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

Harsh V. Kumar - Piper Jaffray & Co. Cody Acree - Loop Capital Markets LLC Ambrish Srivastava - BMO Capital Markets (United States) Srini Pajjuri - Macquarie Capital (USA), Inc. Mike Burton - The Benchmark Company, LLC Ruben Roy - MKM Partners LLC Chris Caso - Raymond James & Associates, Inc. Toshiya Hari - Goldman Sachs & Co.

LLC Edward Snyder - Charter Equity Research, Inc. Bill Peterson - JPMorgan Securities LLC Vivek Arya - Bank of America Merrill Lynch Craig M. Hettenbach - Morgan Stanley & Co. LLC Timothy Arcuri - UBS Securities LLC.

Good day, and welcome to the Qorvo, Incorporated First Quarter 2019 Conference Call. Today's conference is being recorded. At this time, it is my pleasure to turn the conference over to Mr. Doug DeLieto, Vice President of Investor Relations. Sir, please go ahead..

Thanks very much, Chelsea. Hello, everybody, and welcome to Qorvo's first quarter fiscal 2019 earnings conference call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statement contained in the earnings release published today, as well as the risk factors associated with our business in our Annual Report on Form 10-K filed with the SEC, because these risk factors may affect our operations and financial results.

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

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

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

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; as well as other members of Qorvo's management team. And with that, I'll hand the call over to Bob..

Thanks, Doug, and welcome, everyone. Qorvo's solid June quarterly performance was highlighted by broad-based strength across our markets, customers and products. We enjoyed strong demand during the quarter in both Mobile and IDP, and the team did an outstanding job supporting large customer ramps, while securing new opportunities for growth.

By business, IDP quarterly revenue grew 13% year-over-year to $207 million, while Mobile revenue for the quarter grew 7% year-over-year to $486 million. The June quarter represented an excellent start to fiscal 2019 highlighted by strong smartphone unit volumes in China, design win activity and operating discipline.

Qorvo is laser focused on portfolio management in markets that value our capabilities and offer exceptional opportunities for growth. Within these markets, we bring key enabling technologies like BAW, SOI and GaN, a robust product development engine, manufacturing scale, and decades of industry know-how.

Turning to IDP, quarterly performance was driven by record revenue in wireless connectivity and growth in base station solutions. IDP is reaping the rewards of portfolio management in diversified markets including the connected home, the connected car, Wi-Fi, base stations and defense.

These are expanding markets underpinned by positive secular trends like the deployment of LTE Advanced Pro and 5G, the proliferation of gallium nitride, and the Internet of Things. IDP partners with industry leaders and wins with differentiated products and technologies. Revenue for IDP's IoT applications increased over 30% year-over-year.

In Wi-Fi, we are a leading supplier of front-end modules for tri-band distributed Wi-Fi systems. In these systems, our BAW filters maximize spectral efficiency and our PAs increase power-added efficiency.

As the IEEE governing body and the Wi-Fi Alliance work to extend spectrum for 802.11ax, our Wi-Fi portfolio is expanding to include solutions in the 5.9 to 7.1 gigahertz range for products ramping in the second half of 2019.

In the connected home, we're very pleased to support the next-generation SONOS Beam soundbar with our iFEM, integrating a BAW filter for interference-free streaming. In the connected car, we are engaged with multiple OEMs and Tier-1 suppliers in joint development activities for next-generation automotive connectivity.

Beyond the connected home and the connected car, our IoT opportunities are expanding to include a diverse set of emerging applications like electronic shelf labeling and commercial and retail lighting. In infrastructure, it's clear the demand for data is driving up carrier base station investments globally.

They are deploying LTE Advanced Pro, networks to enable narrowband IoT and to build the foundation for upcoming 5G rollouts. We continue to see growth in small cells and massive MIMO and expect our business to expand as these markets develop.

During the quarter, we extended our 5G leadership by introducing several new products for massive MIMO and 5G macro base stations. Our expanding 5G portfolio supports all anticipated frequency bands for 5G architectures up to 39 gigahertz.

Given the superior performance characteristics of gallium nitride versus legacy silicon technologies, we see GaN proliferating in multiple markets including base stations. Our GaN solutions support massive MIMO deployments below 6 gigahertz.

In China, demand is increasing for Qorvo solutions for the 3.5 and 4.8 gigahertz deployments anticipated in 2019.

In millimeter wave, Qorvo's 39 gigahertz GaN front-end modules are powering the first commercially available millimeter wave fixed wireless access service which was recently deployed in Boston, L.A., Washington and additional cities to be added later this year.

In defense, the demand environment continues to be driven by greater performance, increased efficiency and more highly integrated system solutions. Qorvo is the recognized leader in GaN for defense applications and a trusted foundry for the U.S. Department of Defense.

Our GaN solutions deliver distinct customer advantages including higher power density, smaller arrays, lower power consumption and several orders of magnitude improvement in reliability from its current technologies.

