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Executives

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

Ralph G. Quinsey - Chief Executive Officer, President and Executive Director

Analysts

Aalok K. Shah - D.A. Davidson & Co., Research Division

Parag Agarwal - UBS Investment Bank, Research Division

Edward F. Snyder - Charter Equity Research

Anne Edelstein

Unknown Analyst

Dale Pfau - Cantor Fitzgerald & Co., Research Division

William J. Dezellem - Tieton Capital Management, LLC

Blayne Curtis - Barclays Capital, Research Division

TriQuint Semiconductor (TQNT) Q1 2012 Earnings Call April 25, 2012 5:00 PM ET

Operator

Good afternoon. My name is Diane, 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 like to turn the call over to Steve Buhaly. Sir, you may begin your conference.

Steven J. Buhaly

Thank you. Good afternoon, everyone, and welcome to our first quarter 2012 conference call. With me today is Ralph Quinsey, our President and Chief Executive Officer. During the call, we will make forward-looking statements about TriQuint's business and projected financial results. Actual results could differ materially from our projections based on various risk factors, including those described in the 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 numbers during the call will be presented on a non-GAAP basis. Non-GAAP financial measures report tax on a cash basis and exclude equity compensation charges, entries associated with acquisitions, restructuring charges and other specifically identified nonroutine 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 will now turn the call over to Ralph to provide an overview of the quarter.

Ralph G. Quinsey

Thanks, Steve, and good afternoon, everyone. I will start the call with an overview of our first quarter results and then provide a more detailed review of each of our major markets. Steve will follow with a review of our first quarter financial performance and guidance regarding our second quarter outlook. I will then make a few closing comments and open the call for questions.

The financial results for the first quarter were in line with our guidance. TriQuint's revenue for the quarter was $216.7 million and EPS was $0.02. Gross margins were 30.4% and operating expenses were $61.4 million, including $3.9 million of legal expenses related to our antitrust and IP claims against Avago. Compared Q4, total revenue was down 5%, which is slightly better than normal seasonality for Q1.

Mobile Devices revenue was down 8% and we saw a 4% reduction in Defense and Aerospace. However, our network infrastructure market posted a sequential 10% increase in revenue. While our first quarter results were in line with our guidance, our outlook for the second quarter is well below initial expectations. Second quarter revenue is now estimated to be between $170 million and $185 million, which represents an 18% sequential reduction at the midpoint of the range.

The Q2 revenue reduction is largely driven by lower demand from our largest customer, Foxconn. Lower revenue will reduce utilization in our factories causing lower gross margin. I believe the Q2 demand dip is temporary and I expect to return to more normal revenue levels in Q3. Additionally, we are now expecting higher litigation costs as we prepare for trial, which will increase on operating expenses.

We are guiding a non-GAAP loss in the second quarter of between $0.10 and $0.15 per share. Despite our near-term revenue outlook, the overall growth driver for our end markets remain intact and I believe TriQuint is well positioned to take advantage of the market opportunities ahead. Let me provide more color on each market starting with Mobile Devices. Our overall thesis for Mobile Devices remains the same with the strong market and good growth opportunities for TriQuint, and good traction with our MMPAs and transmit modules.

We do see a significant revenue step down in Q2 and I expect this to be temporary with a return to more normal revenue levels in Q3. Mobile Devices revenue for Q1 was approximately $148 million, down 8% sequentially. Revenue from the 3G/4G segment was about $119 million, down 7% sequentially. We have regained momentum in GSM with revenue from our 2G segment, up 26% sequentially, at approximately $9 million.

Lastly, revenue from our connectivity products, largely wireless LAN, is about $20 million, down 24% sequentially. Our cellular revenue growth, independent on our largest customer, did quite well in Q1, whereas typically Q1 is seasonally down 10% to 15%. Cellular revenue from this group of customers was up 8% sequentially. Just to be clear, our combined 2G, 3G and 4G revenue, our core cellular revenue from customers excluding Foxconn was up nicely in what is normally a down quarter.

This is solid performance and a result of successful design wins primarily with customers in Korea and Taiwan. About 2/3 of this growth was in 3G/4G products and 1/3 in 2G products. We are clearly seeing a good response from customers as we reengage with the market post capacity constraints. Key product drivers for revenue growth our MMPAs, transmit modules and our dual products.

Turning to WiLink, where we have broad penetration in smartphones. We saw a 24% revenue decline sequentially. This was a combination of Q1 seasonality and the fact that we are in a gap between product lines with slowing demand for our older products where we are just starting ramp on new products. Some of the weakness is due to customer seeing soft demand from their products in the market.

We have an excellent product offering for next-generation wireless LAN with very good design win success. New products we're having this quarter, as I expect, sequential growth for wireless LAN revenue beginning in Q3. The mobile market continues to see RF content expansion driven by smartphone growth in the addition of 3G and LTE bands. The transition from voice phones to Internet devices that are also phones or smartphones has created a turbulent market and a significant share shifting amongst the major handset suppliers.

