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

Hello, and good afternoon, everyone. This is Vivek Arya, Head of the U.S. semiconductor and semi-cap equipment team at Bank of America Securities. Really delighted to have the team from Qorvo join us this afternoon, Bob Bruggeworth, CEO; James Klein, President of the Infrastructure and Defense Products or IDP Division; and Doug DeLieto, Head of the Investor Relations team. So a very warm welcome to the team from Qorvo. And what we will do is maybe we'll start with some very -- some opening remarks from Bob, but then just get into Q&A. And if you have any questions in between, please feel free to e-mail them to me, and I'll be sure to weave them in -- with my Q&A. With that, welcome, Bob, I'll turn it over to you.

Thanks, Vivek. We appreciate the invitation. That's for sure. And it's great for us to be able to join you and everyone listening in today. Before we begin, I'll give the audience our normal reminder that our safe harbor language that applies to our press releases also applies to our comments today. I would also like to remind everyone that Mark Murphy and I participated in a webcast investor conference just a few weeks ago. Therefore, we were going to jump right into the fireside chat to accommodate as many questions as possible from Vivek and the audience. Vivek, with that, I'll hand it back over to you.

Excellent. So maybe just a few kind of near-term issues, Bob, and then we'll get into the longer-term trends. So first, in terms of the near-term issues, we are still going through, unfortunately, the COVID-19 pandemic. Could you just give us an update on where the Qorvo team is, both from a supply perspective and then from a demand perspective, what headwinds have you faced so far? And where are you now as we get into the second half of the year?

So I think we've addressed this in some public forums previously. But let me start with, things continue to improve on the supply and the demand side. On the supply side, we've gone from some isolated supply chain disruptions to what today I'd say is approaching normal, what it's been like before even. On the demand side, it's much the same as what I've said in our earnings call in our last public comments. We continue to see strength in infrastructure throughout the period. There really hasn't been a slowdown. And if anything, we're seeing a strengthening in the infrastructure with our GaN technology, which was reflected in our outlook. On the handset side, we see overall volumes down, which we talked about. But the march to 5G and associated increases in content are continuing. And I must add that I'm very proud of our team. The team has displayed extraordinary spirit and resilience. Our factories are running great. Our sourcing team has done an extremely good job. Our design teams are continuing to release compelling products. And our sales and application engineers are continuing to get products designed in the next-generation 5G handsets and all the other types of products that we support in the Mobile and our Infrastructure and Defense. So things are running pretty good.

Got it. The second topic, Bob, that's been top of mind for investors has been the effect of U.S.-China trade tensions. So there's kind of 2 parts to that. One is the specific Huawei exposure part. So give us a snapshot of how much dependence you have on Huawei in the near and the medium term and let's say, if Huawei is completely restricted, what that means for Qorvo's business. And then beyond that, there have been other restrictions that the Department of Commerce has laid out. Do they have any implications on Qorvo in terms of shipping to your customers in China?

Okay. I'll take the Huawei question first, Vivek. Before the ban, so if we look over the prior 12 months, Huawei was about 15% of our business. In fiscal '20, they dropped to about 10%. And last quarter, we made it pretty clear, they dropped below 5%. And in fact, we commented for the year, we expect Huawei to be below 5% for the fiscal year '21. Again, that's just Mobile products. We haven't shipped really anything of materiality on the infrastructure side to Huawei. And I think to your question, if they can't source premium products, whether that's basebands or RF, it's our expectations that they will lose share to Vivo, Oppo, Xiaomi, Samsung and even potential Apple. Clearly, the Chinese handset manufacturers are already starting to pick up some of that outside of China. And if they can't support their customers in China, that's who we expect to be the biggest beneficiary there. So I think from that perspective, we're extremely well represented across all those manufacturers that I just mentioned. And then to address the second part of your question as it relates to the additional Department of Commerce restrictions, I'd encourage some of you to read the rules specifically, and you'll see why the new restrictions are not an issue for us. There were a number of Chinese entities added to the BIS Entity List recently, and they're not customers. And we will, of course, continue to actively monitor any rules or regulations that could have an impact to make sure that we are in compliance with all the applicable laws. So the latest change, Vivek, to be clear, had no impact on us.

Got it. Very clear. And have you seen, Bob, any sign of any pull-ins by customers in China? Because I think there is a perception that over the last year, there has been this big inventory build by Chinese customers that perhaps more Huawei than others because of these constant worries about restrictions coming in. It's not been apparent when I look at sales across the board for semiconductor companies. But I would love your perspective, if you noticed any abnormal orders or pull-ins from China-based customers?

