10 February 2020
Qorvo’s quarterly revenue grows a greater-than-expected 7.7%, driven by 5G, Wi-Fi and Defense markets
For its fiscal third-quarter 2020 (ended 28 December 2019), Qorvo has reported revenue of $869.1m, up 4.4% on $832.3m a year ago and 7.7% on $806.7m last quarter (and above the $840-860m guidance), driven by strength in 5G, Wi-Fi and Defense end-markets.
Qorvo had two 10%-or-more customers, one of which was China-based Huawei Technologies Co Ltd, which (along with the other Asia-based handset makers) was stronger than expected (since Huawei is only expected to comprise 5% of total revenue across fiscal second-half 2020, after the firm was added last May to the US Department of Commerce’s ‘Entity List’ prohibiting the sale of products covered by the Export Administration Regulations without obtaining an appropriate export license – this compares with Huawei contributing 15% of Qorvo’s revenue in fiscal full-year 2019).
Specifically, by business segment, Mobile Products (MP) revenue was a stronger-than-expected $662m, up 6.3% on $623m last quarter and 10% on $602m a year ago. “We are offsetting year-over-year the decline that we’ve seen at Huawei,” says president & CEO Bob Bruggeworth. “We are seeing broad-based strength related to 5G across Asian handset producers and, importantly, across all chipset producers,” notes chief financial officer Mark Murphy. “The acceleration of 5G is driving demand for Qorvo’s high-performance and highly integrated solutions,” says Bruggeworth. “Carriers are bringing advanced 5G services across new frequency spectrum and that’s driving greater complexity and enhanced designs as board space remains constrained. Qorvo is solving that complexity by integrating the industry’s broadest portfolio of technologies and advancing the state-of-the-art and functional integration,” he adds.
Infrastructure & Defense Products (IDP) revenue was $207m, down 11.7% on $230m a year ago due to the restrictions on exporting Infrastructure products to Huawei but up 12.5% on $184m last quarter due to strong Defense volumes. “Wi-Fi 6 is at the phase of deployments in base stations… we are starting ramps and starting to recover but, with the loss of Huawei, we are obviously still significantly off of our all-time highs in base stations,” notes IDP president James Klein.
“In Mobile Products, 5G design wins are accelerating, and in IDP we are enjoying robust design-win momentum,” notes Bruggeworth. “Both businesses are returning to growth year-over-year,” he adds.
Mobile Products design wins
“We enjoyed significant [4G and 5G] design-win traction for our bulk acoustic wave [BAW]-based multiplexers across a range of band combinations including our hexaplexers and our recently launched micro BAW-based quadplexer. These multiplexers enable advanced carrier aggregation and they are critical to next-generation higher-data-rate applications,” notes Bruggeworth.
“We also secured multiple design wins to supply low-, mid/high- and ultrahigh-band solutions for second-generation 5G smartphones. These are highly integrated and high-performance 4G/5G solutions enabling customers to reduce product footprint, enhance system performance and deliver products to the market even faster,” he adds.
“Design wins for our ultrahigh-band front-end modules (FEMs) were broad based across customers and made with multiple 5G cellular chipsets. Qorvo’s solutions deliver highly differentiated performance at higher frequencies as we expand our content in the next wave of 5G smartphones.”
Infrastructure & Defense Products design wins, sampling and ramp-ups
In IDP, Qorvo’s gallium nitride (GaN) customer engagements broadened as it ramped GaN high-power amplifiers and small-signal components at a third major OEM in support of 5G massive MIMO deployments. The firm also began volume shipments of BAW filters to a top-tier infrastructure OEM supporting China Mobile’s 5G small-cell deployment. In addition, Qorvo launched a high-power gallium arsenide (GaAs) FEM addressing the more demanding performance requirements of second-generation 5G millimeter-wave base stations.
“In our Connectivity business, we enjoyed a rebound in demand driven by Wi-Fi 6 and supported by recently released GaAs and BAW processes,” says Bruggeworth. Demand for the firm’s newest Wi-Fi 6 FEMs was broad based, securing new design wins and increased shipments across CPE, retail and mobile applications.
“For the Connected Home, we began sampling the industry’s first radio solution combining a Zigbee, Thread and Bluetooth Low Energy system-on-chip (SoC) with a Wi-Fi 6 FEM to enable next-generation distributed Wi-Fi networks,” claims Bruggeworth.
For the connected car, Qorvo sampled a complete V2X front-end solution, featuring its recently released 5.9GHz Wi-Fi coexistence BAW filter, to multiple automotive OEMs and tier-one suppliers.
“Finally, we continue to expand our customer base in the programmable power management end-market, shipping power management ICs into data-center solid-state drives for two of the top three storage providers,” says Bruggeworth.
On a non-GAAP basis, gross margin was 49.3%, down slightly on 49.5% a year ago but up from 46.5% last quarter (and above the 48% guidance) due to better-than-expected manufacturing costs and a favorable product mix.
Operating expenses have risen further, from $150.5m a year ago and $166.7m last quarter to $175.6m (due mainly to a sequential rise in R&D expenses of over $7m), although this is at the low-end of the $175-180m guidance range.
Net income is down on $234.1m ($1.85 per diluted share) a year ago but up from $181.2m ($1.52 per diluted share) last quarter to $220.8m (a record $1.86 per diluted share, $0.19 over the $1.67 guidance).
