Earnings Call Transcript - QCOM Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm Third Quarter Fiscal 2022 Earnings Conference Call. As a reminder, this conference is being recorded July 27, 2022. The playback number for today’s call is 877-660-6853. International callers, please dial 201-612-7415. The playback reservation number is 13731134. I would now like to turn the call over to Mauricio Lopez-Hodoyan, Vice President of Investor Relations. Mr. Lopez-Hodoyan, please go ahead.

Mauricio Lopez-Hodoyan, Vice President of Investor Relations

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 the 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.

Cristiano Amon, President and Chief Executive Officer

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 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 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, demonstrating 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 that Qualcomm and Samsung have entered a new multiyear agreement starting in 2023, expanding the use of Snapdragon platforms for future premium Samsung Galaxy products globally. This validates the Snapdragon as the technology platform of choice for premium Android experiences. 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, taking the license through the end of 2030 with the same royalty terms. The extension encompasses 3G, 4G, and 5G technologies and devices and will also include future 6G standards and products. This license agreement is a significant QTL milestone event. Samsung is the world’s largest 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 longstanding 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 QTL 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’s 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 1 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, to power Volkswagen’s future automated driving solutions. In consumer IoT, we continue to execute on our opportunities across tablets, XR, PCs, and smart consumer devices. For personal computing, we are continuing to drive the inevitable transition to ARM. We are on track to deliver Windows on Snapdragon compute platforms for next-generation PCs 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 Volterra, a new developer kit powered by the Snapdragon compute platform featuring the Qualcomm AI engine. They also announced a comprehensive end-to-end ARM native toolchain for Windows application developers including Visual Studio, Visual C++ .NET and more. In edge networking, we launched four new networking Pro Series Wi-Fi 7 platforms, the world’s most scalable Wi-Fi 7 portfolio, initiating a new era of 10 gigabits per second Wi-Fi for enterprise access points, Wi-Fi mesh, carrier gateways, and premium home routers. We also continue to see strong momentum in industrial IoT and recently announced two new 5G connected robotics platforms with enhanced AI capabilities, computer vision, 5G connectivity, and a comprehensive customizable SDK, to power next-generation robotics and drones, including autonomous mobile robots, AMRs, highly automated manufacturing robots, and more. These achievements demonstrate our ability to continue to grow across automotive in the broader IoT categories in addition to RF front-end and handsets. Our One Technology Roadmap is the cornerstone of the 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, we’re driving our technologies to meet the highest performance requirement for each application and serve as the industry design point. For example, our dedicated automotive SoCs and accelerators for Level 3 and Level 4 autonomous driving can deliver up to 700 trillion operations per second, TOPS of AI processing. Our RB6 robotics platform brings advanced edge AI and video processing capabilities support for up to 7 concurrent cameras and up to 200 TOPS. And we believe our upcoming custom-designed CPUs will redefine computing performance for Windows PCs. Of particular note is our significant momentum in AI. We recently launched the 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, PyTorch, and ONNX as well as AI runtimes such as TensorFlow Lite, TensorFlow Lite Micro, and ONNX runtime. We also have a rich variety of OS support, including Android, Windows, Linux, QNX, Ubuntu, and others. With this new offering, OEMs and developers can now develop and optimize AI models once, then move the same model across different Qualcomm products and tiers for true develop once, deploy anywhere model. We believe the Qualcomm AI Stack portfolio is a revolutionary step in scaling high-performance, low-power on-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. Lastly, 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 are focused on customers and industries that drive stable long-term growth. We believe the industry trends that are driving demand for our technologies 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 7 times to approximately $700 billion in the next decade. Before I turn the call over to Akash, I would like to invite you to join us in New York on September 22nd at our first ever Automotive Investor Day event. Qualcomm is the leading automotive technology platform provider for next-generation vehicles. We will demonstrate how the Snapdragon Digital Chassis is enabling 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 Akash.

