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

All right. We'd like to get started. Good afternoon, everyone. Thank you so much for coming. My name is Toshiya Hari. I cover the semiconductor space at Goldman Sachs. We're very excited to have the team from Qorvo with us this afternoon. We have Grant Brown in the center, Senior Vice President and CFO. We also have a special guest, Philip Chesley, Senior Vice President and President of the High Performance Analog business. Thank you, gentlemen, for joining us.

Thank you. Appreciate being here.

Really appreciate the time. I have a bunch of questions. I will open Q&A to the audience, so to the extent you do have questions, please be prepared. I want to kick off with a couple of near-term questions. You reported June quarter results that were above consensus, very strong results. You guided September quarter revenue to grow 16% at the midpoint. Maybe take us back, talk through the key highlights in the June quarter. And what are some of the key drivers that went into your September quarter guide?

Sure. Again, thanks again for having us this year. But before I start, I just wanted to remind the audience that the safe harbor language that applies to our earnings releases and press releases still applies to today's discussion. And looking at the June quarter, revenue came in above the midpoint of the guide. It was largely due to our ACG or our Advanced Cellular Group, which is in the smartphone market. The strength there was across multiple customers, but the biggest impact attributable to our largest customer. In CSG, we saw a strong pull for our ultra-wideband products and some of our WiFi solutions, including our first ultra-wideband win in a mid-tier smartphone. In HPA, which Philip can speak to as we get into it, we were down a bit on the timing of some large defense programs. We had a record Q4 last fiscal year, and we expect to do very well in the second half of this year as that grows. But due to that seasonality, we were down. In the September quarter, we would expect some broad-based growth across key markets in ACG. Obviously, the ramp at our largest customer is the single largest driver sequentially, and we do expect Android to be down sequentially. We're coming off of some very large content gains on large customer programs in the flagship spaces, and those ramp down as we see a ramp-up in our largest customer. But we do maintain very good representation there with those customers. In CSG, we're benefiting from the WiFi rollouts in some developed countries like India as well as the move from WiFi 6 to 6E and to 7, so there's an underlying driver in that. And then in HPA, as I pointed out earlier, the sequential growth would be in the defense and aerospace area where our GaN, GaAs and some of our advanced packaging capabilities are really critical enabling technologies for those customers. That said, there are some headwinds that remain. The more interest rate sensitive areas of our businesses are still impacted. For our customers, those are the base station, broadband and solar markets. Again, as the interest rates have crept up, the capital intensity of those rollouts slows down. But generally speaking, our power management portfolio and our SATCOM and beam-forming products are all doing very well. I'm sure Philip can comment on this.

Great. A couple of mobile questions before we go to HPA and Philip. Hoping you could characterize the current inventory environment, your customers, you and the broader space. So you've been going through an inventory correction for a year, a year plus, depending on how you look at it. How would you characterize where your customers are at from an inventory standpoint? Compare where you are today versus 3, 6 months ago. And if you can differentiate between iOS and Android, that would be great.

Sure. In terms of the comments for inventory, historically, we've talked about channel inventory in the context of Android. From an iOS perspective, we sell direct to the contract manufacturers that are all working according to a master production schedule. So there's very little inventory for Qorvo that would have any impact. On the Android side, last fall or thereabouts, we started to ship through a considerable amount of the excess inventory in the channel. We consider it normal today, and we're back to shipping to end market demand, which is a positive. It's, at an absolute level, a lower level than what it had been in some of the trailing years, but generally speaking, it's healthy to be back shipping to end market demand and having cleared that excess inventory.

Okay. Great. On your recent earnings call, Bob mentioned that you're not modeling a strong replacement cycle as it pertains to smartphones but curious what your high-level expectations are for smartphone unit growth over the next couple of years. Your largest customer had a couple of announcements from an AI standpoint. What are the potential killer apps, in your view, that could drive some pent-up demand?

