Earnings Call Transcript - QCOM Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm Fourth Quarter and Fiscal 2022 Earnings Conference Call. As a reminder, this conference is being recorded November 2, 2022. The playback number for today's call is (877) 660-6853. International callers, please dial (201) 612-7415. The playback reservation number is 13733389. 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 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.

Cristiano Amon, President and CEO

Thank you, Mauricio, and good afternoon, everyone. Thanks for joining us today. Fiscal '22 has been a strong year for Qualcomm with record performance in our chipset business and a strong execution of our diversification and growth strategy. We remain focused on continuing to transition Qualcomm from a wireless communications company for the mobile industry to a connected processor company for the intelligent edge. We're driving the transformation of industries and growth of the digital economy by powering the billions of smart connected devices at the edge, utilizing our One Technology Roadmap with leadership in wireless connectivity, high-performance, low-power computing and on-device AI. While the semiconductor industry is being impacted by significant macroeconomic headwinds and other short-term challenges from which we're not immune, the fundamentals of Qualcomm's growth drivers remain unchanged with significant opportunities in the coming years. In Q4, we delivered record revenues of $11.4 billion and non-GAAP earnings per share of $3.13, reflecting record revenues in our chipset business and solid performance in licensing. QCT revenues of $9.9 billion were up 28% year-over-year, including record performance across handsets, automotive and IoT. Fiscal '22 revenues of $44 billion were up 32% year-over-year. QCT, the growth engine of the company, contributed revenues of $37.7 billion, up 39% year-over-year with combined fiscal year IoT and automotive revenues growing 38% year-over-year. QTL delivered $6.4 billion in revenues. Let me now summarize a few highlights from the fiscal year. In handsets, we entered into a new multiyear agreement with Samsung, expanding the use of Snapdragon platforms for future premium Samsung Galaxy products globally. We also executed on the changing OEM landscape opportunity, securing key premium and high-tier design wins with our customers in China. Snapdragon has become synonymous with premium mobile experiences worldwide. In automotive, our design win pipeline across connectivity, digital cockpit and ADAS is now greater than $30 billion. We also completed the acquisition of Arriver, which enhances our ability to deliver open, scalable, fully integrated and competitive ADAS solutions. Importantly, we have firmly established ourselves as a key strategic and technology partner for the automotive industry, and the Snapdragon Digital Chassis is now the preferred platform for next-generation vehicles. In IoT, we extended our chipset roadmap to capitalize on trends driving the connected intelligent edge, notably, the convergence of personal computing with mobile; the intersection of physical and virtual spaces; the enterprise transformation of the home; the expansion of broadband; and the ongoing digital transformation across many verticals. In consumer IoT, we increased OEM design wins in ecosystem traction for our next-generation Windows on Snapdragon solutions, which incorporate our custom CPUs. The game-changing AI capabilities of our Snapdragon compute platform recently demonstrated at Microsoft Ignite 2022 developer conference will redefine user experiences on Windows 11. We also announced a multiyear agreement with Meta to develop premium virtual reality and mixed reality experiences starting with next-generation devices