Skyworks Solutions Inc (SWKS) — Q3 2019 Earnings Call Transcript

Thank you, operator. Good afternoon everyone and welcome to Skyworks' third 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 today 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 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 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 to Liam.

Thanks Mitch, and welcome everyone. Skyworks delivered solid financial results in Q3, as the resiliency of our business model allowed us to maintain strong profitability and cash flow. Looking at the quarter in more detail, we reported revenue of $767 million, slightly above our guidance, drove gross margin of 50.4%, and operating margin of 33%, while delivering earnings per share of $1.35. Our cash generation continues to be strong, with operating cash flow of $950 million year-to-date. Looking forward, our design win pipeline is expanding as we capitalize on the ramp of 5G in wireless infrastructure, smartphones, and across IoT. For example, in wireless infrastructure, Skyworks is now supporting a number of global 5G deployments. Our solutions address both 5G macro base stations and small cell radios, and we are ramping today with leading European and Japanese infrastructure OEMs. In addition, Skyworks is enabling 5G massive MIMO base stations for a leading Korean customer. Across the IoT space, we are gaining share in new emerging categories with recent wins at Facebook for their Oculus VR headset, and with Vizio for their sound bars, leveraging our analog SOCs and cognitive wireless radios. We also secured low power LTE CAT M design wins with the leading module providers, including Telit, Gemalto, U-Blox, and Sierra Wireless. We are expanding our reach in the wearables market where we are populating devices that combine our cellular and Wi-Fi technology. We've also extended our Wi-Fi leadership with several signature design wins in the last quarter, including Cisco with their WiFi 6 solutions, DirecTV for their over-the-top streaming devices, as well as design wins with industry leaders such as Amazon, Nest, and Netgear. Finally, in mobile, for the coming wave of 5G phones, we've deepened our engagements with key customers, leveraging our unique suite of solutions to support launches at Samsung, LG, Oppo, Vivo, and others. As these opportunities demonstrate the demand for advanced connectivity and the expansive nature of 5G are creating real-time opportunities for Skyworks. With 5G now launched on four continents, operators are seeing the compelling economics that 5G services can bring, and we expect momentum to continue building into 2020 and beyond. To be clear, 5G is a technology and not a product. We expect the performance gains in speed, latency, and network capacity to spawn a much broader ecosystem where 5G becomes the universal connector. With the application scope going far beyond the smartphone, 5G is already driving new usage cases in emerging areas like industrial IoT, autonomous transport, smart cities, and digital health. For Skyworks, this is a tremendous opportunity as our scale and experience across multiple technology generations position us to lead as 5G becomes a reality. Our capital investments have enabled us to build a highly specialized and vertically integrated supply chain capable of meeting the complex demands of the world's most innovative customers. We continue to advance our filter capabilities, creating leadership positions in SAW and TC-SAW, and in Q3, we commenced volume production of BAW-enabled devices. These devices will be shipping this quarter. Incorporating BAW expands our TAM in mobile and positions us to support a wider array of customers, markets, and applications. In addition to 5G, our capabilities in broad markets have grown as we now serve an expanded set of global customers, including companies like Ford, Continental, LG, along with factory automation leaders such as Bosch, Honeywell, Siemens, and GE. Today, we generate nearly $1.1 billion in annual revenues from our broad market portfolio. That's a compound growth rate of 16% since 2013. So in summary, Skyworks is at the forefront of ubiquitous connectivity, leveraging our decades of experience, world-class scale, and customer relationships. We are well positioned to continue executing on our vision of connecting everyone and everything all the time. With that, I will turn the call over to Kris for a discussion of last quarter’s performance and our outlook for Q4.

