Qualcomm Inc (QCOM) — Q1 2019 Earnings Call Transcript

Thank you and good afternoon, everyone. Today's call will include prepared remarks by Steve Mollenkopf and George Davis. In addition, Cristiano Amon, Alex Rogers and Don Rosenberg will join the question-and-answer session. You can access our earnings release and a slide presentation that accompany this call on our Investor Relations Web Site. In addition, this call is being webcast on qualcomm.com, and a replay will be available on our Website later today. During the call today, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our Website. We will also make forward-looking statements, including projections and estimates of future events, business or industry trends, or business or financial results. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our SEC filings, including our most recent 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements. And now to comments from Qualcomm's Chief Executive Officer, Steve Mollenkopf.

Thank you, Mauricio, and good afternoon everyone. We are pleased to report a strong quarter especially in light of the challenging headwinds impacting the entire industry. Our fiscal first quarter results reflect continued execution by our team on the things within our control and influence. Our Q1 non-GAAP earnings of $1.20 per share were $0.10 above the midpoint of our guidance range. Revenue of $4.8 billion was in line with our guidance. Several positive trends enabled us to absorb the impact of general market weakness. Notably, number one, QCT's strong roadmap and financial performance in the high-end; number two, QTL's second interim agreement with Huawei; and number three, lower than expected operating expenses, which includes the impact of our cost reduction initiatives. Our business prospects remain very healthy as 5G begins to ramp through the balance of this year and beyond. Our Snapdragon platform continues to outperform industry benchmarks and is well-positioned to successfully enable the low latency, high reliability and security requirements of 5G. We continue to extend this expertise with handset OEMs and adjacent industries of compute IoT and auto. Our Wi-Fi business continues to gain share against longstanding incumbents in enterprise. Reliable intelligent and secure Wi-Fi will be an important part of future 5G networks. And we've introduced innovative and differentiated solutions as the market transitions to Wi-Fi 6. In parallel, we remain focused on resolving our Apple and regulatory disputes. Before I turn the call over to George to cover our results in more detail, I want to provide an update on some important legal milestones and our ongoing efforts to defend the value of our intellectual property and drive shareholder value. As most of you know, we are one of the main architects of the wireless ecosystem and our leading investments in R&D have positioned the company at the forefront of 2G, 3G, 4G and now 5G leadership. We have one of the largest patent portfolios in the industry with more than 130,000 patents and pending patent applications worldwide. It is critical that we protect our IP and ensure that we are appropriately compensated for our inventions and investments. Through these various legal cases, we are working to ensure this happens. Courts in China and Germany have found Apple to be infringing our patents consistent with our prior messaging where the potential of multiple patent infringement rulings before the end of 2018. We are pursuing enforcement of the injunctions awarded by these courts and believe the decisions will be upheld on appeal. These favorable rulings demonstrate Apple's infringement across a broad range of our patented technologies that are unrelated to modem chips, but are widely used in smartphones. We expect additional favorable patent infringement decisions in the coming months in the United States, China and Germany as more of our cases go to trial. In addition to our patent litigation there are more legal milestones ahead including the trial involving Apple and its contract manufacturers starting in San Diego in April and a separate case in California state court we filed to stop Apple's misuse and misappropriation of Qualcomm's trade secrets. We continue to believe that over the course of 2019, we will reach a resolution on the key outstanding issues in our disputes with Apple through settlement or litigation and we are prepared for both outcomes. Yesterday, we concluded our arguments in the case with the FTC in the Northern District of California. As stated before, we believe that the