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TriQuint Semiconductor (NASDAQ:TQNT)

Q1 2011 Earnings Call

April 27, 2011 5:00 pm ET

Executives

Steven Buhaly - Chief Financial Officer, Principal Accounting Officer, Vice President of Finance & Administration and Secretary

Ralph Quinsey - Chief Executive Officer, President and Executive Director

Analysts

Nathan Johnsen - Pacific Crest Securities

George Iwanyc - Oppenheimer & Co. Inc.

William Dezellem - Tieton Capital Management

Scott Searle - Merriman Curhan Ford & Co.

Anthony Stoss - Craig-Hallum Capital Group LLC

Todd Koffman - Raymond James & Associates, Inc.

Edward Snyder - Charter Equity Research

David Duley - Merriman

Aalok Shah - D.A. Davidson & Co.

Timothy Luke - Barclays Capital

Paul McWilliams - Indie Research

Richard Shannon - Northland Securities Inc.

Operator

Good afternoon. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the TriQuint Semiconductor First Quarter Earnings Conference Call. [Operator Instructions] I would now turn the call over to Mr. Buhaly. Sir, you may begin your call.

Steven Buhaly

Thank you, Michelle. Good afternoon, and welcome to our first quarter 2011 conference call. This call will include forward-looking statements about TriQuint's projected results. Results could differ materially based on various factors, including those described in our reports on Forms 10-K and 10-Q and other filings with the Securities and Exchange Commission.

This presentation also includes non-GAAP financial measures, which report tax on a cash basis and exclude equity compensation charges, charges associated with 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 is in our press release and in the Investors section of our website.

Ralph will now provide an overview of the quarter.

Ralph Quinsey

Thank you, Steve, and welcome to our callers. This afternoon, I will provide an overview of Q1 results and additional color in our major markets. Steve will follow with a detailed look at Q1 and specific Q2 financial guidance. I will then summarize and open the call for questions.

Revenue for Q1 was $224.3 million, an increase of 24% from Q1 of 2010. Non-GAAP net income comparing the same periods increased 47% to $26.1 million or $0.15 per share despite an additional $4.4 million of litigation expenses. We saw no direct impact from the recent disaster in Japan and have sufficient inventory coverage for Q2 supply. In addition to recognizing the tremendous personal tragedy of the earthquake and tsunami in Japan, we are doublechecking our supply chain and qualifying potential alternate sources as a contingency backup plan. In summary, our supply chain has done an outstanding job, and I do not anticipate any impact from this disaster on our ability to ship products.

Our 2011 growth drivers are in three areas: first, strong smartphone demand for the associated RF content expansion; secondly, high-performance optical product revenue for data transport between cities and within the metro ring; and lastly, new product success in the cable/fiber-to-the-home market also known as the hybrid-fiber-coax network.

Moving to trends in our three major markets, I will start with our largest market, Mobile Devices. Mobile Devices revenue grew 41% in Q1 2011 compared to Q1 2010 but decreased 13% sequentially in line with typical seasonal expectations. Approximately 77% of our Mobile Devices revenue is attributed to 3G/4G solutions, 21% connectivity, largely wireless LAN and 2% to 2G or low-end, voice-only phones.

Our Mobile Devices revenue has grown 348% over the last 4 years as TriQuint launched innovative products to service the unprecedented expansion of our content and the strong consumer demand for devices such as smartphones and tablets.

During the past year, we focused on adding capacity to serve these high-growth markets and are now fully able to meet customer demand. Specifically, we have increased GaAs capacity approximately 25%, BAW filter capacity about 95% and SAW filter capacity approximately 30% as compared to Q1 of 2010.

As discussed on previous calls, we have additional plans for capacity expansion throughout this year, including a 6-inch IMR side line in Texas, which is slated to come online late this year or early next.

All of these technologies are critical for today's advanced platforms. Therefore, I would like to highlight some fundamental changes in our industry. First, RF complexity for this market has increased significantly over the last 4 years. Applications are transitioning from simple power amplifiers to complex architectures that support an increasing number of bands and modulation schemes.

Duplexing technology is now a critical element in new RF standards. Whereas just a few short years ago, this function was done with a simple PIN diode device, today's smartphones require high-performance duplexing filters and complex switching elements implemented in a way that minimizes losses to support long battery life while maintaining footprint flexibility for small, slim and sleek mobile devices.

TriQuint's a leader in each of these enabling technologies, and we are an innovator in high-performance, small-footprint and elegant RF solutions for this market.

We currently estimate the 2011 total available market for mobile devices at approximately $5.1 billion or about 1.7 billion to 1.8 billion mobile devices sold in 2011. This includes handsets, dongles and tablets with both active content such as GaAs power amplifiers as well as filtering and switching content.

