Good day, everyone, and welcome to the Qorvo, Inc. Q3 2018 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Doug DeLieto, Vice President of Investor Relations. Please go ahead, sir.
Thanks very much, Rebecca. Hello, everyone, and welcome to Qorvo's third quarter fiscal 2018 earnings conference call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in the earnings release published today, as well as the risk factors associated with our business in our annual report on Form 10-K filed with the SEC because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or other items that may obscure trends in our underlying performance.
During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today, available on our website, qorvo.com, under Investors. In fairness to all listeners, we ask that each participant please limit themselves to one question and a follow-up. Sitting with me today are Bob Bruggeworth, President and CEO, Mark Murphy, Chief Financial Officer, Eric Creviston, President of Qorvo's Mobile Products Group, and James Klein, President of Qorvo's Infrastructure and Defense Products Group, as well as other members of Qorvo's management team. With that, I'll hand the call over to Bob.
Thank you, Doug. Qorvo delivered an exceptional December quarter, with revenue and EPS exceeding our guidance range. In Infrastructure and Defense, quarterly revenue grew 20% year-over-year to a record $203 million, led by strength in defense, IoT, and GaN. In Mobile Products, revenue increased sequentially to $642 million, led by a very strong ramp in support of our largest customer. The December quarter played out largely as expected. IDP's business continued to strengthen, while smartphone ramps were consistent with our expectations. Beginning late in the quarter, demand trends in mobile deteriorated at our largest customer and also in China. This weakness is impacting our near-term expectations and is reflected in our guidance for the March quarter. As we look forward, we expect continued robust growth in IDP in 2018.
In mobile, we're gearing up for an aggressive ramp of a custom mid-high band PAD in the second half of calendar year. This is the most valuable and highly integrated placement in mobile RF, representing what we call the integration hub in the main path of the RF system. This is a significant customer validation of our BAW technology and multiplexing expertise. Coupled with gains in antenna tuning and envelope tracking, we expect this to drive another generation of year-over-year growth at this top customer. Across the mobile landscape, leading phone manufacturers and baseband suppliers are adopting more highly integrated mid-high band architectures. This is increasing the customer demand for high-order, BAW-based multiplexing from industry leaders like Qorvo, and we are migrating a greater percentage of our design resources to higher-value, BAW-based RF solutions.
To that end, we've sampled a custom mid-high band PAD to another tier 1 smartphone customer for a 2019 platform. In addition to these engagements with marquee customers, we've commenced production of our next-generation RF Fusion portfolio for Phase 6 architectures, including both mid-high band and low-band integrated PAD modules. This solution supports all major cellular frequency bands and more efficiently enables key regional carrier aggregation combinations. In both premium and performance tier smartphones, Mobile Products is targeting the most valuable opportunities with the highest barriers to entry. Premium filters clearly fit within this category, as do antenna tuners, envelope trackers, antennaplexers, and our integrated mid-high and low mid-high solutions featuring our BAW filters. In China, mobile operators are requiring improved data throughput across a larger percentage of smartphones this year.
China Unicom and China Telecom recently mandated band 1 and band 3 downlink carrier aggregation in handsets above RMB 1,500 for the mass market. For higher tier handsets, those greater than RMB 3,000, China Mobile recently mandated band 40 and band 41 downlink carrier aggregation. Phones with these features are expected to be available as early as the middle of calendar year. Supporting our long-term outlook, we see a broad slate of new applications emerging in cellular IoT, which can support billions of incremental units. Qorvo recently announced the co-development of the industry's smallest low-power system in a package module with Nordic Semiconductor for global LTE-M and narrowband IoT applications. This opportunity includes the PA, switch, controller die, as well as module design and manufacturing, including our proprietary integrated RF shielding.
We now expect the first 5G smartphones will launch as early as the first half of calendar 2019. 5G will enable new use cases by expanding data throughput, reducing latency to near zero, and enabling massive machine-to-machine connectivity. 5G will require more complex and more valuable RF solutions than 4G, continuing the ongoing expansion of the RF TAM. Qorvo is uniquely positioned to accelerate the transition to 5G. We offer the industry's broadest portfolio of RF products, and we introduced the industry's first 5G RF front end nearly a year ago. We're helping define 5G standards as a delegate to 3GPP, and we're collaborating closely with the leading wireless infrastructure manufacturers, network operators, chipset providers, and smartphone manufacturers on their 5G programs. We are extremely pleased with what the Mobile Products team has done to deliver the industry's most valuable mid-high RF placement.
