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

Okay. Thanks, everyone, and good morning. I am Srini Pajjuri. I'm the Semiconductor Analyst here, and I want to welcome you to Raymond James Institutional Investor Conference. We have Qorvo with us this morning. From Qorvo we have Grant Brown, CFO; and Douglas DeLieto, VP of Investor Relations. We also have Gina Harrison, the Controller of the company. So I guess the format is going to be -- we're going to have a brief overview of the company from Grant, and then we'll open it up for Q&A. Grant.

Great. Thanks, Srini. I appreciate the invitation. It's great to be here. It's a good looking conference and looking forward to the day of meeting some of you individually. Before I begin, I just want to remind the audience that the safe harbor language that applies to our earnings releases will also apply today. I'll refer you to our 10-K, 10-Q and other filings for further information. I'll open it up with a brief overview by operating segment, including what we're seeing today and what we're excited about and then we can move on to some Q&A. I'll start with HPA here run by Philip Chesley. HPA supports multiple long-term growth drivers, including 5G as well as broadband on the infrastructure side and then increasing semiconductor spend in the defense and aerospace areas as well as new requirements for power semiconductors driven by some mega trends in our industry such as electrification and sustainability.  Just starting off with the Power Devices segment. This is an area where we're seeing robust design activity in our silicon carbide solutions. Qorvo's silicon carbide delivers industry-leading RDS(on) which is the figure of merit for performance there, and that affects the charge time for your electric vehicle or the amount of power that you're using in the data center. So a very important metric. We bring a unique JFET architecture there that's superior to comparable MOSFET solutions, and that's obviously a competitive advantage for Qorvo. On the power management side, Qorvo brings a unique IP portfolio as far as capabilities, our power management ICs enable customers to design their systems with minimal changes, generation over generation, so improving their time to market, which is an important characteristic for our products there. The motor control solutions that we enable material improvements in efficiency and battery-operated tools and other such applications. In the near term, customers with consumer exposure like SSDs and power tools that are battery-operated, for instance, are working down some elevated inventory levels which is contemplated in our outlook, of course, but we continue to be excited by the next generation of design opportunities there.  In terms of defense and aerospace, we see multiple drivers. That includes some system upgrades from mechanical to electrical systems, which contain much more semiconductor content. Compounding this, there's also a trend of one to many. So instead of on manned aircraft, there'll also be multiple drones similarly instead of one large geo satellite, there'll be many much smaller LEO satellites. And then, of course, the increase in content and those unit volumes related to the one-to-many trend is a significant mover. But in addition, there's higher levels of integration for those parts. So that's something that, an area where Qorvo exceeds our customers' expectations and a competitive advantage for us. Maybe one last point on the defense areas, our ship contract with the U.S. government, where we're developing some state-of-the-art RF packaging technologies. And that's being done onshore here in the U.S. and Texas. That's a real asset for the company. As we said on our February earnings call and as Philip Chesley has commented previously, we've expanded that contract and now we're doing multichip modules that combine both the digital optical devices as well as our mix signal RF. So an exciting area for Qorvo on the defense side.  In terms of the infrastructure business, the last item on the list there. We have 2 segments. There's the 5G base station infrastructure as well as broadband infrastructure. In those areas on the base station, very exciting opportunities for us. Looking forward, as the spectrum rolls out as 5G continues to push further into areas like India and beyond China and including the U.S. and Europe. So interesting opportunities there over the long term. And then in terms of the broadband infrastructure, the DOCSIS standard is being rolled out, and that's a significant area of growth for us as the cable operators look to compete with the fiber to the home. Moving over to CSG. The Components & Systems business there at the top is an exciting area for us. That would include BLE or Bluetooth Low Energy matter, ultra-wideband, WiFi, cellular, cellular V2X, IoT, a number of different markets spanning mobile, automotive, enterprise, industrial and the consumer. It also supplies the force and other sensing solutions for automotive and consumer electronics. And then finally, it includes our BAW-based Omnia platform for biosensors, which is a point-of-care diagnostic testing system.  We indicated on our February call, we are looking for strategic alternatives for the biosensors group. And we can talk more about that if there's any questions here I'd refer you to our call. Looking broadly at CSG, Qorvo does bring a lot of expertise across the wireless, different wireless protocols. There's systems that are driving content and integration trends. We're serving mobile, automotive, industrial, consumer, a lot of different markets there across the IoT, and it's relatively nascent. So this is a high-growth area for us as we look forward. Turning to Advanced Cellular. Our technology and product breadth is world-class there. This is our history, supplying cellular for RF smartphones, tablets, notebooks and wearables. We're currently broadly distributed across all major customers in the near term, and we're under shipping to demand currently in the Android ecosystem to rectify an inventory, channel inventory situation that's ongoing. We said on our February call, we had reduced that channel inventory for components in the Android ecosystem by over 20% in December, and we expect continued improvement this quarter. With the overall channel inventories normalizing later this calendar year. As we take steps to control it, those headwinds will be temporary. It's not a structural change. And any of the opportunities for Qorvo. In fact, we're seeing a lot of increased design activity with our customers and in a very strong position in China today as well as with our top 2 customers on the ACG side.  Longer term, the Android ecosystem is only about 40% 5G today. We expect that to go to 60% and beyond that in the coming years. So a large amount of tremendous opportunity there from a SAM perspective, for us to add additional content as that happens. It's a growth opportunity for us looking forward. And the ACG segment, we've said over the long term, should be mid- to high single-digit growth. Overall, I feel very good about how we position that business and looking forward to the channel inventories clearing over the end of the year and some very strong content increases at our 2 largest customers, as we've talked about before. Generally speaking, we're well positioned as a company. We bought short-term, midterm, long-term growth drivers that we're excited about across all of our different businesses, ACG, CSG and HPA. We've got great leaders supporting those businesses and a team on the manufacturing side with our global operations group that's executing very well. With that, I think I'll stop and turn it back over for some Q&A.

