Douglas DeLieto - Qorvo, Inc. Robert A. Bruggeworth - Qorvo, Inc. Mark J. Murphy - Qorvo, Inc. Steven Eric Creviston - Qorvo, Inc. James L. Klein - Qorvo, Inc..

Ambrish Srivastava - BMO Capital Markets (United States) Vinay Jaising - Morgan Stanley India Co. Pvt Ltd. Edward Snyder - Charter Equity Research Toshiya Hari - Goldman Sachs & Co. Harsh V. Kumar - Stephens, Inc. Mike A. Burton - Brean Capital LLC Bill Peterson - JPMorgan Securities LLC Timothy Arcuri - Cowen & Co. LLC Quinn Bolton - Needham & Co. LLC J.

Steven Smigie - Raymond James & Associates, Inc. Blayne Curtis - Barclays Capital, Inc. Ian L. Ing - MKM Partners LLC.

Good day, and welcome to the Qorvo, Inc. Q2 2017 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Doug DeLieto, Vice President of Investor Relations. Please go ahead, sir..

Thanks very much, Robbie. Hello, everyone, and welcome to Qorvo's second quarter fiscal 2017 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 statement published today, as well as the risk factors associated with our business in our Annual Report on Form 10-K filed with the SEC, because these risk factors may affect our operations and financial results.

In today's release and on today's call, we provide both GAAP and non-GAAP financial results.

We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or other items that may obscure trends in our underlying performance.

During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our website at qorvo.com, under Investors.

In fairness to all listeners, we ask that each participant limit themselves to one question and a follow-up. Sitting with me today are Bob Bruggeworth, President and CEO; Mark Murphy, Chief Financial Officer; Eric Creviston, President of Qorvo's Mobile Products group; and James Klein, President of Qorvo's Infrastructure and Defense Products group.

I'm also joined by other members of Qorvo's management team. And with that, I'll hand the call over to Bob..

Thanks, Doug. Good afternoon, everyone, and welcome to Qorvo's fiscal 2017 second quarter earnings call. Revenue for Qorvo's fiscal second quarter increased 24% sequentially and 22% year-over-year to approximately $864 million. Revenue was above our quarterly guidance provided August 2, reflecting broad-based demand.

Gross margin for the quarter was approximately 43%. Within the quarter, we experienced lower than expected manufacturing yields during a steep product ramp to a large customer.

To protect our long-term customer relationships, we did everything we could to assure supply of high quality material to the customer while working through the internal yield issues, and this significantly impacted our gross margin. Operating expenses were $172.9 million, in line with our goal of 20% of sales.

On the bottom line, earnings were $1.29 per share, an increase of 19% versus our prior quarter. Mark will walk you through additional details in a moment and provide a bridge to our margin expectations. In the meantime, I'll update you on some other major initiatives currently underway.

During the September quarter, we brought up and released our TC-SAW process in Greensboro, ahead of schedule, giving us the ability to support additional customer demand this quarter. We are increasing the mix of 6-inch TC-SAW in Florida while moving all gas capacity to Oregon, transitioning all GaN products to Richardson.

We're also ramping our new assembly and test facility into Dezhou, China. In Richardson, the organization has done an outstanding job, releasing our most advanced next generation BAW process, which delivers a significant improvement over our prior generation in key performance metrics.

We've also brought up and are now designing products on our new 8-inch BAW line in Richardson. We are enjoying broad-based demand for BAW filter solutions and we expect the ramp of new customer programs to improve our utilization rates in calendar 2017.

Notably, we continue to enjoy strong demand for our BAW-based multiplexer solutions and we have delivered module prototypes containing our BAW-based hexaplexers. Looking at quarterly performance by segment, Mobile Products grew approximately 22% year-over-year and 29% sequentially to a record $706 million.

Mobile Products supported the launch of highly popular, premium tier smartphones. And in the performance tier smartphones, we enjoyed strong demand for our RF Flex solutions.

In Wi-Fi for handsets, Qorvo's RF Fusion for mobile Wi-Fi delivered customers a unique, highly integrated solution combining our high performance BAW filters with our Wi-Fi front-end modules. In China, Mobile Products is benefiting as smartphone manufacturers migrate from three-mode to full-mode devices.

By the end of this year, we expect more than half of all 4G smartphones manufactured for the China market will be full-mode. Our largest customers in China are looking for ways to introduce fewer models with higher levels of RF content to provide broader coverage of additional geographies as they move towards more of an export market.

Huawei stands out as an excellent example. They are adding more RF content to their smartphones as they build their global brand. Huawei was one of two 10% customers for Qorvo in our fiscal second quarter and they are our largest customer in China.

