Qualcomm - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Qualcomm's second quarter fiscal year 2023 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. If you'd like to ask a question during this time, press Star, then the 1 on your telephone keypad. To withdraw your question, press Star, then the 2. If you're using a speakerphone, please pick up your handset before pressing the numbers. Please limit your questions to one question and one follow-up. As a reminder, this conference is being recorded today, May third, 2023. Playback number for today's call is 877-660-6853. International callers, please dial 201-612-7415. The playback reservation number is 13737571.

I would now like to turn the call over to Mr. Mauricio Lopez-Hodoyan, Vice President of Investor Relations. Mr. Lopez-Hodoyan, please go ahead.

Mauricio Lopez Hodoyan (VP of Investor Relations)

Thank you. Good afternoon, everyone. Today's call will include prepared remarks by Cristiano Amon and Akash Palkhiwala. In addition, Alex Rogers will join the question and answer session. You can access our earnings release and its live 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 today, we will use non-GAAP financial measures as defining 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 statements. Now to comments from Qualcomm's President and Chief Executive Officer, Cristiano Amon.

Cristiano Amon (President and CEO)

Thank you, Mauricio, good afternoon, everyone. Thanks for joining us today. In a challenging macroeconomic environment and broad downturn across the semiconductor sector, we're pleased to deliver fiscal Q2 results consistent with our prior guidance. We delivered fiscal Q2 revenues of $9.3 billion. Non-GAAP earnings of $2.15 per share were at the midpoint of our guidance. Our chipset business delivered revenues of $7.9 billion, near the high end of our guidance range. Our licensing business delivered revenues of $1.3 billion at the low end of the guidance range on weaker demand for handsets. The evolving macroeconomic backdrop has resulted in further demand deterioration, particularly in handsets, at a magnitude greater than we previously forecasted.

We're operating under the assumption that inventory drawdown dynamics remain a significant factor for at least the next couple quarters. While expectations are for a rebound in China demand in the second half of the calendar year, we have not seen evidence of meaningful recovery and are not incorporating improvements into our planning assumptions. While the challenges we are facing are impacting the semiconductor industry, we remain focused on managing what is within our control and will continue to execute on our diversification strategy and leading technology and product roadmap. Market visibility remains limited, we're actively managing operating expenses and will continue to evaluate additional opportunities to drive greater operating efficiencies without losing sight of the automotive and IoT growth opportunities ahead. Let me now provide key highlights from across our business.

In handsets, we extended our 5G technology and product leadership with the Snapdragon X75 5G Modem-RF System, the world's first 5G Advanced-ready Modem-RF platform that will drive the next phase of new 5G capabilities globally, starting in 2024 across segments, device types, and networks. The X75 modem is now the benchmark for 5G performance and features for all flagship smartphone launches next year. Our Snapdragon 8 Gen 2 mobile platform is the standard for Android flagship devices globally, with launches across leading OEMs, including Samsung, Xiaomi, vivo, Oppo, OnePlus, HONOR, Motorola, ASUS, and ZTE. Our Snapdragon 7 series is redefining the high tier. Our recently launched Snapdragon 7+ Gen 2 mobile platform outperforms its competitors' premium tier solutions, winning multiple accolades for its superior power and performance. We're seeing excellent adoption across Chinese OEMs, resulting in share gains.

OEMs are also reporting strong initial sales for products powered by the Snapdragon 7+ Gen 2. In automotive, we see continued traction across global automakers and tier one customers, driven by the increased adoption of our Snapdragon Digital Chassis. We are very pleased to be partnering with Mercedes-Benz on our next-generation Snapdragon Digital Cockpit platforms. This is a result of our long and close collaboration with the ambition Mercedes-Benz software factory and engineering teams and various partners to create an industry-leading MB.OS premium cockpit experience. The new platforms will be featured in Mercedes vehicles beginning in 2023. Additionally, our OEM partners recently launched vehicles with our third-generation Snapdragon Cockpit platform, including the XPeng P7i and Lotus' new Eletre SUV. Notably, during the quarter, we won 12 new designs across our Snapdragon Cockpit and the Snapdragon connectivity 5G platforms with automakers across the globe.

