Greetings, and welcome to the Qorvo, Inc. Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Douglas DeLieto, Vice President of Investor Relations. Thank you. You may begin.

Thanks very much. Hello, everyone, and welcome to Qorvo’s Fiscal 2023 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 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 noncash expenses or any 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 Investor Relations website. Joining us today are Bob Bruggeworth, President and CEO; Grant Brown, Chief Financial Officer; Dave Fullwood, Senior Vice President of Sales and Marketing and other members of Qorvo’s management team. And with that, I’ll turn the call over to Bob.

Thanks, Doug, and welcome, everyone, to our call. Qorvo delivered fiscal third quarter revenue and EPS above the midpoint of our outlook provided during our November 2nd earnings call. In High-Performance Analog, quarterly revenue reflected year-over-year growth in defense, broadband, and power. Our power business posted a strong quarter with robust design activity for our silicon carbide power devices. Offsetting this were power management markets with consumer exposure in infrastructure where customers are working down elevated inventory levels. In our Connectivity & Sensors Group, the quarter reflected lower end market demand and channel inventory consumption for Wi-Fi products partially offset by strength in automotive. Design activity was strong across customers and products, including ultra-wideband, matter, and sensors. Use cases continue to proliferate their benefit from precision location, indoor navigation, seamless connectivity, and enhanced human-machine interfaces. Lastly, in Advanced Cellular, Qorvo participated broadly across customers’ portfolios. The macro environment weighed on overall smartphone volumes across customers, and revenue reflected channel inventory consumption within the Android ecosystem. Design activity continued to be strong across customers and product categories and supports year-over-year content gains at our largest customers. Now, let’s turn to some quarterly highlights. In High-Performance Analog, Qorvo began sampling a radar power solution that combines a high-voltage power conversion PMIC and silicon carbide power switches to control a GaN RF power amplifier. The solution reduces the size by up to 30% in D&A radar systems while expanding Qorvo’s content opportunity. We also expanded our SHIP state-of-the-art RF packaging contract with the U.S. government to develop multichip modules that combine digital optical devices with Qorvo’s mixed-signal RF. In aerospace, we delivered a multichip solution that includes Qorvo’s high-frequency BAW filter as well as a GaN PA for low orbit satellites and other applications. The solution supports cellular satellite links, and we have secured new designs. The opportunity for Qorvo is notable given the trend in defense and aerospace applications of one to many. That means rather than one jet, there will also be many drones; rather than one geo-satellite, there will also be many LEO satellites. At the same time, new capabilities are being added to existing platforms that require increased semiconductor content and higher density and more advanced packaging, all areas where Qorvo is strong and is investing to advance the technology. In cellular infrastructure, we commenced pre-production shipments of our first integrated PA modules, or PAMs, to a Tier 1 European infrastructure OEM for 5G massive-MIMO base stations. We also began sampling our next-generation PAM, which delivers market-leading efficiency for 5G massive-MIMO installations to the leading European infrastructure OEMs. For broadband infrastructure applications, we sampled a CATV power doubler amplifier that maintains linearity and extends bandwidth to enable higher throughput DOCSIS 4.0 capabilities with industry-leading power efficiency. Deployments of DOCSIS 4.0 are scheduled to begin this year and Qorvo is very well positioned as the industry leader. In CSG, we expanded our Wi-Fi content at a Korean-based smartphone OEM to include Wi-Fi 6E and Wi-Fi 7 designs and we ramped Wi-Fi 7 FEMs for access points and routers for our smart home ecosystem customer. We also commenced sampling 5 gigahertz and 6 gigahertz filters. These filters leverage Qorvo’s next-generation BAW process and enable worldwide Wi-Fi 7 frequency coverage. There is an