Qorvo, Inc. (NASDAQ:QRVO) Q3 2023 Earnings Call Transcript

Qorvo, Inc. (NASDAQ:QRVO) Q3 2023 Earnings Call Transcript February 1, 2023

Operator: Greetings, and welcome to the Qorvo, Inc. Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Douglas DeLieto, Vice President of Investor Relations. Thank you. You may begin.

Douglas DeLieto: Thanks very much. Hello, everyone, and welcome to Qorvo’s Fiscal 2023 Third 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 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 any — or other items that may obscure trends in our underlying performance.

During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our Investor Relations website at ir.qorvo.com under Financial Releases. Joining us today are Bob Bruggeworth, President and CEO; and Grant Brown, Chief Financial Officer; Dave Fullwood, Senior Vice President of Sales and Marketing and other members of Qorvo’s management team. And with that, I’ll turn the call over to Bob.

Bob Bruggeworth: Thanks, Doug, and welcome, everyone, to our call. Qorvo delivered fiscal third quarter revenue and EPS above the midpoint of our outlook provided during our November 2nd earnings call. In High-Performance Analog, quarterly revenue reflected year-over-year growth in defense, broadband and power. Our power business posted a strong quarter with robust design activity for our silicon carbide power devices. Offsetting this were power management markets with consumer exposure in infrastructure where customers are working down elevated inventory levels. In our Connectivity & Sensors Group, the quarter reflected lower end market demand and channel inventory consumption for Wi-Fi products partially offset by strength in automotive.

Design activity was strong across customers and products, including ultra-wideband, matter and sensors. Use cases continue to proliferate their benefit from precision location, indoor navigation, seamless connectivity and enhanced human machine interfaces. Lastly, in Advanced Cellular, Qorvo participated broadly across customers’ portfolios. The macro environment weighed on overall smartphone volumes across customers, and revenue reflected channel inventory consumption within the Android ecosystem. Design activity continued to be strong across customers and product categories and supports year-over-year content gains at our largest customers. Now, let’s turn to some quarterly highlights. In High-Performance Analog, Qorvo began sampling a radar power solution that combines a high-voltage power conversion PMIC and silicon carbide power switches to control a GaN RF power amplifier.

The solution reduces the size by up to 30% in D&A radar systems while expanding Qorvo’s content opportunity. We also expanded our SHIP state-of-the-art RF packaging contract with the U.S. government to develop multichip modules that combine digital optical devices with Qorvo’s mixed-signal RF. In aerospace, we delivered a multichip solution that includes Qorvo’s high-frequency BAW filter as well as a GaN PA for low orbit satellites and other applications. The solution supports cellular satellite links, and we have secured new designs. The opportunity for Qorvo is notable given the trend in defense and aerospace applications of one to many. That means rather than one jet, there will also be many drones; rather than one geo-satellite, there will also be many LEO satellites.

At the same time, new capabilities are being added to existing platforms that require increased semiconductor content and higher density and more advanced packaging, all areas where Qorvo is strong and is investing to advance the technology. In cellular infrastructure, we commenced preproduction shipments of our first integrated PA modules, or PAMs, to a Tier 1 European infrastructure OEM for 5G massive-MIMO base stations. We also began sampling our next-generation PAM, which delivers market-leading efficiency for 5G massive-MIMO installations to the leading European infrastructure OEMs. For broadband infrastructure applications, we sampled a CATV power doubler amplifier that maintains linearity and extends bandwidth to enable higher throughput DOCSIS 4.0 capabilities with industry-leading power efficiency.

Deployments of DOCSIS 4.0 are scheduled to begin this year and Qorvo is very well positioned as the industry leader. In CSG, we expanded our Wi-Fi content at a Korean-based smartphone OEM to include Wi-Fi 6E and Wi-Fi 7 designs and we ramped Wi-Fi 7 FEMs for access points and routers for our smart home ecosystem customer. We also commenced sampling 5 gigahertz and 6 gigahertz filters. These filters leverage Qorvo’s next-generation BAW process and enable worldwide Wi-Fi 7 frequency coverage. There is increase in customer interest related to multi-link operation, which is a key attribute of Wi-Fi 7 and enables higher throughput and lower latency. Lastly, we began volume shipments of MEMS-based sensors, enabling an enhanced HMI experience and true wireless stereo earbuds.

