Q2 2020 Earnings Call

Good day and welcome to the core vote incorporated second quarter 2020 Conference call. Today's conference is being recorded at this time I would like to turn the call over to Douglas Delieto, Vice President of Investor Relations.

Please go ahead.

Thanks, very much where everybody to walk in the current fiscal 2022nd quarter earnings Conference call. This call will include forward looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations weaker as you know reviews. The safe Harbor statement contained in the earnings release published today as well as the risk.

Doctors associated with our business and our annual report on Form 10-K filed with the FCC 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 the supplemental information to enable investors to perform additional comparisons of operating results.

And to analyze financial performance without the impact of certain noncash expenses or other items that may obscure trends in our underlying performance during our call. Our common comparisons to income statement items will be based primarily on non-GAAP results.

Situation of GAAP non-GAAP financial measures. Please refer to our earnings release issued earlier today.

Well on our website <unk> dot com under investors sitting with me today, our progress President and CEO , Mark Murphy, Chief Financial Officer, James Klein President of corporate infrastructure in defense products Group, Eric Kristen President of corporate mobile products group as well other members of Congress management teams and with that I'll hand, the call over to Bob.

Thanks, Doug and thank everyone for joining us.

Delivered another outstanding quarter, as our technology investments portfolio management and operational discipline continue to yield strong and consistent results upside during the quarter was attributable to new product cycles across our largest customers.

And maybe products.

The trend toward integration is driving or industry.

And integration is all the more important with the introduction of Fiveg.

<unk> is securing significant content in fiveg smartphones with our premium technologies and are hardly integrated modules, enabling our customers to enhance system performance overcome design challenges and bringing their smartphones to market faster than ever.

No I'd be markets are supported by secular trends, including the deployment of Fiveg.

As well as the proliferation of Aiotv the adoption of why Fysixteen.

Performance advantages of Gan technology in defense broadband and massive Mimo base station applications.

Looking at our September quarter by business, our performance in mobile products was driven by multiple customers and product segments.

Samsung was a stand out as we expanded our participation in their mass market phones.

Well, there's broad portfolio of enabling technologies, coupled with a robust supply chain and solid product execution is allowing us to solve our customers' most challenging problems across all tiers of their portfolio.

To that end.

We're enjoying significant traction with our four largest customers in China, designing our low mid high and ultra high band solutions into their upcoming Fiveg smartphones.

Our wins or broad based in our solutions or mated with all the major chipset providers, including SLS.

Qualcomm Mediatek and our silicon.

And maybe why probably applications, we're ramping or recently launched watched by six friends in support of multiple leading China based smartphone Oems.

Turning to RTP inner defense business, we are at least participant in the U.S. government program to advance the state of the art in RF integration packaging and test.

We're also increasing or gain opportunities with the U.S. problems and we secured wins for our Gan amplifiers and integrated front end modules for Xtend NK ban defense radar and communications programs.

An infrastructure the ramp of Fiveg appears to be rolling out faster than a ramp for fourg.

Activity is primarily in the sub six gigahertz frequencies and core those Gan technology is increasingly the technology of choice during the quarter, we secured new game design wins for sub six gigahertz massive mimo deployments expected to span multiple years.

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Among China based carriers, it's been widely published the China, Unicom, and China Telecom will share cell sites to accelerate fiveg deployments.

This development well drives the need for broader band and higher power amplifiers favoring core those Dan solutions scam enables operators to drive more power.

The smaller form factors and achieve better performance at higher frequencies.

And I would see ratification of why Fysixteen as a catalyst for the industry and design wins for core those wife, probably six solutions are building.

During the quarter.

We launched the world's first why Fysixteen nobody in front end module and the world's first why five six I sense for CP applications, expanding our product portfolio for retail enterprise and network operators.

In automotive, we commence production shipments over why feis them supporting multiple automotive OEM platforms and notably.

Our VTX coexist in BAW filters for 5.9 gigahertz were recently selected by a top automotive OEM for models shipping next calendar year.

The continued expansion of Aiotv devices, and smart home control Corvo is uniquely positioned to combine why fivesix oxfam's with advanced filtering and multi protocol and so see into highly integrated solutions, reducing time to market and supporting smaller end devices to.

Many of today's gateway devices and voice assistant products to incorporate all of these technologies, enabling in room control of the entire smart home.

In programmable power management kormos at the forefront multiple trends, including a trend towards brushless DC motors.

During the quarter, we expanded our portfolio of integrated motor control solutions for brushless motor applications.

