the business side, but we also think it's good for the shareholder base as well. I encourage you to look at that report.
There are a number of goals that we have put in place for ourselves over the next 4 years that hopefully, you can see that well on the website. So one of the things I think we're most proud of is our work to encourage really the next crop of inventors to come into the company, and I'm going to show you a quick video that hopefully explains that.
So I'm hoping that you guys go through the experience of realizing what engineering can enable you to do.
Wow. There's so many things. All right. Find an area to take a seat. It's really inspiring grade.
I am at the Qualcomm Thinkabit Lab. I felt free to make whatever I want.
I got to invent a machine. Can I help you? Can I help you? My name is Mark Granados. I'm in 7th grade.
So imagine engineering is just another set of tools to create whatever it is in your imagination.
There are possibilities out there that I don't even know about yet.
Okay. Can can we try the small scale? We did it. I'd like to be either a mathematician or an engineer. My name is Cariana Clawson.
I'm an 8th grader. If something doesn't work and you can't figure out what it is, you have to keep trying and you have to keep going. I'm learning about robotics, how to code, how to program an Arduino circuit.
There are so many jobs we don't know about yet or like we may want to discover and we're still trying to figure them
out. Anything, anything is possible. If you just let your imagination flow, my future in technology, I feel will be very bright. I know that if we go into that world with the tools that we need, then it won't be a problem at all to fix those problems to create the technology of the future. And it will be a great world that we live in.
All right.
So that's something we're very proud of. I think keeping a robust pipeline of talent into the company is important thing. Also, it's great for us to be able to share, I think, the technology that we work on, and it's really the joy of working on that technology with many people. So we're very proud to be able to do that. So let's talk a little bit about our core business, what's going on in the core business of mobile.
So the first thing I'd talk about is our new product, the Snapdragon 835. This is a tremendous product. If you look at the complexity of the product, its ability to integrate in technologies that each technology by itself is the leader in its individual technology. For example, it has the best modem. It has the best mobile graphics.
It has the best mobile multimedia and audio engine. It has the best DSP. It is truly an exceptional product, and we're very excited about it. I think the world is anxiously awaiting the first launch of that, which will be shortly. But more importantly, this product will not only appear in phones, but it'll start to appear in some of these devices like augmented reality and virtual reality headsets.
And it's a case where those products are being designed at the same time that the flagship phones are being designed. This is also a part that for the first time, you see that the transistor leadership of the industry, the entire semiconductor industry, is actually now in being driven by mobile. It is no longer being driven by other industries. And it's a tremendous statement. It also provides us with a tremendous strategic asset that we can take into new industries, and we hope that's going to be good for the shareholders as well.
So let me talk a little bit about
or at least show you a little bit about what this product will do. So here's another video for you.
Okay. Let me talk a little bit
about the modem. So if you look at what's happening with connectivity worldwide, it continues to be on a rapid acceleration in terms of feature set. If you look at the data rates that we're now able to deliver, we can deliver a gigabit class connectivity to your phone. That's equivalent to and in many cases, actually faster than what your home wired router gets piped into it. So it's a tremendous capability that now exists in these chips, and it's being deployed worldwide.
I have a few stats up here, but I think the most important one is that there are over 180 deployments of LTE Advanced and over 86% of them have Category 6 or above. This will continue to occur throughout the industry. And actually, the world will be accelerating that as they get ready for 5 gs. So in addition to 5 gs coming, there'll be additional modem upgrades in the LTE world. All of that very positive for Qualcomm and something that we've been driving throughout the industry and something I think really demonstrates the leadership of the capability that this company now has.
Let me talk a little bit about
the 835 and the number of products. First of all, everything now in our product line includes the gigabit LTE. It's proven. It's something that allows us to have worldwide deployment, and we think we have a much stronger strategic position because of that happening worldwide. And one of the positive impacts of that, of course, is on the licensing business.
If you look at the licensing business and I think one of the questions we get all the time is, can the market continue to grow? And of course, yes, the answer is the unit growth continues to be there. Our calendar year projections continue to show 7% unit growth. The market continues to grow. It's a large market, but it continues to grow.
Why is that happening? If you look, there's still less than a quarter of the world's connections are using LTE, much less using gigabit LTE and much less going to 5 gs in the future. So there's a tremendous amount worldwide of untapped demand that continues to drive the licensing business. So number 1, the market continues to grow. Number 2, our number of licenses continues to grow as well.