powered by custom Snapdragon XR platforms. We continue to be a leading platform provider for virtually all commercially available and announced XR devices and remain well positioned as XR develops. In edge networking IoT, we have seen positive share traction related to the rollout of WiFi 6 and 6E solutions for enterprise access points and retail mesh systems. We are seeing strong interest in new design wins for our WiFi 7 solutions. Additionally, our 5G fixed wireless access broadband solution is now the industry's platform of choice for wireless fiber globally. In industrial IoT, we built a strong foundation for growth with significant wins across industrial handhelds, robotics, payments, gateways, smart cameras, enterprise collaboration and edge processing. The growing diversity of these end markets positions us well to benefit from durable and margin-accretive growth opportunities in industrial. In licensing, we extended our agreement with Samsung through 2030, establishing an important benchmark for the long term and for future renegotiations. In addition to delivering record financial results, our fiscal '22 achievements validate our strategy and have provided a strong foundation for long-term growth. As we look to fiscal '23, further deterioration of the macroeconomic environment and extended China COVID restrictions have resulted in demand weakness and temporary elevated channel inventory across the industry. As good stewards of capital for our stockholders, we are committed to managing our business in light of the current environment without losing sight of the significant growth opportunities ahead. To that end, we're being very disciplined in managing operating expenses while optimizing our R&D investments to prudently focus on growth within automotive and IoT. We have already implemented a hiring freeze, and we have planned spending reductions across our mature product areas and SG&A to fund our diversification. We are continuing to evaluate additional actions, and we are prepared and committed to making further reductions to operating expenses as needed. It is important to note that the current inventory drawdown is a cyclical adjustment that has no impact on the underlying growth and earnings power of the company in the long term. And we are in a strong position to manage the near-term headwinds. Beyond 2023, we see a number of our strategic growth initiatives increasing in scale. We anticipate automotive revenues will grow consistent with our auto Investor Day projections as the design win pipeline materializes. We expect to see an inflection point in Windows on Snapdragon PCs in 2024 based on a significant number of design wins to date. XR is just at the beginning of its growth curve. 5G wireless fiber presents significant opportunities in regions such as India and other developing economies that have just started to deploy 5G networks. Lastly, the digital transformation of industries will continue to gain momentum, driving connectivity and intelligence at the edge. In summary, despite the short-term challenges, the fundamentals of our growth strategy remain intact. We remain confident in our ability to navigate the current economic downturn given our strong balance sheet and consistent history of strong free cash flow generation. We will continue to focus on stockholder returns and executing on our ongoing diversification opportunities. The powerful secular tailwinds driving multiyear demand for our One Technology Roadmap across multiple end industries are unchanged and resilient. We remain on track to expand our addressable market by more than 7x to approximately $700 billion in the next decade and firmly establish Qualcomm as the connected processor company for the intelligent edge. I would now like to turn the call over to Akash.