Our power management solutions enable smaller lighter devices, the charge faster and operate longer between charges.

On the design from program ability enables our customers the lower product development costs reduced on the market.

We expect to leverage our scale to drive gross and power tools white goods industrial equipment and other product categories.

Finally, after the quarter close we completed the acquisition of Cavendish kinetics, expanding our technical leadership and switching in tune with.

We intend to optimize and scale or RF Mems technology for smartphones and ultimately apply to other growth segments.

In summary, kormos, combining best in class products and technologies with operational excellence to drive solid sustainable results. We are encouraged by customer design activity. We expect a strong December quarter as we support our customers next generation product cycles.

With that I'll turn it over to Mark to provide additional color on the September quarter, and our outlook for the December quarter.

Thanks, Bob and good afternoon, everyone.

Hormones revenue for the second quarter was $807 million $52 million above the midpoint of our guidance and driven by stronger than expected mobile demand.

Mobile revenue of $623 million exceeded expectations at our largest customers and demand strengthened through the quarter.

IP revenue of $184 million was down sequentially and year over year, primarily due to the effects of export restrictions.

As mentioned last quarter, we expect IP revenue to recover through the year on increasing defense volumes ramp of why five six and broader fiveg infrastructure customer demand.

Corbo shipments to walk away in the September quarter exceeded expectations and sales to walk away ended the quarter at approximately 5% of sales.

non-GAAP gross margin in the September quarter is 46.5% at the high end of our guidance range.

With better than expected manufacturing costs, partially offset by higher inventory charges.

non-GAAP operating expenses were $167 million and in line with our guidance.

non-GAAP net income in the September quarter was $181 million and diluted earnings per share was $1.50 to.

22 cents over the midpoint of our guidance.

September quarter cash from operations was $173 million and Capex was $38 million, yielding free cash flow of $135 million.

Core versus first half fiscal 20 free cash flow of $342 million is on record pace and we expect to maintain strong free cash flow through the fiscal year.

We repurchased $165 million a stock in the quarter and our national average at quarter end stated 0.4 net debt to EBITDA.

After a quarter and we issued $350 million, a 10 year unsecured notes to Opportunistically lower our long term cost of capital.

Following the quarter. We also completed the purchase of the remaining equity in Cavendish kinetics, and RF men's company for $203 million further strengthening our technology portfolio for switches tuners and other product applications.

Turning to our outlook in the third quarter at fiscal 2020, we expect revenue between 840 and $860 million or $850 million at the midpoint.

non-GAAP gross margin of approximately 48%.

non-GAAP diluted earnings per share of $1.67 at the midpoint of our guidance.

Our revenue outlook for the December quarter reflects continued or a bus mobile demand supported by an increase in fiveg handset volumes and a return to sequential growth Friday pay.

For mobile we expect December quarter sales to increase sequentially and returned to growth year over year as fiveg handset launches with our integrated solutions and a healthy channel support strong demand.

Friday P., we project December quarter sales to increase on a higher defense business volumes, the why five six ramp and broader fiveg infrastructure customer demand.

While core of as current near term outlook is strong and channels are healthy trade and other factors contribute to challenges and uncertainties forecasting the outlook.

On gross margin our December quarter, Guy or approximately 48% is up 150 basis points sequentially on improves next and lower inventory charges.

non-GAAP operating expenses are projected to increase in the back half of this fiscal year to between $175 million and $180 million per quarter due to operating costs of recent acquisitions and increased product development costs related to growth in fiveg.

Following our recent debt issue interest expense will increase sequentially approximately $4 million.

We expect the December quarter, and fiscal 20, non-GAAP tax rate to be eight 8.2% or lower.

On capital expenditures, we continue to project spend of less than $200 million. This fiscal year and remain highly disciplined on adding capacity.

Spend remains weighted towards improving our BAW and Gan capabilities.

As of September quarter results and our December outlook show Corvo is operating well as Fiveg why Fi defense and other markets strengthen.

As a result of our market outlook operating performance free cash flow for a cast and other factors core Rose Board has authorized a new 1 billion dollar share repurchase program.

With that I'll turn the call back over the operator for questions.

Thank you if you would like to ask a question. Please.

Thanks Darren.

Keypad, if you are using a speakerphone. Please make sure your mute function is [laughter] <unk>.

Okay first I want to ask a question.

Please limit yourself to one question and one follow up well pause for just a moment to allow everyone an opportunity to signal for questions.

The first question will come from Karl Ackerman with Cowen. Please go ahead your question.

Hey, good afternoon, everyone. Thanks, Let me ask a question.

