TriQuint Semiconductor's (TQNT) CEO Ralph Quinsey on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Qorvo, Inc (QRVO)

TriQuint Semiconductor, Inc. (TQNT) Q2 2014 Earnings Conference Call July 23, 2014 4:30 PM ET

Executives

Grant A. Brown – Director-Investor Relations

Ralph Quinsey – President and Chief Executive Officer

Steve Buhaly – Chief Financial Officer

Analysts

Vivek Arya – Bank of America/Merrill Lynch

Edward Snyder – Charter Equity Research

Quinn Bolton – Needham & Company

Cody G. Acree – Ascendiant Capital

JoAnne Feeney - ABR Investment Strategy

Steven Smigie – Raymond James

Mike Burton – Brean Capital

David Duley – Steelhead Securities

Siddharth Sinha – Canaccord Genuity.

Tom Sepenzis – Northland Capital Management

Tom Diffely – D.A. Davidson

William Dezellem – Tieton Capital Management

Operator

Good afternoon. My name is Dustin and I will be your conference operator today. At this time I would like to welcome everyone to the TriQuint Semiconductor Second Quarter Earnings Conference Call. All lines will be placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions).

Thank you. I will now hand the call over to our host, Mr. Grant Brown. Sir, you may begin.

Grant A. Brown

Thank you, Dustin. Good afternoon, everyone and welcome to our second quarter 2014 conference call. I’m Grant Brown, Director of Investor Relations. With me today are Ralph Quinsey, our President and Chief Executive Officer; and Steve Buhaly, our Chief Financial Officer.

During the call we’ll make forward-looking statements about TriQuint’s business, our projected financial results and our proposed merger with RFMD. Actual results could differ materially from our projections based on various risk factors, including those described in a press release we issued earlier today and our reports on Forms 10-K and 10-Q and other filings with the Securities and Exchange Commission.

All financial measures presented in today’s call are on a non-GAAP basis. Non-GAAP financial measures report tax on a cash basis and exclude equity compensation charges, entries associated with mergers and acquisitions, and other specifically identified non-routine items. These non-GAAP measures are provided to enhance understanding of our core operating performance. A full reconciliation of these non-GAAP measures to our GAAP results is in our press release and in the Investors section of our website.

I’ll now turn the call over to Ralph to provide an overview of the quarter.

Ralph Quinsey

Thanks, Grant, and good afternoon, everyone. I am delighted to report TriQuint’s

Second quarter revenue was $230.8 million in earnings with $0.13 per share, both above the high-end of our prior guidance.

Revenue grew 30% sequentially and 21% year-over-year with gross margins as compared to Q2 last year increasing over 1,000 basis points to 41.7%. The significant margin improvement as a result of manufacturing cost improvement, better product portfolio management and higher revenue. Cost reduction actions combined with improved overall manufacturing execution have turned nicely with migrating our product portfolio towards higher value solutions in a way from commodity products and non-strategic foundry. Given the success on these fronts, we now expect full year 2014 gross margins to be comfortably above 40%.

Looking at the industry as a whole, the RF market is entering a period of substantial growth fueled by strong demand for smartphones and the worldwide adoption of 4G LTE.

Growth in LTE is favorably impacting both our mobile and infrastructure markets with strong pull in China to support ramping smartphones demand and to build out of base stations in optical communications networks.

Our strength in premium filters continues to be a tailwind for TriQuint with increasing demands for differentiated products. In response to growing market demand, we plan to further expand our capacity with both BAW and TC-SAW. This new capacity is expected to come online beginning late this year and throughout 2015, effectively doubling our capability.

The other industry news, of course, is the pending combination of TriQuint and RFMD. Most analysts agree this combination makes great sense and more importantly, most of our customers have enthusiastically endorsed it.

Updating key merger milestones, our HSR waiting period has successfully passed. We're planning for shareholder votes this summer and China antitrust approval is on track for the second half goals.

Looking more closely at our infrastructure and defense markets, Q2 revenue was $86.4 million, up approximately 16% sequentially.

During the second quarter, IDP launched 51 new products, exceeding our prior record of 41 products in a given quarter. New product launches are the lifeblood of future revenue growth and profitability in these markets.

For the full year we remain on track for another record year of new product introductions. In the base station market, revenue of $25.2 million was up 77% over the second quarter last year and up over 55% on a year-to-date basis. We continue to experience strong demand supporting the worldwide 4G LTE buildup, or it has increased last year primarily from China and took another step up in Q1. Demand is expected to stay at these levels just north of $100 million a year through 2015 and likely well into 2016 as carriers continue to build out the 4G infrastructure.

Looking forward, this should be an ideal market for our GaN technology, which enables higher efficiency and greater bandwidth for high-power applications. I see GaN for base station power as a great opportunity to significantly expand our servable market in the future.

