Qorvo Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2022

Key Takeaways

  • Qorvo reported $1.045B revenue and $2.25 EPS in Q1, beating the midpoint of its guidance with broad-based strength in power, defense and infrastructure segments.
  • Mobile segment revenue grew year-over-year excluding China customers, while Qorvo secured noteworthy design wins across high-volume platforms, positioning it well in cellular applications.
  • Q2 revenue is guided to $1.12–$1.15B and full-year non-GAAP gross margin is expected to decline to ~48% in H2, reflecting lower factory utilization to improve inventory levels.
  • Q1 included a $110M one-time charge tied to a long-term foundry capacity agreement that was excluded from non-GAAP results, due to changed demand outlook.
  • The company generated $230M in free cash flow and repurchased $350M of shares during the quarter, maintaining disciplined CapEx and a focus on cash generation.
AI Generated. May Contain Errors.
Earnings Conference Call
Qorvo Q1 2023
00:00 / 00:00

There are 20 speakers on the call.

Operator

Welcome to Qorvo's fiscal 2023 First Quarter Earnings Conference Call. This call will include forward looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release published today as well as the risk factors associated with our business in our annual report on Form 10 ks filed with the SEC because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non GAAP financial results. To provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non cash expenses or other items that may obscure trends in our underlying performance.

Operator

During our call, our comments and comparisons to income statement items will be based primarily on non GAAP results. For a complete reconciliation of GAAP to non GAAP financial measures, please refer to our earnings release issued earlier today available on our website atqorvo.comunderinvestors. Joining us today are Bob Grecoworth, President and CEO, Grant Brown, Interim CFO as well as Eric Crevison, Philip Chesley and other members of Qorvo's management team. And with that, I'll turn the call over to Bob.

Speaker 1

Thanks, Doug, and welcome everyone to our call. Corfo delivered fiscal Q1 revenue and EPS above the midpoint of the outlook provided on our May 4 earnings call. In IDP, June revenue was broad based across markets with strength in power, defense and infrastructure. The diverse markets served by IDP are exposed to an expanding list of long term drivers, including enterprise, smart home, automotive connectivity, electric vehicles, battery powered pools, infrastructure and defense radar and comms. In mobile products, June revenue was diversified across customers and product categories.

Speaker 1

Qorvo grew year over year excluding China based customers, While securing noteworthy design wins and content gains across customers and high volume platforms. Qorvo is exceptionally well positioned in cellular applications with a long term outlook supported by growing content and integration trends. Now let's look at some of the quarterly highlights. In ultra wideband, we completed MFI certification of interoperability of our ultra wideband solutions With the Apple U1 Chip used in supported iPhones and Apple Watch models. This will enable developers to create innovative new products and accessories that interact seamlessly with their environment, leveraging the full power and precision of UWB technology provided by Qorvo.

Speaker 1

In MEMS based sensors, Qorvo commenced shipments of force sensors, Which enhance industrial design and improve Trackpad uniformity and reliability in a recently launched consumer laptop. The content opportunity in Trackpad applications typically includes 4 MEMS sensors. For matter enabled applications, we launched a new development kit for gateway and connected devices. Corcos Matter solutions streamline commercial development of smart home applications, including home hubs, mesh lighting, security, speakers and other connectivity and sensing applications. In automotive connectivity, we secured WiFi 6 design wins for an infotainment system at General Motors.

Speaker 1

We also validated Wi Fi 6 placements on a reference design for a top automotive Wi Fi chipset supplier. In biosensors, we obtained FDA emergency use authorization of our Omniodiagnostic test platform using VAW technology for COVID antigen detection. This expands upon the previous EUA to include the significantly larger point of care testing market outside of labs, such as physician offices, urgent care, retail pharmacies, employee health testing and other locations that operate under CLIA waiver. In power management, we were awarded our first design wins to supply enterprise class PMICs for data center applications. This achievement includes multiple customers and builds upon our strength in consumer applications.

Speaker 1

Our power management offerings leverage a unique architecture that delivers measurable innovation and value and that is helping to extend power management into other markets, including defense. In automotive power applications, Qorvo was recognized with an innovation award from American Axle and Manufacturing for superior efficiency using our silicon carbide devices in power conversion applications. We also secured a silicon carbide win with a leading solar inverter manufacturer serving the U. S. And Europe expanding beyond our position in residential energy storage.

Speaker 1

In defense and aerospace, we are recognized by Raytheon Technologies with their premier award for performance and overall excellence in both collaboration and technology and innovation. We also initiated a strategic alliance with a large U. S. Defense prime For package development and assembly, leveraging our advanced microwave module assembly facility in Richardson, Texas. In mobile products, we expanded our content at a Korean based OEM with the first shipments of our low band pads to this customer.

Speaker 1

We also commenced the volume ramp of the industry's first complete main path solution for Phase 7 LE, supporting multiple mass market programs at Honor. Qorvo's RF Fusion for Phase 7 LE enables broader operator coverage and reduces implementation area in customer devices. For U. S.-based Android OEM, we ramp shipments of our mid high band pad antennaplexer with integrated LNA, ultra high band DRX, antenna tuners and ultra wide band solution in support of an upcoming smartphone launch. Both the ultra high band DRX and the antennaplexer with LNA represent new product categories Qorvo.