Sure. In terms of overall smartphone unit growth, we don't have very high expectations of growth. It's relatively benign in the, call it, 1 percentage or 2. The more impactful growth rate for Qorvo is the growth rate in 5G units, which we expect in -- around the 10% range, and that's been pretty consistent. The -- what would -- the question about what would trigger a meaningful upgrade cycle, AI has come up as an example. We're taking a bit of a wait-and-see approach. We haven't taken too big of a position on which killer apps might drive it. It's clear that having AI in the palm of your hand will be pretty exciting, but as it plays into consumer purchasing behavior and what's actually available and when, we haven't taken a big position. So if it drives a super cycle or an upgrade cycle, then it would be upside to our house view. The ultra-wideband technology is maybe, for Qorvo, an interesting area that we could play as we look out in time. Today, we're in certain areas like the digital keys and some building navigation in the future. You could imagine other AI applications that are context to where, where that technology could play in and be very helpful not only in the handset but also in the accessories and the environment that the user is in. Beyond UWB, I'm sure AI will deliver or generate more RF requirements that require more and better RF capabilities. Those AI opportunities are going to be, if it's on device, a power hungry application processor, and the RF can help enable, because of the power efficiency that we could help with on the RF side, those application processors and any AI. So there's opportunity for us. A relatively conservative view on the uptake at this point until we see what types of applications will be there. And then I would also say, as we get into the HPA business with Philip, there's opportunity in AI for Qorvo beyond just the handset.

Got it. Grant, you touched on this a little bit. But when we think sort of AI as a smartphone, we think powerful processors, maybe a little bit more DRAM. What role does -- or will the RF industry play and more specifically Qorvo play as we sort of transition into the AI or RF if you will?

Sure. I think we're touching on a little bit what we call more and better RF. So for Qorvo specifically, the AI-enabled phones are more likely to be a flagship device or a high-tier device, and those naturally have more RF content in them. It's also the case that within those devices from a power consumption perspective, you're going to have higher-end RF capabilities. RF will not only handle the communications piece of the puzzle if there's computations happening in the cloud for AI, but it will also be the case that it could leverage UWB technologies, as I pointed out, the context awareness. There's a lot of different ways in which I think the RF capability will enable AI. Again, the unit story is something that we're taking a wait-and-see approach. But beyond that, it's probably upside to our view if we see any further growth in the unit volumes because of it but largely, unit volumes, flagship smartphones and then more and better RF content in those phones.

In your largest customer, you gained significant content in the 15. You also seem very pleased with the continued progress in the 16. You've also been really vocal about sort of the outlook into next year. I guess what's led to your success at your largest customer? And what's giving you the visibility and sort of the conviction to speak to the out-year? Because, typically, you've got limited visibility, but you've been pretty vocal -- or Bob, in particular, has been pretty vocal. So what's giving you the confidence there?

Sure. We have a very strong relationship with our largest customer. We've had design win activity that spans multiple years with them, and then we have, on a forward-looking basis, incremental design activity that looks beyond that. So you're working on multiple generations at any given time. And we've enjoyed consistent success there. We've been growing our share in highly integrated modules we participated in the past. And so we've proven ourselves there. I think we also have a very competitive leading position in certain areas such as antenna tuning, our power management and other integrated products. So we've proven ourselves in the past. We've made it a priority. We spent a lot of time with that customer. And I think we can have some discussion around that later this year and early next of course. But again, I feel very good about our position with the customer. That said, we're underrepresented in terms of that particular customer as they relate to the overall RF TAM for smartphones. And being underrepresented gives us an opportunity for incremental growth, and we're looking to take advantage of it.

Okay. Great. On the Android side of the portfolio, how should we think about -- similar question, how should we think about potential content uplift? I guess what's unique about Android vis-a-vis iOS is that you still have the 4G to 5G transition that's ongoing. Like where are we in that transition? And how should we think about the incremental content opportunity from here?

Sure. First of all, I would say in our Investor Day, I think Frank Stewart, who runs that group, did an excellent job of laying out the path forward for Android. It's -- it isn't the case that there's a discrete upgrade from 4G to 5G and from 5G to beyond. It's the case that 5G will probably be a lot like 4G and that there's incremental upgrades as we go. So 3GPP has defined different release standards. Those will lead to bigger amounts of content. And that will find its way into the different phones at a certain level of mix over time as they adopt those different technologies. So we're probably just past the halfway point in terms of Android adoption of 5G. And as I mentioned earlier, we're looking at around 10% growth -- unit growth in the 5G category of Android. ACG doesn't address 4G phones today or at least discretely 4G phones. We're looking at those 4G phones and migrating to 5G. Those are coming in at the entry tier. A lot of those phones, the holdout, customers there are more price conscious. And so we're seeing that in terms of mix in the Android ecosystem today, or we're seeing some of that mid-tier migrate to the premium tier as they're taking advantage of some of the AI components or just generally upgrading to a flagship device. So we're seeing that as a bit of a distinction as the mid-tier separates into the premium and the entry tier. For us, the content opportunities, as Frank had pointed out, is really more and better RF. There's receive MIMO, transmit MIMO. You've got some nonterrestrial network types of communications, and then the incremental demands of 5G will find their way into the filtering and all the other capabilities as well as power management and the power consumption and efficiency of those parts. So integration plays a key role in those -- achieving those RF goals.

