Qorvo - Q2 2024
November 1, 2023
Transcript
Operator (participant)
Welcome to the Qorvo, Inc. second quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please note today's event is being recorded. I would now like to turn the conference over to Douglas DeVito, Vice President of Investor Relations. Please go ahead.
Doug DeLieto (VP of Investor Relations)
Thanks very much. Hello, everybody, and welcome to Qorvo's fiscal 2024 second quarter earnings call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in the earnings release published today, as well as the risk factors associated with our business in our annual report on Form 10-K, filed with the SEC, because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or other items that may obscure trends in our underlying performance.
During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today, available on our 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. With that, I'll turn the call over to Bob.
Bob Bruggeworth (President and CEO)
Thanks, Doug, and welcome everyone to Qorvo's fiscal 2024 second quarter call. Revenue, margin, and EPS were all above the high end of the outlook provided during our August earnings call. Customer demand during the September quarter improved versus our August guidance. The primary driver was a large smartphone customer brand. In addition, channel inventories of Qorvo components across the Android ecosystem continued to be consumed, with OEMs indicating inventory levels are approaching historical norms. Channel inventory digestion is allowing Qorvo to ship more closely to end market demand, even as pockets of channel inventory remain in markets such as base station. We have worked closely with our customers to address inventories while continuing to deliver highly differentiated products. They have rewarded us with new opportunities and new design wins, and this underpins our expectations for growth this year and beyond.
Across our three operating segments, Qorvo enjoys multi-year technology upgrade cycles supported by global macro trends, including connectivity, sustainability, and electrification. New protocols and new technologies are offering improved performance and enhanced functionality, and Qorvo is critical in enabling these capabilities. This is playing out in aerospace and defense, automotive, base station, broadband, connected home, power devices, power management, smartphones, Wi-Fi, and other markets. Where the performance is measured in power out, data throughput, talk time, battery life, or distance between charges, customers increasingly require higher levels of power efficiency, integration, and functional density. To enable their future architectures and deliver successive improvements in their next-generation products, they rely on Qorvo's best-in-class technologies and solutions. In HPA, we are a strong beneficiary of the trends in our defense and aerospace business towards what we call one to many.
Put simply, Qorvo's technologies are supporting higher customer volumes, requiring more electronics and higher levels of integration. This applies to unmanned vehicles like drones, upgrades to existing radar systems, low Earth orbit satellites, and other applications. Lastly, we are leading the transition to DOCSIS 4.0 in broadband, and we continue to deliver base station customers increasing levels of functional integration for their 5G massive MIMO deployments. Looking at our power franchise, we offer a highly differentiated solution with our silicon carbide JFET architecture. Our technology offers the lowest RDSon, which translates into faster battery charging, longer battery life, and lower current consumption for applications like EVs, solar inverters, and data centers. These are relatively new markets for Qorvo that are early in the transition to silicon carbide and offer significant growth.
We also offer a differentiated portfolio in power management, where our initial wins have been in SSDs, power tools, and appliances, and we are leveraging our unique SiC to expand into defense, infrastructure, smartphones, wearables, and other markets. In CSG, new technologies are transforming user experiences in automotive, connected home, enterprise, industrial, and other markets. Ultra-Wideband is a critical focus area, and we are very excited about recent developments. Ultra-Wideband is in the very early innings of adoption, and we are seeing exciting opportunities giving expanded smartphone adoption, multiple in-vehicle placements, and an array of new capabilities, such as ranging and precision location for indoor navigation. Wi-Fi is another primary driver, and the transition to Wi-Fi 6E and Wi-Fi 7 is very early on. Wi-Fi 7 devices recently launched by Qorvo's customers are offering breakthrough advances in speed, latency, and network capacity.
Qorvo also offers components and full system solutions that incorporate Bluetooth Low Energy, Zigbee, Thread, and now Matter. Matter is a recently launched technology overlay, essentially a common language that improves interoperability across smart home devices, regardless of protocol or manufacturer. It is supported by iOS, Android, and major smartphone platform providers, and it's widely expected to simplify and accelerate the adoption of smart home devices. It's also early days for our force sensing touch sensors. These are ultra-sensitive MEMS-based sensors that enable new use cases and enhance device functionality. We have broad engagements across automotive smart interiors, track pads, true wireless headsets, smartphones, wearables, and other consumer applications, and our opportunities are expanding as customers engage with our technology and develop new use cases. Looking at ACG, fewer than half of the Android smartphones this year will be 5G.
Android 5G units are expected to grow in the low double digits for several years. That's a big growth opportunity for Qorvo as we move from very little content in 4G phones to significant dollar content in 5G phones. Another driver is 5G Advanced, which leverages new releases of the 5G standard. 5G Advanced smartphones will include additional transmit and receive and satellite bands, favoring Qorvo's product and technology portfolio. 5G will migrate to 5G Advanced over time and bridge us to new development efforts and new content required to accommodate 6G frequency spectrum at the end of the decade. Big picture, Qorvo enjoys a range of opportunities supported by multiyear upgrade cycles. Many of these transitions are very early on, and Qorvo is recognized by customers as a leading technology innovator.