We exited the fiscal year with over 115 licenses signed and in China and with over 335 3 gs CDMA based licenses. We have, I think, the worldwide leadership and extent to which we can talk about our licensing program, which really have the numbers to back it up, and we're proud to be able to have that. And that licensing program is not just standard essential patents. We have are driving technology across everything that goes into that phone, from the multimedia to the graphics to everything that you can think of in a phone. It's actually difficult to use a portion of the phone and not interact with Qualcomm Technologies.
That's one of the reasons why our licensing program, which licenses at the device level, is so efficient for the industry. It gives them confidence. It also allows them to take advantage of all the R and D that Qualcomm uses. I should also remind you that only a small percentage of our patented inventions are actually entirely practiced by our baseband chip. So we have, I think, a tremendous IP portfolio, and it's really an important component of, I think, how the industry continues to grow.
Let me talk about expanding the core. We just announced about 2 weeks ago, 3 weeks ago, the closed we closed on the RF360 joint venture with TDK. That's a pretty significant addition to the company. Not only from a technology perspective, we get filters, module capability and I think some world class expertise to deliver RF front ends, But we jointly we join that up with our expertise not only in systems and the baseband design, but also gallium arsenide and CMOS PAs. And we think this will be a very important component of driving growth not only for the shareholders, but also if we don't take or if we don't make it very easy for people to solve the RF problem, the continued growth of the industry, it's very important that we're able to do that.
So if you look at every new product that will come out and be connected to the Internet, it will be connected to the Internet across multiple bands, RF bands. And we're going to make it very easy not only for our traditional customer base in the handset market to deliver products into that environment but also for new industries like the car and the Internet of Things, and we have the capability to do that now. We're excited about this acquisition. Another growth outside of the core is the Windows 10 opportunity. We announced over the last quarter the that full Windows 10 is now running on Snapdragon, and you'll start to see initial products in the second half of this calendar year.
This is a great opportunity for Qualcomm, not only because it leverages our mobile design, but it opens up the market of PCs to Qualcomm. So the PC market is about a 300,000,000 unit market. We are able to access that now through using the same chipsets that we use for high end smartphones at the time when the build quality, the materials that are used in the phone, now enable the connected laptop, the enterprise laptop to really take advantage of the scale of mobile as well. So this will be a very exciting opportunity, highly leveraged on our core business and one that we're very excited about, and you'll see products flowing out here this calendar year. Let me talk a little bit more about growth.
So if you look at kind of Qualcomm's overall history, a lot of things have happened. We've been fortunate to be the key driver in really connecting people to the Internet. We did the fundamental work continue to do fundamental work that allow you to have a connected computer in your pocket and to be connected to the Internet everywhere. That was not always the dream of everyone, and it was something that I think we anticipated, invested early in and put together the expertise and the scale to be able to drive that worldwide. That's the first 30 years of the company.
If you look at the next 30 years of the company, that will continue to be important. But now we're going to be connecting everything and every world that we live in to every other world. It's a much larger task, but it requires the same expertise, and we think that we're in a strong position to be able to do that. So we spent 30 years connecting people. Now we're going to spend the next 30 years connecting their worlds.
And that megatrend is a very large megatrend. It's something that not only drives our business, but it drives every major electronics and every major industrial industry is being disrupted by being connected to the Internet. And they're looking for partners of the size and quality of Qualcomm to help them do that. So it's a big opportunity for the company, and we think we're well positioned to do that. So we did some work in 5 gs to study what the economic impact of that would be.
And essentially, it's immense. If you look at the number of goods and services created, it will be about 12 $1,000,000,000,000 of goods and services, and it will create 22,000,000 jobs. If you look at the way we define ourselves, today, we're, we think, one of the largest and most significant tech companies. If you define a tech company by the following criteria, which is our job is to invent the technologies that allow new industries to develop. And that new those new industries are actually what create jobs and create economic opportunity, not only for our shareholders, but also for the communities and the world at large.
So with that, I'd like to show you another video. This one's a little loud, so I will just warn you right now that it is loud. So please. So that went by a little bit quickly, but I will tell you one thing I want to point out. If you look at the economic impact, the impact of 5 gs to the growth of GDP worldwide, it's equivalent to the economic impact of India, the country of India, which I think is 6th or 7th largest economy in the world.
That's the type of reach and the type of expertise. And really, the job for Qualcomm is to make that happen. That's why we think if people want to talk about job growth, they want to talk about impacts to society, that's really what we feel we have the opportunity to do as a company. It's very rewarding and exciting to be able to have that type of impact.
