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Qorvo Q2 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Douglas Delieto
    Vice President of Investor Relations
  • Robert Bruggeworth
    Chief Executive Officer
  • Grant Brown
    Senior Vice President and Chief Financial Officer
  • Dave Fullwood
    Senior Vice President of Sales and Marketing
  • Steven "Eric" Creviston
    Senior Vice President and President of Connectivity and Sensors

Presentation

Operator

Greetings, and welcome to the Qorvo Second Quarter 2023 Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Douglas DeLieto, Vice President of Investor Relations. Please go ahead.

Douglas Delieto
Vice President of Investor Relations at Qorvo

Thanks very much. Hello, everybody. And welcome to Qorvo's Fiscal 2023 Second 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 and our annual report on Form 10-K, 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.

We 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. 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 at qorvo.com, under Investors.

Joining us today are Bob Bruggeworth, President and CEO; Grant Brown, Interim CFO; and Dave Fullwood, Senior Vice President, Sales and Marketing; as well as other members of Qorvo's management team.

And with that, I'll turn the call over to Bob.

Robert Bruggeworth
Chief Executive Officer at Qorvo

Thanks, Doug, and welcome, everyone, to our call. Qorvo delivered fiscal second quarter revenue and EPS above the midpoint of the outlook provided during our August 3rd earnings call. As we indicated on our call, Qorvo's business is now organized into three segments: High-Performance Analog, Connectivity and Sensors and Advanced Cellular. In High-Performance Analog, revenue during the September quarter was broad-based with strength primarily in defense and higher power applications. In Connectivity and Sensors, headwinds in consumer markets and related inventory drawdowns impacted revenue as expected, even as favorable design activity was diversified across a growing list of customers and product categories.

As a reminder, Connectivity and Sensors, combines the Connectivity and Sensors businesses previously split between Mobile and IDP. Lastly, in Advanced Cellular, we enjoyed a large customer ramp during the quarter. While unit volumes were weak in the Android ecosystem, we were encouraged by content and integration trends across our Android customer base in their 5G designs. With our new operating structure and global sales organization, Qorvo will capitalize more quickly on opportunities across markets and customers to support growth. We will leverage our core strengths in System Solution Design, Semiconductor Manufacturing, Advanced Packaging Technologies and deep relationships with customers and suppliers to help enable a world that is more efficient, more secure, and more connected.

Now let's turn to some quarterly highlights. In High-Performance Analog, Qorvo signed an agreement with SK Siltron for a long-term supply of silicon carbide wafers. Qorvo has achieved four consecutive quarters of sequential growth in our silicon carbide business. Our expanded relationship with SK Siltron, will further diversify and strengthen our supply base and help support continued growth in our power device business. We released a portfolio of advanced fourth-generation cooking carbide surface mount fess for applications requiring maximum efficiency and low loss. These include DC to DC converters, fast DC chargers, onboard chargers, industrial chargers and IT server power supplies.

New game product introductions included a 5-watt MPA module for massive MIMO cellular base stations and a GaN power module for upcoming DOCSIS 4.0 systems. For power management markets, we introduced the highly compact power management IC designed to enable reconfigurability and reduce our customers' time to market and space-constrained applications, including home automation and networking systems. In connectivity and Sensing, we achieved Matter 1.0 certification and commenced shipments of Matter development kits featuring concurrent connect technology to simplify the design of IoT gateway and connected devices.

We broadened our smart home product portfolio, leveraging our ultra-wideband and Matter system solutions and we expanded our ultra-wideband design engagements, serving enterprise applications, including indoor navigation. We expanded connectivity and sensing design wins supporting top-tier automakers across a range of applications, including infotainment, connectivity, secure car access and EV smart interiors. In Wi-Fi, we secured a broad range of Wi-Fi6 and Wi-Fi 6E design wins in support of 2023 platforms and launched 5gigahertz and 6gigahertz filters for European band Wi-Fi 6E and Wi-Fi7 applications. In biosensors, we launched commercial trials of our COVID-19 diagnostic test platform with multiple retail healthcare outlets, and we began production of flu A/B cartridges for clinical trials in support of National Institutes of Health Initiatives.

In Advanced Cellular we increased shipments of Phase seven LE solutions while securing additional design wins, including low-band, mid-high band and ultra-high band integrated placements across multiple smartphone OEMs. We commenced our first production shipments of our high-performance MEMS-based antenna solutions, and we expanded our MEMS customer engagement to include top-tier smartphone OEMs. Qorvo's MEMS-based antenna solutions reduced loss and enable significantly improved system performance. At a Korea-based smartphone OEM, we expanded our content opportunity by securing our first low-band pad win in their flagship smartphone. This win complements other content we have secured in support of their upcoming 2023 launch. Qorvo will supply integrated placement supporting the main and secondary transmit mid-high bands as well as antenna tuning and Wi-Fi solutions.