Qorvo sensors were selected to replace legacy capacitive touch sensor technology. Design activity for sensors continues to be strong across markets, including automotive. We are working with leading automotive Tier 1s and have secured automotive smart interior design wins in more than 25 vehicles. In Advanced Cellular, we secured multiple design wins across Android OEMs in support of 2023 devices. During the quarter, we commenced the production ramp of multiple components for the leading Korea-based smartphone OEM’s flagship platform. We have increased our content significantly year-over-year. We are broadly serving this customer across our portfolio and continue to support the migration of their mass market phones to integrated 5G solutions.

At a U.S.-based Android OEM, we were selected to supply multiple solutions, including ultra-wideband, antenna tuning and BAW-based antennaplexing in support of their 2023 smartphone launches. Lastly, Qorvo was recognized by multiple customers. We were presented with Honor’s 2022 Golden Supplier Award, and we received quality awards from Vivo for discrete switches and amplifiers and highly integrated solutions. Before handing the call off to Grant, I want to make a few high-level comments to frame our outlook, both in the near term and further out. At our largest two customers, we are very confident in our ability to grow year-over-year content, and that includes this year. In 2023, we expect growth in BAW-based content as well as other content growth.

Equally important, we enjoy a range of opportunities across all of our customers in the future years. Qorvo is supporting the highest volume flagship phones while supplying integrated 5G solutions as mass market portfolios migrate to 5G. Fewer than half of the Android devices were 5G in 2022 and the migration of 5G is expected to extend over many years. We are unique in Advanced Cellular in the breadth of our customer exposure and in the depth of our product and technology offerings. Our long-term view of ACG continues to be mid- to high-single-digit growth driven by multiyear content gains. In particular, we see expanding market for our BAW technology. Productivity gains in our Richardson, Texas fab have enabled a doubling of our BAW output.

We intend to put that to good use as we continue to capture designs and grow our BAW content in flagship phones. We expect the long-term growth rate of HPA and Connectivity and Sensors to outpace Advanced Cellular. Our view for HPA is double-digit growth. And in CSG, we expect growth in the strong double digits. Key growth areas supported by recent wins with silicon carbide devices in EVs and solar inverters, MEMS sensors and notebook track pads and automotive smart interiors and ultra wideband in automotive and Android devices. These and other investment businesses are securing new designs that extend our opportunity in large growth markets. In the near term, the team is performing exceptionally well while navigating extraordinary events. Factory loadings have been reduced, and we are bringing down channel inventories.

We are also actively managing the expense line while sharpening our focus in support of targeted growth. We are working to accelerate revenue related to our Omnia BAW-based biosensors by exploring options for the associated Omnia test hardware, meaning the Omnia desktop test unit and cartridges that contain our BAW biosensors. The technology has been proven commercially, and we are engaged with a diverse set of customers. Qorvo remains at the forefront of connectivity, sustainability and electrification. We enjoy exceptional customer relationships, and we are a key enabler of future architectures. These architectures continue to favor higher levels of performance, integration and functional density to deliver the successive improvements in each market’s next-generation products.

Our customers value Qorvo’s best-in-class products and technologies, and we are securing broad-based design wins in high-growth markets. As volumes recover, we are positioned to deliver long-term growth and robust free cash flow. And with that, I’ll hand the call off to Grant.

Grant Brown: Thanks, Bob, and good afternoon, everyone. As a reminder, our references today will be to our three operating segments: High-Performance Analog, or HPA; Connectivity & Sensors Group, or CSG; and Advanced Cellular Group, or ACG. In our upcoming 10-Q, we will provide historical financial information that reflects these operating segments. Additional historical information will be made available in our fiscal 2023 10-K to be filed this May. I’ll now turn to our latest quarterly results. Revenue for the third quarter of fiscal 2023 was $743 million, $18 million above the midpoint of our guidance. We enjoyed relatively strong performance in automotive, broadband, defense and silicon carbide power devices. However, elevated channel inventories and weak end market demand pressured revenue and order activity across all three operating segments.