Finally, the expanding market requirements for carrier aggregation and the upcoming deployment of 5G favor our unique combination of competitive strengths.

Only Qorvo delivers a comprehensive portfolio of filters, switches, amplifiers, envelope trackers, LNAs and tuners with the scale, integration capabilities and system level expertise to supply a complete portfolio of highly integrated solutions.

Looking at IDP, revenue grew 22% year-over-year and 5% sequentially to $158 million as our focus on higher growth segments continue to bear fruit. We're very pleased with the performance of IDP, in particular the revenue growth, the initiatives to target faster growing market segments, and the rate and pace of new product introductions.

IDP has enjoyed a series of very strong quarters and is closing in on its margin model of 60% gross margin and 30% operating margin. IDP is a recognized global leader with a product and technology leadership strategy that leverages internally developed, best-in-class technologies to provide our customers with differentiated performance solutions.

IDP is highly diversified and competes in a $3.8 billion serviceable market that's forecast by industry analysts to grow at a compound annual rate of 17%, nearly doubling to $7 billion by 2020.

In September, IDP released 49 new products including power amplifiers for small cell, dual and quad linear drivers for optical applications, LNAs, and filters for automotive and integrated front-end modules for Wi-Fi.

The continued aggressive pace of product releases is creating a broad-based pipeline of differentiated solutions with long production tails across our portfolio of markets. IDP's strong performance last quarter was across all major market segments, highlighted by growth in wireless infrastructure, Wi-Fi, Defense & Aerospace, as well as the IoT.

We've seen a continued recovery in the base station market and we enjoy broad-based market share across all OEMs. This helps buffer IDP from the ups and downs experienced by any one customer. Our view on the overall base station market is cautiously optimistic.

We are continuing our focus on the markets' higher growth segments with an emphasis on the transition of base station power amplifiers to GaN technology and the implementation of massive MIMO. In connectivity, IDP enjoyed growth in both Wi-Fi and low power wireless.

With the acquisition of GreenPeak, Qorvo is a recognized leader at ultra-low power short range RF communications. We are expanding our low power product portfolio to include highly integrated RF systems on a chip for the connected home and the Internet of Things, and our target markets are growing faster than 40%.

In Wi-Fi, our growth was supported by continued wins in both the retail and set-top-box market segments. In transport, growth was driven by strength in our cable TV products to support the rollout of DOCSIS 3.1, our traditional long-haul optical driver business and ramping data center interconnect products.

Qorvo's transport business is at the forefront of the buildout of infrastructure to keep pace with the ever-increasing demand for data, and we continue to see an expanding set of opportunities. In Defense, our growth was driven by international and domestic GaN on silicon carbide sales and a major ASIC program ramping.

Design wins for our GaN on silicon carbide devices have been exceptionally strong in the market segments that are growing at over 25% per year. In summary, the Qorvo team did an excellent job delivering 22% year-over-year growth and achieving our goal of operating expenses at 20% of sales.

At the same time, we made progress advancing core technologies and developing highly integrated Qorvo solutions for large customer opportunities in 2017 and 2018. It's clear, we have work to do on our gross margin and we're taking steps to address it.

We continue to drive toward our operating model including above revenue growth and operating income above 30%. Now, before turning the call over to Mark, let's view our achievements and our comments today through the prism of Qorvo's long-term strategy. Qorvo's growth strategy is based on three core principles.

First, leverage our differentiated technologies and product leadership to achieve operational excellence, capture value, and deliver superior financial results. Second, drive the integration of our two predecessor companies to achieve as Qorvo what neither could achieve alone.

Third, prioritize the use of cash on investments that grow our business, return capital to our stockholders through share repurchases and supplement growth in IDP through M&A.

Our long-term view of the RF industry envisions more modes, more bands, more complexity and more RF, all driven by the ever-increasing demand for data and the limited frequency spectrum available to support that demand.

In Mobile Products, only Qorvo can deliver a complete suite of multi-mode, multi-band solutions, combining premium BAW and temp-comp SAW filters, SAW filters, broadband power amplifiers, high probe count switches, high performance LNAs, envelope trackers and antenna control solutions.

And Qorvo is the only industry participant positioning itself to supply internally developed, internally manufactured, and internally assembled system level solutions serving all major cellular frequencies.

We see growing demand for low, mid, and high frequency RF solution sales in the performance tier, as new cellular bands limit board space and pressure our customers' product development cycles.

In the premium tier, we anticipate demand from multiple customers for highly compact, single placement solutions combining coverage of mid and high frequencies. To be clear, this will require more TC-SAW and BAW, a distinct advantage for Qorvo.

