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Edited Transcript of QRVO earnings conference call or presentation 31-Oct-19 9:00pm GMT

Q2 2020 Qorvo Inc Earnings Call

Greensboro Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Qorvo Inc earnings conference call or presentation Thursday, October 31, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas DeLieto

Qorvo, Inc. - VP of IR

* James L. Klein

Qorvo, Inc. - Corporate VP and President of Infrastructure & Defense Products

* Mark J. Murphy

Qorvo, Inc. - CFO

* Robert A. Bruggeworth

Qorvo, Inc. - President, CEO & Director

* Steven E. Creviston

Qorvo, Inc. - Corporate VP & President of Mobile Products

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Conference Call Participants

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* Ambrish Srivastava

BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst

* Christopher Caso

Raymond James & Associates, Inc., Research Division - Research Analyst

* Craig Matthew Hettenbach

Morgan Stanley, Research Division - VP

* Edward Francis Snyder

Charter Equity Research - MD and Principal Analyst

* Harsh V. Kumar

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Karl Fredrick Ackerman

Cowen and Company, LLC, Research Division - Director & Senior Research Analyst

* Rajvindra S. Gill

Needham & Company, LLC, Research Division - Senior Analyst

* Timothy Michael Arcuri

UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment

* Toshiya Hari

Goldman Sachs Group Inc., Research Division - MD

* William Chapman Peterson

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Qorvo, Inc. Second Quarter 2020 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Douglas DeLieto, Vice President of Investor Relations at Qorvo. Please go ahead.

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Douglas DeLieto, Qorvo, Inc. - VP of IR [2]

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Thanks very much. Hello, everybody, and welcome to Qorvo's Fiscal 2020 Second 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. 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 and 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.

During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our website at qorvo.com under Investors.

Sitting with me today are Bob Bruggeworth, President and CEO; Mark Murphy, Chief Financial Officer; James Klein, President of Qorvo's Infrastructure and Defense Products Group; Eric Creviston, President of Qorvo's Mobile Products Group; as well as other members of Qorvo's management team.

And with that, I'll hand the call over to Bob.

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Robert A. Bruggeworth, Qorvo, Inc. - President, CEO & Director [3]

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Thanks, Doug, and thank you, everyone, for joining us. Qorvo 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.

In Mobile Products, the trend toward integration is driving our industry and integration is all the more important with the introduction of 5G. Qorvo is securing significant content in 5G smartphones with our premium technologies and are highly integrated modules, enabling our customers to enhance system performance, overcome design challenges and bring their smartphones to market faster than ever.

In IDP, our markets are supported by secular trends, including the deployment of 5G as well as the proliferation of IoT, the adoption of WiFi 6 and the 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 standout as we expanded our participation in their mass market phones. Qorvo'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 4 largest customers in China, designing our low, mid-high and ultrahigh band solutions into their upcoming 5G smartphones. Our wins are broad-based and our solutions are mated with all the major chipset providers, including SLSI, Qualcomm, MediaTek and HiSilicon. In mobile WiFi applications, we are ramping our recently launched WiFi 6 FEMs in support of multiple leading China-based smartphone OEMs.

Turning to IDP. In our defense business, we are a lead participant in a U.S. government program to advance the state-of-the-art and RF integration packaging and test. We are also increasing our GaN opportunities with the U.S. primes, and we secured wins for our GaN amplifiers and integrated front-end modules for X-band and Ka band, defense radar and communications programs. In infrastructure, the ramp of 5G appears to be rolling out faster than the ramp of 4G. Activity is primarily in the sub-6 gigahertz frequencies, and Qorvo's GaN technology is increasingly the technology of choice. During the quarter, we secured new GaN design wins for sub-6 gigahertz, massive MIMO deployments, expected to span multiple years.

Among China-based carriers, it's been widely published that China Unicom and China Telecom will share cell sites to accelerate 5G deployments. This development will drive the need for broader band and higher power amplifiers, favoring Qorvo's GaN solutions. GaN enables operators to drive more power through smaller form factors and achieve better performance at higher frequencies.

In IoT, the ratification of WiFi 6 is a catalyst for the industry and design wins for Qorvo's WiFi 6 solutions are building. During the quarter, we launched the world's first WiFi 6 dual-band front-end module and the world's first WiFi 6 iFEM for CPE applications expanding our product portfolio for retail, enterprise and network operators.

