Qorvo Inc (QRVO) — Q2 2021 Earnings Call Transcript

Thanks very much. Hello, everybody, and welcome to Qorvo's Fiscal 2021 Second Quarter Earnings Conference Call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in the earnings release published today as well as the risk factors associated with our business in our annual report on Form 10-K filed with the SEC because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance about the impact of certain noncash 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 at qorvo.com under Investors. Joining us today are Bob Bruggeworth, President and CEO; Mark Murphy, Chief Financial Officer; James Klein, President of Qorvo's Infrastructure and Defense Products Group; and Eric Creviston, President of Qorvo's Mobile Products Group; as well as other members of Qorvo's management team. And with that, I'll turn it over to Bob.

Thank you, Doug, and thanks to everyone for joining our call. In our second fiscal quarter, Qorvo outperformed our updated guidance on revenue, gross margin and EPS. Strength was broad-based across customers and supported by multiyear technology upgrade cycles. Both businesses had strong year-over-year growth, supported by new product launches, 5G and WiFi 6. In Mobile Products, the transition of 5G is fueling a shift from discrete products to higher-value content, including integrated modules in flagship and mass market 5G smartphones. Driving growth, Qorvo is leveraging our deep technology portfolio and pursuing opportunities throughout the front end, at the antenna, in the main path, in the diversity path and across the frequency spectrum. At the antenna, the introduction of new bands and band combinations is creating significant design challenges for OEMs. Qorvo solves these challenges with a range of products, including an expanding portfolio of antennaplexers. In the September quarter, we increased volume shipments of our BAW-based antennaplexers solutions to multiple Tier 1 OEM smartphone manufacturers. In the main path, Qorvo's highly integrated 5G solutions include low-band, mid-/high-band and ultra-high-band modules. Customer design activity has been robust, and we expect our main path solutions to grow across customers as demand for integrated solutions expands throughout the high-volume mid-tier. In September, we expanded shipments of our complete main path solutions across multiple Tier 1 Android smartphone OEMs. In the diversity path, the adoption of dual transmit architectures is creating new requirements for integrated transmit and receive filtering. This is especially meaningful for Qorvo because our dual connectivity modules leverage many of the technology advantages we enjoy in the main path, including high-performance BAW multiplexing. We said previously, we anticipate approximately 250 million 5G smartphones in calendar '20, with that number approximately doubling in 2021, and that remains our view. In ultra-wideband, we see adoption in smartphones as the catalyst for a broad ecosystem of connected devices. Similar to Bluetooth, smartphones will be the hub, connecting to multiple peripherals. The technology will enhance how we interact with our media, lighting, appliances, automobiles, digital wallets and a range of other applications in and out of the home. It will also transform how we locate equipment and production pieces on the factory floor, even how we interact with coworkers. In the September quarter, we acquired 7Hugs Labs, a pioneer in ultra-wideband software and system solutions to enhance our capabilities in UWB solutions and accelerate adoption across mobile, IoT and automotive ecosystems. The combination of our hardware technology with their software expertise positions Qorvo to accelerate the development of a broad ultra-wideband ecosystem expected to reach billions of devices in the coming years. 