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

Hi. My name is Atif Malik. I cover U.S. semiconductors and equipment stocks at Citi. It's my pleasure to welcome Bob Bruggeworth, CEO of Qorvo; Mark Murphy, CFO; and James Klein, President of the Infrastructure and Defense Product Group. Mark and Bob are going to go over an update for us on the September quarter and then we'll dive into the Q&A. Mark?

Actually, thanks, Atif, and I want to thank everyone for joining us today. Although it's virtual, we do appreciate it. I also want to remind everyone that our safe harbor language that accompanies our press release applies to our comments today. I'll make a few high-level comments and then make sure we have plenty of time for discussion and Q&A. About an hour ago, we issued a quarterly financial update. If you've not had a chance to look at it, we would suggest you do so. During the September quarter, mobile demand has been stronger than we expected. The team is executing extremely well and we continue to be pleased with our operating performance. As we have laid out before, Qorvo is innovating and investing in the technologies our markets need. We are actively managing our portfolio to sustain leadership where Qorvo is best positioned to serve our customers. We are driving productivity, reducing capital intensity, and we are delivering the cutting-edge technologies our customers need at scale and with industry-leading quality. We are a critical supplier into the 5G, WiFi, IoT, defense and other growth markets. And we are delivering a model to grow revenue, expand margins and drive free cash flow in the future and the long term. Finally, we are serving our customers extremely well as our quarterly update today demonstrates. So with that, Atif, I'll turn it back over to you for any housekeeping questions you may have, and hopefully, we'll get into a lot of great questions with our audience and cover our IDP business that's doing extremely well.

Thank you, Bob. And James is the star of our fireside chat today. But just on that positive preannouncement for the September quarter, if you can talk about what you saw in the mobile demand. Did you see more of the same -- that the China strength in the low, mid-end tiers was stronger than what you expected? And if you can also talk about what you're seeing with the whole Huawei demand kind of shifting to some of the other competitors, whether it's Samsung or other competitors in China. Are you still seeing an upside from that demand?

Yes. As far as what we're seeing in mobile, it's across all of our mobile customers except Huawei. But I think right now, I would say that we haven't seen the impacts of some of the trade restrictions on Huawei yet in their end products. I mean, clearly, they've had inventory and have been building. I think if you look a little bit further out, clearly, they're not going to be able to continue to build phones. And you will start to see share shifts around the world really because Huawei primarily was in China and they had already pulled back a fair amount out of Europe. So -- and we're seeing it currently, some of that is the return of the overseas markets for some of our Chinese customers along with the mass tier at Samsung. What I want to make sure you understand, it's across all our customer base in mobile, except for Huawei. And we've -- go ahead, Mark.

Yes. I would just add that we've been clear in our story, and it's been a risk in our business that we've been very transparent about and indicated clearly that Huawei, we expect it to be 5% or less of our business on any given quarter going forward. That includes September, that statement has not changed with the exception of the fact, obviously, with the additional restrictions beyond the September quarter, we've not factored in -- the numbers that we talked about today, we will not factor in Huawei. However, the broader statement we've made about how we see the market moving if Huawei's unable to ship premium tier phones, that shift in share will go to others which were well represented. And again, I want to emphasize that this updated guidance we've provided is not driven by Huawei. It's broad-based across our mobile customer base.

Got it, Mark. Mark, I don't want to put you on the spot. But I think on the last earnings call, you talked about December quarter also growing for mobile sequentially, partly because of a very public delayed launch of a flagship phone. Do you want to make any comments on December right now or are you good for September?

Yes. I mean, let me flesh out September a bit and I'll [Audio Gap] December. Since I did last quarter, I think it's only fair. Again, I think there's some consistency, hopefully, you're seeing in our message. We said in June that we saw strong demand across multiple markets. And that started with 5G infrastructure and handsets, but it was even broader than that. We were able to intersect that demand, as you saw in the June quarter, in a very challenging environment. We said that we expected more of the same in the September quarter. And just to be candid, it just exceeded our expectations here. It's been much stronger on the mobile side specifically, and again, across the customer base, so very healthy, robust demand. The September quarter even adjusted for the additional week. And if you want to go back and look at the transcript, we went into discussion about the additional week we have in this fiscal quarter. Even with the additional week adjusted, which is about $72 million in this case, it's still a strong quarter. It's over $940 million. I mean, coincidentally, it's adjusted, it's about what our previous guidance was for the September quarter, and that's up 20% sequentially if you adjust the number to $943 million and at 17% year-over-year. In IDP, we expect to be slightly under $300 million for the September quarter, timing of installs, product rollouts and so forth. But if we adjust for the additional week, that number is around $280 million, maybe a little bit below that. And we would expect, consistent with what we said in the June quarter, we expect the December quarter to be down a bit from that, again, due to timing of installs and product launches and so forth. But as we see it now, IDP is going to have an exceptional year based on what's transpired so far and what we see the rest of the year. So well over $1 billion business run rate for the company. On the mobile side, in the September quarter, we expect revenue to be about $720 million, or again, adjusted for the additional week, $670 million, and that would be up 40% sequentially and up 7% year-over-year. Again, uncertain times, but as we sit now and assess the health of our channels and the strength of 5G, we see December quarter in mobile to be flattish. Hard -- again, hard to call at this point. So if we look at IDP being down a bit sequentially, September to December and I'm talking adjusted numbers, of course, absolutely, it would be down, of course. So if we see IDP being down on an adjusted basis and then mobile being flattish, I think you could see revenue in the $900 million to $940 million range in the December quarter. And again, that's somewhat consistent with the guidance we gave previously.