In automotive, we commenced production shipments of our WiFi FEM supporting multiple automotive OEM platforms. And notably, our V2X co-existence BAW filters for 5.9 gigahertz were recently selected by a top automotive OEM for models shipping next calendar year.

With the continued expansion of IoT devices and smart home control, Qorvo is uniquely positioned to combine WiFi 6 iFEMs with advanced filtering and multi-protocol SoCs into highly integrated solutions reducing time to market and supporting smaller end devices. We expect many of today's gateway devices and voice assistance products to incorporate all of these technologies enabling interim control of the entire smart home.

In Programmable Power Management, Qorvo is at the forefront of multiple trends, including the trend towards brushless D.C. 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 to charge faster and operate longer between charges. On the design front, programmability enables our customers for lower product development costs and reduced time to market. We expect to leverage our scale to drive growth in power tools, light goods, industrial equipment and other product categories.

Finally, after the quarter closed, we completed the acquisition of Cavendish Kinetics, expanding our technical leadership in switching and tuning. We intend to optimize and scale our RF MEMS technology for smartphones, and ultimately, apply it to other growth segments.

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

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

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Mark J. Murphy, Qorvo, Inc. - CFO [4]

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Thanks, Bob, and good afternoon, everyone. Qorvo's 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. IDP 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 IDP revenue to recover through the year on increasing defense volumes, the ramp of WiFi 6 and broader 5G infrastructure customer demand. Qorvo's shipments to Huawei in the September quarter exceeded expectations, and sales to Huawei ended the quarter at approximately 5% of sales.

Non-GAAP gross margin in the September quarter is (sic) [was] 46.5% at the end of our guidance range with better-than-expected manufacturing costs, partially offset by higher inventory charges. Non-GAAP operating expenses were $167 million in line with our guidance. Non-GAAP net income in the September quarter was $181 million and diluted earnings per share was $1.52, $0.22 over the midpoint of our guidance.

September quarter cash flow from operations was $173 million and CapEx was $38 million, yielding free cash flow of $135 million. Qorvo's 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 of stock in the quarter, and our net leverage at quarter end stood at 0.4 net debt-to-EBITDA. After quarter end, we issued $350 million of 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, an RF MEMS company for $203 million, further strengthening our technology portfolio for switches, tuners and other product applications.

Turning to our outlook. In the third quarter of fiscal 2020, we expect revenue between $840 million and $860 million or $850 million at the midpoint, non-GAAP gross margin of approximately 48% and non-GAAP diluted earnings per share of $1.67 at the midpoint of our guidance. Our revenue outlook for the December quarter reflects continued robust mobile demand supported by an increase in 5G handset volumes and a return to sequential growth for IDP. For mobile, we expect December quarter sales to increase sequentially and return to growth year-over-year as 5G handset launches with our integrated solutions and a healthy channel support strong demand.

For IDP, we project December quarter sales to increase on a higher defense business volumes, the WiFi 6 ramp and broader 5G infrastructure customer demand. While Qorvo's current near-term outlook is strong and channels are healthy, trade and other factors contribute to challenges and uncertainty forecasting the outlook.

On gross margin, our December quarter guide of approximately 48%, is up 150 basis points sequentially on improved mix and lower inventory charges. Non-GAAP operating expenses are projected to increase in the back half of the fiscal year to between $175 million and $180 million per quarter due to operating costs of recent acquisitions and increased product investment costs related to growth in 5G.

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 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 the September quarter results and our December outlook show, Qorvo is operating, well as 5G, WiFi, defense and other markets strengthen. As a result of our market outlook, operating performance, free cash flow forecast and other factors, Qorvo's Board has authorized a new $1 billion share repurchase program.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Karl Ackerman with Cowen.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [2]

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I guess 2, if I may. First, on Huawei, 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 Huawei? And I have a follow-up.

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Mark J. Murphy, Qorvo, Inc. - CFO [3]

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Karl, this is Mark. So Huawei is somewhat consistent with what we had given guidance on the last call. So on the $52 million variance we had in second quarter to our guidance, roughly 1/5 or $10 million of it was related to Huawei. So Huawei was rather than what we thought would probably be 3% to 4% of sales, ended up being closer to 5% of sales.

