Q1 2023 Qorvo Inc Earnings Call
Please standby.
Good day, everyone and welcome to the <unk>, Inc, Q1, 2023 conference call.
As a reminder, today's conference is being recorded at this time I would like to turn the conference over to Douglas Toledo.
Vice President of Investor Relations. Please go ahead Sir.
Thanks, very much Hello, everybody and welcome to <unk> fiscal 2023 first quarter earnings Conference call.
This concludes 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 noncash expenses or other items that may obscure trends in our underlying performance.
I recall, our comments and comparisons to income statement items will be based primarily on non-GAAP results for.
Radiation of GAAP to non-GAAP .
That's what measures. Please refer to our earnings release issued earlier today available on our website at <unk> Dot com under investors joining us today are Bob <unk>, President and CEO Grant Brown interim CFO as well as Eric <unk> and other members of <unk> management team and with that I'll turn the call over to Bob.
Thanks, Doug and welcome everyone to our call Jorge delivered fiscal first quarter revenue and EPS above the midpoint of the outlook provided on our may 4th earnings call.
June .
<unk> was broad based across markets with strength in power defense and infrastructure. The diverse markets served by IDP are exposed to an expanding list of long term drivers, including enterprise Smart home automotive connectivity electric vehicles battery powered tools infrastructure.
And defense radar and comps and.
Mobile products revenue was diversified across customers and product categories Corvo grew year over year, excluding China based customers, while securing noteworthy design wins and content gains across customers in high volume platforms.
Now, let's look at some of the quarterly highlights and ultra Wideband, we completed MSI certification of interoperability of our ultra Wideband solutions.
With the Apple you, one chip used and supported iPhone and Apple watch models.
This will enable developers to create innovative new products and accessories to interact seamlessly with their environment, leveraging the full power and precision of UW beef technology provided by Corp.
And Mems based sensors hormone commenced shipments of course sensors, which enhanced industrial design and improved trackpad uniformity and reliability and our recently launched consumer laptop <unk>.
The content opportunity and track that applications.
<unk> includes four Mems sensors.
For matter enabled applications, we launched a new development for gateway and connected devices core gross matter solutions streamlined commercial development of smart home applications, including hubs.
Lighting security speakers and other connectivity and sensing applications.
And automotive connectivity, we secure Wi Fi six design wins for an infotainment system at General Motors.
We also validated Wifi six placements on a reference design for our top automotive Wi Fi chipset supplier.
And biosensors.
Obtain FDA emergency use authorization of our <unk> diagnostic test platform using <unk> technology for Covid antigen detection.
This expands upon the previous EUA to include the significantly larger point of care testing market outside of labs such as.
Physician offices urgent care retail pharmacies employee health testing and other locations that operate under CLIA waiver.
In power management, we were awarded our first design win to supply Enterprise class P mix for data Center applications. This achievement includes multiple customers and builds upon our strength in consumer applications.
Our power management offerings leverage our unique architecture that delivers measurable innovation and value and that is helping to extend power management into other markets, including defense.
In automotive power applications Corvo was recognized with an innovation award from American axle and manufacturing for superior efficiency, using our silicon carbide devices and power conversion applications.
We also secured a silicon carbide win with a leading solar inverter manufacturer certainly in the U S and Europe , expanding beyond our position and residential energy storage.
In defense and aerospace we are recognized by Raytheon technologies with their Premier Award for performance and overall excellence in both collaboration and technology and innovation.
We also initiated a strategic alliance with a large U S defense Prime for package development and Assembly.
Leveraging our advanced microwave module assembly facility in Richardson, Texas.
In mobile products, we expanded our content had a Korean based OEM with the first shipments of our low band pads to this customer.
We also commenced the volume ramp of the industry's first complete main path solution for phase seven early supporting multiple mass market programs add honor.
<unk> RF fusion for phase seven early enables broader operator coverage and reduces implementation area and customer devices.
Our U S based Android OEM, we ramp shipments of our mid high band pad incentive collector with integrated Elwood, Illinois.
Ultra high band <unk> antenna tuners, and ultra wideband solution in support of an upcoming smartphone launch.
Both the ultra high band Drs, and the antenna Plexor with Illinois represent new product categories for Corvo.
Lastly, we received our first production order for Mems based antenna solutions in support of our high end gaming smartphone. These are the first volume commercial orders of our Mems antenna solutions, which increase efficiency and improve throughput.
Before turning the call over to grant I am pleased to announce a new organizational structure.
<unk> is now organized into three segments.
Activity in sensors.
Performance analogue and advanced cellular <unk>.
<unk> is leading the connectivity and sensors group <unk> is a leading global supplier of connectivity systems and components, including Ultra Wideband Bluetooth matter Wi Fi cellular Iot and Mems sensors.