7Hugs brings a highly skilled team with vast experience in UWB applications and a portfolio of intellectual property. We're excited to welcome them at Qorvo to build on their success and accelerate growth in ultra-wideband. We also signed a partnership with a leading design services company, Sigma Connectivity, to develop advanced UWB solutions and assist customers in the creation of breakthrough applications, leveraging the unique capabilities of UWB. For wide area applications like asset tracking, Qorvo enables long-range, low-data rate connectivity via cellular IoT. We offer a broad portfolio of discrete solutions as well as highly integrated modules for CAT-M and narrowband IoT through our partnership with Nordic Semiconductor. In WiFi 6, we enjoyed broad-based content gains across both businesses in support of the leading suppliers of smartphones, tablets, mesh networks, gateways, smart speakers and virtual reality headsets. Before turning to IDP, Qorvo was recently granted a license to ship certain mobile products to Huawei. Our December guidance currently contemplates no Huawei revenue as we work with the customer to understand the impact on the license. Now turning to IDP. Wireless connectivity revenue more than doubled year-over-year. WiFi revenue was broad-based across products and customers and supported by the rollout of WiFi 6. Customer demand for our front-end modules and BAW filters was especially strong in support of CPE and retail applications. Looking more closely at content opportunities, our shipments to the leading connected home platform provider included WiFi 6 FEMs, BAW filters and multi-protocol SoCs. Also for next-generation WiFi gateway, we were awarded the entire RF band in support of the leading North American multiple system operator or MSO, including the 2.5 and 5 gigahertz FEMs and a variety of filter products. The FCC recently approved new spectrum for WiFi 6E, and Qorvo is actively supporting leading OEMs in the design of 6E platforms. WiFi 6E will continue to increase the capacity and lower the latency of next-generation platforms, creating a new class of products and applications. In defense and aerospace, Qorvo was the exclusive RF recipient of the multiyear U.S. government SHIP program, recognizing our leadership in advanced semiconductor packaging. This program will continue to advance the state-of-the-art in packaging targeted towards a broad range of applications. Also of note, we advanced the performance of defense phased radars with 150-watt 2.9 to 3.5 gigahertz power amplifier using our industry-leading GaN process. In power management, growth was driven by the transition of solid-state storage in client devices such as laptops and enterprise computing and data centers. Demand has also been strong for our motor control products as brushless motor technology continues to gain share in a broad range of consumer products. Our Programmable Power Management business is performing very well across diverse markets as we help customers enhance product performance, reduce weight, improve reliability and bring products to market faster. In automotive, we began sampling a second-generation automotive cellular V2X FEM that integrates the PA, LNA, switch and BAW coexistence filter to solve critical system-level challenges. In wireless infrastructure, we were awarded multiple design wins in support of 5G massive MIMO deployments, expanding our customer base for GaN amplifiers. Within that, we commenced shipments of GaN amplifiers supporting massive MIMO C-band base station deployments first in the U.S. and then other regions globally. We also launched high-performance BAW filters for Band 41, 5G small cells and repeaters to help enable 5G and WiFi coexistence. Next calendar year, we see continued year-over-year growth on global 5G deployments. The deployment of 5G base stations and the upgrade to 5G smartphones are expected to span multiple years. In IDP, our 5G growth drivers include content gains in small-signal devices and GaN PAs in massive MIMO, and the adoption of GaN PAs in macro base station deployments. Before handing the call over to Mark, I want to thank the Qorvo team for a standout performance in a tough environment. Our design teams are releasing best-in-class products. Our application engineering and sales teams are engaging closely with customers to solve their most complex RF challenges, and our global operations team continues to excel. I'm extremely proud of the team for their outstanding efforts and ongoing commitment to our customers' success. And with that, I'll hand the call over to Mark.

