Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm First Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded January 27, 20 16.
The playback number for today's call is 855-859-2056. International callers, please dial 404 537-3406. The playback reservation number is 24099,843. I would now like to turn the call over to Warren Kneeshaw, Vice President of Investor Relations. Mr.
Kneeshaw, please go ahead.
Thank you, and good afternoon. Today's call will include prepared remarks by Steve Mollenkopf, Derek Averly and George Davis. In addition, Cristiano Amon and Don Rosenberg join the question and answer session. You can access our earnings release and an executive presentation that accompany this call on our Investor Relations website. This call is also being webcast on qualcomm.com and a replay will be available on the website later today.
During this conference call, we will use non GAAP financial measures as defined in Regulation G and you can find the related reconciliations to GAAP on our website. As well, we will make forward looking statements regarding future events or the future business or results of the company. Actual events or results could differ materially from those projected in the 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. I'd also like to remind you that our Analyst Day will be held on Thursday, February 11, at our headquarters in San Diego.
To attend in person, you must be a financial analyst or institutional investor. The analyst meeting will be webcast for those of you unable to attend in person. And now to comments from Qualcomm's Chief Executive Officer, Steve Mollenkopf. Thank you, Warren,
and good afternoon, everyone. We delivered a stronger than expected quarter with earnings per share coming in above the high end of our initial guidance, driven by stronger 3 gs, 4 gs device sales and lower operating expenses in QCT. QCT chipset shipments were near the high end of expectations with low tier strength across OEMs, particularly in China, offsetting some weakness in thin modem sales at a key customer. QTL revenues were higher than expectations on stronger 3 gs, 4 gs device volumes and ASPs and we continue to make progress in signing up Chinese licensees, although there is still more work to be done on that front. During the quarter, we also returned approximately $2,800,000,000 to stockholders through dividends and stock repurchases, which included the completion of the incremental $10,000,000,000 in stock repurchases we announced last March.
This $10,000,000,000 is over and above our commitment to return a minimum of 75% of free cash flow to our stockholders. We are also very pleased to have announced an agreement to form a joint venture with TDK to enable the delivery of RF front end modules and RF filters into fully integrated systems for mobile devices and other IoT applications. Once closed, we will add TDK's capabilities in micro acoustic RF filtering, packaging and module integration technologies to our RF360 portfolio to offer leading edge RF solutions in fully integrated systems that we believe will provide significant advantages in performance and time to launch across our Snapdragon product tiers. The deal is expected to close in early 2017 and is forecasted to be accretive to non GAAP earnings in its 1st year. We have a strong pipeline of new RF front end products, including new generations of our envelope tracker, antenna tuner, switches and CMOS and gallium arsenide PAs.
Our gas PAs are anticipated to enter production in 2017. In addition, we continue to deepen our level of cooperation with and investment in China. We just announced a cooperation agreement with the province of Guizhou, including the formation of a joint venture that will design, develop and sell advanced server chipset technology in China. This builds on the announcement we made in October, detailing the availability of our server development platform, which is now sampling to Tier 1 cloud customers and the strategic partnerships we have established with Xilinx and Mellanox. We continue to make good progress on the elements of our strategic realignment plan and are on track to achieve our cost savings targets.
To his position as an independent director, including 10 years as CFO of Cardinal Health and past automotive industry experience. Following our annual meeting in March, assuming our slate of directors are elected, our Board size will be reduced to 12 members and the average tenure will be reduced to approximately 5 years. I would also like to congratulate Cristiano Lamon on his promotion to President of QCT. He provided exceptional leadership over his 18 years at Qualcomm and will play a critical role in expanding QCT's roadmap, enhancing our customer relationships, structuring our efforts for success in our adjacent opportunities and positioning the business for long term success. On that note, we continue to be pleased with the performance and design traction of our Snapdragon 8 20 Processor.
The first product announcement based on the 820 occurred at CES and we expect a number of exciting launches in the first half of this calendar year, including many at Mobile World Congress. We now have more than 100 design wins based on the 820 and the product is entering mass production using 14 nanometer LPP technology. At the Consumer Electronics Show earlier this month, it was clear that many industries are looking to leverage mobile technology into their products and businesses are looking to the leaders in communications and compute systems such as Qualcomm to make the world more connected and smarter. Our many announcements at the show reflect our progress extending Qualcomm technology into adjacent and new areas, including automotive, IoT and networking. In auto, we announced that Qualcomm Snapdragon 602A Processors will be commercially available in 2017 Audi vehicles.