As far as third quarter, we typically don't breakdown guide by customer, but on Huawei, what we said last quarter is, we expect Huawei to be less than 5% per quarter going forward, and we expect at this point for Huawei to run about what it ran in the second quarter, so close to 5%. We expect the second half to have Huawei at less than 5% of sales or around 5%. For the full year, we still project Huawei to be less than 10% of sales compared to 15% last year.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [4]

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That's helpful. I appreciate that, Mark. Shifting gears to China handsets. May you provide a bit more clarity on your opportunity to sell mid- and high-band PAD to Chinese handset OEMs? I guess are these contracts set in place today? 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 due to stronger demand. You're obviously levered well to the China handset OEMs, but do you think the strength will prove to be femoral due to trade? Or are there other factors we should consider?

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Steven E. Creviston, Qorvo, Inc. - Corporate VP & President of Mobile Products [5]

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This is Eric, I'll address that. We have seen a significant increase in design activity on 5G with our Chinese customers. And we're not seeing a particular increase in overall units planned for the December quarter or March or going forward, but they are aggressively shifting the portfolio from 4G to 5G. The vast majority of R&D resources are being put on 5G phones right now. And when you go to the 5G phones in China, across the board, they're going to fully integrate 4G solutions to support that. So you get an increased RF content due to the higher levels of integration and taking 4G to LTE Advanced Pro, and in addition, you get the additional content from, of course, new 5G bands and even higher than we had expected requirements for multi-carrier operation, and so forth to support nonstand-alone operation. So you put all that together and even on flattish units, you can see how the RF content can increase. In Qorvo, in particular, we're real pleased with our position there and leading supplier to that customer base. And clearly, when it comes to the integrated solutions mid-/high-band, in particular, we're getting the vast lion's share of that business.

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Operator [6]

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The next question will come from Harsh Kumar with Piper Jaffray.

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Harsh V. Kumar, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [7]

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Congratulations on very strong results. I guess today being Halloween, thanks for making it fun and not terrifying. Guys, so on a serious note, both your results and guide our significantly -- very significantly better than the Street. And we just wanted to kind of understand where is the outperformance coming from. Are you -- do you think you're taking share in the new models of 5G? Is it mostly China 5G 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.

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Robert A. Bruggeworth, Qorvo, Inc. - President, CEO & Director [8]

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Harsh, thanks for your commitments, and appreciate that. As I said in my opening comments, for the September quarter, it was really driven by our 3 largest customers. So as you know, our 3 largest customers are in 3 different continents, so we'll just leave it at that. And as we look forward in the guidance, and I think Eric's answer to Karl's question about what's going on in China in 5G is where -- I think it's 2 steps. One is the dollar content for 5G phones is significantly increased over 4G phones, and then also as we've talked over the last couple of calls, that we felt integration was key and being able to integrate the components that are needed for 5G phones, we do believe we're taking some share there from discrete players. So that's really what's going on. You're seeing the integration coming together in the 4G portion of a 5G phone plus for 5G and that's what's really driving it, it's the dollars per handset.

So -- and then second -- the second area is, we're seeing great growth at Samsung. In my opening comments, I talked about expanding into that mass tier phones as well. And we're driving a lot of business there and that's going to be up very nicely year-over-year as well.

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Harsh V. Kumar, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [9]

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And then for my follow up, you are within spitting distance of your high gross margins that you put up in December '18, 49.5%, I think, was the number. How do we think about gross margin line? Your commentary suggest gross margins will be up from here. And also what's interesting is when you went from, call it, $775 million in June to $807 million in September, your margins didn't go up that much, but when you go from September to December, they're jumping up quite a bit. Is that just integration and the new 5G products kicking in? Or is there something else also going on?

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Mark J. Murphy, Qorvo, Inc. - CFO [10]

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Yes. So Harsh, this is Mark. I'll provide a few different answers on this question around, first, the quarter sequential up second to third quarter up 150 basis points. Two things driving that. One, we had around $10 million worth of inventory charges, what I'll call, excess inventory charges in the second quarter. Three primary drivers: one, we had some excess parts on older generation handset products; two, we had a very isolated quality issue in the noncore market; and then three, we were unable to repurpose a portion of a customer-specific product. So as our practice, we took those charges and they're in our non-GAAP results.

Second, third quarter we're up 150 basis points. One is -- a major driver there is the inventory charge not repeating, and then secondly, we have a more favorable product mix second to third quarter. 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 decrease third to fourth quarter down 100 basis points or more, again, as we've seen in previous years, and this is really a function of seasonal mix and then just the effects of manufacturing costs and lower revenues.

