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

Yes. I think what's good about the Qorvo business is it's very diversified across multiple basebands, whether it's Mediatek, SLSI or, to your point, Qualcomm. And as we talked about on our -- when we reported our December quarter that in the March quarter, we saw things constrained. So to us, that wasn't new news. Again, we speak frequently with our customers. We know where the constraints are, and they manage through that. So obviously, as constraints are lifted, as we said, and more and more phones are 5G, we will continue to do extremely well and grow nicely throughout the year.

Okay. James, maybe over to you and the IDP business. Obviously -- and there's a lot of crosscurrents there. But how is IDP situated with regard to supply? And what sort of constraints are you seeing in your business? And then perhaps, are there constraints to your customers which are affecting you as well?

Yes. And as Bob talked about, there are some constraints, but we are actually very tied out with those customers as well. We have seen very, very strong demand in WiFi. And you can imagine the trends that are driving that, the rollout of WiFi 6 and work from home kind of capping in parallel has really driven a strong amount of demand. And so we have very good visibility on what our customers need and what it takes to keep them moving and really no appearance, from my perspective, that customers are building up inventory. And it looks -- I think when I look at it and I look at 5G infrastructure, I would say we're still in the very early part of those deployments in both cases. We just started to ramp both of them as we went through calendar '20. We think it's multiyear cycles for both 5G and WiFi 6. We got 6E coming right beyond that. So I think we're in a pretty good early stages of nice deployments with both of those technologies. But as far as inventory builds, we are constrained, as Bob talked about. We can't supply all the demand. But I think the team is doing a fantastic job making sure we keep our customers moving in areas where they need product and making sure that we keep them line up.

And do you expect you'll have capacity -- more capacity coming on at the end of the year? As you said, there's more 5G deployments expected in the second half of the year. Will you have the incremental capacity to be able to grow that business when it occurs?

Yes. Absolutely. So we've continued to make investments. And I've talked about that in the past. Particularly in GaN, we've invested in everything from transitioning wafer formats to really driving things like our yield up and yield in the supply chain. So I'm very confident in our ability to scale. And if you look at what we did in the first half of '20, I think we demonstrated that we have a significant ability to scale the technology. And we did that very effectively. And in fact, we won the award from ZTE for their best supplier. So I think we had a great experience in the first set of rollout of 5G and looking forward to that continuing as we go through the next couple of years. We are very, very confident in our ability to scale in both WiFi and in 5G.

Right. And maybe -- you talked about GaN as well, and maybe you could expand upon that a bit because that is a transitional change as we go from 4G to 5G. What does that mean for Qorvo content, for your competitive position versus everyone else and then your market share with regards to massive MIMO 5G as compared to 4G?

Yes. I've talked for years about these 2 great underlying trends that really cross both our base station and our defense business. One is the proliferation of what we call phased arrays in the defense business and what we call massive MIMO antennas in base station. But that's really a big content gain, right? We're going from maybe single-element or 8-element transmit/receive functions to 64 in the base station and much, much higher in the defense business. So that proliferation of these kind of antenna systems is really helping us with content. And then, of course, the adoption of GaN just continues to go at a very aggressive pace. It certainly has happened in the defense business over the last, say, multiple years. And then we've seen that in base station really starting aggressively in '20. And we expect that continue -- will continue. And part of that is because of what's required for these 5G base stations. They typically require more bandwidth and higher frequencies. As an example, C-band in the U.S., well up above 3 gigahertz. And that really makes GaN sort of the technology of choice when you're trying to do the power amplifier. So both of those trends are alive and well, and I think they'll continue as we go through these deployments in 5G around the world. As far as content, it's what we said before. That's -- in the kind of the high end, it can be a 10x content gain for us in a fully-deployed massive MIMO 64-element system. And so that's driven by 2 things. One, a bunch of elements. And then now we're also able to do the power amplifier. So a very, very nice content story for us. And we're really pleased where we are with the technology. We continue to make improvements with the technology. And so I think adoption is just going to continue. I think it's -- it will continue into multiple different markets as we go through the next bunch of years.

Right. James, if I ask a follow-up, and I'm going to paraphrase one of the questions came in and kind of roll into something else. But one of the things Analog Devices spoke about in their last earnings was that one of the things they noted is the 64 elements that they were seeing fewer of those than they had expected in China. A lot of that, they attributed to the absence of Huawei or difficulty in Huawei getting components. So I guess, one is have you seen that as well that you see it changing? And then secondly, as the question came in, the timing of the [ CBN ] deployments in the U.S., is it more towards the end of this year? Is it more towards next year? And -- or is that going to drive more of those 64 elements that drive a lot of content? A lot in there in that question, I apologize.

