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

Thank you all for coming. My name is Toshiya Hari. I cover the semiconductor and semi-cap equipment space at Goldman Sachs. Very pleased, very honored to have the team from Qorvo with us this morning. We have Grant Brown, newly -- recently appointed CFO. Congratulations.

Thank you.

And also, Doug DeLieto, VP of Investor Relations. I've got a bunch of questions, but I'll hand it over to Doug for some opening comments.

Thanks, Toshiya. And we appreciate the invite, as always, and we're happy to join everybody here in person. I have 2 quick housekeeping items, and I'll hand it off to Grant. Before that, I do want to acknowledge and congratulate Grant for his recent appointment. As Toshiya said, he stepped up for us in April as Interim CFO and is recently named CFO, and we are excited and look forward to serving with Grant in the years to come. So now for the housekeeping. I will remind our audience that the safe harbor language that applies to our press releases also applies to today's presentation. Also for those of you joining us on online, we have a 1-page PDF about our new operating segment structure available on the IR website, right, where you clicked on the link to access this presentation. And with that, I'll hand it off to Grant.

Great. Thanks, Doug, and thanks, Toshiya. I appreciate you having us here. Great looking conference so far from what we've seen. Just a few comments to open with, and then we can move on to the Q&A. So I'll try to be brief here at the opening. To pick up on what Doug had said, I just want to reiterate the availability of that graphic on our website. It really touches on the new segments that we're really excited about. Bob touched on them in our last earnings call, and you can see the further detail there on the web. Going through each of those, in Advanced Cellular, Qorvo is broadly diversified across our highest growth product categories there with leading customers. The outlook in that cellular market continues to be supported by multiyear content and integration trends across the customer base. Now with outsized opportunities over time as the Android OEMs migrate their portfolios to 5G, we expect those markets served by Advanced Cellular to drive growth in the high single digits. Moving on to Connectivity and Sensing. The newest group or segment in the portfolio includes components and systems for a wide range of connectivity standards, including BLE, Matter, WiFi and Ultra-Wideband. CSG serves large growth markets, spanning mobile as well as the enterprise smartphone and automotive connectivity market. It has 4 sensing and BAW-based biosensors included in that segment, and we see an expanding set of opportunities for CSG, and we're addressing those looking for strong double-digit growth over time. Our high performance Analog segment, we enjoy a number of diverse long-term drivers, including upgrade cycles and 5G infrastructure, power management, power conversion, defense and aerospace, and we're increasing our exposure to that expanding list of drivers, including electronic vehicles -- excuse me, electric vehicles, battery powered tools, infrastructure and defense and radar communications. Similar to Connectivity and Sensing, we expect that to be a double-digit growth segment. In the near term, we're navigating the macroeconomic challenges like all the other companies here today. But while the macro is a headwind, the challenge is really a unit-related issue, not necessarily content. We're seeing exciting content opportunities at all of our customers. That means from a design activity standpoint, position is unchanged and we're looking to unit volumes to improve, and we'll see that in our P&L going forward. Continue to see that growth. We're investing to generate an increasing percentage of revenue in those CSG and HPA areas. And as we do, we'll mix into those higher growth and higher-margin end-markets and look forward to that. But with that said, Toshiya, I'll turn it back to you.

Thank you for that, Grant. I guess as my first question, you sort of alluded on the near term, but I wanted to start off with some short-term dynamics. It's been a little over a month since you guys reported and gave guidance for September. You guided your fiscal second half revenue down 10%, give or take, half-over-half. I think you also did comment that December should be the bottom for your Android business on a sequential basis. A lot has happened over the past month plus in terms of the macro, I was just hoping you could give us an update in terms of what you're seeing in the quarter and to the extent dynamics have changed into December, if you can highlight those as well?

