Qorvo (QRVO) Q4 2018 Results - Earnings Call Transcript

|
About: Qorvo, Inc (QRVO)
by: SA Transcripts

Qorvo, Inc. (NASDAQ:QRVO) Q4 2018 Earnings Call May 2, 2018 5:00 PM ET

Executives

Douglas DeLieto - Qorvo, Inc.

Robert A. Bruggeworth - Qorvo, Inc.

Mark J. Murphy - Qorvo, Inc.

Steven Eric Creviston - Qorvo, Inc.

James L. Klein - Qorvo, Inc.

Analysts

Harsh V. Kumar - Piper Jaffray & Co.

Blayne Curtis - Barclays Capital, Inc.

Chris Caso - Raymond James & Associates, Inc.

Toshiya Hari - Goldman Sachs & Co. LLC

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Bill Peterson - JPMorgan Securities LLC

Vivek Arya - Bank of America Merrill Lynch

Karl Ackerman - Cowen and Company, LLC

Ambrish Srivastava - BMO Capital Markets (United States)

Edward F. Snyder - Charter Equity Research, Inc.

Krysten M. Sciacca - Nomura Instinet

Atif Malik - Citigroup Global Markets, Inc.

Quinn Bolton - Needham & Co. LLC

David M. Wong - Wells Fargo Securities LLC

Timothy Arcuri - UBS Securities LLC

Operator

Good day, and welcome to the Qorvo Incorporated Fourth Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Doug DeLieto, Vice President of Investor Relations. Sir, please go ahead.

Douglas DeLieto - Qorvo, Inc.

Thanks very much, Chelsea. Hello, everybody, and welcome to Qorvo's fourth quarter fiscal 2018 earnings conference call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release published today, as well as the risk factors associated with our business in our Annual Report on Form 10-K filed with the SEC, because these risk factors may affect our operations and financial results.

In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or other items that may obscure trends in our underlying performance.

During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today, available on our website, qorvo.com, under Investors.

In fairness to all listeners, we ask that each participant please limit themselves to one question and a follow-up. Sitting with me today are Bob Bruggeworth, President and CEO; Mark Murphy, Chief Financial Officer; Eric Creviston, President of Qorvo's Mobile Products Group; and James Klein, President of Qorvo's Infrastructure and Defense Products Group; as well as other members of Qorvo's management team.

And with that, I'll hand the call over to Bob.

Robert A. Bruggeworth - Qorvo, Inc.

Thanks, Doug, and welcome, everyone. The Qorvo team delivered a strong March quarter, with revenue and EPS above the midpoint of our range and record quarterly free cash flow of $227 million. The company is continuing to make broad strides operationally with strong commercial traction across products and customers. I'm especially pleased with the success we are achieving on BAW-based products, which we expect will lift factory utilization in the September quarter and beyond.

For the 2018 fiscal year, IDP expanded margins and achieved outstanding revenue growth, up over 20%, while Mobile Products expanded margins and built a solid foundation for profitable growth. Looking forward, Qorvo is better positioned today to target and win our markets' highest growth and most complex opportunities, which in turn will drive us towards our target operating model.

During the March quarter, the handset environment improved in China. We are seeing increased demand in the performance-tier for RF Flex and RF Fusion based solutions as well as for antenna tuning, discrete components and BAW-based multiplexers.

Take for example our wins in Phase 6 architectures that include Qorvo's SAW and BAW technologies. Our Phase 6 RF Fusion solutions include both the mid/high-band and low-band modules, which provide complete front end coverage in two placements. In many cases, we're adding to our Phase 6 design wins with additional high value content, including our industry leading envelope tracking and antenna control solutions.

Despite constraints in frequency spectrum, Mobile operators are mandating improved data throughput and more RF functionality in the same footprint in Mobile devices. To meet these demands, customers are requiring more highly integrated architectures with complex, more functionally dense RF content. These factors favor our device technologies, design capabilities and manufacturing scale, which enable us to drive content gains.

At Qorvo, we're addressing the most complex customer requirement in the RF segments which are forecasted to grow the fastest, including ultra-high band placements, integrated mid and high band placements, antenna plexers, antenna tuning and diversity receive modules. We're investing in the highest growth segments and winning across products and customers.

We're forecasting significant growth in BAW-based products across customers and our BAW factory utilization looks strong as we move into fiscal 2019. Weighing onto this, we will roll out die shrinks and wafer conversions to help manage the need for additional capital expenditures to meet increases in BAW demand. We continue to expect BAW-based products will represent around half of Mobile Products' revenue by fiscal year 2021.

In IDP, March quarterly revenue was another record, up 26% year-over-year to $212 million. We successfully repositioned our product portfolio more than two years ago and we continue to be pleased with the results. IDP competes in diversified growth markets. We partner with the best in the business and we win with differentiated products and technologies.

In defense, year-over-year revenue – year-over-year growth was led by strength in ongoing production programs and the continued adoption of GaN for high-power applications. In IoT, we continue to advance our Pod in Every Room vision with multiple 2.4 gigahertz, 5 gigahertz and BAW filter design wins with leading meshed Wi-Fi networking system providers. We also achieved record revenue in low-power wireless, led by our production ramp of our multi-protocol SoC for Samsung's remote controls.

In infrastructure, the timeline for 5G deployment has accelerated and Qorvo is in close collaboration with customers by participating in dozens of 5G field trials and demos. During the quarter, we extended our 5G market leadership by adding the industry's first 28 gigahertz GaN on silicon carbide front end module for base stations. This follows on the footsteps of the industry's first 39 gigahertz front end module which we released last year.

