Qualcomm Inc (QCOM) — Q2 2019 Earnings Call Transcript

Thank you, and good afternoon, everyone. Today's call will include prepared remarks by Steve Mollenkopf and Dave Wise. In addition, Cristiano Amon, Alex Rogers and Don Rosenberg will join the question-and-answer session. You can access our earnings release and the slide presentation that accompany this call on our Investor Relations website. In addition, this call is being webcast on qualcomm.com and a replay will be available on our website later today. During the call, 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-K, which contain important factors that could cause actual results to differ materially from the forward-looking statement. And now to comments from Qualcomm's Chief Executive Officer, Steve Mollenkopf.

Thank you, Mauricio, and good afternoon, everyone. Thanks for joining us today. We are pleased to report another strong quarter. Our fiscal second quarter non-GAAP earnings of $0.77 per share exceeded the high end of our guidance range, driven by higher licensing revenues and stronger QCT margins. As we look forward, the rest of the fiscal year will be impacted by a slower market for devices, particularly in China, upstream of the larger rollout of 5G worldwide. Two weeks ago, we announced the global settlement of our disputes with Apple and its contract manufacturers. We believe the settlement is a win for both companies, and we are pleased with the result and pleased to have it behind us. Dave will provide more details on the financial impact of this settlement in his prepared remarks. But at a high level, this settlement includes two long-term agreements with Apple: a global patent license agreement, and a multiyear chipset supply agreement. The settlement also includes a one-time payment from Apple to Qualcomm. The term of the global patent license agreement is for six years with an option for Apple to extend for an additional two years. This represents a significant milestone as it is Qualcomm's first patent license agreement directly with Apple. In addition, we believe our resolution with Apple enhances our position with respect to resolving our ongoing licensing issues with Huawei. We will also be supplying modems to Apple for future devices under the terms of our new multiyear chipset supply agreement. In the long term, we will also have the opportunity to provide Apple with other Qualcomm technologies and products to expand our dollar content share in Apple's products, as we have done with our other handset OEMs. We are committed to a strong partnership with Apple. Now that the dispute with Apple is behind us, I thought it would be helpful to describe how we are thinking about the positioning of the company going forward. First, 5G will be a significant opportunity for Qualcomm, both within cellular and in other industries. It is the key technology enabler for the future of the Internet, and having a strong and differentiated technology position is an important asset for our shareholders. This past quarter was a tipping point for 5G when in February at Mobile World Congress, representatives from major Android device manufacturers, network operators and infrastructure providers, joined Qualcomm in celebrating our collective achievement in bringing 5G to life. Since that event, I am pleased to report that the rollout of 5G has officially begun. In the last months, we have seen carriers and OEMs announce and launch commercial 5G services and devices in North America, South Korea, Europe, and most recently, China, representing the first global rollout of a new wireless standard. The arrival of 5G in China is particularly exciting as it brings 5G to the largest mobile user base in the world. To date, the vast majority of the announced 5G devices for China include Qualcomm's Snapdragon chipsets. Second, we enter into the 5G era with strength in products, a favorable competitive dynamic, and more customer diversity and technology breadth than in earlier generations of cellular. This is due to Qualcomm's continued focus on investing in innovation and R&D during a time of much activity and attention on our company. We've transformed QCT by diversifying our customer base, focusing our investments and streamlining our cost structure. Our year-to-date non-Apple QCT operating income doubled compared to a two-year ago period, putting us in a strong position to grow revenues and profits as we began ramping 5G in addition to supplying Apple under this new agreement. As 5G network launches continue to grow, so does our QCT design win pipeline. We now have over 75 5G design wins, more than double the number we announced last January, driven by OEM designs with our first and second generation 5G modems. In February, we announced our second-generation 5G modem, the Snapdragon X55, our second-generation 5G RF front-end solutions and the world's first mobile platform with integrated 5G, all of which position us to power the second wave of 5G devices launching in late 2019 and early 2020 to drive mainstream adoption of 5G. Our early investments in 5G now allow us to offer the world's first modem-to-antenna system for commercial 5G new radio smartphone devices, spanning millimeter-wave and sub-6 gigahertz bands, including baseband, RF transceiver, RF front-end components and millimeter-wave antenna modules. This systems approach is creating a benchmark for 5G RF front-end performance. Qualcomm is heavily engaged as a critical partner to leaders across many industries as they see 5G mobility as a foundational technology for their digital transformation. Third, our cost structure and investment focus are aligned with the opportunities ahead. We will continue to invest where we can leverage our core competencies and bring innovative solutions to large markets. In 5G, this presents opportunities for growth in our core cellular market in addition to many adjacent industries as they leverage 5G to accelerate their digital transformation. In summary, with our agreements with Apple, the beginning of the 5G ramp, our focus on operational execution and capital return, we think we've laid the groundwork for growth in revenue and EPS and stockholder returns over the next several years. As a management team, we are committed to driving stockholder value by taking thoughtful and deliberate actions that we believe will ensure the long-term growth of our company, as you have seen. We appreciate the positive reaction from investors and analysts to our recent announcement with Apple, especially the feedback from many stockholders over the last two weeks who have recognized and appreciated our commitment to sustaining Qualcomm's long-term differentiation and focus on technology and innovation. I would now like to turn the call over to Dave.

