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

[Audio Gap] Semiconductor and semi cap equipment analyst here. Pleased to have Grant Brown, Philip Chesley and Dave Fullwood here from Qorvo. And I love having a full suite guys on stage. I never get to fill the seats, which is awesome. Thanks for joining us. Appreciate it.

Thank you. Thanks for having us.

So I think a good way to start is maybe with a state of the full business. So Grant, could you walk us through what's going on with the ACG business, the CSG, and Philip, maybe with HPA. You guys can mix it up. Whoever wants to go first can start.

Sure. Thanks very much for having us. I always appreciate the opportunity. Maybe before I begin, I'd like to remind the audience that the safe harbor language that applies to our press releases also applies to today's presentation and this discussion and refer everyone to our filings, specifically Form 10-K and 10-Q, for any additional information and risk factors. I'll go ahead and start, and then I'll throw it over to Philip or Dave who can elaborate. Looking across the full business, Qorvo's markets are underpinned by some significant global megatrends that we commented on at our Investor Day. Those are electrification, connectivity, mobility, sustainability, datafication and AI, of course. Each of these unlock new functionality and new user experiences that are made available by the customers we serve and the products of ours that enable that. Our customers require higher performance, greater efficiency, smaller form factors. All of this to enhance the user experience and extend their differentiation, and this creates opportunities for Qorvo in every end market that we address. And our strategy remains intact, just as we laid it out at our Investor Day earlier this year. If I take a quick look at each of the segments, and I'll start with ACG, where we have a strong position with our largest customer. They are the single largest opportunity in ACG, and we have a clear path for content gains over multiple years. In our Android business, the mix is shifting from mid-tier 5G to entry-tier 5G as we've spoken about, and we are increasingly focusing on the flagship and premium tiers. In HPA, and Philip can elaborate here, we continue to expand our defense and aerospace franchise, where we're building a broad-based business in power management as well. And for the full fiscal year, we expect HPA to grow in the mid-teens. Finally, in CSG. Last quarter, we saw strength in WiFi while we're continuing to invest in diversifying growth businesses, including a portfolio of automotive solutions and SoCs for ultra-wideband and Matter. And in ultra-wideband specifically, we're engaged with customers on some really exciting indoor navigation applications. And again, for the full year, we also expect to grow in the mid-teens for CSG. If I summarize and add all that together, our corporate strategy is to reinvest our cash flows into the most attractive opportunities and continue to focus on driving profitability. We're reducing capital intensity, and we're committed to delivering on our long-term financial model. Finally, we continue to execute on our share repurchase as we evaluate other alternatives, such as inorganic growth in acquisitions. I don't know. Dave and Philip can elaborate when we get to those businesses, too.

Perfect. Well, I'm going to pass this over. We're all now mic-ed up here, so I'll keep it going. But now that we're at the year-end, at least from the calendar year-end, we can look back and talk about kind of content at the largest customers for this year and then maybe your outlook in the calendar year '25. So could you level set us, where did we end, and then looking out into next year, where could we go?

Sure. Let me start, and then I'll pass the mic over to Dave. So as you know, there's not a lot we can say about our largest customer. We're doing what we said at our Investor Day, which is to invest more and win more. This year, as we look back, we won the content that we expected to, and we executed exceptionally well during the large seasonal ramp. That content includes discrete placements, like tuners, as well as integrated placements, like ultra-high band pads, among other things. For reference, last quarter, our largest customer was just over 50% of total revenue, and we expect them to be at a similar level in the December quarter. It's seasonal, of course. It's seasonally down in March. But to put that into context, as we've stated, this is our largest opportunity in ACG, and we continue to invest there. As we look forward into next year, we've secured sufficient wins to date that give us confidence in year-over-year content growth in our next year, and we're very excited about that and very well positioned. We're in, of course, as you know, based on the teardowns, all models, but we tend to be weighted toward the Pro models, and you can expect continued strength there. Beyond next year, we've been invited to compete, and we are investing to grow content even further. In fact, we're engaged on more product programs today than ever before. And Dave, I know you want to say something, so.

Thanks, Grant. I think it's important also to address some questions that have come up around some misinformation in a recent news article about our opportunity with the internal modem. To be clear, we don't do modems, we don't do transceivers and we don't do millimeter wave. What the customer counts on us for is integrated RF modules, ET PMICs, antenna tuning and discrete filters and switches. The incremental opportunity for us as they move to the internal platform is the ET PMICs. So I just want to make sure that was clear because I know there's some confusion and a lot of questions about that.

So I'll speak to the financial question. So on last earnings, you mentioned Android mix shift and utilization as gross margin headwinds in the December and the March quarters. Is there any updated visibility there? And what are the important levers for gross margin improvement to your target for the investment, which is 50% plus as we go into fiscal year '26?

