Qorvo, Inc. (NASDAQ:QRVO) Q3 2023 Earnings Call Transcript
Qorvo, Inc. (NASDAQ:QRVO) Q3 2023 Earnings Call Transcript February 1, 2023
Operator: Greetings, and welcome to the Qorvo, Inc. Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Douglas DeLieto, Vice President of Investor Relations. Thank you. You may begin.
Douglas DeLieto: Thanks very much. Hello, everyone, and welcome to Qorvo's Fiscal 2023 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 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 any -- 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; and Grant Brown, Chief Financial Officer; 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 our call. Qorvo delivered fiscal third quarter revenue and EPS above the midpoint of our outlook provided during our November 2nd earnings call. In High-Performance Analog, quarterly revenue reflected year-over-year growth in defense, broadband and power. Our power business posted a strong quarter with robust design activity for our silicon carbide power devices. Offsetting this were power management markets with consumer exposure in infrastructure where customers are working down elevated inventory levels. In our Connectivity & Sensors Group, the quarter reflected lower end market demand and channel inventory consumption for Wi-Fi products partially offset by strength in automotive.
Design activity was strong across customers and products, including ultra-wideband, matter and sensors. Use cases continue to proliferate their benefit from precision location, indoor navigation, seamless connectivity and enhanced human machine interfaces. Lastly, in Advanced Cellular, Qorvo participated broadly across customers' portfolios. The macro environment weighed on overall smartphone volumes across customers, and revenue reflected channel inventory consumption within the Android ecosystem. Design activity continued to be strong across customers and product categories and supports year-over-year content gains at our largest customers. Now, let's turn to some quarterly highlights. In High-Performance Analog, Qorvo began sampling a radar power solution that combines a high-voltage power conversion PMIC and silicon carbide power switches to control a GaN RF power amplifier.
The solution reduces the size by up to 30% in D&A radar systems while expanding Qorvo's content opportunity. We also expanded our SHIP state-of-the-art RF packaging contract with the U.S. government to develop multichip modules that combine digital optical devices with Qorvo's mixed-signal RF. In aerospace, we delivered a multichip solution that includes Qorvo's high-frequency BAW filter as well as a GaN PA for low orbit satellites and other applications. The solution supports cellular satellite links, and we have secured new designs. The opportunity for Qorvo is notable given the trend in defense and aerospace applications of one to many. That means rather than one jet, there will also be many drones; rather than one geo-satellite, there will also be many LEO satellites.
At the same time, new capabilities are being added to existing platforms that require increased semiconductor content and higher density and more advanced packaging, all areas where Qorvo is strong and is investing to advance the technology. In cellular infrastructure, we commenced preproduction shipments of our first integrated PA modules, or PAMs, to a Tier 1 European infrastructure OEM for 5G massive-MIMO base stations. We also began sampling our next-generation PAM, which delivers market-leading efficiency for 5G massive-MIMO installations to the leading European infrastructure OEMs. For broadband infrastructure applications, we sampled a CATV power doubler amplifier that maintains linearity and extends bandwidth to enable higher throughput DOCSIS 4.0 capabilities with industry-leading power efficiency.
Deployments of DOCSIS 4.0 are scheduled to begin this year and Qorvo is very well positioned as the industry leader. In CSG, we expanded our Wi-Fi content at a Korean-based smartphone OEM to include Wi-Fi 6E and Wi-Fi 7 designs and we ramped Wi-Fi 7 FEMs for access points and routers for our smart home ecosystem customer. We also commenced sampling 5 gigahertz and 6 gigahertz filters. These filters leverage Qorvo's next-generation BAW process and enable worldwide Wi-Fi 7 frequency coverage. There is increase in customer interest related to multi-link operation, which is a key attribute of Wi-Fi 7 and enables higher throughput and lower latency. Lastly, we began volume shipments of MEMS-based sensors, enabling an enhanced HMI experience and true wireless stereo earbuds.
Qorvo sensors were selected to replace legacy capacitive touch sensor technology. Design activity for sensors continues to be strong across markets, including automotive. We are working with leading automotive Tier 1s and have secured automotive smart interior design wins in more than 25 vehicles. In Advanced Cellular, we secured multiple design wins across Android OEMs in support of 2023 devices. During the quarter, we commenced the production ramp of multiple components for the leading Korea-based smartphone OEM's flagship platform. We have increased our content significantly year-over-year. We are broadly serving this customer across our portfolio and continue to support the migration of their mass market phones to integrated 5G solutions.
