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MediaTek Inc
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Welcome to the MediaTek 2023 First 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.
And 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 our first 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 to be materially different from the statements. The presentation materials supplement Non-TIFRS financial measures. Earnings distribution will be made in accordance with financial statements based on TIFRS. For details, please refer to the Safe Harbor statement in our presentation slides.
In addition, all contents 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 contents provided in today's call.
Now 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 all in NT dollars. Revenue for the quarter was NT$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 were NT$31.5 billion compared with NT$34.2 billion in the previous quarter and NT$35.3 billion in the year ago quarter.
Operating income for the quarter was NT$14.4 billion, down 20.6% sequentially and 60.6% year-over-year. Non-TIFRS operating income for the quarter was NT$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-TIFRS operating margin for the quarter was 15.7%. Net income for the quarter was NT$16.9 billion, down 8.8% sequentially and 49.4% year-over-year. Non-TIFRS net income for the quarter was NT$17.5 billion. Net profit margin for the quarter was 17.7%, increased 0.6 percentage points from the previous quarter and decreased 5.7 percentage points year-over-year.
Non-TIFRS net profit margin for the quarter was 18.3%. EPS for the quarter was NT$10.64, down from NT$11.66 in the previous quarter and NT$21.02 in the year ago quarter. Non-TIFRS EPS for the quarter was NT$11. A reconciliation table for our TIFRS and Non-TIFRS financial measurement is attached in our press release for your reference.
And that concludes my comments. Thank you.
Thank you, David. Now I'd 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 gross 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 inventory 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 share, revenue 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 a 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 benefits of our leading 4G and 5G products to customers. For the high-end segments, 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.
Traditional 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 supports, we are able to better assist business 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 the sizable and long-tail 4G market well.
Now let me move on to Smart Edge Platform, which performed relatively well among the three revenue groups in the first quarter with a flattish revenue and accounted for 47% of revenue. This performance in the first quarter was supported by our TV SoC, broadband products and tablets.
For TV, overall demand increased in the first quarter as customers' inventory has been normalized and recent sales is improving, especially in North America. For 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 phones to other platforms and enjoy the 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 Platform 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 10GPON. And 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 automotive as well as ARM-based computing market. Our overall automotive revenues grew robustly in the past few years with existing products. In the recent announcement of our Dimensity Auto Platform, we depict the thrusts in the cockpit, connect, drive and components areas, incorporating multimedia AI processor, 5G, Wi-Fi, Bluetooth, navigation, satellite communication and PMIC technologies. We are also working closely with industry partners closely to accelerate these efforts for our future growth.
Now moving on to Power IC, 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 this demand to be stable in the second quarter for PMIC business.
With those market situations we just discussed, our second quarter guidance will reflect both 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 NT$91.8 billion to NT$99.5 billion, down 4% to up 4% sequentially and down 41% to 36% year-over-year at a forecasted exchange rate of NT$30.3 to US$1.
Gross margin is forecasted at 47%, plus or minus 1.5 percentage points. Quarterly operating expense ratio to be at 33%, plus or minus two 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.
However, 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 NT$76 per share, which includes a regular dividend of NT$60 per share and a special dividend of NT$16 per share. With the same policy of 80% to 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 prepared comments. Thank you.
Thank you, Rick. Operator, we are now ready for Q&A. May we please have the first question?
Yes, Jessie. [Operator Instructions] 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 through on the flattish outlook in mobile. Just factoring you've had a couple of quarters already down quite a bit year-on-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 to head? And then if -- 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 an above seasonal once the inventory bleed draws down?
Randy, we believe the inventory both at customer side and the channel is coming down, 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 the fourth quarter. Now it's -- I think the market sentiment remains still weak. I think the customers are drawing the shipment cautiously even when their inventory is at a normal life or so-called. Thank you.
Okay. And 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 at 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? And then 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 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. So this is a year-long effort. We also have some pretty good flat affordable phone using our 9200, which also serving quite well. The important thing, this is 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 -- is in actually, the tape-out, we have the silicon, progress is very good. We will be able to ship to launch products according to an aggressive schedule. And 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 years, three years now. And the following I think is quite a bit better in the cost structure and in the power consumption. So we look forward to the launch of those two products, both on the high-end and on the entry-level. Thank you.
Yes. And I just have 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? And 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? So I'm just curious your competitive positioning as you position that AI engine.
