Mitchell J. Haws - Skyworks Solutions, Inc. Liam K. Griffin - Skyworks Solutions, Inc. Kris Sennesael - Skyworks Solutions, Inc..

Ambrish Srivastava - BMO Capital Markets (United States) Blayne Curtis - Barclays Capital, Inc. Craig M. Hettenbach - Morgan Stanley & Co. LLC Vivek Arya - Bank of America Merrill Lynch Tristan Gerra - Robert W. Baird & Co., Inc. Harsh V. Kumar - Piper Jaffray & Co. Chris Caso - Raymond James & Associates, Inc. Krysten M. Sciacca - Instinet LLC Craig A.

Ellis - B. Riley FBR, Inc. Bill Peterson - JPMorgan Securities LLC Timothy Arcuri - UBS Securities LLC Edward F. Snyder - Charter Equity Research, Inc. Srini Pajjuri - Macquarie Capital (USA), Inc..

Good afternoon, and welcome to Skyworks Solutions' Second Quarter Fiscal Year 2018 Earnings Call. This call is being recorded. At this time, I will turn the call over to Mitch Haws, Vice President of Investor Relations for Skyworks. Mr. Haws please go ahead..

Thank you, Kieran. Good afternoon, everyone, and welcome to Skyworks' second fiscal quarter 2018 conference call. With me on the call today are Liam Griffin, our President and Chief Executive Officer; and Kris Sennesael, our Chief Financial Officer.

Before we begin, I would like to remind everyone that our discussion will include statements relating to future results and expectations that are or may be considered forward looking statements.

Please refer to our earnings press release and recent SEC filings, including our Annual Report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today.

In addition, the results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP. With that, I'll turn the call to Liam..

Thanks, Mitch, and welcome everyone. The Skyworks team produced solid results in Q2 once again demonstrating above-market year-over-year growth in revenue and earnings per share. Let me begin with a few highlights. We produced record Q2 revenue of $913 million, up 7% year-over-year. We expanded gross margin to 50.7%, up 30 basis points over last year.

We delivered 13% EPS growth year-over-year to $1.64, $0.04 ahead of consensus, another Q2 record. And finally, we generated $434 million in cash flow from operations and achieved a 38% free cash flow margin. From a financial perspective, continued strength in our fundamentals and improvements in profitability directly translated to cash flow growth.

At the same time, our solutions are enabling an expanding and diversified set of end markets.

For example, during the quarter, we partnered with the world's largest automotive manufacturer to leverage connectivity across their global fleet; deployed integrated solutions for Honeywell's LTE handheld enterprise hubs; ramped Wi-Fi and ZigBee modules for Nest's connected video systems; secured new design wins at Belkin for mesh networks; supported Garmin's latest Forerunner advanced fitness smartwatches; delivered SkyOne and SkyBlue platforms for upcoming Lenovo and Asus high-performance notebooks; and we launched 802.11ac solutions for the newest DIRECTV streaming gateway.

We also captured strategic design wins across a number of flagship platforms, inclusive of SkyOne, DRx, GPS, Wi-Fi, power management, and antenna tuning solutions In parallel, in our infrastructure markets, we powered Massive MIMO for India's largest carrier, and finally, we collaborated with a premier European base station supplier for small cell deployments supporting AT&T, Verizon, T-Mobile, and Vodafone.

At a higher level, the overarching connected economy is rapidly expanding with global data traffic expected to grow 40% compounded over the next five years.

High-performance data centers are enabling client-to-cloud big data analytics, supporting artificial intelligence, autonomous vehicles, industrial IoT, machine learning, and virtual reality by facilitating a multi-trillion dollar ecosystem.

The sea change towards mobility harnessing cloud access and storage is creating commensurate demand for increasingly more powerful connectivity engines. Our mission at Skyworks is to enable this data-driven world, powering billions of new intelligent devices through instantaneous, reliable, and secure wireless connectivity.

