Qorvo, Inc.

Good day and welcome to the Corvo Inc. Second Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Douglas DeLito, Vice President of Investor Relations. Please go ahead, sir.

Thanks very much. Hello everyone and welcome to Corvo's fiscal 2025 Second Quarter Earnings Call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in our earnings release published today, as well as the risk factors associated with our business and our annual report on Form 10K filed with the SEC, because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or other items that may obscure trends in our underlying performance. During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our investor relations website at .Corvo.com under financial releases. Joining us today are Bob Brookworth, President and CEO, Grant Brown, CFO, Dave Fullwood, Senior Vice President of Sales and Marketing, and other members of Corvo's management team. And with that, I'll turn the call over to Bob.

Thanks, Doug, and welcome everyone to our call. Similar to our first quarter earnings call, our prepared remarks tonight will focus on achievements and opportunities by end market. Corvo's six end markets are automotive, consumer, defense and aerospace, industrial and enterprise, infrastructure, and mobile. Our markets are underpinned by global mega trends such as electrification, connectivity, mobility, sustainability, datafication, and AI. These trends make possible new functionality and new user experiences that are made available to end users by the customers we serve and the products we enable. Consistent with our comments at our investor day, in HPA, we continue to expand our defense and aerospace business during the quarter while building a broad-based business in power management. For the full fiscal year, we expect HPA will grow in the mid-teens. In the markets served by CSG, we maintained our Wi-Fi leadership during the quarter while investing in diverse growth businesses, including an expanding portfolio of automotive solutions and SOCs for ultra-widebanded matter. We expect CSG will also grow in the mid-teens this fiscal year. In the mobile market, ACG supported a seasonal ramp during the quarter at our largest customer. As we said during our investor day, our largest opportunity in ACG is with this customer. They represent over half of the smartphone RFPAM, and we are investing today to grow our share with them next year and in subsequent programs over multiple years. Within the Android ecosystem, Corvo is a leading supplier to the flagship, premium, and mid-tier 5G smartphones. While the flagship and premium tiers are holding up well, the mix in the mid and entry tiers has shifted towards entry-tier 5G at the expense of mid-tier 5G. In our current view, we don't expect this mix shift in Android 5G from the mid-tier to the entry-tier will reverse. While challenging in the near term, this dynamic reinforces ACG's primary strategy of investing to grow our business at our largest customer. ACG's product roadmap is focused primarily on 5G advanced products for our largest customer and the flagship and premium tiers of our Android customers. Our growth opportunity and the flagship remain strong. By contrast, the mid-tier used to be approximately half of the total Android 5G volumes and has declined over the last few quarters to less than a third. In each of the markets we serve, our customers continue to require higher performance, greater efficiency, and smaller form factor to increase functional density, enhance the user experience, and extend their competitive position. Turning to quarterly highlights, in the automotive market we secured a V2X design win with a US-based automotive tier one in support of an automotive OEM based in Germany. Production volumes for this first win are expected to shift in the current quarter. We were also selected to supply a full suite of V2X and network access device RF products in support of an automotive OEM with production volumes also expected to ramp this quarter. In other automotive applications, Corvo's force sensing touch sensors are enabling digital cockpit, climate control, and the best-selling SUV of an additional automotive OEM based in Germany. For an EV OEM based in North America, Corvo was selected to supply force sensing touch sensors for a 2026 model launch. We have content in this customer's current generation model and the number of placements increased in this new award. Our technology's solid surface architecture demonstrates measurable advantages over traditional buttons both inside and outside the cabin. In consumer markets, we increased shipments of force sensing touch sensors in support of high-end audio headphones and expanded our touch sensor engagements in laptop track pads. We also continue to ramp our first generation battery management system for outdoor power tools and other applications. We will sample our second generation solution later this fiscal year and target applications including power tools and e-mobility applications including scooters and e-bikes. In Wi-Fi, we offer full portfolio FEMs, IFEMs, and filters. Our Wi-Fi 6 shipments to consumer markets continue to grow in applications including soundbores. Shipments of Wi-Fi 7 also grew. The RF content opportunity is significantly higher in Wi-Fi 7 than in previous generations and the industry analysts expect Wi-Fi 7 volumes to overtake Wi-Fi 6 as soon as 2027. In connectivity systems, demand for -Wi-Band, BLE, and Matter over thread was broad-based across consumer applications including smart home, location tags, speakers, and other consumer electronics. We received our first production order for our newest BLE Matter SOC from