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Operator [11]

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The next question will come from Ambrish Srivastava with BMO.

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [12]

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Mark, maybe we'll just continue the line of questioning with you. So based on the comments and what you have done in December, would March be a worse-than-seasonal quarter? Or you expect March to be seasonal? And then I had a follow up, please.

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Mark J. Murphy, Qorvo, Inc. - CFO [13]

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So Ambrish, I assume you're talking about the top line or...

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [14]

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Yes. Sorry, top line because you addressed the gross margin.

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Mark J. Murphy, Qorvo, Inc. - CFO [15]

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Yes. So it is a -- the year outlook has certainly improved for us from our view over a quarter ago, and I think you see that reflected, of course, in the September end results and December guide. The handset replacement cycle seems to stabilize. There is a clearer picture in China, and we've got increasing 5G demand. We've got WiFi 6 adoption starting. Our defense business is doing well. We've got growth in various IoT markets. There's great pull on our technologies as you heard Eric talk about.

And lastly, and this is an important point, the channels are healthy. So we feel good about the December guide. But as confident as we are in December, yes, there are some challenges and uncertainty as we go further out, right? And so we're taking a very disciplined view on expanding the business.

The rate and pace of 5G adoption will modulate. China trade, we have to admit remains a source of concern, and if there are supply constraints around that situation, could that (sic) [that could] bleed over into our customer demand. So right now, as we see it, we see second half revenue being roughly in line to down slightly versus what we did in the first half. And since you've got the December guide using that midpoint, that would be a March seasonal decline of around 15% sequentially.

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [16]

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Okay. That's very helpful. Yes -- sorry, go ahead.

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Mark J. Murphy, Qorvo, Inc. - CFO [17]

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And then just while I'm at it, I talked about gross margin down (sic) [goes down] 100 basis points or more, which is typical for our business to have a sequential decline. I've mentioned higher OpEx in the second half in my comments and the higher interest expense. Just at the segment level, won't go into much detail here, but mobile will be up sequentially in the third quarter and return to growth year-over-year, it'll be down the fourth quarter seasonally, sequentially and then up double digits year-over-year. And then on IDP, we'll see very strong growth sequentially in third quarter, again, WiFi, defense, broader infrastructure demand expected to strengthen through the year, and then we're hoping to see year-over-year growth return on IDP, but that's a tougher putt.

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Ambrish Srivastava, BMO Capital Markets Equity Research - MD of Semiconductor Research & Senior Research Analyst [18]

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Okay. I was going to say thanks for the transparency, that's a lot more. But really appreciate is as always. Quick one, since you have been on Board, Mark, you've been very focused on free cash flow. And I just wanted to tied it that back with buyback as well. So is there a target that you are willing to give for the year for free cash flow? And then the share buyback, is there a timing on that, please?

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Mark J. Murphy, Qorvo, Inc. - CFO [19]

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Yes. There is no timing on the buyback. And as far as just -- I'll make some comments historically, over the past 12 months, we've generated over $755 million of free cash flow. And over that time, we've repurchased $716 million, so well over 90% of our free cash flow we have repurchased shares. Over this time, we've also deployed over $500 million with the purchase of 2 companies. So we're certainly -- we're generating more free cash flow than we had been, and we're doing a good job of smartly investing inorganically and then returning sizable amounts to shareholders.

On the capital return, at this point given the market outlook, our operating performance, free cash flow forecast, other factors, we were out of capacity -- we didn't have much capacity left, so the Board approved a new $1 billion program, and I'm just not going to comment the rate and pace at this point other than saying that we'll continue to buyback shares.

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Operator [20]

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The next question will come from Toshiya Hari with Goldman Sachs.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [21]

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Congrats on the very strong results. Mark, you talked about your mobile business returning to year-over-year growth in the quarter. And this is obviously in the face of overall smartphone has been down, Huawei obviously becoming a significantly smaller customer on a year-over-year basis. And you guys, I think, losing a fairly sizable socket at a big customer. So I guess, the question is, what's driving the year-over-year growth? Is it all 5G? Is it -- you guys having better presence with Samsung and some of those mainstream cues? Is it something else? If you can talk about some of the targets on a year-over-year basis for the quarter, would be great. Then I have a follow-up.

