Welcome everyone to MediaTek 2022 Third Quarter Investors Conference Call. Financial results and presentations for today's call are available on the Investors section of the company website at www.mediatek.com. Now, I would like to turn the call over to Miss Jessie Wang, the 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 third quarter results, and then Dr. Tsai will provide prepared remarks. After that, we will open for Q&A. As a reminder, today's presentation will provide overarching 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-IFRS financial measures. Earnings distribution will remain in accordance with financial statements based on IFRS. 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 actions taken in reliance on content provided in today's call.
Now, I would like to turn the call to our CFO, Mr. David Ku, for the third quarter financial results.
Thank you, Jessie. Now let's start with the 2022 third quarter financial results. The currency here are all in TWD. Revenue for the quarter was TWD 142.2 billion, down 8.7% sequentially, and up 8.5% YoY. Gross margin for the quarter was 49.3%, flat from last quarter and up 2.6 percentage points YoY. Operating expense for the quarter was TWD 37 billion, comparing with TWD 37.6 billion in the previous quarter and TWD 31.9 billion in the same period last year. Operating income for the quarter was TWD 33.1 billion, down 15.6% sequentially, and up 12.9% YoY. Non-IFRS operating income for the quarter was TWD 34.3 billion.
Operating margin for the quarter was 23.3%, decreased 1.9 percentage points from the previous quarter, and increased one percentage point from the year-ago quarter. Non-IFRS operating margin for the quarter was 24.1%. Net income for the quarter was TWD 31.1 billion, down 12.7% sequentially, and up 9.6% YoY. Non-IFRS net income for the quarter was TWD 32.2 billion. Net profit margin for the quarter was 21.9%, decreased 1 percentage point from the previous quarter, and increased 0.3 percentage point from the year-ago quarter. Non-IFRS net profit margin for the quarter was 22.6%. EPS for the quarter was TWD 19.54, down from TWD 22.39 in the previous quarter, and up from TWD 17.92 in the same quarter last year.
Non-IFRS EPS for the quarter was $20.22. A reconciliation table for our IFRS and the non-IFRS financial measure is attached in our press release for your information. 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. The last few months have been a challenging time for the entire global semiconductor industry amid aggressive inventory management adopted by the supply chain. Despite the challenging environment, MediaTek still managed to deliver third quarter revenue meeting the low end of our guidance given three months ago, while our gross margin reached the midpoint of guidance. Both were helped by our strong product portfolio and pricing discipline. The supply chain is still in the middle of the inventory adjustment cycle. Overall channel and customer inventories have reduced sizably after the adjustment in the third quarter. Global macro environment continues to deteriorate. High inflation, strong U.S. dollar, and geopolitical uncertainty proceed to weaken consumer purchasing power in many regions around the world across almost all product segments. As a result, overall channel and customer inventories are now close to normal levels.
Many customers continue to manage their inventories with extreme caution amid high uncertainty of future demand, resulting in low orders for components in the fourth quarter. Despite the near-term issues, we believe the strength we've built over the years in areas such as 5G Wi-Fi, multimedia and low power processors will lend a solid support to our business through this inventory cycle. Those strengths not only underpin our ability to sustain robust global market positions across products, but also lead us to numerous future business opportunities. Therefore, we believe we are on a strong footing to tackle near-term challenges. Now let me comment on each of our three revenue groups. In the third quarter, our mobile phone business grew 7% YoY and declined 8% QoQ, accounting for 55% of total revenue.
Smartphone demand was affected by customers' inventory adjustment, especially in the 5G mid-range segment. However, 4G demand was strong in the third quarter and was higher than the second quarter. We continue to expand our presence in flagship and high-end segments. Our Dimensity 9000 and 8000 SoCs have powered numerous popular models. In the third quarter, our Dimensity 9000+ was further adopted by multiple premium ASUS ROG gaming smartphones. The leading performance of Dimensity 9000+ offers extreme mobile gaming experience and is highly recognized by the market. We will continue to develop new flagship solutions with performance and feature upgrades to support our customers. Our next generation flagship SoC will hit the market in November, and we expect this to register revenue by the end of this year.