increase in customer interest related to multi-link operation, which is a key attribute of Wi-Fi 7 and enables higher throughput and lower latency. Lastly, we began volume shipments of MEMS-based sensors, enabling an enhanced HMI experience and true wireless stereo earbuds. Qorvo sensors were selected to replace legacy capacitive touch sensor technology. Design activity for sensors continues to be strong across markets, including automotive. We are working with leading automotive Tier 1s and have secured automotive smart interior design wins in more than 25 vehicles. In Advanced Cellular, we secured multiple design wins across Android OEMs in support of 2023 devices. During the quarter, we commenced the production ramp of multiple components for the leading Korea-based smartphone OEM’s flagship platform. We have increased our content significantly year-over-year. We are broadly serving this customer across our portfolio and continue to support the migration of their mass market phones to integrated 5G solutions. At a U.S.-based Android OEM, we were selected to supply multiple solutions, including ultra-wideband, antenna tuning, and BAW-based antennaplexing in support of their 2023 smartphone launches. Lastly, Qorvo was recognized by multiple customers. We were presented with Honor’s 2022 Golden Supplier Award, and we received quality awards from Vivo for discrete switches and amplifiers and highly integrated solutions. Before handing the call off to Grant, I want to make a few high-level comments to frame our outlook, both in the near term and further out. At our largest two customers, we are very confident in our ability to grow year-over-year content, and that includes this year. In 2023, we expect growth in BAW-based content as well as other content growth. Equally important, we enjoy a range of opportunities across all of our customers in the future years. Qorvo is supporting the highest volume flagship phones while supplying integrated 5G solutions as mass market portfolios migrate to 5G. Fewer than half of the Android devices were 5G in 2022 and the migration of 5G is expected to extend over many years. We are unique in Advanced Cellular in the breadth of our customer exposure and in the depth of our product and technology offerings. Our long-term view of ACG continues to be mid- to high-single-digit growth driven by multi-year content gains. In particular, we see an expanding market for our BAW technology. Productivity gains in our Richardson, Texas fab have enabled a doubling of our BAW output. We intend to put that to good use as we continue to capture designs and grow our BAW content in flagship phones. We expect the long-term growth rate of HPA and Connectivity and Sensors to outpace Advanced Cellular. Our view for HPA is double-digit growth. And in CSG, we expect growth in the strong double digits. Key growth areas supported by recent wins with silicon carbide devices in EVs and solar inverters, MEMS sensors and notebook track pads, and automotive smart interiors and ultra-wideband in automotive and Android devices. These and other investment businesses are securing new designs that extend our opportunity in large growth markets. In the near term, the team is performing exceptionally well while navigating extraordinary events. Factory loadings have been reduced, and we are bringing down channel inventories. We are also actively managing the expense line while sharpening our focus in support of targeted growth. We are working to accelerate revenue related to our Omnia BAW-based biosensors by exploring options for the associated Omnia test hardware, meaning the Omnia desktop test unit and cartridges that contain our BAW biosensors. The technology has been proven commercially, and we are engaged with a diverse set of customers. Qorvo remains at the forefront of connectivity, sustainability, and electrification. We enjoy exceptional customer relationships, and we are a key enabler of future architectures. These architectures continue to favor higher levels of performance, integration, and functional density to deliver the successive improvements in each market’s next-generation products. Our customers value Qorvo’s best-in-class products and technologies, and we are securing broad-based design wins in high-growth markets. As volumes recover, we are positioned to deliver long-term growth and robust free cash flow. And with that, I’ll hand the call off to Grant.