I guess, two I mean first on walk away.

I guess, what's implied in your outlook for December I guess do you think it's more appropriate to exclude revenue associated with the entity ban or I guess, how should we think about hallway and I've a follow up.

Carl This is mark so.

Well I always somewhat consistent with what we had given guidance on the last call.

So on that $52 million variance, we hadn't second quarter, yeah to our guidance.

Roughly a fast or 10 million of it was related to walk away.

So walk away was rather than what we thought would probably be 3% to 4% of sales ended up being closer to 5% sales.

As far as third quarter, we typically don't break down guy by customer, but on wild way, what we said last quarter as we expected why way to be less than five per cent per.

For a quarter going forward.

And and we expect at this point for a while way to run about what it ran in the second quarter, so close to 5%.

We expect the second half.

To have walked away at less than 5% of sales or around 5%.

For the full year, we still project quality to be less than 10% of sales compared to 15% last year.

That's helpful I agree that Mark [noise].

Shifting gears, a China handsets may you provided a bit more clarity on your opportunity opportunity to sell been high band pad two Chinese handset Oems I guess are these contracts.

Set in place today, you know you know we heard from the Korean smartphone manufacturer last night discussing the strength in China handsets.

Some of those Oems procuring more memory not only ahead of China tariffs, but also gives a stronger demand.

We're obviously levered very well to the China handset Oems, but do you do you think the strength will prove to be ephemeral due to trade or are there. Other factors we should consider thank you.

This is Eric I'll address that we have seen a significant increase in design activity on fiveg or with our Chinese customers and or we're not seeing in particular increase in overall units planned for for the December quarter or March or going forward, but they are.

Aggressively shifting the portfolio from Fourg to Fiveg. The vast majority of R&D resources are being I put on Fiveg phones right now.

And when you go to the Fiveg phones in China across the board, they're going to fully integrated Fourg solutions to support that so you get a you know increased our content due to the higher levels of integration and taking Fourg LTE advance Pro and then addition, you get the additional content from of course, new fiveg bands or.

And and even higher than we had expected requirements for multi carrier operation and so forth just supporting on Standalone operation. So you put all that together and even on flattish units you can see how the the RF content can increase in court ruled in particular, we're real pleased with our position there a you know leading supplier to that customer base.

And clearly when it comes to the integrated solutions men had been in particular, we're getting a that you know the vast a lions share of that business.

Thank you for the question. The next question will come from harsh Kumar with Piper Jaffray.

Hey, guys. Congratulations on very strong results I guess today being Halloween paying some making it fun and not kind of fine.

[laughter].

Hey, guys. So no.

Guide significantly very significantly better than the street and.

We just wondering what kinda I understand whereas the outperformance coming from a you do you think you're taking share in the new models of Fiveg is that mostly tied out five do that you're taking share in or is the tide rising for everybody and you're benefiting with it or is there something going on perhaps in the U.S. market. Just some color would be appreciated and I've got a follow up.

Yeah first thanks for your comments and appreciate that as I said in my opening comments for the September quarter was really driven by our three largest customer. So as you know are three largest customers are in three different continents. So we'll just leave it at that and as we look forward into guidance and I think Eric's answer to Carl's question about what's going on in China.

<unk> G.

This is where I think it's two steps one is the dollar content.

For Fiveg phones is significantly increased over Fourg phones, and then also as we've talked over the last couple of calls.

We felt integration was key and being able to integrate the components that are needed for fiveg phones, Oh, we do believe we're taking some share there from discrete players. So that's really what's going on or you're seeing the integration coming together in the Fourg portion will find you phone plus for Fiveg and that's what's really.

Driving it it's the dollars per handset.

And then second the second areas, we're seeing great growth at Samsung in my opening comments and I talked about expanding into their master phones, as well and we're driving a lot of business there and that's gonna be up very nicely year over year as well.

Thanks, guys and then for my follow up within spitting distance off your high gross margin that you put up in December 18, 49 out I think what's that number how do we think about goes my the name your commentary he said that because my they'll be up from here and also what's interesting is when you when.

Call. It 775 million in June seven in September your margins and go up that much but when you go from September to December there jumping up quite a bit is that just integration and the new five new products kicking in or is it something else going on.

Yeah, So har Har systems. This is mark.

I'll I'll provide a a few different answers on this question around.

First the first the quarter sequential up a second to third quarter up a 150 basis points.

Two things driving that one we had.

Around $10 million worth of inventory charges, what I'll call excess inventory charges and in the second quarter. You know three primary drivers one we had some excess parts on older generation handset products.