Yes. I guess let me start with we haven't seen any. We see the deployment of 5G as a multiyear trend -- and in both infrastructure and in handsets, as I've already commented, the strength that we're seeing in the infrastructure. And 5G is being led by China, and there is a significant dollar increase per handset, and we don't see it in our channel. We talked about that on our earnings call that it's healthy, and it's actually quite low compared to historical practices maybe a year ago. And the demand we're seeing is lining up with our models for the industry. And I personally continue to stay in touch with our customers. Now it happens to be over video, and that's customers, both handset and infrastructure, to discuss how we can better serve them as we go through these ramps of 5G. So I feel pretty good about where we are in the business with them.

Got it. And the last one on China, Bob, is when I look at the RF chip market historically, of course, we have had focused specialist players like yourself and some of your U.S. peers. But we have also had a discrete market as part of the RF market. Do you think -- and you know a lot of those discrete companies were based in Asia. Do you think just given, again, this whole trade tension aspect of it that as we go through 5G that there can be alternatives developed to your product? Like are you likely to see more domestic competition from the Asian supplier base as they look to reduce their dependence on U.S. semiconductor suppliers?

So let me start with outside of Huawei for the obvious reasons that they needed to. We haven't seen any of our customers looking to do so. And I think it gets to what we do is very difficult. They need these highly integrated components for the performance. I mean these are highly complex integrated modules with multiple technologies. And that's not just filters, but it's compound semiconductors, leading edge packaging technologies and some of the foundries that we use. And then for some of these players, they have also got to have the design capabilities, the customer intimacy, manufacturing know-how to ramp these products successfully. And that's a combination of capabilities that takes many years to develop. And once things have been integrated, we don't see them being unintegrated in the trends in this industry. So again, the regs today are clearly targeted at limiting Huawei. And I said earlier, I speak with all our other customers, and we're just not seeing them move away. In fact, they want to beat Huawei. And if Huawei is not using best-in-class components, this is their chance because we do impact the customer experience.

Got it. Is there anything special about 5G, Bob, that you think is going to accelerate more integrated components as opposed to depending on discrete components?

So from the perspective of 5G, as we talked about, it is higher frequencies that was typically in LTE, particularly in China. The filtering requirements also get much more complicated. And then they also want to make sure, obviously, 4G doesn't go away, and many of those bands can run through on the chips that we integrate so that you save space, improve performance. And that's 2 things these guys want to know. They also need to put in more antennas, that puts a crunch on space. So it's also a chance for our antenna tuners to also grow where we've got very good market share. So as you add 5G, space is a premium, and you can't sacrifice the performance.

Got it. Then on specific 5G smartphone units and ASPs, maybe if you look at from a 2020 perspective, first, on units. We have heard a range of industry estimates anywhere between 170 million to 200 million units. I think you folks have been somewhat higher about 250 million or so. Could you give us some perspective on what makes you more optimistic than some of the other players that we see in the industry when it comes to 5G unit demand for this year?

First, I want to point out, Vivek, I think we also have pretty good insights into the infrastructure rollout and what the carrier plans are and what they're trying to do to drive subscribers, primarily in China, which is a large part of that. Yes, there will be significant 5G outside of Asia and China specifically. But I think that starts with our insights that we get in some of James' business. But also, we get a lot of customer forecasts. We also discuss across a wide array of all the chipset suppliers. So we have broad-based exposure across all the OEMs that build these phones and those chipsets. So I think we get a pretty good view across carrier, handset manufacturers and in the baseband providers of 5G to come up with our numbers. And again, we did bring it down some this year, but we're still in that 250 million range that you mentioned. And we still feel good about that based on everything we're seeing.

Got it. And I'm glad you've brought this question of rollouts because I think that's where there's been a lot more skepticism about 5G because we don't yet see it to the same extent in the U.S., I guess maybe that's part of the skepticism. It's been a lot more China focused. So maybe give us a sense for where you are seeing these rollout progress? What needs to happen from a rollout perspective to drive this demand for this 200 million or 250 million 5G smartphones?

Yes. I think James would love to answer that. So James, if you would, please?