We have made great progress developing new technologies and winning customer designs. With that said, we wanna make it clear that our end markets have not yet turned, and our outlook does not contemplate a significant change in the macroeconomic environment. The customer demand environment for Qorvo is more a reflection of strong design win activity and the early actions we took to improve channel inventory. When end markets recover, that will represent an additional driver of growth for Qorvo. Now, let's turn to some quarterly highlights. In defense and aerospace, we increased shipments of X-Band transmit and receive FEMs and secured first orders for our 50-watt PAs in support of new land-based C-Band radar programs. We introduced the world's highest power Ku-Band satellite communications amplifier, which enables an 80% size reduction and is optimized for multiple applications.
We also received a large production order for recently launched cell-to-satellite solutions. These solutions incorporate advanced technologies from across our aerospace, base station, and mobile portfolios to enable low Earth orbit satellite connectivity. In infrastructure, we were selected by a Tier 1 base station OEM to supply switched LNA modules for next-generation 5G massive MIMO radios. We also continued to lead DOCSIS 4.0 broadband upgrade cycle with production orders from multiple customers and broad-based design wins. For power management markets, we released QSPICE, a significant improvement over current industry offerings for analog and mixed-signal circuit design and simulation. QSPICE improves the speed, functionality, and reliability of circuit simulation, extending the value Qorvo is providing designers. Since its launch, the tool has surpassed 15,000 unique downloads.
In automotive applications, we were selected to support a major in-vehicle car access platform by a leading German automotive Tier One. This multiyear program has a lifetime value over $250 million, marking a major milestone for our ultra-wideband portfolio. Within this program, Qorvo will supply ultra-wideband solutions for in-vehicle applications for a leading German automotive OEM. We also secured a design win from another leading German automotive Tier One to supply V2X solutions for a communications platform launching this year. Lastly, we were selected to supply force sensing touch sensors that enhance smart interior functionality in a recently launched EV from a Korean-based automotive OEM. Complementing the large ultra-wideband win in automotive, Qorvo was selected by the leading Android smartphone OEM to supply ultra-wideband for their spring 2024 flagship launch.
It's worth noting that the ultra-wideband band wins in automotive and Android markets are significant, as these two customers represent the largest volume opportunities in their respective markets. To extend our reach, we are sampling ultra-wideband solutions across fleet management, logistics, agriculture, and other applications, leveraging our precision location capabilities to advance operational efficiencies. In Wi-Fi, we secured multiyear design wins with Tier 1 network operators in the U.S. and in India. These wins support next generation wireless infrastructure for retail, enterprise, and home applications. Across the Android ecosystem, we increased shipments of our highly integrated modules in support of Android smartphones from the high tier through the mass market. Notably, we extended our strong share position with the leading Android smartphone OEM in their flagship smartphone.
In addition to the ultra-wideband win, we were also selected to supply the low band, mid-high band, ultra-high band, secondary transmit receive, tuning and Wi-Fi. Lastly, we expanded customer sampling of our recently launched mid-high band PAD. Qorvo's newest integrated architecture leverages next generation BAW and SAW technologies and advanced packaging to combine main path content with receive paths commonly included in the diverse receive module. This and other highly integrated Qorvo architectures for the Android ecosystem free board space and improve efficiency to support future 5G form factors and content like flip and fold architectures and transmit and receive non-terrestrial network connectivity. I want to thank the Qorvo team for continued operational excellence. We have moved aggressively to reduce channel inventories by securing broad-based customer design wins.
In the December quarter, our outlook reflects the seasonal profile of a large smartphone customer ramp, as well as healthier channel inventories across most markets. In the March quarter, we expect revenue to be more closely aligned with end market demand. Longer term, we expect revenue, growth and margin expansion as product mix favors our higher growth investment business. With that, I'll hand the call off to Grant.
Grant Brown (Senior VP and CFO)
Thanks, Bob, and good afternoon, everyone. Revenue for the quarter was $1.1 billion. Non-GAAP gross margin was 47.6%, and non-GAAP diluted EPS was $2.39, all exceeding the high end of our August guidance. Revenue increased approximately 70% sequentially and benefited from significant content gains at our largest customer. Consistent with our guidance, factory production levels improved but remained below historical averages. During the quarter, the impact from underutilization and factory-related variances was approximately 550 basis points, versus approximately 800 basis points last quarter. The increase in gross margin above the high end of our August guidance range was largely the result of revenue upside and product mix. A larger portion of September revenue was manufactured at external silicon foundries and processed at third-party OSATs.
By comparison, our December and March revenue will reflect a larger percentage of higher cost inventories manufactured internally during periods of lower utilization and a lower percentage of products manufactured at external silicon foundries and OSATs. Beyond this fiscal year, we continue to see a clear path back to 50%+ gross margin, initially during specific quarters and then on a full year basis. Non-GAAP operating expenses in the quarter were $246 million, slightly higher than our guidance due to performance-based incentive compensation. We are investing in new product development and targeting multi-year growth opportunities across all three segments. In addition to growth-oriented investments, we're also investing in enterprise-wide productivity initiatives. These multi-year efforts will support future growth and enhance profitability as we upgrade, modernize, and standardize around the latest tools and best practices.
