Qorvo, Inc.

Welcome to the Corvo, Inc. second quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please note today's event is being recorded. I would now like to turn the conference over to Douglas DeLito, Vice President of Investor Relations. Please go ahead.

Thanks very much. Hello, everybody, and welcome to Corvo's Fiscal 2024 Second Quarter Earnings Call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in the earnings release published today, as well as the risk factors associated with our business and our annual report on Form 10-K filed with the SEC, because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or other items that may obscure trends in our underlying performance. During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our investor relations website at ir.corvo.com under financial releases. Joining us today are Bob Brugworth, President and CEO, Grant Brown, CFO, Dave Fullwood, Senior Vice President of Sales and Marketing, 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 Corvo's fiscal 2024 second quarter call. Revenue, margin, and EPS were all above the high end of the outlook provided during our August earnings call. Customer demand during the September quarter improved versus our August guidance. The primary driver was a large smartphone customer, RAM. In addition, channel inventories of Corvo components across the Android ecosystem continued to be consumed with OEMs indicating inventory levels are approaching historical norms. Channel inventory digestion is allowing Corvo to ship more closely to end market demand, even as pockets of channel inventory remain in markets such as base station. We have worked closely with our customers to address inventories while continuing to deliver highly differentiated products. They have rewarded us with new opportunities and new design wins and this underpins our expectations for growth this year and beyond. Across our three operating segments, Corvo enjoys multi-year technology upgrade cycles supported by global macro trends, including connectivity, sustainability, and electrification. New protocols and new technologies are offering improved performance and enhanced functionality, and Corvo is critical in enabling these capabilities. This is playing out in aerospace and defense, automotive, base station, broadband, connected home, power devices, power management, smartphones, Wi-Fi, and other markets. Where the performance is measured in power out, data throughput, talk time, battery life, or distance between charges, customers increasingly require higher levels of power efficiency, integration, and functional density. to enable their future architectures and deliver successive improvements in their next generation products, they rely on Corvo's best-in-class technologies and solutions. In HPA, we are a strong beneficiary of the trends in our defense and aerospace business towards what we call one-to-many. Put simply, Corvo's technologies are supporting higher customer volumes, requiring more electronics and higher levels of integration. This applies to unmanned vehicles like drones, upgrades to existing radar systems, low Earth orbit satellites, and other applications. Lastly, we are leading the transition to DOCSIS 4.0 in broadband, and we continue to deliver base station customers increasing levels of functional integration for their 5G massive MIMO deployments. Looking at our power franchise, we offer a highly differentiated solution with our silicon carbide JFET architecture. Our technology offers the lowest RDS on, which translates into faster battery charging, longer battery life, and lower current consumption for applications like EVs, solar inverters, and data centers. These are relatively new markets for Corvo that are early in the transition to silicon carbide and offer significant growth. We also offer a differentiated portfolio in power management, where our initial wins have been in SSDs, power tools, and appliances, and we are leveraging our unique IT to expand into defense, infrastructure, smartphones, wearables, and other markets. In CSG, new technologies are transforming user experiences in automotive, connected home, enterprise, industrial, in other markets. Ultra-wideband is a critical focus area, and we are very excited about recent developments. Ultra-wideband is in the very early innings of adoption, and we are seeing exciting opportunities, giving expanded smartphone adoption, multiple in-vehicle placements, and an array of new capabilities, such as ranging and precision location for indoor navigation. Wi-Fi is another primary driver, and the transition to Wi-Fi 6E and Wi-Fi 7 is very early on. Wi-Fi 7 devices recently launched by Corvo's customers are offering breakthrough advances in speed, latency, and network capacity. Corvo also offers components and full system solutions that incorporate Bluetooth Low Energy, Zigbee, Thread, and now Matter. Matter is a recently launched technology overlay, essentially a common language that improves interoperability across smart home devices, regardless of protocol or manufacturer. It is supported by iOS, Android, and major smart phone platform providers, and it's widely expected to simplify and accelerate the adoption of smart home devices. It's also early days for our force-sensing touch sensors. These are ultra-sensitive MEMS-based sensors that enable new use cases and enhance device functionality. We have broad engagements across automotive smart interiors, trackpads, true wireless headsets, smartphones, wearables, and other consumer applications, and our opportunities are expanding as customers engage with our technology and develop new use cases. Looking at ACG, fewer than half of the Android smartphones this year will be 5G. Android 5G units are expected to grow in the low double digits for several years. That's a big growth opportunity for Corvo as we move from very little content in 4G phones to significant dollar content in 5G phones. Another driver? is 5G Advanced, which leverages new releases of the 5G standard. 5G Advanced smartphones will include additional transmit and receive and satellite bands, favoring Corvo's product and technology portfolio. 5G will migrate to 5G Advanced over time and bridge us to new development efforts and new content required to accommodate 6G frequency spectrum at the end of the decade. Corvo enjoys a range of opportunities supported by multi-year upgrade cycles. Many of these transitions are very early on, and Corvo is recognized by customers as a leading technology innovator. We have made great progress developing new technologies and winning customer designs. With that said, we want to make it clear that our end markets have not yet turned, and our outlook does not contemplate a significant change in the macroeconomic environment. The customer demand environment for Corvo is more a reflection of strong design wind activity and the early actions we took to improve channel inventory. When end markets recover, that will represent an additional driver of growth for Corvo. Now let's turn to some quarterly highlights. In defense and aerospace, We increased shipments of X-band transmit and received SEMs and secured first orders for our 50-watt PAs in support of new land-based C-band radar programs. We introduced the world's highest power KU band satellite communications amplifier, which enables an 80 percent size reduction and is optimized for multiple applications. We also received a large production order for recently launched cell-to-satellite solutions. These solutions incorporate advanced technologies from across our aerospace, base station, and mobile portfolios to enable low Earth orbit satellite connectivity. In infrastructure, we were selected by Tier 1 Base Station OEM to supply switched LNA modules for next-generation 5G massive Bible radios. We also continue to lead DOCSIS 4.0 broadband upgrade cycle with production orders from multiple customers and broad-based design wins. For power management markets, we released QSPICE, a significant improvement over current industry offerings for analog and mixed signal circuit design and simulation. QSPICE improves the speed, functionality, and reliability of circuit simulation extending the value Corvo is providing designers. Since its launch, the tool has surpassed 15,000 unique downloads. In automotive applications, we were selected to support a major in-vehicle car access platform by a leading German automotive tier one. This multi-year program has a lifetime value over $250 million. marking a major milestone for our ultra-wideband portfolio. Within this program, Corvo will supply ultra-wideband solutions for in-vehicle applications for a leading German automotive OEM. We also secured a design win from another leading German automotive Tier 1 to supply V2X solutions for a communications platform launching this year. Lastly, we were selected to supply force-sensing touch sensors that enhance smart interior functionality in a recently launched EV from a Korean-based automotive OEM. Complementing the large ultra-wideband wind in automotive, Corvo was selected by the leading Android smartphone OEM to supply ultra-wideband for their spring 2024 flagship launch. It's worth noting, that the ultra-wideband wins in automotive and Android markets are significant, as these two customers represent the largest volume opportunities in their respective markets. To extend our reach, we're sampling ultra-wideband solutions across fleet management, logistics, agriculture, and other applications, leveraging our precision location capabilities to advance operational efficiencies. In Wi-Fi, we secured multi-year design wins with Tier 1 network operators in the US and in India. These wins support next-generation wireless infrastructure for retail, enterprise, and home applications. Across the Android ecosystem, we increased shipments of our highly integrated modules in support of Android smartphones from the high tier through the mass market. Notably, we extended our strong share position with the leading Android smartphone OEM in their flagship smartphone. In addition to the ultra-wideband wind, we also selected to supply the lowband, mid-highband, ultra-highband, secondary transmit and receive, tuning, and Wi-Fi. Lastly, we expanded customer sampling of our recently launched mid-highband path. Corvo's newest integrated architecture leverages next-generation BAU and SAW technologies and advanced packaging to combine main path content with received paths commonly included in the first received module. This and other highly integrated Corvo architectures for the Android ecosystem free board space and improve efficiency to support future 5G form factors and content. like flip and fold architectures and transmit and receive non-terrestrial network connectivity. I want to thank the Corvo team for continued operational excellence. We have moved aggressively to reduce channel inventories by securing broad-based customer design ones. In the December quarter, our outlook reflects the seasonal profile of a large smartphone customer ramp, as well as healthier channel inventories across most markets. In the March quarter, we expect revenue to be more closely aligned with end market demand. Longer term, we expect revenue, growth, and margin expansion as product mix favors our higher growth investment business. And with that, I'll hand the call off to Grant.

