QUALCOMM Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2023

There are 13 speakers on the call.

Operator

And gentlemen, thank you for standing by. Welcome to the Qualcomm First Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please limit your questions to one question and one follow-up.

Operator

As a reminder, this conference is being recorded February 2, 2023. The playback number for Today's call is 877-660-6853. International callers, please dial 201 6,127,415. The playback reservation number is 13,000,000,000,000 295. I would now like to turn the call over to Mauricio Lopez Odoin, Vice President of Investor Relations.

Operator

Mr. Lopez Odoin, please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. Today's call will include prepared remarks by Christian Amone and Akash Palkawala. In addition, Alex Rogers 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 website. In addition, this call is being webcast on qualcomm.com, and a replay will be available on our website later today.

Speaker 1

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 ks, which contain important factors that could cause actual results to differ materially from the forward looking statements. And now to comments from Qualcomm's President and Chief Executive Officer, Cristiano Mon.

Speaker 2

Thank you, Mauricio, and good afternoon, everyone. Thanks for joining us today. In fiscal Q1, despite the ongoing macroeconomic headwinds and Short term challenges impacting the semiconductor industry, we delivered revenues of $9,500,000,000 and non GAAP earnings of 2 point And $0.37 per share, including year over year growth in QCT Automotive and IoT. QCT revenues of $7,900,000,000 were down 11% year over year as a result of weaker handset demand and inventory draw In the current quarter, combined auto and IoT revenues represent 27% of total QCT revenues, Reflecting continued progress on revenue diversification, QTL delivered $1,500,000,000 in revenues within Q1. As the handset industry continues to experience reduced demand, we are now expecting elevated channel inventory levels to persist at least through the first half of calendar 'twenty three.

Speaker 2

In addition, multiple end industries within IoT are also experiencing weaker than expected demand and elevated inventory levels. Given the current macroeconomic and demand environment, We're implementing further spending reductions and streamlining operations without losing sight of the significant growth and diversification opportunities ahead. This is consistent with our commitment to actively manage operating expenses As indicated during our last earnings call, combined with the actions we have already taken in the quarter, We expect to reduce non GAAP operating expenses by approximately 5% relative to a run rate exiting fiscal 2022. Despite near term headwinds, our long term growth opportunities remain unchanged. Our leading technologies such as advanced wireless connectivity, high performance low power compute and on device intelligence are enabling the ongoing trends of digital transformation across industries.

Speaker 2

From a product and technology perspective, We believe we are in the strongest position in our history. Our strategy is working and we remain focused on Spending our addressable market to approximately $700,000,000,000 in the next decade and firmly establishing Qualcomm As the connected processor company for the Intelligent Edge, I will now provide key highlights from across our business. In automotive, the industry continues to evolve at an unprecedented rate driven by the adoption of digital technologies. Improved safety and security features, increased levels of autonomy as well as new business models and revenue streams. Built platform to help drive this innovation for the next generation of vehicles.

Speaker 2

At CES, we announced Snapdragon Ride Flex, which enables digital cockpit, advanced driver assistance systems and automated driving functions to coexist On a single SoC, a first for the automotive industry. Automakers in Tier 1s Can now scale a unified central compute and software defined vehicle architecture across their portfolio. We also demonstrated our expansion into 2 wheelers with the latest infotainment and cloud connected digital services to enhance safety and deliver a more personal experience for riders. Our solutions also enable OEMs And fleet providers to deliver over the air updates, subscription services, remote diagnostics, geofencing, test protection and more. We are very proud of the progress we have made in automotive and we believe In handsets, our recently announced Snapdragon 8 Gen 2 mobile platform begins a new era of AI accelerated experiences for smartphones.

