Qorvo Inc (QRVO) — Q1 2022 Earnings Call Transcript

Thanks very much, Cody. Hello, everybody, and welcome to Qorvo’s fiscal 2022 first quarter earnings conference call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management’s current expectations. We encourage you to review the safe harbor statement contained in the earnings release published today as well as the risk factors associated with our business in our annual report on Form 10-K filed with the SEC because these risk factors may affect our operations and financial results. In today’s release and on today’s call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or other items that may obscure trends in our underlying performance. During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our website 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 welcome, everyone, to our call. First, the Qorvo team delivered an exceptional June quarter. Revenue, gross margin and EPS were each above guidance. Customer demand during the quarter was broad-based and included recently released product categories including 5G diversity receive modules, MEMS-based touch sensors and Wi-Fi 6E FEMs to name a few. Our R&D teams are relentlessly advancing technologies that enable more complete, integrated solutions and increase differentiation. We are partnering with leading customers, serving them where we are most valued and introducing new products and technologies that expand our addressable markets. We are pleased with ongoing design activity. We are locking in wins and we expect the demand environment to remain robust. In the smartphone market, 5G devices are adopting new architectures and adding functionality that enhance performance and create new challenges related to current consumption, space and handset design resources. To address these challenges, handset manufacturers are selecting more highly integrated solutions that deliver superior performance. For Qorvo, the content opportunity in a 5G device increases by $5 to $7 when compared to a 4G device. We expect handset units to grow 5% to 10% this year with 5G doubling to around 550 million units. In 2025, 5G units are expected to be approximately 80% of total units. In other connectivity markets, new applications are proliferating, supported by generation-over-generation advancements in Wi-Fi, Bluetooth, Zigbee, Thread, ultra-wide band, and other wireless protocols. And a growing number of applications, multiple wireless standards coexist and operate concurrently. As an example, one of the largest smart home providers recently integrated numerous low-power wireless protocols into its distributed Wi-Fi 6 router, creating infrastructure for seamless whole-home operability. We expect this integration trend to continue. Our expertise in areas including product design, software support and system solutions enable us to simplify our customers' product development efforts while significantly enhancing the end-user experience. Outside of connectivity markets, the expanding opportunities are driven by a diverse set of underlying upgrade cycles. Brushless DC motors are replacing larger, less efficient conventional DC motors. Solid-state drives are replacing slower and less reliable hard disk drives. And touch sensor solutions are replacing less functional traditional buttons. We also expect RF-based biotechnology testing will enable central lab performance at the point of care. We expect our first commercial orders for our Omnia test platform by the end of the year. Turning to the June quarterly highlights. In 5G handsets, customer demand for highly integrated modules is expanding. During the quarter, we launched our next generation complete main path solution, which includes low-band, mid-high band and ultra-high band modules, offering higher output power and enhanced MIMO support for upcoming 5G phones. For the diversity path, we began sampling our first 5G DRX, a sub-6 ultra-high band placement offering best-in-class receive sensitivity. These main path and diversity path solutions integrate filtering and amplifiers that were formerly discrete, helping our customers to save board space, improve device performance and accelerate product development efforts. Also during the quarter, we announced the