Lastly, we introduced a highly integrated mid-high-band pack combining main path and diversity receive content. We will be sampling this product to customers in the first half of calendar 2023, and we expect design wins to follow in support of future cellular architectures. Across Qorvo's business in High-performance Analog, Connectivity and Sensors and Advanced Cellular, Qorvo's markets are leveraged to multiyear secular trends like electrification, sustainability and connectivity. We are at the forefront of advances and defense radar and comms, electric vehicles, battery power tools and appliances, wireless and wired infrastructure, smart home, automotive connectivity, precision location and Advanced Cellular architectures. We are a technology leader, and we provide best-in-class products to a growing base of customers.

In the near-term, the Qorvo team is performing exceptionally well, as we navigate ongoing weakness in our end markets. We are reducing factory loadings and bringing down our own inventories, while helping customers to reduce inventory in the channel. At the same time, we are continuing to drive process and product development and have accelerated our efforts in support of future growth. Recent process development efforts include the introduction of Qorvo's next-generation SAW technology, which extends the range of our SAW filter portfolio to cover higher frequencies. Our newest SAW products will be complementary to our BAW products and will be featured in our most highly integrated placements that will be manufactured in our fab in North Carolina.

Recent product developments also include our recently introduced mid-high-band pad, combining main-pad and diversity receives content. This highly integrated solution leverages the reduced size and enhanced performance of our BAW filters to integrate nearly two times the BAW filter content and a smaller footprint than is currently available in mid-high-band architectures with just the transmit functionality. As we have said previously, next-generation protocols continue to require higher performance content and customer architectures continue to favor, higher levels of integration and functional density. We are launching new technologies and new products to fuel design wins and drive content in higher growth end markets.

We expect these efforts to support growth, as inventories adjust and volumes recover. We also expect to increase our growth rate and drive leverage as our investments play out in our higher-growth businesses. I want to thank the team, for continued operational excellence. We are delighting customers with best-in-class products and technologies even as our markets undergo extraordinary events. We are adjusting quickly to supply and demand imbalances and positioning the company to drive sustainable long-term growth.

With that, I'm glad to hand it over to Grant.

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Thanks, Bob, and good afternoon, everyone. As a reminder, our references today will be to our three new operating segments. High-Performance Analog or HPA, Connectivity and Sensors Group, or CSG, and Advanced Cellular Group or ACG. In our upcoming 10-Q, we will provide historical financial information, which has been retrospectively adjusted to reflect these new operating segments. Additional historical information will be made available in our fiscal Q3 10-Q and fiscal 2023 10-K. I'll now turn to our latest quarterly results. Revenue for the second quarter of fiscal 2023 was $1.158 billion, $8 million above the high end of our guidance. HPA revenue of $228 million was up 8% sequentially and 47% year-over-year, driven by strength in defense and non-consumer related power products, including silicon carbide.

Connectivity and Sensors revenue of $143 million was down 6% sequentially and down 19% year-over-year due to weaker consumer electronics spend, primarily for Wi-Fi-enabled products. Finally, advanced cellular revenue of $787 million was up 17% sequentially, representing a strong seasonal ramp and year-over-year growth at our largest customer, but down 15% year-over-year reflecting lower smartphone unit volumes within the Android ecosystem. On a non-GAAP basis, gross margin in the quarter was 49.2%. The quarter benefited from product mix effects offset by higher inventory-related charges and the beginning of planned reductions in factory utilization. Non-GAAP operating expenses in the quarter were $233 million, $7 million lower than our guidance due to opex discipline, the timing of product development spend and lower employee-related expenses.

Versus last year, operating expenses were up $10 million primarily related to additional headcount and higher design and development costs associated with our power management and ultra-wideband businesses. In total, non-GAAP operating income in the quarter was $338 million or 29.2% of sales. Breaking out operating income by each segment. HPA was the most profitable segment this quarter at 35% followed closely by Advanced Cellular at 34% and connectivity and sensors was negative 7%. Non-GAAP net income was $276 million, representing diluted earnings per share of $2.66. This was $0.11 above the midpoint of our guidance range. Free cash flow was $220 million. Capital expenditures were $47 million, and we repurchased $160 million worth of shares during the quarter.

Today, we announced that our Board of Directors has authorized a $2 billion share repurchase. This authorization will replace the prior authorization, which had a remaining balance of approximately $350 million as of October 1. The rate and pace in which we repurchased shares is based on our long-term outlook, low leverage, alternative uses of cash and other factors. Turning to the balance sheet. As of quarter end, we had approximately $2 billion of debt outstanding with no near-term maturities and $914 million of cash and equivalents. We modestly reduced our inventory balance in the quarter to $841 million despite seasonal product ramps in the macroeconomic environment.

Now turning to our current quarter outlook. We expect quarterly revenue between $700 million and $750 million. Non-GAAP gross margin between 43% and 44% and non-GAAP diluted earnings per share in the range of $0.50 to $0.75. Our current view of the second half of the fiscal year reflects ongoing weakness across end markets, primarily in consumer-related areas as well as a more acute inventory correction at our Android smartphone customers than was previously predicted. We expect sales to China-based Android smartphone OEMs to represent approximately 10% of total revenue during the December quarter. We expect this will mark the low point in our Android-based customer revenue and in the March quarter, we continue to project Android base revenue will grow sequentially.