Speaker 1

Lastly, we received our first production order for MEMS based antenna solutions in support of a high end gaming smartphone. These are the first volume commercial orders of our MEMS antenna solutions, which increase efficiency and improve throughput. Before turning the call over to Grant, I'm pleased to announce a new organizational structure. Qorvo is now organized into 3 segments: connectivity and sensors, high performance analog and advanced cellular. Eric Creviston is leading the Connectivity and Sensors Group.

Speaker 1

CSG is a leading global supplier of connectivity systems and components, including ultra wideband, Bluetooth, matter, WiFi, cellular IoT and MEMS sensors. CSG combines the connectivity business formally split between IDP and mobile products. PSG's markets include smart home, automotive connectivity, industrial automation, smartphones, wearables, gaming and other high growth IoT connectivity and healthcare markets. We expect the markets served by connectivity and sensors to support strong double digit annual growth over

Speaker 2

the long

Speaker 1

term. Philip Chesley is leading high performance analog. HBA is a leading global supplier of RF and power management solutions for infrastructure, defense and aerospace, automotive power and other high growth markets. HBA leverages a diverse portfolio The increase in semiconductor spend in defense and 5 gs deployments outside of China. We expect the markets served by HPA to support double digit annual growth over the long term.

Speaker 1

Frank Stewart, who most recently served as General Manager of the RF Solutions Business Unit and Mobile Products is leading the Advanced Cellular Group. HCG is a leading global supplier of cellular RF solutions for a variety of devices, primarily smartphones, wearables, laptops and tablets. ACG leverages world class technology, systems level expertise and product portfolio breadth to deliver high performance cellular products to the world's leading smartphone and consumer electronics companies. It is a highly diversified supplier of custom and open market cellular solutions with a broad reach across Ios and Android OEMs. We expect the markets served by ACG to support high single digit annual growth over the long term.

Speaker 1

We've also centralized our sales teams under Dave Fullwood, who most recently served as Vice President of Sales of Mobile Products. The 3 new segments align our technologies and applications more closely with our customers and end markets, And our global sales force will capitalize on opportunities across customers and markets to accelerate long term diversified growth. Within each segment, Grupo will continue to leverage core strengths in process and packaging technologies, manufacturing scale, systems level expertise and deep relationships with customers and suppliers to enable a greener and more connected world. Efforts. And with that, I hand the call over to Grant.

Speaker 3

Thanks, Bob, and good afternoon, everyone. Following up on Bob's comments about the new org structure, When discussing results for fiscal Q1, we will refer to the operating segments that were effective during that period, Mobile Products and IDP. Our forward looking comments, however, will refer to the new operating segments, Connectivity and Sensors, High Performance Analog and Advanced Cellular. Beginning with our fiscal Q2 10 Q, our historical financial statements will be recast into the new operating segments. With that said, I'll now turn to our June results.

Speaker 3

Revenue for the Q1 of fiscal 2023 was $1,045,000,000 above the midpoint of our guidance. Mobile Products revenue of $733,000,000 was down year over year and sequentially, reflecting the impact of global macroeconomic events on smartphone volumes, primarily within the Android ecosystem. Infrastructure and defense products revenue of $302,000,000 was up double digits year over year driven by strength across power, defense and infrastructure. On a non GAAP basis, gross margin in the June quarter was 50%, in line with our guidance. Impact on our results impacted by a long term capacity agreement.

Speaker 3

Amidst widespread supply constraints during the Q2 of last fiscal year, We entered into a capacity reservation agreement with a silicon foundry supplier. Ongoing events, including COVID mitigation efforts in China, The war in Ukraine, global supply chain disruptions and other factors have negatively impacted the global demand environment within a short period of time. Consequently, customer demand no longer supports the minimum purchase commitments per the agreement. We believe this situation is not normal and does not accurately reflect the performance of our ongoing business. A complete reconciliation of GAAP to non GAAP financial measures non GAAP operating expenses in the Q1 were $234,000,000 $11,000,000 lower than our guidance due to the timing of product development spend as well as employee related expenses.

Speaker 3

Year over year, operating expenses were up $18,000,000 primarily related to recently acquired company OpEx and new product investments, partially offset by lower incentive compensation. Non GAAP operating income in the June quarter was $284,000,000 or 27.5 percent of sales. Non GAAP net income in the Q1 was $238,000,000 and diluted earnings per share of $2.25 was $0.12 above the midpoint of our guidance. Cash flow from operations in the Q1 was $273,000,000 capital expenditures in the quarter were $43,000,000 and remain concentrated in areas where we see continued demand for our differentiated technologies. Free cash flow was $230,000,000 and we repurchased $350,000,000 worth of shares during the quarter.