Two we had a very isolated quality issue and a noncore market.

And then three we are unable to re purpose a portion of a customer specific.

Product.

So as I as our practice, we took those charges and they're in our non-GAAP results.

Second or third quarter, a were up 150 basis points, yeah, one as you.

You know a a major driver there as the is the the inventory charge not repeating.

And then secondly, we have a more favorable product mix, a second to third quarter.

Yes third to fourth quarter I'll take this opportunity to address we'll see what we typically see third to fourth quarter and that is we'll see gross margins decreased a third to fourth quarter down 100 basis points are more.

Again as we've seen in previous years and this is really a function of seasonal mix and then just the effects of.

Fixed manufacturing costs and lower revenues.

Understood. Thank you guys.

I'm sorry.

Thank you for the question. The next question will come from Ambrish Srivastava with BMO. Please go ahead.

Hi, Thank you Marc maybe it was just consider the line of questioning with you.

Yeah, So based on the comments and what you've done a December would Mars b, a worse than seasonal quarter or you expect bars to be sees no and then I had a photo.

[laughter].

So ambrish I assume you're talking about the topline or yes, sorry top line because you address the gross margin.

Yeah.

So you know it it is a you know the year healthier outlook has certainly improved for us from our view over a quarter ago and yeah. I think you see that reflected a course and the September and results in December guide Yeah. The handset replay.

Since cycle things have stabilized there's.

A clearer picture in China, and we've got increasing five key demand. We've got why five six adoption starting our defense business is doing well we've got growth in various aiotv markets. There's great Paul on our technologies as you heard Eric talked about and and lastly, and that's important points to channels are healthy so.

No.

We feel good about the December guide.

But as confident as we are December yeah, there's some challenges and uncertainty as we go further out right and so we're taking a very discipline view.

On expanding the business the rate and pace of Fiveg adoption on modulation.

China trade, we have to admit remains a source of concern and now if there are some supply constraints around that situation could that bleed over into our customer demand. So.

So right now as as we see yet we see second half revenue being roughly in line that down slightly versus what we did in first half.

And since you've got the December guide, a using that midpoint that would be at March a seasonal decline of around 15% sequentially.

Okay, that's very healthy and then that's a little bit.

Yeah, sorry, good yeah, and then just slot while at while I'm at it I talked about gross margin.

Down 100 basis points are more which is typical for our business to have a sequential decline I I mentioned higher opex in the second half in my comments and the higher interest expense.

Just as a segment level, yeah, well going to end the much detail here, but you know mobile will be up sequentially.

In the third quarter and returned to growth year over year, it'll be down the fourth quarter seasonally a sequentially and up double digits year over year, and then on I'd P. Well see very strong growth sequentially in third quarter again, why five defense fraud or infrastructure.

Your demand.

Expected to strengthen through the year and M., where we're hoping to see.

No year over year growth return I'd p., but that's that's a that's a tougher pot.

Okay, I was going to say, it's actually the transparency that's a lot more but really appreciate it does all the quick one since you've been on board Mark you have been very focus on free cash flow.

And I just wanted to tie that back to buyback as well. So is there target that you are willing to give for the year for free cash flow and then the share buyback is their timing of that please. Thank you.

Yeah that there's no timing on on the buyback and as far as you know as far as Justin I'll make some comments historically over the over the past 12 months.

We've generated over $755 million of free cash flow and over that time, we've we've repurchased 716 million so yeah, well over 90% of our free cash flow, we've we've repurchased shares.

Over this time, we've also deployed over $500 million with the purchase of two company. So.

Yeah, we're certainly we're generating more free cash flow than we had been and were.

Doing a good job of smartly investing Inorganically and then returning sizable amounts to.

Shareholders.

You know on on on the capital return at this point given given the market outlook, our operating performance free cash flow forecasts other factors or board. Yeah. We were out of capacity. We didn't have much capacity left so the board approved in a new billion dollar program and I'm, just not going to comment at rate and pace at this point a then.

Saying that we'll continue to buy back shares.

Okay. That's good enough. Thank you very much.

Thank you for the question. The next question will come from Toshiya Hari with Goldman Sachs. Please go ahead with your question.

Hi, guys. Thanks, so much for taking the question and congrats on the very strong results.

Mark you talked about your mobile business returning to your gross.

The quarter.

And this is obviously in the face of overall smartphone units being down.

You know hallway, obviously become significantly smaller customer on a year over year business and you know you guys I think losing a fairly sizable saket.