In total, non-GAAP operating income in the quarter was $279 million, or 25% of sales, which increased from 7.2% last quarter. Breaking out operating margin by each segment, ACG was 34%, HPA was 17%, and CSG was -27%, which includes the impact of the biotechnology division. During the quarter, Qorvo Biotechnologies generated $500,000 in revenue and reduced operating income by approximately $7 million.... Just following quarter end, we successfully closed the sale of the OmniAb Biotechnology business and will continue to sell BAW filters to support the acquirer. Non-GAAP net income was $236 million, representing diluted earnings per share of $2.39. Moving on to the cash flow statement. Free cash flow was $64 million, and CapEx was $29 million.
During the quarter, we repurchased $100 million worth of shares at approximately $103 per share. 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 $707 million of cash and equivalents. Consistent with our expectations and commentary from the prior earnings call, our net inventory balance was reduced in the period and ended the quarter at $840 million, down $78 million sequentially. Looking at days of inventory, this represents a decrease from 210 days to 138 days.
Turning to our current quarter outlook, we expect revenue of approximately $1 billion ±$25 million, non-GAAP gross margin between 43%-44%, and non-GAAP diluted EPS of $1.65 at the midpoint of the revenue range. We project non-GAAP operating expenses in the December quarter will be $235 million-$240 million. Below the operating income line, non-operating expense is expected to be approximately $10 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 2024 is expected to be within a range of 13%-15%. We expect our inventory balance will decrease again in the December quarter.
In terms of channel inventory, the environment continues to improve, with Android OEMs indicating inventory levels are approaching historical norms. Outside of the Android ecosystem, there are smaller pockets of channel inventory that will take longer to digest. We continue to forecast fiscal 2024 revenue above fiscal 2023. For the full fiscal year, fiscal 2024 non-GAAP gross margin is expected to be 44% or slightly better, with variability primarily tracking, utilization, and mix. Qorvo enjoys multiyear growth drivers across all three of our operating segments. We offer a broad portfolio of technologies and capabilities, and we are uniquely positioned across leading customers and large markets. We expect continued strength on large customer programs, and we are investing to drive outsized growth in diverse businesses to broaden our market exposure and accelerate growth. At this time, please open the line for questions. Thank you.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. In the interest of time, we ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Tim Arcuri of UBS. Please go ahead.
Timothy Arcuri (Managing Director and senior Equity Research analyst)
Hi, thanks for taking my question. This is Aman jumping in for Tim. Just looking into fiscal 2025, how should we think about the trajectory of gross margin as, you know, utilization starts to come back? Is there, like, a certain level of revenue we should be thinking about for Qorvo to be back at that 50% range?
Grant Brown (Senior VP and CFO)
Sure, I'll take that. This is Grant. Thanks for the question, Aman. There are a large number of factors that can influence gross margin, such as revenue mix and input costs, including utilization impact. So I wouldn't think of it in terms of an absolute revenue level. Some products carry a higher gross margin than others, due to the nature of that business or end market. For instance, looking at our base station product line, which is generally accretive to gross margins, but with base station demand weaker, coupled with the excess channel inventories we've been talking about there, this is currently a headwind to margin versus historical levels. Product mix can also impact gross margin based on where it's manufactured.
As I mentioned in my prepared remarks, for instance, last quarter, we shipped a higher portion of products that were manufactured at external silicon foundries and processed at third-party OSATs, and those products are not impacted by our internal factory utilization, which, as we've mentioned, is running below historical averages. Aside from product mix, unit cost is the other half of the equation. It's a bit more complex, given that input costs can affect gross margin on a lagging or leading basis. For example, historical underutilization will create higher unit costs in that inventory, and as it's sold in future periods, that impact lags. Alternatively, in anticipation of lower future demand, production volumes can be cut and utilization will fall, and in that sense, the impact tends to lead those anticipated changes in demand. So there's a number of factors that impact gross margin.
I would, again, wouldn't think of it in terms of an absolute revenue level, but rather a time of us to move through our high-cost inventory, return utilization levels back to normal, run the factories efficiently, and we'll be on a path back to 50% plus.
Timothy Arcuri (Managing Director and senior Equity Research analyst)
... Thank you.
Operator (participant)
The next question comes from Gary Mobley of Wells Fargo Security. Please go ahead.
Gary Mobley (Senior Analyst, Semiconductors)
Hi, guys. I wanted to pick up, Grant, with your detailed response to the last question. I know in your prepared remarks, you said gross margin throughout fiscal year 2025 will, at times, be above 50%. So I presume that would be in your seasonally strong periods. And, but did you, did you say that, it is well, 50% or above is the target for the full year, or just the specific, you know, few quarters of seasonal peakness?
Grant Brown (Senior VP and CFO)
Sure. I said that I think it'll achieve 50%, on a specific quarter, before it achieves 50% across the whole year, and that's somewhat macro, dependent, and, obviously, the volumes will dictate, you know, at what levels we return to a utilization where that's possible.
Gary Mobley (Senior Analyst, Semiconductors)
Okay. And Bob, you mentioned, I think in describing the fourth quarter of this year, in line with market conditions, and so your full year guidance implies no more than a, you know, 10% sequential revenue decline in the fourth quarter. So how would you call the seasonal trends in the fourth quarter? Are we talking about mid-single digit, I think, which is usual, or perhaps as much as double-digit % declines?
