Good day, welcome to the Qorvo Inc. Q2 2019 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Douglas DeLieto, Vice President of Investor Relations. Please go ahead, sir.
Thanks very much, Brad. Hello everyone, welcome to Qorvo's fiscal 2019 second quarter 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. Sitting with me today are Bob Bruggeworth, President and CEO, Mark Murphy, Chief Financial Officer, James Klein, President of Qorvo's Infrastructure and Defense Products Group, Eric Creviston, President of Qorvo's Mobile Products Group, as well as other members of Qorvo's management team. With that, I'll turn the call over to Bob.
Thanks, Doug, and welcome everyone. I'm proud of the Qorvo team for delivering a strong September quarter, with both revenue and EPS well above guidance. Our products and technologies make Qorvo uniquely positioned to partner with our customers to develop their most compelling products. Our September quarter extends a strong start to Qorvo's fiscal 2019. We are investing in the right types of growth, and the customer design activity is demonstrating that our technology competes at the highest levels. Operationally, we're making progress related to cost control and capital efficiency, including increased production of 8-inch BAW, continued capacity expansion to support the GaN demand, and the upfit of Farmers Branch. We're doing a good job of growing our top line, expanding our margins, and improving our return on capital.
During the quarter, we supported a series of large product ramps and enjoyed robust design activity in both mobile products and IDP. The relentless demand for an improved user experience is fueling large macro trends, such as the deployment of LTE Advanced Pro and 5G, as well as the proliferation of the Internet of Things. These trends are creating new design challenges for our customers, requiring more RF content, and placing a premium on performance, product and technology breadth, systems-level expertise, and integration. Qorvo is a leader as the industry moves to more highly integrated solutions, enabling wider bandwidths, increased data rates, and enhanced system performance. In IDP, revenue grew to $218 million, led by strength in the base station market. IDP continues to connect and protect across a diverse set of defense and communications customers and applications.
Qorvo's 28 gigahertz high power amplifiers were selected for 32-element phased array deployments, targeting large venues with dense cellular traffic, such as concert halls, convention centers, and sporting arenas. Shipments of 5G solutions were a record in support of multiple leading base station customers. GaN-based revenue increased 27% year-over-year, driven by broad market demand, including 5G infrastructure. Design activity for 5G base stations has been robust across geographies and customers. The emphasis is primarily on sub-6 gigahertz, while millimeter-wave applications continue to gain traction. We're in the early innings of 5G and the migration to higher frequency, increasing bandwidth requirements, and deployment of massive MIMO favor Qorvo's technologies. As deployments of 5G base stations accelerate, our 5G product revenues are forecast to be strong over the next several years. In IoT, new markets and applications continue to proliferate.
Field trials are underway for cellular vehicle-to-everything connectivity. Qorvo is supporting multiple OEMs with our 5.9 gigahertz FEM optimized for Qualcomm's cellular V2X chipset solution. We were selected by Continental, a leading tier 1 automotive supplier, to deliver multiple solutions enabling always-on automotive connectivity to cellular networks around the world. In the connected home, we commenced shipments of a dual-band Wi-Fi IFEM powering Facebook's family of Portal video communication devices. We also partnered with a lighting and IoT solutions company in China, enabling smart interior lighting products, which operate on Zigbee 3.0 and Bluetooth Low Energy 5.0 protocols.
Among new product launches, we introduced a fully integrated system and package for ultra-low power wireless communications that's certified to Zigbee and Bluetooth product specs and delivers Zigbee Green Power energy efficiency. Turning to defense, the deployment of phased array radars and higher frequencies of operation are increasing demand for RF solutions that leverage GaN, GaAs, and other semiconductor processes. During the quarter, Qorvo enjoyed strong demand for our solid-state GaN Spatium high-power products for electronic warfare and communications applications. In mobile, revenue increased to $667 million. We supported the ramps of flagship smartphones, we increased our content on key customer programs, and we helped to enable early 5G smartphone designs. Qorvo's mobile products revenue is expanding across product categories, and our product and technology development efforts are opening up new opportunities for growth.
During the September quarter, we enjoyed robust demand for our antenna tuners, ET PMICs, BAW-based quadplexers, and RF Fusion Phase 6 solutions. RF Fusion Phase 6 leverages Qorvo's premium BAW and SAW filter technologies to deliver complete main path coverage in two placements, a low-band module and a mid/high-band module. During the quarter, we commenced shipments of RF Fusion Phase 6 in support of Vivo's newest flagship smartphone, the Vivo Nex. Integration is an industry trend. Qorvo was built for this. In 5G, smartphone design activity is accelerating across leading manufacturers, primarily in support of sub-six gigahertz deployments. Qorvo was selected by Samsung to supply our 3.5 gigahertz FEM for a series of 5G handset demos across multiple basebands. We also commenced sampling the industry's first dual-band 3.5 and 4.9 gigahertz FEM to a leading China-based smartphone manufacturer.
