Q3 2022 Qualcomm Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Qualcomm third quarter fiscal 2022 earnings conference call.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you would like to ask a question. During this time press Star then the number one on your telephone keypad to withdraw your question Press Star then the number two if you are 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 July 27th 2022.

The playback number for today's call is 8776606853 inner.

International callers, please dial 20161 to 7415.

The playback reservation number is 13731134.

I would now like to turn the call over to Mauricio Lopez, the Doyon, Vice President of Investor Relations. Mr. Lopez. The Doyon. Please go ahead.

Thank you and good afternoon, everyone. Today's call will include prepared remarks by Christiane them on and of course Pago wallet. In addition, Alex Rogers will join the question and answer session.

You can access our earnings release any slide presentation that accompany this call on our Investor Relations website. In addition, this call is being webcast on Qualcomm Dot com and a replay will be available on our website later today.

During the call today, we will use non-GAAP financial measures as defined in regulation G. And you can find the related reconciliations to GAAP on our website. We will also make forward looking statements include 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.

And now to comments from Qualcomm's, President and Chief Executive Officer Cristiano Amon.

Thank you Mauricio and good afternoon, everyone.

Thanks for joining us today I'm very.

Pleased with our performance in fiscal Q3, and how we continue to execute on our long term vision of enabling a world where everyone and everything is intelligently connected as.

As we continue to scale, our one technology roadmap across new industries and applications.

We are transforming Qualcomm from a communications company for the mobile industry into a connected processor company for the intelligent edge.

This quarter, we delivered revenues of $10 $9 billion and non-GAAP earnings of $2.96 per share driven by solid results in both of our chipset and licensing businesses.

In our chipset business revenues of $9 $4 billion were up 45% year over year with record revenues in Iot and automotive.

Illustrating the success of our diversification strategy.

Before I highlight a few notable milestones this quarter I would like to update you on an important development in our relationship with Samsung. We're very pleased to report the Qualcomm and Samsung have entered a new multi year agreement starting in 2023, expanding the use of Snapdragon platform.

As for future premium Samsung Galaxy products globally. This validates the snapdragon is the technology platform of choice for premium enjoyed experiences in.

In addition to Galaxy smartphones. The agreement includes Pcs tablets extended reality and more.

We have also agreed to a seven year extension of our patent license agreement with Samsung taken the license to the end of 2030 with the same royalty terms. The extension encompasses three G. Four G and five G technologies and devices and will also include.

Future six Jeep standards and products.

This license agreement is a significant Q T L milestone event.

Samsung is the award larger smartphone supplier by unit volume with a well developed portfolio of patents.

The extended license agreement with Samsung demonstrates the tremendous ongoing value of our patent portfolio, our innovation and our long standing leadership in driving the important and foundational elements of the mobile roadmap.

The extended Samsung license agreement is an important benchmark for the long term and adds significantly to the stability of the Q T. O program going forward, let me now share some of the key achievements from the quarter.

In automotive the Snapdragon digital chassis is fast becoming the industry platform of choice and is enabling the transition to next generation vehicles.

We are very pleased with the continued traction and design wins across global automakers and tier one partners.

Our automotive design win pipeline is now over $19 billion up approximately $3 billion since fiscal Q2.

This includes the design win with the Volkswagen Group's software company Cariad, two powered volkswagen's future automated driving solutions.

In consumer Iot, we continue to execute on opportunities across tablets, XR P fees and smart consumer devices for.

Proportional computing, we're continuing to drive the inevitable transition to arm.

We are on track to deliver windows on Snapdragon compute platforms for next generation P. CS powered by our custom Cpus, while redefining mobile productivity and on device AI.

To support the accelerating transition to arm based computing, Microsoft recently announced project for Terra a new developer kit powered by the Snapdragon compute platform featuring the Qualcomm AI engine. They also announced a comprehensive into and arm native to Chang.

For Windows application developers, including visual studio visual C, plus plus dot net and more.

In etch networking, we launched four new networking Pro series Wi Fi seven platforms. The awards, most scalable Wifi seven portfolio initiating a new era of 10 gigabit sports second Wifi for enterprise access points, Wifi mesh carrier gateways and premium home routers.