Sure. It's illustrative to look back, I think, on what we had touched on during the earnings call. So our comments as of the last earnings call highlighted some of the near-term dynamics in the market, as you pointed out, primarily related to smartphones. We said global macroeconomic events like the COVID mitigation efforts, the war in Ukraine and other factors are negatively impacting demand, specifically within the Android ecosystem. We said that the inventory levels at Qorvo and our customers as well as the channel were elevated, and we expected it to remain so as long as those macroeconomic factors are in play. We said the visibility into the channel led us to expect the December quarter would be the low point for our Android business. And a number of other factors that we considered when providing the guidance on the call. Now looking forward, the global macro economy is very difficult to predict. So I think further defining our directional commentary might be a bit premature. So I'll refrain from doing so now. But I would say that while those challenges persist, they're temporary in nature. There's a finite amount of inventory there. We're going to process through it. Right now, as we touched on the call, we're actually undershipping to what we believe natural demand is at our customers, and we're underproducing to that undershipment level in our factories, which is the utilization impact that we had talked about. So looking forward, our position with our customers, the design win activity actually is very encouraging, right. The units that we're seeing today don't impact the forward-looking designs for tomorrow. So in terms of the activity, we're seeing with the customers our position with the customers, we feel very encouraged on all those fronts.

And I guess sticking to the near term, Grant, as you think about mobile and IDP, I do apologize, I realize there's an organizational structure change. But as you think about your business in 2 buckets, mobile and IDP, any deviation in how you're seeing the near term? Is one over the other kind of standing out to the upside or the downside? Or how would you...

Yes. I would classify it maybe along the lines of the consumer, right, rather than, say, trying to carve out what would be a backward-looking view on our mobile versus IDP or a forward-looking view based on our HPA versus CSG and our ACG businesses. It's really a consumer-centric bifurcation, right. There's strength in automotive, industrial, and I'm sure you've heard that from a number of other companies, where we're seeing it across handsets and other areas of our business, including maybe WiFi and some power management that plays into SSDs or power tools and other areas. Again, very consumer-facing areas. And so our business would split along those lines as far as strengths and weaknesses.

One of the common questions that we were getting immediately post the call was about the charge, the $110 million charge in the June quarter, which, again, confused quite a few folks. To level with the audience, can you walk us through what the key driver was behind the charge, whether we need to be worried about this persisting or happening again in the out quarters? And I think, Bob, on the call talked about having negotiations with your foundry supplier. Any update on that front as well?

For all the detail, I'd point you to the K and the Q, there's a really good disclosure there, and you can see the time line for what had happened written down there. So I'd firstly direct you there. More specifically to your question on the driver and the repeatability of it, it's both of those elements are intimately related to demand and demand is tethered to the macroeconomic and consumer related issues that I sort of touched on earlier. So I would say though, it could go either way, right? I mean, as far as we think about that charge, what could happen in the future, I won't speculate here. But again, it could get -- could go either way. But with that said, maybe I'll touch a little bit on the context of it to help clarify any confusion. So the contract itself is a multiyear agreement. We were required to purchase silicon wafers from a supplier from 2022 through calendar 2025. The charge had 3 primary components. There was a $13 million impairment related to a prepaid deposit. That was an asset on our balance sheet that we impaired. There was an $11 million charge related to some material that we had or that was on its way and an $86 million liability that we booked to our balance sheet, which was forward-looking in nature. So $8 million of that was the current charge. The rest of it was long term. And that really covered the length of the agreement. So the entire charge was booked in our fiscal Q1, but the length of that charge would span the entire agreement. We've gotten the question just sort of front runner here is that why book the charge ratably over the life of the agreement as you move forward? And to be blunt, it's just not the proper accounting for it. So you have to take the charge in the current quarter per GAAP. We did that and we did actually cite the specific accounting standard for reference in the filing. So there's some additional information there, I guess I'd point to. As far as context around that agreement, we entered into it during 2021 when there was industry-wide silicon supply constraints. And since that time, we've experienced meaningfully weaker demand for 5G handsets, especially in China and in the Android ecosystem, as we commented on earlier, but also throughout Europe due to these unprecedented disruptions there with the Ukraine war. If you look at the time line of the charge itself, you can see in the K, there was $1.4 billion associated with our commitment there to purchase in our latest Q, it was $1.2 billion left. And then as I mentioned or as you mentioned that we're working with that supplier continuing to discuss that agreement with them and have a very good working relationship, and we're placing POs for the demand that we do see for that silicon agreement.

And as you have those negotiations with your key supplier, could there be offsets, positive offsets in the quarters? Or how should we think about the potential outcome of those negotiations, if you will?