Thanks, Liam. Skyworks' revenue for the third fiscal quarter of 2019 was $767 million, that is $2 million above the midpoint of our June 4 updated guidance. Our third quarter revenue reflects the impact of the U.S. Bureau of Industry and Securities of the U.S. Department of Commerce, placing Huawei Technologies and certain of its affiliates on the entity list. Skyworks ceased all shipments to Huawei as of the date Huawei was added to the entity list. After an in-depth review of the export administration regulations and the scope of the entity list restrictions, we ultimately determined that we could lawfully resume shipping certain products, which we started in early July. However, we expect the business with Huawei to remain well below historical levels into the current quarter. Third fiscal quarter non-GAAP gross profit was $386 million resulting in a non-GAAP gross margin of 50.4%. As noted in the financial statements attached to our earnings release, we incurred a GAAP-only nonrecurring charge of $67 million, primarily consisting of inventory-related write-downs due to the addition of Huawei to the BIS entity list. Operating expenses were $134 million, better than our guidance and down slightly sequentially, as we continue to effectively manage our operating expenses. We generated $252 million of operating income, translating into an operating margin of 33%. Third quarter effective tax rate was 8.2%. This drove net income of $234 million or $1.35 of diluted earnings per share. Turning to the balance sheet and cash flow, third fiscal quarter cash flow from operations was $209 million, and for the first nine months of fiscal year operating cash flow was $950 million. Third fiscal quarter capital expenditures were $88 million, we distributed $66 million in dividends, and repurchased 1.2 million shares of our common stock for a total of $86 million. During the first nine months of the fiscal year, we have returned approximately $710 million to shareholders via share repurchases and dividends, and this represents 112% of the free cash flow we’ve generated this year. We ended the quarter with a cash and investment balance of just under $1 billion with no debt. Now looking ahead to fiscal Q4, we are on track to deliver sequential revenue and earnings growth in the September quarter as we execute on strategic product ramps. Specifically, we anticipate revenue in the range of $815 million to $835 million or $825 million at the midpoint. The revenue outlook assumes Huawei revenue remains at nominal levels given the uncertainty associated with ongoing trade-related issues. At the midpoint of the range, revenue is expected to increase 8% sequentially despite significantly lower revenue to Huawei compared to the June quarter. Excluding Huawei in the June and September quarters, we expect our revenue to increase 20% sequentially, reflecting strong seasonal ramps at our large customers as we demonstrate our expanding reach and ability to deliver complex and highly integrated solutions. We expect gross margin in the range of 50% to 50.5%, approximately flat compared to the June quarter, despite the lower factory utilization associated with the reduced demand from Huawei. We expect opening expenses of approximately $135 million, as we continue to adjust our spending levels. Below the line, we anticipate roughly $3.5 million in other income and an effective tax rate of approximately 8.5%. We expect our diluted share count to be 172.5 million shares. At the midpoint of $825 million in revenue, we plan to deliver diluted earnings per share of $1.50. Finally, today we also announced a 16% increase in our quarterly dividend to $0.44 per share, reflecting our confidence in Skyworks' business model and sustainable cash generation capabilities. And with that, let me turn the call back to Liam.

Thanks, Kris. As a proven technology leader, we are leveraging our Sky5 platforms and systems expertise to enable the billions of connections between devices and the cloud, providing the underlying foundation for an entirely new ecosystem in today's connected world. Looking forward, Skyworks is uniquely positioned with established leadership and growing markets and an expansive and innovative set of 5G solutions, global scale, and the deep customer relationships that are facilitating the mobile economy of tomorrow. That concludes our prepared remarks, operator let's open the line for questions.

Thank you for taking my question. I actually had two of them, if I could. First, Liam, I'm curious, how do you expect your largest customer to do in September, both on a sequential and on a year-on-year basis? I realized everyone in the industry is conservative on units, but I was hoping you could give us your insights on content growth that can perhaps help offset some of that unit conservatism. So to whatever extent you can, if you could help us give us some color on sequential and year-on-year growth at your largest customer?

Sure. Well, I mean, it certainly comes down to units, but I will say that the Skyworks team continues to work with all the most significant flagship phones and customers, and we continue to do that this year. A number of very exciting design wins have been consummated with leading customers, we're really proud of what we've done. We're continuing to expand the scope and the reach of the device count, and the complexity of what we offer. So, we really can't predict how the unit curve will look, but I can tell you that our ability to grow and gain content, especially in highly complex, high-margin areas is something that we will demonstrate and we will be very proud to show.

And as a follow-up, Liam, as you start fiscal 2020, I realized that last year was a tough year for the industry with all the weakness in premium units and then the Huawei ban. But as you start fiscal 2020, how should we conceptually think about growth? There's definitely benefits from the onset of 5G, but how material can it be? And if you could just give us an overall look at how you are looking at Skyworks’ overall growth prospects for fiscal 2020? Thank you.