<unk> combines the connectivity business.
Normally split between IDP and mobile products.
<unk> markets include Smart home automotive connectivity industrial automation smartphones wearables.
Gaming and other high growth Iot connectivity and health care markets. We expect the market served by connectivity and sensors to support strong double digit annual growth over the long term.
Phillip Chesley is leaving high performance analog HPA is a leading global supplier of RF and power management solutions for infrastructure defense and aerospace automotive power and other high growth markets.
HPA leverages, a diverse portfolio of differentiated technologies and products to support multi year drivers, including electrification renewable energy.
Increasing semiconductor spend in defense and fire <unk> deployments outside of China.
We expect the market served by HPA to support double digit annual growth over the long term.
Bryan Stuart who most recently served as general manager of the RF solutions business unit and mobile products is leading the advanced cellular group.
ACG as a leading global supplier of cellular RF solutions for a variety of devices, primarily smartphones wearables laptops and tablets.
<unk> Leverages World class technology systems level expertise and product portfolio breadth to deliver high performance cellular products to the worlds, leading smartphone and consumer electronics companies.
It is a highly diversified supplier of custom and open market cellular solutions with a broad reach across iOS and Android Oems.
We expect the market served by ACG to support high single digit annual growth over the long term.
We've also centralized our sales teams under day forward through most recently served as vice president of sales of mobile products.
The three new segments align our technologies and applications more closely with our customers and end markets and our global sales force, we will capitalize on opportunities across customers and markets to accelerate long term diversified growth.
Within each segment <unk> will continue to leverage core strengths and process and packaging technologies manufacturing scale systems level expertise and deep relationships with customers and suppliers to enable a greener and more connected world.
With that I'll hand, the call over to Greg.
Thanks, Bob and good afternoon, everyone. Following up on Bob's comments about the new org structure when discussing results for fiscal Q1, we will refer to the operating segments that were effective during that period mobile products and IDP. Our forward looking comments, however will refer to the new operating segments connectivity and sensors.
High performance analog and advanced cellular beginning with our fiscal second quarter 10-Q, our historical financial statements will be recast into the new operating segments with that said I'll now turn to our June results.
Revenue for the first quarter of fiscal 2023 was $1 billion $35 million.
$10 million above the midpoint of our guidance global products revenue of 733 million was down year over year and sequentially, reflecting the impact of global macroeconomic events on smartphone volumes, primarily within the Android ecosystem.
Infrastructure and defense products revenue of $302 million was up double digits year over year, driven by strength across tower defense and infrastructure.
On a non-GAAP basis gross margin in the June quarter was 50% in line with our guidance the quarter benefited from stronger product mix offset by higher than typical inventory related charges.
On a GAAP basis gross.
Or is impacted by a long term capacity agreement.
Just widespread supply constraints during the second quarter of last fiscal year, we entered into a capacity reservation agreement with a silicon foundry supplier.
Ongoing events, including Covid mitigation efforts in China, The war in Ukraine Global supply chain disruptions and other factors have negatively impacted the global demand environment within a short period of time.
Sequentially customer demand no longer supports the minimum purchase commitments for the agreement.
We believe this situation is not normal and does not accurately reflect the performance of our ongoing business. A complete reconciliation of GAAP to non-GAAP financial measures can be found in our press release and additional information will be available in our upcoming 10-Q filing.
non-GAAP operating expenses in the first quarter were $234 million $11 million lower than our guidance due to the timing of product development spend as well as employee related expenses.
Year over year operating expenses were up $18 million, primarily related to recently acquired company Opex and new product investments, partially offset by lower incentive compensation.
non-GAAP operating income in the June quarter was $284 million or 27, 5% of sales.
non-GAAP net income in the first quarter was 238 million and diluted earnings per share of $2 25.
Was <unk> 12 above the midpoint of our guidance.
Cash flow from operations in the first quarter was $273 million capital.
<unk> in the quarter were $43 million and remain concentrated in areas, where we see continued demand for our differentiated technologies.
Free cash flow was $230 million, and we repurchased $350 million worth of shares during the quarter.
The rate and pace at which we repurchase shares is based on our long term outlook low leverage alternative uses of cash and other factors.
Turning to the balance sheet as of the June quarter end, we had approximately $2 billion of debt outstanding and $859 million of cash and equivalents.
Now turning to our current quarter outlook, we expect revenue between $1 billion $120 million and.
And $1 billion $150 million.
non-GAAP gross margin between 49 and 50%.
And non-GAAP diluted earnings per share in the range of $2 45.
The $2 65.
We ended the June quarter was $847 million of inventory, reflecting seasonal new product ramps and the macroeconomic factors previously discussed.