Mathematically, this yields an average of $2.87 RF content per unit. This is a mix of low-end phones with less than $1 content, feature phone with $2 to $4 of content and high-end phones, tablets and dongles with content reaching $5 to $7 and growing with expanded 3G bands and the addition of LTE or 4G broadband. This market model includes cellular and wireless functionality, a market TriQuint is well positioned to address.

Modeling 2013, I see the average content increasing to $3.21 per unit as the smartphone mix grows from approximately 25% today to 40% or more. This model is built on an annual unit growth rate of about 9% for total devices and a 10% to 15% functional price decline per year.

The conclusion is the RF market we serve today has several more years of 15% to 20% annualized dollar growth driven by the continuing conversion from voice-only handsets to content-rich smartphones and mobile tablets. I expect a 50% crossover point will not be reached before 2014.

Now switching to our networks market, revenue increased 6% in Q1 2011 compared to Q1 2010, but decreased 4% sequentially. Transport revenue grew 37% compared to Q1 of 2010. It is now our largest Networks subcategory. Growth and transport came largely from optical and point-to-point radio, with solid percentage growth from cable and VSATs on a smaller base. Base station revenue was down approximately 19% compared to a strong Q1 2010 with transceiver cards being the largest portion of this subcategory.

Following the 2009 slowdown, we experienced strong first half 2010 buying in this market as customers rebuilt inventory and geared up for growth in India. We believe this ramp was slightly overheated, resulting in an inventory headwind for the past few quarters. Additionally, our mix is transitioning from component revenue to module revenue as integration becomes a vehicle to improve performance and lower our customers' cost. We expect stronger Q2 base station revenue as inventory headwinds appear to have dissipated.

Lastly, our emerging market revenue grew nicely in automotive but was more than offset with softness in AMI and standard products, which we speculate were impacted by a similar inventory build in 2010.

Key new products for 2011 include our market-leading optical driver product line, new converters, doublers and BCOs in our point-to-point and VSAT markets and new products supporting cable and deep fiber as the hybrid-fiber-coax network for home entertainment continues to evolve from a one-way data pipe to a high-speed adaptive broadband network.

Defense and Aerospace is our smallest market but an area where we drive significant value for our customers. Revenue was down 24% in Q1 2011 compared to Q1 2010 and down 13% sequentially. Our Q1 revenue was below expectations and is attributed to revenue sliding from Q1 to Q2. Our outlook of approximately $40 million in revenue for the first half of 2011 remains unchanged. Longer term, we believe reduced government spending will impact the defense market but will be offset by increased demand for retrofit radar systems and our investments in new products. We are currently developing packages, devices and modules for increased RF content, and I expect today's investments will drive growth in 2012 and beyond.

Now Steve will provide our detailed results for the first quarter of 2011 and our guidance for Q2. Steve?

Steven Buhaly

Thank you, Ralph. For the first quarter of 2011, we generated revenue of $224.3 million. Revenue increased 24% over the first quarter of 2010 and decreased 11% sequentially. Year-on-year, Mobile Device revenue grew over 41%, Networks grew 6% and Defense and Aerospace declined 24%. For the quarter, our revenue split to end markets was Mobile Devices, 72%; Networks, 20%; and Defense and Aerospace, 8%. Please refer to the supplemental data posted on the Investors section of our website for a detailed breakdown of our revenue by market.

During the first quarter, revenue from Foxconn comprised 10% or more of our total revenue. Our book-to-bill ratio for the quarter was 1.04. Our non-GAAP gross margin of 40.0% for the first quarter of 2011 was relatively flat sequentially and up from 39.0% in Q1 of 2010. Inefficiencies associated with capacity expansion modestly impacted margins in the quarter.

Non-GAAP operating expenses were $63.2 million or 28.2% of revenue for the first quarter of 2011. Non-GAAP operating expenses grew $10.8 million from the first quarter of 2010 driven by growth in R&D of $5.7 million and litigation expenses. Litigation costs were $5.4 million in Q1 of 2011, an increase of $4.4 million from Q1 of 2010.

Non-GAAP operating expenses as a percent of revenue decreased from 29.0% in the first quarter of 2010 but increased sequentially from 22.9% of revenue. Excluding litigation expense, operating expenses were 25.8% in the first quarter of 2011, down substantially from the equivalent 28.4% in the prior year quarter. Tax expense on a non-GAAP basis for the first quarter was $0.1 million, reflecting usage of net operating loss carry-forwards.

