Welcome, ladies and gentlemen, to the MediaTek 2022 second quarter investors conference call. Financial results and presentations 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 go ahead.
Good afternoon, everyone. Joining us today are Dr. Rick Tsai, MediaTek CEO, and Mr. David Ku, MediaTek CFO. Mr. Ku will report our second quarter results, and then Dr. Tsai will provide our prepared 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 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 second quarter financial results.
Thank you, Jessie. Let me start with a quick update for 2022 second quarter financial results. The currency here is all in TWD dollars. Revenue for the quarter was TWD 155.7 billion, up 9.1% sequentially and up 23.9% year-over-year. Gross margin for the quarter was 49.3%, down one percentage point sequentially and up 3.1 percentage points year-over-year. Operating expense for the quarter were TWD 37.6 billion, compared with TWD 35.3 billion in the previous quarter and TWD 29.2 billion in the same period last year. Operating income for the quarter was TWD 39.2 billion, up 7.4 sequentially, and up 35.9% year-over-year. non-GAAP operating income for the quarter was TWD 40.5 billion.
Operating margin for the quarter was 25.2%, decreased 0.4 percentage points from the previous quarter, and increased 2.3 percentage points from the year ago quarter. Non-GAAP operating margin for the quarter was 26%. Net income for the quarter was TWD 35.6 billion, up 6.6% sequentially and up 29.1% year-over-year. Non-GAAP net income for the quarter was $36.8 billion. Net profit margin for the quarter was 22.9%, decreased zero point five percentage points from the previous quarter and increased 0.9 percentage points from the year ago quarter. Non-GAAP net profit margin for the quarter was 23.6%.
EPS for the quarter was $22.39, up from $21.02 in the previous quarter and up from $17.44 in the same quarter last year. Non-GAAP EPS for the quarter was $23.1. A reconciliation table for our GAAP and non-GAAP 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.
Good afternoon, everyone. Second quarter was another solid quarter for MediaTek. Quarter revenues grew 9.1% sequentially, reaching high end of our guidance, with mobile phone growing the strongest, driven by the ramp of our flagship and high-end solutions. Before I give you an update of each of our three revenue groups, I'd like to make a few comments on the recent market environment. In recent months, macroeconomic challenges add uncertainties to market demand. For example, inflation negatively affects consumer sentiment, leading to reductions of IC demand. Accordingly, we have already observed our customers and their distribution channels start to adjust inventory aggressively, and we expect the inventory management to continue for two to three quarters. In this environment, MediaTek will manage our inventory prudently and control our cost and expenses carefully. Over the past 25 years
Have gone through several cycles. Although each cycle was different, the semiconductor industry's relentless pursuit of better connectivity as well as high performance and low power computing remains the same. Responding to this long-lasting demand trend, MediaTek has been heavily cultivating and developing key technologies that have enabled MediaTek to launch 5G, Wi-Fi 6 and Wi-Fi 7 early in the product cycle with advanced technologies. As a result, MediaTek today is in a much stronger global position as an industry technology leader with a broad product portfolio across mobile, smart edge platform and Power IC. Among which we have built several sizable businesses that demonstrate steady growth with much lower volatilities even during market downturn. For example, our leading position in smartphone, wired and wireless connectivity, and TV are results of structure, market share gain, and profitability enhancement in the past few years.
We believe we can maintain such market positions despite cycles. We also have businesses such as Power IC and connectivity solutions, which are deployed to a wide range of applications with historically more stable demand. Therefore, we believe MediaTek will be much more resilient to market volatilities than previous cycles. Moreover, we will continue to mitigate the short-term market uncertainties. We believe these efforts will further strengthen our market position and pay dividends going forward. Now let me move on to our three revenue groups. In the second quarter, our mobile phone business grew 17% year-over-year and 12% quarter-over-quarter, accounting for 54% of total revenue. The strength mainly came from the ramp of our flagship and high-end 5G product, as well as very robust 4G demand. MediaTek 5G products are highly welcomed by customers.
According to market research report, during the 618 Shopping Festival, 13 out of the 20 best-selling Android models are powered by MediaTek. Among which five are using our flagship, our high-end Dimensity 9000, 8100 and 8000 solutions. Our higher end solutions continue to gain share. We will continue to launch next generation flagship product with our leading computing capability and optimal power efficiency to further expand our presence in the flagship market. Considering market uncertainties, we now expect global smartphone shipment in 2022 to be 1.2 billion-1.27 billion units. Global 5G shipment is expected to be around 600 million, representing a 20% year-over-year growth. Meanwhile, 4G smartphone remains attractive to budget-conscious consumers amidst high inflation concerns.