Yes, I think 2019, as you mentioned has been a difficult year for a number of reasons. There was some volatility early in our fiscal year that was kind of a macro issue. And then we've had the effects of this Huawei ban, which has been pretty significant but we’ll manage. I do think there's tremendous momentum and excitement around mobile today and around 5G at a higher level. So we're starting to see the rollouts on the infrastructure side, we talked about that in prepared remarks. We're certainly working with all the customers that matter in helping them develop 5G capabilities in their smartphone devices, and we expect this to be an incredible catalyst for the industry. As I said in the prepared remarks, 5G is really a universal connector. It is a technology, it's not a product, it will populate multi-market opportunities for us. We have great solutions to make that happen. So, we're really excited about 2020 and beyond. We also feel good in the near-term right now. We just guided a 20% sequential quarter if we net out the effects of Huawei, which we really can't control today. As we look into our Q1, the December quarter, we see sequential growth coming again. So we feel bullish about that and the prospects of 5G ahead.

Yes, that's B. Riley FBR. Thanks for taking the question, guys. Liam, let me just follow up on the last comment. As we look at the December quarter, how should we think about normal seasonality for that business and is the profile that you see right now, one quarter out, trending favorable versus that seasonality or to macro cross currents that probably mean that you would expect to be below normal seasonality?

Well, I think we will be able to deliver a solid seasonal ramp, Craig, coming into our Q1 here in the back half of the calendar year. And again, it is a number of customers involved here, not just one, but we feel good about the outlook during that time frame. We have very good visibility, by the way, with respect to that timing. We also have very good visibility on what we've consummated from a design perspective in the devices that we put forth in leading smart phones. So we feel good about coming through. And then the balance of the year, we'll see how things go. I think broad markets continue to be a strategic vector for us. Despite some of the challenges that we're enduring right now, with Huawei, we think a lot of that demand and time is going to get redistributed and we'll be able to take advantage of that.

Okay. And then for the follow-up, let me just get to really clarification clean-ups for Kris. Kris, can you give us the segment splits and then just on the inventory, days moved up pretty materially on hand was up about 5% despite the write-down. So, how should we think about the company's ability to work down inventory and get it back into a normal level? Thanks, guys.

Yes, let me first give you the splits. So broad markets in Q3 was 37% of total revenue, which was up low-single digits sequentially as well as year-over-year. And you have to, of course, keep in mind that in broad markets, business was also impacted by the Huawei ban, some of the Huawei revenue is accounted for in broad markets, the infrastructure part, as well as some non-mobile wireless connectivity solutions that we provide to Huawei. Again, broad markets, it’s running at more than $1.1 billion in annualized revenue. And I think Liam talked in the prepared remarks about a lot of the strength that we see in that market segment with the launch of WiFi 6, some of the wearable products, automotive, and IoT in general. And so, broad market was 37%, on the flip side mobile was 63%, which was down approximately 10% sequentially and our slowest seasonal quarter of the year. And of course, that segment was impacted even more by the Huawei shipment ban. So that's the split. And then maybe on inventory. Inventory in the June quarter, which again is our slowest seasonal quarter of the year, was up $25 million, days of inventory were up 13 days to 139 days. During our seasonal slowest quarter of the year here, we definitely have been level loading our factories in order to drive efficient usage of our capital equipment. All of it of course in support of the new product ramps that we have with our key customers and where we talked about it, we see a 20% sequential growth into the September quarter, excluding Huawei and then even further growth into the December quarter. And so, in the September and December quarter, we do expect the days of inventory to come down as we will consume some of that inventory. Going forward, I do expect inventory to fluctuate between 110 days to 140 days, depending on where we are in the seasonal cycle. And that is slightly higher than historical levels. But you have to keep in mind that what was a four or five years ago, none of the filters we were making in house. We were all purchasing them from third parties and maybe two years ago, we got to roughly 50% of the filters in house. By now, we are getting close to 95% of the filters in house. That’s obviously driving some higher levels of inventory. But again, inventory is fully in line with what we expected and days of inventory will come down in the September and December quarter.

Yes, thank you. Liam, as we think about 5G from a design perspective, any color in terms of the traction you're seeing on the smartphone side? And then also just a rough estimate of how that's playing out in dollar content and the initial wave?

