Skyworks Solutions Inc (SWKS) — Q1 2019 Earnings Call Transcript

Thank you, Laurie. Good afternoon everyone and welcome to Skyworks' first fiscal quarter 2019 conference call. With me today are Liam Griffin, our President and Chief Executive Officer; and Kris Sennesael, our Chief Financial Officer. Before we begin, I would like to remind everyone that our discussion will include statements relating to future results and expectations that are or may be considered forward-looking. Please refer to our earnings press release and recent SEC filings, including our Annual Reports on Form 10-K for more information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. Additionally, the results and guidance that we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP. With that, I'll turn the call over to Liam.

Thanks, Mitch, and welcome everyone. Despite macro weakness across our global mobile business, Skyworks delivered solid financial results driven by content gains, our expanding footprint and broad markets, continued execution of our innovator product strategy, and the strength of our business model. Specifically in Q1, we've generated $972 million of revenue, delivered a gross margin of 51% and an operating margin of 36.7%. We posted an EPS of $1.83 and produced $549 million in cash flow from operations, a new quarterly record for Skyworks. In addition to achieving strong profitability and robust cash flow, we've clearly expanded our design win pipeline in several emerging high-growth categories. Our solutions are now enabling the newest Wi-Fi standards along with the latest advances in MIMO base stations and across mobile payment platforms. For example, our Wi-Fi 6 products are now powering NetGear routers, Charter Communications Home Gateways and Ruckus Indoor Access Points to name just a few. We also partnered with Square, a market-leading mobile payment platform, powering their latest long-range retail systems. And we supported next-generation high fidelity audio solutions for Bose, enabled by Alexa voice controls. In addition, we've ramped an advanced wireless engine supporting Phillips' end-to-end street light management platforms. And across the infrastructure space, we've secured a number of massive MIMO wins with leading base station providers as they prepare for the ramp to 5G. Across automotive, we reported next-generation telematics solutions for leading German and Korean manufacturers. These results highlight our success as we continue to increase our product reach across a growing set of end markets, applications, and customers. We have extended our technology leadership in cellular and are capitalizing more broadly across the Internet of Things, leveraging a diverse set of connectivity protocols, including Wi-Fi, Bluetooth, ZigBee, and GPS. Looking ahead, 5G technology will fuel a broad array of markets and applications, ranging from industrial IoT, automotive, machine-to-machine, healthcare, smart cities, as well as artificial intelligence. Capitalizing on the advances of our mobile solutions, the launch of strategic product categories, and the diversified strength of broad markets, we remain confident in our ability to outperform. As a management team, we are squarely focused on operational excellence while continuing to invest strategically across innovative technologies and products, establishing a firm foundation for future growth. With that, I will now turn the call over to Kris for a discussion of last quarter's performance and our outlook for Q2.

Thanks, Liam. Revenue for the first fiscal quarter of 2019 was $972 million. Momentum in our high-growth broad market business allowed us to partially offset unit declines across our mobile business. That was mostly driven by weak customer demand in China. In fact, revenue from broad markets continued to outperform in the first fiscal quarter. We have double-digit revenue growth compared to the first quarter of last year, demonstrating continued diversification across multiple end markets, customers, and applications. Gross profit was $495 million, resulting in a gross margin of 51%, down 20 basis points sequentially on lower revenue. Operating expenses were $139 million or 14% of revenue, slightly below our guidance. We generated $356 million of operating income, translating into an operating margin of 36.7%. The first quarter effective tax rate was 9.7%, which brought net income to $325 million or $1.83 of diluted earnings per share. Turning to the balance sheet and cash flow. In the first fiscal quarter, cash flow from operations was a record $549 million and capital expenditures were $129 million, resulting in a strong free cash flow margin. We paid $67 million in dividends and repurchased a record high of 4 million shares of our common stock for a total of $284 million, and we ended the quarter with a cash balance of $1.1 billion and no debt. As noted in our separate press release issued today, Skyworks' Board of Directors has authorized a new $2 billion stock repurchase program. This new buyback plan reflects our confidence in Skyworks' business model and our ability to consistently produce strong free cash flow, allowing us to leverage share repurchases and dividends to generate higher shareholder returns. Our strong balance sheet and cash position provide important competitive advantages, allowing us to make the strategic investments in R&D while funding the capital requirements for 5G, as the complexity of our solutions intensifies. Now, let's review our outlook for the second quarter of fiscal 2019. We anticipate revenue in the range of $800 million to $820 million. We expect gross margin to be between 50.5% and 51%, which is flat year-over-year at the midpoint of the range despite lower year-over-year revenue. In light of the market backdrop, we will continue to drive operational efficiencies and prudently manage our operating expenses down to approximately $135 million. Below the line, we anticipate roughly $3 million in other income and an effective tax rate of 10%. We expect our diluted share count to be approximately 175.5 million shares, assuming a revenue midpoint of approximately $810 million. We plan to deliver diluted earnings per share of $1.43. With that, let me turn the call back to Liam.