Yes. As I pointed out, I think it can go either way, right. We're just as much as we're working with our customers, they're working with us and trying to respond to what are really extraordinary circumstances in the market, given all the disruptions that we've seen. So we're working closely with them. And just as we work with them when supply is short and you have to react in a similar fashion, but for a completely different problem. So we continue to see constructive conversations there.

And then you talked about sell-in currently being below sell-through. I think that's pretty apparent from your results and market data. Based on your customer conversations and market intel, how significant is that gap between sell-in and sell-through? And at what point do you expect your sell-in to converge or meet sell-through, if you will, and the implications for inventory both in the channel as well as on your balance sheet?

Yes. It's a great question. It's difficult to answer. I mean thinking about all of our customers in aggregate, nothing lies like the average. Each one of them has a separate or somewhat distinct set of circumstances associated with them, whether it's geographic reach or the customer exposure they have, the ramp profile as you think about maybe an Honor versus a Xiaomi selling into Europe on the export basis. So they're all very different. They're all subject to the same macro-related demand issues if that's a similarity. So we haven't tried to put a specific time frame on it other than to say we are undershipping to what we believe natural demand is for those customers. And I believe they're under-ordering in order to correct their own inventory situation. So there's that compound effect there that we're seeing in our factories. As we discussed on our call, there's a utilization impact as we have unabsorbed costs coming from the factory utilization. But all said, there's really a fixed amount of inventory there to process through. And so the duration of how long it takes to process through that is a tough call. It's related to the macroeconomic issues, pulling demand out and then related to our customer behavior as far as order pattern and pulling new material in for future build activity. So it's really difficult to put a number on the…

And I guess a related question to that, you just talked about managing your production and cutting utilization rates on the earnings call. I was hoping you could expand on that point and maybe quantify how big the cut utilization rates are? And again, similar to my prior question, at what point should we expect your utilization rates to revert to "normal steady state levels?"

This quarter, keep in mind, we are launching and ramping for some seasonal activity at our largest customers. So, as we commented on the September quarter, we'll see a little bit of that utilization in the current quarter, but it's principally a second half issue for us. Quantifying it, I would say, if you look at our guide in May where we were talking about roughly 50% gross margins across the year versus what we're guiding to today, that delta or that difference is really related to utilization, right. It's almost solely a volume-related issue. And again, that volume is really tied to those macroeconomic demand drivers.

And then again, it's difficult to predict when utilization rates revert higher to normal levels, or...

It is. And it gets to when the orders begin tracing back to what would be a typical order level as we begin shipping to normalized demand and as demand itself normalizes, we're going to have to begin shipping to that. And actually, their factories will see it sooner. We're going to have to begin building to that ahead of actually the revenue in order to be prepared for it. So we will see it a little earlier in utilization and then obviously in the sales as we begin addressing that more normalized demand level.

And I guess given the seasonality at your largest customer that you just spoke to, September, I'm guessing should be the near-term peak from a production or wafer start perspective and December and March, just seasonality-wise, is down sequentially. Is that a fair assumption, or…

We'll see a little bit of an impact in the September quarter. We're already addressing inventory and utilization for the Android ecosystem within the quarter. So you'll see a small amount there, offset largely by the large seasonal ramp. It's primarily a second half activity for us in terms of utilization, driving that down, removing the variable costs in order to respond to the demand profile in the near term. And so it's principally that second half.

And then in terms of your outlook for the smartphone market and perhaps 5G a little bit more specifically, I think it's fair to say that TAM estimates have been coming down in the past couple of quarters, primarily on the Android side. You guys talked about your 5G forecast now being around 625 million, down from 650 million to 675 million prior. Based on, again, your own market intel customer conversations, how are you thinking about the long-term trajectory of the smartphone market as you plan your business, as you plan capacity? And could there be any catalyst that kind of spurs a replacement cycle in smartphones in general and 5G more specifically?