We remain on track to execute on the milestones outlined during Automotive Investor Day. In consumer IoT, we continue to be encouraged by the positive momentum with Windows on Snapdragon. Dell recently launched the Inspiron 14-inch laptop powered by the Snapdragon 8cx Gen 2 Compute platform. In addition to OEMs, we're expanding our ecosystem across BIOS, hardware, software, ODM, and channel partners. We're also launching the Windows on Snapdragon developer portal to enable consumer and enterprise ISVs to test, port, and optimize their applications directly on Qualcomm Silicon. Our next-generation Snapdragon compute platform with custom Oryon CPUs and industry-leading AI acceleration is on schedule to enable commercial device launches in 2024. As a reminder, we remain the platform of choice for all significant ecosystem players for XR. Notably Meta, the joint partnership with Samsung and Google, and broadly in China.

While still in its early phases, we believe the merger of physical and digital spaces will become a significant opportunity for Qualcomm. We also continue to win designs for home robotics, smart appliances, and smart camera applications with household names such as Bosch, LG Electronics, Panasonic, Samsung, and Sony. In Edge networking IoT, we're very pleased to share that we're now collaborating with Reliance Jio on rolling out 5G FWA across India, servicing millions of residents. We also recently announced the Qualcomm 5G Fixed Wireless Access Gen 3 Platform, offering operators the ability to expand their service coverage to new areas while lowering costs and enabling faster deployment. We continue to lead the transition to Wi-Fi 7 with more than 175 cumulative designs across all product categories. Access points account for 89 of these designs, with 16 launches in the quarter.

In industrial IoT, we announced a Qualcomm Aware platform to empower developers and enterprises to easily build real-time intelligence and visibility solutions. The platform combines simple, secure, and scalable cloud-based services with power optimized and precise location tracking and an extensive hardware ecosystem to deliver tailored edge solutions across many industries. Additionally, we led the Bluetooth SIG working group to help establish a new standard for electronic shelf labels that are scalable, ultra-low power, and highly secure. This will help enable large retailers to accelerate the digital transformation of the store with electronic labels that can interact with both store and consumer devices. Our OEM partner, SES-imagotag, recently announced an agreement with Walmart to deploy electronic shelf labels across 500 stores over the next 12-18 months.

I would now like to provide a perspective on the disruptive trends in the artificial intelligence space and the significant opportunity for Qualcomm. Demand for generative artificial intelligence models is growing at an exponential rate. Generative AI models such as ChatGPT, Stable Diffusion, and DALL·E have already scaled to millions of users in a short period of time. We believe that these models will evolve quickly, continue to grow in popularity, and change user experiences across mobile, personal computing, and automotive. Beyond changing internet search, these models will have an impact on content creation such as text, images, audio, and video for both entertainment and productivity. It will also transform many industries. For these models to realize their full potential and scale, they will need to run locally on devices at the edge.

At Mobile World Congress, we demonstrated the world's first on-device Stable Diffusion, a greater than 1 billion parameter foundational model for text-to-image applications running completely on a Snapdragon-powered Android smartphone. In the coming months, we will significantly improve performance and be able to run models in excess of 10 billion parameters locally on the device, and we will increase this capability substantially for our products in 2024. Qualcomm is uniquely positioned to enable the proliferation of AI use cases on Edge devices. We're advancing AI to make core on-device capabilities ubiquitous, such as perception, reasoning, action, and now content creation.

With millions of AI-enabled platform shipments per year, unparalleled AI processing performance per watt in the broadest range of device categories from smartphones to PCs, automotives, and IoT, Qualcomm is firmly at the forefront of this upcoming transformation. Further, very large AI models are placing significant incremental demands on energy-intensive and expensive cloud computing infrastructure. As such, a hybrid AI architecture, leveraging accelerated computing at the edge, can offload or support cloud processing by running AI inferencing directly on the device. Beyond cost optimization, additional benefits of running generative AI on-device include improved latency, security, privacy, and the ability to meet data compliance requirements. This is a new and exciting opportunity for Qualcomm and one of our priority investment areas. As I close my prepared remarks, I would like to reiterate that the secular technology trends driving the long-term growth opportunities for Qualcomm remain unchanged.

Despite the disappointing macroeconomic environment, our investments in technology leadership, our best product roadmap in history, and strategic customer relationships across multiple industries position us well to execute on our strategy and expand across new and diverse end markets. I would now like to turn the call over to Akash.