Once dominant phone manufacturers are, in some cases struggling, and currently the market is consolidating them on a few strong smartphone providers. We are delighted these strong players are amongst our top customers.

TriQuint was early to catch the smartphone wave in 2009. But capacity constraints slowed our growth and customer penetration in 2011. Our constraints restricted our customer diversity and increased revenue concentration. We are seeing a down side of that in Q2. But as I mentioned earlier, I believe this is a short-term impact and I expect a recovery in Q3/Q4 with normal demand patterns going forward in a strong and growing market that we plan to fully participate in.

Additionally, we have expanded our capacity footprint and now have the advantage of full site capacity, enabling us to address the entire market. We expect to fully support all of our large customers that are making solid progress penetrating a broader revenue base. I would like to update investors on a planned technology transition the company has begun as it will result in some restructuring charges this quarter.

We see growing demand for high-performance, high-value filters that support the expansion of 3G bands and the ramp of LTE. TriQuint has developed key technologies like BAW and temperature compensated SAW that allow us to supply highly differentiated products with key performance advantages.

We currently use chip scale packaging or CSP in our filter manufacturing process. CSP assembly technology involve small ceramic packages with gold lids that provide a hermetic environment for our filters. It is the most common packaging technology for filters used today. We integrate these CSP filters into our RF module solutions. We currently manufacturer CSP internally in Costa Rica. We have begun to ramp up our next-generation technology, WLP, or wafer level packaging. WLP is a process that allows us to package filters in our fab while they are still in wafer form. There are clear advantages in size, cost and cycle time for WLP technology.

We are rightsizing our factories in Florida and Costa Rica as we transition to WLP and away from commodity Duplexers towards a higher-value mix of products. This will result in some restructuring charges for the company. We will provide financial details of the charges following discussion of our market.

Switching to networks. Our networks market, I expect 3G, 4G buildout in the EU, U.S. and China will drive base station growth this year. And while Q1 looks quite positive with a strong book-to-bill, I remain cautiously optimistic.

Optical remains a very strong product line for TriQuint and we believe there is a growing opportunity in small cell base stations. Revenue for Q1 was approximately $47 million, up 10% sequentially and 4% from the first quarter of 2011. This growth was mixed but a welcome result in the first quarter after a challenging 2011 where infrastructure spending was down largely due to macroeconomic weakness.

It's still too early to determine the strength or duration of a turnaround, but we are beginning to see signs of a recovery in carrier capital spending. First quarter radio access revenue dominated by our base station products grew 31% sequentially and was bolstered by a onetime end-of-life demand from one of our foundry customers that we don't expect to see in future quarters.

Excluding foundry customers, our base station revenue was up a strong 20% sequentially. LTE infrastructure, an increasing wireless traffic will continue to drive investment by carriers and base station solutions and TriQuint is well positioned to take advantage of future market growth. Transport revenue for the first quarter was down 3% sequentially. Within transport, our optical revenue increased 14% sequentially but was offset by declines in our point-to-point radio and cable product lines.

We continue to believe the transport market would be a growth driver in 2012 as telecommunication companies make investments in infrastructure to support growing data traffic. Within transport, we expect optical to be the strongest segment with expanding demand for both 40-gigabit and 100-gigabit solutions across a broadening set of customers.

Now let me address the Defense and Aerospace market. Revenue for Q1 was about $21 million, down 4% sequentially and up 18% compared to Q1 2011. Our revenue in this market is dependent upon program timing, which can result in swings quarter to quarter. Ramps of new product programs like the F-35 Joint Strike Fighter and the TQP53 counter fire target acquisition radar [ph], formerly known as EQ-36, are progressing as planned.

Additionally, we anticipate increases in spending for retrofit radar systems. More than 5,000 F-16 radars have been produced to U.S. Air Force in 24 nations worldwide. This represents a large phase array [ph] of upgrade opportunity for our defense customers, and we would expect to be a key supplier benefiting from an upgrade cycle. If we model phase array [ph] upgrades for 20% to 25% of the deployed F-16s, that represents about $100 million market opportunity for TriQuint.

Another highlight in this market is our gallium nitrate facilities where we are currently shipping production volumes from multiple gain [ph] programs. To advance our efforts in this area we are actively engaged in multiple government-funded research programs sponsored by DARPA, the Air Force Research Lab and the Office of Naval Research. We expect growth in revenues in these research programs during 2012. Steve will now provide a detailed financial review of the quarter and outline our guidance for the second quarter.

Steven J. Buhaly

Thank you, Ralph. For the first quarter of 2012, we generated revenue of $216.7 million, down 3% from the first quarter of 2011 and down 5% sequentially. Year-on-year, Mobile Devices revenue declined 8%, while Networks and Defense and Aerospace revenue increased 4% and 18%, respectively.