Akash Palkhiwala, CFO

Thank you, Cristiano, and good afternoon, everyone. In a challenging macroeconomic environment, we are pleased to announce strong fourth quarter results with record revenues of $11.4 billion and non-GAAP EPS of $3.13. These results reflect year-over-year increases of 22% and 23% in revenues and EPS, respectively, driven by strength across QCT. This was also a record quarter for QCT revenues of $9.9 billion and EBT margin of 34%, both above the midpoint of our guidance with year-over-year revenue growth of 28% and EBT dollar growth of 37%. Handset revenues of $6.6 billion increased 40% versus the year ago quarter on strength of our Snapdragon product portfolio across premium and high tiers. As expected, RF front-end revenues of $992 million were impacted by the continued weakness of the handset market and channel inventory. IoT revenues were up 24% year-over-year to $1.9 billion on growth across edge networking and industrial IoT. Automotive revenues of $427 million grew 58% versus the year ago quarter due to the broad adoption of our Snapdragon Digital Chassis. QTL revenues of $1.4 billion and EBT margin of 69% reflected the impact of lower handset units relative to our expectations at the beginning of the quarter. Turning to fiscal '22 results. We delivered record non-GAAP revenues and EPS with year-over-year growth of 32% and 47%, respectively. In addition, looking over the past 2 fiscal years, we've more than doubled our non-GAAP revenues and almost tripled non-GAAP EPS from fiscal '20 to fiscal '22, underscoring the strong momentum across our businesses. In QCT, we had records across all revenue streams as well as approximately 500 basis points of EBT margin expansion from 29% in fiscal '21 to 34% in fiscal '22. We are pleased with the continued success of our diversification strategy as we delivered year-over-year combined revenue growth of 38% across IoT and automotive. Lastly, we continue to be disciplined in delivering long-term stockholder value. We executed on our capital return commitments, returning 93% of our free cash flow, including $3.2 billion in dividends and $3.1 billion in stock repurchases. Before turning to first quarter guidance, I'll address how our near-term financial outlook is impacted by the challenges facing the semiconductor industry. As we communicated during the last earnings call, we had started to see a deceleration in demand for mass-tier handsets in consumer IoT. Since then, the further deterioration of the macroeconomic environment and sustained COVID restrictions in China have led to broad-based demand weakening across tiers and regions. Given these considerations, we now project 3G, 4G, 5G handset volumes in calendar 2022 to decline by low double digits on a year-over-year basis, including 600 million to 650 million 5G handsets. This rapid deterioration in demand and easing of supply constraints across the semiconductor industry have resulted in elevated channel inventory. Due to these elevated levels, our largest customers have made significant changes to their inventory policy. They are now drawing down on their inventory, negatively impacting our near-term financial performance. Based on our current assessment, we estimate that there are roughly 8 to 10 weeks of elevated inventory in the channel. While the environment is very dynamic, based on the information we have today, we believe this may take a couple of quarters to work itself through with more than half of the inventory drawdown completed in the first fiscal quarter. We are confident in our ability to navigate this environment successfully, and we'll continue to monitor inventory levels and order patterns closely. As Cristiano outlined, while we navigate this downturn, we've already implemented specific actions to manage our spending levels, including the hiring freeze and reductions in handsets, other mature product areas and SG&A. We will remain disciplined and be prepared to take further decisive actions on additional reductions to operating expenses if the macroeconomic environment continues to deteriorate. Turning to guidance for the first fiscal quarter. We are forecasting revenues of $9.2 billion to $10 billion and non-GAAP EPS of $2.25 to $2.45. The midpoint of our guidance includes an estimated impact of approximately $2 billion in revenue and $0.80 in EPS related to the drawdown of channel inventory with the remaining impact primarily due to weaker end-market demand and foreign exchange headwinds. In QCT, we expect revenues of $7.7 billion to $8.3 billion and EBT margins of 26% to 28%. Following the record performance in the fourth quarter, we expect our handsets and IoT revenue streams to be down sequentially due to the impacts I just described. On a year-over-year basis, we still expect revenue growth across IoT and automotive. We estimate QTL revenues of $1.45 billion to $1.65 billion and EBT margins of 71% to 75%. This estimate reflects the updated handset forecast, including a muted seasonal benefit for the holiday quarter and approximately $50 million headwind from foreign exchange on a year-over-year basis. Lastly, we now anticipate non-GAAP operating expenses to decrease 3% to 5% sequentially. Before I conclude, I'd like to provide an update on RF front-end revenue stream disclosure and planning assumption for Apple product revenues. We have grown our RF front-end revenues to become the #1 player in handsets due to the breadth and strength of our product portfolio. Looking forward, we expect growth to be driven by our strong design win pipeline for 5G and WiFi 7 platforms across handsets, automotive and IoT. As a result, starting in fiscal '23, we will consolidate RF front-end revenues within handsets, automotive and IoT revenue streams. In addition, we'll continue to provide periodic updates on the combined RF front-end revenues against our Investor Day target. For Apple product revenue, we now expect to have the vast majority of share of 5G modems for the 2023 iPhone launch, up from our previous 20% assumption. Beyond this, there are no changes to our planning assumption, and we are assuming minimal contribution from Apple product revenues in fiscal '25. In closing, while the current backdrop presents near-term headwinds for our industry, we remain confident in our leading technology roadmap, deep customer relationships and strong balance sheet to help us navigate these challenges and maintain our leadership position. Our diversification strategy and long-term growth opportunities remain intact as we continue to drive our vision to bring cloud connectivity, data processing and artificial intelligence to the edge. Thank you. Back to you, Mauricio.

Mauricio Lopez-Hodoyan, Vice President of Investor Relations

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

Operator, Operator

Operator Instructions Matt Ramsay with Cowen and Company.