Thank you, Steve, and good afternoon, everyone. We are pleased to announce strong second quarter results with GAAP revenues of $5 billion, above the midpoint of our guidance range; and non-GAAP EPS of $0.77, $0.02 above the high end of our range. The outperformance in the quarter was primarily driven by QTL revenues of $1.12 billion that were positively impacted by approximately $100 million of out-of-period catch-up, offsetting some impacts from overall market weakness. Additionally, we saw improved QCT gross margins and operating expenses, which came in lower than expected. QCT revenues of $3.7 billion were in line with expectations. MSM shipments of 155 million units were within the guidance range but below the midpoint, reflecting overall weakness in global device shipments. QCT EBT margin was 14.6% for the quarter, at the high end of our prior guidance range, driven by improvements in gross margins. Please note results this quarter do not contain any contributions from the settlements of our disputes with Apple and its contract manufacturers. Turning to our global 3G/4G/5G device forecast. We are lowering our estimates for calendar 2019 by another 50 million units at the midpoint to 1.85 billion units due to continued weakness in China and a lengthening of handset replacement cycles, potentially reflecting a pause in advance of 5G rollouts. We now expect global handset units to decline slightly year-over-year, offset by continued growth in non-handsets, resulting in total overall unit growth of approximately 3% at the midpoint. In regards to our recently announced Apple agreements, we expect to record revenues resulting from the settlement of matters prior to the effective date of the agreement of $4.5 billion to $4.7 billion in our third fiscal quarter. This includes a cash payment from Apple and the release of related liabilities. The settlement amount will be excluded from our non-GAAP results. Our guidance for the third fiscal quarter, we estimate GAAP revenues to be in the range of $9.2 billion to $10.2 billion, and estimate GAAP EPS of $3.57 to $3.77, which includes the revenues related to the settlement with Apple and the contract manufacturers. We estimate fiscal third quarter non-GAAP revenues to be in the range of $4.7 billion to $5.5 billion and non-GAAP EPS to be approximately $0.70 to $0.80. For QTL, we expect revenues to be between $1.225 billion and $1.325 billion, including the addition of ongoing Apple royalties, offset by a relatively modest impact from previously discussed market weakness and impacts from OEM mix. This compares favorably to the second quarter of QTL revenues, which after adjusting for approximately $100 million of greater-than-expected catch-up revenues, was about $1.025 billion. As a reminder, our third quarter guidance includes the last $150 million payment under the ending term agreement with Huawei. We expect QTL EBT margin to be 65% to 69%, up sequentially, reflecting the inclusion of Apple licensing revenues and modestly lower litigation expense. In QCT, we estimate 150 million to 170 million MSM shipments for the third quarter and EBT margins between 13% and 15%. QCT is also being negatively impacted by overall market weakness, unfavorable OEM mix shift, including share shift towards Huawei, and