For MediaTek, our successful global expansion in both 4G and 5G, as well as 5G flagship entry, will enable us to deliver a solid growth this year. Moving forward, we believe that 5G penetration will continue to grow from 50% this year to more than 80% in a few years. In addition, the functionality of future 5G phones will be richer than those of today. Consequently, MediaTek is well-positioned to continue to capture the benefit of 5G transition. Now let's move on to smart edge platform, which accounted for 38% of revenue in the second quarter. This group grew 33% from last year and 7% from last quarter. Driven by continuous technology upgrades of several major products including Wi-Fi 6, 5G modem, TV and ASICs for gaming console and enterprise switch.
However, due to weaker consumer sentiment, the demand for TV and tablets has been negatively impacted. Nonetheless, demand for wired and wireless connectivity solutions, particularly Wi-Fi 6, 5G modem and 10G-PON remains robust. We have planted several seeds for our future growth. For example, MediaTek leads the industry in introducing Wi-Fi 7 solutions, which enable us to address the needs of high-end market segments with revenue starting in the first quarter of 2023. We have recently expanded our footprint into enterprise 5G infrastructure segment. We also continuously enhance our capabilities in power efficient Arm-based processors to address the wide range of new applications. With a rich set of product portfolio, we are positioned to address the market needs. We expect our smart edge group will be a significant growth driver for MediaTek in the coming years.
Now moving on to Power IC, which accounted for 7% total revenue in the second quarter and grew 33% from last year and flat quarter-over-quarter. Recently, we have observed a weakening demand for Power IC used in smartphone and notebook. However, the Power IC used for automotive and industrial applications, which account for about 10% of Power IC revenue, remains on track. Moving forward, faster connectivity and more powerful computing require energy efficient and reliable Power IC solutions. We believe MediaTek, through our broad product portfolio and superior technology solutions, is well-positioned to capture the structured growth of Power IC. Now for the third quarter.
Given the ongoing customer inventory adjustments, we expect our third quarter revenue to be in the range of TWD 141.7 billion to TWD 154.2 billion, representing a decline of 1%-9% sequentially, and a growth of 8%-18% year over year at a forecasted exchange rate of 29.5 NT dollars to one US dollar. Gross margin is forecasted at 49% ±1.5 percentage points. Quarterly operating expense ratio to be at 26% ±2 percentage points. With our diversified product portfolio and industry-leading positions, we believe MediaTek can manage the short-term demand headwinds well. We now expect MediaTek to deliver a high teens % revenue growth with a 48%-50% gross margin for year 2022.
Despite short-term demand volatilities for semiconductors, the mid to long-term growth trends driven by accelerated digital transformation remains intact. MediaTek is a leader in the industry. Our investment in key technologies allows us to participate in the technology migration cycles early. We firmly believe MediaTek will continue to capture the growth opportunities brought by the enriched silicon content, as well as expansion of our market globally. This concludes my prepared comments. Thank you.
Thank you, Rick. Operator, we are now ready for Q&A. May we please have the first question? Thank you.
Yes. Ladies and gentlemen, we are now in Q&A session. If you would like to ask questions, please press zero and one on your telephone keypad. Please ask your questions after your name is announced, and 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 zero and one again to come back to the queue. To cancel your questions, simply press zero 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. Thank you. 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 good job staying resilient given what's happening in the environment. If I could ask a follow-up just to the guidance for third quarter and full year. If you could give a view by segment for the 1%-9% decline. Is it largely the anticipation, what you commented, inventory, for fourth quarter or any other factors dampening sales into fourth quarter?
Well, the short answer is yes. The inventory adjustment period, I think we said will last two to three quarters. We are expecting customers to continue adjusting their inventory. Of course, the demand picture for the end customer, for the end consumers will remain uncertain. We believe China market demand is stabilizing. We are not sure about the speed of the recovery, but we do not expect China market to continue going downward. While the U.S. market uncertainty remains, I think higher. There are many different views. I think we believe our customers remain quite cautious with such uncertainty in the next couple of quarters. Thank you.