Matt Ramsay, Analyst

I have a couple of questions for you regarding the smartphone market. You were quite clear in your prepared remarks about the situation with channel inventory and the overall economic decline. While the specifics may differ, the trend doesn't come as a surprise. First, are you observing the ongoing weakness in the global low and mid-tier Android segments? Is that situation becoming worse, or are you now noticing that weakness extending into the high-end premium tier? Secondly, investors have been asking about how weakening conditions might affect the strong average selling prices you've maintained in your wireless business over the past year or two. Are those prices starting to decline, or is it more of a unit-related issue with prices remaining stable?

Cristiano Amon, President and CEO

Thank you, Matt. This is Cristiano. I will start the question and ask Akash to provide some additional insights. In the smartphone markets, we have observed a combination of weak demand, driven by macroeconomic challenges and the ongoing impact of COVID in China, which has significantly affected that market. This situation mainly involves consumers of handsets. Another critical issue we have discussed is the transition from a demand-constrained environment to one where many companies had higher inventory levels. As the supply chain improved, and coupled with macroeconomic uncertainty, there has been a need to reduce inventory to align with current demand. This is beginning to affect the premium tier as customers adjust their inventory levels accordingly. However, we anticipate that as we explore next-generation opportunities, we will see an increase in average selling prices (ASP) due to our enhanced processor content, positioning us strongly in the premium tier. Notably, every premium-tier device from Apple contains Qualcomm components, and the best performance is seen with Snapdragon across Samsung and our clients in China. We expect an upward trend in ASPs. Akash, do you have anything to add?

Akash Palkhiwala, CFO

Just maybe quickly, Matt, on your first question. What we saw in the September quarter through our licensee reporting is weakness across tiers and regions. So it cut across all tiers in that case. And then that's what we are projecting forward in the December quarter as well. And then clearly, on the ASP side, as Cristiano said, the content is increasing and we have opportunity on the upside in that case. And also, you've seen us manage through the last couple of years of foundry price increases, and then we'll be able to keep gross margin strong.

Matt Ramsay, Analyst

As my follow-up, Akash, last year at the beginning of the fiscal year, you were in a different environment with much less volatility. However, you mentioned that the next fiscal year might see 20% or more EPS growth for the company. You exceeded that expectation, coming in at 47%. There are now many different variables at play, such as the inventory correction and changes in the Apple business. If you have any insights about how we should approach the next fiscal year, we would greatly appreciate it.

Akash Palkhiwala, CFO

Sure, Matt. In the first quarter, there are two factors that deviate from recent trends. The first is the inventory reduction we are experiencing, which impacts the quarter by approximately $0.80. This is the primary effect. There's also a slight impact from the weaker market conditions. Looking ahead, we believe the OEM inventory reduction is a temporary issue that will last a couple of quarters, not a long-term challenge. This should guide your projections for the remainder of the year. On the market side, due to current uncertainties, we are planning with the assumption that market weakness will continue throughout the fiscal year. If the market improves, it would be considered a positive surprise, but for now, we'll base our plans on the current market landscape. Applying these expectations will help inform our forecasts for the second quarter and the entire year.

Operator, Operator

Samik Chatterjee of JP Morgan.

Samik Chatterjee, Analyst

I guess I had two as well. And if I can start on IoT, so smartphone. I guess, Akash, you mentioned smart IoT revenues as well moderating sequentially. And I wanted to see if you can now provide a bit more color. You've broken out the sort of IoT business previously into consumer, industrial and edge networking, calling it roughly sort of 1/3, 1/3, 1/3. Now as we start to sort of see some moderation there, can you now talk about the trends in terms of the different sort of subsegments there? And where are you seeing more resilience versus sort of maybe more weakness? And how should we really be sort of projecting that forward? And I have a follow-up.

Akash Palkhiwala, CFO

Sure, Samik. So on IoT, we're obviously pretty happy with the way that business has played out for us. So we've gone from $3 billion in fiscal '20 to $7 billion, $6.9 billion in '22. And then the quarter we reported was a record quarter for IoT at $1.9 billion of revenue. So pretty happy with how the business is doing. Now in terms of the macro environment impacting the IoT market overall, and it's less about Qualcomm, it's about the overall macro environment. We're definitely seeing the impact of that on consumer and in some ways synonymous with handsets. Edge networking is holding for us. And we're seeing some minor pockets of weakness in industrial. But overall, I think when you kind of step back and look at where our IoT opportunity exists, for us, it's about digital transformation and about connecting everything to the cloud. And our technology portfolio is perfectly suited to enable various industries to do that. So we feel pretty optimistic longer term.

