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

Again, this is 48th Annual Tech Conference held virtually this year. My name is Bill Peterson. I work on the semiconductor team. Well, pleased to have Qorvo with us this afternoon. We have Bob Bruggeworth, the CEO; and Mark Murphy, the CFO. You can see they are socially distancing from -- looks like a nice day in North Carolina. We'll begin with an introduction from the team, and then we'll move to Q&A. If there are any questions in the audience, please feel free to click the Question button, and we'll make sure to address that. With that, guys, good seeing you, and welcome.

Thank you, Bill, and it's great to join you, even if it's virtual. It's still a great time to be in the RF business. I do want to remind the audience that our safe harbor language that accompanies our press releases applies to our comments today. We reported last week, a really good March quarter. Our financials were solid. I'm pleased with the revenue, the gross margin, the EPS and also that free cash flow, we had a very good year there. And from a revenue perspective, we're seeing good growth in 5G handsets and infrastructure, our defense business, WiFi 6 and our IoT. In mobile, 5G is taking off. We saw great success in design wins last quarter as well as the revenue, and we're really looking for a good year in our mobile business with 5G. In IDP, gallium nitride really was a star of the show primarily, in our infrastructure business, but also for defense. And as I said, our WiFi 6 also ramped nicely in both handsets, along with a lot of the CPE equipment. And in IoT, we also saw growth. So I'm sure investors also want to know what's going on with COVID-19. We've seen very little to any material impact to our business from the virus. I'm very pleased that all our factories have remained open. Our business operations are running well. We're continuing to release new products and win business at our customers. So we're out doing a very good job of supporting our customers. And you know, the multiyear cycles that we've been talking about of 5G, WiFi 6, defense and IoT, we still think are out there, and we're excited about the future. Also, I want to add, we're excited about the new businesses that we've added, Programmable Power Management and also Ultra-Wideband. And I'm sure you'll have a lot of questions, and we look forward to answering them. Turning back over to you, Bill.

Yes, it's great. And I think you addressed supply, you addressed on the earnings call, which was just last week. It sounds like your factory is doing well. You talked about the type of things you're doing at your sites. I'm curious, if there's any residual impact, maybe your own sub suppliers, at least coming out of this conference, we're seeing and hearing that, the Philippines and Malaysia are still -- have some challenges. Just curious, if there's any like, just remaining residual impacts if you're, let's say, really in the clear?

Yes, actually, Bill, I guess, in that sense, we're pretty fortunate because we really don't have much of our supply chain running through either of those. And what little bit we did, we actually already had second sources. And I do want to tip my hat to our sourcing team and supply chain. They've really good done a good job. The world clearly has changed. And I'm pleased that we have a resilient and responsive supply chain. The team has done a great job. And they always do. I mean this is our business. I mean, from time to time, there's always tightness in the supply chain, customers ordering within lead time, and mix changes and things like that. And I don't want to say it's totally normal, but they're used to being able to deal with these kind of things.

I would maybe just add, Bill, on the supply chain effects, when we gave our updated guide in March, the supply chain effects were a larger part of that outlook and a larger risk factor. Yes, as you know, there were large parts of the handset supply chain, for example, were being affected. As the virus sort of waned in China and went to rest of the world, we ended up with, I'd say, more isolated supply chain effects. And it's still a risk factor for us. So you see it, as we can call it out in our forecast. But it's much more sort of an isolated case now, on a case-by-case basis. And as Bob said, our team has done a great job managing -- having contingency plans in the event part of the supply chain goes down, outside our own operations, of course, to doing health checks on suppliers, to getting an early lead on sensitive parts, all while the org's done a great job of minimizing inventory levels. So our own channel is healthy. Our own business inventory levels are very healthy compared to historical averages.

Yes. And it seems like you're also able to meet the needs for some upside in March. You spoke to mobile driving a bit of upside in March. You are expecting a decline in the June quarter. I guess, first question, what's leading the upside and what led to the upside in March? But -- and then looking ahead, you are at this stage, calling for sequential growth in the September quarter, you said perhaps, in the high single-digit range or slightly higher. I know investors tend to focus on their largest customer. But as far as I can tell, pretty much all your customers are launching phones, multiple phones in the second half. So can you discuss then the puts and takes associated with your initial September quarter look?