We validated our ability to capture the industry's most attractive RF placements, and we have line of sight to expanding content on marquee smartphones. Turning now to IDP. We're enjoying broad-based growth supported by the Internet of Things, the evolution of the wireless ecosystem, the deployment of GaN, the emergence of 5G, and other secular macro trends. These are long-term trends capable of supporting continued above-market growth. In fact, our design wins this quarter were up over 40% compared to the same quarter last year. In the connected car, IDP is supplying the front-end module for Qualcomm's cellular vehicle to everything reference design, delivering superior performance to support low latency transmission in the 5.9 GHz intelligent transportation system band. We also secured a major win with a tier 1 automotive supplier for a LTE network access device.
For the smart home, ecosystem are forming around voice assistants, and products that support multiple protocols are becoming the norm in the marketplace. Qorvo is the only company to support Thread, Zigbee 3.0, Zigbee RF4CE, and Zigbee Green Power in a single radio. We are advancing this trend by mating our multi-stack, multi-protocol system in a package with the HUMAX Chorus voice assistant. In defense, for both domestic and international markets, electronic warfare and missile defense have become top of mind in the industry. IDP participates heavily in both applications, and we're at the forefront of the technology shift to GaN-based phased array system architectures. Our GaN products and the Spatium high-power amplifier family continue to ramp. The focus on high-value sockets and technologies has resulted in greater than 50% year-over-year growth in our defense business.
In infrastructure, we're also helping the lead migration to GaN to improve the performance of LTE base stations and small cells. As LTE moves to higher frequencies above 2.5 GHz, the incumbent technology of silicon LDMOS is unable to achieve the level of performance required. GaN is becoming the technology of choice for transmit amplifiers at all major base station OEMs. In Wi-Fi CPE, the proliferation of distributed Wi-Fi networks coupled with the need for more bandwidth, is driving rapid growth in both consumer and enterprise solutions, and IDP is a primary beneficiary, winning on both performance and integration. Our broad portfolio of power amplifiers, front-end modules, switches, LNAs, and filters continue to win in 802.11ac sockets and positions us well for the 802.11ax wave coming this year.
Overall, IDP has delivered nine out of 10 sequential growth quarters since we repositioned our portfolio to target defense, base station, automotive, smart home, IoT, Wi-Fi, and optical markets. Our outlook for IDP is one of continued growth with an annualized revenue run rate quickly moving towards $1 billion. In both mobile and IDP, our deep technology moat and rich product offerings enable us to target the most attractive opportunities as measured by the technologies required, competitive environment, value creation, and other critical metrics. We're delivering best-in-class products that help customers achieve higher levels of performance, and we're targeting opportunities where we have a distinct advantage with both technology and scale. Calendar 2017 was an excellent year for IDP. In mobile, we made significant advances in the business in terms of technology, cost, and portfolio management.
As we look into calendar 2018, IDP is positioned for continued growth and margin expansion. Mobile is set to support the industry's most valuable RF solutions. With that, I'll turn the call over to Mark.
Thanks, Bob, and good afternoon, everyone. Qorvo's revenue for the third quarter was $845 million, exceeding the midpoint of our guidance by $5 million. Mobile revenue of $642 million was driven by product launches at our largest customer. IDP revenue of $203 million reflects continued strength in defense, including advanced radars and other electronic warfare products, and in connectivity, including Wi-Fi and emerging IoT applications. This was the seventh consecutive quarter of double-digit year-over-year growth in IDP. Non-GAAP gross margin in the December quarter was 48%, 50 basis points higher than our guidance, a sequential increase of 60 basis points, and a year-over-year increase of 370 basis points. We expect continued progress on gross margins as we optimize our product portfolio and drive additional operational improvements. Operating expenses were $151 million, or 17.9% of sales, down $7 million sequentially on ongoing productivity efforts and development program spend timing.
We're ahead of schedule with OpEx reductions. By no means are we letting up on our focus on getting more efficient. We have additional productivity initiatives underway to sharpen R&D spend and lower SG&A. Operating income for the quarter was $254 million, or 30.1% of sales, up 200 basis points sequentially and 480 basis points versus last year. Last year, we committed to achieving a quarter in fiscal year 2018 with an operating margin exceeding 30%. We delivered on that commitment in the December quarter. This is a particularly noteworthy accomplishment when you consider that mobile volumes and fab utilization have fallen short of our expectations this fiscal year. We're pleased that our broad-based efforts are yielding results and intend to continue our disciplined approach to controlling costs and improving margins. On net income, I will start with our GAAP results.
In the December quarter, a GAAP loss of $33 million was impacted by tax expense resulting from the enactment of the U.S. Tax Cuts and Jobs Act. Specifically, we incurred a $96 million net tax expense, which was largely the result of the immediate taxation of cumulative foreign earnings, and which was partially offset by revaluing net deferred tax liabilities on a lower U.S. tax rate. I encourage you to review our forthcoming 10-Q filing for the additional disclosure on taxes. Non-GAAP net income in the December quarter was $220 million, and non-GAAP diluted earnings per share was $1.69, or $0.09 over the midpoint of our guidance. December cash flow from operations increased to $270 million, helping drive record free cash flow of $225 million.
