TriQuint Semiconductor Management Discusses Q2 2012 Results - Earnings Call Transcript

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TriQuint Semiconductor (TQNT) Q2 2012 Earnings Call July 25, 2012 5:00 PM ET

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

Parag Agarwal - UBS Investment Bank, Research Division

Aashish Rao - BofA Merrill Lynch, Research Division

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Edward F. Snyder - Charter Equity Research

T. Michael Walkley - Canaccord Genuity, Research Division

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

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Quinn Bolton - Needham & Company, LLC, Research Division

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

David Duley

Robert Sales

Blaine R. Carroll - Avian Securities, LLC, Research Division

Blayne Curtis - Barclays Capital, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the TriQuint Semiconductor Second Quarter Earnings Call. [Operator Instructions]

I would now like to turn today's conference over to Steve Buhaly. Mr. Buhaly, you may begin your conference.

Steven J. Buhaly

Thank you, Susan, and good afternoon, everyone, and welcome to our Second 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

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

TriQuint's results for the quarter were $178 million in revenue and a loss of $0.09 per share in line with our guidance. Gross margins were 27.9% and operating expenses were $64.3 million, including $3.7 million of legal expenses. As announced earlier this quarter, TriQuint and Avago had agreed to settle all claims between our companies. I am delighted with this outcome. We now have a broad cross-licensing agreement and are refocusing our efforts on the fast-growing BAW marketplace rather than the cost and distraction of litigation. We also recently announced a stock repurchase program. During Q2, we repurchased $25 million of our common shares, which resulted in a reduction of almost 5 million to shares outstanding.

We saw a decline in revenue from our largest customer in Q2 in line with the guidance we set for the quarter. I expect a rebound of Mobile Devices revenue during the second half of the year, primarily from our largest customer. But due to nondisclosure agreements, I cannot comment on specifics or timing. Additionally in Q2, we saw a very strong sequential and year-over-year revenue growth from our optical products. These products support the data traffic explosion occurring around the world.

Regarding our Networks's revenue in total, I would like investors to note that although our total Networks revenue was down 5% sequentially, these results can be misleading due to choppy end-of-life foundry orders as discussed on the Q1 earnings call. Excluding this end-of-life impact, our Networks revenue was up about 17% sequentially. I am optimistic about our Networks opportunities in the second half but also cautious about overall carrier spending.

Let me provide more color on each market, starting with Mobile Devices. Mobile Devices revenue for Q2 was approximately $112 million, down 24% sequentially. The majority of the decline was a result of reduced demand from our largest customer. I expect demand from this customer returned to higher levels in Q3 and Q4. Additionally, we are seeing reduced revenue from some customers as end demand shifts away from them to top smartphone suppliers. Lastly, revenue from our connectivity products, largely wireless LAN, was about $21 million, up 4% sequentially and stronger than expected on the uptake of new products.

The mobile market is still in the early innings of RF content expansion, driven by rapid smartphone growth and the inclusion of more and more 3G and LTE bands, which require more and more RF content. Phone platforms vary but typically, smartphones include voice bands, 3 to 5 bands for 3G and eventually, world phones will include an additional 1 to 5 bands for LTE. Each band adds new power amplifier filtering and switching requirements, bringing sizable dollar content.

In addition, wireless LAN continues to be a great opportunity and successful product line for TriQuint. TriQuint has an advantage in wireless LAN, where customers demand performance over basic or marginal capability. Our TriConnect WLAN solutions at both 2.4 gigahertz and 5 gigahertz lead the industry in critical performance specification and are examples of TriQuint's tradition of innovation and performance leadership.

Looking to the general market, the major trend has been share shifting amongst handset suppliers as the market consolidates around a few top players. While we are doing well with the major players, share shifting and specific chipset shortages have been headwinds to our goal of customer diversification. Lastly, we continue to find good design win success with Samsung and are enjoying growth based on those wins.

Switching to our networks market. Q2 revenue grew sequentially in optical, base station and point-to-point product revenue. TriQuint's new product introductions are accelerating, and design wins are mounting as we expand our product offering. As noted earlier, our total Networks revenue includes a Q1 $7 million to $8 million end-of-life purchase from a foundry customer. Excluding all foundry revenues, Networks generated approximately $38 million in Q2 revenue, up 17% sequentially and regaining 2011 levels.

Second quarter radio access revenue, dominated by our base station products, was up greater than 20% sequentially, excluding foundry. Increasing wireless traffic will continue to drive investment by carriers to improve coverage and fund the transition to LTE. TriQuint is well positioned to take advantage of these base station opportunities.

Transport revenue for the first quarter was up 24% sequentially, led by strong demand for our optical products. The optical market continues to be the biggest growth driver for transport as telecommunication companies upgrade networks to accommodate the rapid growth of data traffic. We are seeing good traction in 40- and 100-gigabit deployments, and we continue to lead the market with new product solutions for an expanding number of optical customers. Lastly, based on solid design wins with our VSAT KA-band product and recently -- in a recently successful satellite launch, I expect increasing second half revenue for VSAT.

Now let me address the defense and aerospace market. Revenue for Q2 was flat sequentially and about $21 million and down 10% compared to Q2 2011. Revenue in this market is program-dependent and can be up and down from quarter-to-quarter based on program timing. Year-to-date, our Defense revenue was up about 2% compared to 2011.

We have continued to win significant production orders of approximately $13 million in Q2 for the latest generation of radar systems such as the F-35 Lightning II Joint Strike Fighter and the Army's TPQ-53 counterfire target acquisition radar. Additionally, as spending tightens, we anticipate increased spending for retrofit radar systems.