At a U.S.-based Android OEM, we were selected to supply multiple solutions, including ultra-wideband, antenna tuning and BAW-based antennaplexing in support of their 2023 smartphone launches. Lastly, Qorvo was recognized by multiple customers. We were presented with Honor's 2022 Golden Supplier Award, and we received quality awards from Vivo for discrete switches and amplifiers and highly integrated solutions. Before handing the call off to Grant, I want to make a few high-level comments to frame our outlook, both in the near term and further out. At our largest two customers, we are very confident in our ability to grow year-over-year content, and that includes this year. In 2023, we expect growth in BAW-based content as well as other content growth.
Equally important, we enjoy a range of opportunities across all of our customers in the future years. Qorvo is supporting the highest volume flagship phones while supplying integrated 5G solutions as mass market portfolios migrate to 5G. Fewer than half of the Android devices were 5G in 2022 and the migration of 5G is expected to extend over many years. We are unique in Advanced Cellular in the breadth of our customer exposure and in the depth of our product and technology offerings. Our long-term view of ACG continues to be mid- to high-single-digit growth driven by multiyear content gains. In particular, we see expanding market for our BAW technology. Productivity gains in our Richardson, Texas fab have enabled a doubling of our BAW output.
We intend to put that to good use as we continue to capture designs and grow our BAW content in flagship phones. We expect the long-term growth rate of HPA and Connectivity and Sensors to outpace Advanced Cellular. Our view for HPA is double-digit growth. And in CSG, we expect growth in the strong double digits. Key growth areas supported by recent wins with silicon carbide devices in EVs and solar inverters, MEMS sensors and notebook track pads and automotive smart interiors and ultra wideband in automotive and Android devices. These and other investment businesses are securing new designs that extend our opportunity in large growth markets. In the near term, the team is performing exceptionally well while navigating extraordinary events. Factory loadings have been reduced, and we are bringing down channel inventories.
We are also actively managing the expense line while sharpening our focus in support of targeted growth. We are working to accelerate revenue related to our Omnia BAW-based biosensors by exploring options for the associated Omnia test hardware, meaning the Omnia desktop test unit and cartridges that contain our BAW biosensors. The technology has been proven commercially, and we are engaged with a diverse set of customers. Qorvo remains at the forefront of connectivity, sustainability and electrification. We enjoy exceptional customer relationships, and we are a key enabler of future architectures. These architectures continue to favor higher levels of performance, integration and functional density to deliver the successive improvements in each market's next-generation products.
Our customers value Qorvo's best-in-class products and technologies, and we are securing broad-based design wins in high-growth markets. As volumes recover, we are positioned to deliver long-term growth and robust free cash flow. And with that, I'll hand the call off to Grant.
Grant Brown: Thanks, Bob, and good afternoon, everyone. As a reminder, our references today will be to our three operating segments: High-Performance Analog, or HPA; Connectivity & Sensors Group, or CSG; and Advanced Cellular Group, or ACG. In our upcoming 10-Q, we will provide historical financial information that reflects these operating segments. Additional historical information will be made available in our fiscal 2023 10-K to be filed this May. I'll now turn to our latest quarterly results. Revenue for the third quarter of fiscal 2023 was $743 million, $18 million above the midpoint of our guidance. We enjoyed relatively strong performance in automotive, broadband, defense and silicon carbide power devices. However, elevated channel inventories and weak end market demand pressured revenue and order activity across all three operating segments.
Looking at each operating segment individually. HPA revenue of $155 million in the quarter compares to revenue of $182 million in the same quarter last year. In HPA, growth in areas such as defense and silicon carbide power devices was offset by inventory consumption in the 5G base station market and softness in consumer-facing markets like SSDs and battery-powered tools. CSG revenue of $97 million in the quarter compares to revenue of $158 million in the same quarter last year. This reflects weakness in end market demand for Wi-Fi products and channel inventory consumption. Finally, ACG revenue of $491 million compares to revenue of $775 million in the same quarter last year. This reflects lower smartphone unit volumes and channel inventory digestion within the Android ecosystem.
