Qorvo, Inc. (NASDAQ:QRVO) Q2 2024 Earnings Call Transcript

Qorvo, Inc. (NASDAQ:QRVO) Q2 2024 Earnings Call Transcript November 1, 2023

Qorvo, Inc. beats earnings expectations. Reported EPS is $2.39, expectations were $1.77.

Operator: Welcome to the Qorvo Inc. Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, today's event is being recorded. I would now like to turn the conference over to Douglas DeLieto, Vice President of Investor Relations. Please go ahead.

Douglas DeLieto: Thanks very much. Hello, everybody and welcome to Qorvo's fiscal 2024 second 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 non-cash expenses or other items that may obscure trends in our underlying performance.

A technician overlooking a circuit board being built and tested for a semiconductor device.

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. 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.

Bob Bruggeworth: Thanks, Doug, and welcome everyone to Qorvo's fiscal 2024 second quarter call. Revenue, margin and EPS were all above the high-end of our outlook provided during our August earnings call. Customer demand during the September quarter improved versus our August guidance. The primary driver was a large smartphone customer ramp. In addition, channel inventories of Qorvo components across the Android ecosystem continued to be consumed with OEMs indicating inventory levels are approaching historical norms. Channel inventory digestion is allowing Qorvo to ship more closely to end market demand, even as pockets of channel inventory remained in markets such as base station. We have worked closely with our customers to address inventories, while continuing to deliver highly-differentiated products.

They have rewarded us with new opportunities and new design wins and this underpins our expectations for growth this year and beyond. Across our three operating segments, Qorvo enjoys multi-year technology upgrade cycles supported by global macro trends, including connectivity, sustainability and electrification. New protocols and new technologies are offering improved performance and enhanced functionality and Qorvo is critical in enabling these capabilities. This is playing out in aerospace and defense, automotive, base station, broadband, connected home, power devices, power management, smartphones, Wi-Fi and other markets. Where the performance is measured power out, data throughput, talk time, battery life or distance between charges, customers increasingly require higher levels of power efficiency, integration and functional density.

To enable their future architectures and deliver successive improvements in our next-generation products, they rely on Qorvo's best-in-class technologies and solutions. In HPA, we are a strong beneficiary of the trends in our defense and aerospace business towards what we call one to many. Put simply, Qorvo's technologies are supporting higher customer volumes requiring more electronics and higher levels of integration. This applies to unmanned vehicles like drones, upgrades to existing radar systems, low earth orbit satellites and other applications. Lastly, we are leading the transition to DOCSIS 4.0, and broadband and we continue to deliver base station customers increasing levels of functional integration for their 5G massive-MIMO deployments.

Looking at our power franchise, we offer a highly-differentiated solution with our silicon carbide JFET architecture. Our technology offers the lowest RDS(on) which translates into faster battery charging, longer battery life and lower current consumption for applications like EVs, solar inverters and data centers. These are relatively new markets for Qorvo that are early in the transition to silicon carbide and offer significant growth. We also offer a differentiated portfolio in power management, where our initial wins have been in SSDs, power tools and appliances and we are leveraging our unique IP to expand in the defense, infrastructure, smartphones, wearables and other markets. In CSG, new technologies are transforming user experiences in automotive, connected home, enterprise, industrial and other markets.

Ultra-wideband is a critical focus area and we're very excited about recent developments. Ultra-wideband is in the very early innings of adoption and we are seeing exciting opportunities, giving expanded smartphone adoption, multiple in-vehicle placements and an array of new capabilities such as ranging and precision location for indoor navigation. Wi-Fi is another primary driver and the transition to Wi-Fi 6E and Wi-Fi 7 is very early-on. Wi-Fi 7 devices recently launched by Qorvo's customers are offering breakthrough advances in speed, latency and network capacity. Qorvo also offers components and full system solutions that incorporate Bluetooth Low Energy, Zigbee, Thread and now Matter. Matter is a recently launched technology overlay, essentially a common language that improves interoperability across smart home devices regardless of protocol or manufacturer.