near-term impacts to adjacent businesses from economic weakness in China. With respect to the cost plan, we have completed and achieved substantially all of the target $1 billion savings based on our second quarter run rate excluding excess litigation costs. For our third fiscal quarter, we expect non-GAAP combined R&D and SG&A expenses to increase 6% to 8%. About 6 points of the sequential increase reflects an increase in our employee bonus plan as a result of the impacts of our Apple settlements. Litigation expense savings are expected to be modest in the third quarter given expenses incurred in advance of the resolution with Apple and its contract manufacturers, as well as continuing costs related to the ongoing regulatory actions in the U.S., Korea and EU. In our fiscal fourth quarter, we expect further litigation cost savings, partially offset by investment in our employees. Longer term, we expect litigation cost savings to be somewhat offset by increased investment to support Apple product ramp. Turning to our tax rate. We estimate our third quarter non-GAAP tax rate to be approximately 14% to 15%, and expect it to be a good proxy for the remainder of the fiscal year. As an update on our share repurchase activity, as of May 1, we have completed approximately 65% of the ASRs at an average price of approximately $61 per share. As a reminder, we expect to complete the ASRs in early September. We are estimating 1.23 billion weighted average shares outstanding for the third fiscal quarter and approximately 1.2 billion weighted average shares outstanding for the full year fiscal 2019. Looking longer term, when we announced our settlement with Apple, we indicated the deal would add an incremental $2 of EPS from the combination of ongoing Apple licensing revenues and product shipments as we fully ramp. The $2 EPS estimate excludes any impacts from the $4.5 billion to $4.7 billion of revenues resulting from the settlement, and it does not incorporate any impacts from the reduction of FX litigation expense. The $2 estimate also does not reflect any contributions from potential resolution with Huawei. Before I finish my prepared remarks, let me summarize the key drivers of our long-term earnings growth opportunities. First, with the global launch of 5G starting in the second half of calendar 2019, we expect to see an increase in both device and chipset selling prices and are well-positioned given the strength of our 5G chipset roadmap. Second, with the multiyear agreement with Apple, we expect to see significant revenue and margin expansion for both our licensing and chipset businesses, with further additional opportunities to capture broader product content over time. Third, we are seeing increased design win traction for our RF front-end products across all OEMs, driven by the upcoming launches of sub-6 and millimeter wave 5G devices. Fourth, while some of our adjacent opportunities have seen short-term impacts from economic weakness, we remain confident in our ability to scale these opportunities over the next few years. And lastly, we will continue to focus on increasing gross margins and driving operating expense efficiencies as we realize our growth opportunities outlined above. Thank you. I will now turn the call back over to Mauricio.