Thanks, Bob, and good afternoon, everyone. Qorvo's revenue for the fiscal '21 second quarter was $1.060 billion, $45 million above the midpoint of our updated guidance provided on September 8. Following our updated guidance, customer demand continued to strengthen, and we were able to support some of that demand within the quarter. Mobile Products revenue of $754 million exceeded our expectations, driven by seasonal demand effects and the ramp of 5G smartphones. Infrastructure and defense products revenue of $306 million was down sequentially as expected but up strongly year-over-year in support of the ongoing buildout of 5G networks and the deployment of WiFi 6. As a reminder, our fiscal year 2021 is a 53-week fiscal year, and our September quarter was a 14-week quarter versus a typical 13-week quarter. Our last 14-week quarter occurred in the period ended October 3, 2015, during our fiscal '16, which was the last 53-week fiscal year reported. Non-GAAP gross margin in the second quarter was 51.7%, which was above our updated guidance due to better-than-expected mix and favorable manufacturing cost variances. Our efforts to improve the portfolio, drive productivity and carefully manage inventories continue to yield favorable results. Non-GAAP operating expenses in the second quarter were $219 million, higher sequentially on the additional week, incentive compensation and other labor costs. Non-GAAP net income in the second quarter was $282 million, and diluted earnings per share of $2.43 was $0.29 above our updated September guidance. Cash flow from operations in the September quarter was $281 million, and CapEx was $44 million, yielding free cash flow of $237 million. We repurchased $105 million of shares during the quarter. During the quarter, we took steps to reduce our cost of debt and further improve our financial flexibility. We renewed our unsecured credit facility at more favorable terms and extended it to 2025. We also increased our term loan to $200 million and raised $700 million through a new issue of unsecured notes maturing in 2031. After the quarter closed, these proceeds and cash on hand were used to pay down our notes maturing in 2026. Today, our debt balance is under $1.8 billion, and cash is approximately $1.1 billion. Our leverage remains low. Our revolver is untapped. The weighted average maturity of our debt is 2029, and we have no material near-term maturities. With our financial flexibility, we can focus on advancing technology, supporting customers and making prudent organic and inorganic investments that support long-term earnings and free cash flow growth. To that end, we acquired 7Hugs Labs in the second quarter to support the ongoing development and adoption of our ultra-wideband products and solutions. This acquisition enhances Qorvo's software capabilities and is an important step in realizing the potential of UWB. We see a wide array of applications emerging with ultra-wideband technology and have significant customer engagement on the design of new products and solutions. We expect UWB to contribute meaningfully to Qorvo over time. Turning to our current quarter outlook. We expect revenue of approximately $1.060 billion plus or minus $15 million, non-GAAP gross margin of approximately 52.5% and non-GAAP diluted earnings per share of $2.65 at the midpoint of guidance. Our December quarter revenue outlook reflects seasonal demand effects and demand for multiyear technology upgrade cycles. In Mobile, demand for 5G is adding RF complexity and driving higher content, and we forecast Mobile revenue in the current quarter to be approximately $790 million. We suspended shipments to Huawei in mid-September in accordance with Department of Commerce regulations. And although we've since received a license for certain mobile products, we've assumed no sales to Huawei in our current outlook. In IDP, we project revenue of approximately $270 million in the current quarter, reflecting the timing of base station deployments. We forecast IDP to sustain strong double-digit year-over-year growth through the balance of the fiscal year with this infrastructure demand picking up in the March quarter. We expect continued strength in defense, WiFi and power management due to durable underlying trends. While considerable economic uncertainty remains with the ongoing effects of the pandemic, currently, we expect end market demand to support full fiscal year double-digit revenue growth for Qorvo. Our December quarter gross margin guide of approximately 52.5% reflects volume growth and ongoing efforts to improve the quality and efficiency of our business. Specifically, we've invested early and adequately in the technologies that markets need, focused our product portfolio on where we can best serve customers, gained productivity across our operations and reduced our capital intensity. We believe our work to keep our inventories and cost structure low will help us sustain over 50% gross margin through the balance of the year, fiscal year. Non-GAAP operating expenses are projected to decrease in the December quarter to around $205 million as we return to a normal fiscal quarter length and other personnel costs decrease. We expect other expense to decrease to under $20 million on lower net interest costs. We project our current quarter and full year non-GAAP tax rate to be at or below 8%. We still project capital expenditures to remain below $200 million in fiscal '21 and focus on areas that advance a differentiated position for Qorvo to best serve customer needs such as BAW and GaN. Currently, we expect free cash flow to be approximately $900 million this fiscal year. As of September quarter results and our December quarter outlook show, Qorvo continues to operate well through a challenging period while serving customers in 5G infrastructure and smartphones, WiFi, IoT, defense and other growth markets. In closing, I'd like to join Bob in thanking Qorvo employees for their continued efforts during this time. Now I'll turn the call back over to the operator for questions.

