Good day, everyone, and welcome to the Qorvo Incorporated Q3 2019 Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Douglas DeLieto, Vice President, Investor Relations. Please go ahead..

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

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

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

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

During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For 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; and James Klein, President of Qorvo's Infrastructure and Defense Products Group; Eric Creviston, President of Qorvo's Mobile Products Group; as well as other members of Qorvo's management team. And with that, I'll turn the call over to Bob..

Thanks, Doug, and welcome everyone. Qorvo delivered a strong December quarter, with record EPS of $1.85, and record free cash flow of $261 million. Total revenue for the quarter was $832 million, above our updated guidance, and gross margin was in line at 49.5%.

Our performance last quarter is especially noteworthy given that the smartphone market weakened considerably after we entered the quarter.

Today, the outlook for smartphones is being affected by a range of factors, including trade tensions, and other macroeconomic headwinds, longer replacement cycles, and what may be a pause in demand ahead of 5G smartphone launches.

Despite these factors, we believe our inventory in the channel is healthy, the adoption of BAW-based architectures across all leading OEMs continues and we're excited about our many market drivers. Investments in 5G are accelerating, the roll out of WiFi 6 is coming soon and IoT continues to proliferate.

The robust demand we're enjoying for infrastructure solutions supports the outlook that 5G capabilities are coming sooner than our industry had originally expected.

In China, carriers have been allocated spectrum for countrywide 5G networks using multiple frequencies, while in the US carriers are launching 5G services in select markets, with plans to go nationwide in 2020, using both sub-6 gigahertz and millimeter wave frequency.

Early use cases in millimeter wave will include applications like point to multi-point broadband. In dense areas like cities, airports, sports stadiums, where bandwidth is typically constrained, users will be offloaded from LTE networks onto millimeter wave networks for a better experience at a much cheaper cost per bit for carriers.

More broadly, 5G consumers will benefit from its ultra-low latency, which enables new applications like augmented reality, and mobile gaming that aren't viable on today's LTE networks. Next 802.11ax, also known as WiFi 6, will deliver speeds up to four times faster than its predecessor.

WiFi 6 will leverage higher performance RF to integrate both 2.4 gigahertz and 5 gigahertz into one network, supporting more users simultaneously without interference. Similar to 5G, WiFi 6 will enable new use cases and deliver significantly improved coverage in high-density areas.

Lastly, IoT is helping companies, individuals, and things make better decisions more quickly and RF productivity will always be central to IoT. We expect IoT applications to evolve to open standards, many with more than 1 radio.

Similar to what we have in phones today, we'll have Bluetooth or Bluetooth Low Energy for short range, WiFi, Zigbee or Thread for local area and cellular connectivity for wide area networks. Qorvo is well positioned in each with products ranging from front-end to system level solutions with integrated firmware and multi-protocol support.

Turning to the December quarter, in addition to our strong financial performance, which Mark will discuss in more detail, we're hitting our stride operationally. We leveraged our culture of lean and clean ramp initiatives to support multiple high volume ramps, while continuing to receive industry-leading marks for our customers on quality.

In IDP, we posted strong growth in 5G infrastructure, supported by massive MIMO deployments. In mobile, we extended the commercial adoption of our BAW-based solutions to include additional marquee smartphone customers. Design activity was robust, supporting diverse markets, products and customers.

In infrastructure, we enjoyed significant demand for our massive MIMO solutions from multiple OEMs. Qorvo offers base station OEMs a unique combination of GaN technology and decades of experience in phased arrays for defense, which is translating into significant massive MIMO business.

The economics of this business are compelling, as a typical MIMO implementation has four times more channels, eight times to 12 times more RF content than a typical macro base station. There is approximately $1,200 of RF content in each of these base stations.

In mobile, Qorvo continue to expand our customer reach of our BAW-based products across leading OEMs. We've been selected by a leading Korea-based smartphone manufacturer to support an upcoming marquee smartphone with a highly integrated mid-high band solution that features Qorvo's BAW-based multiplexer technology.

We are also supplying the mid-high band PAD to Huawei for the Mate 20, and we anticipate increasing our content with this customer in their upcoming marquee smartphone launch. Our BAW-based wins are complemented by other high-value Qorvo components, including our industry-leading envelope trackers and antenna control solutions.

On the design front, we're supporting robust 5G design activity at many mobile customers, primarily for ultra-high band, sub-6 gigahertz applications. We expect 5G smartphones to launch this year with rapid growth expected in calendar 2020.