We have accelerated the pace of new products for the defense industry, including a record 23 new products released in the second quarter, and are on track to release significantly more new products in 2012 as compared to 2011. These include industry-leading gallium nitride, gallium arsenide, SAW and BAW products. This is part of our strategy of expanding our product portfolio, leveraging proven technology and capitalizing on new technologies for growth.

In addition to our product strategy, TriQuint remains a technology leader in primary trusted foundry for compound semiconductors supporting the defense industry. Approximately 50% to 55% of our Defense revenue comes from foundry wafers and services. Our gas technology support a vast array of radar, communications and electronic warfare platforms and our GaN technology is being designed into new defense industry projects. We are strategically partnered with industry leaders to create new advanced technologies and transition them from concept to high-volume production effectively and reliably. These technologies are essential for advanced radar systems, electronic warfare and defense communication infrastructure. We see a stable and long-term opportunity supporting this industry.

Lastly, on May 1, TriQuint officially announced a $12.3 million DARPA engagement won earlier to develop gallium nitride-based Ultra-Fast Power Switch technology. Additionally, we are responding to emerging requirements for millimeter wave systems and recently won a smaller contract from the Office of Naval Research for W-band GaN low-noise amplifier research and development. This further leverages more than $20 million in DARPA funding directed to TriQuint for gallium nitride R&D.

Steve will now provide a detailed financial review of the quarter and outline our guidance for the third quarter.

Steven J. Buhaly

Thank you, Ralph. For the second quarter of 2012, revenue was $178.0 million, down 22% from the second quarter of 2011 and down 18% sequentially. Year-to-date, versus the same period in the prior year, Mobile Devices revenue declined 19% while Networks grew 1% and Defense and Aerospace grew 2%. Sequentially, Mobile Devices and Networks revenue declined 24% and 5%, respectively, while Defense was consistent with Q1 levels. The sequential decline in Mobile Devices was largely caused by reduced demand from Foxconn. The Networks business would have shown double-digit sequential growth, excluding the last time buy demand from a foundry customer last quarter.

For the second quarter, our end market revenue split was 63% Mobile Devices, 25% Networks and 12% for Defense and Aerospace. Please refer to the supplemental data posted on the Investors section of our website for a more detailed breakdown and trend of our revenue by market.

During the second quarter, Foxconn Technology Group accounted for 24% of our total revenue and was the only customer that exceeded 10% of revenue. Please note that Foxconn is a subcontract assembler, and high-volume electronics companies may use multiple subcontractors to build its products and that the mix of firms may vary over time.

Our book-to-bill ratio for the quarter was 1.05. Gross margin was 27.9% for the second quarter of 2012, down sequentially from 30.4% due to low factory utilization. Operating expenses were $64.3 million for the second quarter of 2012, a sequential increase of $3.0 million. The growth in expenses was primarily attributable to higher medical and engineering expenses. Litigation expense was $3.7 million in the second quarter, and I do not anticipate any further expenses related to our now settled litigation with Avago. Tax expense for the second quarter was negligible.

Net loss for the second quarter was $15 million or $0.09 per share. Total cash and investments decreased about $32.5 million to $162.4 million during the second quarter. The decrease was primarily due to the repurchase of about 4.9 million shares for about $25 million. Days sales outstanding increased to a more typical 50 days while inventory increased $9.3 million to $154.8 million, and turns decreased to 3.3. Capital expenditures were $16.4 million.

We recorded a GAAP restructuring charge of $1.8 million, primarily for severance payments relating to staff reductions in Florida and Costa Rica. Due to uncertain future levels of demand, we did not impair equipment in Costa Rica as originally planned.

Now moving to our financial outlook. We believe third quarter revenues will be between $195 million and $205 million. Non-GAAP gross margin is expected to be about -- to be between 30% and 32%. Non-GAAP operating expenses are expected to be between $61 million and $62 million. Third quarter net income per share is expected to be about breakeven on a non-GAAP basis. As of today, we are 90% booked to the midpoint of our revenue guidance.

Prior to our next call, we plan to participate in several investor relations events. On August 15, Ralph will be meeting with investors in Chicago with Charter Equity. On August 16, I will be presenting at Canaccord Genuity's 32nd Annual Growth Conference in Boston.

Our former Director of Investor Relations, Roger Rowe, recently left TriQuint to become CFO of a private company. I will fill the role while we search for a replacement. We congratulate Roger on his new opportunity and thank him for his service. Our Q3 2012 conference call is scheduled for October 24, 2012.

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

Ralph G. Quinsey

Thanks, Steve. While an uncertain macro economy and underutilized factories remain headwinds to TriQuint's short-term performance, we expect strong second half improvement over first half results and see a growing market for many quarters to come. The distraction of litigation is now behind us, and we have strategic capacity available to support steep product ramps for a fast-changing industry.

We remain committed to RF innovation for one of the most dynamic, challenging and exciting products in the world: smartphones. The fundamental pieces of increased demand for mobile bandwidth, driving RF content expansion, is in the early innings of opportunity. The tsunami of data traffic in the form of streaming video, location services and social network is straining the existing infrastructure and creating additional demand for TriQuint to build out and upgrade the worldwide wireless and the wireline networks.

We create some of the world's most advanced technologies, supporting mission-critical applications and apply those technologies commercially to a broad and growing communications market. We are a leader in RF solutions, and I see good opportunities for years to come. TriQuint expects to continue to leverage innovation into revenue growth and improve financial performance.

Susan, we are ready to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the Parag Agarwal with UBS.

