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

Hi. Good morning. Welcome to JPMorgan's 49th Annual TMC Conference. My name is Bill Peterson. I work in the semiconductor research team. We're very pleased to have Mark Murphy, Qorvo's CFO; and James Klein, Qorvo's President of Infrastructure and Defense Products, or IDP group. We've asked the team to spend a few minutes providing a quick overview, and then I'll move on to the fireside chat with a number of questions. [Operator Instructions] and I'll do my best to incorporate them into the session. And with that, thanks for joining, guys. Over to you, Mark.

All right. Thank you, Bill. And thanks for the invitation to speak with you today. Before we begin, I do want to remind our audience that the safe harbor language that applies to our press releases also applies to today's presentation. About 3 weeks ago, Qorvo reported an exceptionally strong March quarter. Demand was broad-based across customers and driven by 5G smartphones and WiFi 6 and 6E. Design activity, both during the March quarter and since, has been robust supporting our view for durable, long-term growth in our markets. In smartphones, we currently forecast overall smartphone volume growth in calendar '21 between 5% and 10% and a doubling of 5G smartphones to around 550 million units. The added RF content in 5G phones is expected to be $5 to $7 per phone compared to 4G, including in the mid-tier. As happened in 4G, 5G architectures are increasing in complexity, and that's driving demand for more highly integrated and greater-value RF content. An example of this is the introduction of transmit in the diversity path. Growing complexity is a multiyear trend that expands our addressable markets and favors our product and technology portfolio. We see similar dynamics play out over multiple years in the markets served by IDP. Automotive OEMs are adopting state-of-the-art cellular and more connected cars. Cable operators are upgrading to DOCSIS 3.1 infrastructure The rollout of WiFi 6 is unfolding across enterprise, retail and service providers, and the allocation of new spectrum for WiFi 6E from 5.9 to 7.1 gigahertz is creating incremental opportunities. Consumer products, such as power tools and appliances, are transitioning to more energy-efficient, brushless DC electric motors, and compute and storage customers are transitioning to more responsive and reliable solid-state drives, both trends supported by our advanced power management solutions. Finally, 5G infrastructure deployments are growing more diverse by OEM and geography, supporting what should be a strong build-out over the next 3 to 5 years. The completion of the C-band auction in the U.S. is yet another example of things to come with the infrastructure build-out. Across our markets, Qorvo is in the early innings of multiyear technology upgrade cycles. We have a broad set of world-class technologies, and we are managing our portfolio to compete where customers place a premium on technology and performance. We are also investing in new technologies, including precision location ultra-wideband, RF-based technology testing and MEMS-based solutions. All of this supports a diverse set of opportunities for Qorvo that we see expanding over many years. And Bill, with that, I'll turn it back over to you for questions.

Yes, Mark. As it's really top of mind for everybody is just the impacts of supply constraints. And it looks like the team is managing these fairly well. You do have silicon providers, but you also have internal capacity as well. But then there's also just, in the broader sense, maybe supply constraints that your customers may have from other component makers. So I guess how does the current supply constraints impact your current business? And how does it, I guess, impact your view on -- you gave a soft guidance for September. How does this all play in with the various supply constraints that exist throughout the ecosystem?

So the market remains tight, and we see pockets of -- some pockets are worse than others. Yes, silicon laminates, capacitors, those sort of things are sporadically tight. We remain in a supply-constrained environment. So the demand outlook, both near term, medium term and longer term, is good. Yes, we continue to work with our customers, supply chain partners. I'd say, even though it's difficult, it's a very constructive environment, and we're working to obviously make our customers as successful as possible. Maybe just to talk a bit about how this is playing out in our own business. Our own inventories remain at historically low levels. We just released the K yesterday. You'll see our finished goods are very low, and our turns remain historically high. The channel is as healthy as I've ever seen it, I guess, to the point of being unhealthy. I mean we're talking days in the channel rather than weeks or months, so it's very tight there. I'd say another interesting data point -- and I think this maybe addresses the question some people have sometimes about double ordering. I heard one company characterize it well as, certainly, customers are trying to get the product they need. I wouldn't call it double ordering. They certainly -- there certainly isn't any double fulfillment, and customers are paying expedite fees. So if there was any excess inventory in the channel or in their hands, they wouldn't be paying expedite to get products. So we think that the -- yes, the demand environment is good. Our bookings are as strong as they've ever been for this time of year. Yes, we gave our full year guide recently, and most of that guide is already booked. We're getting some orders even into next year so -- into next fiscal year. So our quarter remains firm, consistent with our guide. And we have no update to our full year outlook as well, remains very positive.

No, that's really constructive. And that kind of addresses -- there has been some, I guess, rumors or chatter about order cuts in the Android space, and you -- I mean, it pretty much sounds like you're still seeing your business very strong and you just mentioned bookings through the year. So it doesn't appear that you're impacted by that, if there is such a thing. Is that a fair assessment?

