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12 February 2019

Qorvo’s 5G infrastructure revenue growth offsets weak mobile market in China

For fiscal third-quarter 2019 (to 29 December 2018), Qorvo Inc of Greensboro, NC, USA (which provides core technologies and RF solutions for mobile, infrastructure and defense applications) has reported revenue of $832.3m (down 5.9% on last quarter’s record $884.4m and 1.6% on $845.7m a year ago). This is well below the original guidance range of $880-900m given on 31 October, but $12m above the mid-point of the updated guidance range of $800-840m given on 13 November.

Qorvo had two 10%-or-more customers, one of which was a large China-based OEM.

Mobile Products (MP) revenue was $602m, down 9.7% on $667m last quarter (and 6% on $642m a year ago) due to weaker flagship phone volumes and a softer China domestic market (about 30% of mobile revenue, excluding Huawei). Nevertheless: “we extended the commercial adoption of our bulk acoustic wave (BAW)-based solutions to include additional marquee smartphone customers,” says president & CEO Bob Bruggeworth. Qorvo has begun shipments to a leading South Korean manufacturer (for its upcoming marquee smartphone) of a highly integrated mid/high-band PAD (power amplifier duplexer) and ultra-high band (UHB) 3.5GHz front-end module (FEM) that features Qorvo’s BAW-based multiplexer technology. It has also expanded support of Huawei by supplying the mid/high-band PAD, low-band PAD, antenna tuning and an envelope-tracking PMIC for its Mate 20 smartphone. “Our BAW-based wins are complemented by other high-value Qorvo components, including our industry-leading envelope trackers and antenna control solutions,” adds Bruggeworth.

Infrastructure & Defense Products (IDP) revenue was a record $230m, up 5.5% on $218m last quarter and 13.5% on $202.7m a year ago (making an 11th consecutive quarter of double-digit year-on-year growth). “IDP is experiencing especially strong growth in infrastructure as carriers pick up the pace of their 5G investments,” notes chief financial officer Mark Murphy. Qorvo significantly increased shipments of 5G massive MIMO infrastructure solutions to multiple OEMs and secured additional design wins across all anticipated 5G frequency bands, from sub-6GHz to millimeter wave.

In Defense, Qorvo secured a multi-year production contract supporting a large defense aerospace program and is shipping production volumes of high-frequency BAW filters, significantly extending the frequency range of its BAW technology.

“Qorvo offers base-station OEMs a unique combination of GaN technology and decades of experience in phased arrays for defense, which is translating into significant massive MIMO business,” says Bruggeworth. “The economics of this business are compelling, as a typical MIMO implementation has four times more channels (8-12 times more RF content than a typical macro base station). There is approximately $1200 of RF content in each of these base stations.”

On a non-GAAP basis, gross margin is up from 47.7% last quarter to 49.5% (below the original guidance of 50%, but matching the revised guidance). “We’ve seen strong margin expansion so far this fiscal year, driven by mix improvements in factory productivity,” says Murphy.

Due to tighter spend control and lower employee-related costs (including incentive compensation), operating expenses were cut from $168.3m last quarter to a fiscal-year low of $150.5m (roughly back to the $150.8m of a year ago, and below both the revised guidance of $161m and the original guidance of $165m).

Net income has risen further, from $220.2m ($1.69 per diluted share) and $224.9m ($1.75 per diluted share) last quarter to a record $234.1m ($1.85 per diluted share, below the original guidance of $1.95 but above the revised guidance of $1.70).

“Despite substantial headwinds from a weaker-than-expected mobile market and ongoing macroeconomic instability, Qorvo delivered its best quarter ever on earnings and free cash flow,” says Murphy.

Cash flow from operations was $333m (up from $270.1m last quarter). Capital expenditure (CapEx) was $72m (up from a low of $45.5m last quarter). Free cash flow was hence $261.3m (up from last quarter’s record $224.6m). “Operationally, we’re performing as well as we ever have and these results demonstrate that our focus on portfolio management and operating discipline are yielding stronger earnings and free cash flow,” says Murphy.

During the quarter, Qorvo repurchased a record $152m of its stock (almost doubling from last quarter). This makes the last three quarters three of the four largest repurchase periods outside the firm’s accelerated share repurchase (ASR) program of 2016. Cash and cash equivalents hence rose from $558m to $649.7m.

The performance is “especially noteworthy, given that the smartphone market weakened considerably after we entered the quarter,” states Bruggeworth. “The outlook for smartphones is being affected by a range of factors, including trade tensions, and other macroeconomic headwinds, longer replacement cycles, and what may be a pause in demand ahead of 5G smartphone launches,” he adds.

“During the quarter, we initiated actions to improve our manufacturing cost structure in light of multiple factors affecting our near-term outlook for mobile products volumes,” says Murphy.

First, due to market and fab-specific factors, Qorvo began a phased closure of its surface acoustic wave (SAW) fab in Apopka, Florida and a transfer of production to its fab in Greensboro, North Carolina (to be completed by calendar year-end). The firm will continue to incur ongoing period costs at its Florida operation of $6-8m per quarter (for fiscal 2020 through December) as it completes end-of-life product builds and other final production activities. Qorvo expects to gain production efficiencies for both SAW and gallium arsenide (GaAs) devices from increased loadings at the Greensboro fab. “Our proven SAW technology is an important capability for Qorvo going forward, especially for some of our most complex solutions utilizing both SAW and BAW filters,” says Murphy. The Florida engineering teams engaged in advanced filter design and product and process technology development will not be directly affected by the fab closure. “In fact, we are increasing investments in support of development activities by our engineering teams in Florida,” he adds.