We also continue to see strong momentum in industrial Iot and recently announced two new five D connected robotics platforms with enhanced AI capabilities computer vision, five G connectivity and a comprehensive customizable SDK.

To power next generation robotics, and drones, including our autonomous mobile robots amr's highly automated manufacturing robots and more these achievements demonstrate our ability to continue to grow across our automotive and the broader Iot categories. In addition to our in front.

And handsets.

Our one technology roadmap is the cornerstone of this strategy with unparalleled leadership across not one but multiple technologies required for the connected intelligent edge.

This includes on device AI low power high performance compute computer vision advanced connectivity and more.

Importantly, as we expand into new growth areas were driving or technologies to meet the highest performance requirements for each application and serve as the industry design point for example, our dedicated automotive soc's and accelerators for level three and level four autonomous.

Driving can deliver up to 700 trillion operations per second tops of AI processing.

Our RB six robotics platform brings advanced edge AI in video processing capabilities support for up to seven concurrent cameras and up to 200 tops and we believe our upcoming custom designed Cpus will redefine computing performance for windows species.

Of particular note is our significant momentum in AI, we recently launched a Qualcomm AI stack, which unifies our existing best in class AI software solutions into a single package that works across all Qualcomm platforms.

The Qualcomm AI stack is positioned to become the platform for AI at the edge.

The Qualcomm AI stack supports all AI frameworks, including Tensorflow by torch and on X as well as AI run times, such as Tensorflow Lite fanciful like micro and on X runtime.

We also have a rich variety of O S support, including Android Windows, Linux Queuing X you boon to and others with this new offering oem's and developers can now develop and optimize AI models. Once then moved the same although across different Qualcomm products and tiers for true.

Who develop once deploy anywhere model, we believe the Qualcomm AI stack portfolio is a revolutionary step in scaling high performance low power one device AI processing.

These solutions demonstrate how our one technology roadmap is transforming Qualcomm from a wireless communications company for the mobile industry to a connected processor company for the intelligent edge.

Actually as we continue to move forward and execute on our strategy. We're mindful of the challenging economic environment, and we remain disciplined on investments that drive sustainable differentiation and stockholder value.

We're focused on customers and industries to drive stable long term growth. We believe the industry trends that are driving demand for technology remain unchanged and continue to validate our strategy positioning us well for the long term.

We're still on track to expand our addressable market by more than seven times to approximately $700 billion into next decade.

Before I turn the call over to a cash I would like to invite you to join US in New York on September 22nd at our first ever automotive Investor Day event. Welcome is the leading automotive technology platform provider for next generation vehicles, we will demonstrate how the snapdragon digital chassis is any.

The transformation of the automobile and continuing to drive growth in our design win pipeline.

I would now like to turn the call over to our cash.

Thank you, Chris Shantou and good afternoon, everyone.

We're pleased to report strong results in our third fiscal quarter, despite the impact of the challenging economic environment.

We delivered non-GAAP revenues of $10.9 billion and non-GAAP EPS of $2 96, which was above the high end of our guidance.

non-GAAP revenues and EPS grew by 37% and 54% respectively versus the year ago quarter, driven by technology leadership revenue diversification and operating efficiency.

QTL revenues of one $5 billion and EBT margin of 71% were at the midpoint of guidance.

These results reflect the decrease in handset volume in mid and low tiers offset by favorable mix.

Qcd recorded revenues of $9 $4 billion and EBT margin of 32% both at the midpoint of our guidance and reflecting revenue growth of 45% and EBIT dollar growth of 67%, whereas it was a year ago quarter.

Handset revenues of $6 $1 billion increased 59% year over year, driven by the strength of our snapdragon product portfolio, especially in the premium and high tiers.

Consistent with our guidance RF front end revenues of $1 billion grew 9%, whereas as the year ago quarter, an increased adoption of our broad product portfolio.

Iot revenues were up 31% year over year to $1.8 billion.

We saw strong performance across the edge networking and industrial Iot with combined revenue growth more than 40%.

We delivered another record quarter in automotive with revenues of $350 million with year over year growth of 38% driven by launches with our digital cockpit products.