Total revenue in our transport segment was $28 million in the quarter and should remain strong throughout the balance of the year. Optical products were the standout performers were revenue was up approximately 50% sequentially. Our extensive partnerships with industry leaders has positioned TriQuint as the performance leader in driver amplifiers. In fact, Huawei was at 10% plus customer this quarter due in part to strength we saw in optical.

Demand in the transport segment is ultimately driven by data traffic, which continues to expand rapidly. Future systems will require greater bits per bandwidth, lower cost, lower power consumption and smaller size, all areas where we excel. Defense revenue of $26.4 million was up 16% sequentially. Up to 51 IDP products released during the second quarter, 33 were for defense applications and nearly all of these were based on GaN technology.

In fact, in May we were recognized by Department of Defense for achieving significant milestones for GaN manufacturing readiness and maturity. International opportunities also continued to be strong.

Our customers abroad accounted for nearly half of our new product evaluations. Lastly, we continue to win in airborne radar having registered $20 million design win records sport X16 radar upgrades.

Turning now to mobile devices, second quarter revenue was $144.4 million which represents sequential growth of 40% and 22% as compared to Q2 2013. The large sequential growth came in two areas, a strong uptick of BAW filters to support LTE smartphones primarily in China and a return to normal demand from the major customer following a Q1 inventory adjustment.

From a broader perspective, the growing adoption of 4G LTE and the continued increase in RF content are dual drivers of a large and growing market opportunity. Not only is our content in each new world phone increasing but more importantly, the weighted average content across the billions of phones sold each year is increasing.

What this means is as entry-level phones transition to LTE smartphones, RF content expand significantly. While high-end phones are pushing RF dollar content into the teams we expect content to jump from less than $1 to $3 or $4 with entry-level phones moved from 2G to 4G with significant unit volume behind the transition.

Regional roaming 4G phones are expected to drive $8 of RF content. Essential to this transition is requirement for BAW filters specifically needed for new, high-frequency bands and filtering for Wi-Fi co-existence. As Chinese carriers convert the collective 1.2 billion subscribers to 4G LTE smartphones, we anticipate a meaningful increase in the weighted average of our content.

Demand from phone manufacturers in China was up sharply in Q2 and I anticipate the strength will continue into the second half of the year. The LTE opportunity in China is just beginning and it represents one of our larger growth opportunities for the next several years.

Additionally, our demand has been very broad-based with increased penetration across a diverse set of customers. Our filters and MMPAs have earned design wins on 18 new references design platforms covering all six major chipset providers.

Premium filter products have significantly broadened our revenue base where we are now supporting over 50 unique customers worldwide. Complexity in the RF section of the phone has grown significantly, a trend that will continue.

Historically, the industry has been centered around narrowband power amplifiers combined with a few low-cost filters and simple switching. That has changed and our architectures have increasingly become dominated by incredibly sophisticated filters and high-performance switches matched with high-efficiency wideband amplifiers.

Looking at filters specifically, we estimate the average number of filter functions per phone was growing approximately 13 in 2013 to over 20 by 2015. Steve will now provide a detailed financial review of the quarter and outline our guidance for the third quarter.

Steve Buhaly

Thank you, Ralph. For the second quarter 2014 revenue was $230.8 million, up 21% from the second quarter of 2013 and up 30% sequentially. Sequential growth was strong for each of our markets with defense up 15.9%, networks up 16.2%, and mobile up approximately 40% with strong demand for BAW filters. For the second quarter our end market revenue split was 63% mobile devices, 26% network infrastructure, and 11% defense and aerospace.

Please refer to the supplemental data posted on the investor section of our website for more detailed breakdown and trend of our revenue by market. During the second quarter, Foxconn Technology Group and Huawei Technologies accounted for 25% and 11% of our revenue respectively. Please note that our end customers may use multiple subcontractors to build their products and that the mix of these firms may vary over time.

Our book-to-bill ratio for the quarter was 1.07. Gross margin was 41.7% for the second quarter of 2014, up sequentially from 35.3% and up sharply from 31.3% in the second quarter of 2013. Active management of our portfolio highlighted by strong growth in our premium filter business and reductions in lower margin discrete amplifiers, contributed to the 1000 basis point improvement in gross margin over Q2 of 2013.

Sequentially, higher revenues, efficient factory execution and the cost reductions taken earlier this year all contributed to the improvement in margins.

Operating expenses were $72.0 million for the second quarter of 2014, up slightly from the prior quarter. Engineering materials expense was relatively high in the quarter as we finished development of key products. Payroll taxes from option exercises and variable compensation were also higher than expected due to strong overall performance.

Tax expense of for the second quarter was negligible. Net profit for the second quarter was $23.6 million or $0.13 per diluted share. Total cash and investments increased by $16.0 million to $223.5 million during the second quarter. The increase was due to net income and significant proceeds from employee stock option exercises.