Non-GAAP net income for the first quarter was $26.1 million or $0.15 per diluted share. Non-GAAP net income grew 47% over the prior year quarter. Total cash and investments decreased about $24.8 million to $198.8 million during the first quarter. Capital expenditures of $51.8 million were partially offset by $10.8 million of cash flow from operations and approximately $12 million of cash from stock option exercises. Inventory grew by $23.0 million and turns for the quarter decreased to 4.3 as safety stock inventory was replenished. Accounts receivable decreased slightly, but DSO increased modestly to 54 days. Non-GAAP return on equity was 12.1% for the first quarter of 2011.

Non-GAAP financial measures report tax on a cash basis and excludes stock-based compensation charges, certain charges associated with acquisitions and other specifically identified non-routine items. Non-cash tax expense includes certain deferred tax charges and benefits that do not result in a tax payment or tax refund. Complete reconciliations of GAAP to non-GAAP results are available in our press release and in the Investors section of our website.

Moving to our outlook. We believe second quarter revenue will be between $230 million and $240 million with non-GAAP gross margin between 40% and 42%. Non-GAAP operating expenses are expected to grow to between $65 million and $67 million including about $7 million of expected litigation expense. Second quarter net income per share is expected to be between $0.16 and $0.18 on a non-GAAP basis. As of today, we are 86% booked to the midpoint of our revenue guidance. We continue to expect strong revenue growth in the second half of 2011.

During the quarter, we plan to participate in a number of Investor Relations events. On Thursday, May 5, Ralph will be in Boston marketing with Stifel Nicolaus. I will be presenting at the Barclays Conference in New York on May 25. Roger Rowe will be presenting at the Craig-Hallum Conference on June 1 with Tim Dunn in Minneapolis, while Ralph will be in New York on that day presenting at the D.A. Davidson conference. Following that, Ralph will be marketing in New York with Charter Equity. Please contact Roger Rowe if you are interested in participating in any of these events. Our second quarter 2011 conference call is scheduled for July 27, 2011.

I will now turn to Ralph for closing comments prior to welcoming your questions.

Ralph Quinsey

Our performance in Q1 gives us a solid start in 2011. Our 2011 success is tied to strong smartphone demand and the associated RF content expansion, high-performance optical product revenue for data transport and new product success in cable, fiber-to-the-home, VSAT and point-to-point radio.

Short-term visibility is somewhat cloudier than normal due to the crisis in Japan, but the long-term trend lines of rising RF content for phones, increasing demand for broadband infrastructure and new standards driving new opportunities have created the healthiest 3-year outlook for the RF market I have seen in many years.

TriQuint is standing out as the company that is investing in technology and bringing innovation and value to the market. I expect a solid second half of 2011 for TriQuint with strong growth being sustained into 2012 and beyond.

Michelle, we would be delighted to take questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tim Luke with Barclays Capital.

Timothy Luke - Barclays Capital

Thank you so much. Just with respect to your outlook, could you give us some sense of what some of the variables may be in the sales guidance relative to the general health of the core customer set with some peers in the industry seeing somewhat different trends and to what extent you may or may not see any disruption from Japan? And also just give us a sense of -- as you guide for this impact from litigation expense, how you may begin to think about that shaping up after this calendar quarter or how we should begin to think about modeling that through the second half of the calendar year.

Ralph Quinsey

Okay, so let me comment -- this is Ralph. Please let me comment on Japan and the market and then I'll ask Steve to comment on litigation expenses. I don't foresee any impact from the crisis in Japan on our ability to ship products in Q2 or beyond. I believe we have done a very good job of sorting that situation and closing any potential gaps that we might have encountered. From an overall market perspective, I think the market is quite healthy. Certainly, the demand for mobile devices and tablets and other mobile Internet devices have -- has remained healthy. I expect it to be healthy. I did see somewhat of an inventory build in past quarters around our Networks business, specifically in base stations, to some extent, we believe, in AMI and in our distribution channels. I think that's behind us now. It seems to be unwound, and I'm looking forward to a healthy market in 2011. Now Steve can comment on litigation.

Steven Buhaly

I think Ralph got the easier of the two questions. Litigation expense turns out to be a pretty difficult forecasting area out past the quarters, an awful lot of variables involved. But I believe Q3 will be less than Q2 and timing of the trial is -- if we get that far, is probably late this year or early next year. Apparently, dockets are rather crowded in the Arizona Federal Court system. And so I think if the trial were to be in the first quarter of 2012, I think you'd look at declining costs from Q2 in the back half, but I'm not going to hazard a specific guess. I was fairly far off last time in predicting six months ahead, and so I'm going to be a little bit more cautious with the number.

