Good day, welcome to the Qorvo Q2 2018 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Doug DeLieto, Vice President of Investor Relations for Qorvo. Please go ahead.
Thanks very much, Kathy. Hello, everybody, welcome to Qorvo's second 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 and our annual report on Form 10-K filed with the SEC, because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or other items that may obscure trends in our underlying performance.
During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today, available on our website, qorvo.com, under Investors. In fairness to all listeners, we ask that each participant please limit themselves to one question and a follow-up. Sitting with me today are Bob Bruggeworth, President and Chief Executive Officer, 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.
Thanks, Doug. Qorvo delivered a very strong September quarter, with both revenue and EPS exceeding our guidance range. In Mobile Products, revenue was $630 million, with 38% sequential growth. Qorvo supported the ramps of leading marquee smartphones and increased our dollar content on key customer programs. We also benefited from an improved demand environment in China with the launch of flagship devices at Huawei, Xiaomi, OPPO, Vivo, and others. At Huawei, we supported the Mate 10 with BAW filters, antenna tuners, RF front-end modules, and our envelope tracking power management solution. At Xiaomi, we shipped more than $9 of RF content, including our highly integrated RF Fusion products, into their top-tier Mi MIX 2. We were honored to receive their Partnership Award. We expect our design momentum at both accounts to continue in next-generation flagship models.
In IDP, revenue increased 21% year-over-year to a record $190 million, with standout performance in the defense and connectivity markets. IDP is targeting double-digit year-over-year revenue growth across a broad set of customers in defense, base station, automotive, smart home IoT, Wi-Fi, and optical. Customers in these target markets require differentiated products with higher levels of integration, higher power, lower noise figure, better linearity, and greater efficiency. This is where Qorvo excels. IDP has been putting up robust year-over-year revenue growth. Our design wins in the September quarter point to another strong quarter in December. We're very confident in our long-term growth prospects given the underlying macro trends of IoT, 5G, and GaN. In both Mobile and IDP, Qorvo is benefiting as the increasing demand for data is ratcheting up the complexity, driving integration, and increasing RF content.
The depth and breadth of our technology portfolio position us uniquely to selectively target the most attractive market segments based on the competitive environment, market or customer exposure, technologies required, and the value we can bring. Take, for example, our success in Wi-Fi iFEMs. A few years ago, we saw this as a category we could disrupt by combining our market-leading BAW coexist filters with our Wi-Fi front-end modules. That's playing out today. We see continued growth ahead for our Wi-Fi iFEMs across retail, CPE, and mobile devices. The same is true with our industry-leading envelope tracking power management solutions. We recognized the market opportunity for advanced power management over a decade ago, built a robust IP portfolio. We're now expanding our product offerings to support not only cellular, but also Wi-Fi applications. In the September quarter, we launched our ET PMIC for Wi-Fi, supporting a wearable device.
This is an industry first. We have additional opportunities ahead. Likewise, Qorvo's early innovation in antenna tuning is paying off today. The tuning content in marquee smartphones will nearly double this year. We expect this segment will continue to outpace the overall RF market. Qorvo enjoys a strong leadership position. We have multiple opportunities to expand our content across new and existing customers. In GaN, Qorvo is an industry pioneer and technology leader. Our investments in GaN are supporting exceptional growth. In fact, our GaN-related revenue in the September quarter doubled year-over-year. We've also seen our opportunities grow tremendously in IoT. Qorvo's IoT revenue in the September quarter increased by 50% versus last year. During the quarter, we secured an RF front-end module design win supporting the Tile tracker family.
We also secured multiple design wins for automotive IoT applications, supporting top automakers with content per car up to $7. In China, we enjoyed strong demand with the deployment of 900 MHz Narrowband IoT infrastructure. Qorvo's Narrowband IoT solutions optimize performance and power consumption in high volume, low power IoT applications. Finally, in defense, we secured multi-year design wins with a major defense contractor for high power, high efficiency GaAs components supporting several advanced radar applications. All of these achievements represent strategic investments made by Qorvo that are paying off today. Looking forward, let's cover a few examples of what we see driving our growth in the future. As we've indicated before, we're leveraging a unique set of capabilities to target the most promising growth opportunities within the largest profit pools.
In Infrastructure, we've expanded our product portfolio to include a line of small signal products that support the 600 MHz Band 71. This makes Qorvo the only supplier to address all 5G frequency bands from 600 MHz through 39 GHz. We also expanded our family of GaN discrete transistor products with a GaN on silicon carbide dual transistor module. The new module enables base station customers to achieve ultra-high levels of power efficiency and reduce cost versus traditional process technologies. Finally, we're on track with a custom development program integrating multiple BAW multiplexers with PAs, switches, and LNAs. We believe these technologies and design capabilities will enable Qorvo to pursue the most attractive segments of the RF market. Qorvo's BAW delivers lower loss, higher Q, and superior power handling capability, making it optimal for enabling carrier aggregation.