We also released the industry's first BAW filter to deliver a quadrupling in power handling capabilities for 5G massive-MIMO front end modules. 5G is coming across networks and Mobile devices and it's accelerating the requirements for gigabit LTE which will serve as the backbone for 5G.

Gigabit LTE requires best in class, highly integrated placements and Qorvo is targeting the most complex and most valuable solutions, especially those that require BAW-based content. In both Mobile and IDP, Qorvo's addressing our customers' most critical challenge as the complexity of their products continues to increase. This favors superior performance as a differentiator and increases the value of enabling technologies like BAW and GaN.

As we continue on our lean journey and become more efficient through operational excellence, we expect to grow the business with greater capital efficiency, by shrinking die sizes, expanding wafer diameters and leveraging our foundry relationships.

In summary, Qorvo's solutions are enabling customers to achieve higher levels of performance and helping to transform the end user experience. We're targeting our markets' fastest growing and most profitable opportunities and we're gaining design wins across our customer base. We're poised to benefit from the strong secular trends in gigabit LTE, 5G, IoT and GaN and we believe we're well positioned for revenue growth, margin expansion and strong free cash flow in fiscal 2019.

With that, I'll hand the call over to Mark.

Mark J. Murphy - Qorvo, Inc.

Thanks, Bob, and good afternoon, everyone. Qorvo's revenue for the fourth quarter was at the high end of our guidance range at $664 million. Mobile revenue of $452 million was higher than expected on improving China demand. IDP revenue was $212 million, the eighth consecutive quarter of double digit year-over-year growth. IDP has a diversified and sustainable platform for long-term growth built on solutions for advanced radars and other electronic warfare defense applications, Wi-Fi and connectivity applications and GaAs and GaN products for wireless infrastructure.

Non-GAAP gross margin for the March quarter was 48%, at the lower end of our guidance range on mix effects across Qorvo and within both business units. Our margin outlook for the full year of fiscal 2019 remains positive as we optimize our product portfolio, grow our top line, improve factory utilization and drive additional operational improvements.

Operating expenses were $156 million, up approximately $5 million sequentially on higher development program spending and seasonal payroll effects. Year-over-year, OpEx was down $8 million from ongoing productivity efforts, including our September quarter restructuring activities. As with gross margins, our outlook on OpEx is on track with our long term model. OpEx will vary within the year on seasonal effects and the timing of development programs, but over time, we expect to continue driving OpEx down as a percent of our revenue.

Operating income for the quarter was $163 million or 24.5% of sales, up 370 basis points versus last year. Non-GAAP net income in the March quarter was $139 million and non-GAAP diluted earnings per share was $1.07, $0.02 over the midpoint of our guidance and up 26% year-over-year. March quarter cash flow from operations remained strong at $259 million and CapEx decreased again sequentially at $32 million, which helped drive a second consecutive record free cash flow quarter of $227 million.

We are committed to executing a model that delivers stronger and more durable free cash flows and our full year fiscal 2018 free cash flow of $583 million was a strong start to demonstrating that commitment. We repurchased $51 million of stock in the quarter and cash at quarter end was $926 million.

Turning to our outlook, in the first quarter of fiscal 2019, we expect non-GAAP revenue between $645 million and $665 million; gross margin to decline sequentially to approximately 44%, reflecting near-term impacts of product mix and costs associated with low SAW fab utilization; and diluted EPS of $0.75 at the mid-point of our guidance.

On revenue, we expect IDP to post another solid quarter of solid year-over-year growth in the June quarter, but decline sequentially due in part to recent U.S. Department of Commerce actions on ZTE. For Mobile, we see sequential and year-over-year revenues up slightly in the June quarter and an improving demand environment in China.

On gross margin, we view the June quarter as a transition period and forecast gross margins to return to more normal levels in the September quarter. The projected June quarter gross margin decline of 4 points is driven by two principal factors: a weaker overall mix of products and costs associated with low fab utilization. Roughly half of the sequential decline in June is associated with an increase of legacy lower-tier and less profitable products in our mix. We expect this to reverse through the year on new product launches and as our mix shifts to higher margin products in both Mobile and IDP.

The other major drag on margins in the June quarter is costs associated with the underutilization of our SAW capacity. While these costs weigh on margins through the year, with low seasonal revenues, they are particularly impactful in the June quarter. We expect this impact to moderate through the year as revenues increase and our product mix shifts.

Going forward, we will continue to work to minimize the burden of our SAW underutilization, while retaining world-class capability to serve our customers. It is worth noting that outside our SAW capacity, our utilization outlook is positive and in line with previous comments.

Despite these near-term impacts, we currently forecast second half fiscal 2019 gross margin to be at least 50%, with full year gross margin of approximately 49%. Operating expenses are forecast to increase in the June quarter to approximately $165 million on higher personnel costs, including increased design activity. We expect OpEx to remain slightly elevated in the first half of the fiscal year and trend down in the second half, totaling less than 20% of sales for the full year.

We remain on track to achieve the operating margin target we laid out at Investor Day last May of 33% by fiscal year 2020. We expect our June quarter and full year fiscal 2019 non-GAAP tax rate to be approximately 10%. With more profitable growth in Mobile and robust growth in IDP, expanding operating margins and sustained low levels of CapEx, we expect to generate free cash flow in the range of $700 million to $800 million in fiscal year 2019.

So in summary, in the fourth quarter, we posted another quarter above our guidance and delivered strong operating leverage. For fiscal 2019, we expect to transition from a seasonally low June quarter and strengthen considerably in the second half of the year.

For the full year of fiscal 2019, we currently expect our premium Mobile Products and continued strength in defense, IoT and GaN will generate revenue growth of approximately 9% or 10%, support continued margin expansion and drive robust free cash flow.