Our customers expect commercial shipments of 5G devices as early as the second half of calendar 2019. Next, let's drill down for a closer look at 5G, given our broad participation across both IDP and mobile products. Each quarter, Qorvo gains new insights into 5G related to geographies, timing, customers, and architectures. We're enabling global 5G base station deployments today and helping to develop the 5G mobile devices of tomorrow. Qorvo introduced the industry's first 5G RF front end for smartphones. We've participated in nearly every 5G infrastructure field trial, including the Seoul Winter Olympics. We are a voting member of 3GPP, helping to define 5G standards. We are collaborating closely with network operators, base station manufacturers, smartphone manufacturers, and chipset providers on their 5G programs. In the base station market, 5G is helping to drive a rapid shift in power amplifiers from silicon LDMOS to GaN.
We expect the trend to accelerate with approximately half of the power amplifier market transitioning to GaN in the next few years. Compounding this, we expect the content opportunity for Qorvo to increase substantially as fixed antennas are transitioned to massive MIMO phased array deployments. A 32-element array requires 32 PAs and 32 small signal chains. That continues to scale with 64-element and 128-element arrays. On the device side, 5G is increasing the content not only in smartphones, but across an expanding set of new products, from fixed wireless solutions and nomadic devices to M2M nodes and autonomous vehicles. Each 5G smartphone will retain full 4G capability. A great deal of that 4G content will be redesigned to coexist with the 5G bands. The added complexity is a huge opportunity for Qorvo as performance requirements are increasing across nearly all components.
In both IDP and mobile products, Qorvo's leadership in premium categories like envelope tracking, antenna tuning, premium filters, and phased arrays are already playing a critical role in the definition of 5G architectures. In summary, the demand for data is growing, RF content is increasing. The commercial traction is expanding for Qorvo's highest performance and most highly integrated RF solutions. The Qorvo team is successfully executing our strategy. We're confident in our growth and margin drivers. We're pleased with our September quarter. Our outlook remains strong. With that, I'll hand the call over to Mark.
Thanks, Bob, and good afternoon, everyone. Qorvo's revenue for the second quarter was $884 million, $29 million above the midpoint of our guidance, up 28% sequentially and 8% year-over-year. Mobile Products revenue was $667 million, a 37% sequential increase, and reflected strong seasonal ramps. IDP revenue was $218 million, another quarter of double-digit year-over-year growth, with particularly strong demand in infrastructure. non-GAAP gross margin in the September quarter was 47.7%, 20 basis points over our guide. Our margin outlook remains positive as we transition the mix of our product portfolio, improve factory utilization, and drive productivity. Operating expenses were in control at $168 million, down slightly from our guidance. We expect OpEx to trend down slightly through the back half of the year, with full-year OpEx ending at approximately 20% of sales.
Non-GAAP net income in the September quarter was a record $225 million, and non-GAAP diluted earnings per share was $1.75, or $0.13 above the midpoint of our guidance. The earnings power of the business is increasing as we grow in the right areas and remain disciplined in capital and operating spend. September quarter cash flow from operations was near $215 million, and CapEx was $70 million, yielding free cash flow of $144 million. CapEx is currently projected to end the year a little over $300 million and remains principally for BAW and GaN capacity additions at our Texas fabs. We repurchased $87 million of stock in the quarter and ended the September quarter with $558 million of cash and cash equivalents. During the quarter, we redeemed our remaining 6.75% notes due 2023 and repurchased $436 million of our 7% notes due 2025.
In the quarter, we issued $630 million of 5.5% notes maturing in 2026. With these actions, we've lowered our interest costs and extended our average debt maturity to 2026. We are below our long-term leverage target and retain significant financial flexibility to grow the business and return capital to shareholders. Turning to our outlook, in the third quarter of fiscal 2019, we expect non-GAAP revenue between $880 million-$900 million, gross margin to increase sequentially to approximately 50%, and diluted EPS of $1.95 at the midpoint of our guidance. We currently project Mobile Products revenues in the December quarter to be up slightly sequentially in support of seasonal phone ramps. For China, we see a relatively healthy channel, but given the strength from China-based handset manufacturers year-to-date, we are taking a measured view on demand in the back half of the fiscal year.