Bob Bruggeworth (President and CEO)
Sure, Gary. No, Grant, I'll take at least the high level, just to make sure we're clear on what we typically see in the fourth quarter, which as we've said all along, typical anymore isn't typical because it seems every time we're faced with something different from losing our second largest customer to, you know, COVID hits, to various economic factors. What my comments were around is, given the current economic outlook, you know, we're not expecting our markets to rebound. And as we work through all this channel inventory that we talked about, you know, we're gonna hit the, what we think is the end market demand. Now, end market demand, typically, and what we're forecasting now is what we see is our largest customer's run rate continues to come down in March.
We have a seasonal, usually the weakest quarter for our China Android business in March, and some of that is offset by a ramp at the largest Android customer that we have. So, you know, as far as percentages go, I'm not gonna call percentages. I'm just telling you that from our view, that's the dynamics that are driving most of our business. Grant commented that our ACG business is growing year-over-year. Our CSG business will start growing this quarter and will be up in March. And really, the lagging business for us is our HPA business, and we've talked about what's going on there with primarily what used to be our largest business in the infrastructure side, and we're not seeing that now.
So, you know, when you integrate all that, we're still comfortable we're gonna be up significantly in March year-over-year, and we're comfortable we're gonna be up for the fiscal year 2024 over 2023. I don't know, Grant, if you wanna add anything to that, but I wanna give them all the moving pieces.
Grant Brown (Senior VP and CFO)
Sure. No, I think you covered it, Bob. I'd say, you know, maybe 10%, but certainly not 15%, right? We're committed to the comments, you know, any macro-related disruptions aside, that we see growth in fiscal 2024.
Bob Bruggeworth (President and CEO)
Uh.
Operator (participant)
The next question comes from Karl Ackerman of BNP Paribas. Please go ahead.
Karl Ackerman (Managing Director, Equity Research, Semiconductors and IT Hardware)
Yes, thank you. I have a clarification and a follow-up. I guess just given the content gains of your largest customer, is it fair to say that customer now exceeds 50% of your revenue in the quarter?
Grant Brown (Senior VP and CFO)
We won't comment on any customers within the quarter, but we'll sum it up on the 10-K. The only thing I'd say about 10%+ customers is that we did have more than one in the quarter.
Gary Mobley (Senior Analyst, Semiconductors)
Thank you for that. For my follow-up, you know, MediaTek suggested that 5G units should grow double digits next year, certainly above overall smartphone unit expectations of low singles. You know, most of your exposure to incremental gains in 5G do come from China Android OEMs. I was hoping you could address how you think, Huawei does or does not impact, your China Android opportunity, both near term and, longer term. Thank you.
Bob Bruggeworth (President and CEO)
I'll take the first part of that, Karl, and I'll let Dave take the second part, since he was just recently in China. Actually, a large part of our growth for 5G Android is still at the largest Android manufacturer, being Samsung. The second point I would like to make is, you're right, we do have China exposure in 5G, but most of that is actually in the export market for what they're trying to do to build their brands outside of China. So just keep those two facts in mind. Dave was just in China just a couple weeks ago, and I'll let him talk a little bit more about that and what at least we're seeing, talking to all of our customers there, along with your comment about Huawei.
Dave Fullwood (SVP of Sales and Marketing)
Yeah, thanks, Bob. And so maybe I'll start with Huawei and kind of size what we're seeing for you. And prior to the ramp of the new phone that they just announced, they were doing about 2 million units a month. And so we, we've seen a typical, you know, premium-tier phone ramp where that peaked up. We're at the last couple of weeks of data, we're actually seeing that come back down, so they may be on the other side of that ramp. But if you look at the incremental growth that we see over what they were shipping previously, it's, on an annual basis, it's about 10-20 million units. So that's a pretty good growth for that customer.
But it's not that meaningful when you look at a total market size of about 1.2 billion smartphones per year. Now, when it comes to our China customers, as Bob said, a large part of their business and a lot of their growth is coming from overseas business. And so we're very well represented, you know, across our China OEM customers, and certainly in that overseas business, that's where we see a lot of the higher share and growth opportunities. So it's not just a China domestic situation that you have to look at, you have to look at that overseas business. And many of those customers have pretty significant market share in a lot of those overseas markets.
Operator (participant)
The next question comes from Toshiya Hari of Goldman Sachs. Please go ahead.
Toshiya Hari (Managing Director, Senior Equity Research Analyst, Semiconductors)
Hi, thank you. I just wanted to follow up on the China Android market. I guess, specifically, what kind of trends did you see in the September quarter on a sequential basis? And, what's embedded in your guidance for December? And related to that, you know, we've been getting more questions about the competitive landscape in China. You guys have pretty good visibility, and obviously, you've got good relationships with your customers. As you think about models coming out in 2024, any concerns around, you know, market share? You know, how should we think about gen to gen content growth, particularly as it pertains to your OEMs export business? Thanks.
Grant Brown (Senior VP and CFO)
Dave, you wanna handle that one?
Dave Fullwood (SVP of Sales and Marketing)
Yeah, sure, Bob. Let's see, where to start. The China customer base in the export market as well as in the domestic market, I mean, they've got some pretty compelling products. As Bob said, I was just over there a few weeks ago. I got to meet with all of our customers. Our relationships continue to be very strong. They place a very high value on what we bring, and they all reinforce that Qorvo is their main global strategic supplier for RF. So we have deep discussions with them on roadmaps to align their needs to our product plans, and they're very highly engaged on our new low, mid, high PAD platform that we announced a couple of quarters ago.