a large retailer of home furnishing products based in Europe, opening up a new addressable market for Corvo. By leveraging concurrent connect technology, our SOC enables BLE Matter and Zigbee to operate simultaneously. This ensures backward and forward compatibility given Zigbee's large install base and the growing adoption of Matter over thread including within smart home and smartphone ecosystems. Matter over thread is a low latency point to point and mesh technology that significantly upgrades the user experience versus legacy systems. In defense and aerospace markets, multi-year tear winds continue to drive our business. They include the upgrade cycle to non-terrestrial networks and from mechanical radar systems to active electronic scanning radar systems as well as continuous drivers like on-shore wind, the trend of one to many, and system-level functionality requiring advanced RF packaging. Design activity and DNA during the quarter was a quarterly record and diversified across markets including terrestrial, airborne, and shipborne radars, comms, space, and electronic warfare. Design winds included new and existing product categories as well as new platforms and new customers. In SATCOM, we continue to see strength in commercial communications. Corvo has content in both the LEO satellites and the customer ground terminals with the leading satellite broadband network providers. We also have content on commercial and private jets and are helping to bring improved connectivity to air travel. During the quarter, we were awarded a key development contract for an electronic warfare application leveraging our Spatium Solid State PA products. Solid State PAs have the advantages in size, weight, and power versus traveling wave tubes. They are also more reliable with a lower total cost of ownership. In industrial and enterprise, we continue to ramp power management solutions for enterprise SSDs to more broadly serve AI and data center applications and expand on our strong position and client SSDs for laptops. We also expanded our engagements to supply ultra-wideband solutions into Wi-Fi 7 enterprise access points. With the inclusion of Corvo's ultra-wideband technology, enterprise access points serve as anchors in enabling indoor navigation and other applications that leverage precision location awareness. For smart home metering, we're developing a proprietary sub-1 gigahertz FEM to support a leading smart energy ecosystem provider. In other low-power IoT applications, CATM and CAT1, interest in design activity continues to build in consumer, industrial, and enterprise markets. For infrastructure markets, we introduced the industry's first 24-volt power doubler for DOCSIS 4.0 broadband and cable TV applications. This multi-chip module delivers more than 30% size reduction versus hybrid solutions and features adjustable DC current to optimize DC power consumption versus RF output. We recently showcased our broadband portfolio at the SCTE Tech Expo in Atlanta, and we expect our newest solutions to build upon our leadership in DOCSIS 4.0. In the mobile market, we secured new wins at the leading Android smartphone OEM across this customer's smartphone portfolio. In their spring 2025 flagship smartphone, we secured Wi-Fi content and multiple 5G front end placements in the main and secondary transport paths. At other Android customers, we secured additional design wins for our recently launched low, mid, and high-end pad. Each LMH pad delivers a 40% savings in surface area versus prior architectures. This enables customers to leverage the space savings for other functionality, such as processing or memory. Shipments of our LMH pads are expected to grow sequentially this quarter and again in March. Across Android OEMs, the adoption of ultra-wideband in smartphones represents a significant opportunity for Corvo. During September, we build upon the design win mentioned last quarter in the Moto X50 Ultra by securing additional ultra-wideband design wins in upcoming smartphones and tags. These wins are an early indication of the trend we expect of ultra-wideband proliferating across high-volume smartphones and accessories. Furthermore, we expanded Wi-Fi 7 shipments across Android OEMs in support of MediaTek's Dimensity 9400 chipset. Corvo's Wi-Fi 7 fins are optimized with the Dimensity 9400 to deliver flagship Android smartphones' superior performance. Looking further out, we are expanding our PMIC portfolio for the mobile market beyond RF to deliver new innovations that reduce current consumption and significantly extend battery life. We are pioneer and leader in envelope tracking and average power tracking RF power management for smartphones. And we have been awarded a contract by a top tier Android OEM to develop our first DC to DC PMIC for mobile phones. Our proprietary power management solutions deliver superior efficiency and we are excited to bring our technology to flagship smartphones. At a high level, Corvo is investing in core strengths to drive growth with differentiated products and technologies in diverse markets. We're also executing on cost and productivity initiatives to reduce capital intensity and structurally enhance gross margin. In ACG, we're investing to grow in our largest customer. In HPA, we're investing to grow in defense and aerospace and power management. In CSG, our growth investments are focused on automotive, next gen Wi-Fi and matter and ultra wideband SSCs. Corvo solves our customers' most complex RF and power challenges related to efficiency performance and size and we are confident in our ability to drive long term growth and diversification. And with that, I'll turn the call over to Grant.