We expect IDP to post another solid quarter with strength in infrastructure offsetting near-term weakness in Wi-Fi. On gross margin, our December quarter guide reflects ongoing progress improving the portfolio, utilizing our fabs, and driving productivity. We expect gross margins in the back half of the fiscal year to average 50% or more. Operating expenses are forecasted to decrease slightly in the December quarter to approximately $165 million. We're maintaining a full-year non-GAAP tax rate forecast of approximately 8%. We expect operating cash flow to strengthen in the second half of the fiscal year on higher revenue, stronger margins and lower working capital. In the third quarter, CapEx is expected to peak for the fiscal year with BAW and GaN capacity investments in Richardson and the continued build-out of BAW capacity in Farmers Branch. In summary, the September quarter was a record revenue and earnings quarter for Qorvo.
Our portfolio strategy and operational improvements are yielding stronger and more consistent results. Looking ahead, our outlook remains essentially unchanged, with full-year revenue growth around 10%, gross margin increasing to 50% or more for the fiscal second half, and OpEx in control and ending at about 20% of sales for the full fiscal year. With that, I'll turn the call back over to the operator for questions.
Thank you. At this time, we'll open the floor for questions. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We also ask that you limit yourself to one question and one follow-up question today. Again, please press *1 to ask a question. Our first question comes from Harsh Kumar with Piper Jaffray.
Happy Halloween. Congratulations. Stellar execution on the top line, but also congratulations on the margins. Mark, I had one for you. Just looking beyond sort of the second half fiscal that you talked about, now that your factories are mostly BAW and now that you're kind of set with your share at some of the large tier 1 guys, should we think of 47%, 48%-50% as sort of the new range for you guys going forward? I've got a quick follow-up.
Your question, Harsh, was around gross margin?
Yes, sir.
Yeah. I mean, we're not giving quarter guidance. Certainly beyond the quarter we're giving, we've talked about second half guidance for gross margin. I guess the question is: what should gross margin do if we execute on our plan? We believe that we have the potential to expand gross margin going forward. We believe there are a number of reasons. One is, we know this year that the SAW underutilization is a headwind for us, and we expect that to some effect in the near term, which would include early next year. That'll wane through this year and then into next year, so become a lesser effect on the business. We're also continuing to affect the mix transitions that we want to occur with BAW-related revenue, GaN, and other premium technology products, and that'll have a positive effect.
We are being very disciplined around capital, as our capital efficiency improves through larger wafers, die shrinks, and other things, we should see those effects help with the margin. Then there's, of course, other productivity, better yields, lower inventory charges, improved cycle times. I can go on and on. The team is working on a lot of things. I'd say lastly, we are tightening relationships with our supply chain, developing selective partnerships, joint productivity programs, and other things to broaden the scope of our productivity efforts.
Great. Then maybe one real quick on IDP. We've heard from several other companies talk about weakness in a variety of different areas. Infrastructure, generally from everybody, has been positive, suggested by you guys as well. There are other parts of your business in IDP that are broader. Maybe, Bob, you could take this one, or somebody else in the IDP team. Help us understand the different parts and pieces, the pluses and minuses around those subsegments in IDP.
Harsh, this is James. As you said, we did have a very strong base station quarter across all the OEMs. It was driven by strength in both 4G and 5G deployments, and we also saw strong demand for small cell and massive MIMO products, including very early deployments for 5G. That includes material orders for GaN to support those MIMO deployments. On top of that, we have also done very well with share gains, particularly in one of our European OEMs. Very strong growth in base station. We did talk a little bit already about Wi-Fi, we have seen some effects in our Wi-Fi business that we think are relatively near term. We think that slowdown has been based on the delays in the release of the AX standard.
We also have customers experiencing some shortages in other materials that are affecting their production and some impacts of tariffs as they transition some of their manufacturing locations. Defense, we're off a little bit off our record highs that we experienced back in the back half of last year. That business is typically a bit lumpy. What I would say about both defense and Wi-Fi, the fundamentals are both very strong. We do see that the technologies we have are matched very well with where we see both of those marketplaces going.
Thank you. Our next question comes from Blayne Curtis with Barclays.
Hey, guys. This is Thomas O'Malley in for Blayne Curtis. In your prepared remarks, you mentioned a more measured view on demand from China into the December quarter. Can you kind of give us some puts and takes on where you're seeing that weakness from the high end or the low end, and just give us a little more color there?
This is Eric. I can give a little more color on that. We mentioned in last quarter's call that we had seen a very strong market year to date and that a lot of the high-end handsets had just launched, and we were waiting to see how the sell-through goes there. Obviously, where you've got a lot of content and a lot of the high-end handsets there. I think that's the area that we're most conservative on now and just keeping an eye on it, as Mark said, sort of a measured view to see how those sell out.
