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

Good morning, and welcome, everyone, to the Future of Technology Series. This is John Vinh, senior semis analyst at KeyBanc Capital Markets. We are pleased to have Bob Bruggeworth, CEO; and Eric Creviston, President of Mobile Product Groups from Qorvo to join us. Format of this session will be a Q&A fireside chat. If you have any questions, please feel free to submit them online at the bottom of your web page.

Maybe just to start off, Bob, highlight of the quarter, in my view, was IDP. You hit a milestone there. It became 40% of your revenues. I don't think anyone had anticipated that. If I look at the IDP performance, it was up $100 million on a year-over-year basis, grew over 45%. How much of that was 5G versus WiFi 6 versus kind of other growth drivers? And maybe can you talk about the sustainability of IDP over the next several years. And then longer term, is it reasonable to think about IDP potentially becoming half of your revenues at some point?

John, thanks for having us today. I appreciate it. And thanks for everyone listening in on the webcast, and appreciate the question very much. And the IDP team did have an excellent quarter. It was not a surprise to us. It's what -- it came in as expected. As we said on the call, both businesses saw upside during the quarter. So that was great to see. And yes, it was about 40%, but I will point out that given the information that we shared on the call, going into the December quarter, along with the September quarter, it's going to come back down near 30% -- probably 32%, 33% of sales. But it was an excellent quarter. And they've done a great job of pivoting once they were no longer able to ship to Huawei in the prior -- from the prior year, we were and this year, we weren't. So the growth drivers, as you pointed out, we saw strong growth in about every business there: in the Infrastructure business, in the Defense business, this is our year-over-year comments, along with our WiFi business, Connectivity business and our Programmable Power Management. So all businesses except for actually the small Automotive business, we had actually grew, and we're expecting strength to continue. And there are multiyear, long-term growth drivers in that business, and you mentioned 5G, and we do see that continuing. And it's also exciting to see now that the U.S. is starting to release spectrum Sub-6. Because that's really where IDP is growing in the infrastructure market today is Sub-6 as China rolls that out. And it's all, for the most part, massive MIMO where we're participating. And we'll all expect to see that come in the U.S. and Europe in the future years. So we see that as a nice growth driver. We also see a nice growth driver in WiFi, and it's continued to grow over the past 3 years, and we see that continuing. Yes, it's supported by work from home, which many of our audience are doing, I'm sure. And we expect that to continue as new standards come out like WiFi 6E, as an example. So we expect that to continue to grow. On the Defense business, it's lumpy at times, but it's continued to grow very nicely year-over-year. And we expect that to continue as we bring out leading technologies and best-in-class products for the defense market, followed by our power management business, which is also extremely strong. So we feel good about that. And later on, in the automotive business, we expect to pick up, and we're doing a pretty good job of winning sockets there. As you know, it's a much longer design-in cycle and a longer tail. So as we look at it organically, we see strong double-digits growth like we've demonstrated in the past few years. We also want to point out to the audience that we've had some very good tuck-in acquisitions like the Programmable Power Management along with Custom MMIC that we just saw our first full quarter of, which are both doing extremely well since they've been integrated. So now to answer your question, can we take that to 50%? Well, if mobile doesn't grow, that probably could happen. However, on the mobile side, given this year that we expect handsets to be down over 10%. But offsetting that, in the RF TAM, we're seeing a pickup, as we've commented on the number of 5G phones that are going to be released this year, and we expect that RF TAM to be roughly flat. So next year, as we roll forward, we expect the handset industry, even if it stays flat or grows slightly, just the sheer number of 5G phones, the RF TAM starts to grow. So then I think that will put a little pressure on the IDP business to keep up because it's a much larger business. Then you layer on top of that, the Decawave acquisition that we made in ultra-wideband, and we commented on the call that that's growing very nicely, and that's going to be a nice uplift to our business. In the longer term, we've also acquired Cavendish for the RF MEMS business, which will grow that. So I think net-net, both businesses have good technologies and are developing best-in-class products. As I say to James, your job is to get IDP to grow faster than mobile. And as I say to Eric, your job is to get mobile to grow faster than IDP. So we'll have to see. But both are great businesses, growing very nicely. So thanks, John.