Capital expenditures decreased sequentially to near $45 million. We expect CapEx to end the full fiscal year below 10% of sales, down from 18% of sales last year. We are committed to a model of higher margins, lower capital intensity, and greater free cash flow. We are demonstrating clear progress towards those objectives. Cash at quarter end was $841 million. With recent tax legislation, we can more freely deploy cash for investments in growth and repurchasing shares. In the December quarter, we repurchased $80 million of stock. Turning to our outlook, in the fourth quarter of fiscal year 2018, we expect non-GAAP revenue between $645 million and $665 million, gross margin to be flat to up 50 basis points sequentially, and diluted EPS of $1.05 as the midpoint of our guidance.
We expect a quarter of over 20% year-over-year growth in IDP and project IDP to be over 30% of Qorvo's revenue in the March quarter. For mobile, this guidance reflects our current view on near-term demand for our customers' flagship models. In the March quarter, we expect gross margins to increase sequentially by up to 50 basis points, due primarily to reduced volumes of low-band PADs and an increased mix of our higher-margin IDP business. Operating expenses are forecast to increase slightly to approximately $153 million on development program spend and seasonal factors, including payroll taxes. Free cash flow is expected to be around $200 million. We expect our fourth quarter non-GAAP tax rate to remain below 8.5%. Based on our outlook and our current interpretation of recent U.S. tax law changes, we project our fiscal year 2019 non-GAAP tax rate to be 10% or lower.
Our efforts to leverage our technology position and improve the operating performance of our business are paying off. We expect to sustain this progress. In fiscal year 2019, we expect robust IDP growth to continue, supported by trends in defense, IoT, and GaN. As Bob mentioned, we are hitting key milestones to realign the mobile product portfolio from lower to higher margin products and securing design wins in the industry's most attractive segments. We expect to see significant benefits from these efforts starting in the second half of this calendar year. As our product mix and overall fab utilization improve, we expect gross margins to continue to expand. We project significant improvements in utilization at our BAW fab in Richardson, our GaAs fabs, and our China assembly and test factories.
This will be partially offset by lower utilization rates in our SAW fabs, as we migrate resources to bolster recent successes and future opportunities in BAW, and more selectively compete for SAW-based opportunities. With a more focused product portfolio, restructuring efforts taking full effect, and productivity remaining a priority, we also expect OpEx efficiency to improve further. We are on track to achieve the operating margin target we laid out at Investor Day last May of 33% by fiscal year 2020. With more profitable growth in mobile and robust growth in IDP, expanding operating margins, and lower levels of CapEx, we are targeting free cash flow of $800 million in fiscal year 2019. Wrapping up, in the third quarter, we posted another quarter above guidance and delivered strong operating leverage.
While our near-term revenue outlook has been impacted by weaker demand signals from our largest customer and from China, we see gross margins improving up to 50 basis points and strong free cash flow in the March quarter. In fiscal year 2019, we expect our premium mobile products and continued strength in defense, IoT, and GaN to support revenue growth, margin expansion, and greater free cash flow in fiscal year 2019. With that, I'll turn the call back over to the operator for questions.
Thank you. Ladies and gentlemen, the question-and-answer session will be conducted electronically. If you would like to ask a question today, you may do so by pressing star one on your telephone keypad. As a reminder, we ask that you please limit yourself to one question and a follow-up. Again, everyone, that is star one. Your first question will come from Kristen Sciacca with Nomura Instinet.
Congratulations on the quarter. Thanks for letting me ask the question. I just want to clarify one point in particular. For the SuperPAD, did you say that you're sampling at an additional marquee customer?
As far as mid-high-band PAD, as what's in one of the bullets in the press release as well, we did begin sampling another tier 1 customer as well.
Okay, thank you. For the ramp at your largest customer in the second half of calendar 2018, do you expect those content gains to be, let's say, more or less than what you saw in this past ramp?
This is Eric. I'll take that. We're currently projecting we'll have the largest actual generation-over-generation content increase we've seen, driven by many product categories. We see tuning continuing to increase, envelope tracking, as well as BAW-based product.
Great. Thank you.
Thanks, Kristen.
Next, we'll hear from Bill Peterson with J.P. Morgan.
This design win is a terrific result after a lot of effort. I guess the question is how should we really think about seasonality? I know it's difficult to provide out-quarter revenue guidance, but how should we think about seasonality beyond the March quarter with the second half in mind? Thank you.