Very solid results. I guess for my first question, I know you're having a record year for IDP, and it's great to see the sustained margin improvement. I know you don't provide a quantitative outlook beyond 1 quarter, but I was hoping you could talk about the opportunities you have in IDP next year and perhaps whether you think that segment can grow year-over-year.

Yes. Karl, this is James. Thanks for the question. I think the underlying trends for the business are where we said they've been for the last several quarters. We've got a great position in 5G with the rollout of massive MIMO, with the adoption of GaN and the adoption of higher frequencies. I think those are all very good trends for us, and we've got great momentum coming out of this first year of deployments, predominantly in China. WiFi 6 continues to roll out. We've had a string of record quarters for that part of the business. And again, I expect that to continue. And as Bob mentioned, we see 6E coming right at the end of that string of results and really allows for another opportunity to update hardware. And then our defense business just continues to provide a very solid base to the business with really some of the same underlying trends that we've seen before with the adoption of GaN and phased-array antennas coming to play in that market. So overall, I think we're positioned very well for the business to continue on this 10% to 15% trend that we've been on for several years.

Very helpful. And if I may, for my follow-up, you have a record amount of cash on the balance sheet, and you're going to generate record free cash flow this year. Your recent capital allocation priorities have centered on IP-focused M&A. What are your thoughts on buybacks and/or perhaps a dividend given your robust multiyear outlook?

Mark stated that there has been no change in their capital allocation strategy. Their main method of capital return has been share repurchase, which accounted for approximately 44% of their free cash flow this quarter. He noted that during the quarter, due to updates and capital market activities, there were times when they could not repurchase shares outside of the 10b5-1 plan. However, they continue to view share repurchase as their primary source of capital return. Mark highlighted a significant milestone this quarter, with the free cash flow margin reaching about 25% over the last 12 months, generating around $860 million in free cash. They deployed about $700 million for acquisitions and repurchased more than $400 million in stock, totaling $1.1 billion in deployment from $860 million in free cash. Over the last six quarters, they have generated $1.2 billion in cash, spent about $1 billion on acquisitions, and repurchased about $700 million in stock. Since inception, they have returned 113% of their free cash flow or $3.1 billion to shareholders at an average share price of $63. Mark expressed confidence in their successful capital return plan and ongoing acquisition pursuits, noting they have completed five acquisitions in the past six quarters. He mentioned their focus on bolt-on acquisitions, having made two for James' business and three for technology additions, and emphasized the positive integration and performance of these acquisitions within Qorvo. Lastly, he indicated they are actively investing in the assets acquired and are pleased with both their inorganic capital deployment and strong returns to shareholders.

Congratulations on the very strong results. I had 2 as well. For my first question, I wanted to ask on the ultra-wideband opportunity long term. Mark, I think it was you, you talked about contribution from this business potentially being meaningful over the long run. Just for context, how big could this business be over the next, call it, 2 to 3 years as a percentage of Qorvo's revenue? And how are you thinking about the relative size of revenue contribution between mobile, IoT and automotive? And then I've got a quick follow-up.

Yes. Thanks, Toshiya. This is Eric. Just to talk about ultra-wideband, how big it could be, we haven't really set public numbers for what the internal revenue for ultra-wideband might be. But as you know, there's very few players in the area, and the Decawave team that we've acquired really pioneered the latest version of ultra-wideband, the impulse radio type, which is what gives it the capability of proximity awareness and internal navigation and so forth. So we see those as being the key real opportunities for ultra-wideband going forward. And as Mark said, we think that proliferation in the mobile phone will become sort of the infrastructure of the hub for many, many applications like consumer IoT, smart home. Of course, automotive, you will access your car from your phone. And even in industrial IoT applications as well there'll be opportunities there. So it's just a very target-rich environment. And we have said that we expect within 4 years, kind of in calendar '24, it's somewhere between 2 billion and 4 billion units. Again, very limited number of people supplying that market. We think we have the broadest approach to the solution. We have the ability to not only serve the mobile phone but all the accessories that talk to the mobile phone as well as automotive and all the industrial IoT verticals. So we're really excited about the capability and the growth prospects for the business, for sure.

Toshi, as far as IoT revenues, they're very meaningful, but we have not broken those out, but it is sizable and growing very nicely. We're very pleased with that. And our automotive business today is reasonable size but also growing very nicely and should grow substantially over the next few years.

