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

Good morning, everyone. Welcome to Citi's 2021 Virtual Global Technology Conference. My name is Atif Malik. I cover U.S. semiconductors and conductor equipment stocks here at Citi. It's my pleasure to welcome Bob Bruggeworth, CEO from Qorvo; as well as Mark Murphy, CFO. The format of our conversation is fireside chat. I will go with my questions first, and then we'll take your questions. If you have a question for the Qorvo team, please click on the link and submit your question. But before we get started, I'm going to give an opportunity to Bob to say a few comments. Bob?

Thank you, Atif, for inviting us here today. I want to thank everyone for joining us virtually. We appreciate your participation. I'll remind our audience that our safe harbor language that accompanies our press releases also applies to today's presentation. I will begin with a few remarks and will spend some time on discussion and Q&A. In our earnings announcement a little more than a month ago, we said end market demand is robust and Qorvo's outlook is strong. Today, that continues to be the case. We're at the forefront of multiple secular growth drivers in 5G, Wi-Fi 6 and 6E, our programmable power management, IoT, defense, ultra-wideband and other markets. We are investing in technologies, our markets need, and we're expanding into new areas where Qorvo is best positioned to serve our customers. In smartphones, a popular question among investors is, where are we in the 5G cycle? We believe we are early in the cycle with years of growth opportunities ahead of us. What can be overlooked, however, is how well positioned we are in the 5G cycle. More specifically, how well Qorvo's technologies, customer exposure and portfolio management position us to participate more broadly, more profitably and more durably in the current cycle than the last cycle. A broad set of smartphone OEMs rely on Qorvo's best-in-class products and technologies to develop next-generation devices that are superior to the last ones. As 4G phones are replaced with 5G, those first-generation 5G phones contain $5 to $7 of incremental content. In second and third-generation 5G phones, the opportunities grow further as content and performance requirements increase and as integration trends accelerate. We expect this to support growth through the cycle. Outside of handsets, our markets are supported by a diverse set of secular drivers we are seeing expanding over many years. Those include 5G network deployments, the adoption of Wi-Fi 6 and 6E, ultra-wideband, the transition to brushless DC electric motors and the transition to solid-state drives and a range of content drivers in smart home and smart cars, including automotive smart interiors. Across our markets, end market demand is broad-based and supported by strong secular tailwinds. We are broadening our reach in existing markets and investing strategically to enter new markets and extend our technology leadership. And with that, I'll turn it back over to you for your questions you may have, and I know you have some.

Thank you, Bob, for those opening comments. Let's kick it off with the mobile business. What are your latest thoughts on 5G smartphone unit expectations for this year? You have talked about 550 million units on the June earnings call. And then, I'm curious, we conducted a survey at Citi recently that indicates 63% of the consumers plan to purchase 5G smartphone within the next 24 months versus 71% who purchased in the past 24 months, so a modest decline. Are you seeing any impact from the resurgence of the COVID variant to the OEM build plans?

Yes. Thanks for the question. And first of all, at our last earnings call, we talked about smartphone growth in that 5% to 10%, and we're sticking with that. We also, as you pointed out, we saw the market more than doubling from roughly $275 million last year to roughly $550 million this year, so we're continuing to see that. So we're still very optimistic for the market for 5G phones, and we think we're well positioned across many customers to do extremely well.

Great. And just sticking on the supply constraints impacting the overall smartphone units and mix that we are hearing that the 4G SoC components are in extreme shortages, which is also boosting 5G low-end adoption. Are you seeing any impact to the RF components from the 4G SoC shortages and maybe a higher adoption in 5G components?

Yes. I think what's interesting is if you step back, and it's quite well known that there's tightness in the silicon supply chain, so if you're a motive manufacturer, would you want to sell a 4G modem or a 5G modem? So I think as they allocate their capacities that they have available to them, as you pointed out, they're picking more 5G modems, it's much higher dollar content. The good news is we're aligned with that. Our dollar content, as you well know, is a 5G phones $5 to $7 more than a 4G phone. So that's all been contemplated in the guidance that we provided on our outlook for 5G phones along with the comments that we've made also about our overall revenue expectations for the fiscal year.

Good. Bob, I wanted to dive into your supply situation a bit more. And you talked about tight in-house capacity with Wi-Fi supply constrained in the September quarter and some of your customers are having knitting issues. Is the supply situation getting better or worse or about the same?

Yes. Let's take a look at it. On our last call, we talked about 3 buckets as you pointed out: one is the suppliers to us; one is our internal capacity; and then externally, our customers kitting challenges that we've seen Let's take the one that we control the most, which is our internal capacities. And we've been bringing on capacity, and as we mentioned in our call, we thought we'd be in much better shape in December. And then in March, that's tracking quite well. When we look at the external supply chain, some places, we're seeing some improvements, some places we're not. So it's kind of a little bit of mix there. And then in the kitting, we've continued to see challenges there. But what I'm proud of, and I think it's worth pointing out, is the ability of our organization to adapt and change to the mix requirements that are put on our organization. As customers find out that, oh, I can't get this component, but I can get this one, hey, let's push more of this model versus that model. I've been very pleased with how the organization has been able to respond to what is a very dynamic market at this point.