Parag Agarwal - UBS Investment Bank, Research Division

My first question is about your content on future platforms. So if you could provide us some guidance as to what you expect your content to be on the future platforms versus the older generation, that would be great.

Ralph G. Quinsey

So is your question, Parag, about feature phones?

Parag Agarwal - UBS Investment Bank, Research Division

No, no, the future -- the upcoming smartphone platforms.

Ralph G. Quinsey

Yes. So I guess I'm not going to talk about any specifics of unreleased phones, but I can say that on our participation on smartphones has been traditionally strong in the wedge socket. We're starting to see some opportunities in broad technology, and we're seeing very good uptake of our MMPAs. And so I think that's the general direction we'll continue on.

Parag Agarwal - UBS Investment Bank, Research Division

Okay. So basically, I mean, your content could be at the same or maybe slightly higher. Would that -- is that the right way to model going forward?

Ralph G. Quinsey

Yes. From a dollar perspective, traditional content long ago and far away for feature phones and voice-only phones will see less than $1.00. And when you look at the voice content plus to 3 to 5 bands of 3G and growing LTE, the content is multiplied 5x, 6x and more going forward. And for TriQuint, we address not only just the active side of that, the power amplifiers, but also a fast-growing opportunity for SAW and BAW filters as these bands are added and demand more duplexers.

Parag Agarwal - UBS Investment Bank, Research Division

Okay. And then my next question is a housekeeping question. I saw there was a cross-licensing liability of $11 million on the balance sheet. Just wondering how that will flow through the income statement and over what period of time? And were there any cash flow implications at all?

Steven J. Buhaly

You said that was a cross-licensing?

Parag Agarwal - UBS Investment Bank, Research Division

Yes, there was a...

Steven J. Buhaly

That entry is part of the accounting for our settlement with Avago.

Parag Agarwal - UBS Investment Bank, Research Division

Okay. And when do you think or how long will it take for it to go down to neutralize? Or how does it flow through the income statement?

Steven J. Buhaly

Well, Parag, I'm going to have to let the document speak for themselves as the terms of the deal are confidential.

Ralph G. Quinsey

But I could add color that. It's a broad agreement that has some life to it, and the impact to our P&L is immaterial.

Operator

Your next question comes from the line of Vivek Arya with Merrill Lynch.

Aashish Rao - BofA Merrill Lynch, Research Division

This is Aashish Rao calling in for Vivek. A couple of questions, one on connectivity. You talked about sales bouncing back 4% this quarter, but it still is running about 30% to 40% lower than where you were in 2010 and '11. At the same time, some of your competitors have talked about growth being driven by dual-mode 802.11n as well as 802.11ac, which have higher RF content. Perhaps you can help me understand why your sales and connectivity have been a bit weaker vis-a-vis prior levels and when you expect to get back to the $30-million level.

Ralph G. Quinsey

Yes. So as discussed in the last earnings call, we are in a transition between a relationship with one chipset partner to another chipset partner in the RF solution for wireless LAN. And so between those 2, we saw a crossover dip in demand. Actually, that dip has been less than we thought and good uptake of new products, and so we'll continue to grow. But the large majority of our RF connectivity revenue, virtually all of it, comes from smartphone applications. And so we believe that, that opportunity is a growing opportunity. I'm not going to guide for when we're going to get back up to $30 million, but I believe it's a growing opportunity going forward. And I would just also add, if you were doing compares between us and our competitors, we include and publish our revenue from connectivity in the Mobile Devices. The majority of our major competitors include that in their nonmobile devices business.

Aashish Rao - BofA Merrill Lynch, Research Division

Okay, got it. And is it fair to assume that you are aligned with like the leading provider of WiFi in future platforms?

Ralph G. Quinsey

We have traditionally had broad participation in wireless LAN and our products for wireless LAN. Going forward, we're going to continue to get as many customers as possible.

Aashish Rao - BofA Merrill Lynch, Research Division

Got it. And then one question for Ralph. On last quarter, you talked about total capacity that could support about $350 million in sales. Is that still the case or has some of the recent restructuring lowered this? And also, what revenue level will you require to kind of hit the 40% gross margin mark?

Ralph G. Quinsey

Yes. So some of the restructuring probably has had an impact on our ability, but I wouldn't say it's been a significant impact. So we're still in the same ballpark range as far as revenue per quarter to basic building capacity. Largely, what we've done in restructuring is not taking equipment capacity offline. It's just been sizing our factories for the conversions.

Steven J. Buhaly

And we could add staff back if we saw appropriate demand coming. The best way to model our revenue gross margin is a fall-through rate of about 50% to gross margin for incremental revenue.

Aashish Rao - BofA Merrill Lynch, Research Division

Cool, okay. And then last question on status of customer engagement outside of Foxconn. When do you expect to have a second 10% customer?

Ralph G. Quinsey

Well, we've got close this quarter, and I think we'll keep bouncing around close. Happy to get as many 10% customers as we can and working very hard on it.

Operator

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

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Following up on that -- the last question, Ralph. On the last quarterly conference call, you talked about your non-Foxconn customers growing sequentially. Can you give us a sense of how they did sequentially in June and if you'd expect those non-Foxconn kind of customers to be above seasonality in Q3 and Q4 given you got more capacity? And then the second question is now that you've settled with Avago, can you give us a sense of design activity in the BAW filter side?

Ralph G. Quinsey

So on the first question, we did have some customers this quarter that are struggling with the share shifting I alluded to. So in aggregate, we did not grow with our non-#1 customers, but we did grow with some of the larger ones. For example, we did grow with Samsung. So I feel comfortable with our penetration with design wins. The headwind is that some of our customers are struggling as the market consolidates around 2 strong players. And then on the second question, was that, what is the size of the BAW opportunity?