Sure, Craig, absolutely. Well, we see an expanding opportunity in 5G in a number of areas, there's just a great deal of complexity that needs to be resolved in the system. Our customers are looking for integration and cohesive solutions. Platforms like Sky5 that we developed are perfect for these customers; they are configurable, allowing us to resolve much of that complexity. We also have to deal with the challenge of backward compatibility into 4G and 3G. If you look at a 5G enabled phone, you're going to have 5G bands and 5G technology, but you're also going to need to be interoperable with 4G and 3G. There's a physical challenge in the design of the phones; there's a battle for current consumption and coexistence within the device, a lot of complexity that we're working on today with our customers. We're lining up with the critical base band providers as well, so our solutions can be somewhat agnostic around the baseband ecosystem. Adding some of the technologies that we've developed in-house, the DRX technologies will be even more vital in 5G. We've got ultra-high band devices that we're shipping, and we've got BAW technology that we just commenced shipping now that we spoke about. We’re in a very good position. 5G is difficult, it's challenging, and our customers are reaching out to partners that they trust and partners that have been here for years. We want to be one of those partners that help our customers be successful.

Got it. And then just in the follow-up update on Avnera. I know when you bought them, in terms of the context of Skyworks having a much larger platform, bigger customers. How do you think that pays through in terms of design work that they're doing? Are you able to leverage that in terms of some of the momentum for new designs at Avnera?

Sure, Craig, that's a great question. That portfolio is doing very well for us. So one of the designs that we mentioned in the opening remarks was powered by Avnera; they've got some very slick SOC technology that we're leveraging, certainly some great performance in audio. Overall, right now, we're very pleased with what we've seen from that acquisition. It's fully integrated with Skyworks, allowing us to take advantage of a larger sales and marketing organization and a little more strength on the operational side, but so far, it's looking very good. Appreciate that.

Yes, thank you. Good evening. Just a question on Huawei and just trying to get a little more color on what you had said from the pre-announcement earlier in the quarter, it seems that you took out about $60 million out of what you said was a 12% customer in the quarter, which would kind of work out to maybe sort of $40 million of remaining shipments to Huawei in the June quarter. I guess, were to understand that those shipments are minimal as you go into the September quarter and therefore, that's the sequential headwind that you're facing. And then maybe to follow on that, others, it seems like every company has had some difference in terms of what they can and can't ship to Huawei. Some folks are also applying for some licenses for additional shipments. Just some more color on what you can and can't ship and the potential for being able to ship more?

Yes, Chris. So maybe I'll provide some more color on Huawei. So in Q3, Huawei's revenue was slightly above 10% of the total revenue and that was all shipped prior to the ban being effective. We didn't ship after the ban was effective. As you know, we did adjust our guidance, and we took out roughly $60 million of revenue when we updated the guidance. In Q3, it was the stronger seasonal quarter, typically for Huawei. So we did expect actually more revenue than what we've seen in the first half of the fiscal year. Looking forward to Q4, we do expect very minimal revenue with them. We can legally ship certain products, but the demand signal that we get from Huawei is actually very low. We expect revenue to be probably below $10 million in Q4. Liam, do you want to add something?

Yes, to be clear, Chris, when the ban came out, we stopped shipping immediately and we did not ship again for the balance of Q3. As we entered Q4, doing a little homework with our legal team reaching out to SIA and some other associations to get guidance, we felt comfortable with certain products being shipped, and we've commenced shipments, but it's been at a very low level. That’s how we played it. We still feel very good about the business we have today net of Huawei. If Huawei comes back, that's great. The guidance we provided reflects a 20% sequential netting out Huawei in Q3 and Q4, which I think speaks volumes about the organic business and our read into what we can do.

All right, that's very helpful color. Thank you for that. Just as a follow-up, what are the longer-term implications here? And I guess for one, do you feel like as 5G comes out next year, you'll be able to ship components to Huawei 5G phones under the current rules? And if there are still restrictions, we've been hearing for some time that the highly integrated solutions by yourselves and other U.S. manufacturers are really necessary to enable 5G phones. Are there alternatives, in other words, is there potential for it if this situation doesn't get resolved, some of these opportunities will just disappear for the long-term?