Speaker 2

The Snapdragon 8 Gen 2 includes our first ever AI powered camera processor with a larger tensor accelerator for increased performance. We are also pleased to enable the awards first Satellite based two way capable messaging solution for Android smartphones. Snapdragon Satellite will provide global connectivity for messaging utilizing Iridium's weather resilient L band spectrum And we will initially be available on next generation premium smartphones using Snapdragon 8 Gen 2 Within the second half of twenty twenty three, yesterday, I was pleased to join Samsung's Unpacked event where they launched the Galaxy S23 family of smartphones powered by the Snapdragon 8 Gen 2 mobile platform for Galaxy globally. This premium platform features accelerated performance And unique customizations made possible by our expanded strategic partnership with Samsung. The Galaxy S23 represents the first smartphone announced from this partnership.

Speaker 2

In IoT, which is poised to become our largest addressable market, our revenue stream Spans across 3 categories consumer, edge networking and industrial. In consumer IoT, Our next generation PC platform with integrated custom Orion CPUs and upgraded AI engine HasSimple on time and is exceeding our internal KPIs, delivering disruptive CPU performance per watt across tiers. In addition, Snapdragon's AI capabilities and leading battery life Studio effects, including portrait blur, eye framing and noise cancellation with voice focus. Together with Microsoft, we're broadly engaged with the app ecosystem and are pleased that native applications Have been launched for Windows on Snapdragon by market leading ISVs such as Zoom, Amazon Prime Video, VMware Carbon Black, Cisco AnyConnect and CrowdStrike. Additionally, as Adobe announced at our Tech Summit, Its creativity suite of apps, including Adobe Photoshop, Lightroom, Fresco and Acrobat will run natively on Snapdragon.

Speaker 2

We're now engaged with major PC OEMs with multiple platform design wins across their product roadmaps For Consumer and Commercial, in Edge Networking IoT, our Wi Fi infrastructure and networking products Continue to gain share, led by strength in enterprise Wi Fi access points in carrier gateways. We see several trends that are favorable to our Wi Fi solutions. Wi Fi mesh networking continues to grow Polarity Worldwide increasing the number of Wi Fi chipsets installed per home. The hybrid work trend appears to have had lasting impacts on enterprise networking with workers relying on real time collaboration tools regardless of whether they are in the office or remote. Broadband Internet service providers are turning increasingly to a modular software development model, creating new opportunities for Qualcomm in next generation Home gateway routers and the transition from Wi Fi 6 and 6C to Wi Fi 7, which we're currently leading across home, enterprise and carrier segments.

Speaker 2

In 5 gs fixed wireless We're encouraged by the significant momentum in India following the recent 5 gs auctions. Operators have publicly stated their ambition to provide broadband services to 100,000,000 homes using 5 gs FWA. Qualcomm is well positioned To enable the 5 gs FWA Ecosystem in India with our leading product portfolio on 5 gs millimeter wave based High power CPEs complemented by small cell and compact macro cell infrastructure modem RF platforms. We are currently working with CPE and infrastructure OEMs on the commercial rollout in India, Spanning both millimeter wave and sub-six spectrum. In industrial IoT, digital transformation is still in the early phases And the scale of the opportunity for Qualcomm in the long term across many verticals is significant.

Speaker 2

In the tracking and logistics space, We believe we have established one of the largest ecosystems of manufacturing partners. Last month, We announced a new IoT optimized modem, the QCX216 for applications such as smart utility meters, Trackers, eMobility, parking meters, home automation and security and other location based solutions. The QCX-two 16 reduces power consumption by up to 80% versus the previous generation solution, while also enabling customers to design modules with an up to 40% lower cost structure. In retail, our point of sale solutions continue to drive the transition from traditional terminals to full feature Android based terminals. We have shipped over 70,000,000 Snapdragon devices Since 2016 into handheld and desktops point of sale terminals worldwide.

Speaker 2

In enterprise video collaboration, We're leading this rapidly growing segment, powering many of the key OEMs such as Poly, Logitech, Neat, Cisco, Bose, AVer and Alibaba. These are just a few examples of our within industrial and we remain excited about the growth prospects as digital transformation accelerates. In summary, the overall long term growth opportunity for Qualcomm remains unchanged as demand for technology Stands to virtually every device at the edge. Our track record of innovation provides a unique perspective and capability to be at the forefront of the digital transformation across new and diverse end markets. I would now like to turn the call over to Akash.