Looking at each operating segment individually. HPA revenue of $155 million in the quarter compares to revenue of $182 million in the same quarter last year. In HPA, growth in areas such as defense and silicon carbide power devices was offset by inventory consumption in the 5G base station market and softness in consumer-facing markets like SSDs and battery-powered tools. CSG revenue of $97 million in the quarter compares to revenue of $158 million in the same quarter last year. This reflects weakness in end market demand for Wi-Fi products and channel inventory consumption. Finally, ACG revenue of $491 million compares to revenue of $775 million in the same quarter last year. This reflects lower smartphone unit volumes and channel inventory digestion within the Android ecosystem.

On a non-GAAP basis, gross margin in the quarter was 40.9%. Gross margin fell sequentially due to lower factory utilization and higher inventory-related charges including a quality issue at a supplier. Non-GAAP operating expenses in the quarter were $206 million, $90 million lower than our guidance and down $8 million versus last year due to OpEx discipline, the timing of product development spend and lower employee-related expenses including incentive-based compensation. In total, non-GAAP operating income in the quarter was $99 million or 13% of sales. Breaking out operating margin by each segment. ACG was 20%, HPA was 19% and CSG was negative 32%. Non-GAAP net income was $77 million, representing diluted earnings per share of $0.75, which was at the high end of our guidance range.

Free cash flow was $203 million. Capital expenditures were $34 million, and we repurchased approximately $200 million worth of shares during the quarter. The rate and pace of our repurchases is based on our long-term outlook, low leverage, alternative uses of cash and other factors. Turning to the balance sheet. As of quarter end, we had approximately $2 billion of debt outstanding with no near-term maturities and $919 million of cash and equivalents. Our net inventory balance ending the quarter was up slightly at $857 million. Now turning to our current quarter outlook. We expect quarterly revenue between $600 million and $640 million, non-GAAP gross margin of approximately 41% and non-GAAP diluted earnings per share in the range of $0.10 to $0.15.

Our current view reflects ongoing demand weakness across end markets as well as our expectations for further consumption of channel inventory. We continue to expect sales to Android smartphone customers will increase sequentially in the March quarter. For historical reference, the March quarter revenue in fiscal €˜22 for each of ACG, HPA and CSG was $777 million, $211 million and $179 million, respectively. At the volume levels assumed in our guidance, we expect Qorvo’s inventory position will decline in March, but remain elevated. In terms of channel inventory, the picture has begun to improve. For example, total channel inventory for our components in the Android ecosystem was reduced by over 20% in the December quarter. We expect continued improvement this quarter and anticipate the channel to normalize later this calendar year.

We are actively working with customers to consume channel inventories. And in doing so, we expect production levels to remain compressed. This will lead to continuing underutilization charges related to inventories which will weigh on gross margin during fiscal Q4 and carry into next fiscal year. We project non-GAAP operating expenses in the March quarter will be up approximately $20 million sequentially due to the timing of product development spend, seasonal payroll effects and other employee-related expenses. Below the operating income line, non-operating expense will be approximately $15 million, reflecting interest paid on our fixed rate debt, offset by interest income earned on our cash balances, FX gains or losses, along with other items.

Our non-GAAP tax rate for fiscal Q4 is expected to be consistent with fiscal Q3. The rate remains elevated due to the absolute level and geographic mix of pretax profit including FX-related gains within high tax jurisdictions as well as the impact of the U.S. tax law change related to R&D capitalization among other factors. With regards to operations, I want to highlight the outstanding progress our teams have made in terms of productivity gains. We continue to make improvements in product development, filter design, process engineering, factory planning, manufacturing efficiency and many other areas. Today, these gains have significantly increased our effective BAW capacity. And as Bob indicated, the progress continues. And looking forward, we can double our BAW capacity in the Richardson facility versus our current maximum theoretical thresholds today.