Thank you, Dave. Operator, we are now ready for questions.

Congratulations on the Apple settlement. A couple of questions built into that. With the settlement reached with Apple, can you update us on how negotiations are going with Huawei? And with the Apple settlement, does the agreement, the way it's structured with Apple, trigger any changes to current licensees or open up any other current licensee agreements?

So Mike, this is Alex. In terms of the negotiations with Huawei, they're ongoing. We feel that the Apple resolution enhances our ability to resolve issues with Huawei. So we think that's a good thing. In terms of the triggers, I can't get into the specifics of MFM-type provisions. Those are confidential. But we're confident that we'll be able to address any inquiries coming in relating to the nature of the Apple resolution and essentially address other licensees. And I think if you take a look at our Q3 guide in our fiscal year '21, incremental $2 EPS gives you a sense of kind of how we see that all working out.

I wanted to ask, as it relates to just handset demand, clearly, you're making adjustments, and that has an impact on QCT. But from a demand perspective, are you seeing any sequential changes or stabilization in that? Just trying to get a sense for where you feel like we're at in terms of potential incremental risk to those estimates. And then dovetailing on Mike's question related to Huawei. Can you walk us through a little bit, maybe on a year-over-year basis, how Huawei's share gains and those kinds of things may be limiting QTL's benefit, particularly post the Apple settlement?

James, this is Cristiano. I'm just going to get the first question and then hand it over to Alex. I'll start with sequential. No, actually, if you look at our non-Apple MSM business, I think our growth has been consistent with sequential growth historically when you look at our guide for Q3. So I think sequentially, we've basically seen the business behave in exactly the same way. What we did see, there was a little bit of market weakness. I think it was in the script, economic weakness, particularly in China. But the offset of that, we see a pause ahead of a 5G launch. And I want to remind everyone that China just launched. They were supposed to launch in September. China Unicom, and then followed by Telecom, just launched weeks ago, and I think that has an impact. But if anything, it builds our confidence, I would think, about the later part of the year with the 5G transition. With that, Alex, do you want to take the other question?

Actually, I'll jump in. This is Dave. On the Huawei share, a couple of thoughts. One, obviously, as they pick up a little bit of share right now, we are only being paid in QTL under an interim agreement, which is fixed at about $150 million a quarter. So we don't see any financial pickup from share shifts that way. And then similarly, QCT, some of that share coming from OEMs that we monetize a little bit more.

I'll just add one more point. This is Alex. And that is while we have this interim agreement arrangement, I just want to remind people what we do have an existing agreement with Huawei that was entered into at the end of 2014 on the eve of the NDRC resolution. We think that's a very good, very fair agreement. And so that is the context in which this ongoing negotiation is occurring.

I would like to gain more clarity on the $2 figure you mentioned. First, does this $2 impact reflect the complete effect of the chipset design ramp-up, or is it just a partial impact? Additionally, does the current QTL guidance account for all royalty payments made by Apple, allowing us to annualize that figure to reach the licensing part of the $2?

Yes, this is Dave again. Regarding the second part of your question, our Q3 guidance includes the ongoing royalties from Apple, but it also considers some challenges in the market. This gives you an idea of Apple's contribution and our outlook for QTL moving forward. I want to emphasize that this quarter is typically one of our lighter periods for QTL, so keep that in mind when thinking about annualizing the numbers. As for the $2 figure, it reflects ongoing licensing contributions as well as chipset contributions as we ramp up. We anticipate a more substantial contribution from the QCT side as we proceed. If you analyze the Apple contribution in relation to our quarterly guidance, you can get a clearer picture of the $2, with the remainder coming from QCT as we ramp up. As Steve mentioned, there are potential opportunities to expand our collaboration with Apple in the future, but this represents our current perspective.

I have a question about the QTL revenue run rate. The revenue guidance is 12.75, which includes Apple and also accounts for $150 million from Huawei. If I exclude Huawei, it appears you're guiding around 11.25. Previously, you mentioned that the appropriate run rate was about $1 billion to $1.1 billion. Even with Apple included, your guidance is only slightly above that range. Is this mainly due to ongoing market weakness? It seems you've been operating the core business at $900 million or lower for the past couple of quarters. Is there something else affecting this? What do you estimate the actual run rate for core QTL is without Apple and Huawei compared to the previously provided $1 billion to $1.1 billion guidance?

Yes. The $1 billion to $1.1 billion we have given previously was inclusive of the $150 million with Huawei.

No, no. No, it wasn't. No, it wasn't.

Two quarters ago, we indicated that the figure was not included. We then revised this in January to include the $150 million from Huawei. In the January call, we lowered our market guidance by 50 million units, and now we are reducing it by another 50 million units in this call. The main factor we are observing is that we continue to experience some challenges in the market for QTL in our Q3 guidance, which somewhat mitigates the effect of including Apple.