Speaker 3

Thank you, Cristiano, and good afternoon, everyone. And thank you for joining our call during a busy earnings week. I'll start with our 1st fiscal quarter results. Consistent with our prior guidance, we delivered revenues of $9,500,000,000 and non GAAP EPS of $2.37 QTL recorded revenues of $1,520,000,000 and EBT margin of 73%, reflecting slightly lower global handset units. QCT revenues were $7,900,000,000 and EBT margin was at the high end of our guidance range at 28%.

Speaker 3

Handset revenues of $5,800,000,000 reflected the impact of industry wide headwinds we had previously communicated. IoT revenues were up 7% year over year to $1,700,000,000 mainly driven by growth from our edge networking products. Automotive continued its momentum with year over year revenue growth of 58% to $456,000,000 driven by the adoption of our Snapdragon digital chassis. Non GAAP operating expenses were lower than our guidance, decreasing 6% sequentially, which includes the benefit of certain cost actions we outlined last quarter. Our balance sheet remains strong of $1,500,000,000 on the completion of the sale of Veoneer's active safety business to Magna by SSW Partners.

Speaker 3

We expect the transaction to close by the end of the fiscal year. We returned $2,100,000,000 to stockholders, Including $1,300,000,000 in stock repurchases and $842,000,000 in dividends in line with our capital return program. Lastly, our GAAP EPS results included a $0.10 benefit from the U. S. Tax requirement to capitalize and amortize R and This benefit is excluded from our non GAAP results.

Speaker 3

Before turning to second fiscal quarter guidance, I'll provide an update on short term cyclical Driving industry wide demand weakness. Given this uncertainty, we are incorporating a negative bias for 3 gs, 4 gs, 5 gs handset volumes for calendar 'twenty relative to calendar 2022. The impact of broadening demand weakness across handsets and IoT products And the easing of supply constraints has contributed to elevated channel inventory. Based on our current assessment, We expect QCT customers to continue to draw down on inventory at least through the 2nd and third fiscal quarters. At this point, we're optimistic that the demand and channel inventory may normalize during the second half of the calendar year, and we remain in a Strong position to take advantage of the opportunity when it occurs.

Speaker 3

While our business is not immune to the macro environment, we are confident in our ability to navigate this landscape. As Cristiano summarized, we have continued to expand our actions to reduce operating expenses beyond the initiatives we previously outlined. While we are reducing spending on handsets and SG and A, we continue to fund our diversification investments in IoT and Automotive, which is consistent with our long term strategy for the business. The initial benefit of these actions is reflected in our fiscal Q1 results and 2nd quarter guidance. Overall, we are targeting a combined 5% reduction in non GAAP operating expenses relative to our fiscal 2022 exit rate.

Speaker 3

Turning to guidance for the 2nd fiscal quarter. We are forecasting revenues of $8,700,000,000 to $9,500,000,000 and non GAAP EPS of $2.05 to $2.25 The midpoint of our guidance includes an assumption of lower end market demand and the continued drawdown of channel inventory. We are forecasting QTL revenues of $1,250,000,000 to $1,450,000,000 and EBT margins of 66% to 70%, reflecting a sequential seasonal decline in handset units. In QCT, we estimate revenues of $7,400,000,000 to $8,000,000,000 And EBT margins of 25% to 27%. We expect handsets and automotive revenue to be flat sequentially, Offset by a reduction in IoT revenues due to the factors I just outlined.

