Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm Conference Call regarding China's NDRC Investigation. 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 February 9, 2015.
The playback number for today's call is 855-859-2056. International callers please dial 40 4537-3406. The playback reservation number is 8,397, 1934. I would now like to turn the call over to Warren Kneeshaw, Vice President of Investor Relations. Mr.
Kneeshaw, please go ahead.
Thank you, Dustin, and good afternoon, everyone. I'd like to welcome you to our conference call regarding the resolution of the investigation by China's NDRC. Today's call will include prepared remarks by Steve Mollenkopf and Derek Haberle. In addition, George Davis and Don Rosenberg will join the question and answer session. An Internet presentation and audio broadcast accompany this call and you can access them by visiting our website at www.
Qualcomm.com. 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 Web site. During this conference call, 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 Form 10 Q, which contain factors that could cause actual results to differ materially from the forward looking statements.
And now to comments from Qualcomm's Chief Executive Officer, Steve Mollenkopf.
Thank you, Warren, and good afternoon, everyone. Thanks for joining us on such short notice. We announced today that the investigation by the NDRC in China has been concluded. As part of the resolution, Qualcomm has agreed to modify some of its business practices in China and the NDRC has levied a fine of approximately $975,000,000 against the company. Although we are disappointed with the results of the investigation, we are pleased we have reached a resolution that we believe is in the best interest of our stockholders.
This resolution brings certainty to our licensing business in the world's largest wireless marketplace and strengthens our ties to the Chinese wireless and semiconductor industries. We are pleased to be raising the midpoints of our fiscal 2015 revenue and non GAAP earnings guidance to reflect our increased confidence in the outlook. Qualcomm has a long history of contributing to the success of the mobile and semiconductor industries in China and this resolution better positions the company to support its many partners in China. Now that the investigation is over, we will focus on growing our investments and business in China. Finally, I would like to thank the many Qualcomm employees who contributed to this resolution and acknowledge their hard work and dedication during these times.
I would now like to turn the call over to Derek Averley, who will provide you with more specifics.
Thank you, Steve, and good afternoon, everyone. As Steve mentioned, we are pleased that the NDRC's investigation has concluded in a way that enables us to move forward with growing our business in China. Although we are disappointed with the results of the investigation, Qualcomm will not pursue further legal proceedings contesting the NDRC's findings or the fine and we are pleased that the NDRC has accepted Qualcomm's rectification plan and agreed that the plan satisfies the requirements of the NDRC's order. Given the uncertainty created by the investigation as well as the final terms we were able to achieve in the resolution, we believe that it is in the best interest of the company and our stockholders to put the investigation behind us and focus on growing our business and partnerships in China. We believe that the resolution, including the terms of the rectification plan and the NDRC's acknowledgment of the value of Qualcomm's technology and its support of Qualcomm's collection of royalties for 3 gs and 4 gs devices in China positions the licensing business to fully participate in the growing opportunity in China, including collecting royalties on LTE devices such as 3 mode LTE TDD devices.
Let me now walk through in more detail some of the terms of the rectification plan that will affect our future licensing practices in China. As part of the rectification plan, Qualcomm has agreed to the following. Qualcomm will offer licenses to its current 3 gs and 4 gs essential Chinese patents for handsets, tablets and laptops, which I will refer to generally as devices, separately from licenses to its other patents and we will provide lists of patents that we are offering to license during the negotiation process. If Qualcomm seeks a cross license from a Chinese licensee as part of this offer, we will negotiate with the licensee in good faith and provide fair consideration for such rights. It is important to note that the rectification plan does not require QUALCOMM to change its existing licensing practice as to QUALCOMM's other patents.
As part of the above offer to license its current 3 gs and 4 gs essential Chinese patents, Qualcomm agreed that only for licensee branded devices sold for use gs devices, including multimode3gs4gs for 3 gs devices, including multimode3 gs4 gs devices and 3.5% for 4 gs devices, including 3 mode LTE TDD devices that do not implement CDMA or WCDMA. In each case, using a royalty base of 65% of the net selling price of the device. It is important to note that these royalty terms do not apply to 3 gs or 4 gs devices that are not licensee branded devices or that are sold for use outside of China, unless they are made in China and sold for use in a country in which Qualcomm has no patents. Qualcomm has patents in virtually every significant country. Although the definition is a bit more complicated, you can think of licensee branded devices as devices that are clearly marketed and sold as the licensee's own branded product.