Wanted to ask on just the legal front, what's left? You talked about reinvesting some of the potential savings in litigation cost. Maybe you can just level set us as to what that number was, and then just walk through what's left. If you can speak about the FTC, I'd appreciate that as well. But kind of just walk us through the rest of the year as to what you have left on legal and so we can get an idea of what you're reinvesting.

Yes. Regarding litigation, as mentioned in the prepared remarks, we don't anticipate significant savings in Q3. However, we do expect some modest savings. We had substantial litigation costs leading up to the settlement with Apple concerning the San Diego case. In Q4, we foresee additional savings as we finalize expenses related to Apple litigation. There are a few factors that may offset this, particularly adjustments to our employee bonus accrual, which significantly impacted our numbers. This adjustment accounted for about 6 points of our 6% to 8% increase and will affect Q4 as well. Overall, while we are not expecting considerable savings from the decrease in litigation expenses in Q3 and Q4, we expect more substantial savings to emerge in fiscal '20.

And Blayne, this is Don Rosenberg, addressing Dave's point on litigation. Clearly, we have been investing significant time, money, and resources into the global litigation with Apple, which has increased considerably. Thus, moving away from that is crucial for us to return to a normal litigation schedule. We are still awaiting the judge's ruling on the FTC case, which we cannot comment on, and we have the usual range of patent cases and others worldwide. There are also a few class actions stemming from previous allegations involving Apple and the FTC. Nevertheless, there has been a significant reduction in the amount of litigation we need to manage over the next several years.

Steve, I just want to check if you can lay out for us the competitive landscape in 5G, particularly as it relates to baseband modem software or Intel Select. Like does that change how you think about kind of your position in 5G and the peak either the pricing or the margin opportunity created for your content in 5G? Additionally, just to follow up, I know you guys talked about kind of the one-time payment from Apple. Any color on kind of what the uses of that cash are in terms of how you're thinking about capital allocation around that, that will be helpful.

It's Steve. Maybe I'll ask Cristiano to take the first part of that, and then I'll add my perspective and answer the second part.

We are very confident in our 5G position in the marketplace. As a reminder, we accelerated our timeline by one year and have been the preferred choice in every trial and development across infrastructure, operators, and devices. This strong position mirrors our performance in 3G and 4G, and we anticipate a significant opportunity to increase average selling prices and silicon content for QCT. We currently have around 75 designs for 5G, with the majority incorporating our RF front-end content. 5G presents a solid narrative for QCT and is expected to be a major event in fiscal 2020.

Yes. I would like to add briefly that the developments have unfolded similarly to our expectations. It is crucial to be at the forefront of these transitions. Currently, the team is focused on this transition, which requires extensive modem and RF expertise to manage various RF bands and complex antennas. We believe our past investments are gaining traction, and we hope to see that reflected in the business, especially in the next fiscal year. The key challenge now is reducing the price of 5G through integrated products. We recently announced our first product, and more are on the way. We are pleased with the demand for these products and the progress we are making in our roadmap. Regarding the one-time payment, we provided information about our capital return program, particularly the ASR, which has performed well. We are now in a different position to assess the landscape over the next few years. The combination of the Apple settlement and the launch of 5G gives us a stable outlook on revenue and the competitive environment. The focus now is on how we can enhance the company and capitalize on the opportunities arising from 5G. We are still committed to operational excellence, including cost management and capital return. We see significant opportunities ahead, particularly with the stability this resolution brings.

The $4 billion to $4.7 billion for Apple, is all of it a retroactive payment for what they didn't pay? Or is some of it related to future upfront payments? How will you recognize revenues for this amount? Will it all be recognized as one-time, or will you recognize some of it ratably over the life of the contract?

Yes. The $4.5 billion to $4.7 billion is all for resolution of things prior to the effective date of the agreement. So it's all past. We'll recognize it one-time as revenue in Q3 in our GAAP results. And then our go-forward guidance on QTL includes the forward impact of ongoing royalties from Apple starting in Q3. And I would note, our $2 estimate is solely go-forward licensing revenues plus chip contribution.