At the volume levels assumed in our guidance, we expect our inventory position to remain elevated, but improved by the end of the fiscal year as we undership normalized demand and reduced factory utilization. Simultaneously, we are cutting costs in our factories to offset the impact from lower volumes. Unabsorbed fixed costs will impact gross margin in the second half, and we currently expect non-GAAP gross margin for the full fiscal year to be approximately 47%. We project, non-GAAP operating expenses in the December quarter will be down approximately $5 million to $7 million sequentially, reflecting continued cost discipline across the organization and lower variable compensation, offset by continued investment in growth areas.

Below the operating income line, other expense will be approximately $15 million, reflecting the interest paid on our fixed rate debt offset by increasing levels of interest income earned on our cash balances, along with other items. Our non-GAAP tax rate for the balance of the fiscal year is expected to be between 14.5% and 15% due to the absolute level and geographic mix of pretax profit, including FX-related gains within high tax jurisdictions as well as the impact of a U.S. tax law change related to R&D capitalization, among other factors. Turning to our operations, I'd like to highlight the great work our teams have been doing to improve productivity. As an example, in our Richardson facility, we have significantly increased the effective capacity of our BAW filters within the same factory footprint.

This has been achieved across a number of initiatives spanning product development, filter design, process engineering and manufacturing efficiencies. Successive generations of Qorvo's BAW technology have and will continue to meaningfully reduce die sizes and increased die per wafer. Manufacturing efficiencies such as the move from six-inch to eight-inch wafer diameters as well as ongoing processing advancements will further increase effective output. The combined effects of these achievements will allow our Richardson facility to support significant revenue growth. Looking forward, we have the ability to approximately double our BAW output within our existing footprint in Richardson. Despite the macroeconomic challenges impacting customers, our long-term outlook remains positive.

Product performance requirements continue to increase in our end markets and coactivity and electrification trends are accelerating. We have grown our opportunity set across markets, customers and product categories while maintaining our commitment to technology leadership, portfolio management, productivity gains and reduced capital intensity, this has supported strong financial performance during a challenging environment and positioned, Qorvo exceptionally well for long-term increasingly diversified growth.

At this time, please open the line for questions. Thank you.

Questions and Answers

Operator

Thank you. [Operator Instructions] Your first question comes from Toshiya Hari with Goldman Sachs. Please go ahead.

Toshiya Hari
Analyst at The Goldman Sachs Group

Hi. Can you hear me okay?

Robert Bruggeworth
Chief Executive Officer at Qorvo

Yes we can.

Toshiya Hari
Analyst at The Goldman Sachs Group

Okay, wonderful. Thanks so much for taking my question. I guess I had a question on your business in China. Can you kind of provide some context as to how significant your revenue in China was in the quarter? I think based on what you guys reported last quarter, China was about a quarter of your business overall. How did you do in the September quarter? And what's the outlook going into December and in the March quarter?

Robert Bruggeworth
Chief Executive Officer at Qorvo

Sure. Thanks for the question. I'll take that one. The China-based revenue in the quarter was down approximately 20% quarter-on-quarter and about 45% year-on-year, just to put it into perspective. Looking forward, as we commented in the prepared remarks, we're looking at that Android-based China revenue down to approximately 10% of the overall revenue for Qorvo. So a substantial decline both quarter-over-quarter and year-over-year.

Toshiya Hari
Analyst at The Goldman Sachs Group

Got it. And then as my follow-up on gross margins, probably for you, Grant. I guess based on your full year commentary on that, will the implied gross margin trajectory into March is probably down a little bit off of that 43.5% guide you provided for December, beyond March I know its early but how should we think about the path to for you to get back to the 50% or 50% plus? I know you're going through a very sharp production, you're cutting utilization rates. But the pace and timing at which you can improve gross margins in calendar 2023. If you could provide some context to that would be super helpful. Thank you.

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Sure. Related to gross margin, as you pointed out, it's heavily influenced by both mix and the utilization impact. Currently, the dominant headwind is the underutilization, which is generating over 700 basis points of headwind. So we have a clear path back to 50% gross margins beyond that utilization impact from the demand that we're seeing today. We don't typically report utilization by factory, but I think it would be a meaningful metric just to cover very quickly by location.

As an example, for instance, if we look at utilization in Germany, it supports our broadband business, which has actually seen some strength. So the utilization there is doing okay and the migrations to the new DOCSIS standard is helping support that factory in the volumes. Alternatively, if you look at our North Carolina Gas fab, for instance, it's running very low levels of utilization, which impacts our margin in the Wi-Fi business for CSG.

Larger sites like Oregon and Texas are also underutilized given the unit volumes we're seeing from customers as they work through the inventories and the soft demand environment and similarly, our assembly and test operations in China remain underloaded as well. All of this underutilization creates costs that go unabsorbed into a higher inventory volume and negatively impacts the margin. I would expect that to resolve as volumes return and we'll have a clear path back to 50% as that factory mix and volumes both return. In terms of margin, there's obviously a lot of moving parts there and other factors, but the underutilization is the primary one.