Sequentially, Mobile Devices and Defense and Aerospace revenue declined 8% and 4%, respectively, while Networks revenue increased 10%. For the first quarter, our end market revenue split was 68% Mobile Devices, 22% Networks and 10% Defense and Aerospace. Please refer to the supplemental data posted on the Investors section of our website for a more detailed breakdown and the trend of our revenue by market.

During the first quarter, Foxconn Technology Group accounted for 37% of our total revenue was the only customer that exceeded 10% of revenue. Our book-to-bill ratio for the quarter was 0.89 with the weakness in Mobile Devices offsetting strength in Networks. Gross margin was 30.4% for the fourth quarter of 2012, down sequentially from 31.0% and in line with our guidance. An improved product and business mix offset increased costs associated with placing our new 6-inch gas line in production in Texas.

Operating expenses were $61.4 million for the first quarter of 2012, a sequential increase of $4.5 million and in line with our financial guidance. Litigation expenses were $3.9 million in the first quarter and accounted for $1.6 million of the increase over the prior quarter. The remaining increase is largely due to beginning of the year expenses such as FICA. Tax expense for the first quarter was negligible, reflecting usage of net operating loss carryforwards.

Net income for the first quarter was $4.1 million or $0.02 per diluted share. Total cash and investments increased by $32.6 million to $194.9 million during the first quarter. The increase is due to improvements in accounts receivable, reduced capital expenditures and the sale of an equity investment for $7 million. Day sales outstanding decreased to 44 days due to strong collections and a linear shipment pattern.

Inventory declined $6.1 million to $145.5 million and turns improved to $4.2 million. Capital expenditures were $14.0 million. Moving to our financial outlook, we believe second quarter revenues will be between $170 million and $185 million. Non-GAAP gross margin is expected to be between 27% and 29%, driven by weak factory utilization. Non-GAAP operating expenses are estimated to be about $70 million, including about $11 million of expected litigation expense.

Second quarter net loss per share is expected to be between $0.10 and $0.15 on a non-GAAP basis. As of today, we are 91% booked to the mid-point of our revenue guidance. As part of our planned transition in filter packaging technology, and due to a change in product mix, we plan to restructure our filter-related operations during the second quarter. We expect to record a GAAP restructuring charge of approximately $12 million to $14 million consisting of a charge for excess of equipment of about $10 million to $12 million and a cash charge for the remainder that is primarily related to severance costs.

Prior to our next call, we plan to participate in several Investor Relations events. On May 8, Ralph will be presenting at the Bank of America Merrill Lynch 2012 Technology Conference in San Francisco, and on May 23, I will be presenting at the Barclays Capital Global Technology Media and Telecommunications Conference in New York City.

In addition on May 30, Ralph will be attending the DA Davidson Technology Forum in New York City and on the same day, I will be attending the Craig Hallum Institutional Investor Conference in Minneapolis. Our Q2 2012 conference call is scheduled for July 25, 2012. I will now turn the call over to Ralph for closing comments and then we will open up the line to your questions.

Ralph G. Quinsey

Well, specific short-term issues have created a disappointing Q2 outlook, our focus on expanding customer penetration in Mobile Devices has gained momentum, and I expect steady financial improvement for the company in the second half of 2012. The restructuring actions we announced today are necessary as we move to higher-valued products in the next generation packaging technology.

I want to personally thank all those employees impacted by these decisions for their contributions and wish them the best in the future. We remain focused on RF innovation for one of the most dynamic, challenging and exciting markets in the world. We are completing a capacity investment phase for the company that creates a near-term headwind but positions us well for future growth. Our company is financially strong with almost $200 million in cash and no debt. We have strong customer relationships, great products and a growing market.

We are a leader in RF solutions and see good opportunities for years to come. TriQuint will continue to leverage innovation into revenue growth and improve financial performance. Diane, we'd like to open the line for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Aalok Shah.

Aalok K. Shah - D.A. Davidson & Co., Research Division

Can I ask you a couple of quick questions? One is, in terms of your largest customer. I guess, we're just all trying to kind of do the math here. It looks like something else is happening here, a little bit more extreme than what I think your largest customer kind of alluded to. I'm just curious, is it a timing issue with this customer, is there something you can help us to correlate that a little bit better? And the second question is, in terms of the filter packaging changes that you're making right now, and the restructuring, is there anything that's related there to the litigation that you're undergoing with Avago?

