, Qorvo’s quarterly Infrastructure & Defense Product revenue up 20% year-on-year

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5 February 2018

Qorvo’s quarterly Infrastructure & Defense Product revenue up 20% year-on-year

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For its fiscal third-quarter 2018 (ended 30 December 2017), Qorvo Inc of Greensboro, NC, USA (which provides core technologies and RF solutions for mobile, infrastructure and defense applications) has reported revenue of $844.8m, up 2.9% on $820.6m last quarter and 2.4% on $825.4m a year ago (and exceeding the midpoint of the $830-850m guidance by almost $5m). Revenue from China comprised about 20% of the total (lower than historically).

Mobile Product (MP) revenue was $642m, down 2.3% on $656.8m a year ago but up 1.9% on $630m last quarter, driven by a very strong ramp in support of product launches at the firm’s largest customer.

Infrastructure & Defense Product (IDP) revenue was a record $202.7m, up 6.7% on $190m last quarter and 20% on $168.6m a year ago (the seventh consecutive quarter of double-digit year-on-year growth). This reflects continued strength in defense (more than 50% year-on-year, driven by advanced radars and other electronic warfare products) and in connectivity including Wi-Fi and emerging Internet of Things (IoT) applications, as well as gallium nitride (GaN, which is becoming the technology of choice for transmit amplifiers at all major base-station OEMs, says Qorvo).

In particular, during the quarter, Qorvo achieved record Smart Home revenue (up 30% year-on-year), and secured design wins in support of Samsung remote controls.

“IDP has delivered nine out of ten sequential growth quarters since we repositioned our portfolio to target defense, base station, automotive, smart home, IoT, Wi-Fi and optical markets,” notes president & CEO Bob Bruggeworth.

On a non-GAAP basis, gross margin has risen further, from 44.3% a year ago and 47.4% last quarter to 48% (exceeding the 47.5% guidance, and back to the levels of fiscal 2016).

Operating expenses were $150.8m (17.9% of sales), cut from $158.2m (19.3% of sales) last quarter (and below the forecasted $158m) due to being ahead of schedule with ongoing productivity efforts plus the timing of program spending.

Operating income has risen further from $208.7m (operating margin of 25.3% of sales) a year ago and $230.5m (28.1% margin) last quarter to $254.3m (30.1% margin), fulfilling a commitment made last year to achieve a quarter in fiscal 2018 with an operating margin exceeding 30%. This was despite mobile volumes and fab utilization falling short of expectations this fiscal year.

Net income has likewise risen further, from $177.3m ($1.35 per diluted share) a year ago and $198.4m ($1.52 per diluted share) last quarter to $220m ($1.69 per diluted share, above the $1.60 guidance).

“Our third quarter results exceeded guidance, driven by higher revenue, improved gross margin, and effective cost control,” comments chief financial officer Mark Murphy. “We also achieved record free cash flow on strong operating performance and lower capital spend.”

Cash flow from operations rose from $219.9m last quarter to $270.1m. Capital expenditure (CapEx) fell further, from $67.8m last quarter to $45.5m (compared with $136.5m a year ago) after the completion of recent expansions. Free cash flow was hence a record $224.6m (up from $152.1m last quarter and just $83.9m a year ago). During the quarter, cash and cash equivalents rose from $574.9m to $841.3m.

“With recent tax legislation, we can more freely deploy cash for investments in growth and repurchasing shares,” notes Murphy. In the December quarter, Qorvo repurchased $80m of stock.

“Beginning late in the quarter, demand trends in mobile deteriorated at our largest customer and also in China,” notes Bruggeworth. “This weakness is impacting our near-term expectations,” he adds.

For its fiscal fourth-quarter 2018, Qorvo hence expects revenue to fall to $645-665m. This is despite IDP being flat to up slightly in the single-digits sequentially (and up by more than 20% year-on-year, to over 30% of total revenue).

Due mainly to reduced volumes of low-band power amplifier duplexers (PADs) and an increased mix of higher-margin IDP business, gross margin should be flat-to-up 50 basis points sequentially (i.e. 48-48.5%, up 550 basis points from the trough of 42.8% in fiscal Q2/2017 to the midpoint of the current guide).

Operating expenses are forecast to increase slightly to $153m due to development program spending and seasonal factors including payroll taxes.

Despite diluted earnings per share falling to about $1.05, free cash flow is expected to still be strong, at about $200m.

“While near-term market demand has weakened in handsets, our longer-term outlook has improved on recent developments with mid/high-band PADs, Phase 6 design wins, and cellular IoT and other connectivity applications,” says Bruggeworth.