At IDP, our investments in internally developed best-in-class technologies, our sharpened focus on higher margin, higher growth markets and our introduction of hundreds of new products annually are combining to support excellent growth opportunities. These opportunities are underpinned by large secular trends extending into the foreseeable future.

They include high speed connectivity, the Internet of Things, the connected car, data centers, and the proliferation of phased array technology. In wireless infrastructure, cable TV and defense applications, we expect our GaN technology to be increasingly disruptive.

So, from a high level, Qorvo has assembled the technology, products, people and resources to deliver best-in-class, highly integrated systems level solutions.

We are investing in highly differentiated internally sourced technologies, best-in-class products, adding manufacturing capacity to keep pace with customer demand, and we are leveraging our unique combination of competitive strengths to drive above-market growth. And with that, I'll turn the call over to Mark..

quarterly revenue between $800 million and $840 million; sequential gross margin expansion of 100 basis points to 200 basis points; diluted EPS between $1.15 and $1.35; tax rate of approximately 8%. Our December quarter guidance reflects continued strong demand with projected year-over-year sales growth over 30%.

We currently expect gross margins to improve from the second quarter and through the second half of the fiscal year 2017, as our mix of low-band PAD peaks in the third quarter and our operations stabilize.

We expect OpEx to remain near 20% of sales in the third quarter and trend down in dollars through the rest of the fiscal year on lower commissions and an increase in productivity initiatives. CapEx will remain elevated through the rest of the fiscal year, as we invest in premium filter capacity to support forecasted customer demand.

As I close out my first quarter at Qorvo, I'd like to share my initial observations on the company and provide a longer-term outlook on the business. I believe Qorvo is exceptionally well positioned to address rapidly growing RF demand and the design and production challenges posed by growing RF module complexity.

Qorvo has the key technologies, best-in-class design resources, advanced production capabilities and high quality employees to succeed. While the company has all the pieces to deliver extraordinary shareholder value, we have to improve our execution to reach this potential.

The integration has gone well in many ways, validated our vision for the combined company and yielded a common culture and synergies. But there is more that can be done on both the integration and general productivity. For example, this past quarter was the first full quarter in which most of the company was on a common ERP system.

Going forward, we expect that improved visibility, increased financial discipline and rigor, and a broad-based commitment to operational excellence will help drive additional synergies and improve our financial performance.

I'm enthusiastic about Qorvo's future and pleased to be able to contribute to efforts to improve the operating discipline and efficiency of the company. Within six quarters we expect to be at our targeted operating performance.

We currently expect double-digit sales growth to continue through fiscal 2018 and forecast over 30% operating margins by the fourth quarter of fiscal year 2018. The Mobile Products segment is projected to benefit from continued content growth and demand for more complex modules using our premium filters.

Our Infrastructure and Defense Products segment has been repositioned to serve higher growth markets including Wi-Fi, automotive, IoT, and wireless infrastructure. Looking forward through Fiscal Year 2018 we expect IDP's growth to be in line with Mobile Products.

For the rest of this fiscal year we expect our margins will improve as operations stabilize and low-band PAD mix declines. We expect to exit fiscal year 2017 above 46% gross margins and we believe that additional yield improvements, factory loading, sourcing and other productivity initiatives will help drive margin expansion in fiscal year 2018.

Factory yield improvements from process maturity and larger wafer production in SAW and BAW are expected to add approximately 100 basis points to gross margin in fiscal year 2018.

Higher volumes are projected to add over 150 basis points of margin based on higher utilization of our BAW, SAW, and gas lines as well as ramping our new Dezhou assembly and test facility.

Next year, considering projected volumes and the impacts of consolidation efforts and measured capacity additions, we expect our global operations to be running near capacity.

Finally, we projected ongoing supply chain consolidation and procurement initiatives along with additional efforts to wring out merger savings should drive another 150 basis points of gross margin expansion.

Together, by the end of fiscal year 2018, we expect these efforts and a more favorable mix of higher margin products should result in greater than 50% gross margins. In fiscal year 2018, our OpEx is expected to grow at no more than half the rate of sales which will drive OpEx to under 20% of sales. The operating model Bob mentioned is intact.

It's a focus and imperative for our business team, and a goal we expect to achieve. We plan to exit fiscal year 2018 at over 50% gross margins, OpEx below 20% of sales and operating margins over 30%. Achieving this performance will generate substantial free cash flow, which we plan to use for acquisitions and returning capital to our shareholders.

With that, I'll turn the call back over to the operator for questions..

And we'll take our first question from Ambrish Srivastava with BMO Capital Markets. Please go ahead..

Hi. Thank you very much and I do appreciate the color, the longer term trajectory that you're providing. But just near term, I just wanted to focus on the gross margin. You have a gross profit – if I look at what you've guided to versus what you reported, it seems like a negative impact from higher revenues.

