Qorvo, Inc. (QRVO) Earnings Call Transcript & Summary

All right. Great. We'd like to get started. Thank you all for attending. I'm Toshiya Hari. I cover the U.S. semiconductor and semi cap equipment space at Goldman Sachs. Very pleased to have Bob Bruggeworth, CEO of Qorvo here with us today; as well as Doug DeLieto from IR. I've got a bunch of questions given everything that's going on. But I'd like to hand it over to Bob to -- or Doug, rather.

Yes, just I'll say just before we begin the safe harbor language that applies to our press releases also applies to our conversation today. And I'll hand it off to Bob.

Thank you, and good afternoon, everyone, and I appreciate everyone joining us here today. So you also have some great questions. So I'll kind of keep some opening comments short. Business is good. I'm real proud of the way the team is executing today. Both our business units are going to be up year-over-year in March, we're all excited about that. It's quite obvious that one of our largest customers, that being our largest IDP customer and our second-largest mobile customer, this quarter is just going to be a few percentage points, and that's Huawei. I'm sure we'll talk a little bit about that later. But we're pleased with the technology development, the product development, what the teams have been doing for us to really offset a significant decline year-over-year at Huawei. So very pleased with that. The team is executing well. From an operations perspective, the technology development to keeping up with customer demand, the work that Paul Fego and his team have done has also been impressive. We've made great progress in our margins as well. And lastly, from a capital discipline perspective, I think if you go back a few years ago, we had a few hundred million in free cash flow. And this year, when Mark updated our guidance, he said we would be over $700 million. So I think we're doing a very good job there. Real pleased with the team and how we're executing, given the external environment.

Great. I wanted to kick off by asking a question on 5G. It clearly impacts your IDP business as well as your mobile business in a very significant way. Bob, given your rich history and experience in the RF industry, if you can compare and contrast 5G with fast technology cycles, both from a technology perspective as well as a demand perspective, that would be helpful.

Yes. I think, Toshi, from a 5G perspective, we take in 2 parts from the infrastructure side as well as the handset side. And I'll start with the infrastructure side. The biggest shift is really the RF dollar opportunity on the infrastructure side. When we went from 3G to 4G, it was basically just a macro base station. So you think of 1 amplifier, 1 transmit receive chain. And when we went into 5G, yes, you had the macro base stations, but you also had massive MIMO. So when you think of massive MIMO, you think of arrays of 16x16, 32x32, or 64, element arrays, if you will. And each one of those has a power amplifier. And that has been gallium nitride, which is technology that we thought was best for it, and we were doing extremely well with that technology. In fact, on the call, we mentioned we were bringing up a third customer in that area. But you also had either 16, 32 or 64 transmit and receive chains as well. So the dollar content for an RF supplier went from about $100 per macro base station to about $1,000 for a massive MIMO opportunity. So that's one significant difference. So I'll give you that. In the handset, what's also interesting is, this transition, when we went from 2G to 3G and 3G to 4G, as consumers, we weren't really hooked on the data yet. Now we are. So I think we're seeing a migration moving much faster to 5G because now we're used to the data applications, and now we can get our head around why it's important for us to get in on and off the network. The other thing that's interesting about the 5G transition, when I speak about data, it's cheaper per bit for the carriers on 5G, and that is clear as well. So first, it was getting us hooked on the data, 3G to 4G, now it's, "Okay, how do we do it cost effectively?" So I think we're starting to see that as well. So that's a big difference.

Okay. Great. One of the bear cases on Qorvo and, I guess, the RF industry, overall, is the point about some of the high-end phones already having $30 plus or minus in content. It's already such a big percentage of the bond, how could there be upside from here? How do you respond to that?

Yes, it's been a bear case, I think, since I've been in the industry. Why would anyone spend more money on RF, really? And it's been that way for 20 years. And the reason is we impact the user experience as well as the carrier's reputation. When you have dropped calls, you don't blame the RF, you blame the carrier. So carriers are driving a lot of this, okay? Second, from the RF perspective, whether it's $30 or $5, you have to put the RF in there to meet the carrier specifications. And again, as you roll out 5G, you need more and better RF. So that doesn't change. So let's just say, you've got $30 of content, and you want to go into China. You're going to have, for each one of the carriers there, their version of 5G, right? So each carrier is going to demand you have that. In China today, the government is trying to push that you make one phone for all 3 carriers. Back in 4G, you can have one for each. So we just see more and more RF. That's just the way it is today.