Thanks, Bob, and good afternoon, everyone. Revenue for the quarter was $1.1 billion. Non-GAAP gross margin was 47.6%. and non-GAAP diluted EPS was $2.39, all exceeding the high end of our August guidance. Revenue increased approximately 70% sequentially and benefited from significant content gains at our largest customer. Consistent with our guidance, factory production levels improved but remained below historical averages. During the quarter, the impact from underutilization and factory-related variances was approximately 550 basis points versus approximately 800 basis points last quarter. The increase in gross margin above the high end of our August guidance range was largely the result of revenue upside and product mix. A larger portion of September revenue was manufactured at external silicon foundries and processed at third-party OSAPs. By comparison, our December and March revenue will reflect a larger percentage of higher cost inventories manufactured internally during periods of lower utilization and a lower percentage of products manufactured at external silicon foundries and OSATs. Beyond this fiscal year, we continue to see a clear path back to 50% plus gross margin initially during specific quarters and then on a full year basis. Non-GAAP operating expenses in the quarter were $246 million, slightly higher than our guidance due to performance-based incentive compensation. We are investing in new product development and targeting multi-year growth opportunities across all three segments. In addition to growth-oriented investments, we're also investing in enterprise-wide productivity initiatives. These multi-year efforts will support future growth and enhance profitability as we upgrade, modernize, and standardize around the latest tools and best practices. In total, non-GAAP operating income in the quarter was $279 million, or 25% of sales, which increased from 7.2% last quarter. Breaking out operating margin by each segment, ACG was 34%, HPA was 17%, and CSG was negative 27%, which includes the impact of the biotechnology division. During the quarter, Corvo Biotechnologies generated a half a million in revenue and reduced operating income by approximately $7 million. Just following quarter end, we successfully closed the sale of the Omnia Biotechnology business and will continue to sell BA filters to support the acquirer. Non-GAAP net income was $236 million, representing diluted earnings per share of $2.39. Moving on to the cash flow statement. Free cash flow was $64 million, and CapEx was $29 million. During the quarter, we repurchased $100 million worth of shares at approximately $103 per share. The rate and pace of our repurchases is based on our long-term outlook free cash flow, 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 $707 million of cash and equivalents. Consistent with our expectations and commentary from the prior earnings call, our net inventory balance was reduced in the period and ended the quarter at $840 million. down $78 million sequentially. Looking at days of inventory, this represents a decrease from 210 days to 138 days. Turning to our current quarter outlook, we expect revenue of approximately $1 billion, plus or minus $25 million, non-GAAP gross margin between 43% and 44%, and non-GAAP diluted EPS of $1.65 at the midpoint of the revenue range. We project non-GAAP operating expenses in the December quarter will be $235 to $240 million. Below the operating income line, non-operating expense is expected to be approximately $10 million, reflecting interest paid on our fixed-rate debt offset by interest income earned on our cash balances, FX gains or losses, along with other items. Our non-GAAP tax rate for fiscal 24 is expected to be within a range of 13% to 15%. We expect our inventory balance will decrease again in the December quarter. In terms of channel inventory, the environment continues to improve, with Android OEMs indicating inventory levels are approaching historical norms. Outside of the Android ecosystem, there are smaller pockets of channel inventory that will take longer to digest. We continue to forecast fiscal 24 revenue above fiscal 23. For the full fiscal year, fiscal 24 non-GAAP gross margin is expected to be 44% or slightly better, with variability primarily tracking utilization and mix. Corvo enjoys multi-year growth drivers across all three of our operating segments. We offer a broad portfolio of technologies and capabilities, and we are uniquely positioned across leading customers and large markets. We expect continued strength on large customer programs, and we are investing to drive outsized growth in diverse businesses to broaden our market exposure and accelerate growth.