We expect BAW will be increasingly favored as operators require better power handling with the move to Power Class 2. Finally, with the migration to 5G, we expect the bands using BAW today will continue to use BAW, and some SAW bands will move to BAW. We view this as the inevitability of BAW. We're developing and bringing to market a number of exciting BAW-based products for the main path as well as diversity path, and we expect to increase our BAW-based revenue as industry requirements favor our higher performance products. Simply put, BAW growth outpaces filters. Filter growth outpaces RF, and RF content will outpace smartphone units. With that as a backdrop, it's noteworthy that what sets Qorvo apart isn't any one best-in-class capability, it's the entirety of our product and technology portfolio.
We see that as increasingly powerful as the discrete functions are integrated into single placement modules. Our customers are moving towards increasingly complex, more highly integrated placements. Qorvo is focused on operational excellence and product and technology leadership to best address our customers' needs. In the September quarter, the Qorvo team executed extremely well, expanding product portfolios, generating design wins, and earning the enhanced customer trust that accompanies the clean launch of key customer programs. We strengthen our business processes to drive productivity while also investing in sustainable long-term growth and competing for the industry's most complex and most valuable placements where technology wins. With that, I'll hand the call over to Mark.
Thanks, Bob, and good afternoon, everyone. Qorvo's revenue for the second quarter was $821 million, exceeding the midpoint of our guidance by $11 million. Mobile revenue was $630 million, was driven by growth at our largest customer and stronger China business. IDP revenue of $190 million reflects continued strength in defense, including advanced radars and other electronic warfare products, and in connectivity, including Wi-Fi and emerging IoT applications. Gross margin in the quarter was 47.4%, a sequential increase of 10 basis points and a year-over-year increase of 460 basis points. Gross margin in the quarter was negatively impacted by the after effects of Hurricane Irma, which caused an isolated air contamination issue in our Florida fab. The operations team in Florida did a remarkable job to quickly identify root cause and bring the fab back up without any customer impact.
Excluding these costs, gross margin in the quarter would've been above our guidance. While as expected, overall fab utilization weighed on margins in the quarter, operationally, the business is performing exceptionally well, supporting customers through seasonal ramps. Operating expenses were $158 million, down on ongoing productivity efforts and spend timing. Operating income for the quarter was approximately $231 million or 28.1% of sales, up 660 basis points from the prior quarter and 530 basis points versus last year. During the second quarter, we took certain actions, including a headcount reduction program, to reduce costs and improve operating efficiencies. As we've discussed, we're focused on achieving consistent operational excellence and continuously improving our effectiveness and efficiency. We believe a disciplined approach to managing our product portfolio, containing costs, and driving a culture of continuous improvement will lead to greater sales growth and profitability and help us maximize free cash flow.
Non-GAAP net income was $198 million. Diluted earnings per share was $1.52, $0.09 over the midpoint of our guidance. Second quarter cash flow from operations more than doubled sequentially to $220 million. Capital expenditures decreased to $68 million as we wrap up recent expansions, tool conversions, and other investments to support future growth. Cash at quarter end was $575 million. We repurchased $57 million of stock in the quarter and intend to continue buying as part of an ongoing commitment to return capital to shareholders. Let's turn to our outlook. In the fiscal year 2018 third quarter, we expect non-GAAP revenue between $830 million and $850 million, gross margin of approximately 47.5%, and diluted EPS of $1.60 at the midpoint of our guidance. This guidance reflects our view on near-term demand for our customers' flagship models and continued strength in IDP.
Sequentially, we expect gross margin to remain roughly flat, primarily due to mix effects. We expect gross margin expansion to resume in the March quarter and into next year with improving mix, ongoing productivity efforts, and increasing fab utilization. Operating expenses are forecast to remain flat at approximately $158 million for the December quarter. Our outlook also reflects a recent event at a supplier. In mid-October, one of our laminate suppliers had a fire and shut down production. We quickly launched a recovery plan to minimize the impact of the event. Thanks to close and collaborative working relationships with customers and our other qualified suppliers, and the exceptional efforts of our engineering, operations, quality, and sales teams, we don't expect any major customer impact. Our estimate of revenue and cost impacts of the event have been factored into today's guidance.
For the remainder of fiscal 2018, we forecast revenue to decline less than seasonally December to March. In the second half, we expect double-digit year-over-year growth with gains on new mobile platforms and continued strong IDP growth. OpEx is forecasted to be down in dollars from fiscal 2017 as we continue to drive towards our operating model of 20% of sales or lower. We project CapEx to trend lower through the rest of the year, ending the full year below $300 million or less than 10% of sales. Wrapping up, in the second quarter, we delivered another quarter above our guidance. For the second half, we're forecasting a return to double-digit year-over-year growth with expanding operating margins and increasing free cash flow. Our technology investments are paying off. Our operations are running well and ready for growth.