Additionally, they're looking at expanding their business with us in other areas such as power management, sensors, and L-PAMiDs to Wi-Fi. So, the overall market, as Bob mentioned, you know, the channel inventories are approaching normal. Many of those customers are getting to pretty healthy levels. So as we've been saying all along, what was a headwind is now becoming a tailwind, so we're starting to see that growth. We had our largest bookings quarter in over two years. So our customers, you know, have now gotten past the concern about inventory, and they're looking forward now and starting to place orders more aligned to what their true production plans and unit demand is. So, that's certainly improved a lot.
Now, having said that, as Bob mentioned also, we're not anticipating any major rebound in the end market. We're just excited about the design wins that we've had and the inventory in the channel being cleared out, and that's driving a lot of our growth as we go forward.
Toshiya Hari (Managing Director, Senior Equity Research Analyst, Semiconductors)
Got it. And then as a quick follow-up, outside of mobile, some of your broader analog peers have talked about, you know, signs of weakness or clear signs of weakness in industrial and parts of automotive. I think comms infra has been weak for a couple of quarters now. But I guess the question is, you know, outside of mobile, what kind of trends are you seeing? And what sort of trajectory are you assuming as you sort of progress through the December quarter and go into March, outside of mobile? Thank you.
Grant Brown (Senior VP and CFO)
Sure, Toshiya, this is Grant. Let me take that one. We don't explicitly guide by segment, but, you know, the views for each of those businesses is factored into our total guidance. I'll try to provide you a little bit of color there, and then Dave can jump in and add. You know, we have a pretty diverse collection of businesses that serve a number of end markets, and they're not all in phase. You know, as Bob pointed out, last quarter, in fiscal 2020 or fiscal Q2, ACG returned to the year-over-year growth that we expected, and we'll continue to see that for the rest of the year. This quarter, our fiscal Q3, we forecast our CSG segment will return to year-over-year growth.
And then finally, in Q4, we expect HPA to return to year-over-year growth. So, you know, the businesses are a bit out of phase, if you wanna think of them that way. Just continuing with HPA as an example, directly to your question, if you look inside of HPA, there's various trends within each end market. It probably won't surprise you, but the base station market being weak, you know, as an example, our revenue's down over 50% year-over-year for the last four quarters. A few years ago, actually, we hit $200 million in that business, before the Huawei ban and the 5G base station rollout slowed. But outside of China, only 25% of that mid-band 5G infrastructure has been built, so there's a lot of opportunity.
That's one area where we continue to see some meaningful headwind and market weakness. Beyond that, though, you know, there's also the broadband area within HPA. We have a very strong position there, high level of share, but the DOCSIS 4.0 upgrade cycle may be a bit slower, and there could be some pockets of inventory in the very end products there.
So the situation within infrastructures is very different than, say, our defense and aerospace group, where we're benefiting from significant strength and expect to grow in fiscal Q3 and fiscal Q4... So, you know, there's a lot of cross currents there when you get into the details, but, you know, this is why we maintain a diverse set of businesses, and a lot of them share the same manufacturing footprint, which creates the operating efficiencies, but also scale and the diversification on the top line.
Bob Bruggeworth (President and CEO)
What I'll add to that is in the cellular IoT market, actually, we saw this turn about two quarters ago, down. So with CSG coming back, as Grant pointed out, growing next quarter, you know, that's - we're not expecting the IoT, cellular IoT business to come back. That's been down for us, and we've been working through inventory in that segment as well. So I think that's been some commentary as well.
Dave Fullwood (SVP of Sales and Marketing)
Yeah, I think you mentioned automotive as well, and, you know, that we're growing from a pretty small base there. So Bob talked about a lot of the design wins. We're pretty excited about the growth opportunity there. So that's all new programs that'll be ramping, you know, over the next couple of years to help drive that growth for us. But it's coming off of a relatively small base, so we're not as exposed there to really maybe see some of the things you're seeing from some of our peers.
Operator (participant)
The next question comes from Ruben Roy of Stifel. Please go ahead.
Ruben Roy (Managing Director, Equity Research, Applied Technology)
Yeah. Hi, thank you. Bob, I wanted to ask about the ultra-wideband marketplace. I think in the past, you've had a few system wins in the Android ecosystem for ultra-wideband. I don't know if they were characterized as flagship back then. So maybe if you could talk about the broader opportunity in smartphones, specifically that you're seeing, and then, you know, expanding outside of handset. Again, in the past, I think you've characterized the market as several hundred million dollars of opportunity, and you're talking about a $250 million lifetime opportunity in the auto win. So has anything changed? Are you seeing accelerating development? And if you can give us an update on how you characterize the opportunity, that'd be great.
Bob Bruggeworth (President and CEO)
Sure. Thanks, Ruben. Extremely excited about what the team's accomplished in some big wins in ultra-wideband. One of the Android phone manufacturers, Google, we've been in for a couple generations now, so we've, we've talked about that, and that's—you can get tear downs. I think from our comments, you know who the next one is. What surprised us about ultra-wideband is, you know, yeah, I think we said this a year ago or more than when we first acquired Decawave, that we were on the original platforms in our largest customers' phones with the RF front end for ultra-wideband. And what we believed was gonna happen is it was gonna take off in phones first and automotive second. What's actually happening is we're picking up a lot more in the automotive side, and handset seems to be trailing it, at least in the adoption.