Operator

Your next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Gary Mobley
Analyst at Wells Fargo Securities

Hi, guys. I want to pick up on the last line of questioning. And you seem to insinuate that there is a path back to 50% gross margin when these underutilization charges sort of work their way through. But is there a natural resolution or path to the situation or might management have to make some decisions on in terms of defensive realignment with the manufacturing footprint?

Robert Bruggeworth
Chief Executive Officer at Qorvo

Sure. There's, a number of opportunities for us to improve margin looking forward. We are reducing costs in the factory today, primarily variable costs. We can alternatively look at the utilization that we can bring down, which we've commented on previously, the underutilization, as we see it today, is something that will resolve as we're under shipping and under building to what would be a more normalized demand environment. So as that returns to normalcy, I would expect the underutilization to leave itself. The other items in gross margin, and there are others, but they are much less significant. For instance, inflation is one where it might be running approximately 50 to 100 basis points as a headwind today. But again, it pales in comparison to the utilization impact.

There is pricing, which factors into it, but there's nothing that we're seeing there outside of what we expect in historical norms. So again, going back to utilization, it ultimately relates to the volumes we see and the volumes we're seeing right now from customers and the demand levels are intimately related to the macroeconomic effects we've talked about.

Gary Mobley
Analyst at Wells Fargo Securities

Okay. I appreciate the comment that China Android handset OEMs might represent only $70 million to $75 million of your December quarter outlook. And I presume the Android handset customer base overall would represent somewhere between $200 million to $250 million in the same quarter and assuming that, that is the bottom, I'm curious to know how does the other portion of the business trend looking out into the March quarter?

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Sure. You're right. There is weakness beyond simply Android. I mean the -- both the consumer and the enterprise spending on our customers' end products has continued to be a challenge. Our customers have had to reset their production to adjust to the lower levels of demand and certainly the inventory that they're carrying. It varies by end market, certainly. And the inventory challenge in the Android ecosystem is probably the most impactful.

But we are seeing it in our WiFi business as well. We're seeing it across both access points, routers. We're seeing it in power management products, for power tools. We're seeing it in SSDs, which is another area that's seen some weakness in looking out forward in time, I expect, again, those would be similar stories and that they will recover and the volumes will return.

Gary Mobley
Analyst at Wells Fargo Securities

Thanks guys.

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Thank you.

Operator

Next question comes from Vivek Arya with Bank of America. Please go ahead.

Vivek Arya
Analyst at Bank of America

Thanks for taking my question. For the first one, I was -- you gave a 47% gross margin number for the full year, that kind of suggest March sort of flattish in terms of sales and gross margin, just wanted to see if you could kind of clarify that. And then, Bob my question is, what does the recovery look like for Qorvo? Because when I go back to before the 5G cycle started, your quarterly sales were in the $750 million, $800 million level. Last few quarters, they jumped up to 1.1, 1.2, but that was in hindsight above demand. So does the recovery mean you get to somewhere in the middle of where you were pre 5G and where you were in the last few quarters? Or you think you can exceed the recent quarterly run rate?

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Thanks for the question, Vivek. This is Grant. Let me take the first part, and then I'll let Bob address your second question. I mean, first and foremost, we won't guide into March formally, but we did comment on the Android-based revenue, which we do expect to be up in the March quarter. And then in terms of our largest customer, seasonally, you would expect that to be down. So there's some offsetting effects there. We'll have to see how that plays out. The rest of the business, we expect to be approximately flat to slightly up in certain different areas.

Robert Bruggeworth
Chief Executive Officer at Qorvo

Vivek, this is Bob. Thank you for your question. Yes, you're correct that there has been some inventory build, but I want to also point out that we're not anywhere near the number of 5G phones that we expected to be at our number now is pushing closer to 600. And if you recall, when we started the year, we thought it was going to be closer to 700 plus. So that's a pretty big drop, and that's what built up the inventory. And so it's still our expectations to get past where we were at that $1.1 billion, $1.2 billion over time. We've got a lot of growth drivers in our portfolio today, each of the business segments, and we've talked about this. As far as the event cellular, we still believe we can grow in that mid- to upper single digits, we still believe we have room to grow at our largest customer and a lot of BAW content as we look out over the years.

Then if I move into what we're seeing in the high-performance analog business, we've got several growth drivers there. We think defense is going to be a good business for multi-years. We follow that up with what we're seeing in the infrastructure and what we're bringing to that market segment with our GaN modules that we spoke about here. We're excited about the 5G rollout in India because that's going to be supported primarily out of our European customers. And if I look at the power market that Grant talked about today is a little bit off because of what's going on in the data center market, along with the electrical power tools and things like that, but we're taking that product into multiple markets right now and expect that to grow very nicely.

And then our power device business. We just talked about the agreement we signed with SK Siltron to bring on -- they've been a good supplier to us. We want to formalize that. So we've got multi-suppliers and we've seen tremendous growth out of that, and we continue to add to our sales funnel on that. And then if I go to the connectivity and sensing, we believe that's going to be our highest growth. And we've talked before on calls about the success we're having in ultra-wideband to what we're doing with Matter and our development kits. We know Wi-Fi is going to come back both for the handset as well as the access points. So we haven't backed away from our longer-term plans.