FTC's case is based on a flawed antitrust theory and that it failed to meet its burden of proof for its claims. You can access the transcript of our closing arguments and the related slide presentation on our Website at qualcomm.com/news. Over the course of the trial, we made a strong showing that our licensing practices are consistent with industry norms have not harmed competition and in fact the industry is thriving. We have earned or maintained our leadership in the mobile wireless industry with superior foresight, investment and execution driving superior technology solutions compared with our competitors and we have never interrupted commercial shipments of modem chips to any customer in order to obtain unfair licensing rates. Moreover, the evidence presented at trial proved that our agreements with Apple which expired over two years ago were run-of-the-mill incentive agreements that were actually demanded by Apple in order to win its business. The trial reinforces the important role we play in the mobile industry. This is especially critical now as we enter the early innings of 5G, the first mobile generation that is truly shaping industrial policy. In summary, we are hopeful that the law and fact-based analysis will prevail in our FTC proceedings. In parallel, we continue to look for an opportunity to reach a negotiated settlement with the FTC. Let me now spend some time providing you an update on how we are driving the transition to 5G. We are extremely pleased with the growing 5G momentum around the world. In December, we hosted our annual Snapdragon Tech Summit and we're joined by leading 5G ecosystem partners, infrastructure vendors as well as device manufacturers. This level of representation from the mobile ecosystem is a testament to our broad industry commitment to 5G, our solutions and our leadership position. At the summit, we announced our new Snapdragon 855 mobile platform, the world's first commercial platform supporting multi-gigabit 5G and demonstrate an end-to-end 5G consumer experiences with real demos over live millimeter wave 5G networks and devices. We also announced that the Snapdragon 855 is gaining significant momentum with over 100 design wins in development. Since the summit, 5G service has begun to roll out in Korea and the United States and as 2019 progresses we anticipate continued 5G network launches in the United States, Europe, Japan, Australia and China. We are working with more than 20 operators toward commercial rollout starting this year and we expect to be the 5G modem supplier of choice for the majority of the first wave of 5G devices. In addition to commercial 5G service, device manufacturers are also ramping production of consumer 5G devices. At CES, we announced 30-plus commercial 5G mobile design wins based on our 5G chipsets. The majority of these designs are smartphones from global OEM featuring the Snapdragon 855 mobile platform and the Snapdragon X50 5G modem family, which are expected to launch in the first half of 2019. Notably, nearly all of the devices related to these 5G design wins use our RF front-end solutions and we expect these design wins to have a meaningful positive impact to our RF front-end product line. Consistent with the past, 3G and 4G transitions as 5G launches in 2019 across multiple geographies, we expect the carriers to play an active role in driving the transition to 5G devices. Turning to our adjacent opportunities, in automotive, we announced our third generation Snapdragon Automotive Cockpit platforms, which provide a multi-tier scalable architecture across tiers to expand the addressable market for our infotainment solutions. Importantly, to an automotive manufacturer a scalable architecture delivers a consistent experience across budget to mid-tier to premium car lines. We also launched the custom-built Snapdragon 8cx Compute Platform which represents the largest generational performance increase ever for Snapdragon product. We look forward to growing this category with Microsoft and expect more announcements throughout the year. In summary, in a challenging market QCT is continuing to execute consistent with our expectations at the beginning of the year and we are looking forward to our upcoming product launches. Finally, I want to thank our employees for their hard work and focused execution. We continue to make great progress on our important strategic objectives. We are driving the transition to 5G and we are leveraging our core technologies to expand our reach into many exciting new industries. I would like to now turn the call over to George.

