Qorvo, Inc. (NASDAQ:QRVO) Q2 2024 Earnings Call Transcript

Qorvo, Inc. (NASDAQ:QRVO) Q2 2024 Earnings Call Transcript November 1, 2023

Qorvo, Inc. beats earnings expectations. Reported EPS is $2.39, expectations were $1.77.

Operator: Welcome to the Qorvo Inc. Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, today’s event is being recorded. I would now like to turn the conference over to Douglas DeLieto, Vice President of Investor Relations. Please go ahead.

Douglas DeLieto: Thanks very much. Hello, everybody and welcome to Qorvo’s fiscal 2024 second quarter earnings 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 non-cash expenses or other items that may obscure trends in our underlying performance.

A technician overlooking a circuit board being built and tested for a semiconductor device.

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; Grant Brown, CFO; 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 Qorvo’s fiscal 2024 second quarter call. Revenue, margin and EPS were all above the high-end of our outlook provided during our August earnings call. Customer demand during the September quarter improved versus our August guidance. The primary driver was a large smartphone customer ramp. In addition, channel inventories of Qorvo components across the Android ecosystem continued to be consumed with OEMs indicating inventory levels are approaching historical norms. Channel inventory digestion is allowing Qorvo to ship more closely to end market demand, even as pockets of channel inventory remained in markets such as base station. We have worked closely with our customers to address inventories, while continuing to deliver highly-differentiated products.

They have rewarded us with new opportunities and new design wins and this underpins our expectations for growth this year and beyond. Across our three operating segments, Qorvo enjoys multi-year technology upgrade cycles supported by global macro trends, including connectivity, sustainability and electrification. New protocols and new technologies are offering improved performance and enhanced functionality and Qorvo is critical in enabling these capabilities. This is playing out in aerospace and defense, automotive, base station, broadband, connected home, power devices, power management, smartphones, Wi-Fi and other markets. Where the performance is measured power out, data throughput, talk time, battery life or distance between charges, customers increasingly require higher levels of power efficiency, integration and functional density.

To enable their future architectures and deliver successive improvements in our next-generation products, they rely on Qorvo’s best-in-class technologies and solutions. In HPA, we are a strong beneficiary of the trends in our defense and aerospace business towards what we call one to many. Put simply, Qorvo’s technologies are supporting higher customer volumes requiring more electronics and higher levels of integration. This applies to unmanned vehicles like drones, upgrades to existing radar systems, low earth orbit satellites and other applications. Lastly, we are leading the transition to DOCSIS 4.0, and broadband and we continue to deliver base station customers increasing levels of functional integration for their 5G massive-MIMO deployments.

Looking at our power franchise, we offer a highly-differentiated solution with our silicon carbide JFET architecture. Our technology offers the lowest RDS(on) which translates into faster battery charging, longer battery life and lower current consumption for applications like EVs, solar inverters and data centers. These are relatively new markets for Qorvo that are early in the transition to silicon carbide and offer significant growth. We also offer a differentiated portfolio in power management, where our initial wins have been in SSDs, power tools and appliances and we are leveraging our unique IP to expand in the defense, infrastructure, smartphones, wearables and other markets. In CSG, new technologies are transforming user experiences in automotive, connected home, enterprise, industrial and other markets.

Ultra-wideband is a critical focus area and we’re very excited about recent developments. Ultra-wideband is in the very early innings of adoption and we are seeing exciting opportunities, giving expanded smartphone adoption, multiple in-vehicle placements and an array of new capabilities such as ranging and precision location for indoor navigation. Wi-Fi is another primary driver and the transition to Wi-Fi 6E and Wi-Fi 7 is very early-on. Wi-Fi 7 devices recently launched by Qorvo’s customers are offering breakthrough advances in speed, latency and network capacity. Qorvo also offers components and full system solutions that incorporate Bluetooth Low Energy, Zigbee, Thread and now Matter. Matter is a recently launched technology overlay, essentially a common language that improves interoperability across smart home devices regardless of protocol or manufacturer.

It is supported by iOS, Android and major smartphone platform providers and it’s widely expected to simplify and accelerate the adoption of smart home devices. It is also early days for our force-sensing touch sensors. These are ultra-sensitive MEMS based sensors that enable new use cases and enhanced device functionality. We have broad engagements across automotive smart interiors, trackpads, true wireless headsets, smartphones, wearables and other consumer applications and our opportunities are expanding, as customers engage with our technology and develop new use cases. Looking at ACG, fewer than half of the Android smartphones this year will be 5G. Android 5G units are expected to grow in the low double-digits for several years. That’s a big growth opportunity for Qorvo as we move from very little content in 4G phones to significant dollar content in 5G phones.