Great. Then one quick other one, and I'll hit on the margin point again. You guys obviously are seeing some great improvement here, and this quarter a lot of that is obviously bringing a premium part through at the high end and some premium smartphones. Can you talk about what that was like bringing that through and kind of what you're seeing going forward with that product?
Sorry, Tom, I'm not sure we fully understand your question. I will say this, the ramping of our BAW facility is going extremely well. I commented on that before. I'm very proud of what the team's been doing and fantastic ramp in what we've seen, and we're looking forward to continuing to grow our BAW-based business.
Thanks, guys.
Thank you. Our next question comes from Bill Peterson with JPMorgan. Hello, Mr. Peterson, your line is open.
Sorry about that. I was on mute. Congratulations on the strong results and guide. Thanks for taking the question. I guess coming back to China, I think there's a view that the domestic China market is fairly weak, you commented that your content tends to be in some of these flagships, maybe global phones. I guess as we look into next year, assuming unit volumes still kind of remain muted, what can drive content growth? Are you seeing further opportunities for diversity receiver, antenna flexing, or what are the areas where you can drive content further from here in China?
It's a good question. I think the opportunities we see may be centered around integration more as those customers look to pack more features in particular, prepare for 5G capability. People are generally taking more of the handset portfolio up the integration curve. Phase 6 as an example, where we combine the entire main path into two placements, we think that's just a great opportunity for Qorvo to see that really penetrate further and further into the handset portfolio.
Okay, great. Secondly, for James, when we think about the GaN business, it says 27% growth, it sounds like you're gaining share as well. As we look at that, we're just at the very, I guess, start of the 5G ramp. How should we think about the growth of that as we look into next calendar year?
Yeah, as I've stated many times, we see that overall GaN market, again, defense, broadband cable, and wireless infrastructure, that market's going to grow in the low to mid-20s. I think we'll do significantly better than that as we go forward. You saw that in this last quarter. That was driven a lot by defense, but we are now really beginning the start of production deliveries around these 5G deployments and massive MIMO deployments. I think one thing I want to talk a little bit while we're on massive MIMO is we definitely are seeing the OEMs start those deployments. Over the next couple of years, probably maybe three years, we expect that 20% or 30% of the RRUs will be massive MIMO antennas. What that does for us, it results in about a 4X of the number of channels, about an 8 to 12X increase in content for us.
That's going to drive a significant amount of GaN demand as we go through these deployments in 5G over the next several years.
Thank you. Our next question comes from Ruben Roy with MKM Partners.
Hey, thanks for taking my question. James, maybe just follow up on that point around GaN and with 5G. Is that related to sort of the higher frequency base stations that you're looking forward to? Is that kind of the content growth that we could expect as those ship, or are there additional content opportunities as we move over to those high-frequency base stations for 5G over the next few years?
I would say that the content is certainly today, as Bob talked about, in 6 gigahertz and below. In the out years, we believe millimeter wave will continue to gain traction, and we're certainly supporting multiple different millimeter wave opportunities around the industry. As far as the breakout of below 6 gigahertz, we're seeing strength both in Asia deployments and deployments in the U.S. You'll see a little bit of different frequency band selections. Predominantly, I would say we play in a little bit of the higher end of the frequency ranges. It's relatively broad-based at this point.
Thanks, James. A quick follow-up for Eric, just around the China commentary. Number 1, can you remind us what your exposure to China is? Number 2, in terms of the commentary on the channel remaining relatively healthy, it sounds like the component inventory is healthy, or do you think it's a combination of component inventory and actual handsets out there? Thank you.
In terms of mobile exposure to China, it's about 30% of the business goes to China, not including Huawei, the broader customer base in China. Regarding the channel inventory, we've got very clear visibility into our component inventory in the channel, we know that is quite healthy and in line. We don't have quite as good a visibility on the final handset. That's a little bit of a delay, our own component inventory is clear.
Thank you. Our next question comes from Chris Caso with Raymond James.
Yes, thank you. The question regarding your capacity expansion plan that's underway for next year, can you talk a bit about the visibility on the design wins needed to fill that capacity, and your level of confidence, how much is perhaps design wins that have already been won? How much are sort of high probability design wins? I'd imagine now that you're guiding to 50% gross margins, the goal is to keep it there. What's your level of confidence?