So let me talk a little bit about 5 gs.
So if you think about 5 gs, along actually with 4 gs, is really the connectivity fabric that allows us to have not only the mobile industry connected, but to have many other industries connected as well. So 4 gs will continue to evolve. We'll continue to evolve it very rapidly. But in addition to the speeds and the lower latency or utilized to be much easier or utilized by new industries. So things like mission critical services.
So what type of network would you want to have? What type of network would you need to have to have autonomous cars? What type of network would you need to have to have remote delivery of health care? Well, there are features, and there's R and D, and there's work that's done to enable that business to grow. And we are obviously doing that today.
Same thing with massive Internet of Things. If you think of the world as everything that you see, everything that has a battery, everything that's plugged in is connected to the Internet, that's a tremendous amount of that's just an incredible explosion to what the network needs to happen. We're doing the R and D on that to allow that to occur. It's a very exciting time. If we don't do that R and D and we don't get that work worldwide, we really won't have the capability that's required.
But of course, we know how to do that. We've been doing it for 30 years, and we're continuing to work very hard on doing that as part of 5 gs. So Qualcomm, what are we doing? If you look at on the 5 gs side, recently, if I was here last year when I was here last year, I think we would have said that 5 gs is going to happen in 2020 time frame. As of last week, we participated along with over 20 different companies to pull in the availability of 5 gs to the 2019 time frame.
There were some very important statements today actually out of the 3 gsPP Standards bodies also committing to that same time line. So Qualcomm, I think, is leading the industry to 5 gs. 5 gs is accelerating, and we think that's a great thing for all the folks in this room as well as the industry. So we'll continue to do all the things that we that you know that we do. We build the prototype systems.
We build the chips. We do the R and D. We share it through the industry with the industry through the standards bodies and those things are happening. So let me talk a little bit about the opportunities that are growing ahead of us. And probably most importantly is talking about our acquisition of NXP.
Very excited about it. We're very, very excited about the reaction that we got at the end of last year. And if you look simply from a very simple strategic point of view, it is the combination of really the mobile road map and the mobile scale of Qualcomm and the automotive, security and IoT expertise and scale and channel strength of NXP in one company. And we're quite pleased with how that's looking so far. We're in the middle of doing integration planning.
We started working through working with the regulatory bodies to get approval. You've seen a number of milestones from the press about or from ourselves actually about how the process is going. It's on track, and we continue to move forward, and we're very excited about that business. It really makes us the real leader in the connected good Good example of that is a car. If you look at the car, the car is continues to be an incredible technology platform.
But that technology platform today, much of what's the emphasis is actually moving toward the electronics. And those electronics are being disrupted by a few things. 1 is connectivity. So now the car is connected to the Internet, it's connected to the cloud. And the computing capability of those subsystems is increasing.
And with the NXP asset as part of Qualcomm, we can use the connectivity and computing expertise of Qualcomm and really this tremendous franchise of understanding how to deliver products at scale into the automobile. And we think that we will be very well positioned as a company, not just in one area but in many, many areas. And that's important because the key is to deliver subsystems and more technology into the car company in a way that's easy for them to go to market and go to market quickly. These are things that we've learned as part of the handset business, and we look forward to working with our new colleagues in NXP to drive that. The data center is another one.
We have recently sampled our data center chip to a number of key players. It also is a 10 nanometer device. It's the highest performing, we think, ARM processor for the data center. Data center, of course, is a very large market, and we look forward to getting initial feedback on that from our customer base. It's a big opportunity for us and also enables us to be well positioned not only with our cloud providers, which tend to be partners in other areas, but also as part of our relationship with the broader industry and oftentimes in China.
So it's an opportunity for us to really leverage our strength in mobile and deliver that expertise into new technologies as well. So let me just finish up by saying that 2016 was a big year. We did a lot of things in terms of repositioning the company, signing up licensees in China, getting done the or getting announced the NXP acquisition, and I think we exited in a strong trajectory. We continue to win in mobile. I said this in the last earnings call, and it is something I firmly believe.
Our product road map today is as strong as it's ever been. We are earlier to market with better features and a lower cost structure than our competitors, and you see that in our ability to deliver strong results in terms of the chip business. So very proud about that. Now the goal is how do we keep that going, how do we extend that into new markets and how do we continue to grow our licensing business. With that, I'll thank you for your attention and look forward to questions and answer.
Thank you.
We will take a few moments to set the chairs out on stage and then continue on to the question and answer process.
So you're ready?
We're ready for you.