Yes, I definitely think there's going to be continued innovation, no question about it. I mean what we're seeing in design activity at our customers is very encouraging despite the units today being relatively under pressure. And those 2 things don't influence each other. The units today aren't necessarily influencing designs for tomorrow or what we anticipate will be a more normalized level of demand. When you think about it from Qorvo's perspective, it's really a transition to 5G that's going to drive the vast majority of the content opportunity for us. So as we look forward, there's maybe 3 different people at the table when you think about the drive to 5G that are important. There's the consumer themselves using the device. There's the device OEM and then there's the carrier that operates the network, right? From a consumer standpoint, the actual device user is going to see an improved throughput in terms of data rate, lower latency, a better overall experience. And so they're going to see that in 5G and want to participate in it. From maybe more interestingly, from a network operator standpoint, the carriers are going to want to have continued to push for a 5G world and that their cost per bit goes down. And so that's an important consideration on the kind of cost side of their equation. On the perceived coverage from a customer standpoint is going to improve. So their competitiveness amongst each other as a carrier is going to improve. So from both of those perspectives, you can see the carriers having invested interest in 5G penetration. And then lastly, from the handset OEMs themselves, right, they're going to want to produce a compelling device for their consumers, and they're going to want to make it future-proof. So as it migrates to 5G, they're going to want to have that in their phones. Maybe an important distinction that I would call out is when you think about the Android ecosystem versus the iOS ecosystem, the iOS ecosystem has been primarily 5G, in fact, 100% versus the Android ecosystem, which is only around 40% penetrated to 5G today. So that migration is going to happen, that Android and Qorvo is very well represented there as those Android customers to participate in the content. So even though the near-term demand has come down in terms of our 5G units, as you mentioned, looking forward, we're really encouraged by the new design activities and the return to more normalized volume.

And I guess in terms of the competitive landscape, you just talked about your confidence in design activity and the comfort you find there. I think we're getting a bunch of questions on what Qualcomm is saying and what some of the smaller Chinese players are saying in terms of your Chinese customers potentially localizing RF content over the next 3, 5 years. How would you describe the competitive landscape as you see it today versus a couple of years ago? And in terms of opportunity for you guys in terms of content growth, you've talked about Samsung. You've talked about Honor in the past. Where do you see the most opportunity going forward?

Yes. I'll hop on that, I got it. Yes, it's competitive, but it's really always been competitive. And yes, there are some smaller players in China. Qualcomm has really been a player in RF for decades. So they're not really new to the scene. They're larger, obviously, with power management and millimeter wave where you can you see digital in those placements. But if you look at the opportunity for Qorvo, big picture, you have to kind of view it through the lens of 5G architectures and content and integration trends. 5G phones are going to require these broader portfolios and advanced technologies and advanced packaging capabilities, systems-level expertise, manufacturing scale. These are the things that Qorvo brings, right? We've got the people and the products, the R&D pipeline, the scale and the technologies to win. And to your point, we are winning, we are taking share, gaining content at large customers, including the Samsung and Honor, as you mentioned. And we have reason to believe that those gains, especially in Android, will continue. These customers are adding the content to achieve the performance improvements that are embedded in 5G and other functionality. And we've been very encouraged by design activity and support of future architectures.

Shifting gears a little bit on IDP. And again, I apologize no longer IDP going forward. But when you think about the classic IDP business, it's always been a little difficult for us to fully appreciate what's doing well in terms of what's growing and what's potentially challenged. I think the business has grown double digits year-over-year for 2 consecutive quarters. What are you seeing from a demand perspective? And to the extent you've got supply side issues, if you can touch on those as well, that would be helpful.

Yes. I mean kind of to jump on a little bit of what Grant already said, like the opportunity in both Connectivity and Sensors and HPA right now, you'd have to distinguish between consumer-facing and nonconsumer-facing. So we see those both as being our over time, our fastest-growing segments. Right now, the consumer-facing side of HPA is predominantly going to be in power management for SSDs and power tools like battery operated power tools or lawn mowers. Whereas in Connectivity and Sensing, you've got quite a bit that's consumer-facing. So that's going to include smart home and any kind of consumer electronics or WiFi. But that said, we are seeing nice tailwinds in HPA, right? Obviously, as defense budgets kind of migrate toward more high-performance electronics and also as performance requirements increase for power semiconductors, silicon carbide, specifically in support of renewable energy and electrification trends.

And I guess, Doug, on your last point about SIC and I think you guys have talked about ultra-wideband in depth.