Am I reading that correct that this is a negative margin business that you're winning incrementally? And then I had a follow-up..

Well, Ambrish it's – this is Mark. So, it's a mix issue. So, if you look at what we reported in second quarter, we reported roughly 43% gross margin. We pick up more than 200 basis points related to the yield issues that we had on our largest runner.

We pick up another, less than 100 basis points, but more inventory and yield related issues on smaller products. Now we lose 100 basis points related to higher volumes of a lower margin product mix, especially the one part. And that's increasing to about 1.5 times the percent of our business mix that it was in the second quarter..

Okay. And so my quick follow-up then is related to your guide.

I'm not sure if I caught it correct, that improvement that you're seeing in the current quarter, is that – and the margin, is that from the high volume customer being down sequentially or is there a structural improvement in your gross margin?.

It's a structural improvement..

So that customer will still be up Q-over-Q, right?.

Yes..

Strong business..

Okay. I will cede the floor. Thank you..

Thank you..

We'll take our next question from Craig Hettenbach with Morgan Stanley. Please go ahead..

Hi, thanks for taking my question. This is Vinay calling in for Craig. I wanted to go back on gross margins, right. You're calling for 150 bps of sequential improvement and continued improvement going forward, right.

Like, just want to figure out what line of visibility do you have there, and in terms of the various actions you will take because I understand the mix perspective, but what confidence do you have that the yield issue that you faced last quarter will be behind you as we go forward?.

This is Mark again..

Sure..

So we have very good visibility. So the walk I did initially walks to 200 basis points sequential improvement, combination of a better yield in the third quarter, fewer associated inventory write-offs, and then we lose some ground related to the higher volume associated with the lower margin part, so just a mix issue.

So that's a 200 basis point sequential improvement. We gave a range of 100 basis points to 200 basis points to deal with the fact that, listen, we're doing record volumes and we want to make sure that we meet our commitments and we have good line of sight to what the midpoint would be, 150 basis points.

As far as the longer term view, we've done a great deal of work to walk back up to margins that we used to be and how are we going to get there? And as we've pointed out in several calls including today, we have a large number of initiatives under way which begin to bear fruit – well, they've benefited us recently, but they continue to bear fruit through 2018 as our facilities are more mature, as they're fully loaded and our product mix turns over to higher value parts.

So we feel confident in the business model and our gross margin objective in the fourth quarter of 2018..

Got it. That's helpful. For a follow-up, wanted to talk about China smartphones as a group, right. Like you talked about the long-term confidence in that region with more phones being full mode, that's helping you guys with the long term.

But can you just talk about some of the trends that you saw in September? Did that group grow in September, and what are your expectations for China smartphones in December?.

This is Eric. I'll take that..

Sure..

We did have yet another fantastic quarter of growth with our China-based customer set. Of course Huawei was a 10% customer for the company, but beyond Huawei, as well with Oppo and Vivo and many others in China, we did benefit from the trend of higher dollar content in the RF.

We are expecting exiting the year that over half the phones consumed in China will now be full mode phones. We're also seeing many of our customers looking to export and reducing their SKU count, which of course those two things together drive up our content further as we look into next year.

So for the December quarter, specifically to your question, we're remaining cautious on China and being careful for any inventory pockets that might be out there. We see some customer-specific issues, but our products are used across all of our sets. So we expect to work through that in December and then back to growth next year..

Got it, very helpful..

We'll take our next question from Ed Snyder with Charter Equity. Please go ahead..

Thanks a lot. A couple of questions here. Eric, have you identified the problem with the TC-SAW filter and has it been corrected? I understand you can't correct it real-time because you're in production with your largest customer.

But if they were to say to you, hey, we'll take a break, we can recall this part, would your yields on that part snap back to more traditional levels? And then maybe, if you could walk us through the bigger picture, Bob.

You guys were at over 50% gross margins a couple times in the last 18 months or so, and it seems have lost the recipe, besides the TC-SAW part and low-band PAD and all that, I mean it was coming on, lowering – it was dropping before then.

What are the problems that you face since that time that are causing you such angst in the margin profile outside of the yield issues, and what is it going to take to get back on track? Thanks..

Okay, Ed. I'll start with the issues. So we did identify the fact that our yield was lower than expected. To go a little deeper than that, it's specific to the die-level yield within the SAW and TC-SAW manufacturing process. I should be clear it's not related to a design issue. In fact it's not even related to the filter resonators themselves.

It's really contained within the die singulation process and wafer level packaging. The fact is we had a very steep ramp, the volume was heavily loaded towards the back of the quarter.