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Just design activities since you've settled this, if things have picked up considerably and when do you think that will start affecting revenues?

Ralph G. Quinsey

So our design activities have been strong. Our capacity has been virtually full, and we have been expanding capacity for our BAW products. We are selling to multiple customers some new products that are exciting that I mentioned was in a new Verizon phone. Some of the what we call the WiFi notch filters or coexisting filters, they -- when bands are adjacent, they need specific filtering, and those are good products for us.

Operator

Your next question comes from the line of Ed Snyder with Charter Equity Research.

Edward F. Snyder - Charter Equity Research

Several here. The MMPA that you mentioned that you're ramping out, is that the same one you sold at Pantech or is this a broadband MMPA?

Ralph G. Quinsey

We have -- it's our second generation of MMPA. It's a cost-reduction performance enhancement of the first generation that you referred to.

Edward F. Snyder - Charter Equity Research

Okay, so it's more of a standard MMPA. And then you showed a 3G transmit in module at your Analyst Day. Is that shipping, shipping in volume or is it still in design cycle? And I think you had target that to Sams. Is that where -- or Samsung. Is that where most of your growth is with Samsung is in that product?

Ralph G. Quinsey

The part you're referring to, I believe, is what we call the 9069. It's a great product transmit module for mid-tier smartphones. It's been a good growth driver for us with Samsung along with MMPAs with Samsung.

Edward F. Snyder - Charter Equity Research

So it's obviously shipping in volume now?

Ralph G. Quinsey

It is shipping and volume, yes.

Edward F. Snyder - Charter Equity Research

Okay. And now that everyone in the BAW group is back to working on parts instead of giving depositions, would you be doing more BAW filters as stand-alone parts or you're still targeting mostly pads and antenna modules?

Ralph G. Quinsey

We expect to target a broad family of products that will include discrete and integrated products. We are currently selling some discrete products. As you know, we have traditionally sold integrated products.

Edward F. Snyder - Charter Equity Research

Right. And I know strategically in the past, you said you're just going to avoid this because the margins weren't as good or you had more opportunity for, I think, better margins in pads. Did the settlement have anything to do with the shift now, that you're heading back into more discrete devices? Or is it just that demand has gotten so large that end supplies are small, that the margins are decent?

Ralph G. Quinsey

Well, in fact, we've started developing and launching discrete devices prior to any agreement or settlement, so I would say it didn't have anything to do with it.

Edward F. Snyder - Charter Equity Research

So it's just sheer demand?

Ralph G. Quinsey

Yes. So we have been -- like I said, we've had good demand in our BAW products. As you know, BAW is a critical component for traditional band 2. And then there's other bands around the world, band 3, band 7, band 38, band 40. They're just coexistent filters. It's quite an attractive opportunity and a lot of good demand, and so we will target all of that.

Edward F. Snyder - Charter Equity Research

Okay. And then historically, I mean, the best margin and the highest ASPs have been associated with those exceedingly difficult bands like band 2. And to my knowledge, you and Avago were the only ones who could really build that filter. That may have changed. But with LTE, we've added a couple of more that are kind of a pain in the neck. And I know in the past, band 13, which is a Verizon LTE band, has been addressed mostly with Temp Comp SAW from you and others and not BAW. Is that changing now? I know that Avago has fielded a band 13 BAW filter. And so I just get a feel with all this activity going on, Verizon, all these phone hitting Verizon shelves, do you know of a shift in the use of that technology where BAW starts to dominate that lower frequency? Or do you still think it's going to be a SAW-based product?

Ralph G. Quinsey

Yes. So you're absolutely correct that the 3 primary technologies to address critical filtering requirements in the explosion of duplexers for smartphones are SAW, traditional SAW, TC SAW or Temperature Compensated SAW and BAW or bulk acoustic wave. There's overlap. And so different devices -- different technologies can be used for the same device but there's trade-offs. Typically, BAW is going to be used for higher frequencies. Typically, SAW is going to be used for lower frequencies within that range.

Edward F. Snyder - Charter Equity Research

Okay. But I was specifically asking about Verizon's LTE, which you guys have done well on and some of your competitors haven't done so well. It didn't sound like you've got a lot of color on that. Let me take that one offline. But then WiFi, it sounds like you guys have an uptake here. Historically, mostly been Texas Instruments, they've had a problem in their conference call. They even talked about that sinking now. Are you seeing this increased demand shift off of their platform? Are you doing more with Broadcom now or are you still primarily tied to TI?

Ralph G. Quinsey

No, no, we're seeing a shift.

Edward F. Snyder - Charter Equity Research

Okay. And then you -- I think TriQuint was probably the first company to show dual-band pads over a year or so ago. Is that product starting taking off outside of one of the main customers or will you use it outside of say, Apple, which has historically used a lot of the pads. Are we seeing -- are you seeing any traction in dual-band pads or is it still in the development stage?

Ralph G. Quinsey

Well, commenting on the broad market, I would say that the customers, again, due to the share shifting that they're seeing have gotten a little bit conservative. And so we're actually seeing a much better uptake on our MMPA products, particularly when they're associated with a reference design because people are trying to get to market fast and less uptake with our open market dual-band pads.

Operator

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

T. Michael Walkley - Canaccord Genuity, Research Division

Last quarter, you had talked about some recovery in your 2G business. I was wondering if you could update on that business.