Speaker 3

The rate and pace in which we repurchase shares is based on our long term outlook, low leverage, alternative uses of cash and other factors. Turning to the balance sheet. As of the June quarter end, we had approximately $2,000,000,000 of debt outstanding and $859,000,000 of cash and equivalents. Now turning to our current quarter outlook, we expect revenue between 1,120,000,000 $1,150,000,000 non GAAP gross margin between 49% 50% and non GAAP diluted earnings per share in the range of $2.45 to $2.65 effect. We ended the June quarter with $847,000,000 of inventory, reflecting seasonal new product ramps and the macroeconomic factors previously discussed.

Speaker 3

Our current view of the second half of the fiscal year reflects lower demand and we will reduce factory utilization to improve our inventory position. These actions will impact gross margin in the second half and we currently expect non GAAP gross margin for the full fiscal year to be approximately 48%. We project non GAAP operating expenses in the Q2 to be approximately $240,000,000 Below the operating income line, other expense will be approximately $16,000,000 reflecting the interest paid on our fixed rate debt impact, offset by interest income earned on our cash balances along with other items. Our non GAAP tax rate for the full fiscal year It's expected to be approximately 11.25 percent due to the absolute level and geographic mix of pre tax profit as well as the impact of a U. S.

Speaker 3

Tax law change related to R and D capitalization among other factors. Despite the broadly recognized macroeconomic challenges impacting our industry and our near term view, Qorvo's long term business outlook remains positive. Connectivity and electrification trends are accelerating and product performance requirements continued to increase. We are expanding our opportunities across markets, customers and product categories, while maintaining our commitment to technology leadership, portfolio management, productivity gains and reduced capital intensity. In addition, we believe our new business group structure better aligns our organization with our end markets and highlights the strength of our broad product portfolio.

Speaker 3

We are well positioned for long term diversified growth and remain focused on free cash flow as we navigate the current environment. That concludes our formal remarks for the quarter. At this time, please open the line for questions. Thank you.

Speaker 4

And we'll take our first question from Matt Ramses with Cowen.

Speaker 5

Thank you very much. Good afternoon, guys. I wanted to ask some questions, Grant, on some of the commentary that you gave there at the end of your script around some potential for lower revenue levels and some compression in gross margin in the second half of fiscal year. If you guys have any quantification of any of those things and in particular, the drivers of that, is that some of the sort of well documented mid tier Android weakness that some of your peers have talked about or are there other things going on there? Thank you.

Speaker 3

Yes, Matt, I think you got it. It all starts with those macroeconomic events that we mentioned that are impacting everyone, right? For Qorvo, As you pointed out, the important driver there is the 5 gs phones in the area that you mentioned. Earlier this year, we set up the $750,000,000 in calendar 2022 And then revise that in May to between $650,000,000 $675,000,000 where the revenue impact to us was approximately $250,000,000 in the June end September quarters. Since then, as you mentioned, the macroeconomic environment, it's worsened.

Speaker 3

Android based customers to pull back and the channel inventories have grown. So now we see fewer 5 gs units in calendar 2022 as overall demand continues to reflect those macro pressures. Approximately 10% from the first half. But that said, we currently expect the December quarter to be the low point for our Android based business. I realize that's a lot of detail there to hit your question, but I hope that provides some context around the margin guidance of 48% for the full fiscal year.

Speaker 3

I really want to be clear, right? We're taking active steps to improve our inventory position and lowering utilization in order to align with the demand.

Speaker 5

Thank you for that, Grant. I appreciate all the detail there. I know that's a lot of information to get out. As my follow-up question, I wanted to ask About the charges that you guys took against sort of prepaid or reserve foundry capacity. I think it was $110,000,000 that was taken in the June quarter and excluded from the non GAAP results.

Speaker 5

If you could maybe walk us through commitments weren't met, which product lines or segments those might have been in and just The decision to exclude those from the non GAAP results like what were the puts and takes on a decision like that. I know the macros and unusual things are going on now, but it seems like also more akin to normal sort of business operations with customers on inventory builds and digestion than sort of one time items. So I'm just kind of curious around the puts and takes there. Thank you. Appreciate it very much.

Speaker 3

Yes, sure.

Speaker 6

In terms of

Speaker 3

the charge itself, right, maybe I'll start there and then I'll talk about the GAAP only treatment. But the charge itself, I think we've appropriately accounted for the impact, both present and future. As you mentioned, it represents about $110,000,000 charge and touches all the elements of that long term supply agreement that share the same root cause, right? The existing material and the incoming material, the deposit, purchase commitment liability that More directly to your question represents the view of the impact over the remaining life of the agreement. We actually continue to place POs with the supplier for material that supports our current order levels, and we're working with them to negotiate the terms of that agreement.

Speaker 3

Based on that, we determined it wasn't representative of our ongoing business and decided that it wasn't going to fall into our non GAAP cost of goods sold.

Speaker 4

Thank you, sir. Next, we'll hear from Vivek Arya with Bank of America.

Speaker 7

Thanks for taking my question. I'm curious to get your sense for The remaining amount of RF component inventory among your Android customers. So I appreciate that you have given a high level outlook For the second half of the fiscal year and you mentioned December could be the bottom. So is it based on the expectation this all clears up in December? Because March tends to be seasonally weaker.