Furthermore, our millimeter wave technology demonstrates fast, adaptive and reliable beam forming, as well as outstanding thermal performances to achieve excellent user experience. MediaTek's millimeter wave SoC, Dimensity 1050, has begun volume production in the U.S. market since the third quarter. It not only marks a milestone of our global full 5G coverage, which includes both sub-6 GHz and millimeter wave, but also further expands our addressable market, especially in the higher-end segment. In the future, we expect global 5G penetration to increase to mid-50% in 2023 from high 40% in 2022. Based on the current designing activities, we are confident to continue gain market shares in the flagship and high-end segments, while sustain our strong position in the mainstream product category. Now let me move on to smart edge platforms, which accounted for 38% of revenue in the third quarter.
This group grew 11% from last year and declined 9% from last quarter. In the third quarter, telecommunication operators turned cautious and cut back on orders which negatively impacted our Wi-Fi and wired businesses. Meanwhile, demand for computing related products declined significantly, which affected our business in tablets, Chromebooks, and monitors. Despite the challenging market, MediaTek has made substantial progresses in several areas related to 5G modems. For example, we are gaining shares and leading in the US CPE market, and we are working closely with our strategic partner in penetrating into more notebook models, as well as establishing our footprint in automotive telematics. In addition, we are happy to see our leading product portfolio enable our business expansions with global Tier 1 customers.
We're making good progress in Wi-Fi 7 projects and have numerous business initiatives with global customers across computing, XR and IoT devices for future growth opportunities. Now moving on to power IC, which accounted for 7% of total revenue in the third quarter and grew 4% from last year and declined 17% QoQ. Despite weak demand for power ICs in consumer devices such as smartphone and PC, demand for automotive and industrial applications remain robust, mainly driven by market share gains. We expect automotive and industrial together to contribute a higher level of revenue than we forecasted earlier this year, and to exceed 15% of total power IC revenue in 2022 as compared with 10% that we originally expected. Now, for the fourth quarter.
Given the uncertainties of global macroeconomic environment and market demand, we see customers in general pull back orders even though channel and customer inventories have come down from last quarter. We expect the largest impact from customers or adjustments to be in the fourth quarter. That said, we also see a few customers who took meaningful inventory cutting actions earlier, have resumed certain replenishing activities in this quarter. This may indicate that further replenishment from a broader base may take place in the first half of 2023.
With that, we now expect our fourth quarter revenue to be in the range of TWD 108 billion-TWD 119.4 billion, representing a decline of 16%-24% sequentially, and a decline of 7%-16% YoY at a forecasted exchange rate of NT$31.5 to $1 . Gross margin is forecasted at 48.5% ±1.5 percentage points. Quarterly operating expense ratio to be at 31% ±2 percentage points. For the semiconductor industry, 2022 is a year many unpredicted global events, unfavorable impact from geopolitics and rising concerns over macro uncertainties.
Despite our 2022 full year revenue being below what we've previously expected, we still managed to deliver another record year in terms of revenue and earnings under this unusually tough situation. Although no one is immune to the near-term headwinds, we will manage our profitability carefully while reallocate our resources strategically for our mid to long-term growth. We believe the structured growth trend of digital transformation remains solid in our industry, and we will continue to fortify our market position by investing in key technologies early, and we will leverage our competitive strength to expand our addressable markets in computing, 5G products, wireless and wired connectivity, and in various AI, automotive, and industrial applications. Last but not least, we are fully committed to our shareholder return program. Our regular cash dividend based upon 80%-85% payout ratio remains unchanged.
In addition to the regular cash dividend, our TWD 16 per share of special cash dividend will continue as part of the four-year program ending in 2024. This concludes my prepared comments. Thank you.
Thank you, Rick. Operator, we are now ready for Q&A session. May we please have the first question?
Yes. Thank you, Jessie. Ladies and gentlemen, we are now in Q&A session. If you would like to ask questions, please press zero 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 to the next caller. Should you have more questions, please press zero one again to come back to the queue. Should you wish to cancel your questions, please press zero 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 zero one if you would like to ask questions. Thank you. The first one to ask questions, Randy Abrams from Credit Suisse. Go ahead, please.
Yes, thank you, and I appreciate the remarks, and also the execution, just navigating a challenging environment. Wanted to ask the first one just on the fourth quarter, if you could give a little more color between segments, the relative decline. You made a couple comments about the inventory, some areas could be replenishing. I think last year with flagship, you had potential to grow. If you could give an initial view with new flagship and the replenishment, how you view the first quarter seasonality at this stage as well. Thank you.