I'm Jim Mullins, long term long time shareholder. And mine's more of a statement than a question, but thought it needed to be said. So in close reading of your transcript from your recent earnings conference call, I believe you went into great detail in stating the basis for your strong case against Apple. And what I find disturbing is that most of the articles in the press are distinctly biased in favor of Apple and few in the analyst community present any of the many key points in Qualcomm's favor. I understand you don't want to try the case in public, but I wish there was a way to better sway public opinion in your favor.
It appears that Apple must have many advocacy groups supporting it while Qualcomm has very few. In that regard, I responded to a newspaper opinion piece titled, the FTC should not abandon the Qualcomm case, in which the author claimed to support intellectual property rights, but ironically, he labeled Qualcomm as the bad actor. This is troubling as in my belief that Qualcomm should be considered as a national treasure. It was sure engineers working in the trenches for 25 years that enabled mobile wireless revolution, and not Johnny come lately Apple with its slick user interface and marketing pizzazz that gets away with selling a just good enough phone rather than best in class iPhone that throttles its devices with a Qualcomm modem so they don't outperform the Intel counterparts. If you don't mind, I'd like to read take a few minutes to read some of my comments back to that author.
And again, the title of the opinion piece, the FTC should not abandon the Qualcomm case. Mr. Roth, I believe if you understood the underlying details of the Apple v. Qualcomm case, you might change your thinking that Qualcomm is a bad actor. In reality, with little, if any, wireless intellectual property, Apple is the bad actor.
The FTC's new acting chair, Ohlhausen, in her dissenting opinion refers to those devoid of IP as net users of technology and the ones calling for the dilution of intellectual property rights. She stated Qualcomm and intellectual property rights she defended Qualcomm and intellectual property rights in writing and enforcement action based upon flawed legal theory and that by its mere issuance will undermine US intellectual property rights in Asia and worldwide. I apologize for having to read this, but I'm not an expert speaker. Many of Qualcomm's tens of thousands of patents developed over the past 25 years have been incorporated into CDMA and LTE standards by the world's standard setting bodies and have been broadly shared via licenses with over 300 companies worldwide. And as such, have established the fair market value of Qualcomm's IP based upon the long standing industry and standard setting bodies practices practice of royalties based as a percentage of device's sales price.
Apple, over the past 10 years, has used Qualcomm technology to sell over 1 1,000,000,000 iPhones. They've become the world's richest company. Apple's profits dominate smartphone industry, devouring close to 95% of the smartphone profits in the last two quarters of 2016 and are projected to extract 88% in 2017. Apple's tactics of mercilessly squeezing its suppliers and outside application developers are well known as reported by the Wall Street Journal and Forbes last year, with Forbes stating, squeezing suppliers highlight Apple's ability to extract every drop of profit out of the iPhone ecosystem. Apple refusing to sign a Qualcomm license has instead operated under the umbrella of Foxconn's license with Qualcomm, the terms of which included that the royalty base would be at the device level with an ASP cap.
That meant that higher priced devices would naturally command the higher royalty dollar than lower priced devices. One would think that, that alone would constitute Apple's acceptance of Qualcomm's business model and TRAN licensing agreements. Hypocritically, Apple accuses Qualcomm of abuse, claiming Qualcomm's licensing terms accepted by over 300 companies are unreasonable. Several analysts have estimated that Qualcomm's royalties at about $12 per iPhone, which calculates out to about $0.01 per day over a 3 year life, useful life. This is hardly abusive when one considers the daily use and importance of the smartphone, smartphones that have become the users worldwide.
Further, as a percentage of the iPhone $700 plus sales price, the $12 royalty represents less than 2%. Again, this is hardly abusive when the fair market royalty rate for all 3 gs and 4 gs devices sold worldwide is about 3% of the device's selling price. Last page, just a little bit more.
You don't hear us complaining.
Good. Good. I'm going on too much. I have a lot more, but I'm cutting. When Qualcomm refused to be bullied, Apple goes to the extreme means of providing false information to US and foreign governmental agencies to subvert Qualcomm's business model and the industry's long standing device based royalty model.
And in so doing, Apple is willing to undermine U. S. Intellectual property rights, which will dissuade Qualcomm and other innovation companies from investing in future R and D. Again, this is a major concern of the new acting FTC Chair. Knowing this, some might call Apple the poster boy for hypocrisy, bullying and greed.
Given the strength of your case, I hope you dig in, and I'm hopeful that the eventual settlement will include the elimination of or a significant scaling back of Apple's generous marketing incentives as payback for Apple's deceitful bullying actions. That's it.