Speaker 7

So are you saying March is going to be above December? I'm just curious how to think through the trajectory and think through how much inventory is still left in the channel?

Speaker 3

Yes, sure, Vivek. Let me try to put some comments around it. I think given the nature of the events that are impacting that channel inventory, being macro and out of our control. It's hard for us to pin it down precisely. But given that backdrop with COVID lockdowns in China, the war in Ukraine, high inflation and and all the other global macroeconomic challenges.

Speaker 3

Obviously, we do see the inventories higher than normal, especially within the Android ecosystem. And Most of the companies that we're selling to there were planning, ordering and producing for much higher growth than the industry is currently experiencing. So it will take some time to bleed down that inventory, which is again why we're bringing factory utilization down to respond throughout our fiscal year, but we're not putting an exact timeframe on it at this point.

Speaker 1

Vivek, this is Bob. I'll just add a little color there. I mean, clearly our customers are continuing to order from us and we're continuing to ship to them and we're making adjustment. But When we said it's the Android ecosystem is what's bottoming in December, it's coming back up in March, but I mean not to the levels that have been. So we still have a ways Just to be clear.

Speaker 7

Understood. And Bob, just as a follow-up kind of longer term, the industry seems You don't have a tougher time dealing with the China Android customers. Like every few years, this inventory issue comes up because, right, they all hope to gain a lot of share from each other, order a lot of components and then there is this inventory buildup. What do you think You can do or are doing to help kind of diversify away from that dynamic? Thank you.

Speaker 1

Yes. I I think first of all, a little bit of a different view on this year is a little bit different from the perspective of their end market. I think we all expected at the beginning of the calendar year that the China market itself for 5 gs would grow very nicely as well as their export

Speaker 2

market for 5 gs, particularly in

Speaker 1

the Southeast Asia as well as Southeast Asia as well as into Eastern Europe and Europe. As you well know, things kind of changed with all the lockdowns within China. They had trouble even making phones, let alone people going out and buying phones. So that kind of shifted pretty significantly. And then when you layer on top of that the war in Ukraine, which starts to impact some of our Chinese based customers along with someone like Samsung, who Europe is one of their larger markets, clearly what's going on there and the slowdown that we're seeing.

Speaker 1

So A little bit different dynamics, but I think what is important, Vivek, is that I think we've got a good handle on this. I don't think anybody was able to forecast the lasting impacts of COVID and the lockdowns. Now with that said, with the 3 business segments we have, it is our goal if you look at how we laid out the growth rates for each one of these, we will over time significantly improve the diversification of our business outside of handsets in general. And that's one of

Speaker 3

the things we're setting out

Speaker 1

to do with what we've done is to accelerate our growth and accelerate the development of technologies to new products for other markets. So that's some of the steps we're taking, but I think this year is a little bit different than what we've seen in the past out of our Chinese customers. Thank you.

Speaker 4

And next we'll hear from Gary Mobley with Wells Fargo.

Speaker 8

Hey guys, thanks for taking my question. So much of the discussion so far is focused on the mobile related business, but maybe if you can give us an update impact on your view on how IDP is trending from both the demand perspective and supply perspective?

Operator

Thanks, Gary. This is Philip. So IDP is doing well. We posted both quarter over quarter and year over year revenue growth. It really is somewhat market dependent.

Operator

I will say that in our Defense and our Power segment, we continue to see strength. On the base station business, we do see some inventory buildup in that end market. It's actually kind of interesting. You have kind of 2 dynamics that are playing in that market where in some cases there's oversupply, in other cases they can't get enough end. So making that end market a little bit murkier there.

Operator

But in Defense and Power, clearly, we're seeing tailwinds in those businesses.

Speaker 1

Okay.

Speaker 8

And so I presume the resiliency that you're seeing in your September quarter Primarily relates to an iOS build or product cycle, but maybe the Android weakness is really manifesting and can't be guidance in the December quarter. So my question is, what does that Android business bottom out at as a percentage of revenue expectations in the December quarter, just trying to think about the base off which it balances.

Speaker 3

Sure. Let me start and Maybe Bob or Eric can fill in some more of the details. I think in terms of the December quarter, we would expected to be below what we were talking about last quarter on the call. So certainly, it's coming down from what we had talked about as a low point there expected in December and that cuts across our Android based customers in general. And Eric or Bob, if you had any more color on the market itself.

Speaker 6

Yes. This is Eric. We've got it's Interesting dynamic because the team has done a great job actually of capturing design wins in Android and we're launching a couple of major flag ship phones to be beginning to ramp in the December quarter and into March. And so we've got great content and share gains there. The only question is units, right?

Speaker 6

And that's going to be about the rate and pace of this inventory burn down, which is pretty hard to predict. So we've got a strong tailwind in terms of content and share gains, but just a massive headwind right now in digesting the channel inventory.

Speaker 4

And moving on to Blayne Curtis of Barclays.

Speaker 9

Hey guys, thanks for taking my questions. I had 2. Just for the September quarter, I know you're going to guide for the new segments, which Which we don't have, but just any color, because obviously you're talking about this week's second half of the fiscal year, but then you're growing in September. I think in the press release you called out better defense and power, but I was wondering if there's any other moving pieces you can steer us through for September.