Yeah, Bill, at this point, we're not going to give guidance beyond the March quarter. I don't think we can make any changes yet about seasonality because we haven't gotten customer demand signals yet. We're actually in our plan process at this moment. We'll provide more detail around both fiscal year 2019 and about seasonality during the May call.
Okay. Well, let me try a different angle. I guess you mentioned that you expect the China Telecom Unicom lowering the price points should increase carrier aggregation. You talk about the middle of the year. I guess how should we think about attach rates of this? If we consider ET, PAMiD, tuning, and ISMS in China, how should we think about your content growth opportunities in China, I guess specifically this year?
Yeah, this is Eric. I will take that as well. We look at the attach rate of the band 1/3 quadplexer to enable carrier aggregation going from about 15%, maybe 15%-20% as we exited CY 2017, up to about 50% attach rate based on the guidance of the carriers for any handset over RMB 1,500 to require the capability. That's a pretty significant step up and gets us back to where we were, frankly, in 2016 with the attach of that component. As we look forward, as you mentioned, ET is moving into that tier. We are seeing a lot of design work with our customers for our Phase 6 solution. We are the first to market with that solution and ramping into production now. Phase 6 does several things for our customers. It increases the integration level, which speeds their time to market.
It also reduces the size by at least 40%, and in most cases, about 50% of their current designs, and it increases the output power at the same time, enabling Power Class 2. We do all of that in fewer placements by integrating the vast majority, or in some cases, all of the filter content into our two-placement solution that does all of that for the front end. We see that integration factor and the Phase 6 opportunity for us as being a very key content driver for us throughout this year.
Okay, thanks.
From Raymond James, Chris Caso.
Yes, thank you. I guess, the first question with regard to gross margins and the impact of utilization. Given what you're expecting in China as well as the high mid PAD, where do you think you get the utilization exiting this year of the BAW facilities, and what impact does that have on the gross margins?
Are you talking this calendar year, Chris, or are you talking fiscal year?
For the calendar year.
Yeah. We're not going to give specific guidance on gross margin that far out. I'll make a few comments on gross margin. This will certainly help the Richardson fab in particular. I'll get to that in a moment. Our December quarter, we were up again 50 basis points. Excluding the hurricane effects in the September quarter, we've beat five out of our last five gross margin guides. If you look at our guides, the five previous, before five ago, we didn't do so well. We've certainly become more predictable, and that's a positive, allowing us to get more productivity, better visibility, and so forth. We've also had, obviously, steady progression on gross margin from what was a low in the second quarter of 2017 of 42.8%, to our current guide, which is 48%-48.5%.
We're really back at levels that we were back in fiscal year 2016. Again, undoubtedly, we're getting better at forecasting, and we're clearly getting better on improving the business since we're up 500 basis points from trough to the midpoint of the current guide. All this has been an environment of weak volume. It's been with a low margin, low-band PAD, and it's been, candidly, in a company that was still working its way through a transition. If we look where we've been, and we think about the progress that we've made, we have great confidence about the gross margin as we look out. Fabs are running exceptionally well. We've got capacity available that we're going to fill. The fabs are competitive and ready for business.
The technology investments we've made are allowing us to move into markets that are most attractive, and we're securing wins now. You've got a management team that's absolutely focused on gross margin and free cash flow and exhibiting the right behaviors. The market, of course, Chris, is going to dictate at the end, short-term utilization of the fabs. We do expect to, at least in a quarter, touch 50% in fiscal year 2019. That's certainly what we're working through as we're building our plan now, and I'm confident that we'll certainly be above 49% for the year average. That contemplates Richardson, our largest fab, moving up over 80% utilization in the next six months, as well as increased utilization in GaAs, as I mentioned in my comments, and over 80% utilization in our back-end operations.
The one headwind is what I mentioned during my prepared remarks about our SAW utilization going down. On average, fab utilization should be a positive effect going into 2019.
Okay. That's very helpful. My follow-up question was actually going to be on SAW, and if perhaps you could clarify some of those comments. It sounds like that with the success in BAW, there would be a less emphasis in SAW, and that's understandable given the margin structure there. As we get into the second half of the calendar year, should we expect SAW to actually be down year-over-year? Will there would be some shift from SAW to BAW because of some of these design engagements, or is that just sort of less emphasis from a design win perspective going forward?
Our current projection would indicate SAW will be down year-over-year in the second half. We're investing in a lot of key technologies in SAW, which will help enable many different products that are coming. Majority of those products, we're going to focus going forward on products that combine BAW with SAW to really make unique product offerings and leverage that asset further.
Got it. It's helpful. Thank you.
Thanks, Chris.