Our operating costs are in control and declining. Our free cash flow is strong and improving. With that, I'll turn the call back over to the operator for questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up. Again, please press star one. Okay, we'll take our first question from Mike Burton with Longbow Research.
Hey, guys. Thanks for taking my questions. First, good to see recovery in China in the September quarter. Do you think you outperformed the market in calendar Q3 due to those ramps that you mentioned? Looking to December, do you expect the market overall to be up and do you expect to be in line or better than that as those ramps continue to play through? Thanks.
Hey, Mike. This is Eric. I'll take that. We did have strength in the September quarter on China design wins and flagship products, primarily. A lot of chunky dollar content across power amplifiers, switches, tuners, Wi-Fi, and so forth, as we mentioned in the Xiaomi win, is just one example. As those ramped up to begin filling their lines of distribution, we did see a bump in September. Going into December, we're continuing to be pretty cautious in terms of what we think the forecast and actual sell-through of those units will be in December. We still see generally in China a mix toward the mid-tier, which as of now still doesn't require carrier aggregation, so a little dollar content
The growth we are seeing in units is really heading towards India. Again, prices in RF content similar to mid-tier handsets instead of the flagship. It's really very similar to what we saw last quarter, but with a bump in September due to the ramp of these new flagships with a lot of Qorvo content.
Great, thanks. Also for Eric, was Samsung a 10% customer in the quarter, and what are your expectations for them going into Q4? I think usually they're down pretty hard in Q4, but just hoping you could help us detail your progress with them.
Yeah, Mike, this is Mark. They were not a 10% customer in the quarter.
Okay, we'll go to our next question, Krysten Sciacca with Nomura.
Hi, good evening, guys. First question, did you have any other 10% plus customers for the quarter?
We did have a 10% customer. Our largest customer was 40%.
Okay, thank you. Excellent. Moving on to the automotive design win you mentioned in your prepared comments, can you kind of describe what exact functionality that design win was for, and when we should expect to see that start to really show up in revenues? I know the sales cycles can be a bit long there.
Go ahead, James.
Yeah. This is James. We're really focused on key aspects in the automotive being Wi-Fi, LTE chipsets and SDARS. The particular design wins we talked about there were LTE based, again, we would expect revenue to begin later this year, early next year.
We'll take our next question from Cody Acree with Drexel Hamilton.
Hey, guys. Thanks for taking my question. Maybe, Eric, if we could go back to China real quick. It sounds like there's some puts and takes that are maybe not giving you the best visibility, but if you look at it on an annual basis, maybe calendar 2017, calendar 2018, what are your expectations for growth? If you're getting flagship design wins that are giving you some dollar content, but you're getting yet a shift towards these mid-tier products that are lesser, you're also getting growth outside of China, that's probably also lesser dollar content.
Yeah, we think that the trend is clear. Timing is always hard to nail down, but the trend is very clear, just as it is with all of our markets. There is an ongoing demand for more data, that does fundamentally drive the complexity in the RF and the value, as we've talked about many times. Currently, the lack of requirement for carrier aggregation, that's just a current cycle sort of situation. It's not long-term, we don't believe. As an example, today, carrier aggregation is only required this year in handsets over RMB 3,000. If that returns to handsets over RMB 1,500 as is a current proposal, that would take the market requirement from 15% CA enabled up to 50% CA enabled. Of course, that's a trend that we'd very much like to see. We believe at some point next year, that requirement will come back.
That combined with our customers more and more looking at exporting into higher value parts of the market, requiring more carrier aggregation for even EU SKUs. India, as it transitions to more premium tiers, our China customers are ready to capitalize on that. The India spectrum actually is quite fragmented, and so as they demand higher data rates to compete with the rest of the world's carriers, it's natural that they'll need carrier aggregation. The frequencies are higher. It's going to be BAW-based quadplexers for India as well. I think that's a real exciting market, as a matter of fact, that not only are our China customers with Samsung and others are doing well in, and we think India could be as much as a billion-dollar opportunity for RF in calendar 2020. The long-term trends are very much intact.
Do you have a swag at what a longer-term CAGR is for that type of customer base then?
I think, in general, it's growing roughly in line with our overall CAGR. I don't have an exact number off the top of my head, but in the 10-12% range still.
We'll take our next question from Quinn Bolton with Needham & Company.