Our current view of the second half of the fiscal year reflects lower demand and we will reduce factory utilization to improve our inventory position.
These actions will impact gross margin in the second half and we currently expect non-GAAP gross margin for the full fiscal year to be approximately 48%.
We project non-GAAP operating expenses in the second quarter to be approximately $240 million.
Though the operating income line other expense will be approximately $16 million, reflecting the interest paid on our fixed rate debt offset by interest income earned on our cash balances along with other items.
Our non-GAAP tax rate for the full fiscal year is expected to be approximately 11.25% due to the absolute level and geographic mix of pretax profit as well as the impact of U S tax law change related to R&D capitalization among other factors.
Despite the broadly recognized macroeconomic challenges impacting our industry and our near term view <unk> long term business outlook remains positive.
Connectivity and electrification trends are accelerating and product performance requirements continue to increase.
We are expanding our opportunities across markets customers and product categories, while maintaining our commitment to technology leadership portfolio management productivity gains and reduced capital intensity.
In addition, we believe our new business group structure better aligns our organization with our end markets and highlights the strength of our broad product portfolio. We are well positioned for long term diversified growth and remain focused on free cash flow as we navigate the current environment.
That concludes our formal remarks for the quarter at this time. Please open the line for questions. Thank you.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment we.
We do ask that you. Please limit yourself to one question and one follow up question. Once again that is star one if you would like to ask a question, we'll pause for just one moment.
And we'll take our first question from Matt Ramsey with Cowen.
Okay.
Thank you very much good afternoon guys.
I wanted to ask some questions grant on some of the commentary that you gave there at the end of your script around.
Some potential for lower revenue levels and some compression in gross margin in the second half of the fiscal year. If you guys have any quantification of any of those things and in particular the.
The drivers of that is that some of the sort of well documented mid tier Android weakness that some of your peers have talked about or are there are there other things going on there. Thank you.
Yes, Matt I think you got it.
It all starts with those macroeconomic events that we mentioned that are impacting everyone. Bryan for Corvo as you pointed out the important driver there is the five zones in the area that you mentioned earlier.
Earlier this year, we set up to $750 million in calendar 'twenty, two and then revise that in may to between $6 50, and <unk> 75.
Where the revenue impact to us was approximately $250 million in the June and September quarters.
Since then.
As you mentioned the macroeconomic environment, it's worsen.
Android based customers that pulled back in the channel inventories have grown so now we see fewer <unk> units in calendar 'twenty two as overall demand.
Continues to reflect those macro pressures.
In total for Corvo I touched on it in my prepared remarks, but the weakness that we saw there implies a fiscal second half thats down approximately 10% from the first half.
But that said, we currently expect the December quarter to be the low point for our Android based business.
I realize that's a lot of detail there to hit your question, but I hope that provides some context around the margin guidance of 48% for the full fiscal year.
I really want to be clear right, we're taking active steps to improve our inventory position and lowering utilization in order to align with demand.
Okay. Thank you for that great I appreciate all the detail there I know that's a lot of information to get out.
As my follow up question I wanted to ask you about the charges that you guys took.
Against sort of prepaid or ore reserve foundry capacity I think it was $110 million.
Was taken.
<unk>.
The June quarter.
Excluded from the non-GAAP results, if you could maybe walk us through what.
Commitments weren't met.
Hum, which product lines or segments, those might've been and then just.
The decision to exclude those from the non-GAAP results like what were the puts and takes on a decision like that I know that the macros on the unusual things are going on now, but it seems like also more akin to normal sort of business operations with customers on inventory builds in digestion, then and then sort of one time items.
Kind of curious around the puts and takes there. Thank you I appreciate it very much.
Yes sure.
In terms of the.
The charge itself right, maybe I'll start there and then I'll talk about that.
GAAP only treatment, but the charge itself.
I think we've appropriately accounted for the impact both present and future you mentioned it represents about $110 million charge and touches all of the elements of that long term supply agreement that's sure.
Same root cause right the existing material and the incoming material the deposit.
Purchase commitment liability that more directly to your question represents.
You have the impact over the remaining life of the agreement.
We actually continue to place Pos with the supplier for material that supports our current order levels and we're working with them to negotiate the terms of that agreement.
Based on that we determined it wasn't representative of our ongoing business and decided that it wasn't going to fall into our non-GAAP cost of goods sold.
Okay.
Yes.
Thank you Sir next we'll hear from Vivek Arya with Bank of America.
Hello, Thanks for taking my question.
Curious.
To get your sense for that remaining amount of Addis component inventory among your Android customers. So I appreciate that you have given a high level outlook for the second half of the fiscal year and you mentioned December could be the bottom. So is it based on the expectation that all clears up in December .