We also introduced our next generation Snapdragon 820 Automotive Processor as well as several other products including our wireless charging technology. For IoT, we announced a smart home reference platform using the Snapdragon 2 12 Processor, the new Qualcomm aptX HD solution for high resolution audio over Bluetooth, a new Bluetooth Smart SoC, the 1st commercial drone based on the Qualcomm Snapdragon flight platform and the Snapdragon X59X07 LTE modem, which broadens our family of modem solutions for IoT. In networking, we launched Qualcomm Wi Fi SON, which is a self organizing network solution to simplify Wi Fi networking and optimize user experience. And we showed significant traction in multi band Wi Fi 802.11ac and 11ad enabling products across multiple segments. As we did in both 3 gs and 4 gs, we are leading the industry in the development of a unified, more capable 5 gs platform that will take on a much larger role than previous generations and deliver new levels of efficiency.
The foundation of this platform is an OFDM based unified air interface that will not only enhance mobile broadband services, but also enable connectivity for the Internet of Things and new types of mission critical services that require lower latency, higher reliability and robust security. 5 gs will also include native support for advanced technologies such as the use of unlicensed spectrum, multicast and device to device capabilities. We are pioneering these technologies today with our leadership in LTE Advanced and LTE Advanced Pro. These new technologies are paving the way for 5 gs and accelerating our path to a truly connected future. Overall, we are pleased with our progress on key initiatives, execution of the strategic realignment plan, design traction for the Snapdragon 8 20, refreshing the QCT roadmap across tiers, broadening our presence in adjacent opportunities, progress on new licensing agreements in China, execution of our data center strategy and advancements that will extend our technology leadership position.
I want to reiterate that we remain focused on execution to improve our financial trajectory exiting the fiscal year. Our industry and company are undergoing rapid changes and we are enthusiastic about the opportunities ahead. We are extending our leadership in mobile and are driving our mobile technologies and core competencies in communication systems and high performance low power computing into significant new areas. We have taken action to enable us to seize these opportunities while delivering improved performance. I am optimistic about the future and have great confidence in our employees to execute on our strategies and drive growth.
I look forward to seeing many of you at our upcoming Analyst Day and would now like to turn the call over to Derek Averley.
Thank you, Steve, and good afternoon, everyone. QTL had a strong fiscal Q1 with total reported device sales of $60,600,000,000 which was above expectations on both higher ASPs and reported units, as well as some catch up reporting from recently concluded license agreements in China. QTL revenues in the quarter were higher than expectations and would have been even higher if not for a contract dispute with LG that resulted in us deferring revenue of more than $100,000,000 for the quarter. Although LG continues to report and pay, we are not recognizing revenue while the arbitration regarding the dispute proceeds. We believe LG's claims are without merit.
The deferral of this revenue has the effect of depressing the implied royalty rate as you would calculate it as their shipments are included in total reported device sales without the corresponding revenue. Assuming we conclude this matter successfully, as we have done with others in the past, we would expect to recognize the deferred revenues at that time. Looking ahead, the outlook for global 3 gs, 4 gs device shipments continues to be strong. With respect to smartphones in particular, there continues to be a significant opportunity for Qualcomm. LTE penetration is only 14% of cellular connections globally and smartphone unit shipments are forecast to be more than $8,500,000,000 from 2015 through 2019 according to GSM Intelligence and Gartner.
Calendar 2015 global 3 gs4 gs device shipments are largely in line with our prior expectations, driven primarily by migrations to 4 gs in China, partially offset by some recent weakness in developed regions. We continue to estimate that calendar 2016 global 3 gsfour gs device shipments will grow approximately 10% at the midpoint, driven primarily by the migration to 3 gs4 gs devices in emerging regions with particular strength in India. Our estimate for premium tier shipments is down slightly versus our prior view driven by slower than expected sell through at a large OEM, but that is offset by a slightly stronger outlook for emerging region shipments. We continue to expect low single digit growth in global 3 gs4 gs device sales in fiscal 2016 as unit growth more than offsets ASP declines. We will provide further color on our long term outlook for the 3 gs, 4 gs device opportunity at our upcoming Analyst Day.
Now let me provide an update on our progress with licensing in China. We are continuing to aggressively seek to conclude new license agreements on the NDRC terms with the remaining Chinese OEMs and improve compliance. We are making progress with these negotiations and recently concluded new agreements with Xiaomi, Haier, Kiku and Tianyu. These agreements include royalty bearing licenses for 3 mode devices and contain terms that are consistent with the terms the rectification plan submitted to the NDRC. Having said that, we still need to conclude agreements with a handful of key Chinese OEMs and those negotiations continue.