Mr. Mullins, you're hired.
Sounds like an amicus brief. Yes.
But seriously, your first point, just to respond to that, of course, Apple came out first and got the first shot in their complaint in late January. And as you just read, there are a lot of people who are in fact seeing through the veil. And we are helping that process, but we will answer the complaint fairly soon, and there will be some more to say as we do that. As you say, we don't like to try cases in the press. It's best to try them in courts, but it's also best to find ways to see if we can find solutions that are not necessarily litigation solutions.
But we are telling our story, and we will continue to tell our story. And some of what you've just read is clearly an indication that, that story is getting out there. So thank you very much.
I'll just say maybe one thing, which is, first of all, thank you for your comments. And I think it's also important that you understand as shareholders that the majority of our company is actually working on new technology. And we're incredibly excited about that and kind of where the company is going. And that's really it's probably a pretty small percentage of us actually, a very small percentage of us, are trying to work through this commercial dispute. And don't worry, we won't take our eye off the ball on making sure that we do the right thing to reflect, I think, the history of the company but also the positive history of the success of our business model to really helping this industry grow.
But more importantly, we're doing the core work to make sure that not only this industry continues to grow, but many other industries continue to grow as well. So I think we have our priorities in the right place. It's going to be difficult for us to argue this in the press. But don't worry, this is not our first rodeo in terms of getting through these things. And I think there's a lot of confidence up here on the stage.
And I think many of you probably have been through some of our previous trials and tribulations. It feels a little bit like the situation we had with Nokia a long time ago. And one of the things that we did during that time was make sure that we kept a good relationship between the companies even while we were battling quite fiercely over our principles. And I think that's the right thing to do, not to get dragged down, but to take the high road. And but it also we will hold to our principles as we did back then.
Good morning.
To the best of my knowledge, Qualcomm's tender offer for NX PI shares expired yesterday. And my question is, is that a done deal now? Did you acquire the number of shares you were hoping for? And when do you expect to complete the purchase?
Sure. Good question. We announced that we are extending the tender offer period. In these types of acquisitions, what tends to happen is that the tender will continue and be extended through the period while regulatory reviews are outstanding because shareholders generally will not tender their shares Even though they can pull them back if they want to until close, they will not tender their shares until regulatory approval is cleared. So they know that they now can move forward with the acquisition.
So it's very typical to go through this process. We set a new period out. And then if regulatory approvals are not done by then, it will get reset again for a period of time. So everything is very normal.
I know it was reset from February to March. Now has it been reset again?
Yes.
Oh, I can see that. Yes. Okay. Thank you.
Good morning, all. A couple of questions, please. I noticed that on one of the slides at the lower left hand corner in very small print it said includes security. I'd like to know what that means. And with regard to this, I don't know if it meant the same thing as I was wondering about, but what happens when the electricity goes off?
Okay. So are we doing anything to avoid that problem? That's my first question. Can I have an answer with that first?
Sure. So obviously, that is not the area that we tend to play in the ecosystem. However, if you look at one of the big trends that's happening in the infrastructure, delivery of water, delivery of power, it's the industrial Internet is happening. So getting the physical plant of a lot of the infrastructure that delivers many of these basic services to people is getting connected to the Internet. And as a result, the efficiency and the reliability with which those infrastructure assets can be operated as they get connected to the Internet is it improves.
And we're we play a small part in providing that connectivity and the intelligence assets and the security assets that allow that to go forward. So we don't have a direct responsibility other than I think we're providing some of the key technology that make those systems more robust.
And one thing that's quite interesting is the new technology for security is really to look at the behavior of the system. So you don't just look for a scanning that a piece of code came in that has some bad intent, but you actually look for things that are going on in the phone or in other parts of the system to know that something that you didn't expect to happen is going on. And so one of the things that we've done at Qualcomm is to build small machine intelligence that sits inside your phone and just watches what's going on. And if the phone turns on a sensor when it's not supposed to or if it's connecting to an IP address, an Internet address that it shouldn't do or it's doing something that it's unexpected, then it flags that and it lets you know. And through connectivity, eventually, we'll actually be able to share this information among many devices.
So when an attack first happens, then we'll be able to detect it. Our phones will be able to detect it very early on. And this kind of technology will spread in fact has already spread across many systems. So you shouldn't think of security in this very kind of lock it up and the way that your PC used to scan for viruses. There are more sophisticated things that are going on now to try and detect these things.