Samik Chatterjee, Analyst

For my follow-up, I think Cristiano and Akash discussed the content opportunity related to Snapdragon and the fiscal 2023 handset market. A lot of investor concerns about this are driven by OEMs choosing to use previous generation Snapdragon chipsets and focusing on price to make smartphones more affordable for consumers, which might help boost market volumes. Considering fiscal 2023, what are your planning assumptions regarding content or market share gains, and how confident are you that OEMs will not stick to older generation chips in order to optimize the price and cost equation?

Cristiano Amon, President and CEO

Thanks for the question, Samik. Let me start by giving you a direct answer. The design activity we have for next-generation Snapdragon is not showing that. It's showing that, as we expect in the mobile market, especially on the premium tier, it's about a flagship product every year. Soon, I think we're going to announce our next-generation Snapdragon in our Tech Summit in a couple of weeks, and I think design traction is very, very high. I think what we see right now is, structurally, we're very well positioned. If you look of the agreement we have with Samsung, plus the change of OEM landscape in China and how that positions Snapdragon as the premium and high-tier device, I think we're just going to see the fluctuations on the market size and how we deal in the short term with the inventory. But you should assume that the mobile market is going to continue to do its thing and we're going to have a product cycle transition. We expect in the March quarter also to see the benefit of our increased share of Samsung.

Operator, Operator

Mike Walkley from Canaccord Genuity.

Mike Walkley, Analyst

Just more on the planning assumptions for fiscal '23. Do you expect with the macro environment that the handset market shrinks again by double digits from calendar '22 for fiscal '23? And then as a follow-up, I'll just ask them both now. In terms of OpEx with the down sequentially, is this an area that you expect more OpEx cuts as you get into seasonally slower quarters or kind of flattish off this level?

Akash Palkhiwala, CFO

Mike, it's Akash. For fiscal '23, our market assumption is that the kind of the weak market we're seeing in the September-December quarter carries on to the rest of fiscal '23. And so we're not using the first half calendar '22 as the basis but really kind of the current, say, scale of the market carrying forward. So that's our base assumption. And clearly, there is unpredictability and variance around it, but that's the planning assumption we're using for now. On the OpEx side, as we deal with the short-term headwinds, we're clearly taking action on things that we control. As Cristiano mentioned, we've implemented a hiring freeze. We're reducing our spending in mature businesses, including handsets and SG&A. And then we're optimizing our R&D investments to increase focus on automotive and IoT, which is obviously the core of our strategy on diversification. And then finally, the way to think about fiscal '23 OpEx is we expect it will come in below fiscal '22 exit run rate. So we're clearly taking action on OpEx from that perspective.

Operator, Operator

Stacy Rasgon with Bernstein Research.

Stacy Rasgon, Analyst

I would like to ask about the March quarter. You're indicating that the inventory flush will last for a couple of quarters, with more than half completed in the December quarter. It appears there's still a significant amount expected in March. At the same time, Cristiano mentioned that the additional volume from Samsung is starting to increase in March. How should we consider the interaction between these two factors? Will the Samsung volume balance out some of the inventory flush we are still experiencing in March? You mentioned that major customers are altering their inventory plans. Is Samsung one of those major customers? It seems this situation isn't limited to China. Any insight you could provide on the positive and negative factors influencing the market would be appreciated. I also have a follow-up question.