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

We will now begin the question and answer session.

To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. In the interest of time, we ask that you please limit yourself to one question and one follow-up.

At this time, we will pause momentarily to assemble our roster. And our first question comes from Tim Akruri of UBS.

Please go ahead.

Hi, thanks for taking my question. This is Amon jumping in for Tim. Just looking into fiscal 2025, how should we think about the trajectory of gross margin as utilization starts to come back? Is there a certain level of revenue we should be thinking about for a core loan to be back at that 50% range?

Sure, I'll take that. This is Grant. Thanks for the question, Amon. There are a large number of factors that can influence gross margins, such as revenue mix and input costs, including utilization impacts. So I wouldn't think of it in terms of an absolute revenue level. Some products carry a higher gross margin than others due to the nature of that business or end market. For instance, looking at our base station product line, which is generally accreted to gross margins, but with base station demand weaker, coupled with the excess channel inventories we've been talking about there, this is currently a headwind to margin versus historical levels. Product mix can also impact gross margin based on where it's manufactured. As I mentioned in my prepared remarks, for instance, last quarter we shipped a higher portion of products that were manufactured at external silicon foundries and processed at third-party OSATs, and those products are not impacted by our internal factory utilization, which, as we've mentioned, is running below historical averages. Aside from product mix, unit cost is the other half of the equation. It's a bit more complex, given that input costs can affect gross margin on a lagging or leading basis. For example, historical underutilization will create higher unit costs in that inventory. And as it's sold in future period, that impact lags. Alternatively, in anticipation of lower future demand, production volumes can be cut and utilization will fall. And in that sense, the impact tends to lead those anticipated changes in demand. So there's a number of factors that impact gross margin. I, again, wouldn't think of it in terms of an absolute revenue level, but rather a time of us to move through our high-cost inventory, return utilization levels back to normal, run the factories efficiently, and we'll be on a path back to 50% plus. Thank you.

