Welcome to the MediaTek 2023 first quarter investors conference call. Financial results and presentation for today's call are available on the investor section of the company website at www.mediatek.com. Now I would like to turn the call over to Ms. Jessie Wang, Deputy Director of Investor Relations. Ms. Wang, please proceed.
Good afternoon, everyone. Joining us today are Dr. Rick Tsai, MediaTek CEO, and Mr. David Ku, MediaTek CFO. Mr. Ku will report out first for the results, and then Dr. Tsai will provide future remarks. After that, we will open for Q&A. As a reminder, today's presentation will provide forward-looking statements based on our current expectations. The statements are subject to various risks and factors, which may cause actual results materially different from the statements. The presentation materials supplement non-GAAP financial measures. Earnings distribution will be made in accordance with financial statements based on GAAP. For details, please refer to the safe harbor statement in our presentation slides. In addition, all content provided in this teleconference are for your reference only, not intended for investment advice. Neither MediaTek nor any of independent providers is responsible for any action taken in reliance on content provided in today's call.
I would like to turn the call to our CFO, Mr. David Ku, for the first quarter financial results.
Thank you, Jessie. Now we will update the first quarter results. The currency here is our own TWD . Revenue for the quarter was TWD 95.7 billion, down 11.6% sequentially and 33% year-over-year. Gross margin for the quarter was 48%, down 0.3 percentage points from the previous quarter and 2.3 percentage points year-over-year. Operating expense for the quarter was TWD 31.5 billion, compared with TWD 34.2 billion in the previous quarter and TWD 35.3 billion in the year before quarter. Operating income for the quarter was TWD 14.4 billion, down 20.6% sequentially and 60.6% year-over-year. Non-GAAP operating income for the quarter was TWD 15.1 billion.
Operating margin for the quarter was 15%, decreased 1.7 percentage points from the previous quarter and 10.6 percentage points year-over-year. Non-GAAP operating margin for the quarter was 15.7%. Net income for the quarter was TWD 16.9 billion, down 8.8% sequentially and 49.4% year-over-year. Non-GAAP net income for the quarter was TWD 17.5 billion. Net profit margin for the quarter was 17.7%, increased 0.6 percentage point from the previous quarter and decreased 5.7 percentage point year-over-year. Non-GAAP net profit margin for the quarter was 18.3%. EPS for the quarter was TWD 10.64, down from TWD 11.66 in the previous quarter and TWD 21.02 in the year-ago quarter. Non-GAAP EPS for the quarter was TWD 11.
A reconciliation table for our GAAP and non-GAAP financial measurement is attached in our press release for your reference. That concludes my comments. Thank you.
Thank you, David. Now I would like to turn the call to our CEO, Dr. Rick Tsai, for prepared remarks.
Thank you. Good afternoon, everyone. Today, I would like to give you a market update and describe our strategies, and then we will discuss the business condition of our three revenue groups. As we just reported, our first quarter revenue and growth margin were both within our guidance ranges provided a quarter ago. In the first quarter, semiconductor industry continued to be affected by customer inventory adjustments and weak demand. We observed customer and channel inventories have continued to come down. However, demand for certain consumer electronics, such as smartphone, was weaker than expected. We understand that in a weak demand environment, capital market has concerns over smartphone SOC price competition. According to our observation, intense price competition is mainly limited to certain entry smartphone products.
Here, I would still like to repeat what we have said a few quarters ago, that racing to the bottom type of pricing is not an effective strategy, as it is unable to increase end market demand effectively, nor can it change overall market share materially. Therefore, our strategy has consistently been and will continue to be balancing our market shareRevenue and profitability rather than focusing only on price competition. Now let me talk about the business of our three revenue groups. Mobile phone was the business most affected by the weak consumer demand and the more aggressive customer inventory adjustment in the first quarter. As a result, our mobile business declined 20% quarter-over-quarter in the first quarter to account for 46% of total revenue.
