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

Right. Yes. It is a mix, of course. It's a portfolio of products. And margin, to a large extent, is about, of course, the unique capabilities you have. But then also to the earlier question on gross margin, alignment with your factory capacity, right? So we had a much larger SAW footprint a few years ago. We decided to reduce that significantly. And at that scale that we're at today, as we continue to fill it with the low band we have, it improves the margin far more than what we had a few years ago in a much bigger factory scale. So I think getting that scale right, aligning our product plans and how we promote the products to align into that factory at the best price we can. Overall, you've seen margin expansion, and that's what we're going to continue to focus on.

Great. All right. How about dual transmit in terms of that's something that your technology is now kind of coming into play? And what does that mean on a go-forward basis for growth opportunities?

Yes. It's a great question, which is probably hard for investors to really get their head around. But essentially, I've talked a lot already today about the main path, right, the transmit and receive main path. In 4G advanced phones, there's also multiple receive paths. And I think people are generally aware, there's multiple antennas in the phone. Up until now, you've transmitted on one primary antenna, but you receive on up to 4 other antennas to get the best receive performance you can and sensitivity. And so generally, we've been playing in the main path. The receive paths were generally lower frequencies against SAW-based products and so forth. But now that you're moving into 5G, we're seeing more -- 2 things. The frequency ranges are generally moving up. So that's moving towards BAW filters, where we have a much larger footprint and very differentiated technology base. And then you're also seeing, to your point, transmit now on the uplink, transmitting on multiple channels, what we call dual connect. So now in addition to the main path, that receive path which connects to the multiple antennas, diversity antennas, if you're transmitting on it, that's a very different module than a kind of a low-band receive diversity of the 4G era. So that opens up a great opportunity for us to move into that antenna network with the capability of doing dual uplink as well as then the receive channels that come along with it. And so that -- it represents a great opportunity for us. We talked about our largest screen manufacturer, their flagship that just shipped. You can look in the teardowns there. We're now with great content in the transmit uplink.

Excellent. Maybe we can shift gears to Ultra-Wideband. That's an exciting kind of new growth area and really love to get your take in terms of how the technology is today and how should we think about some of these applications as they're emerging.

Yes. It's been a lot of fun. We've -- a year now since we've acquired the Decawave team, and it's been a fantastic year of really building relationships with our key customers in a new product area but then also with a lot of new customers in different areas. So just to remind everyone or if you aren't aware, the new version of Ultra-Wideband, this Impulse Radio Ultra-Wideband, the company we acquired, Decawave, was actually the inventors of this version of Ultra-Wideband, which allows for very precise relative location between devices. And that opens up several opportunities. One is just the opportunity for devices to interact with each other, depending upon where they are in relation to each other, which is a completely new thing. You're not used to your devices recognizing other devices and where they are specifically compared to them. And that opens up a whole wide range of applications. And then also just precision indoor navigation. So it's like precision GPS indoors, right? And so all the things you're used to be able to do with GPS to get around in your car, now that will all be unlocked internally, right, in terms of navigation, location and awareness and so forth. So when you really get your head around this, you see a lot of application across many different verticals. And what we're excited about at Qorvo is our strategy has been to use mobile penetration to drive scale, drive down cost and really get fast aggressive technology cycles and then apply that across automotive, industrial IoT, consumer IoT and all those other businesses then, where we come in with a lot of scale and maturity right off the bat. And Ultra-Wideband is a perfect application of that. I mean the mobile phone, we're engaged now with all of our customers across UWB, and there's no longer any question about whether old phones will have UWB. It's going to be in every manufacturer's phone shortly and then throughout the entire portfolio, like other connectivity standards. But then that makes the mobile phone sort of the hub or the infrastructure for all the applications around it. And if you look at most of our large customers, whether it's Vivo or Google or Xiaomi, I mean, they're looking to build ecosystems around their mobile phones, so consumer, home devices and so forth. And of course, the phone is already certified by the connected car consortium, so you'll be able to operate your car, unlock it and do special features from your phone. So it's really an exciting opportunity for Qorvo as a leader in Ultra-Wideband to develop the capability for the phones but then also transact across all of the ecosystem that talks to it.

Got it. And auto specifically is not as big of a market for Qorvo. So is there anything about the technology that you have or things you can do, relationship-wise, to kind of ramp in that space as well?

Yes. We have a relatively good footprint in automotive across several different wireless technologies, in the radio, in GPS, in V2X, there's several other components there. So we do have a footprint in auto, certainly, and we know that the manufacturers, Tier 1s, and we're a qualified supplier and so forth. And so this does take things to a different level, as it does in the cellular handset for that matter. Whereas in the cellular channel, we're providing RF front-end components. Ultra-Wideband's complete SoC drop in the complete function, and so that's got us talking to software people and integration drivers and software stacks. And we're talking to completely different people at higher levels, even with the mobile phone, but then that same thing will apply to automotive. We're going to be a key supplier on a key new function, which is going to be critical. And auto manufacturers want this just as much as mobile phone manufacturers do as a differentiator. So I think it's a great pull for us. Again, we're well-established and well-regarded across the automotive Tier 1s, and this is an opportunity to go to a new layer there.

Great. And then how do you think about it, just from a market-sizing perspective, over the next number of years? Like how big could this market get? And what a -- from a timing perspective, mobile's first, but kind of what follow -- layers in on top of mobile?