It is supported by iOS, Android and major smartphone platform providers and it's widely expected to simplify and accelerate the adoption of smart home devices. It is also early days for our force-sensing touch sensors. These are ultra-sensitive MEMS based sensors that enable new use cases and enhanced device functionality. We have broad engagements across automotive smart interiors, trackpads, true wireless headsets, smartphones, wearables and other consumer applications and our opportunities are expanding, as customers engage with our technology and develop new use cases. Looking at ACG, fewer than half of the Android smartphones this year will be 5G. Android 5G units are expected to grow in the low double-digits for several years. That's a big growth opportunity for Qorvo as we move from very little content in 4G phones to significant dollar content in 5G phones.

Another driver is 5G Advanced which leverages new releases of the 5G standard. 5G Advanced smartphones will include additional transmit and receive and satellite bands favoring Qorvo's product and technology portfolio. 5G will migrate to 5G Advanced over time and bridge us to new development efforts and new content required to accommodate 6G frequency spectrum at the end of the decade. Big picture, Qorvo enjoys a range of opportunities supported by multi-year upgrade cycles. Many of these transitions are very early on and Qorvo is recognized by customers as a leading technology innovator. We've made great progress developing new technologies and winning customer designs. With that said, we want to make it clear that our end markets have not yet turned and our outlook does not contemplate a significant change in the macro-economic environment.

The customer demand environment for Qorvo is more a reflection of strong design win activity and the early actions we took to improve channel inventory. When end markets recover, that will represent an additional driver of growth for Qorvo. Now, let's turn to some quarterly highlights. In defense and aerospace, we increased shipments of X-Band transmit and receive FEMs and secured first orders for our 50-watt PAs in support of new LAN-based C-band radar programs. We introduced the world's highest power Ku-band satellite communications amplifier, which enables an 80% size reduction and is optimized for multiple applications. We also received a large production order for recently launched cell-to-satellite solutions. These solutions incorporate advanced technologies from across our aerospace, base station and mobile portfolios to enable low-earth-orbit satellite connectivity.

In infrastructure, we were selected by Tier-1 base station OEM to supply switch LNA modules for next-generation 5G massive MIMO radios. We also continue to lead DOCSIS 4.0 broadband upgrade cycle with production orders from multiple customers and broad-based design wins. For power management markets, we released QSPICE, a significant improvement over current industry offerings for analog and mixed-signal circuit design in simulation. QSPICE improves the speed, functionality and reliability of circuit simulation, extending the value Qorvo is providing designers. Since its launch, the tool has surpassed 15,000 unique downloads. In automotive applications, we were selected to support a major in-vehicle car access platform by a leading German automotive Tier-1.

This multiyear program has a lifetime value over $250 million, marking a major milestone for our ultra-wideband portfolio. Within this program, Qorvo will supply ultra-wideband solutions for in-vehicle applications for a leading German automotive OEM. We also secured a design win from another leading German automotive Tier-1 to supply V2X solutions for communications platform launching this year. Lastly, we were selected to supply forced sensing touch sensors that enhance smart interior functionality and a recently launched EV from a Korean based automotive OEM. Complementing the large ultra-wideband win in automotive, Qorvo was selected by the leading Android smartphone OEM to supply ultra-wideband for their Spring 2024 flagship launch. It's worth noting that the ultra-wideband wins in automotive and Android markets are significant as these two customers represent the largest volume opportunities in their respective markets.

To extend our reach, we're sampling ultra-wideband solutions across fleet management, logistics, agriculture and other applications, leveraging our precision location capabilities to advance operational efficiencies. In Wi-Fi, we secured multi-year design wins with Tier-1 network operators in US and in India. These wins support next-generation wireless infrastructure for retail, enterprise and home applications. Across the Android ecosystem, we increased shipments of our highly integrated modules in support of Android smartphones from the high tier through the mass market. Notably, we extended our strong share position with the leading Android smartphone OEM in their flagship smartphone. In addition to the ultra-wideband win, we are also selected to supply the low-band, mid-high band, ultra-high band, secondary transmit receive, tuning and Wi-Fi. Lastly, we expanded customer sampling of our recently launched mid-high band pad.

Qorvo's newest integrated architecture leverages next-generation BAW and SAW technologies and advanced packaging to combine main path content with receive paths commonly included in the diverse receive modules. This and other highly integrated Qorvo architectures for the Android ecosystem, free board space and improve efficiency to support future 5G form factors and content like flip and fold architectures and transmit and receive non-terrestrial network connectivity. I want to thank the Qorvo team for continued operational excellence. We have moved aggressively to reduce channel inventories by securing broad-based customer design wins. In the December quarter, our outlook reflects the seasonal profile of a large smartphone customer ramp as well as healthier channel inventories across most markets.