Thank you, Steve and good afternoon everyone. We are pleased to report solid results in our fiscal first quarter. Our revenues were $4.8 billion in the first quarter in line with our prior guidance and non-GAAP EPS of $1.20 was $0.05 above the high-end of our guidance range. Importantly, our Q1 results include a new interim agreement with Huawei, which contributed $150 million of revenue in the quarter. As discussed last quarter, our Q1 guidance had not included any contribution from Huawei because the final payment under the previous interim agreement was recognized in retained earnings pursuant to our adoption of ASC 606 in Q1. QCT delivered revenues of $3.7 billion and an EBT margin of 16% for the quarter above our prior guidance range of 13% to 15%. The operating margin reflects improvements in gross margins and lower operating expenses driven by our continued focus on driving operating efficiencies. MSM chip shipments of 186 million units came in modestly above the midpoint of our guidance range. QTL generated revenues of $1 billion in the quarter including $150 million from the successful negotiation of the Huawei interim agreement. This new agreement was signed in our first fiscal quarter and runs through the third fiscal quarter of 2019. Under the agreement, we will receive $150 million for each of those three quarters. Relative to our previous expectations, which had excluded any revenue from the interim agreement licensing revenues were lower by a $150 million to $200 million in the quarter. Given the headwinds facing the market broadly, we have reduced our global 3G, 4G device forecasts for the calendar year '18 to the low-end of our previous guidance range consistent with lower royalty units in the December quarter. Emerging regions and China were responsible for the largest shortfall in units relative to expectations although the lower levels of demand appear to be fairly widespread. The weaker global unit market accounted for the majority of the revenue impact in the quarter along with some mix effects. Against this backdrop, we continued to demonstrate disciplined execution on our cost reduction plan. Non-GAAP combined R&D and SG&A expenses were $1.56 billion down 15% sequentially and well below the low-end of the guidance range. Maintaining our focus on our OpEx efficiency remains a top priority and we're on track to deliver against our $1 billion cost reduction plan excluding excess litigation. Expenses in the first quarter also benefited from lower than expected litigation spend due to timing and the effects of a weaker stock market on re-evaluation of deferred compensation allegation. As a reminder, there is a corresponding offset on the deferred compensation liabilities in our investment income. So there is no net EPS benefit. Our non-GAAP tax rate for the quarter was a benefit of 40%. This is in line with the benefit we included in our guidance for the quarter. Today, we have executed on $22.2 billion in share repurchases of the $30 billion authorization we announced last July. This includes $5.1 billion through a Dutch auction and $16 billion under our ongoing ASR programs executed in the fall of last year. As of today January 30, the ASRs are approaching 40% completion and the average repurchase price to-date is approximately $61. As a reminder, the ASR settles at the average trading price less a discount over the life of the agreements. The ASR agreements are scheduled to end in early September 2019. Let's now turn to our financial outlook for the second fiscal quarter of 2019. We estimate fiscal second quarter revenues to be in the range of $4.4 billion to $5.2 billion and non-GAAP earnings per share to be approximately $0.65 to $0.75. We expect QTL revenues to be in the range of $1 billion to $1.1 billion including the $150 million under the interim agreement. We expect the market factors that we saw in Q1 to persist with continued softness in the handset market and weaker overall mix of devices. We expect fiscal second quarter QTL EBT margin to be approximately 54% to 58%. In QCT, we estimate approximately $150 million to $170 million MSM chip shipments for the fiscal second quarter down sequentially as a result of typical volume seasonality, market weakness particularly in the low and mid tiers, timing of OEM product launches and overall competitive dynamics. Lower MSM units amid low tiers is offset by favorable product mix due to seasonality and broader adoption of our newly launched Snapdragon 800 chipset. We expect this mix shift to drive significantly higher revenue per MSM in the fiscal second quarter. We expect QCT EBT margins to be between 13% and 15%. We anticipate fiscal second quarter non-GAAP combined R&D and SG&A expenses to increase by 6% to 8% sequentially due to higher litigation spend and the impact of the counter reset of normal employee tax costs. Non-GAAP combined R&D and SG&A sequential growth is also being impacted by the expected absence of the revaluation adjustment for our deferred compensation liabilities which benefited OpEx in Q1. We remain on track to deliver $1 billion in cost savings from our $7.4 billion baseline. At present, we have achieved approximately $850 million of savings toward our $1 billion target. However, due to excess litigation, we are tracking somewhat above the $6.4 billion run rate. Nevertheless, we are on track to deliver the $1 billion in operating savings and expect additional savings post licensing resolution as litigation costs come down. Non-GAAP interest expense, net of investment and other income in the fiscal second quarter is expected to be approximately $100 million, which is in line with our prior guidance and is a reasonable estimate for each of the remaining quarters in fiscal 2019. Turning to fiscal 2019, we expect our non-GAAP annual effective tax rate in fiscal 2019 to be approximately 0% and reflects both the run rate impacts of tax reform and the fiscal first quarter impacts of our tax restructuring. Excluding the first quarter benefit, we estimate a non-GAAP tax rate of approximately 12% for the rest of fiscal '19. We now expect calendar year 2018 3G, 4G device estimates to be at the low-end of our prior guidance range. For calendar year 2019, we are revising the device forecast to be in the range of 1.85 billion to 1.95 billion units which at the midpoint is a reduction of 50 million units from our prior forecast. This reduction is entirely attributable to handset market softness. We expect handsets shipments to be up 1% percent year-over-year with non-handset devices driving overall unit growth up 5% at the midpoint of guidance. Despite this, we anticipate improving conditions for our chip business in the second half of the year as a result of new product launches including devices with 5G chipsets and growth in our adjacent businesses. That includes my comments. I will now turn the call back to Mauricio.