Good customer so I guess the question is what's driving the year over year growth is it 'cause. It all five GE is that you know you guys, having better president stuff at Samsung and some of the mainstream skews because it's something else. If you can talk about some of that someone to cover something over here, but this quarter.

<unk>.

I mean, it's it's broad customer engagement.

Hi, then fiveg helps but I I really think it's a technology story for us and I'll turn it over to Eric.

Yeah, We've got as you know very broad portfolio. It's just a growing list of opportunities across all of our customers, including our largest customer as well you know from the main pass a integrated transmit modules and so forth for both low band mid high band and and Evermore, increasing ultra high band activity.

But also around tuning in or around the antenna elements of there a lot more signals trying to come and go from those she went to an elements and.

So I think that that's just a enough to do that applies across the board, but really as we said to stand up really has to be Samsung I think we've you know traditionally been a very strong supplier. There. We've got out of line are going up out of alignment with the.

The product road map and their architectures for a cycle or two but we're we're fully back in alignment across not only the flagship or marquee tier, but also the mass tier of handsets, there and just real pleased with the alignment we have in a enjoying building that business back again.

Right I'm a bit on gross margins you know murky you guys have done a great job over the past several quarters.

Executing to some margins can you remind us what somebody initiatives are in place today that.

Hopefully get you to 50% over the medium term I'm, keeping kinda provider bridge to 50%.

Whatever the timeline and that would be great. That's sort of religious about <unk> can you give us an update on what's your thoughts on pharma spreads from a timing perspective, and how that could potentially impact cellphones. Thank you.

Yeah, so such that share, we're obviously still working to to a achieved 50% or more or we believe it. So that's an achievable target and as I think harsh mentioned I'll remind you that we were at 49.5% about this time last year and as far as I won't do a specific walk is there just too many variables.

But yeah, starting with our December guide as a baseline 48%, Yeah, we would expect volume growth for many of the reason that that you know Eric mentioned that James can talk about what we expect volume growth and so we'd expect to see better utilization I mean this year the volumes yeah.

It's certainly been lower than we had originally anticipated and then the mix has sort of weighed on our in house capacity next calendar year. We're also have the consolidation of our fabs.

You know are largely complete and most notably Florida will be closed and those products rolled into Ah grains for a so those period costs effects will subside also overtime, we would expect the mix it I'd p. too.

Improve and be a larger part of Corvo, certainly compared to December quarter Guide does 48% baseline that I talked about.

And then we're doing a lot of ER.

Product Ah portfolio management as well, so that that'll improve that Max and yeah. That's that's the purpose of our.

Yeah select and high Tech investments, Yeah, finally, where we're operating I'd say as well as we ever have and an <expletive> , yeah, that's allowing us to drive I would say better productivity than we were even before.

And to the extent, we're doing that above inflation.

Hi, certain erosion that would ah that would that would be incremental benefit to gross margin.

As far as farmers branch.

You know our current view given the outlook and efficiency gains that we've seen in Richardson I believe we won't need farmers branch.

At scale until late next calendar year gear or even the following year you know as we've mentioned previously and I think you know James and I mentioned this wherein in New York and September due to these gains and the flexibility we haven't Richardson and that's a great fab.

It's a it's allowed us to revisit our original manufacturing concept in Texas.

And we've gone from what was going to be a copy exact idea for farmers branch to more of a single fab concept for the whole Dallas area.

And Oh, yeah that allows us to be more capital and cost efficient and it positions us well for the long term.

Thank you for the details I congrats again.

Thank you.

Thank you for the question. The next question will come from Bill Peterson with JP Morgan. Please go ahead with your question.

Hey, guys and thanks, Let me ask a question then that nice job.

On the results and guidance.

My first questions in mobile and I guess I was hoping that air could sort of level set us you've talked about an artist's tan increasing and extra by about a billion.

Yeah. It sounds like some of the Fiveg opportunities are coming in maybe little bit sooner than expected as you talk about December but.

And to get that feel for how do you think PR Tam should grow next year and the shape of the ramp you know our section as it will be somewhat second half weighted but and then we didn't within that I actually think about your business, especially as it relates to design wins, you had you talked about for large China makers. If you can help our level second market context, as well as the shape of your.

Our business Fiveg. Thank you.

Sure thing things still yeah, we've been saying since our analyst day in 2018, we expect it about a billion dollar increase in New York, Tim and calendar 20, due to Fiveg ramping and its certainly looking like it's going to be considerably greater than that much closer to 2 billion probably and.