Now, as you know, it takes a little bit longer to get to market in a car, so they're out, you know, winning platforms now and building those in. So our expectation is we're gonna lead in design wins in automotive, but phones are gonna come up fast. And Dave mentioned earlier in his comments that we're working with many of the other Chinese handset OEMs to introduce ultra-wideband. The thing I wanna point out is in the Tier 1 German manufacturer that we won in, the current win is now to support a German Tier 1, but they will take that same platform to other U.S. and other manufacturers around the world, that platform, plus we've been working with others on platforms that will also go into the automotive area. So we see a lot of opportunity there.
Placements in automotive can go from, you know, 5 or 6 up to 9 or 10. So they can be big wins depending on how they adopt to use the ultra-wideband in a car, and it's more than just “keyless entry.” And I think that's what's really exciting about the opportunities there. So if I look at that and I look at handset, also, a couple of quarters ago, we talked about ultra-wideband and access points, Wi-Fi access points for indoor navigation, which is another exciting opportunity. And we're just seeing it now going into other types of products. We're working with various manufacturers, OEMs, for other things in your home that need that kind of technology. So we're very excited about the things that are going on there. Really appreciate your question.
Ruben Roy (Managing Director, Equity Research, Applied Technology)
Thank you for all that detail, Bob. I have a quick follow-up for Grant. Just in terms of inventory, and I see the on balance sheet inventory coming down. You know, ahead of, you know, hopefully and potentially a growth year next year, do you have sort of a target level either in DOI or dollar for inventory, or how you're thinking about that as you go forward post December quarter?
Grant Brown (Senior VP and CFO)
Yeah, sure, Ruben. We usually have commented on our target around four turns, so high threes to four would be a pretty typical range for us to, to look to achieve.
Operator (participant)
The next question comes from Edward Snyder of Charter Equity Research. Please go ahead.
Edward Snyder (Managing Director)
Thanks a lot. First, a housekeeping. Can you give us a percentage of revenue for each of the three businesses? Sorry if I missed that. And then, Grant, if I take a look at your China revenue, over the years, actually, it looks like if you exclude the era when you were overshipping and the era when you're undershipping, your average is probably close to 250-300 a quarter. I know you did about $150 million last quarter. We haven't seen the K for September yet. But doesn't this suggest you're dealing with maybe $100-$150 million of inventory burn per quarter? I'm just trying to bracket those numbers.
Grant Brown (Senior VP and CFO)
Yeah, sure, Ed. I can help you with the percent of revenue, but we haven't commented on the China revenue in the quarter. ACG was 77%, HPA was 14%, and CSG was the balance, about 9%. And yeah, we haven't commented on, you know, what a normalized level of Android revenue or China revenue would be outside of the comments we've already made, but I don't know if there's-
Bob Bruggeworth (President and CEO)
All we'd add is we are still under shipping to end demand, best we can tell.
Edward Snyder (Managing Director)
Right.
Bob Bruggeworth (President and CEO)
But we're coming up near the end of it.
Edward Snyder (Managing Director)
Right. But when it snaps back to something more normal, you said inventories are normalizing, and I know demand changes year over year, but given your kind of incumbent position as preferred vendor for most of those phones being sold, yeah.
Bob Bruggeworth (President and CEO)
Yeah, we've been. Maybe this will help. As we bring it down, that means revenues do go up. I mean, it's not we haven't been shipping, so we've been up the last two quarters.
Grant Brown (Senior VP and CFO)
Yeah. And maybe, Ed, I would also make the distinction between channel inventory and our own inventories. So channel inventories, we think are relatively healthy, maybe even earlier than we had commented on in the past, where we thought it would take until December. So that's an improving situation. Our own inventories, as we're selling through them, requires us to achieve the mix shift that we're gonna see in the second half. So we'll start selling through our own high-cost inventories in Q3 and Q4, largely.
Edward Snyder (Managing Director)
Okay.
Grant Brown (Senior VP and CFO)
We do expect growth in Q3, though.
Edward Snyder (Managing Director)
Well, you said you saw the largest bookings in two years, in the last quarter, and normally those bookings are for what, a year out or so? I know it varies, but-
Bob Bruggeworth (President and CEO)
No, not a year, Ed.
Edward Snyder (Managing Director)
Yeah.
Bob Bruggeworth (President and CEO)
Normal lead times for us.
Operator (participant)
The next question comes from Srini Pajjuri of Raymond James. Please go ahead.
Srini Pajjuri (Managing Director, Senior Research Analyst)
Thank you. Just a clarification on the China business, either Bob or Grant. I think one of the comments is that, yeah, the inventories are coming down and business is, you know, from, from the trough levels, it's growing sequentially. But at the same time, I think, Bob, you said in your comments about the March quarter, you're expecting China to be seasonal. Given that inventories have kind of pretty much normalized, I would have thought China would be, you know, better than seasonal in March. So just if you can give some clarification on that, why it, it would only be seasonal in March?
Bob Bruggeworth (President and CEO)
Because what I meant was from the demand perspective, in March, that's typically a seasonally low point for China. That's what I said.