Yeah, Chris, this is Mark. We're not going to talk about customer-specific programs and handicap those. What I can talk about generally is our expansion plans, and I think we've talked at length about our utilization issues on SAW, and we continue to work through those. We do believe SAW is a critical technology for us, and so we will maintain SAW capacity. We have good technology, and we'll deploy that in Phase 6 and other areas, particularly in BAW-related applications. As far as GaAs capacity is well loaded in Oregon and North Carolina. BAW capacity, you heard James talk about GaN, so we're fully loaded there. We've got our BAW capacity in Texas, which currently is the production's all out of Richardson, and Richardson is at capacity. Currently, about 70% of our capacity in BAW is on six-inch, and 30% is on eight-inch.
We are undertaking over the next year, between wafer conversions and bringing Farmers Branch online, bringing on more eight-inch. This time next year, we will have actually the reverse of what we have now, roughly 30% six-inch and 70% eight-inch. Based on our current plans, which also include not only that wafer conversion, but also die shrink programs, yield improvements, cycle time, all these other things, we believe we have the capacity to meet what we believe is our revenue outlook. Now, we're continuously reviewing that plan, and update the spend plan when needed as we consider opportunities, the pace of tool conversions, new tool lead times, technology and process changes, and other factors. Hopefully that gives you some color as to our thinking on capacity.
Yeah. No, that's helpful. Thank you. If I could just follow on with that explanation, and then based on what you said, it sounds like then the sort of variability in capacity, depending on how design wins go, would be the loading on the six-inch fabs then, and you would swing that higher or lower and therefore get the efficiency benefits of loading up the eight-inch fabs. Is that the right way to think about it?
It's hard to say, Chris. It's just a very complex, continuously assessed situation. You could slow the conversion, you could slow various technology programs, you could accelerate them. I gave you what our current view is sitting here on October 31st, we'll give you an update periodically as things change.
Thank you. Our next question comes from Quinn Bolton with Needham.
Hi, guys. Congratulations on the nice results. Wanted to come back. I think in past calls you guys had mentioned sampling custom mid-band, high-band PAs to multiple customers. As you look into 2019, what's your just sort of market share assumptions, or what's the market share opportunity as you ramp both phase 6 designs as well as the opportunity for other custom mid-band, high-band PAs into next year?
This is Eric. Yeah, I think we're working with virtually all of our customers with these product types, in terms of specific share, it'll vary by customer, of course, and product type. We're clearly one of only a few people that can do this, when you combine it with our high-performance SAW, our leadership in tuning, switching, and power management, and advanced packaging, we really like our odds. We've got a lot to bring to the party. We're helping customers design fantastic products and helping them get ready for 5G. There's a lot of excitement around a broad portfolio of products for a lot of customers.
Great. Just a quick follow-up for you, Eric. Looks like your business drove most of the upside in the September quarter. Just kind of curious, was that across the board, or was that primarily driven by the new platform ramps where you guys have talked about your content gains? I guess I'm specifically trying to ask whether China actually grew with the business in September, or whether it was really more of the marquee phones launching for the second half.
Yeah. I would say the growth was fairly broad-based across nearly all of our customers, and skewed towards the marquee platforms, I would say.
Thank you. Our next question comes from Edward Snyder with Charter Equity Research.
Thanks a lot. Let's start off with Eric. How do you feel about, let's talk about 2019, any time in the year is fine, BAW-based DRXs. You guys dabbled in that with Samsung a couple of years ago, but haven't done anything since then. I think last quarter you mentioned that some of the BAW expansion that you're looking at in Farmers Branch is to accommodate what look to be increasingly probable design wins in that. If you could maybe give us an update on that, and if you could talk, are we talking about one or two BAW filters, or are we talking about more of that? Because some of those modules can get very large. James, if I could, IDP's infrastructures, you're shipping GaN into MIMO, but what does that ramp look like specifically in infrastructure?
Most of your GaN goes into defense at this point. What does that ramp look like over the next several quarters? Do you expect to see significant increase, or are you going to kind of status quo here as they evolve? Thanks.
Taking DRX first, we continue to invest in BAW-based DRX modules. We see clear opportunities with the increasing mid and high-band DRX and as MIMO comes on board and so forth. The ones that we're developing have a combination of technologies, but the majority of which are BAW-based, we are seeing technical differentiation in some parameters. We're still targeting second half calendar year next year for first production.
This is James. Let me talk about massive MIMO. We definitely are seeing strong order demands right now. For us, that's much broader than just GaN, because we're supplying the components that affect the rest of the transmit side, plus the vast majority of all the components that go into the receive side as well.
That demand is going today, I talked a little bit about what we see content-wise. As far as the GaN portion of it as well, we do have significant production orders on the books now, and we're in the process of building and producing those. In that section, I agree with you that defense is certainly still the strongest part of our GaN portfolio. The base station is going to grow at a rapid pace, and will outstrip the overall growth to GaN.
