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

Great. Thank you. Good afternoon, everyone. I'm Vivek Arya. I cover semiconductor, semi-cap equipment at Bank of America Securities. And we just have an extra special session for you this afternoon. Delighted to have the management team from Qorvo join us: Bob Bruggeworth, CEO; James Klein, Head of the Infrastructure and Defense Division; and Eric Creviston, who heads the Mobile Products business. And what we will do is I'll turn it over to Bob for some opening remarks, just kind of a state of the union. But if you have any questions, please feel free to send me separately on the Vericast console that you have. But with that, a very warm welcome to Bob and Eric and James. And Bob, let me turn it over to you.

Thank you, Vivek, and good afternoon, everyone. We appreciate everyone joining us today, and we're looking forward to some great questions from you all as well as Vivek. Before we begin, I want to remind our audience that our safe harbor language that applies to our press releases also applies to today's presentation. Qorvo reported a very strong March quarter about a month ago, and we're very happy with how our June quarter is progressing. At a conference 2 weeks ago, we said the design activity has been robust. I can now say that, that continues to be the case. For the year, Qorvo is forecasting smartphone volume growth of 5% to 10% and a doubling of 5G smartphone units to around $550 million. The RF content in these phones is expected to increase $5 to $7 per phone compared to 4G phones. In the market served by IDP, our growth expectations are supported by a range of multiyear trends that include 5G networks deploying around the globe, the migration to Wi-Fi 6 and 6E, added connectivity in cars, upgrades to the DOCSIS 3.1 and the transition of brushless DC electric motors and the transition to solid-state drives. Combined with the content drivers we enjoy in mobile as well as the investments we have made in technologies like ultra-wideband, RF-based biotechnology testing and MEMS-based solutions, Qorvo has assembled a diverse set of opportunities that we see expanding over many years. Now speaking of our IDP business, you'll notice James Klein is here with us. James has announced his intention to retire, and I've asked him to join us today. James built an outstanding business here at Qorvo, and I'm thrilled he has the position to retire. James will remain onboard until a successor is named, so many of you will have the opportunity to spend time with him. He will remain focused on IDP and Qorvo until we have completed our succession plan. So with that, Vivek, we're ready to move on to your questions as well as our investors. Thank you.

Excellent. Thank you, Bob, and thank you for the update. And of course, our best wishes to James, and I'm really happy that he'll be there at least till the end of the year, so you have a very smooth kind of succession plan. Maybe Bob, if we started off with a question on the supply side, and then we will go to different aspects of demand and growth for your business. So on the supply side, we heard about these shortages, just very broad-based supply shortages across the industry. Could you -- and maybe James and Eric as well talk about, Bob, overall for the business. Where are you seeing the most shortages? What are you doing to kind of alleviate them? And when do you think -- or from a supply side, you get back to getting what you absolutely require for your customers?

Yes. Let's start with we're going to provide no update to what we said on our earnings call, and really nothing has changed with our plans. So let me just start with that as an opening comment. There has been tightness, as you know, for quite some time in silicon, and we've mentioned capacitors and even some laminates in the past. But I think what I find interesting is, and I'm going to let James and Eric also comment on this, is a lot of the headlines you hear about are in automotive. And we look at the automotive volumes, and there's nothing like a lot of the consumer businesses that both James and Eric run. So they tend to get some -- a lot of headlines. But we have said all along that we believe we will be supply constrained and we have been. And it's tightness in some of the silicon areas in particular. But we've been working with our customers very well and adjusting to what their problems are and challenges are, getting silicon from some of the very people that are at this conference and adjusting our production plans. And that's why we've also talked about that we now have in place noncancelable orders, long-term agreements across both our business units and getting very good visibility on how things are going. And we expect this to persist for some time, much like the others. There are certain areas within the silicon supply chain that are tighter than others. I think we're also very fortunate. As you know, a lot of our products contain our GaAs and our filter technologies and our GaN-based technologies that we produce ourselves, so we're in pretty good shape. But I'll allow my colleagues to add any color or even take away from what I've said, if they would like. James, anything you want to add?