From Longbow Research, Mike Burton
Hey, guys. Thanks and congrats on the design wins. First, I guess something for Eric. Could you talk about the China market and maybe inventory levels? At the end of 2017, you guys had been a relative gainer as you got back on track at Huawei. What % of sales were the China OEMs, and how do you expect that to trend in Q1? Obviously down, but we saw MediaTek this morning guiding for shipments down about 30%. I'm wondering if you subscribe to that sort of level.
Yeah. We're doing our best to maintain tight control of the channel inventories. We're following the volumes as they come. You see that in our guide, essentially. To answer your question specifically, in the December quarter, the China guys were roughly 20% of our revenue, and that's of course lower than historically. Looking into March, we're consistent with our guide. We're following the directions and taking our judgment to the current plans and trying to make sure that first and foremost, we keep the channel tight, so that whenever the end market recovers, we'll see that demand immediately.
Okay. Maybe a two-parter for Mark. Just the low-band PAD trajectory, obviously, you've talked about it being down in Q1, and we've spoken in the past about being able to migrate to a new low-band PAD with insourced filters. When's the timing of that migration? Can you help us size kind of the margin impact for that? The second part is just the shape of CapEx and OpEx going forward. I'm just curious if you can help us understand that relative to the high-band PAD win, and also the potential for a new customer next year. Thanks.
Yeah. On low-band PAD, I think all I'll say on that is that we've continued to make improvements to the product. There have been some changes in the filters, slight filters required by the customer, and that's helped a bit. Mostly it's just improved manufacturing efficiencies and improvements in that product over time. It's still a net drag on the business. As it sort of pales off in the portfolio, there's a positive mix effect associated with that, and that helps us in the margin going forward. As far as the outlook on CapEx, we are making great strides in becoming less capital intensive. We are doing everything we can to leverage the foundry network where we can.
Where we have unique device requirements that require our own production, we're being very thoughtful about what we add and, of course, driving all the productivity programs you've heard before. That's helped us achieve this lower CapEx profile that we see going forward. This year, we'll be below 10% of sales CapEx. Next year, we think we'll probably be below 8% of sales on CapEx. One example is we're going to be able to increase our BAW capacity, 70% from current capacity to fiscal year 2020, at only about $80 million of spend. A lot of positive things there on CapEx, which of course, when you combine it with the growth we expect and the margin expansion, we see a very strong free cash flow story.
Again, we're in the midst of the planning process, Mike. I'm not going to give specific dollar guidance on OpEx. What I will say is Bob, in part, his productivity drive is really working the organization to become more efficient on OpEx. We've seen great progress this year, as evidenced by this quarter, actually, where we were at 17.9% of sales and really at a $600 million run rate number. Of course, I'm not forecasting that, what I will say that we're striving to build a plan that's certainly below 20% of sales on OpEx for fiscal year 2019.
Great. Thanks.
Next, we'll hear from Quinn Bolton with Needham and Company. Caller, your line may be muted.
I'm sorry. Can you hear me?
Yes.
Great. Thanks. Hi, guys. Congratulations on the nice December results. Wanted to ask a question on your comments about SAW utilization dropping in the second half of calendar 2018. Are we to read into that that your low-band PAD share is declining? I mean, is there a socket change going on the low-band PAD side that's behind that lower SAW utilization? I got a follow-up. Thanks.
Quinn, thanks for the question. I think it's best to say that our utilization is going down. Yes, there is some percentage in share shifts in the low-band PAD. I think what is important is that, as Eric's already mentioned and I commented in my script, that we're shifting our resources to what we believe is a more attractive profit pool. In the same time, we still see plenty of opportunities to utilize the technologies that we developed in SAW, where we can leverage both BAW and SAW.
I think that's the best way to answer that.
Great. Thanks, Bob. Just a question on Samsung. They tend to have a stronger March quarter. Obviously, you guys are guiding March down, reflecting your largest customer and what you're seeing in China. Just wondering if you could give us any sense as you look to the next marquee platform at your largest Korean customer, what do you see in terms of your content and that ramp as we look into March?
Yeah, this is Eric. I'll address that. I'll talk maybe Huawei at the same time. Throughout last year, we had gotten a little out of step with Samsung as well with Huawei. We began to turn the corner with Huawei in their fall flagship launch. I think that's clearly demonstrated now. We're also committing to increasing our content from each platform forward with Huawei, so we'll have greater content in their spring launch and even greater in next fall beyond that. We've begun to turn off Huawei, we've also been clear that we don't expect that to be the case with Samsung in this launch. The spring cycle for Samsung, we're not expecting any growth in content, not expecting much help there.
