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

Good morning, everybody. Welcome to the Wells Fargo TMT Summit. My name is Gary Mobley. I'm one of 3 publishing semiconductor analysts at Wells Fargo Securities. And it's my pleasure to have with us today the management team from Qorvo, including Mark Murphy, CFO; Eric Creviston, who is President of the mobile business unit; and Doug DeLieto, Head of Investor Relations for Qorvo.

And so with that introduction, let me start it off with, I guess, maybe a prompt for you, Mark, to give those who aren't terribly familiar with Qorvo or those who haven't been close to the story lately, a brief overview of Qorvo and what makes Qorvo special.

Sure. Thanks, Gary, and I appreciate everyone joining. What I would start with is Qorvo wins because we have the ability to solve our customers' toughest RF challenges, and those problems are only getting harder. It takes a unique, and I would say, hard to replicate, combination of technologies, products, which include design expertise and operating capabilities to be successful in this space, and we've been able to assemble all of those. The formation of Qorvo actually was done to address the challenges and the market opportunities we're experiencing today. We'll talk quite a bit about that. And fortunately, we have Eric joining us. And these challenges and market opportunities are really driven by some constraints that are underpinning our demand. And that is the insatiable demand for data, which is just absolutely relentless. The irreversible complexity of spectrum. There's just no going back. This will forever remain and becomes increasingly more complicated and then just unrelenting customer demand and our customers' customers' demand for better performance on what I would call, ever-changing form factor preferences. Now all this results in the need for what we say is more and better RF, which means that we need to have the leading technologies. And for us, since we create modules, in many cases, you have to have leading technologies in multiple areas, compound semiconductor, gas and GaN. You need to have a broad suite of acoustic filtering, which is incredibly difficult. And then you have to have CMOS design expertise and partnerships that are deep and multiyear technology development. So the technology is important in our business, of course. We also have to have a product portfolio of integrated products and discrete products that are differentiated and that are most relevant to our customers' problems, and we've been adding to that capability. We already have an outstanding capability overall on products, but we've been adding to that through the UWB business, which Eric will talk about, defense MMIC products, which we bought last year and then programmable power management. So we've been bolting on capabilities and products to serve our customers better. And then, of course, you've got to have the ability in our space to reliably deliver and at world-class quality. It's a very unusual space that, in many times, you add bleeding edge technology and you're ramping to full volume in the initial quarter of launch. And obviously, a customer producing a device with thousands of components can have you fall down. And we create some of the most difficult parts in a phone, for example, or in other products that we serve. Now today, through our business, we serve the market in 2 segments: The Mobile segment, which Eric is the President of that business. That's about 70% of our business; and then we have the Infrastructure and Defense products business led by James Klein. Both of them report to Bob Bruggeworth, and we serve a wide range of customers in support of the markets out of those businesses. And principally, right now it's the rollout of 5G, which we believe is a multi-year durable growth driver across both handsets and infrastructure. We've got the adoption of WiFi 6 and 6E, which is providing higher performance connectivity just at the right time when work from home has become so important to all of us. And then finally, I would call out, we've got increased technology content in defense. And that's a trend that's been multiyear, and we continue to out into perpetuity. On the horizon, we see tremendous growth in UWB, or impulse radio. And again, Eric will talk about that. We see tremendous growth in our power management business. And then, of course, across a wide range of applications in IoT. It's almost difficult to feel the number of opportunities we're seeing. So it's become an interesting capital allocation exercise, but as a result of our ability to serve these markets and our customers well, in '21 -- our fiscal '21, which ends in the March quarter, we expect double-digit revenue growth this year. In fact, December and March quarter is up 20-plus percent year-over-year. We're delivering strong operating leverage on that growth. And importantly, while continuing to invest in the business, I want to make sure I drive that point home. And then we are achieving free cash flow of approximately $900 million. And I would wrap up my comments, Gary, by saying we see opportunities actually expanding at the moment with what we've done and what we're able to do, all while we're executing well on what's in front of us at the moment. So we live with that.

I appreciate that introduction, Mark. I want to do -- I want to, however, bring Eric into the conversation since we have him, again, representing 70% of the overall company revenue. And I wanted to ask about sort of the divergent trends between the overall mobile handset market, which by all accounts, may decline 15% in calendar year 2020 in terms of units. But if I look at the mobile business units of Qorvo and even your competitors, Skyworks, we're looking at a situation where we're going to see high single-digit percent mobile handset-related sales growth. And so could you help us understand the difference or the divergence in those 2 different trends? Is it Qorvo shipping the bill rates higher than end market demand for phone units? Or is it simply a more so a function of higher bill material per device win related specifically to 5G?

Yes. It's really related to the higher dollar content in 5G systems. We've been saying practically over a year now that we expected 250 million 5G handsets to ship this year. And it looks like that's going to be right on the money for the most part. And we've also said that dollar content related to 5G over 4G is in the range of $5 to $7 and regardless of tiers. So on the high tier, it's $5 to $7, but also the mid-tier as you're beginning to see some units there as well. You get that same set of content list. So 250 million units times $5 to $7 of additional content goes a long way and we're seeing that 5G, for the most part. In fact, all the systems that we're aware of so far shipping in production are fully integrated solutions. So they're using modules from companies like us that we think we're very uniquely positioned with the full technology portfolio to do low-band, mid-high band, ultra-high band as well as WiFi in the systems in integrated RF front-end modules. So when we're able to put the silicon together with the gallium arsenide, we have SAW filters and BAW filters covering all the frequency range in very advanced packaging capability. We see a good tailwind in content especially in the second half of the year as the 5G is ramping in on.