Akash Palkhiwala, CFO

Sure, Stacy. It's Akash. From the perspective of the March quarter, you're correct that the benefit from the Samsung launch of the new phone will occur in the second half of March. It will arrive towards the end of the quarter, which will be advantageous for us, particularly as our share from 75% in GS 22 increases to global share in GS 23. Regarding inventory adjustment, you've understood it correctly. There is an impact of $0.80 in the first quarter, which accounts for more than half of the situation. We do anticipate that this will influence the second quarter as well. As for your last question about whether it's just the Chinese companies or Samsung and others adjusting their inventory, it’s actually happening across the entire industry.

Stacy Rasgon, Analyst

Right. That's helpful. For my follow-up, I wanted to ask about the QTL run rate. So I get the market is weak. But presumably, Apple should be stronger than the rest of the market into December. And usually, that gives a pretty big lift. It implies that Android must be really bad in the December quarter, unless there's something else going on. Can you just verify there's nothing else going on, no collection issues or anything like that? Is it just purely sort of Android market-related that's driving the run rate down? So I think it used to be around $1.7 billion in December quarter, and you're guiding about $150 million light.

Akash Palkhiwala, CFO

Yes. Purely driven by market and mix functions. It has nothing to do with any other issue overall. Now just to highlight a couple of things for the QTL numbers in the December quarter. At this point, we are not expecting normal seasonal volume increase into December. So maybe one of the disconnects or questions you might have on the variance between those 2 numbers, $1.7 billion versus $1.55 billion, is driven by that assumption. And then second, I'd say is we do have FX impact that shows up in QTL. I highlighted in my script on a year-over-year basis, that's an impact of approximately $50 million that's included in our guidance.

Operator, Operator

Ross Seymore from Deutsche Bank.

Ross Seymore, Analyst

Akash, I want to go into the margin side of things. And I know you guys don't guide overtly to the gross margin side, but we can kind of back into generally where it is. So within that $0.80 hit to the fiscal first quarter guidance, is there anything going on with charges on the gross margin side? Because the same sort of question that Stacy just asked on the revenue side for the March quarter will likely apply when people work through their models on the gross margin side. Should we expect a snapback there? Is it a onetime thing? Any sort of progression on the profitability would be helpful.

Akash Palkhiwala, CFO

Yes. So first, Ross, on your direct question, there isn't a set of charges that are included in the number that's anything significant. So that's the base assumption. The second thing I would say is if you look at where we guided our fourth fiscal quarter and where we came in, we actually did significantly better than our guidance. And then where we are guiding the first quarter is really in line with the guidance we had given for fourth quarter. So nothing specifically to look at there. We're kind of navigating through the environment. And then over the last couple of years, as I said earlier, we are pretty happy with the way we've navigated through foundry price increases as well. So focus for us is staying disciplined on the pricing side and kind of taking advantage of the technology and products we have to improve our market share.

Operator, Operator

As a follow-up, I wanted to discuss the automotive sector. It's a two-part question. You didn't indicate that it was down in the near term, so can I assume that it's on the rise? There's also concern within the broader automotive industry that it may face macroeconomic challenges. I understand that you have gained significant market share, especially highlighted at your auto tech day in New York, which is promising for the long term. However, are you observing any signs that the current economic conditions could potentially slow down the growth rate you expect over the next year?

Cristiano Amon, President and CEO

So let me give you the first answer. The way you should think about our automotive business is that we have the telematics segment, followed by the digital cockpit, which has been a significant part of our design pipeline and is starting to generate revenue. The next area is ADAS. We anticipate that Qualcomm's automotive narrative is centered on this pipeline converting into revenue and continuing to drive growth, which is less affected by short-term market fluctuations. Akash, would you like to add anything?

Akash Palkhiwala, CFO

I'll just say kind of as you think about our auto business, it's all about new car launches and how the adoption of our solutions kind of helps our revenue as the cars launch. So that's really the primary driver versus the overall size of the market.

Operator, Operator

Joseph Moore from Morgan Stanley.

Joseph Moore, Analyst

I wonder if you could talk about when you think the inventory built because it seems like you were on allocation until just a few months ago. Like do you think people were able to kind of get ahead of that and build inventory while it was still tight? Or did all that inventory build in a relatively short period of time, which would say that the recent numbers might be kind of overstated relative to demand?

