Qualcomm Inc (QCOM) — Q2 2023 Earnings Call Transcript

Thank you, and 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 a slide presentation that accompany this call on our Investor Relations website. In addition, this call is being webcast on qualcomm.com, and a replay will be available on our website later today. During the call today, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our website. We will also make forward-looking statements, including projections and estimates of future events, business or industry trends or business or financial results. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our SEC filings, including our most recent 10-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. 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, and 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. As a result, we're operating under the assumption that inventory drawdown dynamics remain a significant factor for at least the next couple of quarters. Additionally, 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 in leading technology and product roadmap. As market visibility remains limited, we're actively managing operating expenses, and we'll 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 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. Additionally, 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 are seeing excellent adoption across Chinese OEMs, resulting in share gains. OEMs are also reporting strong initial sales for products powered by the 7+ Gen 2. In automotive, we see continued traction across global automakers and Tier 1 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 MBition Mercedes-Benz Software Factory and engineering teams and various partners to create an industry-leading MBOS 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 Snapdragon Connectivity 5G platforms with automakers globally. 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 Orion 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 Platform Gen 3, offering operators the ability to expand their service coverage to new areas while lowering costs and enabling faster deployment. Additionally, 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 the 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 to 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 this model will evolve quickly, continue to grow in popularity, and change user experiences across mobile, personal computing, and automotive. Beyond changing Internet search, this model will impact 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, automotive 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 accelerating 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 in 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, and 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.

Thank you, Cristiano, and 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 and 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 and 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 the 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. Additionally, 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 continued to impact demand globally. We now expect global 3G, 4G, 5G handset units in calendar '23 to be down at least a high single-digit percentage relative to calendar '22, 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 of 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 the third fiscal quarter. We are forecasting revenues of $8.1 billion to $8.9 billion and non-GAAP EPS of $1.70 to $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 to $1.35 billion and EBT margins of 64% to 68%. In QCT, we expect revenues of $6.9 billion to $7.5 billion and EBT margin of 23% to 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 are not immune to near-term headwinds, we are well positioned to benefit from an eventual recovery in the macro environment. Despite a reduction in global handset units and the continued drawdown of elevated channel inventory, QCT handset revenues have 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, 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.

Hi, thank you for taking my questions and for the detailed prepared remarks. I have one question regarding smartphones and another about autos, so I'll start with the smartphone question. I understand that you've adjusted your guidance for the overall market outlook for 2023. However, when I look at your QTL guidance, it seems to indicate a stabilization in sell-through at a certain level. Regarding your QCT guidance, it appears that the main challenges you expect are due to inventory and the timing of purchases. Could you confirm if my interpretation is correct? Additionally, what is the expected impact of timing and inventory challenges on the QCT revenue guidance for the fiscal third quarter? I have a follow-up question as well.

Yes, 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 the macro headwinds have increased meaningfully since the beginning of the fiscal year. So what we've seen is the impact on the 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 accessed. It's just how long it takes to run through it as a result of the market forecast.

Yes, on the automotive side, Cristiano, you mentioned the 12 design wins, specifically in Cockpit and Connectivity. Do you have any updates regarding ADAS and customer engagement in that area, as well as your product roadmap? Additionally, there seems to be some concern about your exposure to China volumes in relation to your pipeline. Could you provide an estimate of how much of your pipeline depends on China electric vehicle volumes? How are you assessing the risks associated with those production numbers?

Very good. The 12 designs is what happened in the quarter. So we just highlighted 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 going to take us throughout the second half of the year, but we're not announcing at this time. The second comment is on the China market. We have seen, I think, consistent with the overall theme of China, some weakness in the China auto market. I think it is consistent with the rest of the market. However, our design and presence with the China EV and the local OEMs is very, very high. I think we continue to gain share.

Thank you very much. Good afternoon. I have two questions that I'll ask together to make this quicker. The first one is for Cristiano. You clearly mentioned in your statement that the recovery in China during the second half of the year may be somewhat subdued, and you were one of the first companies to highlight this issue. Previously, shipments to China peaked at around 500 million units annually, but now it seems we're closer to 300 million on a sell-through basis. Can you confirm if those numbers are accurate? What are you observing regarding the recovery? Also, how much are you currently undershipping that could positively impact your numbers in the latter half of the year as you adjust shipping to match sell-through? I have a follow-up, but I'll start with this one.