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

Yes. Thank you. Just with regard to the MSM business and the guidance you provided, it looked like that had been running down about 20% year-on-year in December. I think your guidance reflects down 15% in March. Recognizing that that includes a rather large design loss, what would you characterize that the continuing business what would that be running on a year-on-year basis is perhaps a better indicator of the underlying business?

This is George. Chris you're correct in citing that the real difference year-over-year in Q1 was driven by the thin modem business share change at Apple. We're actually seeing strong positioning in our products really everywhere else. And if we're seeing any weakness in the guide it's really in low tier units, which is partially seasonal and also just I think a reflection of the economy in China.

This is Cristiano. We can add one thing. As George said we see that on the low end of the units, but we continue to see a favorable product mix towards the higher features smartphones and we expect that trend to continue especially important as we look at the launch of 5G technology towards the later part of '19 and 2020.

Great thanks. I'm going to follow on to Cristiano's comments there at the end. Could you just update us about how we should think about revenue per MSM trends? Clearly a stronger mix implied in your guidance, but could you talk maybe about the RF attach rate and what this could do to the calculation of revenue per MSM or maybe just talk about the RF opportunity and how much your RF business could grow as 5G takes off over the next couple of years? Thank you.

Hey, Mike. It's George. Maybe I'll cover off on the revenue per MSM. What we're seeing is even with a softness in the marketplace our premium tier devices continue to be strong and growing both year-over-year and quarterly, which is really a testament to the new products. And we're also seeing continued strength in the high-end mid tier overall. So, revenue per MSM and in what is normally seasonally challenging second quarter is going to be quite healthy as your back of the envelope calculation is correct. It should be a very strong revenue per MSM and quarter for us.

Mike let me just answer your second part on the RF front-end. We see right now our RF front-end business excluding the impact of Apple. Outside Apple continue to see growth continue to see double-digit growth rates in their business as we head into 2019. But most importantly, this trend of moving towards higher end devices especially with the transition of 5G is was one data point that we like for the absolute majority of the 5G designs we have on the recently announced 855 or the x50 modem, we have RF front-end attach and we're very pleased with their metric.

Thank you. If I could just ask a two parter on China. First, on the chip business there was some mention about macro and a challenging end markets would love your perspective on the market? And also, George I think you've mentioned for the QCT, the MSM sequential down competitive dynamics as one part of that. So, should we take that to read more low-end competition, or potential share loss in China? And then, on the flip side, if we just get an update on the QTL business in China obviously the Huawei deal is pending, but could you talk a little bit about compliance and just how the licensing deals are going with the rest or the longer tail of Chinese OEMs? Thank you.

Yes, to address your question about the competitive landscape, we are experiencing some pressure in the lower-tier device segment. In Q2, we believe this is partly due to losing market share and partly due to seasonal market size fluctuations. Overall, China has been quite different from our expectations for 2018; demand there has been significantly lower than we initially estimated, which has impacted our total demand projections without considering market share. As a result, we've adjusted our estimates for calendar year 2018 units down to the lower end of our previous guidance range. Would you like to add anything?

Yes. I was just going to add one thing. So, Tim on the chip business, I think there is, as George outlined, there's competitive dynamics on the low end. But the biggest factor really seasonality of product launches. So many of our customers probably have product launches in in the coming quarter and it's just typical seasonality. We've seen overall China has been a good story for us. And again, the most important thing is they move towards the higher end devices.