Got it. And then, Mark, as my follow-up on gross margins, great job here. And then, I guess, into the December quarter, you're guiding margins, I think, up 80 basis points sequentially despite IDP revenue being down, which should be a headwind for mix. What are some of the puts and takes in terms of gross margins in the quarter? And I guess more importantly, going forward, I think you talked about sustaining 50% or higher in the back half. But when you think about gross margins on a multiyear basis, where is the ceiling? Or where's the potential for Qorvo given some of the initiatives in place?

Toshi, regarding the December quarter gross margin, we're projecting it to be 52.5%, which is an increase of 80 basis points. You are correct that our mobile mix has increased, but there are various factors influencing the mix, including product mix, which is favorable. About half of the 80 basis points is due to mix effects, while the other half benefits from lower manufacturing costs and excellent performance from our operations team. Higher volumes are aiding absorption, and we have also experienced good test yields, which we expect will improve further. Additionally, we've been effective in managing our spending, all of which contribute positively. We anticipate these factors will persist into the December quarter. Before discussing the longer-term margin trends, I want to note that we do expect gross margins to decrease in the March quarter, with a decline of about 150 basis points compared to the third quarter. This decline will primarily be influenced by mix effects and lower volumes, leading to some absorption challenges among other factors. Looking at the long term, it has taken us several years to align our operations within the company. After the merger, we recognized the need to invest in top-tier technologies that could scale to support ongoing technological trends, and we are now positioned for that. We've worked on refining our product portfolio and getting our operations streamlined, which includes improving productivity and managing our capital spending more carefully. This has led to a reduction in our capital intensity. We still have room to increase volume within our factory network to enhance absorption further. Paul and his team are doing an exceptional job driving productivity by continuing 6- to 8-inch conversions in BAW and 4- to 6-inch in GaN, while Micro-BAW is being introduced and growing in our product share. We’ve seen improvements in cycle times, spending control, and numerous productivity initiatives. Lastly, we’re better leveraging our supply chain partners. Combining our premium technology portfolio with active management of our products, enhanced productivity across the organization, and reduced capital intensity, we believe we can sustain or even expand our gross margins moving forward beyond fiscal 2021.

Great job on the quarterly performance and guidance. I'd like to understand where you noticed growth in September. When you preannounced, you mentioned stronger smartphone demand and that it was quite widespread, but it seems to have exceeded expectations. How widespread is it across your six major smartphone customers, including Huawei? Where do you see the growth? I believe there was also a slight increase in IDP compared to your expectations. Looking ahead to December, you previously expected a flat trend, but now you anticipate significant growth in mobile. What is driving this improvement compared to your earlier outlook? Is Android still seeing a sequential increase like it did in September? Any insights into the growth would be appreciated.

Thanks, Bill. It's Bob, and I appreciate your questions. As far as the upside, after we gave the guidance in early September, it was broad-based, but it was not Huawei. And I've said that, I think, in a couple of other public forums. And it was broad-based across our other 5 customers that you said the big 6. Huawei was not one of them during that period. We saw a little bit of upside in IDP. And as James pointed out, our WiFi business is doing extremely well. And that was a little bit of that and a little bit of defense, a little bit here and there. But overall, business is running extremely well. And our operations team did a good job of keeping up with some of that demand. So real pleased with that. Eric, do you want to take the second part of Bill's question there?

Yes. Looking into December and that strength, it's again not Huawei, as we said. But other than that, it's really pretty broad-based across Android as well as iOS. But also within Android, China is still continuing to look very strong. We're still in the very early innings of the 5G rollout, and there's a lot of subs there. So it's really fairly broad-based in the current view.

Yes. And I guess maybe the second question for James, and I think earlier you said that the 5G infrastructure should start to improve after December. But I guess for the composite of the business, assuming you have better visibility across areas like defense and longer-term opportunities, how should we think about the seasonality of that business? Should we assume WiFi still sustains into the first half of next year based off work-from-home trends and other factors? Just trying to get a feel for how you see that business trending here in the next couple of quarters.