Speaker 3

We estimate non GAAP operating of approximately $2,250,000,000 This reflects the typical calendar year increases for certain employee related costs, offset by the savings from our cost reduction actions. In closing, with the uncertainty of the macro environment, we will remain focused On operating discipline and managing the factors we control, our diversification strategy is on track as evidenced by our design win pipeline across IoT and automotive customers. In addition, our long term secular growth opportunity remains unchanged. We are focused on executing on our strategy enabled by our leading technology roadmap and best in class product portfolio. Thank you.

Speaker 3

Back to you, Mauricio.

Speaker 1

Thank you, Kaush. Operator, we're now ready for questions.

Operator

First question is coming from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

Speaker 4

Hi. Thanks for taking I have a couple. Maybe for the first one, I hear you on the inventory digestion, but maybe one of the other concerns that investors have had for this year on the Handsets side is sort of delay, if any, on in terms of launch plans from the Android OEMs about their sort of relative to their new handsets or Any changes in their pricing strategy and sort of the chips that they intend to then sort of prioritize or sort of the high end versus maiden that they want to prioritize to achieve those pricing strategies in the market. Maybe if you can give us some color in terms of what you're seeing from the OEMs on that front Outside of the inventory digestion, I have a follow-up. Thank you.

Speaker 3

Sure. Sameek, it's Sakash. Really from a handset launch perspective, especially in the tiers that Qualcomm is very strong at, we're continuing to see our customers launch on time. So you We obviously saw the Samsung launch happen yesterday. Our Chinese OEMs are also planning to launch their devices on schedule.

Speaker 3

So no change from our perspective On launch timing in the key tiers for us.

Speaker 4

Okay. Okay. And maybe just a follow-up on the IoT side, you did The weakness that you're seeing in that broader market, but maybe if you can delve into that a bit more. Are you seeing sort of more weakness just Being higher on consumer IoT or is that more worsening across industrial IoT and edge networking as well? And if you can quantify what to how to think about the edge networking

Speaker 3

Sure. So from an IoT perspective, It's very similar impact to other parts of the industry. It's really the short term cyclical headwinds that the entire industry is seeing. We're seeing a factor And so it's 2 parts, it's demand weakness and then OEM inventory drawdown, both of those factors similar to handsets. And within our product line, we're seeing we obviously started seeing impact in consumer IoT that we've talked about previously.

Speaker 3

And we've seen that expand a bit into industrial and edge networking. But as we look at this, these we see these as Short term factors that are clearly kind of driven by the cyclicality in the industry that's going on. But when you step back and look at our design win pipeline, still reflects the opportunity in front of us.

Speaker 2

Hi, this is Cristiano. Samik, just to add one thing, you asked about India. Yes, we As we said in our prepared remarks, we're excited about that opportunity. It's probably likely is going to be one of the largest opportunity for 5 gs as fixed wireless access. And as we mentioned, the opportunity will be across all the operators To connect in the order of 100,000,000 homes.

Speaker 2

So that could be very significant. What we like about it is that millimeter wave has been utilized as Well, for fixed wireless access. So that's a great opportunity for us. Thank you.

Operator

Our next question is from Matt Ramsay with Cowen. Please proceed with your question.

Speaker 5

Thank you very much. Good afternoon, guys. Akash, I wanted to ask a little bit of question a couple of questions about margins. You talked pretty explicitly about OpEx, but we're seeing no surprise maybe with the dynamics And the inventory correction that the QCT operating margins have come down some. And maybe you could just walk us through the puts and takes on margins from here.

Speaker 5

Is March The bottom and how should we model sort of gross margin in QCT as we go forward given the mix of the segments might be a bit different during this inventory correction? Thanks.

Speaker 3

Sure, Matt. So let me address it in 2 parts. 1st, from a gross margin perspective, we did slightly better than our And the results that we announced for the 1st fiscal quarter, and then we're guiding similar margins into the 2nd quarter. So From a gross margin perspective, we are holding well and even in the challenging environment we are in, we are doing a relatively good job. As we've said in the past, we always expected that once we get to supply constraints, there'll be some gross margin pressure and that was Factored into our long term target.