Akash Palkhiwala, CFO

Yes. So it's Akash. That's a fair question. So if you really think about our last earnings, one of the things we said was we expected customers to be cautious with their purchases in the second half of '22. But since then, what has happened really is the macroeconomic environment deteriorated, and we went from a period of supply shortages to demand declines. And it's kind of an unprecedented change over a short period of time. And what you're seeing is really OEMs responding to that and making a change in their inventory policy and now drawing down on inventory. So that's the impact that we're seeing in the December quarter that we sized at approximately $0.80. If you also think about the seasonality, you typically expect December quarter to be a growth quarter as people build inventory going into the holiday season. And what we're seeing is the opposite. So it does kind of come as a surprise in terms of how quickly the environment changed.

Joseph Moore, Analyst

Great. And then if I could follow up, what are you seeing on the pricing side in the more competitive markets, particularly in China? Is that the same as you've described? Or is there kind of incremental competition as you come out of a tight supply situation?

Akash Palkhiwala, CFO

No additional comments to what I just said. I mean, the gross margin question that I answered kind of really factored. It's more of a pricing question than anything else, and those comments still apply.

Operator, Operator

Louis Miscioscia from Daiwa.

Louis Miscioscia, Analyst

This is a longer-term question. I guess some news came out a little while ago from Ford and GM that they're closing down Argo. And also one of the big self-driving ADAS pioneers, Levanduski, actually seems to change his view. Realize that you guys just had the auto day, which is great, and you're really looking out to 2026. But just any comments on this and that how difficult it will be actually to stick to the prior timeframe that you had originally talked about at the auto day?

Cristiano Amon, President and CEO

Thank you for your question, Lou. When considering our ADAS platform, which is part of the Snapdragon Digital Chassis, we are concentrating on scaling the technology for commercial use. We can scale from Level 2 to Level 3 and beyond. The market for robotaxis is still in the future, but our main goal is to integrate ADAS into every vehicle. This focus has driven our design wins and enabled us to succeed across various brands and tiers. We are optimistic about turning our ADAS pipeline into revenue in the coming years. It's important to view ADAS in terms of different levels, starting with mandatory in-car cameras and going up to highway autopilot. Our emphasis is on that segment of the market, which is where we see growth potential.

Operator, Operator

Blayne Curtis from Barclays.

Blayne Curtis, Analyst

I apologize if you've already addressed this, but I'd like to ask again about the current weaknesses. It's clear that Android has a significant amount of inventory to manage. I'm curious if you're considering any softness outside of Android or if there are worries regarding production. I understand this may be challenging to answer, but can you share what you're anticipating for the handset business, including both Android and iOS?

Akash Palkhiwala, CFO

Yes. I think the adjustment we talked about is primarily Android. So that's how you should think about it.

Blayne Curtis, Analyst

Perfect. And then I was just kind of curious, the thought process on rolling in the RF business. I know this is a big TAM for you guys, and you've made a lot of good progress in kind of penetrating that. So I'm just kind of curious, if you just walk through the thought of rolling that back in starting next year.

Akash Palkhiwala, CFO

When examining our RF front-end business, it encompasses the entire development cycle from modem to antenna. As a result, we have established ourselves as the leading player in handsets. Looking ahead, we see growth potential driven by further integration of 5G into handsets and WiFi 7, as well as into automotive and IoT sectors. In our recent disclosures, we noted that in fiscal '22, our auto RF front-end revenue reached $137 million, with a design win pipeline exceeding $900 million. Additionally, our RF front-end revenue in IoT was $405 million. These figures are gaining traction. Historically, our focus was primarily on handsets, but we are nearing a point where automotive and IoT are also scaling up. We believed it was the appropriate moment to adjust our revenue streams accordingly.

Operator, Operator

Timothy Arcuri from UBS.