Akash Palkhiwala (CFO)

Thank you, Cristiano. Good afternoon, everyone. I'll start with our second fiscal quarter results. Despite a difficult operating environment, we delivered revenues of $9.3 billion, which was above the midpoint of our guidance and non-GAAP EPS of $2.15. QTL recorded revenues of $1.3 billion, an EBT margin of 68%, reflecting lower than expected global handset units. On a year-over-year basis, we estimate global handset sell-in units declined by approximately 14%. QCT revenues of $7.9 billion, an EBT margin of 27%, were both near the high end of our guidance. Handset revenues increased 6% sequentially to $6.1 billion, benefiting from device launches with Snapdragon 8 Gen 2, our latest premium-tier chipset platform.

IoT revenues of $1.4 billion reflected a larger than expected impact of macroeconomic environment on demand and channel inventory drawdown. Automotive revenues of $447 million grew 20% year-over-year, driven by the adoption of our Snapdragon Digital Chassis and are aligned with our long-term revenue target. Non-GAAP operating expenses of $2.2 billion were favorable relative to our guidance by approximately $80 million. We returned $1.7 billion to stockholders, including $903 million in stock repurchases and $834 million in dividends. We are pleased to have announced a 7% increase in our quarterly dividend, consistent with our commitment to dividend growth. Before turning to our third fiscal quarter guidance, I'll give you an update on cyclical challenges impacting the semiconductor industry.

Financial headwinds have increased meaningfully relative to our initial expectations going into the fiscal year, with a combination of an uncertain macroeconomic outlook, persistent inflation, and a slower recovery in China, which continue to impact demand globally. We now expect global 3G, 4G, 5G handset units in calendar 2023 to be down at least a high single-digit % relative to calendar 2022, which is lower than our prior expectation. Given the weaker handset forecast, until demand normalizes and visibility improves, we anticipate that customers will remain cautious with purchases and reduce channel inventory risk further. Within IoT, we continue to see the impact of similar factors as handsets. Since it remains difficult to predict the timing of a sustained recovery, we are operating under the assumption that the inventory drawdown dynamics will remain a significant factor for at least the next couple quarters.

To effectively navigate this uncertain landscape, we are focused on driving operating efficiencies while maintaining our commitment to invest in diversification and long-term technology leadership. We believe we remain well positioned to capture a rebound in demand once it occurs. We are on track to meet our commitment of a 5% reduction in non-GAAP operating expenses relative to our fiscal '22 exit rate. This includes a further reduction of spending in handsets to fund diversification investments in automotive and IoT. As the environment continues to evolve, we will evaluate and execute additional cost reduction opportunities to help exceed our operating expense target. Turning to guidance for third fiscal quarter, we are forecasting revenues of $8.1 billion-$8.9 billion and non-GAAP EPS of $1.70-$1.90.

Our guidance reflects the impact of macroeconomic headwinds, weaker global handset units, and channel inventory drawdown. In QTL, we estimate revenues of $1.15 billion-$1.35 billion, an EBT margins of 64%-68%. In QCT, we expect revenues of $6.9 billion-$7.5 billion, an EBT margin of 23%-25%. Based on the midpoint of QCT revenue guidance, we estimate a larger than normal sequential decline, primarily due to the timing of purchases by a modem-only handset customer. On a sequential basis, we are forecasting Android handsets and automotive revenues to be roughly flat with mid-single-digit growth in IoT. Consistent with our previous messaging and second quarter results, QCT gross margins reflect the impact of the transition from supply constraints to elevated channel inventory, in addition to foundry cost increases.

Lastly, we expect non-GAAP operating expenses to be approximately flat sequentially. As we look ahead, we expect the dynamics impacting the third fiscal quarter to extend to the fourth quarter, including the timing of purchases by a modem-only handset customer, resulting in muted seasonality in QCT revenues. In closing, while we're not immune to near-term headwinds, we're well-positioned to benefit from an eventual recovery in the macro environment. Despite a reduction in global handset units and a continued drawdown of elevated channel inventory, QCT handset revenues has benefited from increased content per device, expanded traction with OEMs, and improved mix across tiers. We remain focused on executing our diversification strategy and positioned ourselves for success in our largest growth opportunities, including automotive, industrial and networking IoT, personal computers, and XR. We're confident in our ability to navigate the current operating environment given our strong balance sheet and debt rating. Thank you.