For example, the reduced royalty based terms will not apply to devices sold by a contract manufacturer or ODM to its customer that is itself a device supplier. The reduced royalty based terms also will only apply to devices for which the licensee pays the applicable 5% or 3.5% royalty rates I just described. Qualcomm will promptly give its licensees an opportunity to elect to take these new license terms for applicable sales of licensee branded devices effective as of January 1, 2015. A licensee's acceptance of the new license terms I just described will not modify the royalty terms of its license agreement for sales of any license devices that are not covered by the new license terms. For example, a licensee's sales of devices for use in the U.
S, Europe, Japan, Korea, Latin America or India will not be impacted by the licensees acceptance of the new license terms for China. Qualcomm agreed that it will not condition the sale of baseband chips on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its license agreement. However, this does not require Qualcomm to sell chips to any entity that is not a Qualcomm licensee and does not apply to a chip customer that refuses to report its sales of licensed devices as required by its patent license agreement. It is also important to understand that the NDRC's decision is an application of China's anti monopoly law and each and each jurisdiction has its own laws and precedent. The AML is different in several respects from antitrust and competition laws and therefore we do not believe it is likely that other competition agencies will interpret their laws to reach conclusions similar to the NDRCs.
For example, other competition agencies generally have declined to regulate prices for intellectual property. Given that the NDRC has acknowledged the value and importance of Qualcomm's patented technology and the need for Chinese OEMs to take a license for 3 gs and 4 gs products and that the NDRC has accepted the terms of our rectification plan as satisfying the requirements of their order, we believe the licensing business is now well positioned to address the underreporting that has been occurring over the last several quarters and to complete new license agreements covering currently unlicensed volumes in China. There are also additional provisions in the rectification plan and the new license agreement we recently signed with a major Chinese OEM that we believe will help accelerate the resolution of these issues. Having said that, it will still take us some time to fully resolve the under reporting and unlicensed activity. With respect to guidance for fiscal 2015, the resolution narrows our estimated revenue range for QTL as the settlement in terms of the rectification plan have eliminated a number of the risks that contributed to the lower end of our prior estimate.
Although we are not updating our estimates for fiscal 2015 total reported device sales at this time, we now have an upward bias within this view. To give you a sense for the overall impact of applying the new China royalty terms that I previously explained, if the terms had been in effect for the entire fiscal year 2015 period, we estimate that these new terms would have applied to approximately 10% to 12% of the fiscal 2015 global 3 gs, 4 gs device sales estimate of $265,000,000,000 to $280,000,000,000 Going forward, the mix of devices sold for use in China and the overall size of device demand in China will influence how much of the global 3 gs, 4 gs device sales will be impacted. As a result of the resolution, we are narrowing our fiscal 2015 total Qualcomm revenue guidance range by raising the lower end of the range, reflecting 20 $150,000,000 at the midpoint versus our prior guidance. We are increasing our fiscal 2015 non GAAP earnings per share guidance by $0.05 at the mid point and narrowing the range to between $4.85 $5.05 per share. With respect to the fine imposed by the NDRC, we expect to take a charge to our GAAP results of approximately 975,000,000 approximately $0.58 of GAAP earnings per share in our 2nd fiscal quarter.
Given the timing of the NDRC resolution, the fact that only sales through June 2015 are reflected in QTL's fiscal 2015 and that it will take some time to reasonably conclude the new licensing agreements and fully resolve the underreporting. We expect the benefit of collection of underreported devices will be more of a positive contributor to QTL's performance in 2016 versus fiscal 2015. Factoring in the terms of the resolution, we are still on track with our long term growth expectations for the licensing business. I would now like to turn the call back over to Warren.
Thank you, Derek. Operator, we are ready for questions.
Our first question comes from the line of Mike Walkley with Canaccord Genuity.
Derek, just some clarifications for me. First, is your updated guidance, are you assuming any catch up payments for underreported units in China? And then second, just a clarification for the terms in China, just assuming a high end Android phone sold in that was, say, dollars 6.50 or above an implied ASP cap. Would the number of key rate on that phone if you take 65% off still be the same within China as if it would be elsewhere if the 2 thirds price is still above the ASP cap implied in the licensing deal? Thanks.
