Q3 2023 Quantum Corporation Earnings Call
Handset revenues of $5 $8 billion reflected the impact of industry wide headwinds we had previously communicated.
Iot revenues were up 7% year over year to $1 $7 billion, mainly driven by growth from our edge networking products.
Automotive continued its momentum with year over year revenue growth of 58% to $456 million.
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 with $8 $2 billion in cash and marketable securities at the end of the first fiscal quarter.
In addition, we expect to receive a majority of the transaction price of $1 $5 billion on the completion of the sale of REO nears, the active safety business to Magna bias SW partners.
We expect the transaction to close by the end of the fiscal year.
We returned $2 1 billion to stockholders, including $1 3 billion in stock repurchases and 842 million in dividends in line with our capital return program.
Lastly, our GAAP EPS results included a 10 cent benefit.
From the U S tax requirement to capitalize and amortize R&D expenses.
This benefit is excluded from our non-GAAP results.
Before turning to the second fiscal quarter guidance I'll provide an update on short term cyclical headwinds facing the semiconductor industry.
The environment continues to be dynamic with challenging macroeconomic conditions and COVID-19 headwinds in China, driving industrywide demand weakness.
Given this uncertainty we are incorporating a negative bias for three D. <unk> five D handset volumes for calendar 'twenty three relative to calendar 'twenty two.
The impact of broadening demand weakness across handset and Iot products and the easing of supply constraints has contributed to elevated channel inventory.
Based on our current assessment, we expect you'll see D customers to continue to draw down on inventory at least through the second and third fiscal quarters.
At this point, we are 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.
While our business is not immune to the macro environment, we're confident in our ability to navigate this landscape.
Cause cristiana summarized we have continued to expand our actions to reduce operating expenses beyond the initiatives. We've previously outlined.
While we are reducing spending on handsets on SG&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 first quarter results and second quarter guidance.
Overall, we are targeting a combined 5% reduction in non-GAAP operating expenses relative to our fiscal 'twenty two exit rate.
Turning to guidance for the second fiscal quarter.
We are forecasting revenues of eight 7% to $9 5 billion and non-GAAP EPS of $2 five 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 1.25 to $1 $45 billion and EBIT margins of 66% to 70%.
Reflecting a sequential seasonal decline in handset units.
In Q C. D. We estimate revenues of $7 $4 billion to $8 billion and EBIT margins of 25% to 27%.
We expect handsets in automotive revenue to be flat sequentially.
Offset by a reduction in Iot revenues due to the factors I just outlined.
We estimate non-GAAP operating expenses of approximately $2.25 billion.
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.
We are focused on executing on our strategy enabled by our leading technology Road map and best in class product portfolio.
Back to you Mary Sue.
Thank you cost operator, we're now ready for questions.
<unk> a question press Star then the number one two.
To throw your question press Star two.
If you're using a speakerphone please pick up your handset before pressing the numbers.
One moment please for the first question.
Yeah.
First question is coming from the line of Cemig <unk> with J P. Morgan. Please proceed with your question.
Yeah, Hi, Thanks for taking my questions I have a couple of maybe for the first one.
Hear you on the inventory digestion, but maybe one of the other concerns that investors have had for this year on the handset side as well.
Daily if any on in terms of launch plans from the Android Oems about then sort of related.
After their new handsets or any changes in their pricing strategy.
Chips that they intend to then sort of prioritize oh sort of the high invoices made into chips 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 are outside of the inventory digestion I have a follow up thank you.
Sure somebody could say gosh really from a handset launch perspective, especially in the tiers that Qualcomm is very strong and we're continuing to see our customers launch on time. So you. We obviously saw the Samsung launch happened yesterday, our Chinese Oems are also planning to launch their devices on schedule. So no no change.
From our perspective on on launch timing and key deals for us.
Okay. Okay.
Maybe just a final follow up on the Iot side, you mentioned the weakness that you're seeing in the broader market, but maybe if you can delve into that a bit more are you seeing sort of more weakness just sort of being hired on consumer Iot or is that more of a worsening across industrial Iot and edge networking as well and if you can quantify what.
How to think about that opportunity relative to India and train three.
Okay.
Sure. So from an Iot perspective, you know, it's 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 are a factor of that as well and so it's a.
It's two parts, it's demand weakness and then OEM inventory drawdown are both of those factors similar to handsets and within within our product line. We're seeing we obviously started seeing impact in consumer Iot that we've talked about previously 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. It still reflects the opportunity in front of us.
Hi, This is Christian I know so Mike 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 a it's probably likely is going to be one of the largest opportunity for five G. S. A fixed wireless access.
And as we mentioned you know the opportunity it will be across all of the operators to connect in the order of 100 million homes. So there 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.