Well, first, Bob, I want to thank our internal ops team. I mean Paul and the team have done a fantastic job, and I think we've done better than a lot at keeping our customers up and running. And we've got very tight relationships with our customers, so we're making sure that we're able to keep up with their demand and balance what we supply to what their demand is. So I think our team has done a great job. We're also cognizant of where some of our customers have constraints in other areas. And so we're really engaged with customers to make sure we're shipping product to customers who actually need it. And other customers, we may be delaying a bit if they don't need the product. So I think overall, between the sales team and the manufacturing teams, we're doing a really good job balancing through constraints where they exist in the industry.

Thanks, James Eric?

Yes. Similar on the mobile side, of course. It's a multidimensional problem. It's -- our own supply chain lining up with customer supply chains. Probably one sort of overarching theme has been limited capacity is driving supply towards the higher-value nodes, right? If you have limited wafers, you're going to find one where the most profit is. And today, in my business, that's 5G. So given that we're primarily supplying into 5G handsets today, we might have a bit of a muted effect from that compared to others, but it's still something we're certainly dealing with every day.

Got it. Now maybe let's -- stepping through the demand drivers. And if it's okay, maybe I'll start with the IDP side, and then we will go to the mobile side. And James or Bob, maybe for people who might not be as familiar with the IDP segment, help us dissect the segment. And I know that even though parts of the business, for example, in China, right, might not be where you thought that they would have been, you're still expecting the business to grow at least towards the lower end of, I think, the kind of 10% to 15% kind of longer-term growth objective. So help us dissect the business. What parts are growing this year? What parts are not able to grow? And then what is the right way to think about the longer-term growth prospects for this business?

Yes. Thanks, Vivek. Of course, over all these years, and we've been continuing to grow, diversification has been our friend. And so when we've seen certain markets up, other markets are down and the balance has been very positive. And of course, as you mentioned today, I consider base station and the deployments in China a bit of a headwind. And we've talked about that in the last call. I think that remains still the case today. The deployment in China is much more muted than what we've seen in the past. But that said, the trends in that business, I think, are still very, very positive. We still see GaN adoption going at an aggressive rate. We still see massive MIMO antenna adoption going at an aggressive rate. So all those things, I think, are very, very positive. If we -- so base station is a big part. I also have to mention that it's not just the PA. There is a conception that we're a GaN power amplifier supplier. And for years and years, we've supplied into this market, and we are a leading supplier, really, across the RF chain. I think we've got some of the best low-noise amplifiers in the business. We've got a great portfolio of switches and other amplifiers in that market space. If you move into our WiFi space, the rollout of 6E and Wi-Fi 6 has been a nice driver for us. And we've experienced good growth really across all the underlying segments of WiFi, and I think that trend will continue. Certainly work from home has helped accelerate that, but we're in the early stages of 6 and 6E adoption, and again, going well. And actually, an area that Eric and I share quite a bit. I know Eric is going to talk about WiFi as well when he comes up. If we keep going through the business, we acquired Active semiconductor about 1.5 years ago, and our power management group has really taken advantage of a couple of trends. One, the conversion to solid-state drives and just the deployment of laptops and things like that have been very strong. And then we have world-class motor control capability for linear motors. So brushless motors getting adopted at a record pace is also driving significant amount of growth to that business. I would say it keeps going. Defense has been a very strong part of the business for years and continues. It can be a bit lumpy at times. But when you look year-over-year, it's a bit boring. We just keep growing. We just keep adding to the portfolio, and so defense is -- has been a good, solid base for the company, including bringing in a lot of technology. And then there are some smaller markets in there that are doing well. Automotive is relatively new for us, but we're seeing the connectivity in the car continue to increase. And so we're doing well. Even the cable networks are starting to upgrade to what Bob talked about earlier, DOCSIS 3.1, and we play a role there. So I think in general, the trends are very good for the business. I think we're on the early stages of a good run for the kind of markets we're in and the kind of technologies that we have. But definitely a bit of a headwind this year with the muted deployments in China on 5G. Now that said, 5G is deploying. I mean we see U.S. deployments go, and we see other deployments in Asia, deployments in Europe. So I don't want investors to think 5G deployment has stopped. It's just muted a bit from what it was the prior year in China.