Yes. Bill, it's a good question. There was a Chinese sell-through report, I think it was last week or the week before, that was maybe a bit short of expectations. I saw somebody updated the -- their smartphone units number for calendar '21, revised it down to 5%. We still believe the market is going to grow 5% to 10%, but this particular analyst changed it to 5%. And that's on, Bill, I think this issue of China domestic, which last year was a difficult comp, so the question is how much noise is in there. And then the other factor -- and certainly, first and foremost, thoughts and prayers with the people of India and other places that are dealing with a surge. But I think there's some thought that units may be down because of India. I would just point out a couple of things as it relates to Qorvo. One is we're principally dealing with 5G volumes at this point. So to the extent that overall smartphone units are down due to 4G, that's less impactful to us. In fact, I would argue that it may be helpful because it debottlenecks the supply chain a bit. And silicon and some of these other components are freed up to go to 5G units. The other thing that I think is worth pointing out -- and this is fresh because it was in an analyst report this morning. I noticed that when they called down their units for overall smartphones to be up only 5% this year, they have 5G units at 450 million. And we're at 550 million, so they're 20% below us. And I think that's another noteworthy item as it relates to all that chatter. For Qorvo, we're sticking to our view at this point for smartphones, 5% to 10%. 5G mix will be about 550 million units, and the market's very tight. So we don't see the sort of noise in the market affecting us. It's, in our view, is a multiyear cycle. In our calendar '21, we -- only 40% of the smartphones will be 5G. Might be a little more if that smartphone unit number goes down, but it's still a fraction of what's eventually going to convert. Encouraging signs in infrastructure. That's going to be a multiyear build-out, and it appears right now to be broadening both across OEMs and geographies, which I think is important. And then we've got to remember that even though we're relatively early in the 5G cycle, throughout the cycle, there will be added complexity and more RF that occurs within the cycle, just as it happened with 4G, and we're seeing that already with the introduction of DCM modules, which is adding transmit to diversity features. So that's just, again, an effort to satiate -- or work to satiate demand, which will never be accomplished, but an effort to get data traffic moving. We don't want -- we'll talk about some of our other markets. Fortunately, we've got James here today. WiFi is growing well. Defense is growing well. Power management is a great market we're thrilled to be in. And then as we look out and maybe the 5G cycle gets older several years out, and we're starting to think about 6G or WiFi 7, we're very excited about other big markets that we're entering: ultra-wideband and all those associated applications; yes, the new sensor business we purchased, which should -- capitalize on both our access to smartphone markets, automotive and others and utilizes our MEMS capabilities. And then today, hopefully, we're getting increasingly hopeful that biotechnologies is going to be a real nice business for us. It's -- the technology is special, and we have an opportunity for James to talk about that today.

Yes. Why don't we move on to some of these newer opportunities? I mean there's so much to talk about in mobile, but I think we have NextInput, this bio opportunity you talked about, the ultra-wideband, all of these opportunities. I guess maybe starting with the oldest one, which means the Decawave, what are the target markets long term beyond smartphone? It sounds like -- I know your competitors talk about multiple markets. Are there plays in some of James' target businesses as well as, of course, Eric's?

Yes. Maybe I'll get started and then James can pick it up because we could actually talk about this for the rest of the call. It's a very exciting place to be, and we're very fortunate to have the Decawave team. I mean they were pioneers in the technology. So we're at the leading edge, and we worked with Decawave on the front end. So we were able to -- we had a front row seat into how exciting this technology was. And that's a great team, and that team is thrilled to be with Qorvo because we can bring a lot more resources to bear. And we're -- as I've said in the past, we've actually made that part of the business more dilutive since we bought it since we are, without a doubt, resource-constrained, not opportunity-constrained. It's a real challenge to figure out which opportunity to shoot at, and we are really thrilled. And yes, there's obviously smartphones directly. There's a whole ecosystem around smartphones, and there are certain OEMs that are doing a great job of that, whether we work with them directly or in their partners and their ecosystem. And then, yes, the opportunities for this, it's just like there's a new application almost every day that I hear about given the -- just the unique attributes of the technology. First and foremost, it's extreme precision location capabilities. Automotive is certainly another big market for it. But James, if you want to spend some time on IDP applications.

Yes. Yes, absolutely. We're excited about the technology, too, just because of its broad applicability. I think, Bill, I'll tell you a story. I was in with one of my distributors last week, and we -- when we do distributor reviews, we look at a number of new, unique customers that we're adding to the business and kind of a sign of how the product looks to the market. And the ultra-wideband products were up at the top of the list of adding new customers. And so these are new, unique places that the technology will be used and very, very new. So it's exciting to see that kind of new demand for the products. But obviously, the markets, as Mark talked about, we're heavily engaged in automotive, and we see strong demand there as we go through the design-in cycle with ultra-wideband. And then today, just a broad variety of IoT applications, really a lot focused on the smart home, but you can imagine what those activities look like. The ability to point your phone or point your remote at devices and be able to operate them in a secure fashion, I think, is a great applicability for the products. So I agree with Mark, we are resource-limited. So we're continuing to try to push on that into the markets as quickly as possible.