Thanks, Bob, and good afternoon, everyone. As a reminder, our references today will be to our three operating segments: High-Performance Analog, or HPA; Connectivity & Sensors Group, or CSG; and Advanced Cellular Group, or ACG. In our upcoming 10-Q, we will provide historical financial information that reflects these operating segments. Additional historical information will be made available in our fiscal 2023 10-K to be filed this May. I’ll now turn to our latest quarterly results. Revenue for the third quarter of fiscal 2023 was $743 million, $18 million above the midpoint of our guidance. We enjoyed relatively strong performance in automotive, broadband, defense, and silicon carbide power devices. However, elevated channel inventories and weak end market demand pressured revenue and order activity across all three operating segments. Looking at each operating segment individually, HPA revenue of $155 million in the quarter compares to revenue of $182 million in the same quarter last year. In HPA, growth in areas such as defense and silicon carbide power devices was offset by inventory consumption in the 5G base station market and softness in consumer-facing markets like SSDs and battery-powered tools. CSG revenue of $97 million in the quarter compares to revenue of $158 million in the same quarter last year. This reflects weakness in end market demand for Wi-Fi products and channel inventory consumption. Finally, ACG revenue of $491 million compares to revenue of $775 million in the same quarter last year. This reflects lower smartphone unit volumes and channel inventory digestion within the Android ecosystem. On a non-GAAP basis, gross margin in the quarter was 40.9%. Gross margin fell sequentially due to lower factory utilization and higher inventory-related charges including a quality issue at a supplier. Non-GAAP operating expenses in the quarter were $206 million, $90 million lower than our guidance and down $8 million versus last year due to OpEx discipline, the timing of product development spend and lower employee-related expenses including incentive-based compensation. In total, non-GAAP operating income in the quarter was $99 million or 13% of sales. Breaking out operating margin by each segment, ACG was 20%, HPA was 19%, and CSG was negative 32%. Non-GAAP net income was $77 million, representing diluted earnings per share of $0.75, which was at the high end of our guidance range. Free cash flow was $203 million. Capital expenditures were $34 million, and we repurchased approximately $200 million worth of shares during the quarter. The rate and pace of our repurchases is based on our long-term outlook, low leverage, alternative uses of cash, and other factors. Turning to the balance sheet, as of quarter end, we had approximately $2 billion of debt outstanding with no near-term maturities and $919 million of cash and equivalents. Our net inventory balance ending the quarter was up slightly at $857 million. Now turning to our current quarter outlook. We expect quarterly revenue between $600 million and $640 million, non-GAAP gross margin of approximately 41% and non-GAAP diluted earnings per share in the range of $0.10 to $0.15. Our current view reflects ongoing demand weakness across end markets as well as our expectations for further consumption of channel inventory. We continue to expect sales to Android smartphone customers will increase sequentially in the March quarter. For historical reference, the March quarter revenue in fiscal ‘22 for each of ACG, HPA, and CSG was $777 million, $211 million, and $179 million, respectively. At the volume levels assumed in our guidance, we expect Qorvo’s inventory position will decline in March, but remain elevated. In terms of channel inventory, the picture has begun to improve. For example, total channel inventory for our components in the Android ecosystem was reduced by over 20% in the December quarter. We expect continued improvement this quarter and anticipate the channel to normalize later this calendar year. We are actively working with customers to consume channel inventories. And in doing so, we expect production levels to remain compressed. This will lead to continuing underutilization charges related to inventories which will weigh on gross margin during fiscal Q4 and carry into next fiscal year. We project non-GAAP operating expenses in the March quarter will be up approximately $20 million sequentially due to the timing of product development spend, seasonal payroll effects, and other employee-related expenses. Below the operating income line, non-operating expense will be approximately $15 million, reflecting interest paid on our fixed rate debt, offset by interest income earned on our cash balances, FX gains or losses, along with other items. Our non-GAAP tax rate for fiscal Q4 is expected to be consistent with fiscal Q3. The rate remains elevated due to the absolute level and geographic mix of pretax profit including FX-related gains within high tax jurisdictions as well as the impact of the U.S. tax law change related to R&D capitalization among other factors. With regards to operations, I want to highlight the outstanding progress our teams have made in terms of productivity gains. We continue to make improvements in product development, filter design, process engineering, factory planning, manufacturing efficiency, and many other areas. Today, these gains have significantly increased our effective BAW capacity. And as Bob indicated, the progress continues. And looking forward, we can double our BAW capacity in the Richardson facility versus our current maximum theoretical thresholds today. Increasing a throughput of an existing asset not only reduces cost, but can reduce complexity within the factory network as production is consolidated. The BAW productivity gains in our Richardson facility allow us to achieve our long-term growth goals across all of our customers, including the most demanding BAW-based placements. As a result, we have decided to sell our Farmers Branch facility. We’re in the early stages of marketing the site and initial interest has been encouraging. For reference, the site has been incurring approximately $12 million of non-GAAP COGS per year. We are also evaluating strategic alternatives for our biotechnology business to accelerate and maximize its potential value. The Omnia platform, which is based on our BAW sensor technology, has demonstrated significant promise as a diagnostic testing solution. The biotechnology unit currently resides in our CSG segment. While the revenue impact from a transaction would be negligible, it would reduce total expenses by approximately $32 million per year. At this stage, it’s too early to comment on the eventual outcome, timing, or potential valuation. These actions will sharpen our focus and resources on the many growth drivers across our three operating segments. Our long-term outlook is positive, and we’re well-positioned to weather current macroeconomic challenges. Product performance requirements continue to increase in our end markets, sustainability initiatives underscore the increasing global reliance on power efficiency, and connectivity and electrification trends are accelerating worldwide. We have diversified our opportunities across markets, customers, and product categories while maintaining our commitment to technology leadership, portfolio management, productivity gains, and reduced capital intensity. This has supported strong financial performance during a challenging environment and has positioned us for long-term increasingly diversified growth. At this time, please open the line for questions. Thank you.