Our die-level screens that we have in place in the factory did not catch the issue and so we found it once we had assembled the modules completely and were well into production. Our top priority of course was protecting our customers' lines.

We made sure that they had good material; it resulted in a great many modules that needed to be scrapped at the finished good level. However, by now we have produced, as you can imagine, tens of millions of the part. We understand the problem very well. We now have new die-level screens which are targeting the issue and working effectively.

So, I think it's behind us. To your point, we can't make changes in the actual manufacturing process now that we're in production, we do have some ability to make incremental improvements from here which we're going to do.

But products that we release from this point forward will have improved manufacturing process and not be subject to this yield at all..

And Ed to your second question, getting back to the 50% gross margin, longer-term, Mark clearly walked you through all that. But if you kind of look at what's been going on in our factories, we have our BAW factory full and then we have our SAW factory full, and then we have our BAW factory full, and then we have our SAW factory full.

So, we talked last quarter about our BAW factory was way under-loaded from optimum and that is – a large part as you know, Ed, it's a very good margin product family and quite honestly we missed that.

And we also talked last quarter that some of our initial multiplexers weren't yielding real well and that's still in that mix but we're committed to get back to the 50-plus percent. IDP continues to do extremely well.

The balance of the Mobile portfolio outside of this one product family does extremely well and we've got one area we got to go to work on..

So, I mean, it looks like the revenue profile from all of our checks and what you said and everybody else says looks excellent for all the RF semi companies in terms of the business that you're chasing now. I know you guys are busy to get out to Skyworks, so is Avago. But I guess the big question, Bob, is the loading on the BAW factory dropped.

You have been expanding it even recently in anticipation of better utilization and content wins next year.

How can you be sure that you aren't making the same mistake this time that was made when you expanded capacity and didn't get the business last time?.

But, well, clearly, Ian, we've got a lot more learning as the companies come together and I think if you look at our top line and what we've done already, just the second half, in driving the growth, our product execution has significantly improved. We're making great progress.

I think also you're starting to see the market for BAW based products to expand much greater than just one customer so the risk that we look at whenever we make this investment is actually going down over time because we have a larger customer base to sell BAW based products..

We'll take our next question from Toshiya Hari with Goldman Sachs. Please go ahead..

Great. Thanks. Thanks so much for taking my question.

First, can you maybe share with us your preliminary expectations for content growth going into 2017 at your U.S., Korean and Chinese customers? Should we take history as a guide for next year and assume content growth in the teens or are there inflections you need to 2017 that could lead to a potential acceleration?.

So for the Mobile side, I'll say that we see a continuation really on a relatively consistent slope if you will, more in the 10% to15% range in terms of just the overall TAM growth and that is completely driven by content growth. We are not counting on unit growth at all.

And so it's a continuation of the thing that we've been seeing this year, no real discontinuities..

Let me talk – I'm going to jump in and talk a little bit about IDP growth. There's exciting things really going on in several of our key markets over the past year or so. We've positioned the business to take care of some of those trends.

Trends like connected car, connected home, the proliferation of phased arrays or Massive MIMO, and the development of 5G. So as an example GaN has been a great growth story for us. Our capabilities have allowed us to capture key markets.

Things like DOCSIS 3.1 for cable TV and base stations where they're moving the broader bandwidths and higher frequencies. Also, another area for us is IoT, particularly the connected home. Our system-on-a-chip capability brings some real advantages to our customers.

We offer benefits in multi-protocol, power consumption and range and in the next few years this will be a $1.5 billion market for us..

Great. And then as my follow-up, I had a question on M&A. You've talked about M&A in the past and specifically your focus on the IDP side of the business.

Just wanted to confirm if M&A is still a focus for you guys, and if you can remind us what conditions you would look for in an asset or a business as you filter through potential deals, that would be helpful. Thank you..

number one, high growth; number two, good margin profile; number three, a nice market to help diversify our business in the fast-growing market of the IoT. So we are willing to have M&A activities on smaller companies that are tuck-ins that we believe we can grow and scale given our own ability to grow and scale.

Obviously, another area that we look at are technologies that we might want to tuck-in in either the Mobile business or IDP that we can then leverage. So, but getting far abreast of the RF field currently is not in our interest.

We think we're in great markets that are growing, the semiconductor industry in general was slowing for as far as we can see three to five years out, this will be one of the fastest if not the fastest segments of growth for the semiconductor industry.

We have to continue to improve our execution and our productivity as Mark pointed out, but we think we're in a great place..

And we'll take our next question from Harsh Kumar with Stephens. Please go ahead..

Hey, guys. I just want to clarify something you said earlier.

Your largest customer will be up in December, and if that's the case I'm just curious if you could provide us some color on what is affecting the December guidance that we just had slightly $40-something million down, curious, any color on that?.