Second half of this year, both in the mass tier and in their second half flagship launch, we do expect to turn the corner and start to see meaningful change in share and particularly large opportunities for Samsung in their spring next year launch. We did mention we've sampled a second custom multi mid-high band PAD to another marquee customer as an example. I think James would love to talk about Samsung as well.
Yeah, I want to talk a little bit. Samsung's becoming a very strong customer for IDP, we mentioned in the press release how we've had a great design win with their remote controls. That's really with our Zigbee SoC, great win for the organization. On top of that, we're also starting to do very well with their infrastructure business. You're seeing us supply into things like their demonstrations that are gonna go into the Olympics next month, also into other 5G trials.
Great. Thank you.
Moving on, we'll hear from Edward Snyder with Charter Equity Research.
Thanks a lot. Mark, if I could touch on real quick, how should we be thinking about the margin improvement when it comes to your low-band PAD over the new one, over the old one? Are you talking hundreds or thousands of basis points, or is there even a new one on the horizon in terms of production? Or is most of the benefit coming from tailing off of the old one? Eric, you mentioned, you called out ET a couple of times as an area of growth this year. Is that just more OEMs adopting ET or spreading ET to more phone lines? Or are you starting to see or expecting to see some demand for more ET for uplink carrier aggregation and production this year?
If I could, maybe James, 802.11ax appears to have some fits and starts in the handset side of the business. On your side, are you seeing this coming in size in the next year or so? Or is it just beginning? Where do you stand on the ax ramp? Thanks, guys.
James?
Yeah.
Why don't let James go first?
Yeah, let me go first on ax. We are seeing that ramp, I believe, this year. We already have products that are going out now. Standard's not released, but the products that are in development to support that standard are in development now. A lot of the products that we released last year were in support of sort of the evolution towards that. We're doing very well in AC today, and we think we're positioned very well for the ax ramp that's going to happen during this calendar year.
Sure.
Yeah, regarding envelope tracking, the market there continues to be very exciting. It's enabling many things, not just lower current consumption, but also higher output power in many markets, as we talked about. As you can imagine, content increasing due to performance improvements. Also, the dual uplink, when we get to that point, will require additional envelope tracking content. We are seeing content increases with the OEMs and baseband partners we're working with now. In addition to that, we are engaging quite meaningfully with the new baseband partner as well, which will add potential revenues this calendar year.
Yeah, to add as Mark, on the low-band PAD, between versions we have now, there's between 5 and 10 points margin difference. As we've said, even the improved one is still well below the mobile average margin. These low-band PADs are going to become a less important part of the portfolio going forward. I think we're going to be, as Eric said, we have a very capable SAW design team, outstanding technology. We've proven our ability to compete in the most difficult low-band PAD placements and ramp at the highest volumes with the most difficult customers. It's not a case of not being able to do it's a case of where do we want to spend our time. It's really about, for us, with this confirmation of our technology on BAW as it relates to the mid-high band, really focusing resources there.
I think it's important to note that our revenue mix over time is pretty dramatic, and it's helping us drive our margins as we look out. This year will be less than 25% of Mobile's portfolio will be BAW-related revenue. Next year, fiscal year 2019, we view that being over 30%. In fiscal year 2020, it's over 40%, and in fiscal year 2021, it's nearly half the Mobile business is around BAW-related opportunities, some of which will require the SAW filter content as well.
I think that's the story today, is aggressive portfolio management and modules.
Yeah. If I could follow up. I'm a little confused though, Mark, because the SAW comes out of Florida, and that's not a BAW fab. You set up for a TC SAW there. You started a SAW fab in North Carolina, and all your BAW comes out of Richardson, and then you got Farmers Branch as a backup. I know we've been talking about it as kind of an either/or, but are you saying you're putting BAW capacity into Florida?
Yeah.
What does that mean for Farmers Branch then? Because you haven't really started production there.
Ed, just to be clear, and I try to make clear in the comments, our utilization in our SAW capacity will go down, and it will be a headwind in fiscal year 2019. That is what we're currently planning. We will plan to fill the capacity that we have over time with more selective SAW opportunities.
To be clear, our BAW production will be in Richardson as well as Farmers Branch in the future.
From Piper Jaffray, we'll hear from Harsh Kumar.
Yeah. Hey, guys. Great job on free cash flow and meeting your gross margin goals. Quick question. Bob, if I go back to the December quarter, could you give us a sense of magnitude of Sorry, the March guide. Could you give us a sense of magnitude between your largest customer and the ramp and all the public stuff there that's been talked about in China? What were the factors? Then second question as my follow-up was, the SuperPAD or the mid-high PAD that you're talking about, is this additional TAM? Because there's some confusion about whether it's brand-new content or it replaces some of the things. Maybe you could just explain or shed some color on it, and if you can, maybe ASP, if possible.