Yes, Mike. Hey, this is Derek. On your guidance point, I think the way you should think about catch up is we had a relatively wide range for the QTL revenue guidance at the beginning of the year and we're now narrowing that given we've eliminated some of the uncertainty with resolution of the licensee dispute last quarter and then now the NDRC resolution. So there is and has been some amount of catch up kind of embedded in that range from the outset. And I would say we're incrementally more positive on that now than we were before the resolution.
Your question on the ASP, the royalty caps that we have in place are actually, although we often talk about them in terms of the selling price of the device, they're generally actually a royalty per unit dollar cap. And when you apply the rate, sort of our normal 5% rate to that, it gets you to basically an implied cap on the ASP. So in the situation where you had a very expensive device that was above the cap, applying the discount basically would mute that impact on revenue.
Okay. Thank you.
Next question comes from the line of Tim Wong with BMO Capital Markets.
Thank you. Just two quick ones if I could. First, Eric, if you could just talk a little bit about how you think compliance to this new deal is going to go within China even before there's been several years of questions about who's getting paid in white box and all that other We do know the Chinese government has pretty good track of devices that are being sold. So could you just talk a little bit about how you think compliance will go and the government's involvement with maybe helping Qualcomm track things? And then the second thing just to clarify the does this deal apply to say a non Chinese OEM who makes and sells phones in China?
Or is this just to Chinese branded OEMs? Thank you.
Thanks, Tim. On the compliance front, I guess I would think about it this way, not necessarily expecting that the government is going to get involved in our detailed compliance efforts. But I think a couple of things that are important. One is that we have obviously been in discussions with the NDRC for many months and been working on a way to resolve this. And part of the resolution includes this rectification plan that I just described.
And that was agreed and accepted by the NDRC as satisfying the requirements of their order. So I think that's an important thing to keep in mind in terms of when we go out and offer the terms that are consistent with that plan, how they will be received by the licensees. The second is that the NDRC also has throughout these discussions appreciated and acknowledged the value of our technology contributions in China. And I believe will be supportive of our collection of royalties for that technology going forward. So in the past where companies may have tried to hide behind the government as an excuse for not signing agreements or not paying royalties, I think that risk is substantially eliminated.
On your second question, basically the way you should think about it is we're going to offer these terms to pretty much all of our licensees. And for those that elect to take the terms, for the subset of the patents that are covered, which is our 3 gs and 4 gs Chinese standards essential patents, they'll be entitled to apply these terms for sales that are for use in China, whether they're made somewhere else or made in China. But again, you should think of it as really a China consumption type of environment.
Next question comes from the line of Brian Modov with Deutsche Bank.
Hi, guys. So just following up on that just confirming there will be no impact to the terms of sales and royalties outside of China for companies for Chinese companies selling outside of China and for other companies outside China, they have to pay the rates that were established before this investigation got underway.
Brian, this is Derek. Yes, that's essentially correct. Basically, the licensing terms that apply to other Okay
Okay. And then can we just
kind of look at it and kind of doing the math with the 3 mode solutions, a rate of about 2.25% or 2.75% on the ASP of the phone and perhaps 3.25% on the ASP of the phone for multi mode. Is that kind of the way to think about it?
Yes. I think you're basically applying the kind of the 35% reduction to the headline rate. I think that's the right way to look at it.
Okay. All right. Thank you.
Our next question comes from the line of Ehud Geblum with Citigroup.
Hey, guys. Thanks. Appreciate it. A couple of questions. Question 1, can you give us a sense as to how many devices sold into China today you believe also use your non essential patents and therefore wonder what process you will take to assert your non essential Chinese patents on those devices?
That's A. The 65% reduction, what was the point of actually coming up with that reduction in ASP rather than just stating a royalty rate? And how is the what was the basis behind that 65%? Why was it 50% rather in 75%? And can you bridge the gap between that 65% and the argument that Apple is making with Ericsson?
And it seems that the IEEE just spoke on over the weekend about reducing the ASP of a device that royalties is based on. I know where you stand on that, but there's talk about moving it down to the chip level. And I know you mentioned on the conference call that you don't think that that is the way that things go. But given that this ASP was brought down from 100% down to 65%, if you can give us a justification of 65% and then kind of how that would how that kind of relates to these other comments that would be great. Thank you.
Hey, this is Derek. So on your first point, yes, our view is that devices sold for use in China are definitely using our non essential patents. And what we've done is basically as part of our rectification plan committed to offer licenses to the 3 gs, 4 gs patents under the terms that are set out there separately from our other patents. And our licensees will then decide whether they want to retain the licenses they have that are currently in most cases broader than that under their existing terms, whether they want to accept this. And then we would seek to negotiate separate licenses covering the other patents, the other non essential and in fact other essential patents that we have in our portfolio.
