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

Got it. Super helpful. And then Eric, a question on China. The landscape or the backdrop has been very challenging, very tricky with all the geopolitics that's been going on. That said, it does seem like you've done really, really well there, managing down Huawei as a customer, but at the same time, picking up a lot of content in some of the other players and brands like Honor as well more recently. What kind of dynamics are you seeing there from a market share perspective across your customers? And how do you think about your Chinese business going forward?

Yes. You're right. Huawei was a great customer, a large customer of Qorvo's. But if we look at the blended content we had across their portfolio, they had a large amount of very low end and then, of course, some high end as well. But if you look at the volume that they were doing roughly 200 million handsets, shifting over to Vivo, Oppo and Xiaomi, for the most part, at those customers, we've got much more content because they're a healthy mix of export as well as import business, so they've had -- excuse me, export as well as domestic, their shipments. So they've had more complex RF in the first place to handle multiple networks. They also were early adopters of these fully integrated modules, again, bringing a lot of markets -- products to market quickly. The advantage of the Qorvo integration, especially going into 5G, was quite strong for that customer base. So that mix of those couple hundred million Huawei handsets into Vivo, Oppo and Xiaomi has been a real tailwind for our business. And we're enjoying a lot of great traction and, again, long-term relationships with them because of that.

In the near term, Eric, I know historically, China, I guess, as a region, has been a little bit more volatile than some of your other customers and the boom-bust cycle we've seen before. You talked about being in this virtual world and connecting with your customers more often. You spoke to long-term contracts as well. But are you concerned at all that some of the near-term strength you're seeing in China is coming at the expense of perhaps September and December?

You always have to be concerned, right? You always have to watch for that. We've been doing this for a long time, and we went through a lot of cycles with these customers. As Mark indicated in opening remarks, I think we've got a very sophisticated capability now of monitoring material in the entire flow. Certainly, we've got complete visibility of the inventory parts in our channel. I think we've got multiple ways to gauge inventory in our customers' channel, although clearly not as accurately. There's a lot more data available now than there was in the past, of course. And when we used to have those kind of booms and busts in 2G and 3G, I think it's much more data available to us now, so we get a good feel for that and much better communication. Much more stability as well. If you remember, again, going back to 2G and 3G, we literally had 300, 400 customers in China building phones, right? It would come and go quarter-to-quarter sometimes. And now we've got a few very large, very sophisticated global multinational companies really that we're working with there. And so that gives us confidence, at least in what we see and what we see in the numbers.

Got it. On the competitive landscape in mobile, based on the data that we got from you guys and from your peers and from your customers, I think it's pretty clear that Qorvo has done really, really well in China, really, really well in Korea. With your largest customer, I think you've done well, but not as well perhaps as what you've done or what you've delivered in Korea and China. I guess my first part of the question is, what's driven the success in Korea and China? And can you kind of reflect on the most recent North American product cycle and kind of go through the puts and takes to the extent possible?

Yes. It's obviously challenging for us to talk about our large North American customer and product cycles and so forth. But I will say that I think we're real happy with the diversification in our business. And if you look at all of our customers, including North America, we're gaining content year-over-year. So we're participating in the growth, certainly. And I think we have a unique product portfolio, and it does vary by customers somewhat, where we've got very highly differentiated -- certain technologies that are very -- performing very critical functions, especially around the antenna networks and antenna multiplexing and so forth. So we concentrate on that, but then we also have these highly integrated modules, which some customers really rely on. I think our technology continues to advance, and we're confident now that across the board whether you look at GaN, low noise amplifiers, whether you look at SOI switches or you look at BAW filters or even SAW filters, we think our technology is second to none at this point. And our ability to integrate as well is proven. So cycle to cycle, things will move in and out for various dynamics. But keeping our business healthy and diversified and continuing to lead in the toughest parts of the [ front end ], that's going to continue to be where we focus.