With that, I'll turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

Thank you, sir. Our first question will come from Harsh Kumar with Piper Jaffray.

Harsh V. Kumar - Piper Jaffray & Co.

A couple of questions. Bob, seasonality in the handset space has been all over the place for the last few years. I guess there was a lot of fear and concern going into the June quarter. Can I ask you your viewpoint on the Chinese market and also your largest customers and the puts and takes there?

Robert A. Bruggeworth - Qorvo, Inc.

Yeah, sure, Harsh. I'll take a very high level view on that, like, we don't really enjoy getting into customer mix. As I said in my opening comments, the China market did start to come back, but I also have to acknowledge the team did a really good job on designing in a lot of products. Our customers in China released a lot of new phones.

So I think we're seeing – we went into the quarter with some pretty healthy being low inventory and that's kind of what the uptake was. So we're kind of seeing that continue this quarter. I think our largest customers already spoke for themselves, so I think you guys know how that's going. So China market's looking okay. We're taking very cautious view on it. We've seen this play out before. We're trying to keep our inventories healthy, meaning light, low.

Harsh V. Kumar - Piper Jaffray & Co.

Fair enough. And one for Mark. Mark, I heard your comments. Is it appropriate to think that the gross margin effects are primarily temporary just that SAW is coming down faster, BAW has maybe not – is not going to ramp in the June quarter? Would you give us a sense of timing when BAW will ramp? And then also you gave some numbers first half – you gave full year margin I think of 49%, but you also gave another number 49% and I missed that. Would you just clarify what that was? Thank you.

Mark J. Murphy - Qorvo, Inc.

Yeah. So, Harsh, to your first question, what you are seeing is what you mentioned. We are – and it's starkest in the June quarter, you're seeing the transition from legacy, less advanced products and more SAW related content to a portfolio that's more BAW related and other advanced technologies and as well as GaN, continued growth in IDP. So you're seeing that transition play out and it will improve our margins both because of the more favorable product mix, but also the favorable utilization effects, of course, with our largest fab.

Also in the June quarter, as I mentioned in my comments, we are experiencing the costs of the underutilization in our SAW capacity. And because it's a relatively low revenue quarter for the year, those period costs impact us the greatest. And that effect, while it persists through the year, fiscal year 2019, it goes from about 200 basis points effect in the beginning of the year here down to, it can be as low as under 1% later in the year.

As far as the year margin guidance, we do expect to come off of this 44% gross margin in the June quarter quickly. The September quarter will return to more normal levels, which I would say be 47%, 48%. And then in the back half of the year, as I mentioned in my comments, 50% or more, and that should give you the profile for the year.

Operator

All right. Thank you. Our next question comes from Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Inc.

Hey, guys. Thanks for taking my question. Maybe you could just talk about this BAW ramp in terms of your visibility. Obviously, it's harder to manufacture tens of thousands or millions of units. And I know the issues two years ago with the low-band PAD, I'm just kind of curious your visibility and your ability to manufacture these BAWs. And is there anything left on your side that you still need to accomplish before the ramp in the second half?

Robert A. Bruggeworth - Qorvo, Inc.

Yeah, good question, Blayne. I think first, that factory has done a fantastic job of supporting all of our customers' ramps over the past years with BAW-based products. So we feel real good about that. So second, to your point, a few years ago, we had a very valuable lesson, that we did, a lot of lessons learned. We started something that we call our clean launch programs for our large customers and key products. And that actually was extremely successful this past year, past fiscal year 2018, as we ramped many products for many customers at extremely high volume. So with that as kind of the background, we're feeling pretty good about the work that's going on in our BAW factory and we don't anticipate any problems with ramping BAW products.

Blayne Curtis - Barclays Capital, Inc.

Thanks for that. And maybe if I could just ask about the tick up in OpEx, I think last time you had a big tick up, it was due to some projects or some tape outs or such. Why the tick up in June? And maybe if you could just talk about how long that should you think comes down to second half, is it a couple of quarters and then comes back down?

Robert A. Bruggeworth - Qorvo, Inc.

Yeah, I'll make a high level comment, Blayne. If you really look at it, it's typical that a lot of our design activities are in the beginning of our fiscal year and then tail off at the end of the year. But I'll let Eric go through what drives that.

Steven Eric Creviston - Qorvo, Inc.

No, that's exactly right. The high volume fall flagship launches in particular and maybe getting to the first half of your question to really validate quality and yield and performance, we run a lot of volumes in still the prototype stage to fine tune the process and make sure that we're clean for the launch.

Mark J. Murphy - Qorvo, Inc.

And I would just add that, Blayne, as I mentioned in my comments, OpEx can be seasonal depending on various activities. But we absolutely are committed to this aggressive portfolio management and in part because we very much want to get more efficient with our OpEx and drive that down to below 20% of sales.

James L. Klein - Qorvo, Inc.

Blayne, this is James. Some of the OpEx increase is IDP, obviously, with the growth we've experienced, we are definitely hiring in the R&D area in multiple product areas and we'll continue to do that as we go through the year. So part of that increase is ours.

Operator

All right. Thank you. Our next question comes from Chris Caso with Raymond James.

Chris Caso - Raymond James & Associates, Inc.

Yes. Thank you. Good afternoon. Just a follow-up question on SAW, and it sounds like what you're talking about is once the revenue ramps that's kind of on the area of 100 basis points headwind to margins. Is there anything else that you can do to eliminate that over time, any way to rationalize that capacity or eliminate that longer term drag on – of SAW on margins?

Mark J. Murphy - Qorvo, Inc.