Matt, it's Akash. In terms of China sell-through, I think if you're looking at any of the analyst resources that size the scale of the market, we're seeing pretty much the same number. So if you're quoting that, I don't have the exact numbers in front of me, but that aligns with what we are seeing. The way we are thinking about the inventory drawdown is, of course, it's a near-term phenomenon. We're going to get past it. The strength of our design win pipeline is very strong, so if you look at our share of sell-through, we’ve seen that share grow from '22 to '23, so that should give you a sense of our position going into the next year.

Just Matt, this is Cristiano. I want to add one thing. It seems reasonable to expect that following the reopening, the China market would bounce back after being very suppressed during the lockdown and the pandemic. However, we have not seen those signs yet, so we believe it's wise not to incorporate improvements into our planning assumptions, but we will monitor the situation. The current dynamic aligns with what Akash mentioned: it's an inventory drawdown, which explains the difference between the QCT and QTL business.

As a follow-up, I believe mid-single digits up is reflected in the guidance you provided for IoT. There are three distinct segments in that business. It would be helpful if you could discuss the inventory correction occurring across the IoT sector, as I think many of us lack detailed visibility there compared to your handset business. If you could elaborate on how that business is starting to recover a bit in June, it would be appreciated.

Sure. It's Akash. Initially, the weakness we observed in IoT was among consumers, but it has since extended into industrial and edge networking, particularly with China significantly influencing that decline. It's a blend of all three sectors. Looking ahead, we anticipate growth this quarter will stem from recovery across all three areas, not just one in particular. Additionally, if we consider the broader digital transformation, our technologies are becoming increasingly relevant. Cristiano mentioned Edge AI, which will be crucial in Industrial, PC, XR, and other sectors. I'm still very optimistic about the long-term outlook, and we're prepared to navigate the short-term challenges.

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

Mike, thanks for the question. I can say that we are no longer in a supply-constrained environment. As that issue has been resolved, we have the opportunity to gain market share. As Akash mentioned, if you examine our share of activations and sell-through compared to 2022, the outlook for us in China is very encouraging. We have been increasing our share in the high tier. The new 7 Series has seen significant investments, especially in leveraging the Snapdragon brand, and it is being very well received in the market. Our 7+ has outperformed the competition in the premium tier, which we find favorable as it sets a strong baseline. Additionally, Snapdragon is uniquely positioned in the 8 series. From a share perspective, we are making gains. The entire market is moving into the dynamic we've described regarding inventory, but we are pleased with our position in the marketplace.

Great. Thanks and maybe a quick follow-up for Akash. Just on QCT margins, 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 of quarters?

Yes. So from a gross margin perspective, as we've consistently said, and I said this in the last call, once we get past supply constraints, we expected some pressure on gross margins, so you're seeing that come through. But if you step back from that and just look at the 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. As we look forward, we’re remaining disciplined with pricing as we grow in a mature market.

Hi, guys. Thanks for taking my question. 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? And I guess maybe if you could talk a little bit about the different drivers, Handset, IoT, Auto into Q4?

Sure, Stacy. It's Akash. If you look at our typical seasonality from the third quarter to the 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 it to be muted because the lower demand from the modem-only handset customer extends from June into the September quarter as well. 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 of chips from us.

Thank you. For my follow-up, like, I know you said you expect the inventory drag in the next couple of quarters. But I guess, into June, given 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 directionally, is it getting at least better or worse even though we know it's still there?

Yes. So 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, who will be continuing this over the next couple of quarters. So I haven't specifically sized it in terms of scale, but I would say each of the quarters has an impact from that phenomenon.

Thanks for me asking the 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 going to 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?

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

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's 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, etc.? Is that just evidence of the share gain? Or what's going on there?

Yes. I assume your question, Ross, was related to QCT?

Just QCT, that's what you guys call it. That's not aggregate.

Yes. Yes. So if you think about our historical kind of 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. So it's just following the same trend, and the factors, the market and inventory drawdown exist in both quarters.

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

Yes. 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 would say is just one thing to calibrate in that framework is also to look at the market size as the overall market has continued to come down. But that's, I think, a good way to at least start figuring out the run rate of the business.

Okay. And then you mentioned you always sort of felt like as you came out of an allocation mode that there be a little bit of a gross margin headwind. What causes that? Is it just that? Are there expedites we were getting before? Is it more promotional now? And has there been any change in kind of like-for-like pricing as you've moved out of that type of supply environment?