Back to you, Mauricio.

Mauricio Lopez Hodoyan (VP of Investor Relations)

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

Operator (participant)

To queue a question, press star, then the number 1. To withdraw your question, press star 2. If you're using a speakerphone, please pick up your handset before pressing the numbers. 1 moment please for the first question. First question is from Samik Chatterjee with JPMorgan. Please proceed with your question.

Samik Chatterjee (Analyst)

Hi. Hi, thanks for taking my questions, and thanks for all the details in the prepared remarks. I had one on smartphone and one on autos. If I can start on the smartphone one, I think, I know you're sort of taking down your guidance for the overall market outlook today, for 2023. If I look at your QTL guide, it does sort of imply that you're looking at more of a stabilization in the sell-through at an absolute level. When I look at your QCT guide rate relative to that, it does suggest that most of the headwinds you're seeing or expecting there are inventory and timing of the purchases.

Maybe just sort of, confirm if that's the way, sort of, if I'm interpreting that right, and what's the maybe magnitude of the timing and the inventory headwinds to the QCT revenue guide for fiscal third quarter? I have a follow-up. Thank you.

Akash Palkhiwala (CFO)

Yeah. Samik, you're thinking about it the right way. It's the right thing to connect the market forecast to QTL, and then QCT really has this additional factor that is related to the inventory drawdown. Our view of inventory drawdown is really, you know, the macro headwinds have increased meaningfully since the beginning of the fiscal year. What we've seen is the impact on market is driving a scenario where it takes longer to run through the existing inventory. We don't have a fundamental change in how much inventory we think the channel had going into the year that was excess. It's just how long it takes to run through it as a result of the market forecast.

Samik Chatterjee (Analyst)

Yeah. Okay. On the auto side, Cristiano Amon, you talked about the 12 design wins, but you mentioned them being in Cockpit and Connectivity. I wanted to check if you have an update on ADAS and the engagement from your customers on that front and your product roadmap. Related to autos, I think there's been some concern about exposure to China volumes in terms of your pipeline. If you can sort of maybe give us some ballpark estimate about how much of your pipeline is reliant on China electric vehicle volumes, and how are you thinking about sort of the risk around those production numbers? Thank you.

Cristiano Amon (President and CEO)

Very good. Thank you for your question. The 12 designs is what happened in the quarter. We just highlight in the quarter, we had designs on the digital cockpit as well as 5G for telematics. We are working on some new designs on ADAS that is gonna take us throughout the second half of the year, but we're not announcing at that time, this time. The second comment is on China market. We have seen, I think, consistent with the overall theme of China, some weakness in China auto, I think consistent with the rest of the market. Our design and presence with the China EV, with the local OEMs is very, very high, and I think we continue to gain share.

Operator (participant)

The next question is from the line of Matt Ramsay with TD Cowen. Please proceed with your question.

Matthew Ramsay (Managing Director and Senior Research Analyst)

Yes, thank you very much, guys. Good afternoon. I have two questions. I guess I'll just ask them at the same time to make this quicker. The first one, Cristiano, in China, you were pretty clear in your script, I think you guys were earlier than most bellwether companies in flagging this, but that the recovery in China in the second half of the year might be a bit more muted. During the peak, obviously things were being over-shipped into China during the peak. I think we were 500 million units, give or take, on an annualized basis in China, I think we're running closer to 300 million now on a sell-through basis. Maybe you could update us, are those numbers roughly right?

What are you guys seeing in terms of a recovery? Maybe how much are you under-shipping that today that could still help your numbers in the back half of the year as you come back to shipping with parity of sell-through? I guess I do have a follow-up, but maybe we'll just do that one first. Thanks.

Akash Palkhiwala (CFO)

Yeah. Matt, it's Akash. In terms of China sell-through, I think if you're looking at any of the analyst resources that's sizing the scale of the market, we're seeing pretty much the same numbers. That's what you're quoting, I don't have the exact numbers in front of me, but that's what you're quoting, it'd be consistent. The way we are thinking about the inventory drawdown is of course it's a near-term phenomena. We're gonna get past it. The strength of our design win pipeline is very strong. If one way to measure it in our minds is we look at our share of sell-through, and we've seen that share grow from 2022 to 2023. That should give you a sense of our position going into the next year.