Thanks Bob and good afternoon everyone. Revenue for the quarter was $1 billion and $47 million representing an increase of 18% sequentially. Revenue exceeded the midpoint of our guidance range driven by double digit sequential growth in all three operating segments. Non-GAAP gross margin of 47% matched the high end of our guidance range. Non-GAAP operating expenses in the quarter were $280 million which included approximately $7 million of spend associated with our digital transformation. Non-GAAP diluted EPS of $1.88 came in above the midpoint of our guidance range. On the balance sheet, as of quarter end, we had over $1 billion of cash and equivalence and approximately $1.5 billion of long term debt. There's approximately $412 million of our 2024 notes that remain outstanding which we currently expect to retire this December. We ended the quarter with a net inventory balance of $694 million, the lowest balance in three years reflecting our ongoing inventory reduction efforts. This represents a decrease of $32 million sequentially and over $145 million on a year over year basis. Turning to the cash flow statement, we generated operating cash flow of $128 million and capital expenditures of $33 million resulting in free cash flow of $95 million. As a reminder, our CapEx spend will vary quarter to quarter and reflects the timing of cash disbursements. Consequently, CapEx is a percentage of sales in any given quarter may be above or below our target of approximately 5% of sales. We repurchased approximately $81 million of stock at an average price of $110 per share in the quarter. The rate and pace of our share repurchases considers several key 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. Turning to our current quarter outlook, we expect revenue of approximately $900 million plus or minus $25 million, non-GAAP gross margin of approximately 45% and non-GAAP diluted EPS between $1.10 and $1.30. In our updated outlook, we anticipate fiscal 2025 revenue to be slightly down compared to fiscal 2024, primarily due to two factors affecting our smartphone business. In the near term, while the flagship and premium tier are holding up well, content and rant profiles vary by model. We are experiencing an unfavorable mix. Additionally, in the mass market segment of Android smartphones, the mix has shifted to entry tier 5G devices at the expense of mid tier 5G. These factors are expected to impact our revenue and margins in the second half of fiscal 2025 and into early fiscal 2026. In our current view, we do not expect the shift in Android mass market from mid tier 5G to entry tier 5G smartphones to reverse. As a result, we are taking appropriate actions, including reductions in manufacturing and operating expenses as we focus on opportunities that align with our long-term profitability objectives. We project non-GAAP operating expenses in the December quarter will be approximately $265 million with variability related to the timing of program development spend, operating expense reductions and other factors. According to our current schedule, spend associated with our digital transformation is expected to be approximately $15 million this quarter. We continue to expect approximately $40 million of related expense in fiscal 25 with quarterly variability related to the achievement of progress-based milestones and variability in the rate, pace and scope of the project. Below the operating income line, non-operating expenses expected to be between $8 and $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. We currently earn a higher rate of interest on our cash deposits than we pay on our .75% 2024 notes. Should we retire our 2024 notes in mid December as expected, non-operating expense will increase in the March quarter by $3 to $4 million over the current run rate due to this interest rate differential. Our non-GAAP tax rate for fiscal year 2025 is expected to be within a range of 10 to 12%. We project this will increase over time primarily due to changes in tax legislation. With regards to operations, the Corvo team continues to execute extremely well. On previous calls, we have highlighted multiple initiatives to drive continuous improvement in product development, semiconductor device design, process engineering, factory planning and manufacturing efficiency. The transition to eight inch FAA is a noteworthy example that unlocked effective capacity within the same factory footprint. Furthermore, we have reduced capital intensity through the divestment or consolidation of multiple production facilities, including our Beijing and Dejeaux test and assembly locations and our fabs in Farmers Branch, Texas and Apopka, Florida. To further optimize our internal factory footprint, we are transferring all gallium arsenide or gas production from our North Carolina fab to our Oregon fab. Currently, our North Carolina fab is a dual use facility that manufactures wafers for both gas amplifiers and saw filters. As we transfer gas production to Oregon, we're working closely with customers to manage end of life gas products built in North Carolina. Our North Carolina fab will continue to manufacture saw filter wafers, including our latest LRT saw technology. The transfer of our gas production to Oregon will make room for anticipated saw filter growth in North Carolina. It's a further example of the proactive steps we are taking and continue to evaluate in order to streamline operations and improve gross margin. During the quarter, we made the decision to evaluate strategic alternatives for our silicon carbide business. Our highly experienced team has made considerable strides in advancing the JFET silicon carbide technology. We believe an owner who is strategically focused on this business and can leverage preexisting sales and support overhead will be able to create more value with the asset. For Corvo, exiting the silicon carbide market will allow us to reduce operating expenses and avoid the capital expenditures necessary to remain engaged. The business remains and will continue to remain included in our financial non-GAAP guidance until a definitive course of action has been determined. As we communicated at our investor day in June, Corvo has multiple drivers of growth diversification and profitability. In terms of growth, we expect HPA and CSG to grow in the mid teens this fiscal year. Beyond this fiscal year, we expect HPA and CSG will continue to benefit from the intersection of multi-year secular growth opportunities with our technology capabilities and product portfolios. By segment, our growth targets are strong double digit growth for CSG, double digit growth for HPA, and mid to high single digit growth for ACG. In terms of diversification, our long-term objective is to generate 50% or more of total revenue from HPA plus CSG. In the September quarter, HPA plus CSG represented approximately 28% of total revenue. This was up sequentially and up from 23% in the same quarter last year. In terms of profitability, we continue to execute on the structural actions referenced earlier to improve gross margin in fiscal 26 and beyond. In the near term, quarterly variability in gross margin reflects headwinds in the Android ecosystem as mix has shifted from the mid tier to the entry tier. We remain actively engaged with our Android customers for highly integrated modules where they deliver the most value and differentiation. However, the shift from the mid tier to the entry tier models where price sensitivity is higher given competition from discrete solutions is reducing the total addressable market and our revenue opportunity as we maintain price discipline in that sub-segment. Although the underlying market for mass market 5G in Android is trending toward the more competitive entry tier, it is worth noting that flagship and premium tier smartphones represent the largest portion of our SAM. For Corvo, we expect this will pressure revenue, factory volumes, and utilization into next fiscal year. Partially offsetting this, we expect to see margin and creative drivers such as strength and highly customized placements for flagship smartphones as well as DNA and other highly differentiated product areas that enhance our business mix. Lastly, we are executing well on structural adjustments to our manufacturing operations and taking actions to reduce operating expenses. In summary, we serve an expanding set of customers and in markets with highly differentiated solutions. We're actively deploying capital to drive growth, diversification, and increasing profitability as we are confident in our ability to deliver on the goals we laid out during our investor day. At this time, please open the line for questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. Please limit yourself to one question in one followup. And if you have further questions, you may re-enter the question queue. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster.