And so not going to get into a discussion here today about how and when we're going to do that, but that's sort of something that will come up down the road. On the question on the 65% in the base, I think couple of comments there. One is, one of the theories I think that or at least that was discussed was whether people will move to chip based licensing. And if you look at the resolution here, that's not what happened. And as you said, although there could have been an agreement to reduce the rate and keep it on 100% of the base, that's not where we ended up in the overall discussion.
So I can't really get too deep into how we got to the number other than to say this is a resolution that we felt in the overall scheme of things was the right thing to do for the company to accept and move forward.
Our next question comes from the line of Kolbindergarsha with Credit Suisse.
Thanks. Just a couple of clarifications, Derek. Firstly, just in terms of how to think about the incremental negotiate
these
negotiate these licenses, etcetera, etcetera. So is the right way of thinking about the impact that it's 10% to 12% of that $270,000,000,000 ish TAM, then we have to take a view to what mix there is between 3 mode and 5 mode devices, etcetera, then take a view in terms of the timing, whether it takes a year, 2 years, whatever to get all these into compliance in terms of the incremental impact it gives to your the lower end of your previous guidance? Is that the right way of thinking about it? That's my kind of first question.
Okay, Colvin. You were breaking up just a little bit. I think I got your question. So this is Derek, by the way. Basically, what we're saying is that if you look at the percentage of that total 3 gs, 4 gs device sales, not the reported portion, but the total sort of market that we gave, we think about 10% to 12% of that TRDS or that device sales effectively could be reported under the discounted royalty based terms.
And so that irrespective of whether that's 3 mode or 5 mode, the different rates would apply whether it was 3 mode versus 5 mode. But the basically the 35% reduction in the royalty base would apply to that portion of the total market in fiscal 2015. And when we look at overall, as I said, as I kind of ended my comments with, as we look at factoring in all the terms of the resolution here, we really still feel good about the long term growth trajectory for the business that we talked about earlier in the year.
And so the other question I had, Derek, was just these new rates there's been lots of discussion about most favored nation clauses and all your other agreements. Can you at least emphatically inform your investors that this shouldn't trigger anything on your other agreements with other OEMs around the world?
So we don't actually have anything called most favored nations provisions in our license agreements. I think people use that term loosely. What we do have in some agreements is a most favored royalty rate provision. And essentially what those provisions at a high level would say is if under certain circumstances you to give a licensee a lower rate in a particular country or for particular sales or for a license to particular patents, you would offer that to them. And again, there'd be a lot more detail behind it than that.
So if you look at the situation here, we're going to offer these terms to all of our licensees. And but the impact is limited to Chinese 3 gs, 4 gs standard essential patents and largely for phones that are sold for use in China. And any of our licensees, if they choose to accept them, we'll be able to have the same terms. When the Chinese OEMs sell into other countries, the terms of their agreements are not going to be impacted by these commissions. So there isn't really a sort of a country to country issue here from that perspective.
Our next question comes from the line of Stacy Rasgon with Bernstein. Hi, guys. Thanks for taking my questions. I have 2. The first one is I just have to ask why is 65% of the ASP the right number in China, but 100% is the right number everywhere else?
Secondly, you talk about basically if there's for example, somebody wants to you want to cross license from somebody else, you have to offer them appropriate terms for that cross license. Does that imply that the rates you're laying out here, are these a starting point for negotiations?
Stacy, this is Derek. So on the first point, I think what you have to keep in mind are 2 things. One is what we're talking about here are set of terms for our Chinese 3 gs, 4 gs essential patents. Obviously, patents are jurisdictional by nature. And both the patent laws and the antitrust laws are really country dependent as well.
And so the application of the laws in China very well can lead to different results than the application of different laws in different countries. And if you just look at antitrust regulation around the world, generally, regulators have not engaged in price regulation for intellectual property. So again, our feeling is at least from what we know that the terms of this resolution or the findings by the NDRC are not something Crossroads. Crossroads. Crossroads.
Crossroads.