Looking forward to global <unk> handset forecast.

We now expect calendar 'twenty, two global handsets to decrease by mid single digit percentage on a year over year basis, including 650 to 700 million five G handsets.

Our guidance reflects the continuation of the trends that adversely impacted handset volumes exiting the June quarter.

We expect the elevated uncertainty in the global economy, and the impact of Covid measures in China will cause customers to act with caution in managing their purchases in the second half of calendar 'twenty two.

In the fourth fiscal quarter, we are forecasting revenues of $11 billion to $11.8 billion and non-GAAP EPS of $3 to $3.30.

The midpoint of our guidance includes an estimated impact of approximately 20 cents due.

Due to the macroeconomic headwinds and the reduction in the global handset forecast I just outlined.

We are forecasting QTL revenues of $1 $45 billion to $165 billion, and EBT margins of 69% to 73%, reflecting normal sequential unit growth.

In D. C. D. We expect revenues of $9 $5 billion to $10.1 billion and EBT margins of 32% to 34%.

At the midpoint this implies a year over year revenue growth of 27% and EBIT dollar growth of 31%.

On a sequential basis, we expect growth across skus at the handset and automotive revenue streams.

In handsets, while snapdragon premium tier volume remains resilient our guidance assumes lower demand another tears, reflecting the updated global handset forecast.

In Iot, we are seeing strength across industrial and enterprise, which is offset by pockets of weakness in consumer products.

We anticipate non-GAAP operating expenses to be up 6% to 8% sequentially with approximately half of the girls due to the inclusion of two quarters of expenses for the arrival of acquisition.

As a reminder, our third quarter results did not include a river since we're reporting one quarter in arrears until the fourth fiscal quarter.

Based on the midpoint of our fourth quarter guidance, we're expecting fiscal 'twenty two to be an exceptionally are we.

We expect non-GAAP EPS of $12 55, a growth of $4 relative to fiscal 'twenty one.

We are forecasting Q C D revenues of greater than 37 billion a year over year growth of greater than $10 billion and EBT margin expansion of approximately five points.

Qcd handset revenues are on track to grow slightly below 50% relative to fiscal 'twenty, one driven by increased process or content and expansion of our addressable market.

With our continued focus on diversification, we are forecasting RF front end, Iot and automotive combined revenues of greater than $12 billion in fiscal 'twenty two.

Lastly, we are pleased to announce we signed a long term extension of our license agreement with Samsung through.

2030 at the same royalty terms.

With this agreement, but QTL forecast that we provided at Investor day remains unchanged.

In closing, while we are mindful of the current environment. Our long term fundamentals are intact, we remain focused on driving growth by executing on our vision to bring cloud connectivity data processing and artificial intelligence to the edge. Thank you and back to you Mary Sue.

Thank you <unk> operator, we're now ready for questions.

Thank you and Tequila question Press Star then the number one to withdraw your question Press Star two if you were.

We're using a speakerphone please pick up your handset before pressing the numbers one moment. Please for the first question.

Our first question comes from Matt Ramsey with Cowen. Please proceed with your question.

Yes. Thank you very much good afternoon, everybody I'm.

Cristiano, maybe you could give us a little bit of a breakdown and how you're seeing the handset market right now and particularly we weave and you guys just discuss it in your prepared script, some some weakness and in mid tier Android, but I'd like to sort of double click on that a little bit. If you could contrast, what you're seeing maybe with with premium with with.

The mid tier Android market, specifically in China, and then the mid tier and low tier Android market globally, and if theres any differences in the trends that you're seeing there that would be really helpful. Thank you.

Thank you for your question, Matt look we would we're very familiar with with this market and we've been doing this for years in this market.

You know it it changes with the economy, we will look at them the combination of of the macroeconomic environment and the China Lockdowns. We did see you know the market is likely to be smaller in than we originally forecasted but on the positive side I think our strategy of being full.

Because on the premium and high tier is proving to be you know a resilient one so the weakness we saw more in the mid to low tier premium tier remain resilient and not only in how we report the results in Q3, but how we think about our guide in Q4, and maybe a cash can add a little bit more color to it.