And the first question will come from Tom

O'Malley with Barclays, please go ahead.

Hey guys, good afternoon. Thanks Bob and Graham for getting me on the call here. So I just wanted to dig into the commentary and the press release on the content and the RAMP profiles varying by model. You have some comments on Android later, so obviously maybe more associated with the large North American customer. Could you just kind of parse that out? Obviously headed into the year, you had talked about a good content outlook, but does mixed mean a shift in units more towards the low end? Does that mean RFFE that's lower? When I look at like the first three quarters of your fiscal year, it seems like you're trending down year over year pretty substantially. So just maybe help me walk through what's actually going on there.

Sure, thanks Tom, this is Grant, let me take that one. If we look at the year on the whole, as I said in our formal remarks, we expect fiscal 25 to be down slightly compared to fiscal 24, call it maybe a few percentage points or so, very low single digits. And that reflects the shift in Android 5G that we mentioned in the mass market area and the transition to some of the entry tier levels. Outside of that mass market, the flagship and premium tiers, as I said, are holding up well. And there are some unfavorable trends there in some of the variables like unit volumes, content by model, RAM profiles, and other variables. And that's really any customer, we're not being specific, but it's across all of our customers in that tier. At least at our largest Android customer, our revenue in their highest volume fall models is less than it was last year and less than the design wins that we're actually looking at in the spring launch. So, feel comfortable and confident there about that particular handset. At our largest customer, there's little we can say, however, we do expect a low single digit decline in revenue there for that confluence of variables that I mentioned earlier. But as we look into next year, we continue to be enthusiastic about the breadth of our opportunities at our largest customer, and we're engaged on more programs today than ever in investing to increase our content. So, we're competing for products that we've supplied before and some placements that are new for us.