Okay. Well, let me address first 4G fourth quarter decline, sequential decline. It is some of the areas that declined more than definitely more than usual are in 4G, Wi-Fi, and TV. 4G, we believe, as we said in the comments, the very strong U.S. dollar really renders the developing countries purchasing power to be weakened and not to mention the uncertainty with that. That has a negative impact on 4G shipment.
Wi-Fi mainly because of some of the operators, very large operators, has kind of since they have more or less accomplished their budget earlier in the previous three quarters, so they are slowing down their fourth quarter buying. That had a negative impact on Wi-Fi broadband routers and APs. TV, we believe, TV really started its inventory correction pretty early, starting early this year, first quarter or even late last year. We believe that TV inventory correction is near the tail of the cycle. The fourth quarter probably is the last part of the cycle.
As to first quarter, we mentioned a bit that the fourth quarter decline is pretty severe. We are seeing the inventory level with most of our customers and their channel to be also going down significantly. We believe in first quarter it will be more in the normal level. The issue of course whether because of extreme uncertainty of the end market or at least the immediate end market renders them be very cautious in ordering. Some of them we mentioned have started some of the reordering. Those customers stopped some of their purchasing about half a year ago. We're seeing some weak signals, but some signal nonetheless. Thank you.
Okay. Yeah, and the second question, actually just wanted to ask on your 5G guidance, increasing from high 40s to mid-50s%, sounds like fairly mild for next year. Curious because you talked about the dollar strength, is that also affecting bill of materials or sensitivity, so a bit slower pace into next year on 5G? I'm curious, India with the licenses, do you expect much from those markets turning on that could give a lift. Just curious into next year how you see the 4G versus 5G and then the impact of the dollar affecting that migration.
Good question, Randy. Yeah, we have to agree with what you just said. China market of course is pretty much saturated with 80%+ penetration. India, we believe, India actually is among these set of developing countries. India actually performed relatively well compared to other developing economies. We feel within India's again good economic performances this year and maybe next year, it probably represents a better opportunity for the 5G penetration. We are being cautious because of the U.S. and Europe also, the developing economies are facing still very uncertain futures. That's why we're being cautious in our forecast. Thank you.
Thank you.
Next one to ask questions, Gokul Hariharan from JP Morgan.
Good afternoon, and thanks for taking my questions. My first question, could we talk a little bit about pricing environment? I think we are seeing revenues drop roughly about 20% in Q4 at the midpoint of guidance. Is that mostly volume in both mobile and smart edge segments? Or are we also seeing some price concessions that you have to give to customers given the extremely weak demand environment? What do we expect for pricing, especially for 5G going into next year? Do we see blended pricing starting to come down? It's been very resilient for the first three years, but do we start to see that come down? That's my first question. Thank you.
Well, first of all, we'll start with the fourth quarter. I think the weakness on the fourth quarter is mainly driven by much lower demand on the volume side. On the pricing side, I think they have some pressure, but overall, I guess we're holding up quite well. That's why you can judge from the gross margin guidance, which is given out. For the third quarter, the gross margin was 49.3%. In the fourth quarter, the gross margin guidance, the midpoint is 48.5%. It's actually ±1.5%. As you can see, it's actually the pricing pressures. There's some pricing pressures always there, but actually we're trying to be disciplined around the pricing exercise. For next years, I think that will really depends on what the final product mix looks like.
Right now, we see some positive trends, especially for our flagships momentum. As you can see for this year, we're making pretty good inroads for flagship segment. We believe with our generation two flagship product coming out, the overall revenue contribution on the 5G side from flagships will be even higher next year. I think that will provide some positive lift on the ASP. On the other hand, due to the overall weak macroeconomy, we need to assume basic ASP for the 5G mainstream product, probably the entry-level segment will increase.
Overall on a net net basis, our views actually should be relatively stabilized. Again, it would really depends on what the final product mix looks like next year.
Okay. That's very clear. Thanks very much, David. My second question, could you talk a little bit about just expanding a little on the inventory and customer behavior? What are your customers thinking about as we get into next year? Are we feeling that now that revenue is down almost 30% from the peak level in Q2 that we saw, are we almost done with that inventory clearance, and we should start to move into a bit more of a restocking kind of mode as we get into Q1? Is that the feedback that you're getting from customers?