And our first question is from Toshiya Hari with Goldman Sachs.

You gave really good color on channel inventory, but I was hoping to ask a follow-up there. So, channel inventory as it relates to Android, I think you said, was down more than 20% in the December quarter. I guess, how do you see that evolving over the next couple of quarters? And I guess, more importantly, on the non-Android side or the iOS side, what’s your current assessment of channel inventory and how that plays out over the coming quarters?

Yes. This is Dave. I’ll answer that one. So first, we’re not going to comment on the iOS side of the inventories. And Grant already mentioned the Android. I think when we look at the overall channel inventories and when we refer to channel inventories, we’re talking about all of our components that are out, whether they’re in our distributors or at the end customers. And so, on balance, overall, it’s down about 20% across the entire business, not just within the Android ecosystem. If you look just within our distribution channel, it’s down about a third in the December quarter. But as Grant mentioned, we still have a ways to go in there. So we expect to continue reducing that across this quarter and then into the early part of FY24.

Got it. And then, as my follow-up on gross margins, you’re guiding the March quarter to, I guess, 40, 41%, which is essentially flat sequentially. Can you speak to where your utilization rates are today? And as you continue to work down inventory and the overall industry continues to work down inventory, what cadence should we be thinking about for the rest of the calendar year? Do you think you can exit kind of in the high-40s or even close to 50% calendar ‘23, or is that a little too optimistic at this point? Thank you.

Sure. Toshiya, thanks for the question. I’ll touch on margins here, and I’ll try to cover all of it, both in Q3 and then looking beyond that into fiscal ‘24. For fiscal ‘23, the primary driver of gross margin continued to be underutilization and inventory-related charges. In Q3, it accounted for about 920 basis points of headwind or in that neighborhood, and it’s expected to remain there in the March quarter, hence the flat gross margin guidance. Inflation across direct costs were approximately 80 basis points in Q3 and again, expected to remain there in Q4. As we stated earlier, in Q3, there was a supplier quality issue representing approximately 30 basis points of headwind in our Q3 period. So kind of walking through that Pareto, you can see the dominant factor is clearly underutilization. To your question about getting back to 50%, it’s unlikely in fiscal ‘24, although it depends on your view of the macro economy and a number of other variables. However, underutilization creates a lingering impact due to timing. And so, as volumes fall, those inventory balances will reflect higher per unit costs. And simply put, fewer units moving through a fixed cost factory collect more cost per unit. So, we saw this heading into the December quarter, and it will carry forward into fiscal ‘24. The rate at which that high-cost inventory flows through the P&L will obviously depend on variables like our future utilization or product mix including a ramp of revenue over the course of fiscal ‘24, but although the precise timing is uncertain, the reduction in channel inventories is very encouraging, and it’s a necessary first step. If I do look out over the course of fiscal ‘24, I could see potentially that 920 basis points of margin get cut in half, again, subject to your view of the revenue trajectory throughout the year.

And our next question is from Karl Ackerman with BNP Paribas.

I was hoping you could discuss a little bit more commentary regarding your outlook. You certainly gave much commentary across the P&L for March. But within that outlook, could you discuss the order of magnitude decline between your segments? I’m just trying to have a better understanding of what’s occurring, I guess, in the legacy IDP segment, which appears driven by some maybe some inventory overhang within Wi-Fi, IoT, and maybe telecom infrastructure. And then as you address that question, what are your assumptions for your mobile revenue in China in the March quarter, which I believe was guided to 10% in December?

Sure. So, let me start with our view of the segments in the March quarter. If we go back to kind of comparing our current March guide to our thoughts last November, there’s a bit of variance in HPA and CSG. Instead of flattish, there will be rather modest declines there in dollar terms for our guide. The biggest driver, of course, is ACG. If you consider the size of our largest customer relative to ACG revenues in December and that customer, excuse me, is seasonally down in March and June, it’s a sizable headwind, and that really dictates the path of our top line. In terms of our China-based smartphone OEM revenue, it came in largely in line, just a bit above 10%.

Understood. I just want to follow up regarding the China Android OEMs. It seems they performed slightly better. Should we expect similar revenue levels on a mixed basis in March? It appears to be improving. Additionally, if you could discuss the recovery process and your outlook for the rest of the year, I’d like to understand your confidence in the demand for mid-tier handsets, especially considering the new opportunities in premium-tier Android flagships you announced today. This is important to me because two major Korean memory OEMs indicated this week that the smartphone market could split into strong demand for flagships and weaker demand for lower mid-tier models. It would be helpful to hear your thoughts on production and design strategies for those markets if a bifurcation occurs. Thank you.

Sure. Let me break it down. I'll start, and then Dave can address the different tiers of handset models. In terms of revenue, we expect our China-based smartphone OEMs to remain relatively flat in dollar terms, but overall, our Android revenue should increase. Looking further into fiscal 2024, while I won't go into extensive detail or provide specific guidance due to the significant influence of macroeconomic factors, I can offer some insights on potential drivers. Beyond the March quarter, we anticipate the June figures to be around the same level, with slight variations influenced by the economic outlook and China's reopening. We don’t have high expectations for the reopening at this stage and are being somewhat conservative in our outlook. After that, I expect to see substantial growth in September, followed by strong annual growth in December and March 2024. Dave, would you like to share your thoughts on the tiers?

Yes. So, as Bob mentioned in his remarks as well, we’re seeing really nice content growth in the premium tier. So, we’re well represented there. And of course, we’ve always been well represented in the mass tier year as well, 5G. And so there’s still a lot of room to go in terms of conversion to 5G. So the rate and pace of that may not be as quickly as we would have liked, but it’s still a lot in front of us. So we expect to see that mass tier still moving to 5G over time.