We're also continuing to see interest in our millimeter wave solutions for handsets, and we expect phones to be available as early as 2020.

Whether the devices are fixed, nomadic or mobile, our deep experience in millimeter wave in the defense and infrastructure markets positions Qorvo to play a key role in delivering these solutions into the commercial markets. In IoT, we've expanded into new markets, including electronic shelf labeling.

This next generation retail IoT solution replaces conventional price tags with LCD or E Ink displays to enable dynamic pricing and inventory control. A typical grocery store will have tens of thousands of these placements, this is just one example of how IoT is transforming industries.

Also, during the quarter, NETGEAR selected us to supply both the 2.4 gigahertz and 5 gigahertz WiFi FEMs for their popular Orbi Voice distributed WiFi systems. We're expanding our footprint in the connected home by helping to deliver broader coverage and higher data rates to consumers.

Over time, we see WiFi nodes proliferating in smart home from 10 today to more than a 100, and we envision multi-protocol pods in every room incorporating multiple low power radios.

In automotive, we're broadly engaged with OEMs and Tier 1 suppliers, and we've expanded our product offering to address multiple protocols, including satellite, WiFi, LTE, 5G and V2X. As increasingly complex coexistence requirements evolve in automotive applications, we see new opportunities for our BAW filters.

In cellular IoT, we've commenced commercial shipments of LTE CAT M and narrowband IoT modules in collaboration with Nordic Semiconductor. These highly integrated systems are set to advance the growth of cellular IoT, and expanding markets like asset management, industrial automation and smart cities.

In defense, Qorvo's secured a four-year contract with the US Air Force to develop new modeling and a simulation tool to accelerate advanced GaN designs for mission critical applications.

Qorvo's GaN technology delivers high output power and efficiency, including at millimeter wave frequencies, making it the technology-of-choice for radar, electronic warfare and communication systems for defense applications.

We also secured a multi-year production contracts supporting a large defense aerospace program and we're shipping production volumes of high frequency BAW filters. Despite the near term headwinds in mobile, I'm pleased with our operational performance and excited about our position in the markets we serve, including 5G, WiFi, IoT and defense.

We believe our best-in-class technologies and operational excellence position us exceptionally well to deliver long-term growth and profitability. And with that I hand the call over to Mark..

Thanks, Bob, and good afternoon, everyone. Qorvo's revenue for the third quarter was $832 million, $12 million above the mid-point of our November guidance. Mobile products revenue was $602 million, down 6% year-over-year due to weaker flagship phone volumes and a softer China domestic market.

Infrastructure and defense products revenue was a record $230 million the 11th consecutive quarter of double-digit year-over-year growth. IDP is experiencing especially strong growth in infrastructure as carriers pick up the pace of their 5G investments. Non-GAAP gross margin in the December quarter was 49.5%, consistent with our November guidance.

We've seen strong margin expansion so far this year -- fiscal year, driven by mix improvements in factory productivity, although lower mobile volumes will cause us to fall short of our original target for the second half of fiscal '19.

Operating expenses decreased to a fiscal year low of $151 million in the December quarter on tighter spend control and lower employee-related costs, including incentive compensation. Non-GAAP net income in the December quarter was $234 million and non-GAAP diluted earnings per share was $1.85, or $0.15 above the mid-point of our guidance.

Operationally, we're performing as well as we ever have and these results demonstrate that our focus on portfolio management and operating discipline are yielding stronger earnings and free cash flow. December quarter free cash flow from operations was $333 million and CapEx was $72 million, yielding record free cash flow of $261 million.

We repurchased the $152 million of stock in the third quarter and ended the quarter with $650 million of cash. During the quarter, we initiated actions to improve our manufacturing cost structure in light of multiple factors affecting our near-term outlook for mobile products volumes.

First, due to market and fab specific factors, we commenced a phased closure of our Apopka, Florida SAW fab and a transfer of production to our Greensboro, North Carolina fab. We expect these fabs to be completed by calendar year-end.

We will continue to incur ongoing period costs at our Florida operation between $6 million to $8 million per quarter, which will be recognized in our non-GAAP cost of goods as we complete end-of-life product builds and other final production activities.

By closing our Florida fab, we expect to gain production efficiencies for both SAW and GaAs devices from increased loadings at our North Carolina fab. As we stated before, our proven SAW technology is an important capability for Qorvo going forward. Especially for some of our most complex solutions utilizing both SAW and BAW filters.