Yes, it's a good question, Chris. We've done a number of things already and we've done our best to size our footprint for what we believe we need to serve customer needs and continue to maintain a great capability that we've got. So we've already taken some actions. You will notice in the GAAP results we did impair some assets associated with SAW capacity and you'll see that as a large charge about $38 million, $39 million in the GAAP results.

We will continue to make sure we right-size our asset footprint and maintain the resources – and balance that with maintaining the resources we need to maintain this capability, because it's important for our product launches, particularly as we see this Phase 6 where you're seeing combined SAW and BAW. So we think we need this capability long-term.

Chris Caso - Raymond James & Associates, Inc.

Okay, great. Just as a follow-up to that, in your prepared comments, you talked about greater capital efficiency. Could you expand on that a bit? And I suppose what you just mentioned on SAW is probably part of that, but over time, what effect does that have on free cash flow generation as a percentage of revenue as you take those actions?

Mark J. Murphy - Qorvo, Inc.

Yeah, we've had a great story the past year-and-a-half on free cash flow. Our CapEx as a percent of sales couple of years ago peaked at close to 20%. This past fiscal year that we just closed out we were under 10% of sales. And on a dollar basis, we expect 2019 to be at about those levels or less.

That's – in addition to just improving operating cash flow, this CapEx trend has certainly bolstered free cash flow growth. We were – in the past three quarters, we've generated $600 million – over $600 million of free cash flow. In the past two quarters, individually, we've generated more free cash flow than we did in all of fiscal year 2017. So we are absolutely committed to continuing this.

We do believe the capital intensity of the business is something we can continue to drive down and we're doing that in a number of ways, from better forecasting and planning our capital needs to – we've talked extensively about wafer expansion projects, four to six, six to eight, to die shrink programs which a number of those are still underway, of which BAW die shrink is an important program which you'll hear more about at Investor Day and just as aggressive portfolio management which we're undertaking, which – we talked about SAW capacity earlier. So I see some runway left in getting our CapEx as a percent of sales down over time. And of course, with revenue growth and expanding margins see the operating cash flow improving.

Operator

All right. Thank you. Our next question comes from Toshiya Hari with Goldman Sachs.

Toshiya Hari - Goldman Sachs & Co. LLC

Great, thanks so much. I wanted to ask about IDP. Very nice growth acceleration in the quarter. Curious what drove that in Q4. And related to IDP, you talked about ZTE in your guide. If you could quantify that that would be helpful. And I guess Huawei is probably your biggest customer in IDP as well. So if you can provide some thoughts on the risks associated with that account as well that would be helpful? Thank you.

Robert A. Bruggeworth - Qorvo, Inc.

Toshiya, this is Bob. I'll go ahead and take ZTE. For the company, it's a little bit over $40 million for the year kind of number, so kind of a $10 million run rate, that will size it, the majority of that is IDP. As far as Huawei goes, I'll let James talk about it. It's a big customer, but not anywhere near as biggest, but go ahead, James.

James L. Klein - Qorvo, Inc.

Yeah. For Huawei, they are one of our top five customers. And of course, we'll see how that goes. I mean, it's certainly too early for us to call anything. We'll continue to support the customers we have and look forward to seeing how it all works out.

For ZTE, we do see that as a short-term issue. My belief is that either of those issues will be worked out with the U.S. government or the natural demand will shift to the other OEMs. And we're well positioned really across that whole OEM structure. So I see this as working itself out over the next couple of quarters for us and returning back to normal levels.

Growth for the quarter, particularly strong in Wi-Fi, combining our best in class power amps with our BAW coexistence, band-edge filters and the integration capabilities have really allowed us to get a lot of traction in this marketplace. We're focused in the high performance slot both consumer and enterprise. And the recent product releases we have are really laying the foundation for ax allowing for high throughput and thermal efficiency that's going to be needed for that kind of traffic level.

So, great tremendous activity out of our Wi-Fi group. We also grew our low-power wireless business to record revenue and that was a second growth driver. And then defense has been particularly strong really across all major submarkets, radar, EW, comms and reaching a broad set of customers.

As an example, our revenues through the distribution was also very, very strong, demonstrating the broad applicability of our products. We also had strong production programs in defense. I think that added to it as well. And with the recent passing of the defense spending bill, with over 17% increase in spending, we think that gives us a very nice tailwind. So broad based really over three key markets.

Toshiya Hari - Goldman Sachs & Co. LLC

Okay, great. And as a follow-up, I had a question on BAW. You guys reiterated your fiscal 2021 target 50% of Mobile. I'm curious, what was the number for fiscal 2018? And over the next couple of years, should we expect a relatively linear progression or more of a back half kind of hockey stick inflection in fiscal 2020 and 2021? Thank you.

Mark J. Murphy - Qorvo, Inc.

Yeah. For BAW-enabled revenue, Toshiya, we were under 25% in fiscal year 2018, kind of mid 22%, 23%. In fiscal year 2019, we expect about 30%. And as Bob mentioned, about half the Mobile business in fiscal year 2021 will be BAW enabled.

Operator

All right. Thank you. Our next question will come from Craig Hettenbach with Morgan Stanley.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Yes. Thank you. I had a question on the China smartphone market. You talked about kind of that market's been leaned out and they're starting to recover, but also looks like perhaps some company-specific strengths. So can you talk about maybe your market share position or where you feel that's kind of shaking out and the implications to your growth in that market?

Steven Eric Creviston - Qorvo, Inc.

Sure. This is Eric. I'll take that. Regarding the March quarter beginning to see some strength, we did mention in the call last time that we were being very, very careful with inventory so that when the growth began to come back we would see it immediately. And I think it probably came back a little sooner than we expected.

