8 February 2023
Qorvo’s quarterly revenue falls by a third due to weak end-market demand and elevated channel inventories
For fiscal third-quarter 2023 (ended 31 December 2022), Qorvo Inc of Greensboro, NC, USA (which provides core technologies and RF solutions for mobile, infrastructure and defense applications) has reported revenue of $743.3m, down 35.8% on $1158.1m last quarter and 33.3% on $1114m a year ago, but $18m above the midpoint of the $700-750m guidance range.
“We enjoyed relatively strong performance in automotive, broadband, defense and silicon carbide (SiC) power devices,” says chief financial officer Grant Brown. “However, elevated channel inventories and weak end-market demand pressured revenue and order activity across all three operating segments [High-Performance Analog (HPA), Connectivity & Sensors Group (CSG) and Advanced Cellular Group (ACG)].”
High-Performance Analog (HPA) revenue was $155m, down 14.8% on $182m a year ago, as growth in defense and power devices – including robust design activity for silicon carbide (SiC) – was offset by inventory consumption in the 5G base-station infrastructure market and softness in consumer-facing power management integrated circuit (PMIC) markets such as solid-state drives (SSDs) and battery-powered tools.
Connectivity & Sensors Group (CSG) revenue was $97m, down 38.6% on $158m a year ago, reflecting lower end-market demand plus channel inventory digestion for Wi-Fi products, partially offset by strength in automotive. However, 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.
Advanced Cellular Group (ACG) revenue was $491m, down 36.6% on $775m a year ago, reflecting macroenvironment-driven lower smartphone unit volumes across customers and channel inventory digestion within the Android ecosystem. However, design activity continued to be strong across customers and product categories and supports year-over-year content gains at Qorvo’s largest customers (the biggest comprises about two-thirds of ACG revenue).
On a non-GAAP basis, gross margin has fallen further, from 52.6% a year ago and 49.2% last quarter to 40.9% (below the 43-44% guidance), impacted by: 920 basis points due to lower factory utilization and higher inventory-related charges (as net inventory balance rose slightly, from $841m to $857m); 30 basis points due to a quality issue at a supplier; and 80 basis points due to inflation across direct costs.
Operating expenses have been cut more than expected, from $232.5m last quarter to $205.7m (below the targeted $225.5-227.5m guidance range) due to OpEx discipline, the timing of product development spend, and lower employee-related expenses including incentive-based compensation.
Net income has fallen further, from $330.4m ($2.98 per diluted share) a year ago and $276.2m ($2.66 per diluted share) last quarter to $76.5m ($0.75 per diluted share, albeit at the top of the $0.70-0.75 guidance range).
Net cash provided by operating activities was $237.4m (up from $117m a year ago). Capital expenditure amounted to $34.4m. Free cash flow was hence $203m. During the quarter, Qorvo repurchased about $200m worth of shares. Overall, cash and equivalents therefore rose from $914m to $919m. Qorvo has about $2bn of debt outstanding with no near-term maturities.
“The Qorvo team is operating well in navigating a challenging environment and taking actions to position the company for growth and improved performance,” says president & CEO Bob Bruggeworth. “We are introducing best-in-class products and technologies, and our customers are recognizing us with design wins, quality awards, and new and expanded programs,” he adds.
Such strategic highlights are listed as follows:
- In High-Performance Analog (HPA), Qorvo began sampling an integrated radar power solution that combines a high-voltage power conversion PMIC with SiC power switches to control a gallium nitride (GaN) RF power amplifier (PA), reducing total solution size by up to 30% in defense & aerospace (D&A) radar power systems while expanding Qorvo’s content opportunity.
Qorvo also expanded its SHIP (heterogenous integrated packaging) contract with the US government to develop multi-chip modules that combine digital optical devices with Qorvo’s mixed-signal RF.
In aerospace, Qorvo delivered a multi-chip solution that includes its high-frequency bulk acoustic wave (BAW) filter as well as a GaN PA for low Earth orbit (LEO) satellites and other aerospace applications. The solution supports cellular satellite links, for which Qorvo has secured new design wins. “The opportunity for Qorvo is notable, given the trend in defense & 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,” notes Bruggeworth. “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,” he adds.
In cellular infrastructure, Qorvo commenced pre-production shipments of its first integrated PA modules (PAMs) to a tier-1 European infrastructure OEM for 5G massive-MIMO base stations. It also began sampling its next-generation PAM, which delivers what is claimed to be market-leading efficiency for 5G massive-MIMO installations to the leading European infrastructure OEMs.