Capital expenditures of $21.3 million primarily for premium filter opacity were slightly below quarterly depreciation. As Ralph highlighted earlier, our capital expenditures are expected to increase in Q3 to at least $50 million as we respond to an exciting set of market opportunities and begin executing a doubling of our premium filter BAW and TC-SAW capacity.

Moving to our financial outlook, we believe second half revenue will be between $550 million and $600 million, up 11% at the midpoint from the prior year. While the split of this revenue between the third and fourth quarters is dependent on major program timing, we currently expect third quarter revenue to range between $255 million and $265 million.

Third quarter gross margin is expected to be between 43% and 45%, driven by strong execution, higher factory utilization and product mix. Operating expenses are expected to be about $70 million. Third quarter net income per diluted share is expected to be between $0.23 and $0.25. As of today we are 93% booked, the midpoint of our Q3 revenue guidance.

On the investor relations front, we are looking forward to seeing many of you during our upcoming investor related trips. This summer we will be attending the 34th Annual Growth Conference hosted by Canaccord Genuity in Boston on August 14th. A link to the live audio webcast and presentation materials will be available on the Investor Section of our website. Our Q3 2014 conference call is currently scheduled for October 22, 2014

I will now turn the call over to Ralph for closing comments after which we will open the call to your questions.

Ralph Quinsey

Thanks Steve. These are exciting times for the RF industry. Defining characteristics of success in the future will be accessed to differentiating technologies, product leadership and scale for competitive cost. Recent consolidation activities following our February announcement underscores these points as the industry evolves to focus on profitable long-term growth.

Our pending merger with RFMD represent an elegant combination of capabilities and structure. From a product standpoint we are incredibly excited about incorporating strength from both companies into future products. Customers have asked us to start working together as soon as possible to help them simplify the increasing RF complexity in their products.

Finally, the transition to LTE is driving demand across the Board, from handsets to infrastructure. Our new company will have the worldwide manufacturing financial scale the customers expect from their technology partners.

In the mobile world today, today's buzz is around carrier aggregation and band proliferation, but there are already discussions about 5G initiatives. It is hard to say exactly how this will shape up, but it will surely include denser integration of more and higher frequency bands and drive greater demand for premium filters, high-performance switches, and high-efficiency wideband amplifiers, all areas of strength for our new combined company.

As integration planning continues, we see clear benefits for customers, employees, and investors. Customers will gain access to more high-performance cost effective products. Employees will be part of a larger and stronger company.

And finally, we expect the combination to unlock significant value for shareholders in the form of synergies that will be realized over the coming years. I continue to receive positive feedback on all fronts.

Dustin, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions).Our first question comes from the line of Vivek Arya with Bank of America/Merrill Lynch.

Vivek Arya – Bank of America/Merrill Lynch

Thanks for taking my question. Very good execution in Q2, but when I look at your Q3 outlook, about 4% year-on-year, I know you did mention that there is some uncertainty about timing of programs, but are you being a little conservative here? Is this really a visibility, is that a timing issue? And how do I contrast that 4% year-on-year in Q2 and then 11% in the back half, let's say, something like a 40% year-on-year growth that something like Skyworks guided to?

Ralph Quinsey

So in that net we may be conservative. We think the information that’s in front of us and we give you our best estimates. And then also I would ask you to be mindful that we have discontinued a significant amount of products both in the mobile space and our non-strategic foundry, and if you pull those out, I think you see much healthier growth rates.

Steve Buhaly

Yeah. If you just look at the second half and to avoid the uncertainty around this major program timing, we're up about 11% year-on-year. And the revenue that we're exiting also adds up to 7% or 8% year-on-year, had we not exited. So, had we not been getting out of some of this low-margin amplifier stuff, we would be up about 18% year-on-year in the second half. As it is, we’re forecasting about 11%.

Vivek Arya - Bank of America/Merrill Lynch

Got it. And that makes sense. That’s very useful. And then as a follow-up on the gross margins, very solid progress there. Close to 44% now, RFMD is also getting close to those levels. How should I think about what the target should be as the company's get-together, because I think in the past you had outlined a target of around 45%, but you are already doing close to 44%. So will there be the opportunity to perhaps revise those targets upwards or how should we look at – or maybe how should we look at the drivers of progress from here on?

Ralph Quinsey

I think in this case, I'm going to ask you to hold your question for about 24 hours. Let's let our partners to be announced their results, and then I’d say that would be appropriate question to ask tomorrow afternoon on that call.

Vivek Arya - Bank of America/Merrill Lynch

But what about TriQuint specifically, what would be the drivers of expanding gross margins from here onwards?