As far as I can tell, Randy, we have as good a AI processor in our SoC compared to our competitors. However I think now is more important to work with our customers to utilize the capability, and we have also actually demonstrated and we will certainly in public. We have demonstrated internally the capability to do ChatGPT kind of applications with a very good performance. So we are confident that we will be able to provide the capability for our customers. It is, of course, critical that the customers can come with -- 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. And I guess if we go back to pre-COVID, we were probably in the 1.4 billion or above range. And I guess, Apple's growing their business since pre-COVID. So all the decline is Android-based. And 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? But I'd love to get your perspective on how to think about long-term growth in mobile and smartphones and how you see the Android portion playing out over the next couple of 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, 1.15 plus billion units in 2023. I mean, I don't have a crystal ball per se, but I do believe this will probably be at least short-term bottom for this number. I think the market is ready for a replacement cycle. Of course, the decline from 1.4 billion to 1.1 billion comes with several reasons, one being lengthened replacement cycle.
The other one, probably also was now especially this recently probably during the last six months to 12 months, the emergence of the so-called used or refurbished phone, which really eat into the total unit, the new smartphone sales unit. iPhone certainly has done well, both in China and also in the U.S. internationally. There's -- so we are -- the Android or how should I say, the Android ecosystem really need to work a lot better. The, I mean, the numbers speak to itself. I'm not going to mince words.
But as far as MediaTek is concerned, I hope you understand that I think with our capability and our investment in the high-end flagship phones and also a much more cost-effective low or entry-level phones will sustain our position in this competitive environment. And we are and we will continue to do that. I have that confidence.
Do you think the delta between the 1.4 billion to the 1.1 billion or 1.15 billion, is that largely explained by refurbished phones cannibalizing new devices or is it a mix of things? Because we're all trying to size this secondhand market that seems to be growing and growing structurally. So 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 50 million to 100 million, give or take. So it's just a big range I know, but it is at the stage that probably -- basically, the slowdown replacement cycle is another, I think, it's even more important factor. You see the phone numbers sold in China has remained kind of flat for a few years.
Yes. And maybe just last one for me. I wanted to pick up on Randy's question about generative AI and how you see this playing out on smartphones. How big a semi content driver is this? When you look at the amount of silicon it's going to take to do inference on a smartphone, $10 billion PATAMI a model or something like that. Is this really move the needle as far as semiconductor content on the smartphone? And does AI become the driver -- the new driver of semi content on the smartphone? I'd love to get your thoughts there?
Okay. I can address this question. I'm afraid not in a very, very definite fashion, it is very new, very new. Everybody, I think is rushing, to tell the truth, to the applications and rushing to -- or 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.
So in many ways, we are happy that there is now new applications that will take advantage of the very -- already very strong AI processing capability. However 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, remains to be seen. It takes a little while.
We have to -- basically, we have a road map for our AI processor. The road map is pretty aggressive. We believe the current road map can survive for this generative AI needs. But we -- I think we -- what we need to do, I think the industry needs to do also really to understand how we divide work between the cloud and the edge devices. So that -- I mean 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, our people also needs more and more cloud capability.
So I think those two things just move forward hand-in-hand. And 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. Thank you, Rick.
Next one to ask question, Gokul Hariharan from JPMorgan. Go ahead please.
Hi. Good afternoon and thanks for taking my questions. 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 segment. Could you also give us some more clarity about how pricing is evolving on a like-for-like basis, let's say, Dimensity 8000, Dimensity 7000, Dimensity 6000 segments currently compared to previous generations? Are we seeing pricing coming down or we are still seeing pricing moving up, given that you're adding more functionality to a lot of these products? And, yes, I'll be standing by.
Gokul, it's Dave here, so why don't I take that one? Gokul, I think like the CEO, Rick's opening remark talked about, we do see some segments have led us an intensified price competition. And from our perspective, I think that's something that we need to respond. But I think the key is actually we need to have a balancing strategy. What do we want to balance into, we need to think about the market share, the profitability and the pricing.
So we were not just only thinking about the market share going to maximize it or only trying to counter attack of our pricing. So overall, I guess, we're trying to look at the totality of the pricing. But in terms of the details you're asking about the like-for-like comparison, I think in general, it's coming down a little bit, mainly due to the competition and also due to the weak demand.
But by saying that, I guess, you can judge from our second quarter gross margin guidance, the second quarter gross margin guidance is 47%, plus minus 1.5% compared -- given the fact actually, for the first quarter, gross margin guidance, the disclosed gross margin was 48%. So it's not going to be a huge difference, but also show some pressures on the gross margin. I think that's actually is maybe the better way to look at that.
Okay. Thanks, David. So just to add on to that. So do you expect like last quarter, when you mentioned gross margins stay in this range through the year or do you think there is more gross margin pressure in the second half of the year?