Akash Palkhiwala, CFO

Thank you, Cristiano, and good afternoon, everyone. We are 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 50%, respectively, versus the year ago quarter, driven by technology leadership, revenue diversification, and operating efficiency. QTL revenues of $1.5 billion and EBT margin of 71% were at the midpoint of guidance. These results reflect a decrease in handset volume in mid and low tiers offset by favorable mix. QCT 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 EBT dollar growth of 67% versus the 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% versus the year-ago quarter on increased adoption of our broad product portfolio. IoT revenues were up 31% year-over-year to $1.8 billion. We saw strong performance across edge networking and industrial IP with combined revenue growth of 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 3G, 4G, 5G handset forecast. We now expect calendar ‘22 global handsets to decrease by mid-single-digit percentage on a year-over-year basis, including 650 million to 700 million 5G 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 ‘22. 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 $0.20 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 $1.65 billion and EBT margins of 69% to 73%, reflecting normal sequential unit growth. In QCT, we expect revenues of $9.5 billion to $10.1 billion and EBT margins of 32% to 34%. At the midpoint, this implies year-over-year revenue growth of 27% and EBT dollar growth of 31%. On a sequential basis, we expect growth across QCT handset and automotive revenue streams. In handsets, while Snapdragon premium tier volume remains resilient, our guidance assumes lower demand in other tiers, 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 growth due to the inclusion of two quarters of expenses for the Arriver acquisition. As a reminder, our third-quarter results did not include Arriver since we are reporting one quarter in arrears until the fourth fiscal quarter. Based on the midpoint of our fourth-quarter guidance, we’re expecting fiscal ‘22 to be an exceptional year. We expect non-GAAP EPS of $12.55, a growth of $4 for fiscal ‘21. We are forecasting QCT revenues of greater than $37 billion, a year-over-year growth of greater than $10 billion and EBT margin expansion of approximately 5 points. QCT handset revenues are on track to grow slightly below 50% relative to fiscal ‘21, driven by increased processor 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 ‘22. 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, the 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, Mauricio.

Mauricio Lopez-Hodoyan, Vice President of Investor Relations

Thank you, Akash. Operator, we are now ready for questions.

Operator, Operator

Thank you. Our first question comes from Matt Ramsay with Cowen.

Matt Ramsay, Analyst

Thank you very much. Good afternoon, everyone. Cristiano, could you provide us with a breakdown of your view on the current handset market? In particular, you mentioned some weakness in the mid-tier Android segment in your prepared remarks. I would like to explore that further. Can you compare what you're observing in the premium market versus the mid-tier Android market, especially in China, and also share insights on the mid-tier and low-tier Android markets globally? Any differences in the trends would be very helpful. Thank you.

Cristiano Amon, President and Chief Executive Officer

Thank you for your question, Matt. Look, we’re very familiar with this market. We’ve been doing this for years. And this market, it changes with the economy. We look at the combination of the macroeconomic environment and the China lockdowns, we did see the market is likely to be smaller than we originally forecasted. But, on the positive side, I think our strategy of being focused on the premium and high tier is proven to be a resilient one. So, the weakness we saw more in the mid to low tiers, premium tier remained resilient and not only in how we report the results in Q3, but how we think about our guide in Q4. And maybe Akash can add a little bit more color to it.

Akash Palkhiwala, CFO

Yes, 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 the rest of the world, with some limited impact in the developed economies. And what we are forecasting going forward is really that to continue forward in the second half of calendar ‘22, the adverse trend that we saw exiting the third fiscal quarter will extend. So, we are updating the overall calendar year forecast to decline mid-single-digits versus ‘21, and we’re also updating the 5G forecast to be in the $650 million to $700 million range for the year.

Matt Ramsay, Analyst

Got it. Thank you, guys. Maybe as a follow-up there, Akash, you’ve been ordinarily kind enough to give us some out quarter views on prior calls and with all the movement in the end market and the fact that you’re lowering the 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.