Great. Shifting gears a little bit. I want to bring Philip into the conversation. Just for context, I think you joined Qorvo about 2.5 years ago, and now you lead the HPA business obviously. Curious how you're spending your time. And what would you say are your top priorities as the leader of HPA? And to the extent your priorities have shifted over the past 2.5 years, how so?

Yes, that's a great question. I think for me, priority 1 is how do we -- is scaling our defense, aerospace and our SATCOM business. We have a goal to double the size of that business. There is a tremendous amount of opportunities in defense and aerospace. When you look at just our footprint that we have and the RF front end of radar platforms today, scaling that technology with additional products around our RF front end, we have some capability. The electronic warfare market space is really starting to gain a lot of momentum. So there's a lot happening in that space, and really capturing those opportunities is really priority 1 for me. I think the second priority for HPA and where I spend a lot of my time is building a power management franchise. We are -- as we mentioned at Investor Day, we are driving down a path of getting to where we're 50% handset, 50% non-handset. And to do that, power management is going to be key in building a new revenue vector for us. And so I spent a lot of time taking the products that we've either bought through our Active-Semi acquisition, adding additional IP to that and talent in that area. I think in terms of how my priorities have shifted, I think for the first year or 2, it was really -- the first year, you're just trying to get your hands on the business and the history and the customers. I think really, after that, it was really about 2 things. It was about if we're going to scale these businesses, we have to speed up our development cycles, right? And so we spend a lot of time on how do we get faster and -- at developing products. I think in power management, a lot of my time was spent on bringing in talent through industry connections that I have and others that -- to build a team that can develop really innovative power management products. I think we've done that. We have critical mass in both those areas. And so really, most of my time now, it's more on the innovation side and market expansion side. How do we get those innovative products, what markets we're going after specifically to really grow HPA?

Great. Quick follow-up on growth going forward. I think you presented a CAGR of 19% for your SAM through 2029. You spoke to opportunities across a range of applications. Maybe to level set, can you first give us a rough breakdown of your business by end market? I think the market is still getting accustomed to the new segmentation of the business. What the key growth drivers are? You spoke to A&D and a couple of others. But yes, what are the key drivers? And how should we thinking -- how should we think about those going forward?

Yes, I won't specifically talk -- I'll talk more about kind of the end market piece. But if you look at defense and aerospace, 40%, 45% kind of range, right? You got SATCOM that adds to that. I think the other businesses that we have in end markets are kind of evenly split between industrial. When I say industrial, I'm not just saying base station and broadband. We actually have power management in some industrial areas. And then we have small and growing businesses both in data center as well as in automotive, okay? I think for me, though, when I look at where we -- the markets that are really going to grow, I start -- I come back to what I talked about, really defense, aerospace and SATCOM. When I look at the upgrade cycle that's happening in these active electronically scanned array, or AESAs, we're still in the early to mid-innings of that transition. And then on top of that, you have these upgrade cycles within AESAs to get capabilities that the war fighter needs urgently. So we're seeing -- in my 20 years of developing products for D&A, seeing the fastest cycle of trying to get new technologies and upgrades that I've seen in my career. You add to that the Ukraine war has shown drones are now a key part of that -- the battlefield. And how you deal with that from an electronic warfare perspective using high-power RF energy is really becoming front and center. And we have really great technology to scale that up. So I see that as a growth engine. And then I think the other one I would say is that -- in D&A is SATCOM. We bought a company called the Anokiwave a little while ago or 6 months. I forget. Time goes by fast, so I can't remember the exact time. But what that really brought us was -- that brought us beam-forming capability that really works well with our RF front end. And today, when you look at SATCOM, we're well positioned on the satellite side, but we want to expand in the terminal side, whether that's a consumer terminal, whether that is the upgrade cycle that's happening in aircraft to bring -- to be able to watch Netflix on a plane realtime, that's happening. And now we have kind of the technology and the products and in some cases, pole position in some of those markets. So I still think we're at the beginning of this whole LEO satellite communication, bring Internet through satellite transition. And I think Qorvo is in a good place there. So I'm excited about that. I think in power management, power management, when I look at AI, when I look at all the trends that are driving electrification in the industry, power management is front and center in every one of those, right? You were talking about handsets and AI. It means the same challenges are in the defense industry spacing, right? They're looking at AI. How do you put that into a drone? And now all of a sudden, you got to have the memory, but you've also got to have power management to be able to run those things efficiently, right? And so we are picking our markets of where we apply our power management technology carefully. We're looking at handsets. We're looking at defense. We're looking at some portions of automotive. But I think that, that market, in general, has a lot of tailwinds over the next 10, 15 years. And we want Qorvo to be a big part of that transition.