Initial thoughts into next year, do we think it's a growth year for MediaTek or given everybody's expecting semis to be down next year, next year growth is probably going to be a little bit hard to come by.
Okay. I think customers' sentiments, as you can imagine now, to tell the truth, if you just follow this week, the announcements, sentiment cannot be good. Saying that, still I think it varies. It's just like any time, it varies among different customers, China customers or U.S. customers. I think, and also even among China customers, some are a bit more stable than the others. Not to mention also Korean and the Japanese. Our feeling is, in general, the customers' sentiments are still in a very cautious mode. We have some pickup in the replenishment. We're seeing that. I must say we're encouraged by that, but we're not jumping up and down because of that.
We are operating under the assumptions that the customer will remain cautious for some time. Inventory level, and as I said in my comments, I think we are seeing many customers inventory level has come down quite a bit. Some of them are down to, we believe a two-three months level, which during the normal time, the replenishment cycle would have started. In this unusual time, I think they are still gonna hold that down even further. I cannot say how much further, but cannot be much further either. Next year, of course, we cannot really comment for now 2023.
It's good, but with all the comments we have made just now, it's going to be a challenging year. I don't think anybody now can say with any certainty about being a very strong year next year, or it's difficult to say at least. We remain very cautious, and we're managing. Our primary objectives is to manage our market share. With our product capabilities, product portfolios, our technology advancements, our market positions, we want to manage to maintain our market shares while we exercise the discipline in pricing. We simply do not believe in, for instance, across-the-board price cut in order to ignite any kind of a short-term demand. That doesn't work. We don't do that. We do not do that.
However, I want to bring to your attention the manufacturing cost
Mm.
-increase since 2021 and 2022. It's not stopping. As you have read, I'm sure, from the many reports that the foundry partner have been increasing their price. We believe this cost increase is more structured in nature rather than cyclical. Our pricing in some way need to reflect that also. Finally, of course, we strive to manage our operating expenses. The most important part is really to reallocate our people, which is our biggest resources, toward the mid to long-term growth opportunities rather than staying with our current mature, more mature business segments. Thank you.
Okay. Does that mean that we can still hold on to the 48%-50% margin range that we talked about in the previous call? Or we think there might be a little bit of downside given this cost increase in the foundry space is still continuing even though the market is weak?
To be honest actually, for 2023, there are still a lot of variables out there. I think probably is give us one more quarter. Based on the best knowledge right now, I would say it's the fourth quarter, the midpoint guidance, which is 48.5% ± some buffer. Because every quarter, as you know, the product mix could be different, the customer mix could be different. I think it's still a good reference point. Yeah.
Got it. Thank you. Thank you very much.
Right now we have Brett Simpson from Arete Research. Go ahead, please.
Yeah, thanks very much. Rick, I wanted to just ask about the extent to which MediaTek is undershipping demand at the moment, particularly with the Q4 guide. Can you maybe just share with us in smartphones specifically, how big is that undershipping that you see? You know, you've been through a lot of cycles. I was just keen to get your perspective on how you see this one more broadly and when the trough of the business, when we see the trough and when you might return to positive year-on-year growth for overall. Thank you.
You're specifically asking for which part of the under shipment are you asking? I think I missed a bit of at the beginning of your question.
Just thinking through the Q4 outlook you've gave in smartphones, how much do you think MediaTek is undershipping to demand? Thank you.
All right. Actually, the fourth quarter sequential decline in smartphones, 5G actually is okay. It's a flattish to a bit up sequential shipment. It was 4G that had the surprise drop. Maybe it shouldn't be surprised because of the, as I said, the strong US dollar really is wreaking havoc in the developing economies and makes people very reluctant to spend money. Our customers need to find, what should I say? Ingenious ways to sell their phones into, say, in Southeast Asia or in Africa, for instance. It is 4G that gave us this smartphone decline in the fourth quarter.
You also said kind of a maybe, you know, more generic, more general look at the industry. Our industry has not seen a downturn of this, I think, magnitude for probably over a decade. There was fluctuations in the last 10, 12 years, but nothing compared to this. I really would call this a severe downturn. It's not, of course, it's not what we haven't seen before either. If you go back to 2008, 2009, 2010, 2000, a bubble and even further. There is certainly a cyclical nature because of we.
