7 November 2016

Qorvo's quarterly revenue grows a more than expected 23.8%, as China migrates from three-mode to full-mode smartphones

For fiscal second-quarter 2017 (to 1 October 2016), Qorvo Inc of Greensboro, NC and Hillsboro, OR, USA (which provides core technologies and RF solutions for mobile, infrastructure and defense applications) has reported revenue of $863.7m, up 23.8% on $697.6m last quarter and 22.1% on $707.4m a year ago (and above the $820-850m guidance given on 2 August), reflecting broad-based demand.

Mobile Products (MP) revenue was a record $706.1m, up 29% on $547m last quarter and 22% on $578m a year ago, driven by continued RF content growth, the ramp of a key customer product, and strong Asia customer demand, supported by growth in premium-tier and mid-tier 4G LTE mobile devices. "In the performance-tier smartphones, we enjoyed strong demand for our RF Flex solutions," notes president & CEO Bob Bruggeworth. MP also saw strong demand for bulk acoustic wave (BAW)-based multiplexer solutions. "In Wi-Fi for handsets, Qorvo's RF Fusion for mobile Wi-Fi delivered customers a unique, highly integrated solution combining our high-performance BAW filters with our Wi-Fi front-end modules," says Bruggeworth.

Infrastructure and Defense Products (IDP) revenue was $157.6m, up 5% on $151m last quarter and up 22% on $129m a year ago, supported by growth across all major market segments, highlighted by wireless infrastructure, WiFi, defense & aerospace, and Internet of Things (IoT) as the focus on higher-growth segments continue to bear fruit. In connectivity, IDP saw growth in both Wi-Fi and low-power wireless. "With the acquisition of GreenPeak [of Utrecht, The Netherlands, in April], Qorvo is a recognized leader at ultra-low-power short-range RF communications," states Bruggeworth. "We are expanding our low-power product portfolio to include highly integrated RF systems-on-a-chip for the connected home and the Internet of Things, and our target markets are growing faster than 40%," he adds.

"We've seen a continued recovery in the base-station market, and we enjoy broad-based market share across all OEMs," notes Bruggeworth. "This helps buffer IDP from the ups and downs experienced by any one customer."

IDP enjoyed broad-based design-win activity, highlighted by GaN-on-SiC products for military S-band radar applications and 5GHz WiFi PAs for retail and enterprise. "In Wi-Fi, our growth was supported by continued wins in both the retail and set-top-box market segments," says Bruggeworth. "In transport, growth was driven by strength in our cable TV products to support the rollout of DOCSIS 3.1, our traditional long-haul optical driver business, and ramping data-center interconnect products," he adds. "Qorvo's transport business is at the forefront of the buildout of infrastructure to keep pace with the ever-increasing demand for data, and we continue to see an expanding set of opportunities."

"In Defense, our growth was driven by international and domestic GaN-on-SiC sales and a major ASIC program ramping," says Bruggeworth. "Design wins for our GaN-on-SiC devices have been exceptionally strong in market segments that are growing at over 25% per year."

On a non-GAAP basis, gross margin has fallen further, from 49.7% a year ago and 48.2% last quarter to 42.8% (well below the expected 47%). In addition to higher volumes of one particular lower-margin product, this is due primarily to lower-than-expected manufacturing yield in die singulation and wafer-level packaging regarding TC-SAW filters at a single fab during a steep product ramp of the firm's highest-volume part (a low-band PAD [power amplifier duplexer] module) for a large customer. "To protect our long-term customer relationships, we did everything we could to assure supply of high-quality material to the customer while working through the internal yield issues [resulting in a great many modules that needed to be scrapped at the finished good level], and this significantly impacted our gross margin," says president & CEO Bob Bruggeworth. "We have work to do on gross margin, and we've taken steps to address it," he adds. "We now have new die-level screens which are targeting the issue and working effectively."

Operating expenses have risen further, from $156.8m a year ago and $168.6m last quarter to $172.9m. "We had higher expenses to support ongoing development programs, higher sales commissions, and the full-quarter effects of our GreenPeak acquisition," says chief financial officer Mark Murphy. Despite this, operating expenses as a proportion of sales still achieved the target 20%.

Operating income was $196.8m (operating margin of 22.8% of sales), up from $167.6m last quarter and $194.8m a year ago. Although up from $143.1m (diluted earnings per share of $1.08) last quarter, net income was $170.4m (diluted EPS of $1.29, below the expected $1.35-1.45), down from $183.3m (diluted EPS of $1.22) a year ago.

Driven by operating income growth and efficient working capital management (particularly inventories), net cash flow provided by operating activities has risen from $59m last quarter to $250m. Property and equipment expenditures were $120m (largely addressing growing demand for premium filters through SAW investments in North Carolina and BAW investments in Texas). Free cash flow was therefore $130m. During the quarter, Qorvo repurchased $91m worth of common stock. Overall, cash and short-term investments rebounded from $447m to $469m. Qorvo's board of directors has now authorized a new $500m share repurchase program.

During the quarter, the Mobile Products business secured multiple placements of RF Fusion high-band, mid-band and low-band 4G LTE solutions in upcoming flagship smartphones at leading China-based smartphone OEMs. In China, Mobile Products is benefiting as smartphone makers migrate from three-mode to full-mode devices. "By the end of this year, we expect more than half of all 4G smartphones manufactured for the China market will be full-mode," says Bruggeworth. "Our largest customers in China are looking for ways to introduce fewer models with higher levels of RF content to provide broader coverage of additional geographies as they move towards more of an export market. Huawei is adding more RF content to their smartphones as they build their global brand." Huawei was one of two 10% customers for Qorvo in fiscal Q2 and its largest customer in China.