Right. And I guess you sort of answered my next question as well. But I think, collectively, as a group, we spend a lot of time debating what the new high-end phone could be in terms of the RF architecture, but -- and we spend less time on the mid-end. But lots going on in the mid-end, where some of your customers are transitioning from discrete RF platforms to integrated, obviously, platforms. Can you spend a little bit of time on what you're seeing there and what the opportunity set is for Qorvo going forward?

So getting away from the marquee phones, the mass tier, that is the large number of phones, okay? That is the 1 billion, if you will, users that are out there that are migrating from 4G to 5G. And again, the dollar content to move to 5G is very similar to what it takes in the high-end phones. The difference is, it's on a much lower base. So from a percentage standpoint, yes, it looks a lot larger, but it's also a lot larger because there are so many units. And again, what we're seeing is people are putting in enough 5G, particularly in China, that is the largest market today. They are the furthest deployed in sub-6 gigahertz, and you're seeing 3 different spectrums that are being used -- frequency bands that are being used, and that's driving a lot of that dollar content. Second, when you do that, you need better filtering, and we talk a lot about this, but not just the discrete 3.5 gigahertz, as an example, PA, you need now integration that we're seeing in the 4G LTE, 4G LTE Advanced Pro, what have you. And I think what surprised us is how much of that integration is coming. So 2 years ago, about 2 years ago, when we had our Analyst Day, we threw out how much we thought the TAM was going to grow. We said it was going to be about $1 billion. Well, we've upped that, as you know, to about $2 billion this year in 2020. And that was because of a lot more of the integration that's coming in the mid-tier phones and how 5G is migrating through that tier of phones.

Great. In your prepared remarks, you talked a little bit about Huawei, which, obviously, is getting a lot of airtime amongst all of us. I guess, pre-band, they were mid- to sometimes high teens of revenue for you guys, came down, obviously, post-export ban. And I guess, in the most recent quarter, they were back to being a 10% customer. So I guess, what drove that? And I think there was some confusion around your fiscal year second half guidance as it relates to Huawei, so if you can kind of clarify some of those points, that would be helpful.

Sure. They were about 15% in our last fiscal year. So that would have been FY '20, which -- or FY '20. So I -- excuse me, FY '19. FY '20, they've come down. They actually peaked at about a little over 20%. So what we said in our December guidance was that for the second half, Huawei would be about 5%. What we said this quarter is Huawei would be about 5%. They were a little bit heavier in the December quarter, consistent with what some of our competitors said. And quite honestly, in the March quarter, we're going to be 2% or 3%. What I'm impressed with is, Huawei was well over, well over $100 some million a year ago in March. They're going to be a few percentage points. We upsided the quarter. I thought it was by a pretty decent amount, $95 million, and Huawei was actually less than what most people thought it was going to be in March. Because I think a lot of people had modeled when we said 5%, they did 5% for the December quarter and 5% for March. So when I look at it, I was like, wow, I was surprised, they focused on them being a little bit stronger, which we never said they were going to be 5%. Typically, everybody knows there's a seasonal down, Chinese New Year in March, we didn't think we had to exactly shaped what Huawei was going to be in December and March, so yes, they were up a little bit, but we expected them to be high single digits and down low. Again, typically, that's what happens. And so I'm pleased with where we are.

Okay.

Helpful?

Yes, yes, for sure. And at a very basic level, I guess, to the extent you're comfortable on commenting. What are you able to ship to Huawei today? And what are some of the restrictions in place?

Yes. From an infrastructure perspective, so we used to sell them some small signal LNAs, mixers, things like that and gallium nitride, we're not shipping -- hardly any of that. If we do, it's some of the mix -- or some of the mixed-signal things, and it might be well under $1 million a quarter, so virtually 0. And on the cellular side, some of our more complicated PA duplexers, switch modules, things like that, we're not able to ship a lot of our discrete components that we were shipping before. What I'm comfortable in saying is Huawei continues to buy and wants to buy more so if they ever resolve their issues with the U.S. government, we'd be back selling them the infrastructure side as well as more of our other portfolio. They just can't get the components that are as good as what we've been able to produce for them.

Got it. I wanted to ask about the coronavirus. It's obviously an unfortunate situation evolving day by day. I'm sure it's really hard for you guys to handicap that. But you did mention on the call that there was some risk embedded in your March quarter guidance. I think when Mark went ahead and sort of gave soft guidance for June, you sort of embedded some risk there as well. So if you can kind of clarify what you guys know today? What's embedded in guidance? That would be helpful.