Another driver is 5G Advanced which leverages new releases of the 5G standard. 5G Advanced smartphones will include additional transmit and receive and satellite bands favoring Qorvo’s product and technology portfolio. 5G will migrate to 5G Advanced over time and bridge us to new development efforts and new content required to accommodate 6G frequency spectrum at the end of the decade. Big picture, Qorvo enjoys a range of opportunities supported by multi-year upgrade cycles. Many of these transitions are very early on and Qorvo is recognized by customers as a leading technology innovator. We’ve made great progress developing new technologies and winning customer designs. With that said, we want to make it clear that our end markets have not yet turned and our outlook does not contemplate a significant change in the macro-economic environment.

The customer demand environment for Qorvo is more a reflection of strong design win activity and the early actions we took to improve channel inventory. When end markets recover, that will represent an additional driver of growth for Qorvo. Now, let’s turn to some quarterly highlights. In defense and aerospace, we increased shipments of X-Band transmit and receive FEMs and secured first orders for our 50-watt PAs in support of new LAN-based C-band radar programs. We introduced the world’s highest power Ku-band satellite communications amplifier, which enables an 80% size reduction and is optimized for multiple applications. We also received a large production order for recently launched cell-to-satellite solutions. These solutions incorporate advanced technologies from across our aerospace, base station and mobile portfolios to enable low-earth-orbit satellite connectivity.

In infrastructure, we were selected by Tier-1 base station OEM to supply switch LNA modules for next-generation 5G massive MIMO radios. We also continue to lead DOCSIS 4.0 broadband upgrade cycle with production orders from multiple customers and broad-based design wins. For power management markets, we released QSPICE, a significant improvement over current industry offerings for analog and mixed-signal circuit design in simulation. QSPICE improves the speed, functionality and reliability of circuit simulation, extending the value Qorvo is providing designers. Since its launch, the tool has surpassed 15,000 unique downloads. In automotive applications, we were selected to support a major in-vehicle car access platform by a leading German automotive Tier-1.

This multiyear program has a lifetime value over $250 million, marking a major milestone for our ultra-wideband portfolio. Within this program, Qorvo will supply ultra-wideband solutions for in-vehicle applications for a leading German automotive OEM. We also secured a design win from another leading German automotive Tier-1 to supply V2X solutions for communications platform launching this year. Lastly, we were selected to supply forced sensing touch sensors that enhance smart interior functionality and a recently launched EV from a Korean based automotive OEM. Complementing the large ultra-wideband win in automotive, Qorvo was selected by the leading Android smartphone OEM to supply ultra-wideband for their Spring 2024 flagship launch. It’s worth noting that the ultra-wideband wins in automotive and Android markets are significant as these two customers represent the largest volume opportunities in their respective markets.

To extend our reach, we’re sampling ultra-wideband solutions across fleet management, logistics, agriculture and other applications, leveraging our precision location capabilities to advance operational efficiencies. In Wi-Fi, we secured multi-year design wins with Tier-1 network operators in US and in India. These wins support next-generation wireless infrastructure for retail, enterprise and home applications. Across the Android ecosystem, we increased shipments of our highly integrated modules in support of Android smartphones from the high tier through the mass market. Notably, we extended our strong share position with the leading Android smartphone OEM in their flagship smartphone. In addition to the ultra-wideband win, we are also selected to supply the low-band, mid-high band, ultra-high band, secondary transmit receive, tuning and Wi-Fi. Lastly, we expanded customer sampling of our recently launched mid-high band pad.

Qorvo’s newest integrated architecture leverages next-generation BAW and SAW technologies and advanced packaging to combine main path content with receive paths commonly included in the diverse receive modules. This and other highly integrated Qorvo architectures for the Android ecosystem, free board space and improve efficiency to support future 5G form factors and content like flip and fold architectures and transmit and receive non-terrestrial network connectivity. I want to thank the Qorvo team for continued operational excellence. We have moved aggressively to reduce channel inventories by securing broad-based customer design wins. In the December quarter, our outlook reflects the seasonal profile of a large smartphone customer ramp as well as healthier channel inventories across most markets.

In the March quarter, we expect revenue to be more closely aligned with end-market demand. Longer-term, we expect revenue, growth and margin expansion and product mix favors our higher growth investment business. And with that, I’ll hand the call off to Grant.

Grant Brown: Thanks, Bob, and good afternoon, everyone. Revenue for the quarter was $1.1 billion. Non-GAAP gross margin was 47.6%, and non-GAAP diluted EPS was $2.39, all exceeding the high end of our August guidance. Revenue increased approximately 70% sequentially and benefited from significant content gains at our largest customer. Consistent with our guidance, factory production levels improved but remained below historical averages. During the quarter, the impact from underutilization and factory-related variances was approximately 550 basis points versus approximately 800 basis points last quarter. The increase in gross margin above the high end of our August guidance range was largely the result of revenue upside and product mix.

