Qorvo, Inc.

Greetings and welcome to the Corvo second quarter 2023 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Douglas DeLito, Vice President of Investor Relations. Please go ahead.

Thanks very much. Hello, everybody, and welcome to Corvo'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 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 Ruggerworth, President and CEO, Grant Brown, CFO, and Dave Fullwood, Senior Vice President Sales and Marketing, as well as 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 second quarter revenue and EPS above the midpoint of the outlook provided during our August 3rd earnings call. As we indicated on our call, Corvo'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, Corvo 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, Corvo signed an agreement with SK Siltron for a long-term supply of silicon carbide wafers. Corvo 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 silicon carbide surface mount FETs 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 GaN product introductions included a 5-watt GaN-PA module for massive MIMO cellular base stations and a GaN power module for upcoming DOCSIS 4.0 systems. For power management markets, we introduced a highly compact power management IC designed to enable reconfigurability and reduce our customers' time to market in 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 gateways 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-Fi 6 and Wi-Fi 6e design wins in support of 2023 platforms and launched 5 gigahertz and 6 gigahertz filters for European-band Wi-Fi 6E and Wi-Fi 7 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 AB cartridges for clinical trials in support of National Institutes of Health initiatives. In advanced cellular, We increased shipments of phase 7 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. Corvo's MEMS-based antenna solutions reduce insertion 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. Corvo 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-highband pad combining main path and diversity received content. We will be sampling this product to customers in the first half of calendar 23, and we expect design wins to follow in support of future cellular architectures. Across Corvo's business, in high-performance analog, connectivity and sensors, and advanced cellular, Corvus markets are leveraged to multi-year secular trends like electrification, sustainability, and connectivity. We are at the forefront of advances in defense radar and comms, electric vehicles, battery-powered tools and appliances, wireless and wired infrastructure, smart home, automotive productivity, 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 Corvo 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 Corvo'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 ball 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-highband pad combining main path and diversity received content. This highly integrated solution leverages the reduced size and enhanced performance of our bar filters to integrate nearly two times the bar filter content in a smaller footprint than is currently available in mid-highband architectures with just the transmit functionality. As we have said previously, next generation protocols continue to acquire 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 and 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.

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 10Q, 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 10Q and fiscal 2023 10K. I'll now turn to our latest quarterly results. Revenue for the second quarter of fiscal 2023 was $1,158 million, $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 and 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 electronic spend, primarily for Wi-Fi enabled products. Finally, advanced cellular revenue of $787 million was up 17% sequentially, representing a strong seasonal ramp in 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 11 cents 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 1st. 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 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 and 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 50 cents to 75 cents. 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-based revenue will grow sequentially. At the volume levels assumed in our guidance, We expect our inventory position to remain elevated but improve by the end of the fiscal year as we undershift normalized demand and reduce factory utilization. Simultaneously, we are cutting costs in our factories to offset the impact for 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 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 pre-tax 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 buff 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 Corbeau's BAW technology have and will continue to meaningfully reduce die sizes and increase die per wafer. Manufacturing efficiencies such as the move from 6-inch to 8-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 BAU output within our existing footprint at Richardson. Despite the macroeconomic challenges impacting customers, our long-term outlook remains positive. Product performance requirements continue to increase in our end markets, and connectivity and electrification trends are accelerating. We've 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 Corvo exceptionally well for long-term, increasingly diversified growth. At this time, please open the line for questions. Thank you.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask that you limit your questions to one and one follow up. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Tashia Hari with Goldman Sachs. Please go ahead.

Hi. Can you hear me okay?

Yes, we can.

Okay, wonderful. Thanks so much for taking the 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 2019? 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 the March quarter?

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 Corvo, so a substantial decline both quarter-over-quarter and year-over-year.

Got it. And then as my follow-up on gross margins, probably for you, Grant, I guess based on your full-year commentary on outlook, the implied gross margin trajectory into March is probably down a little bit off of that, you know, 43.5% guide you provided for December. Beyond March, I know it's early, but how should we think about the path for you to get back to the 50% or 50% plus? I know you're going through a very sharp correction. You're cutting utilization rates, but the pace and timing at which you can improve gross margins in calendar 23, if you can provide some context, then that would be super helpful. Thank you.

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 migration to the new DOCSIS standard is helping support that factory and 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 margins. 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, you know, obviously a lot of moving parts there and other factors, but the underutilization is the primary one.