Yes, thank you. It is pretty bad. I mean we have a lot of employees in China, and we've done a lot to help them health-wise and everything like that. But one thing that I want to make sure everybody understands is, our factories -- we were not planning a shutdown for the Chinese New Year. I mean our business is strong, which is what I've been talking about. So we did run most of our factory, which means most of our employees were there, and we took care of them, masks, doctors. We have our own doctors there. We're checking temperatures twice a day, making sure no large groups got together. And actually, we're audited by the government, so actually, your employees are safer here than anywhere else. So to be candid, we did take care of our employees, and we ran pretty much -- almost the whole workforce stayed. We had very few that actually went home. Also, gets to our employees believe in us, and they believe in our business. So real pleased with that. Many of our customers did have their factories open. I think another thing that a lot of people don't realize is, of our Chinese-based customers, many of those actually have factories that are outside of China. So they were running as well. Some of that's for their export market. So when you integrate all that, when we gave our guidance for the March quarter, we did 2 things. We brought the midpoint down a little bit, but we also commented that we expanded the range. So we wanted to acknowledge to the investor base that "Hey, look, this is going to have an impact on our business. We're not sure how much." So we don't know how long it's going to last, we don't know when it's going to peak, we don't know what the government is going to do, but we had a feel for what our factories were going to do and our supply chain because we've been in touch with them. And then we said in the June quarter, "Hey, look, we think the biggest impact is going to be on the June quarter." So yes, a little bit in the March quarter, but mainly the June quarter. And we gave a range of $750 million to $800 million, which is about where The Street expected us. So what that implies is we were going to be $50 million or so above that in June. And everybody was like, "Wow, seasonality in June." Like no, the coronavirus, we think, impacts in June. So I think that might have been a little bit misunderstood.

Okay. And I guess, it's been 2 weeks since you guys reported, a couple of weeks. I forget the exact date. It's all a blur, but since...

It's been a few weeks.

2 weeks tomorrow.

And I'm guessing you've learned more about the situation around the coronavirus, both in terms of supply chain risk, potential changes to demand signals from customers, anything incremental that you can note on that front?

Yes, I think -- I'll start with our own factories. I think that's playing out nice. I don't see that. We've been working with our supply base. We're in pretty good shape there, like we expected, our customers from running their own factories. I think that's -- our industry wasn't running at full capacity. So they'll be able to make up whatever was lost. Well, what I can't give you guys any comfort in yet is what truly was the sell-through and will it be made up. So I can't answer that, and I don't know anyone that could. The macro trends that are impacting Qorvo's business, this does not change. This doesn't change the shift to 5G and everything that you and I have been talking about, whether it's on the infrastructure side or the handset side. The macro trends with WiFi 6, our Defense going into this, those trends aren't changing. Sure, there could be a small blip in this quarter based on the virus, or June like we predicted, but the macro trends that are driving our industry that have us excited, it's not impacting it.

Okay. And then on smartphone channel inventory, I guess, given the whole corona dynamic, it makes it even more difficult to assess where the channel is and where customers are with their inventory. But what's kind of your best guess? And how healthy or unhealthy the channel is today?

Yes. I think from -- let's start again with our components and our inventory. We've commented in the last 2 quarters that it's been healthy, meaning not a lot of days of supply in the channel. So between us and our customers -- and we watch the best we can with our customers' channels, and they're bringing out a lot of new phones. So sell-through is down, there'll be a little bit built up. We'll just have to wait and see. I don't have -- like I said, the end demand, I can't predict. I feel good about our inventory, where we're at in our own inventory, inventory between us and our customers and the channel looks pretty good.

Okay. And then shifting gears a little bit. On the competitive front, Huawei or one of its affiliates, in cooperation with some of the foundries, they're in-sourcing some of the lower-end components in their phones. How do you view them as a credible threat to your business over the next couple of years?

Unfortunately, the bigger threat today is our government. Like I said, my honest opinion is, if we resolve this, most times when you put people on any of your list, the U.S. government is trying to get you to the table to negotiate a deal, and you get off. So that's what I was hoping would happen. Unfortunately, what's happened is some of our market share has shifted to Japan, Korea or even into Europe. That's a U.S. semiconductor comment. And you really haven't hurt Huawei. We'll see what happens over time. But as far as a credible threat, the technology that they still lack is filters. It's still primarily U.S.-driven. So if they want to address and have high-performance phones, that's where their challenge is going to be. So yes, it's a threat, a little bit, but they've always been there. But really, to be able to do these high-end phones, when I talked about even the mass tier, you've got to do a lot of integration, and you need filters. So unfortunately, today, Japan is doing better than the U.S. on that front.