Great. Thanks. Sure, let me cover that one. We've described the mix shift in Android 5G from mid-tier to entry tier. This was anticipated over time but accelerated, and we've discussed that accelerated shift in the OEM build plans in the near term. Our latest comments around utilization and gross margin reflect that dynamic. But looking beyond the next few quarters into fiscal '26, content growth at our largest customer and growth in HPA and CSG will be masked by some of those declines in Android, However, there's no change in the strategy within ACG. In fact, we're investing in 5G Advanced solutions there for flagship and premium tiers, and the market has really only expedited our plans. And we're taking some significant actions. The first action is -- it's been removing variable costs in response to the fluctuations in loading. This has been done. If you look at our guidance, we're -- even though we're down year-over-year in revenue in the December quarter, margin's up. So we're clearly taking costs out. Next, you can look to reduce fixed costs, and we've done that as we've reduced capital intensity, which is one element and an ongoing effort. You already know we've divested factories, and we're further consolidating our footprint. Our latest move is the transfer of GaAs wafer production from North Carolina to Oregon. And beyond the direct fixed costs, we are implementing a meaningful workforce reduction. We are committed to treating our impacted employees with respect and helping them through the transition. This process is currently underway. Employees have been notified. And it represents a meaningful reduction to our operating expense, and our commitment to achieving our financial model. In terms of business-oriented actions, we're not leaving Android or China for that matter, but we've adjusted our Android road map to align with the flagship and premium tiers, which is part of that workforce reduction. Regarding our digital transformation, the rate and pace is guided by the economic benefits. And as always, it's been designed to follow the contours of our business. But versus our prior comments, the spend there will come down meaningfully. Our other operating expense line will come down beginning in Q4 and extend into fiscal '26, and we're reducing the scope of those projects to a smaller list of highly valuable items. Lastly, we, as you know, signed a definitive agreement to divest our silicon carbide business, which is both a gross margin and operation -- excuse me, operating profit-accretive move. These actions will carry into fiscal '26. And in total, on an annualized gross basis, we expect to take out over $100 million of COGS and OpEx. We won't take all to the bottom line, of course. Inflation across material, salaries and outside services will erode some of the savings, but we'll continue to invest in the business as well, specifically D&A, power, UWB and then our largest customer where we have significant opportunity. Specifically to the gross margin part of the question, we're committed to the financial model we laid out at our Investor Day. And we don't have to achieve a 50-50 revenue split, i.e., HPA plus CSG being 50% or more, to achieve our 50% gross margin target. Overall, business mix will improve margin. HPA and, specifically, D&A is margin-accretive, and that will happen over time, given the differential in growth rates. But each of our individual business segments has their own specific margin drivers. Within ACG, the mix of premium and flagship will improve gross margin as we support all of our customers. In HPA, the divestment of silicon carbide, the growth in D&A and other items will improve the gross margin within HPA. And within CSG, we're transitioning the gas production to Oregon and exiting some lower utilization situations in the North Carolina fab. So each of the 3 business segments has their own independent drivers as well as overall business mix at the Qorvo level. With all of those, I think we can get to seasonally strong quarters in fiscal '27, the opportunity to achieve 50% gross margins. Rest assured, we're taking those actions, and we'll provide more detail on our upcoming calls. But I want to make sure we stress that all of the things going on at Qorvo to help us get to our target financial model.

Very, very helpful. So just to synthesize there, $100 million that's across both spend and COGS. And in terms of where that's located across the business, you're going to give more detail, obviously, on the earnings call. But any color -- is that in relation to the Android business that you were talking about as well? So any color there would be super helpful.

Yes, exactly. It's heavily weighted toward the Android business where we're refocusing our efforts to the premium and flagship tiers, but also business support functions, right? So everything that's company-wide, looking at profitability and how we're going to achieve our target financial model, we're committed to that success over the long term.

And then in terms of the timing is the last question on it. And just how quickly can that occur? Is that over the course of several quarters? Is that all going to come out at once? Anything on the cadence.

Sure. These actions are happening right now, actually, and it'll carry into our Q4 and as well into our fiscal '26. So we're taking actions immediately. Some of the fab-related items take longer as we work through end-of-life products and supporting our customers. The product transitions also take longer as we support our Android customers and business we've already committed to, which will span into fiscal '26.

Okay. Super helpful.

Tom, it's probably helpful to size our Android revenue going forward because you're probably going to ask that. So in terms of our ACG revenue, our China-based Android revenue is down 75% from the peak. It's expected to be under $100 million this quarter, which we mentioned before, and it's going to be down year-over-year next fiscal year. So as the product pipeline there, as Grant described, and we only focus on those high tiers, you could think of our $100 million of quarterly ACG China-based revenue bottoming out around $50 million a quarter over the coming years. So anything above that would be upside if there's a shift back towards mid-tier or AI upgrade cycles, those kind of things. But that's kind of how we're thinking about the Android business.

Super helpful. So I guess I think the perfect kind of segue is, so Android as a market seems somewhat structurally challenged. There's clearly a market dynamic that's occurring, that's having you shift priorities from a spend perspective elsewhere. Where, as a company, are you doubling down your efforts in the total business? Where is your areas of growth? And do you feel like this is a time where you potentially would need to add to that growth profile? Or can you do it from an organic perspective? Maybe 2 different questions. Where organically are you focused? And then is there any areas where you would feel that you want to bolster the portfolio?