Yes, that's a great question. The way I look at it is, and you're right, I mean, the technologies that we provide, and I know you understand it’s very, very complex. We're not a discrete component player. We haven't been that company for years. The kind of things that we offer to companies like Huawei are complex and very hard to displace. I don't think this is going to stop 5G; there could be some challenges in China, specifically around 5G and access to technologies. But from a global perspective, the power of 5G as a catalyst, and the investments and opportunities for connectivity, are just so powerful that that's going to continue. Could there be a bit of a pause due to the China issue? Sure, but I don't think it's going to stop the industry globally from executing on this vision of moving up into 5G and the latency, speed, and benefits that it provides. The demand can move around. Some companies or regions being impaired could hurt in the short term. Overall, I think that revenue and opportunity can get redistributed. And we'll be right there for that as well.

Hey, guys, this is Tom Elion for Blayne Curtis. My first one is around the China handset business outside of Huawei. Some of the industry throughout this earnings period have talked about how Huawei is looking internally in China and maybe taking some share there that could affect you guys. How do you view that market right now? Are you seeing that trend play out where other Tier 1 players and Tier 2 players are exceeding some market share?

Yes, that's a great question. We've had a good position with Huawei, but we've also had a very strong position with Oppo, Vivo, and Xiaomi, and so far the business there has been promising and on track, still developing some interesting new solutions for those customers as well. We've been able to build those partnerships over the years. So that part of the China ecosystem at this point looks pretty good.

Great. And then my second one is more maintenance. Can you guys give us the percentage of your largest customer in June? You guys have been pretty helpful about that in the past.

Yes. So in June, the largest customer was well over 40% of total revenue. Again, the June quarter is somewhat of the slower seasonal quarter there, and as we ramp with the large customer in Q4, obviously, that will go up.

Yes, and obviously with some of the Huawei revenue out of the pie, the ratios get skewed a little bit as well, Tom.

Good afternoon, gentlemen. If I may, I'd like to follow back up on the previous question. Your China-based smartphone customer is seeing very strong domestic growth through the June quarter, given nationalistic support. So I'm curious, does your outlook for the September quarter and beyond contemplate ramifications of that proceed nationalism to your mobile opportunity at other smartphone OEMs where you have higher content? Then I have a follow-up.

Yes, to the extent that we can, yes, we feel we've talked about some of the other players in China and demand network there look steady. We talked about Huawei and the issues that we have right here, and that could get resolved. If it gets resolved, we're right back in. We're still very aggressive in gaining success and design wins globally across the board. The only exception right now is the Huawei situation where we're kind of stuck. Beyond that, we're active. We're developing solutions, and we're gaining design wins. The products we make are not commodities; they are not interchangeable; they are very complex custom commodities or custom devices that are necessary for 5G and even higher-end 4G networks.

That's helpful. As my follow-up in your prepared comments, you discussed early shipments of 11AX products. What's your view on the competitive landscape on 11AX given recent M&A in the space? How do you see the adoption of 11AX within enterprise access points and consumer applications over the next few quarters? Thank you.

Sure. Well, 11AX right now is probably in the early stages, but it is definitely the technology that you want to be in for WiFi for higher speed. The 11AX engines that we have today are doing quite well; we named some of the design wins that we had, Cisco is one for example. We have great partnerships with some of the SoC players, so we're able to leverage those solutions broadly with SoC partnerships similar to what we do with base net partnerships. We also have really good technology in WiFi. We've been a market leader from the beginning in WiFi and have been able to take the solutions up over the last several years. The customer reach that we mentioned continues to expand, and WiFi has been a pretty big catalyst in our broad market portfolio. That portfolio has been growing at about 15% CAGR. There is a lot of strength in that outlook and that portfolio.

Thanks a lot. Liam, just want to talk about 5G, but I'd like to get more specific, especially with regard to handsets other than the ultra-high band pad and maybe band 41, at this stage. Maybe we could throw in if you want band 71. Other than those three areas, are you seeing any 5G content in phones today? I know it's going to expand; you don't do millimeter wave today. Are you working on that with your largest OEMs? Thanks.

Well, there are elements of 5G in certain company launches this fall, but you're right; I mean, 5G is really going to be more of a 2020 release, I think in the market. There will be some phones that will have some capabilities. But the real upside to 5G is more of a 2020 and beyond opportunity, and we're well positioned for that with our Sky5 platform. We have a really unique portfolio of devices that can be harmonized and customized depending on the bands and the needs of the OEM. We look good there, but you're right; the 5G opportunity is more of a 2020 play. We're working now on the design wins that will support that 2020 and beyond launch, of course.