Harsh, last quarter we explained to the group that we were – I know some were surprised at our guidance and we said we were still taking a conservative stance in particular on China, and we saw tremendous upside from China during the quarter, which is why we exceeded our revenue guidance, so we're taking in general for our Asia customers a conservative view and we're expecting them to be down significantly quarter-over-quarter.

We are expecting IDP to be flat to up slightly but the majority of that drop is with our Asian customers..

Have you seen that in the orders or is that just your conservative viewpoint? And then as my follow-up, I think your CFO gave the peak of the yield issue as I think the December quarter from what I understand. Now I know your largest customer revenues will come down in March seasonally.

How should we think of that interplay between margins and revenues falling off as we go forward from December quarter?.

Thanks Harsh. Mark will take the gross margin. As far as your question on orders, typically in Asia, we see strength in the beginning of the quarter and then it drops off as we head towards Chinese New Year. So we're taking conservative view. We'll see. These customers are not very good at giving great forecasts and usually within lead time.

So we're not "fully booked" for the quarter, but I think we did the right thing in assuming that business was going to be down..

That's fair..

Yeah, and Harsh, it's Mark. So you'll see the reverse of the effect on the mix that you see in the third quarter.

You'll see the reverse of that in the fourth quarter, so again, the improved yields that we see in the third quarter are partially offset by this mix drag on the higher volume of that low-band PAD, as that low-band PAD decreases in the fourth quarter, we'll see 100 basis point to 200 basis point margin lift from that..

We'll take our next question from Mike Burton with Brean Capital. Please go ahead..

This is Eric. I'll take that, Mike. So, yeah, multiplexer yields are back up where they should be. Margins on that product are roughly at our average right now. We've got newer products coming out up for new multiplexers early next year on our new BAW process with significantly better performance.

We would expect those to be accretive to our standard margin..

Okay, great. And then definitely early here, but as we look forward to the March quarter, can you remind us just kind of some of the seasonality for Qorvo now, I mean especially after, with GreenPeak and some of the changes in the model.

How should we be thinking about on initial basis seasonality for Qorvo, and any color that you might want to add to that, Bob? Thanks.

Thank you. From an IDP perspective typically, roughly flattish going into that March quarter, a little too soon for us to call, but usually it's typically around flat.

But as you notice when you look at what's transpired over the last few years, Q1 for the Mobile business is usually down pretty significantly and it's been trending much closer to 15% primarily as our largest customer ramps down significantly and it all depends on the timing of one of our other Asian customer's ramps, but I think it could be 15% in Mobile definitely..

Great. Thanks, guys..

Thank you..

And we'll take our next question from Bill Peterson with JPMorgan. Please go ahead..

Yeah, and thanks for taking the questions and thanks for providing the gross margin walk. Actually, first one for James.

Can you level, set us on the size of the GaN business now in terms of let's say an annual run rate, I mean where this could go in let's say the balance of the year, in fiscal 2018?.

Yeah. Let me give you a couple of data points, let's first talk about base station. We see in the next three or four years probably 50% of the slots being GaN based so you guys can and look at what that market size is but that's a very large opportunity for us.

We continue to put investment dollars in there, focus for us is really performance and trying to drive cost out. As you know, we're on GaN on silicon carbide and we believe that's the performance play that will win the slots there and then our focus now has really been on driving cost out.

We're first in the industry to get to six inch and we're also doing a tremendous amount of work on very low cost packaging for that marketplace, so about 50% in base station. And then on the Defense side we see that market somewhere being around $350 million or so in the next few years as well.

We're very well positioned on Defense side, number one in the market. Both of those segments are growing above right around 25%. Defense is perhaps a bit faster but both very, very healthy.

Now on top of that also is our cable business, maybe not the most rapidly growing but we have great market share and GaN really is the semiconductor of choice especially for these DOCSIS 3.1 products that we've got out on the market now..

Okay, thanks for the color and then switching back to Mobile. I guess, now that the new flagship's out from your largest customer, obviously the tear downs are just indicating larger content in maybe one model type and then effectively not in the other.

Can you just remind us what your sort of blended RF content is, this generation compared to say last year's generation?.

I'm not sure we're going to be able to give that to you right now. I apologize for that. What we can say is – we continue to grow there, continue to grow revenue dollars per handset each year, so we're in pretty good shape from that perspective..

We'll take our next question from Timothy Arcuri with Cowen & Co. Please go ahead..

Thank you very much. I had two. First of all you're talking about a 50% margin target longer term. I think I was looking back at my notes, so I think we used to talk about margins possibly pushing 55%.