Yeah. Harsh, I want to make sure I understood your first question. In our March guide, you're saying-
Yes
not December results yet?
Yes, March.
Yeah. I think it's safe to say that it's our largest customer along with China. I think there's been a lot of things in the press, as you've already reported out there. I think what we wanted to make sure is you understood how much it impacted us. Since many of our customers haven't reported, I think it's best we not get into a lot of details. It's primarily our largest customer in China is why we're guiding down in March. IDP has flat to up slightly in the single digits. IDP's continuing to do well just like last quarter. Eric, you want to take the TAM question?
Yeah. I'll try, Harsh. I'm not exactly sure how to answer the question. It's not brand-new TAM for the market. It's a particular function within advanced smartphones that has grown pretty dramatically in terms of capability and content generation over generation, and we believe it will continue. We mentioned calling it the integration hub. It's got essentially all the main path mid and high band functions within it, and we see over time how it can grow and actually take over other mid and high band functions, for example, in the diversity path. It's a great high value, very high performance sort of heartbeat of the modem.
Got it. Thanks. Thank you.
From Bank of America, Vivek Arya.
Thank you for taking my question. What is the sustainability, Bob, of maintaining this socket in future years? Some of this content was with the different suppliers, now it's flipping over to you guys. What were the factors behind the win? Importantly, what is the visibility in maintaining this content as you go out in time?
Vivek, let me first say it's nice that we were able to demonstrate the capabilities. Second, as you well know, not all phones are created equally and utilize the same architectures. I want to take a little bit issue with you on that. What I can say is, yes, we're working on future generations. More importantly, we're also working on these opportunities at other customers. I do believe we're at the beginning of the growth here. I think as we said all along, when it was just a single BAW filter or a few BAW filters in a module, we were able to compete.
When things got to higher order multiplexing, yes, we were behind. We talked over the last several quarters about how we had to first improve the resonator improvement performance, then work on how we can design multiplexers, and then how we can put multiple multiplexers in a module along with PAs and switches, what have you. I think what's important is we now have demonstrated that capability. We're in the game. It's our belief that we are going to be able to continue for multiple generations. More importantly, at multiple customers.
Got it. Very helpful, Bob. As my follow-up, if we look back at the low-band PAD example, there were some initial growing pains from a manufacturing and a gross margin perspective. Obviously, this is a very different product. I'm just curious to know what's your level of confidence in yield and margins, as I imagine this is a significantly more complex product than low-band PAD.
Yeah, fair point. It is a very complex product. However, the process itself has been pretty well wrung out, as you can imagine. We did have a very high volume ramp of a high intensity BAW content product a couple of years ago that went incredibly smoothly and very well. Far, our 8-inch wafers in BAW are yielding at least as good as the 6-inch ones were. The entire manufacturing line seems to be running very well. We're already running quite high volume samples of the product to prove out manufacturing variances, look for any quality issues and so forth. We're doing everything we can to assure a smooth ramp. There's no reason to believe it won't go very well.
Got it. Thanks, and congratulations on these new sockets wins.
Thank you.
Thanks, Vivek.
Next, we'll hear from Craig Hettenbach with Morgan Stanley.
Yes, thank you. Just following up on the comments of Huawei in the fall in terms of regaining some momentum. Any thoughts as you transition into the spring in terms of, do you see carry through there, or how are you thinking about Huawei for 2018?
Yeah, I mentioned earlier that we turned the corner on the fall 2017 flagship. We're very excited about the engagement so far for the next fall flagship launch, where we believe we have the capability of significant share gains there as well.
Got it. Thanks. Just to follow up on the Super PAD, just given the confidence in terms of the ramp in the second half, is there any way for you to gauge in terms of relative spread of that business view, versus what's available, or any other context in terms of how you view the opportunity into the back half?
It's a great opportunity. Not many people are able to pull off this level of sophistication and this level of performance and be able to manufacture it in high volume and high yields. I think we're seeing a lot of customer pull for this type of product now that we've demonstrated performance ability. Going forward, I think, just to add to what Bob said earlier, we see a lot of reasons and ways for us to differentiate the capability as power levels go up. We have a lot of power handling capability in our filter technology, we're well-aligned, I think, with the future architectures.
I'm sorry, if I could just slip one more in terms of sometimes you'll give the percentage of customers. For the December quarter, what your largest customer was and any other 10%?
There's one 10% customer, Craig.
Next question will come from Toshiya Hari with Goldman Sachs.
Great, thanks for taking the question and congrats on the win. You guys talked about design wins in IDP being up 40% year-over-year in the quarter. Can you maybe provide some color there? If you could point to one or two or three key contributors there from an end market or end product perspective, that would be helpful. I have a follow-up.
