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Operator
Call Moderator
Hello and welcome to the third quarter 2024 earnings conference call for Corvo. 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 from the question queue, you may press star, then two. I would now like to hand the call over to Doug DeLito, Vice President, Investor Relations. Please go ahead.
Doug DeLito
Vice President, Investor Relations
Hello, everybody, and welcome to Corvo's fiscal 2024 third 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 in Form 10-K, filed with the SEC because these risk factors may affect our operations and financial results. In today's press 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 Brotherworth, President and CEO, Grant Brown, CFO, and Dave Flowitz, Senior Vice President of Sales and Marketing, and other members of the Corvo's management team. And with that, I'll turn the call over to Bob.
Bob Brotherworth
President and CEO
Thanks, Doug, and welcome everyone to Corvo's fiscal 2024 third quarter call. I would like to start by complimenting the team for delivering another solid quarter. The demand environment in the December quarter improved versus our November outlook, and this is reflected in our strong performance. Looking at our business from a high level, Corvo is capitalizing on secular trends, including connectivity, sustainability, and electrification. These trends are playing out over many years, and they are fueling the transition to new technologies and new standards, like 5G Advanced, Wi-Fi 7, Matter, DOCSIS 4.0, and others. As a result, customers across our businesses are increasingly seeking higher levels of efficiency and performance where performance is measured in power out, talk time, or time between charges. Corvo is central to these transitions, and we are critical to enabling these capabilities. We leverage unique competitive strengths to supply our customers best-in-class solutions that enhance efficiency, increase throughput, and reduce form factor. We are a preferred supplier with leading products and a robust technology roadmap, and we are positioned favorably for broad-based growth across our three operating segments. Now let's turn to our strategic highlights, beginning with HPA. Customer demand in end markets, excluding base station, is improving and supports our view for a return to year-over-year growth in HPA in the March quarter. In defense and aerospace, we want an X-band radar design with a major DOD contractor, and we received new standard product orders in support of several large domestic and international ground-based radar systems. We also enjoy increasing demand for our solid-state PA products and for our switch filter bank products across multiple customers and programs. There are multi-year secular trends driving our DNA business, including the trend of one-to-many and the transition of mechanical systems to active electronic scanning systems, both of which increase requirements for more advanced systems-level RF solutions. Earlier today, we announced the signing of a definitive agreement to acquire Boston-based Anokia Wave. Anokia Wave is a leading supplier of high-performance integrated silicon ICs for intelligent active array antennas. We are excited to have the Anokia Wave team join Corvo, and expand our offerings for defense and aerospace, SATCOM, and 5G applications. In power management, we are extending our reach in markets where Corvo enjoys a strong presence, such as wearables and other consumer products. Our most recent award is a PMIC chipset with multiple placements for a wearable and charger at a leading Android OEM. Complementing this, We've begun to see a rebound in SSDs for PC and enterprise markets. We're continuing to expand upon our strong position with an additional power management win in support of a leading manufacturer of laptops. Lastly, our recently launched QSPICE circuit simulation software was honored as the design tool and development software product of the year at the 2023 Electra Awards. In power devices, we're shipping in the power supplies for blockchain applications, and design activity and data center continues to be strong. We're also seeing increased activity in circuit protection where our JFET technology brings unique advantages. In automotive, design activity remains strong, not only for onboard chargers, but also for other emerging applications in electric vehicles. In infrastructure, Corvo is leading the DOCSIS 4.0 upgrade cycle. We commence volume shipments of our newest DOCSIS 4.0 hybrid power doubler in support of multiple cable OEMs. In the cellular base station market, inventories continue to be consumed, and we expect demand conditions to remain soft through calendar year 24. Turning to CSG, customer activity for ultra-wideband is increasing in secure access automotive applications. We are also seeing new applications for ultra-wideband in automotive, including presence detection and other radar-based sensors. This momentum builds upon our recent wins in ultra-wideband, including an in-vehicle car access platform and a flagship Android smartphone launch. As we demonstrated at CES, we are actively involved in a wide array of enterprise and connected home solutions, leveraging matter and ultra-wideband for applications such as door locks, smart lighting, and indoor navigation. In force sensing touch sensors, we received first production orders for an automotive supplier in support of a leading Korea-based automotive OEM. We are seeing increasing traction across a growing set of customers and markets, including automotive, laptop track pads, wearables, and smart health. In Wi-Fi, design activity and collaboration remain strong across reference designs, customers, and operators. Within the Android ecosystem, the demand environment for mobile Wi-Fi is improving with the normalization of Android channeling stores. In access points, Wi-Fi 6 volumes continue to grow with server providers rollouts in India. In Wi-Fi 7, Corvo secured design wins across operator, retail, enterprise, and mobile segments. In ACG, we commend shipments in support of the spring 2024 flagship smartphone launch by the leading Android smartphone OEM. On our last earnings call, we highlighted our content gains in the flagship tier. In addition to the ultra-wideband, Corvo content this year includes the lowband, mid-highband, ultra-highband, secondary transmit and receive, tuning, and Wi-Fi. We are ramping up now and building upon our momentum with a broad set of design wins in this customer's high volume mass market portfolio. Android mass market smartphones are set to transition to 5G through the decade. And our collaboration with Android customers on their long-term product roadmaps positions Corvo to be a primary beneficiary as these new 5G units enter our SAM. To that end, Corvo was recognized by the top four China-based Android 5G OEMs with 2023 awards for innovation, quality, supply, technology, and strategic partnership. To simplify 5G adoption and sustain our position as the leading global strategic supplier to Android OEMs, we continue to launch new architectures and new products that enhance performance and reduce form factors. During the quarter, we expanded customer sampling of our newly launched main path LMH pad. This highly integrated solution is optimized for mass market smartphones. It combines in a single placement the low, mid, and high bin main map content traditionally offered in two placements. This reduces surface area by 40%, simplifies design, and accelerates time to market. In addition to developing highly integrated solutions with increasing levels of functional density, We're also advancing technology in our high-performance discrete portfolio, including our BAW filters. During the quarter, we received purchase orders for discrete BAW filters using our recently released next-generation BAW technology. During the quarter, we continue to bring channel inventories down, and now our shipments are more closely aligned with end-market demand. We're also seeing incremental improvement in end-market demand in the Android ecosystem. For calendar 24, we expect total smartphone units to grow in low single digits, with 5G units growing over 10%. To compete and win, we collaborate with customers on their three-year product roadmaps, and we supply them industry-leading solutions. We enjoy a position as the preferred strategic RF supplier for all the customers we serve in the Android space, and we are very well positioned to benefit as their portfolios continue to transition to 5G. In summary, demand for Corvo's products has improved, primarily due to our proactive efforts to align channel inventories with end market demand and content gains on key customer programs. We are delivering customers industry-leading products and technologies, and design activity remains robust. This positions Corvo favorably for continued strong content and durable long-term growth. And with that, I'll hand the call over to Grant.