Akash Palkhiwala, CFO

Sure, Matt. As you know, December quarter is seasonally a strong quarter for us, both up for the QCT handset business and the QTL business. So that remains unchanged. We’re still going to see flagship device launches and holiday season increases that will benefit our financial performance. We’ll see growth from the third fiscal to fourth fiscal quarter, and we’ll 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 the fourth-quarter, but still expect strong growth rates as we look out to the December quarter.

Operator, Operator

Thank you. Our next question is coming from Tal Liani with Bank of America.

Tal Liani, Analyst

Hi, guys. First question is on balance sheet. Cash and equivalents went down by $4.5 billion, if you can give us some data there? And second, I want to talk about RF. RF on a sequential basis is slowing down. And the question is, it’s basically down on a cumulative sequential basis, it’s down already. And the question is whether the share gain story is 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, RF of QCT, of course?

Akash Palkhiwala, CFO

Sure, Tal. It’s Akash. I’ll begin with the first question and also address the second one, with Cristiano providing additional insights. Regarding the cash balance, we completed the Arriver acquisition shortly after the March quarter ended. The noticeable change is mainly due to the $4.6 billion used for the acquisition. We did experience robust positive cash flow, but this was offset by capital returns, amounting to $1.4 billion, specifically $1.35 billion in the quarter. Additionally, there were other related expenses from CapEx and tax payments during the quarter. So, the primary impact comes from the payment made for the Arriver acquisition. As for the RF front-end, you should consider its growth as closely tied to the 5G market trends. We have adjusted our overall forecast for 5G units for the year, which has influenced the situation. Generally, the scaling does not increase significantly when moving from low mid-tier to high tier; the RF content remains fairly consistent. In contrast, the processor side has witnessed substantial scaling within our handset business, especially as we transition to premium high tiers. Here, the average selling prices and content are significantly higher, and you can observe that benefit manifesting at the upper end of the range.

Cristiano Amon, President and Chief Executive Officer

So Tal, this is Cristiano, just going to add a couple of things. So, we have been very focused on the entire portfolio, continuing to drive leadership across every single component. And one thing that we have been very focused on now is to start to bring RF front-end to auto IoT and Wi-Fi. And we’re starting to track that. As an example, the RF front-end design win pipeline right now is in excess of $900 million in automotive. We also see opportunity with Wi-Fi. We announced our next-generation Wi-Fi and Bluetooth for RF front-end modules to go over chips as well. So, we expect to be focusing on driving growth in auto and IoT. And as Akash said, it’s an attached story on the Snapdragon. It tracks the mobile market, and we grow faster than front-end in mobile because of processor content.

Operator, Operator

Thank you. Our next question is coming from the line of Samik Chatterjee with JPMorgan.

Samik Chatterjee, Analyst

I have a couple of questions. To start with the China smartphone market, Akash mentioned that he expects the global smartphone market to remain stable as it was at the end of June. I recall that some government and regional market data indicated positive signs in June following the reopening. Given your experience with various cycles, what are your thoughts on when the China smartphone market might hit its low point and start to recover? The data from June seemed to suggest some positive momentum. I have a follow-up as well. Thank you.

Akash Palkhiwala, CFO

Yes. Sure, Samik. 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 that headwinds cause these customers to act with caution in how they manage their purchases. And so, it’s really not just kind of standalone what happened in the month of June and projecting that forward. It’s really the overall environment that they are reacting to, and that’s what informs our forecast for units going forward.

Samik Chatterjee, Analyst

And just for a follow-up, for the September quarter guide, if I can ask you to unpack that a bit more. You typically have a high-end North American customer launching their product, and you’ve driven sort of double-digit quarter-on-quarter QCT growth in the past on account of that. The more modest seasonality that you’re guiding to now—is that primarily then sort of weaker mid-tier Android—or are you expecting some softness on the high end as well with your primary North American customer there?