I mean, the last two years have been really, we have seen rampant growth in many ways. The structural change, I think because of the geopolitical situation which we never had before really in our industry, added quite a bit of complexity to the outlook of the future. We are treading water as cautiously as we can while we. At the end of the day, we strongly believe that, building our technology, expanding our product portfolio, creating new TAM and out of the TAM, that's the best way to go, and that's where we are, we're putting our money in. I'm pretty confident that, you know, with our capabilities, we will be able to do that. Thank you.
Rick, just thanks for the color there, but in terms of the trough of the business, do you think that's a Q4? Do you think Q4 marks a trough this cycle, or do you think that we're not through the worst yet?
We are looking at a Q4 at pretty much the bottom for us. We believe we'll see some mild recovery in Q1 sequentially. Yeah. We need to really work on it.
Thank you. Maybe one follow-up for David. David, I wanted to ask about long-term agreements with Foundry customers and how you manage, you know, you signed a lot of LTAs in the last 12 months or so. How do you manage these LTAs? And is there any liabilities we might see from commitments that you've made, but clearly the market has deteriorated significantly since you made those commitments? Thank you.
Well, first of all, we have some LTAs, but we don't have a huge liability. I think that's the starting point. For any potential risk, we already amortize pretty much along the year, pretty much we're starting from.
Second quarter this year. If there's any sort of the worst case scenario, we pretty much reflect that in our, you know, cost of goods sold, which has impacted our gross margin already.
That's clear. Thank you very much.
Next one to ask questions, Brad Lin from BofA Securities. Go ahead please.
Hi. Thank you for taking my question, and congrats on the strong results and margin. I have two questions about more mid to long-term developments of the firm. Firstly, we have learned MediaTek's strong technology development at SEMICON on the heterogeneous integration seminar, and we would love to know that your adoption strategy, and shall we expect MediaTek to enter new markets with the chiplet trend? If available, may we learn its growth outlook for MediaTek? That's the first question. Thank you.
Okay, thank you. If you follow us for the last couple of three years, MediaTek has really moved very fast into the leading-edge process technology and packaging technologies. As the industry moves into, I think, we believe, sub-3 nanometer, 2 nanometer or below, the more so gets blurred. We are certainly working with the partners on, for instance, the chiplet technologies, be it with the tech application for in both mobile sectors and also potentially high performance computing area. We put a lot of effort in that. Thank you.
Thank you. My second question is maybe a little bit, well, related, is that given the rising Arm-based PC and even server adoption, and the strong potential upside of the market, may we learn MediaTek's progress on the market, and when should we see a strong growth for the server market? Thank you.
We do not have, right now, a business line in the server market ASSPs. We do pursue the business in that area with the major hyperscalers in the form of ASIC business model. We're working with several of them, but that's about all I can say for now. Thank you.
Got it. Thank you very much.
Now we have Laura Chen from Citigroup.
Hello. Hi. Good afternoon. Thank you for taking my question. My first question is about your geographic the breakdown. Just wondering that is like we see the weak demand across the region globally. Just curious about MediaTek's exposure to China, to Europe, ASEAN, other emerging market as well as to North America. Which market you would expect to see earlier recovery, like you mentioned earlier in the first half next year. What would be the indicator we may looking for? Thank you.
Hi, Laura. I think, in general, I think our revenue breakdown by geography is actually China is in line with most of the U.S. companies, roughly 40%+, slightly 40%+. Probably the major difference actually, we do have a pretty sizable revenue across the region, especially for emerging market. Unfortunately, actually, due to the strong US dollars, I think emerging markets is actually the area have the biggest hit in fourth quarters. In terms of your second question, talking about how or which area will come back the first, based on our past experience, normally the currency issue is a short-term impact because for most of the emerging markets, they've been in the phone business for more than 10, sometimes even more than 15 years.
They've been going through the ups and downs of the strong and weak U.S. dollars. I think what they're trying to adjust is actually once the U.S. dollars, regardless the strong U.S. dollars or weak U.S. dollar, as long as it starts to stabilize, then normally from past experience we see the customers in those regions will start to replenish their inventory. Again, we don't have a clear visibility yet, but if we were to take a wild guess, I would say probably the emerging market outside China probably will be the area to have the earliest some of the replenishment activity. For U.S., for Europe, for China, I think currently they all have their sort of the macro or geopolitical issues out there. Probably we still need some time to see those issues being toned down a little bit.