Cristiano Amon (President and CEO)

Craig, just Matt, this is Cristiano. I just wanna add one thing. You know, common sense, and I think the overall expectation is following the reopening, the China market was going to bounce back. It has been very suppressed, I think, during the lockdown and during the pandemic. I think what we're basically saying is we have not seen those signs yet, so therefore we thought that prudent not to put in our planning assumptions. We're still gonna be monitoring the situation, but the dynamic we see right now is exactly what Akash outlined. It's an inventory drawdown and that's why I think the difference between the QCT and the QTL business.

Matthew Ramsay (Managing Director and Senior Research Analyst)

Thank you, guys. As my follow-up, mid-single digits up, I think, in the guidance you mentioned for IoT. There's sort of three different segments of the business there. There's been an inventory correction across the IoT business, and I think many of us have less visibility on a granular basis there than in your handset business. If you could just talk through the dynamics of that business recovering a bit in June, that'd be helpful. Thank you.

Akash Palkhiwala (CFO)

Sure. It's Akash. The initial weakness that we saw in IoT was in consumer, and then we've kind of seen that expanded into industrial and edge networking, and specifically China playing a significant role in that weakness. It's a combination of all three areas. As we look forward, a lot of the growth there we're expecting within the quarter is actually gonna be across, recovery across all three, so there isn't one that stands out that I would point to. Maybe the last point on IoT is really when you step back and think about the broader digital transformation process and where we are at, our technologies continue to become more relevant. Cristiano talked about Edge AI, and that's going to be another technology that's gonna be extremely important in industrial PC, XR, and other areas.

still very optimistic about how things look longer term, and we'll kinda work through everything in the short term.

Operator (participant)

Our next question is from the line of Mike Walkley with Canaccord Genuity. Please proceed with your questions.

Mike Walkley (Managing Director and Senior Equity Analyst)

Great. Thanks. Yeah. Yep, Cristiano, just a follow-on question for you just on the market dynamics. You made some comments about how well the Snapdragon 7's performing relative to a premium tier from your competitor. Can you talk about design win traction and share gains you're seeing maybe further downstream from the premium tier? You know, once inventory clears, do you think that you'll start to see some sharper share gains coming back maybe, you know, into Chinese New Year into calendar Q4? Is that too early to call on the inventory side?

Cristiano Amon (President and CEO)

Hey, Mike. Thank you for your question. I will say, we are no longer in, and that's probably an understatement, right? We're no longer into a supply-constrained environment. As the supply-constrained environment got resolved, we have the ability to gain share. I think as Akash outlined, if you look at our share of activations and sell-through compared to 22, you see a very positive picture for us in China. We've been gaining share on what we call the high tier. The 7, the new 7 series, we made a lot of investment, including leveraging the Snapdragon brand in the position of the 7. Very well received in the market. Our 7+ outperform, I think, the competition premium tier.

We like because it sets the floor, and then you have Snapdragon very uniquely positioned in the 8 series. I think as outlined from a share perspective, we're gaining share. Just the whole market still going through the dynamic that we just outlined on inventory, but we like our position in the marketplace.

Mike Walkley (Managing Director and Senior Equity Analyst)

Great. Thanks. Maybe quick follow-up for Akash. Just on QCT margin, just given the inventory work there, is there any mix or anything else we should think about on QCT margins as you go through this inventory clearing and less modem-only shipments over the next couple quarters?

Akash Palkhiwala (CFO)

Yeah. From a gross margin perspective, as we've consistently said, and I said this in the last call, last earnings call as well, once we get past supply constraint, we expected some pressure on gross margins. You're seeing that come through. If you step back from that and just look at mix of devices and how that drives margin one way or the other, there isn't anything that's significant enough to discuss. It's really the current environment playing through, and then as we look forward, us remaining disciplined with pricing as we grow in a mature market.

Operator (participant)

Our next question is from the line of Stacy Rasgon with Bernstein Research. Please proceed with your questions.

Stacy Rasgon (Senior Analyst)

Hi, guys. Thanks for taking my questions. For the first one, I was wondering if you could define what you mean by muted seasonality for September quarter. I think you're usually up. I mean, it's not uncommon for you to be up double digits. What are you thinking now? I guess maybe if you could talk a little bit about the different drivers, handset, IoT, auto into Q4.