Our next question is from Matt Ramsey with Cowen. Please proceed with your question.
Thank you very much good afternoon guys.
Our Kashi I wanted to ask a little bit of a question a couple of questions about margins.
You talked pretty explicitly about.
Opex, but were seeing.
And no surprise, maybe with the dynamics and the macro and the inventory correction that <unk> operating margins have come down some and maybe you could just.
Walk us through the puts and takes on margins from here. It is March the bottom end and how should we model sort of gross margin in Q C. T. As we go forward given the mix of the segments might be a bit different during this inventory correction.
Sure Matt So let me let me address it in two parts first from a gross margin perspective, we did slightly better than our expectations and the results that we announced for the first fiscal quarter and then we're guiding similar margins into the second quarter. So from a gross margin perspective.
We are holding well and even in the challenging environment. We were in a where we're doing a relatively good job as we've said in the past we always expected that once we get through supply constraints on there'll be some gross margin pressure and that was factored into our long term target. So it really nothing nothing new that we haven't told you before on gross margin side.
On on operating leverage which is really the second driver here is the impact that we're seeing from the inventory drawdown.
It uses the operating leverage in the business temporarily in the short term and so you're seeing the operating margin is being impacted by that but kind of once you step back and abstract out of that change you should see the operating margin are more in line with our expectations.
Our next question is from Mike Walkley with Canaccord Genuity. Please proceed with your question.
Great. Thanks.
Cristiana, what Qualcomm has done really well in premium tier Android.
With supply easing you know, what's the appetite to maybe go down to down to you into the mid to high tier Android.
And if so will it be timeline to maybe take share. If you are interested in that market.
Thank you Mike for your question actually.
Actually it's a it's a great question you know what we have seen in this current demand environment as well as the inventory draw them actually the the premium tier had done a little bit better.
Then what the message here has been impacted I think consistent with our expectations. I think you saw that in some of our customers' earnings calls as well however.
We expect that as you get to the second half of the calendar year.
You know, we hope that the inventory draw down situation improves as well as China reopens, and we will see an opportunity for the mid <unk> in the low tier to come back and our design traction is good in those tiers with the Oems and we'll see what happens we're not we're not factoring that better second half.
Yet in our planning assumptions I think we're waiting but I think there's optimism just because of the inventory drawdown as well as China reopening.
Our next question is from Stacy Raskin with Bernstein Research. Please proceed with your question.
Hi, guys. Thanks for taking my questions.
I have a I have two the first one of course youre talking about the inventory correction I mean marches as well as in June .
You're guiding handsets kind of flattish in March I was wondering if theres any sort of like preliminary color you could give us on the June quarter trajectory like do you guys think March quarter in general is the bottom and then I have a follow up.
Okay.
Yeah. So the way Stacy we were thinking about golf, how things play out as 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, an inventory drawdown. So we expect our customers to be cautious and until there is more visibility, they're gonna be careful with additional purchases and draw down inventory. So that's that's what's factored in our updated guidance.
When we look at the second half of the year. That's Casciano said, we're pretty optimistic that demand and channel inventory normalizes.
And that allows us to you don't take advantage of the growth from that point on given our strong position when the dynamic of course.
In terms of bottomed the way I'd think about it is we're going to see them back for the for the margin June quarters, and I think there's an opportunity from that point on AR as we grow in the second half of the year.
Got it thanks, if I could ask a quick follow up on in your Q you talked about you had a $344 million tailwind from a 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 in the handset business.
Relative to that.
Overall benefit you're seeing in Houston.
Yeah. So if you think about pricing in the handset business. It's usually a function of two things first is within a given dear more capabilities being added to the device, especially on the application processor side and so you've seen us benefit significantly from that over the last three years and as we look forward, we are continuing to see demand for additional functionality.
So that's a that's kind of a tier four 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 customer it is but that's that's more timing.
Versus kind of a fundamental trend of our revenue growth.
Yeah.
Our next question is from Ross Seymore with Deutsche Bank. Please proceed with your questions.
Hi, guys. Thanks for let me ask a question I wanted to focus on the handset guidance for the next quarter of fiscal <unk> being flat sequentially can you just talk about the puts and takes that are getting you to flat and in the past last quarter. You gave a framework about I think $2 billion of inventory burn headwind I just wonder if you were indeed success.
Last fall and getting halfway through that or is the issue now pervasive because just demand has dropped so just the puts and takes on that would be helpful.
Yeah, 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 it's a it's what you'd expect seasonally happens once you go between the quarters and so that's what we've assumed in that informs our our Q D. L. <unk>.
Cash for the quarter as well.
Yeah.