And our next question is from Gary Mobley with Wells Fargo Securities.

I want to start by asking for some clarification on what Grant just mentioned regarding the sequential revenue comps and year-over-year growth looking into the first half of next calendar year. Was that in reference to CSG or the business overall?

It was a business overall.

Thank you for that. Is there any update on the purchase commitments from your foundry and suppliers? Do you expect to use all those commitments, or could there be some additional write-downs considering the current dynamics?

Yes. No change to our view. As you’ll remember, we restructured the agreement last quarter to better align our view of demand with supply and are working with that partner on an ongoing basis.

And our next question is from Edward Snyder with Charter Equity Research.

I have several questions. First, it seems that the competitive landscape, particularly in China and possibly with Samsung, is becoming much more challenging. We've received a lot of feedback indicating that BackSan is now a significant competitor in switches, offering high-band modules and competing in ultra-wideband, which wasn't the case two years ago. It appears they have been working hard for a while, and now the political climate in China seems to be more favorable for them. Are you noticing this trend? Are they becoming more aggressive? Additionally, are the margin expectations from the Chinese competitors comparable to what we typically expect from your usual Western competitors? If they are not, how might that impact average selling prices? Is it already affecting ASPs or should we anticipate a decline in ASPs? I have a follow-up question as well.

Hi Ed, thanks for the question. The Chinese competitors have always been present, and we have consistently observed them. What stands out is the demand for highly integrated modules that need top-quality filter performance, especially for exports and within the Chinese consumer market. We remain confident in our position with our integrated modules, including ultra high-band technology. We are making progress with mid-high modules and have significantly improved the performance and cost of our SAW filters for low pads. We feel very positive about our positioning. Regarding pricing, we haven't noticed any significant changes. In fact, there are areas where we are increasing prices. While there's some competition, that's a constant we have dealt with, so we don't see a significant shift in the market.

Great. On that same note about growth, it sounds like the MEMS business has been in development for a long time and is now beginning to show results. While I'm unsure how you're planning to boost ASPs as tuners, we have closely monitored that segment for a while and it seems you may be anticipating a notable increase in ASPs as the industry begins to adopt MEMS. Additionally, since Samsung restructured its handset division and started utilizing open market modules, it seems the actual content in ASP for these modules has significantly decreased, whether for mid-high or low bands. I am specifically referencing the flagship products, as there's a substantial upgrade when moving to modules. I'm trying to get a better understanding of what the overall content picture looks like year-over-year, or compared to two years ago, from the Korean perspective regarding the redesign of the front end. Also, could you share any trends in MEMS products that are countering this trend? Thanks.

Thanks, Ed. I’ll discuss the MEMS and let Dave elaborate on the comments regarding our highly integrated standard products. We're still in the early stages of MEMS, specifically RF MEMS, which we've been developing through the acquisition of Cavendish Kinetics and are just beginning to introduce to the market. Yes, customers are willing to pay for this technology, but we don’t anticipate it replacing all of our antenna tuners. It offers around a decibel of improvement, and those who value that enhancement will pay for it, although it does come with a higher cost per function. The performance gain is significant. Additionally, our MEMS pressure sensors are performing exceptionally well; I've mentioned that they're being integrated into over 25 different vehicles. Major OEMs are starting to implement and evaluate them, and we're seeing increased adoption in watches and other devices. It's still early in its life cycle, but we’re optimistic about it. Now, I’ll let Dave address your questions regarding some of the Korean manufacturers and the trends we’re observing there.

Yes. And while the architectures are similar, especially that particular customer that you mentioned, they’re still very demanding from a performance standpoint. So they have their requirements and you have to meet their requirements to win that business. So, we’re very focused on that. We work very closely with them on the advanced architectures years in advance to meet their needs. So, I wouldn’t think of it necessarily as a standard product. It’s still very demanding sockets.

And our next question is from Vivek Arya with Bank of America.

On the first one, gross margin and then how your balance sheet inventory affects that over time. So, you mentioned gross margin, I think, 41% for March, and June sales are flattish. I imagine gross margins are probably flattish also. And then I heard that you could recover about half of the 900 basis points of underutilization. So, it suggests gross margin somewhere in the mid-40s in the back half. But how do I align that with the inventory that you have on your balance sheet? Where do you see it going over time? And does that impact how the gross margin progression happens in the back half of the year?

Hey Vivek. Thanks. This is Grant. I’ll take your question. Yes, you’ve got it in terms of gross margin, and the answer on inventory is rather simple, right? As that inventory begins to get sold and flow through cost of goods sold, it will drag with it those higher costs per unit associated with underutilization. So, I would expect the inventories to trend down over time, subject to normal seasonal ramps at large customers where we do have to build inventory in advance of those sales. So over time, it will come down, again, offset by some of those growth-oriented builds that we do at seasonal periods of the year.