Speaker 1

Thanks, Blaine. And kind of touched on a little bit, but we're ramping at 2 handset manufacturers, both here in the North America. That's driving good growth. Also as you pointed out, our defense business is strong, our power business is strong. We've got a few other smaller segments that are also doing well.

Speaker 1

What's off is the Android ecosystem that we've been talking about and we think we're going to drop a little bit more in December with that.

Speaker 9

And then I just wanted to ask you, in terms of the obviously, The CHF Act needs to be fully signed, but just kind of curious as you take a longer term view, you're starting to talk more about defense. I'm just kind of curious if you can Any thoughts as to what that could mean for Qorvo?

Operator

Yes, Blayne, this is Philip. We've been partnered with the U. S. Government for many years, right. I mean, you've seen the releases from SHIP programs, the Starry Night, which is 90 nanometer GaN development.

Operator

So for us, this partnership is kind of a natural cadence that we have in our business. When we look at the CHIPS Act, I think for us, It expands the opportunities that we have. I think the good news for us is that we have a lot of relationships already and we're looking at areas where we can basically expand kind of what we've done in the past with the Chipstack.

Speaker 1

I'll add to that Blaine. We're also a trusted foundry. I want to remind the group for filters, GaN and high performance gas products That support everything that Philip said. So I think we're going to be able to participate in that. It's yet to be defined the actual process and the allocation

Speaker 4

Thank you. Moving on to Toshiya Hari with Goldman Sachs.

Speaker 10

Hi, good afternoon. Thank you so much for taking the question. I had a follow-up question on inventory going forward. You talked about taking action here. Can you remind us how you would characterize normal inventory on your balance sheet, Whether it be in dollars or days, and where do you expect to be, exiting the calendar year or the fiscal year given

Speaker 3

Yes, sure. In terms of inventory, we normally think of it as turn. So Ideally, we would be operating at approximately high 3s to 4 turns, was what we would consider more normal. Obviously, where we're sitting today is off the mark and that's I guess going to be reflected in the utilization and gross margin going forward. So In terms of where we expect to end the year in dollar terms, right now, I predict it to be down.

Speaker 3

But again, I'm not going to guide that far out on the balance sheet at this point.

Speaker 10

Got it. And then my second one is more of a clarification. You talked about the second half being down 10% half over half. Was that fiscal or calendar? And was the down 10% for the entire company, which is for mobile?

Speaker 3

It's for fiscal first and second half and that's for the entire company.

Speaker 4

Thank you. Moving on to Edward Snyder of Charter Equity Research.

Speaker 1

Thanks a lot. Couple of

Speaker 11

questions, if I could.

Speaker 1

So you've got all this inventory sitting

Speaker 11

out there and you've had it really since probably this time last year when trying to slow down when you shift Phase 7, What does that say about the obsolescence of the inventory in general? They're sitting a lot of finished goods. I know you don't know how much they have. But given that it's not moving through China very quickly, what's to prevent larger write offs as we move further into Phase 7, Number 1. And number 2, why are you calling December the bottom?

Speaker 11

I mean, we've and really a series of unfortunate events that were very unpredictable with the inventory issues, you have the COVID issues, negative recession issues. But it's kind of been a moving target. We've been expecting the bottom now for Now almost a year and we haven't seen it. And by all indications, if you look at the recession data and all the other metrics, M1, M2O stuff, it doesn't look like it's even close to by the year. So What gives you confidence that December is going to be your bottom on this?

Speaker 11

And then I have full. Thanks.

Speaker 3

Yes. Let me start with the inventory, Ed. Obviously, we have a robust process we go through every quarter, right? And if there was anything excess or obsolete at quarter end, we would have taken the charge inside the quarter. But I And to put that in a bit more context, right, if you set aside the charges related to the long term silicon supply agreement and look at these on a non GAAP basis, We recorded double the normal inventory reserves on our mobile business in Q1.

Speaker 3

So we are actively reviewing our inventory and taking action there from a reserve standpoint. In terms of obsolescence, I don't know, Eric, do you want to comment on factors?

Speaker 6

Yes, yes, sure. So we've got a pretty good view of course into the design win pipeline and to a certain extent we can control the rating page to the new platform of course. But also very importantly, we've got the exact same components being designed in across the board across Android. So there's we don't have like custom one off parts that might get stranded or so forth. We've got quite a bit of opportunity to continue designing in that inventory into handsets

Speaker 4

And moving on to Ambrish Srivastava with BMO.

Speaker 12

Hi, Dan. I just wanted to make sure I understood the charge with respect to the LTSA. The reason you're not including it in the excluding it from the pro form a is If it's something that you don't consider to be normal course of the business, should we assume that there's a big chunk of can That is not addressable to the company anymore?