For 2023, we estimate that global smartphone shipment will further decline to approximately 1.1 billion units, while global 5G penetration rate will continue to increase to mid-50%. As customers remain cautious about future demand, we expect our mobile revenue to be flattish in the second quarter and to improve in the second half. In such a market, we continue to execute our strategies of expanding into high-end segments as well as bringing the full benefit of our leading 4G and 5G products to customers. For the high-end segment, we are on track to expand our flagship market share in 2023. Several flagship models powered by Dimensity 9200 and 9000+ are well received in the market. Additional models with Dimensity 9200 are expected to be released in the second quarter.
Our third generation flagship SOC will also be ready soon in the third quarter this year. Furthermore, all of our flagship SOCs integrate MediaTek's most advanced APU, offering strong AI processing capabilities to perform AI video and speech features and also support generative AI. We believe the fast development of various AI applications will enable more use cases and higher demand for SOC computing capability. We are currently engaging with customers for our next generation APU, which further optimizes advanced AI user experience with good power performance. In addition to flagship expansion, we continue to fully support our customers with an industry-leading 4G and 5G SOC portfolio across segments. With strong product and support, we are able to better assist customers in the fast-changing market and have secured good design wins.
For example, in emerging regions, such as India, 5G adoption is projected to increase from 20% in 2022 to 40% in 2023, with 4G remaining the majority. We believe we are in a good position to continue to benefit from 5G upgrades and also serve a sizable and long-term, long-tail 4G market well. Let me move on to Smart Edge Platforms, which performed relatively well among the three revenue groups in the first quarter. With the flattest revenue and accounted for 47% of revenue. This performance in the first quarter was supported by our TV SOC broadband products and tablets. TV, overall demand increased in the first quarter as customers' inventory has been normalized and regional sales is improving, especially in North America. Broadband products, demand from telecom operators also recovered after the sharp correction in the fourth quarter last year.
For tablets, several of our customers launched flagship 5G tablets using Dimensity 9000 SOCs. We are happy to see that we are able to leverage our leading technologies from mobile phone to other platforms and enjoy up-upgrade benefits. For the second quarter, we expect demand for TV and broadband products remain robust, while demand for other consumer electronics likely to stay weak. I'd like to spend a few minutes on our Smart Edge Platforms business. This is a broad, diversified business which fully utilizes our core technologies, that is modem, wireless and wired connectivity, low-power computing and multimedia processors, et cetera. With the successes already achieved in the last few years, we strive to further integrate these technologies and expand our presence in higher-end segments and diversified customers. A few examples. The 5G tablet just described is the first one.
Secondly, we have successfully made inroads into the top-tier telecom operators with an integrated portfolio of Wi-Fi 6, 6E, 5G modem, and 10G-PON. Being one of the leaders in Wi-Fi 7, we are securing design-ins in the high-end routers and notebook models also. These efforts certainly will be extended into more segments and customers going forward. To further this strategy, we are embarking on major initiatives in the automotive as well as on-premise computing markets. Our overall automotive revenues grew robustly in the past few years with existing products. In the recent announcement of our Dimensity Auto platform, we tested the thrust in the cockpit, connect, drive, and component areas, incorporating multimedia AI processor, 5G, Wi-Fi, Bluetooth, navigation, satellite communication, and PMIC technologies. We are also working closely with industry partners to accelerate these efforts for our future growth.
Now moving on to Power ICs, which accounted for 7% of total revenue in the first quarter and declined 13% quarter-over-quarter. It was mainly due to customer inventory adjustments across almost all applications, except for PC, where we saw a rebound after a meaningful slowdown in the fourth quarter last year. We expect the demand to be stable in the second quarter for PMIC business. With those market situations we just discussed, our second quarter guidance will reflect those customers' cautious outlook about the market demand and our strategies in this competitive environment.