Srini Pajjuri (Managing Director, Senior Research Analyst)
Okay, but doesn't mean that your business is gonna decline seasonally in March quarter, your China business?
Bob Bruggeworth (President and CEO)
But what I also said is we've come, we pretty much cleared out most of the inventory, so we are seeing growth, which is what I just said to Ed, this quarter in our Android business.
Srini Pajjuri (Managing Director, Senior Research Analyst)
Got it.
Bob Bruggeworth (President and CEO)
In China.
Grant Brown (Senior VP and CFO)
Yeah. Maybe, maybe I'll restate.
Bob Bruggeworth (President and CEO)
Yeah
Grant Brown (Senior VP and CFO)
... you know, what Bob had commented on earlier. Just, you know, in terms of next quarter, we do see growth in Android. But March, you know, we do expect to see the typical decline there, which is on the other side of our largest customer's ramp, and March is also historically a seasonally low point for handset sales in China. So those two factors are somewhat offset by the largest Android customer and their timing of phone launches, plus the fact that the channel is healthier. So with all that said, we do think it'll be better than typically seasonal, but again, it's anyone's guess as to what seasonality means, so.
Yeah, our largest customer has the largest impact on March.
Srini Pajjuri (Managing Director, Senior Research Analyst)
Right.
Bob Bruggeworth (President and CEO)
Let's see how their sales do.
Srini Pajjuri (Managing Director, Senior Research Analyst)
Got it. Got it. Makes sense. And then, you know, this year has been in terms of the content expansion for you, Bob, it's been pretty, pretty impressive, and I think some of those content gains also came from share gains. So as you look out to the next six to twelve months, you know, how are you feeling about... Because I do get this question about sustainability of some of the content gains from this year. So if you could help us maybe, you know, to the extent you have visibility, how should we, how should we think about your content gains, both in premium as well as in the, in the mid-tier?
Yeah, I, I can speak to the high-end phones, and I'll start with our largest customer because it, it's been questioned before. But our growth this year at our largest customer really speaks to the strong position we have there, and we are one of their trusted suppliers, as well as the investments we've been making to deliver them, you know, these great technologies and products. This year, we grew mostly from new content and gained some share in sockets that we held for many years. So we feel good about that. Now, remember, they are a performance-driven customer. You know, we're winning where we're bringing strong capabilities and have consistently done well. Now, if you look at the available TAM there, we remain underrepresented. So clearly, that's a target of growth for us, and we'll continue to invest to be able to win there.
Now, that's also regardless of the baseband they decide to use. We enjoy multiple opportunities to grow our content, not only in the areas where we've been strong in the past, but also in areas that will be new sockets to Qorvo. Again, that's about our largest customer. In my prepared remarks, I talked about, you know, the leading Android smartphone manufacturer and our ability to continue to gain share there. And we talked about ultra-wideband along with all those types of components. Dave also spoke about in China and bringing out our new technologies, where we've integrated the mid-high band plus the diversity receive into that module. That's gonna be an ability to grow there as well. Dave also talked about ultra-wideband into some of those handsets, some of our sensors, power management.
So I think as we look across the portfolio, we feel pretty good at our ability to continue to grow our dollar content in handsets, whether it's at the, you know, flagship premium tier or the mass market.
Operator (participant)
The next question comes from Vivek Arya of Bank of America Securities. Please go ahead.
Vivek Arya (Managing Director, Senior Equity Research Analyst)
Thank you for taking my questions. For the first one, you are guiding December sales down 9% sequentially or so. I thought the original intention was to kind of stay flattish. The large customer, I imagine, should be flattish, and I think one of your competitors mentioned a sharp ramp in terms of their China shipments getting into December. So I'm curious, Bob, what is leading you to kind of guide sales down when some of these big customer trends seem to be growing sequentially? Or is it just conservatism, or is it non-cellular markets that's guiding that outlook?
Bob Bruggeworth (President and CEO)
Thanks, Vivek, and I, I know I've said this before, but I'll remind you and the audience, we ship a majority of our parts that are not on the motherboard. So the timing of when we see the ramp is different than maybe you're talking about a baseband customer, I don't know. They're on the motherboard. A lot of what we have goes to the flex circuits, so they build those ahead of the motherboard. So our timing can be different. So I, I just wanna make sure that... That's also, if it's the baseband customer, if you remember, they had an inventory build that they blamed at that customer. We didn't see that build, so therefore, we've naturally followed the progression of the builds. They may have had a pause, and as you point out, the inventory would go down, then they would see a quick ramp up.
I can't comment on their business, but I can tell you the timing. We typically lead the ramp because of how much product we have on flex circuits, which is different than most of the products that are on the motherboard.
Grant Brown (Senior VP and CFO)
Maybe, Vivek, I'll just pick up from there in terms of, our prior discussion around, the December quarter. You know, the flat comment, was relative to $1 billion Q2, and we've just exceeded that by $100 million. So, you know, to Bob's point on timing, ± a couple of weeks at our largest customer can make a very big difference. But those two quarters combined are still ahead of where we were communicating previously. So on the net, a positive trend in the top line.