But in addition to that, with the very tight inventory controls that we have as well as our largest customers, we saw – we actually grew sequentially in the March quarter as it turned out with China and see a lot of that strength continuing on into this quarter. But, of course, we're being cautious and as always trying to make sure that we maintain that low channel inventory both of our own inventory as well as customer inventory.

In terms of share in the transition, the majority of the market today is still Phase 2 and in Phase 3 components. We see throughout this year a continued transition towards the higher levels of integration and performance going up in three, five phases and we're beginning already to get production orders for our Phase 6 system.

And Phase 6 does an awful lot. It's a big step up, a much higher level of integration, higher band coverage, higher output power capability, MIMO and so forth. And for us, of course, it's also an opportunity, because with all the filters integrated, we can get the lion's share of the value (32:46). So there's a big transition for us this year not only in our marquee smartphones, but also in the performance-tier in China picking up higher content with that integration.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Got it. And then if I could have a follow-up for Mark just around inventory, the inventory increased, just how are you thinking about that as you go into the back half of the calendar year, and how you might want to manage inventory?

Mark J. Murphy - Qorvo, Inc.

Yeah. Nothing unusual in inventory, Craig. I mean, we use inventory to maintain loadings in the fabs. And then in the case of SAW, we make sure our cost reduction plans are effectively executed. So nothing unusual about what you're seeing in inventory. We'll see inventory continue to build a bit in this upcoming quarter, and then, as happens, begin to tail off through the larger seasonal revenue periods.

Operator

All right. Thank you. Our next question comes from Bill Peterson with JPMorgan.

Bill Peterson - JPMorgan Securities LLC

Yeah. Hi, good afternoon and thanks for taking my question. My first question is for James. I guess, if you imply the guidance for the June quarter, it's roughly probably a $20 million decline and I guess maybe possibly $10 million from ZTE. But I'm curious on what the decline is outside of that sequentially, acknowledging that there's still strong year-on-year growth trends. But then looking ahead for the full year, how should we think about growth in that segment? I guess you could assume some of the ZTE's business goes somewhere else, but how should we think about the overall yearly impact? Thank you.

Robert A. Bruggeworth - Qorvo, Inc.

Hey Bill, this is Bob. I want to make sure we understood the question, because I think James is going to be down $10-plus-million quarter-over-quarter. So I know you threw out $20 million, so I want to make sure we're addressing the right part, but that's roughly...

Bill Peterson - JPMorgan Securities LLC

The $20 million is to get to – the guidance for Mobile actually increases year-on-year...

James L. Klein - Qorvo, Inc.

We're not guiding individual segments, but ZTE will definitely come out in the kind of levels Bob talked about in quarter-over-quarter. And we had a very, very good Q4 as well. And so you see a little bit of leveling between the 26% year-over-year growth in Q4, you'll see that level out a bit in Q1.

As far as the full year, I think we've got continued great things going on in our underlying markets, and we talk about those six markets. We'll talk about more of those when we get into New York. And we've got great tailwinds in trends like the adoption of GaN, the move to 5G, what we see going on in the IoT space. We model those markets to still grow in that 10% to 15% range and we expect to do at or better than those underlying markets.

Mark J. Murphy - Qorvo, Inc.

And I just want to make sure to take care of some housekeeping here. On ZTE, it does affect our revenue. It is included in our guidance in the June quarter. We've also considered it for the full year, so no more ZTE effect beyond what you see in the current guide. It also impacted slightly the margin in this June guide.

Also, we do adopt 606 revenue standard starting in this first quarter. For us, not a material effect, so no concerns there. We're already at sell-in versus sell-out, so for us that was not an issue. And then customer-owned inventory, we have some issues in the company, but it's very manageable and again, not material to our business.

Bill Peterson - JPMorgan Securities LLC

Okay. Actually my second question is also for James. The GaN business has obviously – it looks like it's been going well and there's some opportunities in 5G, I guess, as we look through this year. Can you quantify the run rate for GaN exiting last year and how we should think about the revenue growth rate or run rate as we exit fiscal 2019? Thank you.

Robert A. Bruggeworth - Qorvo, Inc.

It's more than just the infrastructure side, Bill. I mean, when we look at GaN, it's into multiple products. But I think we can tell you it's not hundreds of millions. It's not single digit millions. It's a pretty decent percentage of James' total portfolio. But it is one of the faster growing segments that James does have where we've invested in some capital to continue to support his growth there. But go ahead, James.

James L. Klein - Qorvo, Inc.

Yeah, I mean, I – it's double digit part of the organization today. It's largely in defense broadband and in satellite communications. The base station revenue for us will become more material next year as we see macro and massive MIMO base stations, including 5G move into production ramp. We've got a great process portfolio, a great product portfolio. We're leveraging our packaging innovation and in some cases even stealing shamelessly from Mobile to really drive our packaging cost down. And we have, therefore, the cost and the scale to differentiate in the market.

We've also had a couple of really great product releases in GaN this quarter, so one of those established a record level of output power. We think that's very material in some of our defense space. And then we also released first to market with the film in the other really key millimeter wave band for 5G at 28 gigahertz. So in general, I think we see GaN business continuing to grow. We modeled the market to grow at about 25% and I think we'll continue to pace that same kind of growth level with GaN.

Operator

All right. Thank you. Our next question comes from Vivek Arya with Bank of America Merrill Lynch.