Our progress and our ongoing interactions with the NDRC and other parts of the Chinese government continue to give us confidence that we will be able to conclude agreements with the remaining key OEMs. While we are working to conclude license agreements and improve compliance through commercial negotiations and audits, we are prepared to enforce our agreements and take other actions against certain OEMs that are not negotiating in good faith, under reporting royalties or refusing to conclude agreements in the near term. Turning to our outlook for fiscal 2016, we continue to expect QTL's revenues to be in the range of $7,300,000,000 to $8,000,000,000 Although additional risk has been introduced as a result of the new LG dispute given that it could be resolved outside of fiscal 2016. In conclusion, although we are seeing some near term softness in the premium tier, the sales of smartphones remain healthy and should continue to grow. We remain confident that we will be able to resolve the dispute with LG, conclude new agreements with the remaining key Chinese OEMs and improve compliance over time.
That concludes my comments, and I look forward to seeing many of you at our upcoming Analyst Day. I will now turn the call over to George.
Thank you, Derek, and good afternoon, everyone. Our first quarter results reflect a strong quarter relative to November guidance and are consistent with our update a few weeks ago. Fiscal first quarter revenues were $5,800,000,000 and non GAAP earnings per share were 0 point 97 dollars above the midpoint of our original guidance. The outperformance primarily reflected stronger revenues in our licensing business and accelerated cost reductions in QCT. We also benefited at the end of the quarter from the permanent reinstatement of the R and D tax credit impacting non GAAP earnings per share by approximately $0.01 to $0.02 In QTL, higher than expected ASPs and shipments led to stronger revenues at $1,600,000,000 and more than offset the dispute impact in the quarter.
Total reported device sales include some reported devices without the corresponding revenue from the LG dispute that Derek described as well as some deferred 3 mode revenues. QCT shipped 242,000,000 MSMs with revenues of $4,100,000,000 and operating margin of 14%, reflecting stronger than expected demand in the low tier, particularly in China, partially offset by lower than expected shipments of thin modems. For the company, non GAAP combined R and D and SG and A expenses were lower than our expectations, decreasing approximately 2% sequentially, reflecting an acceleration of some of our SRP cost initiatives originally forecasted to be taken later in the fiscal year. Operating cash flow was strong at $2,700,000,000 or 47 percent of revenue for the quarter and we returned $2,800,000,000 to stockholders in the form of dividends and buybacks. As of the end of the fiscal Q1, we had approximately $4,900,000,000 of our stock repurchase authorization remaining.
Our non GAAP tax rate was 17% in the fiscal Q1 and we now estimate that our fiscal 2016 non GAAP tax rate will be approximately 18%, including the impact of the permanently reinstated R and D tax credit down from our previous estimate of 19% to 20%. Now turning to fiscal 2016. For QTL, we are not modifying the prior $7,300,000,000 to $8,000,000,000 range revenue range for the year. However, that range did not anticipate deferral of revenues related to the LG dispute. While we are working hard to resolve this dispute and believe their claims are without merit, it is possible that the resolution will not occur in fiscal 2016.
In this case, the deferral of the LG revenue outside of the fiscal year could impact the range by several $100,000,000 In QCT, we continue to expect improving trends in the second half of the fiscal year on new product traction. We also continue to expect to achieve a QCT operating margin of 16% or better in the fiscal Q4. We remain on track to meet the spending reduction objectives under the strategic realignment plan and now expect at least 7 $100,000,000 of savings in fiscal 2016 and to exit the year at a savings run rate of $1,100,000,000 We expect fiscal 2016 non GAAP combined R and D and SG and A expenses will be down approximately 2% to 4% year over year, down an additional 1% at the midpoint on earlier capture of cost savings relative to previous estimates. Turning to our guidance for the Q2 of fiscal 2016. Our outlook reflects a seasonally strong December quarter for 3 gs, 4 gs device shipments for QTL and the seasonally lower 1st calendar quarter MSM shipments for QCT.