Thanks, Kris. As all results indicate, we are continuing to deliver high levels of profitability with consistently strong cash flow. More importantly, we have strategically positioned Skyworks to outperform as we seize upon a complex set of new opportunities in both mobile and broad markets. For example, the shift to 5G is a tremendous catalyst representing an entirely new connected ecosystem, one where Skyworks will play a leadership role. At a higher level, 5G will be transformational, requiring step function increases in analog performance, advanced filtering, and power efficiency. With decades of experience spanning successive technology generations, Skyworks is well positioned to capitalize with strategic partnerships across all smartphone and IoT customers, differentiated systems solutions, enabling unmatched levels of integration and performance, focused investments to expand our product portfolio, IP, and scale. Finally, a business model that leverages both mobile and broad market diversification with leading financial performance means we are committed to creating shareholder value while executing on our ambitious vision of connecting everyone and everything all the time. That concludes our prepared remarks. Operator, let's open the lines for questions.

Guys, I want to start just by understanding the different dynamics in the businesses as we look at the second quarter. Kris, can you just clarify for us what was the split between broad markets and integrated mobile in the first quarter? And then, as we look at the second quarter, what are the gives and takes in the second quarter, Liam? Do you think that can be a trough for the year in integrated mobile or would that come later in the fiscal year?

Yes, Craig. I'll start by giving you some of the details there. So, in the December quarter, broad markets were approximately 27% of total revenue and of course mobile was 73%. So, in terms of broad markets, we are still running at over $1 billion on an annualized revenue run rate. Also, as I mentioned in the prepared remarks, broad markets were up double digits on a year-over-year basis into the December quarter. So, we continue to see a lot of strength in our business, in our infrastructure business, with some of our wireless connectivity solutions and as well we start turning revenue in our automotive business as well.

Right, Craig, and also if you think about the back half of the year pivoting off Q2, which is seasonally down and certainly hit with some macro effects, we feel much better about where the second half is going, consummating strategic design wins, which we will be launching in the back half of 2019.

And then, the follow-up question is on the new share buyback announcement. So, I believe it was a year ago that the program stepped up significantly to $1 billion. I think around 88% of that was executed within one year. So, the question is this; one, should we look at the new program as something that could be executed with similar pacing to last year's program? And if not, then should we think about other uses of cash whether it’ll be further M&A beyond Avnera or potential action with the dividend as things that the Company would try to prosecute?

Yes, so first of all, we continue to generate very strong cash flow, very strong cash from operations; and even when you look at the free cash flow taken into account, our CapEx, we continue to generate a very strong free cash flow. Obviously in the December quarter, the free cash flow margin was approximately 43%. We benefited there from reduction in our DSOs, but on an ongoing basis, we expect and we’re well on track for the 30% free cash flow margin. So, we feel good about that part of that business. And yes, in January of 2018, we put a $1 billion buyback program in place. There was only $129 million left under that previous program so that got cancelled, and we did put a new $2 billion program in place right now. If you look at cash return to the shareholders in fiscal ’18, we actually returned over 120% of our free cash flow back to the shareholders, a combination of our dividend program as well as our share buyback program. We’ll continue to use those two programs to return substantial amounts of the free cash flow back to the shareholders.

I wanted to ask about 5G both on the infrastructure side as well as the mobile side going forward. Can you remind us how meaningful your infrastructure business is within broad markets? And what kind of trends you’re seeing there as it relates to 5G? And then on the mobile side, I believe it's one of the 20/20 dynamics, but what are your thoughts on that as a potential driver for both units as well as content for your business?