Yes. Maybe just to close out on March. So we ran a pretty strong favorable variance to our March outlook, $18 million over our updated guidance. And that was, as mentioned on the call, was largely mobile-driven and across a number of handset producers. And in the end, we just undercalled the demand and the supply chain effects. We just anticipated both of those being worse they ended up being. As it relates to September sequential or sequential growth, June to September, I'm really reluctant to give too much detail because we didn't give a firm guide. And there's a lot of uncertainty. What I did say on the call was high single digits or more. We expect sequential growth. Yes, there's going to be some seasonal effects that are favorable, including flagship launches. We're going to see a strengthening in China, ex Huawei. We're going to see continued strong IDP business. So all of those things are good. Underpinning our entire business is just the secular trends of just more connectivity with 5G and WiFi 6. Our defense business is going to remain strong. So we're fortunate in that sense. Now maybe building on or providing a bit more color on my comments, high single digits or more sequential growth, if the market's macro situation continues to improve and these secular drivers are as strong as we think, then I would expect -- I would expect this to be in the double-digit sequential growth at that point. But again, I point to the risk factors. Some of the risk factors appear to be waning. We'll see demand as sort of the big one at the moment, and we're wrestling with that like every other semi company.

Sure. And I guess from the demand side, you did call out, at least at this stage, you are expecting more than 10% unit declines. We have third-party people talking, 13%, 14%. So that sounds reasonable. You have talked about 250 million units. I think others are in the 200 million range. I believe you've said this is where you really see where your customers are -- that's what they're telling you today. But in the demand environment that's -- you're potentially declining by 10%, I'm curious on, on what is your exposure currently to 5G in terms of mix today? And then obviously, assuming the second half launches happen, your exposure should go up. But just curious on where we stand as snapshot today with your mix of customers?

Yes. Thanks, Bill. 5G, as we said, is driving some of the growth that we saw last quarter. As we look forward, the mix of our customers' designs, the majority of that and in some cases, all of it is 5G. So we're seeing that in some of our China customers. As we look at the phones that they're launching, the largest percentage of the phones they're launching now are 5G. So we do expect now the mix of 5G phones to be larger as a percent of handset shipments in 2020 than what our original expectation was just 3 months ago. So the mix is becoming more pronounced 5G, and our product development releases are 5G, our customers' phone launches are 5G. So it will become a much larger percentage. And again, that's why when we look at the RF TAM, because it's that extra $5 to $7, whether it's in a high-end flagship phone or just a mid-tier 5G phone, we're still seeing that $5 to $7. So the TAM is not going to be off anywhere near as much as handsets. And in fact, it could actually be flat. As Mark said, depending on what happens with the macroeconomy.

Yes. That's helpful. I think...

Yes, the only thing I would add to Bob's comment is -- and we've said this before and maybe just to drive the point home, the activity, the most exciting part is sub-6 gigahertz. And for an RF supplier, it's great. I mean it's good for us on the infrastructure side. It's very good on the handset side, given the complexity of that part of the spectrum. So millimeter wave as important to use cases, we see millimeter-wave growing, but it's going to be a small percent of the 5G rollout -- and in our view, and sub-6 just given the physics of it all is going to -- and the economics associated with that, that's going to be the big driver.

Yes. And we're still moving the technology forward. I mean we're still working and developing, and we have products that we think perform much better than what's out there today. We're just not sure of the actual business case for why people are going to want the handset, understanding all that. But we're still nurturing and maturing the technology, but we're just not seeing it yet.

Yes, it makes sense. I imagine this time next year, it'll probably be a lot more discussion, how that may materialize later in 2021 at that stage or even beyond. But I guess coming back, just the broader competitive landscape, you've discussed RF wins really across the smartphone -- the high-end, your top 6 customers. And some of those guys use Qualcomm, you have MediaTek wins, Samsung LSI. I'd just like to understand the breadth of your design wins across the modem makers. And how do you see the competitive landscape shaking out in 5G?

Yes. Thanks, Bill. I think on the call, we mentioned it, even kind of bullet in our press release, that we do have ultra-high-band 5G, PA sub-6, as Mark pointed out, across all baseband manufacturers. We have mid- high-band pad across all manufacturers. We have low band pads across all. We have switches, we have tuners, we have WiFi chips. So we're able to compete on whosever platform is out there. So let's just keep that in mind. When we look at the competitive landscape for the areas that we play in, there's only a couple, and I'm sure most of our investors know who they are in the handset. But what's really interesting is that some of these players are buying the whole main path from us. That's what I think is really interesting is that we're able to sell low-band, mid-high, ultra-high switches, WiFi, tuners, what have you. And that's what we see. And we see this trend of continuing to integrate. I know there was a lot of concern about are Vivo, Oppo, Xiaomi and others in China going to start to go to some of the Chinese manufacturers that really don't have access to the filter technologies that are in a lot of those components. And the answer has been, no. And again, we've been getting more of their BOM as things move forward as -- and Eric talked about that on the call, as we start to integrate a lot of those discrete components. And once they integrate, we haven't seen anybody go backwards from integration. The other reason you got to remember is that these guys are competing outside of China against some of the other large handset players like a Samsung. So they need that product quality and performance. And within China, they're still competing against Huawei. And if Huawei can't get access to a lot of these good components, this is their opportunity to build their brand within China as well.