Because march tends to be seasonally weaker.
March is going to be above December I'm just.
Curious how to think through the trajectory and think through how much inventory is left in the channel.
Yeah sure Vivek.
Let me try to put some comments around it but I think given the nature of the events that are impacting that channel inventory.
Being macro and out of our.
Joel it's hard for us to pin it down precisely, but given that backdrop with COVID-19 lockdowns in China. The war in Ukraine high inflation and all the other global macroeconomic challenges, obviously, we do see the inventories higher than normal.
Specialty within the Android ecosystem.
So most of the companies that we're selling to there were planning ordering and producing for much higher growth than the industry is currently experiencing so it will take some time to bleed down that inventory, which is again, why we're bringing factory utilization down to respond.
Throughout our fiscal year, but.
We're not.
Putting an exact timeframe on it at this point.
Eric This is Bob I'll, just add a little color there I mean, clearly our customers are continuing to order from us and we are continuing to ship to them and we're making adjustments. When we said it's the Android ecosystem is whats bottoming in December it's coming back up in March but not to the levels that have been so we still have a ways to go there just to be clear.
And Bob just as a follow up kind of longer term.
The industry seems to have a tougher time needing but China Android customers like every few years that this inventory issue.
Comes up because the all.
All hope to gain a lot of share from each other at a lot of components and then in a bit of this inventory buildup.
Do you think you can do or are doing to help kind of diversify away from that dynamic.
Yes, I think first of all a little bit of a different view on this year is a little bit different from the perspective of.
Their end market I think we all expected at the beginning of the calendar year that the China market itself for <unk> with grow very nicely as well as their export market for <unk>, particularly in the southeast Asia as well as into eastern Europe in Europe .
As you well know things kind of changed with all the lockdowns within China that had probably been making loans, let alone people going out and buying phones, so that kind of shifted pretty significantly and then when you layer on top of that the war of Ukraine, which starts to impact some of our Chinese based customers along with someone like Samsung <unk> Europe as one of their larger market.
That's clearly what's going on there and a slowdown that we're seeing so.
A little bit different dynamics, but I.
What is important in that case.
We've got a good handle on this I don't think anybody was able to forecast the lasting impacts of Covid and the Lockdowns now with that said with the three business segments, we have.
Our goal if you look at how we.
<unk> laid out the growth rates for each one of these we will over time.
<unk> improved the diversification of our business outside of handsets in general and Thats, one of the things that you're setting out to do with the with what we've done is to accelerate our growth and accelerate the development of technologies to new products for other markets.
Some of the steps, we're taking but I think this year is a little bit different than what we've seen in the past out of our Chinese customers. Thank you.
Yes.
Okay.
And next we'll hear from Gary Mobley with Wells Fargo.
Hey, guys. Thanks for taking my question.
So so much of the discussion so far has focused on the mobile related business that may be if you could give us an update on your view on how IDP is trending from both the demand perspective and supply perspective.
Thanks, Gary this is phillippe.
<unk>.
<unk>.
It is doing well.
<unk> posted both quarter over quarter and year over year revenue growth.
It really is.
Somewhat market dependent I will say that in our defense.
Our segment.
We continue to see strength on the base station business, we do see some inventory buildup in that end market.
It's actually.
Kind of interesting you have got two dynamics that are playing in that market where in some cases, there's oversupply in other cases, they can't get enough product and so making that end market a little bit murkier, there, but in defense and power clearly, we're seeing a tailwind in those businesses.
Okay.
And.
And so I presume the resiliency that you're seeing in your September quarter.
Primarily relates to.
And iOS builder, a product cycle, but maybe.
Maybe the Android weakness is really manifesting and can't be disguised in the December quarter.
My question is what does that.
Android business bottomed out at as a percentage of revenue in the December quarter, just trying to think about the base off which it bounces.
Sure Let me, let me start and then maybe.
Bob or Eric can fill in some more of the details.
I think in terms of the December quarter, we would expect it to be below what we were talking about last quarter on the call. So certainly it's coming it's coming down from from what we've talked about is that as a low point there.
<unk> in December and that cuts across our Android based customers in.
In general.
And Eric Burke bought a few.
More color on the market itself.
Yes. This is Eric we've got.
It's an interesting dynamic because the team has done a great job actually capturing design wins in Android and we're launching a couple of major flagship phones beginning to ramp in the December quarter.
In the March and so we've got great content and share gains. They are the only question is units right and thats going to be about the rate and pace of this.
Inventory burn down which is pretty hard to predict.
So we've got a strong tailwind in terms of content and share gains, but just a massive headwind right now digesting the channel inventory.
Yeah.
Yes.
And moving on to Blayne Curtis of Barclays.
Hey, guys. Thanks, taking my questions.