Yes. Thanks, Vivek. 5G infrastructure represents a great opportunity for the company. So first, let me talk about 5G deployments. Last year, there were just over 300,000 5G base stations deployed predominantly in Asia. In 2020, that number will over double to approximately 750,000 base stations. And then the following year, we expect that number to continue to increase to just over 1 million base stations deployed. The reason those deployments are important from my side of the business is because massive MIMO antennas are playing such a big role, and they're being deployed at an ever-increasing pace. By next year, we expect MIMO antennas to account for about 90% of the RF chains that are being deployed. And that will result in a number of channels almost quadrupling from 2019 to 2021. And of course, we supply products across all of these channels. The higher frequencies and the combined power are also favoring our GaN power amplifiers in those amplifier slots. As a result, it's going to very much increase our addressable market from about $500 million in 2019 to almost $2 billion in 2022. And we think that will continue. First deployments will be in Asia, but then the U.S. and EU and the rest of the world will follow. So I think it's strength for a long period of time. So I think we have very good insight into the infrastructure rollouts that are going on and definitely see that, that will continue to drive opportunities well beyond the base stations into handsets and other devices that are going to connect into the network.

Got it. Maybe one quick follow-up there, James, is in terms of just the content opportunity that you see on the infrastructure side. So let's say, you mentioned massive MIMO chain side. As we move from the low transceiver counts to say 32x32 or 64x64, could you give us a flavor for how your content moves right in those larger radios? But then also, if you have a position on the small cell side, which I imagine people might use for more capacity fill up.

Yes. And we're seeing rollout effectively what we've been talking about for several quarters, which is when we get to a 64x64 MIMO antenna, our content goes up about -- order of magnitude about 10x. And we can see content in those base stations well north of $1,000. Now what -- the reason that's happened for us is, traditionally, we had played in the small signal side of the base station with LNAs and switches and filters. But in the frequency bands and at the power levels of the massive MIMO antennas, GaN is very, very well suited. So we've now been able to capture significant wins and are ramping our GaN capability in production today around those massive MIMO antenna. So content gain for us is a combination of number of channels plus the ability for us to address the PA slot.

Got it. Does it go up linearly, so let's say, if it's 32x32 instead of 64x64, would it be half of the $1,000 conceptually? Or like how does this change depending on?

The small signal side is relatively linear because there's basically an LNA per. On the transmit side, it's a bit more complex because as you go up in number of elements, the power actually drops. So the radiated power out of the antenna remains relatively constant. So we'll have a smaller PA in a 64 element and a much larger PA in a 2x2 or 4x4 in a macro base station. So it's not exactly linear on the power amplifier side.

Got it. And then lastly, one quick follow-up there is on a lot of pressure on Huawei, right, we saw yesterday, I think even in the U.K., there are moves to restrict the adoption of Huawei. So we could see some share shifts to whether it is Samsung or NEC or Ericsson or Nokia, I guess. How are you kind of positioned? Do you have good exposure across the board to all of these suppliers? Are you more at one versus another? Like if there were to be a share shift from Huawei, then number one, will that pause 5G adoption in any way? And number two, does it have any impact on your opportunity?

So we are definitely well positioned across the top OEMs and in fact, some of the Tier 2 OEMs that are supporting deployments around the world. So I would think as share shifts away from Huawei to other suppliers, other OEMs that, that will, in general, be a positive for us. Now again, as I've spoken about several times, we did reposition our focus. Huawei is a great customer for us, but we're not able to sell to them today. So we very quickly repositioned ourselves to the other customers in the space. And that's going to allow us to be able to return to year-over-year growth in just about a year. So really pleased with the effort of my engineering teams and marketing teams and sales teams to be able to do a quick adjustment to other suppliers in the base. Now it also, I think, talks a lot about the kind of technology we have and the kind of products that we've been able to develop that we're able to do that fairly quickly.

Got it. Maybe, Bob, back to you on the smartphone -- 5G smartphone side. I think you guys were very early in terms of calling out the content growth opportunity in 5G. So an extra -- I think at that time, at one of your prior Analyst Days, you had outlined a $5, $6, $7 kind of incremental content for 5G versus 4G. Is that what you are seeing in practice as well that it is indeed anywhere between 40% to 60% higher content in 5G smartphones versus 4G? Like what's been the experience as we are getting into the actual cycle as opposed to just anticipating the cycle?

Vivek, we are continuing to see $5 to $7 worth of content to support 5G compared with the equivalent 4G model. So I don't want to get into percentages because we're seeing that consistent, whether it's their marquee phone or their mass-tier phone, we're still seeing that $5 to $7 in both. So that's continuing. And I just want to remind the audience that 5G adds significant content, and I'll just use 3.5 gigahertz, as an example. For the transmit side, there's 2 per band; and on the receive side, there's 4 per band. So you do have MIMO going in there. And then also, as I mentioned earlier in my comments that we pick up extra antenna tuning because you're adding frequency bands and don't have the space. And also, now you've got to do a much better job on the multiplexing to support the 4G and obviously power management as well. So yes, it's holding, but it's holding throughout the tiers of phones.