We now expect our second quarter revenue to be in the range of TWD 91.8 billion-TWD 99.5 billion, down 4% to up 4% sequentially, and down 41% - 36% year-over-year at a forecasted exchange rate of TWD 30.3 to $1. Gross margin is forecasted at 47% ±1.5 percentage points. Quarterly operating expense ratio to be at 33% ±2 percentage points. As for the outlook for the second half of the year, given the limited visibility in end market demand, we are not able to give you a definite number for now. We do expect our business to improve in the second half of the year.
With our strong technology and product portfolio, we believe that we can seize the opportunities when market demand improves. On the operating expenses, we aim to reduce the total expenses by mid-single digit this year while maintaining the investment in the key technologies and key projects for the mid to long-term growth. For cash dividend this year, the board has approved a cash dividend of TWD 76 per share, which includes a regular dividend of TWD 60 and a special dividend of TWD 16. With the same policy of 80%-85% payout ratio for regular cash dividend, we plan to propose a change to article of incorporation such that we have the flexibility to pay out regular dividends semi-annually, subject to shareholders' approval at our AGM on May 31st. This concludes my pre-prepared comments. Thank you.
Thank you, Ricky. Operator, we are now ready for Q&A. May we please have the first question?
Yes, Jessie and ladies and gentlemen, we are now in Q&A session. If you would like to ask questions, please press star key and one on your telephone keypad. Please ask your questions after your name is announced. Please limit your questions to two at a time to allow more participants to join the discussion. After two questions, we will move on to the next caller. Should you have more questions, please press star key and one again to come back to the queue. To cancel your question, please press star key and two. As a reminder, it is greatly appreciated that you turn off the speakerphone mode of your device to prevent possible echo effect. We thank you for your cooperation. Now please press star key and one if you would like to ask questions. Thank you.
The first one to ask question is Randy Abrams from Credit Suisse. Go ahead, please.
Okay. Yes, thank you. I wanted to ask the first question just to go from the flattish outlook in mobile, just factoring you've had a couple quarters already down quite a bit year-over-year. Could you discuss the factor on inventory, where you think channel inventory and customer inventory was exiting first quarter, and where you see that continuing ahead? I know you didn't give much outlook on second half yet, due to the uncertainty, but is it your view, or if you could give a framework how you're thinking about your shipment relative to consumption now, how far below consumption, or if you could get at some point and above seasonal once the inventory bleed draws down?
Hey, Randy. We believe the inventory, both at customer site and the channel is coming down. Actually, we just had a discussion with a major large customer OEM. Their inventory level has come down to what they would even deem normal level. Some others are still a bit higher, but definitely coming down from the end of fourth quarter. Now is I think the market sentiment remains still weak. I think customers are drawing the shipment cautiously even when their inventory is at the normal level, so-called. Thank you.
Okay. To follow up maybe on your product portfolio, when you talked about the new flagship, it sounds like it's a little bit early trying to ready it third quarter. I think recently it launched closer to end of year. Could you talk about if there's early signs, or is there much you could do to change the position to continue penetrating more in that flagship category? Also if you could talk about the other side, the move toward a lower cost 5G chip, when you see the timing getting that into the market, and if that could provide a lift, especially as you target some of the inflections in markets like India.
Okay. Randy, for the flagship, our second generation, Dimensity 9200, was launched late last year. I think the launching continued, as I said in my remarks. We will have, I think, pretty major new models in the early third quarter, late second quarter time. This is a year-long effort. We also have, you know, some pretty good and flat, affordable phone using our Dimensity 9200, which also selling quite well. The important thing, this our second generation of flagship, I think the important thing there is that we have been working more closely and better with our key customers in optimizing the overall user experiences, both like in camera, in the gaming and also in the power consumption area.
Our third generation, as you said, well, it will be it's in actually, it's taped out. We have the silicon. Progress is very good. We will be able to ship to launch products according to an aggressive schedule. We believe also our architecture is such that this third generation flagship will be very, very competitive. As to the 5G low end, we have also new products which will be launched, I think, late this year. It's also. We have had a very, very good 5G entry product for two, three years now, the following, I think, is quite a bit better in the cost structure and in the power consumption.