Okay. If I could follow up on the mid-teens CAGR that was set during good macro and before war and really the COVID lockdowns and inflation. Could you give a view on that and I think initially the way you're seeing macro, I know it's a CAGR, so is it your anticipation given the slowdown next year we should factor maybe a bit more conservative? You take a bit more conservative view on OpEx increase through that.
You mean CAGR, Randy, for 2022 or?
Yeah. Well, I'm thinking how you're now looking at 2023 because I think start of the year was 20% this year and then really the target each year to achieve teens growth. Just factoring the market if we should kind of bake in a more conservative view into next year. Do you or do you see product trends that could be enough to maintain a good bit of outgrowth?
Randy, I think for 2023 with the current uncertainty and a very dynamic environment, I don't think we are prepared to really comment on 2023 at this moment. We are in the process of doing the planning for next year. Hope we can give you guys more of our thinking later on. I think you mentioned also OpEx. Yes, it is, I think, critical that we are managing our CapEx and our inventory and trade also.
We do not have a hiring freeze, but we have slowed down our hiring quite a bit. We are now having a pretty strict OpEx target for next year. We are also managing our wafer start and our OSAT business very carefully so that we can at least manage our inventory for the next couple of quarters in a much more stable manner.
Thank you. Okay, thanks for that. The last question I wanted to ask on the pricing, the view on pricing, and it's two-part. If you see 5G, the different price levels for the market, flagship, mainstream, mid to high end. Do you see those bands enough new features to keep those bands continue to be more stable? Then how do you see, if you expect given desire to bring down inventory and customers, how do you see the pricing with a bit more rebating or factoring a bit of margin erosion through the coming inventory correction?
I think our position has not changed from our previous statements or remarks last quarter. We do not see pricing reduction being able to induce new demand. I think we are exercising a disciplined pricing scheme in the company. We do not foresee pricing reductions in any significant degree at all. Thank you.
Okay. Thank you. Thank you, Rick.
Next one to ask questions, Gokul Hariharan, JP Morgan.
Yeah, hi. Thanks for taking the question. My first question, could you talk a little bit more on the inventory levels, especially for mobile, both for MediaTek as well as for your actual customers level? I think last time you did talk about inventory being in the 1-1.5 months run rate. How elevated are inventory levels for SoCs and finished products in the channel based on your evaluation? Just wanted to, could you also give a little bit more color on how you expect this inventory cycle to work out? I think you've said probably two quarters or maybe three quarters. Just wanted to get a little bit more clarity on how you think that is likely to play out.
Let me try to answer this. I think, so long story short, based on our view right now, we do believe probably the whole market will take maybe two to three quarters to adjust or digest about inventory levels on the customer hand or maybe it's also including the inventory on the channel side. The last time we update about inventory, it's pretty much been stabilized out there. We don't really see it increase significantly. Actually it's quite on opposite side because given the overall weak demand out there, the whole supply chain, including our customer and also the inventory, been aggressively adjusting the inventory level. We do believe about the adjustment cycle may be around two to three quarters. It will last probably around two to three quarters.
Got it. Thanks, David. Could you also talk a little bit more about the pricing trends? I think that you did answer to Randy's question, but I just wanted to probe a little bit more. Typically, in most inventory down cycles, doesn't price.
You mean pricing? Again, just like the CEO Rick Tsai talked about earlier, we do believe the weaker demand right now is mainly due to the macroeconomic situation. Any aggressive pricing movement probably not gonna do so, or introduce any structural long-lasting demand. Maybe just a short-term demand, but not gonna change the macroeconomy for the long term. We will not actually adjust our pricing aggressively. I think that's our policy as shared right now.
I think, Gokul has accidentally dropped his line, so we are going to move on to the next one. The next one to ask question, Bruce Lu from Goldman Sachs. Go ahead, please.
Hi, I want to follow up the question about the compound growth for the next few years. Rick, you just talked about that because of my macro concerns. We are no longer to maintain our, like, next two to three years 10%-15% revenue CAGR, or you need to revisit and come out with updated numbers?
Yes. Yes. Just, you know, in light of the current slowdown, I don't think there's any question about that for anybody in the industry. We certainly will have to re-look at our future several years of the CAGR. Again, as I said earlier, we're now working on 2023, and from that point on, we will have a much better idea for our future CAGR. The important thing though is the major growth driving business investment and opportunities continue aggressively. We've been putting resources. We are actually reallocating resources from the more kind of, shall we say, mature business segments into the future growth segments, especially for the next three to five years. We certainly expect and look forward to having a strong growth in that period of time. Thank you.