Cash flow from operations has risen from $173.4m last quarter to $300.8m. Meanwhile, capital expenditure (CapEx) has been increased only slightly from $38m to $40.7m. Free cash flow was hence $260.1m (almost doubling from $135.4m), or record free cash flow margin of nearly 30% of revenue (contributing to free cash flow of over $600m for the first nine months of fiscal 2020, exceeding any prior full fiscal year - in the last 12 months, free cash flow was $754m and the firm repurchased $689m of shares, so more than 90% was returned to shareholders).
During the quarter, Qorvo spent $125m in repurchasing stock, but it raised funds by completing an opportunistic $200m add-on to its $350m of 2029 unsecured notes issued early in the quarter.
Qorvo also completed the purchase of the remaining equity in RF MEMS antenna tuning technology provider Cavendish Kinetics Inc of San Jose, CA, USA, strengthening its technology portfolio for switches, tuners and other products.
Overall, cash and cash equivalents overall hence rose from $586.8m to $1097.7m.
“Following the quarter end, we signed definitive agreements to acquire two companies that we have been evaluating for extended periods,” notes Murphy, namely:
- Custom MMIC of Westford, MA, USA, expanding Qorvo’s portfolio of high-performance GaAs and GaN monolithic microwave integrated circuits for defense and aerospace applications (a ‘bolt-on’ to IDP’s core Defense business).
- Decawave Ltd of Dublin, Ireland, a pioneer in ultra-wideband (UWB) technology and a leading supplier of UWB solutions for mobile, automotive and IoT applications (opening up access to a large new and rapidly growing wireless market for ultra-accurate, ultra-secure short-range location solutions).
“With both companies, there is excellent strategic alignment and cultural fit,” comments Murphy. The combined purchase value of these two acquisitions is about $500m (over three quarters of which is for Decawave), which will be funded from existing cash on hand. “Our guidance assumes both transactions close in February, and the financial impact slightly dilutive to earnings in the near-term is reflected in our March guidance,” he adds.
For fiscal fourth-quarter 2020 (to end-March), Qorvo expects revenue to fall by about 5.6% sequentially to $800-840m, although this is less than the previously forecasted seasonal drop of about 15%, and would be well up on $680.9m a year previously. Specifically, due to “the strength of our broad technology portfolio and strong underlying trends in our end-markets”, year-on-year growth will continue for Mobile Products and return for IDP (although, considering the loss of one of its top customers Huawei just a few quarters ago, IDP’s growth will be relatively small, aided by high single-digit growth due to Wi-Fi rebounding with the ramp-up of Wi-Fi 6 plus double-digit growth for low-power wireless and power management integrated circuits). Sequentially, Mobile Product revenue is expected to fall, but by less than the normal seasonality due to continued robust mobile 5G demand. IDP revenue should rise again sequentially due to sustained strength in Defense, the ramp-up of Wi-Fi 6, and broader 5G infrastructure customer demand, offsetting some of the normal seasonality (which is typically between flat and up only slightly). The Custom MMIC acquisition should contribute just $3m for the part quarter (and about $5m per full quarter in the near-term).
Gross margin will be about 48.5%, down sequentially by about 100 basis point (typical, due to the effect of seasonal product mix and the effects of fixed manufacturing costs on lower revenue). Operating expenses are projected to rise to $185m due to higher personnel cost (including payroll effects) and incremental cost associated with the acquired businesses. Diluted earnings per share should fall to $1.55.
“While Qorvo’s current near-term outlook is strong and channels are healthy, trade and other factors including potential demand and supply-chain effects related to the coronavirus concerns contributed to challenges and uncertainty forecast in the outlook,” cautions Murphy.
“Qorvo’s December-quarter results and March-quarter guidance reflect strength in our end markets of 5G, Wi-Fi and Defense and continued strong operating performance,” comments Murphy. “On capital expenditures, we project less than $190m this fiscal year and remain highly disciplined on adding capacity,” he adds.
“Given our operating results and capital management, we now forecast free cash flow for the full fiscal year of over $700m.” Compared with the target of 30% set some time ago, full-year free cash flow margin should be “closer to 22%, but we continue to see the ability to expand free cash flow margins,” Murphy says. “We are pursuing a model in investing in a way to achieve stronger and more sustainable free cash flow generation over time, and that comes from investing in the right technologies, of which you see some of that in the acquisitions we announced today. It’s selecting the right products and having a rigorous portfolio management process, which we have executed on.”
“We are still not at the utilization levels that we had hoped this year. The infrastructure market softness has impacted us in a couple areas in the network, particularly Texas GaAs, GaN in Oregon,” says Murphy. “In the December quarter, we had period cost in Florida [due to the phased closure of the fab in Apopka, as surface acoustic wave (SAW) filter production was consolidated to Greensboro]… Those do drop off in March. But we still have some period cost associated with [the BAW filter fab in Texas, which was idled in early 2019 rather than being moved from start-up to production] and some small period costs elsewhere… Over time, we expect IDP to improve as a percent of the overall mix,” he adds.
“We have a number of levers to expand margins. We are focused on spending capital only when we need to and then driving free cash flow growth, which allows us to make prudent investments either for accretion or technologies,” explains Murphy.
Regarding the coronavirus, Murphy comments: ”To-date, we’ve seen no material impact to our supply chain or demand signals. However, the situation is evolving. So, we have reflected some added risk to our March guide including a wider range of outcomes. Likewise we are thinking about potential effects into the June quarter and, even though our channels are lean, we are concerned about how this plays out.” In the June quarter, revenue is expected to fall to $750-800m (roughly level with $775.6m a year previously. “We tend to go down from our March to June on gross margins,” adds Murphy. So, gross margin is expected to range between a low 47% to a high 47%.