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Qorvo (QRVO) Beats Q3 Earnings; Shares Fall on Drab View

Zacks Equity Research

Qorvo Inc. QRVO reported third-quarter fiscal 2017 non-GAAP earnings of $1.22 per share (including stock-based compensation), which beat the Zacks Consensus Estimate by 16 cents.

Earnings (excluding stock-based compensation) were $1.35 per share, which surged 31.1% from the year-ago quarter and was in line with the top end of the company’s guided range of $1.15–$1.35 per share.

However, shares plunged more than 10% in after-hour trading attributable to disappointing fourth-quarter guidance. Qorvo’s revenues and earnings are forecasted to decline sequentially due to delayed flagship smartphone launches from two leading customers in China and a Tier 1 customer in Korea.
 

Qorvo, Inc. Price, Consensus and EPS Surprise

 

Qorvo, Inc. Price, Consensus and EPS Surprise | Qorvo, Inc. Quote

We note that Qorvo has outperformed the Zacks Semiconductor Radio Frequency industry in the last one-year. While the stock has gained 60.8%, the industry returned 45.1% in the same time.



Revenue Details

Adjusted revenues improved 33.2% year over year to $825.4 million, which was slightly ahead of the Zacks Consensus Estimate of $823 million. Further, the figure was within management’s guided range of $800–$840 million.

The year-over-year growth was driven by strong demand for the company’s integrated solutions and highly differentiated discrete components. Qorvo launched more than 100 new products in the quarter.

During the quarter, Qorvo started production of its next-generation BAW 5 filter technology, which provides a 40% increase in Q factor for improved insertion loss and a 20% increase in coupling factor to provide wider bandwidths. Further, the company began open market sampling and has received production orders for the product.

Management now expects sales of BAW-based products to increase from less than a third of Mobile revenue in fiscal 2018 to almost 40% in fiscal 2019.

During the quarter, Qorvo announced a partnership with ubisys to deliver the first IoTivity platform on a multi-chip radio. Through this partnership, the company will help simplify wireless communications across various devices by integrating a ZigBee 3.0 and Green Power-based smart home network within the IoTivity framework.

Segment-wise, Mobile Products (MP) revenues increased 34% year over year to $656.8 million, driven by content growth, a low-band PAD ramp and strong Asia customer demand.

Qorvo’s RF Fusion high-band, mid-band and low-band solutions were selected by a number of China-based smartphone OEMs for their upcoming flagship smartphones.

Huawei was one of two 10% customers for Qorvo in the quarter. The Chinese OEM is Qorvo’s largest customer in China.

Revenues from IDP grew 29% year over year to $168.6 million on the back of growth in wireless infrastructure, WiFi, defense, IoT and other markets.

Operating Details

Non-GAAP gross margin contracted 280 basis points (bps) from the year-ago quarter to 43.6%. However, management noted that gross margin hit its target of 150 bps sequential expansion in the reported quarter backed by improved manufacturing yields.

Qorvo also stated that operating expenses as percentage of revenues were 19%, which was better than its long-term model.

Non-GAAP research & development (R&D) and selling, general & administrative (SG&A) expense as percentage of revenues declined 360 and 170 bps, respectively.

As a result, operating margin expanded a massive 520 bps to 23.3%. The figure includes stock-based compensation expense.

Balance Sheet & Cash Flow

As of Dec 31, 2016, cash and cash equivalents were $495.8 million down from $469.2 million as of Oct 1. Long-term debt was $988.9 million as compared with $988.6 million at the end of the previous quarter.

Net cash provided by operating activities was $220 million (down from $250 million in the previous quarter) with free cash flow of $83.9 million (down from $130 million in the previous quarter) at the end of the quarter.

Further, Qorvo returned $67 million to shareholders under its ongoing $500 million repurchase program.

Guidance

Qorvo expects non-GAAP revenues in fourth-quarter fiscal 2017 to be approximately $610–$650 million. The company anticipates gross margin of approximately 46%, which is an improvement driven by positive seasonal mix effects as well as ongoing productivity and quality efforts.

Management expects operating expenses to increase less than 5% sequentially on development program timing and seasonal payroll effects. Earnings are expected to be in the range of 70–90 cents per share.

Qorvo expects capital expenditure for fiscal 2017 to be around $500 million, down from earlier estimates.

Management forecasts normal seasonal sequential growth in first-quarter fiscal 2018. Qorvo expects technology and product pipeline to continually drive double-digit revenue growth in fiscal year 2018. Moreover, the company expects cost reduction activities to provide better performance in fiscal year 2018.

Qorvo expects double-digit revenue growth, increased BAW-based product mix, higher utilization rates, and ongoing productivity and quality improvements, will help the company to achieve 50% gross margin exiting fiscal 2018.

Management anticipates operating expenses to be below 20% of revenues for the year, driven by improving operating efficiency. Management hopes to reach operating margin of 30% during fiscal 2018.

Capital expenditure is expected to be around $400 million, lower than earlier estimates. Based on the aforesaid improvements management expects free cash flow to double from fiscal 2017 to 2018.

Zacks Rank & Key Picks

Currently, Qorvo carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the semiconductor space include Skyworks Solutions SWKS, Applied Optoelectronics AAOI and Broadcom AVGO. While Skyworks has a Zacks Rank #2 (Buy), Applied Optoelectronics and Broadcom sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Skyworks, Applied Optoelectronics and Broadcom are currently pegged at 17%, 18% and 13.6%, respectively.

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