The next question comes from Gary Mobley of Wells Fargo Security.

Please go ahead.

Hi, guys. I wanted to pick up, Grant, with your detailed response to the last question. I know in your prepared remarks, you said gross margin throughout fiscal year 25 will, at times, be above 50%. So I presume that would be in your seasonally strong periods. But did you say that as well 50% or above is the target for the full year or just the specific few quarters of seasonal peakness?

Sure. I said that I think it'll achieve 50% on a specific quarter before it achieves 50% across the whole year. And that's somewhat macro dependent. And obviously the volumes will dictate at what levels we return to a utilization where that's possible.

Okay. And, Bob, you mentioned, I think, in describing the fourth quarter of this year in line with market conditions. And so your full-year guidance implies no more than a 10% sequential revenue decline in the fourth quarter. So how would you call the seasonal trends in the fourth quarter? Are we talking about mid-single-digit, I think, which is usual, or perhaps as much as double-digit percent declines? Sure, Gary.

Go ahead, Grant. I'll take at least the high level. Just make sure we're clear on what we typically see in the fourth quarter, which as we've said all along, typical anymore isn't typical because it seems... Every time we're faced with something different from losing our second largest customer to, you know, COVID hits to various economic factors. What my comments were around is given the current economic outlook, you know, we're not expecting our markets to rebound. And as we work through all this channel inventory that we talked about, you know, we're going to hit what we think is the end market demand. Now, end market demand typically, and what we're forecasting now is what we see is our largest customer's rent continues to come down in March. We have a seasonal, usually the weakest quarter for our China Android business in March. And some of that is offset by a ramp at the largest Android customer that we have. So, you know, as far as percentages go, I'm not going to call it percentages. I'm just telling you that from our view, that's the dynamics that are driving most of our business. Grant commented that our ACG business is growing year over year. Our CSG business will start growing this quarter and will be up in March. And really the lagging business for us is our HPA business, and we've talked about what's going on there with primarily what used to be our largest business in the infrastructure side, and we're not seeing that now. So, you know, when you integrate all that, we're still comfortable. We're going to be up significantly in March year over year, and we're comfortable. We're going to be up for the fiscal year 24 over 23. I don't know, Grant, if you want to add anything to that, but I want to give them all the moving pieces.

Sure, no, I think you covered it, Bob. I'd say, you know, maybe 10%, but certainly not 15, right? We're committed to the comments, you know, any macro-related disruptions aside that we see growth in fiscal 24.

The next question comes from Carl Ackerman of BNP Paribas. Please go ahead.

Yes, thank you. I have a clarification and a follow-up. I guess just given the content gain to the largest customer, is it fair to say that customer now exceeds 50% of your revenue in the quarter?

We won't comment on any customers within the quarter, but we'll sum it up on the 10K. The only thing I'd say about 10% plus customers is that we did have more than one in the quarter.

Thank you for that. For my follow-up, MediaTek suggested that 5G units should grow double digits next year, certainly above overall smartphone unit expectations of low singles. Most of your exposure to incremental gains in 5G do come from China Android OEMs. I was hoping you could address how you think Huawei does or does not impact your China Android opportunity, both near-term and longer-term. Thank you.

I'll take the first part of that, Carl, and I'll let Dave take the second part since he was just recently in China. Actually, a large part of our growth for 5G Android is still at the largest Android manufacturer being Samsung. The second point I would like to make is you're right, we do have China exposure in 5G, but most of that is actually in the export market for what they're trying to do to build their brands outside of China. So just keep those two facts in mind. Dave was just in China just a couple weeks ago, and I'll let him talk a little bit more about that and what at least we're seeing, talking to all of our customers there, along with your comment about Huawei.

Yeah, thanks, Bob. And so maybe I'll start with Huawei and kind of size what we're seeing for you. And prior to the ramp of the new phone that they just announced, they were doing about 2 million units a month. And so we've seen a typical premium-tier phone ramp where that peaked up. Last couple of weeks of data, we're actually seeing that come back down, so they may be on the other side of that ramp. But if you look at the incremental growth that we see over what they were shipping previously, on an annual basis, it's about 10 to 20 million units. So that's a pretty good growth for that customer, but it's not that meaningful when you look at a total market size of about 1.2 billion smartphones per year. Now, when it comes to our China customers, as Bob said, a large part of their business and a lot of their growth is coming from overseas business. And so we're very well represented across our China OEM customers. And certainly in that overseas business, that's where we see a lot of the higher share and growth opportunities. So it's not just a China domestic situation that you have to look at. You have to look at that overseas business. And many of those customers have pretty significant market share in a lot of those overseas markets.