We recently introduced two highly integrated X-band front-end modules optimized for next-generation active electronically scanned array radars.

Our newest GaN modules leverage Qorvo's scale and integration capabilities to combine four parts into one providing the smallest and highest performance FEMs for mission critical radar systems for customers around the world.

Turning to Mobile Products, as we laid out at our Investor Day, Qorvo is repositioning our portfolio to target and win the highest growth, most complex opportunities. We're leveraging core enabling technologies like BAW and SOI to transform our business with a focus on our differentiated solutions.

Today, we're investing to win in mid and high-band PADs, diversity receive modules, antennaplexers and RF Fusion variants for our low-band PAD. As architectures evolve, many of these products including antennaplexers and diversity receive modules offers opportunities to grow our BAW-based revenue.

Qorvo also enjoys broad-based growth opportunities in antenna tuning and envelope tracking. We're developing our fourth generation ET technology and we see a long runway ahead, given the performance requirements of 5G and the challenges of its higher bandwidth and peak-to-average power ratio.

In antenna tuning, demand for Qorvo's industry-leading solution is growing with the advent of LTE Advanced Pro, MIMO and 5G, very simply. New functionality is requiring that the antenna count go up, while the board space available for these antennas continues to be reduced due to industrial design factors.

That requires antennas to be miniaturized which weakens their bandwidth capabilities and adversely affects antenna performance. Qorvo is the leader in antenna management and our antenna control solutions address these challenges to vastly improve the user experience. It's worth noting that this dynamic is no longer limited to premium-tier devices.

Customers in China are adopting Qorvo's multiplexing and antenna tuning solutions, as well as our RF Fusion Phase 6 for their increasingly sophisticated flagship smartphones.

We posted record revenue for our BAW-based quadplexers in China during the June quarter and we're very well positioned as the performance-tier smartphones increase in functionality and adopt more highly integrated Phase 6 architectures.

Qorvo's RF Fusion for Phase 6 features our BAW and SAW filter technologies to deliver complete front-end coverage in two highly integrated placements. Just as we outlined at our Analyst Day, we see multiple avenues for growth in Mobile as global demand for data continues to acquire more and better RF.

Before handing the call off to Mark, I want to say a few things about our recently announced changes to the operations team including the addition of Paul Fego. First, I'd like to thank Steve Grant and Jim Stilson for getting us to where we are today. Steve and Jim have been instrumental in creating our world-class manufacturing platform.

Since we started Qorvo in 2015, Jim and Steve have led the charge to implement our global operations strategy, and together they've helped position us for the growth and opportunities that we see today. We appreciate their continuing contributions as Paul gets up to speed.

Paul joined our team earlier this week bringing 35 years of global large-scale semiconductor manufacturing experience with well known and respected semiconductor companies. Paul's deep experience in front-end and back-end manufacturing with both high-volume and high-mix operations aligns perfectly with Qorvo's operational and business needs.

He will lead the further consolidation of our global operations from wafer fabrication through assembly and test and we look forward to his many contributions as we continue on our lean journey.

Looking across our entire organization, we believe we have the right people, products and technologies to capture an expanding set of long-term growth opportunities. We are positioned to be a primary beneficiary of global macro trends in LTE Advanced Pro, 5G, IoT and GaN.

We're investing in the highest growth segments in the markets we know best and we're differentiating with technology to win across markets, customers and products. And with that, I hand the call over to Mark..

Thanks, Bob and good afternoon, everyone. Qorvo's revenue for the first quarter was $693 million, significantly above the high end of our guidance range. Mobile revenue of $486 million was higher than expected across multiple customers and particularly strong in China.

Mobile returned to year-over-year growth in the quarter which we expect to sustain through the rest of the fiscal year. IDP revenue was $207 million, the ninth consecutive quarter of double-digit year-over-year growth. Non-GAAP gross margin in the June quarter was 44%, in line with our guidance.

Our margin outlook for fiscal year 2019 remains positive and unchanged from previous guidance, as we grow our top line, optimize our product portfolio, improve factory utilization and drive productivity. Operating expenses were $160 million, up less than expected due primarily to timing of program development expenses.

Non-GAAP net income in the June quarter was $124 million and non-GAAP diluted earnings per share was $0.96 or $0.21 above the midpoint of our guidance. June quarter cash flow from operations was $75 million, reflecting inventory builds to support Mobile Product ramps.

CapEx of $44 million was primarily related to BAW and GaN capacity additions in Richardson. We repurchased $100 million of stock in the quarter. Cash at quarter end was $334 million, down from year-end cash of $926 million due to the repurchase of the remaining $429 million of our 2023 notes and from increased share repurchases.

Following quarter end, we completed a partial tender for $300 million of our 2025 notes and a $500 million eight-year unsecured notes issue at a coupon of 5.5%. With these actions, we've lowered our interest costs and extended our average debt maturity to 2026.

We remain well below our net leverage target and retain significant financial flexibility to grow the business and return capital to the shareholders.