Well, I think right now, given the market dynamic, we're probably kind of reluctant to give out the full year gross margin guidance. But by saying that, if you recall, the earlier statement we talked about the first quarter guidance, it was 47.5%, plus minus 1.5%. We think that's right now still going to be the goal we're striving for the full year. And first year -- first quarter, at least it was past that, second quarter based on the guidance, I think we made 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 compute side. Could you tell us a little bit more about what are the time lines 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 take a few more years, because right now, we've actually been investing aggressively and actively for the ARM computing. But given the overall development requirement, I guess, still takes probably two-plus years or two plus minus years for 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 plus revenue already. And we do see actually is a strong growth momentum and possibility for the next few years.
But bear in mind, even we say, actually, design-in is actually pretty healthy. But the design-in and design win cycle, especially for the revenue branding up cycle for automotive is rather slow compared to the normal consumer product. So I think the trend is positive. The design-in and design win is healthy. But in terms of the magnitude, in terms of picking up the magnitude still taking some time. But right now, unless we see $200 million plus 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 very much for taking my questions. So my first question, I just wanted to follow up on the SoC sell-in versus the smartphone sell-through question. And so if you look at first half of the year, how much do you think the 5G SoC are undershipping versus the smartphone sell-through for China smartphone customers? Do you think the gap is narrowing going to second quarter? And based on that, how should we think about your seasonality for Q3?
I think for the -- I think for the earlier number we talked about for the full year, 1.1 billion, that referring to basically the -- we call it as the market share up, the market share up. And for our sell-in business probably was slightly lessened due to the fact both customer and channel still have their inventory. 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 a 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. And then 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. But from a demand perspective, based on what you see, are you seeing better strength in high-end or low-end? And how should we think about your product mix for smartphone SoC this year versus 2022?
Well, I think in general, I would say, from a mix perspective, if mix defined as a high-end, especially for us, is a main flagship versus the other segment, 2022 is definitely better. If you -- based on the year-over-year comparison, we're still seeing the flagship revenue and shipments to grow year-over-year this year. But for other segments, on the smartphones, exactly we see a decline. So on the mix-wise actually is getting better. But unfortunately, due to the weak demand, the overall revenue is still coming down, but 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. So 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? And what would be the key segments for MediaTek focus in the next two years to three 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. The critical thing is to allocate those precious resources. And 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 areas will provide our growth in the next three years to five years in the future. We are, of course, continuing to invest in the flagship SoCs in the mobile, but we are also looking at our portfolio of SoCs. We will not probably build as many as we have before.
And the other thing is we are getting more efficient in the mobile SoC development despite the very demanding needs from a flagship. We are -- as you can tell, we can come up with a very much better performance and much lower power and a much more difficult leading-edge process and we keep our schedule quite well.
So I must say we are very proud with our R&D. They are actually delivering more with sustained resources and, in some cases, lower resources. AI is definitely one area that we are putting a lot of resources because the new areas that we are focusing on are all related for the computing. So that's obvious one area.
Got it. Thank you very much, Rick. So my second question would be related on the CoWoS and Advanced Packaging. We have learned that MediaTek definitely has a very strong IP portfolio in computing, communication and multimedia. And 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 would be great to elaborate also a bit on your opportunity in the AI space for cloud, for cloud too? Thank you.
Well, you have many questions in your question. I guess, first one, you talked 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 we'll take advantage of the advanced 2D to 3D packaging. But you have to also bear in mind this is a very complex equation here because you have the demand, demanding requirements, but you have a leading-edge process, whether you want to use 3-nanometer or 2-nanometer and or the packaging technology can give you good enough power and also good enough cost structure. It's very complex. Your other question?
Okay. So I think the second question will be the third question. I think for the AI right now, we are pretty much focused on the Edge AI. And so we didn't really focus on the Cloud AI. So for most of our AI-related investments are pretty much on the edge side, and to be precise, probably on the inference side, really on the trending side. And that's actually the direction we're heading right now.
Got it. Thank you very much.
And now the line is open to Bruce Lu from Goldman Sachs.
Hi. Thank you for taking my questions. In your prepared remarks you said the smartphone competition is pretty much at the lower-end segment, which is the vast majority of the product offering MediaTek. So do we have the confidence that it won't proliferate to mid to mid-end or even higher-end segment? Because in this market, it's a stack in the market for the smartphone right you have that you upgrade situation, but you still see the intensified competition. What is the rationale behind? And what can we foresee for the competition in the longer term in this stack in the market?
Bruce, I think overall, from a product and mutation perspective, in general, we're looking at a pyramid. Basically, for the entry-level, it's actually the highest volume, both for 4G and also 5G. And I think the bottom line actually is, we do feel actually is our product, both from a performance and a cost structure perspective is actually very strong and very competitive. And I guess your question is really just why actually some players out there trying to launch it on an irrational price competition and to be honest actually is we don't know the answer.