"Integration [following the merger of RF Micro Devices and TriQuint Semiconductor in January 2015] has gone well in many ways, validated our vision for the combined company and yielded a common culture and synergies," says Murphy. "But there is more that can be done on both the integration and general productivity. For example, this past quarter was the first full quarter in which most of the company was on a common ERP [enterprise resource planning] system," he adds. "We expect that improved visibility, increased financial discipline and rigor, and a broad-based commitment to operational excellence will help drive additional synergies."

"During the quarter, we brought up and released our TC-SAW process in Greensboro, ahead of schedule, giving us the ability to support additional customer demand this quarter," says Bruggeworth. "We are increasing the mix of 6-inch TC-SAW in Florida while moving all GaAs capacity to Oregon, transitioning all GaN products to Richardson [Texas]. We are also ramping our new assembly & test facility into Dezhou, China," he adds. "In Richardson, the organization has done an outstanding job, releasing our most advanced next-generation BAW process, which delivers a significant improvement over our prior generation in key performance metrics. We've also brought up and are now designing products on our new 8-inch BAW line in Richardson. We are enjoying broad-based demand for BAW filter solutions and we expect the ramp of new customer programs to improve our utilization rates in calendar 2017. Notably, we continue to enjoy strong demand for our BAW-based multiplexer solutions and we have delivered module prototypes containing our BAW-based hexaplexers."

IDP has enjoyed a series of very strong quarters and is closing in on its margin model of 60% gross margin and 30% operating margin. "We're very pleased with the performance of IDP, in particular the revenue growth, the initiatives to target faster-growing market segments, and the rate and pace of new product introductions," says Bruggeworth. In September, IDP released 49 new products including power amplifiers for small-cell, dual and quad linear drivers for optical applications, LNAs, and filters for automotive and integrated front-end modules for Wi-Fi. "The continued aggressive pace of product releases is creating a broad-based pipeline of differentiated solutions with long production tails across our portfolio of markets," he adds.

For fiscal third-quarter 2017 (to end-December 2016), Qorvo expects revenue of $800-840m, up by more than 30% year-on-year but down significantly quarter-over-quarter at Asian customers (although IDP will still be flat to up slightly). "Yields have stabilized in the fab, which will help support even stronger customer demand for that module," notes Murphy. "We do expect margins to improve on more stable production, however higher mix of the low-band PAD will partially offset the improvement." Gross margin should rise by 100-200 basis points (to 43.8-44.8%), due to better yield and fewer associated inventory write-offs (offset by higher volume associated with the lower-margin product). OpEx should remain near 20% of sales and trend down in dollars through the rest of the fiscal year on lower commissions and an increase in productivity initiatives. Diluted EPS should be $1.15-1.35.

"We currently expect gross margins to improve from the second quarter and through the second half of the fiscal year 2017, as our mix of low-band PAD peaks in the third quarter and our operations stabilize," says Murphy. "We expect to exit fiscal year 2017 above 46% gross margin, and we believe that additional yield improvements, factory loading, sourcing and other productivity initiatives will help drive margin expansion in fiscal year 2018. Factory yield improvements from process maturity and larger-wafer production in SAW and BAW are expected to add approximately 100 basis points to gross margin in fiscal year 2018. Higher volumes are projected to add over 150 basis points of margin based on higher utilization of our BAW, SAW and GaAs lines as well as ramping our new Dezhou assembly & test facility," he adds. "Next year, considering projected volumes and the impacts of consolidation efforts and measured capacity additions, we expect our global operations to be running near capacity," Murphy continues. "Finally, we project ongoing supply chain consolidation and procurement initiatives, along with additional efforts to wring out merger savings, should drive another 150 basis points of gross margin expansion. Together, by the end of fiscal year 2018, we expect these efforts and a more favorable mix of higher-margin products should result in greater than 50% gross margins.

"CapEx will remain elevated through the rest of the fiscal year, as we invest in premium filter capacity to support forecasted customer demand," notes Murphy. "In fiscal year 2018, our OpEx is expected to grow at no more than half the rate of sales, which will drive OpEx to under 20% of sales," he adds.

"Within six quarters we expect to be at our targeted operating performance. We currently expect double-digit [above-market] sales growth to continue through fiscal 2018 and forecast over 30% operating margins by the fourth quarter of fiscal year 2018," says Bruggeworth.

The Mobile Products segment is projected to benefit from continued content growth and demand for more complex modules using premium filters. "We made progress advancing core technologies and developing highly integrated Qorvo solutions for large customer opportunities in 2017 and 2018," says Bruggeworth. The Infrastructure and Defense Products segment has been repositioned to serve higher-growth markets including Wi-Fi, automotive, IoT, and wireless infrastructure. "Our view on the overall base-station market is cautiously optimistic. We are continuing our focus on the markets' higher-growth segments, with an emphasis on the transition of base-station power amplifiers to GaN technology and the implementation of massive MIMO," says Bruggeworth. "Looking forward through fiscal-year 2018, we expect IDP's growth to be in line with Mobile Products," he concludes.

"We plan to exit fiscal year 2018 at over 50% gross margins, OpEx below 20% of sales, and operating margins over 30%," emphasizes Murphy. "Achieving this performance will generate substantial free cash flow, which we plan to use for acquisitions and returning capital to our shareholders."

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