Appreciate the color there. And then the second is just on the gross margin profile. So, if you look at your December guidance, you just get some off-ex in the commentary. So, it implies kind of 44% in change on the gross margin side. You're talking about some manufacturing changes as well to help optimize the business, given the lower volumes that you're seeing in the makeshift to the end of Android. But could you maybe talk about the structural long-term path to gonna get back to the mid-40s or to the high-40s? How long is that gonna take? Or do you think that structurally, kind of for the foreseeable future, the 44 gross margin level is the right way to think about things? Or does it get worse, given the manufacturing decisions?

In terms of our long-term view, no change to our guidance at the investor day, around 50% plus long-term gross margins. So, no change there. You know, on gross margin in the December and March quarters and into early 26, fiscal 26, we do expect to see the headwind associated with that makeshift in the entry tier for those Android devices. It'll cause the utilization and gross margin to come down a bit versus our prior comments. But we still expect fiscal Q1 to mark the low point in fiscal 25, and we will report a full year for fiscal 25 with margins in the mid-40s, as you pointed out. Somewhat comparable to last fiscal year plus or minus. But I did maybe just quickly note that in the December quarter, year over year our gross margin will be up on lower revenue. So it really substantiates the hard work we're doing to pull costs out.

Thank you. The next question will come from Tim O'Curie with UBS.

Please go ahead. Hi, this is Iman jumping in for Tim. I just wanted to double-click on the December guide and your comments for revenue being down year over year. I mean, is that all related to like the makeshift inside of Android, or is something happening at your largest customer, you know, in the last couple of weeks, or potentially if cut units?

Sure. No comments on customer specifics, but, you know, generally speaking, as we said, we expected the premium and flagship tiers to be holding up well. You know, the Android dynamic is having an impact on us as we intentionally pivot away from the entry tier areas that are more margin compressed and focus ourselves on the higher tiers and the areas of the mid-tier is where we see the most value for us and our customers. So, you know, at least in terms of overall volumes, you know, I wouldn't read it directional to any one particular customer.

This is Bob, I'll add to that. The CSG is also gonna be down quarter over quarter. There's a few reasons for that. We can go into that later. I think that's also important to keep in mind. And historically, if you look at the last three years, we have been down in December just because of the profile of our largest customer.

Got it. And then in terms of the mix inside of Android, I mean, does that change your longer term growth targets for mobile moving forward relative to what you provided at your analyst day?

As far as ACG goes, we're still sticking with our strong single digits growth rate there. Brand had in his prepared remarks, so we don't see that affecting us long term by any means. In fact, we gain confidence every day. It seems that we are gonna be able to grow that business

while Android's declining, just to be clear. The next question will come from Christopher Rowland with Susquehanna. Please go ahead. Are you there, Chris? Hi,

sorry about that. So I know it might be a bit early to talk about March, but seasonality, you guys have traditionally been down, I think 10 or 11%, something like that. And I'm a little conflicted here how to think about this. It seems like in one way, you're more reliant on your primary customer. So as we look out, how might this outlook compare to traditional seasonality as you view it today?

Sure, thanks for the question, Chris. The big seasonal drivers, as you point out, are pretty well known, but usually the impact of the seasonality can vary year to year. So we don't provide formal guidance out that far in advance, but for modeling purposes, you could assume that we'd be down in the, let's call it five to 10% range sequentially, which would fit in with our total company commentary around being down very modestly for the full fiscal year. Directionally, we would expect ACG to be down more than that, just given the seasonal dynamics there, but we should expect both HPA and CSG to be growing in the March quarter. In fact, HPA substantially. So we have, as Bob pointed out, some record design activity there, and in fact, we actually had record billings activity as well, so feeling comfortable about our HPA business heading into the end of the fiscal year.

Thank you for squaring that circle for me. And then if I heard it correctly with your footprint change, I believe I heard that you were anticipating growth in SAW. I was wondering if you could flesh that out a little bit, and then how do we think about the dynamics for you guys, SAW versus BAA opportunities moving forward? Thanks.