Consistent with last quarter, our guidance does not include a forecast of potential revenue from signing new license agreements in China and we have excluded estimated revenue from LG as a result of the dispute. We estimate revenues to be in the range of approximately $4,900,000,000 to $5,700,000,000 and non GAAP earnings per share to be in the range of approximately $0.90 to 1 dollars per share. We anticipate fiscal 2nd quarter non GAAP combined R and D and SG and A expenses will be down approximately 2% to 4% sequentially, reflecting continued progress on our SRP initiatives. In QTL, we estimate total reported device sales of $65,000,000,000 to $73,000,000,000 will be reported by our licensees in the March quarter for shipments they made in the December quarter, up approximately 14% sequentially at the midpoint, reflecting the seasonal strength of the holiday quarter. If the dispute related units continue to be reported and the matter is not resolved during the quarter, then we could again see units included in TRDS for which revenue would not be recognized.
Also in QTL, we are expecting a one time benefit of approximately $250,000,000 in revenue in the fiscal Q2 based on termination of an infrastructure license agreement that resulted from one of our licensees acquiring another one of our licensees. This was partially offset by the end of a multiyear amortization of approximately $100,000,000 in quarterly license fees. These events were expected and contemplated in our prior guidance. In QCT, we expect MSM shipments of approximately 175,000,000 to 195,000,000 units, lower sequentially reflecting seasonal trends, somewhat exaggerated by an above seasonal decline in demand for thin modem products. We also see some modest negative impact from mix shift across OEMs and devices in China.
We expect revenue per MSM to be higher quarter over quarter, reflecting stronger mix, including a lower mix of thin modem shipments. And consistent with our prior guidance, we expect QCT's fiscal second quarter operating margin percentage to be in the low to mid single digits. That concludes my comments. I will now turn the call back to Warren.
Thank you, George. Operator, we are ready for questions.
Your first question comes from the line of Mike Walkley with Canaccord Genuity. Please go ahead.
George,
just following up on the QTL guidance, is that $250,000,000 from the merger of your infrastructure customers that's included in the guidance? Just wanted to clarify that. And then overall longer term, as you look at QTL with the royalty rate and more free mode devices coming in there, can you just help us think about maybe the implied royalty rate going forward? That's very helpful.
Sure. Hi, Mike. This is George. Yes, the $250,000,000 is included in the guidance. And remember, it's netted against the expiration of about $100,000,000 a quarter from a previous multiyear agreement.
Mike, this is Derek. On the implied royalty rate question, I think there's so many moving pieces on this, but let me give you just sort of a high level view. I think there's going to be some lumpiness as we go forward just in terms of catch up units coming in and some of those will be 3 mode units for prior periods as well as then as licensees start reporting more 3 mode that will have some that will put some pressure on the rate. Although actually what we're seeing in the market in China is more of a shift to 5 and 6 mode devices and away from 3 mode devices. And so a lot of the design traction now has moved.
And I think as you go into the second half of twenty sixteen, we'll probably start seeing, as a percentage of units in China, a reduction in the amount of 3 mode on a go forward basis.
Your next question comes from the line of Tim Long with BMO Capital Markets. Please go ahead.
Thank you. Yes, just on sticking on the royalty rate and the QTL business, Derek. First, I just want to make sure I understand, I guess, there's the moving parts, but if the LG is a little more than 100,000,000 dollars in that number, it still seems like the calculated number would be 10 or 15 basis points under 3. So is that do we have a new reset to rate there? Or is there something else that dragged the number in the quarter down?
And then the unit numbers, the paid units were pretty good above what we've seen as normal seasonality. So you could just can you break down for us how much of that was catch up or maybe how much of that was contribution from some of these new deals that have been signed recently? Thank you.
Tim, this is Derek. On the rate, there's a few things affecting it in the quarter. We gave $100,000,000 We said more than 100,000,000 dollars and so we're not being entirely precise on that number. So I think you need to be a little bit careful about just pegging it to the $100,000,000 But we also had some catch up units come through in the quarter, for which we didn't have revenue in the quarter, given sort of the structure of the deal in terms of when it's going to get paid out. That revenue we expect will come in, in future quarters.
So that's also having a drag. So you've got sort of the disputed TRDS as well as this three mode element that is kind of collectively putting some pressure on the rate. There is there are catch up units in the quarter. I would say that they're not a huge contributor, but they're probably less than about 20,000,000 units for the quarter.
Your next question comes from the line of Koolbinder Gharsha with Credit Suisse. Please go ahead.
Thanks. Can you just maybe talk through the drivers of the QCT margin decline into the next quarter? It seems quite a severe drop. I know the seasonality, but we haven't observed it to be that volatile in the past. And then the that's the first question on QCT.