Thank you. Our next question comes from Ambrish Srivastava with BMO.
Hi, thank you. James, you're doing double duty today on the call. I'll come back to you with a question as well. What's the right way to think of the longer-term growth for the business? It's been very strong for you guys, 20-plus percent year-over-year growth for several quarters. These last couple of quarters, it's in the mid-teens, which is again, nothing to scoff at. If you look out ahead over the next few quarters, sounds like base stations and GaN, am I framing it correctly? Those are the big drivers. How to think about it, is it a mid-teens grower or should we expect an acceleration? I had a quick follow-up for Mark.
Yeah. We're in line with what we shared at Investor Day. Growth is tracking those underlying markets, and they're growing between 10% and 15%. As I said before, I think we'll do a bit better than that. The defense and Wi-Fi have pulled back a bit, but again, I think the underlying trends are very positive in both of those markets. Once AX takes hold and some of our customers adjust their manufacturing plans, I think you'll see Wi-Fi start to take off again. I think we'll grow just better than those underlying markets, and again, in that 10% to 15% range.
Just to be clear, James is talking about annual numbers.
Oh, yeah
going forward.
Yeah, annual numbers.
Yeah. Right. That's what I was asking. Great. Thanks. Mark, just a quick one for you on the CapEx side. You said in the third quarter, CapEx peaks. Could you just remind us, we should then expect it to trend back to the longer term, what is the longer-term intensity? Thank you.
Yeah. We expect this year to be between 3% and 3.25%. Given the guidance that we've given, that would put it just under 10% of sales for the year. The CapEx as a percent of sales was down sharply last year to 9%. We thought it'd continue to go down, but as we said, we brought some of the spend for Farmers Branch in, so we're just a little bit higher than we expected. We expect CapEx as a percent of sales to resume a downward trend next year.
Thank you. Our next question comes from Vivek Arya with Bank of America Merrill Lynch.
Thanks for taking my question. First question on gross margins. You're at about 50% or so right now. How much more headroom is there? What are the drivers? I think you mentioned you still have some headwinds from SAW, how much is that? When can it disappear? Just the trajectory of gross margins over the next four to six quarters.
Yeah. We're not going to give guidance on gross margin, Vivek, beyond the current quarter and the next quarter, since we've given half year. What I can say is, again, we're focused on investing in the right technologies and developing the right portfolio. We've talked about that at length, large markets, fast-growing markets, hard-to-do products. Secondly, we're maintaining utilization of the fab, selective investments, driving down capital intensity. Then third, we're just operating better, and with greater discipline and driving continuous improvement. Yeah, the lift in margin sequentially, second quarter to third, it's up about 230 basis points. About half of that, well, a little over half of that is continued product and customer mix.
The remainder is net lower cost, so factory productivity, lower inventory charges, and partially offset by some price, and also the adverse effects actually, sequentially, the effects of the SAW underutilization are actually less in the third quarter than they are in the second, on a % basis and an absolute dollar basis.
Got it. For my follow-up, maybe one for Bob. Bob, I understand you don't want to be specific about customers, but if you look back, typically, when are decisions made around what content you will have at your various large customers? Because that does tend to swing a lot from year-to-year. Just give us a sense for at what point in the year, I assume it varies by customer, but at what point in the year would you have good visibility on how next year would shape up? Thank you.
Yeah. Hi, Vivek, this is Eric. I think based on our past experience for flagship OEMs or leading OEM phone designs, we would typically see down select decisions six to nine months prior to phone production.
Thank you. Our next question comes from Timothy Arcuri with UBS.
Thank you. I had two. First of all, Mark, I think you said that you thought that half of Mobile Products in the third calendar quarter would be China. Did that come in as about half? What are you baking in for the mix in December? I had a follow-up. Thanks.
Yeah, Tim, I don't believe we've given details on the mix within business in a quarter. What I can tell you is we had two 10% customers, one of which was a large China-based OEM. You know our largest customers, though.
Sure. Of course. I guess, I had a question whether you thought that Mobile Products outside of your biggest customer, do you think that the other Mobile Products revenue, was it up, down, or flat in September? What are you assuming for it in December? Seems like it's probably gonna be down.
No,
We're not gonna forecast by customer
Yeah, we're not
mix and sorry, we're not gonna go there, Tim. I understand the nature of your question and why you're asking, We're not gonna give you that granularity at this time.
Thank you. Our next question comes from Toshiya Hari with Goldman Sachs.