This is Bob, Grant, I'll go ahead and take that. From a SAW perspective, we talked about a couple quarters ago that we released our next generation SAW, and there are certain bands that are in the mid-band spectrum, if you will, where SAW performs quite well. That's our LRT SAW, that is. Not a standard SAW or temp-comp SAW. So we see plenty of opportunities in that, whether it's in the transmit path, or the TXDSM is an example on the secondary transmit. And for some opportunities, as we're seeing more and more people want power class II in some of the lower frequencies, it's another good technology there. So we just see many different sockets. Traditionally, when people think SAW, they think just the low band. We're seeing it now in the mid-band, high-band opportunities. Again, as you mix some of that mid-frequency band, we see a couple bands where it's absolutely the right technology.

Okay, so this sounds like it's SAW primarily for Android. Is that right, Bob?

It's available to any of our customers. Like I said, it's frequency dependent.

Excellent, thank you, Bob.

The next question will come from Edward Snyder with Charter Equity Research. Please go ahead.

Thanks a lot, guys. So you mentioned we shouldn't read anything in volumes in your guidance for December, in volumes in phones anyway. So it seems to imply there's a content shift that maybe was unexpected. Can you elaborate on that? Is that a fair conclusion, first of all, or is the question, content is as solid as you thought it would be at the beginning of the year, when you guided it, you thought you'd grow year over year in content, and then something else going on. Maybe you could help us with that.

Thanks for the question, Ed. I think the comment was a couple quarters ago when we said we expected to grow slightly for the year. What's actually happened is primarily the Android is what's off from our expectations. That's what's off. Grant commented already a little bit about our largest Android customer for their spring launch. We did not do as well as what we had expected as in prior years, but we already know we're gonna regain that back next year. So I feel good about that, but that definitely was a share loss that we weren't planning on. But also that whole dynamic that we've talked about, the mid-tier moving down, and the pricing discipline that we're putting in, intentionally saying we're not gonna chase this bad business. So that's been the shift over the last six months or so, and it's really been accelerated over the last probably four months.

And just to clarify, Bob, in our largest Android customer, the second half models where our content is lower. Correct, thank you. We expect to gain that back in the first half of next year.

Right, okay. So if we sit back, Bob, I direct this to you strategically. You were there during the GSM, the YBNCD May days in the early 2000s where it was kind of a zero-sum gain because there just wasn't much content being added to the phones that all change with 4G. And as we kind of expected when you first looked at 5G, we're kind of turning to that model here where it's mostly a share shift. You're already seeing it, just as you guys announced today, and we've seen it for some time that the Chinese are moving in that direction where they're taking value out of a lot of their phones. Samsung has clearly cut content in their flagships versus what they used to do two or three years ago. And now it sounds like competition in your largest customer has heated up significantly over the last couple of years. So Bob, strategically, I mean, there's only so much you can do with a market that's kind of flattening out and modest growth here and there. What do you think? You've got some great assets, especially in the defense side of the business. Is there another area you could start engaging in or maybe pour more OPEX and R&D in to try to make up for kind of just, I would say, kind of a flagging handset business, which it looks like is gonna continue for some time? Or, I'm sorry to make this a paragraph long question, or are we looking at, well, it's clear from talking to the handset OEMs that in the next couple of years, once your largest customer gets their own modem involved, we're gonna start moving into AI-enabled phones, which doesn't directly affect you, but it does kind of, you know, ancillary affect you in terms of the content's gonna go up and the size is gonna go down. Is that something that we can look forward to in driving more of your phone business?

Ed, thanks for the question. A lot to unpack there, but let me start at the highest level. As far as more competitors, our largest customer, I guess that's thanks to us. As Grant said in his prepared remarks, we're now working on sockets that we had not worked on before that are now, we believe, available as to win. So we're not seeing any new competitors there. I think it's the same people. I think, as you've commented, we've shifted R&D dollars already ahead of, again, what we thought was gonna be there ramped on in some of our Android business. It just is accelerating the decline faster than what we expected. So I wouldn't say there's new competitors that are our largest customer. We feel good about that. As far as the flagship phones, you know, we still believe we bring the technologies that's needed to be able to make a good margin there, which is why we said we'd stay focused on flagship and premium. And yes, maybe from an RF content, there may not be more being added in some, but there's still other areas that are being added in the RF section. We've talked about terrestrial, but I think people are losing sight of, we still need more and better RF. I commented about Power Class 2. That can't be done with a traditional soft filter, and we're seeing more and more Power Class 2. You've heard us talk about that over the years. So we still think there's a place for us to play with our technology so we can win. Now, your comment about being able to invest in other areas. Yes, we have shifted dollars. I'll remind the group that we've shifted dollars in the DNA, as well as in the power management and HPA. We exited the infrastructure market where we were focused on our GAN for the PAs. As you know, that market's gone to roughly four and a half customers that were available to us to two and a half, that being Ericsson, Nokia, and a little bit of Samsung. So we've already shifted those R&D dollars, and we talked about our DNA business growing. And quite honestly, for the group to hear, our DNA business is now bigger than our China, Android-based cellular business. So we're doing some of the things you've mentioned, and why I've got to stay in right now. In CSG, we're looking for that, along with HPA, to both grow double digits. This year, in CSG, as you know, we've been investing in ultra-wideband matter, along with the automotive area, and again, maintaining our share in Wi-Fi. So feel good about how we're shifting the dollars. But as you know, growth first comes from our largest customer, then it'll come from our DNA and power business, and then lastly, in our CSG business. So thanks for the question, Ed.

