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

Good day, and welcome to the Qorvo, Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Douglas DeLieto, Vice President of Investor Relations. Please go ahead.

Thanks very much. Hello, everyone, and welcome to Qorvo's Fiscal 2026 Third Quarter Earnings Call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in the earnings release published today as well as the risk factors associated with our business in our annual report on Form 10-K filed with the SEC because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain noncash expenses or other items that may obscure trends in our underlying performance. During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our Investor Relations website at ir.qorvo.com under Financial Releases. Lastly, for detailed information regarding the Skyworks and Qorvo combination announced on October 28, I encourage you to review the press release, investor presentation, Qorvo merger proxy and related materials available on our Investor Relations website at ir.qorvo.com under Events and Presentations. Today's call will focus on our Fiscal Third Quarter Results as well as our outlook for the March quarter, and we will not be commenting on the proposed business combination. Joining us today are Bob Bruggeworth, President and CEO; Grant Brown, CFO; Dave Fullwood, Senior Vice President of Sales and Marketing, and other members of Qorvo's management team. And with that, I'll turn the call over to Bob.

Thanks, Doug, and welcome, everyone, to our call. In our Fiscal Third Quarter, Qorvo delivered solid financial performance with notable strategic achievements across each operating segment. We continue to pursue our long-term growth strategy, while executing on restructuring actions to optimize profitability and reduce capital intensity. In ACG, we are supporting the world's leading smartphone OEMs with best-in-class products for their highest-value flagship and premium tier devices. In CSG, we enjoy broad representation in WiFi applications and we are expanding our reach in automotive, enterprise, industrial and other customer segments, our ultra-wideband technology. In HPA, we are growing across a range of customer applications, such as defense and aerospace, satellite communications, power and infrastructure. Within our factory network, we closed our Costa Rica facility in December, a few months ahead of schedule and have transitioned to external partners. The transfer of SAW filter production from Greensboro, North Carolina, to Richardson, Texas remains on track. With these actions, we will be able to operate more efficiently with reduced capital intensity and we will continue to differentiate our products with onshore manufacturing of GaAs, GaN, BAW, SAW and advanced multi-chip modules. Turning to quarterly highlights. In ACG, December quarterly revenue declined sequentially, in line with the view we provided last quarter and consistent with typical seasonality. At our largest customer, content gains on their ramping platform helped to support double-digit revenue growth compared to last December. We supply a diverse portfolio of high-performance discretes, tuners, ETP mix and integrated modules to our largest customer, not all of which have been awarded on the upcoming platforms. However, this time for the upcoming fiscal year, we expect revenue at our largest customer to be approximately flat. For our ETP mix, increasing internal modem adoption provides a multiyear structural tailwind as platforms transition away from third-party modems. With regard to integrated modules on the ultra-high band pad, we received lower share in the upcoming phone models than last year, and we expect our ultra-high-band pad revenue to decline year-over-year. This is a placement where we have demonstrated success across multiple generations. We remain confident in our highly differentiated technology and our ability to compete effectively over subsequent generations. In our largest customer's cellular-enabled iPads, we were awarded the high-band pad representing a product and technology milestone and new content for Qorvo on that platform. We are extremely pleased to have secured this placement. The win gives us the opportunity to demonstrate capability and executed scale on that platform, consistent with our long-term investment strategy. Turning to Android. We remain a leading supplier in premium and flagship smartphones, while we continue to reduce our exposure to low-margin mass tier smartphones. In the December quarter, total Android revenue declined sequentially in the low double digits. In the March quarter, we expect a greater than seasonal decline in Android revenue. For fiscal '27, we expect Android revenue to decline by approximately $300 million versus fiscal '26 driven primarily by our actions to reduce exposure to lower-margin segments and secondarily by the impact of memory pricing and availability on mass tier Android build plans. Qorvo enjoys broad participation across smartphone OEMs, and we are not seeing signs of memory pricing or memory availability impacting the flagship and premium tiers. With our largest customer expected to be a flat ACG revenue is expected to decline in fiscal '27 by the reduction in Android revenue. This is an intentional resizing of our Android business. We are reducing exposure to lower-margin segments, while continuing to serve Android's high-value and premium and flagship tiers. We expect the improvement in product mix to support a higher gross margin in ACG. Additionally, with ongoing OpEx reduction efforts, we expect to deliver expanding operating margins in ACG on the healthier revenue mix. In CSG, we are on track with an automotive ultra-wideband program with a leading automotive Tier 1. Regarding this platform, we are very pleased to announce we did receive our first production orders during the December quarter. This program will span multiple years and support multiple OEMs. We continue to see expansion of our engagements across customer base. Use cases for Qorvo's automotive ultra-wideband technology includes secure access, digital key, child presence detection and short-range radar sensing. We are supplying both our ultra-wideband and WiFi 7 solutions in collaboration with multiple Tier 1 manufacturers of network access points. We're seeing strong customer demand and initial deployments include hospitals, factories and other enterprises requiring ultraprecision indoor navigation and location awareness. Our WiFi portfolio is probably represented in flagship smartphones, fiber gateways, mesh networks, client devices and Satcom ground terminals. And we continue to expand our WiFi, FEM and filter portfolio to enable higher bandwidth, lower latency interacted networks. We delivered first, WiFi 8 samples during the December quarter and customer engagement and WiFi 8 is increasing. Regarding the CSG restructuring discussed last quarter, these actions remain on track. During the quarter, we successfully divested our MEMS-based sensing solutions business, while this represents a headwind to year-over-year CSG growth next fiscal year, it is one of multiple initiatives we are undertaking to improve CSG's profitability. Turning to HPA. We continue to see multiyear tailwinds of D&A, data power and infrastructure markets. In E&A, the passage of the fiscal '26 NDAA includes top priorities such as Golden Dome, the F-47 fighter and the Navy's next-generation fighters, ore ships and drones. Qorvo is a beneficiary of new platforms, upgrade cycles, RF content growth and increases in defense spending. As an example, Golden Dome is a multilayer defense system that requires significant RF content. For the full fiscal year '27, sales in D&A markets are expected to total approximately $500 million. In Power Management, our strategic emphasis on PMICs for enterprise-class SSDs has been met with continued data center growth where customer demand has been very strong. During the quarter, we taped out our first chip for our next-generation enterprise SSD platform. Other power opportunities for Qorvo includes AESA radars, drones, robotics, wearables and smartphones. There is strong interest global an Qorvo's AESA solutions combining our FEMS beam-forming ICs, power management and power control. In infrastructure markets, their increased content requirements and DOCSIS 4.0 systems that align well with our amplifier and control portfolios. Qorvo is a leading supplier of broadband amplifiers for DOCSIS 4.0, and we are well positioned with all major suppliers. We're also a market leader in small signal receive and transmit components used across the RF chain of 5G radio access network. While these products have historically been deployed in terrestrial 5G infrastructure, we are increasingly seeing the same RF building blocks adopted in adjacent applications, such as drones and low earth orbit satellite communications, including direct to-sell satellite architectures. We are sharply focused on growing our highest-performing businesses, and we are divesting or exiting businesses that underperform. In fiscal 2017, we forecast a mid-single-digit decline in full year revenue for the company, as ACG declines and becomes more profitable, CSG is approximately flat, and HPA continues its double-digit growth. As we move through fiscal '27, we expect our defense and aerospace business will be larger than our Android business. That's a meaningful shift in the portfolio that reflects, both the strategic resizing of our Android business and continued growth in HPA. This increasingly favorable mix positions us to deliver full-year FY '27 gross margins above 50% and EPS approaching $7 per share. These outcomes reflect continued operating expense discipline, a structurally improved portfolio mix and our sustained commitment to innovation and operations excellence. And with that, I'll turn it over to Grant.