Some of your competitors, perhaps not your traditional competitors, but relatively newer competitors are making a bit of noise in terms of their traction that they're seeing. I guess in the case of Qualcomm, they're not necessarily new. They've been around for quite a while, but they are pretty vocal and constructive on their outlook. You've got a couple of domestic Chinese companies, mostly design houses who work with foundries, that are growing very -- at pretty aggressive rates, albeit off a very low base. How would you characterize the competitive landscape there? Not so much the incumbents, but some of the newer guys, if you want to call that.

Yes. I think the strength that we've demonstrated over the last 4 quarters is not -- it's a good sign of the competitive climate. You're right, there's a lot going on. We have to also take into context how much this market is growing, right? And so if you look at Qualcomm, for example, they've done really well. Now a lot of that content is content that we don't even compete in. If you look at the millimeter wave, for example, we would be in the FEM or the front-end module part of it, whereas they have a lot of other content they're bringing in, which doesn't even compete with the RF front-end stuff. So they're doing well. The Chinese discretes, as you said, they're picking up some components. Especially as we focus on 5G, there's 4G stuff that's available there that is good business for them. It's not such a good business for us compared to the other things we can do. So it's a healthy environment, but we like exactly where we're focused in. This is where the value is going to continue to funnel in. And people that can differentiate and have the scale to invest in really, really unique new technologies and integrate things, I think that's exactly where we want to be.

Got it. Shifting gears a little bit. On the infrastructure side, you guys are well positioned there. I think the market has been a little slow or slower over the past couple of quarters. We've heard that from your peers as well. That said, I think the outlook into the middle part of this year -- the second half of this year is much more encouraging. Can you kind of speak to the outlook you foresee in the 5G base station business and talk about sort of the competitive moat that you have around your gallium nitride franchise in particular?

Sure. Yes, on infrastructure specifically -- and I'll take the opportunity to talk a bit about IDP because it's -- what we've got is a really diverse business. So it tends to -- focus tends to be on infrastructure given the name. But on infrastructure, specifically, yes, we did have a weaker finish to this calendar year and in our fiscal year than we expected about 6 months ago. And as we went through the year, a couple of things happened. One, there was just some digestion of strong volumes and infrastructure build-out in China at the end of '19 and into early '20. And then also the mix went a different direction, less massive MIMO, more macro as the China infrastructure move to more rural build-outs and lower frequency. So that was an unfavorable set of dynamics for our business, and our growth in that business slowed through the year. As we look forward, we're positive on both the market and certainly our position in the market. In the near term, we see calendar '21 as more of a transition year in infrastructure, in the sense that we think that in the first half of this calendar year, we're going to see the same market dynamics that we saw at the last half of calendar '20, in that kind of heavier mix of macro than massive MIMO and just not quite the same volume that we saw over a year ago. We see that changing in the back half of the calendar year. We see in both the volume and pickup, and we see more of a resumption of massive MIMO-related build-outs. And most folks know that massive MIMO has much higher content of PAs for the antenna array, and GaN is the preferred technology for those devices. So we feel great about our position, and we feel good about the market over time. And listen, it's going to be a multiyear build-out. We are just -- China has yet to build-out completely, of course, or fully. The C-band auctions are wrapping up, and that build-out will start the end of the calendar year in addition to other parts of the 5G build-out in the U.S. and then, of course, you've got Europe. As the sub 6, C-band and some of the higher frequencies end up being deployed, again, it's going to favor this massive MIMO mix and requiring more GaN. And as Eric mentioned, we're as experienced in GaN as anybody in the market. We've been doing GaN devices for decades, leading devices for the -- for parts of our market in the U.S. and feel great about our ability to have our fair share of the market.

Great. And other parts of IDP, WiFi, aerospace and defense -- to your point earlier, you've got a great portfolio. I feel like we don't spend enough time talking about the opportunity set there.