Yes. Let me go to China first. Definitely, first deployments that we saw in 2020 were more tilted towards 64-element arrays. We think a lot of that was based on deployments in heavily populated areas where you really need the performance advantage of those heavily populated arrays or massive MIMO systems. As we move into '21, what we're seeing is a bit of a shift to both macro and 32-element arrays, really because deployments are starting to become more of a mix of highly dense populated areas and more rural deployments in China. So I think that's a fairly natural progression. But of course, China is very early in, so we're going to continue to see deliveries in both of those kind of systems. As far as deployments in the U.S. for timing, as I said earlier, we have orders on the books, and we're starting to deliver product now. You've seen some early tenders out and awards to folks like Samsung. Samsung was very public about their awards last quarter. So I think we'll start to see deployments towards the end of the year. But we're really early in, right? Auctions just completed. Tenders are not all out. Deployment schedules aren't set. But we will definitely see deployments at the end of the year based on what information we get from our customers. And then we'll see it accelerate from beyond that. The role of 64-elements, our customers are -- our initial deployments that we're seeing in the U.S. are 64-element arrays. What that mix ends up being over time, I think, it's -- again, it's too early for us to tell. But definitely, we'll see deployments of 64-element systems in the U.S.

Okay. That's very helpful. Bob, I'll throw back to you, ask a question on gross margins. We couldn't get through the conversation without a gross margin question. And your guidance did expect the gross margin to step down in March and June but still meaningfully higher than over the last 2 years. So maybe kind of explain those dynamics of why the step down in March and June and where do you expect to end up as the year goes on.

Yes. Thanks, Chris. Number one, really proud of the team for the quarter they delivered in December. Many things went extremely well and in the right directions, whether it was just how well our factories ran, the yields. The teams did a good job of not having to write off any obsolete inventories. The absorption rates were great. Product mix was also very favorable. But as we move forward into the March quarter, and we talked about just in James' business, the infrastructure business being down and then what's being up is a consumer business, and those margins are different. So we're going through some product mix issues in March and June. And in the June quarter, we're expecting to see some significant China business in our low band, mid-high and ultra-high band business. And it's not as gross margin rich. I think what's important to your point is we've done a good job of showing the investors our gross margins in control. We do a good job of forecasting it and then hitting it and also that we're able to call our shots. As I just said, we call it, and then we hit it. So it's in control. And I think that's also important. And when we reported the December quarter, we talked about March was going to be down over June, just slightly under 50%. But we expect the year-over-year, that being FY '22 over FY '21, to be a gross margin improvement. So we expect to improve our gross margins year-over-year. And there's still a lot of productivity things that we're working on. We've still got wafer conversions to do. We've got utilization where we can still drive as the business picks up. So -- and product mix. So team's done a good job on the portfolio management. We talked a lot about that in the past to drive gross margin. And you saw that in December, things went extremely well. And we expect for FY '22 to improve our gross margins year-over-year. So things are in control. I'm pleased with how we're doing.

Okay. Fair enough. I'll point out we've got about a little under 10 minutes left. So if there's any additional questions, please get them in now. It will be a last call. But I wanted to follow up with a question on cash flow as well. And Mark, your CFO, that's been really a big focus of him and his tenure as CFO at improving the free cash flow of the firm. Maybe you talk a bit about that. And again, as the industry is kind of kicking along here and we're getting 5G, are we actually starting to see -- should we actually start to see an accelerated cash flow as the capital investments that have been made in the past that you're generating some cash off of them?

I think if you look over the last 3 years, we've significantly improved the cash flow of the business and the quality of the cash flow as a percentage of the revenue. The team has done a great job. The capital discipline that we've put in place, feel good about that continuing. The profitability of the business has improved. So that obviously means we're going to be able to throw off more cash. So our expectations are we will continue to improve, as a percent of sales, our cash flow. We've commented that we can run the business at around 5%. That's roughly what our CapEx investment is going to be this year. We think we can hold that in the mid-single-digits for the future years as well. As we continue to work on our productivity in our factories, we still got wafer conversions. We've got great road maps to continue to shrink not just the die in our gallium arsenide or our GaN factories but also in our BAW filters. And we've talked about micro-BAW that's really just starting to hit the market. So it improves our margins as well as reduces our ability or our need to spend CapEx. So we believe we're going to be able to run the business this way for a while. And I think we've been good stewards of the cash flow as well. Investing in the business, we've made some very good acquisitions that are paying off nicely as well as we've bought back a fair amount of shares as well, returning that to the shareholder over the last 3 years as well. So I think we're putting that free cash flow to good use as well.

I want to pivot a little bit more on to other technology. Interest to me is Ultra-Wideband and Decawave acquisition. You seem to be pretty pleased with that. How material is -- maybe talk about why you got into that business. Is it material to revenue now? And I know Decawave did some licensing as well in the past. Is that -- is the intention or what you're getting now more of kind of getting the revenue from licensing? Is it providing components? How are you managing that business?