If you just mentioned that the inventory correction most likely in two to three quarters, if you started from now, then you know, the inventory correction should be finished by the end of this year or first quarter next year. That should not impact your month and year growth plan too much, right?
Yeah. Bruce, actually, like I would say, this right now is there's a lot of moving targets and moving information out there. We, when we're talking about when to review it doesn't mean we're going to revise it substantially. I think that's what we're talking about. We're just talking about, it's actually not a prudent way to give out any detailed number right now given the market situation, okay? I agree with you, just like what we talked about earlier, for the long term growth opportunity, it's actually not changed because the whole digital transformation still continue. We don't really think the short term cycle adjustment will change the directions of the long term growth themes.
Okay, thank you. The next question would be that, you know, the inventory cycle, I mean, just mentioned that you do expect it to be finished within two to three quarters. You know, most of the investor which we talk to, I mean, the confidence level for that is, like, fairly low. Can you help us to understand that why do you believe this is gonna be finishing within two to three quarters? It won't last more than three quarters or longer. Or what is the possibility to get even shorter inventory cycle?
The again two to three quarters what we are looking at. I think different customers than the depending on their own situation will have their view. We actually look into at least each of our major customers' inventory level very carefully each month. That's how we come up with our estimation. You have to also realize the macro economy picture certainly is the biggest factor. We believe inventory level will go down in two to three quarters. We also believe the China market will gradually recover. The U.S. market is something that we do not have really a good picture right now.
That's why we need to move month-to-month, quarter-to-quarter. Thank you.
Thank you.
Next one we have Gokul Hariharan, JP Morgan. Go ahead, please.
Yeah, thanks for taking my question. I'll just ask one question. MediaTek announced the foundry deal with Intel on 15nm. Could you talk a little bit about the contours of this deal? Is this a regular foundry deal that you are expanding the list of foundries? Or, are there any more product collaborations also that are planned with Intel on Wi-Fi and connectivity, given that you already have a 5G modem relationship with them? Thank you.
Okay. Gokul, I think we kind of made that announcement already, but let me just take this opportunity to explain in detail again. The major reasons or major rationale is we MediaTek always been a multi-foundry strategy on the mature technology. For this time around, I think we are using Intel 16, which is roughly 22 nanometers on a FinFET process. For that process, we do believe globally right now is still kind of in shortage. It's actually one of our policy or strategy, trying to find more vendors and more capacity for 2-3 years down the road. In terms of product we need to take out there, so I think most likely it will be either digital TVs or mature Wi-Fi analog die.
With all that, I guess, on the leading edge node, we still work very closely with TSMC as a very close partner. I understand out there is a lot of speculation or, you know, estimation or guesstimation talking about that they would link with some kind of business deal. I just want to reemphasize actually that's mainly from a capacity planning perspective.
Okay. That's very clear. Thank you.
Thanks.
Right now we have Laura Chen from Citigroup to ask questions.
Hi, good afternoon. Thank you for taking my question, and I very much appreciate your sharing on recent market dynamic. Just wondering that, for the 5G market we just discussed, we kind of lower our estimate for the global 5G market. But I'm just wondering that from your perspective, MediaTek's, in terms of the market share or shipment for the 4G and the 5G SoC market, what would it look like for this year or maybe for the next year growth outlook, if you can provide us?
Laura, well, we have reported our estimate for the overall smartphone shipments, including 5G. Certainly, it's somewhat of a decline compared to last year's. I think is consistent with the other research organization or major players' view. Important thing to us really is to bring our technologies and our flagship entries. When we look at our portfolio, our portfolio offering, we are quite confident that we will be able to maintain our market share, which we have earned over the last about three years. We really are confident that these structural improvements that we have made will keep us with the strong market position that we have now, going forward into next year.
The key here then is yes, that we will be able to keep our market share. Also, we will be able to manage our gross margin at the level we want. Things will gradually get better, we believe.
Yeah. Rick, if I may, I still try to highlight one point, because I understand right now is people looking at negativity. If we put things in perspective, bear in mind, the 5G global shipment year-over-year still grow a very strong 20%. Even we're talking about for next year, given the relative low penetration on 5G, we still believe 5G global shipment next year will continue to grow. So, coupled with actually Rick talked about earlier, our market share is not losing at all, you know, in certain sense actually we still manage to grow the market share. That still represents a pretty good growth opportunity. So, you know, when we talk to different sell-side analysts, sometimes the buy-side investor, I think people worry about the short-term movement, but sometimes miss the big picture.