Timothy Luke - Barclays Capital

What does this one relate to again? Could you just remind me, Steve? And maybe just for Ralph, you've given numbers in the past on revenue growth for the full year. Would you care to sort of reiterate or expand on that guidance level in terms of revenue growth?

Steven Buhaly

Just to wrap up my part, the litigation is with Avago over the bulk acoustic wave filter market.

Ralph Quinsey

And I would say for Q1, we are on track. I'm not going to update or reaffirm annual guidance. As you know, Tim, we do that once a year, and we don't update it through the year. But we're on track with Q1 at 23% or so year-over-year. If you look at the midpoint of our guidance for Q2 combined with Q1, that puts us 18%, and we think we're going to have a strong second half. So I would say we're in the game, but we're not updating or reaffirming.

Operator

Your next question is from the line of Edward Snyder with Charter Equality (sic) [Equity] Research.

Edward Snyder - Charter Equity Research

Thanks. Several questions. First, Steve, any update on your thinking on tax rate for 2012? I know it's a moving target and you've changed. But now that we're launching estimates for the out year, you have a big swing on EPS numbers. And then we've talked previously about 20% operating margin for the full year of 2011, which is kind of your target and 20% growth. Do you still feel comfortable with that after this quarter and the guidance for next quarter? Or should we go on the lighter side of that range? That will be for Ralph.

Steven Buhaly

So I'll take the first one. There's a whole bunch of Safe Harbor statements I have to wrap around 2012 tax estimate of how much income and legislation and all that, but I think modeling it in the range of 15% to 20% would be fair.

Edward Snyder - Charter Equity Research

Good.

Ralph Quinsey

And then the other question, Ed?

Edward Snyder - Charter Equity Research

Yes. So previously, we've been talking about 20% revenue growth for the year and then I think as a target, 20% operating margin for the full year. And I'm not sure if that includes litigation or not.

Steven Buhaly

Ed, I'll take that one. I got the question. It does not include litigation costs, and Ralph talked about the revenue number. We're just guidance plus Q1. We're just a hair short of 20% for the first half. And so we're in the game for the 20% goal. We expect a strong second half as we have had in past years like 2010. And so I think we're in the game there, and similarly, I think we're in the game for operating income targets as well. I think with that stronger revenue will come performance probably better than 20% and the horse races, whether it will be enough better, to make up for a little bit less than the first half

Edward Snyder - Charter Equity Research

And then, I mean, at the analyst day, we talked about constraints on capacity late last year kind of limited what you could do in terms of design wins. So the die was cast for the first couple of quarters in general but then it opens up given all the capacity you've added both in BAW and you're adding in GaAs. So as the second half of the year, how was -- how are things looking in terms of wins towards that end? I know that's pretty far out to start predicting revenue growth, but in terms of what are the competition for design wins, do you feel like you're comfortable with the winds you're getting now for the second half growth?

Ralph Quinsey

Yes, I do feel comfortable with the second half growth. Just to put things in perspective, we've grown our Mobile Devices business over the last four years about 350%, in the last couple of years up to this quarter in the range of 40%. It's our volume driver. And we did hit a little bit of a wall late last year, where we had to manage our demand, work with our customers. And we are experiencing a little bit of a headwind associated with that as we manage some design away. We're still growing the business 40%. We could grow it faster. I think that's the exciting part of the story.

And I believe we did an excellent job working with our customers, being completely transparent and getting ahead of the wave and helping them stay out of trouble through that period of rapid growth for them as well. Therefore, I don't think we're going to see much resistance to designs, and we are not seeing much resistance right now for getting those design wins back.

Edward Snyder - Charter Equity Research

So the headwind you're speaking of, is it just design wins you lost? Or is it in trends you see among some of your customers to go back to some of your parts?

Ralph Quinsey

We would be growing the business faster than we're growing it right now, faster than 40%, based on decisions we made quarters ago as far as choosing which platform to be on or not with customers. We're seeing no resistance right now from our customers as far as if we got good products, they want them.

Edward Snyder - Charter Equity Research

So it sounds like you throttled wireless back on purpose last year. I think we'll establish that. If you take the reins off and it starts to go rapidly to meet your revenue goals, doesn't that start hurting your margin mix? Because given the margin profile of your different segments, you'd almost want to keep Networks and Defense at least at the same rate to try and bolster margins. Should we expect lower margins in the second half?

Ralph Quinsey

I would like to grow Networks, Defense and Aerospace faster. The Mobile Device margins are below corporate average. They are improving with efficiency gains and as value-added products are introduced. So there's a lot of moving parts there, but your baseline assumption is correct, is that there is margin pressure. We've guided, for this year, margins to be in the 40% to 43% range. I believe we're still on track for that guidance.