Speaker 3

So really nothing new that we haven't told you before on gross margin side. On Operating leverage, which is really the second driver here is the impact that we're seeing from the inventory drawdown reduces the operating leverage in the business Temporarily in the short term. And so you're seeing the operating margins being impacted by that. But kind of once you step back and abstract out of that change, You should see the operating margin more in line with your expectations.

Operator

The next question is from Mike Walkley with Canaccord Genuity.

Speaker 6

Christiano, while Qualcomm has done really well in premium to your Android, With supply easing, what's the appetite to maybe go down tier into the mid to high tier Android? And if so, what would be timeline to maybe take share if you have interest in that market?

Speaker 2

Thank you, Mike, for your question. Actually, it's a great question. What we have seen in this current demand Environment as well as the inventory drawdown. Actually, the premium tier had done a little bit better than what the mass tier That as you get to the second half of the calendar year, we hope that the inventory drawdown situation improves As well as China reopens. And we will see an opportunity for the mid and the low tier to come back in.

Speaker 2

Our design traction is good in those with the OEMs and we'll see what happens. We're not factoring that better second half yet in our planning assumptions. So I think we're waiting, but I think there's optimism just because of the inventory drawdown as well as China reopening.

Operator

Our next question is from Stacy Rasgon with Bernstein Research. Please proceed with your question.

Speaker 7

Hi, guys. Thanks for taking my questions. I have 2. For the first one, Akash, you're talking about the inventory correction in March as well as in June. You're guiding handsets kind of I was wondering if there's any sort of like preliminary color you could give us on the June quarter trajectory.

Speaker 7

Like do you guys think March quarter in general is the bottom? Then I have a follow-up.

Speaker 3

Yes. So the way, Stacy, we are thinking about kind of how things play out is the short term headwinds, cyclical headwinds that we're seeing, that uncertainty remains and we're seeing that in handsets and IoT, so both from a demand perspective and inventory drawdown. So we expect our QCT customers to be cautious and until there is more visibility, they're going to be careful with Additional purchases and drawdown inventory. So that's what's factored in our updated guidance. When we look at the second half of the year, as Cristiano said, we're pretty optimistic The demand in channel inventory normalizes, and that allows us to take advantage of the growth from that point on given our strong position when the dynamic occurs.

Speaker 3

In terms of bottom, the way I think about it is we're going to see impact For the March June quarters and I think there's an opportunity from that point on as we grow in the second half of the year.

Speaker 7

Got it. Thanks. If I could ask a quick follow-up. In your Q, you talked about you had a $344,000,000 tailwind from Higher average selling price year over year in the quarter and that was for the overall chip segment, but you used to give that number strictly for handsets. Can you give us some feeling for how Pricing has been trending in the handset business relative to that overall benefit you see in QCT?

Speaker 3

Yes. So if you think about pricing in the handset business, it's usually a function of 2 things. First is within a given tier, More capability is being added to the device, especially on the application processor side. And so you've seen us benefit significantly from that over the last 3 years. And as we look forward, we are continuing to see demand for additional functionality.

Speaker 3

So that's kind of a tier for tier Improvement opportunity for us and for the overall industry. And then the second factor is mix within tiers and that Of course, changes across quarters and so that goes up and down based on what sells through in that quarter and which a customer it is, but that's more timing versus kind of a fundamental trend of revenue growth.

Operator

Our next question is from Ross Seymore with Deutsche Bank. Please proceed with your questions.

Speaker 8

Hi guys. Thanks for letting me ask a question. I want to focus on the handset guidance for the next quarter fiscal 2Q being flat sequentially. Can you just talk about The puts and takes that are getting you to flat and Akash, last quarter you gave a framework about I think $2,000,000,000 of inventory burn Headwind, I just wonder if you were indeed successful in getting halfway through that or is the issue now pervasive because just demand has dropped. So just the

Speaker 3

Yes, Ross. So from a handset perspective, what we've assumed in the March quarter is A standard seasonal decline, and I said this in my prepared remarks, from December into March. So it's what you would expect Seasonally happens once you go between the quarters and so that's what we've assumed and that informs our QTL forecast for the quarter as well.