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Mark J. Murphy, Qorvo, Inc. - CFO [22]

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I mean, it's broad customer engagement. China and 5G helps, but I really think it's a technology story for us, and I'll turn it over to Eric.

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Steven E. Creviston, Qorvo, Inc. - Corporate VP & President of Mobile Products [23]

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Yes. We've got, as you know, a very broad portfolio, just a growing list of opportunities across all of our customers, including our largest customer as well. From the main path integrated transparent modules, and so forth for both low-band and mid-/high-band and evermore increasing ultrahigh band activity, but also around tuning around the antenna elements, a lot more signals trying to come and go from those 2 antenna elements. And so I think that's just an opportunity that applies across the board. But really as we said, a standout really has to be Samsung, and I think we've traditionally been a very strong supply there. We got out of line or got of out of alignment with the product road map and their architectures for a cycle or 2, but 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 and enjoying building that business back, again.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [24]

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Great. And then on gross margins, Mark, you guys have done a great job over the past several quarters executing to margins. Can you remind us what some of the initiatives are in place today that hopefully get you to 50% over the medium term? And if you can kind of provide a bridge to 50% whatever time line is, that would be great. And then sort of related to that, can you give us an update on what your thoughts are on Farmers Branch from a timing perspective and kind of how that could potentially impact CapEx?

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Mark J. Murphy, Qorvo, Inc. - CFO [25]

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Yes. So Toshiya, we're obviously still working to achieve 50% or more. We believe it's an achievable target. And as I think Harsh mentioned, I'll remind you that we're at 49.5% about this time last year. And as far as -- I won't do a specific walk as there are just too many variables, but starting with our December guide as a baseline of 48%, we would expect volume growth for many of the reasons that Eric mentioned and James can talk about, we expect volume growth. And so we'd expect to see better utilization. I mean this year, the volumes had 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'll also have the consolidation of our fabs largely complete and most notably, Florida, will be closed and those products rolled into Greensboro, so those period cost effects will subside. Also over time, we would expect the mix at IDP to improve and be a larger part of Qorvo certainly compared to the December quarter guide this 48% baseline that I talked about. And then we're doing a lot of product portfolio management as well, so that'll improve that mix and that's the purpose of our select and high-tech investments.

Finally, we're operating I'd say as well as we ever have and 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 and price erosion that would be incremental benefit to gross margin.

As far as Farmers Branch, our current view given the outlook and efficiency gains that we've seen in Richardson, we won't need Farmers Branch at scale until late next calendar year or even the following year. As we've mentioned previously, and I think James and I mentioned this when we were in New York in September, due to these gains and the flexibility we have at Richardson and that's a great Fab, 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 yes, that allows us to be more capital and cost-efficient and it positions us well for the long term.

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Operator [26]

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The next question will come from Bill Peterson with JPMorgan.

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William Chapman Peterson, JP Morgan Chase & Co, Research Division - Analyst [27]

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Nice job on the results and guidance. My first question is in mobile. And I guess I was hoping that Eric can sort of level set us. You've talked about an RF TAM increasing next year by about $1 billion. It sounds like some of the 5G opportunities are coming in maybe a little bit sooner than expected as you talk about the December. But I'm trying to get a feel for how you think the RF TAM should grow next year and the shape of the ramp? Our assumption is, it'll be somewhat second half weighted. But -- and then within that how we should think about your business especially how it relates to the design wins you have, you talked about 4 large China makers, if you can help level set the market context as well as the shape of your business in 5G.

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Steven E. Creviston, Qorvo, Inc. - Corporate VP & President of Mobile Products [28]

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Sure. Thanks, Bill. Yes, we have been saying since our Analyst Day in 2018 we expected about $1 billion increase in the RF TAM in calendar '20 due to 5G ramping. And it's certainly looking like it's going to be conservatively greater than that much closer to $2 billion probably. 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 really rapid adoption and switch over of the handsets in China. It's clear from what we're seeing there that the 4G handsets that are going to be released are going to be dropping significantly in the very near term. Whether there's coverage or not, consumers are going to be buying 5G handsets, knowing that the network will be available at some time during that time they own that phone. So they're getting a real jump on it. Obviously, Samsung as well as is transitioning their portfolio rapidly to include 5G content. So that increases the number of 5G handsets well above the $200 million or so that we had originally modeled a couple years ago.