Vivek Arya
Analyst at Bank of America

Very helpful. And maybe for my follow-up. I think on the last call, you had highlighted $110 million charge, if I recall correctly. I was curious what happened to that? Was it paid? Was it negotiated? Any other charges we should be aware of? And is there any obsolescence risk on the inventory that you have?

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Sure. Thanks for the question, Vivek. I'll take the silicon question from last quarter and then I'll roll it forward to this quarter. If you remember, there was a $110 million charge last quarter in the K that we filed, there was $2.2 billion of total purchase commitment liabilities that we had of which $1.4 million was related to this particular silicon agreement. It currently stands at approximately $800 million, which remains on that particular agreement. Given the demand that we are including in our guidance, looking forward, we were able to work with the supplier in that case, in order to better match the supply coming in with the ultimate demand in our silicon. So overall, a very good story, very solid partnership in working through that particular agreement.

Operator

Your next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman
Analyst at BNP Paribas

Yes. Thank you gentlemen, I wanted to maybe first start off with a question for either Bob or Eric. To what extent is Qorvo under-shipping demand in the December quarter, particularly in handsets? And related to that, clearly, volumes are impacting your utilization and margins. But I guess our ASPs on older generation devices coming down by a similar amount as we think about the December quarter guide?

Robert Bruggeworth
Chief Executive Officer at Qorvo

Eric is not here. But Dave, representing our sales and marketing, will address your question, if that's all right?

Karl Ackerman
Analyst at BNP Paribas

Yeah.

Dave Fullwood
Senior Vice President of Sales and Marketing at Qorvo

Yeah. And thank this is Dave. I'm not sure how much -- we can say how much we're under shipping demand. It's a combination of weak demand in the market, especially in the Android ecosystem on top of the inventory that's built up in the channel that's being run off. We don't see pricing as a factor there. It's all more about the units and the inventory.

Karl Ackerman
Analyst at BNP Paribas

Got it, understood. Maybe just to switch gears, if I could, certainly somebody away from mobile, you did mention that field carbide agreement today. I was hoping you could quantify the size and/or capability of revenue you could support with your selling carbide offering now that you signed this long-term supply agreement with SK Siltron, and/or the rest of your suppliers? Thank you very much.

Robert Bruggeworth
Chief Executive Officer at Qorvo

Thank you for that. Again, we've got three different suppliers that supply us the raw wafers, and we've got even more that do the epitaxial, so this is a portion of that. We haven't disclosed even the baseline business, how large it is this year. All I can tell you is it's growing significantly, and we're very pleased with that acquisition. It's coming up on its first year anniversary and very pleased with how it's contributing to the overall performance on the top and bottom-lines. But we're excited about the business. We've got a great product offering there. I ran through a number of the different applications we're in, and we just continue to add to the sales funnel on that business, and we just want to formalize with one of our suppliers in the longer-term agreement.

Operator

Next question comes from Tim Arcuri with UBS. Please go ahead.

Tim Arcuri
Analyst at UBS Group

Hi. Thanks. I just jumped on late. So I just kind of wanted to get a sense of China and sort of how you see things progressing if you're willing to speak beyond June -- sorry, beyond calendar Q4, how do you see the inventory digestion trending beyond December, do you think that March, there'll will still be some residual -- or is December the worst of it?

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Thanks for the question Tim. We did cover the China revenue, the percent of sales and the percentage that it will be down both quarter-on-quarter and year-on-year, which are substantial. In terms of the inventory and the time it will take the process through the inventory, we haven't made a formal statement about that, but we have commented that Android-based revenue in China is expected to be up in the March quarter. We haven't provided formal guidance, but we do expect to see some increase in March.

Tim Arcuri
Analyst at UBS Group

Okay. Thank you so much.

Operator

Next question comes from Edward Snyder with Charter Equity Research. Please go ahead.

Edward Snyder
Analyst at Charter Equity Research

Thanks a lot. I want to dig into the -- you mentioned the mid-high band that combines with the, transmit and the DRx into a single module and a smaller footprint than what we had previously for the mid-high band. I'm assuming your performance has allowed you to reduce the size and addition of a few other things. Is this the new Phase seven LE module that I think a lot of your -- especially your Android customers have been kind of clamoring for to try to reduce the footprint and maybe even the cost to them of the RFFE or is this done for a particular customer so any guidance or any color you can provide on how widespread the attraction of that part might be would be helpful to start with and then I have a follow-up.

Dave Fullwood
Senior Vice President of Sales and Marketing at Qorvo

Yes, Ed, this is Dave. The Phase seven LE is a different solution. So we talked about that earlier this year, and we've ramped that with Honor. We've got lot of new customers, POs in hand, we'll start shipping more that in the beginning of next year. The product you referred to that combines the mid-high-band, Main and diversity path, that's a new product that will ramp probably in 2024. So that's more targeting high-performance, small form factor applications, really leverages Qorvo's strength, optimized size and performance. And so we're working with some leading customers on helping them define that architecture and drive that solution.