And on QTL, Derek, maybe thinking about it another way, it looks like now if my math is right, you've signed with vendors or with these new terms that account for almost 50%, 60% of the Chinese smartphone market. And I would have thought at some point, the increase in compliance in China will drive an uptick to the QTL revenue profile. It doesn't seem to be doing that even if I take out the impact of LG this year. So how should we think about the future compliance of more vendors you want to sign up? Should that QTL revenue ramp start reflecting that or are there other factors that we should think about this
year? Thanks.
Colburn, hi, it's George. So on the margin decline quarter over quarter and again as a reminder, we actually guided this at last quarter's call as well. As you see the big seasonal pullback in volumes and the mix change that we see that has both an absorption of OpEx issue and a gross margin reduction element to it. And the combination of those at this level of revenue pulls it down to our forecast. I will say, as we've talked about, we see those dynamics actually reversing themselves and actually providing momentum into the back half of the year in terms of margin improvement and we still see getting to 16% in Q4 in QCT.
Kalbinder, this is Derek. So again, I think you got to
break down kind of the TRDS picture in China. There's really 3 elements. 1 is the under reporting, which I think is largely referred to as the compliance issue. Then there's 3 mode volume that is unlicensed and we're working actively to get companies signed up so that they start paying on 3 mode. And then the third thing that we talked about last quarter, we're actually a small number of companies, but actually meaningful in size, that had actually started withholding reports and payment of licensed non three mode units.
And so as we conclude new agreements with those companies, you'll see a meaningful improvement in sort of the run rate collection because there also tend to be some of the larger 3 mode players in China. So you'll capture the 3 mode plus you'll get them back reporting on the non-three mode, which will leave you really with this compliance question, which will still be something we need to work through. But those 2, I think it's really a relatively small number of companies that need to get signed, and you'll see pretty material improvement in the run rate in QTL.
Your next question comes from the line of James Faucette with Morgan Stanley. Please go ahead.
Great. Thanks. I just had a couple of questions, I guess related to royalty collections. 1st, in the contract dispute with LG, can you give a little color there as to, is this at all connected to the KFTC process within Korea or is resolution somehow of 1 dependent on the other? And then along those same lines, maybe if you could give any update on your engagement and progress with the different governments that are looking at Qualcomm's practices in Korea, Taiwan and the EU?
Thank you very much.
James, this is Derek. I'll take the first part of that. Really the dispute we have with LG is really unrelated to the issues that are before the KFTC. We've had this throughout the history of the licensing program. It's just sort of part of the business that we'll from time to time have disputes with our licensees.
This is really a contract dispute under their agreement similar to a number of the ones we've had in the past, which we've resolved successfully for the company. And we feel very firmly that we're going to be able to do that again here. And so there'll be a question of timing. We decided for now not to adjust the QTL revenue guidance for the year because we still have 3 quarters left to resolve it. And we think there's a chance that, that can happen.
If it goes all the way through the arbitration process, that will likely push it outside the fiscal year. But we feel very good in our position. And again, we've been through a number of these in the past and they've worked out well.
James, this is Don. In terms of more color on some of the regulatory issues that we're dealing with, Not much more color we can add other than to say our licensing model as you know has been in effect for quite a few decades. It's been modeled after others. Everybody in the industry follows the device level licensing, for example. And we're very confident in the chances of trying to convince regulators that this model has not only been effective, but has enhanced competition.
We've through our licensing model of sharing our intellectual property, I think we have broadened the field and our immense investment in research and development and the core technologies which we patent and then share, I think has contributed to the growth of this industry. And hopefully, we'll be able to demonstrate that as we go through these regulatory matters.
Your next question comes from the line of Rod Hall with JPMorgan. Please go ahead.
Hi, guys. Thanks for taking my question. I've got a couple. First one I wanted to ask you, you talked about you said less than 20,000,000 catch up units in the quarter. I wonder if you could talk a little bit about the potential timing of catch up in China and what the outstanding unit number looks like and we have our estimates, but it would be nice to get some kind of indication from you guys.
And then I also wanted to talk a little bit about QCT margins again. I guess two questions within that. One is, can you give us some idea what the fixed cost level there is? And should we be looking at fiscal Q1, fiscal Q2 and that margin move as some indication of where that number is? Second question I had is those margins were pretty strong in Q1.
And I just wondered if you could talk a little bit about what's going on underlying that since the mix was shifted toward the low end. I would have thought that would drag margins down, but they were actually quite strong. So could you just comment on that?