Yeah, Matt so to add to that in the third quarter. What we saw was lower handset units in the mid low tiers and of course, there was an impact in China, but the rest of the impact was largely in rest of the world.

With some limited impact in the developed economies and what we're forecasting going forward is really that to continue forward in second half of calendar 'twenty two the adverse trend that we saw exiting the third fiscal quarter extending forward. So we are updating the overall calendar year forecast to down mid single digits.

Whereas there's 21 and we're also updating the five G forecast to be in the $6 50 to 700 million range for the year.

Got it. Thank you guys, maybe as a follow up there are costs you've been.

Ordinarily kind enough to give us some out quarter views on on prior calls and with all the movement in the end market and the fact that you're lowering our forecast for the full calendar year on handsets. If you have any color that you could give us directionally into the December quarter, we'd be really grateful. Thank you.

Sure Matt as you know December quarter is a seasonally strong quarter for us both up for the Q C. D handset business on the QTL business. So that remains unchanged, we're still going to see a flagship device launches and holiday season increases that will benefit our financial performance and we'll see we are forecasting growth from <unk>.

First go to fourth fiscal quarter, and we will see growth again going into the first fiscal quarter. We do expect it to be calibrated by some of the same factors that we saw impacting us in fourth quarter, but Oh, there's still expect strong growth rates as we look out to the December quarter.

Thank you. Our next question is coming from Tal Leone with Bank of America. Please proceed with your question Hi.

Our first question is on balance sheet, our cash and equivalents went down by four and a half billion. If you can give us a data there and second I wanted to talk about our EF all rests on a sequential basis is slowing down and the question is it's basically.

Oh, no I said, one accumulated sequential basis, it's down already.

And the question is whether this share gain stories over and now it's going to trend in line with the market can you take us through kind of the trends, but also the ASP trends that you're seeing in the RF segment alright.

Of course things.

Oh sure sure.

I'll start with the first question and also started the second one and Cristiano can add on top.

On the cash balance as as as you know we closed the arrival of acquisition right. After the March quarter ended and so the change you are seeing is primarily driven by a 4.6 billion paid in cash for the arrival of acquisition.

Of course, we did have a very strong positive cash flow and it was a balance of that being offset by by capital return with which we were down 1.4 billion to $1 $35 billion in the quarter and then it was also offset by other related expenses on Capex and tax.

Payments that we made in the quarter. So really it comes down to the payment we made for the right acquisition on second one on the RF front end. So the way you should think about the RF front end growth is.

It it is something that grows more in line with the five G market for us and as you saw we brought down the overall forecast for the five G units for the year and so that has played a role are also generally it. It is something that it does not scale very significantly when you go from a low mid tier two a high tier.

Our RF content remains relatively similar whereas on the processor side, you've seen just tremendous scale on our our handset business as we go to premium ideas. The Sps that are much higher the content is much higher.

We're seeing that benefit show up at the at the top end of the range.

So tell just a question I was just going out a couple of things. So we have been very focused on on the entire portfolio continue to drive leadership across every single component and one thing that we have been very focused now started to bring our effort into two outdoor Iot and Wi Fi So and we're starting to track there.

As an example, the RF front end design win pipeline right now it's in a in the excess of 900 million in automotive.

We also see a opportunity with Wi Fi, we announced our next generation Wifi and Bluetooth via front end modules to go for chips as well. So we expect to be focusing on driving growth in auto and Iot and it's like I said it. It's it's an attached story on the snapdragon it tracks to mobile market and we were.

Grow faster than the front end and mobile because off processor content.

Thank you. Our next question is coming from the line of Sumit Chatterji with J P. Morgan. Please proceed with your question.

Great. Thank you. Thanks for taking my questions I had a couple of them, maybe if I can start with the China smartphone market I know Ive got you.

Assuming that the global smartphone market. So it means the CMV as it is with exiting June .

I sort of remember that some of the government in that region and market data.

Positive signs in the month of June I think after the reopening.

Cummins, given you're sort of seeing many cycles here, what you're thinking in terms of how do when does the market dropped.

China's smartphone market, what gets it to sort of reach a trough or a rebound from then on because I.