Ralph Quinsey

Sure. I can take that. Sure. I still see opportunity for more penetration on premium filters. And as, I'm sure you are aware, premium filters really bring on more value to the company and to the customers than some of our traditional parts. And then on the infrastructure and defense side, we continue to see the opportunity to expand our footprint in those markets with rapid new product introductions and good long-term outlook for growth there. So those two parts of our business clearly are margin drivers for the company.

Vivek Arya - Bank of America/Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from the line of Edward Snyder with Charter Equity Research.

Edward Snyder - Charter Equity Research

Thanks a lot. Couple of question. You've been -- so, Steve just to be clear here, you are unwinding a lot of the non-strategic and low-margin business, that’s coming out in the second half as well. What was that number? Can you give us a revenue number for this period and then what it would've been for September had you not gotten rid of that revenue?

Steve Buhaly

Yes, I don't want to give the precise number, but we are exiting significant amount of revenue year-on-year. I would say that we are probably exiting close to $100 million. This revenue stream is dropping about $100 million from 2013 to 2014. And -- so its roughly 10% growth that we are giving up by moving out of those low margin active device category.

Edward Snyder - Charter Equity Research

Great. And then remind us when will that be completed?

Steve Buhaly

We will be probably two thirds done this year and the remaining third will peal out over the following year probably.

Edward Snyder - Charter Equity Research

Okay, great. And then TriQuint is one of two leading suppliers of TC-SAW, demand for which obviously is ramping pretty hard over the next 12 months now that Verizon isn’t giving any waivers out. Do you expect your share Ralph of TC market to be flat up or down a year from now?

Ralph Quinsey

For us it's a rapidly growing market. We don't look at it so much as share gains, just holding onto the growth. So, I think we will either hold onto share or gain it. We are investing in TC capacity. We think we've some great products in the pipeline. But again, I think the real material question is just hanging onto the growth rates more than gaining or losing share.

Edward Snyder - Charter Equity Research

So, but -- I mean Band 13 is obviously going to be a big focal point in the next 12 months for that product. And I know you guys have talked about and have shown a very compelling part. Have you seen any competitors in that space or you know of in terms of a part that could compete in there? And is this part moved into the top tier of the more difficult filters in terms of technology and pricing?

Ralph Quinsey

To answer the second part of your question, first, yes, this will be an attractive product for us, a high value product, very difficult to build. And we have sampled and have received feedback from quite a few customers as well as chipset partners. So, we think we will have a very good position on that device.

Edward Snyder - Charter Equity Research

Okay. And of the four products that used duplex filters in cell phones, discrete, filter brands, FEMiD, pads, how many are you producing now and collecting revenue for?

Ralph Quinsey

So, give me the categories again Ed.

Edward Snyder - Charter Equity Research

Discrete filters, filter banks, FEMiD and pads, before as you find a filter in a cell phone. Of those four categories, which are you actively participating in right now?

Ralph Quinsey

I would say all, but same IDs.

Edward Snyder - Charter Equity Research

Okay. And then sorry, I might have missed this. Did you talk BAW capacity; where are you now, and where do you think you'll be a year from now?

Ralph Quinsey

We think, we’re going to double the capacity over the next year in BAW.

Edward Snyder - Charter Equity Research

Is that starting this period, because previously you said you had pretty much enough capacity to last you through most of this year, and then you’d take a siding as got further into the year on what’s going on. It sounds like things have change.

Ralph Quinsey

Yeah, so we're at the point of the year where we’re tying to look at future opportunities. We made the decision to significantly invest in both BAW and TC-SAW, because we see clear opportunities for those products over the next several years.

Edward Snyder - Charter Equity Research

Okay. Final question, I mean, obviously, your margins are doing very well even though your revenues are a little bit like, because you're backing out a lot here, it kind of reflects the mixture to filters. Where do you see your amplifier business? It’s been ebb and flow, as you know Samsung is moving into different architectures at this point, it’s going to using more filters integrated wise.

How do you feel about your competitive position in like MMPAs and discrete? I know some of that is what you are unwinding, but would you – did you lose some share last year last six months or so, and is that something you think you're going to – you do better in, in the next six months, or are you pretty much just looking at kind of like [indiscernible] model they are only really interested in doing amplifiers to extent they can sold GaAs or BAW filters through, is that more of a shift in strategy?

Ralph Quinsey

No, I do see healthy growth for MMPAs year-over-year and currently forecasting a fairly robust second half, particularly in China. And we do have some good chipset design win with partners that I mentioned earlier. You're right as far as discrete narrowband amplifiers that is part of the revenue stream, Steve mentioned, we are winding down.

Edward Snyder - Charter Equity Research

Great, thanks a lot guys.