Grant Brown
CFO
Thanks, Bob, and good afternoon, everyone. Revenue for the quarter was $1,074,000,000. Non-GAAP gross margin was 43.8%, and non-GAAP diluted EPS was $2.10, all exceeding the midpoint of our guidance range. Revenue increased approximately 44% year-over-year and continued to benefit from significant content gains at our largest customer. As communicated last quarter, ACG achieved year-over-year growth in September, CSG achieved year-over-year growth during the September quarter, and we expect HPA to achieve strong year-over-year growth in the March quarter. Regarding gross margin, A larger portion of December revenue was manufactured internally during periods of lower utilization, which led to higher unit costs compared to the September quarter. Factory utilization is improving, and the impact from underutilization in factory-related variances continues to moderate. Non-GAAP operating expenses in the quarter were $234 million. We continue to invest in new product development as it is a critical catalyst for driving multi-year growth across all three business segments. Alongside these growth-oriented investments, we continue to launch productivity initiatives across the enterprise. These initiatives, also spanning multiple years, are designed to support future growth, augment productivity, and enhance profitability. In total, non-GAAP operating income in the quarter was $237 million, or 22% of sales. Non-GAAP net income was $206 million, representing diluted earnings per share of $2.10. Turning to the cash flow statement, we're pleased to report that during the December quarter, we generated a free cash flow of $467 million, setting a new quarterly record for Corvo. Our capital expenditures for the period were $26 million, and we repurchased approximately $100 million of stock at $94 per share. The rate and pace of our share repurchases consider several factors, including our long-term financial outlook, free cash flow, debt maturities, alternative uses of cash, and other relevant strategic considerations. This approach ensures that our capital allocation strategy balances future growth with the return of capital and aligns with our underlying goal of delivering long-term shareholder value. On the balance sheet, as of quarter end, we had approximately $1.6 billion of long-term debt outstanding and over $1 billion of cash and equivalents. Regarding balance sheet presentation, The 2024 notes have been reclassified as current and will mature in December. Subject to changes in the interest rate environment and other factors, we currently expect to retire these notes later this year. In line with the expectations shared during our previous earnings call, we successfully reduced our net inventory balance over the period. We ended the quarter with a net inventory balance of $727 million, a sequential decrease of $113 million. In terms of days of inventory, this represents a decrease from 138 days in the September quarter to 118 days in the December quarter. This reduction reflects our commitment to efficient inventory management, and we expect continued improvement in the March quarter. Turning to the current quarter outlook, we expect revenue of approximately $925 million, plus or minus $25 million. non-GAAP gross margin of approximately 42% and non-GAAP diluted EPS of $1.20 at the midpoint of the revenue range. Relative to December, we expect March revenue to reflect a larger percentage of higher cost inventories previously manufactured internally during periods of lower utilization. As these higher cost previously manufactured inventories sell through, It paves the way for future gross margins that reflect increasing levels of utilization. We currently expect to have sold through most of these higher cost inventories and associated costs by the second half of this calendar year. We project non-GAAP operating expenses in the March quarter will be approximately $245 million with variability related to labor related expenses and the timing of program development spend. 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 11% to 13%. In December, we announced a new partnership with LuxShare related to the divestiture of our Beijing and Zhejiang assembly and test facilities. Upon the closing of this transaction, LuxShare will acquire each facility's operations and assets, which includes the property, plant, and equipment, as well as the existing workforce, to enable the seamless continuity of operations. Corvo will continue to maintain our sales, product, and test engineering, and customer support employees in China. We believe that adding LuxShare as a strategic partner will strengthen our position to serve our customers globally. As it relates to our manufacturing strategy, this is a further step in our ongoing efforts to reduce capital intensity. This move aligns with previous actions, including the closure of our Florida manufacturing operations and the recent sale of our Farmers Branch facility in Texas. We are efficiently managing a complex supply chain, including our internal factories, which support all three operating segments and will remain an ongoing focus. We will leverage internal manufacturing where it uniquely differentiates our products and outsource production where we maintain a strong network of foundry and OSAT partners. Corvo is well positioned to capitalize on multiple growth drivers within each of our three operating segments. We are confident that our investments in our technology portfolio, product development, and advanced manufacturing will broaden our addressable market, diversify revenue, expand margin, and accelerate growth.
Operator
Call Moderator
At this time, please open the line for questions. Thank you.
Operator
Call Moderator
Certainly. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 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 2. Please limit yourself to one question and one follow-up. Today's first question comes from Toshiya Hari with Goldman Sachs. Please go ahead.
Toshiya Hari
Goldman Sachs
Hi. Thank you so much for taking the question. I had two questions. The first one on content growth for this year, Bob, obviously you guys did a really good job last year in gaining content, not only at your largest customer but across the board. I know it's a little bit early, but curious how you're thinking about your potential to grow content this year, again, at the largest customer as well as on the Android side. You gave great color on your Korea-based customer, but curious how you're thinking about the year across the board. Thank you.
Bob Brotherworth
President and CEO
Tashia, thanks for your question. And it does seem there's some reports last night have created some confusion about our business. So I think it's best I go ahead and address it now that you gave me the opportunity with your first question. You know, based on our known design wins and engagements with our largest customer, one of our competitors, I think it's been named Qualcomm, we don't believe they're competing on any of the sockets we're engaged in. They did not win any sockets that we've been in. Nor do we see them challenging our share in any of the sockets we're competing for or investing in at our largest customer. In fact, you can ask them. We're quite confident they would tell you the same thing. Now, specifically to Ultra Highband, we've made it clear on past calls it was a multi-source socket. And we were the only company that consistently won over the last three years. You know, we've never had 100% share of the Ultra Highband. In fact, you can look at teardowns of the latest iPhone and see Corvo won the ultra-high band in the Pro and Pro Max models. You know, I know I've said and many of our teams said consistently that this is a performance-driven customer, and we're winning based on multi-year engagements, our technology investments, and clearly our product performance. And we expect to grow with our largest customer, an FY25 product, and grow even more in FY26. I wish I could give you more specifics, but I think that answers your question, Tushyant.
Toshiya Hari
Goldman Sachs
Yeah, I appreciate the color. Thanks, Bob. And then as my follow-up, one for Grant on the gross margin side, I think three months ago you had shared the underutilization charge of, I think it was 550 basis points for the September quarter. Curious if what the headwind was in December, what's embedded in your March quarter guidance, and more importantly, as you progress through the year, how should we think about the trajectory of gross margins? And sorry, one last one. The LuxShare deal, how should we think about that potentially benefiting gross margins medium to long term? Thank you.
Grant Brown
CFO
Sure. Let me try and take all those in order. So the first one, in terms of the impact from the underutilization charges, it's about half, maybe a little less than half of what we had previously reported. And as I pointed out, we'll be working through those higher cost inventories over the balance of this year and should clear them in the second half. So that should give you a sense of the timing there. You know, there's a lot of moving factors that influence gross margin in addition to underutilization. So, you know, the timing of where something was built, when it was built, and then in any given period when it sold. You know, in the September quarter, for example, we had a relatively high percentage of product mix that was manufactured at external silicon foundries and then processed at third-party OSAPs versus... a higher percentage in the December and what we anticipate in March to be manufactured internally during prior periods of lower utilization. So there's this lag effect I described last quarter. The underutilization in past periods obviously can burden the products sold in future periods. But beyond March, No change to our guidance of returning to 50% plus gross margin over time. We have line of sight to get there once we sell through the high-cost inventories. As I mentioned, it's encouraging on the utilization front as it's improving and will continue to execute on further productivity opportunities as well. I commented in my prepared remarks that we expect to have worked through all of that, as I mentioned, in the second half, and that will clear the path for margins that reflect
Operator
Call Moderator
higher levels of factory utilization going forward.
Operator
Call Moderator
Thank you. The next question comes from Ruben Roy with Stiefel.
Operator
Call Moderator
Please go ahead.
Ruben Roy
Stiefel
Thank you. Bob, first of all, on the unit assumptions that you have for the year, low single digits, I think you said, for the total smartphone market and then 5G, 10% or so. How are you thinking about sort of non-China Android and China Android as you think about your mix going forward? It would seem like you're doing quite well, obviously, in Korea and elsewhere. I'm just wondering kind of where you think things shake out with China Android as you kind of progress through calendar 24.
Dave Flowitz
Senior Vice President of Sales and Marketing
Thanks for the question. This is Dave. I'll take that one. As Bob mentioned, as we said before, we enjoy a really strong position as the preferred strategic supplier for all our Android customers. We engage with them multiple years out on their product roadmaps, and it's really a special seat at the table that we have as their leading global supplier. They care deeply about our products, our technology, but also the quality and the supply assurance that we deliver. And we've been that trusted supplier for all of our Android customers for many, many years. And, you know, the one thing we've learned is you have to be there for them over the long term. You can't just come in and out of a market and expect to gain any meaningful share. So at our China customers, as Bob mentioned, we received top supplier awards for innovation, quality supply, strategic partnership for 2023. And that includes awards from Honor, Oppo, Xiaomi, and Vivo. And we're also proud of our position in Android outside of China as well. Bob highlighted the great content in the new Samsung Galaxy S24. For multiple years now, we provide a full lineup of ultra-highband, mid-highband, secondary transmit path, lowband, tuning, and Wi-Fi. And this year, we added ultra-wideband. We're also excited to receive initial purchase orders for our next-generation mid-highband with integrated diversity receive. We announced that product a few quarters ago, and we have our first purchase orders for a U.S.-based Android customer. And this part brings a new level of integration for size and performance, leveraging our latest filter technology for ball and saw. And we've also got a lot of other great content on that phone that we're excited to tell you about in the future as well. We believe we're best positioned to grow with our Android customers as their products continue to transition to 5G over the coming years. And we've got a lot of great new opportunities and content we can address with ultra-wideband touch sensors and power management. So we feel really good about our position really across the entire Android ecosystem.
Ruben Roy
Stiefel
That's great. Thank you for all that detail. A quick follow-up for Grant on the LuxShare commentary. How are you thinking, Grant, about sort of longer-term CapEx? You know, clearly this is part of, you know, sort of the longer-term strategy around CapEx, but if you could speak to that. You know, I know the deal is going to close first half of 24, so maybe a little bit early, but, you know, has anything changed, I guess, with the strategy around CapEx and cash flow? you know, assumptions that you have as you think about, you know, sort of the next 12 to 18 months?