Hey, Rod, this is Derek. On the catch up units in compliance, I think we've we gave some color on that in for the full year fiscal 2015. And if you looked at the delta between what we gave as kind of the global device sales and the reported device sales, it was about 9% or 25,000,000,000 dollars So that was kind of the range for $15,000,000,000 For $16,000,000 it's really going to be dependent, I think, highly on the timing of getting these additional agreements signed. The underlying sort of under reporting by licensees that have agreements, I would say, is kind of largely been in line over the last couple of quarters. It's not materially improving or worsening.
It's really been more the dynamic of the people that have withheld payment and reporting, which will get resolved upon signing the agreements. But so I think the rough sizing that we gave for 2015 with that color hopefully will get you there.
Rod, hi, it's George. On Q1, I think one of the things that you saw was better performance by QCT, particularly on OpEx pulling in some of the cost savings earlier into the year, which actually helped that margin and improved that margin relative to our expectations going into the quarter. I would say that some of that has narrowed the in terms of the OpEx improvement quarter over quarter, you're not getting quite the move. So on lower revenue, OpEx as a percent of revenue is obviously going to weigh on the margin. And then of course, you just have the natural gross margin impact when you see a big seasonal adjustment in units and that's really what we're seeing.
So nothing more than that. And again those things tend to reverse themselves as I said earlier in the second half of the year.
Your next question comes from the line of Simona Jankowski with Goldman Sachs. Please go ahead.
Hi, thank you. Another question on the royalty rate. Just wanted to clarify again, of the 2.65% the LG, what would that number have been? And then once we get past the March quarter and that one time $250,000,000 benefit from the infrastructure merger. Did I understand you correctly that there's going to be $100,000,000 impact on the royalty rate collection on a go forward basis past that, so effectively about a 15 basis point hit to the implied rate?
And then I have a follow-up.
Hey, Simone, this is Derek. So I think last quarter basically what we said about the implied royalty rate for the year, we said listen it's going to be highly dependent on sort of the timing of signing up some of the new agreements in China and moving people over the CPLA rates. But sort of on balance, we expected it to be down modestly for the year. So I would say if you adjusted for the impact of the disputed revenue and the reported sales in the quarter that didn't have revenue coming along with it because of the catch up units, we would be broadly sort of in line with that. You are correct that once this amortization of the $100,000,000 expires that will come out.
We've talked about the fact that we have license fees and those are amortized over a period of time. And so once those go away, they that will become a drag. But that was anticipated. And so when we gave kind of the color of what we expected the rate to do for the year, with all the moving pieces in mind, that was factored in.
Okay. So the clean rate for the quarter was something close to 3% and then looking out a couple of quarters like for like it would come down to something like 2.8% once you remove the infrastructure amortization?
Yes, that's generally correct. I would say that the second part of your question would imply no other changes, but we do think that there are some other things that could potentially play out throughout the year that would be a positive bias on the rate. So that's I think that's maybe the piece you're missing. But otherwise, I think that's generally right.
Okay, understood. And then just a quick separate question was on the comment about your server chips sampling with the Tier 1 hyperscale customers. When would you expect to see production volumes? And when would you expect a
when we first started talking about this, we were pretty clear that we're going to be in an investment mode for a period of time here before this becomes a meaningful contributor. We're very, very positive on the signs we're seeing both in North America with the large cloud players as well as in China. And so you'll start seeing some shipments within probably the next year or so. But really when you think about it as a contributor, it's going to be out a few years.
Okay. Thank you.
Your next question comes from the line of Timothy Arcuri with Cowen and Company. Please go ahead.
Thanks a lot. I had 2. I guess first one is on M and A. Obviously, you have a lot of offshore cash. And I just wanted to get your opinion.
I think that the TDK deal was great, but I wanted to get your opinion on maybe something bigger, some sort of transformational deal that maybe you could do in QCT. So just wanted to get your general thoughts there.
Sure, Timothy. It's Steve Mollenkopf. The way we think about it is we obviously have the ability to path. But we're pleased to be able to return the cash that we have and will continue to do and have options to do that. As the industry consolidates, I think we're going to consider ourselves to be getting in a stronger position versus a weaker position to be able to take advantage of the trends that I spoke about in my script.
So, we feel like we're in a good spot, but we don't feel like we have to do something in order to grow.
Okay, thanks. And then I
guess a question for George. Just on the 185,000,000 MSMs in March, can you give maybe a sense in terms of how many of the new design wins for 820 are included in that number? Or is that more of a June event? Thanks.