Again, year-over-year 5G shipments still grow a strong 20%. When we get into this cycle, especially when we talk about 4G to 5G product migration, is a pretty good ASP appreciation. Okay? Also, in addition to smartphone, our smart edge and power IC, the diversified and balanced portfolio are all grow very nicely.
Thank you, Dr. Tsai and David Ku. That's very clear. Just follow up on this because my understanding is like our 5G products used to have been enjoying better gross margin compared to 4G. I'm not sure if the situation is still maintained.
I think the situation is still maintained. Again, because smartphone right now is account for roughly 50%-55% of our overall revenue. If we have any line of business have a growth margin deviate too much from the from the sort of corporate average, we will not be able to reach that sort of growth margin. Basically right now, all product line have a very similar. Some higher, some lower, but I would say by and large, very close to the corporate average.
Okay, thank you. I've got a second question, if I may have. Just following previous question of Gokul on Intel's engagement. I'm just wondering that other than to diversify our foundry source, if there is any chance we can leverage with Intel's resource to get into the PC-related or peripheral markets with that engagement?
As you all know, we already have a 5G modem engagement with Intel into the x86 notebook PCs. Actually, we believe that the relationship between Intel and MediaTek will continue to grow. But right now, the arrangement between Intel and MediaTek, the foundry arrangement, is mainly still a capacity, a long-term mature technology capacity arrangement. I might add, we have strong confidence that the semiconductor industry will continue to grow at a very good rate despite the current slowdown. It will recover soon. We definitely believe MediaTek will be part of that growth cycle when it happens.
You must realize this is any time you take on a new foundry, a new process. By the way, that process has a FinFET in the process, so it does have some pretty good advantages. We are preparing for the future growth of the company because we all know that the 22nm node is a very good node for many applications. It's also more resilient capacity structure for us going forward. Thank you.
Thank you. That's very helpful.
Next one we have Charlie Chan from Morgan Stanley.
Hi, Rick, David, and Jessie. Good afternoon. My first question is about your 5G strategy. First of all, I know you will keep the pricing discipline, but your foundry partner costs may go a bit higher in 2023. Can you pass through to your customers, and can you maintain the 48% gross margin into 2023? Thank you.
Charlie, I think currently the semiconductor supply chain is actually very dynamic. We have been proactively managing and dealing with it. Like you say, if necessary, we will definitely review our pricing strategy and also capacity allocation to reflect the industry dynamic and also more importantly, our long-term capability to invest for the long term.
That's a quick answer. In terms of next year's gross margin target, I think like we talked about earlier this year, the guidance for the gross margin range earlier this year, the range was 48%-50%. I think this year we are well into this range, more on the mid to high end. I think next year so far is not finalized yet, but we do believe that actually is a good target range to start with for next year.
Got it. Also on 5G. I mean, I do believe that 5G is accretive to your blended ASP, but this year we certainly have better flagship contribution. Next year, I'm not sure if the company want to introduce some entry level or lower price of 5G. If that's the case, do you think your blended ASP for 5G can still go up in 2023?
Charlie Chan, I think it's maybe too early to talk about next year product mix. In general, I think, next year is one thing for sure, we will continue to introduce new product in all segments, which including the flagship and also the entry-level as well.
My second question would be about your long-term investment. Rick just mentioned that although you're kind of controlling the OpEx, but you will continue to invest for a new core technology for the coming 3-5 years. Can you elaborate a little bit on that? For me, I'm particularly curious about your plan for Windows on Arm processor. Because you already have a strong foundation there, but your competitor, Qualcomm, seems to point out they will introduce, you know, the Oryon project for Windows on Arm next year. What's MediaTek's progress on Windows on Arm? Thank you.
We have been investing in the Arm-based processor for, of course, many years. Before, mainly for the mobile SoC and lately, of course, a mobile flagship SoC's applications. We also, as you probably know, leverage those SoC into other applications. Windows on Arm represents, of course, a fairly quite different segment. It's more in the compute segment, moving from the low power to mid power range. As a result, I cannot share with you the details of our engagement or development status.
What I can say is we have putting the resources both from the technical development, all the CPU, GPU capability, some software resources, and we're working with, I would say, really a relevant party going forward. I also want to remind you, for such a major endeavor, it always takes time, a lead time. There will be a lead time for such business to to grow. That's why I talk about this, all these things are for three to five years horizon. Definitely not for, say, next year. That would be the case right now.