Edward Snyder
Analyst at Charter Equity Research

Great. And then a follow-up. I mean, your inventory problems appeared last year at this time pretty much. And I know it's impossible to tell it's difficult to even understand how much inventory relative to demand and seems to have happened subsequently to that to make things worse. But we've now gone for 12 months and it's not getting better, it's getting worse. So what point or is there a point where you start writing off some of this inventory? Or is it all standard product They'll sell just as well in the 2024 phones as it did or targeted for last year's and this year's fall. So I'm just trying to get a grasp of how long you're going to go with it before or is it just selling through?

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Thanks for the question, Ed. In terms of inventory and what we're writing off or reserving against, it is up significantly. So that will be in our gross margin in our non-GAAP gross margin. So we are seeing that today. If we believe anything was excess or obsolete, we would have included it in that. So there's no expectation that there was something we missed. I would also point out that we're doing the things that we can do to help manage that by reducing utilization in the factories. We're working with customers and suppliers.

We're ordering less raw materials, for example, and being selective where we choose to add value to inventory looking forward, I tend to look at finished goods, and it's about 20% of our total now. It typically runs higher than that. So that tells me that we're doing a good job. At least on a historical basis of managing the situation tightly and in terms of what we choose to build knowing that we're going to make sure there's demand to consume it. So we're taking the steps that we need to take today and we're reserving against the excess and obsolete as we see it.

Edward Snyder
Analyst at Charter Equity Research

And if I could follow up on one more is on your largest customer, it might be a bright spot. Certainly, it looked like it from the report for the first quarter etc. Is your content up or down or flat relative, just generally speaking, to where it was last year.

Robert Bruggeworth
Chief Executive Officer at Qorvo

Sorry, that's not anything we've ever disclosed in the past. I know you guys have a lot of fun trying to find a lot of our small parts that are in there. And yes, we enjoyed a nice ramp with them in the last quarter. And quite honestly, we're going to be down probably at all our major customers, obviously, including our China-based customers in December have factored all that into our outlook. But we were up year-over-year in the September quarter with our largest customer.

Operator

Your next question comes from Matt Ramsay with Cowen. Please go ahead.

Matt Ramsay
Analyst at Cowen

Thank you very much for taking my questions. Good afternoon guys. My first one, I was just kind of -- apologies, if this has been asked, we were listening to you guys on Qualcomm at the same time. But one of the comment that their team made was not only a weakening in smartphones demand overall, but also a move that from customers in all geographies and tiers to carry a lower level of inventory. And it sounded like that move had accelerated in the recent weeks and you guys are kind of going through this inventory correction with the China customers. And I wonder if you've seen across the board that kind of trend, even an acceleration and lowering inventory levels at most of the customers. Thanks.

Dave Fullwood
Senior Vice President of Sales and Marketing at Qorvo

Sure. This is Dave. So I mean, I think, that's natural, right? Anytime you get into this type of environment, people are going to start to reduce their inventories because the demand is not growing. So I think that's a natural reaction. And sure, we see some of those similar trends. But I also want to mention that we have a pretty close relationship with all our customers. They forecasted a lot of this business, they placed purchase orders. So we're working with each of them to kind of work through the inventory, whether it's sitting in our factory or sitting in our distribution channel or obviously sitting in our customers' shelves.

We work through that with them on a case-by-case basis to make sure that, that inventory gets consumed. So in those cases, they're often willing to take more inventories on their shelf to heal those problems.

Robert Bruggeworth
Chief Executive Officer at Qorvo

I would only add to that, Dave, that it's broader than just quote our China-based customers, just to be clear. It's broader than just our handset customers as well. We talked about WiFi, whether it's access points or in the phones. But I just want to make sure for audience I understand it's broader than what we're just seeing in handsets.

Matt Ramsay
Analyst at Cowen

No. Thanks for that Dave and Bob that was pretty consistent with the messaging from San Diego as well. As my follow-up, Grant, I know this new segmentation and you guys talked about the historical is being disclosed when the Q comes out. But in the guidance that you've provided for December, if you could talk maybe a little bit more specifically about the new segment directionally, that would be helpful. Thanks.

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Yeah, sure. So the segments directionally will follow a lot of what Bob's comments were previously, right? We do expect them to be down sequentially into December. You get now a good look at the profitability by each of those different segments in terms of HPA, it just recorded a 35% operating margin. ACG recorded a 34% operating margin, which wasn't far behind and then a slight loss on our CSG business, which is our highest growth biggest investment area. I should say, base investment area -- sorry, biggest investment area relative to revenue. I should qualify that.

Operator

Thank you. Next question comes from Ambrish Srivastava with BMO. Please go ahead.

Ambrish Srivastava
Analyst at BMO Capital Markets

Hi. Thank you very much. I had a quick follow-up on the segments. So what's the connectivity segment operating margin was negative. What's kind of the normalized target for this, Grant? And then, I had a quick follow-up on the business.

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Yes, sure. So it's relatively new. But putting all the pieces together, I would expect it to be profitable. We're going to drive that business, both in terms of the top line to increase the scale, so it can absorb the cost structure that it's got as well as looking at the utilization in the factories. So it's building a lot of WiFi parts that come out of our Greensboro fab, which is highly underutilized at the moment. So it's constrained in that regard from an overall unit perspective.