Sure, well, we have been a consistent provider of infrastructure technology for years across a global set of customers in Europe and the Americas and in Asia. So, that something hasn’t changed. We’re starting to see some ramp up in architectures in 5G on the base station side. There are new technologies and MIMO integration there as well. So that is definitely a driver and a catalyst for broad market. In parallel with that, we are absolutely committed to delivering 5G technology. We’re working on that right now with customers that matter. There is a lot of collaborative strategic dialogue between our customers and ourselves to craft the best possible solutions for 5G. It brings with it tremendous opportunities and filtering as well as tremendous opportunities in our gallium arsenide technology. Our ability to integrate these products in our own sites is critical, and as you know we launched our Sky5 platform here last year. We’re making great strides. We think those products will come to market probably in 2020 and more readily in 2021. But the great opportunity, and as we noted in our prepared remarks, the real catalyst for this industry will be at the forefront.

As a quick follow-up, I wanted to ask about China smartphones. What percentage of your revenue came from your Chinese customers within mobile during the December quarter? And I guess going forward, do you think the current quarter is the trough for that business? Or do you think we should prepare for multiple quarters of weakness, just given the inventory situations there?

In the December quarter, revenue from our Chinese customers was approximately 20% of our total revenue. It was down substantially on a sequential basis, which is somewhat in line with normal seasonality. However, we do expect in the March quarter a further minor sequential decline of that business.

Maybe just following up on the last question. Obviously there's a lot of well-known weakness in mobile, but it equates to some substantial down year-over-year. So I'm just kind of curious as you look back at December and then maybe even that whole fiscal year. In terms of your market versus your sharing, you can kind of look back there and analyze what drove those substantial year-over-year declines and then any perspective as you look forward at that reversing?

Sure, Blayne, this is Liam here. The way I would look at this is, you've got a regional effect with China specifically with the China demand really softened. And so, think about that as a geography set; it certainly impacted customers in China. It also had a bit of a headwind on the export market, but a lot of Chinese brands would populate technology from companies like Skyworks, and then those products would go all over the world and emerging markets and they're hard to track. But we use it as revenue there. So you have the China consumption coming down, you have the export markets also coming down. And then we have some specific unique challenges with Tier 1 customers that had much more advanced, richer content with a lot of value and technology in their units that are coming down. Some of that was China and some of that with other markets, but it was a combination of that affecting China at a high level, and then you could port that into individual customers of Skyworks and kind of read through the day, even Samsung had some challenges here in the last quarter. That's what we've been doing. If you look out in time, I feel a lot better about where we're positioned. We're executing on the things that we can control. We're delivering great content, high-performance technologies that our customers love. We're ready for 5G. In parallel, we've got a broad markets business that continues to grow double digits. So, we feel better about the second half. This was a tricky period that we've navigated through but we expect to show better results as we get into the second half.

I just wanted to go back to the broad market. It seems like, and you mentioned some momentum in March, just going back to the first question. Is December the trough in broad markets? And do you expect it to increase sequentially?

Yes, it should be, and we should continue to see some increases sequentially here. It tends to run on its own uncorrelated vector, right, vis-a-vis mobile, and we continue to be upside surprised by some of the new design wins that we bring forth. One of the nice things I will say is where mobile is fairly well characterized in terms of customers, TAM, and value, the broad markets business, there is not the headroom there. So, even in a market that could move sideways to down, we could grow, and we're doing that. One of the things to remember is that the breadth of our wireless protocols, whether it's Wi-Fi or Bluetooth or ZigBee, or cellular really offers a great opportunity for us as we look at an increasingly diverse set of customers and provide a menu of options for those customers as they move to connected solutions.

This is Jim calling for Ambrish. Thanks for the question. First, I was wondering if you guys could give us a bit of an idea of when you expect to your BAW revenue to become more meaningful? And how does it translate into margins? I guess specifically, do you expect there should be a tailwind towards your 52% gross margin target?

Sure. Well, as we noted in the last earnings call, we have been making very good progress in our Bulk Acoustic Wave portfolio, and as you know, we have been a market leader in temperature compensated SAW. We continue to invest in that category and that’s becoming and continues to become a real strategic weapon for us. The Bulk Acoustic Wave technology is moving along very well. We have design wins, and we expect revenue in the second half. I don’t want to quantify too much on that right now, but we have made the kind of progress that we expected to make. We've made more investments in capital as well to fortify the scale of our BAW technology. It's just another great opportunity for us to expand TAM and create the most diverse set of solutions that we can provide our customers, which is very meaningful for us in 5G as well, as we move into that category.

