Qorvo, Inc.

Good day, everyone, and welcome to the Corvo Inc. Q1 2023 conference call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Douglas DeLito, Vice President of Investor Relations. Please go ahead, sir.

Thanks very much.

Hello, everybody, and welcome to Corvo'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-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 complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our website at corvo.com under investors. Joining us today are Bob Bruggaworth, President and CEO, Grant Brown, interim CFO, as well as Eric Crevison, Philip Chesley, and other members of Corvo's management team. And with that, I'll turn the call over to Bob.

Thanks, Doug, and welcome everyone to our call. Corvo delivered fiscal first quarter revenue and EPS above the midpoint of the outlook provided on our May 4th earnings call. In IEP, 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 tools, infrastructure, and defense radar and comms. In mobile products, June revenue was diversified across customers and product categories. Corvo grew year over year, excluding China-based customers, while securing noteworthy design wins and content gains across customers and high-volume platforms. Corvo 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 Corvo. In MEMS-based sensors, Corvo 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 four MEMS sensors. For Matter-enabled applications, we launched a new development kit for Gateway and connected devices. Corco's 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 Wi-Fi 6 design wins for an infotainment system at General Motors. 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 omni-diagnostic 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. 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, Corvo 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. 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 US 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. 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. Corvo's RF Fusion for Phase 7 LE enables broader operator coverage and reduces implementation area in customer devices. For US-based Android OEM, we ramp shipments of our mid-highband pad, antenna plexer with integrated LNA, ultra-highband DRX, antenna tuners, and ultra-wideband solution in support of an upcoming smartphone launch. Both the ultra-highband DRX and the antenna plexer with LNA represent new product categories for Corvo. 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. Corvo is now organized into three segments, connectivity and sensors, high-performance analog, and advanced cellular. Eric Creviston is leading the connectivity and sensors group. CSG is a leading global supplier of connectivity systems and components, including ultra-wideband, Bluetooth, Matter, Wi-Fi, cellular IoT, and MEMS sensors. CSG combines the connectivity businesses formally split between IDP and mobile products. CSG'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 the long term. Philip Chesley is leading high-performance analog. HPA is a leading global supplier of RF and power management solutions for infrastructure, defense and aerospace, automotive power, and other high-growth markets. HPA leverages a diverse portfolio of differentiated technologies and products to support multi-year drivers, including electrification, renewable energy, the increasing semiconductor spend in defense, and 5G deployments outside of China. We expect the market served by HPA to support double-digit annual growth over the long term. Frank Stewart. who most recently served as general manager of the RF Solutions business unit in mobile products, is leading the advanced cellular group. ACG 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 market served by ACG to support high single-digit annual growth over the long term. We've also centralized our sales teams under Dave Fullwood, who most recently served as vice president of sales of mobile products. The three 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, Coover will continue to leverage core strengths in process and packaging technology, manufacturing scale, systems-level expertise, and deep relationships with customers and suppliers to enable a greener and more connected world. And with that, I'll hand the call over to Grant.