Our Florida engineering teams engaged in advance filter design and product and process technology development will not be directly affected by the fab closure. In fact, we are increasing investments in support of development activities by our engineering teams in Florida.

Second, we have decided to idle our Farmers Branch, Texas facility, rather than move it from start-up to production. We will consolidate BAW resources and production in the near term at our Richardson, Texas facility, while preserving a flexibility to scale production in Farmers Branch to meet expected future growth.

Ongoing period costs from the idled Farmers Branch fab will be approximately $5 million in the March quarter, and drop to approximately $3 million per quarter until the fab starts production. These expenses will be recognized as part of our non-GAAP results. We currently expect the Farmers Branch fab will start production in early calendar '20.

Given the proximity of the Farmers Branch fab to our Richardson fab and the favorable start up yields we achieved in Farmers Branch, we believe Farmers Branch will play a critical future role by allowing us to scale our BAW production efficiently in response to demand.

As a result of actions initiated in the third quarter, we recorded and excluded from our non-GAAP results $18 million related to Florida fab asset impairment charges and accelerated depreciation from changes in the estimated useful lives of certain assets.

Over the next fourth quarters, we expect to record approximately $100 million of additional charges related to accelerated depreciation of Florida production assets, as well as employee termination and other exit costs related to Florida, Texas and other locations impacted by our restructuring actions.

These restructuring costs will be excluded from our non-GAAP results and I refer you to our 10-Q filed today for additional details.

Steps to right size our manufacturing footprint, along with targeted reductions in operating expenses and redirecting certain R&D resources, are together designed to allow us to pursue growth opportunities for IDP, sharpen our focus in mobile products on the highest value, most complex opportunities, and achieve earnings and free cash flow growth in fiscal '20.

Turning to this quarter's outlook, in the fourth quarter of fiscal 2019, we expect non-GAAP revenue between $660 million and $680 million, gross margin of approximately 47%, and diluted EPS of $1.05 at the mid-point of our guidance.

We expect Mobile Products revenues in the March quarter will be down approximately 25% sequentially, with worse than normal seasonal declines being partially offset by content gains with the leading Korea-based smartphone manufacture. For China, while volumes are muted, we believe our inventory in the channel is healthy.

We project IDP to be roughly flat sequentially on continued strength in 5G infrastructure market demand. Our March quarter gross margin guide reflects lower revenue, the effects of lower utilization, including the impact of Farmers Branch and Florida period costs, and less favorable product mix, partially offset by improved segment mix.

Operating expenses are forecast to increase in the March quarter to approximately $160 million due to seasonal payroll effects and increased investment to support IDP growth. We expect our March quarter non-GAAP tax rate to be approximately 8.6%.

We expect operating cash flow to remain strong in the fourth quarter, helped by working capital management. CapEx is expected to decrease in the March quarter as we focus expenditures on IDP growth opportunities and priority mobile development programs.

CapEx is currently projected to end the fiscal year at approximately $240 million and we expect free cash flow to exceed $600 million in fiscal '19.

Despite substantial headwinds from a weaker than expected mobile market and ongoing macroeconomic instability, Qorvo delivered its best quarter ever on earnings and free cash flow, and IDP's outlook remains strong.

We've taken decisive actions to address these conditions and we're continuing to invest to support growth in IDP's markets and do advance high value programs in mobile.

Operationally, we're performing as well as we ever have, and with our technologies, we are uniquely positioned to take advantage of growth drivers in multiple markets, including the acceleration of 5G infrastructure investments, the adoption of BAW-based architectures by all leading OEMs, and the proliferation of new applications for the Internet of Things.

Ultimately, we expect the emergence of 5G will drive smartphone volume and RF content increases. In summary, we achieved record results in the December quarter. We believe our position in broader connectivity markets remains compelling for future growth and we expect another year of record earnings and free cash flow in fiscal '20.

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

Thank you. [Operator Instructions] At this time, we'll take our first question from Chris Caso with Raymond James..

Yes. Thank you. Good evening.

I guess the first question is about some of the manufacturing changes and the impairments that you talked about, I guess first question of that is what's the cash impact of those restructurings as we go through the fiscal year and I assume that's included in your free cash flow target? And then from there, what sort of margin offsets are you expecting from that? Maybe you could walk through the pluses and minuses from a gross margin standpoint of those actions?.

Thanks, Chris. I'll let Mark address that..

Yes. So, good question, Chris. The majority of the costs that I laid out on the charges, the GAAP charges are non-cash items, principally accelerated depreciation associated with the decisions on those assets, principally in Florida. So the vast majority are non-cash.

Now, some of the charges laid out, which you'll see in the Q around terminations, those will be cash. But again, the preponderance are non-cash, and yes, reflected in our free cash flow guide.

On a go-forward basis, I've tried to lay it out pretty clearly between the ongoing period costs in Florida, which will continue through December, and you should have experienced modeling those because those have been basically headwinds for us over the past year, but those will continue through December, and then, we'll have the added costs of Farmers Branch of $5 million this March quarter and then, decreasing to $3 million per quarter until that fab is started up.

Right now, I believe it will be early '20, but for the rest of -- for fiscal year '20 modeling you should assume $3 million per quarter on Farmers Branch. And then, of course, for fiscal '20 through December, should assume the $6 million to $8 million for Florida..

All right. Okay. And just as a follow-up to that, perhaps you could take us through the thinking that caused you to take these actions? I know you don't take them lightly.

How much of it is just the realization that -- how much of it is a reaction to the current market conditions and how much of it perhaps is looking forward that perhaps the state of the market before 5G actually hit?.

Thanks, Chris. Bob. Number one, we've been talking for some time now about our SAW capacity in Florida.

We've talked about the charges that Mark had previously went through with you, how much it was costing us a quarter, and given some great work that the team has done in being able to bring up some of that in-house in Greensboro and consolidate some things, I think, it really is just a function of a lot of good work being done by the team, and being able to consolidate the operation and close the facility.

We will be end of lifing a few of those products there that have been lingering on, but it's the right thing to put us in the right manufacturing footprint. On Farmers Branch, the team has done an excellent job there in bringing up the capacity. We're real pleased with the yields.

I also think given the team and what they are now looking at from a market realities that I went through with the handset volumes in the smartphone and what's going on with replacement cycles, the overall demand in smartphones, it just made sense for us given looking at the programs that we've got laid out that we believe we're going to support between now and 2020 as Mark pointed out.

It was the right thing to just delay bringing that factory up, it's still well within our plans to bring it up as Mark outlined..

We'll go next to Blayne Curtis with Barclays..

Thanks for taking my question. Maybe just from a high level, I mean, obviously, smartphones are weak, but just any color, it's a pretty sharp drop in the March. So if you can give us any color? I'm assuming it's mostly China, but if you can walk us through.

And then in terms of the offset, is there any way to think about, is that shared socket, I mean, and just trying to gauge how much of an offset that was for you? Thanks..

Yeah. Thanks Blayne. At a real high level, we are seeing our largest customer down, China down again this quarter, it was down last quarter, as we commented, we're taking a measured look at that.

So it's playing out kind of as we've expected, but for this quarter it's going to be down more than we expected and that's being offset by -- we're seeing tremendous growth in Huawei as we've gained back share and have been talking about that for about three quarters, along with we're really starting to see the growth come back at Samsung that we've also talked about.

So those things are actually offsetting a pretty steep decline, as you pointed out, in a couple of other places..

Thanks.

I mean just curious, within IDP if you can think about how big 5G is today for you over the last couple of quarters? I mean you've been saying nice double-digit growth, just kind of understand what stage you are in terms of 5G, as some have seen some pretty big impacts early on, just kind of curious how much of this has been for you?.

James, you want to take that?.

Yeah. Great question. And before I answer, I'd like to take the opportunity to recognize the IDP team and the functions that support the business. We had a great quarter, record revenue, record profit and it wouldn't have happened without the great team that we've built supporting the business. So I just want to say thanks to the team.

We're really excited about 5G and what the opportunities are it's bringing to the business. We see product ramps at several of our customers and the ramps are including these new technologies we've been talking about of massive MIMO antennas and GaN power amplifiers.

As Bob stated, the content gains for us are significant, approximately $12,000 RF content in the each of the base stations with MIMO. On GaN, we're also ramping several customers to support these deployments. We have products in volume production that support 2.6, 3.5 and 4.9 gigahertz. In total, 5G represents a $1 billion opportunity for us.

Today, It's a $600 million or $700 million market in 2019 and that will accelerate to about $1 billion opportunity for us in 2020..

And we'll go next to Harsh Kumar with Piper Jaffray..

Yeah. Hey, guys. Thanks for letting me ask a question. Bob, can I ask you all puts and takes done between your large customer in China, is it fair for us to think that there is a chance you could grow in 2Q or is it too early to make that assessment, yet? 2Q meaning calendar 2Q..