We look forward to the launch of those two products, both on the high end and on the entry level. Thank you.
Yeah. I'll just say one last question. You mentioned more in the prepared remarks on the AI engine, and also capability for generative AI. Could you talk about the positioning or potential to get additional silicon or get paid for that in your devices, just both with mobile and also in Smart Edge, where the AI could be more meaningful block? How do you see your competitiveness, where I know Qualcomm's put a lot up on, being able to serve some of these language models and do a bunch on AI? I'm just curious your competitive positioning as you position that AI engine?
As far as I can tell, Randy, we have as good AI processor in our SOC compared to our competitors, hardware-wise. I think now it's more important to work with our customers to utilize the capability. We have also actually demonstrated, and we will certainly in public. We have demonstrated internally the capability to do a ChatGPT kind of applications with very good performance. We're confident that we will be able to provide the capability for our customers. It is of course critical that the customers will come up with applications that is meaningful to consumer user experiences. Thank you.
Okay. Thank you, Rick.
The next one to ask question is Brett Simpson, Arete Research. Go ahead, please.
Yeah, thanks very much. Rick, I wanted to ask, in your prepared remarks you talked about mobile phone market being 1.1 billion this year. I guess if we go back to pre-COVID, we were probably in the 1.4 or above range. I guess, you know, Apple's growing their business since pre-COVID, so all the decline is Android-based. I wanted to just understand how you reconcile what's going on with the Android ecosystem. Is it a structural problem with the market? Is it simply secondhand iPhones are just sort of cannibalizing new smartphones in the market? Love to get your perspective on, you know, how to think about long-term growth in mobile and smartphones, and how, you know, you see the Android portion playing out over the next couple years. Thank you.
Thank you. Great question. Indeed, you're right. The total number has come down from 1.4 billion about to now, as I said, 1.5, 1 plus billion units in 2023. I mean, I don't have a crystal ball per se, but, yeah, I do believe this is probably the at least the short-term bottom for this number. I think the market's ready for a replacement cycle. Of course, the decline from 1.4 - 1.1 comes with several reasons. One being a lengthened replacement cycle.
The other one probably also was now, especially this recently, probably during the last 6 months-12 months, the emergence of the so-called used or refurbished phone, which really are eating to the total units, the new smartphone sales units. iPhone certainly has done well, both in China and also in the U.S. internationally. We are the Android. Or how should I say? The Android ecosystem really need to work a lot better. This, I mean, the numbers speak to itself. I'm not going to mince words.
As far as MediaTek is concerned, I hope you understand that with our capability and our investment in the high-end flagship phones and also a much more cost-effective low entry-level phones will sustain our position in this competitive environment. We are, and we will continue to do that. I have that confidence.
Mm.
Thank you.
Do you think the delta between the 1.4 to the 1.1 or 1.15, is that largely explained by refurbished phones cannibalizing new devices? Or is it a mix of things? We're all trying to size this second-hand market that seems to be growing and growing structurally. Any thoughts there?
It's definitely a combination. Refurbished phone plays, I think, a significant role. I don't have the definitive number, but our internal estimate is between TWD 50 million-TWD 100 million, give or take. It's a big range, I know, but it is at the stage that... Basically the slowdown, replacement cycle is another, I think it's even more important factor.
Mm.
you see that the phone numbers sold in China has remained kind of flat for...
Yeah. Maybe just last one from me. I wanted to pick up on Randy's question about gens of AI and how you see this playing out on smartphones. How big a semi content driver is this? You know, when you look at the amount of silicon it's gonna take to, you know, do inference on a smartphone, you know, 10 billion parameter model or something like that, does this really move the needle as far as semiconductor content on the smartphone? Does AI become the driver, the new driver of semi content on the smartphone? You know, love to get your thoughts there.