The next question comes from Toshiya Hari of Goldman Sachs.

Please go ahead.

Hi, thank you. I just wanted to follow up on the China Android market. I guess specifically, what kind of trends did you see in the September quarter on a sequential basis, and what's embedded in your guidance for December? And related to that, we've been getting more questions about the competitive landscape in China. you guys have pretty good visibility and obviously you've got good relationships with your customers. As you think about models coming out in 2024, um, any concerns around, you know, market share, you know, how should we think about gen to gen content growth, um, particularly as it pertains to, to your OEMs, uh, export business. Thanks.

Dave, you want to handle that one?

Yeah, sure, Bob. Um, let's see where to start. The, um, the China, um, customer base in the export market as well as in the domestic market. They've got some pretty compelling products. As Bob said, I was just over there a few weeks ago. I got to meet with all of our customers. Our relationships continue to be very strong. They place a very high value on what we bring, and they all reinforce that Corvo is their main global strategic supplier for RF. So we have deep discussions with them on roadmaps to align their needs to our product plans, and they're very highly engaged on our new low-mid-high SPAD platform that we announced a couple quarters ago. Additionally, they're looking at expanding their business with us in other areas, such as power management, sensors, and L2Y band. So the overall market, as Bob mentioned, the channel inventories are approaching normal. Many of those customers are getting to pretty healthy levels. So as we've been saying all along, what was a headwind is now becoming a tailwind. So we're starting to see that growth. We had our largest bookings quarter in over two years. So our customers have now gotten past the concern about inventory, and they're looking forward now and starting to place orders more aligned to what their true production plans and unit demand is. So that's certainly improved a lot. Now, having said that, As Bob mentioned also, we're not anticipating any major rebound in the end market. We're just excited about the design wins that we've had and the inventory in the channel being cleared out, and that's driving a lot of our growth as we go forward.

Got it. And then as a quick follow-up, outside of mobile, some of your broader analog peers have talked about you know, signs of weakness or clear signs of weakness in industrial and parts of automotive. I think comms infra has been weak for a couple of quarters now. But I guess the question is, you know, outside of mobile, what kind of trends are you seeing and what sort of trajectory are you assuming as you sort of progress through the December quarter and go into March outside of mobile? Thank you.

Sure. This is Grant. Let me take that one. We don't explicitly guide by segment. But, you know, the views for each of those businesses is factored into our total guidance. I'll try to provide you a little bit of color there, and then Dave can jump in and add. You know, we have a pretty diverse collection of businesses that serve a number of end markets, and they're not all in phase. You know, as Bob pointed out, last quarter in fiscal Q2, ACG returned to the year-over-year growth. that we expected, and we'll continue to see that for the rest of the year. And then this quarter, our fiscal Q3, we forecast our CSG segment will return to year-over-year growth. And then finally, in Q4, we expect HPA to return to year-over-year growth. So the businesses are a bit out of phase, if you want to think of them that way. Just continuing with HPA as an example directly to your question, if you look inside of HPA, there's various trends. within each end market. It probably won't surprise you, but the base station market being weak, you know, as an example, our revenue's down over 50% year over year for the last four quarters. A few years ago, actually, we hit 200 million in that business before the Huawei ban and the 5G base station rollout slowed. But outside of China, only 25% of that mid-band 5G infrastructure has been built, so there's a lot of opportunity But that's one area where we continue to see some meaningful headwind and market weakness. Beyond that, though, you know, there's also the broadband area within HPA. We have a very strong position there, high level of share, but the DOCSIS 4.0 upgrade cycle may be a bit slower, and there could be some pockets of inventory in the very end products there. So the situation within infrastructure is very different than, say, our defense and aerospace group. where we're benefiting from significant strength and expect to grow in fiscal Q3 and fiscal Q4. So, you know, there's a lot of cross-currents there when you get into the details, but this is why we maintain a diverse set of businesses, and a lot of them share the same manufacturing footprint, which creates the operating efficiencies, but also scale and the diversification on the top line.

What I'll add to that is in the cellular IoT market, actually, we saw this turn about two quarters ago down. So with CSG coming back, as Grant pointed out, growing next quarter, you know, we're not expecting the cellular IoT business to come back. That's been down for us, and we've been working through inventory in that segment as well. So I think that's been some commentary as well.

Yeah, I think you mentioned automotive as well, and, you know, that – We're growing from a pretty small base there, so Bob talked about a lot of the design wins, so we're pretty excited about the growth opportunity there. But that's all new programs that'll be ramping over the next couple of years that'll drive that growth for us. But it's coming off of a relatively small base, so we're not as exposed there to really maybe see some of the things you're seeing from some of our peers.

The next question comes from Ruben Roy of Stiefel.

Please go ahead.