For broadband infrastructure applications, Qorvo 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 reckons that it is positioned as the industry leader.
- In the Connectivity & Sensors Group (CSG), Qorvo expanded its Wi-Fi content at a Korea-based smartphone OEM to include Wi-Fi 6E and Wi-Fi 7 designs and ramped Wi-Fi 7 front-end modules (FEMs) for access points and routers for its smart home ecosystem customer.
Qorvo began sampling 5GHz and 6GHz filters that leverage its next-generation BAW process, enabling worldwide Wi-Fi 7 frequency coverage. “There is increasing customer interest related to multi-link operation, which is a key attribute of Wi-Fi 7 and enables higher throughput and lower latency,” notes Bruggeworth.
Qorvo also began volume shipments of MEMS-based sensors for true wireless stereo earbuds, replacing legacy capacitive touch sensor technology. “Design activity for sensors continues to be strong across markets, including automotive,” says Bruggeworth. “We are working with leading automotive tier-1s and have secured automotive smart interior design wins in more than 25 vehicles.”
- In the Advanced Cellular Group (ACG), Qorvo began the production ramp of multiple components for a flagship platform of the leading Korea-based smartphone OEM, and secured multiple design wins across Android OEMs in support of 2023 devices. “We have increased our content significantly year-over-year,” notes Bruggeworth. “We are broadly serving this customer across our portfolio and continue to support the migration of their mass-market phones to integrated 5G solutions.”
Qorvo was also selected by a US-based Android OEM to supply multiple solutions, including ultra-wideband (UWB), antenna tuning and BAW-based antenna-plexing in support of their 2023 smartphone launches.
Finally, Qorvo was recognized by multiple customers, including receiving Honor’s 2022 Golden Supplier Award as well as quality awards from Vivo for discrete switches and amplifiers and highly integrated solutions.
“In 2023 and beyond, the secular trends in our businesses remain strong,” says Bruggeworth. “Customers increasingly require higher levels of performance, integration and functional density to deliver successive improvements in next-generation products,” he adds.
For its fiscal fourth-quarter 2023 (to end-March), Qorvo expects revenue to fall further, to $600–640m (down from $1166m a year ago), despite expecting sales to Android smartphone customers to grow sequentially. Revenue from China-based smartphone OEMs will remain roughly flat. The decline reflects ongoing demand weakness across end-markets as well as expectations for further consumption of channel inventory.
“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,” says Brown.
“We expect production levels to remain compressed. This will lead to continuing under-utilization charges related to inventories, which will weigh on gross margin during fiscal Q4 and carry into next fiscal year,” he adds. With under-utilization and inventory-related charges having about the same impact as in fiscal Q3, together with continued inflation across direct costs, gross margin should hence be roughly flat at about 41% in fiscal Q4.
Operating expenses should rise about $20m sequentially due to the timing of product development spend, seasonal payroll effects and other employee-related expenses. Diluted earnings per share are hence expected to fall further, to $0.10–0.15.
“In addition to ongoing alignment of supply and demand, we expect unit volumes across our businesses will recover later this year, and we have secured content gains in large customer programs, all of which will support improved financial performance,” says Brown.
“We would expect June [quarter] to be roughly flattish. 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,” says Bruggeworth. “At our largest two customers, we are very confident in our ability to grow year-over-year content, and that includes this year,” he adds. “Over the course of fiscal 2024, I could see potentially that 920 basis points of margin [impact from factory under-utilization and inventory-related charges] get cut in half.”
“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,” says Brown. “Looking forward, we can double our BAW capacity in the Richardson facility versus our current maximum theoretical thresholds today,” he adds. “We see an expanding market for our BAW technology. We intend to put that to good use as we continue to capture designs and grow our BAW content in flagship phones,” adds Bruggeworth.
“Increasing 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 [e.g. die-size shrinks, the transition from 6- to 8 inch wafers, and successive generations of BAW filters] 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 [described as a ‘safety valve’ whose capacity is no longer needed, since the Richardson productivity gains came to fruition]. We’re in the early stages of marketing the site and initial interest has been encouraging. For reference, the site has been incurring approximately $12m of non-GAAP COGS [cost of goods sold] per year,” Brown notes.
“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,” continues Brown. “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 about $32m per year. These actions will sharpen our focus and resources on the many growth drivers across our three operating segments.”