Good day, welcome to the Qorvo, Inc. fourth quarter 2018 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. Sir, please go ahead.
Thanks very much, Chelsea. Hello, everybody, 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, 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, James Klein, President of Qorvo's Infrastructure and Defense Products Group, as well as other members of Qorvo's management team. With that, I'll hand the call over to Bob.
Thanks, Doug, welcome everyone. The Qorvo team delivered a strong March quarter, with revenue and EPS above the midpoint of our range 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 am 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 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 market's 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 six architectures that include Qorvo's SAW and BAW technologies. Our phase six RF Fusion solutions include both mid/high-band and low-band modules, which provide complete front-end coverage in two placements. In many cases, we are adding to our phase six 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 are addressing the most complex customer requirements in the RF segments which are forecasted to grow the fastest, including ultra-high-band placements, integrated mid and high-band placements, antennaplexers, antenna tuning, and diversity receive modules. We are investing in the highest growth segments and winning across products and customers. We are forecasting significant growth in BAW-based products across customers, and our BAW factory utilization looks strong as we move into fiscal year 2019. Layering 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 of 26% year-over-year to $212 million.
We successfully repositioned our product portfolio more than two years ago. We continue to be pleased with the results. IDP competes in diversified growth markets. We partner with the best in the business. We win with differentiated products and technologies. In defense, 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 a production ramp of our multi-protocol SoC for Samsung's remote controls. In infrastructure, the timeline for 5G deployment has accelerated. 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. 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. Qorvo is targeting the most complex and most valuable solutions, especially those that require BAW-based content. In both mobile and IDP, Qorvo is 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 solutions are enabling customers to achieve higher levels of performance and helping to transform the end-user experience. We're targeting our market's fastest-growing and most profitable opportunities, and we're gaining design wins across our customer base. We are poised to benefit from the strong secular trends in Gigabit LTE, 5G, IoT, and GaN, and we believe we are 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.
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 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 to $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. 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. Diluted EPS of $0.75 at the midpoint of our guidance.
On revenue, we expect IDP to post another solid quarter of solid year-over-year growth in the June quarter, but declined 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 four 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-$800 million in fiscal year 2019. 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 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.
Thank you, sir. If you would like to ask a question, please signal by pressing star one 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. Again, press star one to ask a question, and as a reminder, please limit yourself to one question and one follow-up. Our first question will come from Harsh Kumar with Piper Jaffray.
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?
Yeah, sure, Harsh. I'll take a very high-level view of that. We don't really enjoy getting into customer mix. As I said in my opening comments, the China market did start to come back, 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. I think we went into the quarter with some pretty healthy being low inventory, and that's kind of what the uptake was. 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. 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.
Fair enough. 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 is not going to ramp in the June quarter. Would you give us a sense of timing when BAW will ramp? Also you gave some numbers first half, and 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.
Yeah. 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, as well as GaN, continued growth in IDP. You're seeing that transition play out. 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 cost of the underutilization of our SAW capacity. Because it's a relatively low revenue quarter for the year, those period costs impact us the greatest.
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 can be as low as under 1% later in the year. As far as the year margin guidance, we do expect to come up off this 44% gross margin in the June quarter quickly. The September quarter will return to more normal levels, which I would say would be 47%, 48%. In the back half of the year, as I mentioned in my comments, 50% or more. That should give you the profile for the year.
All right. Thank you. Our next question comes from Blayne Curtis with Barclays.
Hey, guys. Thanks for taking my question. Maybe you can just talk about this BAW ramp in terms of your visibility. Obviously, it's harder to manufacture tens of thousands or millions of units. I know that the issues two years ago with the low-band power, I'm just kind of curious your visibility and your ability to manufacture these BAWs. Is there anything left on your side that you still need to accomplish before the ramp in the second half?
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 feel real good about that. 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. That actually was extremely successful this past year, past fiscal year 2018, as we ramped many products for many customers at extremely high volume. 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.
Thanks for that. Maybe if I 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? Maybe if you could just talk about how long that should, you said it comes down the second half. Is it a couple of quarters, then comes back down?
Yeah. I'll make a high-level comment, Blayne. If you really look at 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.
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 volume and still at the prototype stage, to fine-tune the process and ensure that we're clean for the launch.
I would just add that, Blayne, as I mentioned in my comments, OpEx can be seasonal depending on various activities. 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.
Blayne, this is James. Some of that 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. Part of that increase is ours.
All right. Thank you. Our next question comes from Chris Caso with Raymond James.
Yes, thank you. Good afternoon. Just a follow-up question on SAW. It sounds like what you're talking about is once the revenue ramps, that's kind of on the area of 100 basis point, 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 of SAW on margins?
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. 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 six where you're seeing combined SAW and BAW. We think we need the capability long term.