Grant, the reason I asked the question is because I heard before on the call that you think channel inventory normalizes later in the calendar year. I’m hoping I got that right. So, if channel inventory doesn’t normalize until later, how will your balance sheet inventory start to get back to more normal levels?

Yes. They’re not necessarily sequential. They can happen simultaneously depending on the level of demand. Although you’re correct, I think the first stage of that would be a reduction in the channel inventories, increase in order activity from our customers pulling through our inventory, along with, as I said, the offset and builds for large customer ramps, but they’re happening somewhat simultaneously, not perfectly sequentially.

Understood. And then for my second question, you mentioned content gains at your top two customers. Are these competitive wins, or is this new term? Like is your gain somebody else’s loss of content, or is it just new capabilities that customers are planning to add? And kind of related to that, just given the nature of these customers, do you expect to retain this content in the following years? Like, are these multiyear programs or the visibility is only there for the first year? Thank you.

Part of the questions we can’t answer, but I will tell you that it is both content and share gains at our largest customers, our largest two customers.

Which can continue, Bob? So these are like multiyear decisions or...

Can be, and some are, some aren’t. So, we’ll see.

And our next question is from Blayne Curtis with Barclays.

Maybe I just want to start, you’ve been kind of giving how large your largest customer or 10% customers are. Just trying to get a starting point for some of these moving pieces in December.

Sure. So, our largest customer is a significant portion of ACG revenues, usually representing about two-thirds of that business, if not more, in certain periods. And then our second largest customer, we haven’t commented on, but it generally hovers around that 10% mark. And certainly, with some of the growth we expect there could be more.

Got you. And then I guess, following up on Vivek’s question, just sort of trying to gauge the magnitude of these content wins you’re speaking to. You talked about being able to double capacity at Richardson, I’m assuming you have given the pullback in Android, some excess capacity already. So, I’m just kind of curious the time frame in terms of doubling that capacity if you have that on your horizon.

Sure. Let me talk to that. I think just at the highest level, there isn’t a BAW placement that we can’t fully support at any customer. Our Richardson facility is really the key takeaway there. We’ve driven some significant gains for the reasons I mentioned earlier in the prepared remarks. But the productivity gains, the overall die shrinks, the move from 6 to 8 inches, and then, of course, the successive generations of BAW filters that we’re running through that factory lend themselves to a significant increase in capacity. So, as we look at Farmers Branch, the need for that, I guess, over time has been somewhat of a safety valve in case any of those initiatives didn’t come to fruition. But given the success of the team there, we’re able to support all the BAW-based processing we need out of our Richardson facility.

Our next question is from Matt Ramsay with Cowen.

I was going to ask you, and I’ll change the order because it builds on Blayne’s last question. In the BAW filter space, have there been any changes in the competitive landscape? I understand that one of your U.S. competitors has made significant progress on their BAW roadmap in the past couple of years, and it seems like some products may be closer to impacting the market. You sound quite confident in your content gains based on your previous answers, but are there any changes in the competitive dynamics with your main competitors in BAW?

Yes. No changes to our primary competitors. And to the earlier follow-on regarding the capacity at Richardson, that is something that we can do over time, not necessarily this year. But that’s something that we have the ability to do in subsequent years to add on to the effective capacity there at Richardson. But again, I just want to make sure that’s clear that we do have to take steps, add equipment, et cetera, in order to make that possible. It will be in the out years, but it’s really a comment around Farmers Branch and supporting the ability for us to do that in the future given our ability to sell the Farmers Branch facility.

Thank you for the clarification. As a follow-up, I want to focus on the wireless infrastructure side, which seems to have similar inventory dynamics as the mobile and smartphone markets. Do you have any insights on the inventory buildup there? Has it decreased? What is the timing for any potential reacceleration? Is it comparable to the situation in the mobile segment, or is it longer or shorter? Any context you can provide would be helpful. Thank you.

Yes. And I think that’s pretty well known. We’ve seen inventory build up there, and that’s certainly been impactful to our infrastructure business. And it will take some time, we think, for that to bleed off throughout the year. So, it’s probably similar, but may even take longer than what we’ll see in mobile.

And our next question is from Raji Gill with Needham & Company.

I would like to elaborate on the commentary regarding September, December, and March. The significant sequential growth in September following a flat June is noteworthy. This growth is typically driven by seasonal factors in September, but can you provide some insights on the relative seasonal patterns? Is this growth also supported by a substantial rebuild from our customers along with share gains? Any qualitative insights on what is specifically driving the commentary for September would be appreciated. Also, considering December and March showing year-over-year increases, it’s clear that December 2022 and March 2023 present relatively easy comparisons in terms of revenue. Thoughtful feedback on December and March would be valuable. Thank you.

