Qorvo, Inc. (NASDAQ:QRVO) Q3 2024 Earnings Call Transcript
Qorvo, Inc. (NASDAQ:QRVO) Q3 2024 Earnings Call Transcript January 31, 2024
Qorvo, Inc. beats earnings expectations. Reported EPS is $2.1, expectations were $1.65. QRVO isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Third Quarter 2024 Earnings Conference Call for Qorvo. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Doug DeLieto, Vice President, Investor Relations. Please go ahead.
Douglas DeLieto: Hello, everybody, and welcome to Qorvo's Fiscal 2024 Third Quarter Earnings Conference 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 press 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.
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 & Marketing; and other members of Qorvo's management team. And with that, I'll turn the call over to Bob.
Robert Bruggeworth: Thanks, Doug, and welcome everyone to Qorvo's fiscal 2024 third quarter call. I would like to start by complementing the team for delivering another solid quarter. The demand environment in the December quarter improved versus our November outlook, and this is reflected in our strong performance. Looking at our business from a high level, Qorvo is capitalizing on secular trends, including connectivity, sustainability, and electrification. These trends are playing out over many years and they are fueling the transition to new technologies and new standards like 5G advanced, WiFi 7, [indiscernible], DOCSIS 4.0, and others. As a result, customers across our businesses are increasingly seeking higher levels of efficiency and performance, where performance is measured in power out, talk time or time between charges.
Qorvo is central to these transitions, and we are critical to enabling these capabilities. We leverage unique competitive strengths to supply our customers best-in-class solutions that enhance efficiency, increase throughput, and reduce form factor. We are a preferred supplier with leading products and a robust technology roadmap and we are positioned favorably for broad-based growth across our three operating segments. Now let’s turn to our strategic highlights, beginning with HPA. Customer demand in end-markets, excluding base station is improving and supports our view for a return to year-over-year growth in HPA in the March quarter. In defense and aerospace, we want an expanded radar design with a major DoD contractor and we received new standard product orders in support of several large domestic and international ground-based radar systems.
We also enjoyed increasing demand for our solid-state PA products and for our switch filter bank products across multiple customers and programs. There are multi-year secular trends driving our D&A business, including the trend of one-to-many, and the transition of mechanical systems to active electronics scanning systems, both of which increased requirements for more advanced systems-level RF solutions. Earlier today, we announced the signing of a definitive agreement to acquire Boston-based Anokiwave. Anokiwave is a leading supplier of high-performance integrated silicon ICs for intelligent active array antennas. We are excited to have the Anokiwave team join Qorvo and expand our offerings for defense and aerospace, SATCOM, and 5G applications.
In power management, we are extending our reach in markets where Qorvo enjoys a strong presence, such as wearables, and other consumer products. Our most recent award is a PMIC chipset with multiple placements for wearable and charger at a leading Android OEM. Complementing this, we begun to see a rebound in SSDs for PC and enterprise markets. We are continuing to expand upon our strong position, with an additional power management win in support of a leading manufacturer of laptops. Lastly, our recently launched QSPICE, circuit simulation software was honored as the design tool and development software product of the year, at the 2023 Elektra Awards. In power devices, we're shipping into power supplies for blockchain applications, and design activity in data center continues to be strong.
We are also seeing increased activity in circuit protection, where our JFET technology brings unique advantages. In automotive, design activity remains strong, not only for onboard chargers, but also for other emerging applications and electric vehicles. In infrastructure, Qorvo is leading the DOCSIS 4.0 upgrade cycle. We commence volume shipments of our newest DOCSIS 4.0 hybrid power doubler in support of multiple cable OEMs. In the cellular base station market, inventories continue to be consumed and we expect demand conditions to remain soft through calendar year 2024. Turning to CSG customer activity for ultra-wideband is increasing in secure access automotive applications. We're also seeing new applications for ultra-wideband in automotive, including presence detection and other radar-based sensors.
This momentum builds upon our recent wins in ultra-wideband, including an in-vehicle car access platform and a flagship Android smartphone launch. As we demonstrated at CES, we are actively involved in a wide array of enterprise and connected home solutions, leveraging [radar] (ph) and ultra-wideband for applications such as door locks, smart lighting, and indoor navigation. In force-sensing touch sensors, we received the first production orders for an automotive supplier in support of a leading career-based automotive OEM. We are seeing increasing traction across a growing set of customers and markets, including automotive, laptop trackpads, wearables, and smart home. In WiFi, design activity and collaboration remain strong across reference designs, customers, and operators.
Within the Android ecosystem, the demand environment for mobile WiFi is improving with the normalization of Android channel inventories. In access points, WiFi 6 volumes continue to grow with certain provider rollouts in India. In WiFi 7, Qorvo secured design wins across operator, retail, enterprise, and mobile segments. In ACG, we commenced shipments in support of the spring 2024 flagship smartphone launch by the leading Android smartphone OEM. On our last earnings call, we highlighted our content gains in the flagship tier. In addition to the ultra-wideband, Qorvo content this year includes, the low band, mid-high-band, ultra-high band, secondary transmit and receive, tuning, and WiFi. We are ramping up now and building upon our momentum with a broad set of design wins in this customer's high-volume mass-market portfolio.
Android mass-market smartphones are set to transition to 5G through the decade. In our collaboration with Android customers on their long-term product roadmaps positions Qorvo to be a primary beneficiary as these new 5G units [indiscernible]. To that end, Qorvo was recognized by the top four China-based Android 5G OEMs with 2023 awards for innovation, quality, supply, technology, and strategic partnership. To simplify 5G adoption and sustain our position as the leading global strategic supplier to Android OEMs, we continue to launch new architectures and new products that enhance performance and reduce form factors. During the quarter, we expanded customer sampling of our newly launched main path, LMH pad. This highly integrated solution is optimized for mass-market smartphones.