And my follow-up is I guess turning towards broad markets. I think you point to a bit of a macro slowdown across your whole markets. But looking at broad market specifically, why are we not seeing the slowdown there beyond infrastructure and IoT? Where are you I guess like, are you seeing the slowing?

Yes, so broad market has provided an upside here and we’ll continue to do so. Again, as I mentioned, there is just so much opportunity that we haven’t yet covered. We’re doing great work with our Wi-Fi product lines, along with our ZigBee product line, getting into the infrastructure space now that’s taken off again for us. A lot of connected devices in the home, security, working with customers like Amazon, like Nest. We even have some defense business in our broad market portfolio. So, it creates a great opportunity because we’re really not constrained by TAM and sort of markets. We are growing the TAM. We’re expanding our reach and we’re getting into new customers and accounts. So, there’s a lot of headwind for growth even if some of the market dynamics at a macro level are not in our favor.

This is Enaya calling in for Craig. Thank you for taking my question. I wanted to discuss the opportunities you see for content growth at your key customers when you consider the appeal in front of you. What are the main products that contribute to content growth for you? Additionally, what kind of enhancement would 5G provide?

Sure, well, if you look at the opportunities today, there is still an incredible ecosystem that lives and breathes on connected devices and smartphones, and the higher-end players really embrace that. If you look at what we have been seeing, as we have been seeing an increasing opportunity in mobile devices, even in 4G, we have been seeing that. Much more complex solutions, our DRX category, for example, our high-band solutions now bringing BAW to the table are all moving in the right direction. But the big inflection is going to be the step up into 5G and that will absolutely happen. When that happens, it's necessary to bring new technology into the same physical form factor, that same handset, with new technologies, new spectrum, new frequencies, more filtering. The ability to coexist with different devices brings a tremendous amount of complexity and challenge and creates a unique opportunity for Skyworks and the top-tier players in our space to win. We look forward to that. All of this is a parallel opportunity in the infrastructure side, but we are absolutely seeing the block diagrams, the expectations, and the dialogue with our customers that point to tremendous opportunity when 5G arises.

And from a follow-up, I just want to touch upon Avnera. Can you provide us an update on how the integration is going? Where do you see the key opportunities and any milestones that we should be looking forward to as you measure your progress on that acquisition?

So in the December quarter came in fully in line with our expectations. By now we have fully integrated that business into our growth markets. We're really pleased with the Avnera acquisition. It came with a very strong management team, some great IP and technology. We see a lot of good progress there as we integrate that into our business.

Right, and if you think about the strategic rationale with Avnera, it's increasingly clear that voice is becoming one of the most important interfaces now in devices whether it's connected devices or automotive. Voice technology is very critical and it's going through a phase now operates with more IP being layered in. That technology for us, by virtue of the Avnera acquisition, puts us in a great position to capitalize leverage their unique solutions, allowing Skyworks with greater scale and manufacturing and also greater reach from a customer perspective to weave that all together to develop new sets of opportunities and new revenue curves as we look out.

I guess my first question is how to think about the shape of the year as you go through the end of the fiscal year. I think June is usually flat, up maybe a little bit, and September's usually up about 10%. So are there any sort of weird things that you could point to with the comps this year that would make this year sort of abnormal versus what is typical seasonally?

Sure, yes, it's a great question. As we look out, what you just modeled is kind of what we see as well, you typically have March quarter that's seasonally down, obviously more pronounced this year across the space. If you look at the June quarter, that's flattest maybe a little bit. Then, we get into the second half of the calendar year, our Q4 and then Q1 calendar and fiscal. We would expect higher level to grow. What we do know is that we are doing the work necessary to win and platforms that matter. Not just in mobile platforms, but also in broad markets, and in infrastructure and the design win execution has been very, very favorable for us. It doesn't show up in the March quarter numbers. So we feel good about that. The breadth of the technology for us is really opening up. It's not one or two accounts. We're moving the dial with some of our unique solutions across more and more players in mobile, and the broad market is really just about adding new applications and customers. We expect again, we're not guiding the full year, but we do expect knowing what we know about our business and what we deliver on content and in a lot of cases have yet to ship. We feel very good about that signature where you kind of have a flat or slightly up Q3 and then we move into the second half with a stronger top line, and the financial performance in the bottom line should follow.