Ambrish Srivastava
Analyst at BMO Capital Markets

Got it. Got it. And then real quick on the Android business. I know you put out your China revenues in your filings. But what was the peak for the Android handset revenues going back a year or even higher before that.

Robert Bruggeworth
Chief Executive Officer at Qorvo

So is your question on China based Android or including our other customers that are Android based.

Ambrish Srivastava
Analyst at BMO Capital Markets

I think it's a good point you raised. It's just the Android customer base, which is causing banks or the biggest downshift in the trajectory of the business.

Robert Bruggeworth
Chief Executive Officer at Qorvo

I can't speak to Android specifically off the cuff, but I can tell you that our China-based business as a percent of total revenue was approaching 50% at the peak. A good portion of which was Android.

Ambrish Srivastava
Analyst at BMO Capital Markets

Okay. Got it. That's what I was looking for. Thank you, very much.

Robert Bruggeworth
Chief Executive Officer at Qorvo

Thank you.

Operator

Next question comes from Blayne Curtis with Barclays. Please go ahead.

Blayne Curtis
Analyst at Barclays

Hi, guys. Thanks for taking my questions. And I guess a little repetitive, everybody has bounced around tonight, so I apologize. But obviously, Android needs substantial correction. I was just kind of curious on that other customer. There's been a lot of concerns, but I haven't seen anything concrete in this guide that is down sharply, have you changed the way you're looking at that customer baked in any conservatism. Obviously, there's manufacturing issues that's in the news as well as concerns about their annual cuts.

Robert Bruggeworth
Chief Executive Officer at Qorvo

Hi, Blayne, it's Bob. I made a comment earlier that we were up year-over-year with our largest customer, but I also commented that in the December quarter, we're expecting to be down at all of our large customers, including our customers in China. And we also believe across our customers that their flagship phones are not immune to what we're seeing out there. The end consumer almost no matter what market segment we're facing, and we've got multiple products for more than just handsets, we're seeing it decline. So that was some comments I made earlier.

Blayne Curtis
Analyst at Barclays

And then you made the comment that Android is up in March. Obviously, Samsung always has their ramp then and a good quarter for that customer. Would you still expect the VOX to be correcting inventory? Or is the comment that Android is up in March because you're through that inventory and even the VOX could be up?

Robert Bruggeworth
Chief Executive Officer at Qorvo

I think, number one, I'm not glad you brought up our Korean customer and what's going on there. I mean, we also commented that we picked up a low-band pad in the marquee phone, and we're pretty happy about that. That's new content we've never gotten. We did get the low-band pad and some of their high-volume phones, but we hadn't been in the marquee phone and we've got a lot of extra content there. So yes, as they launch their next level phone, we're going to do extremely well. And it's our expectations today that what we're seeing from China. Now again, we have to remember, are there rolling lockdowns, what's going to happen.

But based on everything we see today, we do expect to be up there. But when you integrate all that with our largest customers, typically down, we're seeing some other weakness in other consumer businesses as we adjust the inventories, that's why we're not predicting March yet. But Blayne, I think we are at the point where we feel just like we said last quarter, this was going to be the low point December for our Android-based customers.

Operator

Next question Christopher Rolland with Susquehanna. Please go ahead.

Christopher Rolland
Analyst at Susquehanna Bancshares

Thanks for the question and Bob, you just stole some of my thunder there around the low-band-pad win that you had there. Perhaps talk about that opportunity in low-band. Is this expanding for you, do you think? And then,, just more generally, maybe you can talk about the content growth opportunity that you guys see per 5G units as we move into 2023 more generally? Thanks.

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Sure, I'll take this one. Good question. And it's definitely a content game for us. We've never had the low band on their flagship model before. As Bob mentioned, in some of their master 5G phones last -- this past year, we did get some of the low-band sockets, but this is new for us in the flagship. So this will actually be the highest content we've ever had in that phone model. So we're pretty excited about that starting early next year. As far as additional content, it's hard to say. I think it's consistent with what we said in the past.

I will say, there's one area that I think is another exciting opportunity for us as we move into Wi-Fi7. There's been a lot of cases in Wi-Fi6, where the PA that's integrated in the SoC is sometimes good enough performance and they don't need an external fab. But we don't see that happening in Wi-Fi7. So we've got great Wi-Fi fam socket win on a major Asia-based chipset platform provider on their reference design with our fans. So we're really excited about that. That's definitely going to be a growth opportunity as forward.

Christopher Rolland
Analyst at Susquehanna Bancshares

Thanks for that. And then, as we all kind of piece together what's inventory digestion versus true lower demand. Maybe this could be a helpful way to address that. I think you gave a global handset unit number for 5G. I think you were at like $625 or something like that for the year. Where do you see that now on perhaps reduced demand?

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Sure. We commented that we think it will be approximately 600 million units now for calendar 2022, so down approximately 25 million units coming out of December.

Operator

Next question comes from Raji Gill with Needham & Company. Please go ahead.