Speaker 8

But you guided flat sequentially. So I'm just trying to from December to March, are you saying it would be down except Now it's going to be flat because you're burning less inventory?

Speaker 3

Okay. So I understand the confusion. So the what I talked about was the total handset market, which we are expecting to be down quarter over quarter consistent with seasonal trend. What we said was flat was QCT handset revenue. We expect to be flat.

Speaker 3

And of course, that's a function of mix of chips and also inventory drawdown differences.

Operator

Next question comes from Joe Moore with Morgan Stanley. Please proceed with your question.

Speaker 6

Great. Thank you. Going back to how much inventory you're reducing in handsets, what's your visibility into that? And I mean, are you Are there certain customers where they sort of didn't take anything in December and so you know that they're coming back? Just can you give us a sense of are you sure this is all inventory reduction and not end demand?

Speaker 3

Yes, Joe. We have a sense of kind of what sell through the OEMs had Because of our QTL business and then we have the ability to compare that with what's happening in QCT. So we do have a pretty good What is happening in the industry and we're confident that a large portion of it was inventory drawdown.

Speaker 6

Okay, great. And then specific to the China region, I think you mentioned some new launches in the March quarter, but it sounds like The situation there is pretty challenging in terms of visibility. Like is China different than the rest of the world for you right now?

Speaker 3

Yes. The uncertainty in China definitely reflects in our customers' purchases and that's what we talked about that we expect Until there is more visibility, we expect customers to be careful with additional purchases and drawdown on inventory. But in terms of handset launches, We are still seeing the OEMs being extremely active and planning handset launches on the regular cadence and driving functionality within the market.

Speaker 2

This is Cristiano. Let me just add one thing. If you look at the China handset market, the majority of sales, even though they have a big online component, the majority of sales It's offline market. So as we have saw, with the lockdowns and the COVID situation, there was a big impact In the handset market in China, common sense, and that's how some of our OEMs are also thinking is, As the COVID gets behind China, you should expect the markets to open up. And what we have visibility right now Yes.

Speaker 2

A lot of the new device launches are preparing for that and some of it which is going to be announced at Mobile World Congress. It's too early to draw a conclusion. So let's go back to that conversation that there is optimism that second half could be better.

Operator

Our next question is from Blayne Curtis with Barclays. Please proceed with your question.

Speaker 9

Thanks for taking my question. I guess it's kind of a combination of I'm curious inventories are up on your balance sheet of costs. Just kind of curious whether you need to work Those down as well. And then I guess for Cristiano, just going back to a prior question on the midrange, I'm curious about the pricing environment. I mean, MediaTek is having a tough first half Well, can you just comment on what that environment is and then your kind of just thoughts in general about Pricing and moving per share within the modem business, you did a good job navigating at the high end during the shortages, but just kind of curious Favoring profitability versus share, what are your thoughts?

Speaker 9

Thanks.

Speaker 3

Blaine, it's Sakash. I'll take the first one and then I think Christiana will take the second one. From an inventory perspective on our balance sheet, you're seeing something similar to what you're seeing on our peers and customers as well, the same set of drivers. As you know well for leading edge nodes, which is where we operate, the lead time is 5 to 6 months now for the foundry And chip production. And so we were clearly starting wafers based on a different market expectation and before the inventory drawdown.

Speaker 3

So We've calibrated that down. We are working with our suppliers and over time we'll get to a reasonable place. It is important to also remember that When you look at 3 years ago versus today, we've grown tremendously in terms of revenue and scale across our businesses. And then also supply has caught up to demand. So those two factors would naturally increase inventory anyways, but the remaining we'll be working through as I mentioned.