Right. Thank you, David. For China, like, Rick also mentioned that because the 5G penetration is relatively high, do you also expect that growth in China can continue sometime next year or recover anytime soon?
I think 5G in China this year is pretty flattish, maybe even coming down a little bit. From our perspective, what we gain is actually to build the segments, segmentation market share again, mainly we're talking about the flagship. For next year's, our view is actually sort of 5G, due to the penetration in China, it's at 80% already. For China alone, it's not hard for them to see the volume strong growth. In China, it will still provide some decent opportunity for us to get more market share for the flexible one, which will be really helpful for in terms of revenue growth.
Okay. Thank you. My next question is about your non-smartphone business. We know that MediaTek has a quite comprehensive IP portfolio and has been working on various ASIC project previously, like networking, interface, et cetera. May I know what the current progress and what about the revenue or growth margin looks like? Do you think that this business will continue to grow into next year?
I think, I'm assuming you're referring to our ASIC business or just non-smartphone business, Laura. Okay. Well, why don't just go ahead and answer that. I think for the ASIC business, Laura, in general, I think they carry a pretty decent gross margin because this is all custom-made product. For the ASIC products, for the ASIC business, which includes the consumer product and also includes the enterprise business, I think overall, we all see pretty decent and stable growth, especially for enterprise business, even though the base is pretty low right now because of the design win, the Wei-Sheng , and also the ramping up schedule we received from our customer. In general, we are still looking for a pretty stable growth next year on the ASIC business.
On the connectivity, I think it's like the CEO talking about the fourth quarter really taking a pretty big hit. For next year, in general, I guess we're still looking so positively given the overall, especially right now we are getting into some segmentation gain, both from the Wi-Fi 7 and also the high-end Wi-Fi. Given the overall macro situation, I guess we probably will give out the final guidance or forecast base case probably one quarter later.
Okay. Thank you, David. Lastly, can you also talk a little bit about the automotive? I recall that Rick also mentioned about that infotainment. I'm just wondering that aside from infotainment or connectivity, anything we can expect for the automotive market for MediaTek?
Well, I think, automotive, we do have a reasonable revenue from both, infotainment or you can call it cockpit control now and, telematics, although both are still small, compared to the total size of the market. If you look at our capability also in the Wi-Fi area or in the camera area, there are, in our mind, a lot of opportunities, and computing capability, of course. A lot of opportunities for MediaTek in the automotive segment. We are in the process of organizing internally the effort to have a more coherent, what shall we say, growth initiative in this segment.
You also know that the lead time is always quite long for the automotive customers and industry. We see a new with the EV conversion and automated driving trend. We believe this lead time will be shortened a bit, compared to before. We are certain this is one area that we will be pursuing vigorously. Thank you.
Okay, thank you very much.
Now it's turn for Sunny Lin from UBS to ask questions. Go ahead, please.
Sure. Thank you so much for taking my questions. My first question is on the inventory comment that you mentioned earlier. Just wonder, if you look at Q4, which applications are you seeing inventories coming down more significantly?
I think for the smartphone side, actually, we do believe both for 4G and 5G, the channel and customer inventory all coming down pretty healthily in fourth quarter. Actually our view, like the CEO talking about earlier, should be very close to normal level because we do a very detailed and thorough channel check.
Got it. A follow-up would be for 2023, do you have any initial expectation for the growth of the whole smartphone market in China?
Maybe it's a little bit too early to talk about that. I think we will provide some more detailed views actually, so, one quarter later, basically, as we always did.
Sure. No problem. My second question is on competition. I think this year, you guys do a pretty good job in managing inventories pretty early. Your competitor cut foundry production slightly later. Would that be a concern for next few quarters that competition could potentially intensify because of the inventory issues at your competitor?
Well, so far, actually, we didn't really see any sort of abnormal activities out there, to be honest, because we believe this time around, during this downturn, pretty much everyone has been acting on pretty quickly about the supply chain adjustment. Overall, we didn't really see this adjustment coming. Yeah. By saying that, I think competition is always out there, so. Not necessarily triggered by sort of high inventory.