Moving forward, 5G will usher in an age of truly ubiquitous connectivity and intelligent automation, enabling richer, smarter, and more convenient ways to live, work, play, and educate.

Skyworks is leveraging our deep systems knowledge, strategic partnerships, and formidable investments to accelerate the deployment of 5G, uniquely meeting the requirements for low, mid, high, and ultra-high frequency bands with our differentiated Sky5 platform.

In short, Skyworks is well-positioned to capitalize on the revolutionary applications ahead while facilitating the more expansive connected economy of tomorrow. I will now turn the call over to Kris for a discussion of last quarter's performance and our financial outlook..

Thanks, Liam. Revenue for the second fiscal quarter of 2018 was $913 million, up 7% compared to Q2 of last year, exceeding our guidance and consensus estimates. Gross profit was $463 million, or 50.7% of revenue, up 30 basis points over the prior year. Operating expenses were $132 million.

As a result, we generated $331 million of operating income, translating into an operating margin of 36.3%. Our tax rate was 9.5% in the quarter. Net income was $302 million, translating into $1.64 of diluted earnings per share, up 13% year-over-year and exceeding our guidance by $0.04. Turning to the balance sheet and cash flow.

Second fiscal quarter, cash flow from operations was $434 million and capital expenditures were $90 million, driving a strong free cash flow margin of 38%. Dividends paid were $58 million and we repurchased over 1 million shares of our common stock for a total of $112 million. We ended the quarter with a cash balance of $1.9 billion and no debt.

Now moving on to our outlook. Strong growth in our growth market portfolio is mitigating the near-term softness at leading smartphone customers and the trade restrictions imposed by the U.S. government on a Chinese OEM. Specifically for the third fiscal quarter, we expect revenue to be in the range of $875 million to $900 million.

We expect further gross margin expansion to between 50.7% and 51% with operating expenses remaining flat sequentially. Below the line, we anticipate roughly $3 million in other income and a tax rate of 9.5%. We expect our diluted share count to be approximately 183.5 million shares.

Accordingly at the midpoint of approximately $888 million in revenue, we plan to deliver diluted earnings per share of $1.59. Finally, based on new program ramps heading into the second half of the calendar year, we anticipate a resumption of sequential revenue growth in the September quarter with sustained momentum into the December period.

With that, let me turn the call back to Liam..

Thanks, Kris.

As our results demonstrate, Skyworks is on track to deliver another year of record performance underpinned by content-rich design wins, spanning a number of strategic end markets, world-class operational execution and scale, the launch of our Sky5 platform as 5G becomes a reality, and decades of experience in developing innovative solutions over successive technology generations.

Finally and most importantly, we are committed to delivering premium levels of profitability and cash generation, consistently creating value for our shareholders. That concludes our prepared remarks. Operator, let's open the line for questions..

All right. Thank you. And our first question comes from the line of Ambrish Srivastava from the Bank of Montreal. Please go ahead..

Thank you. Liam, I just wanted to delve a little bit into the top line. This is a notoriously bad visibility industry to be in.

But what gives you the confidence, not just for the September quarter, but you said sustained momentum outside of normal seasonality? Could you please talk about the content growth that you would be seeing on a year-over-year basis as we go into new platforms? And then I had a quick follow-up..

Sure, sure. Yeah, well, as you know, our products are designed into some of the most compelling companies on the planet, whether it's smartphones, whether it's IoT applications or infrastructure, other broad markets. And the design cycles are long, and we have very good visibility into the content that we ultimately enjoy.

And the challenge is obviously units, right? You can't always tell what the unit numbers are going to be.

But when we look at our data today, looking at the content position that we have in leading applications, the continued push for performance that we see in mobility, and the appetite for the consumer to want that data faster and faster as we just discussed in the prepared remarks, we're very confident in our position in terms of gaining content, gaining share, extending reach, and also with great visibility as we look out into the next couple of quarters.

So that's sums up where we formulate our guidance and our outlook..

Could you just quantify how much content you will be gaining?.