Harsh, I appreciate you asking the difficult questions so early in the call, it is a little difficult for us to call that. I think we are being realistic in what we think is going to happen in the March quarter and it is a little too soon to call, but I do expect China to start to come back some.

As Mark commented and I did as well, our inventory channels are pretty healthy. So I think as they continue to release some new phones, and again that's ex-Huawei just to be clear, and our largest customer, we'll let them decide what they're going to do..

That's fair. I appreciate any color you guys can give us on that.

And then in the current quarter, in the March quarter, on a percentage basis, if you would have tried and compare and contrast China versus your large customer, one was a bigger factor relative to your thinking than the other, or did it just -- did they both go down quite a bit?.

As we look at March, let's just say, they're both down significantly because we're having a really nice ramp at two other customers. I think I'll leave it at that..

Fair enough. Thanks, guys..

We will go next to Ambrish Srivastava with BMO..

Thank you very much. I just wanted to -- I was a little surprised, you're talking about fiscal '20 earnings growth and free cash flow.

Is that a typo in the press release or what are you referring to in terms of how should we be thinking about free cash flow growth in fiscal '20?.

Yeah. Ambrish, this is Mark. So this year, we expect to end free cash flow over $600 million. We are very early in our planning cycle, so I don't want to provide too much detail, but just to give you a sense of where we are at a high level and we'll go into a lot more detail in the May earnings call.

But right now, we see, fiscal year '20 as being flattish to up slightly at the consolidated level on the top line, mobile flat, flattish year-over-year. But just really on the mobile side just too early for us to make a call on greater strength in the handset market.

We do believe 5G is going to drive volume in both handsets and RF content, but there is little impact of that, we think, in fiscal '20 as we see it..

No. That makes -- sorry, go ahead..

Yeah. I just was going to say, thrilled with what we see in IDP and continued growth there as that business nears a $1 billion revenue. Cost reduction actions we're taking are going to help next year on gross margins.

Again, too early to call because we are still in our planning cycle, but as we see it, we do see expanding gross margins next year even with the burden of Florida and Farmers Branch, which I laid out earlier.

Just trying to give you a sense of profile and you've seen this from us before, from fourth quarter to first quarter, we are going to be down on gross margin.

So we should be -- we expect to be below 46% in the first quarter on gross margin and that's related to loading and mix, but the rest of the year, we see roughly back to what you saw in the back half of this year.

So we feel great about the business and how we've been able to move gross margin and as we make these changes, and our portfolio changes take hold, we will be -- we expect to be targeting over $50 million and see over $50 million as we go forward. OpEx, we expect to be in control, maybe up slightly and taxes up a bit.

On free cash flow, we expect -- we've had great progress on free cash flow. Last three years, we've nearly tripled it.

Free cash flow margins have gone from 7% to over 20%, but we see a year next year of modest growth in CapEx, if any, and just focused on investing in the right technologies, selecting the right products and markets in which to compete, continuously improving the operations, and finally, reducing capital intensity..

Okay. Mark, thank you. And I don't want to be too tough on you. You have delivered on then one metric, on free cash flow to sales since you've been here. Maybe just a quick follow-up on IDP.

Little bit -- we are hearing of so much weakness across segments, why is it that your diversified business is not seeing that? Give us a sense for the mix between 5G, comms, et cetera, and where are you seeing the drag, if any? Thank you..

Let me talk about strength first and we'll talk about a couple of the challenges in the business. Certainly, seeing strength in the base station business, and I talked about that really driven by 5G. We've also seen strength in our broadband, our cable TV business and that's been driven by the strength in the DOCSIS 3.1 deployments.

So both nice growth drivers for the quarter. On the headwind side was our WiFi business and we talked about that last quarter, several factors there.

One is there has been a delay in the AX or WiFi 6 standard release, still some unrelated materials shortages and some impact of tariffs as some of our customers relocate their manufacturing outside of China, but we believe that business has found its bottom and is starting to recover back.

And then, in general, our defense business is just lumpy as it's been for years. It's on -- the underlying foundations are very, very good and growing, but we do end up having up and down quarters in defense based really on large production programs..

We will go next to Bill Peterson with JPMorgan..

Taking the question. I want to first ask a question on mobile. Obviously, we understand the unit drags, but you've talked in the past about some opportunities in areas such as diversity receive, kind of [indiscernible] seen in tuning. And I guess we should think probably more 4X4 MIMOs.