Okay. Yes. So basically, I think the way you should think about this is we are committing to offer a set of terms that are part of a plan that the NDRC has basically reviewed and accepted as satisfying the requirements of their order. So from that perspective, we don't view it as a starting point for negotiation, but really just an obligation to offer these terms in substitution of the existing licenses that we may have in place or new licenses we're going to negotiate. To the extent that we want cross licenses or desired cross licenses, we've committed to negotiate to provide fair value for those rights.
In some cases, we may not obtain cross licenses. In some cases, licensees may not have any patents that would apply to our chipsets. And in other cases, we may provide other kinds of value or consideration different than just adjustments to the royalty terms. So really highly dependent on the various negotiations.
Our next question comes from the line of Simona Jankowski with Goldman Sachs.
Hi. Thanks very much. I just had a clarification first and then two questions. The clarification was, just wanted to understand the mechanics of how you're raising the sales in EPS guidance without raising the TRDS guidance. And then the questions I had is the first one, Derek was, if you add the licensing rate for the 3 gs, 4 gs non standard essential patents to the additional separate license rate for the remaining 3gs, 4gs patents as well as just other patents not related to 3gs, 4gs.
Is that sum total going to be effectively larger than what customers would have otherwise gotten before decoupling the 2? And then my second question was in terms of the condition of the sale of chips on license terms that the NDRC deems unreasonable or does not deem unreasonable. How will that be adjudicated and enforced? And do you anticipate that slowing down your design and process in China for chips?
Thanks, Simona. This is Derek. On the first point, we basically said that we're at this point, we're not going to update our guidance on the TRDS, but we do have a more positive view on that range than we did before the resolution. But I think we decided just given the timing here we would wait and address that during the next earnings call. So don't read too much into that.
On the second question, yes, you're thinking about it correctly in the sense that we will have
patents now to the extent
these licensees accept the new additional patents that are outside the scope of that license that we will need to negotiate separate agreements with them. And again, I don't want to get too deep into what our strategy is around that. But we do expect that we will be compensated for those patents and the use of that technology, maybe just in a different format than the current agreements that we have today. And then on your last question, really the way that you should think about this is, there were a set of terms, I think, that we agreed as part of the rectification plan to change. And I think to the extent we offer license agreements with those terms, we will not be offering agreements that have unreasonable terms from the NDRC's perspective.
So I think it's really kind of more business as usual, meaning that we will continue to supply chips to our licensees. And when we get into disputes with the licensee, our first resort is not to cut off their supply. I mean we definitely will try to work with them and that would be a last resort and I can think of almost no occasion where we've actually had to resort to that. So really no impact as far as I would tell on design traction or engagement with OEMs. In fact, I would say we're in a much better position now with this behind us because there was some amount of uncertainty through the course of the last 15 months that the chip business was having to operate through and did quite well regardless.
But I think this kind of cleans up whatever lingering uncertainty might have been there puts us in a better position going forward.
Our next question comes from the line of James Faucette with Morgan Stanley.
Thanks very much. A couple of questions for me. First, I think, Derek, you've said or at least implied that your current licensees may be able to opt for maintaining their current license rather than for the new rectification outline that you've laid out with the NDRC. Am I understanding that correctly? And first and second, what portion of the existing licensees would you expect might want to stay with their existing license rather than opt for a new structure?
Or at the very least when would you expect to have some sense of that? That's kind of my first question. And my second one is just a clarification. When you talk about the net selling price description you were using for describing 3 gs and 4 gs Essential Chinese patent. How does that compare to the way that we've historically talked about wholesale and retail prices?
Thanks.
Sure, James. This is Derrek. So, yes, to answer your first question, we've basically committed that we will offer licenses separately for the 3 gs, 4 gs Chinese essential patents. And so we'll make that offer to our licensees. Obviously, they can take that offer or they can decide that they want to reject it and keep what they have.
It's really probably too early for us to speculate on how many of the licensees will decide to take the new offer versus keep their existing agreement. And I think as this plays out probably over the next couple of 3 months, we'll have a better sense of where that will stand and we can kind of report back to you on that. On the net selling price, that term think of it as exactly how the agreements have operated historically. So we talk about having kind of a gross price, which rolls through the TRDS and then licensees take deductions to get to the net selling price they pay the royalty on. Exactly the same construct there, no change to it.
The only difference is for this limited set of patents and products, you will have a 35% reduction to that NSP once it's calculated.
Have
Hi, guys. I have two questions. First, on a like to like basis, you have new guidance for the overall revenues, but it includes kind of China excuse the numbers down. And I'm wondering on a like to like basis, what is the revenue growth year over year, which is more reflective of the ongoing growth after this transitory year? That's number 1.