Yeah, I mean, it's not one number. It's a customer-by-customer opportunity. Certainly, the customers that are pushing the performance barriers and really raising the connectivity speeds and data rates and performance, those accounts provide more opportunity for us on a dollar basis.

But there's also some operates from 3G to 4G, and some players in emerging markets that are just starting to move the needle. So it's a culmination of all of that that provides us with a view to see upside here in the second half..

Thank you. And now to the line of Blayne Curtis from Barclays. Please go ahead, sir..

Hey, guys, thanks for the question. Liam, maybe you can just talk about – obviously this is a tough seasonal period for handsets.

And maybe you can just talk about the China market, what you're seeing in terms of recovery, and then maybe as you look into June, if you could maybe just think about – obviously the marquee smartphone is weak, everybody knows that, maybe just what impacted the guidance? And then highlight China recovery in the second half..

Yeah. So China is obviously an important market, they're a market that consumes technology, they export technology, they're also a conduit for us to address emerging markets from an end user perspective. And it's been a market that we've enjoyed and we continue to enjoy.

There's a lot of content opportunities across the diversified players within China. We do well there. We're starting to see kind of that translation from low end to mid-tier within China and then the mid-tier players getting a little stronger.

There have been some cases where you have some pockets of kind of sideways action in China that can happen as we kind of pause into 4G and get ready for 5G. But our content position there continues to move up. Certainly as we noted, we do have an issue with one player in China, ZTE, where we've got about a $25 million to $30 million hit on revenue.

That is now completely contemplated in the guidance, so that's an issue. But as we move into the second half, as we noted, the tier 1 players where the opportunity is greatest, the performance is most difficult and the opportunity to drive connectivity speed and data rates continues to go up.

That's where we see the real opportunity here in the second half..

I just wanted to ask you on the broad market side, it's been a consistent double-digit grower.

Just opportunity with 802.11ax is in terms of content, and then just timing as it seems like that is pushed a little bit to the right, but just as you look into next year, when do you think 802.11ax will start hitting?.

Well, we're starting to see 802.11ax show up in roadmaps now for products that would come probably late next year. We can deliver that through smartphones, we can deliver that technology through access points, routers, streaming applications.

And I should also include that broad markets in general is going to be a meaningful catalyst for us in the second half in addition to the comments on smartphones. And Wi-Fi in general continues to be a real strong piece of our business through IoT. So we'll see that coming together. But 802.11ax will definitely be there.

You're right it's been pushed out of it, hasn't been an impediment to our growth, but it will be an accelerator as we get into late 2018 and into 2019..

Thank you. And now to the line of Craig Hettenbach of Morgan Stanley. Please go ahead..

Yes, thanks. Just had a question on gross margin, just a sequential, I mean, you should probably see some benefits from mix perspective in terms of mobile weaker and broad market stronger.

So anything else within the gross margin mix that you call out into the June quarter?.

Yeah. So revenue is down slightly on a sequential basis. So we don't get a little benefit from size and scale. But there's definitely some moving parts from a mix point of view that is helping us, and that's why we guided the gross margin on to be up potentially between flat to up 30 basis points sequentially.

Again looking forward to the second half of 2018, we believe that we can continue to make some good progress, further gross margin improvements towards our target model of 53%..

Okay.

And then just a follow-up to Liam, the discussion around kind of weakness at smartphone customers, where do you think you are at this point from a production perspective and inventory? And how much is being worked through versus how much you think has to continue to come out of the system in the smartphone side?.

Sure. Yeah, I mean, certainly we felt the unit number for the Q3 period was a little bit light and one of the reasons why our guidance is roughly flat if we add back the ZTE. But as we go into the second half, we see turnover of portfolios with our leading customers. We see new products ramping. We know what our position is within those products.

We're very comfortable with that. We see the technology being pushed yet again, which allowed us to continue to grow our content and position. So we do feel very good about that. And second half data points really do have some independence from what we're seeing in the first half with different products..