But you guided flat sequentially. So I'm just trying to from December to March are you, saying it would be down except for now it's gonna be flat because you're burning less inventory. Okay. So I understand the confusion. So the what I talked about was the total handset market, which we are expecting to be down a quarter over quarter consistent with <unk>.
No trend what we said was flat was QC. The handset revenue, we expect to be flat and of course, that's a that's a function of mix of chips and also inventory drawdown differences.
The next question comes from Joe Moore with Morgan Stanley . Please proceed with your questions.
Great. Thank you.
Going back to how much inventory you are reducing in handsets, but what's your visibility into that and I mean are you.
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.
Yeah, Joe Oh, well, we have a sense of are kind of what sell through the Oems had because of our QTL business and then we have the ability to compare that with what is happening in Q C. D. So we do have a pretty good sense of what is happening in the industry and we're confident that a large portion of it was.
Inventory drawdown.
Okay, Great and then specific to the China region, I think you mentioned that new launches in the in the March quarter.
But it sounds like the situation there is pretty challenging in terms of visibility like it's trying to different and the rest of the world for you right now.
Yeah, the uncertainty in China definitely reflects in our customer's sports users and that's what we talked about that we expect in it until there is more visibility we expect customers to be careful with additional purchases in drawdown on inventory.
But in terms of handset launches, we are still seeing the Oems being extremely active and planning in such launches on the regular cadence and and driving functionality within the market.
The description of limits 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 is offline market. So as we have saw with the Lockdowns and the Covid situation. There was a big impact and indeed in the handset market in China.
Common sense are you know what that is how some of our Oems are also thinking is S. As the Covid gets behind China, you should expect the markets to open up and what we have visibility right. Now is a lot of the new device launches are preparing for that and some of it.
Is gonna be announced at mobile World Congress.
It's too early to draw a conclusion. So it go back to that conversation that there is optimism that second half could be better.
Our next question is from Blayne Curtis with Barclays. Please proceed with your questions.
Thanks for taking my question I guess kind of a combination of the two I'm I'm curious.
Inventories are up on your balance sheet at cost just kind of curious whether you need to work those down as well and then I guess for Christiane I was just going back to a prior question on the mid range I am curious about the pricing environment. I mean, mediatek is having a tough first half as well can you just comment on what that environment is and then you kind of just thoughts in general.
About pricing and moving for sure within the modem business and 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 thanks.
Sure Blayne, so gosh I'll take the first one and then another question I 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 are the lead time is five to six months now for the foundry and the chip production and so we were clearly starting wafers betas, Don a different market expectation and before the inventory drawdown. So we've calibrated that down we're working with our suppliers.
And over time, we will we will get to a reasonable place.
It is important to also remember that.
When you look at three years ago was yesterday, we've grown tremendously in terms of revenue and scale across our businesses.
And then also supply has caught up with demand. So those two factors would naturally increase inventory anyways, but the remaining will be working through as I mentioned.
I blame Christina and I'm going to take your second question look essence, probably clear both us and the other chip supplier in a handset market dealing with the same challenges, which is the demand weakness and inventory in AR inventory draw down.
We 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 and open up our view is we're very well positioned from a competitive perspective, we have visibility into the design pipeline and we will remain disciplined on pricing, which is consistent with how we have behaved.
Over the past few years.
Thank you.
Yeah.
The next question comes from the line of Brett Simpson with Arete Research. Please proceed with your questions.
Yes, thanks, very much I wanted to ask about fixed wireless access and.
I think he talked about in the prepared remarks that you saw a big opportunity in India, playing out over the next couple of years with with fixed wireless access, but can you maybe just talk a bit about the asp's Qualcomm gas from a typical devolves and fixed wireless access and how do you see the business evolving.
Next couple of years as you start to attack that India opportunity and you could see some of the success you've had in the U S still far here and maybe other markets just maybe help us understand how that really plays out for for Qualcomm. Thank you.
Oh, Thank you for your question.
So I will I'll start by saying that.
That you know, we're really like that market and we think that market is a long term market I think the it's clear to see now that our.
Home broadband for the first time, you'll have a wireless solution that can augment our fiber and you know, it's really about fiber and <unk> you don't find a you know cable everywhere outside.
The United States. So we think that's an opportunity for both developed and developing economies and of course, if you look at the size of India. That's why we're very excited about it and 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 S. P. 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 five G modem and we are very well.
<unk> with millimeter wave technology.
Yeah.
Okay did you say sorry Christian did you say you book that in mobile systems or as the Iot and Iot business.
It's within the Iot revenue stream.
Okay. Okay fantastic Yeah, what I mentioned is it's compared to our handset business.
The S speeds that we have for fixed wireless is really accretive to margins.