I see. Fair enough. Thanks, Rick and David.
Next one, we have Sunny Lin from UBS.
Hi. Good afternoon. Thank you for taking my questions. My first question is on the 5G pricing. If we look at in the past, new generation of chips would tend to have pretty meaningful premium in the first few years, but then the premium will come down to drive a higher penetration. Now that the 5G pricing is still a lot higher versus 4G, just want to get your thoughts on how the price gap may evolve going to next few years. Ultimately, how much do you think a 5G chip could deserve in terms of premium over 4G? Thank you.
Sunny, I think based on what we see right now, the gap probably gonna stay here for quite some time. It's mainly due to the complexity of the 5G technology. You know, simply put, you know, 5G transmission and also the functionality is actually much stronger to 4G, and we just need to spend more area or put in more transistors on each product. That's why actually the size of the chipset will be much larger, and consequently the pricing of the product will be higher. Based on what we see right now, there's no magic pill to against this. In the near terms, most likely the gap will stay there.
On the other hand, since you're talking about the penetration, the good news actually is, at least based on what we see this year, the 5G penetration already has reached to a good 50% globally already. Obviously the pricing is, the gap of the pricing, to be precise, didn't really somehow slow down the 5G penetration or picking up. We do believe next year the 5G penetration will continue to increase. It's, in a way, similar to 4G versus the 2G. Believe it or not, right now, we're still talking about 200 million-300 million 2G every year, and the gap between 2G and 4G is still pretty wide out there. It's just different product segmentation, going forward. I think that's our view so far.
Got it. Maybe a very quick follow-up. If you look at the cost structure for 5G, do you still see a lot of room for cost reduction going to next two, three years? Or, you think most of the cost improvement has already been done?
I think there are still some cost improvement area, but probably it's not quite a lot. Because again, right now for 5G, most likely we're talking about the leading edge process, you know, flagship, you know, even if we talk about four or three. Even for mainstream, we're talking about seven or six. The pricing on the supply side and also the complexity on the supply side is actually not that easy to resolve. On our side, in terms of the intellectual property, we can definitely do some improvement on others, but it's not gonna be, you know, reduced substantially.
Got it.
Most likely, the cost structure will be similar.
Got it. Thank you. My second question is on your flagship 5G. Could you help us think through the potential upside going into 2023? I think competitively, your peer supply issue is getting resolved, and they have also switched to TSMC's 4nm. What's the drivers for you to get a higher share into next two, three years? Do you see any upside outside of China?
Yes. Again, we are happy with what we have achieved with our first generation flagship, Dimensity 9000. With actually about less than 18 months of development time. The performances and the acceptance from the market, I think is quite good from our point of view. During this period, we have really, I would say, learned to further improve our performance, especially from the user experience point of view. For the flagship phone, the user experiences is truly critical in order to be accepted by those high-end customers.
We have learned a great deal. These are not only in the hardware, IT and the process technology, but a lot of which also comes from the system software design. We are quite confident that our second generation SoC, which now we have silicon at hand already, will have a pretty significant improvement over the first generation. We just believe that we will continue penetrating with our offering because we have good performance and we have also reasonable cost structure for our customers. Thank you.
Thank you very much.
Next in line for questions, Frank Lee from HSBC. Go ahead, please.
Thank you. I had a question, I guess two questions. The first one is kind of the overall discussion people have had on the inventory and your view of two to three quarters of digestion. I guess just looking at the fact that we've come off kind of an unprecedented two-year upturn, and inventory levels seems quite elevated across the board for quite some time, just to understand the rationale behind why two to three quarters, which seems to be a normal cycle inventory is all we need, or at least the expectation is that's about how long it takes.
Frank, like we explained earlier, we actually take a hard look for all the customers and channels and level of inventory. I think one key thing I'm sure to highlight is actually overall, we're still talking about 5G shipment year-over-year growth 20%. Which means the end selling point is still pushing out a pretty good number of phones out there. Think about it that way, the digestion or the final channel is still leaking out, but the selling in obviously is actually coming down substantially. As you can tell, the whole supply chain, which including our side, foundry side, even our customer side. It's a basic math. When you have a steady outflow but much smaller inflow, and right now the channel inventory and the customer inventory, we're not talking about 10 months or 20 months.