Hey, guys. I wanted to address the timing shift that you had mentioned. If you look at the consensus expectations on the street going into the call, you guys are guiding about $50 million or so below that level. I know you don't have access to all of our models, but can you give us any sort of sense how much revenue we may be talking about was affected by timing shifts from perhaps December into March? Then, second question for Bob. You guys cutting heads here to streamline expenses, which is good to hear long-term, but I think you've talked about some very important projects. You've got this custom module development for your largest customer. I think you guys have also acknowledged that you're not spending a lot today in diversity receive. It seems like there's some pretty big opportunities that you could have diverted those resources towards.
Any reason why you didn't shift those resources to some of those projects?
Yeah. Thanks, Quinn. The first part of your question was, I think, you were expecting, I think you said $890 million, and we gave you $840 million, and number 1, I think we exceeded last quarter by about $10 million, let's not split hairs there. IDP is tracking exactly as planned. It's a little bit off in the mobile area, and I'll let Eric talk a little bit about it, then we'll address the second part of your question.
Yeah. It is clear that the outlook for mobile in Q3 is lower than previous expectations. We've talked about it. It's related to flagship product sales, or at least our take on the forecast for those, what we're expecting. It's across multiple customers, not just one customer. I think it's pretty clear and public now that our largest customer has a delayed overall product cycle compared to past years that clearly has an effect. Many are speculating that it's affecting the entire market because a lot of the premium handset buyers are waiting to get their hands on the very latest models, and they want to try those before they decide, regardless of what they buy. We feel at least like there's been a general push-out during this cycle.
Maybe, Quinn, just to close the loop on revenue. It is a difficult quarter to forecast for the reasons that Eric and Bob mentioned. As we look out into March, as far as what sort of seasonal dip we see, more muted than normal. Right now we're calling low to mid single digits on a decrease from December to March. As far as OpEx, we are not changing any priorities on our programs. In fact, we would view this as narrowing the focus on the most valuable opportunities we have. The company's matured in its merger. We're on a common system now. We've done a lot of work around defining processes and making them more efficient, reducing defects. It's just allowing us to be more efficient.
We're at the point where we can take some more targeted actions that don't interfere with our growth plans, and we did that. We ended up, at the end of the day, we'll have a net about 300 people that are reduced in the company. About 200 of those are our cost of goods folks, and 100 are in the OpEx category. As I mentioned in my comments, we continue to see OpEx specifically as a percent of sales to trend down. This year, we believe we'll end between 20% and 21% of sales, next year, see that drop.
We'll take our next question from Ambrish Srivastava.
Hi. Thank you very much. Could you get to the gross margin, please? I just want to make sure I understand this. In the fiscal third quarter, revenues are up, you're guiding it down, I think you alluded to a mix issue. That was my first part, what mix issue? A related question is, sounds like, are you backing out from the 50% target that you had given exiting the fiscal year? If you are, how should investors think about the trajectory of the gross margin expansion that you said it will start to expand beyond March? Thank you.
this is Mark. I'll take the questions in the part. First, on the second quarter, we reported 47.4%, and as you mentioned, the guide is relatively flat. If you add back the Florida issue we had around air contamination, you end up with, we were at really 48% normalized margin. The decrease from that 48% to the 47.5% that we guided, 50 basis points, is primarily related to the increase of our low-band PAD in the mix, which we've been clear about before. I've never indicated that the margin expansion that we have planned would be linear. This is an example where we're increasing, but modestly. In fact, if you normalize the margin, same quarter, we are down, but again because of mix. Talking gross margin more generally, we absolutely are not backing off on our target.
For the year, we don't foresee ending the year at 50% as we had hoped. I will say that, this is our fourth consecutive quarter of a gross margin increase. As we mentioned, we expect to increase that again in December and again in the March quarters. Excluding this Florida effect in the second quarter, we've made or beat our gross margin guidance in each quarter over the past year. The important thing is that we're able to forecast. We understand the drivers. I'm certainly not saying it's easy, but we do believe, and there are things out of our control as Bob indicated, but we do have a handle on what's going on. We're not pleased with the gross margin, as I said last quarter. Not where we want to be, not where we expected to be.
We do see a roadmap to 50%, as we talked about before. How are we going to get there? We're going to get there through volume growth, as you heard in our investor day, we do expect to outpace the market. We expect that volume growth to be on our better margin products. BAW-enabled revenue specifically, which we've talked about the criticality of that in both mix and loading our fabs.
Tuners, PMIC, IDP as a mix of the business generally has been increasing, that helps us on the margin. Utilization we've talked about is our biggest drag on margin, I'm happy to say that we believe we've reached the low point in this second quarter forecast improvements on utilization through the rest of this year and into next year. Finally, we've got a number of productivity projects that are still underway. Improving yield, shrinking die, traceability of projects, of course, the wafer expansions that we've talked about before reduce the capital intensity associated with that. Again, confident in our ability to reach that target and actually exceed it in time. For the rest of this year, we do expect margin expansion from December to March.