The question is whether you will recognize the $4.5 billion to $4.7 billion as a one-time event, or if you have already recognized it on a GAAP basis.

Yes, it'll be in Q3. Yes. We'll recognize it one-time in Q3.

Congrats on the settlement with Apple. Just had a question on the revenue premise. I believe you guided for it to be up substantially, and it was. And I think you said it was in line with your guidance. So 2 parts to the question. Can you give us a little color what drove that up so nicely in the March quarter? And then of equal importance, it looks like you're guiding for that to be flat sequentially in the June quarter. So can you talk about some of the puts and takes that benefited margin, and why those are continuing or not in the June quarter?

Ross, this is Cristiano. Looking at the March quarter, we noticed some product mix changes, particularly with premium tier chipsets. We experienced seasonal trends with our Chinese customers. For our Q3 guidance, we previously mentioned that there was overall market weakness in China, but in the premium tier, there's a pause as 5G has launched. This launch is part of the Android ecosystem, particularly with our MSM800 5G designs. We see this pause happening as new 5G phones are being introduced. This aligns with comments from other OEMs in reporting their earnings regarding the premium tier market dynamics. Additionally, when we analyze our sequential growth from Q2 to Q3 for the non-Apple business—excluding legacy Apple units—it has remained steady and is consistent with our historical data.

Steve, you gave I thought some helpful information in your prepared script about some of the non-Apple progress that you made in QCT over the last couple of years. And you've dropped us some data in the last few quarters about some adjacencies that have been growing. I wonder if you might step back and give us a little color on the investments that you've been making in areas like auto, networking, some of the adjacencies that you had talked about growing the company into over the last maybe 3 or 4 years ago before some of the headwinds with Apple. And Cristiano, specifically about RF. It looks like a ton of RF attached in the early 5G programs. Any thoughts about how sustainable that might be until volume ramps in 2020?

I'll start with a general overview, and then Cristiano can provide more details on the second point. Over the past several years, we have focused the company on areas that significantly leverage our technology roadmap for mobile. This focus is primarily upstream of 5G, as we believe this roadmap is relevant for adjacent industries. A prime example is the automotive sector. In connected cars, we see potential in selling modems and computing capabilities for head units, and the demand for computing in cars has been increasing, showing good progress over the years. While the automotive business has a longer timeline and can be difficult to enter, it tends to have strong customer retention, which is promising. In terms of industrial IoT, we believe this sector is thriving and benefits from the digital transformation I referenced earlier. On the other hand, consumer IoT has yet to fully capitalize on emerging opportunities, though we still see future potential there. We are committed to investing in our marketing strategies, and we possess a robust technology roadmap that enables us to enter various shaped markets distinct from cellular markets. Regarding the RF sector, we recognize significant opportunities, especially with the rise of 5G. We aim to increase the integration of RF content within devices as we identify such opportunities. Cristiano will elaborate on this later. Additionally, we should not overlook investment opportunities in areas like fingerprint technology, which we find intriguing. We see 5G as a chance to leverage our R&D scale in mobile, and we intend to capitalize on this while maintaining our focus.

I want to add a few points. When looking at our non-Apple adjacent markets, even amid some economic weaknesses, we are still experiencing growth in both Q2 and Q3, with year-over-year growth remaining in double digits. While some of our ventures are small, the trends are promising. I’d like to emphasize a few points that Steve mentioned regarding industrial sectors, particularly the alignment of our industrial strategy with 5G. The expansion of 5G beyond mobile into various industries will significantly support scaling industrial IoT. We also see similar potential with Cellular V2X, which will enhance our digital cockpit and telematics business. Additionally, we have ongoing investments in computing that we expect to materialize in the latter half of the calendar year, particularly with our 8cx, which is the Snapdragon designed for PCs in collaboration with Microsoft. Returning to 5G, I believe our position is unique. The development speed of 5G, especially regarding antenna numbers and carrier aggregation, is progressing quicker than with 4G. Our ability to design systems and utilize device real estate for front-end components gives us a competitive edge. We are the only company that integrates everything from digital components to antennas in-house, allowing us to leverage our strengths as a system provider rather than just a component supplier. This is evident in every current 5G design, where our front end is present, and we anticipate this trend to continue.