A larger portion of September revenue was manufactured at external silicon foundries and processed at third-party OSAPs. By comparison, our December and March revenue will reflect a larger percentage of higher cost inventories manufactured internally during periods of lower utilization and a lower percentage of products manufactured at external silicon foundries and OSATs. Beyond this fiscal year, we continue to see a clear path back to 50% plus gross margin initially during specific quarters and then on a full year basis. Non-GAAP operating expenses in the quarter were $246 million, slightly higher than our guidance due to performance-based incentive compensation. We are investing in new product development and targeting multi-year growth opportunities across all three segments.

In addition to growth-oriented investments, we’re also investing in enterprise-wide productivity initiatives. These multi-year efforts will support future growth and enhance profitability as we upgrade, modernize, and standardize around the latest tools and best practices. In total, non-GAAP operating income in the quarter was $279 million for 25% of sales, which increased from 7.2% last quarter. Breaking out operating margin by each segment, ACG was 34%, HPA was 17%, and CSG was negative 27%, which includes the impact of the biotechnology division. During the quarter, Qorvo Biotechnologies generated $0.5 million in revenue and reduced operating income by approximately $7 million. Just following quarter-end, we successfully closed the sale of the Omnia Biotechnology business, and will continue to sell BAW filters to support the acquirer.

Non-GAAP net income was $236 million, representing diluted earnings per share of $2.39. Moving on to the cash flow statement. Free cash flow was $64 million, and CapEx was $29 million. During the quarter, we repurchased $100 million worth of shares at approximately $103 per share. The rate and pace of our repurchases is based on our long-term outlook, free cash flow, low leverage, alternative uses of cash, and other factors. Turning to the balance sheet. At the quarter-end, we had approximately $2 billion of debt outstanding with no near-term maturities and $707 million of cash and equivalents. Consistent with our expectations and commentary from the prior earnings call, our net inventory balance was reduced in the period and ended the quarter at $840 million, down $78 million sequentially.

Looking at days of inventory, this represents a decrease from 210 days to 138 days. Turning to our current quarter outlook, we expect revenue of approximately $1 billion plus or minus $25 million, non-GAAP gross margin between 43% and 44%, and non-GAAP diluted EPS of $1.65 at the midpoint of the revenue range. We project non-GAAP operating expenses in the December quarter will be $235 to $240 million. Below the operating income line, non-operating expense is expected to be approximately $10 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 ‘24 is expected to be within a range of 13% to 15%. We expect our inventory balance will decrease again in the December quarter.

In terms of channel inventory, the environment continues to improve, with Android OEMs indicating inventory levels are approaching historical norms. Outside of the Android ecosystem, there are smaller pockets of channel inventory that will take longer to digest. We continue to forecast fiscal ‘24 revenue above fiscal ‘23. For the full fiscal year, fiscal ‘24 non-GAAP gross margin is expected to be 44% or slightly better, with variability primarily tracking utilization and mix. Qorvo enjoys multi-year growth drivers across all three of our operating segments. We offer a broad portfolio of technologies and capabilities, and we are uniquely positioned across leading customers and large markets. We expect continued strength on large customer programs, and we are investing to drive outsized growth in diverse businesses to broaden our market exposure and accelerate growth.

At this time, please open the line for questions. Thank you.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Tim Arcuri of UBS. Please go ahead.

Unidentified Analyst: Hi, thanks for taking my question. This is [Iman] (ph) jumping in for Tim. Just looking into fiscal 2025, I actually think about the trajectory of gross margin as utilization starts to come back, is there a certain level of revenue we should be thinking about for our core loan to be back at that 50% range?

Grant Brown: Sure, I’ll take that. This is Grant. Thanks for the question. There are a large number of factors that can influence gross margins such as revenue mix and input costs including utilization impacts. So I wouldn’t think of it in terms of an absolute revenue level. Some products carry a higher gross margin than others due to the nature of that business or end market. For instance, looking at our base station product line, which is generally accretive to gross margins, but with base station demand weaker, coupled with the excess channel inventories we’ve been talking about there, this is currently a headwind to margin versus historical levels. Product mix can also impact gross margin based on where it’s manufactured.