Okay. Thank you for answering a difficult question, and you should be given credit from recovering from the trough. Thank you.
Okay. We'll take our next question from Toshiya Hari with Goldman Sachs.
Yeah, great. Thank you for taking my questions. The first one, Eric, I was hoping you could give us an update on the development efforts, at your largest customer, which you talked about last quarter. How do you feel about that opportunity today relative to three or six months ago, in terms of actually winning that business and, in terms of timing, when would you and when would we know, whether or not you actually do win that business?
Yeah. Thanks for the question. We're very excited about the opportunity. We believe we continue to be on track. We've learned a tremendous amount, as we've gone through this development. It's improving our technology and our design capability and our prototyping and we're delivering high volume samples today. We continue to believe we're on track. It's not over till it's over. To answer your question, it's roughly the end of the calendar year, approximately, that we should have more clarity on that. In the meantime, as we commented earlier as well, the outcome from this in terms of technology and design capability and so forth, is gonna impact a lot of other programs as well as we see generally the industry's toughest, most value problems are centered around enabling CA in the mid and high bands and driving higher levels of integration there.
This is a very, very important product. We're still quite confident that we're on track. It's gonna grow well beyond that with the capability it's bringing us.
Okay, great. As a follow-up, we've all heard quite a bit over the past couple of days in terms of how market share in the modem market could potentially change going forward. I was hoping you guys can remind us how different your opportunity is with the Intel SKUs as opposed to the Qualcomm SKUs. Thank you.
It's an interesting question to think about. Now, if you step back from it, the fact is, we're developing a full complement of RF solutions, with all the functionality needed for the entire RF front end and driving, of course, particularly on the advanced carrier aggregation-based systems that are kind of in the premium tier. We made those up with all basebands out there, so Qualcomm, Intel, HiSilicon, MediaTek, Samsung LSI. We're engaged in winning revenue and delivering production on all those platforms today. On one sense, we're agnostic. We are a supplier to the entire industry, and the RF is selected, in many cases, separate from the baseband.
Having said that, if you look at what's in the market today, it's clear that we have very good alignment with Intel and we do enjoy working with them, and I think our ET tracker in particular has been a real success there.
We'll take our next question from Karl Ackerman with Cowen.
Hi, good afternoon, everyone. I have two questions. First question is on inventory. Could you describe how you would characterize your own levels of modules in the channel, given all the ramps of new flagship devices you are seeing across your top customers? I guess, given that your top three customers in mobile are ramping various devices, is there a greater propensity for you and your customers to engage in longer-term contract agreements with you on a quarterly basis that would increase your backlog, and visibility more so than you have had historically? I have a follow-up, please.
Let me take a shot at that, Karl. As far as our major customers and how we do business, and I commented this on the last quarter as well, we have what we'll call schedule share agreements where they project their demand out for about a year, and we react to that. From agreement perspectives, yes, we've got contracts like that, but the backlog, it's a visibility for a year. We know it's gonna change week to week because we as consumers don't know when we're gonna buy phones. That's the predominant share of our market today, is done that way with our high volume large customers. As far as the ramps go with maybe some of our customers in China, they are getting more sophisticated as their phones get more complex and they need to ensure the capacity's in place and things like that.
We are getting now much better visibility out of that set of customers that two years ago we sure didn't get. Overall, I'd say yes, it's improving and that perspective of understanding their plans. The issue is, as always, how successful are the phones when they get launched to market?
I would just bring, Karl, maybe just bring it to a tactical level. Part of the reason our utilization has been poor, one of the factors is we are very much trying to drive our own inventory levels down. Focusing on not loading the fabs for the purpose of inventory and all those associated risks and cash drain. Also related, we're watching the China inventory channels very closely, and those have gotten more healthy through the year. We're pleased about that development.
I guess as a follow-up to that then, this relates to your longer-term margin profile. I do understand that margins were a bit challenged due to some one-offs this quarter. Of course, your current margin outlook is for 50% gross margins and 30% operating margins , though about two years ago, you had articulated being able to expand gross margins toward even up to 55% margins. Now that China smartphone is beginning to improve after a tumultuous first half and you are increasing shift more of your manufacturing onto larger sized wafers next year, and presumably the headwind on this Low Band S-PAD abates, I guess, what is inhibiting you from achieving that target over the next year or two?
No, I think, Karl, you've laid out the drivers that we believe will be able to achieve the target. Back in that period, there was a lot of discrete BAW, as you heard Eric say, the requirement for CA dropped, we've seen that BAW market get weaker than we expected. We expect tremendous BAW growth over the next several years, that's going to load our largest fab, which is our largest drain on margin. Furthermore, we continue to make, just as we have from our last Low Band S-PAD version to this one, continual improvements in manufacturing yields and just the way that we do the product, to improve the margin in that product. Those are certainly factors that'll help us going forward on margin.