Turning to our outlook, in the second quarter of fiscal year 2019, we expect non-GAAP revenue between $850 million and $860 million, gross margin to increase sequentially to approximately 47.5% consistent with previous comments, and diluted EPS of $1.62 at the midpoint of our guidance.

On revenue, we expect IDP to post a stronger September quarter helped in part by the recent lifting of the U.S. Department of Commerce's ban on ZTE. For Mobile, we see sequential revenue up over 30% on seasonal ramps.

On gross margin, our September quarter guide reflects expected progress on mix improvements and productivity gains partially offset by under-loaded SAW capacity. We expect gross margins in the back half of the year to average 50% or more.

Operating expenses are forecasted to increase in the September quarter to approximately $170 million, principally driven by increased design activity. We expect OpEx to trend down in the second half, totaling less than 20% of sales for the full year. We're lowering our second quarter and full year non-GAAP tax rate forecast to approximately 8%.

We expect operating cash flow to strengthen in the second half of the fiscal year on higher revenue, stronger margins and lower working capital. CapEx is expected to increase in the second quarter primarily due to BAW and GaN investments in Richardson, expansion of BAW capacity in Farmers Branch, and the purchase of a leased facility.

Our CapEx for the rest of the year remains tied to design opportunities, tool conversions, new tool lead times and other factors. Currently, these factors point to moderately higher CapEx this fiscal year primarily driven by acceleration of our build-out of Farmers Branch as we gain confidence in our BAW-based revenue outlook.

We believe this increase is for the right reasons, value-creating investments supporting our high-growth and high-margin businesses where we hold differentiated positions. As a result, our free cash flow forecast for the year is now expected to be closer to $700 million. So, in summary, we posted a first quarter well above our guidance.

Looking ahead, we expect full year revenue growth around 10%, gross margin increasing to 50% or more for the second half, and full year OpEx below 20% of sales. With that, I'll turn the call back over to the operator for questions.

Operator?.

Yes, sir. And our first question will come from Harsh Kumar with Piper Jaffray..

Bob, congratulations, a lot of good things happening in the quarter. Mark, I wanted to ask a question about your 10% full year growth forecast. You've obviously given us all the way through September.

Can you provide us maybe some color on how we should think about December? Is that expected to be up? And then, any more color you can give us low/mid-single-digits whatever? And then, how should we think about March? And then I've got a follow-up after that..

Sure, Harsh. And we're not going to give specific guidance on revenue in the back half, but what we can say is based on what we see now, we do see a sequential increase second quarter to third quarter, so our September quarter to December quarter. As you would expect, we would see seasonality with a decrease into the March quarter.

Normally, that seasonality has been sort of 10% to 15%. And if we were to right now call are we going to have on the high end of that or the low end of that, we would say that we'd probably have on the low end of that..

This is very helpful, Mark. And then for my follow-up, historically, Qorvo has been sort of the third content guy at the large customer. But I believe this year, you are benefiting from a strong ramp in content.

Would you be able to give us some idea, maybe some color on what kind of content you're looking at in terms of uptick? And also, does this mean that you're now quite possibly the number two supplier content-wise to the large guy?.

Harsh, this is Bob. And first of all, thanks for your opening comments. We're not going to be able to answer any future comments about any of our customers for that matter. What I can tell you, Harsh, is what I am very proud of the organization and what we've done as far as developing the technologies and products that our industry needs.

I think with the way we're positioning the portfolio today, we believe we can grow as fast as the industry or slightly faster than the industry, and I think I'll just leave it at that for this time..

Thank you. Our next question will come from Cody Acree with Loop Capital..

Hey, guys. Thanks for taking my questions and let me echo my congratulations.

Maybe to that last question a bit differently, just the strength that you've seen in your mid and high-band PAD and you alluded to this in your prepared remarks, can you just talk about any other successes that you had and when you might expect those ramps – not just PAD, other mid type (21:23) and designs?.

Yeah, this is Eric. I'll be happy to take that.

We see backed by the general trends that we covered I think pretty thoroughly on our Investor Day of our customers looking to add a lot of band coverage and in particular, mid and high-frequency bands extending up to ultra-high band now looking at additional carrier aggregation requirements and multiple bands at once being covered there, and those are generally in the mid and high-frequency ranges because of antenna sizes and so forth, all of that really is driving a need for more BAW filtering and in more and more cases, we see those being integrated into higher level products, whether it's in Phase 6 which is our primary workhorse of the future for our China-based customers for the most part, all the way up to the highest tiers of the flagship phones, and it is also across multiple product categories.

It applies to the main path obviously and also receive diversity path. For the same reasons, we think BAW has key advantages. And as we looked at sharing fewer and fewer antennas with more and more radios, antennaplexing as well is going to be of more importance. And there, again, that's really almost entirely BAW-based products..

And Eric, thank you for that.

Can you just delineate a bit of the health in China you're seeing in unit demand, and just any comments you have on some of the second/third tier OEMs and any pricing sensitivity that you're starting to see in that second/third tier market?.