interoperability of our family of ultra-wideband products with Apple's U1 chip and the nearby interaction protocol. Qorvo's ultra-wideband solutions provide a superior level of accuracy, reliability, latency and security when compared to traditional technologies like Wi-Fi, BLE and NFC. In addition to remote access to our cars and homes, ultra-wideband will enable new applications in the connected home, indoor navigation, contactless payment, factory automation, and other use cases. With more in-house software capability from our recent 7Hugs acquisition, we now offer a complete solution, and we're working with customers on products combining our ultra-wideband hardware with our latest software release, shortening their time to market. We see a growing set of applications for our ultra-wideband solutions and customer design activity is accelerating. In Wi-Fi for handsets, we secured new reference design engagements with our Wi-Fi 6E FEMs. These chip-on-board FEMs reduce insertion loss and enhance handset design flexibility versus system-in-a-package solutions by enabling placement closer to the antenna. Leading Android manufacturers are moving from system and package placements to best-in-class RF solutions and Qorvo is winning on the strength of our product design, performance, and customer support. In automotive, we achieved record revenue, up more than 80% year-over-year in support of automotive OEMs in the U.S., Europe and in Asia. Growth was driven primarily by the increased demand and expanding connectivity requirements for Wi-Fi, VDX, LTE and 5G. Content growth was also included our touch sensor solutions, which automotive OEMs are using to enable smart interiors. This is a new growth category for Qorvo, and we have secured design wins in support of multiple automotive customers. To enhance the functionality of our touch sensor solutions and foster new use cases, we've integrated infrared capabilities, a milestone achievement for our sensor team. For the smart home, we partnered with a leading supplier of home mesh networks to introduce the first Wi-Fi 6 router with integrated BLE, Thread, and Zigbee multi-protocol operation. This leveraged our ConcurrentConnect technology. We also secured a BAW filter design win with a leading supplier of high-end audio speakers to support the pairing of Bluetooth Low Energy and Wi-Fi 6. As a member of the Connectivity Standards Alliance and an early participant in the upcoming matter connectivity standard, Qorvo stands to benefit as multi-protocol, seamless interoperability drives IoT adoption and growth. In power management, we released a 40-volt motor control solution that supports the ongoing transition to higher voltage battery power tools. Demand for our motor control and power management products has been very strong, driving growth in applications from appliances and battery power tools to enterprise compute, laptops, and gaming. We are seeing demand for brushless DC motors expand into lower-cost power tools and smaller appliances, given the advantages in efficiency, size, and reliability. We are also leveraging the configurability of our power management solutions to address new applications in defense and other markets. In infrastructure, we increased shipments to multiple OEMs in support of 5G sub-6 gigahertz massive MIMO and macro deployments in the US, Japan, Korea, and Canada. We also achieved initial design wins supporting a massive MIMO deployment in India, and we secured BAW filter design wins for 3.5 gigahertz and 4.9 gigahertz 5G small cells with a major China-based OEM. New product launches, including GaN integrated PA modules for massive MIMO systems and a family of high-efficiency power amplifiers for 5G small cells serving densely populated areas. Across our markets, there are strong secular tailwinds. Connectivity is proliferating and complexity is increasing, which is expanding our growth opportunities. We supply best-in-class products. And our investments in new product areas and differentiated technologies are extending our technology leadership and broadening our reach. As our June results and September guidance demonstrate, end market demand is broad-based and robust, and our outlook is strong. And with that, I'll hand the call over to Mark.