We'll take our next question from Edward Snyder with Charter Equity Research.
Thanks, guys. I guess one for each, if I could, I'll just put them out there and we can answer them in order. Bob, you mentioned an ET PMIC for Wi-Fi. Is that in the mobile group or is that James' group? James, what's your GaN split between defense and cellular infrastructure? I know you're more heavily weighted to the former. Are you getting much traction in the cellular side of it? If you could maybe give us an overview of where you are. I know most of your Wi-Fi CPEs, but are you doing anything with the iFEMs side of the business? Eric, your tuner content seems to be ramping fairly rapidly.
How much of that correlates to the big increase we're seeing in antenna count in the flagship models, and how much is just a wider spread of bands or a quest for better performance on existing bands? Could you maybe update us on the Wi-Fi FEM business, which seems to be taking off? I know the Chinese OEMs were moving into it, and are moving into it. Are they shipping into production there? They must be. What do you think the chances are of that product moving into your largest customers? Finally, Mark, I know in a perfect world, what's your best guess on, in a perfect world, if the gross margins are down on utilization at Richardson and Richardson doesn't budge forever, how much of a penalty did you take this quarter?
Just trying to get an idea of what it could have been if you were running more normal levels. I know you said it bottomed this quarter, but just trying to get a quantitative number on what you're suffering due to Richardson. Thanks, guys.
Ed, thanks for your questions and appreciate you giving me the easiest one. The ET PMIC that I mentioned for Wi-Fi is in the cellular group, so I appreciate that one. James, if you want to address the GaN split, CPE infrastructure, defense, how many different places we sell GaN, that would be helpful for him.
I'll do Wi-Fi as well.
That'd be great.
Thanks, Ed. We continue to see strength with GaN. As we reported, it doubled year-over-year. I think we'll see that trend moving forward into the next quarter. Largely been driven by defense, cable TV, and our VSAT business. You asked when base station revenue will become material, we see that in the next year or so as our products in both macro and massive MIMO base stations, including early things for 5G, move into production ramp. If we go onto the Wi-Fi side, what's really driven the business is, you mentioned iFEMs, has been our work in iFEMs and being able to integrate some great technologies into a common box. That's fueled tremendous amount of growth in the connectivity business as well. That business was up 81% year-over-year. Fantastic growth in that product set for the company.
We're also laying the long-term foundation there as we transition to AX, we believe our products will really enable that high throughput and thermal performance that's required for the next standard coming along.
Eric, do you want to pick up on Wi-Fi as well and then move into the tuner question?
Yeah, absolutely.
The Wi-Fi for mobile, the industry traditionally was served through a system and package in which the Wi-Fi FEMs and filters and so forth would be sold to a module integrator. That's still where the flagship of couple of our largest customers are. The China market, as you indicated, moved a little faster towards disintegrated that system and package and buying the integrated front-end modules from us. Certainly for the flagship devices coming out of China today that are running 2x2 MIMO, they're typically using a pair of iFEMs for high performance. Now your question is, when might that penetrate our largest customers and their marquee handsets? I think, in order for that structural change to happen, it's going to be driven by technology like LAA.
Whenever the Wi-Fi and the cellular start actually co-mingling more directly and sharing antennas and amplifiers and so forth, especially in the 5 gig area, that's where I think we could see a disruption that might change that architecture. Let's see. The first question you asked was about the tuner content going up. We are very pleased with the tuner business. It's going very well for us. It's driven, as you said, by the increased antenna count, in particular, to support MIMO, complicated and actually increased further beyond that, by the antenna sharing as well. At once they're adding more antennas, there's only so many antennas they can add. There's just not that much physical space. The transition to these full-screen displays has made the area for antennas even less so. They're adding antennas, they're doing their best to add the fewest they can.
They're sharing antennas as much as possible between Wi-Fi and cellular, as an example. When they do that, there's a need for a couple of things, not just increased tuner content, but also these antenna-plexers so that you can multiplex signal in and out of a given antenna element to various places. There's just a tremendous amount of work and innovation going on right now. We have a fantastic team of applications engineers and designers working to help our customers really manage these antenna networks. It is where a ton of value's being generated right now in the industry.
Thanks, Eric. Mark, the question about Richardson impacted gross margin.
Yeah. Ed, there's a lot of variables in this and a lot of complexity in the network. The gross margin impact by our utilization on the fabs is around 200 basis points in the quarter. More than offsets that depreciation benefit we talked about last quarter. Texas, as you know, is our largest fab, so it's over half of that.
Operator?
Okay, we'll go to our next question, Bill Peterson with J.P. Morgan.