Edward Snyder - Charter Equity Research

And then if you could touch base -- just two more -- touch base on Defense was weak this quarter, and that's usually when your better margin spots in the infrastructure. You shed a little inventory there. How confident are you that they're coming back versus just permanently share loss in either of those two?

Ralph Quinsey

Yes. The Defense business is lumpy, and things do slide from period-to-period, and so the expectations have not changed for the first half. Some revenue just slipped from one period to the next. From a Networks perspective, backlog is quite strong right now for base station products, and transport has been on a healthy trend line. So I expect Q2 to be a good growth quarter for our Networks, Defense and Aerospace business.

Edward Snyder - Charter Equity Research

Okay. So then final question. Just to keep track of your capacity, can you give us an update on the wafer starts per week currently for like both GaAs and BAW?

Ralph Quinsey

No, I'm not going to do that. Ed, I appreciate the question. We did update some of those numbers in our analyst meeting to talk about general capacity concerns and shared some information, tried to be more transparent. We are not going to be in the mode of giving wafers per week updates on the quarterly calls.

Edward Snyder - Charter Equity Research

Okay. So if you don't answer that one, can you then tell me if you're on the iPhone 5 and how much your content would be?

Ralph Quinsey

I have no comments about that.

Operator

Your next question is from the line of Nathan Johnsen with Pacific Crest Securities.

Nathan Johnsen - Pacific Crest Securities

Thanks for taking my question. I guess to follow up on the question on capacity, even if you're not able to provide an update on wafer starts, et cetera, just I think you had talked about getting to about a potential $300 million run rate at the end of Q2. Any change to that trajectory? Or are you still basically on track?

Secondly, as it relates to optical, clearly, there's been some concerns with inventory builds associated with one of your primary customers. I just wanted to see what your confidence was that the same sort of issue wouldn't be impacting you.

And then lastly, one of the things that you guys were kind enough to share in your analyst day was what you viewed as the architecture of choice for 2011. I wanted to know when we should expect to see that architecture begin to show up and tear down and enhance? Is that kind of a mid this year type of event? Or is that maybe later in the year?

Steven Buhaly

I'll take your first question if I could remember that far back. I think it was about how we're doing on our revenue/capacity objectives. And we are pretty much on track. As you know, we added about $23 million of inventory to replenish our safety stocks this quarter. And I will add to that, that we ran at about 90% utilization at our primary fabs during the quarter. If you translated that inventory build into revenue at about a 40% margin, we would have been able to ship about $262 million in revenue if we didn't have any inventory build. And so that's pretty much progress along the lines that we expected towards being able to support $300 million of revenue by the end of the second quarter.

Ralph Quinsey

And then specifically to your question on optical, I'm not seeing the issue that you mentioned. Our optical business is up about 80% year-over-year, and it's flat sequentially from Q4. So I believe that we're in good shape on optical. The architecture question that we talked about the Analyst Day was our multi-market architecture, which means there's a lot of customers involved. We're actively working design win activity with that now, and so the best visibility I can give you is it's a second half event.

Operator

Your next question is from the line Todd Koffman with Raymond James.

Todd Koffman - Raymond James & Associates, Inc.

I wanted to ask about recent industry share shifts going forward. I think people are pretty well aware of some of the sockets you may have lost in the past. But last night, RF Micro Devices made some comments about their share gains at Research in Motion, HTC, Samsung, et cetera, and I was wondering, what's your view on recent industry share shifts developing over the next couple of quarters from your view and perspective. Thank you.

Ralph Quinsey

Yes, if you're speaking to RF share, I believe TriQuint is one of the more penetrated suppliers across a wider customer base than some of our other competitors. And so as share shifts from one customer to the other or volume shifts from one customer to the other, we tend to have good coverage regardless of the customer. Did I understand your question correctly?

Todd Koffman - Raymond James & Associates, Inc.

Maybe more directly, amongst your key customer wins, have you seen any share loss developing -- that might develop over the next six to nine months as some of those key customers of yours were called out last night?

Ralph Quinsey

Yes, I think that we're going to grow with many of our customers this year. We have one large customer in Korea that had a strong second half. We had made a press release that we were involved with the Galaxy platform of Samsung and had won the complete RF front end. And at that time, we said that was an unusual event. Typically those sockets are shared. We continue to participate in that platform, but we have come down from our strong second half for that customer. I don't see any other significant deviations as far as the overall trend line of growth.

Operator

Your next question is from the line of Aalok Shah with D.A Davidson.

Aalok Shah - D.A. Davidson & Co.

Just a couple of housekeeping questions. Steve, I think you mentioned Foxconn was the only 10% customer. Is that correct?