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? 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?
Yeah. We've had a great story the past year and a half on free cash flow. Our CapEx, as a % of sales, a couple of years ago peaked at close to 20%. This past fiscal year that we just closed out, we were under 10% of sales. On a dollar basis, we expect 2019 to be at about those levels or less. In addition to just improving operating cash flow, this CapEx trend has certainly bolstered free cash flow growth. In the past three quarters, we've generated 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. We are absolutely committed to continuing this.
We do believe the capital intensity of the business is something we can continue to drive down. 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 to eight, to die shrink programs, which a number of those are still underway, of which BAW die shrink is an important program which we'll hear more about at Investor Day. Just this aggressive portfolio management which we're undertaking, which we talked about SAW capacity earlier. I see some runway left in getting our CapEx as a % of sales down over time. Of course, with revenue growth and expanding margins, see the operating cash flow improving.
All right. Thank you. Our next question comes from Toshiya Hari with Goldman Sachs.
Great. Thanks so much. I wanted to ask about IDP. Very nice growth acceleration in the quarter. Curious what drove that in Q4. Related to IDP, you talked about ZTE in your guide. If you could quantify that would be helpful. 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.
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'll 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 big as. Go ahead, James.
Yeah. For Huawei, they are one of our top five customers, and of course, we'll just see how that goes. 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 those issues will be worked out with the U.S. government or the natural demand will shift to the other OEMs. We're well-positioned really across that whole OEM structure. 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 advantage filters and 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. The recent product releases we have are really laying the foundation for 802.11ax, allowing for high throughput and thermal efficiency that's going to be needed for that kind of traffic level. Great, tremendous activity out of our Wi-Fi group. We also grew our low-power wireless business to record revenue, that was a second growth driver. Defense has been particularly strong really across all major sub-markets, radar, EW, comms, and reaching a broad set of customers. As an example, our revenue through the distribution was also 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.
With the recent passing of the defense spending bill with over a 17% increase in spending, we think that gives us a very nice tailwind. Broad-based really over three key markets.
Okay, great. As a follow-up, I had a question on BAW. You guys reiterated your fiscal 2021 target, 50% of mobile. 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.
Yeah. For BAW-enabled revenue to China, we were under 25% in fiscal year 2018, kind of mid 22%, 23%. In fiscal year 2019, we expect about 30%. As Bob mentioned, about half the mobile business in fiscal year 2021 will be BAW-enabled.
All right. Thank you. Our next question will come from Craig Hettenbach with Morgan Stanley.
Yes, thank you. I had a question on the China smartphone market. You talked about kind of that market's been leaned out and is starting to recover. Also looks like perhaps some company specific strength. 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?
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 careful with inventory so that when the growth began to come back, we would see it immediately. I think it probably came back a little sooner than we expected. In addition to that, with the very tight inventory controls that we have as well as our largest customers, we actually grew sequentially in the March quarter, as it turned out, with China. See a lot of that strength continuing on into this quarter. 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 two and phase three components. We see throughout this year a continued transition towards the higher levels of integration and performance going up into three, five phases, and we're beginning already to get production orders for our phase six system. Phase six does an awful lot. It's a big step up, a much higher level of integration, higher band coverage, higher output power capability, MIMO. So forth. 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 at our front end. 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.
Got it. If I could have a follow-up from 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?
Yeah. Nothing unusual in inventory, Craig. 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. 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.
All right, thank you. Our next question comes from Bill Peterson with J.P. Morgan.
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. 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, how should we think about the overall yearly impact? Thank you.
Hey, Bill, this is Bob. I want to make sure we understood the question because I think James is going to be down $10+ million quarter-over-quarter. I know you threw out $20 million, I want to make sure we're addressing the right part, that's roughly what it is.
The $20 million is to get to the guidance for Mobile Products actually increases year-over-year. Yeah.
Yeah, we're not guiding individual segments, the ZTE will definitely come out in the kind of levels Bob talked about in quarter-over-quarter. We had a very good Q4 as well, you see a little bit of leveling between a 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, we talk about those six markets. We'll talk about more of those when we get into New York. We've got great tailwinds in trends like the adoption of GaN, the move to 5G, what we see growing on in the IoT space. We model those markets to still grow in that 10%-15% range, and we expect to do at or better than those underlying markets.
I just want to make sure, take care of some housekeeping here. On ZTE, it does affect our revenue. It isn't included in our guidance in the June quarter. We've also considered it for the full year, no more ZTE effect beyond what you see in the current guide. It also impacted slightly the margin in this June guide. We do adopt the ASC 606 revenue standard starting in this first quarter. For us, not a material effect, no concerns there. We're already at sell-in
Versus sell out, for us, that was not an issue. Customer-owned inventory, we have some issues in the company, it's very manageable and again, not material to our business.