As I mentioned in my prepared remarks, for instance, last quarter we shipped a higher portion of products that were manufactured at external silicon foundries and processed at third-party OSATs, and those products are not impacted by our internal factory utilization, which as we’ve mentioned, is running below historical averages. Aside from product mix, unit cost is the other half of the equation. It’s a bit more complex given that input costs can affect gross margin on a lagging or leading basis. For example, historical underutilization will create higher unit costs in that inventory and as it’s sold in future period, that impact lags. Alternatively, in anticipation of lower future demand, production volumes can be cut and utilization will fall.

And in that sense, the impact tends to lead those anticipated changes in demand. So there’s a number of factors that impact gross margin. I, again, wouldn’t think of it in terms of an absolute revenue level, but rather a time of us to move through our high-cost inventory, return utilization levels back to normal, run the factories efficiently, and we’ll be on a path back to 50% plus.

Unidentified Analyst: Thank you.

Operator: The Next question comes from Gary Mobley of Wells Fargo Securities. Please go ahead.

Gary Mobley: Hi, guys. I wanted to pick up, Grant, with your detailed response to the last question. I know in your prepared remarks you said gross margin throughout fiscal year ‘25 will, at times, be above 50%. So I presume that would be in your seasonally strong periods. And — but did you say that as well 50% or above is the target for the full year or just the specific few quarters of seasonal [peakness] (ph)?

Grant Brown: Sure. I said that I think it will achieve 50% on a specific quarter before it achieves 50% across the whole year. And that’s somewhat macro dependent and obviously the volumes will dictate at what levels we return to a utilization where that’s possible.

Gary Mobley: Okay. And, Bob, you mentioned, I think, in describing the fourth quarter of this year in line with market conditions. And so your full year guidance implies no more than a 10% sequential revenue decline in the fourth quarter. So how would you call the seasonal trends in the fourth quarter? Are we talking about mid-single-digit, I think which is usual, or perhaps as much as double-digit percent declines?

Bob Bruggeworth: Sure, Gary. I’ll talk to — at least the high level, just make sure we’re clear on what we typically see in the fourth quarter, which as we’ve said all along, typical anymore isn’t typical because it seems every time we’re faced with something different from losing our second largest customer to COVID hits to various economic factors. What my comments were around is, given the current economic outlook, we’re not expecting our markets to rebound. And as we work through all this general inventory that we talked about, we’re going to hit the, what we think is the end market demand. Now, end market demand typically, and what we’re forecasting now is — what we see is our largest customer’s rent continues to come down in March.

We have a seasonal, usually the weakest quarter for our China Android business in March, and some of that is offset by a ramp at the largest Android customer that we have. So, as far as percentages go, I’m not going to call percentages, I’m just telling you that from our view, that’s the dynamics that are driving most of our business. We — Grant commented that our ACG business is growing year-over-year. Our CSG business will start growing this quarter and will be up in March. And really the lagging business for us is our HPA business and we’ve talked about what’s going on there with primarily what used to be our largest business in the infrastructure side and we’re not seeing that now. So when you integrate all that, we’re still comfortable we’re going to be up significantly in March year-over-year, and we’re comfortable we’re going to be up for the fiscal year ‘24 over ‘23.

I don’t know, Grant, if you want to add anything to that, while I’ve given all the moving pieces.

Grant Brown: Sure. No, I think you covered it, Bob. I’d say, maybe 10%, but certainly not 15%, right? We’re committed to the comments, any macro-related disruptions aside, that we see growth in fiscal ‘24.

Operator: The next question comes from Karl Ackerman of BNP Paribas. Please go ahead.

Karl Ackerman: Yes, thank you. I have a clarification and a follow-up. I guess, just given the content gains in your largest customer, is it fair to say that customer now exceeds 50% of your revenue in the quarter?

Grant Brown: We won’t comment on any customers within the quarter, but we’ll sum it up on the 10-K. The only thing I’d say about 10% plus customers is that we did have more than one in the quarter.

Karl Ackerman: Thank you for that. For my follow up, MediaTek suggested that 5G units should grow double-digits next year, certainly above overall smartphone unit expectations of low singles. Most of your exposure to incremental gains in 5G do come from China Android OEMs. I was hoping you could address how you think Huawei does or does not impact your China Android opportunity, both near-term and longer-term? Thank you.

Bob Bruggeworth: I’ll take the first part of that, Karl, and I’ll let Dave take the second part since he was just recently in China. Actually, a large part of our growth for 5G Android is still at the largest Android manufacturer being Samsung. The second point I would like to make is, you’re right, we do have China exposure in 5G, but most of that is actually in the export market for what they’re trying to do to build their brands outside of China. So just keep those two facts in mind. Dave was just in China just a couple weeks ago, and I’ll let him talk a little bit more about that and what [at least] (ph) we’re seeing, talking to all of our customers there, along with your comment about Huawei.