Speaker 3

No, I wouldn't make that conclusion. If you look at the charge self right there is a purchase commitment liability that stretches far into the future right the length of the contract and so that entire charge would be coming out in the quarter and that's certainly not reflective our of our operating business this quarter. Generally speaking, the situations that led to the charge are also not indicative of our business, right? The time in which we originally signed it, there was a massive silicon shortage and today we're seeing a significant drawdown in demand due to very large impactful macroeconomic factors. So neither of those things are reflective of our business and management's view and we Have excluded it

Speaker 1

for that reason. The other point I'd point out is it is a multi year agreement to make sure you understand what Grant was saying. It's not Just this quarter that was the charge. And so over multi years we looked at this.

Speaker 12

Right. And that's why I asked over multi years should we assume that There is a chunk of hand that has gone away. But I guess I understand it's a combination of supply demand. I just had a quick follow-up and I just want to make sure I got this right. When you talked about channel inventory, did channel inventory grow in the quarter?

Speaker 12

So is the trending continuing to trend higher? And then are you revising down your 5 gs units estimate, because you had revised it down prior quarter. I just wanted to know where you stand on those two fronts. Thank you.

Speaker 6

Yes. This is Eric. Yes, channel inventory did grow in the quarter and we continue to see outlook for 5 gs units dropping lower than we had thought before. And as Grant said, we were in the $650,000,000 to $675,000,000 range. It's now looking closer to $625,000,000 Others We're seeing maybe 600.

Speaker 6

So, it's not a crystal ball, of course, but yes, we continue to see general softness there.

Speaker 4

And next we'll hear from Rajiv Gill with Needham and Company.

Speaker 2

Yes. Thank you for taking my questions. I appreciate it. Just two questions as well. 1 on the gross margins and you talked a little bit about this before, It implies margins are going to kind of drop to kind of 46% a little bit under that for December March.

Speaker 2

And If you go back, you haven't got to seen that level of margin in say in 3 or 4 3, 3.5 years at a much lower revenue level. So, wondering if you could maybe elaborate a little bit further in terms of how much the utilization you're dropping? What's happening kind of with pricing as well? Any thoughts there would

Speaker 13

be helpful.

Speaker 3

Yes, sure. So In terms of the back half, I mean, to average into the 48%, I would say probably 47% is maybe a better estimate to start with. I know that will lead you a little bit ahead of the 48%, right? And so there's some error in forecast, because we typically only provide a quarter guidance. It's looking out longer.

Speaker 3

But in terms of the utilization. If you look at what we had said last quarter, our gross margin should have been approximately flat to ticking up marginally. And the delta between that and what I'm talking about today is almost entirely utilization based. So this is a conscious decision on our part lower utilization in response to demand and adjust our inventory balances.

Speaker 2

Got it. And for my follow-up, When you're indicating down 11% in the second 10%, sorry, from the 2nd fiscal half versus 1st fiscal half, it implies that the revenue over the next those two quarters are going to be down closer to 30% on a year over year basis. So just wondering if you could kind of give us a sense in terms of the demand landscape. I understand that the China lockdowns have had a major impact. But just wondering kind of any more insight in terms what's happening there in terms with respect to demand overall demand.

Speaker 2

Are there any signs that the Chinese economy is stabilizing? Any kind of stimulus that's happening to increase consumer spending there? And just remind us again what percentage of your revenue is coming from the China market? Thank you.

Speaker 3

Yes, sure. So to put that into perspective, our China based customers were down approximately 45 plus percent on a year over year basis. So that provides some context to the number, right? And that's all in relation to the macroeconomic factors we talked about with the war in Ukraine, the COVID mitigation efforts especially. And I just mentioned around China, it's the largest producer and consumer of 5 gs phones.

Speaker 3

So this had obviously a sizable impact on our top line as we experienced the inventory correction we expect in the second half of our fiscal year.

Speaker 6

Yes. And this is Eric. Looking at it the way you laid it out there sort of exaggerates what's happening in the market because we are bleeding down inventories. We're under shipping to the market demand for our components significantly during these next few quarters to get that channel inventory brought down.

Speaker 4

Thank you. Harsh Kumar with Piper Sandler has our next question.

Speaker 14

Yes. Hey, guys. Quick question. Bob, what do you think your exposure to China OEMs and handsets is today as a percentage of revenue, Let's say for the June quarter and where do you think you'll end up when all this is done with respect to call it the inventory flushing out In call it either the December or March, you pick what you want to give me. But where do you think you'll bottom out in terms of your exposure to Chinese guys?

Speaker 3

Yes. Let me take that one. I think it's more or less mid-30s Typically as a percentage of overall sales and we'll probably bottom out around 20% of our overall sales.

Speaker 14

Okay. Very helpful. And then my other one was a simple one. Have you guys started to throttle down The gross margin utilization in or is there a plan to throttle down the utilization in the September quarter? Or is that something you plan exclusively In the December March quarter.

Speaker 3

Yes. If you look at our guidance for the September quarter that does include the impact of us throttling down utilization.

Speaker 1

Action.

Speaker 4

Thank you. Next, we'll hear from Chris Rolland with Susquehanna.

Speaker 15

Hey, guys. Thanks for the question. And this one is probably for Grant. So sorry, back to the charge again. If If I understand it correctly, this is $110,000,000 charge, and it represents Stuff that you did, I guess, in the past, but also charges that you took in the future.