Thank you. And now to the line of Vivek Arya from Bank of America. Please go ahead..

Thank you for taking my question. Liam, I wasn't sure if you quantified how much of a headwind ZTE was.

And then importantly, my first question is, is there a way to help us at least get a sense for how much year-on-year growth rates can you get towards in the September and December quarter? I understand that the unit trends might be a little bit volatile.

So just because I think there is so much focus on that part of the year, if you could just give us, even if it's a range of where do you think year-on-year growth rates would shake out in September and December, that would be very helpful..

Sure. Yeah, with respect to ZTE, they're about $25 million to $30 million of revenue. The lion's share of that is mobile, but there's also some infrastructure pieces. So that one is pretty well quantified.

And when we look out to the second half, we're definitely – again I can't provide complete guidance here, but we're clearly anticipating meaningful sequential growth into Q4 September and then meaningful growth again into December, following a traditional seasonal pattern for mobile and smartphones.

There's an ability for us to have a higher inflection on that given content gains we expect, but you should anticipate solid growth two quarters in a row there from Q3 close..

Got it.

And as a follow-up, in some of the places where I think you are expected to perhaps expand your share or gain more content and know that fact for example, right, and maybe add more diversity to receive, for example, how is the competitive situation beyond just the traditional competitors? Do you sense any more competition from Japanese players, for example? If you could just give us a sense for how is the competitive landscape in the places where you are gaining more content.

Thank you..

Well, the competitive landscape is being vetted out based on performance and technology. That's what it is today. This isn't just about capacity. It's just not about having good enough product. It's about having the best product. And in the markets that really matter that really drive change and push the envelope, we're winning.

And I would say that our Tc-SAW capabilities are not only world class in terms of output but in terms of performance. The quality of that technology right now has been advanced by Skyworks and allows us to push the frequency envelope wider and wider and broader and broader.

Our DRx diversity technologies provide a tremendous benefit to the customer and the end user, very unique stuff that's crafted and tuned and tested here at Skyworks and developed completely in-house. Those are the kind of things that really move the dial. So there's a competitive environment, of course, and this is a great market.

And competitors see some of the things that we see. But the real strength of Skyworks is moving up, advancing that technology, adding functionality, extending our reach, and creating the most compelling end products for our customers.

And we commented today on the prepared remarks, when you look at markets like data center and cloud, which are really important today, invariably they are tethered to a handheld device that needs very high-speed instantaneous data in order to make that cloud ecosystem really, really pay off.

So that client-to-cloud connectivity is a big deal, and in the client side where we play, we have to be better and better every year and support our customers, and that's what we're doing..

Thank you. And now to the line of Tristan Gerra from Baird. Please go ahead..

Hi. Good afternoon. What is the extent to which, as we move above 3 gigahertz frequencies, the extent to which this is an opportunity for Skyworks medium term, either in terms of technologies or higher content opportunities, if you could elaborate on this..

Sure. Well, when we start to move above 3 gigahertz, we're entering the domain of what we call 5G.

So we've talked a lot about that in the past, and Skyworks has a really strong, compelling platform, our Sky5 platform, which really is a culmination of multiple solutions from transmit to receive chain, solutions addressing that new spectrum that one would see from 3 gigahertz up to 5 gigahertz and even beyond. So we're working on that right now.

We have the key elements, the IP, the engineering technology to it put together, we have the devices now that are in process and in the development stage clearly targeted with customer opportunities in mind. So we'll start to see that evolve.

And I think it's an important point in the industry because as 4G has proliferated quite well from 3G and we are probably in mid to late innings on 4G, 5G is going to step up and bring a whole new wave of technology opportunities to Skyworks.

And they're going to be more challenging, but we're making those investments today across the board and the elements that we provide and then the ability to integrate and configure for our customers. So that's something that we look forward to here over the next several years..

Okay. Thank you.