Sure. Thanks, Grant, for a great overview. So I guess I'm going to start off with the ACG, the mobile group which is roughly 65% of your sales. And you talked about inventory correction right now. I think if you look at the smartphone market last year, it was down double digits. And for this year, I think Gartner is forecasting it to decline again. So my question is, you talked about high single-digit growth long-term potential. And obviously, the 5G cycle has helped you quite a bit. So can you talk about as we come out of this inventory correction, can you talk about where you see the opportunity? You talked about some content growth across the board. So if you could give us some additional color on that, what gives you that confidence that this can grow high single digits, even though the end market is relatively flattish.

Sure. That's a great question. So there's a couple of things going on. I mean maybe I'll start with just the dynamics around mix, right? So as I mentioned, the Android ecosystem is only about 40% penetrated today. So as that approach is 100% over the very long term, and we're going to see a mix shift effect there where handsets that were 4G are moving into 5G architectures, and we have increased content there. We've talked about maybe $5 to $7 of incremental content as we move from 4 to 5. So that mix shift is a big piece of it over time. We've got great exposure to our Chinese customers, different levels of tiers within their product portfolio. So that's one of the factors that's driving that. In terms of the content side, I also mentioned that we've got incremental content in our top 2 largest customers as well as a very well represented content growth at all of our customers within ACG. But some of the areas where I think you'll see some content growth is it's not just static from 4G or 5G. There's different flavors in between. As we saw in 4G, there's 4G to LTE, LTE Advanced. There's a lot of different improvements there. Sometimes it's new bands. Occasionally, it's new content or better performance that drives it.  In terms of the 5G opportunity for us, there'll be more transient content, especially for secondary Uplink, which will be -- add some new capability there. There's higher power requirements. So Power Class 2 is another area where performance really does matter for the battery life on the handset, and that's an area where we can add more value. Nonterrestrial network. We're starting to see that. So some of the satellite opportunities, adds content as well. We'll see additional content in WiFi that moves to 6 and 7. And then one of the areas that is specific to Qorvo would be on the antenna tuning side. We have a very large business in antenna tuning and we're the go-to partner for the industry there. And as form factors change and the antenna needs to be corrected in order to compensate for any number of things, including multiple radios or just challenging form factors, foot phones, et cetera, our antenna tuners will be needed there. So those will be a lot of different areas where we can participate in 5G growth.

Got it. And talking about the premium segment, Grant, you talked about gaining content across your customers, especially the top 2 customers. So at this point, given the design cycles, is it fair to say that you do have visibility through the year to kind of say that you have the design wins you have secured. So it's just a matter of time in terms of the ramps. Is that how we should think about it? Or are you still kind of bidding for these designs?

Yes. inside the year, we have great visibility. The question on content on a per unit basis versus the volume of handsets being driven through that particular design win is sort of 2 different questions really. In terms of the content itself, again, great visibility there. We've for the rest of the year. In terms of the macroeconomic situation, it's always a bit of a question mark as to how much unit volume gets pushed through each of those design wins. So from a revenue perspective, it's different. But in terms of absolute content, yes, you're right. We've talked about our content up on a unit basis at both of our largest customers. In fact, I can't talk about anything yet to be released, but looking backwards, we have spoken to Samsung and a significant improvement there in our content gain year-over-year, which is meaningful, including on the low band, where we haven't been represented meaningfully previously. So a lot of great content win there for Qorvo.

Great. And then moving on to the low mid-tier. You kind of mentioned that only 40% of Android is transitioned to 5G. I think we are starting to see that happen this year and next year and have seen forecast from anywhere from $250 million to $300 million incremental handsets going to 5G and most of them are low to mid-tier. And you've had a pretty strong position in those markets and also in China. So if you can talk about the opportunity there, how does that opportunity compare with the premium content opportunity? And how should we think about your positioning at the different customers there as well.