Speaker 2

Hi, Blaine, Christiano, I'm going to take your second question. Look, as is probably clear, both us And the other chip supplier in the handset market dealing with the same challenges, which is demand weakness in inventory drawdown. In the areas that we have more competition, which is mid to low tier, we also saw that's the one that is most Impacted by the demand weakness. So as we think about the market open up, our view is we're very well From a competitive perspective, we have visibility into the design pipeline and we will remain disciplined on pricing, which is Consistent to how we have behaved over the past few years.

Operator

Thank you. The next question comes from the line of Brett Simpson with Arete Research. Please proceed with your questions.

Speaker 10

Yes, thanks very much. I wanted to ask about fixed wireless access. And I think you talked about in your prepared remarks that you saw a big opportunity in India Playing out over the next couple of years with fixed wireless access. But can you maybe just talk a bit about the ASPs that Qualcomm gets From a typical device in fixed wireless access and how do you see the business evolving next couple of years as you to attack that India opportunity and you can see some of the success you've had in the U. S.

Speaker 10

So far here and maybe other markets. Just maybe help us understand how this Really pleased for Qualcomm. Thank you.

Speaker 2

Thank you for your question. So I will start by saying that we really like the market and we think the market is a long term market. I think the It's clear to see now that home broadband for the first time you have a wireless solution that can augment Fiber and it's really about fiber and 5 gs. You don't find cable everywhere outside the United States. So we think that's an opportunity for both developed and developing economies.

Speaker 2

And of course, if you look at the size of India, that's where we're very excited about it. We saw the Auctions, the investments are being put into place by the operators and infrastructure. When we sell into that market, I think while I can't really talk about the ASP. I tell you it's accretive in margins to our handset business, especially because we have a lot of content in many cases. We also have the ability to do on Wi Fi access point in addition of the 5 gs modem, and we are very well positioned With Millimeter Wave Technology.

Speaker 10

Okay. Did you say sorry, Christian, did you say you booked Mobile systems or is it IoT, an IoT business?

Speaker 3

It's within the IoT revenue stream.

Speaker 10

Okay. Okay. So I'm satisfied.

Speaker 2

Yes. What I mentioned is, it's compared to our handset business, the ASPs that we have for fixed wireless is really accretive Margins. That's what I think. But it's in the IoT business. Thank you.

Speaker 10

Okay. Maybe just a follow-up. I wanted to ask about the recent U. S. Restrictions around Huawei.

Speaker 10

Are you seeing any impact in this at all? I mean, it looks like Huawei has been shipping quite a lot of 4 gs devices recently. Have you been shipping components to Huawei? And if so, can you just help with the impact of the latest restrictions on the business? Thank you.

Speaker 7

So this

Speaker 11

is Alex. I'll start and then maybe Akash can fill in if he has anything further. So I don't think it's fair to characterize it as the latest restrictions on Huawei. What we've seen are news reports, to the effect that Commerce is considering not issuing new licenses to Huawei. And we haven't heard anything from Commerce itself.

Speaker 11

Qualcomm has a set of licenses that we've had for a while that basically allow us to ship 4 gs And other chipsets, including Wi Fi to Huawei. Those licenses were issued because Commerce reached the determination that they don't affect national security issues. Those will continue for some number of years. And so within the scope of those licenses, we don't see an impact. Akash, anything else?

Speaker 3

Nothing to add. Thank you.

Operator

The next question is from the line of Tal Liani with

Speaker 12

Inventory days doubled and it has been going up every quarter in the last 4 quarters, 5 quarters. Can you talk about inventory days And what is it composed of if there is anything special we need to discuss just because of the high value? And second, more qualitatively, I want to understand what is the lag or what should be the lag on sales in China From inventory levels versus demand recovery as China reopens, Meaning from the time that China reopens and there is demand for handsets, how should we think about the lag from that to being translated into demand from you?

Speaker 3

Yes. So Tal, it's Akash. From our perspective, the way We think about our inventory and it's really not necessarily inventory, it's really wafer starts. What we would like to do is, Given the lead time of 5 to 6 months, start wafers 5 to 6 months in advance plus some Room on top for mix changes that might happen during the period. So that's the framework under which we operate.