Akash Palkhiwala (CFO)

Sure, Stacy. It's Akash. If you look at our typical seasonality from third quarter to fourth quarter, it's really driven primarily by the launch of a new flagship device and the build that happens for that device. Outside of that, there are some other puts and takes, but that's the primary driver of the growth. What we're suggesting is, as I outlined in the prepared remarks, we expect that to be muted because the lower demand from the modem-only handset customer extends from June into the September quarter as well. The reason for this is we saw them buy a little more earlier in the year, this is just kind of balancing purchases of chips from us.

To be clear, this is not a comment, to be clear, this is not a comment on their sell-through, and it's not a comment on our share within the OEM either. This was just the timing of purchases from chips from us.

Stacy Rasgon (Senior Analyst)

Thank you. For my follow-up, like I know you said you expect the inventory drawdown to last the next couple of quarters, I guess into June, do you think the magnitude of the drawdown is better or worse or about the same as what you saw in March? I'm just trying to gauge, you know, directionally, is it getting at least better or worse, even though we know it's still there?

Akash Palkhiwala (CFO)

Honestly, Stacy, there's a different story with every OEM. There are certain OEMs who are much further ahead in reducing the inventory profile and there are others, including the ones we just discussed, happening over the next couple of quarters. I haven't specifically sized it in terms of scale, but I would say each of the quarters has an impact from that phenomena.

Operator (participant)

Next question's from the line of Ross Seymore with Deutsche Bank. Please proceed with your questions.

Ross Seymore (Managing Director, Senior Equity Analyst)

Hi, guys. Thanks for letting me ask a question. Cristiano, I just wanted to focus on the diversification side of things. I know organically what you're doing in IoT and automotive. Are there inorganic opportunities to accelerate that, or is the diversification effort gonna just simply take time because automotive and IoT are great markets, but they take a reasonable amount of time to penetrate, especially given their relatively smaller size versus your handset-oriented businesses?

Cristiano Amon (President and CEO)

Thank you. Thank you, Ross. Look, there are inorganic opportunities that we continue to look into the market. We've been clear, we have been focused in identifying M&A opportunity to help us to accelerate diversification. We've been very careful just because of the current environment. We wanted to do something that is actionable and we'll continue down this process of identifying. We are looking at inorganic options as well to accelerate diversification. We're also very excited about what, you know, I mentioned into the prepared remarks. I think this incredible opportunity that we now have, we're very uniquely positioned to do AI at a very high performance and low power in all the devices at the edge.

I think that's going to accelerate our diversification strategy across all the new segments, even though it could create a new upgrade cycle in phones, but it's going to be relevant to all of the other segments of diversification as well.

Ross Seymore (Managing Director, Senior Equity Analyst)

Thanks for that, Cristiano. I guess one for Akash as my follow-up on the handset segment. It looks like you're guiding that down kind of low teens sequentially. I know you said Android flat and the modem-only customer would be the headwind. How is Android flat if you still are saying macro is a problem, inventory burn's a problem, et cetera? Is that just evidence of the share gain or what's going on there?

Akash Palkhiwala (CFO)

Yeah. I assume your question, Ross, was related to QCT.

Ross Seymore (Managing Director, Senior Equity Analyst)

Just QCT, the, what you guys call handsets, not aggregating handsets.

Akash Palkhiwala (CFO)

Yeah. Yeah. If you think about our historical kinda trend between these two quarters in the Android business, we're staying very consistent with that this quarter. I mean, if you look at last year, second quarter to third quarter, our Android business was roughly flat and we're guiding the same this year. It's just following the same trend and the factors, the market and inventory drawdown exist in both quarters.

Operator (participant)

Our next question's from the line of Joe Moore with Morgan Stanley. Please proceed with your questions.

Joe Moore (Executive Director and Senior Equity Analyst)

Great, thank you. I guess as you look at the year-on-year decline in handsets, you know, how much of that would you attribute to, you know, inventory build in a year ago, inventory depletion now, or any kind of change in kinda like-for-like pricing? Can you just kinda separate out those three factors?

Akash Palkhiwala (CFO)

Yeah, Joe, we haven't talked about it, or given specific numbers on it, but one of the frameworks, to look at it would be to look at the two years combined. One year had the build, the second year has the bleed. If you look at that combined, it will give you a framework of what the run rate strength of the business is. The other thing I'd say is just the one thing to calibrate in that framework is also to look at the market size, as the overall market has continued to come down. That's I think a good way to at least start, figuring out the run rate of the business.