Thank you. Bob, I wanted to ask about the ultra-wideband marketplace. I think in the past you've had a few system wins in the Android ecosystem for ultra-wideband. I don't know if they were characterized as flagship back then, so maybe if you could talk about the broader opportunity in smartphones specifically that you're seeing, and then expanding outside of handsets. Again, in the past, I think you've characterized the market as several hundred million dollars of opportunity. You're talking about a $250 million lifetime opportunity in the auto wind. So has anything changed? Are you seeing accelerating development? And if you can give us an update on how you characterize the opportunity, that'd be great.

Sure. Thanks, Ruben. Extremely excited about what the team's accomplished in some big wins in ultra-wideband. One of the Android... Phone manufacturers, Google, we've been in for a couple generations now, so we've talked about that, and you can get teardowns. I think from our comments, you know who the next one is. What surprised us about ultra-wideband is, you know, again, I think we said this a year ago or more than when we first acquired DecaWave, that we were on the original platforms in our largest customers' phones with the RF front end for ultra-wideband, and what we believed was going to happen is it was going to take off in phones first, and automotive second. What's actually happening is we're picking up a lot more in the automotive side, and handset seems to be trailing it, at least in the adoption. Now, as you know, it takes a little bit longer to get to market in a car, so they're out winning platforms now and building those in. So our expectation is we're going to lead in design wins in automotive, but phones are going to come up fast. And Dave mentioned earlier in his comments that we're working with many of the other Chinese handset OEMs to introduce ultra-wideband. The thing I want to point out is in the Tier 1 German manufacturer that we won in, the current win is now to support a German Tier 1, but they will take that same platform to other U.S. and other manufacturers around the world, that platform, plus we've been working with others on platforms that will also go into the automotive area. we see a lot of opportunity there. And placements in automotive can go from, you know, five or six up to nine or 10. So they can be big wins depending on how they adopt to use the ultra-wideband in a car. And it's more than just, quote, keyless entry. And I think that's what's really exciting about the opportunities there. So if I look at that and I look at handset, also a couple quarters ago, we talked about ultra-wideband and access points, Wi-Fi access points for indoor navigation. which is another exciting opportunity. And we're just seeing it now going into other types of products. We're working with various manufacturers, OEMs, for other things in your home that need that kind of technology. So we're very excited about the things that are going on there. Really appreciate your question.

Thank you for all that detail, Bob. I have a quick follow-up for Grant. Just in terms of inventory, and I see the unbalanced sheet inventory coming down. You know, ahead of, you know, hopefully and potentially a growth year next year, do you have sort of a target level either in DOI or dollar for inventory or how you're thinking about that as you go forward post-December quarter?

Yeah, sure. We usually have commented on our target around four turns.

So high threes to four would be a pretty typical range for us to look to achieve.

The next question comes from Edward Snyder of Charter Equity Research.

Please go ahead.

Thanks a lot. First, housekeeping. Can you give us the percentage of revenue for each of the three businesses? Sorry if I missed that. And then, Grant, if I take a look at your China revenue over the years, actually, it looks like if we exclude the era when you were overshipping, and the error when you're under-shipping, your average is probably close to 250 to 300 a quarter. And I know you did about 150 million last quarter. We haven't seen the K for September yet. But doesn't it suggest you're dealing with maybe 100, $150 million of inventory burn per quarter? Just trying to bracket those numbers.

Yeah, sure, Ed. I can help you with the percent of revenue, but we haven't commented on the China revenue in the quarter. ACG was 77%, HPA was 14%, and CSG was the balance, about 9%. And, yeah, we haven't commented on, you know, what a normalized level of Android revenue or China revenue would be outside of the comments we've already made.

But I don't know if there's – All we've added is we are still undershipping to end demand, best we can tell.

Right.

But we're coming up near the end of it.

Right, but when it snaps back to something more normal, you said inventories are normalizing, and I know demand changes year over year, but given your kind of incumbent position as a preferred vendor for most of those phones being sold.

Yeah, maybe this will help. As we bring it down, that means revenues do go up. I mean, we haven't been shipping, so we've been up the last two quarters.

Yeah, and maybe, Ed, I would also make the distinction between channel inventory and our own inventories. So channel inventories we think are relatively healthy, maybe even earlier than we had commented on in the past where we thought it would take until December. So that's an improving situation. Our own inventories, as we're selling through them, requires us to achieve the mix shift that we're going to see in the second half. So we'll start selling through our own high-cost inventories in Q3 and Q4 largely.

And we do expect growth in Q3, though. Well, you said you saw the largest bookings in two years in the last quarter, and normally those bookings are for what, a year out or so? I know it varies.

No, not a year, Ed.

Normal lead times for us.

The next question comes from Serini Pajuri of Raymond James.

Please go ahead.