Yes, understood. There is a question coming in. And this may be a clarifier of something you've already mentioned. But he's saying most people are expecting 200 million units. So just do the comments for the year. Is it looking richer for 5G? Or did you basically just feel 200 million is low? Just try to clarify some of the unit perspective.

Yes. Back when we gave our quarterly guidance back at the end of January, we talked about 300 million units, and people thought we were high then. And we felt pretty comfortable with that number. And then in March at a conference, we updated that number to 250 or slightly above. And on this recent call, we said around 250. Yes, we're higher than some of those, but I think some of the people that are putting those numbers out actually may not have the breadth into all the different phone launches and all the different programs that we have. I dare say, in 5G, I'm not sure there's a phone out there that we're not aware of. We might have differences in what end demand is going to be, but we may have access to more phones, they're going to be 5G because we're on a lot of those platforms. I can't think about a 5G phone that's going to be launched that we're not in. Maybe not all the components like I talked about, but we're in them, and I think we get a pretty good feel. And obviously, our customer forecasts are well north of 250. We haircut that.

And then just to reiterate, when we -- yes, we're basically holding around 250 as we updated in early March despite our total handset volumes coming down. So our mix has actually shifted a bit towards more 5G. So that maybe highlights the conviction we have around this transition to 5G and how strong it is. And then if there's any handset -- if there's handset demand that sort of rolls into future quarters, it's more likely that's going to be then 5G mix, which, as we've talked about before, the content is higher for us. So that's a favorable effect.

Understood. Another question, just trying to clarify content. So this is, can you identify the 5G benefit? You mentioned incremental content in 5G phone from what they expect on 4G. So is that $2 to $4 on top of existing RF content? We look at the market about 30 million to 40 million lighter for 4G phones. So perhaps, the TAM is flat as a result of the 4G decline. This is just coming from the audience.

Yes, I'll try and restate. We are looking at total handsets being down greater than 10%, little bit over 10%. And what we said is on 5G, yes, the added dollars on the mid-tier phones and the flagship phones is $5 to $7. So yes, depending on how this comes out, and as Mark just commented, we expect 5G to be a larger percentage. So therefore, the RF TAM could be flat to slightly down. So I'd agree with that.

Okay. Thanks for the clarification. You mentioned Huawei earlier. I mean, it had been a 15% customer prior to the ban. I remember this time last year was right when things started to kind of go south on that. It really drove your growth top line 5% in your last fiscal year, and even with Huawei headwinds, probably on the order of $150 million to $200 million last year, just on lower revenues. So I guess, can you give us an update on the current engagements? And we do see that the P40 uses your content, my guess, because they find value in that in servicing their customers globally. How should we think about Huawei in your engagements?

Yes. Thanks for pointing it out, Bill. I tried on the last quarterly call, just make sure investors kept that in mind, how much of a headwind Huawei was year-over-year, and in particular in the March quarter, and I'm really proud of the team for their ability to execute and grow our business, elsewhere, in IDP as well as in mobile, outside of Huawei. Huawei is an interesting account. The U.S. government clearly has its target on them. And we're still engaged with them. A lot of people worried that Huawei would leave totally -- and they recognize the value we bring, the products we bring and how they do make their products better. Now with that said, there's no way they're going to return to historical values or historical levels of what we used to ship to them. And on their premier phones, as long as the U.S. government will permit us to sell to them, and we're going to follow the letter of the law, we're not going to risk our business in supporting them. They're buying standard components that we can sell to anybody else. You commented about the decline, and Mark commented about our ability to manage our inventory. We didn't write anything off. We were very fortunate. It's also clear they're narrowing down the number of U.S. suppliers they're going to interact with. Okay. So we happen to be one that they're still comfortable dealing with. But as far as the outlook goes, they're going to be significantly less than a 5% customer as far as we can see. We're not banking our plans on them. But clearly, if the government will allow us to ship to them, we will. We think that's good for our investors, and it's good to help them out. But we're not planning on them being a big customer returning unless things change in Washington.