Operator

Our next question comes from the line of Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Company

Hey guys, congratulations on the very nice gross margins and margin outlook. Just wanted to come back to the visibility in the second half, can you say whether your lead-times have changed this year versus last year? I think if we circle back to last year, this time you had better visibility it seems like into kind of the split between Q3, Q4. And I am just wondering if lead-times have come in which is making the visibility a little bit harder to call between the third and fourth quarter split.

Ralph Quinsey

No material difference between last year and this year on lead-times. There is uncertainty because we have large programs that we deal with in the mobile space and we are just trying to represent that uncertainty.

Quinn Bolton - Needham & Company

Okay. And then just, you talked about, I think -- and filters on 18 different reference designs. I am wondering if you can comment about what you are seeing in terms of industry demand for pads or wide band pads. Is that architecture starting to become more prevalent? Are you seeing the baseband guys designing pads into some of their reference designs or are pads still more being pulled through by OEMs rather than baseband partners?

Ralph Quinsey

So, I do see the continuing trend towards advanced integration in pads and we are seeing more of a pull from the OEMs from customers and from the chipset partners.

Quinn Bolton - Needham & Company

Okay, great. And then just lastly for Steve, with the third quarter guidance that you've given and applied some pretty healthy sequential growth in the December quarter, which I think would tend to benefit gross margin, all things equal. Is there anything going on with inventory or fab loadings in Q3 that might change kind of the gross margin outlook for the fourth quarter?

Steve Buhaly

We will -- we typically build ahead a little bit. So, sometimes from a factory perspective, Q3 is actually busier than Q4 since in Q4, they may slow down a bit for Q1.

On the other hand, better revenue also improves gross margins since it kind of dilutes the effect of the manufacturing variance. So, I think those might fight for a draw and you may see a fairly level couple of quarters in terms of gross margin.

Quinn Bolton - Needham & Company

Great. Thank you.

Operator

Our next question comes from the line of Cody G. Acree with Ascendiant Capital.

Cody G. Acree - Ascendiant Capital

Yeah, thanks for taking my question. May be go into China, you talked about the infrastructure strengths. We have had a couple of companies point -- or at least one company yesterday, point to some weakness there. Just what you are seeing from inventory health and your expectation and disability more than anything to back half?

Ralph Quinsey

Visibility is still fairly good. We have grown, as I mentioned in the script, quite a bit in that space. And I think we'll maintain those levels going forward. So, I'm not seeing evidence yet of a significant change or correction. We're always mindful of that in a fast growing market. But even if that does show its face, this is still a very long-term solid growth opportunity for the company.

Cody G. Acree - Ascendiant Capital

And then on the gross margin side, just with the expansion you’ve seen already this year so far, with the merger upcoming, what do you think you maybe pull forward on some of the movement you might have been thinking about toward the merger that may have already been pulled into these early quarters that’s – I mean, what's left post-merger to think about the Oregon and the Texas facilities?

Ralph Quinsey

Yeah. For the most part, we haven't taken any actions that would create any of the synergies that we anticipate in the merger. So, I expect all of the $150 million we called out at earlier continues to be available to the new company in terms of synergies.

Cody G. Acree - Ascendiant Capital

Thanks, guys.

Operator

Our next question comes from the line of JoAnne Feeney with ABR Investment Strategy.

JoAnne Feeney - ABR Investment Strategy

Yeah. Thanks, guys. I’d like to get a better understanding of the timing issue for the second half. And perhaps it would help us, if you could help us understand the split that you're seeing in the mobility right now between new customers, China related or not China related, and then perhaps your business with your existing customers. And is there a difference in timing between when you anticipate those groups ramping, and is there a difference in uncertainty about when those groups ramp and could that help us to understand better the issue of uncertainty about the third quarter?

Ralph Quinsey

Yeah. And maybe this will help JoAnne. The revenue stream in China is fairly broad-based, spread over quite a few customers and responding to the rapid ramp-up of smartphones – 4G smartphones in China. We also have one or two very large customers that have very large programs that we're involved with and that’s where all the uncertainty is. Just -- we just don’t know -- I mean, we will respond to a rapid buildup of product. Orders are coming in as expected. I have no reason to believe there will be anything other than what we've been told. But, we just mentioned that there is uncertainty in there

JoAnne Feeney - ABR Investment Strategy

Okay, that’s helpful. And then separately on the network side and wireless base station side. Can you shed any light on what you're seeing there regarding component orders? There have been some folks that have reported that has remarked upon a significant inventory build and a stall in activity in base station builds. We are hoping you could let us know how that’s affecting TriQuint and what you are seeing in that opportunity for this quarter and next perhaps.

Ralph Quinsey

I would characterize that as when you're driving down the highway at 100 miles an hour and you slow down or you are accelerating from 50 to 100 miles an hour and then when you reach 100 miles an hour, a steady-state, it feels like you have stopped. We feel like that we've ramped up to a run rate of about $100 million a year for our base station products and we think it is going to stay there. Not seeing any evidence yet of inventory build up or slow down.

