6 February 2017

Qorvo's quarterly revenue up 33% year-on-year, driven by RF handset content growth

For fiscal third-quarter 2017 (to end-December 2016), Qorvo Inc of Greensboro, NC, USA (which provides core technologies and RF solutions for mobile, infrastructure and defense applications) has reported revenue of $825.4m, down 4.4% on $863.7m last quarter but up 33% on $619.7m a year ago, driven by strong demand for integrated solutions and highly differentiated discrete components.

There were two 10% customers, the largest comprising about 37% of revenue and Huawei at 11%.

Mobile Products (MP) revenue was $656.8m, down 7% on $706.1m last quarter but up 34% on $489m a year ago, driven by strong RF handset content growth, a low-band PAD ramp and strong Asia customer demand (with China comprising 41% of Mobile revenue, including Huawei's 11%).

Infrastructure and Defense Products (IDP) revenue was a record $168.6m (up 7% on $157.6m last quarter and 29% on $130m a year ago), driven by broad-based growth in WiFi, defense (radar), wireless infrastructure (base stations), the Internet of Things (IoT) and other markets.

"We supported the launch of marquee smartphones and leading China-based OEMs and delivered record revenue in IDP," says president & CEO Bob Bruggeworth. "We did this while qualifying leading technologies for top customer programs, introducing over 100 new products, and achieving key milestones on operational initiatives."

On a non-GAAP basis, gross margin was 44.3%, down from 47.9% a year ago (due to a shift in product mix to low-band PAD [power amplifier duplexer] products) but up on 42.8% last quarter (reflecting improved manufacturing yields for low-band PAD-related products).

Although still above the $139.8m a year ago, operating expenses (OpEx) have been cut from $172.9m last quarter to $157.1m (19% of revenue, better than both the 20% guidance and long-term target). This is due mainly to lower R&D expenses (cut from $115.7m to $105m) and personnel costs. Selling, general & administrative (SG&A) expenses also fell, from $57.2m to $52.1m.

Operating income has hence risen further, from $156.9m a year ago and $196.8m last quarter (operating margin of 22.8% of revenue) to $208.7m (higher-than-targeted operating margin of 25.3%).

Likewise, net income has risen further, from $148m ($1.03 per diluted share) a year ago and $170.4m ($1.29 per diluted share) last quarter to $177.3m (a record $1.35 per diluted share, at the top of the $1.15-1.35 guidance range).

Net cash flow provided by operating activities has fallen back from last quarter's $250m to $220.4m. Property and equipment expenditures has been increased from $120m to $136.5m to support projected premium filter demand, particularly bulk acoustic wave (BAW). Free cash flow was hence $83.9m (down from $130m). Qorvo returned $67m to shareholders under its $500m share repurchase program (announced in November). During the quarter, cash and short-term investments rose from $469m to $495.8m.

During the quarter, Mobile Products secured multiple design wins for complete RF front-end systems combining low-, mid- and high-band RF Fusion placements for smartphones and other connected mobile devices. Qorvo is forecasting strong growth for RF Fusion for cellular across all frequencies. "These solution sales command up to $10 of Qorvo content and we expect them to represent an increasing percentage of Mobile revenue, given customer design activity and the breadth of our product portfolio," says Bruggeworth.

Qorvo also secured a mid-band RF Fusion win in support of a flagship smartphone ramping this year. For the high band, the firm's solutions operate up to the ultra-high Band 42. "That is a clear competitive strength that is supported by our recently launched GaAs HBT5 process, which we believe delivers the industry's best performance," says Bruggeworth. As well as bringing up its new HBT5 GaAs process, the firm also migrated new GaAs-based designs from its fab in Greensboro, NC to its fab in Hillsboro, OR.

In IDP, during the quarter Qorvo released its next generation of integrated front-ends for WiFi. "Key to our success on the enterprise and retail side, we launched a broad family of new 802.11ac FEMs enabling smaller, more efficient routers, gateways and other network devices," notes Bruggeworth.

For the smart home and IoT, during the quarter IDP introduced what is reckoned to be the industry's first multi-protocol system-on-a-chip (SoC) to integrate IEEE 802.15.4, ZigBee 3.0, Thread and Bluetooth Low Energy communication protocols in a single chip for sensors and actuators throughout the home.

IDP also saw broad-based design-win activity, highlighted by a complete RF solution win with content above $5 at a leading WiFi router OEM, multiple gallium nitride (GaN) wins for radar, electronic warfare and wireless infrastructure, and the adoption of BAW filters in automotive applications.

During the quarter, IDP made substantial progress in consolidating GaN manufacturing in Richardson, Texas by transferring products from Greensboro, NC, and achieving customer qualification.