Timothy Arcuri, Analyst

I had 2. I guess the first one is on Apple. You did update that you now expect the vast majority of the launch in 2023 for you to be in the product. That's not a big surprise, I think, to most people. And you said that by 2025 that you'll be out of the products, but you used the word product. So I just want to clarify that you are still assuming that once they don't need your modem anymore that they will still pay you a royalty for said patents?

Cristiano Amon, President and CEO

This is Cristiano. The licensing business is completely independent of whether or not we supply modems to them. So your assumption is correct. We expect to continue to have licensing revenues. And I think, consistent with what we said in the past, we're focused on our strategy on long-term customers, and we just can assume that our planning assumption is we don't have any visibility and continue to provide the modem in '25.

Timothy Arcuri, Analyst

Perfect. And then I guess also, Akash, I had a question on the financial model for QCT. I know you gave it a year ago, and things have changed a lot since then. At the time, you were sort of implying if you sort of ran the growth rate out to ‘24, it was sort of implying a $40 billion QCT revenue out in 2024. You’re now down to sort of $8 billion a quarter, so you’re now run rating more like $32 billion. Do you still feel confident that you can get back next year into the $10 billion a quarter that would get you to that $40 billion financial model next year?

Akash Palkhiwala, CFO

Yes. We recently reported $38 billion in revenue for fiscal year 2022 for QCT. Our strategy remains the same, and we are currently performing ahead of our targets. Right now, our main focus is on navigating the current environment, and there are no updates to our Investor Day targets.

Operator, Operator

Brett Simpson from Arete Research.

Brett Simpson, Analyst

I wanted to ask just the extent to which Qualcomm thinks are under-shipping demand in the December quarter. And maybe just factoring in the weak outlook for December, and I think you talked about the flagship ramp with Samsung in the March quarter. Is it fair to assume the December quarter is a trough for Qualcomm this cycle? I mean any perspective there as we look through that fiscal '23 would be very helpful.

Akash Palkhiwala, CFO

Yes. Brett, from an inventory drawdown perspective, we definitely see the first quarter as the bottom. As we said, more than 50% of the inventory drawdown, we think, happened in the first quarter. And so that hopefully answers the question you were asking.

Brett Simpson, Analyst

Okay. And maybe just a follow-up on China. I mean it's something that certainly is on a lot of investor minds. How does Qualcomm feel about your position in the region, particularly with the geopolitics that's happening right now? Do you see risks here long term to the business? Or is there scope for growth in China? Any perspective there would be much appreciated.

Cristiano Amon, President and CEO

Thank you for the question. We were not affected by the latest set of restrictions, and we have observed our business in China continue to grow, particularly in the auto and IoT sectors. We see similar growth in those areas in China. Our position is global, and we maintain one global standard, especially regarding the mobile market in 5G. Currently, our stance in China appears stable. Although it is challenging to predict the environment, we believe our business at Qualcomm remains strong with opportunities for growth. We are optimistic that the extended lockdown will conclude soon, which should positively influence the phone market size.

Operator, Operator

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 CEO

Yes. Thank you, everyone, for listening to the call. I just want to say a big thank you to all of our employees and partners that are helping us to the incredible fiscal '22 and how we navigate to fiscal '23. Just a few comments. When you step back from the current short-term macroeconomic and this temporary cyclical inventory drawdown, we feel that Qualcomm is very well positioned. A lot of the trends continue to point to our technology roadmap. You need connectivity, advanced processing and artificial intelligence at the edge. And as we outlined in the script, we see that everything is on track, including expanding design for our Windows on Snapdragon with our custom CPU. The ability to continue to materialize the auto as well as IoT and industrial IoT and the digital transformation has proven to be overall resilient in the long term. So we will be decisive in managing operating expenses, especially if the downturn gets steeper or more prolonged than we expect. But I would like to remind everyone that the current inventory is a cyclical adjustment that has no impact on the underlying long-term earnings power of the company. And we're well on our way, executing our growth strategy and all the fundamentals remain in place. Thank you so much.

Operator, Operator

Ladies and gentlemen, that concludes today's conference call. You may now disconnect.