Grant Brown
CFO
Sure. The cash flow question, I think we'll, you know, as we look forward, as I've always said, we'll follow the P&L. So, you know, largely that'll be dictated by our, by the growth that Bob mentioned in fiscal 25 and 26. In terms of our CapEx As a percentage of the top line, we do expect it to continue in that 5% or less category. If there are capacity additions made, it will be in response to demand and the capacity required to serve it. As it relates to the sale of Beijing and Dijon, we're really excited to partner with LuxShare as we transition those sites. The agreement is over multiple years and there is Obviously, some benefits there for Corvo as the volume increases, and we found a great partner to help reduce our capital intensity, and we're confident in their ability to provide the cost improvements that we'd expect over time in a rather similar relationship to what we incur today cost-wise at those locations.
Operator
Call Moderator
Thank you. The next question comes from Edward Snyder with Charity Airways.
Operator
Call Moderator
I'm sorry. Charter equity research. Please go ahead.
Edward Snyder
Charity Airways
We're not at charity just yet. A couple of things. Bob, thank you very much for clearing that up right off the bat. I really appreciate that. That clears up a lot of confusion. Maybe we can shift gears then a little bit on the Android market. I know you do very well in China and the whole inventory digestion, and that's all, I think, fairly clear now. But when you get back to a normal run rate here – The content game seems to be shifted a little bit. The Chinese suppliers have picked up a little bit, but they don't seem to be threatening you in modules. And now you're talking about these very high integrated modules, which would separate you from any other competitors. I don't think Skyworks even has that part yet. So, one, content-wise, by combining all that into a single module, it must be, you know, the sum of the parts isn't quite equal to the individual pieces. is it a content decline just on average, or are you pulling in content that they may not have had before, or are they paying for a premium? So I'm just trying to get an idea of how that shakes out when China finally gets back to a normal run rate. And then I had a follow-up, please.
Dave Flowitz
Senior Vice President of Sales and Marketing
Yeah, this is Dave. It kind of depends. So Bob mentioned our low-mid-high, and so that's a combination of what used to be the mid-high band, which we generally enjoyed a pretty high share of that, And the low band, which we had good share, but we shared a lot of that with some other competitors. But when we integrate the low, mid, high all together, obviously we can pick up some content there overall as we support customers with that platform. You also have to look at the different SKU strategies that our customers have. So depending on what markets they serve, there may be more or less filter content. So we work with them, as Bob mentioned and I mentioned as well, on their long-term roadmaps to help architect to support their solutions across those different tiers. So whether they're doing a global SKU or they're doing regional SKUs, we can tier the product along with that to fit the need that they have there.
Edward Snyder
Charity Airways
Great. And then if I could, you historically haven't sold discrete filters in quite a long time, if I can remember. I know you're doing it now. Is that why? Well, first of all, Maybe give us some idea of where those are going. Is that mostly into Wi-Fi? I mean, who, where, what? And is it driven mostly by the fact that you have capacity in Texas that could support that, whereas you're not seeing maybe as much on some of the modules that you did before? And then, yeah, let's just do that one.
Dave Flowitz
Senior Vice President of Sales and Marketing
Yeah, and it's an interesting one. So we've been in the discrete filter markets. It's not been a huge business for us because we focus more on the modules, as you said. But it's a very good performing module. It is for 5G, not for Wi-Fi. And I like to use an example as customers, even in that tier of the market, are paying for performance, right? They want the latest and greatest technology from us. And even on a very base product like a discrete filter, they're still looking for performance.
Operator
Call Moderator
So we're pretty excited about those products.
Operator
Call Moderator
Thank you. The next question is from Carl Ackerman with B&B Paribas.
Operator
Call Moderator
Please go ahead.
Carl Ackerman
B&B Paribas
Yes, thank you. Two, if I may. A question first for Grant. You know, with shutdowns of your Florida facility, which I believe was historically saw, and the sale of Farmer's Branch but also expansion of your Richardson facility, I guess, why wouldn't gross margins exceed 50% on a lower revenue base than the prior peak as 5G unit volumes continue to grow from here?
Grant Brown
CFO
Sure. So those are all productivity enhancements, you know, and then as we've talked about, it's largely a utilization, a function of utilization. So in addition to Just shuttering some of those facilities that you mentioned, we're also producing significantly smaller dye. And so we have effective capacity that has grown regardless of the number of wafers. So you can get more dye out of a given wafer. So there's productivity there. And I would say there's a lot of productivity opportunities for us looking forward as we work into that across the board. So, you know, there's productivity initiatives that we still have to do, and in terms of, you know, why we haven't achieved 50%, it's, again, largely a utilization issue.
Carl Ackerman
B&B Paribas
Sure. Thanks for that, Grant. I guess, Bob, you know, you also mentioned that 5G units would grow over 10% this calendar year. I'm curious if that is done predominantly in mid-range across maybe the China Android OEMs, or is that only from Korean and US OEMs. To give you some color on the constitution of the 5G unit growth in calendar 24, that would be very helpful. Thank you.
Bob Brotherworth
President and CEO
Yeah, thanks for the question, Carl. It's primarily the Android ecosystem, so it would include all the Android manufacturers because we're seeing some of, in China, the manufacturers that are not HBox also moving into 5G. So it's a broad comment across the Android ecosystem is what we see driving most of that growth.
Operator
Call Moderator
Thank you. The next question is from Srini Pajuri with Raymond James.
Operator
Call Moderator
Please go ahead.
Srini Pajuri
Raymond James
Thank you. I guess on your March quarter outlook, pretty solid guide, by the way. Bob, just trying to understand the puts and takes by different segments. I think you said HPA is going to grow nicely in March quarter, which seems to imply that the smartphone business is probably seasonal. But based on what you said, it looks like Android is coming back a bit and your content is increasing. So I'm just curious as to why it's not better than seasonal as we look into the March quarter.
Grant Brown
CFO
Sure. Hey, Srini, this is Grant. I'll take that question. We don't guide specifically by segment, but our views are incorporated in the total guidance. I'll give a bit of color on each segment. In ACG, we expect substantial year-on-year growth, despite the typical sequential decline associated with our largest customer's fall ramp. Partially offsetting that seasonal decline is healthier channel inventories and improving smartphone unit demand in China, as well as the flagship launch by our largest Android customer. In HPA, we also expect year-over-year growth across all the businesses except Bay Station. From a mixed perspective, the more capital-intensive end markets we serve, such as Bay Station and some others, including infrastructure, face headwinds due to the interest rate sensitivity of those customers and some of those larger build-outs. Consequently, defense and aerospace now represents over half of the HPA top line, making that segment a bit more sensitive to the timing of some of those defense programs. quarter to quarter. In CSG, we also expect year-over-year growth in the March quarter, supported by our Wi-Fi revenue, which we've talked about. It'll be up meaningfully from Q4 last fiscal year. And then slower-than-expected ramps and IoT-related areas are expected in March, probably persisting through the first half of 2024. Although the auto market appears to be weakening, in general, our secular opportunities there lie in the automotive connectivity areas, which are supported by the growing adoption of 5G, Wi-Fi, V to X, and ultra-wideband. I think Dave commented on it earlier. We've already announced some significant design wins there in CSG for automotive and smartphone, and we're targeting additional areas, including industrial enterprise and smart homes.
Srini Pajuri
Raymond James
Great. That's great color, Grant. I appreciate that. And then, Grant, cash flow, very, very strong here. Obviously, you had a little bit of a headwind in the first half with working capital. Now I think that has become a tailwind, but quite impressive nevertheless. So can you talk about how you're thinking about cash flow going forward? I think you mentioned CapEx is going to be relatively small. and you also kind of suggested that inventory might come down again. So just want to hear your thoughts on, you know, cash flow generation going forward, and then, you know, what are the uses for the cash going forward? I guess, you know, it looks like you made an acquisition, and obviously you've been buying back shares. So if you can talk about that, that would be helpful. Thank you.
Grant Brown
CFO
Sure. In terms of cash flow next quarter, as you point out, there's a few puts and takes. I would expect CapEx to be up. It's going to follow – the level of support for the top line and our capacity additions there for our customers' demand. So I would expect that to be up in the March quarter, but remain on the year under our limit of around 5%, well under. The monetization of our receivables is something that I expect will continue. That's been a significant tailwind last quarter, along with the reduction in inventory balances. So you're starting to see that come down. as we're able to sell through inventories rather than purchase as much new material. So that helps cash flow. You know, looking forward, as I pointed out, you know, rate and pace of our buyback will fluctuate. It's dependent this year on our maturing 2024 notes, which we'll look to take out by December, and then, you know, obviously we'll be continuing to grow, you know, throughout the calendar year and into fiscal 25. So, you know, overall, you know, we should see some improvement, but on a quarter-to-quarter basis in March, there's some additional items there.
Operator
Call Moderator
Thank you. The next question comes from Matt Ramsey with TD Cohen.