Second, Qorvo is idling its fab in Farmers Branch, Texas, rather than moving it from start-up to production. BAW resources and production will be consolidated in the near term at the firm’s fab in Richardson, Texas, while preserving the flexibility to scale production in Farmers Branch to meet expected future growth. Ongoing period costs from the idled Farmers Branch fab will be about $5m in the March quarter, and drop to $3m per quarter until the fab starts production. The Farmers Branch fab is now expected to start production in early calendar 2020. “Given the proximity of the Farmers Branch fab to our Richardson fab and the favorable start up yields we achieved in Farmers Branch, we believe Farmers Branch will play a critical future role by allowing us to scale our BAW production efficiently in response to demand,” says Murphy.

In addition to $18m of fiscal Q3/2019 Florida fab asset impairment charges and accelerated depreciation (from changes in the estimated useful lives of certain assets), over the next fourth quarters Qorvo expects to record about $100m of additional charges related to accelerated depreciation of Florida production assets, as well as employee termination and other exit costs related to Florida, Texas and other locations impacted by the restructuring.

For fiscal fourth-quarter 2019 (to end-March), Qorvo expects revenue to fall to $660-680m. While continuing to see double-digit year-on-year growth, IDP revenue will be roughly flat sequentially (sustained by continued strength in 5G infrastructure market demand). However, there will be a 25% sequential drop in Mobile Products revenue, with the firm’s largest customer down and China down again more than expected (to below 30% of mobile revenue), plus worse-than-normal seasonal declines in the broader smartphone market. This will be offset partially by regaining market share at Huawei plus content gains with leading Korea-based smartphone maker Samsung. As a consequence, Qorvo should have three 10%-or-more customers for the first time since the March 2016 quarter. “Lower mobile volumes will cause us to fall short of our original target for the second half of fiscal 2019,” warns Murphy.

Gross margin should decline to 47%, reflecting the lower revenue, the effects of lower utilization (including the impact of the Farmers Branch and Florida period costs of $13m) and less favorable product mix, partially offset by improved segment mix.

Operating expenses are forecasted to rise to $160m due to seasonal payroll effects and increased investment to support IDP growth.

Diluted earnings per share are expected to fall to $1.05. However, operating cash flow should remain strong, helped by working capital management. CapEx should fall as Qorvo focuses expenditure on IDP growth opportunities and priority Mobile development programs (ending the fiscal year at $240m). Free cash flow should exceed $600m for fiscal 2019 (up from $583m in fiscal 2018).

“Despite the near-term headwinds in mobile, I am pleased with our operational performance and excited about our position in the markets we serve, including 5G, WiFi 6 [802.11ax], IoT and defense,” says Bruggeworth.

“We’re supporting robust 5G design activity at many mobile customers, primarily for ultra-high-band sub-6GHz applications. We expect 5G smartphones to launch this year, with rapid growth expected in calendar 2020,” he adds. “We’re also continuing to see interest in our millimetre-wave solutions for handsets, and we expect phones to be available as early as 2020. Whether the devices are fixed, nomadic or mobile, our deep experience in millimeter wave in the defense and infrastructure markets positions Qorvo to play a key role in delivering these solutions into the commercial markets.”

Also, Qorvo has secured a design win to supply both its 2.4GHz and 5GHz WiFi FEMs for NETGEAR’s Orbi Voice tri-band distributed WiFi systems. “We're expanding our footprint in the connected home by helping to deliver broader coverage and higher data rates to consumers,” says Bruggeworth. “Over time, we see WiFi nodes proliferating in the smart home from 10 today to more than a 100, and we envision multi-protocol pods in every room incorporating multiple low-power radios.”

In IoT, Qorvo has expanded into new markets, including beginning shipments of multi-protocol Zigbee/BLE SoCs for electronic shelf labeling applications.

“In automotive, we’re broadly engaged with OEMs and tier-1 suppliers, and we’ve expanded our product offering to address multiple protocols, including satellite, WiFi, LTE, 5G and V2X,” says Bruggeworth. “As increasingly complex coexistence requirements evolve in automotive applications, we see new opportunities for our BAW filters.”

In Defense, Qorvo has secured a four-year contract with the US Air Force to develop new modeling and a simulation tool to accelerate advanced GaN designs for mission-critical applications.

“Steps to right size our manufacturing footprint, along with targeted reductions in operating expenses and redirecting certain R&D resources, are together designed to allow us to pursue growth opportunities for IDP, sharpen our focus in mobile products on the highest-value most complex opportunities, and achieve [another year of record] earnings and free cash flow growth in fiscal 2020,” says Murphy.

“Investments in 5G are accelerating, the roll out of WiFi 6 is coming soon and IoT continues to proliferate,” says Bruggeworth. “The robust demand we’re enjoying for infrastructure solutions supports the outlook that 5G capabilities are coming sooner than our industry had originally expected,” he adds.

“With our technologies, we are uniquely positioned to take advantage of growth drivers in multiple markets, including the acceleration of 5G infrastructure investments, the adoption of BAW-based architectures by all leading OEMs, and the proliferation of new applications for the Internet of Things,” believes Murphy. “Ultimately, we expect the emergence of 5G will drive smartphone volume and RF content increases.”

See related items:

Qorvo reduces December-quarter revenue, gross margin and earnings guidance

Qorvo’s quarterly revenue rises 8% year-on-year to a record $884m

Qorvo’s quarterly growth driven by mobile demand in China

Qorvo’s quarterly revenue up 3.5% year-on-year, as 26% growth in Infrastructure & Defense Products counteracts drop in Mobile Products

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

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