Yes. Great question. Thanks for asking. In fact, it's a perfect segue to Philip to talk about HPA. But before we do, I will say, the $100 million we're taking out, we're doing exactly as you described, right? We're taking that out of our spend profile, and we'll be reinvesting that -- not all of it, we're going to take some to the bottom line, of course. But we're going to be reinvesting in areas like D&A, UWB, of course, in our largest customer, flagship and Android. But maybe it's a good chance for Philip to step in and talk about HPA.

Appreciate the segue. I think 2 areas where we are going to invest significantly is in D&A and in power management, and maybe I'll spend some time kind of going through each of those segments for you, Tom. So when you look at our D&A business today, it's on track to be about $400 million of business for us this year. And you look at it, it's gross margin, significantly gross margin-accretive. It's -- the D&A business has a mid-teens CAGR, and it's going to grow double digits this year. And I think when I look at the D&A business and the end markets, what I see is the fastest technology insertion cadence that I have seen in 25 years of being and selling in semiconductors into the D&A market. And I think maybe what's known that maybe not as well known is just what's driving a lot of that. You look at the upgrades that need to happen to the radar platforms, whether that's land, sea, air, there are new capabilities, new threat profiles that we have to address. And that's driving new architectures and adoptions at higher frequencies, which is all really good for Qorvo because that is really kind of the bread and butter of our D&A business. The other area that is also really starting to take off is the electronic warfare side of things. In the past -- I mean electronic warfare has always been important, but most EW systems today are really built around an older technology called traveling wave tubes. They're big, they're bulky, they're not reliable. And really, there's a fast cadence to upgrade that capability. You guys all watch the news, you know why. Qorvo actually has really the industry-leading wideband solid-state PA technology that is absolutely required and enabling in the EW space. And it's a multibillion-dollar SAM opportunity for us, just in that segment. All of the -- I just want to kind of maybe frame this for you. When you hear solid-state PA, it's not just a chip, it's a full system. I mean it's a pretty big size. And we build all of that from the MMIC that goes into it to the full system. We do that all onshore in our facility in Texas at AMMA, right? So you have that growth. And then we're seeing both the communications segment and the SATCOM area, again, also accelerating. And we have all of the filter technology that's required for that. We have all of the compound semi that's needed. We announced months ago that we bought Anokiwave. Why did we buy Anokiwave? We need beamforming technology, which kind of fills in a portfolio gap that we had in that space. So all of those market dynamics is really why we feel like we want to kind of double down in that area. And maybe just some fun facts for you that maybe isn't as well known about HPA and the D&A business. So we are the market leader in the GaN PAs and the RF finance. We have the largest market share, right? So we're well positioned for that, the tailwinds that come to that end market. I talked about the wideband SSPAs. We have really the 2 different types of BAW filter capability, both the high frequency and the low frequency, all built onshore, right? We have the -- we're really the only supplier that has the advanced packaging capability that can integrate all the stuff onshore, right? And I think really an important point is that we bring not only all that capability onshore, we bring the commercial scale that we get from our ACG business, which allows us to really be able to ramp this up in a way that really no other of our competitors can do. And I think that's lost on a lot of people because to the D&A market and to the DoD, having that production -- commercial and that D&A footprint and the economies of scale that come with that is just mission-critical, right? And so I think super important. I just want to reiterate how -- why that is important. So I think a lot of tailwinds there. At Investor Day, I said, look, we want to grow D&A to $1 billion. We're going to look at -- we're going to do that organically. We're going to do that inorganically. And on top of that, that's why when I showed the charts on SAM for D&A, I mean, in just a few years, it's gone from a $3 billion SAM to a $5 billion SAM, right, so a lot of growth opportunities there. The other area that I'll touch on that we're investing in, in power management. We have a real successful franchise in ACG and power management, right, our ETP mix and everything else. And we're leveraging that capability to move into other areas. And today, again, I think maybe isn't as well known, we are one of the market leaders for PMICs for the solid-state drive market. So whether that's notebook or that's data center, we have a big footprint in those end markets. And we're going to invest much more on the data center side with that technology. We're also taking that PMIC technology and we're moving it into our customers, our handset customers because not just in handsets, they have ear buds and watches and everything else. It's really a perfect technology fit, both from a customer relationship perspective but also from a technology perspective. So we see a lot of growth, a lot of SAM opportunity there as well.

That's a great explanation and overview. I want to touch on CSG as well. But just to dot my Is and cross my Ts here. So you had the asset sale this week, maybe talk a little bit about that. And then now we have moving parts. You have $100 million coming out of the COGS and the spend. You have a little bit lighter Android, it sounds like. And then you have the sale, which you, I believe, said closed in Q1. So all of those moving parts, anything changing? I think you would have said out front in terms of the profitability in the December quarter. It seems like you're still within the range or you would identify that. And then how does that translate into March to the best of your abilities? I know you're just going to update us a little bit more on the earnings call, but...