Raji Gill
Analyst at Needham & Company LLC

Yeah. Thanks for taking my question. And again, I joined late as well, so I apologize if this question was asked. When we're looking at calendar 2023 in terms of the overall market, I'm just curious to see how -- what the Chinese handset customers are thinking about a recovery year looks like in calendar 2023. The designs for phones are six to nine months in the future. So I'm just wondering, is there any feedback that maybe you could provide of what a recovery year could look like in calendar 2023 off a $600 million kind of 5G markets this year? Any thoughts on that?

Robert Bruggeworth
Chief Executive Officer at Qorvo

I think what's important, and it's a good question and if I could answer that, I know a lot of you would be super impressed if I was actually accurate. I think what we focused on is the design activity, to your point, that we've been working on. And we're quite encouraged by the number of new phones and obviously, our design wins that are there and the amount of content that they're putting into their phones. It's just what you're really asking is the number of units. And let's just go through their markets.

The China consumer is at an all-time low right now. Everybody had hoped after President, she was elected to his next-term they'll back away from the Zero COVID policy. We haven't seen that yet. So what's the China market going to look like? They're a major export market. A lot of that is Eastern Europe. The war in Ukraine doesn't look like it's slowing down. So we have to factor that in.

And then you put in place, they're strong in Europe as well, you look at inflation and what they're seeing over there. So until a lot of those things get under control, they're not leaning forward, okay? What they are doing is continue to design new phones. We work with them on that. We get those wins. Many of those are some of the same products we're shipping today. Many are some of the new products that we've also talked about. So very difficult to project 2023. What we feel good about is our design wins, our market share is consistent or higher as we go forward. The number of units, we'll just have to wait and see.

Raji Gill
Analyst at Needham & Company LLC

Got it. Understood. And for my follow-up, last quarter, you were cutting utilization to kind of stoke the inventory burn. I don't believe you quantified it. You might have quantified it on this call. But I'm just curious, how are you thinking about ramping down the utilization rate at your internal fab and kind of what the impact would be on the margin front. Thank you.

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Sure. Thanks for the question. I touched on it a bit earlier in terms of utilization by location. And there are different businesses which impact different factories in various ways based on product mix that we see running through those factories. So in aggregate, it's difficult, if not misleading, to quote a particular number. And we haven't done that in the past for that reason. But I can say that underutilization is significant. It's having a meaningful impact on our gross margin to the tune of greater than 700 basis points. So adding that back, as I talked about earlier, gets us on path to our 50%-plus gross margin looking forward.

Operator

Your next question comes from Vijay Rakesh with Mizuho. Please go ahead.

Vijay Rakesh
Analyst at Mizuho

Yes. Hi, guys. Just wondering, I know you talked about by March quarter, we start to see some growth. Hopefully, you got that right. But is that predicated more on ex China growth? Or how are you seeing that? Because as you mentioned, might be some of the COVID could continue into next year, right?

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Yes. Let me clarify that a bit on aggregate. We're not commenting on the March quarter in terms of whether it would show growth. But on a customer basis, seasonally, we would expect our largest customer to be down. We do expect Android based business to be up, and there will be some offset between those two that were not forecasting at this point publicly. And the rest of our businesses are expected to be approximately flat with some specific strength on the areas Bob touched on earlier.

Vijay Rakesh
Analyst at Mizuho

Got it. And then on the inventory side, I was wondering if you could comment on what the channel inventory levels were or where you see it exiting December versus normal levels? And similarly, where you think customer handset, customer OEM inventories are on the RF components side? Thanks.

Grant Brown
Senior Vice President and Chief Financial Officer at Qorvo

Yes. I'm sorry, was the question referring to China or.

Vijay Rakesh
Analyst at Mizuho

In general, what is China inventories, what are you seeing in terms of RF component levels and same on your customer. Where do you think inventories are as you exit the December quarter, let's say.

Steven "Eric" Creviston
Senior Vice President and President of Connectivity and Sensors at Qorvo

Yes. It's hard to put a number on it because it varies by market and even by customer and product area. In some cases, we have customers that are reasonably healthy in terms of the inventory they're carrying. And others, they've got a lot of inventory that they've got to work through and then in some cases, we have distributors in between that are kind of a mixed bag as well.

Vijay Rakesh
Analyst at Mizuho

Got it.

Robert Bruggeworth
Chief Executive Officer at Qorvo

What I'd add to that is, unfortunately, every quarter, the -- our customers are chasing demand down for the various global effects that we talked about, three major things: inflation the war and lockdowns in China. So unfortunately, every time they've been wrong and they thought they were reducing it enough when they weren't. They still overbuilt. So we'll just have to wait and see how this things end. What I think is great is they're paying close attention to it. And as Dave pointed out, we've got a great relationship with our customers. And we're working with them to work through this.

Operator

Thank you. I would like to turn the floor back to management for closing remarks.

Robert Bruggeworth
Chief Executive Officer at Qorvo

We want to thank everyone for joining us today. We look forward to speaking with you again at upcoming investor events. Thanks again. And hope you have a good night.

Operator

[Operator Closing Remarks]

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