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 affected 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 second quarter 10Q, our historical financial statements will be recast into the new operating segments. With that said, I'll now turn to our June results. Revenue for the first quarter of fiscal 2023 was $1.35 million, $10 million above the midpoint of our guidance. Mobile products revenue of $733 million 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 million 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. The quarter benefited from stronger product mix, offset by higher than typical inventory related charges. On a gap basis, gross was impacted by a long-term capacity agreement. Amidst widespread supply constraints during the second quarter 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 for 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 can be found in our press release and additional information will be available in our upcoming 10Q filing. Non-GAAP operating expenses in the first quarter were $234 million, $11 million lower than our guidance, due to the timing of product development spend as well as employee-related expenses. Year over year, operating expenses were up $18 million, 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 million, or 27.5% of sales. Non-GAAP net income in the first quarter was $238 million, and diluted earnings per share of $2.25 was 12 cents above the midpoint of our guidance. Cash flow from operations in the first quarter was $273 million, Capital expenditures in the quarter were $43 million and remain concentrated in areas where we see continued demand for our differentiated technologies. Free cash flow was $230 million, and we repurchased $350 million worth of shares during the quarter. 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 billion of debt outstanding and $859 million of cash and equivalents. Now, turning to our current quarter outlook, we expect revenue between $1,120,000,000 and $1,150,000,000. Non-GAAP gross margin between 49% and 50%. and non-GAAP diluted earnings per share in the range of $2.45 to $2.65. We ended the June quarter with $847 million of inventory, reflecting seasonal new product ramps and the macroeconomic factors previously discussed. 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 second quarter to be approximately $240 million. Below the operating income line, other expense will be approximately $16 million, reflecting the interest paid on our fixed-rate debt offset by interest income earned on our cash balances along with other items. Our non-GAAP tax rate for the full fiscal year is expected to be approximately 11.25% due to the absolute level and geographic mix of pre-tax profit, as well as the impact of a U.S. tax law change related to R&D capitalization, among other factors. Despite the broadly recognized macroeconomic challenges impacting our industry, and our near-term view, Corvo's long-term business outlook remains positive. Connectivity and electrification trends are accelerating, and product performance requirements continue 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. 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.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you please limit yourself to one question and one follow-up question. Once again, that is star 1 if you would like to ask a question. We'll pause for just one moment. And we'll take our first question from Matt Ramsey with Cowan.

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 the 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.

Yeah, Matt, I think you got it. You know, it all starts with those macroeconomic events that we mentioned that are impacting everyone, right? For Corvo, as you pointed out, the important driver there is the five G phones in the area that you mentioned. Earlier this year, we set up the 750 million in calendar 22 and then revised that in May to between 650 and 675, where the revenue impact to us was approximately 250 million in the June and September quarters. Since then, as you mentioned, the macroeconomic environment has worsened. Android-based customers have pulled back, and the channel inventories have grown. So now we see fewer 5G units in calendar 22 as overall demand continues to reflect those macro pressures. In total, for Corvo, I touched on it in my prepared remarks, but the weakness that we saw there implies a fiscal second half that's down 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. You know, 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.

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 reserved foundry capacity. I think it was $110 million that was taken in the June quarter and excluded from the non-GAAP results. If you could maybe walk us through what 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 the 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 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.

Yeah, sure. You know, in terms of the charge itself, right, maybe I'll start there and then I'll talk about the gap-only treatment. But the charge itself, you know, I think we've appropriately accounted for the impact, you know, both present and future. As you mentioned, it represents about $110 million 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. You know, 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. 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 goal.

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

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

Yeah, sure, Vivek. You know, let me try to put some comments around it, but I think, you know, given the nature of the events that are impacting that channel inventory, you know, 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 all the other global macroeconomic challenges, 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, we're 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. you know, throughout our fiscal year. But, you know, we're not putting an exact timeframe on it at this point.

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 adjustments. 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 it had been. So we still have a ways to go there, just to be clear.

Understood. And, Bob, just as a follow-up, kind of longer term, you know, the industry seems to, you know, 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, you know, gain a lot of share from each other, you know, order a lot of components, and then, you know, 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.

I think, first of all, a little bit of a different view on this year is a little bit different from the perspective of, you know, their end market. I think we all expected at the beginning of the calendar year that the China market itself for 5G would grow very nicely, as well as their export market for 5G, particularly in 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. you know, 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. 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, You know, with the three business segments we have, you know, it is our goal if you look at how we laid out the growth rates for each one of these, you know, we will over time significantly improve the diversification of our business outside of handsets in general. And that's one of the things, you know, we're setting out to do with what we've done is to accelerate our growth and accelerate the development of technologies and 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.

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

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 on your view on how IDP is trending from both the demand perspective and supply perspective.

Thanks, Gary. This is Philip. So, you know, IDP, you know, is doing well. We posted, you know, both quarter-over-quarter and year-over-year revenue growth. You know, it really is – Somewhat market dependent, I will say that in our defense and our power segment, we continue to see strength. On the base station business, you know, we do see some inventory buildup in that end market. It's actually kind of interesting. You have kind of two dynamics that are playing in that market where, in some cases, there's oversupply. In other cases, they can't get enough product in, so making that end market a little bit murkier there. But in defense of power, clearly we're seeing a tailwind in those businesses.

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

Sure. Let me start, and then maybe Bob or Eric can fill in some more of the details. I think in terms of the December quarter, we would expect it to be below what we were talking about last quarter on the call. So, you know, certainly it's coming down from what we 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 have more color on the market itself.

Yeah, this is Eric. We've got, you know, it's – It's an 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 flagship phones. It'll 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? And that's going to be about the rate and pace of this inventory firm 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.

And moving on to Blaine Curtis of Barclays.

Hey, guys. Thanks for my questions. I had two. Just for the September quarter, I know you're going to guide per the new segments, which we don't have, but just any color? Because obviously you're talking about this week's second quarter. 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 to for September.

Thanks, Blaine, and kind of touched on a little bit, but we're ramping at two 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. And, you know, what's off is the Android ecosystem that we've been talking about. And, you know, we think, you know, we're going to drop a little bit more in December with that.

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

Yeah, Blaine, this is Philip. You know, we've been partnered with the U.S. government for many years, right? I mean, you've seen the releases from, you know, SHIP programs, the Starry Night, which is, you know, 90 nanometer GAN development. So for us, you know, 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. You know, I think the good news for us is that we have a lot of relationships already. And, you know, we're looking at areas where we can, you know, basically expand kind of what we've done in the past with the CHIPS Act.

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. You know, it's yet to be defined, the actual process and the allocations and things like that. But as we continue to learn, we've been very active in the CHIPS Act.

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

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 some of the actions that you talked about?

Yeah, sure. In terms of inventory, we normally think of it as turns. So, you know, ideally, we would be operating at approximately, you know, high threes to four turns was what we would consider more normal. You know, 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, you know, where we expect to end the year and dollar terms, You know, right now I predict it to be down, but, again, I'm not going to guide that far out on the balance sheet at this point.

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 it down 10% for the entire company or just for mobile?

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

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

Thanks a lot. A couple questions if I could. So you've got all this inventory sitting out there, and you've had it really since probably this time last year when China slowed down. You shipped phase seven, which is the new one out there. What does that say about the obsolescence of the inventory in general? They're sitting on a finish because 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 one? And number two, why are you calling December the bottom? I mean, we've had really a series of unfortunate events that were very unpredictable with the inventory issues and the COVID issues and the recession issues. But it's kind of been a moving target. We've been expecting the bottom now for a 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, the M1, M2O stuff, it doesn't look like it's even close to bargain year. So what gives you confidence that December is going to be your bottom on this? And then I have four other things.

Yeah, let me start with the inventory, Ed. So, you know, 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 mean, 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 even on a non-GAAP basis, we recorded double the normal inventory reserves on our mobile business in Q1. So, you know, 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 architectures?

Yeah, yeah, sure. So, you know, we've got a pretty good view, of course, into the design wind 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 designed in across the board, across Android. So there's, you know, 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 when the volume comes back.

And moving on to Ambresh Srivastava with BMO.

Hi, Grant. 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 forma is if it's something that you don't consider to be normal course of the business, should we then assume that there's a big chunk of CAN that is not addressable to the company anymore?

No, I wouldn't make that conclusion. If you look at the charge itself, 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 of our operating business this quarter. Generally speaking, you know, the situations that led to the charge are also not indicative of our business, right, the time in which we had You know, originally signed it, there was a massive silicon shortage, and today we're seeing a significant drawdown in demand due to some very large impactful macroeconomic factors. So, you know, neither of those things are reflective of our business and management's view, and we have excluded it for that reason.

Another point I'd point out is it is a multi-year agreement. to make sure you understand what Grant was saying. It's not, you know, just this quarter that was the charge. It's over multi-years we looked at this.

Right. And that's why I asked over multi-years should we assume that there's a chunk of time that has gone away. But I get to understand it's a combination of supply and demand. I just did 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? So, is it trending, continuing to trend higher? And then, are you revising down your 5G units estimate? Because you had revised it down prior quarter. I just wanted to know where you stand on those two fronts. Thank you.

Yeah, yeah, this is Eric. Yeah, channel inventory did grow in the quarter, and we continue to see outlook for 5G units dropping. you know, lower than we had thought before. And as Grant said, we were in the 650 to 675 range. It's now, you know, looking closer to 625. You know, others, you know, are seeing maybe 600. So, you know, it's not a crystal ball, of course, but, yeah, we continue to see general softness there.

And next we'll hear from Raji Gill with Needham & Company.

Yes, thank you for taking my questions. I appreciate it. Just two questions as well. One on the gross margins, and you talked a little bit about this before, but it implies, you know, margins are going to kind of drop to kind of 46%, a little bit under that for December and March. And if you go back, you haven't got to seeing that level of margin in, say, in three or four, three, three and a half years at a much lower revenue level. So, I wonder 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 be helpful.

Yeah, sure. So, in terms of the back half, I mean, to average into the 48, I would say, you know, 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, you know, there's some There's some error in that forecast, you know, because we typically only provide a quarter guidance. It's looking out longer. 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 to lower utilization in response to demand and and adjust our inventory balances.

Got it. For my follow-up, when you're indicating down 10% from the second fiscal half versus first fiscal half, it implies that the revenue over those two quarters are going to be down closer to 30% on a year-over-year basis. 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, you know, any more insight in terms of what's happening there with respect to demand, overall demand. 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, you know, what percentage of your revenue is coming from the China market? Thank you.

Yeah, sure. So, you know, to put that into perspective, our China-based customers were down approximately 45 plus percent on a year-over-year basis. So that provides, you know, 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, you know, around China, it's the largest producer and consumer of 5G phones. 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.

Yeah, and this is Eric. You know, 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 undershipping to the market demand for our components significantly.

during these next few quarters to get that channel inventory brought down.

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

Yeah. 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 and 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 exposure to Chinese guys?

Yeah, let me take that one. I think, you know, 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.

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

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

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

Hey, guys. Thanks for the question, and this one's probably for Grant. So, sorry, back to the charge again. If I understand it correctly, this is a $110 million charge, and it represents stuff that you did, I guess, in the past, but also charges that you took in the future. Is there any way to kind of break that up between the two? And does this go, were you thinking there are 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.

Yeah, sure. You know, and why don't we save that for the 10Q? 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 million charge.

Okay. I thought I was looking at something. I don't know if it was the Q that was talking about $1.4 billion to 2025. So in terms of the charge that you did take, What, like, what percent of those waivers or dollars of that 1.4 billion would that represent?

I'd rather not get into it until you've read the queue. It'll lay out in pretty explicit detail exactly the charge. The 1.4 would be the aggregate total amount of purchase commitment that we have. The 110 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.

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

Hi, good afternoon. Thanks for taking my question. This is just a follow-on from one of the previous questions around utilization. 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?

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.

Yeah, I just want to point out with cycle times being what they are, you know, 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.

Okay. Thanks for that. And then it looks like you guys have revised. I was looking at your guys's K and comparing it to the queue. So on the purchase commitment, exiting the March quarter over a multi-year period of time, I think you guys had about $2 billion in purchase commitments, 900 million for this fiscal year, obviously that's being revised lower. You took the $110 million charge. Um, 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, let me... Yeah, 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, you know, multiple years, you know, that number, it might help you put that number into perspective.

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

Yeah, the Q we haven't, for this quarter, we haven't issued the Q yet.

Yeah, so we issued the K. I don't know if he's comparing it.