Yes. And actually -- so it's a little hard to predict because it can grow so rapidly, and it will be a bit chunky as new opportunities open up, right -- typically, right, when something is growing rapidly across multiple industries like this. So technically, if you look in mobile right now, it's definitely driving the volume, but it's all really Apple today, right? They've put it in their handsets, clearly, and they've talked about HomePod and other applications. If we take out Apple who does their own proprietary chip, it will be standard compliant, and we'll be able to talk to it with ours with accessories. But they have their own. If you take that out, really, it's industrial IoT today and that all of our business today, a little bit in automotive and industrial IoT is driving. There's many, many, many hundreds of applications in industrial. And we talked about Connexin, for example, that uses it to track like sporting teams. They have Ultra-Wideband on all the NBA players and the NFL and European Soccer League. All the players have multiple UWB on them, even the ball or puck has it. They do a lot of analytics and so forth. I mean it just shows what precision high-speed accurate location can be used for. You can take that into a factory environment and look at drones that are navigating throughout dense factory networks very accurately and safely. So today, industrial IoT is the largest, and it will kind of grow slowly, as you can imagine. Mobile will then take off. I think this calendar year, you'll begin to see it proliferate, and then it will go down throughout the portfolio. So a few good, very strong years of proliferation in mobile. And while that's going, the ecosystem around mobile, including consumer electronic devices, will be picking up steam. And if you go out past year 3 or so, the volume will really be driven by all of these devices that connect to the mobile phone, and that will eventually be the vast majority of the market.

Understood. Maybe shifting to Mark. Just briefly on IDP. Can't do a call without talking about wireless infrastructure. I know that was a market that was really strong. There's a little bit of a lull for you and others that are seeing right now. How are you thinking about wireless infrastructure through the year? And anything else people should be mindful in terms of IDP growth drivers in 2021?

Yes. I think there was some -- again, some additional bad news on that last night, it sounds like. But we did see a weak finish to calendar '20, and we're seeing a weak start to this year. And I don't think -- we've been clear about that, and so I don't think there should be any surprise at this point. And the factors are relatively well known. I mean we've got -- yes, there's a very strong China build-out at the end of '19 and in the first half of '20, and there is some digestion associated with that. And then we had the mix turned unfavorable in the second half of last year, more rural versus urban. More rural means more macro versus urban would be more massive MIMO. So we had that unfavorable mix effect for us. As we look forward, positive on both the market and our position in the market. We see the 5G build-out still in the early innings. And if there's any doubt about that, then the C-band auctions, which you saw close recently, point to how much the carriers are going to want to build out their infrastructure. In the second half of this year, we think we'll see stronger build-outs from China, and we think those will become more urban. So we'll see a bit of a more favorable mix shift. And then in the second half of the calendar year in the U.S., we think we're going to be -- also see a strengthening of build-outs. We will probably start to see tower climbs for the C-band in the -- back in the December time frame or very early next year. So I think that's going to happen soon. Qorvo is very well positioned across the customer base. And on GaN technology, in particular, nobody has more experience than Qorvo. We've been doing GaN semiconductors for decades. And so we feel very good about the market and our position.

Great. And then I just want to wrap up here with capital intensity and free cash flow. You've been able to kind of bring the CapEx as a percent of sales down to mid-single digits. You talked about looking to hit $1 billion in free cash flow. What does that do in terms of optionality for you? You've been acquisitive for tuck-ins. You buy back stock. Like can you just bring that all together, capital intensity and free cash flow?

Sure. It's a good question. And again, we've been very thoughtful about how we've been growing the business, and this has been a multiyear effort to make sure we sustain our technology leadership and actually expand it. We feel great about the technology portfolio we've got. We've been very active in managing the portfolio. Eric talked about it. I've talked about it. But we're very deliberate about where we want to compete, and that's where our customers are going to value us the most. That allows us to build the best footprint. And then we drive productivity in the [ org ] very hard, and that's yielding great free cash flow. We've gone up almost 5x in 4 years on free cash flow, and we're proud of that. And we think it's a way point, and there's more free cash flow growth coming if we continue to do what we're doing. We've been active in deploying it. So we've generated about $1 billion over the past year. About $500 million of that was deployed to acquisitions. Eric talked about Decawave. That was the largest. And then we bought a software company, and then we bought about close to $500 million on repurchase. We've been even more aggressive if you look at the last 8 quarters. We bought $1 billion [ total companies ]. We bought back $1.2 billion of shares. To your point, as this free cash flow increases, which we think it will, we think we can keep our capital intensity down in the mid-single digits as a percent of sales without compromising our growth. We've got great optionality with that increased cash flow and the low leverage on our balance sheet. So -- and that optionality can be used for a number of things, investing organically. We've got a lot of opportunities to invest organically, UWB, biosensors, I can go on and on, Programmable Power Management. We've got opportunities inorganically, and we'll continue to do those. You've seen a number of things we've done. And then finally, we'll -- to the extent we have the capacity and the cash flow outlook and no immediate opportunities, we'll continue to buy back stock, which we've done $3.3 billion since the company's inception at an average price of $65. So, so far, so good.

All right. I think we'll wrap there. So Eric and Mark, it's been great to dig into the business with you and hear about some of the things that are driving the company, both from a growth and margin perspective. So appreciate that and appreciate all the investors that have been on the webcast as well.