And then as a quick follow-up and following up on a prior question about inventories, should we make the assumption that excess inventory and specifically of component inventory in the smartphone supply chain should be basically back to normal by mid this year, or do you expect lingering impact into the September quarter?.

No, I think when we look today at the inventory including the inventory on our books, the inventory in the distribution channel as well as the inventory further up in the supply chain, it's currently at a healthy level. There's always some minor fluctuations there, but I would describe it as a healthy level currently..

Thank you. And now to the line of Harsh Kumar from Piper Jaffray. Please go ahead..

Yeah, hey, Liam, I had one for you at a broad level.

Do you think that we are still, as a handset component supplier, we're still in a 10% to 12% growth environment? And if so could you tell me may be what 5G can do to help that number out as it comes along next year?.

Sure. Yeah, I think if you look at the culmination of smartphones today that are really right for the uprate cycle today, that we're on the cusp here of a big turn in wireless connectivity, and that's 5G, and an even broad market.

So when you look at broad market what we're doing there, which is somewhat uncorrelated to smartphones, it runs with a whole different customer set, and we've been doing great there. And then you look at our position in 4G moving to 5G, we're very comfortable. And so the opportunities to be in the double digits top line are absolutely there.

When you look at 5G, a couple of basics here that we want to make sure we understand. 5G is additive to current 4G and 3G phones. So when you have a device today that you're carrying around today, it doesn't have any 5G technology. It has a lot of great technology a lot of content opportunity, but it's not 5G.

So 5G is incremental adds to what you see today. It's new frequencies, the last question that we had from the last call talked about what do you see 3 gig and above? We see new technology, new waveforms, new opportunities to filter to transmit to receive, very complex, and you have to do that in a device that carries 4G and 3G as well.

Current budgets are challenged, efficiency is challenged, integration capabilities, all that has to come together, and that's really good for us, that's in our sweet spot. So we look forward to that and it's going to be faced in over time as we saw 4G. There's an infrastructure side, there's obviously the handheld side.

And then the other thing that 5G will do is create network capacity expansion that will allow more and more independent IoT devices to join the network. So there's a lot there, we're excited about it, it's going to require some incredible technology investments and scale, and some of the smartest people in our company to work on this.

So we're looking forward to it, it will be incremental, and it will be one of the key catalysts to getting to that double-digit growth..

Hey, Liam. Thank you. For my follow-up, on the last call, I think you guys specifically talked about tremendous amount of content increase perhaps in the back half with your largest customer. I'm curious what you're seeing there. And then also you mentioned something very interesting, Massive MIMO on the infrastructure side. You gave an example in India.

I'm very curious what you're doing on the infrastructure side that involves Massive MIMO..

Sure. Yeah, so with respect to the infrastructure side, we have these incredible antenna arrays that we've develop and sell to our networking folks and they're quite powerful and very unique.

And so we're leveraging different technology that when you see a smartphone there's a lot of low-noise amplifier technology and some switching technology and some filtering technology, but done at a higher grade and a higher level for infrastructure. And to make all those really interesting things happen in 5G, you do need that network upgrade.

So we're working on that in parallel with the great stuff that we're doing inside the handset and inside the IoT devices. And I think the infrastructure market has been somewhat stagnant for a while, the 5G step-up is a way to really light the fire again in that space, and we'll be there..

All right. Thank you. And now to the line of Chris Caso from Raymond James. Please go ahead..

Yes. Hi. Thank you. Just for first question is just a housekeeping.

Could you give us the split between broad market and mobile in the March quarter? And just to confirm, assume by your other comments, you're expecting broad market to increase as a percentage of revenue as you go into June, correct?.

Yeah, that's correct. So in the March quarter, broad market was approximately 27% of total revenue, so we're around that $1 billion annualized run rate. And there's a lot of design win momentum as we explained during the prepared remarks. And there will be further strong growth in the second half in broad market.

As a result of that the percentage of broad market of total revenue will continue to increase..

Great. For a follow-up question, I wanted to ask about the impact of the move to 4x4 MIMO.