That's great. The base station business, which you obviously manage, has gone through a cyclical correction post the fairly significant build-out of 5G. Curious what your forward expectations are in that business. And can you remind us what drove the decision to exit from the GaN PA and PAM businesses?

So I think my take on base station is that I think it's hit bottom. It probably has more tailwinds than headwinds at this point. You look at the market. You still have 70% to 75% depending on the research report you read of base stations that have not been upgraded to 5G. So I think we're starting to see that business have some forward momentum. I think the rate and pace of that rollout will really depend on interest rates, CapEx, considerations from the different base station guys. But I think the worst is behind us. I think in our broadband business, it really -- I think the same thing. I think we've kind of hit rock bottom, and I think things are improving. DOCSIS 4.0 is starting to roll out. A lot of that certification testing is ongoing. Some of it's passed. We're starting to see that. So my expectation is those businesses will be not headwinds for us. They'll be tailwinds for us. In terms of the decision around to exit the PAM business and the PA business, it really came down to 2 things. The first is once Huawei got banned, you took a big player out of the market. And then for all intents and purposes, ZTE became not really a customer you could sell to, right? So all of a sudden, your 2 biggest users are out of your SAM. So that's one. I think the second thing that really drove the decision was people think GaN, well, GaN for defense and GaN for base station, they're both GaN. They're the same. They're not. What you need for GaN for base station is linear power. What you need for GaN for defense is kind of pulse power. And so you don't -- they're 2 very different developments. I'm a big believer in focus. I thought the opportunity in defense was bigger. And so we decided to take -- to stop that investment and move those R&Ds and double our focus in the defense and aerospace market.

Okay. That makes sense. A question on China, and this could be for Philip. It could be for Grant or both of you guys. The overall business grew 6% sequentially in the June quarter. It was up a nice 30% year-over-year. But when you kind of go back in time, it's still less than half of where you were at the peak. Is the peak to trough decline, is that a function of end demand weakness in China? Is it inventory? Is it competition? Is it all of the above? Maybe, Grant, if you can speak to overall Qorvo; and Philip, to the extent you've got comments on HPA, that would be great.

Yes. Sure. I'll cover the handset part and then if you want to talk about the infrastructure piece, Philip. So on handsets, there continue to be some macroeconomic headwinds. I'm sure everyone's read some of those in the news that are impacting both demand and mix. I pointed out the SKU shift to some of the entry tier devices in Android specifically, and that's definitely a piece of the puzzle. Sell-in is at an absolute level lower than we had seen in some of the prior years, and that would impact the overall number of units sold and the RF content available for us. Now it's stabilized and -- at this point, and we've cleared the channel inventory. So it's not in a bad spot, but at an absolute level, it's lower. There are some export markets for our China-based handset customers into Eastern Europe that have some geopolitical uncertainty and unfortunate events unfolding there that are impacting demand. So we're seeing some constraints there. And then I'd go back to the 5G units that are new to 5G, are likely 4G units coming into our SAM, and those are going to be at the lower end of RF content in terms of total dollars, and we're seeing a SKU shift there as those incremental buyers are more price conscious. So we're seeing all of those impacts on the handset side. We managed through the inventory correction, and we're in a better spot today but at an absolute lower level. And I think you have to put the overall demand on the handset side in perspective of the peaks of what consumers were purchasing coming out of COVID and upgrading all of their home equipment and devices and then the troughs we saw in the inventory correction. And you normalize that, I think the peaks were somewhat of a distraction or a bit misleading. I don't expect that us -- we'll regain those levels on the handset side. I don't know, Philip, if you want to talk to infrastructure.

Yes, I think on the infrastructure side, I mean, the biggest headwind HPAs have was the Huawei ban. And if you normalize for that, you would see HPA's growth story look very, very different, right? And I think -- and I had said that at Analyst Day. I think that when you look at -- at least for HPA for China, we have -- we don't have a ton of exposure there. Where we are -- where we do have exposure is mostly in our motor control power management products for segments like garden tool. And what we see there is still soft. I think of areas that I still have some inventory and some things that we're through. I think that's the one end market that's still kind of recovering a little bit. But all in all, HPA doesn't have a significant exposure anymore in China.