Increasing a throughput of an existing asset not only reduces cost, but can reduce complexity within the factory network as production is consolidated. The BAW productivity gains in our Richardson facility allow us to achieve our long-term growth goals across all of our customers, including the most demanding BAW-based placements. As a result, we have decided to sell our Farmers Branch facility. We’re in the early stages of marketing the site and initial interest has been encouraging. For reference, the site has been incurring approximately $12 million of non-GAAP COGS per year. We are also evaluating strategic alternatives for our biotechnology business to accelerate and maximize its potential value. The Omnia platform, which is based on our BAW sensor technology, has demonstrated significant promise as a diagnostic testing solution.

The biotechnology unit currently resides in our CSG segment. While the revenue impact from a transaction would be negligible, it would reduce total expenses by approximately $32 million per year. At this stage, it’s too early to comment on the eventual outcome, timing or potential valuation. These actions will sharpen our focus and resources on the many growth drivers across our three operating segments. Our long-term outlook is positive, and we’re well-positioned to weather current macroeconomic challenges. Product performance requirements continue to increase in our end markets, sustainability initiatives underscore the increasing global reliance on power efficiency, and connectivity and electrification trends are accelerating worldwide. We have diversified our opportunities across markets, customers and product categories while maintaining our commitment to technology leadership, portfolio management, productivity gains and reduced capital intensity.

This has supported strong financial performance during a challenging environment and has positioned us for long-term increasingly diversified growth. At this time, please open the line for questions. Thank you.

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Q&A Session

Operator: And our first question is from Toshiya Hari with Goldman Sachs.

Toshiya Hari: You gave really good color on channel inventory, but I was hoping to ask a follow-up there. So, channel inventory as it relates to Android, I think you said, was down more than 20% in the December quarter. I guess, how do you see that evolving over the next couple of quarters? And I guess, more importantly, on the non-Android side or the iOS side, what’s your current assessment of channel inventory and how that plays out over the coming quarters?

Dave Fullwood: Yes. This is Dave. I’ll answer that one. So first, we’re not going to comment on the iOS side of the inventories. And Grant already mentioned the Android. I think when we look at the overall channel inventories and when we refer to channel inventories, we’re talking about all of our components that are out, whether they’re in our distributors or at the end customers. And so, on balance, overall, it’s down about 20% across the entire business, not just within the Android ecosystem. If you look just within our distribution channel, it’s down about a third in the December quarter. But as Grant mentioned, we still have a ways to go in there. So we expect to continue reducing that across this quarter and then into the early part of FY24.

Toshiya Hari: Got it. And then, as my follow-up on gross margins, you’re guiding the March quarter to, I guess, 40, 41%, which is essentially flat sequentially. Can you speak to where your utilization rates are today? And as you continue to work down inventory and the overall industry continues to work down inventory, what cadence should we be thinking about for the rest of the calendar year? Do you think you can exit kind of in the high-40s or even close to 50% calendar €˜23, or is that a little too optimistic at this point? Thank you.

Bob Bruggeworth: Sure. Toshiya, thanks for the question. I’ll touch on margins here, and I’ll try to cover all of it, both in Q3 and then looking beyond that into fiscal €˜24. For fiscal €˜23, the primary driver of gross margin continued to be under utilization and inventory-related charges. In Q3, it accounted for about 920 basis points of headwind or in that neighborhood, and it’s expected to remain there in the March quarter, hence the flat gross margin guidance. Inflation across direct costs were approximately 80 basis points in Q3 and again, expected to remain there in Q4. As we stated earlier, in Q3, there was a supplier quality issue representing approximately 30 basis points of headwind in our Q3 period. So kind of walking through that pareto, you can see the dominant factor is clearly underutilization.

To your question about getting back to 50%, it’s unlikely in fiscal €˜24, although it depends on your view of the macro economy and a number of other variables. However, underutilization creates a lingering impact due to timing. And so, as volumes fall, those inventory balances will reflect higher per unit costs. And simply put fewer units moving through a fixed cost factory collect more cost per unit. So, we saw this heading into the December quarter, and it will carry forward into fiscal €˜24. The rate at which that high-cost inventory flows through the P&L will obviously depend on variables like our future utilization or product mix including a ramp of revenue over the course of fiscal €˜24, but — although the precise timing is uncertain, the reduction in channel inventories is very encouraging, and it’s a necessary first step.

