8 May 2017

Qorvo’s quarterly revenue hit by delayed smartphone launches in China and Korea

For fiscal fourth-quarter 2017 (to 1 April), Qorvo Inc of Greensboro, NC, USA (which provides core technologies and RF solutions for mobile, infrastructure and defense applications) has reported revenue of $642m, up 5.7% on $607.1m a year ago but down 22% on $825.4m last quarter.

Revenue for Mobile Products (MP) was $474m, down 28% on $656.8m last quarter and up just 2% on a year ago, as two leading customers in China and a tier-1 customer in Korea delayed flagship smartphone launches. With Samsung and Huawei comprising just over 10% of Mobile Product revenue each and open-market China lower than normal at about 24%, China fell from 41% of Mobile Product revenue to 35%.

Revenue for Infrastructure & Defense Products (IDP) was $168m, roughly equal to last quarter’s record and up 18% on $142m a year ago, due to continued growth in defense, Wi-Fi and Internet of Things (IoT), reflecting the repositioning of the firm’s product portfolio to target high-growth segments. In particular, Wi-Fi grew more than 40% year-on-year, with notable strength in 5GHz power amplifiers (PAs) and 802.11ac front-end modules (FEMs). Defense & Aerospace grew more than 20% year-on-year, with strength in gallium nitride (GaN)-based power amplifiers.

“In the March quarter, we collaborated with all major infrastructure OEMs on next-generation 4G and pre-5G macro base-station GaN PAs, we supported 1Gbps throughput in the ZTE Gigabit smartphone, we supplied the industry's first 5G RF front-end in collaboration with Intel, and we achieved full certification of the first single-placement integrated module [spanning all major RF functions required in the main path, including amplifiers, switches and filters] covering low, mid and high bands on a MediaTek baseband,” says president & CEO Bob Bruggeworth.

Also during the March quarter, Qorvo shipped its first BAW 5-based bulk acoustic wave filters (launched in the December quarter) in its RF Fusion WiFi integrated front-end modules (iFEMs), in support of Xiaomi, Oppo and Vivo;

“In premium-tier smartphones, we’re enjoying strong demand for RF Fusion for cellular,” notes Bruggeworth. Qorvo added ZTE to the list of customers buying its full suite of RF Fusion solutions, combining low-band, mid-band and high-band placements. “These highly compact solutions cover multiple modes and bands and require more temperature-compensated SAW and more BAW,” he adds.

Also during the quarter, Qorvo commenced shipments of Power Class 2 solutions to Sony, LG and HTC, and secured design wins for Power Class 2-capable RF Flex and high-band RF Fusion solutions.

The firm also secured multiple design wins at Samsung, Huawei, Xiaomi and others, in support of performance-tier smartphones.

In IDP, during the quarter Qorvo secured an important 802.11ac design win in the recently released Sonos sound bar for home audio networks (incorporating a BAW filter). “The integration of BAW filters into our Wi-Fi solutions is a focus for IDP,” notes Bruggeworth. The firm also secured a design win in a recently launched dual-band 802.11ac wireless router, delivering up to 1.2Gb/s. “We're quickly filling this Wi-Fi sales funnel, including for 802.11ax programs,” he adds.

Qorvo also expanded its optical product portfolio by launching five phase amplitude modulation 4 (PAM4) products for data center interconnect applications.

On a non-GAAP basis, gross margin was 46.2%, down from 50% a year ago but up from 44.3% last quarter (and exceeding the expected 46%) due mainly to improved product mix (lower low-band PAD volumes) and cost-related activities (ongoing productivity and quality efforts).

Operating expenses rose further, from $142.9m a year ago and $157.1m last quarter to $163.1m, including $108.9m in research & development (R&D) and $132.7m in selling, general & administrative (SG&A).

Operating income was $133.4m (operating margin of 20.8% of sales), down from $208.7m (operating margin of 25.3%) last quarter and $160.6m (operating margin of 26.5%) a year ago.

Net income was $111.7m ($0.85 per diluted share, $0.05 over the midpoint of the $0.70-0.90 guidance range), down from $177.3m ($1.35 per diluted share) last quarter and $142.6m ($1.04 per diluted share) a year ago.

Operating cash flow has rebounded from last quarter’s $220.4m to $247.1m (up 50% year-on-year). Capital expenditure (CapEx) has risen further, from $136.5m to $165.8m, primarily due to the timing of filter capacity additions. Free cash flow hence fell further, from $83.9m to $81.3m. During the quarter, cash and short-term investments rose from $495.8m to $545m. This was after Qorvo also returned $51m to shareholders under its $500m share repurchase program.

For fiscal first-quarter 2018 (to end-June 2017), Qorvo has lowered its original forecast (of 7-10% sequential revenue growth to $680-685m) by $50-55m to $610-650m. Of the shortfall, about $30m is related to end-manufacturers working through unforeseen inventory, $10m is due to one of the delayed Asia-region smartphone models eventually being canceled, and $10m is due to not seeing the traditional market recovery after Chinese New Year. In contrast, revenue from South Korea’s Samsung should grow.

Despite the $630m mid-point of this guidance range being down quarter-to-quarter, gross margin will still rise to about 47%. Operating expenses should rise sequentially by about $5m, due partly to R&D related to custom product development for Qorvo’s largest customer. Net income is expected to be $0.70-0.90 per diluted share. “This guidance reflects normal seasonal effects at our largest customer and weaker-than-expected near-term China demand [roughly flat quarter-to-quarter],” says chief financial officer Mark Murphy.

Neverthless, for fiscal full-year 2018 Qorvo foresees strong revenue growth, gross and operating margin expansion.

“Our newly released BAW 5 technology has immediately gained commercial traction in cellular, Wi-Fi and other applications,” notes Murphy. “This technology, along with our proven design capabilities, is providing us the opportunity to work on the industry's most complex integrated modules and enabling us to participate in the largest and most attractive markets in RF,” he adds.

“IDP’s portfolio continues to grow more attractive, with broad-based exposure to many high-growth markets including 5G, Wi-Fi, automotive, and other IoT [leading to double-digit growth again in IDP for fiscal full-year 2018],” says Murphy. Although we’re a bit slower out of the gate than expected due to near-term softness in China demand, our forecast outlook for the full year of fiscal 2018 looks good.”

Driven by the timing of marquee smartphone launches plus continued growth at Samsung, Qorvo expects sequential revenue growth of over 30% in the September quarter then more in the December quarter prior to the normal seasonal decline in the March quarter, amounting to double-digit growth for full-year fiscal 2018 over fiscal 2017 (though closer to 10%, due to the slow start in China). This will be joined by higher BAW-based product mix [rising from under 30% of Mobile Product revenue now to about 40% by fiscal 2019], higher utilization rates and ongoing productivity and quality improvements to help the firm achieve its 50% gross margin target exiting fiscal 2018. “Operationally, we continue to make solid progress on yield improvements, wafer size conversions [to 8-inch BAW and 6-inch temperature-compensated SAW, complementing significant reductions in die size], capacity rationalizations, sourcing initiatives and other productivity efforts to drive margin expansion,” notes Murphy. OpEx efficiency should continue to improve, achieving operating expenses of about 20% of sales for the year, forecasts the firm. “We are resolute in hitting our operating model of 30% operating margin during the fiscal year 2018,” says Murphy.

CapEx is forecast to fall to about $400m, as the firm completes its expansion to support multi-year above-market growth of filter-based products.

With strong revenue growth, expanding gross margins, improving OpEx efficiency (lower OpEx as a percent of sales) and lower CapEx, free cash flow is expected to double from fiscal 2017 to fiscal 2018.

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