Right. So, overall, we – obviously, from our results last quarter, we had another pretty strong quarter with March. We're real proud of the team what we've created both in terms of product portfolio as well as applications and customer support throughout China.

We're, if not the largest, we're very close, but in most cases, we're the largest supplier to all the leading handset suppliers throughout the region. And we've seen both I think a refilling of the channel in some cases, which is kind of in the lower and mid-tiers, but also a lot of our customers have brought out some fantastic new flagship products.

And these are really compelling products. Industrial design is very, very good. The feature set is good and competitive and they're having a lot of success so far. So, still a little bit early.

We need to see those handsets continue to sell on through, but at least in the June quarter, we saw pretty healthy uptick across a wide range of our customers and our product portfolio..

Thank you. Our next question will come from Ambrish with BMO..

Hi. Thank you. I just wanted to go back to the reported quarter and you had a very big upside on the top line, but I was wondering why there was no fall through on the gross margin side? And then, I have a quick follow-up, please..

Yeah. Ambrish, so you're right that in the quarter with a higher revenue, the SAW utilization drag which we anticipated had less of an effect principally driven by that higher revenue. But we did have, as you can see, a higher mix on Mobile which goes against us. Within Mobile, we had a higher mix in China.

And then, I would say also in IDP, and James can talk about this perhaps later, a bit weaker mix in IDP. So, the positives of the higher revenue and the lesser effect of SAW was offset by these mix effects both across the segments and within the segments.

I would just note, Ambrish, we're in line with the guide and the September guide is in line with my previous comments..

Yeah, clearly, you are guiding for what you've said before.

And then, just a real quick one on ZTE, when do you expect it to get back to the annual run rate that you had given last quarter, I think it was $40 million?.

Yeah. Ambrish, this is Mark. I'll take that one as well. For ZTE, we already see them returning to historical levels and we've got that built into our second quarter forecast and we've got it reflected into the rest of the year at those levels.

Now, we've taken a bit more conservative view on parts of China just to make sure that our forecast remains intact there. But, the ZTE effects and the normal run rate of that business is back in and we're certainly pleased that they're a customer again..

I just want to add that was $40 million for the year, just to be clear..

$40 million for the year, so $10 million a quarter, Ambrish..

Thank you. Our next question comes from Srini with Macquarie Securities..

Thank you. Mark, just to follow up on the gross margin question. I guess, as we move to the second half of the fiscal year, your guidance implies I think low 50% gross margin.

I'm just wondering, is it pretty much a function of SAW utilization getting better and then BAW mix getting better? Are there any other puts and takes? If you can give us any color on that, that'll be helpful..

Yeah. The drivers for the margin expansion in the second half remain consistent with what I've talked about before. As the revenues grow, the impact of the SAW and the utilization becomes less impactful. Also, the costs related to that, we continue to work those down, so that helps us as well.

And then, it's fundamentally driven by a change in more favorable mix, BAW-related content and then just continued improvements in the overall fab utilization..

Great. And then to follow up I have a 5G question maybe for Bob. Bob, I think in the press release you mentioned you have a new design win at 3.5 gig. I'm just curious where we are in the 5G cycle.

Is that design win for 5G? And then, there's also a lot of talk about rolling out 5G in lower frequency band, for example in a 600 megahertz and also 2.5 gigahertz.

So, I'm curious, if 5G gets implemented in lower frequencies, around 600 megahertz to 2 gigahertz, is there any incremental content? Or is it going to be similar to what we saw with 3G and 4G in terms of the absolute content? Thank you..

Yeah. Thanks, Srini. I think what's great is both James and Eric can answer your question. So, I think we're going to take some time and make sure that there's good clarity between two businesses because I did talk a lot about 5G in both of the businesses.

So, if you don't mind, I think we ought to start with James and talk about 5G and some of those questions. Then, Eric, if you'll, pick that up after that..

Yeah. Let me start by IDP and really talk about where we see the infrastructure going. We have recent design wins and key product demonstrations really around the world and I think these reflect our leadership position in 5G.

There's pilot deployments going on in numerous cities and really across the broad spectrum of products, so all the way from very low frequencies that you mentioned earlier up to 39 gigahertz. The infrastructure rollouts appear to be on track for 2019, so that's probably a bit of an acceleration on what we've talked about in the past.

We also see 5G rollouts driving some nice underlying trends like the proliferation of GaN to be used in massive MIMO systems. So, we are now shipping in volume power amplifiers into massive MIMO deployments that are intended to support the early rollouts of 5G systems.

So, I would say in general, the infrastructure rollouts are somewhat ahead of what we've been discussing in the past..

And on the Mobile side, there's a tremendous amount of activity. Of course, we're generally working with customers looking out two to three years which is well into the deployment of 5G. The 3.5 gigahertz ultra-high band design win that we mentioned is not 5G yet.

It's notable though as we see that range which will become in 77 being one of the first bands to deploy 5G in commercial handsets from the road maps we see. And so, being an incumbent in that band we think is important at getting the content.

