Grant Brown: It was a business overall.
Gary Mobley: Okay. Thank you for that. And any change in view on the purchase commitments from your foundry and suppliers? Are you — do you anticipate utilizing all those commitments, or might we be looking at some additional write-downs there just given the dynamics?
Grant Brown: Yes. No change to our view. As you’ll remember, we restructured the agreement last quarter to better align our view of demand with supply and are working with that partner on an ongoing basis.
Operator: And our next question is from Edward Snyder with Charter Equity Research.
Edward Snyder: Several questions actually. First off, it sounds like the competitive environment, especially in China and maybe in Samsung is getting much more difficult. We’ve gotten lots of feedback of BackSan being a major competitor in switches, fielding high-band modules, competing in ultra-wideband, which wasn’t the case two years ago. And I know they’ve been out there slugging away for some time and now it seems like maybe the political environment in China is favoring them more. First off, are you seeing that? Are they becoming more aggressive? And number two, are the margin expectations for the Chinese anywhere close to what we come to normally expect from your normal western competitors? And if not, wouldn’t that affect ASP — is it affecting ASP or should we expect the ASPs to decline? And then I have follow-up, please.
Bob Bruggeworth: Hi Ed, thanks for the question. As far as the Chinese competitors, they’ve always been there. We’ve always seen them. I think what is overriding everything is the highly integrated modules that require premium filter performance, particularly for those that are being exported as well as for — within the China consumer market. So, we still feel very good about our position there with our integrated modules, whether it’s ultra high-band. What we’re doing, obviously, with mid-high as well as the work that we’ve done, improved significantly the performance and cost in our SAW filters for low pads. So we feel real good about how that’s positioned. And from a pricing perspective, we haven’t seen significant changes there, Ed. I think there are some areas we’re actually raising prices. In some areas, yes, there’s a little bit of competition, but we always have that. So, we haven’t really seen a change in the market.
Edward Snyder: Great. And then on that same note about increasing, it sounds like the MEMS business is — you’ve been working on MEMs forever and now they’re showing up. And the ASPs, I don’t know you’re looking to fuel them as tuners and we’ve tracked that business pretty closely from the time, but it sounds like you might be seeing a significant increase in ASPs to the extent that you want the — industry starts adopting MEMs. And maybe if I could flip that over, it sounds like since Samsung organize the handset division, now that you’re using open market modules, the actual — content in ASP for those modules seems to have dropped significantly, whether it be the mid-high band or the low band. And I’m just talking about the flagship, of course, because the master is a big step-up going to modules.
So I just try to get at my arms around what the overall, let’s say, year-over-year or year over two years ago, content picture looks like from the Koreans point of view in terms of redesigning that front end? And then what kind of trends in products like MEMs, do you have that are bucking that trend? Thanks.
Bob Bruggeworth: Yes. Thanks, Ed. I’ll take the MEMS and let Dave speak a little bit more about your comments about the standard products that we’ve been selling that are highly integrated — integrating in all the filters. As far as MEMs goes, we’re still very early on in that, Ed. As far as the RF MEMs go, as you know, we’ve been working on that through the acquisition of Cavendish Kinetics and really just beginning to roll that out. And yes, they are paying for that. We don’t expect that to go broadly and replace all of our antenna tuners. It gets you a DB or so. And people that are willing to pay for it will pay for that. That technology is — costs a little bit more per function. But you get — you pick up a significant improvement in the performance.
And then second, we’re also — our pressure sensor MEMs, we’re doing extremely well there. I commented in my opening comments about being in over 25 different vehicles. So people are starting to implement and track pads across — all of the major OEMs are now looking at it, we’re engaged with them. We’re just seeing that proliferate in the watches and various other devices. So, it’s very early on also in its life cycle. So, we feel real good about that. And I’ll let Dave speak a little bit about your question about some of the Korean manufacturers and what we’re seeing there.
Dave Fullwood: Yes. And while the architectures are similar, especially that particular customer that you mentioned, they’re still very demanding from a performance standpoint. So they have their requirements and you have to meet their requirements to win that business. So, we’re very focused on that. We work very closely with them on the advanced architectures years in advance to meet their needs. So, I wouldn’t think of it necessarily as a standard product. It’s still very demanding sockets.