Ralph G. Quinsey

Yes, our 2G business, I think, was about 4% of our revenue, and it was actually down sequentially.

T. Michael Walkley - Canaccord Genuity, Research Division

Okay, great. And you also mentioned during your comments how some customers were delaying shipments due to not getting chips. Are you referring to maybe that 28-nanometer supply shortage? And can you give any color, if so, what that might have hurt you on your revenue and guidance?

Ralph G. Quinsey

Yes. I'm afraid I can't quantify the actual amount. I just don't have that good of information. But certainly, customers have shifted their mix; in some cases, delayed some phones; and in particular, newer phones where we were targeting. And I believe that did have a material impact on our revenue for the quarter.

T. Michael Walkley - Canaccord Genuity, Research Division

Okay, good. Are you seeing any of those customers? Are they still planning to launch when they get the chips? Or are you seeing them cancel products due to the fact that it's getting pushed more into a competitive time to launch it?

Ralph G. Quinsey

Again, various points of data I don't have access to. But in general, I would say the customers will continue to launch products.

T. Michael Walkley - Canaccord Genuity, Research Division

Okay. One last question for me, just if you could update us on the filtering transition from CSP to WLP, I mean, how that's going? And just how we should think about in the model, from chip scale to WLPs, how those products come along and more the mix over time?

Ralph G. Quinsey

Yes, the benefits that WLP are cost cycle time, size and performance. WLP is a manufacturing technique that allows us to encapsulate the filters hermetically within the fab as opposed to placing them into ceramic packages with gold lids. And so again, based on the cost and size opportunities, we think that we've got a real winner going forward in this, just exploding opportunity for filters and duplexers. When you consider that as you transition from voice to data, which includes 3G and LTE, you've got tens of new bands coming into phones that need duplexers. And WLP is a key component, SAW WLP is a key component being successful in addressing that market.

T. Michael Walkley - Canaccord Genuity, Research Division

And just in terms of timing, how should we think about in terms of getting the products into sampling and maybe into design wins? Is it the second half of next year when it really ramps in volume just to get some feel for how it might impact the model?

Ralph G. Quinsey

Yes, we're sampling now and expect to ramp up next year.

Operator

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

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

Just a couple of quick questions. I wanted to follow-up on Parag's questions. In terms of like the high-end smartphones that are coming out this year, Ralph, I'm curious, can you give us a sense of how much RF content you guys think that you guys can address in those types of phones and what you think the overall RF content looks from a previous year generation to kind of current year generation? I'm not talking about any specific smartphones but maybe more of the higher-end smartphones that you see out there in the market today.

Ralph G. Quinsey

Yes. So I think that there's -- depending upon the platform of the phone and how many bands are incorporated, there's quite a bit of RF content available. We'll go after as much of it as we can possibly get.

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

And then in terms of how you guys are -- some of your competitors are, of course, addressing like things like GPS on As [ph] and antenna switch modules. Can you give us a sense what TriQuint thinks about those markets?

Ralph G. Quinsey

Yes. We have -- we actively pursue the complete RF solution. So we sell products that incorporate switching, amplification and filtering into -- as you know, in various configurations. Some of our higher volume products right now, our PA-Duplexers that incorporate both amplifying and filtering, it also translates modules that incorporate switching and amplification.

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

Okay. And then, Ralph, lastly, just in terms of how you're thinking about the LTE bands going forward. Maybe I'm missing it here, but aren't most of these bands typically discrete bands that are being addressed by LTE and how are discrete PAs addressed by -- for LTE? And do we think at some point we'll start to see more integration within LTE itself?

Ralph G. Quinsey

Yes. So as LTE begins to roll out, traditionally, we've seen a lot of discrete applications. Keep in mind, it's been a relatively low volume endeavor today for LTE phones. It will really pick up, I believe, in 2013 and 2014 and be a big part of the market. But largely, it's been a North American, Korean, Japanese issue to date. As far as integration, I think you'll see all forms of integration. I think you'll see what's referred to as antenna duplexer modules. You'll see duplexer banks. You'll see PA-Duplexers integration. And then you'll see some of the bands from an amplification point of view incorporated into a broadband MMPA that will cover both 3G and LTE bands. Our product road map has that on it today.

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

Steve, can I ask you one quick question on inventory? Are you comfortable with this level of inventory right now? And how should we expect inventory levels to kind of move around over the next couple of quarters?

Steven J. Buhaly

I'm comfortable from an E&O perspective with the inventory. I don't think we have any undue risk there. I don't like being at 3.3 turns. I think we ought to be at something closer to 5 long term. This quarter, we did a little bit of level loading in the fab as we had an unusually low revenue period, and that makes turns look worse probably than they really are. I expect them to improve a bit in Q3 as we get the top line up and probably would improve more, but we will be building for some product ramps that we anticipate in the fourth quarter. And in the fourth quarter, I expect to have turns be substantially better. So I think we'll make sequential progress through the year, more in Q4 than in Q3.

Operator

Your next question comes from the line of Dale Pfau with Cantor Fitzgerald.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

A couple of questions here. Ralph, as you look forward into Q3, could you give us an indication of how much growth you expect in each of your various segments? And then I've got a couple of follow-ups.

Ralph G. Quinsey

Yes, Dale, I don't want to give specific guidance by segment. But I would say that the large dollar growth is going to come from Mobile Devices. I do expect both Networks and Defense to turn in good quarters percentage-wise. But from a dollar perspective, it's going to come from Mobile Devices.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Would Networks and Defense both grow?