On a non-GAAP basis, gross margin in the quarter was 40.9%. Gross margin fell sequentially due to lower factory utilization and higher inventory-related charges including a quality issue at a supplier. Non-GAAP operating expenses in the quarter were $206 million, $90 million lower than our guidance and down $8 million versus last year due to OpEx discipline, the timing of product development spend and lower employee-related expenses including incentive-based compensation. In total, non-GAAP operating income in the quarter was $99 million or 13% of sales. Breaking out operating margin by each segment. ACG was 20%, HPA was 19% and CSG was negative 32%. Non-GAAP net income was $77 million, representing diluted earnings per share of $0.75, which was at the high end of our guidance range.
Free cash flow was $203 million. Capital expenditures were $34 million, and we repurchased approximately $200 million worth of shares during the quarter. The rate and pace of our repurchases is based on our long-term outlook, low leverage, alternative uses of cash and other factors. Turning to the balance sheet. As of quarter end, we had approximately $2 billion of debt outstanding with no near-term maturities and $919 million of cash and equivalents. Our net inventory balance ending the quarter was up slightly at $857 million. Now turning to our current quarter outlook. We expect quarterly revenue between $600 million and $640 million, non-GAAP gross margin of approximately 41% and non-GAAP diluted earnings per share in the range of $0.10 to $0.15.
Our current view reflects ongoing demand weakness across end markets as well as our expectations for further consumption of channel inventory. We continue to expect sales to Android smartphone customers will increase sequentially in the March quarter. For historical reference, the March quarter revenue in fiscal 22 for each of ACG, HPA and CSG was $777 million, $211 million and $179 million, respectively. At the volume levels assumed in our guidance, we expect Qorvo's inventory position will decline in March, but remain elevated. In terms of channel inventory, the picture has begun to improve. For example, total channel inventory for our components in the Android ecosystem was reduced by over 20% in the December quarter. We expect continued improvement this quarter and anticipate the channel to normalize later this calendar year.
We are actively working with customers to consume channel inventories. And in doing so, we expect production levels to remain compressed. This will lead to continuing underutilization charges related to inventories which will weigh on gross margin during fiscal Q4 and carry into next fiscal year. We project non-GAAP operating expenses in the March quarter will be up approximately $20 million sequentially due to the timing of product development spend, seasonal payroll effects and other employee-related expenses. Below the operating income line, non-operating expense will be approximately $15 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 Q4 is expected to be consistent with fiscal Q3. The rate remains elevated due to the absolute level and geographic mix of pretax profit including FX-related gains within high tax jurisdictions as well as the impact of the U.S. tax law change related to R&D capitalization among other factors. With regards to operations, I want to highlight the outstanding progress our teams have made in terms of productivity gains. We continue to make improvements in product development, filter design, process engineering, factory planning, manufacturing efficiency and many other areas. Today, these gains have significantly increased our effective BAW capacity. And as Bob indicated, the progress continues. And looking forward, we can double our BAW capacity in the Richardson facility versus our current maximum theoretical thresholds today.
Increasing a throughput of an existing asset not only reduces cost, but can reduce complexity within the factory network as production is consolidated. The BAW productivity gains in our Richardson facility allow us to achieve our long-term growth goals across all of our customers, including the most demanding BAW-based placements. As a result, we have decided to sell our Farmers Branch facility. We're in the early stages of marketing the site and initial interest has been encouraging. For reference, the site has been incurring approximately $12 million of non-GAAP COGS per year. We are also evaluating strategic alternatives for our biotechnology business to accelerate and maximize its potential value. The Omnia platform, which is based on our BAW sensor technology, has demonstrated significant promise as a diagnostic testing solution.
The biotechnology unit currently resides in our CSG segment. While the revenue impact from a transaction would be negligible, it would reduce total expenses by approximately $32 million per year. At this stage, it's too early to comment on the eventual outcome, timing or potential valuation. These actions will sharpen our focus and resources on the many growth drivers across our three operating segments. Our long-term outlook is positive, and we're well-positioned to weather current macroeconomic challenges. Product performance requirements continue to increase in our end markets, sustainability initiatives underscore the increasing global reliance on power efficiency, and connectivity and electrification trends are accelerating worldwide. We have diversified our opportunities across markets, customers and product categories while maintaining our commitment to technology leadership, portfolio management, productivity gains and reduced capital intensity.
This has supported strong financial performance during a challenging environment and has positioned us for long-term increasingly diversified growth. At this time, please open the line for questions. Thank you.
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