Ralph G. Quinsey

So to answer the second question first, litigation related to filter packaging, the answer is no. And for the first question, as you know, we are bound by some NBAs, but I can say that we have customers that manage large supply chain. Some of them are growing quite rapidly and we're at the end of that chain and ride the demand as we see it. Our long-term outlook remains unchanged and positive so we feel good about our positioning. So the largest decline for Q2 remains Foxconn or -- demand from Foxconn. As a secondary portion of that, we will see wireless LAN continue to decline -- expectations to continue to decline in Q2. But again, I feel very good about our second half design wins product roadmap. We're adjusting that gap between older product lines and newer product lines. And some of our customers are seeing weaker demand, which puts pressure on the older product line. And then lastly, and not as significant but still on the list, we will have an unfavorable compare, at least we're expecting and an unfavorable compare during the quarter, because of the large foundry networks buy this quarter that we're not anticipating a similar buy next quarter. And that's in the $5 million to $7 million range.

Aalok K. Shah - D.A. Davidson & Co., Research Division

Okay. And Ralph, if I could just follow up on the comment about your large customers. You noted before that Samsung would increase for you guys. And I'm also curious just in terms of share. Do you think your share at your largest customer will be able to -- you're going to be able to maintain your share after your large customer over the next couple of quarters?

Ralph G. Quinsey

Yes. So I would first say that the short-term dip that we're seeing in the current quarter as -- it's all about existing products. Products that have been in the marketplace. Going forward, we have every expectation to continue to support all of our customers in the same fashion that we're supporting now and to grow opportunities with many of our customers.

Operator

Your next question comes from Parag Agarwal.

Parag Agarwal - UBS Investment Bank, Research Division

Just wanted to drill down on the previous question. Now if we go back and look at September 2011 quarter, there was a dip in revenue and that was attributed to your largest customer. And that was ahead of a new product launch by that customer. Now would it be right to say the revenue drop you're seeing right now is similar to the one you saw in the September quarter or are there some different dynamics going on here?

Ralph G. Quinsey

If I understand your question, your proposal is for the launch of some new products, we may see less demand for an existing product, is that your question?

Parag Agarwal - UBS Investment Bank, Research Division

Yes.

Ralph G. Quinsey

Again, I can't comment specifically on any one customer, but I can say that, that is a -- I wouldn't be surprised if that would happen in the market.

Parag Agarwal - UBS Investment Bank, Research Division

Okay. And secondly about your comment that you will see a normal revenue level in the second half of the year. Just one thing, what gives you confidence that you will be able to reach that level? And is it in absolute terms or we are talking in terms of seasonality?

Ralph G. Quinsey

Yes. So we're not guiding the revenue levels in Q3 and Q4, but I would expect them to come back up to normal levels within the same expectations that we had at the beginning of the year. Our expectations for the second half haven't changed materially. Now all caveats are in place while we can't predict the future. But based on my understanding of what I think is a strong market, a solid customer set, growing penetration with customers, good design win and uptake of our products, I think we're going to be fine in the second half.

Parag Agarwal - UBS Investment Bank, Research Division

Okay. And last question. Other than your largest customer, do you expect to see any significant other customers, other handset customers exiting [ph] the year?

Ralph G. Quinsey

Yes, absolutely. I think we saw good growth in the first quarter in that customer set. We're seeing good uptake of our MMPA, good uptake of our transmit modules. We're seeing that in Korea, we're seeing that in greater China, but I feel pretty good about the ability as we -- again we've got a great product roadmap now. We've got our capacity issues behind now. We're rolling out the design wins as we speak. I think we're back on track.

Operator

Your next question comes from Edward Snyder.

Edward F. Snyder - Charter Equity Research

You got a nice bit of growth in this quarter in 2G. What would you attribute that to, is that share gains, is that new products, is it mix or are you seeing a wider customer base buying from you? I'm just trying to get a feel of how things have picked up so nicely there.

Ralph G. Quinsey

I would say that when we ran into constraints, we backed off on the 2G market as, Ed, I'm sure you're aware. And actually, we delayed the launch of some products until we had really filled out our capacity footprint. Those are great products. When we launched them, we saw good pickup. I would say the majority of that pickup right now is coming from Korea, but we're all seeing uptake in greater China.

Edward F. Snyder - Charter Equity Research

And then on the filter side of the business, it sounds like there's a bit of turmoil there with reorganizing, is this all due to wafer scale packaging, a move to that. And when you're done with all this, what's the big advantage? Are you going to see better margins in your filters [indiscernible], is it going to be simpler to do wafer scale than what you're doing now?

Ralph G. Quinsey

Yes. I think we're going to see smaller filters, better margins and focus around high performance. The way you should think about, it was really 2 categories of filters in Mobile Devices. They are relatively high volume, commodity Duplexers in the marketplace. And then there's this class of products that are relatively low volume now but they are going to grow significantly over the next several years that are high-performance Duplexers for more difficult or challenging band, also coexisting filters and we have shifted our focus towards those high-performance filters. In conjunction with that, we are transitioning from a ceramic and gold base hermetic packaging capability to a wafer level packaging, which gives us great size, cost and cycle time advantages. And we can do that all within our existing wafer fab. So those are the 2 trends, right?' We're targeting high performance filters, we're resizing our factories around those technologies and those opportunities and also a transition from CSP to WLP. There's resizing of our factories around that.

Edward F. Snyder - Charter Equity Research

So is this a precursor to offering straight Duplexers? In the past, you've used all your internal filter production for your own modules. Can we expect to see a new market for filters and packages more than we had in the past?

Ralph G. Quinsey

I wouldn't say one way or the other on that. As I think the point is more if we're going to continue to be a strong filter supplier, we're going to shift our energy towards the high-value add portion of the market. We buy a lot of components from the open market now. We buy chip capacitors, inductors, we buy CMOS, we buy SOI, we outsource all of our module assembly. And so we're not shy or saying that we're never going to buy filters from the outside market, but that's really not the point of the transition right now. We've seen great opportunity for some filters. As you know, in line with the classic PCS filter, the Band 2 or the Band 20, Band 7, Band 3. There's just a lot of opportunities in these LTE bands and then some of the co-existing or filtering in very crowded spectrum, which will be increasingly crowded spectrum. So we want to make sure that we're putting our resources and energy solely in those markets and those opportunities because we see the best return there.

Edward F. Snyder - Charter Equity Research

Okay. So I'm a little confused, I apologize. There's a lot of background noise. I don't think the operator doesn't have their phone on mute or what, but my question was, are you going to offer filter modules as standalone products in the future or in the near future after this move to wafer scale packaging? I wasn't talking so much about buying other people's. You seem to have lots capacity for your own filters.

Ralph G. Quinsey

Got it, Ed. So possibly. We're not going to limit ourselves at this time. I think that there's good opportunity for using the filters integrated to modules. But if there is -- again some of these high-value discrete filters, we have already begin launching in the BAW area. If you look at some of the more standard reference designs, their preferred solution is a discrete filter. And we have launched those filters and have showed up on references [indiscernible]. So I guess, we're already in process. Again, focus on the high-value sites it's already in process of supply and those types of products.

Edward F. Snyder - Charter Equity Research

Okay. And the biggest downturn in the largest customer, is this anything specific with your products, any problems in your products in production or is it generally just the demand curve that you're seeing?

Ralph G. Quinsey

Can't speculate what's causing it, but I can tell you it has nothing to do with our products.

Edward F. Snyder - Charter Equity Research

So it shouldn't be something concerned combined with the reorg that there's problem with production or technology-wise out of TriQuint, right?

Ralph G. Quinsey

No. Our dip in Q2 is, for lack of a better term, completely out of our control. We think it's short-term. And again, I'd much rather have a larger revenue in Q2, but I have fairly high confidence that we will return to – I have real high confidence that we will return to normal revenue levels in the second half of the year.

Edward F. Snyder - Charter Equity Research

And I think Steve mentioned that absent your largest customer that you grew nicely in the mobile products this last Q1, too. Had that all planned out as you'd expected, you would've seen higher growth. So in other words, your large customer weighed on results for Q1 also?

Ralph G. Quinsey

Yes. So we have fairly strong forecasting and order rate across all of our businesses, specifically in Mobile Devices early in Q1. We were off to the races. And then about 1/3 of the way in the quarter, our visibility got cloudy and expectations starting to come down. So I think based on the success in other areas, I would've expected to have a better quarter than we did have. So I agree with you.

Edward F. Snyder - Charter Equity Research

Fair enough. Final question, connectivity. It's down pretty hard here. I know you partnered with a couple of the main providers of chipsets and smartphones in the past and in tablets. Was this primarily concentrated in one of your chipset partners, or is it more broad-based? You mentioned a transition, a product transition for yourself, the new ones that picked up. I'm just trying to decide or figure out given the brute force we've already heard. Other people have had problems in connectivity too but it was mostly their end customers shifting and they weren't on the new platform. So how much of this was just your partners losing share, how much of it was your products not being out where they need to be in the future versus [indiscernible].

Ralph G. Quinsey

Yes. Hard to quantify that way, but you're right, we have a couple of major chipset suppliers and we are seeing a transition of demand largely from one to largely another. We continue a great product, and I feel really, really good about wireless LAN. We've got some great products not only for the launch in the second half of this year. But for new standards like 802.11ac, we're in very good shape with high performance products specifically around high-frequency 5 gig. In addition, some of our customers are struggling right now and your demand is well below expectations, and that comes through in lower wireless LAN demand. So seasonality, some customers are struggling and then there's transition between major product lines.

Edward F. Snyder - Charter Equity Research

So but not TriQuint basically. Your products are out there and you've got a decent product you're looking for growth later.

Ralph G. Quinsey

Exactly. Our products are solid.

Operator

Your next question comes from the line of Vivek Arya.

Anne Edelstein

It's actually Anne Edelstein calling in on Vivek's behalf and I guess that we're wondering if you see the excess capacity issues that have been affecting the space having any effect on pricing trends?

Steven J. Buhaly

Having effect on what, Anne?

Ralph G. Quinsey

Pricing trends.

Anne Edelstein

Pricing trends.

Steven J. Buhaly

I would separate the market, if you're talking specifically Mobile Devices. I would separate the market into 3G/4G and then 2G. And then 3G/4G, I think it's still about having the right products, the right technology and having capacity to grow with the customers are the real issues. And 2G, as I mentioned the last call, this is quite competitive. We've done okay there but it's a fairly competitive market. We'll participate there, but we are not in a position where we want to chase a lot of low margin 2G opportunity.

Anne Edelstein

Okay. It's helpful. And then can you provide some more specific color on the progress that you've made in addressing 4G LTE market with your MMPA and PA Duplexer module technology. And I guess, what are your key differentiators to help you succeed in that space against as your primary competitor?

Ralph G. Quinsey

Yes. So in 3 major product areas for Mobile Devices, first will be MMPA. We just have great performance, largely measured by current or battery life. Great product, it's been very successful, and we are now in the process of sampling our next generation products with the MMPA. And so we got a good roadmap for that revenue stream. Our transmit modules are really built on a long-standing lead and just good fundamental quad-band edge amplifiers. We have, for a long time, had a very good success that really differentiate themselves for that core, what we used to call the wedge products. We call those the 5012s, et cetera. But we just built on that, they're now transitioning into transmit modules and we're seeing good uptake there. And then lastly, we've been an innovator with PA-Duplexers, and we'll continue to address that market as well.

Anne Edelstein

Okay, great. And then I guess, just really quickly? Could you guys quantify perhaps the margin effect in your transition to the WLP model over CSP?

Steven J. Buhaly

I think it's a little too early to do that. It will clearly be favorable to us simply by removing the packaging that's associated with the CSP approach. We'll come out ahead of the game, but it's too soon to give you any specifics.

Operator

Your next question comes from Blane Carol [ph].

Unknown Analyst

I think 2 areas that you've said you're expected to be down sequentially. First one is wireless LAN and Network and the second one is Networks. Can you quantify that a little bit for us?

Ralph G. Quinsey

Just a little bit of a correction. So all of our Wi-Fi or wireless LAN revenue, we roll up into Mobile Devices. So I said we were going to be down, sequentially going forward for the current quarter in Mobile Devices from our largest customer, Foxconn, in wireless LAN and then we will have an unfavorable compare in our networks business around base station foundry. And I did quantify that comparison, it's going to be a $5 million to $7 million headwind. But the large amount of the dip in revenue is associated with lower demand from our largest customer.

Unknown Analyst

And that's what it's trying to do, trying to back into what that number can be. Do you want to throw a ballpark number out there on what Foxconn can be down sequentially?

Ralph G. Quinsey

No, I don't. I appreciate the questions, but I just don't want to talk any specifics around our largest customer.

Unknown Analyst

All right. Don't you want to give me the other numbers so I can back into it?

Ralph G. Quinsey

I appreciate the question, but I've given you about as much information as I'm comfortable with.

Unknown Analyst

On the 2G business, again it was up nice sequentially. What do you think going into the second quarter, will that be up sequentially again and will that continue throughout the year?

Ralph G. Quinsey

You know, I do think that we're going to see some more success in GSM. What I can't tell you is if it's going to be net positive because I think that we're going to see some weakness in narrowband CDMA. We rolled that all up into 2G. By far, the growth that you saw with GSM as I highlighted in the script, and CDMA is a little bit cloudy for us right now. We know that, that market, some of our customers in that market are struggling, hard to separate.

Unknown Analyst

I'm sorry. Just didn't hear the last part.

Ralph G. Quinsey

Hard to separate. The general takeaway is, we should see some good uptake over the next several quarters in 2G GSM.

Unknown Analyst

And then I guess, last question on the AC, Ralph, where do you see, outside of handsets, where is the early adoption going to be on 11 AC rollouts?

Ralph G. Quinsey

As you know, a little background information. AC has got a denser modulation scheme. It's basically 5-gig only and it's got some favorable power considerations so we just get more data through more efficiently, right? That's the whole point of AC. So I think any place where you have data-intensive to the applications, it's an opportunity. Certainly within the home for moving video streaming and audio, that will be an opportunity. And I think when you look at larger screen applications whether they'd be laptops, Ultrabooks or tablets, I think that would be a natural application.

Operator

Your next question comes from the line of Dale Pfau.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Real quick. Could you please, Steve, repeat what you're expecting for the litigation charges in the second quarter?

Steven J. Buhaly

$11 million.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

$11 million.

Steven J. Buhaly

Thanks for making me repeat that ugly number.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Well, I wrote it down and I didn't believe my number. Okay. Let's talk about your chip scale, wafer scale again here. As you make this transition, are you planning to use this on products that are currently qualified, and you're going to have to go through a requalification or will this only be for products that have not yet been qualified at your customers? Then I've got some follow ups.

Ralph G. Quinsey

Yes. So just to be clear, we're already using a first-generation wafer level packaging. It's in our dual products and we're in the sampling customer design in phase of our dual product. So I expect that will start to move into production in the second half of the year as I've highlighted on previous calls. And then we'll go through some changes, some normal changes in the implementation of wafer packaging as you do with any technology, there is subsequent generations. We have a roadmap planned out. And typically, we launch those with next-generation products or next design in for customers. But I wouldn't expect a lot of in-process running change activity around the conversion CSP to WLP, if I understood your question correctly.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Just from a practical standpoint, is this what you think hit on margins because you're clearly going to have to be running older technologies for those products that are currently in production and qualified relative to the next gen stuff? Is there a penalty there, and when do you think we might see that penalty end, if that's the case?

Ralph G. Quinsey

I do think there'll be some headwinds as we cross over for the next couple of quarters. But I think by the time we get into the middle of 2013, we will be in full swing of our wafer level packaging. Keep in mind, we're not abandoning CSP. There are still markets and applications where CSP is absolutely the right situation, particularly in some of our networking applications. So we will maintain some capacity capability for CSP to support the opportunities where that's the right solution. The high, high volume solution is typically associated with Mobile Devices, but not always, is going to transfer to our wafer level packaging.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

And then could you talk a little bit about the trend you're seeing out there in your MMPAs. Are you seeing more uptake in MMPA than you are on sort of the pad or dual pad architecture outside of your largest customer?

Ralph G. Quinsey

So in the general market, we're seeing good uptake in MMPA. We expected to see uptake of those products before some of the other products because we launched them earlier. And again, we're on the next generation. So I would say we're right on plan. The MMPA has been a very successful product family for us and then the transmit modules is very successful. And we talked about a couple of phones in the earnings release that are using some of our products, including the Samsung Galaxy S Series and Huawei Iron Phone. But by and large, as we talked about the last call, we're going to through this phase of good use, good uptake of the MMPAs. And we're just going to enjoy that revenue as it comes.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Final question. How are the margin spreads now between your wireless components and your Networks and Defense. Is there still a considerable spread in those margins and the margin is trending in your Networks and Defense business offer [ph] are trending flat.

Ralph G. Quinsey

Yes. So first of all, I'll talk to standard margins and I would say that our standard margins in Networks Defense and Aerospace continue to be much higher, more in line with what you would expect from the high-performance analog-type business because they are, in fact, high-performance products and they solve unique problems. In our Mobile Devices business, margins are lower -- standard margins are lower as you would expect in a more competitive, high volume market, but certainly, different than our network in Defense and Aerospace. Probably the more material issue for us right now is that we've added capacity strategically, we think we can fill that capacity, that's why we added it. But that creates a headwind for us on gross margin. And so as a company now since we basically use shared assets to manufacture our products, we have headwinds in the gross margins. I'll let Steve add anything if I didn't get it totally correct.

Steven J. Buhaly

No, I think that's good.

Operator

Your final question comes from the line of Bill Dezellem.

William J. Dezellem - Tieton Capital Management, LLC

I heard you say that your operating expenses were $61.4 million, and I guess I'm not able to get to that number if we just take the $66.2 million in the press release and subtract off $3.9 million of litigation expense and just being close to 62.3. What am I missing there?

Ralph G. Quinsey

I'm not sure what the math is you're doing there, Bill. I've got OpEx, non-GAAP $61.4 million.

Steven J. Buhaly

Bill, there's a reconciliation attached to the press release there on our website, and it's basically stock-based compensation and adjustments for cost with acquisitions. We do not deduct the litigation charges that comes from non-GAAP results.

William J. Dezellem - Tieton Capital Management, LLC

That's my error. I did not hear the non-GAAP. I was simply looking at the GAAP numbers. So pardon me, faux pas on my part. I want to shift then to your largest customer and beat this dead horse just a little bit more. You've mentioned that you're feeling good about the longer-term so I'm just going to ask point blank, over the next 1 to 2 years, do you expect to lose market share with your largest customer?

Ralph G. Quinsey

I appreciate the question, and because of non-forge [ph] agreements, I can't specifically answer that. But I would like to tell you is that I expect to grow our business, our penetration and our market share across all of our customers over that time period. I see no limitation for this company not to be able to satisfy increasing amounts of RF content for all of our customer bases. As you are well aware, we went through a period and after a great success and great growth in 2009, 2010, where we limited ourselves. We've corrected that. And now I'm ready to go, get all the business we can, and I think there's great opportunity out there.

William J. Dezellem - Tieton Capital Management, LLC

And, Ralph, I want to make sure that I heard what you said correctly that you had over the next 1 to 2 years, with all of your important customers, you expect to maintain or gain market share, or did you say that you have basically the capacity. So therefore, the potential and the interest in doing that or is that actually an expectation?

Ralph G. Quinsey

It is a target and it is a desire, it is a focus. And my personal opinion, is that I would be disappointed if we didn't not have that type of success.

William J. Dezellem - Tieton Capital Management, LLC

And I'm just to continue down this path just a little bit more, which is to what degree do you have insight into those design wins today that will be affecting that 1- to 2-year time horizon that I am asking about?

Ralph G. Quinsey

I appreciate the question and again I apologize, I don't want to comment specifically due to non-disclosure agreements on design wins or even potential design wins with some of our customers.

Operator

Your next question comes from the line of Blayne Curtis.

Blayne Curtis - Barclays Capital, Research Division

You talked about getting back to a more normalized levels and I just was curious what your definition. Does that mean get back to previous levels kind of what you're doing per quarter last year?

Ralph G. Quinsey

Yes. And I am sensitive to the question. I am unwilling to guide for Q3 and Q4, and so I would say, we have the same expectations on the second half now that we had, as we went into the year, we're going through a period of dip in Q2.

Blayne Curtis - Barclays Capital, Research Division

Okay. Got you. And then, Steve, I won't make you repeat the $11 million, I'll repeat it. But you were previously looking at a litigation expense in September. Is that now back down to a lower level in September?

Steven J. Buhaly

I think, first of all, these things are really hard to call. It's a very complex piece of litigation and, it's tough to see how fast a month frankly in terms of the activity levels. I think you're going to be [indiscernible] unless we're able to come to a settlement, I think it's going to run at an elevated level through the third quarter as a trial is scheduled for this summer.

Operator

Your final question comes from the line of Edward Snyder.

Edward F. Snyder - Charter Equity Research

I only got 7 and my first question is in so I wanted to follow up with the remainder. First off, Ralph, are you in production on the dual at this point or are you still sampling? And if so, can you give us any indication of how many customers you have for that product yet?

Ralph G. Quinsey

Our expectations has always been for second half production for those products and so we are still in the sampling phase.

Edward F. Snyder - Charter Equity Research

Okay. So the comments on the call that the dual was doing well because you mentioned 3, I think, MMPA most of your strength, that's for order strength or for interest?

Ralph G. Quinsey

So just to be clear, we're seeing good order strength on MMPAs and transmit modules, and duals are in the sampling stage right now. And we're seeing good interest from customers. Don't expect to see production volume until the second half of the year.

Edward F. Snyder - Charter Equity Research

Okay, great. And then on the MMPAs, you had one product out for – I think it was Pantex last fall, are we still dealing with that one or have you come out with a fuller line of products at this point?

Ralph G. Quinsey

That product has found design wins and multiple customers, and we are now sampling the next generation product, which is a performance cost improvement version, very similar footprint.

Edward F. Snyder - Charter Equity Research

And same profile production in the second half of the year?

Ralph G. Quinsey

That, yes, I would say second half of the year for that one.

Edward F. Snyder - Charter Equity Research

And the transmit module, sorry to be so detailed, you brought this up at the Analyst Day and it looks like a very compelling product. And I think you've mentioned that one area that you look to gain traction is Samsung. Are you taking orders for that now for production in the second half of the year also?

Ralph G. Quinsey

No, that is in production. That's starting to ramp up in Q1, actually late Q4 early Q1, but really material volume in Q1. It will continue to grow in Q2 and Q3 is my expectation.

Edward F. Snyder - Charter Equity Research

And this is the 2G transmit module that we talked about at the Analyst Day, right?

Ralph G. Quinsey

Yes, exactly.

Edward F. Snyder - Charter Equity Research

Okay. And the final question, just remind us on the MMPA, you are the reference...

Ralph G. Quinsey

Let me just clarify, that is what we call WGPRS. So it goes into a 3G phone with a GPRS voice channel. It's not the 2G transmit modules that targets to voice phones only.

Edward F. Snyder - Charter Equity Research

Right. So it's a GPRS up and Edge down, correct?

Ralph G. Quinsey

Exactly. Exactly. It goes into what I would call a mid-tier, mid-to-low tier 3G phone that uses Edge or uses GPRS for the voice channel.

Edward F. Snyder - Charter Equity Research

Is this the one we were talking about at the Analyst Day?

Ralph G. Quinsey

Yes.

Edward F. Snyder - Charter Equity Research

Okay. And then final question. Remind us, are you are not the reference design partner on the Qualcomm MMPA design for that part -- for Pantex?

Ralph G. Quinsey

You know, we have good reference design positions across all of the reference design partners. But again, we are increasingly putting in place NDAs but we just don't want to talk about which ones were won and which ones were off. But we are seeing great pull for the MMPA. And so let me just leave it at that.

Operator

There are no further questions at this time.

Ralph G. Quinsey

I want to thank all the callers for your time and participation today, and we look forward to updating you on July 25 on our next scheduled call. Thank you.

Operator

This concludes today's presentation. You may now disconnect.

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