Yeah, hi. I guess just first off, a near-term question. If we think about just the December quarter, you talked about continued strength in IDP, but I guess a sequential point of view, can you give us a feel for the sequential growth for IDP and I guess, Mobile Products?
All right, give a sec there, Bill.
Bill, just to be clear, are you talking just for the quarter?
Yeah, just for the quarter. I guess within the embedded in the guidance, what kind of sequential growth, I guess, are we looking at for IDP?
Mid-single digits.
Yeah.
Okay.
Yeah, the business grew over 20% in the second quarter, and we're expecting similar year-over-year growth in the third quarter.
Okay, terrific. I guess that probably puts us on track to maybe perhaps exceed our 15%, I guess, prior target you mentioned in the last quarter from a year-on-year point of view. I guess the details will come out in the Q in terms of operating performance, but, can you give us a feel for how we are relative to the model of 60%-
Yeah
gross margin, 30% ops?
Well, I'll just make a general statement that James has managed to be well ahead of his model. In fact, in this quarter, he actually exceeded 30% operating margin in the business.
We're expecting him to do it again next quarter.
Okay. Terrific results, in that segment. Great.
Thank you.
Okay, we'll take our next question from Vivek Arya with Bank of America Merrill Lynch.
Thanks for taking my question. Maybe one for Bob and one for Mark. For the first one, if my math is right, I think you're guiding March to roughly $770 million , definitely better than seasonal. March often tends to be seasonally quite soft, visibility's perhaps not as great. I'm just wondering, Bob, what are the assumptions underlying that? For Mark, on the gross margin side, I think you mentioned gross margins will be flat in December because of mix. If your largest U.S. customer is perhaps weaker and IDP is better, and I assume you recover some of the fab issues, shouldn't gross margins be up sequentially in December? Thank you.
Vivek, I need to ask a clarifying question.
I think-
For the March quarter, what did you say you had revenue like?
Basically, because you're saying second half will be up 10%, I'm just sort of trying to I hope my math is right.
Yeah. What we said is second half year-over-year would be double digits. We also said, Vivek, that we'd be down December to March, low to mid-single digits.
Right. That's what I'm wondering, that March you are guiding, visibility and other things tend to be seasonally softer. Is your forecast based on firm orders or is it based on some other assumptions?
Vivek, number one, I want to make sure. We don't agree with your $770 million or whatever. I couldn't hear you correctly. We think we're going to be down mid-single digits when we look at March versus December, and that's based on, as always, our judgment of our customers' forecasts. As I said, the majority of our business is run off schedule shares. From a visibility perspective, provided the marquee phones sell as well as they do, the marquee phones that we know at our largest customer, the ramp of that profile is different than what we've seen in prior years. They've announced that. I'm sure tomorrow they'll have more color on it. Factoring in all these things, that's how we get to, we think we're going to be down mid-single digits in the March quarter.
Vivek, on the margin, as we all know, this is unusual seasonality. Fact of the matter is that that lower margin product is larger in December than it was in September, unlike last year. As far as IDP, yes, the IDP growth is going to help as far as mix, but there's also mix within IDP. When it all shakes out, the dominant factor here is the mix of Mobile Products sequentially.
We'll take our next question from Srini Pajjuri with Macquarie Capital.
Thank you. Hi, guys. Question on China. You mentioned you're seeing more progress in BAW there. Is there a way to think about how much BAW, or what's the penetration of BAW in the premium segment, Bob? Are you still running into TC SAW-based solutions there, or are you seeing any of your BAW competitors also competing in that market?
This is Eric. There are some discrete BAW solutions, which of course, we are providing. Just to be clear, we didn't indicate that we were seeing an increase in BAW currently. What we were saying is, we're forecasting when we return to the BAW penetration that was there last year, which was driven by carrier aggregation requiring quadplexers, which were primarily BAW-based, right. If you go from a carrier aggregation requirement of about 15% of the market this year to 50% next year, that roughly triples the opportunity, let's say, for those BAW quadplexers. That's really the opportunity we're referring to.
I guess my question was more about the BAW wave that you mentioned, Eric. I'm guessing that has some BAW content in that. I'm just curious if.
It's a new BAW design that you won against TC SAW or if you're displacing the existing BAW suppliers out there.
No, it's existing BAW bands.
We'll take our next question from Chris Caso with Raymond James.
Yes. Good evening. I just wanted to follow up with some of the comments on BAW and capacity utilization. Perhaps you could talk about what you think would be the profile of the improvement in utilization as you go through. I know there's conviction in that utilization improving over a three-year period. What do you expect to be the profile of that? Importantly, what would be the driver of that? Eric, you had mentioned this potential for carrier aggregation on 15% of the TAM to 50% of the TAM. Is that something that you think is achievable over the next year?