Joe Moore (Executive Director and Senior Equity Analyst)

Okay, thank you. Then you mentioned, you know, you always sort of felt like as you came out of an allocation mode that there'd be a little bit of gross margin headwind. What causes that? Is it just, you know, that are there expedite fees that you were getting before? Is it more promotional now? Has there been any change in kinda like-for-like pricing as you've kinda moved out of that tight supply environment?

Akash Palkhiwala (CFO)

Yeah. It's a combination of them. I mean, given supply constraints, we were able to exercise some pricing leverage that gets neutralized in the current excess inventory environment. That's just playing out through the numbers. The other two factors to keep in mind is we had a price increase from foundry that ran through starting first of January as well. Some underutilization in our RF front-end fabs that over time will get filled back in as demand comes back, and so that should be a tailwind for us going forward.

Operator (participant)

Our next question's from the line of Blayne Curtis, Barclays. Please proceed with your questions.

Blayne Curtis (Director and Senior Research Analyst)

Hey, thanks for taking my questions. I had 2. Maybe just following up on that last one on gross margin. I mean, I guess if I'm looking at the numbers, seems like your ASP is still going up. Is it really just the higher cost? I guess second part of it is, I think there's a lot of concern about more competitive environment, MediaTek moving up to the high end. Just can you go back and just talk about that environment? I think you said there's not more like for like, but I mean, I think there's a lot of concern about maybe people buying older products down and not taking Gen 2 and MediaTek moving up. Just kind of touch on those points.

Cristiano Amon (President and CEO)

Blayne, so I'll address the first part and then Cristiano will address the second part. On gross margin percentage, I think it's a reasonable way of thinking about it. Our gross margin dollars per device continues to grow, and that's the strength, and it's gonna add scale and profitably to the business. We have seen gross margin percent get impacted by the couple factors I just outlined. Again, those are, to me, kind of ins and outs of the business. It's better to kinda step back and look at the broader, longer term opportunity for us to continue to add content to our chips, which we have done very successfully over the last three years.

We have an opportunity to do that, especially with our new custom CPU cores coming into play into all of our product lines, including handsets. With the AI that Cristiano just outlined, that will create an opportunity for us as well.

Blayne Curtis (Director and Senior Research Analyst)

Excellent.

Cristiano Amon (President and CEO)

What?

Blayne Curtis (Director and Senior Research Analyst)

Go ahead. Thank you.

Cristiano Amon (President and CEO)

No, I'm sorry.

Blayne Curtis (Director and Senior Research Analyst)

Go ahead.

Cristiano Amon (President and CEO)

I'm just gonna add a couple of comments to your specific questions. Look, the way we see this, we have done, I think, the right choices of investment. We feel pretty good about the roadmap and we took this very, very focused strategy and make sure that our seven tier outperforms the competition premium tier. That changes the landscape, which means we are very well positioned above that in the eight, as I outlined. Our design traction, it's very good, especially within all of the OEMs, no exception. I remind you that we are globally with Samsung. You know, our agreement with them, we have the launch of S23 that just happened, then we have the Fold and Flip, and then we have the S24.

It's gonna be, you know, a number of years as association of Samsung with Snapdragon brand globally. You know, the size of the market is not good, but our position is very strong. As I outlined before, we're gaining share.

Blayne Curtis (Director and Senior Research Analyst)

Gotcha. If I could just follow up with the modem-only, in terms of the timing there's, you know, I guess you guys have been waiting if there's any decision of that customer to move away. I'm just curious if that timing you would be notified at this point, or if you thought that that timing of shipments had anything to do with their transition.

Cristiano Amon (President and CEO)

No, it has nothing to do with the transition. For the transition, I think we said a number of earnings call ago that we're expecting to be in the product that they launch in 2023 and in 2024, we have no change to our planning assumptions.

Operator (participant)

Our next question is from the line of Brett Simpson, Arete Research. Please receive your questions.