In the first half of the last fiscal year, you provided some details regarding your largest customer as a part of your revenue. Can you share what that figure was in December and what you expect it to be in March?

So in the December quarter, our largest customer was over 50% of our total revenue, pretty much in line with what it was in the December quarter a year ago. Keep in mind that the December quarter is a very strong quarter for our large customer. When you look at it on a full-year basis, we expect that large customer to be in the mid-40s as a percent of total revenue, again pretty much in line with what it was last year.

Just wanted to follow up on the commentary of increased investments for VOD, does that change in any way the CapEx outlook for the year which I think was around $400 million?

No, not really. I mean we expect our CapEx to run slightly above 10% of revenue. It's a combination of some capacity expansion CapEx that we do, especially in our filter operation as we continue with our in-sourcing process that we talked about in the past. But in addition to that, we are making the necessary technology-related CapEx investments in our filter operation and in our back-end operation. A substantial part there is in support of our ramp with BAW filters.

As a follow-up, the OpEx guide of $135 million, you're only up about $3 million year-over-year in spite of Avnera. How much of that kind of the OpEx you're taking out is temporary versus any permanent changes in that number?

As a management team, we will manage our operating expenses. We know what we can control. We will look at discretionary spending. Obviously, the rest on variable operating expenses as well that's come down on lower revenue. At the same time, we will not hesitate to make the necessary investments for our future and make the necessary investments to build those new technology building blocks that support 5G, all the good R&D activities to support further expansion of our broad market business. So, it's a combination of both again we will continue to very prudently manage our operating expenses and adjust if and when necessary.

I wanted to ask about the revenue trends for the year, specifically how we should consider gross margins, especially since it seems you have a solid understanding of the products you will release later this year. Can you provide insight into how we can expect gross margin expansion throughout the year?

So, first maybe a couple of numbers there, right. So, December came in at 51%, down 20 basis points on lower revenue. We guide March at 50.5% to 51%, which is sequentially down, but in line with normal seasonality and so approximately flat on a year-over-year basis. Looking forward to the remainder of the year and beyond that, I feel good about our ability to further expand the gross margin towards our target model of 53%. Obviously, if we have more revenue tailwinds that will help us to get faster through the 53%, but we are again focusing on operational efficiencies, we are driving the technology curve, and we are introducing new products to the market that are more value-add type of products. The combination of all of that will help us to further improve the gross margin.

I think in the past you described the broad markets as margin accretive, and presumably that can grow faster than mobile. Looking at your design win pipeline, do you believe that business can continue to grow at a double-digit rate for the entire fiscal year?

Yes, so broad market is above average gross margin and we do believe that we can continue to grow that business double digits.

Liam, so if I look at the December quarter revenue and also the March quarter outlook, they're down almost double-digit year-on-year even though your content is up and then broad market is growing nicely in a double-digit pay. So my question is, to what extent do you think your March quarter outlook actually reflects the end demand? I mean, we know that obviously the end demand has weakened. But I'm just wondering, if there's inventory at the component level that you need to work through, and then the March quarter outlook, it's probably not a true reflection of the words and demand. If you could shed some light on that, that would be helpful.

Yes, I mean, obviously, the way the quarter rolled out for us is not what we expected and not what we anticipated, and I think that that's kind of shared by a number of peers, not just in mobile, but anyone in semis and even in tech can absorb this reduction. It's not specific to a customer. I think we had, as I mentioned, a China effect that really hurt us and then some other trickle-down challenges. But how do you set all that? Where we are here off our current guidance and into the March quarter? We feel it's the right guidance that balances and positions ourselves well for recovery in the second half. We are always keenly analyzing where the inventory is, and what our customers have on hand if we can see that and we usually can. One of the reasons why the number was down in Q2, quite frankly, is to reconcile that. So, we feel that we created a balanced view here from our guide in our position to move forward and up from here.

And then, you talked about 5G. Obviously, that's probably a bigger driver next year, but it looks like several of your customers are going to announce 5G phones in the not too distant future. I'm just curious as to what you're seeing in terms of design win interaction? And then also, if you can comment on when you talk about content expansion, what exactly will drive content expansion? Is it simply that you need more powerful PAs and filters or either more bands? Or if you could shed some light on that, that would be helpful.