Steven Buhaly

Yes.

Aalok Shah - D.A. Davidson & Co.

Okay. And then on the inventory front, maybe you can qualify a little bit of it. I mean, I understand that you probably want to build a little bit of buffer inventory, but is it mostly for hand or cellular? Or is it kind of spread across the board?

Steven Buhaly

Yes, it's spread across the board, but the bulk of it is cellular, because that's where we really had tight capacity situation and stripped out the safety stocks last year.

Aalok Shah - D.A. Davidson & Co.

Okay. Okay and then as we go into kind of the next quarter, how are you guys thinking about the revenue mix? I know you can't give me a specific guidance as to the breakdown, but are you expecting maybe that the Networks and the Aerospace business to be a little bit stronger than the cellular business at this point in the quarter?

Ralph Quinsey

Like you said, Aalok, we're not really guiding that -- with that granularity. I think Networks and Defense and Aerospace will be up. I think Mobile Devices will be up.

Aalok Shah - D.A. Davidson & Co.

Okay. And Ralph, to go back to the last question just a little bit, I mean in terms of the RFMD call last night -- I know you don't want to talk too much about specific platforms, but it does seem like they've won some major platforms here recently and maybe against you guys. I'm trying to get a sense of really where do you think your strength is going to be especially with some of these higher-profile platforms like the higher-profile smartphones. Do you think you can get back to where you were with some of these key customers like the Samsung later this year?

Ralph Quinsey

Oh, I have confidence that we will grow our business with Samsung and with RIM second half versus first half. I think the opportunities in front of us are not only exciting, they're astounding. If you followed through the numbers I gave you on the market model, this is just a wonderful time to be in the RF business, and TriQuint is very well positioned to grow across the board.

Aalok Shah - D.A. Davidson & Co.

Great. And then lastly just, Steve, maybe you could -- I know you said you were 86% booked to midpoint. Give me a sense, if you can, just how does that relate in previous quarter -- how does that relate to previous quarters?

Steven Buhaly

I think it's a couple of points below what the average would be. We're -- I'd say the average is probably 89%, 90%. So it's close, but we're not quite there. But we always -- we try to go a little bit beyond just a few period numbers and apply some judgment to the forecast. And so we think this is a reasonable point to be given all the P's and Q's inside the numbers.

Aalok Shah - D.A. Davidson & Co.

Historically, has Q2 been a stronger turns per quarter for you guys?

Steven Buhaly

I'm not sure. It's probably more dependent on the individual circumstances.

Operator

Your next question is from the line of Anthony Stoss with Craig-Hallum.

Anthony Stoss - Craig-Hallum Capital Group LLC

Ralph and Steve, a couple of quickies for you here. Ralph, love to hear your view on kind of inventory in the channel on the handset side. And if you could comment on if you've seen any kind of changes or unexpected changes in order patterns in the last 30 days. And last but not least, I'd love to hear your views on your positioning going into the second half this year with your biggest customers. Thanks.

Ralph Quinsey

So as far as inventory in the channel for handsets, we don't have a lot of exposure to the low end as you know, Tony. We have more exposure to the very high end in smartphones, and that looks very healthy and demand continues. And I'm not making any kind of guidance on specific customers.

Operator

Your next question is from the line of Scott Searle with Merriman Capital.

Scott Searle - Merriman Curhan Ford & Co.

Steve, just a quick housekeeping question. I'm not sure if I missed it earlier, but what was depreciation in the quarter?

Steven Buhaly

You didn't miss it, and that's a good question. It was $14 million in the quarter.

Scott Searle - Merriman Curhan Ford & Co.

Okay. And just to follow up, in terms of your June guidance, you're indicating that all segments look like they're going to grow. And if I just kind of plug that into the model and take a view of the midpoint, it seems like Mobile Devices are growing less than they have more recently for you in the June quarter. And in line to maybe -- more or less, I guess, in line with where the rest of the market is, and you guys have historically been share gainers. Is there something that's going on there from a product cycles standpoint, customer ramping up, ramping down that we should be aware of?

Ralph Quinsey

I would say that year-over-year, you can expect Mobile Devices to continue to grow in line with how we have grown in the past. The only deviation from that is the slight headwind we're seeing in the first half associated with decisions last year when we were tight on supply. But other than that -- and I don't consider that a significant impact to the business. Other than that, I expect Mobile Devices, year-over-year, to be another strong growth year driven into the strength of smartphones and other Internet devices, mobile Internet devices and the RF content expansion that comes with that.

Scott Searle - Merriman Curhan Ford & Co.