Operator: And our next question is from Vivek Arya with Bank of America.
Vivek Arya: On the first one, gross margin and then how your balance sheet inventory affects that over time. So, you mentioned gross margin, I think, 41% for March, and June sales are flattish. I imagine gross margins are probably flattish also. And then I heard that you could recover about half of the 900 basis points of underutilization. So, it suggests gross margin somewhere in the mid-40s in the back half. But how do I align that with the inventory that you have on your balance sheet? Where do you see it going over time? And does that impact how the gross margin progression happens in the back half of the year?
Grant Brown: Hey Vivek. Thanks. This is Grant. I’ll take your question. Yes, you’ve got it in terms of gross margin, and the answer on inventory is rather simple, right? As that inventory begins to get sold and flow through cost of goods sold, it will drag with it those higher costs per unit associated with underutilization. So, I would expect the inventories to trend down over time, subject to normal seasonal ramps at large customers where we do have to build inventory in advance of those sales. So over time, it will come down, again, offset by some of those growth-oriented builds that we do at seasonal periods of the year.
Vivek Arya: Grant, the reason I asked the question is because I heard before on the call that you think channel inventory normalizes later in the calendar year. I’m hoping I got that right. So, if channel inventory doesn’t normalize until later, how will your balance sheet inventory start to get back to more normal levels?
Grant Brown: Yes. They’re not necessarily sequential. They can happen simultaneously depending on the level of demand. Although you’re correct, I think the first stage of that would be a reduction in the channel inventories, increase in order activity from our customers pulling through our inventory, along with, as I said, the offset and builds for large customer ramps, but they’re happening somewhat simultaneously, not perfectly sequentially.
Vivek Arya: Understood. And then for my second question, you mentioned content gains at your top two customers. Are these competitive wins, or is this new term? Like is your gain somebody else’s loss of content, or is it just new capabilities that customers are planning to add? And kind of related to that, just given the nature of these customers, do you expect to retain this content in the following years? Like, are these multiyear programs or the visibility is only there for the first year? Thank you.
Bob Bruggeworth: Part of the questions we can’t answer, but I will tell you that the — it is both content and share gains at our largest customers — our largest two customers.
Vivek Arya: Which can continue, Bob? So these are like multiyear decisions or…
Bob Bruggeworth: Can be and some are, some aren’t. So, we’ll see.
Operator: And our next question is from Blayne Curtis with Barclays.
Blayne Curtis: Maybe I just want to start, you’ve been kind of giving how large your largest customer or 10% customers are. Just trying to get a starting point for some of these moving pieces in December.
Grant Brown: Sure. So, our largest customer is a significant portion of ACG revenues, usually representing about two-thirds of that business, if not more, in certain periods. And then, our second largest customer, we haven’t commented on, but it generally hovers around that 10% mark. And certainly, with some of the growth we expect there could be more.
Blayne Curtis: Got you. And then I guess, following up on Vivek’s question, just sort of trying to gauge the magnitude of these content wins you’re speaking to. You talked about being able to double capacity at Richardson, I’m assuming you have given the pullback in Android, some excess capacity already. So, I’m just kind of curious the time frame in terms of doubling that capacity if you have that on your horizon.
Grant Brown: Sure. Let me talk to that. I think just at the highest level, there isn’t a BAW placement that we can’t fully support at any customer. Our Richardson facility is really the key takeaway there. We’ve driven some significant gains for the reasons I mentioned earlier in the prepared remarks. But the productivity gains, the overall die shrinks, the move from 6 to 8 inches, and then, of course, the successive generations of BAW filters that we’re running through that factory lend themselves to a significant increase in capacity. So, as we look at Farmers Branch, the need for that, I guess, over time has been somewhat of a safety valve in case any of those initiatives didn’t come to fruition. But given the success of the team there, we’re able to support all the BAW-based processing we need out of our Richardson facility.
Operator: Our next question is from Matt Ramsay with Cowen.