But then in addition to that as I said, it looks like across the board, all the 5G handsets so far without any -- going the other way, they're all going to fully integrated 4G systems inside them. And part of that is just to get the size. I mean 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 that integration turned for all the base content and 4G also has content.

And then the last adder is the requirements from China Mobile, and so forth for band coverage. And so having n79 in every phone, for example, the requirements for dual signaling, and so forth, these are now being put in every single 5G handsets. So that's coming together to increase the total TAM in CY '20 well above what we had modeled previously.

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William Chapman Peterson, JP Morgan Chase & Co, Research Division - Analyst [29]

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Okay. The -- moving to James, James' business has, obviously, seen really rapid growth that's accelerated here in the last few quarters, including the guide. I mean you talked over the potential return to year-on-year growth, but I guess, with Huawei significantly lower, what -- do you have an of sort of -- you mentioned you're broadening out your wireless infrastructure coverage customers, but how should we think the growth of that business as we look in the next year with March maybe returning to growth and then progressing to the next year, given that we have WiFi 6, defense and then additional customers for the infrastructure?

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James L. Klein, Qorvo, Inc. - Corporate VP and President of Infrastructure & Defense Products [30]

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Bill, this is James. Thanks for the question. The restrictions of Huawei have definitely limited our ability to grow in the near term. However, as Mark said, we hope to return to year-over-year growth in Q4. We're going to take a good step in that direction in Q3 with double-digit quarter-over-quarter growth. Longer-term, we remain really positive about the underlying trends on the markets we serve, and that includes the adoption of massive MIMO and 5G, the adoption of GaN in several different markets, and the WiFi 6 coming on and IoT in both automotive and in the connected home. And the addition of power management has also improved our long-term outlook. And in fact, that business grew 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 combined, my expectation is that we will return back into double-digit growth mode as we get down into out years.

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Operator [31]

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The next question will come from Chris Caso with Raymond James.

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Christopher Caso, Raymond James & Associates, Inc., Research Division - Research Analyst [32]

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First question, is that there's been some lingering concerns since the trade restrictions were put in place that the Chinese OEMs and Huawei, in particular, would backslide into 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 can you address that concern? And if you can also address if it's feasible without highly integrated components, do you think that even if they chose to deal with that, that it would be possible to do a 5G phone even for domestic sub-6 in China without these highly integrated components?

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Steven E. Creviston, Qorvo, Inc. - Corporate VP & President of Mobile Products [33]

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This is Eric. We have seen, of course, customers experimenting with full discrete solutions and even trying to go as far as to building handsets without any U.S. semiconductor content, for example. Those experiments are out there. You'll see them in the field. I think that experiment was enough to really fully validate the fact that you can't make a competitive handset without using U.S. content. And further, really you can't build a compelling handset without going to integration because the solution size is so large and power-hungry and poor performing that it really integrated the selling factor for the handset. So experiments happen, it confirms the thesis and generally people are returning to integration in full force.

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Christopher Caso, Raymond James & Associates, Inc., Research Division - Research Analyst [34]

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As a follow-up to that, perhaps if you could clarify the restrictions on what you can and can't ship to Huawei both in the handset and the base station side, is it only -- is the restriction only on 5G? Does it apply to 4G also? And actually, one of the experiments you referred to that we've seen did use fully integrated 4G with a discrete 5G solution, so perhaps is that suggestive of you can't ship the 5G solution?

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Robert A. Bruggeworth, Qorvo, Inc. - President, CEO & Director [35]

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Chris, this is Bob. And I think we addressed this in the last call as best we could. And I wish I could get into a lot of details. It's quite complicated. We spent a lot of time making sure that we comply with all of the legal requirements that we can't ship to Huawei given the export restrictions. The restrictions are such that we are able to ship components that go into their phones. We have shipped 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. I think the important thing is we are able to ship to them. We are fully in compliance with the export restrictions that are required to support them.

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Operator [36]

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The next question will come from Craig Hettenbach with Morgan Stanley.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [37]

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In the IDP business, I know you've talked a lot about kind of aerospace, defense and then infrastructure. Can you touch on just kind of the broad-based IoT business kind of the scope of that business today and opportunities that you're seeing?