Number 2, you said before that China accounts for 6% to 9% of TRDS. You're saying now 12% to 13% is the impact of the deal, which means the difference if I take the midpoint of both, the difference of roughly 5% is the impact of this term applied to other vendors. Now can you discuss this a little bit? Does it mean that all vendors that are international Samsung, Apple, etcetera, all vendors will be able to take it? Because you said in the prepared remarks that if it's an ODM, then they don't get this agreement.
So does it mean that one company such as Samsung does get to elect or get to get lower
rates and then another company such as Apple will not get lower rate because they're using ODM.
What's the risk there that you'll have different types of disputes with different vendors that are having different manufacturing process? So can you
just
Thanks.
Tal, hi, it's George. I'm not completely sure I understood the way you phrased the revenue question, but
I can tell you the only
adjustment that we've made in
the revenue outlook since the earnings call, which was only about 10 days ago, which also included some adjustments for things like the settlement of the dispute with the customer and the implications of that was to raise the low end of the range $300,000,000 so that the middle part of the range so the midpoint of the range was up $150,000,000 So beyond that really I think in terms of the impact of this over time on revenues and all the things that relate to catch up and other things that could affect our revenue guidance going forward, we'll update those things on our earnings call. On your 6% to 9%, the 6% to 9% that we had talked about previously was really the amount of the TRDS that related to the underreported devices. I'm not sure if that really that's the number that I'm aware of. So I'm not sure where your question was going other than again we will be updating the progress against underreporting over time.
Right. But This is Derek. Let me just add to that. I think so you might be we might have confused things a little bit. The 6% to 9%, George is correct.
That was basically the amount of the global TRDS that we think was underreported, which some of that is China, some of that is actually volume outside of China. What we're saying with the 10% to 12% is assume the total market, so assume everything is getting reported. We believe that about 10% to 12% of the TRDS in fiscal year 2015 would be something that could be subject to these lower royalty terms for China. So they're kind of apples and oranges in terms of the percentages. Let me try to answer your last question.
So I don't want to talk specifically about any particular customer or licensee. So let me shy away from that. But let me emphasize a couple of things. Basically, the way that the rectification plan is set up is the royalty terms, the 5% and the 3 point 5% applied to the 65% royalty base only apply to the licensee the licensee sales of its own branded products. And so if you have a if we have a licensee who is acting as a contract manufacturer or an ODM to another handset supplier.
And even if they accepted these terms, they would pay on the full they would continue to pay on the full net selling price as opposed to having the discount apply. Now, of course, their customer could always come to us and accept a license with the discounted royalty base, assuming they were also willing to accept the 5% and the 3.5% royalty rates. So the second point is you're only entitled to the royalty discount on the base as long as you've agreed to pay the 5% and the 3.5%. If your agreement today is different than that, we will offer this to you and you have an ability to accept it. But you don't get to kind of pick and choose and take a lower rate and apply this base.
They go together.
Our next question comes from the line of Tavis McCourt with Raymond James.
Hey, thanks very much for taking my questions. I want to make sure I understood the existing licensees that could take these new terms. Would they then need to renegotiate with you for the non standard essential patents? And if that's the case, in your new financial assumptions, have you assumed that any will do that? Or are you assuming that all will stay status quo amongst the existing licensees in China?
Thanks.
Tavis, this is Derek. I would think about it like this. Think about first China and then everywhere else. Everywhere else, I would assume no impact. Within China, if they elected to take the new terms, they would now have a license only to our 3 gs, 4 gs essential patents in China at these new terms.
And the rest of the portfolio, as you noted, within China would remain unlicensed. And as I said, we believe that substantial portion of those patents. And we're going to look to come back and have separate discussions with our licensees that accept these new terms for those patents. We don't really have anything baked in to the guide on that basis, just given that that's going to be a new set of discussions for us to have.
Our next question comes from the line of Mark Hsu with RBC Capital Markets.
Thank you. And recognizing there's China and everywhere else, does that only last until current agreements expire and new contracts are signed? How should we think of large renegotiations in the future for the everywhere else territory? And on the rates 5% on 3 gs, 3.5 percent on 4 gs. What does that mean when China eventually moves to 5 gs considering the work that Qualcomm is doing on LTE Advanced and meeting the definition of 5 gs?