During the December quarter, Qorvo sampled a custom mid/high-band PAD to an additional marquee smartphone customer; began production of next-generation RF Fusion front-ends for Phase 6 architectures (including mid/high-band and low-band integrated PAD modules); secured design wins for bulk acoustic wave (BAW)-based band 1+3 quadplexers in support of the top four China-based smartphone OEMs; and sampled what is claimed to be the industry’s first RF front-end module meeting 5G standalone and 5G non-standalone requirements to multiple mobile device customers and baseband chipset suppliers. Qorvo was also selected by Qualcomm to supply an automotive front-end module (FEM) for a cellular-to-everything reference design, enabling vehicle connectivity. In addition, it co-developed what is claimed to be the industry’s smallest cellular IoT module with Nordic Semiconductor, enabling global LTE-M/narrowband IoT applications. Overall, design wins in the December quarter were up by more than 40% year-on-year.

“We expect continued robust growth in IDP in 2018 [with the annualized revenue run-rate quickly moving towards $1bn], and in mobile we are gearing up for an aggressive ramp of a custom mid/high-band PAD in the second half of the calendar year,” says Bruggeworth. “This is the most valuable and highly integrated placement in mobile RF, representing what we call the integration hub in the main path of the RF system,” he adds. “This is a significant customer validation of our BAW technology and multiplexing expertise. Coupled with gains in antenna tuning and envelope tracking, we expect this to drive another generation of year-over-year growth with these top customers,” he adds.

“Our efforts to leverage our technology position and improve the operating performance of our business are paying off and we expect to sustain this progress,” says Murphy. “In fiscal 2019 we expect robust IDP growth to continue, supported by trends in defense, IoT and GaN,” he adds. “We are hitting key milestones to realign the mobile product portfolio from lower- to higher-margin products and securing design wins in the industry’s most attractive segments.”

“We expect to see significant benefits from these efforts starting in the second half of this calendar year,” says Murphy. “As our product mix and overall fab utilization improve, we expect gross margins to continue to expand [above 49% for fiscal 2019, including reaching 50% in at least one quarter]. That contemplates Richardson, our largest fab [for BAW filters], moving up over 80% utilization in the next 6 months as well as increased utilization in our GaAs fabs and over 80% utilization in our China back-end assembly & test factories. This will be partially offset by lower utilization rates in our SAW [surface acoustic wave] fabs as we migrate resources to bolster recent successes and future opportunities in BAW and more selectively compete for SAW-based opportunities,” he adds. On average, fab utilization should be a positive effect going into fiscal 2019.

“Our current projection would indicate SAW will be down year-over-year in the second half,” notes Bruggeworth. “We are investing in a lot of key technologies in SAW which will help enable many different products that are coming, but with majority of those products we are going to focus going forward on products that combined BAW with SAW to really make unique product offerings and leverage that asset further,” he adds. The proportion of Mobile revenue that is BAW-related is expected to rise less than 25% for fiscal 2018 to over 30% in fiscal 2019, then over 40% in fiscal 2020. In fiscal 2021 nearly half of Mobile business should BAW-related (some of which will require SAW filter content as well).

“With a more focused product portfolio, restructuring efforts taking full effect and productivity remaining a priority, we also expect OpEx efficiency to improve further [targeting below 20% of sales for fiscal 2019],” says Murphy. “We are on track to achieve the operating margin target we laid out at our Investor Day last May of 33% by fiscal year 2020,” he adds.

Qorvo expects CapEx to be below 10% of sales for fiscal 2019 (down from 18% last year) and below 8% the next year. “For example, we are going to be able to increase our BAW capacity 70% from current capacity to fiscal year 2020 at only about $80m of spend,” says Murphy. “With more profitable growth in mobile and robust growth in IDP, expanding operating margins and lower levels of CapEx we are targeting free cash flow of $800m in fiscal year 2019,” he adds. “While our near-term revenue outlook has been impacted by weaker demand signals from our largest customer end from China, in fiscal year 2019 we expect our premium mobile products and continued strength in defense, IoT and GaN to support revenue growth, margin expansion and greater free cash flow in fiscal year 2019.”

See related items:

Qorvo revenue grows a more-than-expected 28% quarter-to-quarter

Qorvo’s quarterly revenue down 8.3% year-on-year, but exceeding lowered guidance by $10m

Qorvo’s quarterly revenue hit by delayed smartphone launches in China and Korea

Qorvo's quarterly revenue up 33% year-on-year, driven by RF handset content growth

Qorvo announces $500m accelerated share repurchase

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