In the March quarter, we expect revenue to be more closely aligned with end-market demand. Longer-term, we expect revenue, growth and margin expansion and product mix favors our higher growth investment business. And with that, I'll hand the call off to Grant.

Grant Brown: Thanks, Bob, and good afternoon, everyone. Revenue for the quarter was $1.1 billion. Non-GAAP gross margin was 47.6%, and non-GAAP diluted EPS was $2.39, all exceeding the high end of our August guidance. Revenue increased approximately 70% sequentially and benefited from significant content gains at our largest customer. Consistent with our guidance, factory production levels improved but remained below historical averages. During the quarter, the impact from underutilization and factory-related variances was approximately 550 basis points versus approximately 800 basis points last quarter. The increase in gross margin above the high end of our August guidance range was largely the result of revenue upside and product mix.

A larger portion of September revenue was manufactured at external silicon foundries and processed at third-party OSAPs. By comparison, our December and March revenue will reflect a larger percentage of higher cost inventories manufactured internally during periods of lower utilization and a lower percentage of products manufactured at external silicon foundries and OSATs. Beyond this fiscal year, we continue to see a clear path back to 50% plus gross margin initially during specific quarters and then on a full year basis. Non-GAAP operating expenses in the quarter were $246 million, slightly higher than our guidance due to performance-based incentive compensation. We are investing in new product development and targeting multi-year growth opportunities across all three segments.

In addition to growth-oriented investments, we're also investing in enterprise-wide productivity initiatives. These multi-year efforts will support future growth and enhance profitability as we upgrade, modernize, and standardize around the latest tools and best practices. In total, non-GAAP operating income in the quarter was $279 million for 25% of sales, which increased from 7.2% last quarter. Breaking out operating margin by each segment, ACG was 34%, HPA was 17%, and CSG was negative 27%, which includes the impact of the biotechnology division. During the quarter, Qorvo Biotechnologies generated $0.5 million in revenue and reduced operating income by approximately $7 million. Just following quarter-end, we successfully closed the sale of the Omnia Biotechnology business, and will continue to sell BAW filters to support the acquirer.

Non-GAAP net income was $236 million, representing diluted earnings per share of $2.39. Moving on to the cash flow statement. Free cash flow was $64 million, and CapEx was $29 million. During the quarter, we repurchased $100 million worth of shares at approximately $103 per share. The rate and pace of our repurchases is based on our long-term outlook, free cash flow, low leverage, alternative uses of cash, and other factors. Turning to the balance sheet. At the quarter-end, we had approximately $2 billion of debt outstanding with no near-term maturities and $707 million of cash and equivalents. Consistent with our expectations and commentary from the prior earnings call, our net inventory balance was reduced in the period and ended the quarter at $840 million, down $78 million sequentially.

Looking at days of inventory, this represents a decrease from 210 days to 138 days. Turning to our current quarter outlook, we expect revenue of approximately $1 billion plus or minus $25 million, non-GAAP gross margin between 43% and 44%, and non-GAAP diluted EPS of $1.65 at the midpoint of the revenue range. We project non-GAAP operating expenses in the December quarter will be $235 to $240 million. Below the operating income line, non-operating expense is expected to be approximately $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 ‘24 is expected to be within a range of 13% to 15%. We expect our inventory balance will decrease again in the December quarter.

In terms of channel inventory, the environment continues to improve, with Android OEMs indicating inventory levels are approaching historical norms. Outside of the Android ecosystem, there are smaller pockets of channel inventory that will take longer to digest. We continue to forecast fiscal ‘24 revenue above fiscal ‘23. For the full fiscal year, fiscal ‘24 non-GAAP gross margin is expected to be 44% or slightly better, with variability primarily tracking utilization and mix. Qorvo enjoys multi-year growth drivers across all three of our operating segments. We offer a broad portfolio of technologies and capabilities, and we are uniquely positioned across leading customers and large markets. We expect continued strength on large customer programs, and we are investing to drive outsized growth in diverse businesses to broaden our market exposure and accelerate growth.

At this time, please open the line for questions. Thank you.

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