Got it. We had a fireside chat with Analog Devices earlier today, and they mentioned that their non-China exposure is now almost 3x their China exposure. Do you have some similar kind of quantification of how dependent is your business on China 5G recovery to grow double digit or so this year?

Yes. I think it's going to vary, Vivek, as we go through the years because, for us, at least, they're offset -- China deployed a couple of years earlier than what we saw in the other regions. If we look into what we saw last year, China was about half of the market. But the rest of the market is now starting to grow substantially faster than what we saw in China. So I think it will vary over time. But generally, the way I think about China content is about half last year, and that will continue to decrease as we go over time through the 5-year cycle.

Got it. And one final one on China 5G is that we know that the configurations they are putting in this year perhaps are not as content-rich what they had, right? There is less use of MIMO. There's a lot more macro base stations as they go out in some of the more suburban or rural areas. Do they come back to densification later on, so you get back on the MIMO track? Like how -- because you have been through many of these cycles, right? This is not the first time it's starting, stopping and then going. What is the progression from here?

Yes. I think 2 things have happened in China this year. One, there's just been almost a pause in deployments, in general, from what we saw last year, whether it be macro or massive MIMO. And then as you mentioned, we've seen more macros start to be deployed this year and more 32 element arrays versus 64 element arrays be deployed as they start to make some of the initial rural deployments. I think that mix is going to continue to change. But one thing that I think is important to understand is that our content gains compared to 4G, it's 10x on a 64 element array, 10x, not 10%, but 10x. On a 32 element, it's more than 5x. So 5G deployment is a big content gain for IDP. The mix is going to change a bit. The regions are going to change a bit. I've taken a much longer-term view at this market is we're early on. We've got all the technology to play, and we're able to play in all the regions. So I think we'll just continue to move forward into the business. And maybe I overuse the word lumpy a bit, but we're going to have our ups and downs. We're not going to win every slot, but I'll always fall back on diversification. It's been my friend for 5 years, and I think it will continue to be that friend going forward. So yes, Vivek, I think that mix is going to change a bit towards lower content. But again, we've got the rest of the world coming on and all that. So I think the business itself will continue to be able to grow as we go through these next 5 years.

James, do you want to remind the group the timing of releasing your macro base station GaN amplifiers?

Yes. I mean we're -- yes. Thanks, Bob. We've got, as I said before, a broad portfolio of products. And certainly, we focused early on, on the products that would work inside a 64 element because we knew they was going to deploy first. We then started to develop 32 element type deployments, and now we're in the process of doing those as well as doing macro products as well. So we're developing those macro products now that will allow us to also address deployment. So -- with macro base stations. So the intent, Vivek, is when we -- as we go through this journey, our intention is to address a very, very broad section of the base station market. We may not address some of the very, very lowest frequencies with our GaN, but the vast majority of the deployments we plan to have products to be able to address.

Got it. And then finally, James, when you look at deployments in the U.S., right, in terms of 5G, to use kind of a sports analogy, what innings are we in, in the U.S. deployments? Because now the hope is that, okay, China has stopped. U.S. should take over, but are we early innings? Are we middle innings? Where are we in terms of the 5G deployments in the U.S.?