Yes. I can't give you the specifics too much on that. But what I can tell you is that we really see the 820 as more of a
a
it's really going to be more evident in the second half of the year. And maybe Christiane, I'll let you jump in on that. We're seeing more it's more I would say Q2 is more of a strong seasonal effect with an exaggerated effect as I said in my prepared remarks on thin modem.
Yes. Just one comment. I think very optimistic about the 820 design traction. Right now, we're supporting key flagship designs to carrier certification, then volume ramp will happen in the second half of fiscal twenty sixteen.
Your next question comes from the line of Tal Liani with Bank of America Merrill Lynch. Please go ahead. Hi, guys. Hopefully you can hear me okay.
Just one clarification before my question. You said in response to what Simona asked you, you said that there are positives on the rate that could come through the rest of the year outside of LG coming back. Is there any other positive on the royalty rate that could any other positives could impact the royalty rate? So that's question number 1. Question number 2 is about the implications of $820,000,000 in the second half of the year.
Can you discuss the implications on margins and the implications on ASPs? Think the ASPs are quite straightforward, but the question is, when you start ramping 8 20, does it have positive implications on margins right from the beginning? To the contrary, it has negative implications at first until you ramp to a certain level or you expense certain expenses and only then it goes up? Thanks.
Tal, this is Derek. On your first question, there are a couple of things. Really the primary positive driver would be OEM mix. So share gain by companies that are paying a higher running royalty rate than others and we think there is some potential for that as the year progresses.
This is Cristiano. On the 820, I think as we said is the real volume hemp ramp is going to be in the second half of the year. That's where we go into mass production. I think we feel pretty good about the 820 and the overall economics. I also think we are on, as we said, on a 14 LPP process node.
Another thing to think about QCT in the second half is, we're seeing increased design traction across all tiers, not only the A20, in particular in China because of the acceleration of LTE Advanced, which is 4 gs plus and the all mode that was mentioned by Derek earlier.
Your next question comes from the line of Stacy Rasgon with Bernstein Research. Please go ahead.
Hi, guys. Thanks for taking my questions. I have 2. First on the chipset guide, I know you're pointing to sort of a seasonal effect, obviously, driven by exacerbated by thin modems. But at the same time, it's a 24% quarter over quarter decline, 57,000,000 units.
I think this is your biggest sequential chipset decline ever. Can you give us or at least help us parse out the impact, I guess, of the seasonal effect? Is there any sort of inventory flushing going on? Do you think that sort of this is sort of a normal run rate kind of exiting the quarter? I mean, how should we be thinking about those other sort of seasonal drivers impacting that guide?
And for my second question, you have this $100,000,000 license amortization rolling off. Do you have any other licensees with amortization that's rolling off, say, within the next 3 years?
Stacy, hi, it's George. Let me just respond to the chipset guide question. So I would say we're certainly seeing above normal seasonality in this quarter, in particular on the thin modem side. We've also seen some OEM mix in China having an effect, but I would say that is a third deep third effect to what is seasonal first, above seasonal and thin modem and then some modest OEM mix where customers of ours are ceding some share to customers that use other devices.
Stacy, this is Derek. On the amortization question, I mean, we have over the years done different kinds of deals, some of which have license fees that are amortized over a period of time. And so there are things that come into the amortization and go out. That's just sort of an ongoing basis. But beyond that, you saw an acceleration of $250,000,000 of license fees that would have been amortized over a longer period of time that will come in next quarter.
And those are really the 2 that we're highlighting at this
time. Your next question comes from the line of Tavis Makort with Raymond James. Please go ahead.
Hey, guys. Thanks for taking my question. George, just to make sure I have the $250,000,000 coming in, that's coming into QTL, correct? And then I think you mentioned in the prepared comments, outside of the thin modem customer, you're I forget if the verbiage was, was you're seeing some strength or at least stability in emerging markets in your chipset business. That's not completely obvious to me why that should be typically in a strong dollar environment.
Handset sales can really get hurt in emerging markets. So I'm wondering if you're just not seeing that yet or is there some channel inventory issues going on or perhaps some market share gains as we exited last year and enter this year? And then a final one for you, Steve, on the TDK joint venture. You mentioned gas PAs, and I wasn't sure if you were referring to having them sampling in fiscal 'seventeen or we should see those in commercial products in fiscal 2017? Thanks.