Hey, Mark, this is Derik. Excuse me, I'm getting over or fighting a little bit of a cold here. So the answer to your first question really we have long term agreements in place as we have discussed for some time. But to the extent that we do negotiate new agreements, those typically will be a renegotiation on a worldwide basis. So we would look to negotiate terms outside of China that we believe would be different than what we're committing to in the rectification plan just as today the terms outside of China are going to be different and that will persist for some period of time as well even under that own licensees agreement if they choose to take the China term.
So don't see that as really a big change in the way that we have to deal with the future. Sorry, the second question was? Okay, 5 gs, yes. So I mean, there's really got to separate a couple of things. One is the way that we define the scope of our 4 gs agreements.
We use that really as a shorthand often and even sometimes we refer to it just as LTE. And depending on how people label things, it doesn't necessarily change the coverage or the impact of the license agreements. You might recall that when various later versions of HSPA Plus and things like that in the U. S. Were rolled out, some of the operators refer to that as 4 gs even before LTE was launched.
So the labeling of that really makes less difference than really what is the underlying technology and patents that are covered by the agreement. And we think there's really quite a long runway on LTE and the continued evolution there. And then depending on what 5 gs ultimately looks like, even when there is a 5 gs, that may already be covered by the existing agreements. We'll just have to see how the technology evolves when we get there.
Our next question comes from the line of Timothy Arcuri with Cowen and Company. Thanks so much. I had 2. Derek, I know you don't want
to update TRDS, but my question is about the gap between TDS and TRDS. And maybe how many of the 195,000,000 units that are covered or how many of that 195,000,000 unit gap is covered by the new guidance? And then I had a second question on how does this affect the FTC's RAND investigation if at all, particularly around the 65% in China versus 100% in other regions? I guess the natural concern would be that this opens up a can of worms outside of China due to the FTC. Maybe just talk about that a little bit.
Thanks.
So Tim, this is Derek. I would say, again, I think you're just going to unfortunately going to have to wait a little bit for us to give you an update on the TRAs. We haven't yet basically rolled all that through. We obviously have a view on the revenue. But as we look at the overall market, we'll we are incrementally more positive obviously on the reported units, but we're going to we're just going to wait and roll that through.
I don't know if George if you want to
Yes. I would just say right now we're still saying that we expect the benefit to be something that you'll see in 2016 more than in the remaining period that we have this fiscal year, although obviously part of our increase is optimism around faster collection than our previous assumptions.
This is Don. With respect to the question about the FTC, again, remember keep in mind that the FTC is in very preliminary stage. It's asking questions. It hasn't said anything more than it's seeking information to understand our licensing program. So I think that's totally separate and distinct from and under different laws than the Chinese laws.
As you know, the AML is a new competition law in fairly new competition law in China and it's being applied the way the NDRC chooses to apply their law. The FTC is has a long history. And also as Derek said, we in the U. S. Under our antitrust laws don't have any specific provision that talks about regulating prices or excess so called excessive prices.
So there really is no relationship between the 2.
Our next question comes from the line of Srini Pajjuri with CLSA Securities.
Thank you, George. I'm still struggling with the guidance. Given that the royalty rate or the ASP is coming down, I would have thought your fiscal 2015 guidance would have come down a bit. I'm just curious, I mean, are you not changing the guidance because the impact will mostly be felt in 2016? Or did you already assume when you first gave the guidance, did you already build in some of these assumptions in your outlook?
Yes. Actually, we feel very comfortable raising the guidance. The guidance that we had given before as we said was actually quite wide in terms of the range for the licensing business much wider than we usually had because there were a number of potential outcomes that were more negative since there was a lot of uncertainty as to how this settlement would be resolved. And based on the settlement that we have and risk factors that we could take away and some sense of improved collection performance for the remainder of the year that we were able to raise guidance.
Okay. And just a quick clarification, George. Given the change to the ASPs and how they're measured, in your reporting as well as in your guidance,
are you going to give
us the 65% number? Or are you going to 5% number? Or are you going to incorporate the 100% number going forward? Thank you.
We're going to I mean, we'll it's a separate the issue of the ASP will be the reported ASP. The impact of the 65% will be more reflected in the overall Hey, guys. Thanks
for taking my questions.
2 Hey, guys. Thanks for taking
my questions. 2 here. 1, just curious, you had the recent settlement with the customer and then this agreement provides for 3 mode license. Just curious of 3 mode market, how much you're collecting and whether how much do you think you can collect going forward? As you look at the under reporting, it's really a different issue.