Vivek Arya - Bank of America Merrill Lynch

Thank you for taking my question. Bob, I'm curious how sensitive are your second half sales to the success of one particular model of the flagship phone versus another? What happens if for example depending on pricing the demand shifts to say the OLED models versus the LCD models because I think that's sort of what tripped up the industry in this last generation. So I'm just curious what kind of assumptions you're making on the kind of mix that you might see.

Robert A. Bruggeworth - Qorvo, Inc.

Yeah. The comeback in the assumption what I've said in the past will hold true today. We will not speak about any upcoming phones that not have been announced, have not been in the market. So I'm very sorry, I can't help you with that question. It's a good question, but like past times when it's been asked, I'm not going to be able to help you. When it's in the market, we'll see what happens.

Operator

All right. Thank you. Our next question will come from Karl Ackerman with Cowen.

Karl Ackerman - Cowen and Company, LLC

Hello. Good afternoon. I had two questions. For my first question, I did want to circle back on inventory. I was hoping you could describe how you would characterize your own level of modules in the channel, given what appears to be still a mismatch between production builds and sell-through of higher-end smartphones. And, I guess, maybe the follow-up to that, would you expect to see the inventory overhang abating at the end of your June quarter, or perhaps could that percolate into the September quarter?

Robert A. Bruggeworth - Qorvo, Inc.

Sorry, Karl. I'm not sure we fully understand your question. Number one, our channel between us and most of our customers is direct. So, we ship it, they build it, et cetera. So I'm not sure what you're meaning. For those customers that we support through distributors and reps in China, we think our inventory levels between us and them are very low as I said in my opening answer to a question around this. So I'm not sure if that addresses your question or not.

Karl Ackerman - Cowen and Company, LLC

Fair enough. I guess maybe as a side question, if I may, I'd love to hear your thoughts on the millimeter wave opportunity, now that you have just launched a 5G base station 28 gigahertz module, and particularly whether you expect to see revenue in calendar 2019? Thank you.

Steven Eric Creviston - Qorvo, Inc.

So, we've experienced revenue already in what we would call the last mile applications and we do expect to continue to have that. These are largely demo programs that are getting rolled out in the major city areas around the country. So we have revenue in those markets. I think broader proliferation will start to happen in next calendar year and then really take hold in 2020. Still a lot of speculation about below 6 gigahertz 5G and millimeter wave 5G and I think we'll place our bets in both and see how that plays out over the next couple of years.

Operator

All right. Thank you. Our next question comes from Ambrish with Bank of Montreal.

Ambrish Srivastava - BMO Capital Markets (United States)

Thank you very much. I had a couple of clarifications for you, Mark. Just on the free cash flow and gross margin, and they're both kind of interrelated. On the gross margin front, you're keeping your guidance intact versus what you've said in the past. And your free cash flow comes down just a touch if I got it correct between $700 million to $800 million versus $800 million that you had given before?

Mark J. Murphy - Qorvo, Inc.

Yeah, Ambrish, what I say before our target that I stated before was $800 million, and that very much remains $800 million. I mean, I'm going to be going for over $800 million. But I'm giving you a guide for the year. And it's difficult sometimes to predict when we're going to need CapEx spend or to Craig's earlier comment on working capital management. So there is a risk factor applied to my guide there.

Ambrish Srivastava - BMO Capital Markets (United States)

Okay. And then for my margin question, I just wanted to make sure I understood the margin ramp up in the back half. So I get the underutilization charge and that will reverse. But the – half of the impact from the 400 bps this quarter is – in the guided to quarter is from product mix. How does that get corrected by itself, or is it mostly in Mobile, or is it IDP? And how does that transition through the year? Thank you.

Mark J. Murphy - Qorvo, Inc.

Yeah, Ambrish, just to clarify, so you're right, half is costs associated with utilization, half is associated with the mix. On the mix, so 200 basis points, about 50 basis points of that is truly Mobile versus IDP mix within Qorvo. So just more Mobile business. And then about 100 basis points is mix within Mobile, so higher volume of legacy products relative to advanced or newer products.

And we do expect as we've talked about before and we've reinforced in this call, we expect that to reverse and new products to drive up margins going forward. And then, the other 50 basis points is just some other smaller factors, including a little bit of IDP impacts and including the ZTE effect which we talked about earlier.

Operator

All right. Thank you. Our next question comes from Edward Snyder with Charter Equity Research.

Edward F. Snyder - Charter Equity Research, Inc.

Thanks a lot. I'll start with Eric. It sounds like you've landed quite a bit of content in Phase 6 platform. Can you give us an idea of generally where that goes for like the base case? I know the base case maybe a super PAD, but then you've talked about upside cases, include envelope tracking, tuning and maybe antenna plexer. So just in general, are we talking like the base case $1 to $2 in total content going to $8 to $10 or just help us quantify maybe what that is.

And then for James, Cree announced the acquisition of Infineon's RF business which gives them a direct channel right into the wireless infrastructure OEMs that you're addressing in some of your things. And given that they're the supplier to you for silicon carbide, does this change the dynamic at all, because prior to this, they really weren't a big supplier there, so now they can both supply you and compete with you? I'm just curious, how that affects or does it affect your view of it? And then I have a follow-up with Mark, please.

Robert A. Bruggeworth - Qorvo, Inc.

Go ahead, Eric.

Steven Eric Creviston - Qorvo, Inc.

Yeah. So in terms of the dollar content opportunity for us specific to China, if I understood the question right, as we move through these phase architectures from two through six, we see probably the largest single step between generations going from sort of the three, five to the six. But there's also a broad range of different applications in different dollar content implications.

As I mentioned, we've got MIMO implemented, Power Class 2, higher power across really all the bands. We have more bands integrated. We have 40% smaller size, which obviously commands a premium in the ASP. And then we have some applications which are actually looking to bring UHB in as well. And so there's a broad range of ASPs, but significantly higher dollar content over what's shipping in the market today.