To support growth in temperature-compensated surface acoustic wave (TC-SAW) filters, Qorvo transferred what it claims is an industry-leading product from its 4-inch line in Florida to its 6-inch facility in Greensboro and commenced high-volume customer shipments. The firm is also ahead of schedule on its transition from 6-inch to 8-inch BAW filters (so the need for the fab in Farmers Branch near Richardson – acquired in 2016 from Maxim Integrated Products Inc – has been pushed out a bit, and CapEx will be a bit lower in the short term). In addition, the firm has begun work on significantly reducing filter die sizes for both SAW and BAW.

During the quarter, Qorvo released into production 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). "We released a number of solutions utilizing our BAW 5 process in December, including multiplexers and RF Fusion for cellular and WiFi," says Bruggeworth. The firm began open-market sampling and received its first BAW 5 production orders for a key handset design win for its RF Fusion for mobile WiFi. "Qorvo's RF Fusion for mobile WiFi solutions combined our industry-leading BAW coexistence filters with our WiFi PAs, switches and LNAs," he adds. "RF Fusion for WiFi will be disruptive to today's costly SiP [system-in-package] architectures and smartphones, as carriers introduce License Assisted Access (LAA)," Bruggeworth believes. "Qorvo is a leader in coexist filters, and LAA requires additional coexist filtering in the 5GHz band," he claims.

"We achieved a significant performance milestone in BAW filter resonator performance, and we are competing today on the most complex BAW-based product opportunities," says Bruggeworth. "We now expect sales of BAW-based products will increase from less than a third of Mobile Products revenue in fiscal year 2018 to approaching 40% in fiscal year 2019, as performance requirements and the need for integrated modules increase. These products will include discrete BAW placements as well as highly integrated front-end integrating BAW and, in some cases, BAW and SAW," he adds. The BAW-related fab (6- and 8-inch in Richardson, Texas) has been underutilized, but utilization is now 50-60% and is expected to rise to over 80% by fiscal fourth-quarter 2018.

"Finally, we're continuing to add state-of-the-art assembly & test capacity in our facility in DeZhou, China," notes Bruggeworth.

For fiscal fourth-quarter 2017 (to end-March), Qorvo expects revenue to fall to $610-650m (with revenue from China being flat to down slightly quarter-to-quarter). "Guidance primarily reflects a greater than historical sequential decline in the March quarter, as two of our leading customers in China and a tier-1 customer in Korea delayed flagship smartphone launches," says chief financial officer Mark J. Murphy. "The flagship phones will begin to ramp in March, but they're really going to be in high volume in the June quarter," adds Bruggeworth. In addition, IDP revenue should be flattish quarter-to-quarter (though up substantially year-on-year for a fourth consecutive quarter).

Nevertheless, fiscal fourth-quarter gross margin should rise further to 46%, due mainly to improved product mix (lower low-band PAD volumes) and cost-related activities (ongoing productivity and quality efforts). OpEx is forecasted to be up less than 5% sequentially due to development program timing and seasonal payroll effects. Diluted EPS is expected to fall back to $0.70-0.90. CapEx for fiscal year 2017 should total around $500m (down from earlier estimates).

"Looking out to the June quarter [fiscal first-quarter 2018], we currently are forecasting normal seasonal sequential growth [up 7-10% quarter-to-quarter]," says Murphy. Gross margin should rise further to 46.5-48%.

"As we move past June through fiscal year 2018, we expect revenue to strengthen [including in China] as new programs launch," says Murphy. For fiscal year 2018, Qorvo expects double-digit revenue growth, driven by continued broad-based growth in IDP and increasing demand for Mobile Products (including multiplexers, diversity receive modules, WiFi, RF Fusion, and RF Flex). The firm is also forecasting year-on-year content gains in marquee smartphones, driven by low-band PADs, envelope trackers and tuners.

"We expect this double-digit growth, along with increased BAW-based product mix, higher utilization rates, and ongoing productivity and quality improvements, will help us achieve 50% gross margin exiting fiscal year 2018," Murphy says.

Qorvo expects OpEx efficiency to continue to improve and projects it to be below 20% of sales for the year. "Hitting our operating model of 30% operating margin remains our objective during fiscal year 2018," says Murphy. IDP in particular is a double-digit growth business that is highly diversified and is closing in rapidly on the firm's target model of 30% operating margin. CapEx will remain elevated in fiscal 2018, but is expected to be down from previous estimates to about $400m. With double-digit revenue growth of 10-15%, expanding gross margin, improving OpEx efficiency and lower CapEx, Qorvo expects free cash flow to double from fiscal year 2017 to 2018.

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