Thank you for the question, Bill. As Mark mentioned last quarter, we’re tracking closely to those expectations. For Q3, we’ve already indicated 270, and I believe Q4 will align with the range Mark discussed last quarter. We'll see growth resume in Q1 of the next fiscal year. I previously mentioned that our underlying markets really support growth of 10% to 15%, possibly leaning towards the higher end. We had an outstanding first half; comparing it to the same period last year, we achieved a 55% growth. The year-over-year growth rate for the current quarter we are guiding is about 30%. There are very positive trends in the business, bolstered by strong technology and partnerships with our customers. While we anticipate some fluctuations with the 5G rollout, we expect momentum to regain as we enter our fourth quarter and the beginning of FY '22.

Congratulations on the strong results. My first question is about the sell-through of 5G smartphones among your customers and what it indicates about the seasonality for the March quarter. I have the impression that we are still in the early phases of 5G and that the strength and content gains could persist into March. This might suggest a more gradual seasonality with a decline of around 8% to 9%. However, you've mentioned a robust second half, which makes me wonder if traditional seasonality could come into play with a decline in the mid-teens. I'm interested in which direction you're leaning and your overall thoughts on the sell-through of 5G smartphones.

Yes, Vivek, it's Mark. We're not going to provide detailed guidance for March, but I have a few comments. The key point is that we believe the technology upgrade cycle for 5G will extend over multiple years for both handsets and infrastructure, which also applies to broader connectivity trends that we think are strong. However, there is still a lot of uncertainty in the market regarding the rollout rate and pace, especially in the short term. Additionally, the ongoing pandemic, the global economic recovery, and other factors are influencing the situation. I would like to note that the increase in 5G demand, along with remote work and other factors, is putting pressure on parts of the supply chain. Fortunately, our inventories are well-managed, and the overall supply chain inventories are lean. We are committed to meeting customer needs as much as possible. Regarding your question about March, we believe it’s reasonable to anticipate a decline from a very strong December, potentially around 10% or more. We also expect our gross margin to decrease sequentially by 150 basis points or more due to lower volumes, mix effects, and other factors, although we anticipate being up year-over-year by at least 100 basis points. Furthermore, we expect operating expenses to remain flat to increase as we continue to invest for the long term. Overall, we see this as a long-term trend and are making the necessary investments.

Got it. Very helpful, Mark. And then for my follow-up, what do you think about the competition from Qualcomm? They spoke about a 50%, 60% plus kind of growth rate in their RF front-end business. Is that apples-to-apples to what you sell? Are you starting to see them in more places? Do they have some kind of advantage because they're able to bundle some of their RF components with the 5G modem and the strong position they have on the 5G modem? I'm just curious, has the competitive landscape changed for you from a Qualcomm perspective from what you're seeing right now?

Thank you for the question, Vivek. I don't believe there has been any significant change. We have discussed this topic previously. Different companies interpret the RF total addressable market differently and decide what to include in their RF business. For Qualcomm, they incorporate many other features and functionalities that aren't typically covered by the RF community. They are likely benefiting from the initial rollout of millimeter wave technology since they include a wide range of functionalities and content that are not inherently RF-related. It's essentially a matter of how they classify what they call RF. As for their attach rate and the actual RF components in their baseband, we haven't observed any substantial change in that aspect. Our customers are seeking top-tier RF components, and the overwhelming majority of RF content isn't usually within their competitive reach, particularly in the mass market. There's a significant opportunity, but we haven't noticed any shifts in that dynamic.

Firstly, congratulations on your outstanding performance. I'll continue from the previous question. Regarding millimeter wave, it seems that the traditional sub-6 players in RF are not yet in that space, including your company, which presents an opportunity. Do you believe this is a matter of coverage or time before you can enter that market? Or is there simply no application for your technology there? Alternatively, is this related to some industry disruption, such as changes in baseband technology, giving you a chance to enter? Any insights would be appreciated.

