8 February 2016

Qorvo's quarterly revenue falls 12% after demand pause from largest Mobile Products customer

For its fiscal third-quarter 2016 (to 2 January), Qorvo Inc (which provides core technologies and RF solutions for mobile, infrastructure and defense applications) has reported revenue of $620.7m (well below the original guidance of $720-730m), down 12% on $708.3m last quarter and 16% on $742m a year ago for the combined December 2014 quarter revenues of RF Micro Devices Inc of Greensboro, NC and TriQuint Semiconductor Inc of Hillsboro, OR, USA (following the merger of the two firms on 1 January 2015). Nevertheless, in Qorvo's first full year, compared to calendar 2014, revenue grew 12%.

Qorvo had two 10%-or-more customers: the larger at about 42% of revenue (representing the collective demand of multiple subcontractors for this end-customer); and China-based telecoms equipment maker Huawei Technologies Co Ltd (a customer for both Mobile Products and Infrastructure & Defense Products) at 10%.

Mobile Products revenue fell 15% from $578m last quarter to $489m, due to a late reduction in demand from Qorvo's largest customer. "Customers are building less phones than what we expected just a month ago even," notes president & CEO Bob Bruggeworth.

Infrastructure & Defense Products (IDP) revenue grew slightly from $129m last quarter to $130m, with 18% growth in Wireless Infrastructure (indicating an initial recovery in the China base-station market). This is driving further recovery from the low of $122m in the June 2015 quarter (which followed a sharp drop for wireless infrastructure due to a pause in LTE base-station deployments).

On a non-GAAP basis, gross margin has fallen from 49.7% last quarter to 47.9% (well below the expected 50%). This is due mostly to lower yields but also to about $4m worth of inventory adjustments (since December tends to be a higher quarter for writing off excess and obsolete inventory, as Mobile customers separate their winners from the losers, notes Buhaly), leading to a one-off hit of 200 basis point to margins. However, for Qorvo's first full year, compared to calendar 2014, gross margin rose more than 400 basis points.

Operating expenses (OpEx) fell $17m from $156.8m last quarter to $139.8m, reflecting a significant reduction in variable compensation expense (accruals for bonus expense) and seasonally lower spending.

Net income has fallen from $183.3m ($1.22 per diluted share) last quarter to $148m ($1.03 per diluted share, well below the initial guidance of $1.25-1.30).  

Nevertheless, cash flow from operations has risen again, from $168.8m last quarter to $218m. Capital expenditure (CapEx) was $61.5m (down from $80.3m), primarily to address growth in demand for premium filters. Free cash flow was hence $156.5m.

Total cash and investments at the end of the December quarter exceeded $1bn. During the quarter, Qorvo repurchased 4.6 million shares of common stock at a total cost of $250m. The firm has $750m remaining in its one-year $1bn share repurchase program (which was approved in November 2015 and expires on 4 November 2016). "Our balance sheet and strong cash flow provide the opportunity to create value for our shareholders through share repurchases while continuing to invest in internal and external opportunities to drive long-term diversified growth," says chief financial officer Steve Buhaly.

"The Qorvo team executed extremely well in our first full year versus calendar 2014, growing annual revenue 12%, expanding gross margin more than 400 basis points and achieving more than 40% growth in operating income," says Bruggeworth.

"Qorvo is leveraging our comprehensive portfolio of tightly integrated, world-class RF solutions, rapidly introducing new products and technologies, expanding into the new serviceable markets, and enjoying very favorable design-win activity," says Bruggeworth. "We are growing our dollar content at our three largest mobile customers in the most highly anticipated marquee smartphones being released this year [starting to ramp later this quarter], and we anticipate strong growth in IDP," he adds. 

In December, Qorvo released the industry's first 6-inch temperature-compensated surface acoustic wave (TC-SAW) filter wafers in its Florida fab, qualified 6-inch SAW wafers in its fab in Greensboro, and demonstrated its first 8-inch bulk acoustic wave (BAW) wafers in its Texas fab. Qorvo has begun shipping its recently launched BAW-based quadplexers for FDD bands 1 and 3 (an industry first, it is claimed) enabling carrier aggregation in 4G LTE devices, and demonstrated BAW-based hexaplexer prototypes.

Qorvo has also been selected to support a number of key cellular platforms with its next-generation envelope-tracking (ET) power management integrated circuit (PMIC) and begun shipment to a large global smartphone OEM, and has landed a number of large-scale wins for later this year.