Could you detail what that means with regard to content both on the low-band pad, as well as diversity received? Perhaps quantify the increase or give us some sense of how that affects content in both of those areas?.

Sure. Yeah, so I think what you're seeing here now is just the push for performance. It's being delivered by more intense requirements and specifications on mid-band, high-band, low-band. Diversity received is another really important section. And then MIMO, which is going to give you some incremental data streams within a mobile device.

So, that technology, the MIMO technology is now starting to flow through with some of the leading smartphone players. We have some other players that haven't yet even hit the diversity receive side that we're working with.

And again, the DRx, we call DRx diversity receive is really about downlink performance, which has been – lately it really has been the bottleneck. It's downloading high-speed video, high-speed data, the burden has been quite strong there. So we're seeing incremental content, Chris, in these applications.

So these are devices and engines that weren't needed three or four years ago, weren't required, and now they're coming forth. And certainly the leaders in the space are first to market on these technologies, but we do see the opportunity to pick up in the mid-tier as well and bring that technology forward..

Thank you. And now to the line Krysten Sciacca from Nomura Instinet. Please go ahead..

Good afternoon. Thanks for taking my question. First one, I just want to dig into broad markets a little bit for this quarter. I think I had it modeled up a little stronger this quarter. So if you can maybe just talk a little bit on what were some of the push and pull factors in the quarter in broad market..

Sure. Yeah. The broad market business in Q2 I believe was about 10% sequential. And it will be a similar level coming into Q3. And it really is a diversified pool of applications and customers that we pursue, and we talked about some of them, infrastructure as part of broad markets. We have some early-stage automotive engagements that are moving along.

We do a great deal of work in access points, routers, applications like Nest, Dropcams security systems. It's a very broad set of end markets and customers, and it's also a very broad set of wireless topology. So we go from Wi-Fi to Bluetooth to ZigBee to Thread, and back up the LTE if we need to.

So it's a broad set of end markets and customers served by a pretty rich, deep portfolio of wireless topologies. And we work with our customers to make sure we put the right solution in the right application..

That's helpful. Thank you. And then just kind of pivoting over to mobile, I think there's been some debate between whether BAW or SAW will be used in 5G, and I feel like there is – I've heard both scenarios. And I was just wondering if you can comment on what you're seeing developing so far for 5G..

Absolutely. Yeah. I think what you're going to see in 5G is depending on the frequency and the waveform the right filter or the right engine will be deployed.

So what we do at Skyworks is that we have access into all the necessary filter elements and then we bring our gallium arsenite technology, our packaging, our test technology to make sure that the engine, the transmit or receive engine, SkyOne transmit and DRx on the receive side, are going to fit the requirements of our customer.

When you get to 5G, you've got a lot of new technology. It's higher frequency. There's more challenges, there's more issues, and the solutions are not laid out yet. So everybody's going to go at it somewhat differently. You will need filtering, of course. The filtering could be bulk acoustic wave, or BAW. It could be Tc-SAW, temperature compensated SAW.

But it will be high-end. It will be high performance. So I think there'll be some differentiation there of the companies that can provide not just the filter, but the complete solution to navigate the challenges within 5G. And it's going to be a great opportunity for us..

Thank you. And now to the line of Craig Ellis of B. Riley FBR. Please go ahead..

Yeah. Thanks for taking the question. Liam, I wanted to follow up on an earlier question regarding the return to double-digit growth, and I think a lot of that was couched in the context of what happens on the integrated mobile side.

But what I wanted to ask is as you look at 5G and given the evolution of the portfolio towards a lot more IoT, how does the 5G transition for broad markets compare to what you saw in both 3G and 4G? What does that do to the company's overall growth rate?.

Yeah.

No, that's a great question because ultimately our job is to try to put the best products out there for our customers, and it really doesn't matter whether we call it broad or whether we call it mobile, right? So I think what's going to be interesting about 5G is you're going to start to see things like IoT really proliferate, and some of those IoT devices may carry a cellular engine, not necessarily a Wi-Fi engine, right.