So presumably that should be a headwind, but I guess can you help us understand are these opportunities -- can they really fire in the fiscal '20, or are they going to be really beyond? I presume you obviously see more opportunities as 5G gets certain in the following year, but how should we think about content gains this year?.

Yeah. It's a excellent question. So you're right, we're still very enthusiastic about our investments and replacement in the markets, antenna tuning driven by the complexity of trying to get all the radios into the industrial design of today's handsets. That's fundamentally going to continue to be a very important market, especially as you add 5G.

Envelope tracking power management as well is a great area for us and we see more and more adoption of our sorts of architectures. And in BAW-based modules, especially highly integrated ones, we will be in production with the top six handset manufacturers to share with integrated mid and high band module.

So it's, great, especially as 4X4 MIMO, LTE Advanced Pro comes in, that's a lot of additional content.

The headwind is of course units and as units are soft in the handset market or smartphone market overall, and the trend, at least, what we saw in the last quarter, is that it's really the high-end of the flagship models that have been slowing more than the overall market even. And of course, we're pretty levered to that.

So I think that's where there is a little caution during calendar '19, but to your point, in '20, we see a very clear ramp of 5G handsets. In our Analyst Day, we mentioned, it's about $1 billion worth of additional market in calendar '20 due to 5G and we're not backing down on that at all.

So despite the challenges in the TAM in CY '19, we see a clear path to solid growth in calendar '20..

Okay. Thanks for that. And James, as we look out for this year and 5G is apparently starting, you kind of talked about some of the puts and takes.

But assuming AX comes back, you have other IoT, local area short range, wide area and so forth, automobile coming eventually, how should we think about the growth for the fiscal year -- calendar '19 or fiscal year '20, If you can help us frame the growth opportunities? You have talked in the past about a market growth of 10% to 15%, trying to understand what we should expect for the Qorvo's performance in that?.

Yes. So really no change Bill to what we've talked about. We've just hit our 11th in a row quarter of double-digit growth. We're certainly trying to do that again for next quarter.

We still believe the underlying markets are going to grow in that 10% to 15% range, driven by those underlying market things like the adoption of 5G and phased arrays coming into defense, massive MIMO will come in to base station. And then just the general proliferation of IoT.

So I think, we'll see that 10% to 15% growth in underlying markets and I'm still confident that we'll do as well as that, if not better, than those underlying markets..

We'll go next to Rajvindra Gill with Needham Company..

Thanks for taking my questions. I appreciate it. A question on the IDP, particularly on ADAS and self-driving vehicles.

I want to get a sense of your competitive differentiation there and how you're thinking about the growth rate for that particular segment?.

James, you want take the question on the automotive, how you are doing there?.

Absolutely. So, we're heavily engaged with key OEMs and Tier 1s really across multiple different areas, WiFi, DSRC, cellular VITA X, LTE/5G, RF front ends, digital radio or satellite radio, and also co-existence filtering.

Today, that represents about a $700 million SAM as we get into 2021 and we're we are really trying to support multiple customers and trying to move into all of those spaces. I think it's still relatively early in. We are definitely shipping into the automotive market, but the big uptick for us will be as we enter into 2021 and 2022 car year models..

And just a follow-up on the gross margin. So I think it was mentioned that gross margin will drop below 46% in June, and then, there is an expectation of it ramping back up to where it was second half of last year.

Wonder if you could elaborate further on that, is that basically, once this process has been done, you're starting to ramp the loadings at that one particular fab, can you maybe discuss a little bit about the expectation of the ramp in margins in the second half?.

Yes. We are experiencing what we've been thriving to do with the business all along and we've been very accurate by the way on our ability to forecast. We've hit -- excluding the Florida hurricane miss that we had, we've hit every gross margin forecast since December 16.

So we feel great about our ability to understand what's happening in the market and the profile of the margins.

Initially in the early part of the year, we have clearly the addition of that Farmers Branch period costs, then we just have mix effects and the lower revenues at the beginning of the year, and then, through the year, we see positive mix effects, both products and in James' businesses.

His business continues to outpace the overall business, and then, those period cost effects have a lesser effect until at the back end of the year those period cost effects are minimal. So we've got, we believe a clear read on continued progression of an expansion of gross margin year-over-year.

And it's about investing in the right products, continue to operate well and minimizing our capital footprint..

We'll go next to Vivek Arya with Bank of America..

Thanks for taking my question. Bob, on the competitive landscape, one of your competitors has mentioned a few times now about reclaiming the content that they lost last year and the other competitor is talking about entering the BAW filter market.