Operator
Call Moderator
Please go ahead.
Matt Ramsey
TD Cohen
Thank you very much, guys. Good afternoon. I guess my question is trying to dovetail some expectations the market is increasingly having about AI adoption in clients or handset devices, particularly flagship ones, and dovetail that, Bob, with your commentary about visibility to maybe accelerating content gains for you with your large customer. And what I'm trying to understand a bit more is Do you guys, as AI, I guess, peripherates over the long term in the handset market, do you view that in and of itself as a driver of TAM or RF content for your company, or is it more that the resources in the phone are going to get jacked up a lot in terms of compute and memory, et cetera, and that puts additional constraints on RF where your company can distinguish itself through R&D and taking out things like cost and board space and power, et cetera. I'm just trying to figure out what you see driving the visibility of content as AI presumably comes into these devices.
Dave Flowitz
Senior Vice President of Sales and Marketing
Yeah, this is Dave. It's early days, as you know, with AI, but it's pretty exciting. I think you hit on a lot of the key points already. I mean, definitely it could be a catalyst that can help improve their replacement rate as people want to upgrade to take advantage of the new AI capabilities that show up in phones. It should drive more data over the network, and that, of course, means more and better RF. And then, as you pointed out, it's going to be more computing processing power in the device, which is going to put more pressure on the rest of the phone. And so that, to us, translates into performance. And it could be in the RF, and we can deliver better and better RF and lower power consumption to help solve those problems. But also, we can deliver power management. And there's a lot of areas in the phone to address with power management that we can use our IP there to help, again, reduce current consumption, improve battery life, and make more room to run the AI on the phone. But it's early, and so we have to see how this plays out. But definitely, we're looking forward to how AI can... help drive the smartphone market further.
Matt Ramsey
TD Cohen
Got it. Thanks for the comments there. That's helpful. I guess as my follow-up, it's just a quick one. I know you guys didn't discuss financial terms or whatnot, but you did announce an acquisition today. Maybe you could give us a little context around the technologies that you're bringing in, the people that you're bringing in. Just any color there would be helpful. Thanks.
Grant Brown
CFO
Thanks for the question, Matt. This is Grant. I'll take that one. We're really excited to bring the InocuWave team on board here at Corvo. They bring a highly experienced talent in RF silicon, antenna, and phase array systems to our DNA group. The technology will complement our existing product portfolio, the beamforming capabilities especially, where we can leverage those with our advanced packaging capabilities. In terms of the deal, we didn't announce the terms, as you mentioned, but we do expect to close this quarter. The impact is factored into our guidance. Initially, it'll add revenue in the low single digits per quarter and be slightly dilutive to EPS, but accretive to gross margin and all that's factored into our guide.
Operator
Call Moderator
Thank you. The next question is from Chris Casso with Wolf Research.
Operator
Call Moderator
Please go ahead.
Chris Casso
Wolf Research
Yes, thank you. I wonder if you could speak to, you know, seasonality for the rest of the year and, you know, recognize that you only want a guide for one quarter. But, you know, with I guess some of the inventory corrections, certainly in the mobile business looking like it's behind us, you know, is the expectation to kind of return to normal seasonal patterns? And then, you know, how does that apply to the non-mobile businesses, which I guess are still going through some degree of corrections?
Grant Brown
CFO
It's a little early to comment with any specificity on what would be our fiscal 25 or the balance of this calendar year largely, but absent any macro-related disruptions, as I pointed out, we do expect to grow and improve our gross margins year on year. It's worth pointing out that given the content gains and success we're having in our largest customer and the success in our defense and aerospace areas, our revenue seasonality will more closely align to to those customer programs and ramp profiles. So as we anticipate that quarterly profile or the shape of revenue across 25, we expect it to look very similar to 24. Beyond 25, we're proactively investing, focusing on diversifying our business and pursuing substantial customer platforms where we have the technology to win and the customer engagement to justify that product development.
Chris Casso
Wolf Research
That's helpful. As a follow-up to that, if you could speak to the CSG and HPA businesses, and could you give us perhaps an update on what you think are longer-term growth rates for those businesses? There's a lot of different moving parts in there, and I know through this correction, perhaps some of the expectations may have changed in that You know, what's your kind of outlook for those businesses as we look over the next two years or so?
Grant Brown
CFO
This is Grant. I'll take that one, too. You know, I would think of Corvo as having a portfolio of diversified businesses that contribute to the revenue line. No change to our long-term growth metrics that we've commented on in the past. But, you know, if you decompose the business, about two-thirds of it is ACG, and this is primarily the smartphones and other cellular devices, including tablets and wearables, that we've largely commented on already. The other third of our revenue is composed of our HPA and CSG businesses, and HPA, over half of that business is now defense and aerospace, and then CSG, over half that business is Wi-Fi currently. It hasn't always been the case, and HPA base station used to be significantly larger. Those have better than corporate gross margins typically, and so that's an area where we still have a lot of opportunity, but it's underrepresented in HPA at the time. Between HPA and CSG, there's smaller portfolio businesses that range from $25 to $75 million annually or so, and they address market opportunities in the billions, so there's a lot of room to grow there. substantiating our comments on the strong double-digit growth rates. Our largest investments are aimed at very large customer programs, as I pointed out, in ACG for fiscal 25 and beyond. We're looking to scale our defense and power franchises within HPA, and we're building our UWB and Matter Business and CSG, and all combined, this collection of businesses brings diversification and some financial resiliency here. since they're rarely, if ever, all in phase. It's also interesting to note that in each of our operating segments, the largest businesses all benefit from our shared internal manufacturing capabilities. Our more nascent businesses rely on external capital, and over time, we expect to grow the less capital intensive simply because of the relative growth rates in those smaller businesses.
Operator
Call Moderator
Thank you. The next question is from Thomas O'Malley with Barclays.
Operator
Call Moderator
Please go ahead.
Thomas O'Malley
Barclays
Hey, good evening, guys. Thanks for taking my question. I wanted to ask kind of a broader 30,000-foot view question on Huawei's entry into the Android market. Can you just talk about what your internal estimates are for, you know, Huawei smartphone penetration in calendar year 24 and just how that impacts your outlook for Android, particularly as you get into the back half of the calendar year in 24th?
Thomas O'Malley
Barclays
Did we also add revenue, what we currently do?
Dave Flowitz
Senior Vice President of Sales and Marketing
Yeah, revenue is very low, near zero or at zero at this point with Huawei. But that's a good question. I think the performance of the phones that are out there, the newer ones, I think it's pretty widely known. People have done performance evaluations, and there's definitely some performance challenges on those phones. So we don't think that they could export them to other markets. They'd probably have a very difficult time getting carrier approval, so we think they're limited to China. And so if you look at their performance to date, since the May 60 ramp, we think they did about 30 million in calendar year 23. If you take the last four months of data and you start to project that forward, you can see an incremental 10 to 20 million units added in CY24. So that's kind of how we're sizing it right now, and that's all built into our models. There was probably some pent-up demand from Huawei users, so we'll have to see how that plays out and how sustainable that is. But in any case, any of those numbers you use, it's really not that significant when you think about a 1.2 billion unit smartphone market. So it's not that meaningful to us on a grand scale of things. And when we think about our China customers, the ones I mentioned earlier, they have pretty meaningful market shares also outside of China. And that's where a lot of the growth is coming from that Bob talked about as the market converts to 5G because most of China has already moved to 5G. So for us, we look at that as a great opportunity to work with those customers to continue to grow and that 5G comes into our market because we're really not present today in the 4G portion of the market.
Thomas O'Malley
Barclays
Helpful. And since that one wasn't your favorite, I can give you a bit of a layup now. But just if you look at the competitive environment in Android at the high end, your competitor is talking about having a bit more capacity and maybe going after that market. Can you remind us of your competitive positioning there, particularly in ball filters, and why existing customers go with you? And if they were to enter the market, why you think that you'd keep the share profile that you have today?
Dave Flowitz
Senior Vice President of Sales and Marketing
Thank you. You're referring to the Android market? The Android market. Yeah, and I think I commented on this earlier. I mean, we've been working with these customers for a very, very long time. In fact, I was just in China last quarter, sat with all of these customers talking about our long-term roadmaps, and we mentioned the awards we got. I mean, there's a lot of trust and relationship that's been built up over the years. So we're very confident that, you know, we'll continue to enjoy our leadership position there. And other competitors, I mean, they may come and go, but we feel confident we'll maintain our leadership position there.
Operator
Call Moderator
Thank you. This does conclude our question and answer session. I would like to turn the call back over to management for closing remarks.
Bob Brotherworth
President and CEO
We want to thank everyone for joining us on the call tonight. We appreciate your interest, and we look forward to speaking with many of you at upcoming investor events. Thanks again, and have a great evening.