And we'll be able to address that. We'll have that flexibility. So I think there's going to be some great things. We're going to have the classic, hopefully the classic upgrade cycle that we see in 5G where again we bring in new technology that is additive to what we see in smartphones.

But then in parallel, one of the really important points around 5G is enabling new markets, enabling markets like autonomous driving where you need incredible high data, incredibly fast data with literally no latency, right. Instantaneous latency.

So those are markets that would be technically broad market for us but could have a very powerful growth factor and technology need that we can supply. So we'll see more and more of that industrial IoT, a lot of really creative interesting markets that need a 5G connection to really work. So we're going to see it in IoT.

We're going to see it in autonomous vehicles. We're going to certainly see it in smartphones. And all of that together will hopefully support and really bring some tailwinds behind our double-digit growth rate..

Okay. And then for the follow-up, I'll ask one for Kris, and maybe part of it as a two-parter question we'll return back to you Liam. But, Kris, it looked like there was a tax benefit in the quarter.

Are we now seeing a tax rate that's lower for fiscal 2018 and 2019 than what was guided last quarter at 11% and 10%, if I've got these numbers correct? And then, Liam, it looked like there was about $120 million or so of share repurchase in that quarter and you just raised the share buyback on the last call.

Is the recent level of share repurchase activity the level we should expect, or off of such robust operating cash flow, would you expect that to tick up as we go through the rest of the year? Thanks, guys..

Yeah. So let me first answer the tax question. So for this year we expect a tax rate on or about 9.5%. For next year, previously I've said 10%, and we are still looking at on or about 10% for fiscal 2019.

And then on the repurchases and the cash return to shareholders, you're absolutely right, last quarter we've initiated a $1 billion share buyback program. Last quarter we repurchased approximately 1 million shares for $112 million. We've also indicated that it's our target to return 60% to 75% of the free cash flow back to the shareholder.

We will continue to use our share buyback program, as well as our dividend program to drive the cash return to the shareholders toward that target. Definitely at the current stock price level of somewhat in the low $90s, it's a great buying opportunity and we definitely will continue to step up our share buyback program in this quarter..

Thank you. And now to the line of Bill Peterson of JPMorgan. Please go ahead..

Yeah. Hi. Thanks for letting me ask a question, and nice job on the financial performance. I guess you did mention that ZTE is largely in mobile but obviously some in broad markets.

So I guess the question is when you look at the potential impact for the full year in broad markets, do you still sort of stick with the mid-teens type growth level, or does it come off a bit? How do you think about that? What's driving the growth really in the second half, specifically between, let's say, Wi-Fi or more EDGE devices?.

Yeah. So in terms of broad market, we target somewhere between 10% to 15% year-over-year growth. So call it somewhat in the low teens potentially approaching 15%. Obviously we have a little bit of a headwind here with ZTE. I would say probably $5 million to $10 million per quarter of the ZTE business is in broad market, especially in infrastructure.

So we're having a little bit of a headwind. And so without the ZTE headwind, we would be close to 15% year-over-year growth..

Okay. Thanks for that. And I believe in the last call you mentioned that CapEx could be in the range of around 10% of revenues.

I guess in light of some of the weaker demand profile in the first half, how should we think about CapEx for this year?.

So if you look historically, CapEx has been flipped away in between low 6% and as high as 13%. This year there's definitely some seasonality to it as well within the year and quarter-over-quarter. But this year we're probably going to end up somewhat in the high end of that range, especially in support of two items.

As we discussed, we have a major ramp with new platforms with leading customers coming up in the second half that are very content-rich products with a lot of filters complicated or complex integration in the back end. And so we are making the necessary capacity CapEx investments to support that growth in the second half of the year.

In addition to that we continue to make technology-driven CapEx investments improving the technology, the filter technology, the reach of the technology there. And so a combination of that will result in a slightly higher CapEx this year. Longer term we will be on or about that 10%..