Great. Mark, on the gross margins, you maintained the 50% outlook for September. Any takeaways on the gross margin line from the upside in September on the top line?

Yes. Of course, we're continuously scrubbing gross margin. It's a great -- area of great focus for the company and we're constantly reassessing mix and absorption and other factors. Pleased to say, and you see this in our update today, we're maintaining a 50% gross margin outlook. Puts and takes relative to our last forecast, of course, on the negative side, the stronger mobile volumes bring slightly unfavorable mix relative to IDP, so that stronger mobile is, they weighed on margins a bit relative to our last guide. On the other hand, we're seeing very good factory performance and absorption based on the higher volumes. So the puts and takes, we see a forecast that's about the same on gross margin. And again, we -- as I said in the June quarter call, we -- as of now, what we see rest of year, we expect to be able to sustain that gross margin levels. So nothing's changed there. I will note, Atif, since we're kind of running through the P&L here, I do want to make sure there's an adjustment for folks on OpEx. You won't be able to get to the $2.14 EPS without this increase. We are looking at higher OpEx in the quarter. We had guided to $207 million. We're looking at around $214 million. That's a combination of labor costs and product development spend and so forth. And the rest of the year, we see, we now see OpEx running at about $200 million per quarter in the second half of our fiscal year when before I had said about $196 million. So a little bit higher OpEx, reflecting some labor costs and then just continued investment in the business and a lot of good opportunities we see.

Great. I think we can move to James to talk about the IDP business, but I really appreciate the update, Bob and Mark. James, if we just focus on the September quarter, kind of near term, like Mark said, a little bit below $300 million bogey but still double-digit year-over-year growth in the September quarter. I mean IDP business has been a huge success story. I might have dosed off, it's like 1/3 of your sales now. Can you just talk about your expectations for the number of global base stations this year and next year?

Yes. I think we'll -- we're going to stay the course for what we've projected in the past. We talked about 0.75 million base stations to be deployed in 2020 and we do see that number increasing as we go into next year, mostly driven by China deployments both this year and next year. Now I will say the latest round of Huawei sanctions may have some impact on deployments in China. But I think it's a bit too early for us to really try to call that. As a footnote though, as we see any shifts away from Huawei to the other OEMs that are supplying in that marketplace like ZTE or Ericsson, those will be positive for Qorvo. So I think right now, a little bit too early to see how it works out with Huawei, and any shift that would come away from Huawei into the other players should be a positive impact for us.

Sure. And next year, you're also looking at the 20%-plus growth number?

In a number of -- yes, a number of base stations. Yes, yes, yes, absolutely. And again, exactly what frequencies and what configurations that get deployed, I think it's still a bit early. But yes, we are still expecting a ramp in the rollout, and again, predominantly driven by the deployments in China and the start of some deployments in the U.S.

Great. And then you have talked about a 10x dollar content gain from $100 to $150 in 5G base station driven by multiple antenna accounts. Can you talk about the specific demand areas where Qorvo is strong?

Yes. First of all, that 10x number, it's an approximate number and it really depends on the antenna configuration. So on a 64 element, antenna, as an example, our content gains can actually be a bit higher than 10x. On a 32, obviously, they could be a bit lower. And so again, that's sort of an approximate number. A significant amount, probably over half of our content gain is just the addition of the PA socket. So with GaN really being adopted in this marketplace really by all of the major OEMs, that brings effectively a large adder to what we're able to service in the market. And so we continue to pursue those slots. And specifically with those greater than 2 gigahertz, we think that's GaN's sweet spot, so we're going to continue to drive for that. Now that said, we've also got a very nice, robust business in small signal. And of course, if you go from a normal macro that maybe has 8 channels to a 32- or 64-element array, you also get a significant content improvement on the small signal side. And we've got market-leading products on the small single side as well. Great example are our low noise amplifiers, which we believe sort of set the standard in the industry for performance.

And James, who are the competitors on the PA socket side for you for the base stations?

Well I think very -- we're pretty aligned with what you see in most of the analyst reports, where Sumitomo has been in the market for a long period of time with their products in GaN. And then, of course, we've -- Cree's been there with us as well. And then we have the more traditional LDMOS players that are in the market, have been in the market for a while, so Ampleon, NXP, things like that. The way I look at the market, again, is if it's over 2 gigahertz, it's going to tilt towards GaN. If it's below 2 gigahertz, it typically tilts towards LDMOS.

Okay. On the GaN side, last week, China put out this update that they want to focus on the third generation of semiconductor, silicon carbide, gallium nitride. Can you just talk about the barriers to entry in the GaN market and if there's a reason to be too worried about some of the domestic players in the China market?