Glad to hear it. Second question, you've referred in past years to how much money Qualcomm has overseas and how we can't bring it back to the United States because of punitive tax conditions. So but I haven't heard any mention of that today. And given that President Trump is going in the right direction, at least I think so, What how much do you expect Qualcomm will profit from techs revamp?
Sure. So we have a little over $30,000,000,000 offshore today. And when you think about the challenges that a lot of companies have that have large offshore sales and build cash overseas, it's you oftentimes don't have a chance to redeploy it. And so you have basically idle cash sitting on your balance sheet, which is a negative. That's why so many people are anxious to have the ability to return that and use it in other places.
For us, we have probably the best alternative. We announced the NXP acquisition, which is a $47,000,000,000 acquisition of which we will be able to deploy our offshore cash offshore, and it means that we'll only need to actually borrow $11,000,000,000 to finance that acquisition. And we expect, as we've said, that we'll be able to bring our balance sheet or the financial strength of the company back to the same levels within a couple of years because of the strong cash flows of the 2 combined two companies. So the best outcome for us is to be able to utilize that cash in an investment that's attractive for the company going forward. Absent that and going forward, we'll continue to still build cash offshore.
So we're a strong advocate for tax policy reform that will allow us to bring cash back efficiently. Today, a lot of companies who pay dividends and return capital to shareholders, you're only allowed to do that with onshore cash. And so the things that the current administration is talking about and other proposals that are out there being reviewed are looking at allowing you to bring that back so you can actually you can invest in the U. S. And you can also return capital in the U.
S. Using your worldwide resources, which we very much support. You're welcome.
Hello again. My name is Kim. I'm a long term shareholder, happy one. And thanks for the increase in dividend. It'll help me feed my goldfish.
I have more goldfish.
You must have a lot of goldfish.
Just joking with a little bit of gold and fish. Anyway, I'm going to ask a couple of nerd questions. So in your projection forward towards 5 gs and the Internet of Things, as in the past Qualcomm has had substantial intellectual property at the physical layer. So within the 5 gs projected standards, will Qualcomm have any physical layer intellectual property as an IS95 or how might it vary? And then I have a follow on IoT question.
I can weigh in on that first. So yes, I think if you look at the development that's already happened in 5 gs, and it's still somewhat early days, so there's going to be many other decisions still to be had within Standards Development Organizations. I think our IP position is shaping up quite well, very I would say, very similar to both 3 gs and 4 gs, where we're not just contributing to 1 or 2 narrow pieces of the standard, but we're really continuing to innovate across the whole system and making contributions broadly. So we will have meaningful and significant IP on the physical layer, but also much broader than that across the rest of the system. And there's still a lot of work to be done in 4 gs, as Steve mentioned in his remarks.
And a lot of the work that's being done now in the early stages of 5 gs will come back into 4 gs. And also, a lot of the development that's already happened in 4 gs will become the foundation for 5 gs. So we feel very good about the position we have today, and I think it's just going to continue to improve as we go through the iterations of 5 gs and that accelerates.
Okay.
And you should feel comfortable that we have cool technology coming in the future too. There's still new things to be invented, so.
I continue to be surprised. And then a follow on question is really on the Internet of Things, physical layer. So how does local company Ingenue or others physical layers view of the Internet of Things. So they have this their own I forget the acronym for it, but how does their solution merge with Qualcomm's vision? So there could be a multitude of physical layers for the Internet of Things.
And if that's other people's physical layer intellectual property, it's hard to express yourself. So
Well, I would say maybe the short answer to that is that the world is not getting any more or any less complex. So if you look at the products that need to be delivered worldwide to provide connectivity to cellular, the many different standards that will be or have been deployed and will be deployed for the Internet of Things. You have private networks, oftentimes and increasingly leveraging the good work that we're doing to get the unlicensed band to use LTE technologies. But still it's a proliferation of many different bands and many different types of systems to provide that worldwide footprint that's required to really make large industries make it so that they can take advantage of it. You have to have access to all of these.
You have to have expertise not only in one technology but into many different technologies. And that's really what we have built and what we continue to build as a company. It's reflected in our IP, but it's also reflected in our product strategy and reflected in the channels that we're putting in place to be able to deliver those products. And I think that last piece, I just want to highlight that was actually one of the reasons for doing the combination with NXP is that the fact that we can deliver it here in San Diego is unique and interesting, but our but we have to be able to deliver it to 30,000 different customers worldwide. And we will have that asset and that capability together in the combined company.