Got it. Maybe just a last question on OpEX. How should we think about the amount and percentage for 2023?
I think for the amount, I think overall, again, we are still finalizing the annual plan next year. I think overall this year's for 2022, overall the OpEX increase is roughly 18% YoY. I think the overall our goal is actually next year the growth will be much lower than this year's. Yeah. With this, how we manage that.
Got it. Thank you so much.
Next one to ask questions, Charlie Chan from Morgan Stanley.
Hi, Rick, David, Jessie. Good afternoon. My first question is actually on your own inventory, because last quarter your inventory days goes up a little bit. This quarter, the turnover seems to be very, very slow, right? I know you're also cutting some foundry orders, but do you think your own inventory days will come down in fourth quarter?
Currently, I think inventory days in Q4 versus Q3 should be flat or should maybe coming down a little bit. Charlie, like you say, inventory day is really a function of the inventory on hand and also the sales forecast. Probably the way we manage that is actually to make sure the overall inventory on hand is actually continues coming down. For example, for Q2 versus Q3, I think our inventories on hand is actually expected to coming down. For the days, really depends on the, you know, how much we can sell in those quarters. Given the fourth quarter guidance actually is, the days will be up or flat-ish a little bit. It will not coming down. For Q1 and Q2, we do foresee is actually the days of inventory.
I think the amount of inventory will continue coming down for sure, but the days of inventory probably need to wait until Q1.
I see. What would be the normal inventory for MediaTek for your chip inventory?
I think it's 80-90 days should be all the normal days.
Okay. You think that you can get there in first half next year?
Yeah, first half of next year for sure.
Okay. My second question is about your kind of low cost 5G chip. My personal opinion is that that's very important, not just to the competition, but also for the further penetration in the emerging market. As mentioned, we just said that inflation is a big pressure. If you can enable kind of more affordable 5G phones for China or other emerging markets, there could be a volume upside. My question is there a concrete plan for this low price 5G SoC. Secondly, if there is such a plan, why don't you pull it a little bit forward to, you know, address the market demand?
We do have, as you know, that MediaTek has a portfolio which covers all the way from flagship to entry-level. We are doing and we have a large market share over there. The real is how we have IC actually almost ready for what you would call low cost.
Entry-level.
5G entry. I think really things are not just like that. We really need to look at our market potential and also very importantly, whether we can really have a reasonably good gross margin. As I said earlier, our pricing must reflect our value. You know, we must also earn a reasonably good gross margin. It's not. We do not really want to just cut price to enable certain demand because that really remains to be seen whether it's true or not. We work very closely. We have customers who are very good at marketing and selling local entry-level phones in different emerging economies. Very, very good.
We work extremely closely with them, and we meet their requirement through having a good product for them. We do not plan to just go in with a very low cost SoC through sacrificing our margin. Thank you.
I see. Thanks, Rick. Also, I think Laura brought a very good question about your ASIC business, right? Because from what we can see, you have a greater IP. You have the best designers. You have a very low wafer cost from your foundry partner compared with other design service competitors. Why is it just a stable growth next year? Because from what we can see, the TAM for the ASIC business, right? No matter from automotive or data center, even Chinese customers, right? Because China is now restricted for some high performance chip design. Why your ASIC business can grow only slightly instead of a big booming?
Well, we understand what you're saying. It is a good market. The size of which, well, is I guess debatable, but we're talking about ASIC. We're talking about I think mainly it's the accelerator type of ASIC chips, be that in with hyperscalers. Now you're talking about only three of them, just about. We have the ingredients. I agree. I admit also that we are kind of a bit late in the game. We're a bit late in the game. We are engaging, but we also know who to talk to. We are now engaging with a major player.
Hopefully, I can give you some different kind of news in the next few conference calls.
Sure. Looking forward to that. Yeah. Thanks, thanks, Rick and David.
Ladies and gentlemen, in the interest of time, we are going to take two more callers for questions. Next one to ask questions is Bruce Lu from Goldman Sachs. Go ahead, please.