I think the month of June did show some positive signs and I have a follow up thank you.

Yeah sure. So you're right we did see some improvement in the month of June but the way you should think about the Oems reacting to the data is is these headwinds are causes cause these customer wants to act with caution in how they manage their purchases and so it's really not just kind of a standalone what <unk>.

And in the month of June and projecting that forward, it's really the overall environment that they're reacting doing that that's what informs our forecast for units going forward.

And just for my follow up for this.

September quarter guide, if I can ask you to unpack that a bit more where you typically have a little high in north American customer launching that.

That product and you drill.

Given sort of a double digit quarter on quarter Citigroup in the Boston Garden.

That the more modest seasonality that you're guiding to now is that primarily then sort of a week or two.

Your Android mid and low tier Android or are you expecting some softness on the high end as well with you.

So north American customer there.

Sure. So when you look at our fourth quarter guidance, we are guiding a midpoint of $3.15 worse is a June actuals of 296 so.

We're still guiding strong growth on a quarter over quarter basis in this environment and on a year over year basis that that implies a 24% growth on the EPS side.

If you look at the guidance range, we gave we widened the range given the uncertainty and also estimated that our guidance midpoint had an impact of about 20 cents related to the macroeconomic.

If you if you break that down on your on your direct question premium beer volume is holding right. So just from overall snapdragon and and of course, the new launch happens as planned as well, but what we are seeing is the customers buying high mid low tiers being careful.

With with inventory as they manage and kind of worked through the market environment and so youre seeing that factored into our guidance going forward. Maybe if you can just add one thing Oh.

This is Chris you know so the way the way to look at our Q4 guide, including the macroeconomic environment that we saw he said 20 cents a V P S.

We see as growing 24% year over year, the way I want back that is a we have the micro we have the reduction of the mobile market, but if you. If you break that down in addition to what I said about the premium to your being resilient, even as we have less units in mid and low we have sequential growth in alto, we had record out until Q3, we see sequential growth.

In Q T N N D. I O T. I think consistent what we have been the conversation throughout this earnings seasons is any offset in any consumer weakness has been offset by strength in industrial and in enterprise and.

When we look at those numbers at 24% year over year growth exactly faster than some of our peers and they have even less consumer exposure than we do because of mobile. Thank you.

Thank you. Our next question is coming from the line of Rod Hall with Goldman Sachs. Please proceed with your question.

Yeah. Thank you I've got two questions for you guys. One is going back to kind of the high end and not necessarily September not that particular high end, but the.

The Chinese volume makers in the back end of the year I know that as the supply chain Cristiana has been kind of sure I think there were some original thinking those guys might preorder chips and that might affect your September quarter and I'm. Just curious if you know if that is happening or are you seeing some impact on the September quarter from there.

As anticipated Android launches and I guess the late October November time frame and then I have a follow up on that.

Yeah, Rod it's a gosh.

We're not seeing any front end of a behavior off of people buying sooner than expected that's impacting our September quarter on the on the handset side and the premium tier where the demand is holding up as you know that we have strong relationships are very strong roadmap and that deere and so we're seeing customers continuing to buy as.

Normally they would as we go into the September quarter, and then looking forward to December .

So then of course, just to clarify most of that impact will probably come in the December quarter is that correct.

On that comment.

Yeah. So if if a if you're talking about Apple's phone launch out there.

You you would see a normal normalized out high end high end Android launches mainly in China.

Yeah exactly so so we we see purchases that happened through the September quarter on a normal basis, but December end of December is when they start launching phones, both going into holiday season, and then going into Chinese new year. So we expect to see the seasonal benefit of that.

Great. Okay. Thank you for that and then I also wanted to just ask you guys on channel inventory, we've had spotty indications of inventory clear, it's Verizon, saying theyre going to clear inventory in high end I think all all levels of the smartphones as we look into the fall and you know theres a lot of inventory clear its going on in retail we.

See some abnormal high in promotions in China occurring as well so I'm just curious what you think the status of it.

Inventory is out there and whether you think some of this inventory clearance might pull some demand forward out of the you know the early part at least of the fall season.