I'll ask 2, if I could. First one, trying to level set QTL revenues ex Apple. So could you help me understand what catch-up payments or input/output were related to ASC 606 and other kind of moving parts within that QTL for March and any expectations for June? And then the second question. Your goal, I believe, was $6.4 billion OpEx without excess litigation for fiscal '19, obviously, will come in above that because of the litigation. But as you look to fiscal '20, is that a number that we could get to considering that most of the litigation that we've been talking about is behind us now?

Let me start with the second quarter. We noted in our prepared comments that there was approximately $100 million in unanticipated one-time or out-of-period QTL revenues of $1.12 billion. This is related to ASC 606 adjustments from prior periods as well as some one-time adjustments due to cleanup on a few programs from earlier times. Moving forward with ASC 606, we will continually forecast our revenues. There will always be a possibility of true-ups as we transition from estimates to a complete understanding of how the quarters have played out. For the third quarter, there are no specific out-of-period matters expected, but we anticipate that adjustments will occur regularly each quarter due to the nature of ASC 606. Regarding operating expenses, our target was to reach $6.4 billion. We still have significant litigation costs, and as I mentioned earlier, we expect to realize some savings from these litigation expenses as we enter fiscal year 2020, although this may be somewhat counterbalanced by the need to invest more to support the growth with Apple.

For your chipset ramp with Apple, is there an opportunity to win back the sockets on 4G?

This is Cristiano. Look, we're not providing a lot of details, but I think it's fair to assume that it's going to be a new engagement. It takes a little bit of time to develop devices of the chipset. And independent of our engagement of Apple, in general, I think all developed economies will have 5G launch in 2019.

Okay, great. And the RF front end, you're saying the majority of those designs will include your RF front end. Can you give us an idea of what percentage increase of content that might be?

Yes. My comment is about in the Android ecosystem. I think we're not detailing any RF front end engagement with Apple right now. What I will say, as we reestablish ourselves as a supplier of Apple, we reopened the door for opportunities beyond the modem.

Steve, so I wanted to go back to this $2 number. The QTL piece is clear. You were clear about a 6-year agreement with them. But on the QCT side, obviously, they have a pretty big modem team. So what sort of supply agreement, if any, is there on the QCT side? I think you said multiyear when you announced that $2 number. So should we just infer that you'll be the supplier to them for 2020 and 2021, and then beyond that, who knows? Or is there something else to think about there?

Yes. I'd say this maybe a little bit unsatisfying, but I'm not going to go through all the details, other than to say, on the chipset agreement, it's a multiyear agreement. I think both companies are happy with it. It's something that, at least the way we look at it from the QCT side or from the Qualcomm side, is it provides a lot of stability to our business. So we think that's a good, good agreement for us. And then also, I'll just remind you, there's a lot of tension removed out of the system as a result of these settlements, and I really like the opportunity to have the two teams just working together on products in the future, much more natural relationships, something that I think both sides can find and maintain a good relationship. But it is a multiyear agreement. And other than that, I really can't talk much about it. You know the terms on a licensing agreement, six years plus an option to extend two more years for Apple.

Steve, just to follow up on the previous question, to the extent you can tell us. What sort of ASP increase do you expect in 5G for the 10 modems? And then I'm guessing the $2 number has some market share assumptions at Apple. To the extent you can tell us, is it 100% or is it less than that, at least for the first generation? And then, Dave, on the QTL EBIT margin, your guidance is for 65% to 69%. When do you expect to get back to the previous 80%, 85% ranges?