When you look at 600 megahertz and you asked whether there's additional content, for example, if you roll out 5G, I think that's a really important question. People tend to talk about 5G as a bolt-on to 4G, in the early rollouts. It's really anything but when it comes to the RF; you can't bolt on something in RF.

Anything you add impacts everything else that's there. So, if you take 600 megahertz to 5G, you're going to add more requirements on that band. It's going to have to be a higher performance band, but it's also going to affect isolation and so forth characteristics of other bands near that.

So, as soon as we see 5G coming into the handset in any band, it will affect the content throughout the handset..

Thank you. Our next question comes from Mike Burton with Benchmark..

Hey, guys. And thanks for taking my questions and congrats on the results. Just wanted to follow-up on China for Eric, I guess, first. You mentioned it was strong in the June quarter.

Can you help us size the Chinese OEM business for you? And what are your expectations for that business in both the September quarter, but also longer term if you could help us understand the content uptick with Phase 6?.

Yeah. So, in terms of sizing it, the China business excluding Huawei was over 30% of Mobile revs last quarter, so it's fairly substantial. And in terms of dollar uplift with the Phase 6, it varies from what the baseline is. For the most part with Phase 6, we're integrating the entire functionality into two placements.

So, in terms of dollar opportunity for us, it raises us from some percentage of the total to the entire total. So, we are able to take all the main path content at least with the Phase 6 solution. And in terms of dollar content in total add, it depends upon what the customer is starting with, so it's really hard to identify a number with that..

Okay. Fair enough. And then second one for James. A lot going on in your business for us.

When you look ahead, how would you rank order your growth opportunities for the businesses? Are you starting – I mean, is it really kind of 802.11ax or the initial 5G deployments now or something else? And how should we think about that in the biggest opportunities for both this fiscal year and for next?.

Yeah. I think you go back to those underlying trends that we talked about. We talked about the deployment of 5G which is driving significant content for us in our base station business. We're seeing that in this year as well.

And we're seeing that with massive MIMO and small cell deliveries continuing to increase and actually becoming material in our base station business as we go through the year. So, I would say 5G is going to drive growth.

On top of that, we'll also have significant growth in IoT and that will be both in the low-power side, our SoC portfolio that's going to support everywhere from connected home to retail commercial lighting to now this shelf tag opportunity we've talked about. And on the higher power side, it's going to support all of our Wi-Fi systems.

So, those are growth drivers. And then on top of that, defense remains very, very steady growth engine and that's really driven by that other underlying trend we talked about which is the proliferation of GaN. We do see GaN growing actually significantly faster than what we had talked about the market doing. And we are winning in defense.

We're winning in our broadband area. And as I stated earlier, we are now starting to win in the base station. So, first production deliveries are going out now for these massive MIMO GaN-based systems and that is becoming material revenue for us.

So, again, to recoup, it's across IoT, it's across 5G and it's across GaN that's really the big drivers of growth in the business..

Great. Thanks a lot..

Thank you. Our next question comes from Ruben Roy with MKM Partners..

Hey, guys. Thanks a lot for taking my questions. First question for Mark, I just wanted to run through the OpEx commentary quickly. You mentioned some design activity driving the Q2 outlook up a little bit.

Is that sort of broad-based design activity or sort of big customer related, if you can just kind of walk through that? And then, to get to the less than 20% for the year, that would imply some meaningful downticks in Q3 and Q4 and maybe you could just walk through what's driving those downticks in OpEx. Thank you..

Yeah. Ruben, we've been clear that OpEx for us – much like our business is seasonal, OpEx can be seasonal. And so, there are a number of programs across the business, many different customers and it will fluctuate based on design cycles and size of programs and the amount of prototyping and so forth.

So, some of that pushed out of the June quarter and we'll pick a little bit up of that in the September quarter, but it's just again more design activity that we foresee in the September quarter. And we just – and given our outlook on design activity, overall it continues to become harder and harder to make the decisions on what to spend money on.

So, we're certainly trying to keep OpEx in check, but it will wax and wane based on seasonality..

Okay. Thanks for that, Mark. And then, a question for Eric. Just on 5G, you guys talked a lot about that. But I'm just wondering, I've been hearing uptick in 5G commentary from a number of component companies.

Would you say that there's been any sort of – has some of the design activity been pulled in there would you say? Or is it kind of in line with what you guys were thinking when we talked about it at the Analyst Day? Thanks..

Yeah. We were the first to bring a 5G product to market. It's been well over a year now. So, in early 2017, we announced the first one. We've had dozens and dozens and dozens of engagements and we've been working on this quite a while. So, I guess, from our perspective and especially since Analyst Day, really, we don't see anything changing.

Everything seems to be on pretty much the same pace it has been from the beginning..

Thank you. Our next question comes from Chris Caso with Raymond James..

Yes. Thank you. Just a question with regard to the CapEx and if you could talk about what's given you the incremental confidence to make that CapEx investment.