And the other element is really just you have to have the RF expertise. And so we think we have a unique set of assets as a large company to be able to do that. And our job is to grow the industry, and it's going to be a harder thing to do because of the diversity, but I think we're well suited for it.
Great. Thank you very much. And you've done a good job at convincing me to stay around until next year's
Thank you.
Hi, Jan Bourgeois. I'm also a very long time stockholder, also very happy. I didn't hear anything today really on health care. And to me, that's a very important area. So I'd like to hear just a little bit more what you're doing in that field.
Yes. I think we're actually very excited about the opportunity in health care. And Paul has been an early advocate and proponent of Mobile Healthcare for many, many years. But we're now really seeing the solutions come together in the market that really can deliver a difference. And in particular, we're seeing insurers.
One of the chicken and egg problems we had early on was who's going to pay for this stuff. And now you might have seen we had some announcements just in the last few months with UnitedHealthcare. They're actually starting to deploy our connectivity solutions and some of the algorithms that we can run-in the cloud to basically fuel this motion program, which will actually return dollars to people in terms of their premiums as long as they meet activity levels throughout the course of the day. But that's just really one example. Our vision for this business is really much broader than that.
It's really to make sure we have the connectivity across all of the different care settings so that we can monitor patients and actually provide more of a real time feedback in response to how health care is delivered. And I think there's a tremendous amount of opportunities there, and the development we're doing across low cost sensors and low power sensors will be important as we move these solutions with the connectivity that we already have today. So stay tuned. I think you'll hear more and more as time goes on.
Hi. Can you talk a little bit more about your current relationship with China and what the settlement was? Because last year you displayed a huge debt that you were trying to settle and I just would like to hear a little more detail about
it. So I think if you saw what Steve put up on the slides today, it's been a long journey in China, but I would say that we're quite pleased with where we're positioned today. We've not only done the work that we needed to with the government to resolve the investigation we had a couple of years ago, but that then led to quite a lot of work across a lot of people in the company to conclude new agreements with over 100 companies in China, which was a lot of work. But we're pleased we're now through the back end of that, and we've concluded agreements now with all of the large OEMs in China. So I think that's been very positive.
At the same time, I think we've done a good job as a company building out a much stronger set of relationships in China that will really set up our business as we move forward. And part of that includes the work that we're doing to set up a joint venture in China to focus on the data center products that we're developing here for the U. S. Market as well.
So that speaks about today and going forward. What happened to all of that debt? Did you have to write it off?
You're talking about the fine? We had
a fine from the Chinese.
And what happened with that?
Yes. So We paid a fine of $975,000,000 as part of the settlement. There was no debt established associated with that. And we had I
thought they weren't paying the licensing fees.
Was that not Oh, okay.
Got that. So those that basically has come into revenue as we've resolved the so there were companies that basically withheld royalty payments.
But you've
compromised us with the new agreements on the old debt?
No, we've really tend to the extent we've compromised, we really tried to do it through just spreading out payment terms for companies that may have had difficulty paying. But you've seen hopefully, if you follow the earnings, we've had significant what we call catch up amounts coming into revenue over the last couple of quarters.
So you haven't forgiven those licensing fees?
No. We've been negotiating those as part of the overall agreements.
Thank you.
And
they'll continue to come in over time as well.
On the entertainment side of Life, I know we haven't talked about that today. And I've read, I'm not sure if it was last year, did we discuss it or did I read it that through the chips and through the virtual reality, we're going to be able to bring more people courtside. And I read somewhere that maybe I think it might be the Sacramento Kings is going to be the test or the first team where we're going to be able to have that courtside experience from seats that may be from the nosebleed seats. Can you address that?
Yes. So we have done some tests where we put 3 60 cameras on the court side, and we actually did a thing where we broadcast the game to India. So there were kids wearing VR goggles who got feel like they were sitting at courtside. When we build out the new arena, we put a lot of capability wireless capability in it, and it's pre wired actually for us to eventually work with operators to put small cells in there, which will give you tens of megabits per second per seat. So you'll actually be able to do virtual reality essentially anywhere in the arena.
And one of the things we're looking at right now is to do it in the boxes because we can put a very high speed wireless connection, maybe even gigabit class wireless connection up there, and then you'll really get great experience from it. So some of the things that are going on, I mean, we're a little early days because the quality of the screens right now, the resolution isn't quite high enough. They are getting better. And so you see what almost looks like a screen door effect when you're watching a game and it's a little distracting. So the technology is improving.