Akash Palkhiwala, CFO

Sure. So, when you look at our fourth quarter guidance, we’re guiding midpoint of $3.15 versus June actuals of $2.96. So, we’re still guiding strong growth on a quarter-over-quarter basis in this environment. And on a year-over-year basis, 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 $0.20 related to the macroeconomic. If you break that down on your direct question, premium tier volume is holding, right? So just from overall Snapdragon, 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 inventory as they manage and kind of work through the market environment. And so, you’re seeing that factored into our guidance going forward.

Cristiano Amon, President and Chief Executive Officer

Maybe if I can just add one thing. This is Cristiano. So, the way to look at our Q4 guide, including the macroeconomic environment that we size at $0.20 of EPS, we see us growing at 24% year-over-year. The way I will unpack that is, we have the macro, we have the reduction in the mobile market, but if you break that down, in addition to what Akash said about the premium tier being resilient even as we have less units in mid and low, we have sequential growth in auto. We had record auto Q3. We see sequential growth in QT. And in the IoT, I think consistent with what we have been in the conversation throughout this earnings season is any offset in any consumer weakness has been offset by strength in industrial and enterprise. And so, when we look at those numbers, a 24% year-over-year growth is actually faster than some of our peers, who have even less consumer exposure than we do because of mobile. Thank you.

Operator, Operator

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

Rod Hall, Analyst

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 Chinese high end makers in the back end of the year. I know that as the supply chain, Cristiano, has been kind of short, I think there was some original thinking, those guys might preorder chips, and that might affect your September quarter. And I’m just curious if that is happening; are you seeing some impact on the September quarter from those anticipated Android launches in, I guess, the late October, November time frame? And then I have a follow-up on that.

Akash Palkhiwala, CFO

Yes. Rod, it’s Akash. We’re not seeing any front-end behavior of people buying sooner than expected that’s impacting our September quarter on the handset side. In the premium tier, the demand is holding. As you know, we have strong relationships, a very strong roadmap in that tier. And so, we are seeing customers continuing to buy as normally they would as we go into the September quarter and then looking forward to December.

Rod Hall, Analyst

So then Akash, just to clarify, most of that impact would probably come in the December quarter? Is that correct, on that comment?

Akash Palkhiwala, CFO

Yes. So, if you’re talking about Apple’s phone launch, you would see a normalized impact.

Rod Hall, Analyst

High-end Android launches, mainly in China.

Akash Palkhiwala, CFO

Yes, exactly. So, we see purchases that happen 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.

Operator, Operator

Thank you. I would like to remind everyone in the conference that we have adequate time for questions today. Please limit yourself to one question and one follow-up. Our next question comes from the line of Michael Walkley with Canaccord Genuity.

Michael Walkley, Analyst

Thanks. Congrats on the Samsung deal extension through 2030 that includes 6G. Just, Akash, 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? And then maybe for Cristiano, if you could provide any color just on the Snapdragon commitment? Is there any guaranteed share exclusivity or anything you can share on that?

Alex Rogers, Executive Vice President

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, which 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 2030 at the same royalty rate. So, that’s it, it’s pretty simple, pretty straightforward. We see it as a 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.

Cristiano Amon, President and Chief Executive Officer

Thank you for the question, Michael. Besides record auto and IoT revenues, I'm particularly excited about the Samsung agreement this quarter. Over the years of our relationship, we've averaged about 40% market share compared to their in-house solution, which had 22% prior to this agreement. Our share has now increased to around 75%, and we’re announcing a multiyear agreement to supply power for Samsung Galaxy smartphones globally. This is incredibly exciting as it brings substantial stability to our mobile business and validates our strategy of focusing on premium and high-tier products. Additionally, it's important to note that the silicon content of a Snapdragon 8 Series is at least equal to or better than the revenue and earnings from five modems for another OEM. The second part of this multiyear agreement includes growth opportunities linked to our diversification, expanding beyond Galaxy smartphones to also cover Galaxy books, Windows PCs, Galaxy tablets, future extended reality devices, and more. This agreement is very significant, and I'm thrilled about how closely our companies are working together.