Ralph G. Quinsey

Don't want to guide specifically. We're targeting them for growth.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Okay, that's fine. And then can we talk a little bit about your not writing off the equipment in Costa Rica? Because this last quarter, I think you said you were going to do that. Let's talk a little bit about why you didn't and if you still may see those write-offs.

Ralph G. Quinsey

Yes, the short answer is it turns out that there is opportunity for those assets in the plan going forward for filters that we -- part of this expanding opportunity for filters that we hadn't originally incorporated in the road map. So from a cash perspective, it just made sense to hold on to the asset and try to fill it as opposed to take the write-off now.

Steven J. Buhaly

Dale, you really want to be sure because if you write it off, you've got to dispose of it, and you're probably not going to get a whole lot for it. And the worst thing you could do is wake up a year later and realize you actually needed and go buy it for full price. So we want to be very cautious and deliberate there.

Ralph G. Quinsey

And we're excited about the opportunities. Right? We'd love to fill those factories up and grow the revenue that comes from them.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

And back to discrete filters again and your movement in that direction. Are you shipping any significant revenues right now in discrete? And what kind of revenue could we see by the end of the year?

Ralph G. Quinsey

I would say the majority of our revenue right now comes from integrated products when you speak of filtering, and the majority of it is integrated with amplifiers. We have begun shipping some discrete filters, and we've had a small amount of discrete filter shipments ongoing for some time in the tune of 1 million to 2 million a quarter across a variety of markets, including the mobile devices market. That hasn't changed. But going forward, we are focused on accelerating that, both on the BAW side and then -- using the functions of WLP, it's likely those will be integrated somehow, but the opportunities and options for integration using WLP are much widely expanded over our traditional chip-scale package.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Okay. So just order of magnitude, could we expect to see tens of millions of dollars by the end of the year in discrete shipments?

Ralph G. Quinsey

I would say, no, not the end of this year at tens of millions of dollars in discrete shipments.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Okay. And one financial modeling question. With the spike up in the networking business last quarter, I was surprised that the margins weren't a little bit stronger. Is that just the fact that we had such low utilization that, that had a negative impact even on the positive contribution for networking?

Ralph G. Quinsey

I think that's the issue. In fact, our standard margins improved across our businesses and for the company, offset by low utilization.

Operator

Your next question comes from the line of Quinn Bolton with Needham.

Quinn Bolton - Needham & Company, LLC, Research Division

Rob, you'd mentioned just short of getting close to a second 10% customer. Your largest customer is Foxconn. I'm wondering, is your second customer a direct OEM or is that also a contract manufacturer for a mobile device manufacturer?

Ralph G. Quinsey

The one that was getting close is Samsung.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay, okay. And then just in terms of shipments into the contract manufacturing base, can you remind us, is that a hub arrangement or do you recognize shipments upon sort of delivery to that contract manufacturer?

Steven J. Buhaly

There's a variety of arrangements out there, so we cater to the subcon's request. So we have a mix of hubs, of recognition upon receipt by the customer and recognition when we ship the product to the customer.

Ralph G. Quinsey

I would say the largest amount our revenue there falls into category of recognition when it's received.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay. So I guess specifically, your biggest customer is Foxconn, a contract manufacturer, that's upon receipt rather than a hub situation at this point?

Steven J. Buhaly

That's the current status.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay, great. Shifting over to the last time buys, I think you said you have $7 million to $8 million in Q1. I just wanted to confirm, was there no meaningful last time buy revenue in the June quarter?

Ralph G. Quinsey

We have some lower amount of revenue that continues but we didn't have that -- we had the spike in Q1. The delta spike was in that range. We may have spikes like that in the future, we may not. I don't know.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay. But certainly, there was a spike in Q1 and came down to a more sort of nominal level in Q2 and hard to forecast because it's last time buy revenue?

Ralph G. Quinsey

Exactly.

Steven J. Buhaly

Yes. So it makes it difficult to track our radio access, our base station market with that kind of last time buy coming in and out.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay. Shifting into the wireless LAN and the connectivity business. It seem to come in much stronger than where I was looking at for the June quarter, and I think you referenced the same kind of better than expected. Can you -- you mentioned just sort of moving away from your historic partner there, TI. Is there a particular baseband -- wireless LAN baseband company that you're now partnering with or you're looking or have multiple reference design to folks like Broadcom, Marvell and Qualcomm Atheros?

Ralph G. Quinsey

Yes. So we're excited about all the reference design players. Right now, we're seeing uptake of new products mostly tied to Broadcom. We look forward to supporting the other players, including Qualcomm.

Quinn Bolton - Needham & Company, LLC, Research Division

Great, okay. And then just last one -- one last one for Ralph and a quick one for Steve. Ralph, you had sort of mentioned some of the LTE opportunities. But at least, it sounds like in the near term, you're seeing some of your historic strengths are wedge, BAW, SAW filters and the MMPAs. Didn't hear much about LTE devices and just kind of wondering if you can get -- if you look out to 2013, how do you see LTE as a revenue opportunity for TriQuint? Is that coming in through your broadband MMPA or do you see opportunities for providing discrete band 13, 17 PAs or band 3, band 20, what have you?

Ralph G. Quinsey

Yes, let me just frame it for you, Quinn. Like I said, LTE is just starting. It was a big percentage growth for us this quarter. I don't know the exact number, I can look it up, but it was triple-digit percent growth but started on a small base. And so we're into the $1 million to $2 million quarter type of levels on LTE. We did very well at Samsung. I think that if you look at their LTE phone shipments, at least the new phone shipments, we had content in a very, very high percentage of those phones. Where we've traditionally been good in the marketplace is with the linear and polar edge wedge socket in those applications, and that's the area of strength for us.