Operator
Call Moderator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Thank you. Thank you. Thank you. you you Hello and welcome to the third quarter 2024 earnings conference call for Corvo. 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 from the question queue, you may press star, then two. I would now like to hand the call over to Doug DeLito, Vice President, Investor Relations. Please go ahead.
Doug DeLito
Vice President, Investor Relations
Hello, everybody, and welcome to Corvo's fiscal 2024 third 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 press 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 Brotherworth, President and CEO, Grant Brown, CFO, and Dave Flowitz, Senior Vice President of Sales and Marketing, and other members of the Corvo's management team. And with that, I'll turn the call over to Bob.
Bob Brotherworth
President and CEO
Thanks, Doug, and welcome everyone to Corvo's fiscal 2024 third quarter call. I would like to start by complimenting the team for delivering another solid quarter. The demand environment in the December quarter improved versus our November outlook, and this is reflected in our strong performance. Looking at our business from a high level, Corvo is capitalizing on secular trends, including connectivity, sustainability, and electrification. These trends are playing out over many years, and they are fueling the transition to new technologies and new standards, like 5G Advanced, Wi-Fi 7, Matter, DOCSIS 4.0, and others. As a result, customers across our businesses are increasingly seeking higher levels of efficiency and performance where performance is measured in power out, talk time, or time between charges. Corporal is central to these transitions, and we are critical to enabling these capabilities. We leverage unique competitive strengths to supply our customers best-in-class solutions that enhance efficiency, increase throughput, and reduce form factor. We are a preferred supplier with leading products and a robust technology roadmap, and we are positioned favorably for broad-based growth across our three operating segments. Now let's turn to our strategic highlights, beginning with HPA. Customer demand in end markets, excluding base station, is improving and supports our view for a return to year-over-year growth in HPA in the March quarter. In defense and aerospace, we want an X-band radar design with a major DOD contractor, and we received new standard product orders in support of several large domestic and international ground-based radar systems. We also enjoy increasing demand for our solid-state PA products and for our switch filter bank products across multiple customers and programs. There are multi-year secular trends driving our DNA business, including the trend of one-to-many and the transition of mechanical systems to active electronic scanning systems, both of which increase requirements for more advanced systems-level RF solutions. Earlier today, we announced the signing of a definitive agreement to acquire Boston-based Anokia Wave. Anokia Wave is a leading supplier of high-performance integrated silicon ICs for intelligent active array antennas. We are excited to have the Anokia Wave team join Corvo, and expand our offerings for defense and aerospace, SATCOM, and 5G applications. In power management, we are extending our reach in markets where Corvo enjoys a strong presence, such as wearables and other consumer products. Our most recent award is a PMIC chipset with multiple placements for a wearable and charger at a leading Android OEM. Complementing this, We've begun to see a rebound in SSDs for PC and enterprise markets. We're continuing to expand upon our strong position with an additional power management win in support of a leading manufacturer of laptops. Lastly, our recently launched QSPICE circuit simulation software was honored as the design tool and development software product of the year at the 2023 Electra Awards. In power devices, we are shipping in the power supplies for blockchain applications, and design activity in data center continues to be strong. We are also seeing increased activity in circuit protection, where our JFET technology brings unique advantages. In automotive, design activity remains strong, not only for onboard chargers, but also for other emerging applications in electric vehicles. In infrastructure, Corvo is leading the DOCSIS 4.0 upgrade cycle. We commence volume shipments of our newest DOCSIS 4.0 hybrid power doubler in support of multiple cable OEMs. In the cellular base station market, inventories continue to be consumed, and we expect demand conditions to remain soft through calendar year 24. Turning to CSG, customer activity for ultra-wideband is increasing in secure access automotive applications. We are also seeing new applications for ultra-wideband in automotive, including presence detection and other radar-based sensors. This momentum builds upon our recent wins in ultra-wideband, including an in-vehicle car access platform and a flagship Android smartphone launch. As we demonstrated at CES, we are actively involved in a wide array of enterprise and connected home solutions, leveraging matter and ultra-wideband for applications such as door locks, smart lighting, and indoor navigation. In force sensing touch sensors, we received first production orders for an automotive supplier in support of a leading Korea-based automotive OEM. We are seeing increasing traction across a growing set of customers and markets, including automotive, laptop track pads, wearables, and smart health. In Wi-Fi, design activity and collaboration remains strong across reference designs, customers, and operators. Within the Android ecosystem, the demand environment for mobile Wi-Fi is improving with the normalization of Android channeling methods. In access points, Wi-Fi 6 volumes continue to grow with server providers rollouts in India. In Wi-Fi 7, Corvo secured design wins across operator, retail, enterprise, and mobile segments. In ACG, we commend shipments in support of the spring 2024 flagship smartphone launch by the leading Android smartphone OEM. On our last earnings call, we highlighted our content gains in the flagship tier. In addition to the ultra-wideband, Corvo content this year includes the lowband, mid-highband, ultra-highband, secondary transmit and receive, tuning, and Wi-Fi. We are ramping up now and building upon our momentum with a broad set of design wins in this customer's high-volume mass market portfolio. Android mass market smartphones are set to transition to 5G through the decade. And our collaboration with Android customers on their long-term product roadmaps positions Corvo to be a primary beneficiary as these new 5G units enter our SAM. To that end, Corvo was recognized by the top four China-based Android 5G OEMs with 2023 awards for innovation, quality, supply, technology, and strategic partnership. To simplify 5G adoption and sustain our position as the leading global strategic supplier to Android OEMs, we continue to launch new architectures and new products that enhance performance and reduce form factors. During the quarter, we expanded customer sampling of our newly launched main path LMH pad. This highly integrated solution is optimized for mass market smartphones. It combines in a single placement the low, mid, and high bin main path content traditionally offered in two placements. This reduces surface area by 40%, simplifies design, and accelerates time to market. In addition to developing highly integrated solutions with increasing levels of functional density, we're also advancing technology in our high-performance discrete portfolio, including our BAW filters. During the quarter, we received purchase orders for discrete BAW filters using our recently released next-generation BAW technology. During the quarter, we continue to bring channel inventories down, and now our shipments are more closely aligned with end-market demand. We're also seeing incremental improvement in end market demand in the Android ecosystem. For calendar 24, we expect total smartphone units to grow in low single digits, with 5G units growing over 10%. To compete and win, we collaborate with customers on their three-year product roadmaps, and we supply them industry-leading solutions. We enjoy a position as the preferred strategic RF supplier for all the customers we serve in the Android space, and we are very well positioned to benefit as their portfolios continue to transition to 5G. In summary, demand for Corvo's products has improved, primarily due to our proactive efforts to align channel inventories with end market demand and content gains on key customer programs. We are delivering customers industry-leading products and technologies, and design activity remains robust. This positions Corvo favorably for continued strong content and durable long-term growth. And with that, I'll hand the call over to Grant.