Again, I think I can address this question. I'm afraid not in a very, very definite fashion. This is very new. Very new. Everybody I think is rushing, tell the truth, rushing to, well, I guess including us, to claim that we can, we have the capability to support generative AI such as ChatGPT, et cetera, et cetera. Which is definitely true because the AI processor we have built in our SOC is very powerful, which in my mind has not been fully utilized by our customers actually. In many ways, we are happy that there is now new application that will take advantage of the very, already very strong AI processing capability.
I think the jury is still out whether or how much new silicon we need to invest in the AI processing in order to achieve much broader or wider user experiences improvement. I think it remains to be seen. It takes a little while. Basically, we have a roadmap for our AI processor. The roadmap is pretty aggressive. We believe the current roadmap can survive for this generative AI needs. We, I think what we need to do, I think the industry needs to do also, we need to understand how we divide work between the cloud and the edge devices so that. I think it's, in a way, if you look at the automotive, it's fairly similar too.
People are adding more and more computing power in the car, but more people also use more and more cloud capability. I think those two things just move forward hand in hand. That's why we continue to invest, for instance, in the leading edge processes and packaging, so that we can provide those capability when we are convinced that the that will improve the user experiences and hopefully a better value for our products. Thank you.
Great. Great. Thank you, Rick.
Next one to ask question, Gokul Hariharan from JP Morgan. Go ahead, please.
Hi, good afternoon, and thanks for taking my question. First question, I wanted to talk a little bit more on pricing. Rick, I think you mentioned there is some price pressure in the entry-level segments. Could you also give us some more clarity about how pricing is evolving on a like-to-like basis? Let's say your Dimensity 8000, 7000, 6000 segments currently compared to previous generations. Are we seeing pricing coming down or you are still seeing pricing moving up given that you are adding more functionality to a lot of these products? We can go.
Gokul, Stay here. Why don't I take that one? Gokul, I think the CEO, Rick Tsai, the opening remark talk about, we do see some segments have a very intensified price competition. From our perspective, I think that's something that we need to respond. I think the key word is actually we need to have a balancing strategy. What do you mean by the balancing? Truly, we need to think about the market share, the profitability and the pricing. We will not just only think about the market share, trying to maximize it, but only trying to, you know, counterattack about pricing. Overall, I guess we're trying to look at the totality of the pricing.
In terms of the details that you're asking about, like comparison, I think in general it's coming down a little bit, you know, mainly due to the competition and also due to the weak demand. By saying that, I guess, you can judge from our second quarter gross margin guidance. The second quarter gross margin guidance is 47% ±1.5%, compared given the fact that actually for the first quarter gross margin guidance, the disclosed gross margin was 48%, so it's not gonna be a huge difference, but also shows some pressures on the gross margin. I think that's actually the, maybe the better way to look at that.
Okay. Thanks, David Ku. Just to add on to that, do you expect last quarter when you mentioned gross margin to stay in this range through the year, or do you think there is more gross margin pressure in second half of the year?
Well, I think right now, given the market dynamic, we're probably kind of reluctant to give out a full year gross margin guidance. By saying that, you know, if we recall the earlier statement, we talked about the first quarter's guidance, it was 47.5% ±1.5%. We think that's right now still gonna be the goal we're striving for the full year. First quarter, at least we passed that. Second quarter based on the guidance, I think we need that guidance as well. For the second half, again, that's at least the goal we are working on right now.
Okay. Understood. Could you, maybe second question on your renewed effort, initiative into the automotive and Arm computing side. Could you tell us a little bit more about what are the timelines in terms of product launches and potential customer wins? When do you expect this to become a more meaningful kind of revenue contributor for your Smart Edge business? Is it something that's happening in the next year, or is it like something that will take more time to kind of crystallize?