Speaker 15

Is there any way to kind of break that up Between the 2 and does this go were you thinking there cuts all the way to 2025 or is this just near term? Any other details there in terms of past versus future would be great.

Speaker 3

Yes, sure. And Why don't we save that for the 10 Q? There'll be a lot of additional detail that will come out and it'll provide all the background with the agreement as well as the breakout On the $110,000,000

Speaker 15

charge. Okay. I thought I was looking at something, I don't know if it was the queue that was Talking about $1,400,000,000 to 2025. So in terms of the charge that you did take, What percent of those wafers or dollars of that 1,400,000,000 Would that represent?

Speaker 3

I'd rather not Get into it until you've read the Q, it will lay out in pretty explicit detail exactly the charge. The $1,400,000 would be the aggregate total amount of purchase commitment that we have. The $110,000,000 is the amount of a particular agreement that we feel we couldn't live up to according to the existing terms, which we're negotiating now with the supplier.

Speaker 4

Thank you. Next, we'll hear from Harlan Sur of JPMorgan.

Speaker 13

Hi, good afternoon. Thanks for taking my question.

Speaker 15

This is

Speaker 13

just a follow on from one of the previous questions around utilization. So It declined in June. It looks like utilizations are declining in September, and I assume that it's also heading lower In December, given sort of the rough fiscal year outlook, would you guys consider December quarter to be the bottom of your manufacturing utilizations?

Speaker 3

We're not guiding at all to utilization. It's a complicated function of Which products and which factories in our network are loaded with a given mix for our customers in any particular time period. It's not something that we typically provide any color on.

Speaker 1

I just want to point out with cycle times being what they are, what we're running in our Q4 would be for Q1 and all those kind of things. So I don't want you to draw any false conclusions on how things are looking. I think we'll leave it at the guidance we gave you on the gross margin.

Speaker 13

Okay. Thanks for that. And then it looks like you guys have revised us looking at your guys' K and comparing it to the Q. So On the purchase commitments exiting the March quarter over a multiyear period of time, I think you guys had about $2,000,000,000 in purchase commitments, dollars 900,000,000 for this fiscal year. Obviously, that's being revised lower.

Speaker 13

You took the $110,000,000 charge. Looks like you guys revised the value in terms of timing. I'm just wondering, Was there also a renegotiation of the pricing on that permitted supply on this Well,

Speaker 1

let me

Speaker 3

Yes. Let me try to clarify on that point. That's for a multi year timeframe. So if you look at our cost of goods sold over multiple years. That number, it might help you put that number into perspective.

Speaker 1

I don't know if he's comparing last K or last Q with what? We didn't issue the K

Speaker 3

Yes. The Q we haven't for this quarter we haven't issued the Q yet. Yes.

Speaker 1

So we issued the calendar compared.

Speaker 4

Thank you. Moving on to Tim Arcuri with UBS.

Speaker 16

Thanks a lot. I wanted to also ask about this charge. So just in the continuum of all the agreements you have, It seems relatively small and specific to one particular agreement, yet you were saying that it's because demand is broadly lower. So I'm wondering is the conclusion maybe that there's a design win that you thought you'd get that you didn't get and that's why This particular agreement is being revised down. I would think that if it's because demand broadly is softer that you'd be revising multiple agreements down.

Speaker 3

Great question. So, let me cover that one really quickly. It's all tied together. So the weakness that we see in the second half, us dropping utilization in our factories and this long term supply agreement are all attached to the same set of root causes, which are the macroeconomic factors that we tied in before. The contract itself is a multiyear agreement and the charge represents the impact all over that contract period.

Speaker 3

So It's all represented in that $110,000,000 for the life of the agreement.

Speaker 1

I also want to add that we are currently negotiating this And just keep that in mind as we cover this. But again, it's the Android ecosystem weakness that we've been talking about.

Speaker 16

Okay. Okay, got it. And then I guess just a quick question on customers. I mean, obviously you had a 10% customer, but I wonder if you had a second 10% customer in the March quarter. Sorry, did

Speaker 1

you Yes, the best place

Speaker 3

I'd point you to would be our K for our largest customers. We don't report them on a quarterly basis.

Speaker 4

Thank you. Next, we'll hear from Srini Tajiri with SMBC Nikko Securities.

Speaker 17

Thank you. Grant, pretty solid free cash flow number despite lower GAAP, I guess net income. If you could just help us reconcile that. And then the bigger question is maybe for Bob. Bob, given the inventory correction And also the macro uncertainty, how should we think about your CapEx going forward?

Speaker 17

I know these are longer term decisions, but I'm just curious if there is any change Your CapEx plans.

Speaker 3

Yes, sure. Thank you for pointing out the free cash flow. I think It highlights our discipline around cash flow and us managing the business to generate free cash. Obviously, there's some strength in the quarter and then some discipline around CapEx, right, which is Something that we've carried over the last number of years actually. Looking forward, I don't expect there to be any change.