This is Alex stepping in on the QTL question. The story with China also is good on the QTL outside. Under our new 5G FTC licensing program, we now have over 35 new licensees or licensees signed up to the new agreements and amendments and a good significant number of those are Chinese OEMs. So, the licensing program is doing well in China including with respect to compliance.

Hi, guys. Thanks for taking my question. I wanted to ask about the revisions to your market outlook. So, you're taking your global units down I guess to the low-end of the range a few points versus where you were. But your QTL revenues right now excluding the Huawei settlement are running 900 million give or take. That's more than 10% lower than your prior outlook which was like $1 billion to $1.1 billion. So how do I reconcile that I guess with your comments on where you're seeing the weakness in the market which seems to be more like a low end it seems to imply that ASPs would have to be down a lot given the revenue you're blushing since you're down more than the unit revision. I guess how do we think about the trends of units in ASPs playing out and what effect that's having on your QTL revenues right now.

Yes, what you're observing is the adjustment resulting from the change in reported units, which aligns with the numbers we're now utilizing to update our guidance. Additionally, it's important to consider the dynamics in our outlook related to how many OEMs are not paying for their licenses and reporting, compared to those that are. You'll notice that even as market conditions generally worsened in Q2, when accounting for the Huawei payment, we are seeing a slight improvement in the underlying revenue for QTL. This change reflects the mix of the parties involved.

Are you noticing improvement? In the second quarter of last year, the actual Huawei payment was around 965, and this time you are guiding for around 900, which still represents a significant decline, doesn't it?

You're discussing the second quarter using an apples-to-apples comparison. I believe if we look at that way, the market is down modestly compared to the quarter when we experienced very low demand from China, which we've mentioned before. This is the main factor, and while we do see some decline, it’s not as significant as one might expect due to the dynamics from what effectively was the third quarter last year.

Thanks guys. Good afternoon. I guess a couple of things. The first just to follow on to Stacy's question. I guess a lot of the data that we're seeing is globally not related to your QTL revenues, but just globally out of the smartphone market isn't great. And I guess Cristiano talked about launches in the second quarter potentially that will help that. But an up 5% unit growth for the whole industry seems a bit aggressive. And maybe that embeds growth in auto and some other areas. So maybe you could talk a little bit about what you're seeing in the market that that leads you to think the smartphone market is going to grow this year? And then, secondly, George any additional thoughts a lot of investors asking me about additional breakouts in QCT to reflect some of the adjacency businesses in the revenue versus just one line. Any thoughts that would be helpful. Thank you.

Yes, this is George. I'll discuss the device forecast. The 5% growth includes non-handsets, which is where we're seeing real year-over-year growth. We anticipate a 1% growth in handsets compared to 2018, which itself was down 1% from 2017. Our forecast indicates continued softness, and we expect developed handset demand to decline due to replacement rates as consumers consider transitioning to 5G devices. Additionally, the impact from China in 2019 is not as significant as it was in 2018, and we are not observing substantial growth in other emerging markets like India. Thus, we project modest growth from emerging markets in 2019, resulting in overall handset growth being flat to 1%.

This is Cristiano. Just want to add one important data point. So, you have the overall market dynamic, but then you have the chip business, one thing that we see happening when we think of our China business and we see that accelerating as many of our customers had expanded globally outside China domestic especially now from Southeast Asia, India and LATAM going into Europe, we've seen our customers starting business in U.K., Germany, Spain, Italy, Portugal and France and that's an addition and it's a good trend to the chip business. Thank you.

And we'll look to have I think a more robust discussion on the adjacent as we get to an analyst meeting which we think is the right environment to go into that.

Thank you very much. I want to revisit some of the points Steve made regarding licensing and the assertion of Qualcomm's IP portfolio. You mentioned cases in China. Can you provide an update on your perspective about the necessity of asserting and eventually implementing IP licensing for non-essential IP concerning Chinese OEMs? Additionally, does the situation with Apple have any implications? This is my first question, and related to that, how do you view the situation with Huawei and the interim payments they have been making? Could you provide an estimate of what Qualcomm expects may be owed under the previous licensing agreements and clarify what that difference might be? Thank you very much.

