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

All right. We're good to go? All right. Good morning, everyone. Thanks for coming back. I'm Chris Caso, I'm semiconductor analyst here at Raymond James. Pleased for our next presentation to be Qorvo, RF supplier to the handset space and a lot of other spaces as well. I'm pleased to introduce from Qorvo here is Mark Murphy, Chief Financial Officer; and Doug DeLieto, Investor Relations. There was an announcement this morning that you guys had, which is probably a place -- you have some prepared remarks, and I have a feeling you're going to discuss some of that. Maybe we could start there.

Yes. Exactly, Chris. So what I'll do is I'll just start with some opening comments. I'll address the update to our guidance that we provided today, give you some broader view of the market and then we go into Q&A. But thanks again, Chris. It's great to be here. I'll start with the normal reminder that the safe harbor language that applies to our press releases also applies to our comments today. And then briefly, for those that don't know Qorvo well, I'll start with an overview on how we fit in the electronics supply chain. Qorvo is an RF solutions company that was formed to best serve the opportunities we see today in advanced 4G, 5G and other wireless standards and access -- and across cellular infrastructure, defense and aerospace, WiFi, automotive, IoT and other markets. RF challenges are getting more difficult. Qorvo solves these challenges, improve system performance and helps get customers' products to market faster. Serving customers well in this space requires a hard-to-replicate combination of advanced and unique device technologies, leading design expertise and experience, in-house manufacturing technologies and scale, deep supply chain and customer partnerships and many years of acquired know-how throughout the enterprise. Now to our updated view on the business, including the near-term financial outlook and effects of the coronavirus on it. This morning, we've provided updated guidance for our March quarter to approximately $770 million revenue, down from $820 million to the midpoint of our January 29 earnings call guidance or a decrease of roughly $50 million from our previous midpoint. If you recall, we were one of the earliest companies to comment on the potential impact of the virus on our results, reflecting some impact in March, providing an expanded range, given the uncertainty, and providing a view on how we thought it may impact our June quarter. Unfortunately, COVID-19 effects worsened since we provided guidance. And our current view is reflected in today's updated outlook. And as far as the commercial effects of the virus, we're seeing both supply and demand effects. On the supply side, some parts of the supply chain are experiencing reduced labor, which is limiting throughput. There have also been some isolated component shortages. At present, neither of these factors appears to be getting worse. And from recent customer comments and our interactions across the supply chain, it may be getting better. On the demand side, with the disruption around the Lunar New Year and some ongoing concerns, we are seeing some demand effects beyond what we anticipated. We are seeing demand stability, and in some cases improve, but the effects are likely to persist through the June quarter, a comment we made on our January earnings call. We do see these effects as largely delays to be captured later. As far as our own operations, we have experienced no COVID-19 cases and are operating well. We took precautions early to safeguard our employees. And since, we have been running strong, most of our employees worked through the Lunar New Year. With great credit to our team, our operations have been held up as a benchmark by local authorities for other factories in the area. We've provided an update with our best view at the moment. But as you know, there's a lot of uncertainty with this situation. We are staying abreast of this situation and doing our best to support customers, suppliers and local authorities while keeping the welfare of our employees and their families the top priority. Moving beyond what we hope is a relatively short-term disruption. The overall and longer-term market trends in our business are good, and Qorvo is well positioned. You saw in our November and January calls how the 5G rollout has commenced on the infrastructure and handset sides of the business. We'll provide more detail on our May earnings call. But we still see very strong base station market growth in calendar '20 and calendar '21, the number of base stations more than doubled in '19 to '20 and continuing to grow strongly into '21. And of note, the infrastructure business does not seem to have been affected at all by coronavirus. 5G handset ramp is occurring faster than 4G. COVID effects are impacting overall demand. But we still see over 250 million 5G handsets in calendar '20 at $5 to $7 of incremental RF content per unit. And other parts of our business are strong as well. In WiFi, volumes are up as WiFi 6 standard was ratified last year. In trade, supply chain issues have been resolved. In defense, electronic warfare is a higher percent of defense spend. And Qorvo is especially well positioned in this area. And to that point, we recently bolted on an advanced GaAs/GaN defense and aerospace business called Custom MMIC. And that was 1 of 4 acquisitions we've done in the past year. So we're thrilled about that, and we'll talk more about that today. Finally, and before we move to Q&A, while the near-term market is challenging, the long-term view on our markets is good and Qorvo's approach to these markets and how we operate remains consistent. Qorvo is focused on innovating and investing in technology to drive and sustain technology leadership. We're selecting the right products where Qorvo is best positioned to serve customers. We're driving productivity, quality and continuous improvement to lower manufacturing and operating expenses. We're reducing capital intensity through both lower CapEx and more aggressive working capital management. Qorvo is pursuing and delivering a model to drive free cash flow growth over the long term. And with that, Chris, we'll go to Q&A.