Okay. I think for the Arm computing, probably will still takes few more year, because right now we actually been investing aggressively and actively for the Arm computing. Given the overall development requirement, I guess still take probably 2+ years or 2 ± years for the Arm computing to see the real revenue coming in. On the other hand, for the Dimensity Auto, the good news is actually we've been investing in this for many years already. So for this year, roughly you're talking about $200 million+ revenue already. We do see it actually is a strong growth momentum and possibility for the next few years.
Bear in mind that even we say that the design in is actually pretty healthy, but the design in and design win cycle, especially for the revenue ramping up cycle for the automotive, is rather slow compared to the normal consumer product. I think the trend is positive, the design in, design win is healthy, but in terms of the magnitude, in terms of picking up magnitude, still taking some time. Right now, at least we see TWD 200 million + revenue already for this year.
Okay. All right. Thanks, David. Thank you.
Right now we have Sunny Lin from UBS. Go ahead, please.
Hi. Good afternoon. Thank you very much for taking my questions. My first question, I just want to follow up on the SOC sell-in versus the smartphone sell-through question. If you look at first of the year, how much do you think the 5G SOC are undershipping versus smartphone sell-through for China smartphone customers? Do you think the gap is narrowing going to second quarter? Based on that, how should we think about your seasonality for Q3?
I think for the, I think for the earliest, the number we talked about for the full year, $1.1 billion, that referring to basically the, we call it the market sell-out. The market sell-out. For our sell-in basis, probably will slightly less than that due to the fact those customer in general still have the inventory. Okay? That I think that's the first question. The second question you're talking about is seasonality. I think, we probably won't be able to give out detailed guidance, but at least from the trend-wise, we do believe actually the second half should be better compared to the first half.
Got it. Thank you for that color, David. My, my second question is on your product mix. I think officially, the major China smartphone OEMs are planning to be a bit more aggressive on high-end for margin considerations. From demand perspective, based on what you see, are you seeing better strengths in high-end or low-end? How should we think about your product mix for smartphone SOC this year versus 2022?
I think in general, I would say is, from the mix perspective, if mix defines the high-end, especially for us, it's only flagship versus the other segment, 2022 is definitely better. If you base on the year-over-year comparison, we're still seeing the flagship revenue and shipments grow year over year, you know, this year. For other segments on the smartphones, exactly, we see a decline. On the mix side, mix wise, actually it's getting better. Unfortunately, due to the weak demand, the overall revenue is still coming down. Mix wise, definitely improving.
Got it. Thank you very much.
The next one to ask question, Brad Lin from Bank of America Merrill Lynch.
Thank you for taking my question. I have two questions. One is on the resource allocation and the other on the CoWoS and potentially opportunity for AI. For R&D, given the gradually saturated 5G smartphone and engineers are pretty valuable assets for the firm, how would the firm allocate and realign the R&D resources for the growth segments, including AI and auto, also the Arm processor? What would be the key segments for MediaTek focus in the next 2-3 years horizon? Thank you. That's my first question.
Thank you. In this very demanding environment, we are not reducing people. We're not increasing either.
Thing, is to allocate those precious resources. You are quite right, in your questions that we are definitely moving our resources very, very rapidly toward the automotive and computing area because those area will provide our growth in the next three to five years in the future. We are, of course, continuing to invest in the flagship SoCs in the mobile. We are also looking at our portfolio of SoCs. We will not probably build as many as we have before. The other thing is the we are getting more efficient in the mobile SoC development.
Despite the various demanding needs from a flagship, we are, as you can tell, we can come up with some very much better performance and a much lower power and a much more difficult leading edge process. We keep our schedule quite well. I must say, we're very proud with our R&D. They are actually delivering more with the same resources, in some cases, lower resources. AI is definitely one area that we are putting a lot of resource, resources because the new areas that we are focusing on are all related for the computing. That's obvious one area.
Got it. Thank you very much, Rick. My second question would be related on the CoWoS and other advanced packaging. We've learned that MediaTek definitely has a very strong IP portfolio in computing, communication and multimedia. Would you please share with us the latest development and what are the potential action plans that may help fuel MediaTek's growth, like a strategic alliance or M&A? It'd be great to elaborate also a bit on your opportunity in the AI space for cloud too. Thank you.