That's what I think all of that but it's in the Iot business. Thank you.
Okay, and maybe just a follow up I wanted to ask about.
The recent U S restrictions on Huawei are you are you seeing any impacting this at all and then it looks like while we've been shifting quite a little foggy.
Devices.
Recently have.
Have you been shifting components to Huawei and if so can you just help with the impact of the latest restrictions on the business. Thank you.
Yeah. So this is Alex I'll start and then maybe a cost can fill in if these if he has anything further.
I don't think it's fair to characterize it as the latest restrictions on Huawei, what we've seen or news reports.
To the effect that.
Commerce is considering not issuing new licenses to Huawei.
And we haven't heard anything from Commerce itself Qualcomm has a set of licenses that we've had for a while that basically allow us to ship <unk> and other chipsets, including Wi Fi to Huawei.
Licenses were issued because Congress 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 of caution or anything else.
Nothing to add thank you.
The next question is from the line of Tal Leone with Bank of America. Please proceed with your question.
Hi, guys.
Two questions inventory days doubled and it has been going up every quarter in the last four quarters five quarters can you talk about the inventory days.
And what is it composed off if there is any any anything special we need to discuss just because of the high value.
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, which is China real reopened.
Meaning from the time to China Reopens and there is demand for handset how should we think about the the the lag from that to being translated into demand from you.
Yeah, so it dilutes that gosh from 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 five to six months.
<unk> dot wafers five to six 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 are.
You're right that our current inventory balances are higher than where we'd like it like it to be in earlier in the call I went through the rationale as to how we ended up there.
So we're working with our suppliers and we will kind of normalize it over time and we feel confident we can do that.
On your second question on the lag.
That's already embedded in the way, we provided a our view into the future which is <unk>.
As we we expect inventory drawdowns to happen through the March quarter, then going into the June quarter, but as we go into the second half of the calendar year.
<unk> comes back and normalize as we have the ability to benefit from it.
Got it.
Last question I'm I'm getting a repeat of the questions on your licensing part I saw today. The the what you said about Nokia and Ericsson can you discuss the licensing portion in terms of any forthcoming Oh.
Discussions negotiations or anything that we need to be aware of or is it as stable as it was the previous year.
So this is Alex.
It really is just a stable as we've described previously all of the major Oems are signed up long term.
No other new renewals are coming up until fiscal year 'twenty five.
You know the Nokia license basically split into a couple of parts infrastructure to Nokia handset to Microsoft.
Those licenses as as they evolved.
Got it no longer material to the QTL business, so that's pretty much where things stand.
Got it thank you.
Our next question comes from C. J Muse with Evercore ISI. Please proceed with your questions.
Okay. Thank you for taking the question two if I may the first one.
If you look back three months ago, you talked about kind of a two quarter correction.
We screened so just curious to level set kind of how things have transpired over the last three months you know how much of the change statement here is just and demand declining versus your customers working down.
I'll come semiconductor inventory and then the second question.
Can you kind of spoke to it earlier around building inventory and we'd love to hear your thoughts around kind of wafer start volume commitments on how to think about the impact to TCP margins in calendar 'twenty three and is there any risk of a onetime catch up payment on reduced volumes. Thanks, so much.
So on your first question C. J from a inventory perspective, there there are a couple a couple of drivers to it. So first is are the weaker market second is inventory drawdown and both are both are significant factors and then the third I'd say is we've also seen Iot having the same.
<unk> seen some of the characteristics and so you're seeing a combination of those factors.
Impacting the time period for which the drawdown last again is 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 our the strength of the business and so as the recovery happens, we'll be in a position to do benefit from it.
Can you repeat your second question I'm not sure I understood it well yeah sure as it relates to your commitments.
Commitments, particularly with TSMC.
You're taking down the volume purchases.
Any risk to pricing anti-war catch up payments.
Yeah. So a lot of our 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.
We're navigating through those and nothing to report at this point.
Okay.
That concludes today's question and answer session. Mr. Han do you have anything further to add before joining the call.
Yes. Thank you.
Maybe just.
To summarize I think how we see the earnings call I think.
Beyond 2023 for Qualcomm, we see many of our growth initiatives, increasing scale, including Alto B six you know XR and five G <unk>, who would talk about it in industrial.
When we look at the current environment, we remain very confident in our ability to navigate the economic downturn in the short term challenges given our strong balance sheet and consistent history of strong free cash flow generation.
As you can see we're taking action, where we can control and we believe we will 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 auto and Iot diversify the company and deliver value for stockholders.
Like to thank all the employees for the dedication contributions to Qualcomm as well as our many partners and suppliers and thank you all for attending the call and it was a popular earnings day today. Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.