Yes. So it's a combination of them. Given supply constraints, we were able to exercise some pricing leverage that has been neutralized in the current excess inventory environment, so 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, and 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.

Thanks for taking my question. But maybe just following up on that last one on gross margin. I mean, I guess if I'm looking at the numbers, it seems like your ASP is still going up. So is it really just the higher cost? And I guess the second part of it is, I think there's a lot of concern about more competitive environment, MediaTek moving up to the high end. So just can you go back and just talk about that environment? I think you said there's no more like-for-like pricing, but I mean, there's a lot of concern about maybe people buying older products and not taking Gen 2 and MediaTek moving up. Just kind of touch on those points.

Yes, 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 kind of adds scale and profitability to the business. However, we have seen gross margin percent get impacted by the couple of factors I just outlined. But again, those are, to me, kind of ins and outs of the business. It's better to 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 across all of our product lines, including handsets. And then with the AI that Cristiano just outlined, that will create an opportunity for us as well.

I’m just going to add a couple of comments to your specific questions. Look, the way we see this, we have made the right choices in our investments. We feel pretty good about the road map, and we took this very, very focused strategy to ensure that our 7 tier outperforms the competition's premium tier. That changes the landscape, which means we are very well positioned above that in the 8 tier, as I outlined. Our design traction is very strong, especially with all of the OEMs, with no exception. I remind you that we are globally associated with Samsung. Our agreement with them means we have launched the GS 23, that just happened, then we have the Fold and Flip, and then we have the GS 24. It's going to be several years of association of Samsung with the Snapdragon brand globally. While the size of the market is not good, our position is very strong. As I outlined before, we're gaining share.

I would like to follow up on the modem-only situation. Regarding the timing, I understand you have been waiting for a decision from that customer about their transition. Can you let me know if you are aware of that timing now? Also, do you think the timing of shipments is related to their transition?

No, it has nothing to do with the transition. Regarding the further transition, I think we stated a number of earnings calls ago that we expect to be in the product that they launched in '23. In '24, we have no change to our planning assumptions.

Thanks so 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. Even going back pre-COVID, Apple has been growing their business since COVID, and Android just seems to keep losing share. So what do you think is going on? And how much of the structural decline in Android, do you think, is the secondhand iPhone market? And then I don’t know whether you can size this, how big do you think the secondhand market is and how it's affecting Android? And what do you think the Android value chain is going to do to reboot their business?

Yes. No, it's a great question, and there are a number of things to unpack. First, I just want to go back a little bit in recent history. There was an addressable market for premium devices, and to some extent, premium and high-tier devices became available as Huawei declined in share. The reality is that Apple gained a significant amount of that share. We did as well, I think. So our competition grew at the expense of the market. That resulted in a much larger decline; you look at Huawei's Android as a net loss for Android, and that's where Apple gained share. The market is smaller, and the component of hand-me-down phones is accounted for in our planning for a smaller market. I think that's where we are until we go to the next upgrade cycle; cyclical business. But our position in Android has improved, and if you look at our trajectory within the smaller Android market, we’ve been gaining share and focusing on the value share of the market with concentration in the high and middle tiers.

Yes, Brett, it's Akash. So 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, so that obviously still exists. There has been a little bit of a change at the top with the refurbished phone market, and that’s something that we're definitely closely watching and contemplating in our numbers at this point.

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

Sure. For 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, so you should think of that as a proxy based on historical trends. 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, in the fourth quarter, we typically have seasonality and 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. As we go from there into the holiday season, that's typically a strong quarter for us and we would realize benefits as we go forward.

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

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

Yes. Thank you so much for listening to our call. Here's the summary. 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 where 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're investing in the right technologies for growth and diversification, especially in IoT and Auto. I feel we have a very competitive road map, so we're well positioned to benefit when the market returns to growth. The last comment is we are going to become very relevant in AI. As you look at the speed of new models appearing, new companies investing, new use cases, the ability to run those things locally. I talk about having the ability to run 10 billion parameter models on the phone without compromising battery life and being able to demonstrate that very shortly this year, and you can see how that creates an even larger opportunity for us in Automotive as well as in the entering of next-generation personal computing. So 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 want to thank all the employees for their dedication and contributions to Qualcomm and also our many partners and suppliers. Thank you.