Thank you.

The next question will come from Nicholas Doyle with Needham, please go ahead.

Hey guys, thanks for taking my question. Just, I guess, a clarification on the entry segment of Android. Are you guys walking away entirely? I mean, I'm thinking if Android's mixing down, you guys have talked about the LMH pad gains, so just wondering when that can start to offset. And also, how long will the mix shift to entry phones be an overhang? Does it go away, does the overhang go away entirely, or do you expect some stabilization at some point in calendar 25?

Thanks, Nick. This is Grant, let me take the second part of your question, then I'll pass it over to Dave. At least in terms of the TAM, which I think you were hinting at, I believe it'll be more like a reset, and then we'll grow from there, as we communicated at Investor Day, in that single digit range. But call it a reset of maybe a billion dollars, approximately, in the TAM, and we're seeing that in our fiscal Q3, Q4, and probably in the Q1 of fiscal 26. And then from there, I think we'll have readjusted, rather intentionally, via our pricing discipline, our position in the markets and some of the mid-tier. And as you pointed out, the LMH, which I'm sure Dave can talk more about. But it's very much an intentional move in order to prioritize profitability and focus on the customers where we're adding value and they recognize that they're willing to pay for those integrated modules to differentiate their phones. Dave?

Yeah, so as far as that shift, as Grant mentioned, it's largely driven by the macro weakness, especially in China, but other markets as well, where the consumer behavior has shifted. And so we're responding to that. And as it relates to the low, mid, high, we mentioned last quarter that we're just starting to ramp that. We now have DesignWins and POs with the top four OEMs in China. But our expectations now for that product family is that we will not participate in that, especially in that entry tier, as Grant mentioned, with our pricing discipline. It's not a market that we plan to participate in. So we're going through a bit of a pocket. That pocket may be a little bit bigger as we transition from the old architecture to the new low, mid, high architecture, but also as we come out of the other side of it, our expectations now for that family of products is certainly lower than when it was due to the TAM reduction that Grant mentioned.

Thanks. And my second question is on the OPEX, could you just expand a little bit on the reductions? I know you mentioned a couple things in the prepared remarks, but I guess how does that impact the line item near term, I guess, down 15 million or so next quarter, and does that continue trending lower?

Sure, on OPEX, our guide incorporates the reductions that reflect that change in the Android business. Resource allocation, as Bob was pointing out earlier, is an ongoing process, right? It allows us to focus on and shift dollars to the best investment areas that we have, and I think that will continue as we look forward in time and continue to develop the plans and target areas for our OPEX dollars going forward. I won't guide OPEX any further than the current quarter, but it is definitely an area that we're going to use to realign ourselves with the highest and best use of our resources. Thank you.

The next question will come from Chris Sankar with TD Cowan, please go ahead.

Yeah, thanks for taking my question. I actually had to do a short term and a long term question. First one, Bob, on the short term, over the next two quarters, when I look at your guidance or the consensus, it's about 300 million below. How do you think about it in buckets? How much of it is kind of related to the unfavorable mix in the content, versus how much of it is related to weak volume ramp from your largest customer?