Is that your overall weight of the business? Are there actual confirmed design wins that are supporting that CapEx? I mean, generally, if you could just help us to assess the risk that that CapEx will in fact be utilized as we go forward over the next year or so?.

Yeah. Chris, it's a good question and maybe it's easier to talk about in the general context of free cash. And we're there very thoughtful about CapEx, it's a very difficult decision for us and want to start with that, because we've been targeting $800 million of free cash, we gave a range of $700 million to $800 million.

We're feeling now that given the CapEx view, it's going to be down to around $700 million, could be less, could be more, difficult to call at this point.

And just for some color, the CapEx we thought we have this year was, on a dollar basis, about the same as last year which is $270 million and we thought this year would trend down as a percent of sales.

Now, given what we've seen on BAW requirements in fiscal year 2020 and beyond and the level of design activity, timing of tools, which you know at this point is tight and other factors, we just thought it was best to accelerate expansion of Farmers Branch and get out ahead of that.

This acceleration of Farmers Branch will require, we think, $50 million or more this fiscal year and so that we certainly didn't anticipate in the quarter.

Now, some things we didn't anticipate either, right, like taking out the lease and a couple of other investments here and there, but you can normally, you have things that you can offset that with reduced expenditures elsewhere, but this is large enough that it's changed our CapEx view and our free cash view.

Now, what do we get for the spend? Now, we had already planned to spend money expanding Farmers Branch, doing a lot of conversions at Richardson. And so, now we're projecting to spend around $200 million and that'll provide us about this time next year, we'll have 75% more wafer capacity than we have now.

Now, when you layer in the die shrink that we're doing and other productivity programs, yeah, you end up with over 2x the amount of capacity by this time next year for that incremental investment. So, today, we're about 75% 6 inch; next year this time, we expect to be about 75% 8 inch.

And we'll have – a lot of that will be at Richardson, of course, but then we'll finally have Farmers Branch up and running this time next year. Yeah, we're continuously updating this plan as we've done here.

We're trying to spend only when we need to spend and what we need to spend, but while considering the opportunities we have in front of us, the pace of tool conversions that we can do, the new tool lead times, the technology and process changes we want to introduce and other factors. So hopefully that helps, Chris..

That is helpful. I guess as a follow-on to that, the natural next question would be what does this mean for gross margins as we go into next year. And the benefit you're having in the second half of this year is filling up that BAW capacity that you had installed earlier.

Can those gross margins be sustained next year in the 50% range despite the fact that you're adding this additional CapEx and... (42:03).

Right now, Chris, and that's what's sort of prompting us to accelerate the investment. Our line of sight right now is that we'll continue to keep the fabs loaded excluding the SAW fabs we have in the near term. We certainly appreciate the pain of not having the fabs loaded.

Long term, we still believe that below 10% of sales on CapEx is what we're going to have. And then on margin, it's fundamentally going to be driven by reinvesting in the right technologies and developing the right portfolio which we made clear at Investor Day, largest markets, fastest growing markets, hardest products to do.

Are we going to maintain utilizations at the fabs which to your point are we making selective investments, are we driving down capital intensity which we believe we are.

And then finally, are we achieving the operational discipline and continuous improvement that we want to see and where we think we're on a great track there with Bob's leadership, introduction of Paul and others..

Thank you. Our next question comes from Toshiya Hari with Goldman Sachs..

Yeah. Thank you for taking the question. I wanted to follow up on CapEx as well. Mark, in your prepared remarks, you talked about an improved BAW-based revenue outlook. I was hoping you can elaborate on that.

Is that more tied to adoption in China going forward, or is it higher market share at your largest customer, or both?.

I think, Toshiya, it's pretty much our view of adoption of BAW and our confidence in competing and it's widely ranging, right? It's Phase 6 activity we're seeing there, it's Wi-Fi, it's 5G, it's other areas and diversity. And so, I think Eric is probably the best to expand on it..

Yeah. I think Mark hit on the key points.

It's really broad based and I think the increase in confidence in particular quarter-over-quarter is about our ability to address with BAW the adjacent segments of diversity receive and the antennaplexers, that's probably the biggest change quarter-over-quarter, and just looking at the timing of when we're going to need both high-volume samples, as well as volume production capabilities to support those markets..

Got it. And then as a follow-up, we hear a lot about component shortages, and I think some of the passive components, MLCCs in particular, you're seeing significant tightness.

Is there an impact on Qorvo from a cost perspective or in terms of your ability to ship to customers?.

This is Bob. I'll go ahead and take that one. Number one, we're not seeing a disruption where it's impacting our ability to capture the revenue. We have longstanding relationships with many of these suppliers. We're not seeing any price changes.

We continue to march down their technology road maps very much aligned with where they're driving the industry, and so far, so good, pleased with how the team has been handling this. You're correct, that tightness has been going on actually for quite some time and we've been taken care of and we appreciate that from our suppliers..

Got it. Thank you..

Thank you. Our next question comes from Edward Snyder with Charter Equity Research..