So, and then, just to be clear, do you see yourself participating in the millimeter wave set? I know Qualcomm is the only game in town, and that part is atrocious in terms of performance-wise. So if you're a large OEM, your largest customers, where they want to feel the phone using that product, they don't want to suffer the battery life problems or the heat problems we're already seeing now. We're going to have to do something other than CMOS. Are you working on something now and do you think Qualcomm's control of the baseband would impede you from winning a slot if you were?

Well, I mean, we certainly see millimeter wave as another opportunity in mobile here as we go to 5G; there's opportunity on the infrastructure side and the handheld side, so we're looking at both. I don't believe we're going to be impeded by any baseband; we've been interoperable across the board here for years. Those technologies, I don't think they're going to be widespread early on, but over time, millimeter wave could be a catalyst in the industry. Again, infrastructure and within the handset, and we’ll continue to work on those opportunities.

Yeah, hey guys. First of all, congratulations on commercial BAW shipments. Liam, I had a quick one on that for you. I think your largest customer is widely speculated to have their 5G phone out next year. How would you rate the readiness of your BAW portfolio? And then as a follow-up to that, for example, in like a Sky5 solution that you mentioned in your press release, how much of the BAW is internal versus externally sourced?

Yes, so great questions. What you're going to see is a blending of the technology over time. When you look at Sky5 and the incorporation of BAW, we're going to see that really roll up as we move out. We're delivering solutions now, this quarter that I mentioned. The BAW technology we're delivering is organic; the technologies that we mentioned in the prepared remarks are BAW-enabled devices in a system-level solution. They're integrated with other elements. We have all the critical supply chain elements to make it work. We've been very conservative about talking about BAW, but now we're there and delivering. We expect it to be the beginning of some real significant opportunities as 5G moves along and the complexity of mobile continues to go up.

Thanks for the color, Liam. And then for my follow-up, a West Coast competitor namely Qualcomm effectively talks about there being some kind of a benefit in them having a 5G base band and tying their RF to it. First of all, do you see any validity in that statement? And then secondly, do you run into them as far as design wins or competition is concerned in 5G?

Well, we compete with lots of companies, and we're used to that, and I think it's healthy. We've done our best to garner the lion's share of design wins in the areas that we can play. We're not at all concerned about that; that's a normal thing. But I will say that in most cases, we've got very collaborative baseband providers that work with us and understand that ultimately, the work that we're doing as semiconductor providers is to make our customers' products the best. We'll continue to do that. A lot of interesting things are happening in 5G with very difficult challenges to resolve. We've got great people on our side and great partnerships with baseband players, and we'll deliver the products that our customers want.

Hi, thanks for taking my questions. Mainly a focus for Kris here, capital intensity is running about 12% of sales here today. How do you see that tracking in the fourth quarter and then in the next year, considering all the 5G launches that will be coming up?

Yes, you're right. So campuses running in the 12% range to revenue right now and of course, we will have to take into account reduced demand signal from Huawei as we look at factory utilizations and CapEx into that. We will continue to make the necessary investments to advance technology and to increase our capabilities, especially in our filter operation. I expect CapEx to maybe trend below 10% of revenue, but there are a lot of elements that play into that.

And then second as a follow-up, I think you mentioned there's some underutilization drag because of the Huawei weakness. I was hoping you could maybe qualify what the impact is at least here in the near-term from that drag on gross margin?

Yes, so gross margin in Q3 came in as 15.4%, and we guided Q4 now the September quarter to 50% to 50.5%. So flat, maybe slightly down. We continue to execute very well on driving higher value-added and higher complex products into the market, which typically translates into higher gross margin. We do have a little bit of a mixed benefit. The addition of Huawei to the entity list and a strongly reduced demand signal from Huawei is becoming somewhat of a headwind for gross margins and gross margin expansion. Huawei was running on about 15% of total revenue, and most of that product was running to our fabs, the front end fabs, the back ends fabs, and some of our filter fabs as well. That underutilization is becoming a little bit of a headwind. We will see how the Huawei situation plays out and what the future demand will be.

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