Grant Brown
CFO
Thanks, Bob, and good afternoon, everyone. Revenue for the quarter was $1,074,000,000. Non-GAAP gross margin was 43.8%, and non-GAAP diluted EPS was $2.10, all exceeding the midpoint of our guidance range. Revenue increased approximately 44% year-over-year and continued to benefit from significant content gains at our largest customer. As communicated last quarter, ACG achieved year-over-year growth in September, CSG achieved year-over-year growth during the September quarter, and we expect HPA to achieve strong year-over-year growth in the March quarter. Regarding gross margin, a larger portion of December revenue was manufactured internally during periods of lower utilization, which led to higher unit costs compared to the September quarter. Factory utilization is improving, and the impact from underutilization in factory-related variances continues to moderate. Non-GAAP operating expenses in the quarter were $234 million. We continue to invest in new product development as it is a critical catalyst for driving multi-year growth across all three business segments. Alongside these growth-oriented investments, we continue to launch productivity initiatives across the enterprise. These initiatives, also spanning multiple years, are designed to support future growth, augment productivity, and enhance profitability. In total, non-GAAP operating income in the quarter was $237 million, or 22% of sales. Non-GAAP net income was $206 million, representing diluted earnings per share of $2.10. Turning to the cash flow statement, we're pleased to report that during the December quarter, we generated a free cash flow of $467 million, setting a new quarterly record for Corvo. Our capital expenditures for the period were $26 million, and we repurchased approximately $100 million of stock at $94 per share. The rate and pace of our share repurchases consider several factors, including our long-term financial outlook, free cash flow, debt maturities, alternative uses of cash, and other relevant strategic considerations. This approach ensures that our capital allocation strategy balances future growth with the return of capital and aligns with our underlying goal of delivering long-term shareholder value. On the balance sheet, as of quarter end, we had approximately $1.6 billion of long-term debt outstanding and over $1 billion of cash and equivalents. Regarding balance sheet presentation, The 2024 notes have been reclassified as current and will mature in December. Subject to changes in the interest rate environment and other factors, we currently expect to retire these notes later this year. In line with the expectations shared during our previous earnings call, we successfully reduced our net inventory balance over the period. We ended the quarter with a net inventory balance of $727 million, a sequential decrease of $113 million. In terms of days of inventory, this represents a decrease from 138 days in the September quarter to 118 days in the December quarter. This reduction reflects our commitment to efficient inventory management, and we expect continued improvement in the March quarter. Turning to the current quarter outlook, we expect revenue of approximately $925 million, plus or minus $25 million. non-GAAP gross margin of approximately 42% and non-GAAP diluted EPS of $1.20 at the midpoint of the revenue range. Relative to December, we expect March revenue to reflect a larger percentage of higher cost inventories previously manufactured internally during periods of lower utilization. As these higher cost previously manufactured inventories sell through, It paves the way for future gross margins that reflect increasing levels of utilization. We currently expect to have sold through most of these higher cost inventories and associated costs by the second half of this calendar year. We project non-GAAP operating expenses in the March quarter will be approximately $245 million with variability related to labor related expenses and the timing of program development spend. 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 11% to 13%. In December, we announced a new partnership with LuxShare related to the divestiture of our Beijing and Zhejiang assembly and test facilities. Upon the closing of this transaction, LuxShare will acquire each facility's operations and assets, which includes the property, plant, and equipment, as well as the existing workforce, to enable the seamless continuity of operations. Corvo will continue to maintain our sales, product and test engineering, and customer support employees in China. We believe that adding LuxShare as a strategic partner will strengthen our position to serve our customers globally. As it relates to our manufacturing strategy, this is a further step in our ongoing efforts to reduce capital intensity. This move aligns with previous actions, including the closure of our Florida manufacturing operations and the recent sale of our Farmers Branch facility in Texas. We are efficiently managing a complex supply chain, including our internal factories, which support all three operating segments and will remain an ongoing focus. We will leverage internal manufacturing where it uniquely differentiates our products and outsource production where we maintain a strong network of foundry and OSAT partners. Corvo is well positioned to capitalize on multiple growth drivers within each of our three operating segments. We are confident that our investments in our technology portfolio, product development, and advanced manufacturing will broaden our addressable market, diversify revenue, expand margin, and accelerate growth.
Operator
Call Moderator
At this time, please open the line for questions. Thank you.
Operator
Call Moderator
Certainly. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 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 2. Please limit yourself to one question and one follow-up. Today's first question comes from Toshiya Hari with Goldman Sachs. Please go ahead.
Toshiya Hari
Goldman Sachs
Hi. Thank you so much for taking the question. I had two questions. The first one on content growth for this year, you know, Bob, obviously you guys did a really good job last year in gaining content, not only at your largest customer but across the board. I know it's a little bit early, but curious how you're thinking about your potential to grow content this year, again, at the largest customer as well as on the Android side. You gave great color on your Korea-based customer, but curious how you're thinking about the year across the board. Thank you.
Bob Brotherworth
President and CEO
Tashia, thanks for your question. And it does seem there's some reports last night have created some confusion about our business. So I think it's best I go ahead and address it now that you gave me the opportunity with your first question. You know, based on our known design wins and engagements with our largest customer, one of our competitors, I think it's been named Qualcomm, we don't believe they're competing on any of the sockets we're engaged in. They did not win any sockets that we've been in. Nor do we see them challenging our share in any of the sockets we're competing for or investing in at our largest customer. In fact, you can ask them. We're quite confident they would tell you the same thing. Now, specifically, the ultra high band, we've made it clear on past calls it was a multi-source socket. And we were the only company that consistently won over the last three years. We've never had 100% share of the ultra high band. In fact, you can look at teardowns of the latest iPhone and see Corvo won the ultra-high band in the Pro and Pro Max models. You know, I know I've said and many of our teams said consistently that this is a performance-driven customer, and we're winning based on multi-year engagements, our technology investments, and clearly our product performance. And we expect to grow with our largest customer, an FY25 product, and grow even more in FY26. I wish I could give you more specifics, but I think that answers your question, Tushyant.
Toshiya Hari
Goldman Sachs
Yeah, I appreciate the color. Thanks, Bob. And then as my follow-up, one for Grant on the gross margin side, I think three months ago you had shared the underutilization charge of, I think it was 550 basis points for the September quarter. Curious if what the headwind was in December, what's embedded in your March quarter guidance, and more importantly, as you progress through the year, how should we think about the trajectory of gross margins? And sorry, one last one. The LuxShare deal, how should we think about that potentially benefiting gross margins medium to long term? Thank you.
Grant Brown
CFO
Sure. Let me try and take all those in order. So the first one, in terms of the impact from the underutilization charges, you know, it's about half, maybe a little less than half of what we had previously reported. And as I pointed out, we'll be working through those higher cost inventories over the balance of this year and should clear them in the second half. So that should give you a sense of the timing there. You know, there's a lot of moving factors that influence gross margin in addition to underutilization. So, you know, the timing of where something was built, when it was built, and then in any given period when it sold. You know, in the September quarter, for example, we had a relatively high percentage of product mix that was manufactured at external markets. silicon foundries and then processed at third-party OSAPs versus a higher percentage in the December and what we anticipate in March to be manufactured internally during prior periods of lower utilization. So there's this lag effect I described last quarter. The underutilization in past periods obviously conferred in the products sold in future periods. But beyond March, No change to our guidance of returning to 50% plus gross margin over time. We have line of sight to get there once we sell through the high cost inventories. As I mentioned, it's encouraging on the utilization front as it's improving and will continue to execute on further productivity opportunities as well. I commented in my prepared remarks that we expect to have worked through all of that, as I mentioned, in the second half, and that will clear the path for margins that reflect
Operator
Call Moderator
higher levels of factory utilization going forward.
Operator
Call Moderator
Thank you. The next question comes from Ruben Roy with Stiefel.
Operator
Call Moderator
Please go ahead.
Ruben Roy
Stiefel
Thank you. Bob, first of all, on the unit assumptions that you have for the year, low single digits, I think you said, for the total smartphone market and then 5G, 10% or so. How are you thinking about sort of non-China Android and China Android as you think about your mix going forward? It would seem like you're doing quite well, obviously, in Korea and elsewhere. I'm just wondering kind of where you think things shake out with China Android as you kind of progress through calendar 24.
Dave Flowitz
Senior Vice President of Sales and Marketing
Thanks for the question. This is Dave. I'll take that one. As Bob mentioned, as we said before, we enjoy a really strong position as the preferred strategic supplier for all our Android customers. We engage with them on multiple years out on their product roadmaps. And it's really a special seat at the table that we have as their leading global supplier. They care deeply about our products, our technology, but also the quality and the supply assurance that we deliver. And we've been that trusted supplier for all of our Android customers for many, many years. And the one thing we've learned is you have to be there for them over the long term. You can't just come in and out of a market and expect to gain any meaningful share. So at our China customers, as Bob mentioned, we received top supplier awards for innovation, quality supply, strategic partnership for 2023. And that includes awards from Honor, Oppo, Xiaomi, and Vivo. And we're also proud of our position in Android outside of China as well. Bob highlighted the great content in the new Samsung Galaxy S24. For multiple years now, we provide a full lineup of ultra-highband, mid-highband, secondary transmit path, lowband, tuning, and Wi-Fi. And this year, we added ultra-wideband. We're also excited to receive initial purchase orders for our next generation mid-highband with integrated diversity receive. We announced that product a few quarters ago, and we have our first purchase orders for a U.S.-based Android customer. And this part brings a new level of integration for size and performance, leveraging our latest filter technology for ball and saw. And we've also got a lot of other great content on that phone that we're excited to tell you about in the future as well. We believe we're best positioned to grow with our Android customers as their products continue to transition to 5G over the coming years. And we've got a lot of great new opportunities and content we can address with ultra-wideband touch sensors and power management. So we feel really good about our position really across the entire Android ecosystem.
Ruben Roy
Stiefel
That's great. Thank you for all that detail. A quick follow-up for Grant on the LuxShare commentary. How are you thinking, Grant, about sort of longer-term CapEx? You know, clearly this is part of, you know, sort of the longer-term strategy around CapEx, but if you could speak to that. You know, I know the deal is going to close first half of 24, so maybe a little bit early, but, you know, has anything changed, I guess, with the strategy around CapEx and cash flow? you know, assumptions that you have as you think about, you know, sort of the next 12 to 18 months?