As a mentioned earlier, we are mindful of that. If we do see evidence of that, we'll probably have a correction. But it is not going to change the long-term value of the opportunity. There will be a long-term build out of 4G infrastructure around the world. We have great participation in that build out both on the base station side and on the optical side. As I mentioned, our optical revenue, we are of about 50% sequentially. So, clearly, not seeing a slowdown on that side of the business.

JoAnne Feeney - ABR Investment Strategy

Very helpful. And then just, I could squeeze in one more question. So then given what you said, if we think about your guidance segment-by-segment, it sounds like mobility will be driving the vast amount of growth networks, perhaps very little growth in defense similarly. Can you perhaps give us a better sense of the ranking of those and how that big the differences might be?

Ralph Quinsey

We haven't guided for that, but year-over-year, we should see fairly balanced growth. There's always more opportunity to grow faster in the mobile side of the business.

Steve Buhaly

And JoAnne, I’d add just one other question or one other comment to your question on revenue timing. I just note that a substantial majority of our business to major platforms goes direct to subcontractors like Foxconn, our number one customer. We're certain other customers may have a more lengthy supply chain, i.e. they may sell to an intermediary then sells to an end subcontractor and therefore, they recognize revenue a little early in the cycle, but will all end up in the same place.

JoAnne Feeney - ABR Investment Strategy

Okay, that's helpful. Thank you.

Operator

Our next question comes from the line of Steve Smigie with Raymond James.

Steven Smigie - Raymond James

Great. Thanks a lot guys. Just as I look across the revenue here Q2, Q3, Q4, it seems like dollar-wise at the end of the day you're higher than where the Street was originally, so an overall bump. And I just -- if I look at the timing of the quarters, it seems like you had a huge ramp in the June quarter. So, I guess the first quarter is, overall do you see opportunity a little better than you did a quarter ago. And then is some of the success in Q2 just pulling revenue forward from Q3?

Ralph Quinsey

The first part of your question is yes, our outlook has improved. And I agree with your analysis compared to expectation. Not a lot of pull forward. It’s just the way that it lays out in our forecast.

Steven Smigie - Raymond James

And then on the defense business, you didn't say – I don’t think you said you're seeing very strong orders there. You did say that about the other categories. Just curious, how defense is doing at this point?

Ralph Quinsey

Defense is a very stable business. It has high and low quarters, but typically grows in that mid single digit rate. We've actually been growing little bit faster than that. Compared to – at least sequentially, compared to a year ago quarter, we’re about flat.

But looking forward, a lot of new product in the defense area, we continue to receive orders for the build-out of phased array, radar systems, for example the F-16, comment I made in the script, so I feel pretty good about the defense partner right now.

Steven Smigie - Raymond James

I'm sorry to beat the base station thing to death. Could we see sequential growth in base stations this quarter?

Steve Buhaly

Sure. That’s in the possibility. But right now, I think we've reached a level of a little north of $100 million a year and I think that will persist for some time.

Steven Smigie - Raymond James

Cool. Thanks very much.

Operator

Our next question comes from the line of Mike Burton with Brean Capital.

Mike Burton - Brean Capital

Thanks, guys. Maybe for Steve, I guess for both. First you guys are, obviously, guiding for another increase in Q4. How should we be thinking about some of the puts and takes on the margins heading into Q4 at the midpoint of your guidance both for Q3 and the second half? And then what is the contribution margin, you expect to have for gross margins going forward?

Steve Buhaly

Yeah, so on your first question we have guided -- set upon a guide for Q3's 44%. I think there is -- and if I forecast little further in the future, I'd say Q4 would be something in the same neighborhood. Puts and takes there, the factor is typically busier in Q3 because they build in advance for the quarter. On the other hand, higher revenue levels that we would expect in Q4 would kind of dilute the negative effect of some of our variances. So I would guess its going to be pretty steady in that range over the second half of the year. And what was your second question?

Mike Burton - Brean Capital

It was asking on the contribution margin. But also if you could give me your outlook on OpEx and then the other question I wanted to ask was on, what percent of revenues are you guys actually seeing from China currently and obviously you are partnered with QUALCOMM out there, I was wondering on progress with any of the other baseband guys. Thanks.

Steve Buhaly

So I think filter has traditionally been around 50% for us. I think that’s edging up as we see growth in our higher margin filters. And so I think in the 55% range, maybe a little higher is appropriate. And then in terms of OpEx, I think that’s going to be pretty flat at around 70 million.

Ralph Quinsey

Then is the mix -- regional mix of revenue, again this is hard to know where the revenue ends up. This is a sell through revenue. Americas is about 18%, Asia 78%, Europe 4%. And then within Asia, China is about 50% of our total.