But at least from our perspective, we do believe there's going to be a long-tail demand out there. That's point number one. Point number two, the bottom line is actually is we don't have strong pressure on the inventory, and also we feel comfortable about our cost structure and pricing.
So we need to respond reasonably, but we will not respond irrationally. So that's why in the opening remarks, we made quite clear. It's a dedicated balance, if we need to find the right balance between 0 and 1, but we will not go too aggressive on that because actually that's going to be a long-tail business. But the bottom line is actually is our cost structure and product performance is actually very competitive. I think that's our view.
Okay. 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 propagation process by themselves, right? So I want to know what's MediaTek's strategy to accounting for this kind of shrinking addressable market, i.e., if you try to provide them a very expensive modem, then you might be getting some business out of it or you try not to provide any more that they slow down the whole progress for their internalized chips. So what kind of strategy MediaTek is working on right now?
This is a classic, of course, for the -- what they call that co-competition or --
Competition.
Yes, 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, everything, combined together, we are really confident in that.
So in our mind, 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.
Okay. Thank you.
Next one to ask question Charlie Chan from Morgan Stanley. Please ask your question.
Thanks. Hi, Rick, David and Jessie. Good afternoon. So I have -- first question is regarding your ASIC business strategy. I think you already revamped your automotive, right, which is a good sign. But right now, it seems like ASIC design demand is still very, very strong like of kind of capable vendors. Do you think to expand this ASIC business a little bit to address the Cloud AI markets? And would you consider to do some strategic partnership with some IP or design service industry peers? Thank you.
Well, ASIC, relatively speaking, is the nature of the business is much less for comparison, for instance, automotive is less in size and also more complicated in that -- 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 3-nanometer, TSMC 3-nanometer, sooner probably than the other ASIC supplier to scale.
And also we have all the necessary IPs that they need for the hyperscalers. To stay on that, I also would say this is also a competitive market. I believe we are making inroads this year, but the, well, but I hope to be able to say is that probably near the end of the year, we have something to report. Thank you.
Okay. Great to hear. Thanks, Rick. And my second question is about your chip costs. I know pricing environment is pretty difficult to react, but costs could be something you can manage, right? So first of all, is on your manufacturing cost, how are you going to address the foundry cost, meter, wafer cost and the back-end cost since you are facing some pricing pressure as well? And secondly, is it a little bit mid to long-term cost, the IP licensing and royalty? I think this is already popping news, right, that ARM, your major CPU IP vendor try to hike the fee, right? So how are you going to address those cost increase issue? And would you consider some alternatives like RISC-V CPU IP in your future products? Thank you.
Charlie, I'll talk about the wafer and back-end cost, first. I think long story short actually is that right now, as everyone can see, for the whole industry, we are all talking about weak demand, both from a design sector and also from a foundry and also back-end sectors, I think everyone know that. But 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've all been going through for a good time during the COVID situation.
Now actually post-COVID, our demand is actually weaker. So we are actively talking to all our supply chain eco-partner and vendors and trying to basically get some support. I think in general, I think we're getting some positive feedback. We probably won't be able to tell a bit about detail, but you can rest assured, I think that's the directions we are working on right now.
Thanks. And how about the --
Well, on the CPU, it 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 [indiscernible] for many, many years or through their portfolio. There is definitely a discussion on the business model in the leading-edge, very leading edge, the biggest core.
The important thing is such, we believe both companies believe through working closely together, collaborating together, we make more money together, and that's how we approach it. Both companies are very strong. Both companies are very capable and I truly believe that through collaborating together that we will have much better products, and they will get their fair share of the return for their investment. Thank you.
Thanks, Rick. So 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 -- but purely on the cost side, can you give us some color? And also, again, right, RISC-V, you said something you will seriously take it as a very important alternative in your long-term portfolio?
Sorry, we normally won't break out by single vendors and talk about what's the impact to the gross margin. But probably the better way to look at that is actually is, if there's any impact already included in our guidance, both for the gross margin [indiscernible] and also the gross margin guidance both for the second quarter and also kind of provide a hint for the full year, I think this has all been incorporated already.
Got it. Thanks. Okay. RISC-V, any comments?
No.
Okay. Thanks gentlemen.
Okay. Thank you, ladies and gentlemen. Because we are running short of time now, so I'm going to hand it over to Ms. Jessie Wang for closing comments.
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 the Investors section of MediaTek's website. We would like to thank you for your participation and you may now disconnect.
Yes. Thank you, Jessie. And ladies and gentlemen, we thank you again for your participation in today's conference. You may disconnect now. Thank you and goodbye.