Brett Simpson (Senior Analyst)

Thanks very much. Cristiano, I wanted to ask about the state of the Android market. There seems to be a sort of consistent structural share loss here, and I guess even going back pre-COVID, Apple's been growing their business since COVID, and Android just seems to keep losing share. What do you think is going on and how much of the structured decline in Android do you think is the second-hand iPhone market? I don't know whether you can size this, you know, how big do you think the second-hand market is and how it's affecting Android, and what do you think the Android value chain's gonna do to reboot their business? Thank you.

Cristiano Amon (President and CEO)

No, this is a great question. There are a number of things to unpack. First, I just wanna go back a little bit in recent history. I think there was an addressable market for premium devices. To some extent, premium and high-tier devices that became available as Huawei declined in share. In the reality, Apple pick a significant amount of their share. We did as well. I think so. Our competition, I think everyone had grew as the expense of the market. I think that is resulting to a much larger. You look at that, Huawei Android is a net loss of Android, that's for the areas that Apple gain share.

The market, it's smaller, and those, even the component of hand-me-down phones, it's accounted in our planning of a smaller market. I think that's where we are until we go to the next upgraded cycle, cyclical business. Our position in Android has improved. I think if you look of our trajectory, actually on the smaller Android market, we've been gaining share and focus on the value share of the market with concentration in the high and the middle tier.

Brett Simpson (Senior Analyst)

Do you think the second-hand market's growing structurally? I mean, just to understand the dynamics, because, you know, some of the data we've seen, it would suggest that, you know, this is starting to have an impact on Android volumes.

Cristiano Amon (President and CEO)

Yeah. Brett, it's Akash. I divide this into two parts. I think there's a second-hand market that has been around for a long period of time in emerging markets, as a hand-me-down device, that obviously still exists. There has been a little bit of a change at the top with the refurbished phone market, that's something that we're definitely closely watching and contemplated in our numbers at this point.

Operator (participant)

Thank you. Our last question is from the line of Tal Liani with Bank of America. Please receive your questions.

Tal Liani (Managing Director and Head of Technology Supersector)

Hey, thanks. Akash, sometimes you give us more indications of future quarters, I wanted to ask about QTL/QCT for the September quarter. Can you co-provide us some comments on your expectations?

Akash Palkhiwala (CFO)

Sure, Tal. For the QTL, typically the market size is relatively flat between the June and the September quarter. There is a slight change in the market, and our revenue is relatively flat as well. You should think of that as a proxy based on historical trend. There isn't something specific going on this year that I'd say is different than last year, pending a recovery in the market. From a QCT perspective, on the fourth quarter, we typically have seasonality, seasonal growth. What I said in my prepared remarks is that we expect muted seasonality this year because of all the factors that we've been discussing on this call and have been outlined in the prepared remarks as well. That would be a framework to come up with a number for September.

Obviously as we go from there, you go into the holiday season, that's a typically a strong quarter for us and we would realize benefits as we go there.

Tal Liani (Managing Director and Head of Technology Supersector)

Got it. What's normal seasonality for Q4 for QCT? When you say muted, what's your benchmark?

Akash Palkhiwala (CFO)

Well, I would say if you look at last year, you would probably come up with a number that would be normal. We don't expect to be close to that. We'll see, lot of different factors. We don't have, to be honest, that clear insight into quarters at this point to give a forecast. If you can wait for the next call, we'll definitely be updating you on that.

Operator (participant)

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

Cristiano Amon (President and CEO)

Yes. Thank you so much for listening to our call. Here's the summary. Like, from our perspective, while the market conditions remain challenging, we're very confident to reach our Q3 estimates at this point. We're taking action what we can control as we navigate the near term headwinds, but it's most important, we'll continue to execute on our strategy. We like our strategy. I think we invest in the right technologies for growth and diversification, especially in the IoT and auto. I feel we have a very competitive roadmap, so we're well positioned to benefit when the market returns to growth. I think the last comment is we are gonna become very relevant in AI. As you look up the speed of new models appearing, new companies investing, new use cases, the ability to run those things locally.

I talk about having ability to run 10 billion parameter models on the phone without compromising battery life and be able to demonstrate that very shortly in this year. You can see how that creates an even larger opportunity for us in automotive as well, the entering of next generation personal computing. We're excited about that. We'll continue to invest in this area. In summary, we're very focused on our long-term success and we're steadfast in our commitment to drive maximum value for our stakeholders. I wanna thank all the employees for the dedication, the contributions to Qualcomm, as well as our many partners and suppliers. Thank you.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.