Thanks, Chris. I'd like to go back in time. We have been working with our largest customer 3, 4 years ago on the RF front end for Ultra-Wideband. So to us, we've known about it coming and being put into phones for many years. And we've been looking for an opportunity to acquire a company to get into that space. It was very intriguing to us. It fits in both sides of our business, not just mobile, where clearly, that was the first place that the industry primarily sold, but also in James' business as well, industrial applications along with automotive. So not new to us, maybe new to many of our investors. But again, because of the deep customer relationships we have, we have great visibility into what will become future trends. So let me just park it there for that. Now to your point, today, most of our business is in the social distancing so that you can tell if you're within 6 feet. There's a company out there called Connexin that's out there that's using our technology. The reason I talk about them is the NBA uses them. The NFL uses their tags. James is an SEC fan. I'm an ACC fan. You can imagine that. Well, the ACC uses that technology. And again, that's why I tell James, that's why the ACC is running so many basketball games and the SEC is not because they don't have the technology. But today, most of it's in that area. But we're seeing great traction and design wins that we're starting to build within the mobile phone industry, along with those things it'll connect to, so a lot of the peripheral devices. And if you use Bluetooth, as an example, for every phone that has Bluetooth in it, which all of them do, there's 3 or 4 things it connects to. We see the same thing happening with Ultra-Wideband. And we're expanding our customer base that way as well. And then also in automotive, in James' business, whether it's in the key fob or the car, it's just going to take a little bit longer to take off. So today, most of our business is in the industrial area for social distancing, but the design activity is heavily in mobile phones, accessories for mobile phones, along with the automotive side. So we expect it to be, in a few years, hundreds of millions of dollars. It's a great opportunity for us.

Right. And your comment, ACC versus SEC, we -- the same issue at Raymond James. I'm from New York as Doug. We don't know anything about college sports. But SEC, I'm told, is big at Raymond James. So -- the -- and with that and follow-up on M&A. And you've done -- after TriQuint, so a number of these kind of small tuck-in acquisitions, is that what we should expect going forward, the types of things that you would look at in the future, things like Decawave, the power management and such?

Well, what we look for -- and James' business is a good example. GreenPeak was one of the first ones right after we got kind of a bolt-on, get us into the IoT market. Then you can look at the power management play. We also picked up a great business up in Boston that has GaAs/GaN designers to help really complete the work that we're doing in defense with some other components, nice tuck-ins. On the mobile side, to your point, the Cavendish technology with RF MEMs and then the great work the team has been doing there, and we really look forward to bringing that to market where you'll see a significant change in performance out near the antennas by reducing the loss so that you -- once again, back to battery life extends. And that's going to be a big play for us. So really, a new technology to help grow the business. And with Decawave, you see that as a technology play but also great bolt-on for James' business along with Eric's business. So it will be in the mobile arena as well as the industrial and automotive areas. So what we've seen out there is great businesses where we're a better owner, and we can help them scale and really grow that business. And so far, we've done a good job of that.

Right. We're almost out of time, but I'll ask one more kind of wrap-up question, which is we've now seen 5G. It's here. We've gotten the content increases that we had expected. As we look over maybe the next 2 years or so, is your growth going to be more dependent on additional content gains? In other words, we've seen maybe 10%, 15% historic content growth per phone. And does that continue from here from your exposure on your largest customers' phone for the Chinese phones? Or is it more about just pumping out more 5G phones and increasing 5G as a percentage of the total? What's going to be the driver over the next 2 years?

Yes. I always smile because I think we get this question every year over the last 5 years because even 4G, we had that conversation. And we coined a phrase called more and better RF. And that's clearly what the carriers want. And we see that trend continuing, to be quite honest, Chris. And even over the next 2 years, not all phones are going to be 5G. So we expect the content to continue to grow. We're also expecting handset units to grow over that period. We were down clearly last year. This year, it's our expectations. We're not even going to get back to what volumes were in 2019. So we do expect some unit growth, but you will continue to see carriers putting requirements back on handset manufacturers for more and better RF as they continue to want to monetize that spectrum. We've talked about better filters so that -- and they'll pay for that because they can use more of that spectrum they have. But Chris, we also didn't talk about carrier uplink. We talked about our dual connectivity modules, which, again, is more RF. We talk a lot about bringing in carrier aggregation on the downlink. We're just in the early innings of carrier aggregation on the uplink. And right now we're only talking about 2, and we can see that continuing to grow as well, where they're going to want to get you on and off the network even faster. So we think the trend of more and better RF is going to be here for many years.

Well, and Bob, if I could, and that -- all of that applies to IDP as well. I mean I see great underlying trends in the business substantial areas for us to grow in 5G and WiFi. And then areas of longer-term things that will allow us to grow, we talked about Ultra-Wideband. Our power management business is continuing to do very, very well. We talked a bit in the last call about some of the work that we're doing in the biomedical testing field. Those are all areas where we're applying technology that I think continue those growth trends much, much longer term than the current cycles we're in. And then when you look at WiFi 6E is here, and we're working on 7 today. So I mean I think those trends just continue. To Bob's point, the need for wireless connectivity and better RF just continues to drive more and more demand for the kind of products we do.

All right. Well, great. Well, gentlemen, it looks like we're out of time. I look forward to asking you the same question a year from now in a much better locale so -- that I've got right here. So we appreciate the time. Thanks for coming.

Thanks. And we look forward to that, Chris. Thank you. Have a great day, everyone.

Yes. Thank you.

Thanks, everyone.