Well, you have many question in your question. I guess first one, you talk about packaging. I think the CoWoS and the packaging technology you described are more for the definitely for the high power computing area. For the mobile, because of the size limitation and the power consumption limitation, these are not that suitable. For the high power computing, I think as we said earlier, the new fields we are moving in definitely will take advantage of the advanced 2D to 3D packaging.
You have to also bear in mind, this is a very complex equation here because you have the demanding requirements, whether you have leading edge process, whether you want to use 3nm or 2nm, and whether the packaging technology can give you good enough power and also good enough cost structure. It's very complex. Your other question here in cloud. Yeah, okay. I think the second question will be the, or third question. I think for the AI right now, we're pretty much focused on the edge AI, we didn't really focus on the cloud AI. For most of our, like, AI-related investment are pretty much on the edge side and to be precise, probably on the inference side, rarely on the training side.
That's actually the direction we are heading right now.
Got it. Thank you very much.
Now the line is open to Bruce Lu from Goldman Sachs.
Hi. Thank you for taking my question. In your prepared remarks is that the smartphone competition is pretty much at the lower end segment, which is the vast majority of the product offering is like that. Do we have the confidence that it won't proliferate to mid to mid-end or even higher end segment? You know, because, you know, in this market, it's a second market for the smartphone, right? You have the dual operate situation, but you still see the intensified competition. What is the rationale behind and, you know, what can we foresee for the competition in the longer term in this second market?
Bruce, I think it's overall from a product segmentation perspective in general, we're looking as a pyramid. Basically, for the entry level is actually the highest volume, both for 4G and also 5G. I think the bottom line is actually is we do feel is actually is our product, both from performance and cost structure perspective, it's actually very strong and very competitive.I guess your question is really just why is actually some players out there trying to launch some irrational price competition. To us, actually, we don't know the answer. But at least from our perspective, we do believe that's gonna be a long tail demand out there. That's point number one .
Point number two, the bottom line is actually, we don't have strong pressure on inventory, and also we feel comfortable about our cost structure and pricing. We need to respond, you know, reasonably, but we will not respond, you know, irrationally. That's why, in the opening remark, we make it very clear, it's a delicate balance. It's, you know, we need to find the right balance between zero and one, but we will not go in too aggressively on that, because actually that's gonna be a long tail business. The bottom line is actually our cost structure and product performance is actually very competitive. I think that's our view.
I see. Thank you. The second question I want to ask is about your strategy to deal with your customer when they are trying to develop the application process by themselves, right? I want to know what's MediaTek's strategy to, you know, accounting for this kind of, you know, shrinking addressable market. I.e., if you try to, you know, provide them a very expensive modem, then you maybe get some business out of it, or you try not to provide them any modem, they slow down the whole progress for their internalized chips. What kind of strategy MediaTek's working on right now?
This is a classic, of course, for the, what they call a.
Competition.
Or?
Competition.
Competition. First, I think first thing first, that is whether we have a really strong and competitive product offering ourselves, which we do. Again, not just from a computing, but also from our modem capability. We can combine together. We are really confident in that. In our minds, it is something we cannot just shy away. We will face up to it. We provide our product and we believe and we, by the way, we strongly believe we have also much better cost structure in comparison. Modem, we... Look, if I can make a lot of money from modem, I don't mind at all.
Modem, as we said, is one area that we want to generate a lot more revenue by itself, not just a supporting role for the SOC. Thank you.
I see. Thank you.
Next one to ask question, Charlie Chan from Morgan Stanley. Please ask your questions.
Thanks. Hi, Rick, David and Jessie. Good afternoon. I have first question is regarding your ASIC business strategy. I think you already revamped your automotive, right? Which is a good sign. Right now it seems like ASIC design demand is still very strong, but lack of kind of a capable vendors. Do you think to expand this ASIC business a little bit to address the cloud AI markets? Would you consider to do some strategic partnership with some IP or design service in industry peers? Thank you.