Yes. Thanks, Harsh. This is Eric again. When we look at millimeter wave, I think it's important to realize, I mean, Qorvo is certainly a technology leader in millimeter wave. The work that James and his group has been doing for decades to provide millimeter wave in incredibly high-performance situations is second to none. And our customers have validated that. If we go up and do component-level evaluations of various functions in the millimeter wave front end, there's no question, there'd be a huge advantage to the system at going with our technology. So the question is really the rate and pace of the rollout and seeing how the economics play out. I think as of now, we're sort of testing the waters in millimeter wave. So customers are employing sort of easy-to-use integrated solutions. They don't have the best performance. But for now, the real question is whether there's any infrastructure to talk to. There's rollouts, of course, across dozens of cities, but they're incredibly limited in terms of coverage area and real-world dynamics of getting the signal in and out in a reasonable way. And the cost of employing the infrastructure and being able to be mobile, but they need device on a millimeter wave network. There's just a lot of questions that haven't been sorted out. So I think it's great that it's being tested. As an RF company, we would be thrilled if it becomes mainstream, and we would love to participate in it. I think customers have all evaluated our technology. It's really a matter of waiting to see if the need really survives the first 1 or 2 generations.

Understood. And then for my follow-up, do you see RF content increasing again next year associated with 5G after this initial wave of 5G content uptick? And if so, like, what would be some of the big broad drivers? Is it just the same as expanded bands, expanded channels and things of that nature? Or do you see something else happening?

Yes. So see, there's probably two ways to think about it. So we said the units for 5G we expect to roughly double again next year, so from 250 to 500. But on that doubling, the content increase is staying at roughly the same at $5 to $7, depending upon the tier and the exact model, right? So in that sense, you're seeing the units are same. But then longer term, I think you're going to see the same dynamic that's driven 4G. So we're still very early in the 5G cycle. There are new bands still coming. And within the bands, they're trying to find ways to use more of the spectrum. And so there's going to be a priority on higher technology to monetize all that spectrum and get the data out of it that 5G promises. We're also just beginning to see these dual connect modules where we've got dual transmit antennas now for 5G, and some of these are really challenging, frequency allocations and the bands that they want to transfer on simultaneously. That's going to add an awful lot of complexity and challenge for RF, which will drive even more value there, I think. And so we're investing in the areas that we think are going to be our customers' toughest challenges. So as the RF gets harder and more complex and more valuable, we're going to be positioned to provide the best technology to solve the problem.

Congratulations.

Thanks, Harsh.

I would like to inquire about the various factors influencing the smartphone market in China. You mentioned having a limited license with Huawei specifically for their handset business, and I've heard that others may have also received a limited license from the U.S. Commerce Department. I'm curious whether they have managed to stabilize their supply chain to support their mobile handset business. Additionally, I would like to get your perspective on whether they might lose market share and how Qorvo could potentially benefit if your market share with alternative customers increases. What are your thoughts on this?

Yes. Thanks, Gary. Number one, as you pointed out, our license is for certain mobile products, not IDP. So you're correct, let's get that clean. And we're working with the customer. But I think we pointed out on our last quarter call that we're very fortunate that we have the same products that we sell to all these customers, and they go with multiple basebands. So from a supply perspective, we're very fortunate with our inventories that we sell the same components to all these guys. And the mobile team has done a fantastic job of designing products that will work across customers and across basebands.

Okay. As my follow-up, I wanted to ask about Huawei again, but on the GaN power amplifier side, I believe they've been pretty much the driving force of that portion of your business as a lead customer in China. But I'm curious to hear your thoughts on the adoption of some non-Huawei 5G RF players.

Yes, the adoption has been widespread. All of the OEMs have programs related to GaN, with many already moving their products into production, especially in massive MIMO applications which typically involve significant content. We have secured wins with several of these OEMs supporting deployments in China and other regions. Overall, I believe the adoption is progressing very well. We had an excellent quarter for GaN, matching our previous record and almost quadrupling our business from the same time last year. The trends align with our projections that 5G will drive MIMO and higher frequencies, consequently boosting GaN adoption. We remain committed to scaling the technology and enhancing performance to maintain this growth as we are still in the early stages of 5G deployments globally.

I had a question on the gross margin and really from a mix perspective within mobile, any context you could share in terms of perhaps some of the tailwinds that integration is helping as well as maybe the BAW business increasing as a percent of total as you go out in time?