Great. Just a follow-up question to that. Just on a go-forward basis, can you just talk about how you think about internally, allocating internal incremental R&D resources between Eric's and James' group?

Sure. One of the things that we take a real good look at is where should Qorvo participate and where do we have the technology advantage and the product road map that will grow our businesses. So we really go down and look at each one of the businesses within their domains and analyze. And there are years that we fund a little more in IDP. We increase that, and maybe a little less in mobile. And there's other years where we increase more in mobile and a little less in IDP. But in general, our goal is to have our R&D dollars growing at a much slower rate than our top line.

Great. Maybe switching over to 5G handsets. I think it's interesting despite kind of the handset TAM being down 10% to 15% this year, depending on whose estimate you go with. Outlook for 5G handsets from your perspective, sounds like it's remained largely unchanged. I think we've seen some sell-through data recently out of China that over half of the sell-through volume was 5G. I think you're maintaining your outlook of roughly about 250 million units. Maybe can you give us your perspective on why that estimate hasn't changed? Is it potentially you were conservative to begin with? Or is there something about 5G that has caused kind of those expectations to remain intact here?

Yes. I think, John, at the beginning of the calendar year, we had a number that was a little bit higher than that. And as you recall, when we reported our March quarter, we brought that down to 250 million. And I know a lot of people still questioned us and a lot of people had their numbers maybe in that 175 million range. And we came out again with the June quarter, and we said, "Hey, we're holding it to 250 million." And as the year matures, we're feeling more and more confident in that. And you've seen several other analysts -- now some are calling to 250 million, some are still a little bit lower. But I think we've got a good view. When you look at -- Eric's team has done a really good job of diversifying our business. So I feel we have a really good view of the major customers that are going to drive that 250 million to have a good feel for that number.

Great. Maybe switching to Eric. I think you've been highlighting over the last year that you have a fully integrated module solution that supports all signal pass, including low, mid-high and ultra-high. Can you just talk about the traction that you're getting there? Where are you seeing kind of the most uptake? And then what's the biggest benefit that your customers get when they go to a single, fully integrated solution? Is it cost, time to market...

Yes. The primary problem we're solving is complexity, of course. As you're adding 5G on top of all the 4G for backward compatibility, you're actually bringing 4G up even to better capability than it had on a stand-alone 4G network while being compatible with all the 5G extra content and bands. So it's incredibly complicated, especially around the antenna. But to clarify, for the smartphones that we're bringing up, we have integrated modules for each band, for the low band, the mid-high and the ultra-high. So there's 3 placements in total. But within those, they're fully integrated. LNAs are integrated, shields are integrated, all the switching and passes, all the components that you need. So it is just 3 placements for the entire main path of a full featured, covers all the bands sort of 5G phone. And that really helps our customers get to market quickly. And the board space is such a premium within the handset, too, with other functions that they're adding, ultra-wideband, for example, and more antennas and different industrial designs that if we can make things more compact and help them get to market quickly, that's going to help them tremendously.

Great. Maybe related to that, Eric, can you talk about kind of the integration trends you see over the next several years? I know that you guys have great visibility to kind of platform decisions that are made several years out. I think, historically, flagship platforms have remained discrete, whereas you're starting to see more mid- to low-end handsets become more integrated. Can you talk about kind of the integration trends going forward? Could we start to see flagship platforms become increasingly more integrated going forward? Or is it really going to be more of a mid-to-low phenomenon?