Yes, yes. I would say -- one thing I would say, China hasn't stopped. I don't even think we're the seventh inning stretch. I think we're in the -- we've taken a TV timeout in the second or third inning in China. The U.S. is clearly in the early stages. I mean we have just started to make our early deliveries as we go through this year, so it's very, very early. And then, of course, I would say that's the same thing for India. Same thing for Europe. And some Asia, there was early deployments in places like Korea and Japan, but we're seeing those continue as well. So yes, we're -- if you think about what happened in 4G, which was about a 5-year deployment, and it was staggered as well. We're maybe in the -- we're in the second year in China, and we're in the first year in the U.S.

Got it. Very clear. Maybe on the mobile side, the one, I think, very interesting and somewhat unique aspect, I think, of your mobile business is just the diversity of customers. I know in RF, it is hard to be too diverse just given one large customer, right, has a big influence on the market. But even given that, right, you have a lot more diversification versus your other peers. So that is a positive, I understand. But does it also create challenges in forecasting the business, right? Because instead of 1 or 2 large customers, now you have to look at the forecast from 3 or 4 or 5 customers and then trying to say, Well, how much of this demand is real, right? How much -- because some of those customers in China in the past have, right, perhaps overestimated what their demand would be. So how are you managing the business given this element of diversity in it?

Yes. It's a good question, Vivek. I would say it's never easy to forecast, of course. But having diversification maybe does give us a bit of an advantage in 2 ways. And the first way is regarding demand. We don't just take customer forecast and factor them or anything. We have a market model for the industry, right? And so we've had a pretty good track record of predicting overall high-level total units in each region, mix between standards and feature set introduction. We've done a fairly good job of modeling all that, and that's really what we based our forecast on. Customer forecast, of course, have to support that, and we rationalize those, too. But -- and then on the supply side, our team has done a really good job of really finding ways to make common elements. In many cases, the exact same part number shifts across the majority of our customers. That helps tremendously. Of course, as demand moves around, one customer wins a slot. Another one doesn't. We're still able to supply right from our supply chain. So when we put those 2 things together, it gives us some amount at least of stability and predictability against our forecast.

Got it. When you look at 5G adoption, Eric, we saw as China was the first one, the infrastructure side. We also saw a very fast ramp of 5G, right? Like we look at MIIT data, right, it's like 70%, 80% adoption of 5G in the mix right now. What do you think is U.S. adoption or Europe, right, or, say, non-China adoption of 5G? Where are we in that cycle? Because every time this question of 5G comes up, people always say, "What is the killer app for 5G? Why would I ever go and buy a 5G phone if I'm not able to have, right, any more in terms of benefits?" So from your perspective, what is the benefit of 5G in a smartphone? And where are we in the adoption cycle from a non-China perspective?

Yes, yes. A lot of ground to cover there. So starting with kind of a killer app, I think it's not necessarily about the consumer in 5G. It's about the network itself. So the operators are very, very keen to roll out 5G because it helps with driving on the cost per bit for data. It's much more efficient in the use of the network. Now in doing that, they brought a lot of multiple channels of operation, at the same time, being able to talk on multiple base stations to increase the efficiency during handoffs. So a lot of things the consumer doesn't see, but it makes a big difference in network efficiency also happens to drive RF content up. I mean these are really big RF challenges. Now when you look at consumer benefit, I still believe that low latency is going to drive a killer app of something, and it could be online gaming, for example, which will benefit from better bandwidth, too. But really, that latency, that's generally low but controlled, that's really going to be a breakthrough. But of course, you have to have the majority of people using it for it to work, right, effectively. So to the beginning part of your question about where are we, we're still really in the very early innings. The percentage of shipments is growing, 5G or 4G. But if you look at the installed base, it's 4 billion to 5 billion smartphones out there, maybe 500 million 5G today. So we're really still in the very early innings of actually getting the handsets rolled out into everyone's hands.

Got it. And within your shipments, Eric, what is the proportion of selling into 4G phones versus 5G phones? First of all, are you able -- do you have that mix with a great deal of certainty? Because I imagine there are a lot of common components also, right? So how do you come up with the exact mix? And what is that saying in terms of your proportion of 4G versus 5G shipments right now?