Quinn Bolton - Needham & Company, LLC, Research Division

Right. I understand that sort of the 15, 13 has been sort of a key part in a lot of those functions. Wondering if you're actually supplying either discrete or single-mode PAs specifically for the LTE bands? Or does that come through some of your broadband MMPA efforts next year?

Ralph G. Quinsey

Yes, as you know, we have targeted more integrated approaches. We do have 3x3s out there for some of the bands. We do generate revenue. I wouldn't say it's a material part of our revenue. We are seeing uptake, more uptake associated with products like RIM and PA right now.

Quinn Bolton - Needham & Company, LLC, Research Division

Great. And then just the last one for Steve. You mentioned the CapEx but I didn't know if I caught the depreciation in the quarter. Could you give us that figure?

Steven J. Buhaly

Yes, you bet. Depreciation in the quarter was $21.5 million.

Operator

Your next question comes from the line of Tavis McCourt with Raymond James.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

First, a clarification. I want to make sure you guys mentioned when you gave the third quarter guidance, did you mention you expect the mobile customers outside your top customer to be up or not?

Ralph G. Quinsey

I have not guided specifically to that. Certainly, our target to grow our business across all of our customers.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Okay. And then just taking down into the discrete BAW filter opportunity. Ralph, do you have an estimate of perhaps how big that market is today or how big it could be as some of these more sensitive bands get deployed?

Ralph G. Quinsey

Yes, I think it's a big market. Right? If you look at the filtering opportunity, it's billions.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Are there -- is there a specific CapEx that you would need to do to build that capability more fully?

Ralph G. Quinsey

The short answer is yes. We have been investing in filter technology, open development and capacity, in particular, our BAW line. We've been chasing that market and growing capacity, and I expect we'll probably continue to add capacity on that line.

Operator

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

David Duley

Just a couple of quick ones for me. Steve, do you think this is the right level of operating expenses, given where you can see revenue over the next few quarters and they kind of breakeven at this $200-million run rate? And then, Ralph, maybe you could just talk a little bit about why you're so confident about a second half recovery for TriQuint.

Steven J. Buhaly

Yes, I think the OpEx is appropriate, given the growth opportunities in the market we're serving. And I'd say the company is committed to continuing to invest as necessary to exploit those. And the benefits of adding more demand into our factories and better utilizing them will be significant on the P&L.

Ralph G. Quinsey

And as far as second half, looking through our various markets, in the defense industry, it's a fairly predictable business. Big pieces move because of program shifts quarter-to-quarter. But longer periods, it's fairly predictable. And as I've discussed in the past, we're moving back into a phase with programs like Joint Strike Fighter and the ground-based radar program I mentioned in the script. Those are opportunities for us, and so I feel we'll have a tailwind in that market. The Networks, our order rate has been strong and our new product introductions have accelerated significantly, and we're seeing good uptake of those new products. So I feel good about that market. And then in the Mobile Devices market, which is the most difficult one to forecast, there's really 3 things you need to know, right? Design wins, timing and units. Now I've got a pretty good handle on design wins, and I feel good about where we sit with design wins. Timing and units across the grand scope of customers is harder to forecast. Net-net, if my assumptions about the marketplace are solid, I think we'll have a good second half.

Operator

Your next question comes from the line of Bob Sales with LMK Capital Management.

Robert Sales

A couple of questions. First of all, when -- given the consolidation of the handset market to a couple of big players, how do you think about now and target, the players beyond that to make sure you're investing the right R&D and sales and marketing? Is this something that translates into volume?

Ralph G. Quinsey

Okay, if I understand the question, for the broader markets, how do we target what can be elusive opportunity. And certainly, we addressed the market to the extent that we can support reference designs because we think reference designs -- at least that part of the market, we think reference designs are going to be more the path for that group of customers. And we've got great participation with all of our reference design players, and we'll continue to support them.

Robert Sales

Okay. And then a question -- you made an earlier comment. I think you said that customers are becoming more conservative in using MMPAs versus dual-band pad. Did I understand that right and can you expand on that just a little bit more?

Ralph G. Quinsey

Yes, I'm sorry, I didn't communicate effectively. Customers are becoming more conservative, and so they're more and more doing exactly what's on the reference design. And we've got good participation with our MMPAs on some important reference designs, and so we're seeing uptake in demand from customers around those products. Some of our PAD products are not on reference designs, they offer differentiated approach for customers. And in this mode where customers are feeling the pressure, they see that possibly as lower risk.

Robert Sales

Got you. Okay. And then in the antenna switch side of the business, there's been an ongoing discussion about SOI-based switches. And I know -- I don't think that TriQuint has necessarily been viewed as a leader in that technology. Can you talk about that a little bit more and your views of how you are targeting that particular product segment?

Ralph G. Quinsey

Yes, we have done quite a bit of work on SOI switches. We also continue to manufacture and sell our PM switches. I think there's opportunities for both, but I think the growing opportunity is on the SOI side.

Robert Sales

Okay. And then last question for you. When you look at the business over the next 12 months, what -- you obviously have some assets you haven't written off. You're comfortable with your guidance looking out to the second half of the year and Q4 -- a Q4 big product release. What can you describe to us to give us confidence that beyond this widely anticipated Q4 product launch, that TriQuint can grow back up to and through past revenue levels?