Yes, it's a couple of things. Yes, you will see announcements for 5G in the next 12 months. There's no question about that. We are absolutely going to be populating those phones when they're announced. I think the big shift to the 5G ecosystem will probably get a little bit later, around the end of 2020 and into 2021. But there will be steps along that path. If we look at the opportunity, just envision what we're looking at here is, you've got a 4G technology engine that is in place already in your device and that is not going away. 5G is going to be incremental and additive to your current handset. No one is walking around today with 5G frequencies in their phone or dealing with 6 gigahertz and above or dealing with millimeter wave in their phone. They're not doing that yet. That is coming. The increased opportunity for companies like Skyworks is that it will drive a great deal of architectural complexity. Those who know how to handle that, and companies that have the ability to be configurable and flexible in the architecture will thrive because every customer wants it differently, whether it's a geographical roaming issue or it's a size issue. They're different; these are not cookie-cutter devices, and that's great for us because it gives us an opportunity to shape the curve, work with the customers, provide the greatest technology, and also be early. We're looking forward to this. We're making investments. We've rounded out our filter portfolio now with BAW. We've done a tremendous job with our Sky5 platform on both transmit chain and receive side with the DRX technology. We're even weaving in some of our devices and Wi-Fi 6, GPS and some of these applications. We’re looking forward to this. Again, this was forward-looking revenue that we'll be seeing, you know late into this year and further into 2020 timeframe.

Elaborating on the previous 5G and infrastructure question, would you be able to say whether you had content currently into the Asia geography ramping and then kind of think of China specifically in the second half of this year? Just trying to see how impactful that ramp could be on your revenue line as you exit kind of 2019? And also, could you give us a bit of color on your market share looks like in 5G base stations versus what you’ve had so far in 4G?

Sure, we expect to and we are positioned to support all of the global infrastructure players in 5G, the U.S. players, the European players, and the players in Asia. All of them are customers for us today. The advances we see in the MIMO architectures and the specific spectrum required to deliver the 5G waveforms present great challenges that we're going to work with these suppliers and these infrastructure players to overcome. We have a balance to do. We've seen a lot of great work come out of Ericsson and Nokia Siemens Networks. There are obviously some players we see in APAC, and we're well positioned there across this space. The infrastructure has to be in place for this new network to perform. We have great technology and opportunity in handheld devices, but we also have to pair that up with the infrastructure side. We need that signal working together, and we're all over it in each one of those customers.

Given that we are not expecting a significant increase in RF content in the U.S. before seeing a notable upturn in 5G in 2020, this year is likely to be somewhat subdued. Should we adopt a positive outlook regarding RF content, particularly in the Chinese markets, where we anticipate higher 5G production this year? How should we evaluate the year-over-year potential comparisons in your mobile business throughout this year?

There's a lot there, but what I would say is, it's possible that China may be early in 5G, that's possible. But I think you also got to look at the global theater here because I think you've got some tremendous technologies coming to market across the globe in Korea, from the U.S., from Europe, as well as China. I think it's going to be more balanced in my perspective and what I'm seeing in my dialogue with customers; it's going to be more balanced in terms of launch. As I also mentioned, you're going to have different flavors and technologies that are going to be put forth. Some of it is absolutely necessary. There are new frequencies and new spectrums impact the products that go into these phones that have to be able to deliver advantage and deliver signals across that spectrum. We will be one of those players. There will be some other things that will be required as well. Just think about the coexistence of all this technology in a single device that will create lots of challenges, harmonics challenges, coexistence challenges that have to be overcome. We will be working with our customers to do that. There will be players in China, but I think it’s going to be much more of a global impact. Also remember that 5G is truly a technology; it brings incredible data rates, low latency, and capacity. 5G is not just a catalyst for mobile phones; it's going to create IoT opportunities, small cell opportunities, and enable markets that we haven't seen before, as we move into the future, including automotive. There’s a lot to look forward to, and we're in good position working with market leaders globally.

I am just wondering on the BAW technology. What is the roadmap there? And what do you see as the mix of broader and you said exists 2019?