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James L. Klein, Qorvo, Inc. - Corporate VP and President of Infrastructure & Defense Products [38]

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Yes. This is James. So the market in general is still maturing. Several different standards have been competing WiFi, ZigBee, BLE, Thread and NB IoT. We're positioned pretty well across all of those different aspects of the market. Our strategy has effectively been to try to supply in the connected home and in the automotive space. Our automotive business, although is small, is growing at a very nice clip, and in fact, grew well into the double-digit range year-over-year in this current quarter. WiFi has been a bit weak over the last couple of quarters as we have reported, but we are showing signs of recovery. The WiFi 6 standard released in October and it's fueled our second quarter in a row of very strong design wins, and we think that's a great sign that, that business will return back into a growth mode fairly soon.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [39]

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Got it. And just a follow-up question for Mark. Appreciate the color on just some of the OpEx with the RF MEMS acquisition. Can you share just from a revenue perspective how that settles out?

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Mark J. Murphy, Qorvo, Inc. - CFO [40]

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Yes. So I'll give an update Craig on both -- so both our acquisitions. So on the recent RF MEMS business that's not financially accretive in fiscal '20 and that's reflected in our guide. So it's an increase in OpEx and there's no income accretion there. On the Programmable Power Management business, I think it was last call, I said the $50 million of revenue in our fiscal '20 and slightly accretive. As James mentioned, that's very much on track. It's delivered on expectations in the September quarter and our guide reflects the previous guidance I gave around that business.

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Operator [41]

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The next question will come from Edward Snyder with Charter Equity Research.

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Edward Francis Snyder, Charter Equity Research - MD and Principal Analyst [42]

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Eric, you talked a lot about the move to -- rapid move to phase 6 in China now, I know the experimental launch in the high end, and now it sounds like they're going in mass to rollout 5G, which I guess, is to be very expected. But that poses a problem here because if the handset volumes are growing in mass to this and you have to buy these modules from Skyworks, Avago or yourselves, how does that work with Huawei? I mean are these components not covered by the band as Huawei being left out of the shift? Or have they found a substitute for these products?

And then James, if I could, you're guiding up next quarter led by defense and you called out GaN and X-band. Are you looking at production now with some of these large systems like [Spy 60 or GATR]? Or is it more development work? And if it's the former, can you give some kind of color on the run? I know this stuff has been in development for many years now, but some of these are very large systems with big unit volumes in the long term, just trying to get a feel for how defense will play out over the next -- well, long term actually, next 12 months or so? And then I have a follow up.

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Steven E. Creviston, Qorvo, Inc. - Corporate VP & President of Mobile Products [43]

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So to your first question about Huawei in the highly integrated modules, while staying completely consistent with export regulations, we're able to ship the highly integrated modules across to all frequency bands to Huawei's handset division.

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James L. Klein, Qorvo, Inc. - Corporate VP and President of Infrastructure & Defense Products [44]

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Yes. And for defense, so the defense business has been solid growth engine for us. And I think it's really going to have a nice backup and fuel the recovery we talked about earlier. GaN related -- there are numerous production programs for GaN. We announced 1 this quarter, that was the arrangement with Lockheed Martin on Q-53 and again, you can read what that system is. But there are numerous other production programs using our GaN capability.

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Edward Francis Snyder, Charter Equity Research - MD and Principal Analyst [45]

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Okay. And then Eric, I come back, so you talked about ultrahigh band wins, which we kind of see dabbling with that about last year, so I know it's showing up here. But then also you talked about higher content 5G than you had expected. Is there something being added to the 5G section or you talking more of the halo effect of 5G on 4G, for example, in the tuners, antenna plexers that sort of thing? So I'm just getting my arms around given the phones we're seeing in the bands and the tear downs, what additional actually pure 5G content could you be talking about when you say that 5G content is higher than anticipated?

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Steven E. Creviston, Qorvo, Inc. - Corporate VP & President of Mobile Products [46]

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Yes. Great question, Ed. The halo effect with 4G was largely contemplated. I think that's on track for the most part. Additional tuning is definitely higher than we had expected. But I think the primary new content in 5G proper are brands like, as I mentioned as an example, n79 being required across all China handsets, not just China Mobile, for example. The requirements for the dual signaling for nonstand-alone operations that you have to transfer on 4G and 5G at the same time. Once that was fully incorporated into the architectures, it turned out to take more switching, more complex RF than was expected. And by the way, we don't see any of this going away. Even if China immediately went to stand-alone 5G, all the architectures we're seeing are going to keep that dual signaling mode. They'll use that 4G carrier to transmit even more data on. So we don't think that this is just sort of a onetime blip in content. It's going to continue to ratchet up from here going forward.