Well, ASIC, relatively speaking, is the nature of the business is much less, well, compared to, for instance, automotive is less in size and also more complicated in that, you, as you know, the major hyperscalers are all doing their own in-house AI accelerators, et cetera. So the ASIC opportunity varies from hyperscaler to hyperscaler. Again, we, our strength in this area is our capability to bring up the leading edge process such as 3nm, TSMC 3nm, sooner probably than the other ASIC supplier to scale. Also we have all the necessary IPs that they need for the hyperscalers. Saying all that, I also would say this is also a competitive market.
I believe we are making inroads, this year, but, with what I hope to be able to say is probably near the end of the year, we have something to report. Thank you.
Okay. Great to hear. Thank, thanks, Rick. My second question is about your chip costs. I know pricing environment is pretty difficult to react, but cost could be something you can, you can manage. Right? First of all is on your manufacturing cost. How are you going to address the, you know, foundry cost, no matter wafer cost and the backend cost, since you are facing some pricing pressure as well? Secondly, is a little bit mid to long term cost, the IP licensing and royalty. I think there's already public news, right, that Arm, your major CPU IP vendor, try to hike the fee. Right? How are you going to address those, the cost increase issue?
Would you consider some alternative like, RISC-V, CPU IP in your future products? Thank you.
Charlie, I'll talk about the wafer and so backend cost first. I think it's long story short, actually. Right now, as everyone can see, for the whole industry, we are all suffering about weak demand, both from the design sector and also from the foundry and also backend sector. I think everyone know that. The good news is actually is because of that bad environment, if you like, I think the whole ecosystem is now taking a serious look about the pricing. Because we all been going through, quote-unquote, "a good time" during the COVID situation. Now, as we post-COVID, it's like demand is actually weaker. We are actively talking to all our supply chain eco-partner and vendors and trying to basically get some support. I think in general, actually, we're getting some positive feedback.
We probably won't be able to spell out about detail, but you can rest assured, I think it's, that's the direction that we are working on right now.
Well, thanks.
Yeah, on the CPU, you know, Arm's has been on the news quite a bit recently for different aspects. What I'd like to say is the MediaTek has been working with Arm for many, many years, all through their portfolio. There's definitely discussion on the business model, you know, in the leading edge, very leading edge, the biggest core. The important thing is such, we believe both company believe through working closely together, collaborating together, we make more money together. That's how we approach it. Both company are very strong. Both company are very capable. I truly believe that through collaborating together, that we will have much better products.
They will get their fair share of the return for their investment. Thank you.
Thanks, Henry. In that case, or David, right, any impact in terms of the gross margin or operating margin from the potential license fee hike? I know you guys can work together to get more value, right? Just purely on the cost side, can you give us some color? Also again, right, RISC-V, is that something you will seriously take it as a very important alternative in your long-term portfolio?
Sorry. We normally won't break out by a single vendor to talk about what's the impact to the gross margin. Probably the better way to look at that is actually is, if there's any impact, it already been included in our guidance, both for, you know.
Okay.
the gross margin to close and also the gross margin guidance, both for the second orders and also we kind of provide a hint for the full year. I think it's all been incorporate already. Yeah.
All right, thanks. Okay. RISC-V, any comments?
Nope.
Okay. Okay. Thanks, gentlemen.
Okay. Thank you, ladies and gentlemen. We are running short of time now, so I'm going to hand it over to Miss Jesse Wang for closing comment.
Ladies and gentlemen, this concludes MediaTek's 2023 first quarter conference call. The audio replay will be available in one hour after the call at investor section of MediaTek's website. We would like to thank you for your participation, and you may disconnect.
Yes, thank you, Jessie. Ladies and gentlemen, we thank you again for your participation in today's conference. You may disconnect now. Thank you and goodbye.