This is Don Rosenberg. I'll begin, and Alex may want to add to this. Regarding the value of our non-essential patents as well as standard essential patents, these often get overlooked in discussions. You might be aware that a majority of the approximately 130,000 patents or applications Steve mentioned earlier are indeed non-essential patents. Furthermore, all the lawsuits we have initiated worldwide against Apple are related to non-essential patents. As Steve has pointed out, we have been quite successful thus far, and we have several cases set to proceed throughout the year, with significant milestones in terms of hearings or final decisions in Germany, China, and the U.S. across various courts. The overall value of our patent portfolio is extremely high, which is something we consistently consider when evaluating our licensing strategy. I also want to emphasize that we started our licensing program nearly thirty years ago without any standard essential patents in our portfolio, as we weren't part of the standard at that time, yet we were still licensing that portfolio. We have maintained the licensing terms consistently as our patent portfolio expanded to include both standard essential and non-standard essential patents, as referenced by Steve.

This is Alex. I’d like to address the first part of your question. I believe Don is right that we've shown significant value in our non-essential patents. However, it's important to take a step back and consider what we've achieved over the last four years. We've established a strong licensing program focused solely on standard essential patents both in China and abroad. Even though we continue to onboard a large number of SEP-only licensees, we still have many licensees who prefer broader portfolio agreements, which creates a diverse mix in our overall licensing strategy. Overall, I think our program is progressing positively. We do have some challenges related to the Apple litigation, but our current focus is on successfully implementing the 5G program, which we've accomplished over the past year. Regarding the Huawei interim agreement, it is a non-refundable agreement, but I prefer not to discuss the specific numbers involved. We’ll leave it at that.

Hi guys. Thanks for let me ask a question. I want to return to the QCT side, kind of a two-part question. First, last quarter when you guided, you cited not only the obvious issue sequentially with Apple, but also China inventory burns. So I want to see what the update was on that is the weakness you're pointing to in MSMs in 1Q. Just demand or is there inventory burn and if so how much longer will that last? And then, the revenue per MSM side of the equation. obviously, a big pop up in your fiscal 2Q guide. How should we think about that continuing through the rest of the year? Just the 5G side obviously come in as a tailwind, and then, how does China and answer to the first part of the question potentially weigh against that. Thank you.

Hey, Ross. This is George. Again, I think we've definitely seen sell-through ahead of sell-in continue in China. So, inventory continues to come down whether it reflects the new normal yet what we'll have to see, but that certainly was part of it. But again, the overwhelming year-over-year effect was just related to the one customer. I think on revenue per MSM as we start to see 5G pickup and additional premium tier devices increase that's definitely going to be a tailwind for revenue per MSM. We haven't forecasted it out yet, but we think that'll certainly be a tailwind force both not only at the end of this year but as we go as we ramp 5G in 2021.

Hi. Thanks. Question for Steve or George. There was a lot of testimony in the trial in the past couple of weeks that Apple wanted to buy your modem, but you would not sell it to them. That's for the current phones. But now, Intel is talking about the XMM 8160, which is going to ship in the back half of this year. So obviously there's going to be a performance difference, but that's a 5G modem. So, is that enough to get them to the table? Is the performance difference enough? And then, I guess as a follow-on to that what would the deadline be for them to settle, and then, be able to get your modem in their phone for the fall? Thanks.

This is Steve. We feel very comfortable with our roadmap in comparison to our competitors. While there are many competitors, we believe we have a strong position overall. When you consider our features and power size, we feel confident. Typically, decisions need to be made in the first quarter of this year to influence products for next year, but I can't speak for everyone. Some OEMs, especially in Asia, tend to move more quickly, but that's my general perspective on the timing.

Thanks for taking the question. Actually, maybe just following on that in terms of the 5G landscape you mentioned you had the majority that early wins here. Just kind of curious your visibility into next year and you just comment on the landscape how diverse the 5G landscape would be next year in shipping phone?