<unk>.
Just for the September quarter, I know Youre going to guide part of the new segments, which we don't have but just any color because obviously you're talking about this weak second half of the fiscal year, but then youre growing in September I think in the.
Press release, you called out better.
And power, but I was wondering if there's any other moving pieces you can start to for September .
Thanks, Blayne and kind of touched a little bit, but we're ramping it to handset manufacturers. Both both here in the North America. That's driving good growth also as you pointed out our defense business is strong our power business is strong we got a few other smaller segments that are also doing well.
Yes.
And then I just wanted to ask you.
In terms of the obviously.
If that needs to be fully signed but just kind of curious as you take a longer term view youre starting to talk more about defense and just kind of curious if you can have any thoughts as to what that could mean for carbo.
Yes, Blayne this is phillippe.
We then partnered with the U S government for many years right I mean, you've seen the releases from shirt program, starting night, which is near 90 nanometer again again development. So for US. This partnership is kind of a natural cadence that we have in our business. When we look at the chest Act I think for us it expands.
The opportunities that we have.
I think the good news for US is that we have a lot of relationships already.
And we're looking at areas, where we can.
Basically expand kind of what we've done in the past with the chipset.
I'll add to that Blaine were also a trusted foundry I want to remind the group for filters Jan and high performance gas products that support every single.
Philip said so.
I think we're going to be able to participate in that.
It's yet to be define the actual process and the allocations and things like that but as we continue to learn but we've been very active in the chipset.
Thank you moving on to Toshi Hari with Goldman Sachs.
Hi, good afternoon. Thank you so much for taking the question I had a follow up question.
Inventory going forward.
You talked about.
Taking action here.
Can you remind us how you would characterize normal inventory on your balance sheet.
Whether it be in dollars or or days.
And where do you expect to be.
Exiting the calendar year or the fiscal year, giving given some of the actions that you talked about.
Yes sure.
In terms of inventory, we would normally think of it as turns so.
Ideally, we would be operating at approximately high threes to four turns.
We would consider more normal.
Obviously, where we're sitting today is off the mark in that.
Yes.
It is going to be reflected in the utilization and gross margin going forward. So.
In terms of where we expect to end the year in dollar terms right now is predicted to be down, but again I'm not going to.
Guide that far out on the balance sheet at this point.
Got it and then my second one is more of a clarification you talked about the second half being down 10% half over half.
Was that fiscal or calendar and was the down 10% for the entire company just for mobile.
As for our fiscal first and second half and Thats for the entire company.
Okay.
Thank you moving on to Edward Snyder of charter equity research.
Thanks, a lot a couple of questions if I could.
So you've got this inventory sitting out there and you've had it really since probably this time last year, when China slowed down phase.
Page seven.
Went out there what does that say about the obsolescence of inventory in general Theyre sitting a lot of finished goods I know you don't know how much they have got.
Given that it's not moving to China real quickly on <unk>.
To prevent larger write offs.
As we move from phase seven.
Number one and number two why why you're calling December the bottom.
It really.
A series of unfortunate events.
Unpredictable with the inventory issues of Nexobrid and she is negative recession issues.
It's kind of been a moving target and we expect them to bottom households, now almost a year and you haven't seen it and by all indications. If you look at the recession data and all the other metrics.
Stuff that doesn't have legs in close to bottom. So what gives you confidence that December is going to be your bottom on this.
Okay.
Yes, let me start with the inventory.
So obviously, we have a robust process. We go through every quarter right and if there was anything in excess or obsolete at quarter end, we would have taken the charge inside the quarter, but I mean to put that in a bit more context right.
If you set aside the charges related to the long term silicon supply agreement and look at these on a non-GAAP basis, we recorded double the normal inventory reserves on our mobile business. In Q1. So we are actively reviewing our inventory and taking action there from a reserve standpoint.
In terms of obsolescence.
Eric you want to comment on architectures, yeah, Yeah sure. So we've got a pretty good view of course.
The design win pipeline and to certain extent, we can control the rate and pace to the new platform of course, but also very importantly, we've got the exact same components.
Find an across the board across Android centers.
We don't have like custom one off parts that might get stranded or so for us we've got quite a bit of.
Opportunity continued designing in that inventory into handsets.
When the volume comes back.
And moving on to embrace <unk> srivastava with BMO.
Thanks, Andy I, just wanted to make sure I understood the charge with respect to the TSA.
The reason you are not including it in the <unk>.
Moving it from the pro forma is.
If it's something that you don't consider to be normal course of business should be they assume that there is a big chunk of Ken that is not addressable through the company anymore.
No I wouldn't make that conclusion.