Yeah. So on the inventory side, I mean, clearly with the kind of the end market side is being impacted both from a macro into China perspective, what we're seeing is that the that has an impact on the inventory cycle that the industry that needs to work through in the second half of the calendar year, both through September and December .

And that's what's kind of forecasted within the guidance that we gave.

And as a result, as I said before we expect Oem's Do Act act with some caution with their purchases.

As as they worked through the inventory balance.

Thank you. Our next question is coming from the line of Michael Walkley with Canaccord Genuity. Please proceed with your question.

Great. Thanks, Congrats on the Samsung deal extension through 'twenty.

<unk> 20th theory that includes 60, just a cost for this deal are there any upfront payments or anything that might impact the cash flow or the model or is it more just an extension of 2030.

Maybe for Cristiana, if you could provide any color just on the snapdragon commitment is there any guaranteed share exclusivity or anything you can you can share on that and thank you.

Michael This is Alex Thanks for the question on the Samsung licensing deal. The way. This works is we have a current agreement that's been in place since 2009 was set to expire at the end of 2023 instead, what will happen is we've agreed to extend that for seven years through to the end of 'twenty 30 at the same royalty rate so that.

It's pretty simple pretty straightforward a we see it as a very very significant milestone event for the QTL licensing program validation of our portfolio validation of our innovation leadership and it's a very important benchmark.

For future renewals as well.

It really contributes a lot to the stability of the QTL program going forward.

Hey, Michael Thank you for the question, Yes look that's besides to record an alto and Iot revenues. The Samsung agreement is probably my favorite thing in the quarter and here's the way I would describe the growth opportunity for the chipset business.

We would average Ah if over them. After many years of this relationship if you remember about 40% share versus their anyhow solution with the Galaxy 22, which was prior to signing disagreement or share climb up to about 75% and now we're announcing a multiyear agreement to power the <unk>.

Samsung Galaxy smartphones globally. So very excited about that it provides a incredible stability a full blown mobile business I cannot think of anything better to validate our strategy to be focused on share of wallet and premium and high tier.

And then disagreement so very very exciting I remember Ah I would like to remember you all that that's a very good trade when we think about the silicon content of our Snapdragon H series E. It'd be at least you know equal or better than revenue and earnings of five a modem for another OEM.

Now the second part of this multi year agreement is the opportunity for growth tied up with our diversification. So.

It expands beyond Galaxy smartphones to include Galaxy books are Windows, Pcs Galaxy tab tablets, and future extended reality devices and other devices. So a very significant agreement very excited and really the companies are a much closer together.

Okay very helpful. Thank you.

Yeah.

Thank you. Our next question is coming from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks for let me ask a question. My first question is on the QTL side of things are remarkably in line for the quarter and guide and if I think about last year.

For your fiscal fourth quarter.

Business conditions appeared pretty strong this year, you're talking about uncertainties macro headwinds et cetera.

But you're guiding to the same QTL amount. So I guess, a big picture question I'm getting from investors is it seems like Qualcomm is derisked for Q C. T side, but maybe not the QTL can you talk about how we fold the QTL guidance in with the more cautious macro view.

Yeah sure all sorts of gosh is as I said in my prepared remarks, the other factor on the QTL side is device mix being stronger and and maybe a portion of it is inflation, helping D. S piece, but also we've seen kind of people upgrade devices as they buy new ones and so the mix is what does offset.

The the volume months of beauty outside.

Great. Thanks for that and I guess looking forward and shifting gears a little bit you guys. Obviously reporting guide and talk about your EBT margins, a bunch, but gross margins have been a big tailwind for the company as well in this last quarter by my math.

We're supposed to drop per your guidance in the June quarter, but it dropped a little bit more than I was expecting so could you just talk about the puts and takes within the Q C. T. Gross margins what would be generally tailwind headwinds what we should think about as we head into.

The back half of this calendar year.

Sure happy to so when you think about do you see the gross margins are the key things for US is one our diversification strategy as we use the technology, we created for handsets and apply it to other markets.

That helps our gross margin profile and op margin profile as well, but also gross margin profile.