If I do look out over the course of fiscal €˜24, I could see potentially that 920 basis points of margin get cut in half, again, subject to your view of the revenue trajectory throughout the year.

Operator: And our next question is from Karl Ackerman with BNP Paribas.

Karl Ackerman: I was hoping you could discuss a little bit more commentary regarding your outlook. You certainly gave much commentary across the P&L for March. But within that outlook, could you discuss the order of magnitude decline between your segments? I’m just trying to have a better understanding of what’s occurring, I guess, in the legacy IDP segment, which appears driven by some maybe some inventory overhang within Wi-Fi, IoT and maybe telecom infrastructure. And then as you address that question, what are your assumptions for your mobile revenue in China in the March quarter, which I believe was guided to 10% in December?

Bob Bruggeworth: Sure. So, let me start with our view of the segments in the March quarter. If we go back to kind of comparing our current March guide to our thoughts last November, there’s a bit of variance in HPA and CSG. Instead of flattish, there will be rather modest declines there in dollar terms for our guide. Biggest driver, of course, is ACG. If you consider the size of our largest customer relative to ACG revenues in December and that customer, excuse me, is seasonally down in March and June, it’s a sizable headwind, and that really dictates the path of our top line. In terms of our China-based smartphone OEM revenue, it came in largely in line, just a bit above 10%.

Karl Ackerman: Understood. I guess, just — maybe just to follow up on that with regard to the China Android OEMs. It sounds like they came a little bit better. Should that remain at a similar level of revenue on a mixed basis in March? It sounds like it’s going to be improving. And I guess, to the extent you could talk about the recovery process or how you see the recovery process for the balance of the year, I guess the question I would like to understand is, given some of the new — the opportunity in premium-tier Android flagships you’ve announced this — today, it’s certainly great to hear. But I guess, if you could discuss the level of confidence you have in demand returning for mid-tier handsets, the balance of the year, would be super helpful because I ask because two very large Korean memory OEMs this week indicated the smartphone market could bifurcate between good demand for flagships, you have weaker demand for lower mid-tier models.

And so if you could just kind of comment on, I suppose, the production approach and your design approach for those markets, if they do bifurcate, it would be very helpful. Thank you.

Bob Bruggeworth: Sure. Let’s — if I decompose it, I’ll start and I’ll let Dave tackle the different tiers of handset models. In terms of revenue, as we look forward into the guide, we would expect our China-based smartphone OEMs in dollar terms to be roughly flat but overall, our Android revenue to be up. And then as we look maybe deeper into fiscal €˜24, without going into too much detail or attempting to guide at this point given the overwhelming impact of macroeconomic factors, I can shape it a bit for you and provide some of the drivers. In terms of revenue beyond the March quarter, we would expect June to be roughly flattish. It could be a bit higher, a bit lower depending on your view of the economy or China’s reopening.

We don’t have terribly ambitious expectations for the reopening at this point. We’re playing a bit conservative with our view. From there, I would expect September to see significant sequential growth and then December and the March 2024 quarters to be back to strong annual growth from there. Dave, I don’t know if you mind commenting on the tiers.

Dave Fullwood: Yes. So, as Bob mentioned in his remarks as well, we’re seeing really nice content growth in the premium tier. So, we’re well represented there. And of course, we’ve always been well represented in the mass tier year as well, 5G. And so there’s still a lot of room to go in terms of conversion to 5G. So the rate and pace of that may not be as quickly as we would have liked, but it’s still a lot in front of us. So we expect to see that mass here still moving to 5G over time.

Operator: And our next question is from Gary Mobley with Wells Fargo Securities.

Gary Mobley: I want to start by asking for some clarification on what Grant just mentioned regarding the sequential revenue comps and year-over-year growth looking into the first half of next calendar year. Was that in reference to CSG or the business overall?