Hey, great. Thanks a lot for taking the question. Mark, you talked about CapEx and capital intensity potentially reverting lower next fiscal year and beyond. Given that backdrop, how should we think about cash usage going forward? If you can comment on M&A and shareholder return, that'd be great. On shareholder returns specifically, have you guys debated a dividend internally at all? Thanks.
Yeah, Toshiya, no dividend at this time. We do forecast strong free cash flow generation going forward. We certainly have the balance sheet capacity and cash flow outlook to grow the business, including inorganically and return cash to shareholders, which now is done through share repurchase. We did buy, as I mentioned, $87 million in the quarter. Outside the ASR, I believe that's the third highest quarter of repurchase we've done. We've done about $187 million in the last six months, so higher than the free cash flow generated over that period. We've returned more than all of our free cash flow to shareholders.
Got it. As a follow-up, one for Bob. Just given the trade tension between the U.S. and China, have you sensed any change in posture or operations among your Chinese customers in the form of pull-ins or projects being delayed or anything of that sort? Thank you.
Let me start with a little broader comment that we've assessed the impact on us from the different sets of tariffs that have been imposed by the U.S. and China, what's been imposed so far, so far all that's been immaterial on our business. James mentioned we've got a couple in the retail space, non-handset, that have been looking to move their supply chains. As far as China-based handset customers, no, we've seen no change in their buying behaviors, patterns, what they're doing for their supply chains, et cetera.
Thank you. Our next question comes from Cody Acree with Loop Capital.
Thanks. Two more questions. Bob, maybe following on to that last question. To what extent are you factoring in or looking at a risk-based scenario of the broader market slowdown that we've seen echoed by many of the analog companies on a very broad base to that working in and maybe eating into some of the secular growth drivers?
Let me start with Cody. I think as James has already pointed out, we think we've started to see some of that in his business. We've got some strength in some areas. The growth in 5G is offsetting some of the weakness that we're seeing as infrastructure business is strong, and yes, we've seen some in the retail area. As far as our mobile business goes, we've modeled for the whole year, we didn't expect the handset industry to grow. We didn't expect the handset industry or consumption of handsets in China to grow either this year. It's been primarily around content. A lot of that thinking that now some people are seeing, we took a conservative view from the macro perspective earlier in the year.
Just lastly, in your mobile business, the RF Fusion, RF Flex integrated products, can you maybe give us some color on percentage of your mix and how those integrated products been growing and maybe what your expectations are for the midterm on that as a percentage of revenue?
Sure. Today, the vast majority of our business into the China ecosystem, if you will, is the RF Flex parts, which are not as integrated. I think virtually all of our customers are now either in production or will be in production with a phase 6 type of phone to test the benefits of the integration performance and so forth. Today it's relatively small, less than 10% of our sales into the China ecosystem. We expect it to grow significantly next year, as you can imagine, based on the traction we're seeing now.
Thank you. Our next question comes from Krysten Sciacca with Nomura Instinet.
Good evening. Thanks for taking my question, and congrats on the great results. As many of us know, a few of the marquee phone launches this year were a bit delayed or launched later than usual. Can you maybe just talk in a very general, broad sense what you're seeing in terms of seasonality for this year for the December and March quarters versus what you've seen historically?
Krysten. I appreciate the question and understand why many investors might want to know that answer, but like I've said on prior calls, we're not going to comment on how future customer programs are running and things like that. I think we've given you guys enough color on at least the entire industry of our business with the guidance that we provided for this quarter, Mark's opening comments about what we expect to grow for the year, and I think that's really enough information that's needed at this time.
Okay, thanks. For my follow-up, in the prepared remarks, you'd mentioned that for 5G, some of the prior 4G content will need a redesign. I was just wondering if you may maybe delve into that a little bit more and maybe discuss how much increase in content for 4G that will lead to for 5G handsets.
Sure. Yeah, Krysten, this is Eric. I'll be happy to speak to that. We talked about this a bit at our Analyst Day as well. We've learned a lot since then, of course. We do see some brand-new bands coming into the handset. A lot of activity right now around 3.5 gigahertz bands and 4.9 gigahertz bands, which will be dedicated 5G bands. That's all new content. When you put those in and you also look at taking the 4G in the phone fully up to LTE Advanced Pro, that's going to be important for any 5G handset, because when it isn't in range of a 5G base station, you're still going to want to have some sort of competitive throughput. You'll see virtually all 5G phones have LTE Advanced Pro as a baseline.
There you've got full 4x4 MIMO, 256 QAM, high power amplifiers, and so forth. We see 5G handsets having significantly more 4G content. That's why in total in CY 2020, we think the effect of 5G on the RF TAM for us is about $1 billion.
Thank you. Our next question comes from Srini Pajjuri with Macquarie.