So on the $250,000,000 that will be reported in QTL. In terms of what we're seeing in the channel, I would say we're not seeing an unusual inventory build like we saw a couple of quarters ago, with the exception, like I said, we've we're probably seeing a stronger than normal seasonal pullback in thin modems. But that's really what I would say is more of the outlier for our quarter.
This is Cristiano. Just to add a comment. I think when you look at the Q2 $185,000,000 midpoint of the guidance, I think what we said is the China was a very minor impact. I think it's not any unexpected design change. What it is, is the mix of OEMs in the marketplace.
We saw a slightly increase of volume for an OEM that is not using QCT as a vertical OEM in China, but I think it's very minor. The main thing really is seasonality and the Fin modem demand adjustment.
And this is Steve. Just one other additional thing. Really what's driving worldwide unit demand for the products is just the transition to 4 gs. So you're still only seeing what something like 14% of the market is using 4 gs now and that continues to be a positive trend for us across tiers. With respect to TDK, the TDK commentary and the gallium arsenide PAs, we will be in production in 2017 and I think comfortably so.
So we expect to see products in the market using those PAs in that timeframe. Your next question comes from the line of Srini Pajjuri with CLSA Securities. Please go ahead.
Couple of questions. First a clarification, George, on the annual guidance for licensing. I'm just curious if LG is impacting only $100,000,000 or is it $100,000,000 per quarter? And then a follow-up to Steve's question answer on the GasB and TDK deal. Steve, I mean, obviously, RF market in general has been growing very nicely over the past few years.
And some would argue that actually that the deal why the deal now, what do you see out there that gives you that this is the right time to invest more aggressively in this market?
Srini, hi, it's George. So the LG impact that we talked about of over $100,000,000 is a quarterly number. So the annual impact, of course, is going to be dependent on what their royalty obligation would be for the year relative to the guidance range. It was not anticipated or included in the 7.3 $1,000,000,000 to $8,000,000,000 range. So it would be an adjustment to that and really it will be a function of when it is resolved as to what the potential impact would be until then.
And this is Steve. On the RF front end business, I think it continues to be a very large TAM that for us we haven't been participating in outside really largely by our envelope tracking business. And that's like all of our RF businesses or analog businesses, they're actually that's a good a good profitable business. And so our ability to grow that even within that TAM is I think a good story for us. Our view of the market is that you're going to need to have all the pieces filter, module, PA, baseband, switches to really be meaningful as a long term player and that capability will continue to be important not only in the handset market, but also across all of the connectivity markets that open up as everything becomes connected and certainly in 5 gs.
So we think that's a good set of assets. We'll be able to grow that moving forward. We've got some execution to do to prove that, but we feel like we have we're getting the right pieces and we're going to make it happen. Your final question comes from the line of Edward Steiner with Charter Equity. Please go ahead.
Thanks very much. On the same kind
of theme on the
RF, I think you launched RF360 in early 2013 and now you've got the TDA relationship which expands upon that. Should we expect revenue from RF to be material to consolidate results in fiscal 2017? Or is that something more of an 2018 event? And then with respect to the RF products you're selling now, do you anticipate that you'll be selling these RF modules into solutions that don't use your baseband? Obviously, your solutions that do use baseband transfer would be natural home for those.
But do you think you're intending to reach beyond where you are, your baseband sockets wins are and move out to general market? And then a follow-up if I could on makeshift and QCT.
So this is George. We'll consolidate as soon as we close the transaction because we'll have 51% and effective control from a reporting standpoint. In terms of supporting other devices and other customers, we would anticipate continuing to do that just as TDK does today.
Will this show up in one
of the existing segments? And once consolidated, it will be mature enough? Are you considering breaking out its own group?
It will be reported in QCT.
Okay. And then finally, was mix shift away from thin modems in the December period, was that a major component in the sense of increasing QCT margins or was it not very material?
Hi, this is Cristiano. I think George answered that earlier. I think one of the things where we're ahead of the plan of delivering some of the cost savings that we had a part of our strategic realignment plan. And I think that has been a key contributor of our stronger margin in Q1.
This ends our allotted time for questions and answers. Mr. Mollenkopf, do you have anything further to add before adjourning the call?
Sure. I just want to
thank everyone for attending the call today. We are executing on the plan to get the company growing again. We're focused on improving licensing in China, and I look forward to the second half of the year as our new products ramp. I also want to remind everyone that we will hold our Analyst Day in San Diego in 2 weeks where we will go into more detail on our strategy and priorities. I will close by thanking all of the Qualcomm employees on their hard work and for delivering a stronger than expected Q1.
Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.