Yes. I'll go back one step, as a matter of fact, and start with the TAM that Bob responded to in terms of the TAM growth. And what's interesting about the 250 million units, we also said that we see $5 to $7 worth of content within each tier. So in a high tier, you're adding $5 to $7 to something already in the 20s. In the mid-tier, you're taking a phone that had $10 to $12 worth of content and adding another $5 to $7. And then as we're going into the low tier, we're actually still seeing that sort of lift, but now it's on a base of, say, a $3 to $5 [ band ], you're adding still $5 to $7 worth more for 5G. And one of the reasons for that is we are seeing integration really go down into the lower tier. The complexity of this -- if you look at the handset designs, the teams that are used to doing those lower-tier designs are even less equipped to deal with all the complexity 5G brings with it. And also, the carriers are beginning to require multiple transmit frequencies at once. It's just -- it was there for a nonstand-alone operation to begin with, kind of anchoring on a 4G band while transferring data on a 5G. But once the carriers got this into their network, they're not giving it up. They want the capability, the flexibility to be efficient with the data by transmitting on 4G and even multiple 5G bands at the same time. That drives a lot of complexity, and it will be a requirement for the handsets to operate on that network. So for that, it raises the dollar content at all tiers, but it also drives that integrated solution. Once it's done and working, it's so much easier for handset manufacturers just to repopulate onto the next design rather than try to take a step backwards and go discrete even for the low tier.

Got it. Thanks, Eric. We actually do have a follow-up question on that submitted online. Just relative to the mid-tier 5G market in China moving towards front-end modules, what's the percentage of that market that's using modules versus discretes? And where do you see that trending? And then on your commentary on the $5 to $7 in incremental content in the mid-tier, is that an average across all level -- all material levels in high end? And then just on the RF front-end TAM, can you clarify, is your thinking that on 5G this year that the TAM for high-end flagship, that the TAM is roughly about $30?

So let's start with the first question, which was what's driving that extra content even in the mid-tiers. And it's primarily new bands. And so everyone's heard of n77, n78, n79, these new kind of ultra-high band frequencies that are rolling out for 5G, especially prevalent in China, of course. So that's all sort of new content that has to be added to work on the current networks, right? And then in addition to that, as I said, is bringing 4G up to the point where it can host the 5G. And so a lot of more complex filtering and switching even in what would have been just a 4G section of the phone previously. So it's really that added complexity that brings that in with the added frequencies being covered. And then the question was about the content of $5 to $7, whether that's an average or -- there's a lot of different handsets being developed, dozens at a time. There may be some slightly above or slightly below. So that's -- the majority of the phones will fall in that sort of $5 to $7 range of added content. And what was the third part of the question? It was...

Just the high end-flagship TAM. Is it roughly about $30 for the TAM in high-end 5G flagships?

Yes. That's a reasonable number. It's in that range, yes.

Okay. Maybe moving forward to talk about just U.S.-China trade tensions. Since the HiSilicon band and kind of obviously, we got a recent licensing agreement with Qualcomm and Huawei, I think there was optimism that there is potential, a chip deal there and potentially a license that's going to be granted. But either way, it's pretty clear that Huawei is going to have to go to a merchant baseband here, right, either it be MediaTek or potentially a combination of MediaTek and Qualcomm. Does this create incremental opportunities for you? And perhaps, can you talk about how you're positioning changes between MediaTek and Qualcomm-based platforms versus a HiSilicon-based platform?

Sure. Thanks, John. And we're not going to speculate on which way Huawei is going to go or what their plans are. But I think what Eric and his team have done a very good job of is developing best-in-class RF components that work with, whether it's the Qualcomm baseband, the MediaTek baseband, the SLSI baseband, or for that matter, HiSilicon. And what's also important is it was the same RF component that worked across all 4 basebands. So the good news is, and we've enjoyed some business with Huawei, that whatever they've been using, if they choose another baseband and want to stay with the same architecture, those front-end components will work. So they've done a pretty good job of that. Our goal is to ship best-in-class RF components to our customers where we legally can. So at the same time, when it comes to Huawei in particular, we'll make sure that we can legally ship to them. But the point I want to make is the platform that's been built for our best-in-class RF components, they work for whichever baseband our customers choose, whether that's, as you pointed out, Huawei or Vivo, Oppo, Xiaomi, Samsung, et cetera. So I think that's what's important, so that we're able to handle the mix of what our customers want to do with the same products.