And Ralph, maybe to follow up on that and couple it back to your -- the company's prior expectations of 20% growth for the year, it sounds like you're still -- without specifically reaffirming or guiding to it -- that you still think you're going to be in the ballpark. And so that implies a pretty big step-up in September and December in the ballpark of $30 million to $40 million sequentially each quarter. So could you help us understand why you have such comfort with these design wins you already have in pocket today? I mean, should we be looking for new 10% customers be popping up on the list? With the Samsung pop back up there, do we expect HTC or RIM to maybe achieve that level of contribution?

Ralph Quinsey

You're right. I remain enthusiastic towards the target of 20% revenue growth, and as we said earlier, I think we're in the game. But also, as you mentioned, I'm not reaffirming or reasserting guidance. We are well penetrated across the smartphone space, and the market is growing rapidly. That gives me confidence that we can grow the businesses well.

Steven Buhaly

And Ed, we've just typically had a stronger second half. Last year, I think about 55% of our revenue was in the second half. And so it's not unheard of that we have 55%, 57%, 58% of the year's revenue show up in the second half.

Scott Searle - Merriman Curhan Ford & Co.

Okay. And Steve, just one last question on gross margins. This quarter you were at the lower end of the range. Part of that looks like its mix, Defense slipping out from margin to June and Mobile Devices maybe being a little bit better. But you also mentioned some inefficiencies that you experienced in the quarter. Could you shed a little light on that in terms of what happened and if we will see that repeat in the June quarter?

Steven Buhaly

You bet. We just had a little bit of more yield issues and a little bit more attention to detail issues, if you will, that I think just go hand in hand with a lot of disruption in the fabs. If you're really running efficiently, you'd like everything to just be the same. And so there's a little bit more than we expected when we put the guidance together. I think it probably cost us a percentage point in gross margin. And we think we'll be in a bit better shape there in the second quarter, and so we're guiding at the midpoint 41%.

Operator

Your next question is from the line of David Duley with Steelhead.

David Duley - Merriman

Thanks. Most of my questions have already been asked. But just to get a little information, how much more on CapEx would you think you'll be spending? Or what would your CapEx budget be in Q2? And could you repeat what it was in Q1? And can you give us a forecast for depreciation of Q2?

Steven Buhaly

Yes. CapEx was just under $52 million in Q1. It's going to be lower than that in Q2. I continue to think we're going to be averaging $45 million, maybe $47 million a quarter. Obviously, since this is when the checks are cut, it's going to bounce around a little bit just on timing. So I think we will be in the $90 million to $95 million for the first half of the year on CapEx. Depreciation is $14 million this quarter, probably trending up towards $15 million in the second quarter.

David Duley - Merriman

And the CapEx budget of the total year, what do you think that will end up being at this point?

Steven Buhaly

Consistent with the first half run rate.

David Duley - Merriman

And by year end, can you give us a dollar of potential capacity?

Steven Buhaly

Yes, you bet. I think we'll be able to support $350 million of revenue in the fourth quarter.

Operator

Your next question is from the line of Richard Shannon with Northland Capital.

Richard Shannon - Northland Securities Inc.

A couple of questions from me, I guess, first of all on inventory. What are your expectations in dollar terms seeing inventory finishing the second quarter? And what are the implications for utilization in your GaAs fabs during the second quarter?

Steven Buhaly

Yes, for inventory I think it'll be flat to slightly up. We might -- we built most of the safety stock that we intended to. We might have a little bit left to go there, and it turns out to be about five in the second quarter. And I'm sorry, what was your second question?

Richard Shannon - Northland Securities Inc.

Just about utilization in the second quarter, because you were at 90% in the first.

Ralph Quinsey

Yes. I would expect utilization, GaAs utilization, to stay in that range.

Steven Buhaly

In the 85% to 90%.

Ralph Quinsey

Yes, 85% to 90%.

Richard Shannon - Northland Securities Inc.

Okay, great. Fair enough. Second question, on your WiFi, your connectivity business, obviously, you have some very nice trends there. Kind of curious about what you think your share is, and also, I think you're fairly concentrated in terms of customer base there. Have you seen any expansion in the customer list there?

Ralph Quinsey

Yes. It's hard to give you a share number on that. But if I had to make the stab, I would venture to say it was in the 30% range of the market in Mobile Devices. We have a fairly wide, actually, customer list for our wireless LAN products. I would expect we ship to a half a dozen or more customers, all of the major players in the handset space.

Richard Shannon - Northland Securities Inc.

And Ralph, is that mostly on a foundry basis? Or is that expanded beyond that?

Ralph Quinsey

No, it's mostly product now. There is still some foundry. It's crossing over from foundry to product.