Thanks a lot. Eric, I'm a little bit surprised to hear about Farmers Branch. Up in the past, you've said that you expect you can fill most of the big secondhand ramp in BAW out of Richardson, most of that actually on the 6-inch lines, which you had upside protection on that.

Is that still the case, or are you expecting maybe that you're going to – a little bit sooner than it's possible. And if so, I know the qualification of that fab, you've got a preliminary one which is not the complete qual on it (46:10) and so you're probably talking several months here. You mentioned high-volume prototype runs followed by production.

Is visibility in BAW on those type of products, which are very vertical, improved or changed significantly over the last several months that gets you rolling on Farmers Branch earlier? And then I have a follow-up for James, please..

Let's say – I believe the beginning of your question was about the question, what's driving most of the growth in the BAW utilization and how it's going to be servicing Richardson and nothing has changed there in terms of the primary path.

Marquee handset-based integrated modules with mid and high-band content, that is the bulk of the growth and that's what's driving it.

What we're talking about here is now pulling in Farmers Branch by a quarter or two to where the CapEx falls into this fiscal year as opposed to next fiscal year essentially and that's timing just of our entry into these adjacent markets, diversity receive and antennaplexers basically..

Yeah and just to be clear, Farmers Branch is not going to be operational for customer parts here this fiscal year, it'll be next fiscal year..

All right. So, based on those comments, it sounds something like Farmers Branch is most of the adjacent markets, etcetera.

Where are all the quadplexers that you're shipping into China going now? It's kind of split, isn't it? It's not coming out of Farmers Branch, is it?.

Zero out of Farmers Branch. Everything that we're producing is BAW-based today. The BAW filters are being made at Richardson..

Perfect. Thank you. And then, James, if I could, it sounds like mix works against you this quarter.

Was that more Wi-Fi, less defense in GaN? And if you could maybe, postulate a little bit, what does it suggest when 802.11ax finally shows up in handsets next year? I know it's been delayed a bit, but some of the flagship guys are going to have it in the phones and I expect 802.11ax start seeing a lot more use which will probably pull-through to your side of the business too.

Would that affect your mix on a gross margin significantly if that were to occur faster than you thought? Thanks..

Yeah. So, the first comment about mix in the quarter I think was largely correct. So, a little bit more in our consumer side products and a little bit less in our defense-based world so that mix works against this event. Defense has typically been a little bit lumpy for us, although on a great trajectory going forward.

So, I think we'll get back to mix and we're pretty comfortable with how we'll execute towards the model throughout the whole year. As far as – 802.11ax has delayed a bit. And I think once 802.11ax does come online, it will be another significant growth driver for us in Wi-Fi. Wi-Fi has been doing great, but this will be that next big growth spurt.

We are way out ahead of it. We're getting on reference designs, and in most cases, we're either primary or secondary on all of the 802.11ax reference designs that are out and we're also expanding the portfolio to encompass the new frequency bands that we believe are coming. So, yes, short answer is, yes. It will drive the next growth spurt..

All right. Thank you. Our next question comes from Bill Peterson with JPMorgan..

Yeah. Thanks for taking the question. My first question is for James and maybe piggybacking, it sounds like some of the IoT is coming in better. You're getting some sooner production for GaN and 5G, ZTE has come back.

Should we think of this business being on track to kind of return to mid-teens type of grower this fiscal year, and then what will be driving that?.

Yeah. I think we're still on track for what we said at Analyst Day which is our underlying markets are growing 10% to 15% and we believe we'll do at or better than what those underlying markets will do and it's certainly too early to call the year. Great start, as Bob stated in the first quarter, at 13%.

And I think we'll just continue to track at above market growth rate as we go forward. What's going to drive it is, is that story we just talk about over and over and over. IoT is going to drive it, that's going to include Wi-Fi and our low-power systems.

The base station market is doing very, very well for us, as I talked about earlier, and that's that proliferation of massive MIMO and 5G really starting to come on board. And then GaN is just continuing to be pretty aggressively up into the right. And so, those trends are very much holding true and I expect they will hold true for the year..

Okay. Great.

And then my second question, assuming the positive growth trends continue in IDP, that would kind of suggest obviously you said earlier you expect further year-on-year growth in Mobile in the September quarter, but can you help parse out some of the unit demand versus content gains? And in particular, obviously, China came in better in the June quarter.

Are you expecting, I guess, directional weakness based off of sell-through trends? Or help us understand why it seems to be modest growth overall in Mobile in the September quarter, if you could help us understand the puts and takes there, that would be great. Thank you..

Yeah. Yeah, thanks, Bill. This is Eric. So, we still are not expecting much overall in terms of units in the market, so it's content growth primarily. Our handset customers in China, of course, are dealing with the domestic market which is clearly going down significantly year-over-year.

They're making up for that with some pretty terrific progress in the export market. The content in those devices varies widely from region to region. So, it affects the projections for the dollar content mix. Going into the second half, we're basically kind of banking the shrink we saw in June, not expecting – not counting on that continuing.