You look at the charge itself right. There is a purchase commitment liability that stretch as far into the future right. The length of the contract and so that entire charge would be coming out in the quarter and thats certainly not reflective of our of our operating business. This quarter generally speaking.
The situations that led to the charge are also not indicative of our business right at the time in which we had.
Originally signed it there was a massive silicon shortage and today, we're seeing a significant drawdown in demand due to.
Very large impactful macroeconomic factors. So neither of those things are reflective of our of our business and managements view and we have excluded it for that reason.
The other point is.
Sorry, it's a multiyear agreement make sure I understand what Greg was saying its not.
Just this quarter that was the charge itself over multi years, we've looked at this.
Alright, and Thats why I asked over multiyear should we assume that the.
Z.
Chunk of Ham that has gone away, but I guess I understand it's a combination of supply demand and just a quick follow up I just want to make sure I got this right.
When you talked about channel inventory.
Channel inventory draw in the quarter. So is it trending continuing to trend higher and then are you revising down your <unk> units estimate because you had revised downcycle right I just wanted to know whether you said those two trends. Thank you.
Yes, yes. This is Eric.
Channel inventory did grow in the quarter.
Continue to see outlook for 500 units dropping.
Lower than we had thought before.
As grant said.
In the $6 50 to 675 range now looking closer to 625, others are seeing maybe 600 so.
It's not a crystal ball of course, yes, we continue to see general softness there.
Okay.
And next we'll hear from Rajiv Gill with Needham <unk> company.
Okay.
Yes. Thank you for taking my questions I appreciate it just two questions as well one on the on the gross margin you talked a little bit about this before but it implies margins are going to be kind of dropped to kind of 46% a little bit under that for December and March and if you go back you Havent got the scene.
That level of margin say in three or 433, and a half years at a much lower revenue level.
So wondering if you could maybe elaborate a little bit further in terms of how much the utilization youre dropping.
What what's happening with pricing as well any thoughts there would be helpful.
Yeah sure so.
In terms of the back half I mean to average into the 48 I would say probably 47 is maybe a better estimate to start with.
That will leave you a little bit of ahead of the 48% right and so theres some theres some error in that forecast.
Because we typically only provide a quarter guidance.
It's looking out longer but in terms of the.
Utilization if you look at what we had said last quarter. Our gross margin should have been approximately flat ticking up marginally and the delta between that and what I'm talking about today is almost entirely utilization base. So this is a conscious decision on our part to lower utilization in response to demand.
And adjust our inventory balances.
Got it and for my follow up when Youre, indicating down 11% in the second.
10%, sorry from the second fiscal half versus first half.
It implies that the the revenue over the next two quarters are going to be down closer to 30% on a year over year basis.
So just wondering if you could kind of give us defense in terms of the demand landscape I understand that the China Lockdowns have had a major impact.
But just wondering kind of any more insight in terms of.
What's happening there in term with respected demand overall demand.
Are there any signs that the Chinese economy is stabilizing any kind of stimulus.
Happening to to increase consumer spending there and just remind us again, what percentage of your revenue is coming from from the China market. Thank you.
Yeah sure so to put that into perspective, our China based customers were down approximately 45 plus percent on a year over year basis.
So that provides some context to the number right and thats all in relation to macroeconomic factors, we talked about with the war in Ukraine that Covid mitigation efforts, especially and I just mentioned around China is the largest producer and consumer of <unk>. So this had a obviously a sizable impact.
On our topline as we experienced the inventory correction, we expect in the second half of our fiscal year.
Yes. This is Eric.
Looking at it the way you laid it out there sort of exaggerate what's happening in the market because we are bleeding down inventories, we're under shipping to the market demand for our components significantly. During these next few quarters to get that channel inventory brought down.
Thank you harsh Kumar with Piper Sandler has our next question.
Yeah, Hey, guys quick question, Bob What do you think your exposure to China Oems and handset is.
Today as a percentage of revenue.
Let's say for the June quarter, and where do you think you'll end up when all this is done.
With respect to call it the inventory Flushing out.
And call it either the December or March you pick what you want to give me.
But what do you think you will bottom out and come to great exposure to Chinese guys.
Okay.
Yes, let me take that one I think.
More or less mid thirties, typically as a percentage of overall sales and we will probably bottom out around 20% of our overall sales.
Okay.
Very helpful. And then my other one was a simple one has have you guys started to throttle down the.
The gross margin utilization.
And are is there a plan to toggle down the utilization in the September quarter or is that something you plan exclusively in the December and the March quarter.
Yes, if you look at our guidance for the September quarter that does include the impact of us throttling down utilization.
Thank you next we'll hear from Chris Rolland with Susquehanna.
Hey, guys. Thanks for the question and this one's probably for grant.
And it represents stuff that you did I guess in the past, but also charges that you took in the future.