Robert A. Bruggeworth - Qorvo, Inc.

And Ed to your question about the supply chain from Cree, we actually have multiple supply chains to support James' business. Cree is as you pointed out one of them. I think we have excellent relationship with them. They made it clear to us they will continue to support us. So it's our expectations we will continue to have multiple supply chains to support James' business.

Edward F. Snyder - Charter Equity Research, Inc.

Okay. And then Mark, if I could, question kind of on CapEx. I know it's not a – it's going down again here too, but if you look at your mix coming up here between the Phase 6 wins, which has got a lot of BAW associated with it, of course the superPAD is your largest customer, and you got the quadplexers now shipping into China with the new phones there. I mean, BAW sounds like it's on a steadily increasing pace and that kind of dovetails with your guidance. When do you expect, or do you expect that you'll have to ramp Farmers Branch at some point? And can you just remind us where you are on that, is it qualified, is it production ready? Are you guys still working on it?

And then if I could, I don't know if Steve's there, Steve Grant there, but if not, maybe Eric can handle this one. Along the same exact lines, you've shipped BAW to your – high performance, high frequency BAW to your largest customer in the past on six inch. How confident are you that you can supply the needs, especially your largest customer, using just six-inch instead of having to move to eight inch. And if you have to move to eight inch, what kind of risk are you looking at in terms of yields? Do you feel comfortable whether there's something you didn't have volume production before? Thanks, guys.

Steven Eric Creviston - Qorvo, Inc.

Ed, as far as the ramping on six inch and eight inch et cetera, you're correct, Steve's not here, he'll get into this I'm sure at the upcoming investor conference in May, later this month. But we're very confident in our yields what they've been running on six inch as well as on eight inch. So we will have production coming through this year on eight inch. We'll go through a little more detail on that at the Investor Day, but Ed, we're up and running on eight inch and we've talked about that in the past. Mark?

Mark J. Murphy - Qorvo, Inc.

Yeah, Ed, we're still obviously trying to do everything we can to avoid additional CapEx dollars. But the CapEx dollars we are spending are majority BAW. And that's despite efforts to convert more six inch to eight inch and die shrink programs will help. But Farmers Branch is not going to be needed this year. We'd be able to get it ready to go. And certainly the yields and what's being produced there in test is very good. So we're ready and we'll turn it on when it's needed maybe as early as next year.

Operator

All right. Thank you. Our next question will come from Krysten with Nomura Instinet.

Krysten M. Sciacca - Nomura Instinet

Hi, good afternoon. Thanks for taking my question. The first one is just a housekeeping question, were there any 10% plus customers for the quarter? And approximately what percentage of revenues were they?

Mark J. Murphy - Qorvo, Inc.

Yeah, Krysten, one 10% customer.

Krysten M. Sciacca - Nomura Instinet

Okay. Thanks. And then following up on that particular customer, I know in prior conference calls, you've noted that this upcoming refresh will be one of the largest content gains gen-over-gen. Has anything changed in that, or do you still see that to be true?

Robert A. Bruggeworth - Qorvo, Inc.

I think, Krysten, the way I think I'd like to answer that is we're still very confident in our BAW-based designs. I talked a lot in my opening comments as well about answering questions that we continue to expect a significant BAW ramp this year. We're supporting multiple customers and really look forward to second half of the year.

Operator

All right. Thank you. Our next question comes from Atif Malik with Citi.

Atif Malik - Citigroup Global Markets, Inc.

Hi, thanks for taking my questions. First question for Mark. Mark, what changed on the gross margins coming down in the second quarter? The SAW underutilization, is it something on your side, or is it a change in the customer product mix? And then I have a follow-up.

Mark J. Murphy - Qorvo, Inc.

So, by second quarter, I'm assuming you mean second calendar, the June quarter. So, yes, just to remind folks, we've got two factors occurring. One is mix related issues and the other is, Atif, as you point out, these costs associated with SAW capacity underutilization.

No problem with the parts other than we don't have enough SAW to sell. It's simply an accounting convention. When we experience abnormal levels of utilization, the fixed cost cannot be allocated to unit production so they need to pass through as period costs. And that's the effect you're seeing most pronounced in June, in part because through the year, its highest level is in June and then we have our lowest revenues. So on a percent basis, of course, it has the largest effect.

Atif Malik - Citigroup Global Markets, Inc.

Got it. And then a follow-up for Eric. Eric, if I look at the teardown of a phone that's already out, Galaxy 9, there is a combination of mid and high band PAD in that phone and architecturally the Korean handset maker is not too far behind the U.S. handset maker. But with respect to Chinese handset makers, how far behind you think they are in terms of adopting something similar where the mid and the high bands are getting combined? Thank you.

Steven Eric Creviston - Qorvo, Inc.

Yeah, thank you. That's a great question. And I think that's fundamentally what's driving this significant shift in the Mobile portfolio throughout this year. We're finding that highly integrated modules that combine coverage for mid and high frequencies and allow you to very elegantly at a low loss support carrier aggregation combinations across all of that. They really help customers get to market with the leading edge handsets and that's applying widely to many customers in many segments.

And really when you look at our Phase 6 solution, that's exactly what that is as well. You've got a low band module and then you got a mid and high integrated module, so solves all that complexity. So I think throughout this year, as we exit this year, you're going to see a lot of different instances of handsets from different customers and different tiers adopting similar technology.