Okay. Actually, my second question is also for James. The GaN business obviously looks like it's been going well, 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.
Yeah. It's more than just the infrastructure side, Bill. When we look at GaN, it's into multiple products. 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, 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. Go ahead, James.
Yeah, 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, in some cases, even stealing shamelessly from Mobile to really drive our packaging cost down. 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. One of those established a record level of output power. We think that's very material in some of our defense space. We also released first to market with the FEM and the other really key millimeter wave band for 5G at 28 gigahertz.
In general, I think we see GaN business continue to grow. We model the market to grow at about 25%, and I think we'll continue to pace that same kind of growth level with GaN.
All right. Thank you. Our next question comes from Vivek Arya with 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? I think that's sort of what tripped up the industry in this last generation. I'm just curious what kind of assumptions you're making on the kind of mix that you might see.
Yeah. Vivek, I'm making the assumption that what I've said in the past will hold true today. We will not speak about any upcoming phones that have not been announced, have not been in the market. 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.
All right. Thank you. Our next question will come from Karl Ackerman with Cowen.
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. I guess maybe as a 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?
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. I'm not sure what you mean. 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. I'm not sure if that addresses your question or not.
It's 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 just launched a 5G base station 28 GHz module, particularly whether you expect to see revenue in calendar 2019. Thank you.
We've experienced revenue already in what we would call the last mile applications. We do expect to continue to have that. These are largely demo programs that are getting rolled out into major city areas around the country. 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 GHz 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.
All right. Thank you. Our next question comes from Ambrish with Bank of Montreal.
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.
Your free cash flow comes down just a touch, if I got it correct, between $700-$800 versus $800 million that you had given before.
Yeah, Ambrish. What I'd say before our target that I stated before was 800, and that very much remains 800. I mean, hell, I'm going to be going for over 800. I'm giving you a guide for the year. It's difficult sometimes to predict when we're going to need CapEx spend or to Craig's earlier comment on working capital management. There is a risk factor applied to my guide there.
Okay. From my margin question, I just wanted to make sure I understood the margin ramp-up in the back half. I get the underutilization charge, and that will reverse. The half of the impact from the 400 basis points this quarter or in the guided two quarter is from product mix. How does that get corrected by itself? Is it mostly in Mobile, or is it in IDP? How does that transition through the year? Thank you.
Sure.
Yeah, Ambrish, just to clarify, you're right, half is cost associated with utilization, half is associated with the mix. On the mix, 200 basis points, about 50 basis points of that is truly Mobile versus IDP mix within Qorvo, just more Mobile business. About 100 basis points is mix within Mobile. A higher volume of legacy products relative to advanced or newer products. 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. The other 50 basis points is just some other smaller factors, including a little bit of IDP mix and including the ZTE effect, which we talked about earlier.
All right. Thank you. Our next question comes from Edward Snyder with Charter Equity Research.
Thanks a lot. Let's start off with Eric. It sounds like you've landed quite a bit of content in phase six platform. Can you give us an idea of generally where that goes for the base case? I know the base case may be a super PAD, then you've talked about upside cases. We include envelope tracking, tuning, maybe antennaplexers. Just in general, are we talking like the base case, $1-$2 in total content going to 8-10, or just help us quantify maybe what that is? 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. 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. 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? Then I have a follow-up with Mark, please.
Sure, there. 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. There's also a broad range of different applications in different dollar content implications. As I mentioned, we've got MIMO implemented, power cost to 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. Then we have some applications which are actually looking to bring UHB in as well. There's a broad range of ASPs, but significantly higher dollar content over what's shipping in the market today.
Ed, to your question about the supply chain from Cree, we actually have multiple supply chains to support James's business. Cree is, as you pointed out, one of them. I think we have an excellent relationship with them. They made it clear to us they will continue to support us. It's our expectations we will continue to have multiple supply chains to support James's business.
Okay. Mark, if I could, question kind of on CapEx. I know it's going down again here too, but if you look at your mix coming up here between the phase six wins, which has got a lot of BAW associated with it, of course, the super PAD is your largest customer, and you've got the quadplexers now shipping into China with the new phones there. 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? Can you just remind us where you are on that? Is it qualified? Is it production ready, or are you guys still working on it?
If I could, I don't know if Steve Grant's 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 to your largest customer, using just six-inch instead of having to move to eight? If you have to move to eight, what kind of risk are you looking at in terms of yields? Do you feel comfortable with it as something you've been in high volume production before? Thanks, guys.
As far as the ramping on six 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. We're very confident in our yields, what they've been running on six-inch as well as on eight-inch. 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. Ed, we're up and running on eight inch, and we've talked about that in the past. Mark?