So I guess the first question is sort of what happened to that 500 basis points? Was there some permanent loss from these issues you've been having?.

Yeah. As far as the gross margin targets, when we presented one time back November a year ago we talked about driving our margins between 50% and 55%. I think what Mark and I have both said today is we're still comfortable with getting better than 50% gross margin, so that's still in the realm of possibilities..

Okay. Thanks. And then I guess I wanted to ask on the trajectory to get back there.

You had talked about it taking like six quarters, but is it really – is it a SKU-based issue so that when you move this low-band PAD SKU off, when you cycle that through, that's when the margins are going to really come back, so it's probably a bit more back-end loaded as you kind of look out the next six quarters?.

Okay. First, I want to make sure we understand, we talked a little bit about this I think last quarter when we talked about that program. Our expectations are it's a multi-year program so it does continue to live on, as you will, greater than 12 months.

Many of the things that Mark talked about are, if you will, also a little bit out in time so when you couple those two things, yeah, it starts to really pick up on the out quarters.

Plus, as we also talked about loading of our factories, next year is when we expect that we're going to be very well loaded in our SAW facilities along with our BAW facilities and we actually haven't enjoyed that..

Yeah. Tim, I think it's important to note that the path to 50%-plus does require that we have more BAW-based content. It's better. It's higher-value business, we're solving more difficult problems so the price point's better, and again, our lowest utilized fab at the moment is our BAW fab in Texas.

So once we load that we're going to get tremendous benefits on the absorption and then we also get the benefits on mix..

Thank you, Mark. Appreciate it..

We'll take our next question from Quinn Bolton with Needham & Co. Please go ahead..

Hi Bob. Hi, Mark. Wanted to follow-up on the gross margin; if I could go back to last quarter you guys sort of guided down gross margin I thought mostly because you had to use outsourced SAW filters and some of the high volume runners. This quarter you're talking about having some yield issues on the SAW process that you've talked about.

So, I'm just trying to get a sense, are you still buying a lot of SAW filters externally and just not getting good margin on the pass-through, or have you been able to in-source that production and as you tried to ramp the in-sourced production you ran into this yield issue? And so we've had sort of a changing impact on that gross margin?.

Quinn, we are still buying a tremendous amount of filters. Last quarter we talked an awful lot about filter independence, and as far as – we're still continuing to add to our design resources. Mark talked a little bit about the OpEx increase. We're adding designers and continue – because we see a lot of opportunities to reduce our costs through that.

The part that we're talking about, yes, it does use outsourced filters, but it also had some of our internal filters in there, and that's the yield issue that Eric talked through. And I think we commented last call, but I'll make it clear again.

This is a product that we're not able to change the process, nor the product design for its multi-year life. So we're going to have this for a while. What we do believe is that the low-band PAD market is a good market for us. We will have the right cost structure, and we'll remain competitive..

Just a follow-up on that, Bob. Obviously, you've got a near-term yield issue that you've identified and you fixed.

When you fix that yield issue, does that go away and the overhang really is just the fact that you still use a fair amount of outsourced SAW filters, or can you not improve the yields in that particular PAD for the life of that product?.

So, Quinn, this is Eric. I guess the detail on that is, we have certainly addressed the issue at the module yield level which is the big dollars, of course, of fallout. We're going to continue to run this product for its lifetime with sub-par line yields in the factory, if you will.

Now, of course, the volumes will tail much lower next year and so forth as the new handset ramps to replace the current one, as we have new products that are brought up, they expect to – we expect those to yield as they should. So, yield highly and improve the margin going forward..

Got it. Great.

And then, just a quick one, in the past quarters you've given us a percent of revs from your largest customer, just wondering if you can provide that again this quarter?.

I'm sorry, Quinn. Could you repeat it? It was a little bit garbled.

I thought it was something about our largest customer?.

In past quarters you've given us the percent of revenue from that largest customer and I don't think I caught it. I apologize if I missed, but I don't think you gave that percent of revenue from your largest customer this quarter..

All right. We'll give you that in just a second..

So, it's roughly 40% of Mobile..

So, it's a little over 30% for the company then..

Got it. Thank you..

We'll take our next question from Steve Smigie with Raymond James. Please go ahead..

Great. Thanks a lot guys. I was just curious, and I believe you guys commented that you would expect to see double-digit revenue growth going forward and I just wanted to make sure I heard that right.

And would that be sort of each quarter or on an average over some period of time you get double-digit revenue growth?.

I guess, we didn't really break it out. I think what we're very comfortable in is we can grow the business next fiscal year double-digits..

Okay. And then sort of following up on a previous question, not necessarily for a particular customer but overall it seemed like you'd been getting roughly 20% dollar content increase from one generation of phone to the next.