Sure, this is Grant, let me take that one. So we haven't bucketized it, but a considerable amount is related to the underutilization charges. They were approximately 170 million, or excuse me, 170 basis points in the quarter, and will probably grow by 100 basis points or so into Q3 and Q4. So we can add that back and you get quite a ways toward our 50% target. Beyond that, some of the other structural changes that we're making, if you have to find their way into the cost of goods sold line, we talked about moving to eight inch bar, we've talked about migrating our capacity for gas to Oregon, those will begin to help as well. And then, as our product portfolio pivots, we'll have a higher percentage of revenue coming from HPA and CSG, where we expect some margin accretion there just from a business mix. So quite a number of factors happening at various stages sequentially. And so those should all factor into the long-term achievability of our 50% gross margin target. Just by means of reference, if we do look at some of that business that we're talking about in the Android space, right now, China-based Android is under 100 million and expected to trend lower over the course of fiscal 26. So our exposure to that has grown smaller. If you look at our China-based Android revenue down over 75% from the peak, and Android revenue in general is down 50% from the peak. So significant reduction in exposure there already. And as we move forward, we'll be adding in, or looking to add in more margin accretive revenue going forward.

Got it, thanks for the ground. And I think you kind of answered my next question, because it's a long-term, we're just kind of like above the 50% gross margin, because it looks like some of the headwinds are facing it, there's some cyclical content-related stuff. There's also some structural changes. So with the time reduction, et cetera, is it fair to assume restructuring plus focus on profitable opportunities is kind of what gets you to 50%? Or do you think there are other levels that you could pull?

It's a fair mix of both. I'd say it's the business-mix exposure to HPA and then improving profitability in CSG, and as well as a focus on profitability within the Android ecosystem, especially, as we target some of the premium flagship and the upper end of the mid-tier, where highly integrated devices and our gross margin is better.

Got it, thank you very much. Thank you.

The next question will come from Peter Pang with JP Morgan. Please go ahead.

Good afternoon, and thanks for taking my question. If I look at where consensus expectations, versus the guidance for the ACG segment, it seems like it's about $400 million worth of shortfall. Maybe if you can just bucket into the bucket that you described, how much of that is just a shift to the lower tier? How much of that is just different content and rentals?

Thanks for the question, Peter. It's hard for us to bucket anything against analyst consensus because we don't model analyst consensus. So I don't have a good baseline to compare it to. As we look at it, a healthy portion of it is simply related to the models, mixes, and associated volumes there, as they impact Corvo specifically. A large portion of it is related to our pricing discipline, and as we look into the second half, the trend toward the entry tier Android 5G, which has, as I mentioned, a billion dollar impact on TAM, and we have a meaningful market share there. We call it in the 20 to 30 plus percent market share. So it has a very meaningful impact on Corvo specifically.

Got it, okay. And then a follow-up is on, as your largest customer, does your content vary across the different SKUs, or do you have a certain index, over-index exposure to certain SKUs?

This is Bob, I'll go ahead and take that one. It's obviously public if you've done pare-downs. We have various content, depending on the models and the SKUs and where they go, and that's continued through the year. So mixing models within the current year, the prior year, the year before that, that all gets into the mix and models that Grant was talking about. So yes, our content varies. It's not the same in every phone they make.

Thank you. The

next question will come from Carl Ackerman with BNP Paravis. Please go ahead.

Yes, thank you, gentlemen. I have a clarification question and a follow-on I'll just ask at the same time as I may. What is the right way to think about the mix you have of mid-tier Android of that 100 million per quarter you're running at today? And the reason why I ask is, I guess how much of the change in your outlook on China Android is driven by competitive dynamics from Chinese RFC vendors versus market demand dynamics shifting to different smartphone OEMs that you may not have exposure with today? Thank you.

Yeah, this is Dave. Historically, we've been more concentrated in the high tiers and down into the mid-tier, and with the shift into the entry tier, that's obviously a headwind for us. So, what was the second part of your question? One

of the questions I think he was asking is, is a competitor where we don't play, maybe he's hitting at Huawei? I mean, that's playing out as we expected.

Yeah, I mean, Huawei is definitely playing out as expected. I mean, they're on track for what we had projected earlier in the year to do about 45 million units. So, I don't think that's meaningfully different than what we thought. The big change is with this shift into the entry tier and the competitive dynamics there, as you go down in the tier, the discrete solutions become more prevalent, and the pricing environment, as Grant mentioned, is tougher there, so we don't tend to compete there. The other dynamic is our customers tend to outsource the lower end phones to the OEM channel, which we don't traditionally participate in. Historically, that's been mostly 4G. We're seeing more and more of that is 5G entry tier phones as well. And so, as they outsource those phones, that directly comes out of our available market.

Got it, thank you.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

We wanna thank everyone for joining us on tonight's call. 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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.