Sure. If I look at the delta and 5G units in calendar year 2020, it's about 200 million units per year overall estimate, right? And so 50 million last year, 250 million this year, roughly. But if I look at the forecasted delta for next year, it's roughly 300 million units. And so should we look at that as being maybe a step function driver of RFFE growth for your particular business unit?

I'd say it's a continual growth driver, right? We're in the very early innings of rolling out. As you said, there was a couple -- tens of millions last year. There will be 250 million as we're saying this year. We said approximately doubling to around 500 million next year, but it's going to continue to work its way through the portfolio. Just as 3G and 4G did, it's a multiyear cycle as it goes down. And one of the things that, again, I want to highlight is we see that 5G content growth, regardless of the tier. So if it's $5 to $7 on a high-end 4G phone that might have had $25 of content, that's a certain lift, but if you are in the mid-tier and you put in $5 to $7 on a 4G phone that would have had $10 of content, of course, as a percentage, it's much higher. So we think we're in the very early innings of multiyear growth in RF content-driven by 5G.

Got you. I want to switch gears to a couple of current events. And there what -- I don't expect you to comment on the validity of this, but I mean, there was an article in DigiTimes last week talking about Apple perhaps in-sourcing their own RFFE needs. And so I know you can't speak to a customer specifically, and particularly that one, but what is the impediment to some of these big smartphone OEMs, and they seemingly are growing and increasing in market share concentration? What is the impediment for them to get it into the RFFE business versus some of the captive development silicon, which for the most part, is fabless?

Right. Right. As Mark sort of highlighted, what really drives our business are very long-term technology trends and investments we've made. What's different with RF versus even digital within semiconductors is the fact that RF has very specialized technologies for each function, right, as opposed to silicon, which is largely digital with some analog content, it's still very similar processing. In RF, you've got specialized semiconductor technologies in gallium arsenide, for example, for the power amplifiers. We use some silicon. We use SOI silicon as well, but then we also use acoustic technologies. And more and more, the acoustic technologies that are doing the filtering, those are becoming the key elements, really, of the architecture. And when you look at what's enabling these 5G systems going forward, the ability to manage the antenna networks and use acoustic technologies again to route the signals in and out of multiple antennas at the same time, that's a very, very challenging and very specialized problem. Also just geographically or physically on the phone, in order to make these systems work, the antennas are spread out all around the edge of the phone. And the RF needs to be out there near the antenna element, right? So it's not this sort of thing where you have sort of a big silicon chip in the middle and you can just keep adding functions in growing the silicon. RF is being pushed more and more specialized and more and more around the edges of the periphery of the phone. And that's where we live, right? And it's not the sort of environment that it's easy to penetrate. The acoustic technologies are very differentiated. We've got a decades-long R&D into these technologies. So it's not likely that there'll be new entrants, whether from phone OEMs or for that matter from start-up companies and other entrants.

Got you. Okay. And I want to talk about the different market dynamics. The mobile handset market is very dynamic right now in that you've got a #2 player struggling to keep its supply chain together. You've got a major 5G product launch, one of the top U.S. OEMs. And so against that backdrop, how would you describe the market dynamics for RFFE for mobile handsets right now? Would you describe it or characterize it as being a bit frothy right now?

I think it's gratifying actually to see that the market uptake in 5G coming in as we had expected and the investments we've been making. I mean you can truly say that Qorvo was built for 5G. So when -- in 2015, when we did the merger and we put all the technologies needed for the RFFE into one company that's Qorvo. It was really with the vision of these integrated modules in going forward. And we're seeing this happen now across all OEMs, to your point, there are shifts between the OEMs and there's different launch cycles and so forth, but the commonality is that 5G is driving a lot of excitement and capability in the industry, and it's really enabled by this RF front-end integration that we're providing.

Okay. There's been a lot of very detailed teardowns of the iPhone 12, and I guess the most important takeaways from those teardowns is the ability for the iPhone 12 to support what roughly 50 frequency bands, including 5G. And according to tech insights, the RFFE bill materials has gone from roughly $33 to $45 and that's excluding any contribution for millimeter wave. And so my question to you is, can you speak to the overall trends in the number of frequency bands required for 5G phones, and how this drives demand specifically for RFFE?

Sure. I mean that's been a driver of our industry for some time now as more frequency bands are introduced. There continues to be new bands introduced and certain bands are becoming more and more important, especially as you go higher in frequency. We'll have the C-band auction, for example, next week, we'll see how that turns out, it will affect the amount of content in the phone. But as we're going forward, it's not just about the new bands as we've seen over the past several years. Within those bands, too, customers are trying to get more and more through the bands that they have, right, trying to make the networks more efficient, which pushes the filtering requirements, again, significantly up in terms of complexity. So you've got more bands, you've got -- trying to get more data through each band that you already have, and then on top of that and what's really driving a lot of complexity is trying to use the band simultaneously. So in receive mode, we've had received diversity where the phone can pull a signal from multiple antennas. That's been established for several years now. That continues to grow in complexity on the receive side. But now on the transmit side, which is a much harder problem, the antenna -- multiple antennas being used at the same time for transmit of diversity, that's kind of a new capability that's coming with 5G that's going to push complexity and dollar content up significantly.

And that drives what I referred to as cycles within the cycle?

Yes, exactly.

I guess, RFFE product cycles within each [ air ] interface its cycle, so to speak?