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Operator [47]

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The next question will come from Timothy Arcuri with UBS.

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Timothy Michael Arcuri, UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment [48]

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Mark, I guess, my first question, can you give us a sense of your largest customer, how big they were maybe in the quarter? And maybe not, if you don't give us numbers, can you talk about like year-over-year how much they grew or didn't grow?

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Mark J. Murphy, Qorvo, Inc. - CFO [49]

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No. Tim, we had one 10% customer in the quarter, and I can't give details about that specific customer's growth.

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Timothy Michael Arcuri, UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment [50]

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Okay. Awesome. And then, do you have any sense, maybe James, about if you have any forecast that you're sort of thinking about for the global 5G handset builds for mostly, obviously, sub-6 next year, the numbers all over the math, there's somewhere at $175 million and some people talk about $300 million. Can you help us think about what sort of a global TAM will be so we can think about how big things could actually be for you next year in 5G?

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Steven E. Creviston, Qorvo, Inc. - Corporate VP & President of Mobile Products [51]

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I'll [answer] the guide, and then let James chime in on the infrastructure side. I mentioned earlier that we had baselined around a -- about $1 billion adder in the TAM for the calendar year '20 and that was roughly 200 million handsets of $5. So we were projecting that back in 2018 even or earlier. And so what we're seeing now is maybe not quite 300 million, but approaching 300 million in terms of units likely, and the content being a little above $5 as well $6, $7 worth of additional content. So that's -- we're, as we said much closer to $2 billion now based on customer forecast and the architectures we see ramping next year.

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James L. Klein, Qorvo, Inc. - Corporate VP and President of Infrastructure & Defense Products [52]

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On the base station said, we see about $1 billion of TAM being added and it's all associated with 5G add-ons. And most of that is attributed to the adoption of massive MIMO. We expect over the next several years somewhere in the range of 30% of the base station deployed will use massive MIMO technology. And as I've talked about before, that's about a 10x content gain for us in each one of those base stations.

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Operator [53]

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The next question will come from Raji Gill with Needham & Company.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [54]

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And I echo my congratulations. You mentioned in terms of the portfolio of the Chinese handset customers moving to 5G from 4G. But (inaudible) fairly seen, I guess, a jump in the actual units rather the RF contents going up. To the earlier question about the TAM, I'm just wondering if this -- the replacement cycle that you're expecting to see in 5G will actually also result in higher incremental units for the overall Chinese handset market? And how do we think about that? When do we expect maybe like unit growth to start to kind of increase as a result of the transition to 5G?

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Steven E. Creviston, Qorvo, Inc. - Corporate VP & President of Mobile Products [55]

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So we're not modeling an increase in unit growth going forward. We did see replacement cycles kind of moving out, that was part of a bit of a drag over the last year. They've stabilized now for the time being at least. We are modeling them necessarily kicking back. If units go up, it means replacement cycles have to get -- have got to be shortening, and we're not modeling that over all.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [56]

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So this is just primarily going to be driven by purely RF content gains to support 4G, but also the new bands?

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Steven E. Creviston, Qorvo, Inc. - Corporate VP & President of Mobile Products [57]

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Yes. That's right, exactly. So total number of handsets more than being 5G versus 4G without more units and then 5G having higher content.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [58]

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Higher content. Got it. Okay. And then, for my follow-up question, I guess, it is to the earlier question about the risk of Huawei and other Chinese handset OEMs using non-U. S. filter companies. You had mentioned that there's some experiments out there, but the results are that there's a push back to an integrated solution. Knowing the fact that these RF designs are pretty much have already been locked in for the funds next year, if we look at 2021, is there potential risk that these OEMs will move to more of a FEM architecture ID without integrated power amplifier versus the FEM ID architecture?

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Robert A. Bruggeworth, Qorvo, Inc. - President, CEO & Director [59]

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Number one, I want to make sure we understand that in China, let's understand the export phones as well. So for anything they're exporting, 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 all know, the RF does influence dropped calls, battery life things that we as consumers recognize and 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 Huawei, and 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 tarnish their brand. The other 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 their direction at least in the architectures we're seeing are still with the integrated products that we've been talking about.

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Operator [60]

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

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Robert A. Bruggeworth, Qorvo, Inc. - President, CEO & Director [61]

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

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Operator [62]

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Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect your lines.