Yeah. I think the drivers of that are the carrier aggregation attach that we talked about, also Wi-Fi. We have BAW in our coexistent filters for Wi-Fi. Some of these antenna-plexers that I mentioned are BAW based as well. Then, of course, it's the custom module that we're working on today that has a tremendous amount of BAW content in it. There's several things that are gonna layer in. Again, the trend is clear that the timing of each of those is a little harder to predict, but there's clearly a trend towards layering on a lot of different opportunities for BAW.
Then Chris, just as that BAW-enabled revenue increases, and we've talked about before, we're less than 25% now, we're gonna be closer to 30% next year, and then that expands in the planning horizon. That loads Richardson specifically and then Farmers Branch. By mid-next year, we would expect to be 80% or so loaded if our plans play out as expected. Then it becomes a case of just very carefully managing our CapEx. As we need additional capacity, we're doing it in the most cost-effective way, which the wafer size increase, the die shrink, all these other things we believe will reduce the capital intensity of the business going forward.
Okay. Just as a follow-up to that, I think you said 80% number on your plans. Does that contemplate BAW penetration at your largest customer, or would that be additive to that?
I'll just leave it, Chris, is that in order to get the utilization that we want, we're gonna need BAW-based revenue, without a doubt. We also need to continue to do well in winning SAW-based business and GaAs-based PA products and other things. We are absolutely focused on increasing our profitability with high-quality products.
We'll take our next question from Atif Malik with Citi.
Hi, thanks for taking my questions. The first question's on seasonality. I understand March quarter is better than seasonal because of the pushout of the flagship customer. Do you think that the June quarter seasonality could be below seasonal because of the impact of that phone on the Korean customer launch every year?
We're not giving March guidance. We're not gonna give June guidance, for sure.
Okay, fair enough. Mark, I have a question on gross margins. I absolutely agree with Ambrish earlier, that you guys have made a lot of progress in the gross margins, you guys keep on running in new excursions, whether it's laminate supply issues. What is it with your manufacturing process, or is it complicated with BAW and SAW and everything? We don't hear about these issues from other RF makers. Maybe they're also having these issues, but they're not talking about on their call. What is it about your manufacturing process that could help us get more comfortable with these excursions in the future?
Well, I think just very quickly, there's an important distinction. Last year, you could argue that it was something in our control, and we had a bad quarter, some manufacturing excursions, and looked at ourselves and really cleaned up our processes. It's paid off, and we have been running much better. The ramps this year are going very well. The two incidents we mentioned here, in the interest of disclosure, wanted to make sure folks understood it, I would say these are out of our control. One is literally an act of God, the Hurricane Irma, where interestingly, in the days after the hurricane, after the fab was back up and running, there were some defects associated with sulfur compounds on the wafers, on the metal layers of the wafers.
It turns out it was decaying vegetable matter and conventional fab air filtration wasn't sufficient. We changed some very good root cause analysis and recovery action by the team, changed the filtering, and then just natural dissipation, the problem went away, and we did not impact the customer. That's the important thing. This fire at a laminate supplier, again, out of our control, what it speaks to is the good operational excellence on our part, had some qualified suppliers. We mobilized, worked with our customers, worked with these other partners, worked with these other qualified suppliers, and as we see it, we're on track to have a minimal impact from this event.
We'll take our next question from Craig Hettenbach with Morgan Stanley.
Yes, thanks. I wanted to come back to this opportunity on the mid and high band with Apple. It looks like your competitor, at least on one of the versions of the current phone, is shipping, and so they've gone through all the processes and trials and sampling. Does that change at all your thinking in terms of what the prospects are as you go into next year?
Not at all.
Okay. On the IDP business, which is running 20%, can you talk about some of the subsegments in that space in terms of where you see is driving the really robust growth?
Yeah, as I talked earlier, our connectivity business was very strong with what we've been able to do in Wi-Fi. We had a great quarter in the defense business, substantial growth really across all our major sub-markets, radar, EW, comms, and through our distribution channel there as well. We had a broad section of customers. We also had nice growth in the IoT segment. As you're aware, we're first in the industry to have SoCs that can operate in multiple standards. We are seeing great attach rate of those chips. We've been able to get some industry first awards. Embedded Computing, as an example, gave us the most innovative silicon product of the year. That's also created substantial growth, and we talked about greater than 50% growth in our IoT business. Been very broad-based.
We also saw strength in small cell, NB-IoT, as we talked about in Bob's script. We've been cautious about small cell for many years. It looks like this maybe is the breakout year in the small cell activity. NB-IoT was also, we believe, is starting a ramp that could last a couple of years in China. Pretty broad based, I guess I would say.
That concludes today's question and answer session. I'll turn the call back over to management for any additional or closing remarks.
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