Grant Brown
CFO
Sure. The cash flow question, I think we'll, you know, as we look forward, as I've always said, we'll follow the P&L. So, you know, largely that'll be dictated by our, by the growth that Bob mentioned in fiscal 25 and 26. In terms of our CapEx As a percentage of the top line, we do expect it to continue in that 5% or less category. If there are capacity additions made, it will be in response to demand and the capacity required to serve it. As it relates to the sale of Beijing and Dijon, we're really excited to partner with LuxShare as we transition those sites. The agreement is over multiple years and there is Obviously, some benefits there for Corvo as the volume increases, and we found a great partner to help reduce our capital intensity, and we're confident in their ability to provide the cost improvements that we'd expect over time in a rather similar relationship to what we incur today cost-wise at those locations.
Operator
Call Moderator
Thank you. The next question comes from Edward Snyder with Charity Airways.
Operator
Call Moderator
I'm sorry. Charter equity research. Please go ahead.
Edward Snyder
Charity Airways
We're not at charity just yet. A couple of things. Bob, thank you very much for clearing that up right off the bat. I really appreciate that. That clears up a lot of confusion. Maybe we can shift gears then a little bit on the Android market. I know you do very well in China and the whole inventory digestion, and that's all, I think, fairly clear now. But when you get back to a normal run rate here – The content game seems to be shifted a little bit. The Chinese suppliers have picked up a little bit, but they don't seem to be threatening you in modules. And now you're talking about these very high integrated modules, which would separate you from any other competitors. I don't think Skyworks even has that part yet. So one, content-wise, by combining all that into a single module, it must be, you know, the sum of the parts isn't quite equal to the individual pieces. is it a content decline just on average, or are you pulling in content that they may not have had before, or are they paying for a premium? So I'm just trying to get an idea of how that shakes out when China finally gets back to a normal run rate. And then I had a follow-up, please.
Dave Flowitz
Senior Vice President of Sales and Marketing
Yeah, this is Dave. It kind of depends. So Bob mentioned our low-mid-high, and so that's a combination of what used to be the mid-high band, which we generally enjoyed a pretty high share of that, And the low band, which we had good share, but we shared a lot of that with some other competitors. But when we integrate the low, mid, high all together, obviously we can pick up some content there overall as we support customers with that platform. You also have to look at the different SKU strategies that our customers have. So depending on what markets they serve, there may be more or less filter content. So we work with them, as Bob mentioned and I mentioned as well, on their long-term roadmaps to help architect to support their solutions across those different tiers. So whether they're doing a global SKU or they're doing regional SKUs, we can tier the product along with that to fit the needs that they have there.
Edward Snyder
Charity Airways
Great. And if I could, you historically haven't sold discrete filters in quite a long time, if I can remember. I know you're doing it now. First of all, Maybe give us an idea of where those are going. Is that mostly into Wi-Fi? I mean, who, where, what? And is it driven mostly by the fact that you have capacity in Texas that could support that, whereas you're not seeing maybe as much on some of the modules that you did before? And then, yeah, let's just do that one.
Dave Flowitz
Senior Vice President of Sales and Marketing
Yeah, and it's an interesting one. So we've been in the discrete filter markets. It's not been a huge business for us because we focus more on the modules, as you said. But it's a very good performing module. It is for 5G, not for Wi-Fi. And I like to use an example as customers, even in that tier of the market, are paying for performance, right? They want the latest and greatest technology from us. And even on a very base product like a discrete filter, they're still looking for performance.
Operator
Call Moderator
So we're pretty excited about those products.
Operator
Call Moderator
Thank you. The next question is from Carl Ackerman with B&B Paribas.
Operator
Call Moderator
Please go ahead.
Carl Ackerman
B&B Paribas
Yes, thank you. Two, if I may. A question first for Grant. You know, with shutdowns of your Florida facility, which I believe was historically saw, and the sale of Farmer's Branch but also expansion of your Richardson facility, I guess why wouldn't gross margins exceed 50% on a lower revenue base than the prior peak as 5G unit volumes continue to grow from here?
Grant Brown
CFO
Sure. So those are all productivity enhancements. And then as we've talked about, it's largely a utilization, a function of utilization. In addition to just shuttering some of those facilities that you mentioned, we're also producing significantly smaller dye. And so we have effective capacity that has grown regardless of the number of wafers. So you can get more dye out of a given wafer. So there's productivity there. And I would say there's a lot of productivity opportunities for us looking forward as we work into that across the board. So, you know, there's productivity initiatives that we still have to do, and in terms of, you know, why we haven't achieved 50%, it's, again, largely a utilization issue.
Carl Ackerman
B&B Paribas
Sure. Thanks for that, Grant. I guess, Bob, you know, you also mentioned that 5G units would grow over 10% this calendar year. I'm curious if that is done predominantly in mid-range across maybe the China Android OEMs, or is that only from Korean and US OEMs. To give you some color on the constitution of the 5G unit growth in calendar 24, that would be very helpful. Thank you.
Bob Brotherworth
President and CEO
Yeah, thanks for the question, Carl. It's primarily the Android ecosystem, so it would include all the Android manufacturers because we're seeing some of, in China, the manufacturers that are not HBox also moving into 5G. So it's a broad comment across the Android ecosystem is what we see driving most of that growth.
Operator
Call Moderator
Thank you. The next question is from Srini Pajuri with Raymond James.
Operator
Call Moderator
Please go ahead.
Srini Pajuri
Raymond James
Thank you. I guess on your March quarter outlook, pretty solid guide, by the way. Bob, just trying to understand the puts and takes by different segments, I think you said HPA is going to grow nicely in March quarter, which seems to imply that the smartphone business is probably seasonal. But based on what you said, it looks like Android is coming back a bit and your content is increasing. So I'm just curious as to why it's not better than seasonal as we look into the March quarter.
Grant Brown
CFO
Sure. Hey, Srini, this is Grant. I'll take that question. We don't guide specifically by segment, but our views are incorporated in the total guidance. I'll give a bit of color on each. In ACG, we expect substantial year-on-year growth despite the typical sequential decline associated with our largest customer's fall ramp, partially offsetting that seasonal decline. is healthier channel inventories and improving smartphone unit demand in China, as well as the flagship launch by our largest Android customer. In HPA, we also expect year-over-year growth across all the businesses except Base Station. From a mixed perspective, the more capital-intensive end markets we serve, such as Base Station and some others, including infrastructure, face headwinds due to the interest rate sensitivity of those customers and some of those larger build-outs. Consequently, defense and aerospace now represents over half of the HBA top line, making that segment a bit more sensitive to the timing of some of those defense programs quarter to quarter. In CSG, We also expect year-over-year growth in the March quarter, supported by our Wi-Fi revenue, which we've talked about. It'll be up meaningfully from Q4 last fiscal year. And then slower-than-expected ramps and IoT-related areas are expected in March, probably persisting through the first half of 2024. Although the auto market appears to be weakening, in general, our secular opportunities there lie in the automotive connectivity areas, which are supported by the growing adoption of 5G, Wi-Fi, V to X, and ultra-wideband. I think Dave commented on it earlier. We've already announced some significant design wins there in CSG for automotive and smartphone, and we're targeting additional areas, including industrial enterprise and smart home.
Srini Pajuri
Raymond James
Great. That's great color, Grant. I appreciate that. And then, Grant, cash flow, you know, very, very strong here. Obviously, you know, you had A little bit of a headwind in the first half with, you know, working capital. Now I think that has become a tailwind, but, you know, quite impressive nevertheless. So can you talk about, you know, how you're thinking about, you know, cash flow going forward? I think you mentioned, you know, CapEx is going to be, you know, fairly relatively small. And you also kind of suggested that inventory might come down again. So just want to hear your thoughts on, you know, cash flow generation going forward. And then, you know, what are the uses for the cash going forward? I guess it looks like you've made an acquisition, and obviously you've been buying back shares. So if you can talk about that, that would be helpful. Thank you.
Grant Brown
CFO
Sure. In terms of cash flow next quarter, as you point out, there's a few puts and takes. I would expect CapEx to be up. It's going to follow the level of support for the top line and our capacity additions there for our customers' demand. So I would expect that to be up in the March quarter, but, you know, remain on the year under our limit of around 5%, well under. The, you know, monetization of our receivables is something that I expect will continue. That's been a significant tailwind last quarter, along with the reduction in inventory balances. So you're starting to see that come down as we're able to sell through inventories rather than purchase as much new material. So that helps cash flow. Looking forward, as I pointed out, rate and pace of our buyback will fluctuate. It's dependent this year on our maturing 2024 notes, which we'll look to take out by December, and then obviously we'll be continuing to grow throughout the throughout the calendar year and into fiscal 25. So overall, we should see some improvement, but on a quarter-to-quarter basis in March, there's some additional items there.
Operator
Call Moderator
Thank you. The next question comes from Matt Ramsey with TD Cohen.
Operator
Call Moderator
Please go ahead.