Sure. In terms of customer representation, we're very well represented across all of the different Chinese customers. We've been there through the downturn, and we're still there. We have our field application engineers, sales folks and our product portfolio matches up very well with those customers. So very well positioned, really encouraged by the design activity there. In terms of moving from 40% to 60%, it's a 20-point increase on, you could call it, $1 billion to $1.3 billion of smartphones. It's not hard to imagine. You can easily get to the numbers you're just quoting around 200-plus million incremental 5G smartphones over time. So and then the -- maybe lastly, just a quick comment on the replacement rate coming out of COVID extended. I don't expect that to be the norm going forward. So as more customers migrate to 5G phones or even replace 5G phones from the ones that they've gotten in the early stages, I think we'll see some content uplift there.

I'd only add one kind of nuance and that is we are very well represented at the customers that are migrating those 4G phones to 5G, but we're not well represented in the 4G portfolios, right? So as they migrate to these integrated solutions, they're entering our addressable market, whereas they were not necessarily previously.

Right, right, right. So maybe just on the topic, obviously, it's low to mid-tier and there's a pretty good amount of incremental content, but also I think the competition is pretty intense as well. So if you could touch on that competition from the U.S. suppliers as well as I believe there are some domestic suppliers as well in China that are looking to enter the market. So if you can talk about that.

Yes, sure. So maybe in terms of some of the larger suppliers, the global suppliers, I think our presence with those China-based handset OEMs has been very strong. I mean we have facilities there in China. We've supported them through multiple years and across the entire portfolio, low, mid, high band, all of the different potential RF placements, we have a very competitive, if not the best-performing solution there. So very well represented there as far as a customer relationship goes. The smaller players on the discrete side usually have a barrier to entry in the form of integration. So in order to come up with a full module, you need all of the different components that go into that module, including some filters, which don't have a foundry network available to get a hold of. So as integration trends move down the tiers in 5G, we'll see less discretes and more opportunity for Qorvo on the integration side, which has more of a global supplier type competitive dynamic that we're targeting.

Great. And I guess given your presence in China, a lot of us in the audience and on the webcast want to know, given China has reopened and there's a lot of optimism about business coming back. Any color you could provide? And what sort of trends you're seeing? And what's your expectation for that market in the next quarter or 2.

Sure. So we're looking at our -- without giving exact guidance, we were talking June about flattish from what our guidance in the March quarter is. And that would imply that we're still working through channel inventories there in China. We expect that to continue. We saw some great progress in the last quarter. We expect great progress this quarter. And then we're starting to see, as everyone probably that's following the smartphone sell-through, you're starting to see some of that activity in the numbers there. Still relatively early for the year-to-date period. But as we move forward, it will give our customers more confidence as inventory starts to come down, we'll start to see more order activity there. So very encouraged by what we've seen so far, but it's still relatively early.

Got it. And then just one last question on the inventory topic. Your own balance sheet inventory has edged up a bit. And you're not unique in this regard because most of your peers are also seeing that inventories jump a bit here. So what's your expectation for your own inventories to normalize..

For our inventories, as you pointed out, elevated, we expect that to continue as long as the macroeconomic issues persist. And to a degree, the channel will take some period of time throughout this calendar year, say, for it to normalize. However, despite being elevated, I expect them to be down by the end of our fiscal year here ending this month and should show some signs of progress there. There's some seasonality to it. I would just point out quickly, we do have our largest customer ramping in the summer months. And as such, we will be building in order to support that customer. So that's a bit of a seasonal factor. But in general, as channel inventories come down and our inventories should come down as well.

Great. And audience, if you have any questions, please raise your hand. So I have a few more. So I guess one longer-term technology question, maybe this is for you, Doug. The industry has gone through multiple product cycles from 2G to 3G, 4G, we're in the 5G cycle, which is still a long way to go. But what do you see on the horizon? And what's next after 5G? I mean this is one of the questions I get a lot from investors. What do we look forward to in the smartphone industry longer term beyond 5G?

Yes. There's definitely there's a 6G on the horizon, but we're more than 5 years out. I would just refer back to a lot of what we just talked about, which is the nonterrestrial networks, right? A lot more MIMO coming, secondary transmit coming, not just in the mid-high bands but ultimately, you're going to see it in the low bands and in the ultrahigh bands, WiFi coming. So there's a lot of content coming. And for Qorvo specifically, 600 million Android phones coming into our SAM that are not in our SAM currently and us being the go-to guy in these integrated solutions across all customers. And just again, we've talked about it, but bringing up Samsung across their portfolio makes us essentially customer agnostic outside of China, bringing up honor makes us customer agnostic inside of China. So we are absolutely customer-agnostic, whoever does well, we can do well.