Qorvo has also recently expanded its shipments of antenna control solutions into the China smartphone market. Previously, the firm's antenna tuners and impedance tuners had been highly concentrated within a small number of high-volume marquee devices, but Qorvo has now increased its addressable market in China as these customers add RF functionality to support their expanding presence in the worldwide market.

In IDP, the December quarter was an exceptionally strong design-wins. Qorvo captured multiple key design wins for macro- and small-cell base-station applications. "Network capacity constraints will accelerate the adoption of small-cell base-stations and massive MIMO active antennas," believes Bruggeworth. "Massive MIMO active antenna systems are driving a 10x increase in RF content in next-generation base-stations," he adds. "We continue to work on capturing new design wins as the market shifts from 4G LTE to LTE-A, LTE-Pro and eventually 5G." At January's 2016 Consumer Electronics Show (CES) in Las Vegas, Qorvo supplied a suite of critical microwave components (including phase shifters, power amplifiers and switches) for a 5G 'massive MIMO' demonstration performed by a leading base station OEM.

Qorvo also expanded its presence in the connected home with key design wins in gateways and access points, highlighted by design wins in flagship products at both NETGEAR and LINKSYS. "The rapidly increasing number of connected devices represented by the Internet of Things will be IDP's largest growth engine," believes Bruggeworth.

In defense, continued strong growth in gallium nitride (GaN)-based products included securing a multi-year win on a next-generation electronic warfare system using Qorvo's patented Spatium solid-state RF power technology incorporating GaN MMICs (with hundreds of system installations anticipated over the life of the contract).

"March-quarter revenue expectations are slightly below our pre-announcement [stated in early January, for revenue to be flat sequentially], reflecting an overall conservative posture [in Mobile, not IDP], given the cautious environment, as well as the timing of new product ramps," says Buhaly. For fiscal fourth-quarter 2016 (ending 2 April), Qorvo expects revenue to fall to $600m. Gross margin should rise back to about 50%. OpEx is expected to be almost $150m.

Over the next few quarters, CapEx should be $60-70m per quarter, believes Buhaly. Most of that will be for filter capacity expansion; some of the wafer size increases where Qorvo is moving SAW and TC-SAW from 4-inch wafers to 6-inch; BAW from 6-inch wafers to 8-inch; and expanding SAW footprint into the factory in North Carolina. "We see our 6-inch SAW capacity contributing to growth and profitability in the current year, and we see our 8-inch BAW capacity doing the same in 2017," says Bruggeworth.

Infrastructure & Defense Products revenue is expected to recover further in the near-term, reinforcing top-line growth opportunities in calendar 2016. "Our IDP team continues to sharpen its focus on the highest-growth segments in its diversified business portfolio," says Bruggeworth. "This focus drives alignment with the growth markets of the Internet of Things, connected home, connected car and the high-growth segments within aerospace & defense," he adds. "By leveraging Qorvo's comprehensive product and technology portfolio, we are providing customers highly differentiated solutions, especially exciting in the growth rate of gallium nitride solutions into many of IDP's key market segments, driving a compound annual growth rate of about 25% for the next few years. We expect growth rates in 2016 to be well above IDP's underlying markets and significantly above the legacy growth rates of our pre-merger multi-market organizations," Bruggeworth states. 

"We think calendar 2016 will be a strong year for Qorvo, during which we will continue to make progress on our target operating model," says Buhaly.  "Our long-term goal is to move margins up to 55%, and we are hard at work at both developing and implementing parts of our manufacturing cost reduction roadmap, including some significant changes in filter wafer sizes and significant activities there," he adds.

"We are uniquely positioned to reduce cost and enhance our operating model," believes Bruggeworth. After exceeding its target of $75m in annual synergies in its first year (boosting gross margin in second-half calendar 2015), Qorvo is on track for the cumulative $150m by the end of calendar 2016, due mostly to consolidation of the former TriQuint mobile product portfolio into Qorvo's China-based assembly & test facilities (including increased in-sourcing of module assembly and SAW filters).

See related items:

Qorvo lowers quarterly revenue guidance from $720-730m to $620m due to weak demand for Mobile

Qorvo's quarterly revenue rises 5.2%, led by Mobile Products

Qorvo announces proposed $1bn senior notes offering

Qorvo's quarterly revenue grows 6% as mobile products growth outweighs 40% drop in wireless infrastructure

Qorvo's quarterly revenue up 46% year-on-year

Qorvo reports combined RFMD-TriQuint December-quarter revenue up 33% year-on-year to $742m

Merger of RFMD and TriQuint as Qorvo now completed

Tags: Qorvo RFMD TriQuint

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