Thanks for the color..

Thank you. And now to the line of Timothy Arcuri from UBS. Please go ahead..

Thank you. Kris, I just wanted to confirm that that calendar 2018, that the mobile business is going to grow double-digit for the full calendar year..

We didn't say that. And again, we haven't provided any guidance for September. But given where we are now two, three quarters into it, it's not likely that we will see double digits in mobile..

Not likely. Okay. Okay. And then on Huawei, obviously they were a 10% customer last year. Are you seeing them sort of hedged in terms of their suppliers given that they're being looked at by the U.S.

government as well? Are you seeing them move into business away from you to any other supplier to sort of hedge themselves?.

No, we have not seen that. And they continue to be a strategic customer of ours..

Thank you. And now to the line of Edward Snyder from Charter Equity. Please go ahead..

Thanks, Liam. Huawei, ignoring for a minute the potential for the U. S. government to say nothing happened, they were a 10% customer last year, which was the first time in a long time. But a lot of that was a concentration in the node. I think you've guided for when you guided about 10% or $10 in content per phone.

Given the changes that have occurred in both those models this year and their unit volume issues, et cetera, do you expect them to be a 10% customer in this fiscal year?.

Yes. I mean, we still – the fiscal year is not over. Huawei is a very important customer. We have a great relationship there. We've populated the P20, the P20 Pro, we have infrastructure business. And they've been a great partner for quite some time. And the technology reach that we put forth there has been great for both of us.

So we don't see – I can't quantify the full year right now but they're certainly an important customer, one that we spend a lot of time with, one that really values our technology. And we have, I think, a business relationship there that should prosper..

Yeah. And I know you guys have done a spectacular job of actually solving a lot of the problems from some of your largest customers that's why you gained so much content in all these ancillary areas, especially DRx. And now that Qorvo has bugged out of the low-band pad, you got the business to yourself.

But given the push especially all by the big guys of dual sourcing, we've seen a number of replaces, why should we expect them to bring someone in or open that up to other players in the next 12 months or so, both DRx or may be low-band pad? Do you anticipate new competition? And maybe going back to sharing some of these swatches based on the fact that they wanted to diversify the supply chain like we've seen in the high-bands? Thank you..

Yes. I think the number one requirement for customers is great technology and conveyance of value to them, and we bring it. So competition has always been there especially at the largest customers, but the competition is at the highest of the largest customers, everybody knows where the dollars are.

And I'm really happy with our team's performance and executing and raising the bar with technology in great solutions and continuing to gain..

All right. Thank you. And our final question for today comes from Srini Pajjuri from Macquarie. Please go ahead..

Clarification, Kris, on the gross margins, you said you'll see some mix benefit next quarter. But I guess as we head into the second half of the calendar, you probably have some mix headwind because of mobile coming back strongly.

So can you talk about the puts and takes for the second half? And then how did you get from 50.7% to 53% which is your longer term model? Is that just a function of the volume or is it mix, or are there any other puts and takes that you can give us color on? Thank you..

So there's definitely two sides to the equation when you talk about gross margin. One is on the revenue side and the value creation, and the other side is the cost and cost reductions. And on both sides we continue to make good progresses.

Liam talked about the level of complexity, the higher data speeds, 5G, which is coming around, that is definitely helping us to deliver more value to our customers, and that's helping from a margin point of view. On the other side, of course, cost and cost reductions that is a key process and a key focus item of the management team.

We continue to drive cost efficiencies, yield improvements, OE improvements. We continue with our filter in-sourcing process. And definitely in the second half of the year, as new ramps with leading customers is happening, we will have additional benefits there from size and scale.

And so a combination of all of that will – I'm comfortable that we will steady progress towards that 53%..

Great. Thank you..

And, Mr.

Griffin, you have your final remarks?.

Sure. Well, thank you, all, for participating on today's call. We look forward to seeing you at upcoming investor conference or other events during the quarter. Thank you..

Thank you. And, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect..