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

Okay. Good afternoon, and welcome to JPMorgan's 50th Annual Technology Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Bob Bruggeworth, Chief Executive Officer; and Grant Brown, Interim Chief Financial Officer of Qorvo here with us today. It's been a busy earnings season. So I've asked Bob to kick us off with an overview of Qorvo, and then we can go ahead and kick off the Q&A. So with that, gentlemen, thank you for joining us today. Let me turn it over to you.

Good. Thank you, Harlan. Thanks for everyone coming out. It's great to see people in person. So hopefully, you're having productive meetings as well. Also I want to thank all those that are online listening and your interest in Qorvo. I'd also like to remind you that our language that accompany -- our safe harbor language that accompanies all our press releases also applies to our comments today as well. So Harlan, thank you, again. I do want to take a look back at March. I promise only take 33 minutes and 56 seconds in opening comments and everything will be fine. I do want to take a look back at March. We had a really good March quarter. We grew in March over the December quarter. We saw growth in both our mobile business as well as our IDP business quarter-over-quarter and year-over-year. Growth in mobile was driven by 5G, along with the timing of marquee phone ramps. So very nice growth there. And when we look at IDP, it was very broad-based across customers and products. So both businesses are doing extremely well. Also when we gave our March earnings report, we also talked about the number of 5G phones and the market that we saw. So leading up to that quarter, we've been talking about 700 million to 750 million phones of 5G in calendar 2022. We took that down to 650 to 675. So we've brought down the number of 5G phones. We also believe the smartphone market itself is also coming down. Now why is that? A lot of that has to do with our customers in China, which is one of the growth areas for 5G. The consumer sentiment had been declining, along with, as you recall, late in March, we started to see the lockdowns, which continued all the way up to this day. So we saw that, unfortunately, also because of what happened with Russia and Ukraine, it also is impacting some of the export market for some of our China-based handset customers, along with Samsung as well in Eastern Europe and some of that into Western Europe. So when we integrated all that, we felt it was best to bring down our numbers for 5G, which impacted our revenue, which I'm sure we'll get questions later. So we'll save that. Next, we view this as temporary. We don't see this as a structural change in our end markets. In fact, those long-term growth drivers that we talk about, 5G, the transition from WiFi 6, 6E and 7 continue. Ultra-wideband, we believe that's market is still going to grow significantly over the years to come. Then also the work we've been doing to build our power business with our programmable power, active semi acquisition along with the silicon carbide business for power conversion, that being another recent acquisition, those look very good and also our defense business for long-term growth, we continue to see that growing along with the infrastructure. So a lot of good things going on there. So again, we view these all as temporary. So what we're focused on is continuing to evolve our technology and bring our best-in-class products. Another thing that we talked about, it's been our strategy in our handset business to go a little bit deeper to build a very diversified customer base, okay? Most of you know, we've done a good job at our largest customer being Apple, then we looked at basically China; Vivo, Oppo, Xiaomi as also being very good. If you remember, Huawei, 3 years ago, it was our largest customer in China. They were about 14% of sales. And as you know, the U.S. government managed to make that go to almost zero for us. So therefore, we had to rebuild. We focused on Samsung, and we talked a lot in our earnings call about the growth that we're seeing in Samsung, not just in the flagship but also in their mass tier platform as well. And they're using very similar modules to what's in the flagship. So we'll probably have some questions about that later, but that's clearly a growth engine for us. And that's a place where we were underrepresented in the market. The other area that we talked about was Honor. And as you know, Honor was the mass tier brand for Huawei, which they spun out, which is called Honor. Totally separate from Huawei, and we're building back as they're now moving to modules. They were on a lot of discrete components because they couldn't get modules from us and our competitors because we're based in the U.S., we're using U.S. technology. So that's another great opportunity that will carry out over the next 12 to 18 months as they continue to bring out new phones. So when you step back, what you'll see is from our largest customer, then you move into Samsung, then you move into Honor, Vivo, Oppo, Xiaomi, we will be extremely well represented no matter who wins. So we have built what we believe is the most diversified RF player in the market. So we're excited about where we are. Again, what we think is impacting our business is now short term or temporary, and we look forward to continuing to grow, as I talked about all our long-term growth drivers.

Yes. That's a great overview. Thank you for that. I will start off with a couple of kind of near-term questions, and I do want to delve into the longer-term opportunities for the team. You rightly pointed out that the team lowered its 2022 5G smartphone shipment outlook by 7% to 10% combination of supply chain dislocations, demand-related issues. It's not been quite a month yet, but does the team have a better understanding, a better visibility on the situation in China and understanding of how much of the weakness is supply chain, production dislocation versus true end demand?

Sure. Let me take that one. In terms of the breakdown between it being supply and demand-driven, initially, we talked about the supply-related issues. So there were things like the kitting issues and some other things, and it was easy at that time to identify simply because it was the only factor. But now we've got a disproportionate amount of demand that's causing the headwind there. And so it's a bit of a mixed bag. It's hard to separate the 2 constructively. But I would say it's more demand than supply driven at this point. No change to our original thoughts on it. When we broke it down on the earnings call, we talked about approximately $250 million of our revenue split between the June and September quarter. If you're looking at that, you could say that there's somewhere between 50 million and 75 million units that came out, as Bob pointed out, take roughly the midpoint there, call it about $10 worth of content, maybe a little bit more on average, times our share in the market and you can get to the $250 million there that we see in the near term and no change to those thoughts right now.

And then on the revised 5G smartphone shipment outlook that still actually does imply 20% growth in 5G shipments this year, right? And the team is over-indexed to 5G on your strong design win pipeline, you're bringing on, as you mentioned, some new customers and you have pretty good content gains. And so I think on the call, you said you had anticipated quarter-on-quarter growth for the remainder of the year in mobile. Any more visibility, quantification on mobile sort of as we think about the profile, how do we think about the profile of mobile second half versus first half or maybe even calendar 2022?

Yes, sure. So we talked about the strength that we see at Samsung and Honor. And so that gives us some confidence heading into the back half of the year without necessarily quantifying it. There is an inventory-related overhang that we'll be working through. So even though we can talk about the total handset shipments, say, it's a little different when they're working through inventory and pulling from Qorvo for component parts. So we're going to see a bit of a delay as that rebounds.

Yes. I think what's also -- keep in mind that we believe that this market for the advanced cellular products that we put into the phones, we still believe that's a single to upper single digits type of growth profile. So we still believe it's in a growth market. And as Grant commented, we have to work through some inventory that's between -- we have a little bit of inventory, that will be revenue, between our customers, they have also some inventory of our components. So we just have to work through that to be able to really see how this plays out. It's a cloudy time when we look out in the market for the various factors that we've talked about, what's going on, but we still believe the long-term growth drivers are there behind the units.

And just my last sort of short-term question. Do you guys still feel like the China market production/demand for you guys is sort of just kind of bouncing along the bottom here?

It's certainly a low point, right, in the quarter. We talked about it coming down almost in half. And so from a sort of typical year perspective, certainly. It's hard to call, but at the moment, certainly more optimistic as people look to buy handsets coming out of the lockdown scenario, along with probably other goods, right? I mean, it's hard to really forecast what exactly their highest priority items will be, but I'd put that in the mix.

Yes, let me add to that. I mean, we haven't really had lockdowns here. Yes, some of us didn't travel. Some of us didn't go to the office, but we could still get food. We can still get whatever household goods we need it. A lot of our employees are -- I can speak to our workforce at least, they were not able to get a lot of those things. So what we have to figure out is when they can get out and about, because you're not out eating in restaurants and this and that, people are going to realize we run the risk of another lockdown. Therefore, what are the things that I should go spend my money on? Some of it might be upgrading phones. Some of it might be just their normal consumables like food, toiletries, what have you, your laundry detergent, what have you, because they haven't been able to get out and people can't get them things. So we're not sure what the consumer is going to do. And another thing is, in China, the latest phone is a status symbol. Well, if you're not going out and you're not eating out and laying your phone down on tables and things, are they going to buy new phones, those are unknown for us. But what we do know is our design activity continues. They're still designing new phones. They may not be selling as many, and we think that will turn over time. So predicting when that happens is not something, quite honestly, we've got a good crystal ball. All I can tell you is that the relationships with our customers only continue to get stronger and the opportunities for us continue to get bigger. With the number of units, we'll just have to wait and see.

Perfect. Yes. So let's talk about the opportunities. I mean, you've articulated in the past, your RF content for 5G smartphone is increasing about $5 to $7. You continue to gain WiFi and power management content as well. You've got increasing penetration into Samsung smartphones, as you mentioned, and you have some new customers, for example, Honor, that's going to start to ramp in the second half of the year. And then obviously, your flagship North American customer. I believe the team is still gaining content. Qualitatively, how much of the second half growth is being driven by share gains or new customer wins versus just straight content uplift at your existing customers?

Yes. I think we have to -- let's see Samsung as a good example. The breadth of products that are now in their phones run from envelope trackers to average power trackers to antenna tuners to switches to integrated PA modules to WiFi. So very diverse products, and it will be great in pace as they roll out new phones. I talked about mass tier, in fact Eric Creviston spoke at our last earnings call that the mass tier is starting to use very similar modules that what's in the flagship. So you're going to see a broad set of products over time. . Second place, Honor. Honor has actually taken our most recent modules that we've released, which is our latest fusion products for their phones, and that will be slowing over time because they're lower volume, but it's multiple handsets over time. So like 12, 18 months type of time frame. That looks very solid. So the real question about what's going to drive the growth is what happens to the China market that we talked about as well as an example, Xiaomi, the export market in Eastern Europe. So that's what's really going to drive the growth. We'll get some content gains offset by, as Grant already mentioned, the digesting of the inventory that the Vivo, Oppo, Xiaomi has. So you net that all out, and then we won't talk about our largest customer.

Right. Perfect. Do we have any questions from the audience? If you do, raise your hand, and we can have a mic get sent over to you. We have one right up here.

Just a question on Samsung. What is the cadence of like the mass tier layering in? Obviously, the flagship line did well for you guys. When does mass tier here actually become bigger than a flagship for you, if ever?

Oh, the mass tier will be bigger over time. Absolutely. I mean we're starting to do some of that volume. I mean we just disclosed that Samsung was greater than 10% last year. We had a very nice March quarter with them, which was a mixture of the 2. But I actually haven't seen the data between the 2 different phones because of what I said, they're using some of the same parts. But I'm sure the team has it. I just don't have it at my fingertips, but there's no doubt the mass tier, just by the sheer volume and moving the integrated products, it will be larger.

[Technical Difficulty].

I don't have it right now. It might already be. I mean, obviously, any given period, if you mean for the full year, we'd have to talk about it. But as you know, they're typical ramp of the flagships now, and they're always introducing the mass market phones.

Any other questions? Let's think about the pipeline longer term, right, because it might seem early to ask. But on the other hand, many of the architectures and SKUs for next year are already being determined by your customers, right? You've done a great job, as you mentioned, expanding across the portfolio at Samsung. You're starting to penetrate into Honor, broad portfolio of products. There'll be more RF, power, connectivity, complexity increases across your existing customer SKUs. So what's the initial pipeline of design wins and opportunities look like for the Qorvo team as you think about next year?

Yes. It was one of my earlier comments that the engagement has never been better, and it's very broad. Other things that we're now working with our customers on is ultra-wideband. We talked about that we're already in some of the Google phones that are out there. We'll continue to expand on that and also drive through other opportunities with ultra-wideband. Another area in the portfolio that we're also talking to handset customers is our sensor business, the work that we're doing there. So being able to put the touch sensors in that we're already in many of the electric car in the dash and as well as in the steering wheel, we're starting to see phone makers in there, particularly in gaming phones that are very advantageous for latency. Believe it or not, in gaming, that's really important. So we see other opportunities to grow as well. So we feel really good about how the acquisitions that we've been making add to our opportunities, not just in the handset, but also outside of that.

Right. Okay. We have an e-mail question coming in. What do you believe the trajectory of reopening in China will be in the second half, best guess? Do we see China opening as early as beginning of June?

It's a tough question to answer, right? I think anyone's -- your guess is as good as ours. I think that instead of maybe trying to time it, we could at least discuss the impact of what that would have maybe when it does happen, right? So as we were talking to inventory, there's going to be the initial pull out of their existing inventories on site to build handsets. And then from there, it'll start to pull a bit out of, if there's anything in the distribution channel and us, of course. So we'll be selling into our own inventory. So it will take some time. I think it's important to point that out because the inventory balances won't be like a light switch, where all of a sudden, if things go back to normal, there'll be some delay as we pull through that inventory. So it's a very difficult to time. I don't know if we have any incremental insight into it, but certainly, it would be a bit of a delay. The gross margin, I think we've talked about, too, in terms of impact, right? So as we're selling more than we're producing in order to drain off inventories in those areas, we'll see some headwinds to gross margin as we commented on the earnings call.

Perfect. Let's turn to your IDP business. 5G C-band networking deployments continue in North America, you've got Europe, you've got Asia, ex-China, you've got a strong position in GaN-based power amplifiers, modules. You also do very well in small signal, right, LNAs, switches, drivers. Is there enough deployment momentum now ex-China to drive sustainable growth in infrastructure into the second half of the year and next year for IDP?

Yes. Sure. Definitely seeing interest outside of China. Too early to call on specific growth rates in any specific time periods, but it's definitely starting. If you go back and look at the business, we had a very strong business at Huawei before we were cut off and certainly have all the technology development that's associated with that. The rest of the world will be not far behind, but the timing is somewhat uncertain.

Yes. The only thing I'd add is we've kind of backed away from China. It's just very lumpy on that particular business. It's on our own capital. So what we've focused now on is, obviously, the big players, whether that's in Asia, Samsung or NEC, here in Europe, you've got Nokia and Ericsson. And what we're doing now is bringing out as you highlighted, the GaN as well as some of the small signal components in a module, leveraging the technologies that we developed for the handset, and we're working with them and that seems to be gaining some traction as well. You're right, C-band is a sweet spot for the GaN. And we're seeing that roll out as well throughout the world. But we do expect that business to be double-digit growth. It's unfortunately just come off a smaller base because of what happened with the China rollouts. So, we're stepping away from that. All the -- most of the 5G that was rolled out last year was in frequencies like 700 megahertz, which is not a sweet spot for the gallium nitride. So the C-band is very important to us along with any of the other higher frequencies.

I feel there's a pretty big SAM expansion opportunity for the team, and that is the focus on 5G enabling all these private networks, right, that are going to start to take advantage of virtual RAN or O-RAN-based architectures. Essentially, a combination of virtualization and standard-based RAN building blocks that enable faster time to deployments, right, for a lot of these new end markets that haven't taken advantage of land-based connectivity. So has the team tried to size this new SAM expansion opportunity? And when do you expect O-RAN, V-RAN based networks to start to become a more meaningful part of the overall infrastructure spend?

The good news is they're going to buy the same products.

Right. That's right.

And there's been a lot of talk, and I think we're starting to get in the hype phase, but we're not seeing a whole lot of traction yet. But it's probably in the years making, but it's -- we'll see how it rolls out. But what I like is we have the technology products. And again, I think there are also ones that are going to really want that module deployment so they can drop them in and they work.

The teams -- as you mentioned, the teams mid- to longer-term outlook for IDP is double digits, right, 10% to 15% growth. I believe you also said you're going to grow double digits this year. Your core strength, obviously, 5G networking, aerospace and defense, but you've got a lot of other things in the pipeline, right? You got automotive, IoT, industrial segments of the market with your WiFi, power management, power semiconductor, UWB, sensor portfolios. What percentage of IDP do these newer products and end markets represent? And how much faster is it going relative to that sort of overall kind of growth target of 10% to 15%?

I think I'm going to let Grant answer this. But you mix some of the businesses that are in our mobile business with some of the businesses that are in IDP. And I think maybe, Grant, you can take a look at what we said publicly about the different market segments and how they're growing and that might help.

Yes. Sure. If I slice it a little bit differently than mobile and IDP, just to talk about the areas that you mentioned, approximately $1.4 billion of our top line last year would meet the non-smartphone areas that you just discussed, and those are growing very strongly into the double digits, right? So approximately 30% of our revenue growing double digits with the core smartphone RF business growing probably in the mid- to high single digits, combines hitting the overall company growth rate in the 10% to 15%.

And the newer segments that you guys have either inorganically or organically acquired the power management products, the UWB products, the sensor portfolio, like how much faster is that growing relative to IDP's overall growth rate, you think?