Operator

All right. Thank you. Our next question will come from Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Co. LLC

Hi, guys. I had two questions. One, Mark, if I heard you right, I think you said you're looking for 9% to 10% growth in fiscal 2019. Just wondering from a broad brush, can you give us sort of what are the biggest drivers? Is it sort of the ramp of mid band, high band PADs? Is it China coming back? Is it continued growth in IDP? What are the biggest drivers?

Mark J. Murphy - Qorvo, Inc.

Yeah. I'll just say generally, Quinn, we're experiencing good design win momentum across our customer base. And of course, and then many of the things Eric talked about, Phase 6 is a good example. And so we've seen our strength in China improve even further. And then, of course, James' business, a small sequential decline in the June quarter, but still year-over-year growth, and then that growth picks back up again to double digits in the rest of the year.

Quinn Bolton - Needham & Co. LLC

Got it. And then as my follow-up for Eric, it sounds like BAW-based products are 22% or 23% of your business in fiscal 2018, expect to be about 30% in fiscal 2019. If I just take consensus estimates, it feels like your BAW-based products go from about $500 million in fiscal 2018 to somewhere around $700 million in fiscal 2018. I guess I would think with the custom mid band, high band PAD and Phase 6 products ramping, you'd have a heck of a lot more than $200 million of growth. Can you help me reconcile that?

Robert A. Bruggeworth - Qorvo, Inc.

Sorry. I'm not sure I understand all of the questions. We've given you a lot of data out there and that's your model. I'm not sure how to even begin to answer that. We always have a lot of moving parts that are out there. I think we also mentioned in the last call we weren't participating in some high volume products that use SAW which is why we've got a fab utilization problem. So I'm not going to get into modeling every bit of Eric's business. I'm sorry. I can't help you with that one.

Operator

Thank you. Our next question comes from David Wong with Wells Fargo.

David M. Wong - Wells Fargo Securities LLC

Thanks very much. If I'm correct, your 9% to 10% fiscal 2019 growth suggests that in the second half of this calendar year your Mobile Products should grow year-over-year. And if that's right, can you give us some idea of how that is split between content growth and unit growth?

Mark J. Murphy - Qorvo, Inc.

Yeah, David, just a clarification. I mean, Mobile returns to year-over-year growth actually in the June quarter. So that's noteworthy, maybe we should have mentioned that earlier, so thank you for the question. As far as the content growth, we are experiencing content growth, but I'll leave it to Eric to go into any details.

Steven Eric Creviston - Qorvo, Inc.

Yeah. It's a tough question to answer. Certainly, in terms of handsets, we're not counting on unit growth in the industry. It's content that's growing our TAM. Within our own business, certainly for the most part, that's also the case. We're selling fewer parts that have higher content at a pretty dramatic ratio, although there's other parts in the market like ET and antenna tuning which will be growth drivers as well, which are driven by a lot of unit growth as well.

David M. Wong - Wells Fargo Securities LLC

Okay, great. And in IDP, if one backs out all the ZTE effects, would you actually expect to continue to see 20-plus-percent growth through fiscal 2019 in IDP?

Steven Eric Creviston - Qorvo, Inc.

Well, as I said earlier, we model those underlying markets 10% to 15%. I expect it will do at or better than that. Still very, very bullish about the business. Mark mentioned earlier design wins. We had fantastic design win last year. We were actually up 20-some-odd-percent year-over-year. So I think business is strong, but right now we're modeling it 10% to 15%.

David M. Wong - Wells Fargo Securities LLC

Great. Thanks so much.

Robert A. Bruggeworth - Qorvo, Inc.

Thanks, David.

Operator

All right. Thank you. Our next question comes from Timothy Arcuri with UBS.

Timothy Arcuri - UBS Securities LLC

Thank you. Mark, I'm still trying to figure out the mix of the Mobile business for March and June. Can you give us maybe a little bit of clarity on either the percentage of revenue from the largest customer or maybe from China in March? And then what is modeled for June? Thanks.

Mark J. Murphy - Qorvo, Inc.

No. I mean, I'm not going to give you percentages on our largest customer other than they're a 10% customer. We had a – as I mentioned, for the June quarter, well, we talked about the March quarter and strengthening in China, which was stronger than expected. We're seeing that continuing into the June quarter.

And then furthermore, we just have the sort of transition period whereby we've got more legacy products and later generation or older products in the cycle here that are in the mix in the June quarter. We expect that to turn through the year, of course, with a number of handset launches and our product portfolio is a higher margin portfolio through the back half of the year.

Timothy Arcuri - UBS Securities LLC

Got it. Okay. And then I'm just wondering bigger picture, if you look at there's just been so much chop in the supply chain for some of the big smartphone customers. And I guess from a big picture, is there a change in the way that they're managing inventory, maybe extending some of the programs that they have with contract manufacturers and sort of how they hold inventory on their own balance sheets? And does that impact the sort of seasonality in your business as you look to the back half of the year? Thank you.

Robert A. Bruggeworth - Qorvo, Inc.

I think it's best to really ask the contract manufacturers what's going on on their end. I think I've mentioned before a lot of our large customers are on hubs. We ship into them. They pull from that and build phones and ship them. So you'll have to ask them what they're doing with their subcontractors. I'm sorry we're not able to answer that anymore.

Operator

All right. That concludes the Q&A portion of today's call. And I would now like to turn the conference back over to management for any closing remarks.

Robert A. Bruggeworth - Qorvo, Inc.

Thank you very much for joining us tonight. We believe we are better positioned than ever to capture our markets' highest growth and most complex opportunities. We expect this to drive content gains across products and markets. We look forward to meeting with many of you during upcoming marketing trips and we hope to see you at our Institutional Investor Day in New York on May 23. Thanks again and good night.

Operator

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.