All right. Well, thank you for that. And I'd say the impact to March is probably not terribly surprising after your largest customer made some comments 2 weeks ago. I guess first question on that is you had already included some impact -- contemplated some impact on the June quarter. Is there anything you could say with regard to how the more recent developments, the slower March, might filter into our expectations for June?

Boy, let me talk a bit about March first. The short answer on June is our original comments, I think, still apply. We had said that the March quarter would be impacted and that we expected those effects to continue through June as the supply chain and demand adjusted. And that's still the case. I think it's just too early to determine or make a call on June, whether we call further down what our June number that we guided to or whether it's going to improve more dramatically. As it relates to March, we were very early calling some effect in our March quarter around coronavirus. And we had contemplated roughly $20 million of effect. And it was largely demand-related effect that we saw at that time. Unfortunately, as everyone knows, we're all wrestling with what's been a more impactful event than expected. And there's been some further demand erosions in February and then we experienced some supply chain disruption. Now our own operations are running fine. What we're seeing on the supply chain side is labor constraints, particularly at contract manufacturers and then we see some isolated component shortages. Now I don't think it's getting any worse in...

From a supply -- from a production and supply...

I think both demand and supply chain don't appear to be getting any worse. Certainly, the virus effects seem to be getting worse globally. But as I as it relates to China, it doesn't appear to be getting worse, either for demand or supply chain effects. On the demand side, we've begun to see order activity stabilize. In some cases, order activity has improved a bit. Now whether that's a false dawn or not, I don't know, but it seems to have at least stabilized. In the -- on the supply chain side, there have been many reports about more labor coming back. Our own operation, I think this week has been the first week that we've been able to ship every day. Prior to this week, we were only able to ship a couple of days a week because the supply chain just couldn't handle our volumes. So we felt comfortable enough at this point based on what we see that we could make -- provide an updated guide.

Okay. Well, it's fairly consistent. We've heard from other semiconductor companies that supply chain was probably worse 2 weeks immediately following Chinese New Year. Some facilities got back online. But I guess the open question as we go into June and forward is are there virus impacts on end demand elsewhere in the world outside of China? And I guess that's probably a difficult question to answer right now.

Yes, it is. And when we gave our guidance at the end of January, our demand-related impact that we included in the March guide was thinking through, okay, this is happening during Chinese New Year. This is going to affect the normal buying activity through that. And so we adjusted it. The way the supply chains typically work is that some inventories will build through this demand slowdown and as the supply chain is out of sync. We'll see a little bit more inventory in our business, for example. I imagine the channel, which has been very healthy, will fill up a bit and then that will sort of take it -- that will work itself out in June. And we'll have hopefully a more stable situation. And hopefully, the weather will help the situation. And then the demand will be clean coming out of the June quarter and September will be healthier. That's the current view. I also want to make a comment that -- and I alluded to it in our -- in my introductory comments. This effect and this updated guidance for us is 100% mobile handsets. On our more broadly diversified fixed wireless business, infrastructure and defense products, we've seen no effect. In fact, if anything, it seems like the infrastructure build-out has been a bit stronger. So that's been a stabilizing factor in our business that has been rock-solid on our forecast.

Okay. And I guess the good news, to the extent there is any good news with the situation, is we are in the very early innings of the 5G ramp in China. Widely expected, we'll have a 5G phone from one large North American OEMs in the second half of the year, which is probably a good segue to the stuff that you're probably more interested to talk about, which is content opportunities and how we grow with the 5G cycle and your exposure to that.

If I could just, Chris, one -- just one housekeeping item before we leave the updated guidance. So we shaved $50 million off our revenue for the March quarter. June quarter is very difficult to call, but we did call that down. You heard me talk about the effects, how we see it playing out. As it relates to further down the P&L in the March quarter, we didn't guide because we don't have as good a visibility as we typically have. We had given a gross margin guidance before in the March quarter of 48.5%. We're still working to achieve that. But there's more risk in that than there was before. So are we going to be at 48.5%? Depending on how we're loading and where inventories are and all that, do we end up at 48.25%? It's just too hard to call right now. And then on OpEx, we're doing what we can to lower OpEx, given the situation. But obviously, Qorvo's about technology, we're continuing -- we see an end to this. It's important to us to continue to invest in the business. So we're being prudent, but -- about what we cut, but we're reducing some OpEx to help offset some of this revenue effect. So in the end, we get to it -- if you do the -- walk down the P&L, you end up with somewhere in the $1.35 to $1.40 EPS neighborhood, where we were at $1.55 before.