We're talking about maybe, you know, 2 + 3 months with that pattern, if that pattern continue to two to three quarters, unless you believe next year the demand will decline. Otherwise, I mean, if you're doing the math, most likely after two to three quarters, but I think we should have some chance to see some picking up or stabilization. I think that's our view. Still trying to highlight the key point is, currently, even though people see lots of negative news, bear in mind, there's still a pretty strong year-over-year growth. The final selling point still pushing our phone, I would say, steadily, okay? Next year, we're still looking for more 5G phone going to be sell.
Okay, thank you. I guess my second question is just overall on pricing. I understand, you know, the duopoly situation you have on the smartphone side, which I think will help insulate or protect downward pricing pressure compared to past cycles. How should we look at the other businesses where you don't have so much necessarily a duopoly, but potentially more competitors as we look at this inventory cycle from a pricing point of view? How should we think about these other applications?
I think if you look at our other segments, either we have pretty strong, very strong market position or the competition is relatively muted, I would say. For Power IC, it is really a very broadly based segment of the pricing. It's again not so sensitive to the macro environment. That's why we believe that we're confident that going forward the key things for us is continuing investing in our capability, our technology, our product portfolio. We will be able to maintain our market position. We certainly will maintain our gross profit margin. When the market turns, MediaTek will come out stronger and healthier. Thank you.
Okay, thank you.
Ladies and gentlemen, in the interest of time, we are going to take the last one question. The last one to ask question, Brett Simpson from Arete Research.
Yeah, thanks very much. Rick, I wanted to ask about potential M&A with MediaTek. I guess when we look at some of your U.S. fabless peers, they've been, you know, highly active in large scale or medium scale M&A, and it's been relatively successful from a synergy point of view. I guess when we look at MediaTek, you have a very strong balance sheet. You're generating, you know, north of $5 billion of free cash this year. Now that we've seen valuations come back in semis, you know, what's holding MediaTek back from being more active in the M&A side? If you are looking at M&A, can you maybe share with us what areas might make sense in terms of complementing what you're doing today? Thank you.
We certainly are looking at an M&A target. I also must say the overall environment is not very friendly. If you look at the deals which have failed to go through the regulatory process in different areas, different regions, countries, the failure rate is very high. It's very high. That's why we're being cautious, and we don't want to fall into the trap of spending a lot of resources and then just end up paying a breakup fee. Saying all that, we understand that for our future growth, again, for the next 3-5 years, it is advisable to look to have some synergistic target.
I cannot share with you which area we're looking at, unfortunately, of course. What I can say is that we work in that respect, and we also need to work on to have a more friendlier environment for the M&A also. Thank you.
Thanks, Rick. Maybe just a second question, if I may. I wanted to get your perspective on how you see automotives as a potential meaningful market for MediaTek. I mean, you have IP that's highly leverageable into autos, and we've seen some of your competitors talk about very large pipelines, you know, over the next sort of five years. Just sort of dovetailing into your long-term CAGR thought process, can you just maybe share with us, your thoughts on how you see MTK in the automotive markets, specifically in things like 5G, digital cockpit, you know, where are you winning business? I mean, given 5G and autos looks like it's gonna be a big market, and it's a two-player capability, and you have a very strong modem portfolio.
You know, just can you help us understand how you're thinking about this segment of the market? Thank you.
Agreed. I think this is a segment that MediaTek. It's not that we don't have a presence. We do, I assure you. Not big enough, I also agree. We understand the fact that we can leverage our IPs. I think of our future growth in our future growth map. Of course, the automotive industry is a quite different industry compared to, say, a consumer smartphone or a computing business segment. They're quite different. Because of the move into the digital cockpit control, as you said, and the much higher connectivity requirements, it opens the door for us. We certainly are in the process of moving into a growth mode for this segment.
We understand certainly full well that we have a very strong portfolio in the modem. Of course, in the Wi-Fi area too. Well, I'm not even sure leverage is the good word. We will definitely expand those IP capability into different segments, and the automotive being a very important one. Thank you.
Thank you.
Ladies and gentlemen, we thank you for all your questions. Now, I'm going to hand it over to Miss Jessie Wang for a closing comment. Miss Wang, please proceed.
Ladies and gentlemen, this concludes the MediaTek 2022 second quarter conference call. We would like to thank you for your participation, and you may now disconnect. Thank you.
Yes. Thank you again, ladies and gentlemen, for your participation in today's conference.