Thank you. Moving on to Tim Arcuri with UBS.

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's being revised down? I would think that if it's because demand broadly is softer, that you'd be revising multiple agreements down.

Oh, no, 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 multi-year agreement, and the charge represents the impact all over that contract period. So it's all represented in that $110 million for the life of the agreement.

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.

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.

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

Thank you. Next we'll hear from Srini Pejuri with SMBC NECO Securities.

Thank you. Grant, pretty solid free cash flow number despite, you know, lower gap, I guess, net income. If you could just help us reconcile that. And then the bigger question is maybe for Bob. You know, Bob, given, you know, the inventory correction and also the macro uncertainty, how should we think about your CapEx going forward? I mean, I know these are longer-term decisions, but I'm just curious if there's any change to your CapEx plans.

Yeah, 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, 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. I'll start, and then if Bob has 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 year. And generally speaking, as we look out in time, it should be around 5% of sales.

So I think to follow on to answer your question, longer term, we're not making any change in our CapEx. We believe that, you know, this too shall pass. The world will 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 broad filters as an example where, you know, we have made tremendous progress over the last three or four years to be able to double the capacity by actually reducing our dye sizes. And we continue to work on those things. So, you know, when you get a downturn like this, we continue to work on those things. 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 grand years ago.

And moving on to Brett Simpson of Aritz Research.

Yeah, thanks very much. Bob, I wanted to ask a bit more about IDP and the growth that you see in the 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, 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, that'd be very helpful. Thanks.

Thanks, Brad. I'm going to delegate to Philip because he can't wait to talk about it.

Thanks, Brad. You know, I think, um, I appreciate the question. You know, I think when you look at our, you know, our defense business, um, There are a lot of real strong tailwinds that we see occurring. And, you know, that goes from our GAN process technologies as defense space moves in the radar segments from LDMOS to GAN. We're well positioned there. You know, we see it both at our foundry. We see it in our standard product business in defense as well. So this isn't just 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, our defense business, into an RF and analog play. We've moved some of our power management technology into that market, as well as our SHIP program, which does the advanced packaging that we have in Texas. We're seeing a lot of really good opportunities in that space. So I think that defense... With the increased semiconductor spend in the RF side, the SAM expansion that we're doing, you know, with our SHIP program, as well as what we're doing in some of the other analog segments, you know, it has a lot of positive, you know, tell us right now.

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

Yeah, hi, thanks, guys. Just quickly on the, I know you mentioned the December quarter bottom. Just one thing, 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 it be a challenge for the China handset guys, especially with the head of an iPhone ramp to kind of run through their inventory? Okay.

Yeah, 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.

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

This is Eric. I'll take that. Yeah, it's not a significant challenge. If you look into those suppliers, they are gaining some traction. 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 5G handsets. I mean, it's really required that you use this type of technology. So, yeah, some progress in some component areas, but nothing that is particularly meaningful as of now.

Thank you. Moving on to Atif Malik with Citi.

Hi. Thank you for doing my question. I have a question for Eric. Eric, on the way up, you know, last year into strong demand, the RF front-end attach rate, two apps process, there 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 that? you know, those kind of headwinds in the past attached to the apps process or does it any matter?

Yeah, it's an interesting question. I'm not sure there's any particular correlation other than to your point when we were constrained, it created opportunities for others. That's a good point. And we're certainly coming out of that constrained environment. But, you know, at the end of the day, it's about who's got the best products, right? And it's, you know, it's product by product and, you know, handset by handset, you know, the decisions are being made. We've got a very competitive product portfolio, a strong R&D pipeline, an incredibly talented team working on these things. And, you know, we think we've got every reason to believe that, you know, the gains and shares that we've been enjoying, especially in Android, are going to continue.

Thank you. That's all I have.

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.

Thank you for joining us today. We appreciate your interest, and we look forward to seeing you at our upcoming investor events.

Thank you, and have a good night.

That does conclude today's conference. Thank you for your participation. You may now disconnect.