Thanks, Bob, and good afternoon, everyone. Qorvo's fiscal third quarter revenue of $993 million, non-GAAP gross margin of 49.1% and non-GAAP diluted earnings of $2.17 per share, all compared favorably to guidance. During the quarter, our largest customer represented approximately 53% of revenue. On the balance sheet, as of quarter end, we held approximately $1.3 billion of cash and equivalents and approximately $1.5 billion of long-term debt outstanding with no near-term maturities. We ended the quarter with a net inventory balance of $530 million. This represents a sequential reduction of $75 million and a decrease of $111 million compared to where we ended last fiscal year. During the quarter, we generated operating cash flow of approximately $265 million and incurred $28 million of capital expenditures, which resulted in free cash flow of $237 million. Regarding our outlook for fiscal Q4. Our guidance reflects continued momentum in HPA, offset by our strategic pivot from lower-margin mass tier Android and the normal seasonal decline at our largest customer. Our expectations for the March quarter are as follows: revenue of $800 million, plus or minus $25 million; non-GAAP gross margin between 48% and 49%; and non-GAAP diluted EPS of $1.20 plus or minus $0.15. Gross margin continues to improve on a year-over-year basis. In Q3, non-GAAP gross margin increased approximately 260 basis points versus last fiscal year and we expect a similar improvement year-over-year in Q4. This improvement is a direct result of multiple initiatives. We've actively managed our product portfolio and pricing strategies to reduce exposure to mass tier Android 5G. We've positioned the company to benefit from growth in D&A, which is margin accretive, we've divested or exited margin-dilutive businesses, and we continue to manage factory costs aggressively as we have consolidated our manufacturing footprint. We project non-GAAP operating expenses in the March quarter to be between $240 million and $250 million, below the operating income line, nonoperating expense is expected to be between $8 million to $10 million, reflecting interest paid on our fixed rate debt, offset by interest income earned on our cash balances, FX gains or losses, along with other items. Our non-GAAP tax rate for fiscal '26 is expected to be approximately 15%. We continue to monitor the situation as changes the tax policy in the U.S. and internationally may evolve over time. At this time, please open the line for questions.

[Operator Instructions] The first question comes from Thomas O'Malley with Barclays.