Yes. We've got -- I mean we've got a fantastic rest of the business. I mean the infrastructure business, we have a solid business, but we have a fantastic rest of the portfolio. It's -- with our December results and the March guide, that business will be over $1.1 billion in fiscal '21. It grew over 35% year-over-year. And that was from infrastructure, which we've talked about, but also strong defense growth, really strong WiFi growth, and then the programmable power management business that we bought is growing strong double digits. If you were to take the business, you break it down roughly into 1/4 quarter defense; a bit more than 1/4 infrastructure; about 1/4, what we call connectivity, which is primarily WiFi; and then we've got -- the remainder of the business is the programmable power management, we have automotive, we have a number of other IoT businesses. And so it, again, speaks to the diversification of the business. Our end markets, we see as growing over 10%. So we would expect to grow at or above the market. Maybe just taking through the businesses, defense business, long-established for decades, great foundation for the business, long-term programs, the most advanced technologies and sort of sticky business with the primes and others in that supply chain. On the WiFi side, we had the combination of the rollout of WiFi 6 starting last year, and then we had the work-from-home trend, of course, which accelerated through the pandemic. And so that demand has been very strong, and we think it will stay strong. We think that WiFi 6 and then just the elevated performance expectations of consumers are going to play to our best-in-class power amplification requirements of BAW filtering and better band edge and coexist performance. And then just the integration that's occurring also now in WiFi plays to Qorvo's strengths. Quickly, we're thrilled to have programmable power management in the portfolio. And that, again, is growing strong double digits as we help customers go to market faster with power management solutions for them, really driven by a number of applications, but including these brushless motors. And see -- we see moving that business into other markets we serve, such as defense. And then we just have a good broad IoT presence. We're in remotes. We're in dog collars. We're in a number of other smaller applications all over, not the least of which automotive. And so we continue to grow that business quickly and figure out ways to serve it in a constructive way. So over the next 3 to 5 years, we see strong growth continuing, see -- we're really well positioned. I do want to note, we introduced this biotechnologies business. It's -- we were selected to participate in this RADx initiative for testing, and so we're working towards an agreement on that. It's a new market for sure, and it's an emerging opportunity. We'll have to see how it develops, and we're certainly working to get an approval from the FDA to use the technology. But it's promising, and we hope to talk more about that in the next call.

A question for Ultra-Wideband. Not sure if this is for you, Mark or Eric. It's an interesting market. It's nascent. The technology is ramping nicely, it seems like. And you spoke to multiple customer engagements on the call. So just wanted to get an update on what you're doing on the ground today and what the 2- to 3-year opportunity set was in UWB?

All right. I'll be happy to take that. Thanks, Toshiya. Yes, real acceleration of engagements across multiple ecosystems on Ultra-Wideband, it's -- as you said, it's nascent. But just for the listeners that may not be aware, it's a radar technology that's very specific for measuring distance between 2 things very, very accurately and very, very rapidly. It's actually really a super challenging radio system. It's in a 6 to 9 gigahertz radio spectrum, broadband 500 megahertz, 1 nanosecond kind of pulse and so it's unique. And the applications are broad, really, any sort of indoor navigation or proximity, location awareness, which applies as it turns out to many, many things. So we've got a revenue stream now that's growing based on industrial IoT sort of applications. We're engaged in virtually all the major handset manufacturers now. We believe it's only a matter of time before it proliferates all manufacturers and all tiers of handsets. And so there's a lot of work going on there. And of course, automotive, it will be in all of the next-generation automotive key fobs. So engagements with multiple Tier 1s there as well. And then really, long term, the volume is going to be in consumer devices, all the things that talk to your phones. So tracking tags as an example and your home pods, your home networks and security systems, your door locks, a lot of things. Your cell phone will essentially be the infrastructure for a lot of these applications going forward. And we've got a really great team, technologists, marketing guys. Our sales team, the Qorvo sales team is -- [ prepared ] quickly. We've added more resources there, and then we brought what we had from Decawave and 7Hugs as well. So it's a broad network of applications, and we're working hard to build the team rapidly to make sure we get the best people in the industry and do our best to build this new thing out.