Vivek Arya (Managing Director, Senior Equity Research Analyst)
Got it. Makes sense. And then on gross margins, so December 43.5, I guess, at midpoint. March, I guess, seems to be implying closer to 41%. And I think the explanation you're giving is that because these two quarters you're using your internal high cost inventory. So does that impact get over by March? So as we start conceptually thinking about modeling gross margins, you know, from June onwards, what is that starting baseline that we should keep in mind? Is it low 40s? Is it mid-40s? I understand you're not gonna give guidance for next year, but I just don't know how to think about what is normalized gross margins as we start thinking about your next fiscal year.
Grant Brown (Senior VP and CFO)
Sure. Now, some of this depends on the inventory, as you pointed out, that we're carrying the high unit cost inventory that we sell through and the mix of that in the March quarter. Some of this also relates to the utilization within the March period as we start to look forward to the demand that we see in the coming year. So, it's a difficult or complex question to answer prospectively, Vivek. But, nonetheless, in terms of the gross margin for the March quarter, as I mentioned, our full year guide of 44%, and now saying a bit better than that, could imply that we have upside to the March to what you've just described.
And then in terms of our fiscal 2025, it's gonna be a gradual continuation from there upward, I would expect, because the June quarter is still seasonally weaker for us, as we head into the larger ramp in September, just from a seasonal perspective. So hopefully, that gives you at least some idea of how we're gonna track into fiscal 2025. Maybe going back to some of my prepared remarks, I did say that I believe we could achieve 50% gross margin, at first on a quarterly basis, and then subsequently on an annual basis across an entire year when we get through the inventory as well as return utilization levels to more normalized levels.
Operator (participant)
The next question comes from Chris Caso of Wolfe Research. Please go ahead.
Chris Caso (Managing Director, Senior Equity Analyst)
Yes, thank you. Good evening. The question is on cash flow and on your ability to, you know, start ramping the cash flow again, you know, once the market comes to a fuller recovery. And I suppose that's gonna depend a lot on, you know, what the CapEx needs are and for how long. And so, you know, if you could talk about that, you know, the kind of expectations for cash flow and, you know, for how long you can kind of keep the CapEx at lower levels so you can drive some cash in the next cycle.
Grant Brown (Senior VP and CFO)
Sure. So obviously, we'd expect cash flow to improve materially given the improvement in the P&L. It's a bit of a lagging indicator as we collect receivables, so we should see that. I wouldn't expect anything different in terms of our guidance on CapEx at around 5% of sales or less. Again, that can fluctuate, of course, but I wouldn't expect too much different there from a free cash flow perspective.
Chris Caso (Managing Director, Senior Equity Analyst)
Okay, thank you. Just as a follow-up, if you could talk about the competitive environment some and, you know, one of the things that was noted, you know, with the Huawei phone that came out is there was some Chinese RF there, and, you know, it's a very different architecture from, you know, the phones that you're supplying into your China customers. But I guess the question is: Are you seeing anything different with regard to the capabilities of some of the local Chinese suppliers that would have some effect on the market?
Dave Fullwood (SVP of Sales and Marketing)
... Yeah, I think from a capability standpoint, I mean, we don't see anything out of the norm. I mean, there's certainly some key technology areas that they're definitely behind in. And so, I think if you look across the phone, even outside of the RF, there's probably a lot of areas that the technology's behind in, maybe even up to three years behind. So I think from a competitive environment, we don't see any big change just because of that Huawei phone ramp.
Operator (participant)
The next question comes from Blaine Curtis of Barclays. Please go ahead.
Blayne Curtis (Managing Director)
Hey, thanks for squeezing me in, and I apologize if you said this earlier. But just in terms of the September quarter, you know, mobile came in a bit better than you were expecting. I believe the expectation was that you weren't gonna see much Android growth. Can you just clarify if that upside came from Android or your largest customer? And I don't know if you gave the percentages. I think you said two 10% customers, but are you willing to give those out?
Grant Brown (Senior VP and CFO)
Yeah. Thanks, Blaine. This is Grant. No, we didn't give out the percentages. We'll do that annually, but I just did mention that we had 2. In terms of the quarter, you know, the upside in revenue was largely driven by ACG, and it was predominantly our largest customer, but not entirely so.
Blayne Curtis (Managing Director)
Got you. And then I wanted to ask, just follow up on our gross margins. I'm trying to understand, I guess, you know, your mix has shifted dramatically to this largest customer, and I'm just trying to figure out if that—how much of an effect does that have on your gross margin, you know, the customer mix versus the utilization of your fabs? And just, does that have any impact or not?
Grant Brown (Senior VP and CFO)
Yeah, sure. Maybe if we just look at, you know, bridging Q1 to Q2, there was 470 basis points of improvement there sequentially. You know, of that, maybe 2.5% was moving from the 800 basis points of underutilization to 550 basis points. There's 2.5, and that was largely anticipated in the guidance of 45%-46% for Q2. That leaves a little over 200 basis points left. That included some quality and other items, but it was primarily the product mix that I mentioned in the prepared remarks, where we are, you know, producing that product on silicon foundries outside of Qorvo's factory network, and then processing them at OSATs that are third party.
You know, that doesn't carry the same burden as the higher cost inventory we'll be selling in the second half.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Bob Bruggeworth (President and CEO)
We want to thank everyone for joining us on today's call. We appreciate your interest in Qorvo, and we look forward to speaking with you at upcoming investor events. Thanks, and have a great night.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.