Okay. And I guess just as a follow-up to that, you talked about your interactions with the government. How have those conversations evolved over the past year, 1.5 years? Obviously, you're probably going back and forth trying to educate them, if you will, in how you guys, obviously, contribute to the economy so on and so forth. But what's been sort of the nature of the conversation between you guys and the government?

Yes. Number one, it's more frequent. I'll give you that. And I think it's really good that the Semiconductor Industry Association, which is probably different than most industry associations, it's primarily only CEOs. So it's my peers, whether it's Qualcomm or Texas Instrument or pick your favorite semi company, it's primarily CEOs. So when we do go meet with the government, whether it's the State Department, the Commerce Department, the Department of Defense, what have you, U.S. trade representative, it's the CEOs running the business opposed to lobbyists that are on the payroll. So they do hear us. And we do try to educate them on how important the semiconductor industry is to the innovation that goes on to the very thing that they want to protect, whether it's AI, 5G, quantum computing, et cetera, we spent a lot of time on that. It's clear, some of the departments, we are getting their attention because there was rumblings in Congress. And I can't validate if it was being worked or not, but there was a lot of rumblings, and then you read about how it slowed down. The Department of Defense or whoever, which branch of the government slowed things down with the Commerce Department, but they are hearing us. As an industry, we are the fourth-largest exporter of products from our -- I mean we are a force to be reckoned with. So they are listening. And we've made it clear to them that what you've done has hurt our industry, you slowed us down. If your worry was that China was going to catch up to us, you've only made it easier for them. And that's playing well as well. So we're working with them on those types of things.

Okay. That's helpful. On IDP, as you mentioned, Bob, one of your bigger customers, Huawei, is no longer a significant customer there. Despite that, I think in the current quarter, you're guiding that business to be up year-over-year?

Correct.

You talked a little bit about WiFi 6. Aerospace and Defense seems to be doing well, maybe less so comms infrastructure. But if you can kind of point to some of the growth drivers in that business, both near-term and long term, that would be helpful.

Yes. The largest business today is the Defense business. It's doing extremely well. And one of the things that we mentioned on the call is we had signed an agreement to acquire a company called Custom MMIC. They make the receive and transmit at millimeter-wave frequencies, which complements the work that we're doing in our gallium nitride and our gallium arsenide high-frequency things. I do want to let the group know that we did close on that last Friday. So we've closed that acquisition. So that is an area of growth for us is Defense. Unfortunately, in the world today, it's not as stable. And the good news is, from an electronic perspective, the U.S. still leads, and we're a key technology to that. And we thought Custom MMIC was a great addition to our portfolio to continue to grow that. On the infrastructure side, on the call, we talked about adding a third customer for our gallium nitride for massive MIMO. So as China rolls out their next wave of base stations for 5G, we see that as a great growth opportunity in the second half of the year. We talked about our connectivity business. Our WiFi 6 business is taking off, both in handsets as well as in CPE but also our low-power wireless. That's our ZigBee, Thread and Bluetooth Low Energy combo chip. That's playing out as we expected. We've done an extremely good job of winning a lot of business in the voice-activated remote controls but also starting to work with what we call a pod in every room. So it's our belief that you're going to have distributed WiFi along with ZigBee, Bluetooth Low Energy and Thread because not all devices need to carry the burden or the current consumption, if you will, of WiFi, and you're going to start to see these pods in every room. We do quite well with many of the distributed WiFi players, and we're starting to see those chips in there as well. So we think that's going to be growth. And a little bit further out, we've talked the last -- about over the last year of some of the business we're winning in the automotive marketplace. And again, I think most of you know, that's a little longer gestation period, but it's got a nice tail and a long life cycle. So we're going to start to see that take off as well.

Okay. Then as a quick follow-up. How should we think about accretion from Custom MMIC, both in terms of, I guess, revenue and earnings today? And more importantly, from a growth perspective, how much faster could that business grow relative to the corporate average?

Yes. So one of the things we said when we announced both Custom MMIC and Decawave is that Custom MMIC is going to be once -- it's for a full quarter, it will be about $5 million a quarter. So we think we can grow that double digits. So it's a nice, solid business, great, great team, honestly, a great business. We've known them for a long time. The Decawave acquisition, what we talked about is, that would actually be dilutive for about 18 months. So low-single millions of dollars, but believe that, absolutely, we're a better owner, and we can drive that business.