Okay, thank you for taking my question. So I want to ask about the geopolitical impact to MediaTek. I think management mentioned that in the prepared remark, and then we see several times that during the previous Q&A. But I saw most of the business are consumer related and the impact should be limited. You know, is that the right understanding? But what I really want to know is that, you know, China and non-China, structurally it looks like it's gonna be a two different supply chain. And MediaTek is in a sophisticated situation with higher revenue country exposure in China. If this is structural, can you help us understand your, you know, strategy and approach moving forward to face this geopolitical tension?
Bruce, I think you are right. I think, well, when we talk about geopolitical impact, we're not referring to, for example, the recent October 7th, the new policy issued by the U.S. government, whether or not they'll have direct and immediate impact to our business. The answer is, no. But what we're talking about is due to the geopolitical situation, the overall sort of macro economy pressure and also somehow slowing down, potentially slowing down about, the economic development. More importantly, that somehow put a cloud on people's, expectation about the future, especially when they're trying to plan out for the future. I think that's kind of thing is when we're talking about or referring to geopolitical situation or concern.
We are certainly not referring to, you know, certain of our products are subject to the U.S. constraint. I think that's not what we're referring to.
How about the two different supply chain? Are you going to have a different approach or strategy?
I think for the supply chains, actually, it's in the past, actually even before the geopolitical situation, given the overall needs or demand we need on the foundry and also the backend side, we already been pretty global already. You know, taking another recent news, for example, the new engagement we got with Intel is just one of the new directions. I think overall we just continue to strengthen the globalized supply chains and policy and make sure it's more resilient. I think that's the trend.
No, I think I'm not asking about your supply chain. I'm asking about the entire tech supply chain, i.e. your customers. If they are a Chinese customer, they probably will prefer the domestic supplier or, you know, U.S. will not allow a non-China vendor to sell it to Chinese. That's a potential headwind for your business, right? Are we gonna see a different approach or a different strategy?
So far actually we haven't heard anything materially from our customer, if that's your question.
Are we preparing for that?
To be honest, actually, probably not, because actually, like you say, if the Chinese customer demand everything being built in China, the answer is probably there's no facility to build in China, for example, for the leading-edge process node. Likewise, actually, if some U.S. customer asking for that, the answer is probably you don't have enough leading-edge node capacity in the U.S. I guess probably not in the near term. For whatever reason, if our customer strongly demand for that, just physically what we used to know is not available for those solutions, if you ask me.
How about your networking business or others, other product?
If it is possible, we will certainly accommodate that. By the way, like I say, this is part of the operation already. I'm assuming you're talking about the customer trying to take the pretty extreme direction.
If you're talking about the daily operation, like I said, it's already been on the global scale already.
I see. Okay. Thank you. My next question is more about the mid to long-term growth. I mean, you know, what can we expect as the major growth driver, you know, when the inventory correction cycle is over, whether it's in the first or second quarter or even third quarter next year? You know, what can we expect? What is the key product we are looking at for the growth for next year?
Well, we think you have to look at it in two aspects. One is, of course, the growth from our current product portfolio and the technology capabilities. I think, for that, if you look at the world and where in the future, the connectivity is something that is ubiquitous, be that, especially wireless, in the form of modem or in the form of Wi-Fi. We are quite bullish about the future of the connectivity, because just about all the edge devices will have Wi-Fi and a big portion, some portion of it will carry modem. MediaTek being one of the very few really strong supplier of those capability. We're very bullish on that.
In the meantime, we also will be working toward, as I said earlier, the automotive. We're looking into the computing area, but those things takes a little time, so they are more kind of three-five years out. Thank you.
Are we going to have the updated three-year revenue CAGRs in the coming analyst meeting?
Bruce, so far, the views actually haven't changed yet. Again, we don't want to overshooting, so far it's no change. We were not gonna change the view just due to some of the concerns about geopolitical.
It's still 10%-15%?
So far, that's our goal.
Understand. Thank you.
Ladies and gentlemen, as we have run out of time, I'm afraid we have to end the Q&A session right now. Thank you for all your questions, and I'm going to hand it over to Miss Jessie Wang for closing comment. Miss Wang, please proceed.
Ladies and gentlemen, this concludes MediaTek's 2022 fourth quarter conference call. We would like to thank you for your participation, and you may now disconnect.
Yes. Thank you, Jessie. Thank you, ladies and gentlemen, for your participation in today's conference. You may now disconnect. Thank you and good-