Did the second is as we sell more premium tier devices that is also a helpful trend for us and so you've seen the benefit of that even in the face of increasing pricing from foundries, we've been able to do pretty well on the gross margin side, we did see a mix change as we went through the quarter, where we ended.

Slightly lower than we had forecasted at the beginning of last quarter, but when you look forward or mix is shifting up again, and it's maybe a balance of the previous quarter that allows us to guide very strong on the gross margin side.

If you look forward are really no change I think we're very comfortable with where we are at we've given a long term operating margin guidance, which contemplates a strong gross margin profile and we're comfortable with our guidance no change there.

Okay.

Thank you. Our next question is coming from the line of Joe Moore with Morgan Stanley . Please proceed with your question.

Great. Thank you.

Similar note can you talk a little bit about your pricing strategy in the.

Handset part of the business you saw the gross margin benefit during a period of tight supply and I think some people have worried that as that period comes through and you'll see more price competition can you just generally talk about how you see that dynamic.

Yeah. So honestly the pricing has been relatively stable on the handset side, it's obviously, a very large market and and there too to players who are who are participating in that market and there is sufficient market for both of us. So that's how we're approaching the market and we've seen them be consistent as well.

The other thing I'll say is on the operating margin side, we we've I'm the guy the way, we gave guidance for the greater than 30% at Investor Day, we contemplated some decline in the gross margin profile, but really what we're focused on is executing and as I've said this before but were focused on exit.

On the upside to that number.

Great. Thank you and then you talked about inventory in the context of the.

Sort of end market retail can you talk about component inventory.

Of Qualcomm parks I mean, the fact that you had a shortage until relatively recently does that does that is that the reason why you haven't had some of the same inventory correction in China that maybe some of the RF guys Pat.

Well from an from an RF perspective, we've seen some of the similar trends that our peers have seen but but when you look at the handset side, which is obviously the majority of our our inventory profile, we've been chasing supply to get people comfortable place and so as we've said before we always expect that demand.

And supply to reconcile in the second half of calendar year, and we're really seeing that play out as planned.

Great. Thank you very much.

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

Thanks for taking my question I assume maybe I'll start with my last one just given the prior question just on inventory.

And then I guess it is a quite a bunch in terms of your inventory in June under Dave can you just comment on do you feel like you're you're finally caught up I know, it's been a long time coming but at this point is it still getting your ship.

Yeah, Blayne generally we feel like we're in a relatively good place now of course. They are blocked itself nodes are parts that we're still dealing with shortage on but overall, we feel like we have reconciled to a reasonable place.

I'll say just when you look at our inventory balance just we've more than doubled our revenue over the last couple of years and we're also heading into a stronger seasonal quarters for our September and December and so what you're seeing on the balance sheet is really a reflection of what's coming up.

Gotcha, and then just for Cristiano I wanted to follow up on the question on the Samsung Agreement. You said you you you you said last quarter. Your your share was much higher of that 75%.

Obviously, they have struggled with their internal modem, just trying to maybe a little bit more color as to what the agreement need.

Is there any kind of handset.

And that share that's wrapped around it.

Or is it more about these other device I'm just trying to understand the real punch line on the agreement.

Yeah. The way you should think about it is snapdragon willpower there their galaxy product line, you know their galaxy flagship products and what I can say at this point is we were 75 on Galaxy has 22 before the agreement you should've thinking about we're going to be much better than that when galaxy 20.

<unk> three <unk> and.

And beyond that it's a multiyear agreement and.

It's.

And that's probably what I can what I can tell you you should think about us power in their devices globally.

Yeah.

Thank you. Our next question is coming from Brett Simpson with Arete Research. Please proceed with your question.

Yeah. Thanks, very much Cristiano I wanted to ask about the Apple guidance that was laid out by of course at the Investor Day I think it cost you mentioned that new iphones in second half 'twenty. Three you would expect about 20% share of those new I phones, now that we're getting closer to that timeline.

Has your view changed at all about that buy back share and if we were to see more demand for Qualcomm modems at at this accounts.

Can you secure the foundry capacity and would you need to negotiate new long term agreement for modems. Thank you.

Uh huh.

We're not providing any apple updates at this time.