Thanks. This is Cristiano. One of the things we like about 5G; 5G it's not a static target, it's a moving target. There is a multiple variations of 5G capabilities. And as soon as we launch we continue to see that increasing from sub-six to millimeter wave to new cores and care aggregation and we have now basically line of sight to a number of devices that will be continuously being added to the market as we have most developed economies launching 5G in the second half of '19. So, we're very optimistic about how fiscal '20, how significant 5G will be for us.

This is Steve. I want to add that there are several mode changes to consider regarding how the network will operate and the various frequency bands to manage over the next 24 months. If you are not engaged from the start, it will be challenging to implement a competitive solution, especially if you enter the market too late. That’s why we focus on being early. Additionally, there were initial concerns about the size of 5G handsets and whether they would be appealing, given the RF complexities. However, early indications show that these handsets will be attractive. 5G will play a crucial role in the industry. Also, it's important to remember the economic incentives for operators to promote 5G. We expect that not only will it be evident in the handsets, but also through the sales channels encouraged to promote 5G. We anticipate seeing this unfold in the coming year.

And please stay tuned to this year of Mobile World Congress. I think will be very exciting in this area.

Yes. Good afternoon. Thank you for taking my question. I guess if I could squeeze two in. First one, as you think about non-handset growth driving the up 5%. Could you share with us what the implied non-handset unit growth is and how you think about the implications to both royalties and MSM ASP. And then just as a quick follow-up question, based this question on QTL, I think you're guiding that up 3% at the midpoint. I'm a little surprised it's higher Q-on-Q given the FX headwinds and unit volumes out there, are there any sort of catch up payments or things like that we should be considering in there. Thank you.

Now no real big anomalies in that respect. So, it's really more the mixed element that we talked about. In terms of non-handset growth again to get to 5% overall growth, you've got to see something like 27% growth in the non-handsets to get to that. That is largely driven by growth in IoT. Obviously, you still see growth in everything from automotive to compute. But, it's really IoT and we're certainly seeing strong growth in industrial IoT in our own business there.

Thank you for taking my question. Steve, I want to return to your comment regarding the FTC litigation. You mentioned that negotiations with the FTC are still ongoing. Since the closing arguments have concluded, do you believe there’s enough time to possibly reach a settlement? How do you feel about that? Additionally, if the ruling were to be unfavorable, what options would you have moving forward? Also, do you foresee any changes to your business model in the meantime, particularly if you are pursuing an appeal or other alternatives?

Sure. Well, I'll take the first part of that and then maybe ask Don to jump in on the second part. With respect to settlement talks with the FTC as you might imagine we have been engaged with them for some time. We continue to be engaged. And if we think that we can find a resolution we would take that to try to remove this risk off the table not a statement on how we feel about our case. But as you might imagine this is an important element and we continue to work it. I think the judge gave some direction at the end of trial in terms of when she might rule. And I would just point you to that in terms of timing, but we have the ability to continue to work this and as you would expect we are.

Yes, this is Don, Srini. Regarding the judge's comments at the end, she did not specify when she would rule but indicated in the recent hearings that this is a complicated case and may take longer than usual. We believe we presented an exceptionally strong case, so we won't comment or predict the outcome while the case is pending before the judge. However, we think the government did not successfully prove what we believe was a flawed theory and failed to support it with convincing evidence. We've demonstrated that this is a competitive industry, and our licensing program has facilitated its growth over the years. We are hopeful for a favorable outcome and will refrain from discussing potential outcomes until they arise. The judge acknowledged the case's complexity, and based on what has been asked and not asked by the FTC regarding the ruling, her decision will have to consider several potential outcomes, so we cannot comment on the possibilities.

Yes. Thank you. Thanks everyone for joining us today. This would be I think a very important quarter not only due to legal milestones but also just continued innovation from the team and continued milestones for 5G. Thanks everybody from Qualcomm for working so hard. And we will talk to you again next quarter. Thank you.