Operator

Your next question is from the line of Bill Dezellem with Tieton Capital Management.

William Dezellem - Tieton Capital Management

I have a couple of questions here. The first one is, is there a point as we go forward -- and this is not a question about near-term quarters, but probably at some point in future years, where the Network business will grow faster than the Mobile business because of the amount of smartphones that are in the market and therefore, driving an amount of data usage that will increase the demand for networks and frankly, the rate of growth therefore, because of the law of large numbers will flow the smartphone market? Or are we not thinking about this correctly?

Ralph Quinsey

Tough question to answer, Bill but a reasonable question to ask. A couple of points. The handset business is so large from a dollar perspective. It has the opportunity to just grow faster than just about anything else on the planet. When you break the Networks business down, you have to remember that it's just a bunch of small submarkets that we have artificially thrown together and called it Networks. Right now, there are parts of that business, at least for us, that are growing as fast or faster than Mobile Devices, in particular our optical products that we talk a lot about. And that is along the lines of your question, because so much data, particularly streaming video, is being dumped into the networks, people have to upgrade the speed and the capability of those networks.

William Dezellem - Tieton Capital Management

And then the next question is relative to the litigation expense. What -- Steve, I think you mentioned, as your predictive powers were poor 6 months ago, but what caused a variation from what you were originally thinking was going to be the case?

Steven Buhaly

Yes. So first of all, you remember, it's correct. They were -- I do characterized it as fairly poor visibility there. I think the differences are a few. One is that a trial's a pretty -- loss is a pretty dynamic thing. And in this case, activity level has just increased on a number of fronts. And second, I think in hindsight, the forecast just wasn't very good. I think that that's an area we can improve on.

William Dezellem - Tieton Capital Management

You no longer let the lawyers predict their own compensation, huh?

Steven Buhaly

Don't get me started.

William Dezellem - Tieton Capital Management

Sorry, I shouldn't have said that. So let me ask a question that I'm not even sure if it has relevance or not. But are you carrying a cost burden that is negatively impacting earnings either in a small way or a larger way as a result of the capacity expansion that you have done and as you are doing over the next few quarters?

Steven Buhaly

As long as we keep our utilization in that 85% to 90% range, I'd say no. That's a good spot for us to be. It's fairly high utilization but still leaves us a buffering capacity to make up either for our yield issues or our customers' poor forecasts so that we can help them when they need more.

Operator

Your next question is from the line of Paul McWilliams with Next Inning Tech Research.

Paul McWilliams - Indie Research

Thanks for taking my question. Just got one left after all the good questions others have asked. For the second half, how do you envision the split between Mobile, Network and Defense?

Ralph Quinsey

Good question. We don't guide specifically on the submarkets. In total, I think we'll have a stronger business in Mobile Devices in the second half than the Networks business, but I don't have specific guidance for you.

Paul McWilliams - Indie Research

Okay. So maybe somewhat a little bit above the -- your 72% that you had for Q1?

Ralph Quinsey

Again, don't have guidance. I think there's certainly the -- there's a tailwind for Mobile Devices the size of the market. So I think that's a reasonable expectation.

Operator

Your next question is from the line of George Iwanyc with Oppenheimer.

George Iwanyc - Oppenheimer & Co. Inc.

Thank you for taking my questions. Ralph, with your comfort on the second half and looking at maybe your top three or four wireless customers, is that more a reflection of flat share and positive RF fundamentals? Or is it more of a combination of share gains and the good RF fundamentals?

Ralph Quinsey

No, I do believe we're gaining share, and I believe we'll continue to gain share. I was excited at the Analyst Day, because I had speculated that we would move from a #3 share position in the total RF space to a #2 position this year. It appears that we have done that, and I believe we'll continue to gain share through the year. I don't think that's the material story for investors by the way. I think the rising tide of demand is really the material story for investors not so much a share shifting story in a 0 sum game.

George Iwanyc - Oppenheimer & Co. Inc.

And just following up on that, which product areas do you see the most design momentum or design interest in right now?

Ralph Quinsey

For us, in 2011, it's all about smartphone demand and the associated RF content. I would say secondly, our optical products have good traction. These are the modulator driver amplifiers, high performance, high ASP, city-to-city, metro-ring type of amplifiers. And then beyond that cable/fiber-to-the-home, I think we've got some really good opportunities in this country and in China associated with our most recent acquisition, TriAccess.

Operator

And at this time, I'm showing there are no further questions.

Ralph Quinsey

Thank you, Michelle, and I'd also like to thank all of you for joining the call. We appreciate your questions and look forward to updating you on our next earnings call.

Operator

And this does conclude today's conference call. You may now disconnect.

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