Sure, well, what I will say is that we've been working on our BAW products for quite a while. We haven't said much about it until the last earnings call, but we're making great advancements, great strides, sampling customers that matter, getting incredible feedback, delivering on the successes that we have, and also learning about new opportunities that we haven't yet addressed. It's certainly rounding out our portfolio as many players in that space as well, but we're going to be a meaningful element in BAW as we go forward. As Kris mentioned, we made strategic investments in this technology. This isn't just IP; this is also being able to deliver the kind of technology and scale and the production side that makes this happen. The BAW process is very different from surface acoustic wave that requires a whole different type of manufacturing complexity, and we know how to get that done now with a lot of help. You should just continue to see steady growth in that area as we move forward. Our TC SAW technology is also vital to these architectures. We're seeing a lot of growth there as well. We continue to work that. One of the things we do differently than some of our peers is it's the integration, it's bringing in the right filter, the right ICs, the right mix of gallium arsenide and SOI technology, the packaging and the configurability that we can offer to each customer that I think makes it unique. Having BAW now within our portfolio ready solves another issue, and we're looking forward to delivering that as time goes on.

And then, the inventory side, I know it's tough to get a handle on all the inventories, but your inventory went off looks like in the December quarter. But if you're going to March with the revenues coming down, are we expecting inventories in-house to go up again or do you see them coming down? Also on the channel inventory side, any thoughts on how channel inventories look in China, etc? What's your best guess there?

On our own books in the December quarter, inventory was flat, slightly up $3 million versus the September quarter. When you look at inventory going forward, of course, you have to take into account our seasonal pattern for fiscal Q2 and fiscal Q3 which are the lowest quarters, and then we see strong sequential growth into fiscal Q4 and fiscal Q1. We obviously want to maximize our capital equipment efficiency and try to minimize our CapEx. As a result of that, we will level load our operational activity into our factories. During the low seasonal quarters, we typically build some internal inventory, so you will see inventories go up in fiscal Q2 and fiscal Q3, and then we start reducing that in Q4 and Q1. That's our own inventory level. Regarding the inventory in the distribution channel, we've definitely seen some cautious behavior from most of our distributors given the level of volatility in some of the macro headwinds out there. We are not fighting the trend. We are working with our distribution partners, and we keep a very healthy, normal level of inventory in the channel.

With respect to the gross margin question, in terms of margins kind of stabilizing and potentially expanding as you increase your mix of broad markets. I was wondering about any particular pricing pressure you're seeing in your mobile business that could potentially offset that mix shift, that positive mix shift going forward?

Sure, yes. So, certainly, the broad market portfolio has accretive margins to the Company. What I will say is, as we move into more advanced 5G, the mobile business is going to get much more complex, and differentiation, execution, and scale are going to matter. We think we're going to do very well in that environment and provide a tremendous amount of value to our customer but also achieve the kind of margin that we deserve for bringing our technology to market. We feel good about our outlook and gross margin as we move to 5G and beyond.

For my follow-up regarding the overall market, could you share what percentage of revenue is generated from ADAS and autonomous driving? What is your current position in this area? Where do you see growth potential, and in which specific products do you anticipate significant market share gains, whether in Wi-Fi, Bluetooth, the sub 6 gigahertz band, or MIMO? How do you view the 5G system architecture for connected cars?

Sure, that's a great question. We are fortunate today, before 5G has arrived, we've had a really strong, I would say, the last year and a half has seen a real strong uptake in automotive and engagement with a number of leading players, some we can announce and some we just can't. It started with some of the instrument clusters that work in infotainment work, and now we're doing a lot of the telematics work. So, it's a meaningful part of our broad market revenue. We don't segment automotive with a specific product line, but it's a meaningful piece and one of the fastest growing. Moving to 5G, we’re working with the players now; the connectivity element is vital, it's critical. Again, you need the data rates to be 100x what we see in 4G. Latency is absolutely at a premium; near zero latency is required, and in many cases, redundant cellular engines are required to ensure reliability and performance. Each player has a different way of looking at this, but it's going to be a significant opportunity for connectivity and wireless connectivity. Beyond that, I think we can move further along within the automobile and collision avoidance and even some vision systems and things like that down the road. Some of that we don't have in the portfolio today, but we absolutely will be well positioned on the core connectivity elements which are vital in 5G for the autonomous vehicle. That's an exciting opportunity. I'm happy that the team has been able to execute today on 4G opportunities and some other in-dash automobile solutions, but 5G for automotive is going to be really special.

Thank you all for participating in today's call. We look forward to seeing you at upcoming investor conferences and events during the quarter. Thank you.