And it's equally weighted from at least our view currently between more units than we had originally expected and more content per unit. So we got both factors affecting it pretty significantly and the higher units are really driven by this this really rapid adoption and switch over a of the.

The handsets in China, It's it's clear from from what we're seeing there that.

The Fourg handsets that are going to be released for gonna be dropping significantly in the very near term, whether there's coverage or not to consumers are going to be buying fiveg handsets, knowing that the network will be available. It sometime during the time they they own that phones, so they're getting your a real jump on it obviously.

The Samsung as well as transitioning their portfolio rapidly to include five few content. So so that increases the number of fiveg handsets, well well above the 200 million or so that we had originally modeled a couple of years ago. But then in addition to that as I said it looks like across the board all the Fiveg handsets.

So far without without any.

Without any or be it going the other way there, they're all going to fully integrated fourg systems, a inside them in part of that was just to get the size of many of these are really cramming, an awful lot of functionality into these handsets. So they need the integration for that but it also helps them get to market faster and improves performance. So so that integration trend for all the.

Based content and Fourg also adds a content in the last the last out or is the requirements from China mobile and so forth for band coverage and so you know having in 79 and every phone for example, the requirements for dual single signaling and so forth. A these are now being put in every single Fiveg handset. So all that's coming together.

To increase the total Tam and see why 20, well above what we had not previously.

Okay, Thanks for that and.

The moving to James James is businesses, obviously seasonally rapid growth that's decelerated here in the last few quarters, including including the guide you talked about the potential returned to year in your growth, but I guess, you know with while we significantly lower what do you have enough sort of you mentioned your broadening it out your your wife.

Superstructure coverage.

Customers, but how should we think the growth in that business as we look into next year March maybe returning to growth in that and then progressing through the next year given that we had like by 60 cents.

And additional customers for the infrastructure.

Bill This is James Thanks for the question and the restriction is a long way have definitely limited our ability to grow in the near term. However, as Mark stated, we hope to return to year over year growth in Q4.

We're going to take a good stuff in that direction in Q3 with double digit a quarter over quarter growth.

Longer term, we remain really positive about the underlying trends in the markets we serve.

You know that includes the adoption of massive mimo and Fiveg easy adoption again in several different markets in the wife, Isix coming on and and a I O T. In both the automotive and in the connected home.

And the addition of power management has also improved our long term outlook in fact that business grew a quarter over quarter about 40% and is.

Very much on pace to how we looked at it prior to the acquisition.

So with all that combine my expectation is that we will return back into double digit growth mode.

As we get element to our out years.

It takes about.

Thank you for the question. The next question will come from Chris <unk> with Raymond James. Please go ahead with your question.

Yes. Thank you good evening <unk> first question is that there's been some some lingering concerns since the trade restrictions were put in place that.

The Chinese Oems and why wait in particular would backsliding to discrete RF solutions, either because they couldn't get access to U.S. components or because they were worried that they wouldn't be able to in the future. Your results don't seem to point that direction, but <unk> can you address that concern and if you.

It also address if it's feasible.

Without highly integrated components do you think that you know even if they chose to do that that it would be possible to do with Fiveg phone, even you know for domestic sub six in China.

Without these highly integrated component.

Yeah. This is Eric.

We have seen a of course customers experimenting with a full discrete solutions and even trying to go as far as to build handsets without any a U.S. semiconductor content. For example, a those experiments are out there you'll see them in the field.

I think that experiment was enough to really fully validates. The fact that you can't make a competitive.

Handset.

Without using U.S., so a content and and further really you can't build a compelling handset without going to the integration because the solution size is so large and power hungry and poor performing that it really degrades the the selling factor for the handset. So you know experiments happen. It confirms says the thesis and generally people are we.

Turning to the integration in full force.

Well take it was as a follow up to that perhaps.

If you could clarify the restrictions on on what you can and can't ship to walk away.

Both in the hands in the base station side is it only restriction only on Fiveg does that apply to afford you also and actually one of the experiments you referred to a that we've seen did use fully integrated fourg without discrete fiveg solution. So perhaps is that you know suggestive of you you catch.

Chip the Fiveg solution [noise].

Chris This is Bob and I think we address this the last call as best we could and I wish I could get into a lot of details it's quite complicated, though we spent a lot of time, making sure that.

No we comply with all the legal requirements that we can shift to a walk away or given the export restrictions or the restrictions or.

Such that we are able to ship components that go into their phones, we have ship components that go into their infrastructure side.

But I don't think I can get into a really serious discussion without.

A lot of help and understanding from a lot of people on what is good and what is bad to ship.