Operator, Operator

Our next question is coming from the line of Ross Seymore with Deutsche Bank.

Ross Seymore, Analyst

My first question is on the QTL side of things, remarkably in line for the quarter and guide. And if I think about last year, when you guided 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, the big picture question I’m getting from investors is it seems like Qualcomm has derisked the QCT side, but maybe not the QTL. Can you talk about how we fold the QTL guidance in with the more cautious macro view?

Akash Palkhiwala, CFO

Yes. Sure, Ross. It’s Akash. As I said in my prepared remarks, the other factor on the QTL side is device mix being stronger and maybe a portion of it is inflation helping the ASPs, but also we’ve seen kind of people upgrade devices as they buy new ones. And so, the mix is what is offsetting the volume on the QTL side.

Ross Seymore, Analyst

And I guess, looking forward and shifting gears a little bit. You guys obviously report and 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, it was supposed to drop per your guidance in the June quarter, but it dropped a little bit more than I was expecting. So, Akash, could you just talk about the puts and takes within the QCT gross margins? What would be generally tailwinds, headwinds, what we should think about as we head into the back half of this calendar year?

Akash Palkhiwala, CFO

Sure. Happy to. So, when you think about QCT gross margins, the key things for us is, one, our diversification strategy as we use the technology we have 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. 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 up slightly lower than we had forecasted at the beginning of last quarter. But when you look forward, our 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, 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 that guidance, no change there.

Operator, Operator

Thank you. Our next question is coming from Joe Moore with Morgan Stanley.

Joe Moore, Analyst

On a 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 to an end, you’ll see more price competition. Can you just generally talk about how you see that dynamic?

Akash Palkhiwala, CFO

Yes. The pricing for handsets has been quite stable. It's a large market with two main competitors, and there is enough demand for both of us. We are maintaining this approach, and we’ve noticed consistent behavior in the market. Regarding operating margins, when we communicated our guidance of over 30% at Investor Day, we anticipated a slight decline in gross margins. However, our main focus remains on execution, and we are dedicated to achieving better results in that area. Well, from an RF perspective, we’ve seen some of the similar trends that our peers have seen. But when you look at the handset side, which is obviously the majority of our inventory profile, we’ve been chasing supply to get to a comfortable place. And so, as we’ve said before, we always expected demand and supply to reconcile in the second half of the calendar year, and we’re really seeing that play out as planned.

Operator, Operator

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

Blayne Curtis, Analyst

Hey. Thanks for taking my questions. I have two. Maybe I’ll start with my last one, just given the prior question. Just on inventory, I mean, I guess, it is quite a bunch in terms of your inventory in June, 100 days. Can you just comment on do you feel like you finally caught up? I know it’s been a long time coming, but at this point, is it still gaining your shipments?

Akash Palkhiwala, CFO

Yes, Blayne, generally, we feel like we’re in a relatively good place. Now of course, there are pockets of nodes or parts that we’re still dealing with a shortage on. But overall, we feel like we’ve reconciled to a reasonable place. I’ll say just when you look at our inventory balance, we’ve more than doubled our revenue over the last couple of years. And we’re also heading into a stronger seasonal quarters for us, September and December. And so, what you’re seeing on the balance sheet is really a reflection of what’s coming up.

Blayne Curtis, Analyst

I wanted to follow up on the Samsung agreement. Last quarter, you mentioned your share was significantly higher at 75%. They faced some challenges with their internal modem, so I’m looking for more details about what this agreement entails. Is there a specific handset share associated with it, or is it primarily focused on other devices? I’m trying to grasp the key implications of the agreement.