Thank you. Just a clarification on the China business, either Bob or Grant. I think one of the comments is that, yeah, the inventories are coming down and businesses, you know, from the trough levels, it's growing sequentially. But at the same time, I think, Bob, you said in your comments about the March quarter, you're expecting China to be seasonal. Given that inventories have kind of pretty much normalized, I would have thought China would be better than seasonal in March. So just if you can give some clarification on that, why it would only be seasonal in March.

Because what I meant was from the demand perspective, in March, that's typically a seasonally low point for China. That's what I said.

Okay, but it doesn't mean that your business is going to decline seasonally in March quarter, your China business.

But what I also said is we've pretty much cleared out most of the inventory, so we are seeing growth, which is what I just said to Ed, this quarter in our Android business. Got it.

Maybe I'll restate what Bob had commented on earlier. In terms of next quarter, we do see growth in Android. But March, we do expect to see the typical decline there, which is on the other side of our largest customer's ramp. And March is also... historically a seasonally low point for handset sales in China. So those two factors are somewhat offset by the largest Android customer and their timing of phone launches, plus the fact that the channel is healthier. So with all that said, we do think it'll be better than typically seasonal, but again, it's anyone's guess as to what seasonality means.

Our largest customer has the largest impact on March. So let's see how their sales do.

Got it. Got it. Makes sense. And then, you know, this year has been, in terms of the content expansion for you, Bob, it's been pretty impressive. And I think some of those content gains also came from share gains. So as you look out to the next six to 12 months, you know, how are you feeling about, because I do get this question about sustainability of some of the content gains from this year. So if you could help us maybe, you know, to the extent you have visibility, how should we think about your content gains both in premium as well as in the mid-tier?

Yeah, I can speak for the high-end phones, and I'll start with our largest customer because it's been questioned before. But our growth this year at our largest customer really speaks to the strong position we have there, and we are one of their trusted suppliers, as well as the investments we've been making to deliver them these great technologies and products. This year we grew mostly from new content, and gain some share in sockets that we held for many years. So we feel good about that. Now remember, they are a performance-driven customer. You know, we're winning where we're bringing strong capabilities and have consistently done well. Now, if you look at the available TAM there, we remain underrepresented. So clearly, that's a target of growth for us, and we'll continue to invest to be able to win there. Now that's also regardless of the baseband they decide to use. We enjoy multiple opportunities to grow our content, not only in the areas where we've been strong in the past, but also in areas that will be new sockets to Corvo. Again, that's about our largest customer. In my prepared remarks, I talked about the leading Android smartphone manufacturer and our ability to continue to gain share there. And we talked about ultra-wideband along with all those types of components. Dave also spoke about in China and bringing out our new technologies where we've integrated the mid-high band plus the diversity received into that module. That's going to be an ability to grow there as well. Dave also talked about ultra-wide band into some of those handsets, some of our sensors, power management. So I think as we look across the portfolio, we feel pretty good at our ability to continue to grow our dollar content in handsets

whether it's at the flagship premium tier or the mass market.

The next question comes from Zizek Arya of Bank of America Security.

Please go ahead.

Thank you for taking my questions. For the first one, you're guiding December sales down 9% sequentially or so. I thought the original intention was to kind of stay The large customer, I imagine, should be flattish. And I think one of your competitors mentioned a sharp ramp in terms of their China shipments getting into December. So I'm curious, Bob, what is leading you to kind of guide sales down when some of these big customer trends seem to be growing sequentially? Or is it just conservatism or is it non-cellular markets that's guiding that outlook?

Thanks, Vivek. And I know I've said this before, but I'll remind you in the audience. We ship a majority of our parts that are not on the motherboard. So the timing of when we see the ramp is different than maybe you're talking about a baseband customer. I don't know. They're on the motherboard. A lot of what we have goes to the flex circuits. So they build those ahead of the motherboard. So our timing can be different. So I just want to make sure that. That's also, if it's the baseband customer, if you remember, they had an inventory build that they blamed at that customer. We didn't see that build. So therefore, we've naturally followed the progression of the builds. They may have had a pause. And as you point out, the inventory would go down. Then they would see a quick ramp up. So I can't comment on their business. But I can tell you the timing. We typically lead the ramp because of how much product we have on flex circuits, which is different than most of the products that are on the motherboard.

Maybe, Vivek, I'll just pick up from there in terms of our prior discussion around the December quarter. You know, the flat comment was relative to a billion-dollar Q2, and we've just exceeded that by 100 million. So, you know, to Bob's point on timing, plus or minus a couple of weeks at our largest customer can make a very big difference. But Those two quarters combined are still ahead of where we were communicating previously. So on the net, a positive trend in the top line.