So sort of generically speaking across the platforms you're winning, does it seem reasonable as we look forward in the coming year, that you'd expect to see sort of that 20% or a little better, or a little worse? Any thoughts on that?.

Yeah. For the Mobile side, I think that is a possibility. We're seeing a trend towards full solutions and really this is across all tiers, both in our RF Flex portfolio as well as RF Fusion.

We have customers now asking us to do a complete reference design, everything from the transceiver to the antenna essentially and of course Qorvo is unique in having that capability of having all those products and the system architecture and even power management in-house.

So we do see great opportunities to actually see some phenomenal content growth across especially if you look at our kind of Asia customer base the Tier 2 customers in Asia which are driving now a great deal of the units in the industry. So I think as you average that out we can continue to see those kind of content increases..

And this is James. That content story really holds for multiple markets. I mean, things, if you look in the Wi-Fi spaces we move to 8x8 MIMO, we see big content growth in the base station market as Massive MIMO comes along. That's also a significant driver for us in content. So that is really holding true for us in several of the markets that we serve.

Auto is another example. We're moving from traditional SDARs to now content with LTE and even more in the future. We expect probably 350 million connected cars in the next few years..

Yeah. Just to follow-up on the – Quinn, the question you asked. So, top customer 35% of total Qorvo revenues. Two customers that are over 10% share – or 10% of our mix, the total there is 46%, the combined top two and then the top 10 customers are 63%..

Thanks..

And we'll take our final question from Curtis – or I'm sorry, Blayne Curtis with Barclays. Please go ahead..

Hey, guys. Thanks for taking my question and sorry to go back on the margin – but just trying to understand what – last call you talked about all of these issues in terms of yield particularly on low-band PADs.

So I'm just trying to figure out, I mean, I'm assuming you knew that ramp was coming so I guess what went against you, were the yield issues greater than you expected and just trying to understand the timeline there..

Yeah. Blayne, this is Eric. Yeah. The yield issue that we're reporting and talking about today is actually entirely different than what we were talking about on the last call.

The last call we were ramping just beginning volume and seeing sort of garden variety normal ramp issues working on – kind of tuning out of the filters themselves and getting them in spec and so forth.

And then as we said late in the quarter once we got into volume we began to find parts that were out of spec essentially that were not caught in the die-level screens..

I got you.

And then I'm just curious as you said that you had picked your quadplexer yields and I'm just kind of curious as you look forward to hexaplexers and closing the gap in terms of the lead there, when do you expect to have those shipping in volume next year?.

So, the question is when do we expect to be shipping hexaplexers in volume?.

Yes..

Yeah, so the first part of your question on the quadplexer yields, just confirming again that we have got those straightened out, that's shipping on our baseline process.

The new advanced BAW process which we just released will have the quadplexers shipping first half of next year and currently expect hexaplexers to ship second half of next year also on that advanced BAW process..

And I just want to ask you one follow-up question on – one of your Japanese competitors has been talking about improved SAW. Just kind of curious, your perspective BAW versus improving TC-SAW.

Do you think, particularly as you move to these carrier aggregation combinations, do you see any combination where a TC could insert itself?.

I think we see a lot of opportunity for modules that have both technologies in them and of course we're agnostic pretty much to which one wins, but there are some conditions in which some bands are getting tougher that were traditionally SAW or TC-SAW that we see BAW moving into, but I think the opportunity of putting both technologies into a module is unique for us and that will help address some parts of the market..

And we do have time for a final question from Ian Ing with MKM Partners..

Yes, thanks for fitting me in.

You got a lot of questions on execution, but my question is, as you work with your top customer, how do you think they feel about the Qorvo supplier engagement? Do you think they're getting fulfilled properly as they ramp their flagship, what are your thoughts on the future opportunities, they talked about shortages? Thanks..

Yeah, thanks, great question. And I think the relationship is very much intact.

We worked very closely together as you can imagine and the Qorvo team obviously we never liked to have these sorts of issues, but I'd tell you the entire manufacturing team really buckled down and focused and did some incredible work to make sure we're able to recover from the material that was taken out of the line and still keep up with demand.

So I think overall again, it's not the situation you want to have, but you can really learn a lot about each other and actually gain some trust through these sorts of situations..

Okay. Thanks. That's all I had..

Thank you, Ian..

And I'll now turn the program back over to our presenters for any additional or closing remarks..

Thank you for joining us today. Qorvo is at the center of a growing global framework interconnecting people, places and things, and we are uniquely positioned as complexity drives higher levels of integration, narrowing the playing field, and supporting superior financial results in the future. Thanks again and have a good night..

And this does conclude today's program. Thank you for your participation. You may now disconnect and have a great day..