The important thing is we are able to ship to them we're fully in compliance.

With the export restrictions that are required to support them.

Got it thank you.

Thank you for the question next question will come from Craig I didn't catch with Morgan Stanley . Please go ahead with your question.

Great. Thanks, and the I'd be tea business I know, you've talked a lot about kind of aerospace defense and infrastructure.

And just kind of the broader based Io tea business, you know kind of the scope for that business today and opportunities that you're seeing.

[noise] [noise] Yeah. This is James so the market in general still maturing several different standards have been competing well ipi zigbee, Billy thread and NB Iot see I'm, we're positioned pretty well across all of those different aspects of the market.

Our strategy is effectively been to try to supply in the connected home in the automotive space, our automotive business. Although a small is growing at a very nice clip and in fact, a grew well into the double digit range year over year in this current quarter.

Why has been a bit week over the last couple of quarters as we were reported.

But we are showing signs of recovery.

The wife I six standard released in October and is fueled our second quarter in a row very strong design wins, and we think that's a great signed that that business will return back into into a growth mode. They're fairly soon.

Got it. Thanks I just a follow up question for Mark appreciate the color and just some of the Opex with the RF Mems acquisition can you share just from a revenue perspective, you know how that that settles out.

Yeah. So a I'll give you an update Craig on on both so both our acquisition so on on the on the recent RF mens business, that's not financially accretive in fiscal 2000, and not a and that's reflected in our guide so it's a increase in Opex and.

There's no income.

Creation, there on the programmable power management business I think it was last call I said a.

The $50 million of revenue in our fiscal 2000 and slightly accretive.

As James mentioned that that's very much on track to that's delivered on expectations in the September quarter.

And Ah.

And our guide reflects the previous guidance I gave around that business.

Got it thanks.

Thank you for the question. The next question will come from Edward Snyder with Charter equity Research. Please go ahead with your question.

Thanks, a lot Eric.

Oh, you talk a lot about smooth the rocks moved just say six in China now I know the experimented with last year. The high end enough sounds like the going in mass to go to Fiveg. So I guess is to be expected that poses a problem here because if the hazard only injury going in mass to this and you have to buy these modules from Skyworks avago or yourselves, how does that work with walk away.

And if there are these components not covered by the band as long as being left out of the shift or are they found a substitute for all these products and then James if I could you got a up next quarter led by the Feds you called out Dan and expand.

Are you looking at production now some of these large systems like Spice 60, or Gator or is it more development work and if it's a former can you give some kind of color on the run I hope to stuff's been in development for many years now, but some of these are very large systems, let's dig unit volumes in the long term trying to get a feel for how defensive player.

Out over the next Oh, well walk from actually next 12 months or so I've a follow up.

So to your first question about walk away in a highly integrated modules, while staying completely consistent with export regulations were able to ship the highly integrated modules across all frequency bands to always handset division.

And I enjoy some part yeah, Ed for for defense. So the defense business has been solid growth engine for us and I think really going to have a nice back half in fuel recovery talked about earlier.

Jan related.

There are numerous production programs for again.

We announced one this quarter that was the arrangement with Lockheed Martin known on Q 53, and again you can read what that system is but there are numerous other production programs using arc and capability.

Okay and that Eric but come back you just talked about ultra high Ben wins, which kind of seen dabbling in late last year. So I know, it's showing up here, but then you also talked about higher costs in five years and you'd expect it is there something being added to the Fiveg section or are you talking more of the Halo effect five John Fourg for example in that.

Errors antenna flex is that sort of thing so I'm just trying to my arms Raul given the false machine the bands in the tear downs, what additional actually pure fiveg costs and could you be talking about when you say that I see cuts is higher than anticipated. Thanks.

Yeah, Yeah, great question that the the Halo effect with Ford She was largely contemplated I think that's on track for the most part.

Additional tuning is tuning is definitely higher than than we had expected, but I think the primary a new content in fiveg proper our bands like as I mentioned as an example in 79 being required across all trying to handsets not just trying to mobile for example, oh the requirements for the dual signaling for non standard.

Loan operations that you have to go transmitter in Fourg and Fiveg at the same time once that was fully incorporated into the architectures. It turned out to take more switching more complex or if the than was expected and by the way. We don't see any of this going away, even if I'm trying to immediately went to Standalone fiveg. All the architectures, we're seeing are going to keep that dual signaling mode Bill.

We use that for GE carrier to transmit even more data on so we don't think that this is just sort of a onetime blip in content. That's it's going to continue to ratchet up from here going forward.