Cristiano Amon, President and Chief Executive Officer

Yes. You should consider Snapdragon low power as part of the Galaxy product line, specifically their flagship products. Before the agreement, we had a 75% share on Galaxy S22. I can tell you that we expect to perform significantly better on Galaxy S23 and future models. This is a multiyear agreement, and that's all I can share at this moment. You should think of us as the power behind their devices globally.

Operator, Operator

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

Brett Simpson, Analyst

Cristiano, I wanted to ask about the Apple guidance that was laid out by Akash at the Investor Day. I think, Akash, you mentioned that new iPhones in the second half ‘23, you would expect about 20% share of those new iPhones. Now that we’re getting closer to that timeline, has your view changed at all by that share? And if we were to see more demand for Qualcomm modems at this account, can you secure the foundry capacity? And would you need to negotiate a new long-term agreement for modems? Thank you.

Cristiano Amon, President and Chief Executive Officer

Brett, we’re not providing any Apple updates at this time. And we feel pretty good about our modem roadmap in 5G. And I think you should expect that Qualcomm will continue to be a leader. And especially as modems becoming more difficult, it is supporting more than one end market beyond smartphones. Thank you.

Brett Simpson, Analyst

Okay. That’s clear. And maybe just a follow-up for Akash. I just wanted to ask about free cash flow. You’ve had a lot of moving parts, I guess, looking at fiscal ‘22 with prepayments for foundry and some of the working capital increases. But can you talk more broadly about the ability of Qualcomm’s free cash flow margin targets, what’s the business really capable of achieving? And when might we start to see higher levels of free cash flow from the business? Thank you.

Akash Palkhiwala, CFO

Yes. Brett, you’re right. Over the last couple of quarters or several quarters, we’ve had a few ins and outs, two kind of key ones being acquisitions that we have done, but then also capacity reservations. 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 and to your direct question, no change to our strategy that we outlined at Investor Day. We are 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.

Operator, Operator

Thank you. Our final question is coming from the line of Srini Pajjuri with SMBC.

Srini Pajjuri, Analyst

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 5G, even with your guidance for a little bit of a decline here, I think most of the premium market is fully penetrated with 5G. And as we think about the next couple of years, the opportunity seems like it’s mostly in 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 5G in mid-end and low-end?

Cristiano Amon, President and Chief Executive Officer

Thank you for your question. Actually, a very good question. Maybe I’ll answer breaking it down into two parts. Look, it worked very well for us to be focused on share of wallet and especially in the supply-constrained environment to make sure we secure the sockets and had supply for the sockets, which is really important for this strategy in premium and high. It does not mean that we’re not going to serve opportunities in the mid and low. And 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.

Akash Palkhiwala, CFO

Yes. Hi, Srini. We’re going to 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. There’s a lot more demand for processor content, whether it’s CPU, GPU, camera, AI, security, audio video, we are increasing content across the board. And so, we do expect that that will drive stronger revenue growth on the handset side. As Cristiano mentioned on RF front-end, of course, we’ll benefit from the transition to 5G, which as markets like India start deploying 5G later this year, we’ll see the benefit of expansion of SAM since 5G is where we really play there, and then also for auto and IoT expansion opportunities. So, different vectors for growth in that area.

Operator, Operator

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

Cristiano Amon, President and Chief Executive Officer

Yes. I just want to start by thanking our employees and our partners for really a great quarter. A couple of things that I’d like to message. None of our growth drivers have changed. All the fundamentals of strategy are in place. We’re really focused on things we can control, but our strategy is working. We are transforming Qualcomm into a company that was communications for the mobile industry into a connected processor company for the intelligent edge. We’re very excited about the Samsung agreement. It is the way to think about stability and growth in our handset business. And one of the things we mentioned in the script that we didn’t talk much about 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 opportunities in the other devices. And don’t forget to tune in for Auto Investor Day. Auto is a success story for the company, continues to be, and we’re going to have some exciting things to share with you in our Investor Day later in the year. Thank you very much for your support, and talk to you soon.

Operator, Operator

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