Matt Ramsey
TD Cohen
Thank you very much, guys. Good afternoon. I guess my question is trying to dovetail some expectations the market is increasingly having about AI adoption in clients or handset devices, particularly flagship ones. And dovetail that, Bob, with your commentary about visibility to maybe accelerating content gains for you with your large customer. And what I'm trying to understand a bit more is, do you guys, as AI, I guess, peripherates over the long term in the handset market, do you view that in and of itself as a driver of TAM or RF content for your company? Or is it more that the resources in the phone are going to get jacked up a lot in terms of compute and memory, et cetera, and that puts additional constraints on RF where your company can distinguish itself through R&D and taking out things like cost and board space and power, et cetera? I'm just trying to figure out what you see driving the visibility of content as AI presumably comes into these devices.
Dave Flowitz
Senior Vice President of Sales and Marketing
Yeah, this is Dave. It's early days, as you know, with AI, but it's pretty exciting. I think you hit on a lot of the key points already. I mean, definitely it could be a catalyst that can help improve the replacement rate as people want to upgrade to take advantage of the new AI capabilities that show up in phones. It should drive more data over the network, and that, of course, means more and better RF. And then, as you pointed out, it's going to be more compute and processing power in the device, which is going to put more pressure on the rest of the phone. And so that, to us, translates into performance. And it could be in the RF, and we can deliver better and better RF and lower power consumption to help solve those problems. But also, we can deliver power management. And there's a lot of areas in the phone to address with power management that we can use our IP there to help, again, reduce current consumption, improve battery life, and make more room to run the AI on the phone. But it's early, and so we have to see how this plays out. But definitely, we're looking forward to how AI can help drive the smartphone market further.
Matt Ramsey
TD Cohen
Thanks for the comments there. That's helpful. I guess as my follow-up. It's just a quick one. I know you guys didn't discuss financial terms and whatnot, but you did announce an acquisition today. Maybe you could give us a little context around the technologies that you're bringing in, the people that you're bringing in. Just any color there would be helpful. Thanks.
Grant Brown
CFO
Thanks for the question, Matt. This is Grant. I'll take that one. We're really excited to bring the InocuWave team on board here at Corvo. They bring a highly experienced talent in RF silicon and TANF and phased array systems to our DNA group. The technology will complement our existing product portfolio, the beamforming capabilities especially, where we can leverage those with our advanced packaging capabilities. In terms of the deal, we didn't announce the terms, as you mentioned, but we do expect to close this quarter. The impact is factored into our guidance. Initially, it'll add revenue in the low single digits per quarter and be slightly diluted to EPS, but accretive to gross margin and all that's factored into our guide.
Operator
Call Moderator
Thank you. The next question is from Chris Casso with Wolf Research.
Operator
Call Moderator
Please go ahead.
Chris Casso
Wolf Research
Yes, thank you. I wonder if you could speak to, you know, seasonality for the rest of the year and, you know, recognize that you only want a guide for one quarter. But, you know, with I guess some of the inventory corrections, certainly in the mobile business looking like it's behind us, you know, is the expectation to kind of return to normal seasonal patterns? And then, you know, how does that apply to the non-mobile businesses, which I guess are still going through some degree of corrections?
Grant Brown
CFO
It's a little early to comment with any specificity on what would be our fiscal 25 or the balance of this calendar year largely. But absent any macro-related disruptions, as I pointed out, we do expect to grow and improve our gross margins year on year. It's worth pointing out that given the content gains and success we're having in our largest customer, and the success in our defense and aerospace areas, our revenue seasonality will more closely align to those customer programs and ramp profiles. So as we anticipate that quarterly profile or the shape of revenue across 25, we expect it to look very similar to 24. Beyond 25, we're proactively investing, focusing on diversifying our business and pursuing substantial customer platforms where we have the technology to win and the customer engagement to justify that product development.
Chris Casso
Wolf Research
That's helpful. As a follow-up to that, you know, if you could speak to the CSG and HPA businesses, and, you know, could you give us perhaps an update on, you know, what you think are longer-term growth rates for that business, those businesses? There's a lot of different moving parts in there, and I know, you know, through this correction, you know, perhaps, you know, some of the expectations may have changed in that What's your kind of outlook for those businesses as we look over the next two years or so?
Grant Brown
CFO
This is Grant. I'll take that one, too. I would think of Corvo as having a portfolio of diversified businesses that contribute to the revenue line. No change to our long-term growth metrics that we've commented on in the past. But if you decompose the business, about two-thirds of it is ACG, and this is primarily the smartphones and other cellular devices, including tablets and wearables, that we've largely commented on already. The other third of our revenue is composed of our HPA and CSG businesses, and HPA, over half of that business is now defense and aerospace, and then CSG, over half that business is Wi-Fi currently. It hasn't always been the case, and HPA base station used to be significantly larger. Those have better than corporate gross margins typically, and so that's an area where we still have a lot of opportunity, but it's underrepresented in HPA at the time. Between HPA and CSG, there's smaller portfolio businesses that range from 25 to 75 million annually or so, and they address market opportunities in a billion, so there's a lot of room to grow there. substantiating our comments on the strong double-digit growth rates. Our largest investments are aimed at very large customer programs, as I pointed out, in ACG for fiscal 25 and beyond. We're looking to scale our defense and power franchises within HPA, and we're building our UWB and Matter Business and CSG, and all combined, this collection of businesses brings diversification and some financial resiliency here. since they're rarely, if ever, all in phase. It's also interesting to note that in each of our operating segments, the largest businesses all benefit from our shared internal manufacturing capabilities. Our more nascent businesses rely on external capital, and over time, we expect to grow the less capital intensive simply because of the relative growth rates in those smaller businesses.
Operator
Call Moderator
Thank you. The next question is from Thomas O'Malley with Barclays.
Operator
Call Moderator
Please go ahead.
Thomas O'Malley
Barclays
Hey, good evening, guys. Thanks for taking my question. I wanted to ask kind of a broader 30,000-foot view question on Huawei's entry into the Android market. Can you just talk about what your internal estimates are for, you know, Huawei smartphone penetration in calendar year 24 and just how that impacts your outlook for Android, particularly as you get into the back half of the calendar year in 24th?
Thomas O'Malley
Barclays
Did we also add revenue, what we currently do?
Dave Flowitz
Senior Vice President of Sales and Marketing
Yeah, revenue is very low, near zero or at zero at this point with Huawei. But that's a good question. I think the performance of the phones that are out there, the newer ones, I think it's pretty widely known. People have done performance evaluations, and there's definitely some performance challenges on those phones. So we don't think that they could export them to other markets. They'd probably have a very difficult time getting carrier approval, so we think they're limited to China. And so if you look at their performance to date, since the May 60 ramp, we think they did about 30 million in calendar year 23. If you take the last four months of data and you start to project that forward, you can see an incremental 10 to 20 million units added in CY24. So that's kind of how we're sizing it right now, and that's all built into our models. There was probably some pent-up demand from Huawei users, so we'll have to see how that plays out and how sustainable that is. But in any case, any of those numbers you use, it's really not that significant when you think about a 1.2 billion unit smartphone market. So it's not that meaningful to us on a grand scale of things. And when we think about our China customers, the ones I mentioned earlier, they have pretty meaningful market shares also outside of China. And that's where a lot of the growth is coming from that Bob talked about as the market converts to 5G because most of China has already moved to 5G. So for us, you know, we look at that as a great opportunity to work with those customers to continue to grow. And that 5G comes into our market because we're really not present today in the 4G portion of the market.
Thomas O'Malley
Barclays
Helpful. And since that one wasn't your favorite, I can give you a bit of a layup now. But just if you look at the competitive environment in Android at the high end, your competitor is talking about having a bit more capacity and maybe going after that market. Can you remind us of your competitive positioning there, particularly in ball filters, and why existing customers go with you? And if they were to enter the market, why you think that you'd keep the share profile that you have today?
Dave Flowitz
Senior Vice President of Sales and Marketing
Thank you. You're referring to the Android market? The Android market. Yeah, and I think I commented on this earlier. I mean, we've been working with these customers for a very, very long time. In fact, I was just in China last quarter, sat with all of these customers talking about our long-term roadmaps, and we mentioned the awards we got. I mean, there's a lot of trust and relationship that's been built up over the years. So we're very confident that, you know, we'll continue to enjoy our leadership position there. And other competitors, I mean, they may come and go, but we feel confident we'll maintain our leadership position there.
Operator
Call Moderator
Thank you. This does conclude our question and answer session. I would like to turn the call back over to management for closing remarks.
Bob Brotherworth
President and CEO
We want to thank everyone for joining us on the call tonight. We appreciate your interest, and we look forward to speaking with many of you at upcoming investor events. Thanks again, and have a great evening.
Operator
Call Moderator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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