And we feel pretty good about our our modem roadmap and five G and I think you should expect like walking will continue to be a leader in especially as modems that coming more difficult what is supporting more than one end market beyond smartphones.

Smartphones. Thank you.

Okay. Okay. That's clear thanks, and maybe just a follow up for a caution I just wanted to ask about free cash flow you've had a lot of moving parts I guess looking at fiscal 'twenty, two with prepayments for foundry and some of the working capital increases, but can you talk more broadly about the ability of a qualcomm is free cash flow Mark.

Margin targets, what's the business really capable of achieving and when might we start to see you know higher levels of free cash flow from the business. Thank you.

Yeah, Brett Youre right that is over the last lost a couple of quarters or several quarters, where we've had a few ins and outs.

Two kind of key once being acquisitions that we've done but then also our capacity our congratulations and then in addition to that obviously a pretty aggressive capital return program. So it's really a combination of those factors when I step back in and do your direct question no change to our strategy that we all can.

At Investor Day, we're very focused on returning most of our free cash flow to the shareholders. That's something that we have prioritized over the last several years, we've been very aggressive with it and we are planning to continue to do that.

Thank you. Our final question is coming from the line of <unk> <unk> with F. N. B C. Please proceed with your question.

Thank you Cristiano can you talk about your position in the mid to low end I know you've been focused on the premium segment and the reason I'm asking. This question is that if you look at five G. Even with your guidance for a little bit of a decline here.

The most of the premium market is fully penetrated with far G and as we think about the next couple of years the opportunity seems like it's mostly on the mid and low end. So I just want to get my hands around what's your market share today, and how should we think about the growth opportunity for you as the market transitions to <unk> and mid end and low end.

Thank you. Thank you for your question actually very good question, maybe ill Oh answer breaking down into parts look at it it worked very well for us to be focus on share of wallet and especially in the supply constrained environment to make sure. We secured the saw kitchen had supply for additional work, it's really important for.

This strategy, which is a premium and high it does not mean that we're not going to be.

B serving opportunities into mid and low and it's it's it's now an environment as supply gets normalized as we predicted for the second half we have an opportunity to win a lot of the sockets in the mid low and that's definitely an upside to our model.

Got it and then maybe for Oh, gosh I've touched on the discrepancy between associate growth on RF growth I think you gave us a pretty good explanation for this year, but as we as we look out to the next year or two should we expect that discrepancy to kind of remain or do you think the hansard growth than the RF growth will be somewhat similar thank you.

Yeah.

Yeah, Hi, Sidney.

We're going to have continue to have a discrepancy I think if you look at a couple of web slides that we included this time around it shows how the content is increasing at the premium tier for us.

And that's just an example, obviously that applies to really all tiers theres a lot more demand for processor content, whether it's CPU GPU camera AI security audio video, we're increasing content across the board and so we do expect that that will drive stronger revenue growth on the handset side.

As Cusano mentioned on RF front end are of course will benefit from the transition to five G. A wood as as markets like India started deploying five day later this year, we'll see the benefit of expansion of Sam.

Since five years, we're really we really play there and then also for auto and Iot expansion opportunities there so different vectors for growth in that area.

Yeah.

Thank you that concludes today's question and answer session. Mr. I'm on do you have anything further to add before adjourning the call.

Yes, Oh, just wanted to start by thank you to our employees and our partners are really a great quarter.

Couple of things that I would like to message.

None of our growth driver has changed all the fundamentals of the strategy are in place, we really focus on things we can control, but our strategy is working we are transforming Qualcomm in a company that was communications for the mobile industry into a connected processor company for intelligent edge. We're very excited about the Samsung agreement. It is the way to think about.

Is stability and growth in our handset business and one of the things we mentioned in the in this in the script that we didn't talk much about it is the incredible progress, we're making in AI and really building a very competitive development platform for the edge, that's where we see a lot of the growth silicon opportunity.

And in the other devices and don't forget to tune in for out to Investor Day. Also is a success story for the company continues to be and we're going to have some exciting things to share with you.

Western day later in the year. Thank you very much for support and talk to awesome.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.

Yeah.

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