Mike Burton - Brean Capital

Okay. And then a couple of quarters ago you talked about focusing on kind of the white-box market and MediaTek. I was wondering if there is any updates on them or any other baseband providers outside of Qualcomm.

Ralph Quinsey

Yeah, we got to now have references on six baseband suppliers -- reference design suppliers. We're seeing good reference design wins for our filters and for our MMPAs. And clearly the -- a lot of the demand is very broad-based in China, particularly for our filters.

Mike Burton - Brean Capital

Thanks guys.

Operator

Our next question comes from the line of David Duley with Steelhead Securities.

David Duley - Steelhead Securities

Yes, thanks for taking my questions. I was just wondering if you might get us an idea of what your overall factory utilization rates are in your different areas?

Ralph Quinsey

The utilization rates in total are still in that mid-60s range and we're not raking it down by factory. I would just add the color that utilization rates are higher for our filter factories than for our gas factories.

David Duley - Steelhead Securities

And could you give us an idea of what your overall filter revenue might be this year, what your run rate is? I think you've given us some statistics in the past to help us understand how big the piece of business and how fast it's growing?

Ralph Quinsey

Yeah that's a hard number to say, for the mobile revenue, I think we passed the 50 point -- more than 50% of our revenue is filter related. A lot of that is integrated into devices that have a lot of other active content. But I think that's a good rule of thumb.

David Duley - Steelhead Securities

Okay. And then as far as your revenue in China goes, how should we think of the growth rate of that piece of business? Should we kind of look at the overall number of LTE phones being sold and to use that as the growth rate or will we see a content increase for you guys? Just help us understand what you think is going to happen there.

Ralph Quinsey

Yeah, I think we should look at it as far as 4G phones being sold and use the conversion rates that I talked about in the script and we have on our website as far as content per phone and make your own estimates about how much of that content we will win. It’s significant, right. Going from a 2G entry level phone to an entry-level smartphone, which I think will be a big part of the demand change over the next year or so.

We're going from less than $1 to $3 or $4 of content. And when you look at the world phones for 4G, it jumps up to – I'm sorry the roaming – global roaming phones for 4G it jumps up to $8, and of course the world phones as you know are well into the teens. So, quite a bit of content.

So, two drivers, one just a growing adoption of 4G phones whether it’s TV or FTD around the world, and then the content increases that our industry is seeing and particularly, TriQuint is seeing on premium filters.

David Duley - Steelhead Securities

Thank you very much.

Operator

Our next question comes from the line of Mike Walkley with Canaccord Genuity.

Siddharth Sinha - Canaccord Genuity

Hi. This is Sid on for Mike Walkley. Thanks for taking my questions. A quick one on China with the transition to TDLTE and there seems to have been lower 3G channel inventory now. How do you think about China seasonal trends towards the end of the year, and do you worry about inventory correction in China perhaps later in the year? Is that something you worry about?

Ralph Quinsey

So right now we are not seeing any evidence of that. We've certainly are mindful of the fact that fast growing markets can see inventory corrections. But once again, I think the long-term trend line is for growth in that marketplace. We’re not seeing any evidence of short-term inventory corrections. If and when we do, we will react to them appropriately. But the long-term growth in that market and the long-term conversion to 4G smartphones in China, I think is the bigger part of the story.

Siddharth Sinha - Canaccord Genuity

Okay, thanks. And then just a quick one on the non-handset business, particularly on your GaN product line. I just wanted to take your -- get your opinion on the product -- potential product overlap for the synergies here with RFMD's MPG business. I believe RFMD has focused on the sub-3.5 gigahertz frequencies while TriQuint has a broader portfolio of products, covering higher frequencies up to 100 gigahertz. So, would it be fair to say that there isn't too much of an overlap here and the combined entities would cover a very large frequency range from all away from RF to millimeter wave frequencies?

Ralph Quinsey

That’s a very fair and accurate assessment. And really the theme across many of our products and markets, where as we dug into, that we found very little product overlap and very complementary roadmap. So very accurate.

Siddharth Sinha - Canaccord Genuity

Great. Thank you.

Operator

Next question comes from the line of Tom Sepenzis with Northland Capital Management.

Tom Sepenzis - Northland Capital Management

Yes, hi. Thank you for taking my question. I'm just wondering where you're going to put the extra filter capacity? Is that in your existing fab or where exactly is that going to go?

Ralph Quinsey

That’s correct, Tom it's in our existing filter fabs. We're going to expand our existing filter fabs. We've reached a size and scale in our filter fabs where we can add capacity fairly quickly.

Tom Sepenzis - Northland Capital Management

And how much additional capacity can you add in that -- after this doubling?