Is there any way to kind of break that up between the two and does this go where you're thinking there are cuts all the way to 2025 or is this just near term.
And any other details there in terms of pass versus future would be great.
Yes sure.
And while we save that for the 10-Q there'll be a lot of additional detail that will come out and they will provide all of the background.
The agreement as well as the breakout on the $110 million charge.
Okay I thought.
I was looking at something I don't know if it was the Q that we're just talking about $1 4 billion to 2025. So in terms of the charge that you did take what like what percent of those wafers or dollars of that $1 4 billion.
Would that represent.
I'd, rather not get into it until you have read the queue.
It will lay out its pretty explicit detail exactly the charge.
The one four would be the aggregate total amount of purchase commitment that we have the 110 is the amount of a particular agreement that we feel.
We couldnt live up to according to the existing terms, which we're negotiating now with a supplier.
Thank you next we'll hear from Harlan sur of Jpmorgan.
Hi, Good afternoon. Thanks for taking my question. This is just a follow on from.
Previous questions around utilization so.
<unk> declined in June it looks like Utilizations are declining in September I assume that it is also heading lower.
December given.
Sort of the rough fiscal year outlook would you guys consider.
December quarter to be the bottom of your manufacturing utilization.
We're not guiding it also utilization.
Complicated function of which products and which factories and our network are loaded with a given mix for our customers in any particular time period, it's not something that we typically provide any color on the I just want to point out with cycle times being what they are and what we're running in our Q4 would be for Q1 and all those kind of things so I don't.
I want to draw any false conclusions on how things are looking at it I think we'll leave it at the guidance. We gave you on the gross margin.
Okay. Thanks for that and then.
It looks like you guys have revised looking at you guys can comparing it to the queue. So on the purchase commitments exiting.
Our march quarter or over a multiyear period of time I think you guys had about $2 billion in purchase commitments of 900 million for this fiscal year obviously.
That's been revised lower you took the $110 million charge.
<unk>.
It looks like you guys revised the value in terms of timing I am just wondering was there also a renegotiation of the pricing on that committed supply.
On this.
Let me.
Yes, let me try to clarify on that point, that's for a multi year timeframe. So if you look at our cost of goods sold over multiple years.
That number it might help you put that number into perspective.
Okay.
Once these comparative less.
Okay. Our last Q1, we didn't issue the K, yes.
Yes.
For this quarter, we have an issued the Q yet so.
<unk> comparison.
Comparison.
Thank you moving on to Tim Arcuri with UBS.
Thanks, a lot I wanted to also ask about this charge so.
Just in the continuum or all of the agreements you have.
It seems relatively small and specific to one particular agreement yet.
Yet you were saying that it's because demand is broadly.
Lower so I'm wondering is the conclusion. They do that there is a design win that you thought you'd get that you didn't get it. That's why this particular agreement is being revised down I would think that is it because demand broadly are softer than you'd be revising multiple agree that's gone.
No great question. So let me cover that one really quickly it's all tied together so the weakness that we see in the second half.
US dropping utilization in our factories and this long term supply agreement are all attached to the same set of root causes which are the macroeconomic factors that we tightened before the contract itself is a multi year agreement and the charge represents the impact.
Impact.
All over that contract period. So it's all represented in that $110 million for the life of the agreement.
I also want to add that we are currently negotiating this.
Just keep that in mind as we covered this.
But again, it's the Android ecosystem weakness that we've been talking about.
Okay. Okay got it and then I guess just a quick question about that.
I mean, obviously, you had a 10% customer, but I wonder if you had a second 10% customer.
March quarter.
Sorry.
Yes. It is the best place I'd point, you to would be RK for our largest customers. We don't report them on a quarterly basis.
Thank you next we'll hear from <unk> <unk> with SMB CLEC Nikko Securities.
Thank you grant.
Pretty solid free cash flow number despite lower GAAP net.
Net income if you could just help us reconcile that and then the bigger question is maybe for Bob Bob given the inventory correction and also the macro uncertainty.
Should we think about your capex going forward I mean, I know these are longer term decisions, but I'm just curious if there's any change to your capex plans.
Yes sure.
Thank you for pointing out the free cash flow I think.
It highlights our discipline around cash flow and managing the business.
To generate free cash.
Obviously, there is some strength in the quarter.
And then some discipline around Capex right, which is.
Something that we've carried over the last.
A number of years actually looking forward I don't expect there to be any change I'll I'll start and then if Bob has anything to add on your second question, but going forward no expectations for change there. We're still looking for capex to be in line or lower this year than last year and generally speaking as we look out in time and it should be around five.
5% of sales.
So I think to follow on to answer your question longer term, we're not making any change in our capex.
We believe that.