Well I'll tell you about our journey. We started developing GaN, I guess, just a bit more than 20 years ago, with a real focus initially on being able to demonstrate reliability. So I would say sort of that first barrier is to be able to build a process that has long life, very reliable performance and we certainly have achieved that with our gallium nitride. The second was really to be able to ramp it up into production and be able to produce the kind of volumes that you need to produce, especially for some of these commercial-type products like you're talking about. And so we've also, as you certainly has noticed last quarter and this quarter we're in, we have been able to get up that production curve and be able to produce the technology and volume. You also need a healthy supply chain. I think we've been very focused on making sure we have that as well and that's all part of scale. Now I didn't mention performance, but I will tell you that we win and lose these slots based on just a very few points of efficiency, just a very few points of our dBs of gain, things like that, so it is also very much performance-driven market. So I think you've got to get the fundamental technology right, you've got to be able to scale it and then you need world-class performance on top of that. So I would say still pretty good barriers. We've been doing it for 20 years.

James, you want to talk anything about design as well, techniques?

Yes. Thanks, Bob. I didn't -- that's a good point. We -- to be able to design certainly in this environment, and I'll talk about base station, you really need world-class Doherty design expertise to be able to hit the demands of this market. And those demands are basically a highly efficient power amplifier working over a broad range of loads and a broad range of environmental conditions as well. So we've also been focused pretty intently over the last several years of being able to design those Doherty's. Of course, you need low-cost packaging as well that performs very well at these frequencies. So certainly, a lot of barriers to be able to do all those things. And certainly, we've seen RF design be a challenge for a lot of folks and something that we've mastered over all the years. Now as you move into other markets with GaN like our defense business, the barriers get even higher, as you can imagine, one, because you move into much broader and higher frequency ranges. And of course, you have many other restrictions about where the work can be done and who can do the work that add to those barriers to entry into that part of the market.

James, can you talk about the defense portion of the IDP business? How big is this? You have called this as an asset to the defense department. Just talk about the product portfolio.

Yes. So the size of the business -- as I said before, defense represents about 1/4 of IDP, and it will ebb and flow a bit depending on some of our big multiyear contracts. But I think it's generally correct to talk about it being about 1/4 of IDP. We've been in this business and supported this market with a broad set of portfolio products for several decades. We have products that go all the way from sub-1 gigahertz up to almost 100 gigahertz. And we support virtually the entire RF chain, whether transmit side, receive side, a broad, broad set of products. And so I think when we talk about diversification inside IDP, this is kind of the poster child for being diversified. It's the defense business. Now I also want to talk about growth in the defense business. If you look at since we formed the company, IDP has grown at a CAGR sort of in that mid-, low teens, right, somewhere between 10% and 15%. And that's even with the down year last year because of the Huawei ban. So we've had a pretty good run of growth since we've formed the company. The defense business is actually just slightly above the growth rate of the overall IDP. So I do want people to understand that we -- it is not just a great, stable business for us. It's also a great growing business for us. Now why is it growing? It's very similar to what we've seen in base station. We've got very good underlying trends in the defense business with the adoption of, in that market, what's called phased arrays, what we call massive MIMO in the base station market. So we got a big content uplift. And on top of that, we've got the adoption of GaN going on in the defense space, just like we do in other markets. So really good underlying trends that allow us to capture that business.

Great. And James, on the base station infrastructure side, when do you expect the millimeter wave part of the base stations to kind of roll out and how will that impact your business?

Yes. I would say we -- for a millimeter wave, I think it's still a bit early in the deployments, and I would say, still a bit unclear whether there will be massive millimeter wave deployments. Really, I think, dependent on what the adoption rate looks like in the phone. We are certainly positioning ourselves with technology to be available. If that ramps, and I think most folks know that we certainly participate in the early millimeter wave deployments. So I would say it's pretty early in, and we'll be ready with technology as it moves forward, particularly with GaN. I think GaN will offer a significant performance improvement just like it has in other areas. So once millimeter wave starts to take off, we think GaN will start to take off. Now that said, what we're really focused on that market is the China deployments, and then we're getting ready for C-band deployments in the U.S. Auctions are coming up later this year. There was an initial auction recently. And we want to make sure that we're ready for those deployments in the U.S. And this is in the higher part of the 3 gigahertz bands. And so we have been out sampling products. We're designing a record at several OEMs in those frequency bands, including some very key ones. So we want to make sure that we're positioned, just like we were for China deployments, we want to make sure that we're positioned for U.S. deployments.

And James, is there a reason to believe you can take the know-how in GaN and massive MIMO to Eric's business on the mobile side as -- move to millimeter wave or a lot of this is separate from mobile?

Yes. I think right now, the move of GaN to mobile, it's probably a bit early on whether that technology will play there or not. But certainly, millimeter wave, we've got the technology in the mobile space to service the millimeter wave market. And we'll do that with the combination of gaAs and some of the silicon processes but we, again, we've been in the millimeter wave space for years and years and years inside IDP. And I think we've got the foundational technology to apply to both mobile and the IDP markets in those frequency ranges.