Yeah, Ed. We're still obviously trying to do everything we can to avoid additional CapEx dollars. The CapEx dollars we are spending are majority BAW, and that's despite efforts to convert more six to eight, die shrink programs will help. Farmers Branch is not going to be needed this year. We'd be able to get it ready to go. Certainly, the yields and what's being produced there in test is very good. We're ready, and we'll turn it on when it's needed, maybe as early as next year.
All right. Thank you. Our next question will come from Krysten with the Nomura Instinet.
Hi. Good afternoon. Thanks for taking my question. First one's just a housekeeping question. Were there any 10% plus customers for the quarter, and approximately what percentage of revenues were they?
Yeah, Krysten, one 10% customer.
Okay, thanks. 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?
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.
All right. Thank you. Our next question comes from Atif Malik with Citi.
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? Then I'll follow up.
By second quarter, I'm assuming you mean second calendar, the June quarter. Yeah. Just to remind folks, we've got two factors occurring. One is mix-related issues, and the other is, Atif, as you point out, that 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 where when we experience abnormal levels of utilization, the fixed cost cannot be allocated to each unit of production, so they need to pass through as period costs. 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 revenue. On a percent basis, of course, it has the largest effect.
Got it. Then a follow-up for Eric. Eric, if I look at the teardown of a phone that's already out, Galaxy S9, there is a combination of mid and high band PAD in that phone. Architecturally, the Korean handset maker not too far behind the U.S. handset maker. 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.
Yeah. Thank you. That's a great question, 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 from mid and high frequencies and allow you to very elegantly and at low loss support carrier aggregation combinations across all of that, they really help customers get to market with the leading-edge handsets, that's applying widely to many customers in many segments. Really, when you look at our phase six solution, that's exactly what that is as well. You've got a low-band module meeting a mid and high integrated module that solves all that complexity. 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.
All right. Thank you. Our next question will come from Quinn Bolton with Needham & Company.
Hey, guys. Two questions. One, Mark, if I heard you right, I think you said you're looking for 9%-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?
I'll just say generally, Quinn, we're experiencing good design win momentum across our customer base. Many of the things Eric talked about, phase six is a good example. We've seen our strength in China improve even further. Of course, James' business, a small sequential decline in the June quarter, but still year-over-year growth, that growth picks back up again to double digits in the rest of the year.
Got it. It's my follow-up for Eric. It sounds like BAW-based products are 22% or 23% of your business in fiscal 2018, expected 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 six products ramping, you'd have a heck of a lot more than $200 million of growth. Can you help me reconcile that?
Sorry, I'm not sure I understand all the questions. We've given you a lot of data out there, 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 I also mentioned the last call, we weren't participating in some high-volume products that you saw, which is why we've got a fab utilization problem. I'm not going to get into modeling every bit of Eric's business. I'm sorry, can't help you with that one.
Thank you. Our next question comes from David Wong with Wells Fargo.
Thanks very much. If I'm correct, your 9%-10% fiscal 2019 growth suggests that in the second half of this calendar year, your Mobile Products should grow year-over-year. If that's right, can you give us some idea of how that is split between content growth and unit growth?
Yeah, David, just a clarification. Mobile returns to year-over-year growth actually in the June quarter. That's noteworthy. We maybe should have mentioned that earlier, so thank you for the question. As far as the content growth, we are experiencing content growth.
Yeah
I'll leave it to Eric to go into any details.
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 of 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.
Okay, great. In IDP, if one backs out all the ZTE effects, would you actually expect to continue to see 20-plus % growth through fiscal 2019 in IDP?
Well, as I said earlier, we model those underlying markets 10%-15%. I expect we'll do that or better than that. Still very bullish about the business. Mark mentioned earlier design wins. We had fantastic design win last year. We were actually up 20 some odd % year-over-year. I think business is strong, but right now we're modeling it 10%-15%.
Great. Thanks very much.
Thanks, David.
All right. Thank you. Our next question comes from Timothy Arcuri with UBS.
Thank you. Mark, I'm still trying to figure out the mix of the Mobile Products 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.
No, I'm not going to give you percentages on our largest customer other than they're a 10% customer. As I mentioned for the June quarter, we talked about the March quarter and strengthening in China, which was stronger than expected. We're seeing that continue into the June quarter. Furthermore, we just have this sort of transition period, whereby we've got more legacy products and 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.
Got it. Okay. 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. 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.
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. You'll have to ask them what they're doing with their subcontractors. I'm sorry, we're not able to answer that anymore.
That concludes the Q&A portion of today's call. I would now like to turn the conference back over to management for any closing remarks.
Thank you very much for joining us tonight. We believe we are better positioned than ever to capture our market's 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. We hope to see you at our Institutional Investor Day in New York on May 23rd. Thanks again, and good night.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.