---
title: "Qualcomm: Clearing inventory is the top priority at present (Q2FY23 Qualcomm conference call)"
description: "High inventory, suppresses performance release."
type: "topic"
locale: "en"
url: "https://longbridge.com/en/topics/5713607.md"
published_at: "2023-05-04T12:00:40.000Z"
author: "[Dolphin Research](https://longbridge.com/en/news/dolphin.md)"
---

# Qualcomm: Clearing inventory is the top priority at present (Q2FY23 Qualcomm conference call)

On the morning of May 4, 2023, Beijing time, Qualcomm (QCOM.O) released its second-quarter report for the fiscal year 2023 (ending in March 2023) after the Long Bridge stock market closed. The main points are as follows:

**1\. Financial summary:**

**1.1 Revenue:** Qualcomm US achieved $9.275 billion this quarter, a year-on-year decrease of 16.9%, slightly exceeding market expectations ($9.09 billion);

**1.2 Gross profit and gross profit margin:** The gross profit for this quarter was $5.12 billion, a year-on-year decrease of 21.4%, with a gross profit margin of 55.2%, lower than market expectations (57.4%);

**1.3 Net profit:** The net profit for this quarter was $1.7 billion, a year-on-year decrease of 41.9%, lower than market expectations ($1.987 billion);

**1.4 Guidance for next quarter:** The expected revenue for the third quarter of the 2023 fiscal year is $8.1-8.9 billion (market expectations are $9.281 billion), and the adjusted profit for the third quarter is $1.7 to $1.9 per share (market expectations are $2.16 per share).

**Conference call takeaways: 1) Inventory reduction is the main direction for the company going forward if there is no recovery seen currently; 2) Overall performance for next quarter is similar to this quarter; 3) The decrease in gross profit margin is impacted by cost increase and inventory surplus.**

**2\. Conference call content:**

**2.1 Management statement**

In the face of a challenging macroeconomic environment and widespread contraction in the semiconductor industry, we achieved revenue of $9.3 billion and Non-GAAP EPS of $2.15 at the midpoint of our guidance in the second quarter.

Revenue from our chip business was $7.9 billion, near the high end of our guidance range.

Revenue from our licensing business was $1.3 billion, at the lower end of our guidance range due to soft demand for smartphones.

The constantly changing macroeconomic backdrop has led to further deterioration in demand, beyond our prior expectations. Therefore, we continue to **assume that dynamic inventory reduction will remain a key factor in the coming quarters** and we operate the company accordingly.

Additionally, while we expect Chinese demand to rebound in the second half of the year, there is **no meaningful evidence of recovery and we have not factored that improvement into our planning assumptions.**

While the challenges we face are affecting the entire semiconductor industry, we remain focused on managing the products that we can control and continue to execute our diversification strategy across leading technologies and product roadmaps. **We are actively managing operating expenses and continuing to evaluate additional opportunities to improve operational efficiency while not losing sight of the growth opportunities in automotive and IoT.** **FY23Q3 Guidance**

**Predicted revenue is between 8.1-8.9 billion USD, with a non-GAAP earnings per share of 1.7-1.9 USD. Our guidance reflects the impact of macroeconomic headwinds, weak global smartphone sales, and reduced channel inventory.**

**1) QTL business revenue is between 1.15-1.35 billion USD, with an EBIT margin of 64%-68%.**

**2) QCT business revenue is between 6.9-7.5 billion USD, with an EBIT margin of 23%-25%.**

Based on the midpoint of QCT revenue guidance, we anticipate a significant normal sequential decline, mainly due to the timing of purchases by ordinary mobile phone customers. We continue to predict that **revenues from Android phones and automotive businesses will remain roughly steady, while IoT business will achieve median growth.** Consistent with our previous messaging and Q2 performance, QCT gross margins reflect the impact of supply constraints and increased channel inventory.

We expect non-APAC operating expenses to remain roughly steady. We expect the dynamics affecting Q3 to continue into the Q4 quarter, including the seasonal weakening of QCT revenue due to ordinary mobile phone customer purchase timing.

Although we cannot avoid short-term headwinds and despite the sustained decline in global smartphone shipments and increased channel inventory, we will benefit from the eventual recovery of the macro environment. We remain focused on executing our diversified strategy and succeeding in our biggest growth opportunities, including automotive, industrial, and networking. Considering our strong balance sheet and debt rating, we are confident in our ability to lead in IoT, PCs, and XR in the current operating environment.

**2.2Q&A**

**Q1: How much resistance to QCT business revenue guidance comes from consumer purchasing timing and inventory?**

A1: It is correct to link market forecasts with QTL. In addition, QCT also has an additional factor related to inventory reduction. Our view on inventory reduction is that macro headwinds have indeed increased since the beginning of this fiscal year. Therefore, what we see is a situation where **it takes longer to digest existing inventory due to the impact on the market. We believe that the excess inventory in the channels this year has not fundamentally changed. This is just the time frame spent on market forecasts.**

**Q2: Regarding ADAS, is there any latest news to provide, including customer participation and product roadmap? How do you consider concerns about potential dependence on China's new energy vehicle production?**

A2: Twelve new designs happened this quarter. Therefore, we emphasized this quarter that we designed digital cockpits and 5G remote information processing systems. We are doing some new designs that will be carried out in the second half of this year, but we will not announce them at this time.

Regarding the Chinese market, I think some softness in the Chinese automotive market is consistent with other markets. But our design has a very high participation rate in the Chinese electric vehicle market and collaboration with local OEMs, and I believe our share will continue to increase. **Q3: What are the latest developments regarding China's economic recovery? What are the prospects for sales in the latter half of the year?**

A3: As far as China's sales situation is concerned, I believe that if you look at any resource that analyzes market size, the numbers we see are almost the same. So this is what you are citing. I don't have exact figures in front of me, but they are basically consistent. Of course, our view on inventory reduction is that it is a short-term phenomenon and we will overcome it. Our design advantage is very strong. One way we measure it is by looking at our market share, which we see growing by 22-23%. This should give you a rough idea of our position entering next year.

Additional: From common sense and general expectations, the Chinese stock market will rebound after reopening. I think it has been suppressed throughout the epidemic and quarantine period. I think we really haven't seen these signs yet. Therefore, we think the cautious approach is not to add assumptions to our plans, because you need to monitor the situation. But what we are seeing now is the reduction in our inventory. This is why I think there is a difference between our qct and qtl businesses.

**Q4: What are the prospects for inventory adjustment in the IoT business in Q3?**

A4: The weakness we initially saw in the IoT field was in consumers, and then we saw it expand to industrial and edge networks, especially China playing a key role in this weakness. So this is a combination of all three areas. Now, as we look ahead, we anticipate that much of the growth this quarter will actually be a recovery for all three parts. So I won't point out a prominent one. Perhaps the last point about the IoT is that when you step back and think about the broader digital transformation process and where we are, our technology will continue to become more important. Edge AI was mentioned before, which will be another technology that is very important in industrial PCs, XRs, and other areas. So the long-term prospects for things are still optimistic and will be good in the long run.

**Q5: Regarding the Snapdragon 7 series, can you talk about the market share benefits you have seen? Will there be a greater increase in market share after inventory clearance?**

A5: I would say we are no longer in a supply-constrained environment, which may be a conservative statement. With the supply constraint environment being resolved, we have the ability to gain market share. I think in terms of revenue, if you compare our activations and sales share in China, you will see that our outlook in China is very optimistic. We have gained more market share on the so-called high-end model, the brand new 7 series. We have made a lot of investments, including leveraging the Snapdragon brand in the position of 7, which is very popular in the market. Our 7+ performs better than competitors at the premium level, which we like because it lays the foundation. Snapdragon occupies a very unique position in the 8 series. I think from a share perspective, we are gaining share of the entire market, entering the inventory dynamics we just outlined, but we like our position in the market. **Q6: From the perspective of QCT's profit margin, what needs to be considered during inventory clearance?**

A6: From the perspective of gross profit margin, as we have always said, and as I mentioned in the last earnings call and earnings conference call, once we get past the supply constraints, we expect that gross margins will face some pressure, so you will see that. But if you step back and look at the mix of different devices and how they drive profitability, there are no major issues worth discussing. It really is the current environment that is at play here, and looking forward, as we continue to develop in mature markets, we will continue to strictly control pricing.

**Q7: Could you explain what "seasonality was mild" means for the September quarter? What is the growth analysis of the segments?**

A7: If you look at the typical seasonality from Q3 to Q4, it's primarily driven by the introduction and build of new flagship devices. There are some other factors, but that's the main driver of growth, as I outlined in my prepared remarks. We anticipate that this type of growth will decelerate, however, as the decline in demand from mainstream phone customers will continue from June to September. The reason is that we saw them buy more earlier this year. So it's just a balancing of when they're buying chips from us. I want to be clear that this isn't commenting on their sales or our share in OEMs. This is just when they're buying chips from us. Every OEM has a different story. Some OEMs are way ahead in reducing their inventory, and there are others, including the one we just talked about, that will happen over the next few quarters. So I don't have a specific scale, but what I want to say is that this impact happens every quarter.

**Q8: How do you consider the speed of penetration in IoT and automotive fields?**

A8: We have always been focused on finding opportunities for comprehensive development to help us accelerate diversification. We have been very cautious just because, in the current environment, we want to do something actionable and we will continue to drive that process forward. We are also very excited about what I mentioned in my prepared remarks. I think we're in an extremely unique position right now where we can achieve high performance and low power artificial intelligence on all edge devices. I think that will accelerate our diversification strategy in all new areas, even though it may create a new upgrade cycle for phones, it's also related to all other diversification areas.

**Q9: Regarding QCT's weaker guidance, what are the unfavorable factors behind it?**

A9: If you consider our historical trend in android business over the last two quarters, you will find that we have been maintaining that trend. I mean, if you look at the last year's Q2 to Q3, our android business was roughly flat and it's the same this year. So it's just following the same trend and the fact that there's market and inventory decline in both quarters. **Q10: When you see the annual decline in mobile phone sales, how much do you attribute to inventory consumption a year ago? How much do you attribute to factors such as price?**

A10: We haven't discussed this yet or given specific numbers, but one framework for studying it is to add up the data from these two years. One year of construction leads to one year of bloodshed. If you look at it comprehensively, you will have a rough idea of the enterprise's operational rate. One thing to calibrate within this framework is to look at the size of the market because the overall market has been declining. But I think this is a good method, at least it can start calculating the operation rate of the business.

**Q11: What are the headwinds to gross margin as you move away from the allocation model? Will there be a price change as you leave this supply environment?**

A11: **Under supply constraints, we are able to exercise some pricing leverage, which is neutralized in the current environment of excess inventory.** This is just a digital approach. Two other things to keep in mind are that as of January 1st, our manufacturing plant prices have also increased. Some RF front-end factories have underutilized capacity, and as demand recovers over time, it will be filled. So this should be a driving force for us in the future.

**Q12: Other than costs, what other considerations are there for gross margin and rising ASP?**

A12: Regarding gross margin percentage, I think this is a reasonable consideration. The gross margin percentage for each of our devices continues to increase, which is our advantage and will expand our business scale and improve our profitability. **But we have seen the gross margin percentage affected by several of the factors I just outlined**. However, these are the ins and outs of my business to me. We're better off taking a step back and focusing on broader, longer-term opportunities, continuing to add content to our chips, which we've been very successful at over the past few years. We have opportunities to do that, especially as our new custom CPUs enter all of our product lines, including phones, and then the AI I just discussed, which will also create an opportunity for us.

**Q13: From the consumer's perspective, are you worried that people may buy old products instead of second-generation ones?**

A13: From our point of view, I think we made the right investment choice. We feel good about our roadmap, and we've taken this very focused strategy to ensure that our Snapdragon 7 series is better than our competitors, and our position above the Snapdragon 8 series is very strong.

As I outlined earlier, our design traction is very good, especially across all OEMs without exception. Reminder, we are global partners with Samsung and we have an agreement with them. Samsung will promote the Snapdragon brand globally, which will take several years. It's not a large market, but our position is very strong, and as I mentioned earlier, our market share is increasing.

**Q14: Regarding the current state of the Android market, what is your view on Apple's market share invasion and the development of the second-hand market?** A14: First of all, I'd like to review that high-end devices have a growing market in recent history, and to some extent, high-end devices have emerged. In reality, due to Huawei's declining share and Apple encroaching on a considerable portion of its own share, our competitors, I believe, are all growing, which has led to a greater market cost. You look at Huawei's Android, which is a net loss, and this is the area where Apple gains its share. I think this is our current situation until we enter the next upgrade cycle. Our position in the Android field has improved. I think if you look at our trajectory of development in this smaller Android market, you'll find that we've been gaining shares and focusing on the high-end and mid-range markets.

There is a second terminal market that has existed for a long time in emerging markets (as a second-hand device), so this obviously still exists. In the refurbished phone market, the market has undergone some changes, so this is the data we are currently closely monitoring and considering.

**Q15: How do you evaluate the performance of QCT/QTL business in the September quarter?**

A15: Generally speaking, the market size is relatively stable between June and September quarters. The market has changed slightly, and our revenue has remained relatively stable as well. So you should see it as a proxy based on historical trends. Before the market recovers, I don't think there's anything particularly different from last year. From the perspective of the fourth quarter, we usually have seasonal factors, seasonal growth. As I mentioned in the prepared remarks, we anticipate the seasonal factors to be less pronounced this year due to all the factors we discussed on our conference call and outlined in prepared remarks. So, that sets a framework for the September number. Then obviously, as you start from there, you go into the holiday season, which is usually a strong quarter, and we'll realize our benefits there. This is the normal seasonality of QCT's fourth quarter.

Longqiao Dolphin's research on Qualcomm

**Financial Report**

May 4, 2023《[Qualcomm: Chip "Big Shot" Hidden Big Thunder, Winter Will Be Longer](https://longportapp.com/en/topics/5699148?channel=t5699148&invite-code=294324&app_id=longbridge)》

**In-depth**

December 20, 2022《[Qualcomm: Making Billions a Year, Why Does the Chip King Only Worth 10x PE?](https://longportapp.com/en/topics/3775259)》

December 8, 2022《[Qualcomm (Part I): Behind-the-Scenes "Big Shot" of Android Phones](https://longbridgeapp.com/en/topics/3734235)》 **Risk Disclosure and Statement for this Article:** [**Dolphin Investment Research Disclaimer and General Disclosure**](https://support.longbridge.global/topics/misc/dolphin-disclaimer)

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> **Disclaimer**: This article is for reference only and does not constitute any investment advice.