Yes. Craig, we usually don't provide detailed breakdowns of our product mix, but you are right. The ongoing trend of integration, especially with BAW-related modules, is beneficial for us. Our largest manufacturing facility is in Richardson, which means we have a significant cost structure there. Therefore, the volume and continued growth in BAWs are crucial and are contributing positively. Additionally, we have other products with specialized technology that also enhance our mix. Overall, both BAW and other integrated modules are contributing to the positive mix.

Got it. And then just a follow-up for Eric. In terms of integration within mid-range phones or the mass market, can you discuss where we are in that cycle? This has been an important growth driver, but how much more do you see as the market shifts towards integration, and how significant is the role of 5G in the need for integrated solutions versus discrete parts?

Yes. It's a good question. As you know, 4G sort of grew up discrete, and as it became more complicated and more bands, integration became required really to fit everything into the space. And 5G is essentially launched with fully integrated modules. And to date, I don't believe we're aware of any design that's going discrete. It's just very, very, very complex. And once you're used to having a highly integrated fairly miniaturized compact RF solution, it's really hard to undo that and go to discrete solutions because you still have to do all of this on multiband operation and multiplexing and so forth. So it's very hard for a phone customer to match these things on the phone board. So if not 100%, the vast majority of 5G phones are continuing to use fully integrated solutions.

If I could, Eric, based on Bob's comments and our own analyses, it seems that most of the strengths in your businesses are from the main path modules and probably tuners, both of which have performed very well. Skyworks is also excelling in diversification, particularly with the new transmit versions, and we’ve seen a significant increase in antennaplexers at Apple, which appear to be directed to Broadcom. I understand you possess the technology to compete in these areas, but we haven't observed much of it yet. Will we see more involvement from Qorvo in these sectors as these technologies enter the Chinese phone market? Or do you think that, since you've only recently adjusted your focus towards these potentially lucrative but lower average selling price products instead of larger mid- or high-band offerings, it will simply take time before you can penetrate the non-Chinese OEMs? And then Mark, go ahead.

Yes. So I think that since we formed Qorvo, we really had a focus on looking at the full architecture because we've got visibility into it and investing in the key technologies that are going to solve the customers' toughest problems. And you're right, we've got tremendous expertise around the antenna systems, not just tuning, but also multiplexing and antennaplexing and switching and LNAs and all the things you need to make the antenna networks work. And you know that's getting to be more and more and more important regardless of the tier or the customer base, right? But also the advanced power management that we have, which is a very specialized power management to help in these high-modulation standards, we're going to continue to invest in that. We think there's new opportunities there. Our BAW filtering, we believe we're second to none now. And we're not slowing down. We've got many, many more improvements and steps-up in performance and cost, as well reduction for BAWs. So that's going to be the anchor of a whole suite of modules, as you're indicating, even the receive modules that have transmit capability in them. And then all of the main path modules will continue to rely heavily on BAW. So I don't think we're limited at all of where we play. It's a target-rich environment for us. We're kind of prioritizing our investments to where we think we'd get the best ROI. I think it's going really well. And we're going to continue to build out the portfolio and continue to play in more and more areas as we see them being attractive.

Yes, Ed, I am not entirely sure what your question is. Your figures regarding historical data are correct, but we have made significant investments in the business since that time. As you know, there were initiatives to streamline our operations to align with our future direction, and as Eric mentioned, we've focused heavily on active portfolio management. Currently, we have consistently improved gross margins from a low point in September 2016. We are very positive about the technology and the business. As Eric noted, we are making the right product decisions that benefit our customers and ourselves. The operations team is performing exceptionally well, and there is substantial potential for increased productivity, which we expect will support our margins. Additionally, we are decreasing our capital intensity. All of this indicates that we should be able to maintain our current levels and, in time, we see no reason why we shouldn't be able to expand margins.

Thank you for joining us on our call tonight. We'll be presenting via webcast at upcoming investor conferences, and we invite everyone to listen in. Thanks again, and have a great night.