Okay. Well, that's very helpful. You've made our modeling job easier by making those comments. So we do appreciate that. So 5G, 5G content opportunities. You talked about -- you through some numbers out in your prepared comments as well. Maybe talk about -- and I think there's a -- I don't know if there is a misperception but not full understanding on the content opportunities, particularly with the China handset OEMs, who perhaps didn't integrate as much as the Korean and North American suppliers in the 4G generation and seem to be moving in that direction. So maybe you could talk a little about that and the content opportunity that you have there.

Yes. So let me talk first about 5G at a high level. 5G -- and I don't believe this is an overstatement. 5G is going to have a very profound effect on our lives, I think more profound than 4G had on us. And we're in the early innings of this. And it's because of the -- not only the additional bandwidth that you get in those data rates, it's the low latency attributes of 5G, it's the machine-to-machine. So it's going to be transformative to the space. I can't tell you exactly all the applications that will emerge, but I'm highly confident there'll be profound things that occur. So we're excited to be on the leading edge of it. You have -- I'm going to break the market down. And we serve both the infrastructure side of the business, which is the base stations, and we have the handset side of the business. On the base station side of the business, that business led by James Klein, the business is fantastic content opportunity for us. Most of the base stations being put on the Earth at this point are 5G base stations, the large majority of them. It's -- we believe it's going to grow about 2.5x just the number of base stations between '19 and '20 and then grow strong double digits again between '21 -- or '20 and calendar '21. It's -- not only is that growth impressive, our content story within that is even better. You've got -- in 5G base stations, you have this massive MIMO technology, which has a large number of elements. And those elements can be GaAs or GaN and that's right in Qorvo's wheelhouse. And then also, given the performance requirements of 5G base stations, there's been a conversion of silicon technologies called LDMOS to gallium nitride semiconductor technologies. And that conversion is occurring and we're enjoying that. It's just an uplift for us because we don't have really any LDMOS business. So we're excited about the infrastructure part of our business. Huawei and those restrictions has impacted us pretty severely on that side of the business. And our business went from exceptionally strong to almost nothing today with Huawei. But the supply chain is realigning, and we're beginning to see growth in other customers. So you'll see our IDP business has been recovering -- it recovered strongly last quarter sequentially. This quarter, it grew year-over-year. And we see that growth continuing. The handset side is equally exciting around 5G. As I mentioned in my comments, we see 5G handset adoption or penetration occurring faster than 4G did. And there is some research on that, which folks can see. We see about -- our old number was 300 million handset -- 5G handsets out of 1.5 billion smartphones in calendar '20. We see that now, given these virus effects, probably in the 250 million to 300 million range. Each of those 5G handsets has an incremental $5 to $7 of RF content. Some of that's RF content solely with the -- associated with the 5G radio, some of it is changes in the RF front-end architecture around 4G.

And from what level to start -- what's the baseline level?

Depends on the phone, but...

Yes. It could be a double in your lower end, 4G to 5G, in China. Mid-tier, let's say, more than a double.

And we see the 5G handset, as I said, 250 million to 300 million on a base of 1.5 billion. That 1.5 billion, we don't really see handset growth numbers. So that number stays constant the next several years. But that 5G number, 250 million to 300 million and then in calendar '21, kind of the 450-ish million and then in calendar '22, we see about half of the smartphones being 5G. Now as it relates to the Chinese handset producers, they are producing world-class phones. And hats off to Huawei, Oppo, Vivo, Xiaomi. I mean they're really producing excellent smartphones for their consumers. And they do it with the help of companies like Qorvo. And we'll continue to -- we're in the trenches with them, working on solving these tough problems around 5G in the handset. And it requires more power. You're always getting less and less space on the phone and the spectrum requirements are ever more complicated around this stuff. So it's a very intimate relationship with customers. And then once we get a design win, you've got to be able -- you've got to be a company that customers can rely on to go from -- I don't know if there's many other industries like this. You develop a technology that's never been seen before in a new architecture. And you go to peak volume in that first period that you launch it. And so your manufacturing confidence needs to be very high and your yields need to be very good and your quality of the customer needs to be world-class because they've got to rely on you because you're -- you could hold up the launch of a phone. We have a general saying that you've probably heard us talk about for years that the world needs more and better RF. And that certainly applies to 5G.