Thanks, Bob, and good afternoon, everyone. Qorvo's revenue for the fiscal year 2022 first quarter was $1.110 billion, $30 million above the midpoint of our guidance and $323 million or 41% higher than last year. Mobile products revenue of $836 million was up 79% year-over-year on the growth of higher content 5G smartphones. Infrastructure and Defense Products revenue of $274 million was down year-over-year due to especially strong infrastructure demand during the June 2020 quarter, but the segment was up sequentially as Wi-Fi and programmable power management growth continued and infrastructure growth resumed. Non-GAAP gross margin was 52.5% and above our guidance on more favorable mix and pricing, improved manufacturing yields and lower inventory charges. Non-GAAP operating expenses in the first quarter were $216 million or 19.4% of sales and in line with expectations. Sequential and year-over-year increases in OpEx were driven by technology and product development expenses associated with key organic growth programs and recent acquisitions. Non-GAAP operating income in the June quarter was $367 million and 33.1% of sales. This was the third consecutive quarter of operating margin over 33%. Non-GAAP net income in the first quarter was $323 million, and diluted earnings per share of $2.83 was $0.38 above the midpoint of our guidance. Cash flow from operations in the first quarter was over $341 million and CapEx was $65 million, consistent with the level of spend we've discussed previously to support our outlook. Free cash flow was $276 million, and we repurchased $300 million of shares. The first quarter share repurchase was the largest dollar amount since an ASR in the March quarter of 2016. Since the company's formation and through the June quarter, we have repurchased $3.7 billion of shares at an average price of approximately $71. On the balance sheet, cash decreased to $1.2 billion, following the close of our Next Input acquisition and the share repurchases. That remained unchanged at approximately $1.7 billion. Our leverage remains low. Our revolver is untapped, and we have no material near-term maturities. Yesterday, Fitch initiated a credit rating on Qorvo at BBB+. This, along with S&P's upgrade of Qorvo to investment grade in April, highlights the quality of Qorvo's business, the strength and durability of our cash flows, and the financial discipline we've maintained. Now turning to the current quarter outlook. We expect revenue between $1.235 billion and $1.265 billion; non-GAAP gross margin between 52% and 52.5%; non-GAAP diluted earnings per share of $3.24 at the midpoint of guidance. Our September quarter revenue outlook reflects sustained and broad-based customer demand driven by multiyear technology upgrade cycles. Qorvo revenue of $1.250 billion at the midpoint is up 13% sequentially, 18% year-over-year and approximately 27% year-over-year adjusting for last year's 14-week quarter. As a reminder, our fiscal year 2021 was a 53-week fiscal year, and the September quarter last year was a 14-week quarter versus this fiscal year's more typical 13-week quarter. We forecast mobile revenue in the current quarter to be approximately $985 million at the midpoint or up 31% year-over-year and 18% sequentially. In IDP, we project revenue to decline slightly to approximately $265 million in the current quarter on defense program timing and continued supply constraints. We expect IDP sequential and year-over-year growth to return in the December quarter. Our September quarter gross margin guide of 52.25% at the midpoint is 55 basis points higher than last year's second quarter and reflects our ongoing portfolio management and sustained strong operating performance. In the second half of the fiscal year, we currently expect gross margins to remain around 52%, resulting in full year gross margin above 52%. Non-GAAP operating expenses are projected to increase in the September quarter to approximately $233 million on added labor and other development expenses associated with recent acquisitions and key growth programs. At the midpoint of our September quarter guidance, operating margin is forecasted to remain over 33% for the fourth consecutive quarter. We now project our current quarter and full year non-GAAP tax rate to be approximately 9%. Capital expenditures are projected to increase to around $75 million in the September quarter as we work to intersect demand and support long-term supply agreements with multiple customers. We are off to a strong start in fiscal 2022, and we are well positioned to continue delivering premium technology to an expanding set of customers in 5G, Wi-Fi, IoT, defense, power management and other growth markets. Now I'll turn the call back over to the operator for questions.

Sorry about that. Great results and guidance. I'll make sure to improve on the mute button. You mentioned the strong growth in mobile, up 16% sequentially. I'm curious about the Android market, which is still expanding, and the good mix of 5G. However, many are noticing more stable trends for the latter half of the year, yet you seem to be performing better. Could you explain the factors influencing the mobile guidance for September?

Thanks, Blayne. Eric, do you want to take that one?

Sure. Yes. We're continuing to see really strong design activity for our highly integrated full main path solution. We introduced Fusion21 with more capability, more band coverage, and more MIMO support in particular. We’ve entered the diversity market, as you saw in our strategic highlights. And really, a lot of the activity in next-generation 5G phones is around antenna management. So that part of our business, which has been strong for some time, continues to see a lot of design interest and customers asking us to even step up and take maybe a larger role in terms of determining the antenna control, the interfaces, the tuning, and the antenna flexing and so forth in and out of the antenna. So really, as you're looking to build the next generation of 5G handsets, we're just real pleased with the way our portfolio is lining up to the key challenges that our customers are having.

Could you provide some insights on the gross margin? You initially thought the June quarter might be slightly lower. What factors led to a better outcome? Looking ahead, you mentioned that the margins might be relatively flat for the remainder of the year. Are there any variables influencing that outlook? I understand IDP is down, but you indicated it should recover, which would be beneficial, correct?

Yes, Blayne, you raised a valid point regarding the delivery of our margins despite a weak infrastructure business in IDP. This highlights the strength of the rest of our operations. The June quarter showed another strong performance, and overall, things are progressing very positively. The challenging environment has made forecasting difficult, yet our improvements are surpassing even our ambitious targets. The organization is functioning exceptionally well, and our strategic positioning is having a significant impact. For the June beat, we experienced higher volumes which positively influenced our mix compared to our guidance. However, we are still experiencing supply constraints. This situation offers us tactical opportunities related to product types and pricing. Moreover, our operational efficiency is remarkable. Product test yields have exceeded expectations, manufacturing costs are manageable, and we are achieving good utilization rates. Consequently, our fixed cost absorption is predictable and even better than anticipated, while inventory charges have been lower than expected. Overall, we are very pleased with the quarter. We are adjusting our guidance slightly downward, although we will still see an increase of 55 basis points year-over-year. Some of this adjustment is due to anticipated moderation in price effects and a return to more normal inventory charges. However, it is crucial to recognize that we are stabilizing around 52%, and the business is structurally stronger than it was in previous years, indicating sustainability. This stability is a result of various initiatives we have implemented. We definitely lead in several technologies and have a diverse portfolio that provides us flexibility in product offerings and opportunities. We have actively managed our portfolio, selecting the right products and targeting customers where we can provide the most value. Our focus on productivity and cost savings has matured within our culture, allowing us to achieve more efficiently, benefiting our customers and improving our risk management over the past 1.5 years. We are also exercising discipline in our capital expenditures as we increase spending to support what we believe is a clear and promising outlook.

Thanks for taking my question. For the first one, I think last quarter, Bob, you gave us this kind of 15-ish percent sales growth for the full year fiscal 2022, was hoping you could update that number? And just give us some perspective on what that range implies for the back half of the year?

Sure, Vivek. Thank you for the question. Actually, I think it was Mark that gave it, but I'll go ahead and give you my answer for the year. Last quarter, when we gave you the year, we were giving you guys an idea that we thought we could grow about 15%. And I think now it's safe to say, we're going to grow well north of 15%, but probably less than 20%. So I'd put it in that range now, Vivek, and really pleased with how the mobile business is running, how the team is going on. Mark mentioned that supply constraints, the team is managing the complexity of the business with the constraints out there that all of you know about. But clearly, we're not demand constrained. It's on the supply side, Vivek. So obviously, if we can continue to do an extremely good job. We'll keep you updated.

And maybe I'll just add to Bob's comments, Vivek, on maybe to give a little sense of the profile. As Bob said, we see revenue now between 15% and 20% versus around 15%. If we look at the year, we look at second to third quarter as being flattish, maybe down if the macro situation erodes. But right now, we're not seeing that. We're still in a supply constrained environment. We do, as I mentioned, see IDP growth resuming in the third quarter sequentially. But the business will still be less than $300 million in the December quarter. That would imply then that mobile is down a little bit sequentially. And the fourth quarter is just too early at this point to really call definitively. We think that IDP will be over $300 million in the fourth quarter, so continuing to grow through the year and then mobile be down a bit seasonally. We do, just our gross margins to be clear, see those leveling out around 52% in the back half for a total year of a little over 52%.

Very helpful. And then for my follow-up, I was hoping you would give us your perspective on the China smartphone market. How much of your mobile business is exposed to the Chinese smartphone makers on an aggregate? How much of it is 5G versus 4G? And what have you seen recently? There have been kind of mixed data points about sell-through and some deceleration in units, perhaps more to do with export markets than anything else. But just give us your overall perspective on the China smartphone market level of exposure, 5G versus 4G and any trends that you're seeing there versus your expectations 90 days ago? Thank you.

Sure. Vivek, this is Eric. Yes, so we're very pleased with our business in China and working with the major OEMs there to continue to help them build out their 5G portfolio. And as you pointed out, their market is not just China domestic, but also to a large extent, international shipments now in exports. So they've got a broad and growing portfolio of really leading-edge technology handsets and doing very well in Europe, for example, and other places. So it's a vibrant design opportunity for us, using leading-edge technologies, continuing to stick with the roadmap around highly integrated products that we're supporting and very much adopting our antenna control solutions and so forth. So the environment for design, in terms of relationships and so forth is fantastic. The product portfolio turns over fairly often, which gives lots of opportunities for new functions and new integration levels and features and so forth, which is always great for us. So in terms of recent slowness in the sell-through, you see some noise in the data. It's still great sell-through. The 5G phones are on track this year. The vast majority of what we're shipping to our Chinese customers today is 5G components and, of course, the sell-in into China domestic as well as vastly 5G already. But even for the export market, they're transitioning rapidly to 5G. So it's a great opportunity for Qorvo going very well.

Yes. Good afternoon. I had a clarification question and a follow-up. My clarification question is, how many 10% customers did you have in the quarter? And my second question is on IDP. Some of your peers in the supply chain have noted Wi-Fi modules for auto and industrial electronics are seeing lead times extend, as part availability is in tight supply. I was wondering, are you able to fully meet demand and are conservative on broader supply chain constraints? Or are you also seeing tightness for substrates in your IoT business? And if you are seeing tightness, what steps have you or could you take to alleviate some of those constraints over the next couple of quarters? Thank you.

I'll start, and then James can provide further details. Regarding the number of 10% customers, we don't typically disclose that each quarter; instead, we provide a full-year summary. However, I can mention that, similar to last quarter, we had several 10% customers and another customer that was quite close. Thus, we have a fairly diverse customer base in our sector. Regarding challenges in Wi-Fi, the IDP segment is expected to grow sequentially, particularly in areas like Wi-Fi and programmable power management. However, we are facing supply constraints in three primary areas: first, we have internal limitations due to our in-house capacity for certain components. Second, there are external constraints related to incoming materials and outside service providers. Lastly, there are issues with kitting, where a customer may not receive all the necessary parts, which affects our demand. With that, I'll turn it over to James.

Yes, Karl. Mark mentioned a different timeline for several matters. To start with the good news, some of the kitting issues appear to be improving. As we head into Q3 and Q4, we expect to see further enhancements. We are increasing our internal capacity, which will support us as we approach the end of the calendar year. Additionally, the external supply constraints are also expected to improve significantly in our fourth quarter, with some progress in December. As Mark noted, this positions us to begin growing again in Q3 and Q4 for IDP. There are a few other factors that will contribute to our growth in the latter half of the year. One is that we are moving past the exceptionally high growth we experienced in the first two quarters last year with base stations, which will facilitate our entry into a growth phase. We are also seeing substantial strength and good visibility in power management and our Wi-Fi business as we progress into the second half of the year. Furthermore, the base station business continues to recover.

Hey guys, thanks for taking the question. I'll ask a two-part question, because I think the answer may be the same. Curious to know your largest customer, I think, is expecting some lower unit volumes, some supply chain constraints. And I'm wondering if you factored in those extraneous factors into your September quarter guide to presume you have. And then as well, are you sort of walking back the second half or even the second quarter gross margin guide a little bit because of perhaps some additional customer concentration?

No, actually, Gary, I would say our gross margin guidance is up for the year. So, the profile may be a little bit different. We exceeded expectations in the second quarter, but I wouldn't read too much into that. We base our guidance on what we believe is the best understanding of the demand and the isolated supply chain constraints, and we do our best to assess the situation. I can't provide any further details on that.

Okay. Just my follow-up question, I wanted to ask about these lower inventory charges. These lower inventory charges have been a tailwind for you guys for several quarters now. I understand it's a supply constrained environment. Are those lower inventory charges a function of just the demand environment exceeding supply? Is it as simple as just less obsolescence and being able to sell perhaps some products that were borderline obsolete?

I think it starts with we're operating better and better matching what we're building to customer demand. And yes, the tightness in the market can help clarify that. But I think we've just, over the years, gotten better operationally, and that's helping us. We've seen our inventory charges sort of trending down. And I'd say, at this point, yes, we just probably need to do a better job of building it into forecasts and that it's a more durable level, which we're of course happy about.

Thank you. Your margins are impressive, and I appreciate Mark breaking down how operational efficiencies and mix contribute to that. With IDP down and margins up, it was somewhat unexpected. Is this primarily due to the mix from mobile, especially considering the situation in China, which is significant for you? We're noting increased demand for antenna tuning and BAW products, which contribute positively to global margins. I'm trying to understand if this is mainly driven by technological advancements in Chinese phones along with improved operational performance, or if there are other factors at play. I also have a follow-up question.

I think you've got it directionally correct, Ed. I mean we've got, of course, some highly differentiated discrete parts. But a big move here for us is the move to integrated modules, more sophisticated modules and then just our operational performance and driving cost out, better utilizing our factories, getting FX cost absorption, spends in control. And then just having a good road map to drive cost down and pick the right places to compete. So it's a collective effort, right? It takes early R&D many years ahead of time and having an advantage in design and good portfolio management. And then at the end of the day, we got to be able to produce things efficiently and everyone is doing a great job across the board, and you're seeing the results.

I’d like to explore mobile with Eric. When TriQuint and RF Micro merged, there was discussion about avoiding a significant focus on the largest customer to prevent revenue concentration. At that time, you were evenly distributed with around 20% across major groups, including IDP, which seemed satisfactory. Now, it appears we might be heading back to a model with several 10% customers. Considering the push for 5G in lower-cost phones, which is attracting a larger share of the discrete market, will this situation change? Given China's overall market size, does this represent a substantial portion of your revenue? Are you considering 10%? If you had multiple 15% customers from the box manufacturers, wouldn't that make you more vulnerable to fluctuations in China than you would prefer?

To differentiate our business in China from our Chinese handset OEMs, it’s important to note that it is not solely dependent on domestic consumption. Approximately half of their volumes are currently being exported globally, reaching various tiers of phones in numerous countries. The most significant change over the past five to six years is how their phones are increasingly resembling the true flagship devices worldwide, incorporating the latest features and sometimes even leading the way, thanks to their speed and product turnover. They are effectively shipping worldwide and are early adopters of our highly integrated technologies, such as 5G DRX modules and dual connect modules, as well as advancements in antenna systems. We are very pleased to partner with these companies.

Yes, thank you. Good evening. My first question is on the supply constraints. And if you give us some sense of, for how long you expect these constraints to last? Obviously, the mobile business has a seasonal aspect to it in the first half of the year. I imagine the answer would be different for IDP. And perhaps as you catch up on some of these constraints, does that affect the seasonality of the business such that if you're catching up on supply, we kept some better than seasonal quarters as you're able to catch up with some of the demand that you perhaps weren't able to fulfill?

Thanks for the question. The team has worked very hard to navigate through this complexity, and forecasting the unknowns at this moment is quite challenging. I'm pleased with how the team manages operations, meets demand, and addresses product mix. There are many experts predicting that these issues could persist for years, while some suggest just a few quarters. It's not our role to make those forecasts. What I can confirm is that we are currently constrained on capacity to meet demand. We are adding capacity, and so are our suppliers. We will see how well the products we support in both IDP and mobile continue to perform. The global situation and recovery, as well as the ongoing impact of the virus, also need to be considered. I don't think it would be wise to provide a specific timeline, but I feel positive about the progress we are making and that demand continues to rise, which is what really matters.

Got it. Thank you. As a follow-up, perhaps you could talk a little bit about uses of cash and the cash flow has improved pretty nicely last year in this. You spoke about repurchases in your prepared remarks. Now that you're generating this cash, what are your plans for it?

Chris, our plans are to continue operating as we have been, maintaining a balanced approach to capital deployment. We're pleased with the June quarter and the start of the year, reporting $276 million in free cash flow and deploying $467 million, which indicates strong initial deployment. Over the last 12 months, we've generated $1.2 billion in free cash flow, deploying about 80% of it, with three-quarters allocated to repurchase. Considering that at the beginning of last year, everyone was cautious due to COVID, 80% deployment is commendable. In the last eight quarters, we generated $2 billion in free cash flow and deployed $2.1 billion, with 60% on repurchases and 40% on acquisitions. Recently, we had a quarter with balanced deployment of 50% towards acquisitions and 50% towards repurchase. The management team is focused on long-term free cash flow generation, and we believe this trend will continue this year. Our priorities include organic investments to maintain our technology edge and building the necessary capacity for promising markets. We are also considering inorganic opportunities that make sense. During the last nine quarters, we've spent $1.2 billion on acquisitions and are excited about the markets we've entered, potentially adding over $4 billion in total addressable market, conservatively, and expecting that to exceed $10 billion in the coming years, excluding Bio, which represents a new and exciting market for Qorvo. We will continue to explore opportunities that make sense for Qorvo regarding markets, customers, technology differentiation, financial health, and of course, company culture.

Yes. Thank you.

I had two as well. I guess, Mark, the first question is on gross margin. I think you've beaten the last four quarters by about 200 basis points. Each of those quarters and then even before that, you were beating by about 100 basis points. So I guess the question is, like, is this just consistent conservatism? Or is there something that's kind of surprising you intra-quarter that's making it better? I mean, if I apply that same level in September, you'll do 54%, which is like a 70% drop-through. That's super good, given that it's a down IDP quarter. So I'm just trying to handicap your guidance versus the fact that you've been beating by a lot during the past four quarters? Thanks.

Yes, Tim, I mentioned this earlier. We haven't been very accurate in our forecasts, but fortunately, it turned out well this time. I wouldn’t add 200 basis points since we are trying to refine our approach. This past year and a half has been particularly challenging for forecasting, especially as the market has tightened rapidly and there are numerous operational factors to consider. It's important to recognize that forecasting during these times can be difficult, and one tends to be more conservative and aware of potential risks. On a positive note, our improvements have exceeded our expectations and have motivated us to continue that trajectory. While our operating leverage, as you pointed out, may decline in the December and March quarters, it’s important to remember that this is against tough comparisons from last year. During those times, we highlighted the business's potential but had revised our guidance downwards. As you've noticed, we did make some adjustments. However, I want to emphasize that we’ve stabilized around 52%, and the business is in a better structural position than before.

Awesome, Mark, Thank you. I guess my second question is really on the shape of the business for fiscal Q3 and Q4. It might be splitting hairs a bit, but the comments seem to imply maybe a little below seasonal in mobile products for fiscal Q3 and fiscal Q4. Is that supply constraint, maybe some concern around China? And I guess maybe a different way of asking the question is if the constraints didn't exist, how much better would fiscal Q3 and fiscal Q4 be, like is it having a material effect on the guidance? Thanks.

Yeah, Tim, it's Mark. I think as we look ahead to the September quarter, I want to provide some insights. We have a fairly good perspective on December, though it is still some ways off. Very few companies, if any, are giving guidance for March at this time. I want to convey our current situation. Right now, we are experiencing supply constraints, which reinforces our confidence in the demand for the near to medium term. We also feel optimistic about long-term demand due to our market position. There are some early signs that pricing is easing and there are fewer urgent requests for expedited shipments. We notice that some channels are operating at an unsustainable level, but there are indications of recovery. These are early signals that the industry is beginning to address these issues. For now, I believe it's wise to provide you with our best estimate given the circumstances.