Ralph Quinsey

It depends on the factory. I think for BAW we could more than likely double it again or beyond. And for TC-SAW, and depends if we would either change wafer diameter size or build more brick and mortar at our existing site. But again, we could probably at least double.

Tom Sepenzis - Northland Capital Management

Great. Thank you. And then can you just talk about the transport business. It now looked like it was up about 50% sequentially. So, can you talk -- give us a little more color in terms of what the levers are there? Is it broad-based multiple customers or is it one or two people driving that?

Ralph Quinsey

The material store was in the optical business. We had seen some weaker quarters bouncing around the last several quarters. And that came back very strong in the -- just completed quarter. So that's really what was driving that growth, really strong optical business.

As you know Tom, that product is used to move data from city-to-city around the metro ring. So, as more smartphones get dumped into the hands of world's population, more data gets dumped into the infrastructure and people have to invest in the equipment to move it around.

Tom Sepenzis - Northland Capital Management

Do you expect that to keep growing at a crisp pace or should it taper off after the strong move we saw here in June?

Ralph Quinsey

I think it's a similar story to the base stations, story where it has ticked up and it should stay at the elevated levels for the foreseeable future.

Tom Sepenzis - Northland Capital Management

Great. Thank you so much.

Operator

Our next question comes from the line of Tom Diffely, D.A. Davidson

Tom Diffely - D.A. Davidson

Yes, good afternoon. First, another question on a capacity expansion plans. You talked about $50 million in the third quarter, and just to clarify is that mainly for BAW -- I know it's for both, but is BAW filter the biggest component?

Steve Buhaly

BAW filters will probably be end up being somewhere around two thirds of the capital expenditure.

Tom Diffely - D.A. Davidson

Okay. And then when we look beyond the third quarter to get the full doubling of capacity, what’s the total capital investment?

Steve Buhaly

That’s kind of to be determined. And – but it’s going to be significant.

Tom Diffely - D.A. Davidson

Okay. All right, and Steve, maybe a little one on the gross margin, the 1,000 basis points improvement year-over-year, is there some way that you can quantify the impact it came from, volume versus mix versus maybe some cost reduction?

Steve Buhaly

Yes, but we’re not going to go into that level of detail here. But I would say that they are all contributors, everything from the expense reduction that we took earlier in the year to the portfolio management that we've been executing to a yield improvement in our factories. They’ve all been significant contributors.

Tom Diffely - D.A. Davidson

Okay. Would you say there is some headroom then for each of the three categories going forward?

Steve Buhaly

Well, we've guided gross margins up sequentially, so I’d say yes.

Tom Diffely - D.A. Davidson

Okay. Ralph, maybe on the merger, we've seen a lot of companies have issues with China as being kind of the stumbling block. Do you consider that your biggest hurdle at this point?

Ralph Quinsey

I consider it one of the key milestones we need to complete along the path to closing the deal. It’s progressed through the expectations that we had as far as timing. So, I don't see any major issue in the overlap of products, and I don't have a lot of exposure experience with the Japanese – I’m sorry the Chinese department that’s handling this. And so we’ll work through the process.

Tom Diffely - D.A. Davidson

Okay. Thank you.

Operator

Our next question comes from the line of Bill Dezellem with Tieton Capital Management.

William Dezellem - Tieton Capital Management

Thank you. A couple of questions. First is relative to the gross margin improvement that you saw in this quarter, I hope I didn’t miss this earlier. But was that a function of something other than the increased volumes and sales level?

And then the second question is, you have not had some time to get customer feedback post acquisition or combination announcement, would you please discuss the commentary that you have received, please?

Ralph Quinsey

I will take the second part of the question and I'll let Steve answer the first part. By and large all of the customers we've talked to are excited about the opportunities. Several customers, several major customers have asked us to accelerate our activity of working together to create better products for them and just give them the benefits of the combination.

So I am hard-pressed to find any negative customer feedback on the merger. With the exception of one or two customers are just concerned about in the situation like this, and there are synergies involved, they're concerned about a long-term continuation of supply. Of course, we have assured all of our customers that we would not put them at risk and would continue to supply products to support them.

Steve Buhaly

And on your first question I think the one contributor you didn't mention was the proactive portfolio management we've been engaged in, in phasing down some of the low-margin products that we had in our portfolio and as premium filters have grown. And so the combination of those two has certainly been very accretive to our overall margins.

William Dezellem - Tieton Capital Management

The next change is also very important from the standpoint of your exiting that low margin business is hurting the revenue growth that you already have discussed, plus the fact that filters are your highest margin product that you have.

Steve Buhaly

Well said.

William Dezellem - Tieton Capital Management

Great. Thank you both.

Operator

And we have no further questions at this time.

Ralph G. Quinsey

All right, well, I want to thank everyone for their participation on the call.

Operator

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. You may all disconnect.

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