Got it. Transitioning to the financial side of the company, if you will. Mark, wanted to ask you on margins. You just had a very strong quarter in December and gross margins of 54.4%. When you joined Qorvo back in 2016, the company would have multiple issues every other quarter, and I think margins at the time were in the low to mid-40s. So congrats on pulling up gross margins to this extent. I was hoping you could kind of take a step back and kind of walk us through what you drove -- obviously, not just you, but the broader team. What drove the improvement? And more importantly, going forward, what kind of initiatives you have in place to improve things further?

Yes. Good question, Toshiya. And I think that's sort of -- where you ended there is probably the place to start in the sense that it was a collective effort across the entire company. And as you mentioned, we sort of -- we did hit our low point in September '16. We had a -- we had some quality issues on a launch, and the company was relatively young and had all these opportunities and was sort of getting its legs under it. But we collectively as a team under Bob's leadership and great portfolio management work by Eric and James figured out, hey, where are our strengths? What technology advantage do we have? How do we continue to sustain and accelerate that technology advantage? How do we work the portfolio to optimize it? And of course, that affects capital risk as well. And then how can we serve customers the best. And then we launched a very intense productivity program throughout the company and began to change the culture of the company around productivity. And of course, we've talked about the productivity programs we've been doing, wafer conversions and die shrinks and cycle time reductions and all sorts of things. And finally, we just became highly disciplined around each incremental dollar of capital that we're going to spend. And so you see our capital spend dropped precipitously. We were 18% of sales in fiscal '17. We'll be under 5% of sales this year. Now we could only do that through, again, best technologies, right products, great productivity in the company, and that's enabled us to be able to grow while dropping CapEx. On the margin, sort of as we look forward, I think the most important thing to understand is that on the full year basis, our margins are up, and we believe they're sustainably up over 50%. So I know our margins tend to have some volatility due to a number of factors. But important thing is, if you look year-over-year, we're up. And if you think about our margins on a go-forward basis annually, we believe over 50% sustainable. While our margins can be a bit volatile, to your -- one of your points, we become, in my view, very predictable. We know how the business is running. We know what's going to happen to margins better than we did 4 or 5 years ago. And I think that I don't think we've missed a margin guide since September '16. I don't want to say we'll never miss a margin guide, but we certainly have gotten better around meeting our commitments on gross margin. And it's because we know how important it is in characterizing the health of the business and the value that we're bringing to customers and how efficiently we're running. So back on the November call, I did mention that March would be down, I think, 51% or below. So we guided the March quarter at 50.5% to 51%. That's where we believe it's going to land. And then in this last call, I said that the June quarter, I expect it to be below 50%. And I also said that OpEx, on a go-forward basis, we expect to run 20% or less. And then that I expected operating margin to stay above 30% for the year. So by definition, clearly, I expect gross margin to stay above 50% as we go forward here for the year. Sequentially, again, we're going to move around a bit. We've got a number of factors in our business. We've got the relative size of mobile, the IDP. We've got product mix. We've got customer mix. We've got -- you know we've got our own fab. So we've got inventory decisions and how much fixed cost absorption occurs. And looking out in the future, how do we want to load our plants. We've got yield issues all the time. We've got inventory -- and do you write off inventory or how are those levels to how you've written it off before? We take all our inventory write-offs to non-GAAP. So everything is there in the results you see. So there's a lot that goes on in a given quarter. And -- but we -- again, I want to emphasize, we've done a good job of forecasting it well. And I think the most important thing is that we've steadily increased our margins. And now we can say that we're over 50%, and we expect to stay over 50% for the year.

Got it. And with that, unfortunately, we're out of time. I could go on for another 30, 60 minutes, but we've got to close. Mark, Eric, thank you so much for the time. It's always great to see you and host you. Hopefully, we get to see you in person pretty soon.

Thank you, Toshiya.

Thanks a lot. Stay well.