It very well might, but we're assuming at least that the China will be filled and demand will relax back down for now until we see differently..

Thank you. Our next question comes from Vivek Arya with Bank of America..

Thanks for taking my question. First one also back on June quarter and China. You beat your results by almost – the June quarter number by almost $40 million versus midpoint of what you had set before and you're saying China contributed a lot of that strength.

What's your kind of visibility into sell-through trends there? Is there any risk of any kind of inventory adjustment as they go through the next two to three quarters?.

Yeah, Vivek, I guess, what I was trying to imply in my last answer essentially, we have very good visibility of our channel inventory now, so we are confident our channel inventory is healthy. In terms of handset inventory, that's a lot harder for us to gauge, right? We see the product announcements, we see forecasts from our customers.

By the time we see sell-through, sometimes it can be late and that's why we're trying to be as conservative as we can here and hold our component inventory, the thing we can control, as tightly as we can..

Got it. And as my follow-up, I think in the past, you have mentioned BAW getting to 30% of the mix and then 50% longer term.

Is that dependent on taking more share from your larger competitor? Or do you think that is essentially just a broader adoption of BAW across your customer base?.

Thanks, Vivek. This is Bob. It's really what we see in the market. We see tremendous opportunities for BAW. We've mentioned antennaplexers, diversity receive modules, we talked about mid/high-band PAD in multiple configurations to go with our Phase 6 and others that by discrete. So, we really see it much more of a market opportunity for us.

I think again, the good news is we've now got our technology where it's as good as what we see out in the industry, in the market, and we've got people who now know how to make it, design it and sell it. So, we're gaining our confidence in our ability to participate in a great growth area..

Thank you. Our next question comes from Craig Hettenbach from Morgan Stanley..

Yes, thank you. I had a question on base station in particular GaN adoption. If you can just elaborate on what you are hearing from customers from a design perspective, and maybe just clearly there're some advantages, but also some push-backs around kind of costs.

So just how you're seeing GaN develop as you go into 5G for base stations?.

Yeah. Let me talk specifically about us and how we're moving into the market. So, what's in front of us today is really a move into massive MIMO using our GaN power at plars (55:33). So, we've got production orders on the books and we're shipping, we see that as a fantastic growth opportunity for us to support that market.

The very high power macro PAs that are also proliferating in the market are beginning too. We see those as opportunities that will start building in the pipeline next year. They will be focused largely above 3 gigahertz. So, in that 3 to 6 gigahertz range. And those frequencies in 3 to 6 gigahertz are largely driven around 5G.

So those are in part driving GaN type solutions. But again, GaN is growing, industry models are showing in the mid 20s. And for us, we see our GaN work growing significantly faster than that..

Got it. And then just a follow-up question for Eric.

I know there's been a lot of focus on the China smartphone market, but just as you see things and then maybe this is in context versus a year ago or so, but just how you feel about your market share position within China and things to think about there going into the back half?.

Well, I think we're certainly the largest RF supplier to the handset customers there in China and happy to be in that position and look forward to maintaining it again. The products that they're bringing to market are world-class and it's inspiring to see what they're doing to innovate and add value to their customer set.

Again, they've dealt with their contracting domestic market and responded beautifully with a great job of exports. And so, we're happy to be a part of the market and we're investing to make sure we maintain leadership there..

Thank you. Our next question comes from Timothy Arcuri with UBS..

Thank you very much. Just Mark, back on the question about China and Mobile, it sounds like it was about half of the Mobile business in June.

Is it right to think that it will be down maybe 20% sequentially on a dollar basis in the third calendar quarter? And I guess on that, whether it's down 10% or 20% or whatever it is, it's a bit atypical for it to be down on a dollar basis in this third calendar quarter.

Is that just because you saw channel refill in June and you're facing a tough comp next?.

This is Bob. I'll go ahead and take that. Number one, your 50% is a little bit high, so let's just start with that. And yes, we are taking a very cautious outlook, but it is not going to be down quarter-over-quarter..

Okay, won't be down. Okay. Okay, then lastly on your big Korean customer, it hasn't been a great story for you, I think maybe misaligned on some architecture so far. But you should have some pretty good visibility in terms of what's going to start to ship next year.

Should we begin to expect some more sizeable content gains there for 2019 and 2020 and if you can help us size that? Thank you..

Sure. This is Eric. Yeah, I think exactly as you said, it's how we see, we had a misalignment in our product portfolio with the direction they were heading a couple of years ago. We remain on track with the expectations we said previously.

We'll begin to see a turn on our share this fall and then next spring a significant step up we believe in terms of our share, and then alignment from here as far as we can see maintains very, very good..

Thank you. I would now like to turn it back over to management for closing remarks..

I want to thank everyone for attending tonight's call. We hope to see many of you at our upcoming investor presentations and we look forward to speaking with you again on our second quarter call. Thank you and have a good night..

Thank you, ladies and gentlemen. This concludes today's teleconference and you may now disconnect..