So, I'm just curious how is your visibility around content in the flagship phones and just any insights on the competitive landscape?.

Eric, you want to pickup that..

Sure. Yes, we're still quite enthusiastic about our opportunities overall in the flagship space. As I mentioned, integration in the mid and high band is really driven by high order multiplexers, which are enabled by high performance BAW filters.

We're well positioned or we are one of only two heavyweights in this space right now and we're competing on a level playing field here. There's a lot to be done. There's a lot of these products to be developed and we're working hard to get our engineering at scale to be able to fully staff all the opportunities, frankly.

Regarding new entrants in the market, of course, given how attractive this segment is, the growth potential in margin within that space, so there is going to be people that are going to continually trying to enter it.

We will just remind you of how many years it takes to get from a working technology to a filter product to a duplexer, then a high order multiplexer and all the other integration needed to enter the highly integrated mid and high band space, but there are a lot of other opportunities involved as well, discrete filters and so forth and WiFi and you really find it all over the phone going forward.

So, it's a great space, we're trying to get our engineering capability scale to build a fully step up those opportunities..

Got it.

And for my follow up, IDP has been a really strong success story for you, do you see opportunities to maybe think of M&A, et cetera, to expand that opportunity set as we get into more of the infrastructure built before you start to see the benefits of 5G on the handset side?.

Yeah. Thank you, Vivek. And appreciate your kind words about the work that the IDP team is doing to deliver solid results. And we've talked, I think, in many of the past calls that from an M&A outlook we do consider and have bought companies to support under James business in IDP. We will continue to look and do so.

In the area of mobile, we continue to look at opportunities to bring in technologies as well as other companies. So we have a very active funnel, but at the end of the day, we want to make sure we bring in opportunities that we believe we're better owner and we can create and deliver shareholder value and we will continue to do so.

So we did a very good job on the couple of these so far and we will continue to look..

We go next to Toshiya Hari with Goldman Sachs..

Great. Thanks for taking the question. I think Qualcomm obviously the close partner for you guys, at the same time they have been pretty vocal about their ability to gain RF content into 2020 and beyond.

How do you guys think about that potential risk from a competitive standpoint?.

I will tell you, Qualcomm's a great company. As you pointed out, we do work with them, we do have a lot of products that sit beside there's, whether it's WiFi or cellular, so I'll let Eric, if you would like to address a little bit more than that, I mean..

Yes. I think you're right. We do go to market together and in a lot of cases it will continue in the future. If you look at about 70% of the smartphone market, it's the top three OEMs and they tend to pick and choose the RF component and the baseband separately and do that integration. We see that continuing.

So in other parts of the market, I know that they have aspirations, but I can tell you all of our customers are working with us to integrate our solutions onto all the baseband suppliers' designs..

Great. And then just as a follow-up. I had a question on gross margins as well. So, Mark, I think for the March quarter, you're guiding revenue essentially flat year-over-year. I think your gross margin is down about 100 basis points year-over-year. I think the mix -- the IDP mix is growing year-over-year, which should be positive for gross margins.

So I guess what's the offset there, is it just utilization rates or is there something going on the pricing front? Thank you..

Yes, it's pretty easy to share. Year-over-year, it's the Florida and Farmers Branch period costs effect. So in the case of Florida around $8 million, and in the case of Farmers Branch, at $5 million in that March quarter, so $13 million total of headwind year-over-year..

And pricing is pretty stable?.

We're in the electronic space, so pricing goes down on a number of products and we work to replace those in future generations of more integrated, more advanced, better margin products..

So stated differently, no change in the normal pricing environment..

We'll go next to Edward Snyder with Charter Equity Research..

Thanks a lot. Eric, leaving your largest customer aside for a minute, you just announced a big win at superPAD at your Korean customer. You've got more gains coming in the superPAD BAW, which prepared at Huawei. You supply a lot of BAW into Phase 6, which is being deployed since the fall last year.

There were a couple of the products we were talking about for BAW moving into next year and yet we're taking Farmers Branch out of the mix until calendar '20. So, even if your revenues down, one would expect that the mix of BAW would have improved significantly with all these big wins.

I know unit volumes in China have been weak, et cetera, but I am still scratching my head about the Farmers Branch move and tepid guidance on second half of the year for BAW.

I am missing something, is BAW-based DRx off the table now or what am I missing?.

So regarding the BAW-based area, actually, we are reevaluating the entry point in the market for that. As I mentioned earlier, we're just seeing tremendous need to staff a lot of the programs in the mid and high of the main path.