Yes, sure. So, as we look into September, again, I would just reiterate, we’re not providing any official guidance into fiscal ‘24, but we’re attempting to shape it just a bit given some of the macroeconomic uncertainty. And obviously, the macroeconomic situation will inevitably dictate the trajectory of revenue. But just looking at some of the drivers that we see seasonally, there is a significant ramp in the September quarter, so. And as Bob stated, we feel as though we are well represented on large platforms across all of our largest customers. So, continued strength at some of those customers as the channel inventories be in clearing will occur as well as a large seasonal ramp gets to a sequential increase in September that’s pretty substantial off of a rather low base as we’re talking about a roughly flattish June. So, that’s the primary driver, call it around September. And then into December and March, you’re right, the comps get relatively easy. But with the channel inventory picture clearing up by the end of the calendar year, as we talked about earlier, it should provide for a restocking, if you will, or us selling into potentially demand even at just recurring to normalized levels.

Got it. And for my follow-up, regarding your conversations with the Chinese OEMs and the Korean OEMs, what is the kind of expectation as it stands today in terms of their customer forecast for calendar ‘23 going into calendar ‘24? Obviously, calendar ‘22 was kind of a horrific year in terms of units. Are the forecasts relatively conservative off that very challenging 2022 or are some OEMs more aggressive in their forecast plans. There’s more capacity coming online for a variety of different smartphone components. Does that enable new product ramps? Just any commentary in terms of what the customer feedback is and forecast. Thank you.

Dave, would you like to take that?

Yes, certainly. The customer sentiment and their forecasts are quite cautious. Although we have observed some early signs of improvement in China and smartphone sales, particularly during the first few weeks of January, it's essential to see this trend sustain over a couple of months before our customers can regain confidence. Currently, the purchasing order patterns and forecasts remain cautious for the rest of the calendar year. Does that address your question?

Oh yes, it does. Thank you. I appreciate it.

Our next question is from Chris Caso with Credit Suisse.

The question is about capital expenditures and cash flow from a short-term perspective, particularly how you plan to manage these as you continue to reduce inventory. Looking at the longer term, it seems like you may have sufficient capacity for a while. What can we expect in terms of inventory normalization and the potential positive impact on revenue? Will we see this reflected in cash flow performance?

Sure. So, we don’t guide specifically to the balance sheet or cash flow, but I’ll try to give a little bit of color on the drivers. So, having now collected on sales in prior quarters, our cash flow will likely start to follow the path of the P&L, obviously. As we look forward, we still expect to generate free cash flow, and CapEx should be in the 5% to 7% range of sales, representing discipline there and some reduced CapEx intensity as we move forward, having invested in our facilities over the prior years, and looking forward, will be largely capacity driven as we see demand and obviously, improvements in our performance and technology required. But generally speaking, I’d be looking for the cash flow to follow P&L.

Got it. Just to follow up, much of the conversation has focused on the cellular segment. Regarding the non-handset part of the business, I've heard there is still some inventory to work through in the infrastructure products. Can you provide an overview of the inventory situation for the non-handset business? Is it taking longer to recover in this area compared to the cellular business, or what is your outlook for these sectors as we move through the year?

Yes, it definitely varies. So, the infrastructure business is probably going to be slower to recover. We’ve got Wi-Fi, a lot of that’s consumer-facing. That is probably very similar to what we see in the smartphone space, but some of that’s also more operator and enterprise-driven. And so, we saw that occur a little bit later. So that will probably take a little bit longer to recover. And then our power management business as well, it’s very consumer-facing with power tools and solid-state drives and other types of devices like that that are more consumer-oriented. So, they’ll go probably very similar to the way the smartphone market goes.

And our next question is from Harsh Kumar with Piper Sandler.

I wanted to revisit an earlier question regarding growth in December and March. I understand you mentioned year-over-year, but did you mean that specifically, or is there a chance that those businesses, considering the decline in revenues and units, might also show sequential changes during this period, or will they adhere to a seasonal trend?

Are you referring to our fiscal ‘24 or our just announced December and this March?

No, no, fiscal ‘24.

Fiscal ‘24. It’s a little early to comment on that. Certainly, from a year-over-year standpoint, the comps are relatively easy and it’s with a high degree of confidence, we believe we’ll be able to grow. The degree to which would determine whether it was sequential or not, I think it’s a bit premature to comment on. Overall, we still are encouraged by fiscal ‘24 and believe that it will be above fiscal ‘23.

That’s fair. And then I wanted to ask about your gross margins. Your revenues came down for the guidance for March, but your margins are kind of hanging in there. You mentioned a couple of things, small things, the 80 basis points and 30 basis points issues. But what’s the reason why your margins are able to hang in here?