Ralph G. Quinsey

Well, we have a long tradition of differentiating technology and innovative solutions. We've grown the business. We grew the business quite rapidly for 5 years, ran into a capacity constraint, stalled the business, but we're quite comfortable with the product cycle associated with Mobile Devices. And we think that we are unique and differentiated in the fact that we offer a broad family of capability in RF solutions that includes active devices like HPT, pHEMT, actively involved with SOI, as well as very important filtering technology, now even more valuable to us with WLP, BAW technology, a new addition to our portfolio of technologies, have been very, very good for us, a lot of demand for BAW around the world. And we're an innovator around temperature compensated SAW, which has some characteristics that offers us some great opportunities. So again, when you look at the amount of capability that TriQuint brings to the solutions, our history of being an innovator. And now we have capacity in place and more and more having strategic capacity in place, we will be a differentiator with the steep product ramps. I get a sense of comfort about our ability to be successful over the next 12 months.

Operator

Your next question comes from the line of Blaine Carroll with Avian Securities.

Blaine R. Carroll - Avian Securities, LLC, Research Division

If I -- when I look at the connectivity business, typically, I thought of that business as moving either directly or indirectly with the 3G/4G business. Steve, I guess if I look at the first quarter of this year and the fourth quarter of last year, it seems that connectivity -- we took connectivity and added it to the 3G/4G revenue. Connectivity was somewhere around 14%, 15%, 16% of the sales of those 2 buckets. And then this quarter, it jumped up to 20%. Did you follow that logic, first of all?

Ralph G. Quinsey

I did not.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Okay. Ralph, I don't follow a lot of what you say about technology.

Ralph G. Quinsey

[indiscernible] 3G/4G business.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Say it again?

Steven J. Buhaly

Connectivity revenue divided by the 3G/4G revenue.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Plus connectivity, yes.

Ralph G. Quinsey

Right, right.

Blaine R. Carroll - Avian Securities, LLC, Research Division

So add those 2 buckets together and then what is connectivity as a percent of those 2. Is that a fair way of looking at the connectivity business? And if so, Steve, why the jump up to 20% of those 2 buckets? And is that sort of a level that we should have it at going forward?

Steven J. Buhaly

I don't know about going forward. That's probably not something we would guide. But I think your thesis is right from a TAM standpoint that WiFi is currently correlated with the number of 3G/4G phones. But your mileage will vary on individual products where we win designs, don't win designs, which sockets do we win. And so you're going to see in a quarter-to-quarter, company-to-company basis, those numbers bounce around a bit. Ralph, I don't know if you want to add anything to that.

Ralph G. Quinsey

I have nothing to add other than we're quite transparent. The numbers are out on the website. You can look at them. And if you're comparing sequentially, we had a significant decrease in revenue largely from our largest customer that we felt was temporary and we think that, that will come back. And so you may be looking at just a short-term discontinuity.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Yes, okay. And I guess sort of if your 3G/4G went down because of that customer, Ralph, I guess, I was assuming that your connectivity would have gone down because of exposure to that customer, but your connectivity was actually up sequentially.

Ralph G. Quinsey

No. And we have -- like I said, we traditionally had a fairly broad participation in connectivity.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Okay. So it can be outside of wins that are tied to your 3G/4G is what I'm getting at.

Ralph G. Quinsey

It can be.

Operator

Your next question comes from the line of Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

So you have an obvious ramp in the back half of the year. But maybe I was hoping you could address kind of the other customers you alluded to getting close to a 10% customer. Are you going to be able to add another 10% customer this year? And kind of can you just talk about how that outside of even those 2 customers, how the rest of the business will track in the back half of the year?

Ralph G. Quinsey

Yes, I don't want to guide specifically on this specific customer on when they would be a 10%. But I can say I feel comfortable with the progress we're making with Samsung, and we're certainly targeting to grow with all of our customers. The biggest headwind we're seeing is even though we may have good design win traction, some of our customers, their business is struggling and their expectations are now lower than when we began those the design. I really have no control over that, Blayne. I'll continue to support those customers to the best of my ability and hope to grow with them.

Blayne Curtis - Barclays Capital, Research Division

Got you. And I apologize if this was already asked. But on the gross margin, did you address what your utilization rate was and will be for the guidance?

Steven J. Buhaly

No, that is the first time we've heard that question, which is good. And utilization in the quarter, I cannot give you. In aggregate, it was in the low 60s kind of percentage. And it will be a little bit lower than that probably in Q3, somewhere in that range.

Blayne Curtis - Barclays Capital, Research Division

And I guess maybe just the drivers for the deflection in the gross margin, if not utilization.

Steven J. Buhaly

Utilization is a dominant driver right now of our gross margins. It would be substantially higher if we were heavily utilized versus where we are right now.

Ralph G. Quinsey

In fact, Blayne, if you step back and look at our standard margins, they actually have been improving, with improved product mix both within market segments and in total, offset by the low utilization. And that's my expectation going forward as far as standard margins. Our challenge now is to get revenue, fill up the factories, good fall-through, 50%. And I think we can reach very high gross margins in this business.

Blayne Curtis - Barclays Capital, Research Division

And do you flow during the current quarter or is that -- you recognize it when the products actually are sold?

Steven J. Buhaly

It's a bit of a mix. But from a modeling standpoint, I think it's safe to recognize it when the product is sold. Occasionally, we'll have a little inventory build or burn that will affect it. But that's impossible to model, so I would use that 50% fall-through on revenue in the quarter.

Operator

And there are no further audio questions at this time.

Ralph G. Quinsey

Well, I'd like to thank all the participants for your attendance in our call. Our next conference call is scheduled for October 24, 2012, so we will update you at that time. Thank you.

Operator

Thank you for participating in today's conference. You may now disconnect.

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