Sounds good. And can you talk about what you see in the China smartphone market? It looks like the demand has stabilized in August after a bit of inventory adjustment April through July based on third-party data. Are the RF component inventory levels at OEMs in China above, below or at normal levels?

Let me start with, I'm very pleased with how the organization is addressing the China market. As you know, it's a dynamic market. But what I think we've done a really good job of the major players within China of getting good share at each one of them. So that helps us a lot. The other thing that we've seen go on, and I want to make sure people understand, so a lot of that data that we see is for the domestic market only and doesn't pick up some of the export market. And what we have seen as Huawei share has come down outside the United States, several of the Chinese players, along with Samsung, who we also have good share at has done a good job there. So from that perspective, I really like how we balanced our portfolio across a number of customers within China. So very pleased with that as well as what we're doing with building our business at Samsung. Now I'd say, it's somewhat of a mixed on the channel of the RF components. Some are returning a little bit back to normal levels. Some are still, let's just say, hand to mouth is probably the best way to say it. And there's no doubt we're still in a supply-constrained market there. But it's been pretty dynamic, as I've said, throughout real pleased with how the teams are reacting to all this.

Great. And then just picking up on China. Bob, you guys have done a very good job over the last few years in gaining market share in China with MediaTek Phase 6 and then just across the OVX supply chain, we are hearing Honors beginning to come back versus the domestic players OVX that, that have gained share, like you pointed out, particularly Xiaomi and Apple also gaining share. And you were very well positioned at Huawei before the U.S. restrictions came along. How do you see the share shifts and your overall share situation in China if the Honor brand starts to come back?

Yes. Let me start with, again, I think the strategy that we've been deploying in mobile is to really be well diversified across a number of different customers. And in fact, I think it's safe to say that we've built the most diversified, at least when it comes to the 5G handset business that there is out there of any of our competitors. So very pleased with that. Now more specifically to your question about Honor, we have an extremely long history with the Honor brand. We did extremely well. As you remember, we went through a tough place when the U.S. government wouldn't let us shift to Huawei, okay? And then they spun off the Honor brand. We know all those players extremely well. In fact, I know their Chairman extremely well and have known him for many years. So we continue to have dialogue with them. Now what they did is what they had to do was pivot when they initially went out on their own, they had a supply chain that was built up around not using U.S. suppliers. So we've been working with them to build back their supply chain much like it was at Huawei. In fact, they're using the Huawei playbook, if you will, for how they're interacting with Qorvo and their other key suppliers out there. So as they continue to build their brand back, build their business back, our expectations are we'll be well diversified across Honor, Vivo, Xiaomi and Samsung as well as our largest customer, Apple. So that again, as share shifts happen between these players, which they do, we'll be well balanced and be able to survive quite nicely where others may not be as much as diversified as we are.

Great. And then a question on dollar content, where in the second year of 5G migration, so still early innings here. You talked about $5 to $7 content increase in 5G over a 4G device, a new diversity received, mid to high band, MIMO complexity increase, antenna control solutions and then ultra-wideband adoption are some of the areas of incremental content adders for you. How should we think about your dollar content growth in next 1 to 2 years as new 5G buying plus 5G phone upgrade kind of layers on?

I think it's best just to stay at an extremely high level there. And I think you outlined many good drivers why we believe we're still in the beginning of a multiyear secular trend of growth, and we believe we can grow this business 10% to 15% year-in and year-out for the various reasons that you've outlined. I mean, clearly, we've also commented that it's our expectations by about 2025 that 80% of the phones will be 5G. And as you know, we're a long way from there now. So you're going to continue to see more and more 5G. You're going to see the $5 to $7 of content. You're going to see added content as they put in added filters added capabilities. We've got our dual connect modules. We've got a diversity path. We've got more antenna management going on. We're bringing in the sensor business as well. You commented on ultra-wideband. So we see lots of opportunity to continue to see growth in our mobile business.

Great. And not to leave Mark behind. I feel like Qorvo has structurally changed over the last couple of years as better management on your product mix, a lot stronger execution. And the question I have for Mark is, like some of it is just a better execution on the original merger synergies that you guys talked about between RFMD and TriQuint. What other steps, Mark, did the management and the company take to improve the mobile business?

Well, I think your question in a way answers the question. It was a coordinated effort across a number of dimensions. Yes, the company's heritage, both RFMD and TriQuint, is around technology and the vision that 5G and -- well, advanced 4G and then 5G is going to drive this integration trend, which was going to require best-in-class technology. So the company's foundation is built on that. And we continue to be a leader across a number of different technologies and continue to have elevated investment in R&D, as you can see. And then we -- post-merger, there was -- yes blessed was being able to do everything, we had to work our way to not do everything. And over the period of years, we've focused on those technologies and products that were most differentiated, and you see that today in our product portfolio, and that's an active process that we continue to be. We also in that process, sharply reduced our capital spend and became much more circumspect about what we're spending our capital dollars on and ensuring that high-probability products and highly differentiated products are those that are consuming our capacity and that we limit our capacity based on clear line of sight about where our customers value us the most. And then finally, we've driven tremendous productivity in the company. I mean, I arrived soon after the merger and the maturation of the company around productivity has been remarkable, and I think everybody is proud of that. And again, you see that in our results. And in the end, you have a model where we've been outpacing the market on the top line. We've sustained improvements on gross margin and believe that we've reached a new foundation around 52 that we can build on. We've been generating operating leverage growth on OpEx, we were around 22%. We'll be close to 19% of sales this year and expect that to go down as we grow, which also sustains investment in the right areas in the business. So -- and lastly, in the end, the earnings growth and free cash flow growth as a result has been exceptionally strong and yielded that favorable outcome.

Mark, as a follow-up, I just got a question from a client. Can you kindly ask, how sustainable are the gross margins and OpEx control from here?

We absolutely believe it's sustainable. I mean, that's -- the point we were making on the last earnings call is, we've set what we believe is a foundation that we can build on and sustain or expand the margins from there. It's a combination of continuing to find the playbook that we've run to date. But also it's investing in some new technologies. And you saw -- you heard Bob talk about some of those earlier, including programmable power management, our ultra-wideband and the sensor fusion business. We have MEMS technology and then we can talk about a few others. So it's continuing to deliver what the market needs and more and better RF and then continue to expand the business and adjacent competencies and grow the business and leverage our fixed cost base.

Great. Let's switch to the IDP business. The IDP business was down year-over-year in the June quarter, but it's expected to be down in September. China 5G infrastructure demand was weak in first half. You're expecting it to pick up in second half. Can you talk about the number of base station units expectations this year? And any views into next year?

Let me start with the overall IDP business. So our expectations, as we commented in our last earnings call that we'll grow in December, we'll grow in March. So things are still on track there, feel very good about that. I think at times when people want to understand the number of base stations, I think it's as important to understand what type of base stations are going out, meaning are they going to be macro or are they going to be massive MIMO? And I think we've made clear that where we really shine is in massive MIMO and also at what frequency. So a lot of the Chinese rollout that tenders went out for were at 700 megahertz, which we participate in the small signal chain but not in the macro amplifier. So most of that. And then you have to also then look at who won the tenders. And Huawei got a majority of those. Well, we can't ship to them. So if it's 700 megahertz Huawei, not likely going to be really good for us. Now we did see some of our other customers pick up some business there, Ericsson and Nokia. So we'll get some business out of that. Some of that is going to be in the massive MIMO areas. What we also commented on the last quarterly call was that we're seeing pickup in Korea, Japan, Canada, the U.S. C-band, some in Europe and then further out more in India in the massive MIMO areas and the higher frequencies that we like. So we feel good about that. We also talked about small cells, okay, in the 3.5 and 4.9 gigahertz where we've got some fantastic filtering capabilities along with some of our other small signal components. So we're starting to really diversify our business in our infrastructure. So that all remains on track. And we continue to believe we can grow that business 10% to 15% given the growth drivers of the infrastructure business of our defense of Wi-Fi and some of the others that we've already talked about.

Great. And Bob, James has talked about a 10x dollar content gain from $100 to $150 range in 5G base stations. How should we think about the content growth for the base stations?

Yes. And that's what I was saying is, I think we need to be really careful on are they deploying macro base stations and at what frequencies. Let's just take in those higher frequencies that I've already mentioned. And if they're laying out 64-element arrays, our opportunity is pushing over $1,000, okay? When it comes to 32, it scales down, 16, scales down from that. So that's what I think is important is understanding the mix within that and then who's going to be able to manufacture those. So outside of Huawei, whether it's ZTE, Ericsson, Nokia, Samsung, Datong, we've got great businesses with them, and we've been building out a great portfolio for them as well.

Okay. And how do you see your opportunities in Wi-Fi and Defense, which is the most profitable piece of IDP in the next few quarters?

Sorry, could you repeat the question?

How do you see your opportunities in Wi-Fi and Defense, which is the most profitable piece?

Yes, yes. Both businesses, we expect to continue to grow nicely. Our Defense business, we are a trusted foundry. We've got great products and technologies in that area. Many of those are high frequency. Many of those actually have fed the technology into what we're seeing in the millimeter wave as well areas of our business. So great business, great growth. It's just a little bit lumpy, but it continues to grow year-over-year. From a Wi-Fi perspective, we've talked about on the last couple of calls, the tightness in the supply chain that we've seen and as we put in some of our own capacity, we expect that business to continue to be a strong growth driver and driving our productivity that Mark already spoke about to continue to improve our financial performance in our Wi-Fi business as well.

Great. And Mark, one for you. What is the confidence level in IDP getting above $300 million in the March quarter, like you commented on the last earnings call? And is IDP a 10%, 15% revenue grower long term?