Okay, thanks. As you said, really strong design win again this quarter, 40% year-over-year. Really the same story as our revenue growth, led by defense and IoT. Strong design wins combined with the funnel really gives us pretty bullish outlook for the business for future growth. Couple of specific examples or things that we talked about in the press release, you saw our design win with Samsung on TVs, that's a nice future growth prospect for our low-power wireless business. We've also had a string of nice design wins inside the Wi-Fi business as well.
Great. Thank you. The second one's for Mark. Clearly, you guys are doing a great job in improving free cash flow here and going forward. How should we think about capital allocation over the next couple of years in terms of how you guys prioritize investments versus capital return and perhaps M&A? Thank you.
Yeah, you're right. As evidenced in the December quarter, the guide in March and the outlook for 2018, the free cash flow generation has been very strong, and we expect it to continue. We've been clear that we intend to maintain a 1.5 times debt-to-EBITDA ratio. We're currently fine there. We're actually under that, no need to pay down debt. Possibly take out the 2023 notes in this calendar year for some lower cost financing. Other than that, we'd like to sustain those levels of leverage. With that and with the greater flexibility on cash with the new tax law, we've got both significant balance sheet flexibility and capacity. We've been clear that our first priority is to invest in the business, which we've been doing.
We believe we're going to be a lot less capital intensive going forward, that frees up even more of this operating cash flow to fall down into free cash flow, we'll look at M&A activity. Really excited about what James has done with the IDP business, a lot of growth vectors in that business. Certainly keen on bolt-ons that are where we're focused. Always looking at opportunities in James' business to bulk up and diversify Qorvo overall. To the extent our leverage is okay and there's no immediate acquisitions, we will return cash to shareholders.
Thank you.
From Citigroup, Atif Malik.
Hi, thanks for taking my question. If I look at the American smartphone maker, the number of models or SKUs they're putting out are doubling this year from our checks, in four models versus two last year. When I look at your content being up this year, how should we think about the unit impact that there are more models, and from the volume diversification? Maybe you can help out just providing kind of top-line growth expectations for this year, and then I have a follow-up.
I'm really sorry, but any future predictions at our largest customer architectures, number of phones, et cetera, I'm sorry, we're going to stay away from that. I'm sorry, we can't help you with that. Maybe you can ask them tomorrow.
Sure. Just the RF top line growth, the market growth 10%-15%, are you expecting your top line to outperform?
Yeah. We're still looking at the long-term RF market as a 10%-15% opportunity in mobile due to all the drivers that we've spoken about many times, really driven by the demand for mobile data. We're thinking this calendar year, obviously off to a bit of a slow start, might be closer to the low end of that in terms of total market. In terms of our own growth, we're committed to growing at or ahead of our market while expanding gross margin and really focusing on cash flow as we go.
Great. Follow-up.
I'm gonna jump in for IDP. We'll have another 20% growth year as we close out FY 2018, with strength in IoT and defense and GaN. We're gonna stay focused on our high growth markets. We model those underlying markets to grow at an average of 10%-15% as well, I expect that we'll grow at or greater than those growth rates.
Great. As a follow-up, Qualcomm has announced a memorandum of understanding with a major Chinese smartphone manufacturer, Lenovo, OPPO, and vivo, on the RF front end. Can you just talk about the impact of this on your China opportunity? Thank you.
Yeah. We don't see any obvious impact, certainly nothing immediate. Obviously Qualcomm's already a supplier into that market with various filters and ET and so forth. I think we understand the motivation for the announcement. We don't think it necessarily has any implications on us.
Next, we'll hear from Blayne Curtis of Barclays.
Hey, guys. Thanks for taking my question. Just want to ask you on this mid-high band PAD, if you could just walk us through when this got determined, then just trying to gauge your visibility, you gave a very specific free cash flow number. Just if you can think about any sensitivities to that, obviously, in other generations, mixes mattered and such, kind of just any indications of what your visibility is and what the put factors could be in terms of what that win could be.
I don't think we can really give any more detail around the mid-high band PAD, other than to say we're progressing forward. It's on track. The team's done just a fantastic job developing an incredibly competitive product, we can't really get into any more detail.
Okay. Just wanted to go back to gross margin and vol utilization. It's a nice result to see gross margin up a little with the top line coming down. Are you starting to build filters ahead of this win for the second half?
No, Blayne, we're not. We will be soon, not now.
Okay.
That does conclude today's question and answer session. I would now like to turn the conference over to management for any additional or closing remarks.
I want to thank everyone for attending tonight's call. We look forward to meeting many of you at upcoming conferences, and we ask that you save the date of May 23rd for our 2018 Investor Day. Thanks again, and good night.
Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation, and you may now disconnect.