Got it. Makes sense. And then on gross margins, so December 43.5, I guess, at midpoint. March, I guess, seems to be implying closer to 41%. And I think the explanation you're giving is that because these two quarters, you're using your internal high-cost inventories. So does that impact get over by March? So as we start conceptually thinking about modeling gross margins, you know, from June onwards, what is that starting baseline that we should keep in mind? Is it low 40s? Is it mid 40s? I understand you're not going to give guidance for next year, but I just don't know how to think about what is normalized gross margins as you start thinking about your next fiscal year.

Sure. And now some of this depends on the inventory, as you pointed out, that we're carrying the high unit cost inventory that we sell through in the mix of that in the March quarter. Some of this also relates to the utilization within the March period. as we start to look forward to the demand that we see in the coming year. So it's a difficult or complex question to answer prospectively. But nonetheless, in terms of the gross margin for the March quarter, as I mentioned, our full year guide of 44%, And now saying a bit better than that could imply that we have upside to the march to what you've just described. And then in terms of our fiscal 25, it's going to be a gradual continuation from there upward, I would expect, because the June quarter is still seasonally weaker for us as we head into the larger ramp in September, just from a seasonal perspective. So hopefully that gives you at least some idea of how we're going to track into fiscal 25. Maybe going back to some of my prepared remarks, I did say that I believe we could achieve 50% gross margin at first on a quarterly basis and then subsequently on an annual basis across an entire year when we get through the inventory as well as return utilization levels to more normalized levels.

The next question comes from Chris.

Yes, thank you. Good evening. The question is on cash flow and on your ability to start ramping the cash flow again, you know, once the market comes to a fuller recovery. And I suppose that's going to depend a lot on, you know, what the CapEx needs are and for how long. And so, you know, if you could talk about that, you know, the kind of expectations for cash flow. And, you know, for how long you can kind of keep the CapEx at lower levels so you can drive some cash in the next cycle.

Sure. So obviously we'd expect cash flow to improve materially given the improvement in the P&L. It's a bit of a lagging indicator as we collect receivables. So we should see that. I wouldn't expect anything different in terms of our guidance on CapEx at around 5% of sales or less. Again, that can fluctuate, of course, but I wouldn't expect too much different there from a free cash flow perspective.

Okay, thank you.

Just as a follow-up, if you could talk about the competitive environment some. And, you know, one of the things that was noted, you know, with the Huawei phone that came out is there was some Chinese RF there. And, you know, it's a very different architecture there. from the phones that you're supplying into your China customers. But I guess the question is, are you seeing anything different with regard to the capabilities of some of the local Chinese suppliers that would have some effect on the market?

Yeah, I think from a capability standpoint, I mean, we don't see anything out of the norm. I mean, there's certainly some key technology areas that they're definitely behind in. And I think if you look across the phone, even outside of the RF, there's probably a lot of areas that the technology's behind in, maybe even up to three years behind. So I think from a competitive environment, we don't see any big change just because of that Huawei phone ramp.

The next question comes from Blaine Curtis of Barclays. Please go ahead.

Hey, thanks for squeezing me in, and I apologize if you said this earlier, but in terms of the September quarter, you know, mobile came in a bit better than you were expecting. I believe the expectation was that you weren't going to see much Android growth. Can you just clarify if that upside came from Android or your largest customer? And I don't know if you gave the percentages. I think you said two 10% customers, but are you willing to give those out?

Yeah, thanks, Wayne. This is Grant. No, we didn't give out the percentages. We'll do that annually, but I just did mention that we had two customers In terms of the quarter, the upside in revenue was largely driven by ACG, and it was predominantly our largest customer, but not entirely so.

Got you.

And then I wanted to ask, just follow back up on that gross margins. I'm trying to understand, I guess, your mix has shifted dramatically to this largest customer, and I'm just trying to figure out if that how much of an effect does that have on your gross margins, you know, the customer mix versus the utilization of your fabs? Does that have any impact or not?

Yeah, sure. So maybe just look at, you know, bridging Q1 to Q2. So there was 470 basis points of improvement there sequentially. You know, of that, maybe 2.5% was moving from the 800 basis points of underutilization to 550 basis points. So there's two and a half, and that was largely anticipated in the guidance of 45 to 46 for Q2. And then that leaves a little over 200 basis points left. Now, that included some quality and other items, but it was primarily the product mix that I mentioned in the prepared remarks where we are producing that product on silicon foundries outside of Corvo's factory network and then processing them at OSAPs that are third parties. So, you know, that doesn't carry the same burden as the higher cost inventory we'll be selling in the second half.

This concludes our question and answer session.

I would like to turn the conference back over to management for any closing remarks.

We want to thank everyone for joining us on today's call. We appreciate your interest in Corvo, and we look forward to speaking with you at upcoming investor events.

Thanks, and have a great night.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.