It combines in a single placement, the low, mid, and high band main path content traditionally offered in two placements. This reduces surface area by 40%, simplifies design, and accelerates time to market. In addition to developing highly integrated solutions with increasing levels of functional density, we're also advancing technology in our high-performance discrete portfolio, including our BAW filters. During the quarter, we received purchase orders for discrete BAW filters using our recently released next-generation BAW technology. During the quarter we continue to bring channel inventories down and now our shipments are more closely aligned with end-market demand. We are also seeing incremental improvement in end-market demand in the Android ecosystem.
For calendar 2024, we expect total smartphone units to grow in low single digits, with 5G units growing over 10%. To compete and win, we collaborate with customers on their three-year product roadmaps and we supply them industry-leading solutions. We enjoy our position as the preferred strategic RF supplier for all the customers we serve in the Android space, and we are very well positioned to benefit as their portfolios continue to transition to 5G. In summary, demand for Qorvo's products has improved, primarily due to our proactive efforts to align channel inventories with end-market demand and content gains on key customer programs. We are delivering customers industry-leading products and technologies, and design activity remains robust.
This positions Qorvo favorably for continued strong content and durable long-term growth. And with that, let me hand the call over to Grant.
Grant Brown: Thanks, Bob, and good afternoon, everyone. Revenue for the quarter was $1.074 billion. Non-GAAP gross margin was 43.8% and non-GAAP diluted EPS was $2.10, all exceeding the midpoint of our guidance range. Revenue increased approximately 44% year-over-year and continue to benefit from significant content gains at our largest customer. As communicated last quarter, ACG achieved year-over-year growth in September, CSG achieved year-over-year growth during the September quarter, and we expect HPA to achieve strong year-over-year growth in the March quarter. Regarding gross margin, a larger portion of December revenue was manufactured internally during periods of lower utilization, which led to higher unit costs compared to the September quarter.
Factory utilization is improving and the impact from underutilization in factory-related variances continues to moderate. Non-GAAP operating expenses in the quarter were $234 million. We continue to invest in new product development as it is a critical catalyst for driving multi-year growth across all three business segments. Alongside these growth-oriented investments, we continue to launch productivity initiatives across the enterprise. These initiatives also spanning multiple years, are designed to support future growth, augment productivity, and enhance profitability. In total, non-GAAP operating income in the quarter was $237 million or 22% of sales. Non-GAAP net income was $206 million, representing diluted earnings per share of $2.10.
Turning to the cash flow statement. We're pleased to report that during the December quarter, we generated a free cash flow of $467 million, setting a new quarterly record for Qorvo. Our capital expenditures for the period were $26 million and we repurchased approximately $100 million of stock at $94 per share. The rate and pace of our share repurchases consider several factors, including our long-term financial outlook, free cash flow, debt maturities, alternative uses of cash, and other relevant strategic considerations. This approach ensures that our capital allocation strategy balances future growth with the return of capital, and aligns with our underlying goal of delivering long-term shareholder value. On the balance sheet, as of quarter end, we had approximately $1.6 billion of long-term debt outstanding and over $1 billion of cash and equivalents.
Regarding balance sheet presentation, the 2024 notes have been reclassified as current and will mature in December. Subject to changes in the interest rate environment and other factors, we currently expect to retire these notes later this year. In line with the expectations shared during our previous earnings call, we successfully reduced our net inventory balance over the period. We ended the quarter with a net inventory balance of $727 million, a sequential decrease of $113 million. In terms of days of inventory, this represents a decrease from 138 days in the September quarter, to 118 days in the December quarter. This reduction reflects our commitment to efficient inventory management, and we expect continued improvement in the March quarter.
Turning to the current quarter outlook, we expect revenue of approximately $925 million plus or minus $25 million, non-GAAP gross margin of approximately 42%, and non-GAAP diluted EPS of $1.20 at the midpoint of the revenue range. Relative to December, we expect March revenue to reflect a larger percentage of higher cost inventories previously manufactured internally during periods of lower utilization. As these higher cost previously manufactured inventories sell through, it paves the way for future gross margins that reflect increasing levels of utilization. We currently expect to have sold through most of these higher cost inventories and associated costs by the second half of this calendar year. We project non-GAAP operating expenses in the March quarter will be approximately $245 million, with variability related to labor-related expenses and the timing of program development spend.
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 2024 is expected to be within a range of 11% to 13%. In December, we announced a new partnership with Luxshare related to the divestiture of our Beijing and Dezhou assembly and test facilities. Upon the closing of this transaction, Luxshare will acquire each facility's operations and assets, which includes the property, plant, and equipment, as well as the existing workforce, to enable the seamless continuity of operations. Qorvo will continue to maintain our sales, product and test engineering, and customer support employees in China.
We believe that adding Luxshare as a strategic partner will strengthen our position to serve our customers globally. As it relates to our manufacturing strategy, this is a further step in our ongoing efforts to reduce capital intensity. This move aligns with previous actions, including the closure of our Florida manufacturing operations and the recent sale of our Farmers Branch facility in Texas. We are efficiently managing a complex supply chain, including our internal factories, which support all three operating segments and will remain an ongoing focus. We will leverage internal manufacturing where it uniquely differentiates our products and outsource production where we maintain a strong network of foundry and OSAT partners. Qorvo is well positioned to capitalize on multiple growth drivers within each of our three operating segments.
We are confident that our investments in our technology portfolio, product development, and advanced manufacturing will broaden our addressable market, diversify revenue, expand margin, and accelerate growth. At this time, please open the line for questions. Thank you.
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