Speaker 3

You're right that our current inventory balance is Higher than where we'd like it to be. And earlier in the call, I went through the rationale as to how we ended up there. So we are working with our suppliers and we'll kind of normalize it over time and we feel confident we can do that. On your second question on the lag, I think that's already embedded in the way we provided our view into the future, which is As we expect inventory drawdowns to happen through the March quarter than going into the June quarter, but as we go into the second half of the calendar year, As demand comes back and normalizes, we have the ability to benefit from it.

Speaker 8

Got it.

Speaker 12

Last question. I'm getting a repeated question on your licensing part. I saw today the what you said about Nokia and Ericsson. Can you discuss licensing portion in terms of Any forthcoming discussions, negotiations or anything that we need to be aware of or is it as stable as it was the previous year.

Speaker 11

So this is Alex. It really is just as stable as we've described previously. All the major OEMs Are signed up long term. No other new renewals are coming up until fiscal year 'twenty five. The Nokia license basically split into a couple Parts Infrastructure to Nokia, handset to Microsoft, those licenses as they evolved We're not no longer material to the QTL business.

Speaker 11

So that's pretty much where things stand.

Speaker 12

Got it. Thank you.

Operator

Our next question comes from C. J. Muse with Evercore ISI. Please proceed with your questions.

Speaker 7

Thank you for taking the question. 2, if I may. The first one, if you look back 3 months ago, you talked about kind of a 2 quarter correction. Now it's at least 3. And so just curious So level set kind of how things have transpired over the last 3 months, how much of the change statement here is just end demand declining Versus your customers working down Qualcomm Semiconductor inventory?

Speaker 7

And then the second question, You kind of spoke to it earlier around building inventory and would love to hear your thoughts around kind of wafer start Volume commitments, how to think about the impact to QCT margins in calendar 'twenty three? And is there any risk Of a one time catch up payment on reduced volumes. Thanks so much.

Speaker 3

So on your first question, C. J, from an inventory perspective, There are a couple of drivers to it. So first is the weaker market, second is inventory drawdown and Both are significant factors. And then the third I'd say is, we've also seen IoT having the same some of the characteristics. And so you're seeing a combination of those factors impacting the time period for which the drawdown lasts.

Speaker 3

Again, as we look at it, this is a shorter term thing that when you step back, it doesn't necessarily the drawdown doesn't impact the strength of the business. And so As the recovery happens, we'll be in a position to benefit from it. Can you repeat your second question? I'm not sure I understood it well.

Speaker 7

Yes, sure. As it relates to your wafer commitments, particularly with TSMC, if you're taking down the volume purchases, Any risk to pricing and or catch up payments?

Speaker 3

Yes. So a lot of Our commitments were more in the form of prepayments rather than volume commitments. So that just means you get the prepayment back over a longer period of time. But

Operator

That concludes today's question and answer session. Mr. Ramon, do you have anything further to add before joining the call?

Speaker 2

Yes. Thank you. Maybe just to summarize, I think, how we see the earnings call. I think beyond 20 23 for Qualcomm, we see many of our growth initiatives increasing scale, including auto, PCs, XR and 5 gs FWA, we talk about it in Industrial. When we look at the current environment, we remain very Our ability to navigate the economic downturn and the short term challenges given our strong balance sheet and consistent history of strong free cash flow generation.

Speaker 2

As you can see, we're taking action on what we can control, and we believe we'll emerge even stronger as we continue to execute on our strategy. We're focused on Qualcomm's long term success and we'll work diligently to continue to drive growth, Especially Altun IoT diversify the company and deliver value for stockholders. I'd like to thank all the employees for their dedication and contributions to Qualcomm as well as our many partners and

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Earnings Conference Call
QUALCOMM Q1 2023
00:00 / 00:00