There are some new companies bringing out new display technologies as well, which don't have that issue. And so I think over the next few years, we're going to see this really come to fruition. But it's absolutely a thing that we're looking at. And now it's not just the Kings. The entire league is doing it.
And in fact, a number of leagues are now looking at it. So I think virtual reality will be a big part of the way that we experience sports in the future.
Exciting. Thank you.
Hello, Robert Little, also a long time shareholder. I wanted to also follow-up on Include Security footnote. I've heard newspaper articles where police and hackers can turn on the phone or the GPS without the user knowing about it. Is that a feature
of the
technology or a weakness of the technology? And also, I've also heard that hackers and government have a relatively easier time access to getting past the password on Android phones versus Apple phones. And I was just wondering is that something that because of something that Apple is so much better at doing or is that basically something in the hardware that Qualcomm should be addressing? Thanks.
I'd be happy to.
So one of the things I think when Steve made his presentation about Snapdragon 835, it talks about a lot of security we do. And we're not responsible for security in the upper layers, but actually, we're enabling a lot of things into the phone. And I answer your second part of your questions about to the point that you can actually eliminate someday password. If you password is just a proxy of yourself, you have your account ID or password. If your phone can every time use in position, location, using biometrics or your fingerprint or eye recognition, authenticate you every single time you wanted to go into an Internet knowing that's you, that's your phone and that's a location that you're expected to be, then we can actually eliminate passwords in the industry.
And I think we're on this journey to add more and more capabilities to technology in our chipsets that you actually make things more secure. We don't take responsibility on the OS on the upper layers, but we are indeed developing the fundamental technology that actually could make that available for companies that make use of our chipsets to make those things more secure. So with regards to your first question, I think one of the things that has happened since the beginning of cellular is it's lawful intercept.
And I
think it is not on what we do, but in a lot of the mobile infrastructure providers, the ones that provide the base stations and the switches, they have the capability to do lawful intercept. It's actually a legal requirement, but is on the infrastructure side, is not necessarily over the air or in the chipset that we provide, okay?
Any other questions?
Yes. I have a question in that I was doing some research and I believe it was Val U Line. And their perception was that Qualcomm, although it has terrific intellectual property, over the long term, your profit margin direction, your basis point direction in profit margins is going to be downward. Do you agree with this? It would be offset by a larger balloon growing worldwide.
But do you see any short term opportunities for the increase in your basis point margin profitability increase?
Sure. Do you want me to? Yes. I think a number of those views were established really coming out of the 'fourteen, 'fifteen period and the adjustment that we went through with the, 1, the shrinkage of the premium tier, the contraction there, some of the issues that we saw in terms of compliance and other issues affecting the licensing business. And so some of the reports came out and looked at a trend and were drawing trend lines.
And really, it wasn't until the second half of this year of FY 'sixteen where people could see the many actions that Steve talked about, the strategic realignment plan, the actions that were taken to really reposition the company to get the cost structure in line with the changes that we were seeing in the industry and also so that we could see profit margin expansion. So you're seeing not only revenue and earnings growth now year over year, which is the periods that people tend to look at there. But you're seeing it strengthening in the core businesses because of the recovery of those businesses and things like improved compliance and the licensing is being signed up. You've also seen, again, the cost structure of the chip business. You've seen growth in adjacent markets.
One of the areas that's going to lead to further margin expansion and also operating margin growth will be these adjacencies. And then, of course, you bring in something like the RF front end with the closure of the TDK joint venture. That's going to represent a very important growth opportunity as the RF front end becomes a bigger piece of the handset market over the next 5 years. So there's a lot of things that we've pointed to that are in the portfolio today, and that's before you get into the potential of combining NXP and Qualcomm together and the expansion, both the margin and the growth of both the top line and bottom line that comes from that. So I think some of the views have really been colored by the last couple of years.
The company has taken a lot of actions to address that. And I think you're now starting to see the recovery.
It's Chairman, so
All right.
Well, I just want to say thanks to everyone for coming and particularly for your support. Many of you are very long term shareholders, and we're trying to do our best to return some value to you. And hopefully, that's done pretty well over the years. And as I said earlier, there's a lot of really exciting technology to come. Obviously, 5 gs is on its way, the Internet of Things and Automotive.
We're making a big acquisition with NXP, so that will change in some ways the way the company works. But I think at the base, we are always going to be a company that's built on innovation, and that's the way to success for us in the future. So we appreciate your support, and we look forward to seeing all of you next year. Thanks very much.