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

Hi, guys. I wanted to pick up on the last line of questioning. you seem to insinuate that there's 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 in terms of defensive realignment with the manufacturing footprint?

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. You know, the underutilization as we see it today is something that will resolve as we're undershipping and underbuilding to what would be a more normalized demand environment. So as that returns to normalcy, I would expect the underutilization to 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. 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.

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

Sure. You're right. There is weakness beyond simply Android. I mean, both the consumer and the enterprise spending on our customers and 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 Wi-Fi business as well. We're seeing it across both access points, routers. We're seeing it in power management products for power tools. You know, 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.

Thanks, guys. Thank you.

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

Thanks for taking my question. For the first one, you gave a 47% gross margin number for the full year. That kind of suggests 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 recovery look like for Corvo? Because when I go back to before the 5G cycle started, you know, your quarterly sales were in the 750, 800 million level. Last few quarters, they jumped up to 1.1, 1.2, but that was, you know, in hindsight, above demand. So does 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 do you think you can exceed, you know, the recent quarterly run rate?

Thanks for the question. 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'd 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.

This is Bob. Thank you for your question. Yes, you're correct that there has been some inventory bill, 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, 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 events cellular, we still believe we can grow in that mid-up or single digits. We still believe we have room to grow in our largest customer and a lot of blog 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 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, it's 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, you know, we just talked about the agreement we signed with SK Siltron to bring on You know, they've been a good supplier to us. We wanted 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, you know, before on calls about the success for having an 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 long-term plans.

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?

Sure. Thanks for the question, Vivek. I'll take the the silicon question from last quarter, and then I'll roll it forward to this quarter. If you remember, there was $110 million charge last quarter. And in the K that we filed, there was $2.2 billion of total purchase commitment liabilities that we had, of which 1.4 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.

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

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

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

Yeah, and thanks, Dave. So I'm not sure how much we can say how much we're undershipping 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 bought off. We don't see pricing as a factor there. It's all more about the units and the inventory.

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

Yeah, 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 wanted to formalize with one of our suppliers in a longer-term agreement.

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

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 you see the inventory digestion trending beyond December. Do you think that March, there will still be some residual, or is December the worst of it?

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 to 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.

Okay. Thank you so much.

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

Thanks a lot. I want to dig into the, you mentioned a mid-highband that combines both the transmit and the DRX functions into a single module in a smaller footprint than what we had previously for the mid-highband. I'm assuming the performance has allowed you to reduce the size in addition to a few other things. Is this the new Phase 7E 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 call you can provide on how widespread the attraction of that part might be would be helpful to start with, and I had a follow-up.

Yeah, this is Dave. The Phase 7 LE is a different solution, so we talked about that. Earlier this year, and we've ramped that with Honor. We've got a lot of new customers, POs in hand. We'll start shipping more of 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 we'll ramp probably in 2024. So that's more targeting, you know, high performance, small form factor applications. Really leverages Corvo's strengths, optimized size and performance And so we're working with some leading customers on that, helping them define that architecture and drive that solution.

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. I think it's difficult to even understand how much inventory relative demand and things 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 that will sell just as well in the 2024 phones as it did or targeted for last year's and this year's phones? 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?

Thanks for the question, Ed. In terms of inventory and what we're writing off as 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 believed 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, you know, 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 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.

And if I could, finally, one more. On your largest customer, it might be a bright spot. It certainly looked like it from their report for the first quarter shipments, et cetera. Is your content up or down or flat relative, just generally speaking, to where it was last year?

Sorry, Ed, 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, you know, quite honestly, we're going to be down probably at all our major customers, obviously, including our China-based customers in December, and have factored all that into our outlook.

But we were up year over year in the September quarter with our largest customers.

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

Thank you very much for taking my questions. Good afternoon, guys. My first one, I was just kind of, apologies that this has been asked. We were listening to you guys on Qualcomm at the same time. But one of the comments that their team made was not only a weakening in smartphone demand overall, but also a move that's 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.

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's 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 pretty close relationships with all our customers. You know, 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, you know, sitting in our factory or sitting in our distribution channel or obviously sitting in our customer shelves. You know, we work through that with them on a case-by-case basis to make sure that that inventory gets consumed. So, in those cases, you know, they're often willing to take more inventory on their shelf to help solve those problems.

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 Wi-Fi, whether it's access points or in the phones, but just want to make sure, you know, for our audience to understand it's broader than what we're just seeing in handsets.

No, thanks for that at the end, Bob. That was pretty consistent with the messaging from San Diego as well. As my follow-up, Grant, I know there's new segmentation, and you guys talked about the historicals being disclosed when the queue 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 segments directionally, that would be helpful. Thanks.

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 know, you get now a good look at the profitability by each of those different segments in terms of HPA, you know, 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 on our CSG business, which is our highest growth, biggest investment area.

I should say biggest investment area, sorry, biggest investment area relative to revenue.

I should qualify that.

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

Hi, thank you very much. 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 businesses.

Yeah, 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, you know, looking at the utilization in the factories. So it's building a lot of Wi-Fi 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. 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?

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

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

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-specific.

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

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

Hey, guys. Thanks for taking my question. And, yeah, it gets a little repetitive. Everybody was bouncing 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 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.

Hi, Blaine. It's Bob. I made a comment earlier that, you know, we were up year over year with our largest customer, but I also commented that in the December quarter, you know, 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, you know, 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, you know, we're seeing it decline. So that was some comments I made earlier.

Thanks. And then you made the comment that Android is up in March. Obviously, you know, Samsung always has their ramp then. It's 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?

I think, number one, I'm glad you brought up our Korean customer and what's going on there. I mean, we also commented that, you know, we picked up a low-band pad in their marquee phone, and we're pretty happy about that. That's new content we've never gotten. We did get the low-band pad in, you know, 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, you know, as they launch their next product, S-level phone, we're going to do extremely well. And, you know, it's our expectations today that, you know, 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, you know, predicting March yet. But, Blaine, 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.

Next question comes from Christopher Roland with Susquehanna. Please go ahead.

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 unit as we move into 2023 more generally. Thanks.

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 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 ramp 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-Fi 7. There's been a lot of cases in Wi-Fi 6 where the PA that's integrated in the SOC is sometimes good enough performance and they don't need an external FEM, but we don't see that happening in Wi-Fi 7, so we've got a great Wi-Fi FEM 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 we go forward.

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?

Sure. We commented that we think it'll be approximately 600 million units now for calendar 22, so down approximately 25 million units. coming out of December.

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

Yeah, thanks for taking my questions. And again, I joined late as well, so apologies if this question was asked. When we're looking at calendar 23 in terms of the overall market, the I'm just curious to see what the Chinese handset customers are thinking about a recovery year looks like in calendar 2023. You know, 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, you know, a $600 million kind of 5G market this year? Any thoughts on that?

I think what's important, and it's a good question, and, you know, 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, you know, 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 Xi 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? Their major export market, a lot of that is Eastern Europe. The war in Ukraine doesn't look like it's slowing down. So they have to factor that in. And then you put in place, you know, they're strong in Europe as well. Well, heck, 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 23. 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.

Got it. Understood. And for my follow-up, you know, last quarter you were cutting utilization to kind of stoke the inventory gap. Bern, 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, you know, ramping down utilization rate at your internal FAB and kind of what the impact would be on the margin front? Thank you.

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, it gets us on path to our 50% plus gross margin looking forward.

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

Yeah, hi, guys. Just wondering, I know you talked about by March quarter we start to see some growth. Hopefully you caught that right. But is that predicated more on Ex-China growth, or how are you seeing that? Because as you mentioned, some of these COVID restrictions could continue into next year, right?

Yeah, 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, you know, 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 we're 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.

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

Yeah, I'm sorry. Was the question referring to China or I didn't know in general, what are channel channel inventories?

Uh, what are you seeing in terms of RF component levels? Um, and you know, say same on, on your, at your customer, uh, where do you think inventories are as you exit the December quarter? Let's see.

Yeah, it's hard to put a number on it because it varies by, 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, you know, in some cases, we have distributors in between that is kind of a mixed bag as well.

What I'd add to that is, unfortunately, you know, every quarter, our customers have been chasing demand down for the various global effects that we talked about, three major things, inflation, the war, and You know, the lockdown's in China. So, you know, unfortunately, every time they've been wrong and they thought they were reducing it enough and they weren't. They still overbuilt. So, you know, we'll just have to wait and see how this thing ends. 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.

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

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.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.