Okay. On the product assumptions with Apple, I won't give share numbers, but I will comment on ASP. The ASP story, at least in the case of as we move to 5G, they tend to be good for us. And the ASPs, as we're moving in through the 5G ramp, we said that they're going to be a good story. And looking at what we're seeing broadly across the industry, that seems to be playing forward.

And two things will drive the QTL margin going forward. One will be some of the wind down of litigation, excess litigation spend. The other important one will be top line expansion as we now add Apple back in and when we resolve Huawei. Both of those will be factors driving margin up over time.

I have a quick question regarding the corporate overhead you're expecting for the June quarter. When we look at the midpoint of your margin guidance for QTL and QCT, it appears there is approximately $300 million in corporate overhead. Could you provide more details on how this is structured?

Yes. That's the bonus adjustment that I talked about in my script. So resolution of Apple, we adjust our normal employee bonus accrual for the addition of the impacts of Apple. Because it's third quarter now, we take a number of quarters of catch-up into the quarter. That is not pushed out into the business unit margins. It's held in corporate. So that's the bulk of the delta you're seeing.

And so just to understand the movement in OpEx that we can expect through the end of the fiscal year, you talked about the litigation. Can you size it at all of us? Can you help us understand like the magnitude of how this sort of plays out over the next few quarters and how you see the underlying OpEx rising? And how we should really model the next sort of 2 or 3 quarters of absolute OpEx?

Sure. So first of all, in Q3, I think the midpoint of our range is around $1.7 billion, $1.8 billion or something like that of OpEx. That includes when you look at this bonus adjustment, it's about $100 million. So it puts us at about $1.6 billion, $1.7 billion. That's up slightly from where we were in Q2 for a couple of seasonal-type things and includes some modest savings in litigation. In Q4, we expect further savings in litigation. The one-time elements of the bonus catch-up will be out, and we think that it puts us probably somewhere flattish on the adjusted Q3. So you think about Q3 without the $100 million at $1.6 billion, $1.67 billion.

Yes. QTL, I think as I said before, I think a couple of drivers that will improve, and that is the reduction of litigation savings. So I said that we'd see more of that flowing into fiscal '20 from a timing standpoint. And then resolution of Huawei and the addition of more on the top line in QTL. So obviously, that timing would be reflective of whenever we reach agreement with them, is I think the two major drivers.

This is Cristiano. Regarding QCT, our plan remains unchanged as we continue to scale and grow in mobile. We have made significant progress in expanding our non-Apple business. As all agreements are finalized, we expect to return to our long-term profitability target at QCT. We are looking forward to a strong 5G season as the year wraps up.

Could you provide more details about the RF front end wins you mentioned? I believe you noted that 75% were design wins and that most of them include a front end. Are you focusing more on the mid-end or low-end? Also, could you give a rough estimate of the content you're looking at?

Thank you for your question. Regarding 5G, our RF front end content is present in all 75 design wins for 5G Android, which includes both sub-6 bands and millimeter wave. Most of these designs are for flagship smartphones in the premium tier. Our content spans a range of features from envelope trackers to power amplifier modules, incorporating diverse elements across all bands, switches, and antenna tuners. As I mentioned earlier, we are observing significant performance differentiation in 5G, enabling us to offer a comprehensive solution from the digital baseband to the antenna.

Got it. And on the QTL side, if you look at the June quarter, you talked about seasonality. But as you look beyond, with the Apple payments starting to normalize, what would be a normalized QTL run rate that we should be looking at?

Yes. The best way to approach this is to consider that our Q2 guidance now factors in Apple going forward. It also reflects some challenges due to market weakness, and this quarter is typically one of the lighter ones for QTL. Taking these factors into account will help you better estimate the annualized outlook.

Yes. First of all, thanks, everyone, for joining us today. Just a quick note to our employee base. Just thank you so much for staying focused during this period of time. You put the company in a great position. I look forward to the ramp of 5G and really the opportunities that are ahead of us. Just thanks a lot for all your hard work, and we'll talk to you next quarter.