As you can imagine, now that we've entered with all the top six OEMs, now there is a demand for many variants and variations in next generations and there are new basebands coming along, which we're being asked to pair to.

So, there is a lot of work to be done there and we are doubling down if you will, to make sure we can fully staff those opportunities. To your point though, year-over-year our BAW-based business is going to grow very nicely. That doesn't change.

The timing of when exactly we need Farmers Branch is depending upon exact products and the amount of BAW content in any one of them..

Okay. And then James, if I could, you are the largest GaN manufacturer in the military in the world right now. You are now moving into the commercial side of the business here. You talk a lot about 5G growth and especially cellular infrastructure.

How much of that is the GaN side of your business, because as an earlier question alluded to, seeing broad-based weakness at everybody from TI to Marvell to just everybody else.

You're not seeing it, but then you're kind of unique in the world and that you've got GaN to drive, and there is maybe only one or two other guys you've been supplying that product.

So I'm just trying to get an idea of how much of your strength -- I know military that way -- is coming from GaN in the 5G story?.

Well, certainly defense remains very strong position for us in GaN. And you are right, in the base station side of the market it is starting to significantly ramp as well and we are ramping products across all those frequencies that I talked about earlier, and products into multiple OEMs.

But also inside of the 5G ramp, we also have a very nice position in things like LNAs and switches and driver amplifiers, so really the whole rest of the RF chain and that's what drives that potential content up to well over $1,000 in Massive MIMO antennas.

We do expect that the number of Massive MIMO channels will actually eclipse macro channels in 2019. So it shows you a little bit of the growth rate there. And I didn't say it earlier, but I think we do see line of sight to a $1 billion run rate. So that's certainly the journey that we're on now..

We'll go next to Timothy Arcuri from UBS..

Thank you very much. I guess, Mark, the first question is, China was, I think, 30% of mobile products ex-Huawei last quarter.

I'm wondering what that number was for December and maybe what you think it's going to be for March?.

Yeah. China revenue for the Company, ballpark, 30%, and then, we will be down sequentially in the business in China. Still up year-over-year..

Okay.

And you're just talking about mobile products, right?.

I was talking about the Company as a whole. Mobile products coincidentally also is now 30% of the mobile business and in the fourth quarter, we will be down both sequentially and year-over-year..

Okay. Got it. Okay.

And then, did you have a second 10% customer this quarter, I would think so?.

Yes, we did..

Okay. Awesome..

And then I'll just make a comment that in the March quarter we actually expect to have three 10% customers, which we have -- last time we had that was fourth quarter of '16 or March of '16..

We'll go next to Craig Hettenbach with Morgan Stanley..

Yes. Thank you. Just a question on the mid-high band PAD.

And if I think about the traction you had in last year's flagship phone, as well as upcoming Samsung phone, can you talk about just your ability to continue and build on that momentum, I mean what type of visibility you have in terms of future phones going forward?.

Sure. Yeah. We have obviously a lot of design momentum. We feel confident that we have no technology handicap of anything. We have got certain performance parameters that favor our technology. The complexity is increasing. And as I mentioned, we're being asked to support multiple basebands across multiple customers.

So there's a lot of work to do, and in light of the challenging overall environment, of course, we're keeping our overall OpEx in check in and managing to -- at the same time bulk up our capability around the highly integrated BAW filter design modules.

So, a lot of enthusiasm for a lot of customer diversification coming and product diversification coming as well in that category..

Got it.

And then just as a follow-up for Mark, with the buyback pace nearly doubling in the quarter or last quarter, can you just talk about remaining authorization and then how you are thinking about deployment of cash from here?.

Yes. So Craig we had -- outside the ASR, we had record repurchases in the quarter of $152 million. I think the last three quarters have been the three out of the four largest repurchase periods outside the ASR.

We have just under $700 million left in the authorization, expect to continue to make progress working that down as we see the free cash flow of the business continuing to be strong. And we see, frankly, the stock price being at a level that we would continue buying back our shares.

Of course, we continue to look at M&A, continuing to keep tabs of the environment and as you know, the rate and pace is a function of many factors..

And at this time, I would like to turn the call back over to management for any additional or closing remarks..

We want to thank everyone for joining us on tonight's call. We hope to see you at upcoming investor meetings. We look forward to speaking with you on our fourth quarter call. Thank you and have a good night..

And again, this does conclude today's conference. We thank you for your participation. You may now disconnect..