Thank you. Eric, just to follow up on the previous questions, some of the U.S. carriers are talking about rolling out 5G on lower frequency bands. I guess T-Mobile is talking about 600 MHz and Sprint 2.5 GHz. I'm just curious, in that case, do you still expect incremental content, whether it's 5G or 4G, given that these are lower frequency bands?
Yeah, it's a very good question. Yes, we do, although the effect is not as great, of course, in those bands as when you add completely new bands. When you run the 5G modulation through that, it does affect what power amplifying, switching, filtering, and everything around those bands. Of course, it gets harder. It never gets easier when you're pushing more data through a phone in any band. We do see some impact from those bands as well.
Great. For my follow-up, Mark, I know you don't want to talk about customer-specific demand, if I look at your March quarter implied guidance for fiscal 2019, I think you seem to be implying about down 10%, which is much better than the last two years. I'm just curious as to what's driving that better-than-seasonal guidance for the March quarter.
Yeah, I'll let Eric answer that since it's a mobile-specific driver.
I think we've talked about opportunities with Samsung in particular, where we have much greater content. We've talked for some time now about new opportunities with Samsung's phones, both this fall with ultra-high band, as we've now discussed, and then a big step up in the spring launch with a much higher integrated platform there. That's going to be a bit of a tailwind for us in March.
Thank you. Our next question comes from Karl Ackerman with Cowen and Company.
Hi, good afternoon, gentlemen. If I may, I'd just like to go back to the last question. I was curious whether your content uplift in March is exclusively focused on mid-range models or tied more to flagships, because I think your prior guide was dependent upon ramping on a particular model at that key customer in the March quarter. I had a follow-up, please.
I forgot exactly the way you phrased it, but if you're asking about the less than seasonal decline or the offset to seasonality maybe, it's a mix.
Right.
Probably the biggest driver is flagship content, also a continued just migration towards more Phase 6 phones with our China customers, too.
Understood. I guess despite all the near-term consternation on automotive, it would seem your IDP business tied to automotive continues to scale very well with two notable design wins in the quarter. It would seem this business should continue to grow above the segment average. I was hoping you could just talk about the content opportunity you see within your automotive business over the next 12 months and really just how large you see that revenue opportunity for you over the next 12 months as well. Thank you.
This is James. We are seeing significant traction with our focus on AEC-qualified parts, particularly Wi-Fi, satellite radio, and the V2X systems that Bob talked about in his remarks.
Our Cat 4 and Cat 6 products are shipping into car models early next year, I think that's when we'll start to see the first really material revenue. Cat 16 products will support 2022 models. We're still in a pretty long design cycle for the automotive business.
Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley.
Yes. A question on 5G infrastructure, just given that's probably one of the stronger parts of the market right now. Can you talk about kind of your visibility into that market and how you kind of see it shaping up as you go through 2019?
Any specific what you're talking about, market in general, or? I guess I wanted to clarify.
Yeah. For 5G infrastructure, the inflection that you're seeing now, just kind of how you're seeing that trajectory into 2019 and the type of visibility you're getting for customers into that as of right now.
I think we are definitely seeing the ramp beginning now. We're anticipating that to be strong for the next several years, very similar to what we saw in the 4G rollouts that we had several years back. Sustainable, it looks well-behaved from our perspective as far as number of base stations that are going to get rolled out. What's different for us this time than 4G rollouts early on is a content story. Because of the massive MIMO that I talked about earlier, that drives significant content increase for Qorvo, and because of our GaN capabilities, we're now able to supply the power amplifier slot, which we weren't in the 4G rollouts back a few years ago.
Again, I think it's normal ramp, what we saw back three or four years ago, and I think we'll be able to play in a much larger role because of MIMO and GaN.
Got it. Just a follow-up question for Eric. I appreciate the comments on how you're seeing the China handset market. For Qorvo specifically, you mentioned another 10% customer. Can you just talk about how you're feeling just from kind of a market share perspective and what type of momentum you're seeing in China?
The second 10% customer has been a great customer for us this year. We've been building business through content gains and getting a higher presence on their platforms, both their flagship platforms as well as their mass-tier platforms. That's been a great story for us this year. Of course, we're overall the leading supplier of RF to all the other big suppliers in China as well. Overall, it's been just a great year for us in China and a lot of excitement again about the new technologies we're working on together for next year.
Thank you. At this time, I would like to turn the conference back over to management for closing remarks.
We want to thank everyone for joining us on tonight's call. We hope to see you at upcoming investor meetings. We look forward to speaking with you on our third quarter call. Thank you again. Have a good night.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect.