Qorvo Inc (QRVO) — Q4 2023 Earnings Call Transcript

Thanks very much. Hello, everybody, and welcome to Qorvo’s fiscal 2023 fourth 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 provided supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without 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 a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our Investor Relations website at ir.qorvo.com under Financial Releases. Joining us today are Bob Bruggeworth, President and CEO; Grant Brown, CFO; Dave Fullwood, Senior Vice President of Sales and Marketing; and other members of Qorvo’s management team. And with that, I’ll turn the call over to Bob.

Thanks, Doug, and welcome, everyone, to our call. Qorvo’s fourth quarter results were consistent with the outlook provided during our February 1st earnings call. Looking at our end markets, the quarter played out largely as expected, with lower end market demand in some markets, primarily those with consumer exposure and channel inventory consumption, with the majority of that being in the Android ecosystem. We made significant progress clearing channel inventory. At the same time, we continued to introduce new products and secure new designs, positioning Qorvo to best support our customers as end markets recover. We are seeing increased strength in customer design activity across our businesses, and we are confident in our ability to grow. In High-Performance Analog, we enjoyed relative strength in power devices and defense markets, offset by our management markets with consumer exposure and inventory digestion at infrastructure OEM. We continue to enjoy broad-based multiyear design win activity that we see contributing to long-term growth. In our Connectivity and Sensors Group, relative stability in automotive during the quarter was offset by continued inventory draw-downs and weak end market demand for Wi-Fi enabled products and cellular IoT. Design activity was strong across a variety of applications, including smart home, precision location, indoor navigation, automotive connectivity, automotive smart interiors, and enhanced human-machine interfaces. In Advanced Cellular, total Android revenue was up sequentially on the strength of a large customer flagship ramp with record Qorvo content. We believe March was a low point for China-based Android quarterly revenue, and we expect total Android revenue will grow sequentially in June while channel inventories continue to be consumed. Design activity during the quarter continued to be favorable across all leading smartphone OEMs. Now, let’s turn to some quarterly highlights. In High-Performance Analog, Qorvo was selected by an industry leader to supply cell-to-satellite solutions that combine a variety of technologies, including multiple RF components and BAW-based multiplexers. These solutions enabled low earth orbit based space-to-terrestrial connectivity, helping to provide cellular coverage in the hardest to reach geographies. We achieved a milestone with the delivery of our first prototype RF multi-chip modules to BAE Systems under the SHIP contract with the U.S. Department of Defense. Qorvo is leveraging our state-of-the-art production capabilities in our Richardson, Texas facility to advance heterogeneous packaging integration and enables significant savings in power, size, weight, and cost. This early milestone showcases the speed and efficiency of our collaboration with our program partners. It is a critical first step towards the goal of reestablishing U.S. leadership in microelectronics and accelerating the modernization of microelectronic systems for next-generation phased array radars, unmanned vehicles, and satellite communications. In our power device business, we booked a multimillion dollar follow-on silicon carbide inverter order for residential and industrial solar applications. The Department of Energy forecasts solar power will make up more than half of new capacity in the U.S. in 2023, and the market for silicon carbide inverters is expected to achieve double-digit compound annual growth rate through 2026. This win complements our ongoing business in automotive charging applications and data centers. In our Connectivity and Sensors business, we were selected to supply ultra-wideband solutions across multiple verticals, including a next-generation smartwatch, supporting secure car access, Wi-Fi access points, enabling indoor navigation, and an additional 2024 flagship Android smartphone. Of note, ultra-wideband design activity for in-car applications has ramped up significantly. We are a member of the Car Connectivity Consortium, and we are proud to be a contributor to the Digital Key Plus program for the Android ecosystem recently announced by BMW. With Digital Key Plus, BMW drivers with compatible smartphones can unlock or lock their cars and start the engine without having the key and without removing the phone from their pocket. In Automotive Connectivity, we collaborated with automotive OEMs and leading third parties to advance smart antennas and next-generation shark fin architectures. We also expanded design engagements related to 5G network access devices with automotive Tier 1s. In sensors, we secured a design win to supply force-sensing touch sensors in support of a premium true wireless headset for a leading European OEM. The headset will leverage the ultra-sensitivity of Qorvo’s MEMS-based sensors to enable a new industrial design. In Wi-Fi, we secured our first Wi-Fi 7 BAW filter design win, and we expanded sampling of our Wi-Fi solutions, enabling full coverage of 2.4, 5, and 6 gigahertz bands for smartphones and consumer and enterprise access points. In Advanced Cellular, we supported the ramp of a Korean-based smartphone OEM’s flagship smartphone with multiple Qorvo placements, including low band, mid-high band, and ultra-high band pads as well as secondary transmit, tuning, and Wi-Fi. We are pleased to support this customer broadly in their flagship tier, and we are seeing expanding opportunities as they migrate their mass market portfolio to integrated 5G solutions. Across the Android ecosystem, Qorvo was awarded broad-based design wins in support of flagship, mid-tier, and mass market 5G devices at the top five Android smartphone OEMs. To support new designs, we shipped our first samples of our newest mid-high band pad to an Android OEM, addressing this customer’s most challenging performance and size requirements. This is the industry’s most highly integrated front-end placement. It combines main path and diversity receive content for the mid and high band. And as we said previously, this product integrates nearly two times the BAW filter content in a smaller footprint than existing main path only, mid-high band pad architectures. It leverages the reduced size and enhanced performance of our newest BAW and SAW filters. We expect the first smartphone featuring this solution to launch in calendar 2024. Across the business, we’re leveraging investments in best-in-class technologies, introducing differentiated products that delight our customers. We have many growth drivers in our portfolio, and design activity has been strong. In HPA, design wins secured in the March order span a variety of applications in aerospace, battery management, defense radar, electric vehicles, and renewable energy systems. In CSG, we secured new business in automotive connectivity, indoor navigation, smart home, and wearables. In ACG, we enjoyed broad representation across all leading OEMs, and we are increasing our content in the highest volume flagship phones. We believe we have room to grow at our largest customer, including BAW-based content, and we are a leading supplier to the Android ecosystem where the transition to 5G supports long-term content gains. Last year, approximately 40% of the roughly 920 million Android smartphones were 5G. And we see Android 5G smartphone unit growth achieving a double-digit CAGR for several years. Over time, we expect HPA and CSG to outpace the growth rate of ACG, increasing our total growth rate and driving leverage as mix increasingly favors our high-growth investment businesses. I want to thank the team for continued operational excellence. We are introducing new technologies and launching new products to align with the industry’s growth drivers and broaden our market exposure. We are seeing increasing strength in customer design activity across our businesses, and we expect improved financial performance supported by content gains and large customer programs. And with that, I’ll hand the call off to Grant.

Thanks, Bob, and good afternoon, everyone. As a reminder, our references today will be to our three operating segments: High-Performance Analog or HPA, Connectivity and Sensors Group or CSG, and Advanced Cellular Group or ACG. In our upcoming 10-K, we will provide historical financial information that reflects these operating segments. I’ll now turn to our latest quarterly results. Revenue for the quarter was $633 million. Non-GAAP gross margin was 41.3%. And non-GAAP EPS was $0.26. Relative to our expectations as provided on our February earnings call, results exceeded the midpoint of guidance, despite a weak demand environment and channel inventory reduction efforts. As considered in our fourth quarter guidance, we held factory production at characteristically low volumes, which created underutilization impacts that negatively affected margins. On a non-GAAP basis, gross margin of 41.3% improved sequentially, given a modest increase in factory utilization. Charges related to low factory utilization continued to weigh on margins on a year-over-year basis. Non-GAAP operating expenses in the quarter were $227 million. Consistent with our expectations, OpEx was up sequentially given the timing of seasonal employee-related expenses such as payroll taxes, the timing of vacation accruals, and other items. In absolute dollar terms by functional area, the sequential increase was principally driven by R&D as we support our customers and invest in future growth opportunities. In total, non-GAAP operating income in the quarter was $34 million or 5% of sales. Breaking out operating margin by each segment, ACG was 14%, HPA was 13%, and CSG was negative 51%. During the quarter, Qorvo Biotechnologies reduced CSG operating income by approximately $11 million. As a reminder, we are currently in the process of seeking strategic alternatives for this business. Non-GAAP income was $26 million, representing diluted earnings per share of $0.26. Fiscal Q4 GAAP results were impacted by two notable noncash balance sheet impairments. These items were recorded during the quarter but address multiyear time horizons and do not reflect the underlying performance during the period. The first impairment is related to Qorvo Biotechnologies. While we are seeking strategic alternatives, it is too early to comment on possible outcomes. We strongly believe in the technology and the team and feel the business will more quickly achieve its highest potential outside of Qorvo. During the quarter, we determined that the investment required to fund the future roadmap would not fit within our business model. Without the internal funding commitment, the forward-looking outlook would not be realized under Qorvo ownership and consequently, the asset failed the test for impairment. The second impairment is related to the cash deposit asset on our balance sheet tied to a long-term silicon supply agreement. There is no cash impact during the period as the deposit was remitted to the supplier at the time the agreement was executed and was scheduled to be refunded at the end of the agreement in calendar 2026. We have elected to apply the prepaid cash deposit against portions of monthly purchase commitments in lieu of ordering additional wafers. This will allow us to better align our specific mix of silicon wafer inventory with SKU-level finished goods demand over time. We are comfortable with our current silicon inventory relative to forecasted demand, while mindful of the risk in ordering long lead time materials. A reconciliation between GAAP and non-GAAP results can be found in the earnings release, and more information will be available in our upcoming 10-K. Moving on to the cash flow statement. Capital expenditures were $34 million, resulting in free cash flow of $31 million. During the quarter, we repurchased $150 million worth of shares. The rate and pace of our repurchases is based on our long-term outlook, free cash flow, low leverage, alternative uses of cash, and other factors. Turning to the balance sheet. As of quarter end, we had approximately $2 billion of debt outstanding with no near-term maturities and $810 million of cash and equivalents. Our net inventory balance ending the quarter was down $61 million to $797 million. For the full year, we recorded revenue of $3.6 billion, non-GAAP gross margin of 46.3%, non-GAAP operating margin of 21.1% and non-GAAP earnings per share of $5.99. We had two 10% customers in fiscal '23. Apple accounted for 37% of total sales in fiscal '23 versus 33% in fiscal '22 and Samsung accounted for 12% of total sales in fiscal '23 versus 11% in fiscal '22. Looking forward, we are encouraged by ongoing progress in reducing channel inventories, and we expect to benefit from strong dollar content growth on a large customer seasonal ramp. Turning to our current quarter outlook. We expect quarterly revenue between $620 million and $660 million, non-GAAP gross margin of approximately 41.5%, and non-GAAP diluted earnings per share of approximately $0.15. Our outlook contemplates the current demand environment, further consumption of channel inventory, and seasonal factors. Our non-GAAP guidance for fiscal Q1 includes normal operating spend for the biotechnology unit, but excludes any cost related to its divestiture. We project non-GAAP operating expenses in the June quarter will be up approximately $10 million sequentially due to investments in multiyear customer programs, investments in core systems and other productivity initiatives, and the return of incentive compensation based on our expectations for improved financial performance. Below the operating income line, non-operating expense will be approximately $10 million to $12 million, reflecting interest paid on our fixed-rate debt, offset by interest income earned on our cash balances, FX gains or losses, along with other items. Our non-GAAP tax rate for fiscal '24 is expected to be within a range of 13% to 15%. We expect our inventory balance will increase in the June quarter as we support a seasonal ramp at our largest customer. In terms of channel inventory, inventories of our components in the Android channel were reduced during the March quarter by approximately 25%. This follows a more than 20% reduction in the December quarter. Our expectations for this quarter are for channel inventories to decline again in the double digits. Later this calendar year, we expect Android channel inventories will normalize. Outside of the Android ecosystem, there are smaller pockets of channel inventory elsewhere in our business that may take longer to digest. For the full year fiscal '24, we forecast revenue will be above fiscal '23 and expect to benefit from strong dollar content growth at our largest customers. For the full year, fiscal '24 non-GAAP gross margin is expected to be approximately 44%, with variability on a quarterly basis, primarily tracking utilization and mix. Looking across the fiscal year, we expect significant sequential improvement in gross margin during fiscal Q2 as we sell new products for our largest customers that are less burdened by higher costs associated with underutilization. We expect sequential declines in gross margin during Q3 and again in Q4, primarily related to utilization and mix. Beyond June, excluding biotechnologies, operating expenses for Q2 through Q4 are expected to be approximately $240 million to $245 million per quarter, with variability related to the timing of product development spend, investments in core systems and related productivity initiatives, the return of incentive compensation based on our expectations for improved financial performance as well as other items. Qorvo enjoys many growth drivers across our three operating segments. We’re leveraging a broad portfolio of technologies and capabilities to grow content this year on large customer programs and we are uniquely positioned across leading customers and end markets. We are investing to drive outsized growth in diverse businesses to broaden our market exposure to accelerate growth. At this time, please open the line for questions. Thank you.

I guess my first question, hoping you could talk a little bit about full year ‘24 revenue. Grant, you gave good color on gross margin and OpEx as well. But how are you thinking about the top line in fiscal ‘24? And if you can kind of provide context around or color around the three segments, that would be super helpful. And then I have a follow-up.

Thanks, Toshiya. I appreciate the question. This is Grant. In terms of the full year fiscal ‘24 guidance, based on our current view and barring any macroeconomic deterioration, right, we’re not forecasting a significant jump in handset unit sell-through. In fact, we actually believe smartphones to be down year-over-year, but 5G phones to be up in the 5% to 10% range. So, that underpins our overall fiscal ‘24 view for ACG. We do expect some growth in HPA and CSG as well, especially as the year progresses. But generally speaking, not a terribly aggressive back half of the year. That said, just walking through the quarters, margin will follow mix, as I pointed out in my prepared remarks. Although there is no change to our view of returning to 50% in the gross margin line, it’s unlikely in ‘24. If I take it quarter-by-quarter beyond the June quarter guidance, our fiscal Q2 in September, we would expect revenue to be up approximately 50% sequentially. Again, this is driven by strong content gains and to a large seasonal ramp. Gross margin will also be up in the neighborhood of approximately 400 basis points quarter-on-quarter as mix begins to favor some newer products, which are less burdened by those higher unit costs associated with underutilization. In the December quarter, our fiscal Q3, we expect revenue to be approximately flat and continuing off of September. Gross margin will be down 100 to 150 basis points as utilization begins to ramp down following that large seasonal ramp and mix begins to modestly shift to some of that higher cost inventory. And finally, in the March quarter, our fiscal Q4 of calendar year 2024, we expect Android to be a higher percent of our mix, but decline less than might be historic seasonality due to a clean channel and returning to shipping to end demand. However, gross margin will be down 200 to 300 basis points quarter-on-quarter as mix reflects that higher cost inventory. As I mentioned in the prepared remarks, beyond June, I gave some color around OpEx for the year, which would exclude Bio in the $240 million to $245 million per quarter, with some of the variability there related to product development spend and other items. Generally speaking, we have a good degree of confidence in content for our September period. And then as we clean the channel in the Android ecosystem in ACG, we feel comfortable returning to shipping to end market demand. Tax rate is probably in that 13% to 15% range, consistent with fiscal ‘23. And we believe share count will be approximately 100 million shares or less.

Grant, thanks for that very explicit fiscal year ‘24 revenue guide. It’s quite helpful. But I wanted to ask about something one of your competitors was talking about this evening. That is some subseasonal shipments to their largest customer, I presume Apple, their modem-only customer. I’m wondering if that factors into your guidance or is factored into your guidance, what maybe some of the undercurrents going on there, how that made an impact on you from a competitive standpoint or just from a customer-specific standpoint?

Hi, this is Bob. Gary, thanks for the question. As you know, we don’t usually discuss our largest customer in detail. I can share that we expect ACG to show a decline quarter-over-quarter, which leads us to anticipate a decrease in smartphone revenue. Historically, this quarter tends to be slower for our largest customer. I’m not sure about the comments made earlier, but we have a strong understanding of the market. We frequently discuss our model and how things operate, so we are confident in what we've conveyed.

Okay. Do you mind if I ask a follow-up?

Absolutely. Go ahead, Gary.

All right. So I guess the $64,000 question is what will the new normal look like with your Android customers, once they’re through draining their excess inventory? What’s your best feel based on design win traction? Do you think you can achieve a new revenue high at some point in the future in your Android customer base specifically?

Thanks for the question, Gary. As you mentioned, forecasting the future is quite challenging. However, I do know this: if we look back at where we’re gaining market share, particularly in the Android ecosystem with partners like Samsung and Google, we believe we’ve started to make progress for 2024. We've been facing challenges like not meeting demand and reducing inventories, which were 20% two quarters ago and 25% last quarter. As we address these issues and continue to gain market share, I believe we can achieve or surpass previous performance. Our largest customers have been performing well in their markets, which is positive. Importantly, we are the sole strategic supplier for the top six Android manufacturers, and we're growing our business with our largest customer. From this perspective, we are confident that we can continue to grow.

Bob, I’m curious, what do you think is the visibility of kind of retaining this new content over the next several years? Because customers in the market have a habit of making different architecture decisions every year. So, as you start ramping this new content, how do you think you are able to sustain it over the next few years?

Yes. I think what’s interesting, Vivek, is, I mean, over time, we’ve done a pretty good job of holding in the areas that we’re winning nice share and growing, and as they add content in those areas, we’ve done well. So as we look out, we feel pretty good about things. And I even commented and Grant did as well that we believe we can continue to grow content at our largest customer, whether it be BAW-based or our discrete components that we sell there. So, we feel good about the outlook there for multiple years.

And for my follow-up, do you think this was a competitive win, or do you think this is a new technology that customers are adding in this area? So, is this expanding the pie, or do you think this is kind of a competitive win from something they might have been using from somebody else before?

Yes. I think I answered this question last quarter, I believe, on a similar topic, and it was both. We’re gaining content through both share gains as well as, to your point, making the pie bigger. Both.

I guess, based on your comments on channel inventory realignment for Android, why wouldn’t channel inventory be aligned with sell-through by the end of the June quarter, given the further improvements that you’re seeing? And as you address that question, how would you characterize the inventory balances and timing of reaching normalized inventory in your infrastructure and IoT businesses?

Yes, this is Dave. I'll address that question. In the Android ecosystem, we distribute numerous products to various customers, so outcomes depend on their program schedules and how well their phones perform compared to their expectations. In some instances, we anticipate being in a solid position by the end of the June quarter. However, in other cases, it may take longer, influenced by the customer and their operations. As Grant mentioned, by the second half of the year, we expect the Android ecosystem to clear all channel inventory and resume shipping according to actual customer demand. Base stations will require more time since some customers accumulated excess inventory during last year's supply constraints, meaning they will need longer to reduce that surplus. We expect this process to extend through the current calendar year and into early next year.

Hey Karl, this is Grant. Let me jump in there. And maybe if I take it up a level. Our view on channel inventories is incorporated in our guide. So, our 50% increase in the September quarter is predicated largely on content gains. Sequentially, we would expect the channel to begin clearing and us to begin shipping to more normalized demand later in our fiscal year. Again, it doesn’t incorporate anything aggressive in terms of unit growth. This would be simply a return to what could be considered somewhat normal, and that would be incorporated in our guide. So, you can make at least the quantification of it based on that.

You seem very confident about the gains expected in the fall. Bob, you mentioned both share gains and new content. Could you elaborate on the share gains aspect? Is this a focus area that you've not explored before, considering you usually concentrate on specific segments, or will this involve entirely new territories? Additionally, you mentioned an all-in-one, mid-high band, DRx, etc. The channel has been observing this for a while, and while there have been previous attempts, those were limited. It appears that more Android companies are receptive to this now. My question is, having an all-in-one solution gives you a stronger position since you're among the few that have successfully built one, but doesn't it also limit the total average selling price or overall revenue potential compared to selling individual modules? Can you provide some insight on how that tradeoff plays out? I also have a follow-up question.

Yes. Thanks, Ed. And as you know, for our largest customer, we won’t talk about any future architectures, but I’m sure once you turn down the phones, you’ll see where we want. And as I said, we’re very confident in our ability to continue to grow there. And Dave, do you want to take out of the work that we’re doing there? Second part of his question.

Yes. Ed, you referred to it as an all-in-one. And what we talked about on the bullet there was a solution that combines the mid-high band plus the diversity receive. So that diversity receive, that’s all new content for us. We don’t traditionally service that part of the phone. But in general, we’re supporting our customers, I think, with a very high performance, small size is what they’re looking for. So that’s creating a lot of value as well. So we don’t see it as an ASP issue. It’s a very high-performance small-sized solution that’s going to drive.

Sure, Ed. This is Grant. I’ll take the question. Quarter-on-quarter at a high level, our revenue outlook for fiscal '24 hasn’t changed. If anything, it’s actually improved. What has changed would be our current forecast of mix over the out years in that contract, right? As you understand, wafers aren’t fungible once they’ve been fabricated and our demand profile is complex. The supply agreement covers multiple products, technologies, customers across multiple years. So, there’s a significant mix impact. Furthermore, we can’t order wafers for products that haven’t been defined yet. So there’s a timing element as well. But since we have to place those well in advance, we have to make sure we manage our inventory accordingly. And we’re comfortable with our current inventory based on forecasted demand. So, we’re applying our prepaid deposit, as you mentioned, to the wafers that we don’t believe we’d ultimately need. And we know there’d be continued variability in the mix over the remaining life of the agreement. It could be better, it could be worse. But this is something we analyze each quarter and we’re continuing to work with the supplier in that case to stay aligned.

I really appreciate the additional fiscal '24 details and guidance you've provided, and I understand there are ongoing developments. However, I want to consider the reasoning behind sharing such detailed quarterly information for the entire fiscal year. Many of us are paying attention to MediaTek's insights from Asia and just listened to Qualcomm's remarks, which indicate significant uncertainty in the handset market, especially with your largest customer in terms of volumes and the market recovery in China. My question is about the decision to offer this level of granular detail right now for the next four quarters and the confidence behind those estimates, considering the broader macroeconomic situation, despite the content gains you have. Thank you.

Yes. Sure, Matt. This is Grant. Let me take the question. First off, we usually give some color around the forward fiscal year as we start it. So it’s something that we do as a matter of practice. I think it’s extremely helpful, in this case, given the volatility in the market. So I hope that it’s helpful for you as you’re putting your models together. In terms of the quarter-by-quarter guidance, it’s so specific to the margin profile given the mix of products and the inventory balances we’re carrying, that I wanted to make sure that we were upfront and helping people understand the margin is going to follow that mix and to a degree the utilization associated with those customer ramps. So, it’s important to understand that it will vary on a quarter-by-quarter basis. So, I wanted to make sure that we gave as much color as we could there. Underpinning our overall view, again, is nothing overly aggressive from a recovery or a step function jump in handset unit sales. So, I don’t want to be overly conservative, but there’s nothing aggressive there. As we’ve said, we’re really looking to just clear the channel inventory. We’ve been working aggressively to do so. And I think we’re making a lot of progress there. As we return to normal in the channel later in our fiscal year, we should see some incremental improvement just simply being able to shift to what would be considered end market demand.

As my follow-up, it’s great to see the inventory in Android coming down. I think you guys mentioned 20% reduction last quarter and then another 25% reduction now. So maybe just could you level set us on an absolute dollar terms or maybe a unit terms of where you see the inventory that needs to still be worked through in the Android community or how much of a drag is it still for another couple of quarters? If there’s any kind of quantification there, that would be helpful as we think about maybe modeling beyond the inventory burn over the next couple of quarters? Thanks.

Matt, I’ll make a couple of comments and then turn it over to Dave. But we really don’t want to get into giving dollars and units and all that because it moves around based on future demand. I think what we can say is that we’re going to continue to reduce the channel inventory. So, we have a ways to go. And what we said was we’ll reduce it this quarter and probably continue to reduce in September. It’s probably going to take till December on the overall channel inventories. And I think we were one of the first saying, hey, we were going to do this, to your point. And I can’t speak for the others that you’re listening to, but we started to throttle back on this a long time ago and others are just seeing it. I also think our lead times are much shorter than theirs, which is why we saw this before they did and saw now coming back differently. Coming back in a sense, not the market’s coming back, that we’ve made significant progress on reducing the inventories in the channel. So, the headwinds are subsiding and slight tailwinds are going to be behind us as we start shipping into the end demand, even though it’s significantly lower than what we saw a year ago. So, I think I captured that. Dave, if you want to add any color to that, feel free.

No, I think they’re all good comments, Bob. And we did see that the Android sales, we think that bottomed in December and our sales into China bottomed in March. And so, as Bob said, we’ve still got some work to do to clear that inventory in the next couple of quarters, but we do see that improving already. Bookings are up. Customer demand is coming back. And so, it’s only a matter of time at this point.

I appreciate the question, Matt. Regarding gross margin, Grant, is the primary factor utilization? Can you provide some quantification for us? Although it's not directly under your responsibility, gross margin performance has been quite volatile. Could you clarify whether utilization is at its lowest in recent history? Is this the main factor that gives you confidence in the gross margin outlook?

Sure, Ambrish. This is Grant. I’ll take the question. Yes, underutilization is by far the largest issue we are facing. Last quarter, we reported over 900 basis points, and this recent quarter showed approximately 1,000 basis points. So, we are consistently experiencing this headwind from underutilization, which is the largest factor affecting us. This underutilization contributes to higher unit costs for the products in our inventory. As these costs flow through the profit and loss statement, particularly in cost of goods sold, we will continue to feel the pressure from underutilization for some time, as we discussed last quarter in relation to fiscal ‘24 and as I am reiterating today. So, underutilization is indeed the biggest issue. The next factor worth mentioning, which I have addressed previously, is the impact of inflation. We are seeing a headwind in the range of 80 to 100 basis points, which is a distant second to underutilization.

Thank you for the insights. I have a quick question regarding the assumptions for the more than 50% quarter-over-quarter growth. Is that primarily due to inventory normalizing, given that demand remains uncertain? Should we consider that it's mainly driven by some level of normalization on the Android side and also the content gains from your large customers? Is that the correct way to approach this?

I would turn that around. Very little expectation of the channel clearing in time for the September quarter, very much dependent on content gains and a large seasonal ramp.

Grant, I wanted to just talk a little bit about HPA and CSG in terms of how you’re seeing the rest of the year play out. You mentioned that you’re not very aggressive, but you do think there’s going to be some growth progressing through the year. So, I wonder if you could talk a little bit about the pricing environment in those markets. There’s been a lot of discussion around pricing, when things were tight last year and how you’re thinking about that as we flow through this year? And then also if you could just comment on where we are in inventory and when you think that normalizes when we get back to sort of your longer term kind of growth targets for those two businesses. That would be great.

Thanks for the question. I’ll take the first part. I’ll let Dave comment on pricing. In terms of our HPA and CSG businesses, we would expect to see strength in defense and power devices within our HPA business that will grow over the course of the year. And then in our CSG business, we’ll see growth in Wi-Fi business and then the other connectivity elements, including UWB. So a strong sense and confidence on those businesses given where they’re standing today and the growth trajectory over the year. Dave, if you don’t mind comment on pricing.

Yes. I mean certainly, the pricing environment that you referred to a year or two ago is a little different now, but we don’t see anything out of normal from what we see in the market. And we’re pretty excited about in 5G entry. I think Bob mentioned that only 40% of Android phones last year had converted to 5G. So, we still got a long way to go there. We see that growing at double digits for the next several years. And that’s all new content for us because we really haven’t participated in the 4G entry space for many years. So, as customers start to migrate more and more of their portfolio to 5G, that’s all new opportunity for us. So, we’re pretty excited about that growth opportunity as well.

Ruben, maybe I’ll give you just a little bit more color here on the segment revenues in Q4, and then I’ll compare it to a year ago, just for reference. HPA in Q4 was $133 million in revenue, CSG was $82 million in revenue, and ACG was $418 million. If you look back one year at the March quarter in our fiscal '22, HPA was $211 million, CSG was $179 million, and ACG was $777 million. So as we get back to those levels of growth we would expect over time, we should see some forward progress throughout the fiscal '24 year.

That’s great. Thanks for that perspective, Grant. I appreciate the breakout for Q4 before the K came out. If I could, just really quickly, Bob, following up on Ed’s question about ASP. With all the content moving up to the BAW filter content in one of your placements, is $5 to $7 still the right way to think about ASPs in a typical 5G handset, or do you think we might start to push that higher with the added value?

Yes. I think your number is probably on the low side. If we look at the average smartphone, it’s much higher than that. But we see that pretty stable over time. I mean, of course, there’s going to be ASP erosion, but the conversion from 4G to 5G is going to be a big driver to offset that. And there’s also new content. Wi-Fi 7 is going to add new content. We talked about our BAW filters there, but also as you look backwards in time, in a lot of cases, Wi-Fi 5 and prior, there wasn’t even a FEM involved. And so Wi-Fi 6 and now Wi-Fi 7, there are opportunities there for us with our FEMs and our Wi-Fi portfolio, and we’re well represented across all the reference designs there. And then even in 5G, there continues to be new capabilities, new requirements coming in 5G advanced. And that’s going to increase complexity, increasing the performance requirements. And in a lot of cases, there’s new content opportunities there as well. So, all that’s going to be easily enough to offset any ASP erosion that we see.

Bob, just a question on China. I think you’re guiding for sequential growth in second quarter, June quarter. So, I’m just curious, it’s slightly more optimistic than what we heard from some of your peers. Is this driven by the smartphone side, or is it more non-smartphone business that you’re seeing, a little bit of a pickup there? In general, if you can talk about what you’re seeing in China because there’s been a lot of expectation? I think we’re still kind of not seeing a whole lot of pickup since the reopening. So, any comments there, I think, would be helpful.

I completely agree with your last point. We're also not observing any improvement. As we've indicated for the second quarter, we're continuing to lower channel inventories. Consequently, we've decreased inventory levels. Customers still need to place orders for certain parts. Therefore, what we're communicating is that we're expecting an increase in our revenue. This is unrelated to end demand; it indicates that we're nearing the end of our inventory cleanup process. I believe Dave mentioned our bookings have shown strong growth, with the largest bookings in China we've seen in nearly two years. This reflects a shift in momentum, but not in the end market. We align with what you've heard from others. Over the past two quarters, we've effectively reduced channel inventory. We're starting to identify the bottom of this cycle. As I mentioned before, the challenges are easing, and positive factors are beginning to emerge. However, this should not be interpreted as a commentary on end market conditions, but rather on our revenue outlook.

Got it. And thank you for that clarification. And then, Grant, on the gross margin, I know a lot of questions have been asked about utilization. If I take your, I guess, guidance, it looks like you’re going to exit the year in low-40s. So I’m just trying to bridge the gap between that and your long-term model. So, is it primarily utilization, or are there any other factors that are going to, I guess, help you get to that 50% plus levels?

Sure. It’s really the two factors, right? There’s both utilization and mix. So, as we’re selling newer products that didn’t run through the factories when they were underutilized, obviously, they carry better unit costs, and you see that in gross margin in the September quarter. In the December and March quarters, you start to see more sell-through of products that we have already on the shelf and that incorporates higher unit cost due to prior underutilization. So it’s a bit of mix and utilization.

Okay. Is there any revenue level, Grant, that you think you need to get to before we see a 5 handle on the gross margin side?

I wouldn’t say that it’s a revenue. Again, it goes really back to mix. It depends which products we’re selling through and what kind of contents are in those products. So it’s not an absolute revenue level, but again, really related to mix. Sorry, just to follow up on that. I do feel confident in the path back to 50%. As I pointed out earlier, in the Pareto of gross margin, it’s dominated by underutilization. So really, in terms of the path back, it’s just a question of filling up the factories in order to get there.

Grant, I have two questions. How do we look at kind of the strategic exposure to your largest customer? You said fiscal '23, Apple was 37%, Samsung 12%. It sounds like based on the content gains this year, you will grow those percentages, both these customers. And historically, Apple in terms of profitability has not been kind of the best exposure name. So how are you balancing content growth with profitability?

Sure. As Bob mentioned, we are highly confident in our content. We’re fully supporting all our customers, including this one. Looking ahead, we’ve never provided specific guidance on any customer as a percentage of revenue, so I would be cautious in doing that now. However, we feel good about our standing in that area. Regarding profitability management in the future, as I noted in my prepared remarks, we are investing significantly in multi-year opportunities with various customers. The R&D investments we are making now will drive revenue in the coming years. We believe we are well-positioned to succeed, and we have the technology needed to achieve it. We are confident in our development and the investments we are making.

I understand. And then on the power devices, silicon carbide, and I understand you’re growing from a small base and the multiple million dollar order on inverter side. How strategic is this business to Qorvo? How are you investing your R&D dollars towards this business? And could this be a 10% type business maybe in a couple of years?

Yes. We think it’s a very strategic investment for Qorvo, right? It’s similar to a lot of the other compound work we do. We have a differentiated solution with our JFET technology. We have a lot of customer demand. And in terms of the investment there, I think it’s well placed. We do expect to grow significantly. And as you’ll see in the 10-K, we will be paying a contingent payment to the shareholders of United Silicon Carbide, which reflects a lot of success in that business that we’ve seen since we’ve taken it over.

You guys are set to ramp into new smartphone models across your customers in the second half of this year. I appreciate the new and higher content gains. How are the pricing trends on like-for-like components on these new model ramps either versus prior generation or on a year-over-year basis?

Yes. I don’t think we can comment on a like-for-like. I mean, every generation, there’s always new challenges to solve. And so, we’re just excited about the content gains that we have. As Bob mentioned, in some cases, that’s new content, in some cases, it’s share gain. And that’s probably true as you look across the customer base, similar story plays out.

Okay. Perfect. I believe it’s spread across both, your HPA and Connectivity segments, but wanted to get your views on the broadband access markets, cable, fiber-to-the-home. On the infrastructure side, where are we in the DOCSIS 3.1 upgrade cycle? Seeing lots of activity on DOCSIS 4.0. On the gateway side, hearing Wi-Fi 7 home gateways may be starting next year. So, the team has multiple tailwinds here. What is the team’s sense on timing? And then more near term, like what’s the state of the access market’s demand wise? And are you guys also burning through excess inventories here?

Yes. I think the timing of what you said, I think that’s pretty consistent with what we’re seeing, and we do see a lot of new design activity in the newer standards, and we’re very well positioned there with our technology. And to your point, we do see some inventory challenges there as well that we’re working through. So, we think that’s relatively near term, but there will be a little bit of challenge there to get through in that business.

We want to thank everyone for joining us today. We appreciate your time. We look forward to meeting with you at upcoming investor conferences. I hope you have a good night. Thank you.