I think, generally speaking, if I look back over the productivity gains that we’ve made over multiple years, we’re still seeing those in our margins today, even though the volumes aren’t in the factories. 900-plus basis points of headwind from underutilization is significant. I don’t want to understate that. But in terms of productivity and the work that our operational teams have done is really speaking to the strength of those gains and our ability to hold margins at 40%.

And our next question is from Joe Moore with Morgan Stanley.

You talked about changes to your foundry agreements. Can you just speak generally to the cost of foundry wafers? Do you see that continuing to rise? And if so, are you able to pass that through to your customers? And if it reverses, do you anticipate having to pass declines on to your customers? Thank you.

Thanks, Joe. And actually, with some of the capacity freeing up, we’re not seeing the increases that I know we saw some of that earlier last year, last calendar year, earlier in the year, so we’re not seeing it. In some cases, to your point, we have been able to pass that on to our customers. And again, as we’ve always said, pricing set by the competition, if we all raise prices, we all get an increase; we all don’t, we don’t get an increase. So we’ve been able to pass some of that along. But as Grant pointed out, the inflation is impacting us in our COGS, about 80 bps. So we’re not able to pass it all along, but there’s other inflation in there, not just foundry parts.

Thank you. And our next question is from Atif Malik with Citi.

I have one clarification and one question. When you guys talk about channel inventories to normalize later this calendar year, are you talking about China Android or total Android or total smartphone?

Well, we’re talking about total smartphone inventories, but even some of the other markets that we mentioned earlier in one of the previous questions. We see elevated inventories, not just in smartphones, we see it in a lot of the other markets as well.

But, when are you expecting China Android inventories to normalize?

It all depends on how well the phone sells in the market. As I mentioned, early indications in January are improving. If that trend continues through February, March, and into the second quarter, then our inventory will be reduced much more quickly. However, we are not forecasting that yet. We want to see sustainable improvement before getting too optimistic.

Understood. And then, is it possible to break out or comment on how big the silicon carbide power device business is as a percentage of HPA sales?

Yes. We haven’t given that information. What I can tell you is we’re very pleased with the acquisition. And I know when we file our Q, you’ll see why I say that. But it’s been a tremendous acquisition. But I’m sorry, we haven’t sized it. It’s probably bigger than what most people think. It’s smaller than what some other people think. But we haven’t given any of that revenue out yet, but we’re very pleased with it. It’s profitable, and it’s doing a fine job.

And our next question is from Ambrish Srivastava with BMO Capital Markets.

I just had one question, Grant. Thanks for providing that down 20% comment. I’m just struggling with how does it help us? And I ask with reference to what are we talking about? Are we talking days, months, what is normal level? And I know it’s harder in the more diversified areas. But in the handset side, you should be able to kind of quantify and tell us, all right, at the peak, it was x weeks, x months and here we are, and then we think if there’s some kind of normal pattern, this is what normal level looks like.

Yes. I think that’s a great question, Ambrish. The issue always is when you look at your days of inventory in the channel, you have to understand what’s the sell-out. And so far, and I think I said this last quarter as well, when we work with our customers and we go through all the math, they reduce their production, we reduce ours. And unfortunately, their sell-out has been lower. So, you have to look at it. Now again, Dave’s mentioned a couple of times on the call, the first three weeks so far in January, at least we can speak to the data that we get, and I think all of you get, the actual sell-out is up, and that’s a good sign. But we’re not going to get into the game of naming numbers like this because it all depends on the future output of what they sell out. So, we’ve got a little ways to go. That’s why I think we’re being careful on our comments around June, but we feel very good about September. So, we roughly think it’s in that time frame.

So handset inventory cleaned out by September and the rest, as you said, others will take longer. Your best guess at this point is by December that should clean out as well, right?

Well, we’ve got different parts of the business. In the Wi-Fi area, it’s going to follow because we’re in a lot of the Android phones with our Wi-Fi products, it will follow more of what I said for the handsets. Then Wi-Fi that’s in some of the retail and some of the industrial applications, things like that, that may take a little bit longer. We don’t always get a good read there. It’s a smaller part of our market, not as much data is published. But I think on the infrastructure side, what Dave talked about, that is going to take a little bit longer. The area of our power management that goes into the SSDs, and that’s a call on the PC market. So, you guys follow that. We’ll see how that goes. So it’s going to be all different ones. But the major part of our business is the handsets, as you know. And I think we’re giving you as much color as we can as we project forward.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

We want to thank everyone for joining us on today’s call. We look forward to speaking with you at upcoming investor events this quarter. Thanks again. Hope you have a good night. Thank you.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.