These are customers that are just choosing not to report units, not disputing the royalty rate. So I was curious though if they were doing that because of the 3 mode that they didn't agree with it or are those just simply people who are not reporting units? Any thoughts there, thanks.
Blayne, this is Derek. Yes, I think it's they're kind of like you said 2 separate issues. We have some under reporting activity from licensees that have existing agreements and then you have sort of the three mode issue, which actually was a combination of companies that hadn't yet or haven't yet signed license agreements and some under reporting. I think there was really more pressure on the under reporting in the three mode camp, just because we haven't yet got all the agreements in place like we do on 3 gs. So I think that we believe will subside now.
And I think the confidence we have with the NDRC really kind of supporting the business model and the technology contributions we've made in both 3 gs and 4 gs as well as the recent agreement that we signed as you mentioned which also covers 3 mode. I think we feel we have even increased level of confidence now than we did before that we'll be able to fully participate in collecting on the 3 mode volumes in China. It's just going to take a little bit of time to get those remaining agreements in place and I think that will help drive an improvement in compliance as well.
Our next question comes from the line of Rod Hall with JPMorgan.
Yeah. Hi, guys. Thanks for taking my question. I just wanted to, I guess restate what you said and make sure that I clearly understand what the impact of this is. So first of all, it sounds like the NDRC has basically set a maximum royalty level at which you under which whatever agreement you do in China has to fall.
So you now have to go out and renegotiate with all of your existing licensees and people that don't have licenses under the umbrella of that maximum limit. So I just want to make sure that that's what's happened. So we now have the process of you going and renegotiating a rate with all those people and we wait and see how that comes out. The other thing I wanted to ask you about is the list of people as the NDRC specified a list of vendors here at all or they're just saying that anybody in China operating under these terms that you've laid out is subject to this ruling? Thanks.
Rod, this is Derek. I think I would view the situation differently than the way you characterized it. Meaning, we have committed to a rectification plan that basically under which we will go out and offer licenses to our licensees with the terms that are specified and that we described today. And basically, for the companies that have existing agreements, they're going to have a choice. They're either going to accept those new set of terms or they can kind of work down from there.
This is more of a floor than a maximum. So, to this is more of a floor than a maximum. So that would be the first one. The second one is, we didn't I don't want to get into our discussions directly with the NDRC, but let me just say we've offered or we've agreed to provide these offers to pretty much all of our licensees and new licensees for that matter. So it's not confined to any particular set of companies.
Our next question comes from the line of Amit Shah with Nomura Securities.
Derek, it's just my sense that there wouldn't be much of an impact from offering this deal to your existing licensees and I was hoping you could just frame that for us.
Well, I think what we did is we tried to give you the tools for you all to make an assessment of what the potential impact could be. I mean, obviously, going from 100% to something less than that 65% on a set of products for a portion of the portfolio has an impact. And then we try to size for you the amount of the TRDS over 15 we thought could be potentially impacted there as well. As I laid out, we do have other IP that then is would be outside the scope of these agreements. We'll have to see how that plays out over time.
But I don't think I would say that we don't expect an impact.
And our next question comes from the line of David Wong with Wells Fargo.
Thanks very much. First, just a very simple clarification. When you talk about China 3 gs Technologies, so this new agreement explicitly says that you should get royalties from TD FCDMA. Do I understand that correctly? And second, in making the new agreements with companies in China, which aren't currently licensees, do you plan to ask for upfront payments for past periods or are you going to just focus on royalties going forward?
David, this is Derek. I guess the way I would answer your first question is, when we talk about 3 gs, we weren't focusing specifically on TDS CDMA. I guess I would view TDS CDMA as sort of beyond the scope of what we have in the rectification plan. And as to new licensees, our typical practice is when we approach a company that's been in the market, we will as part of that negotiation, if they've been selling unlicensed product prior to taking a license, that's definitely part of the discussion is dealing with the prior unlicensed activity.
And this ends our allotted time for questions and answers. Mr. Mollenkopf, do you have anything further to add add before joining the
call? Yes, thank you. I would like to close by first thanking everyone for calling in on such short notice and second by saying that we're pleased to have concluded this matter, which we think removes a major uncertainty clouding our business and we will now focus on the sizable opportunities in China that lie ahead. Thank you.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.