Speaker 3

I'll start and then if Bob, is there anything to add on your second question? But going forward, no expectations for change there. We're still looking for CapEx to be in line or lower this year than last

Speaker 1

So I think to follow on to answer your question, longer term, we're not making any change in our CapEx. We believe that this too shall pass. The We'll return to growth predicting when as everyone's pointed out will be a challenge. But from our macro view, while I also point out, We continue to make great progress and I'll use some of our Bluff filters as an example where we have made tremendous progress over the last 3 or 4 years Double the capacity by actually reducing our die sizes and we continue to work on those things. So when you get a downturn like this, we continue to work on those things.

Speaker 1

We don't stop any of that engineering work to improve our productivity. So over time, yes, we're going to be able to, as Grant pointed out, continue to expand our business While running at a very low CapEx compared to what we historically won ran years ago.

Speaker 4

And moving on to Brett Simpson of Arete Research.

Speaker 18

Yes. Thanks very much. Bob, I wanted to ask a bit more about IDP and the growth that you see in next few quarters. You've been delivering double digit revenue growth after a difficult prior fiscal year. And maybe within IDP, just the defense opportunity that you see in front of you.

Speaker 18

We've seen some big contracts being awarded to some of your customers like Radian and Lockheed Martin for things like Stingers and Javelins and there seems to be a big reboot in munition builds that has to happen in the defense part of the business. So To what extent are you seeing a benefit from this and any more details you can sort of share with us on your outlook for defense and aerospace in particular that'd be very helpful? Thanks.

Speaker 1

Thanks, Brett. I'm going to delegate to Philip because he can't wait to talk about his business.

Operator

Thanks, Brett. I think I appreciate the question. I think When you look at our defense business, there are a lot of real strong tailwinds that we risk occurring. And that goes from our GaN Process Technologies as defense space moves in the radar segments from LD Moss to GaN, we're well positioned there. We see it both in our foundry, we see it in our standard product business in defense as well.

Speaker 13

So this isn't just

Operator

a story of what's happening in the geopolitical environment today. This is really there's some long term drivers of growth in that business. We're also doing SAM expansion. We're looking to build this business or defense business into RF and analog play. We've moved some of our power management technology into that market, as well as our SHIP program, head, which does the advanced packaging that we have in Texas.

Operator

We're seeing a lot of really good opportunities in that space. I think that defense with the increased semiconductor spend in the RF side, the SAM expansion that we're doing with our SHIP program as well as what we're doing in some of the other analog segments, it has a lot of positive tailwinds right now.

Speaker 4

Thank you. And moving on to Vijay Rakesh with Mizuho.

Speaker 17

Yes. Hi. Thanks, guys. Just quickly on the I know you mentioned the December quarter bottom. Just wondering, as you look at that, wouldn't it be Kind of we are already hearing high RF inventory and high handset inventory, but wouldn't be a challenge for the China handset guys, especially with the Ahead of an iPhone ramp, to kind of run through their inventory?

Speaker 3

Yes. In aggregate, that's true, right? We're building for a seasonal ramp. We are seeing strength in our defense and power businesses as well as our bio business that Bob talked about earlier. So from a seasonal perspective, that's correct.

Speaker 17

Got it. And then obviously there's also some of the domestic China RF suppliers who seem to be gaining share on the 5 gs handset side. Can you is that a challenge or is that factoring into some of the outlook that you're seeing?

Speaker 6

Yes. This is Eric. I'll take that. Yes, it's not a significant challenge. If you look into those suppliers, They are gaining some traction.

Speaker 6

We can't say they aren't, but they're discrete players and discrete functions, which the market for that is the extremely low tier phones and we continue to have the playbook we have. We have everything in house, every filter switch, PA, packaging, power management, antenna tuning, everything you need in one roof and we put those into very highly value added miniaturized modules, which aid in especially if you look at 5 gs handsets. I mean, it's really required that use this type of technology. So, yes, some progress in some component areas, but nothing that is particularly meaningful as of now.

Speaker 4

Thank you. Moving on to Atif Malik with Citi.

Speaker 19

Hi, thank you for taking my question. I have a question for Eric. Eric, On the way up last year into strong demand, with RF front end attach rates 2 apps process that was a bit of a headwind for you guys because of supply constraints. And now on the way down, Should we expect you guys to kind of benefit from those kind of There were headwinds in the past attached its attendance to ask process or it doesn't really matter?

Speaker 6

Yes. It's an interesting question. I'm not sure there's any particular correlation other than to your point when we were constrained to create opportunities for others. That's a good point. We're certainly coming out of that constrained environment.

Speaker 6

But at the end of the day, it's about who's got the best products, right? And it's product by product and handset by handset, the decisions are being made. We've got very competitive product portfolio, strong R and D pipeline, incredibly talented team working on these things. And We think we've got every reason to believe that the gains and share that we've been enjoying especially in Android is going to continue.

Speaker 19

Thank you. That's all I have.

Speaker 4

We want to thank everyone for their questions And we will conclude the conference at this time. We'll turn the conference back over to management for any additional or closing remarks. That does conclude today's conference. Thank you for your participation.

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