Bill, and I would -- yes, I would -- maybe to finalize some comments on UWB. And we've said this and stick to this view as, it's not material now, certainly less material, in fact, dilutive in the beginning of the year and continues to grow through the year, but remains dilutive for this fiscal year. Yes, but we see this as being a several hundred million dollar business in several years for Qorvo.

Maybe another -- I mean, again, you guys have so many different technologies. It was, I guess, you, maybe 2 quarters ago, talked about the Qorvo biotechnologies, the Omnia COVID-19 rapid antigen test. You have the emergency use authorization. Can you share more about this opportunity? I mean obviously, COVID is still with us. You referenced earlier about India and so forth. I mean what are the economics here? And I guess beyond COVID, are there additional market opportunities for some of the base technologies? And how should we think about this part of your business as we look ahead?

Yes. Thanks for the question, Bill. I think I want to give you a little history on bio before I jump in and talk about what the applications are. This is a technology that we actually started back in 2013, and it was based on BAW. We believed, at that point in time, that we could develop a nonoptical-based sensor to detect basically contaminants in a liquid. And we thought we could do that with much better precision and accuracy than could be done optically. We've been targeting, since that time, both the human; and veterinary market. You've seen us enter the veterinary market several quarters ago in getting that product out there. I think that's been beneficial for us in learning how to develop a product and learning the user experience, if you'll say it, and make the rest work through that. Early on, our focus in the human space had been around troponin, which is associated with you having a stressed -- heart stress. We -- when COVID hit, we quickly pivoted the organization towards both antibody and antigen testing. We've completed development of both of those products and completed the clinical trial. We have received antigen approval from the FDA, as you mentioned, and so that product is in the stage now beginning to move into production and into the market. We were really happy to receive the contract award with funds from BARDA through the NIH RADx program to help us scale manufacturing. And I think -- I'm excited about the funds. I'm probably more excited about the partnership with NIH. They are definitely helping us work through the product, and they're doing a lot of testing for us, and so that's been very, very helpful. But they're also helping us with scaling manufacturing. So the partnership has been very, very strong with NIH, and I'm happy with the progress that we were making. We expect to have that product early stages of being into the market this summer and then ramping the larger-scale production as we get towards the end of the year, again, with a lot of the funds that come out of that. Now what's special about the device is that through our clinical trials and through the testing that we've seen with RADx, we've been able to achieve 100% specificity, which means, basically, we have very, very low false positives and false negatives. We also have a near-PCR level of detection. So we believe with an antigen workflow, a more simplistic workflow, we can actually get results that are fairly common to what would be in a central lab PCR test. And we can do that, instead of in days, we can do it in 20 minutes and -- in the formatted device that has been designed for point of care. It hasn't been approved by the FDA for point of care yet, but we're hopeful that will happen soon. But we think it's special. The market itself today, obviously, for COVID is several billion dollars. But honestly, we do see that starting to decline as we go through the next several years. What's great about this product is the ability for us to fill out a broad range of products in the portfolio. So as I mentioned, we have the veterinary products. We've also got the troponin work that we've done. And on our road map is also add flu A/B testing into the platform. So we're encouraged. The overall point-of-care testing market is north of $10 billion. So I think, over time, as we go through years and years, we expect to be able to build this up. And I think very similar to what Mark said about ultra-wideband. We believe that we can build this into a several hundred million dollar business as we go out into the year. So it's encouraging, exciting technology, and we're really happy that we can help with the current pandemic.

And maybe I'll -- just to maybe add a brief comment on bio and our broader M&A activities. I think the exciting thing about bio is it's, again, another market that helps us address a very large TAM potential. And we acknowledge we're newbies to the world of biotech, diagnostic testing, so we're being careful as we enter the market. But we have a special technology, and that's been proven now by the regulators. So we're -- we are excited about the market. And then if we step back more broadly in the same theme, we've bought, in the last 8 quarters, and then if you add NextInput on top of that, yes, we've bought about $1.2 billion worth of companies over a couple of years. What's exciting to me is some of them are obviously contributing immediately to the company. They're accretive. Others are dilutive. But I think, as we know, what's most important is what's the market that you're able to address with these. What is your chance of being able to gain share and capture value. And we're thrilled. I mean again, we bought about $1.2 billion of companies. If you look at Qorvo and IDP's base business, our TAM is about $20 billion. This $1 billion-ish of acquisitions has given us access to, at a conservative estimate, about $4 billion worth of TAM. And several years, that's over $10 billion worth of TAM. And most exciting, that's excluding the TAM that James just referenced on biotechnologies. So that's all TAM that's available excluding biotech. So I think we've been -- we're excited about the acquisitions we've done and how they're performing with the company.