So thanks for the color on the content. I think, Bob, you mentioned the ultra-highband potentially not having as much content there in this generation, but you have some of the ET coming back in. If you look at the next several generations of content, it looks like with this dual sourcing, you've seen a lot more swimming in other people's lanes is the way I think I've heard it talked about in the past where one guy would compete in a couple of sockets and now you've seen that proliferating to some other sockets, which is just kind of increased the competition and you guys have called out a couple of areas where you're seeing that. Maybe talk about the content roadmap on a go-forward basis? Like do you think that there are other sockets, you obviously talked about the highband, the mid-highband on the iPad? Like do you see other sockets where you could have some more traction? Or do you feel like the win is behind you or in front of you in terms of content over the next several generations.

Yes. Thanks a lot. I appreciate the question, Tom. And as you know, we don't like to comment on future generations or even architectures. But I will say that there continues to be opportunity for us to continue to grow our footprint there, no doubt about it. It's been -- as you know, a lot of it was sole source. As you can see, it does appear they're multi-sourcing more or at least dual sourcing, I should say, more sockets in the future. And we're investing in R&D to continue to grow our largest customer.

Helpful. And then just a clarification on the second one. I think you mentioned into March, Android will be down more than seasonal. I'm sure there's a million different ways, 5, 10, 15 years, you can look at seasonal. But in terms of what I have here, Android is actually up in the March quarter? I know you've seen some different seasonality. What do you mean by down more than seasonal? What is normal seasonal for March in Android?

Yes. I appreciate the question, Tom. And you're exactly right. Typically, Android has been up in the March quarter. And as we've been strategically exiting a lot of that lower-margin business and we talked last quarter about even some of the Android ramps and other phones that we're not participating as much. Again, due to our strategic emphasis on making sure we're getting paid for the value we bring. And this year, it's going to be down quarter-over-quarter. So that's the big swing. You're correct.

The next question comes from Peter Pang with JPMorgan.

Just for the Android business, I think the prior expectation was you're going to exit about $200 million and now you guys are saying $300 million. So maybe just talk about whether that is just expedite exit? Is it the memory impact, what drove the accelerated pace? And then as we think about longer term, what is the business revenue run rate after your finishing exiting.

Peter, this is Grant. Let me take that one and then Dave can fill in some more detail. So we had said that it will be a multiyear event as we exit the lower margin or lower tier Android businesses. It could run approximately $150 million to $200 million in our fiscal '26 and then again in our fiscal '27. Last quarter, we had mentioned that we expected the larger portion of that in our fiscal '26 to hit in the second half and especially impacting the March quarter, and that's exactly what we're seeing in results. And then in fiscal '27 instead of the $150 million to $200 million, we're taking that estimate up to $300 million that we could exit in fiscal '27. And that's both due to our strategic exit from the business as well as some of the memory pricing and availability constraints that are impacting customers build plans.

Perfect. And then just on the gross margin, you talked about potentially getting to the 50%. Maybe you can kind of lay out on how we should think about that margin profile over the course of the 2027.

Peter, we're getting a lot of background noise when we're talking. I don't know if it's on your end or not.

Sure. So I think your question was around margin profile. So as we look out in fiscal '27?

That is right. That is right. Okay.

Yes. So the biggest driver for margin as we look out in fiscal '27 is mix. It's both business mix as HPA becomes a larger percentage of the total, which is margin accretive as well as product mix inside of the segments, especially within ACG, we've talked at length about the exit from the lower tier Android business, which is having a sizable effect. Obviously, our utilizations aren't where we'd like them to be, the biggest gains in gross margin for the moment are coming from that business mix I talked about. So there's still further headroom as we add additional volumes over time. I would complement the operations team. They've had done a considerable job of pulling costs out, while maintaining the capacity that we need to strategically target very important pieces of business, all while transferring multiple lines of production, which is not a small feat as Bob commented earlier, both on Costa Rica as well as the North Carolina transition to Texas.

The next question comes from Gary Mobley with Loop Capital.

Thanks for the explicit guidance, Bob, for fiscal year '27 and specifically on Apple, you're calling for revenue to be flat in fiscal year '27 with perhaps some content loss in the upcoming iPhone 18 in aggregate. So is that more or less one part volume growth offset equally by some content decline. Maybe you can just help us out there in terms of like your volume assumption for iPhone units, I guess, that assumption.

Yes. Thanks, Gary, and we're not going to comment on our largest customers' volumes or expectations we're just giving you an indication of what we think our revenue is going to be given everything we know at this time.

Okay. And then looking at your fourth quarter revenue guide, it's down about $70 million roughly on a year-over-year basis. How much of that decrease is a function of business divestments. I believe there might be 2 significant business divestments within that year-over-year comparison. And I would assume the rest is mostly Android related?

That's correct. The vast majority of it is Android related. It's relatively small from the divestitures that we've made and the Android component of that, obviously, we'll see how that exactly plays out. We're seeing both our strategic exit as well as some of the customer forecast driven by some memory pricing concerns, which is just starting to find its way into the customer dialogue.