Right. Thank you.

Thank you for the question. The next question will come from Timothy Arcuri, Yes. Please go ahead.

Thanks, a lot Mark I guess, the first question or can you give us a sensitive.

Your largest customer how big they were maybe in in the quarter and you know maybe not if you want to give US numbers can you talk about like year over year, how much. The grew work didn't grow thank you.

No, Tim we had 110% customer and the quarter and I can't give.

Details about that specific customers grow.

Okay Awesome and.

And then do you have any sense, maybe James about [noise].

If you have any forecast, which are sort of thinking about for the global Fiveg I hand to build for you know, mostly obviously some six next year. The numbers are all over the masters summer at once I mean side than some people talk about 300 can you help us think about what out sort of like global Tam will d.. So we can pick about how big you know how big things could actually.

Before you next year anymore.

Hi, G. Thank you.

No.

Sitting right in the James said chime in on the infrastructure side I mentioned earlier that we had a baselined around a about a billion dollar a add or in the Tam for calendar year 20, and that was roughly 200 million handsets at $5. So we were projecting that back in 2018, even or early.

And.

So what we're seeing now is.

Maybe not quite 300, but approaching 300 in terms of units likely.

And the content being a little above five as well probably six $7 worth of additional content. So that's you know were as we said much closer to $2 billion now based on customer forecasts to Austin and the architectures, we see a ramping next year.

[noise] on the base station side we.

We see about a billion dollars a tam being added.

And it's all associated with Fiveg add ons and most of that is attributed to the adoption of massive mimo.

We expect over the next several years it somewhere in the range of 30% of the base station deployed we use massive mimo technology and as I've talked about before that's about a 10 x. content gain for us Oh it each one of those base stations.

Awesome. Thanks much.

Thank you.

Thank you. The next question will come from Russia, Gill with Needham and company. Please go ahead.

Yes, Thank you and I Echo my congratulations.

You mentioned a in terms of the the portfolio of the Chinese handset.

Customers moving to Fiveg from Fourg, but [laughter].

Fairly C.A. I can jump in the actual units rather the RF content is going up.

You know two to the earlier question about the Tam I'm just wondering if there's the replacement cycle.

That you're expecting to see in Fiveg.

Actually also result, and higher incremental units for the overall Chinese handset market.

How do we think about that.

When do we expect maybe a unit growth to start to kinda increase.

As a result of the transition to Fiveg.

So we're not modeling an increase in unit growth going forward. You know, we did see replacement cycles kind of moving out that was part of a bit of a drag over over the last year, a they've stabilized now for the time being at least we are modeling them necessarily kicking back you know if units go up that means replacement cycles I forgot I've got to be short.

Thing and we're not modeling that overall.

So this is primarily going to be driven by purely RF content gains support fourg, but also the new bands.

Yeah, that's right exactly so total number of handsets more than being fiveg versus fourg without more units.

And then Fiveg, having her comes in.

Okay, and then but for my follow up question.

I guess it has to their their question about the risk of.

You know well wait and other Chinese handset Oems using non U.S. filter companies you'd mentioned that you do some experiments out there but.

The results are that you know, there's a push back to an integrated solution.

Hi, knowing the fact that these RF designs are pretty much have already been locked in for.

Next year, and we look at a 2021.

Is there potential risks that these Oems will move to more of a stem architecture I'd without without integrated power amplifier first hand might be architecture.

Let me [laughter].

Number one I want to make sure we understand that in China.

[noise], let's understand they export phones as well.

So for anything direct sporting they're going to compete with obviously, Samsung and others. So they're going to make sure. They buy the best RF and as you well know the RF does influence dropped calls battery life things that we as consumers recognize you know.

Judge phones by so that's important distinction second even in China, they're building their brands and want to make sure that they can compete with walk away.

So far we have not seen anyone that is willing to sacrifice if they have the ability to buy from U.S. suppliers.

To sacrifice performance and and tarnished their brand.

One thing I just want to caution you on is that there are many phone designs that are still left to be done in the second half of this year and you know their direction at least in the architectures. We're seeing are still with the integrated products that we've been talking about.

Very good thank you good insight.

Thank you for the question. We've reached the end of our question and answer session I'd like to turn the call over to management for any closing comments.

Thank you we want to thank everyone for joining us on tonight's call. We hope to see you at upcoming Investor meetings. So we look forward to speaking with you again, when we report our third quarter results. Thanks, again, I hope you have a good nice.

Thank you ladies and gentlemen. This concludes today's event you may now disconnect your lines.

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