This too shall fast the world will return to growth predicting when as everyone's pointed out will be a challenge, but from our macro view.
While also pointed out.
We continue to make great progress and I'll use some of our boss filters as an example, where we have made tremendous progress over the last three or four years to be able to double the capacity by actually reducing our die sizes and we continue to work on those things. So when you get a downturn like this we continue to work on those things will not stop any of that engineering work to improve.
Our productivity so over time, yes, we're going to be Eldon as Greg pointed out continue to expand our business, while running at a very low capex.
And what we historically one brand years ago.
Okay.
And moving on to Brett Simpson of Arete research.
Yes, thanks, very much Bob I wanted to ask a.
A bit more of a IDP and the growth that you see next few quarters.
You've been delivering double digit revenue growth after a difficult prior fiscal year and maybe within IDP just the defense opportunity that you see in front of you we've seen some big contracts being awarded to some of your customers like Raytheon and Lockheed Martin for things like Stingers in javelin and it.
It seems to be a big rebuild ammunition builds that has to happen in the defense part of the business. So to what extent are you seeing a benefit from this and any more details you can share with us on your outlook for defense and aerospace in particular that'd be that'd be very helpful. Thanks.
Thanks, Brian I'm going to delegate to fill up because he can't wait to talk about it.
Thanks, Brad I think I appreciate the question I think when you look at our debt our defense business.
There are a lot of real strong tailwind that we see occurring and that goes from our Gan process technologies as defense space moves in the radar segments from LD Moss began.
We're well positioned there.
We see it both in our foundry, we see it in our standard product business and defense as well.
This isn't just a story of what's happening in the political environment.
<unk> today. This is really a there is some long term drivers of growth in that business.
We're also doing Sam expansion, we're looking to.
Build this business, our defense business into an RF and analog play.
<unk> moved some of our power management technology into that market as well as our ship program, which does the advanced packaging that we have in in Texas, We're seeing a lot of.
Really good opportunities in that space. So I think that defense, where the increased semiconductor spend in the RF side, the Sam expansion that we're doing with.
With our ship program as well as what we're doing and some of the other analog segments.
It has a lot of positive.
Tell us right now.
Thank you and moving on to Vijay Rakesh with Mizuho.
Yes, hi, Thanks, guys. Just just quickly on the I know you mentioned the December quarter, but I'm just wondering as you look at that what would it be kind.
Kind of we had already hitting high RF and maintain high handset inventory, but it wouldn't be a challenged China handset guys, especially with the head of an iPhone Graham good kind of run through that inventory.
Yeah in aggregate that's true right, we're building for a seasonal ramp.
We are seeing strengthen our defense and power businesses as well as our bio business that Bob talked about earlier, so from a seasonal perspective, that's correct.
Got it and then.
There is also some of the domestic China auto suppliers seem to be gaining share on the <unk> handset side can you.
Is that a challenge.
Is that factoring into some of the outlook that you see.
Yes. This is Eric I'll take that.
It's not a significant challenge if you looking to those suppliers are gaining some traction we can say that they are discrete players in discrete functions.
The market for that is the extremely low tier phones, and we continue to have the playbook. We have we have everything announced series fill through switched VA packaging power management antenna tuning everything you need in one roof and we put those into very highly value added miniaturize modules, which aid.
And especially if you look at <unk> and sets I mean.
Really required that use this type of technology.
So, yes, some progress and some component areas, but nothing that is.
Particularly meaningful as it.
Now.
Thank you moving on to <unk> Malik with Citi.
Hi, Thank you for taking my question I have a question for Eric.
Alright.
On the way up.
Last year or two.
Strong demand.
The audit front on the attach rate to App sources. So it was a bit of a headwind for you guys because of supply constraints.
The rebound.
Should we expect.
You guys to kind of.
Benefits.
Just kind of.
There are headwinds.
In the past.
And then two apps processor or it doesn't really matter.
Yes interesting question I am not sure if there's any particular correlation other than to your point, when we were constrained to creating opportunities for others.
Good point, and we are certainly coming out of that that constrained environment, but at the end of the day, it's about who's got the best product right and.
It's a product by product handset by handset.
The decisions are being made we've got a very competitive product portfolio, a strong R&D pipeline and incredibly talented team working on these things.
We think we've got every reason to believe that.
Gains in share that we've been enjoying especially in Android.
Can you.
Thank you that's all I have.
Okay.
We want to thank everyone for their questions and we will conclude the conference at this time I will turn the conference back over to management for any additional or closing remarks.
Thank you for joining us today, we appreciate your interest and we look forward to senior at our upcoming Investor events. Thank you and have a good night.
That does conclude today's conference. Thank you for your participation you may now disconnect.
Okay.
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