Hi, thank you. Mark, I just wanted to come back to the longer-term gross margin. And you actually have been very candid about the uneven performance on that front as well as on the free cash flow side. So kudos to you for admitting it and then delivering on it. But I just wanted to come back to the structural changes. Could you just remind us what are the big heavy lifting? I know it's easy for us to just model it out. But it's 500 bps versus where it used to hover around, and obviously, the business is bigger. But can you just help us understand what are the changes you've made that has allowed you to structurally be 500 bps above where you used to be? And then I had a quick follow-up, please.

I think we've talked about this for years and going back to the Investor Days. And it sounds repetitive at this point, but, I mean, it starts with both the companies that came together were technology leaders in their own right on some different products and created an enterprise that was going to be a leader as 5G hit. And it took a few years to get legs under the org. But that technology advantage and this wide suite of technologies to serve customers' problems is foundational to the rest of it. And we continue to maintain that lead. And then that gives us the opportunity to make good calls on where to play, where to compete, where the customers are going to value us most. So we've been very active in portfolio management. Yeah, we've driven productivity, and we've talked about that over the years, the wafer size expansion, the die shrinks, the myriad of other productivity programs, not only in the factories but in R&D and other areas. And then, we've been very mindful about capital spend. Our CapEx as a percent of sales was almost 20% at one point. We've driven that down to mid-single digits, and expect it to stay around there. And hence, as 5G hit, our factories have gotten loaded, we're getting great fixed cost absorption, costs are in control. And then we've got this great pipeline of products that Eric's talked about and James. So it's all those things, taking all the people in the company. And that's allowed us as, I think, structurally higher gross margins.

I understand. I have a quick question about the gross margin. I want to clarify something. You mentioned that pricing was a factor in the reported quarter. However, I didn't quite catch your description of the pricing environment. Did you mean that pricing is not as robust as it was during the reported quarter, or that pricing isn't a significant factor in your guidance for price erosion?

It's still a very constructive environment, and the market remains tight, although it's not as tight as it was a couple of quarters ago. We're still discussing long-term agreements with customers, and that process is ongoing. I was just making a comparative comment, Ambrish.

Congrats on the quarter and thanks for the question. You guys had a lift in your own internal inventories in the quarter. And I was just wondering, was that just to service upcoming demand? Or do you guys plan to have a little bit of a buffer there, or maybe even use it strategically. Just wondering what that was about?

We have been performing exceptionally well in managing our inventories, and our overall working capital is at historic lows. Regarding inventory levels, we are still close to achieving four turns. We experienced a slight decrease, which is partly to support the seasonal ramp-up. Essentially, we are shipping products as we produce them.

Yeah. Okay. And then from recollection, I think you mothballed one of your facilities. Is there a point here in the cycle here where you would open that up again and start filling that up?

I think you're referring to Farmers Branch. And yeah, that is one of the aspects of trying to grow capital efficiently, and we would expect to utilize that facility next fiscal year.

Hi, everyone. I appreciate the opportunity to ask a question. I know you mentioned 550 million 5G handsets for 2021. What is your outlook for 2022 regarding 5G unit sales? Additionally, could you provide some insights on the factors that will influence content growth for 5G handsets moving forward? Thank you.

Yeah. So this is Eric. Yeah, we're not commenting formally on 2022 yet. At this level, once we get through, we'll be at still under half of the handsets of the shipping or smartphones that are shipping will be 5G. We did say that we think 5G will be up to 80% by 2025. So you can maybe connect out there and make an estimate.

Got it. And in terms of the content growth opportunity into next year?

Yes, it continues. Some of our advanced features this year will become available in the other tiers moving forward. This means you're not only getting an increase from the additional 250 million phones per year, but also the other 5G phones being shipped are incorporating more advanced content. This contributes to the overall growth of the total addressable market.

We want to thank everyone for joining us tonight. We look forward to speaking with you again at upcoming investor conferences. Thanks again, and have a good night.