Qorvo Inc (QRVO) — Q4 2022 Earnings Call Transcript

Thanks very much, Sarah. Hello, everybody, and welcome to Qorvo's fiscal 2022 fourth quarter earnings conference call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in the earnings release published today as well as the risk factors associated with our business in our annual report on Form 10-K filed with the SEC because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain noncash expenses or other items that may obscure trends in our underlying performance. During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our website at qorvo.com under Investors. Joining us today are Bob Bruggeworth, President and CEO; Grant Brown, Interim CFO; Eric Creviston, President of Qorvo's Mobile Products Group; Philip Chesley, President of Qorvo's Infrastructure and Defense Products Group; as well as other members of Qorvo's management team. And with that, I'll turn the call over to Bob.

Thanks Doug, and welcome, everyone, to our call. Qorvo delivered fiscal fourth quarter results above the midpoint of our outlook provided on February 2nd earnings call. Demand drivers were broad-based across end markets, including 5G, IoT connectivity, defense, and power. Both Mobile Products and IDP grew year-over-year and sequentially. In Mobile Products, revenue was diversified across customers and supported by content and integration trends. Of note, Qorvo more than doubled revenue year-over-year at Samsung with growth across multiple product categories. We also expect content gains as the year progresses across Honor's smartphone portfolio with opportunities spanning multiple products and technologies. In IDP, revenue was broad-based across markets and included our newly added high-voltage silicon carbide solutions. We were pleased to see IDP return to year-over-year growth, driven by infrastructure, power management, and other markets. IDP enjoys an increasing number of long-term drivers in growth markets, including automotive connectivity and electrification, defense radar and communications, power management, communications infrastructure, and others. Now, let's look at some of the quarterly highlights. In Mobile Products, we increased shipments to Samsung for mass tier and flagship 5G smartphone programs. Qorvo products included RF Fusion, Wi-Fi 6E FEMs, antenna control solutions, and RF power management ICs. We were recognized by Honor as their only core strategic supplier in the RF category, and we received the first production orders for our next-generation RF Fusion solutions. At multiple China-based smartphone OEMs, we secured design wins covering a range of products, including complete main path and secondary transmit solutions supporting multiple basebands. In ultra-wideband, we were selected by an existing ultra-wideband customer to supply our first system in a package, or SIP, for multiple upcoming smartphone models. Our ultra-wideband SIP strengthens our product portfolio and offers customers a complete solution that integrates our SoC, RF front-end, and software. Qorvo's ultra-wideband offerings received a higher percentage of FCC certifications last year than competing solutions, and design activity this year has been robust. In automotive sensors, we received a design win to supply MEMS-based touch sensor solutions for smart interiors at one of the largest U.S.-based automotive OEMs. Moving to IDP, in power devices, we continue to see strong design-in activity as silicon carbide technology expands across multiple markets. During the quarter, we received a multimillion dollar order for a new silicon carbide power device solution for circuit protection and EV charging stations. In power management ICs, we achieved another quarter of sequential and year-over-year revenue growth, driven by solid-state drives and motor control solutions for power tools. In automotive connectivity, we received our first design win for a highly integrated V2X FEM, enhancing performance and extending range in the short-thin application for a leading European-based automotive OEM. In infrastructure, the business returned to year-over-year growth and we secured design wins from multiple leading OEMs for massive MIMO small signal applications supporting C-band deployments in the U.S. In Wi-Fi, we sampled our first wall-based Wi-Fi 6E filter, reducing form factors for CPE tri-band mesh networks. We also began ramping the industry's first enterprise wideband FEM covering both Wi-Fi 6 and 6E for enterprise CPE customers. This new FEM enables configurability in RF chain management, increasing capacity and maximizing throughput. In low-power connectivity markets, we secured design wins for a multi-protocol, low-power wireless SoC, integrating BLE, Zigbee, and Thread. These wins enable remote control applications for our leading Korea-based TV OEM and leading U.S.-based MSO. In support of the matter connectivity protocol, we expanded customer engagements with retail and service providers to integrate matter into Wi-Fi gateways. Matter is an open and universal smart home protocol expected to simplify and accelerate the adoption of seamless and reliable wireless connectivity. In both mobile and IDP, Qorvo's markets are supported by multiple long-term secular trends related to connectivity, electrification, sustainability, and our increasingly digital lives. The Qorvo team continues to do a fantastic job supporting customers while adjusting for the challenges related to the war in Ukraine, supply constraints, and COVID lockdowns in China. While challenges persist, they are temporary in nature and not structural. Qorvo remains laser-focused on the opportunities ahead, introducing new technologies, launching best-in-class products, entering new markets, and expanding our customer engagements. As an example, take Samsung, where we had previously been underrepresented and where the combined opportunity extends for years. Of note, our customer diversification in mobile is unmatched and affords Qorvo an expanding set of opportunities as 5G continues to grow. Adding to that, an increasing percentage of Qorvo's revenue exposure is to higher growth end markets. These include IoT connectivity, power management, power conversion, and defense, all of which are forecast to grow long-term in the double-digits. So, while we navigate these challenges, our current views suggest June is the bottom, with sequential growth in revenue resuming in September. I'm proud of how the team is staying focused, advancing technology, and supporting our growth. With that, I'll now turn it over to Grant Brown, who I'm pleased has accepted the role of Interim CFO. Grant has been with Qorvo for many years, most recently as Treasurer. Before that, Grant led our tax and FP&A departments as well as other management roles. He has been a key contributor to Qorvo's growth, and he has extensive knowledge of our business. I am confident, Grant, the finance and IT teams will continue to execute on Qorvo's ongoing financial and strategic priorities. And with that, I'm glad to hand it over to Grant.

Thanks Bob, and good afternoon, everyone. I'd like to start by thanking Mark Murphy for his leadership and many contributions to Qorvo. Working alongside Mark and Bob for many years, together with the strength and experience of our finance team, has enabled a smooth transition. Turning to the quarter, Qorvo's revenue for the fourth quarter fiscal 2022 was $1.166 billion, $16 million above the midpoint of our guidance. Mobile Products revenue of $865 million was up both year-over-year and sequentially on 5G content gains and higher flagship volumes. Infrastructure and Defense Products revenue of $301 million was up double-digits both year-over-year and sequentially, driven by broad-based strength across the product portfolio and customer base. Non-GAAP gross margin in the March quarter was 52%, in line with our guidance. Non-GAAP operating expenses in the fourth quarter were $229 million, up $15 million sequentially due to seasonal payroll effects and increased spending related to technology infrastructure. Year-over-year operating expenses were up $21 million, primarily related to recently acquired company OpEx, new product investments, and technology infrastructure, partially offset by lower incentive compensation. Non-GAAP operating income in the March quarter was $377 million, or 32.3% of sales. Non-GAAP net income in the fourth quarter was $340 million. And diluted earnings per share of $3.12 was $0.18 above the midpoint of our guidance. Cash flow from operations in the fourth quarter was $346 million. Capital expenditures in the quarter were $51 million and remain concentrated in core areas such as BAW and GaAs, where we see continued demand for solutions that include these differentiated process technologies. Free cash flow was $295 million and we repurchased $327 million of shares during the quarter. We continue to repurchase shares based on our long-term outlook, low leverage, and other factors. Turning to the balance sheet. As of the March fiscal year-end, we had approximately $2 billion of debt outstanding and $973 million of cash and equivalents. In our GAAP financials as part of our annual assessment, we recognized a $48 million impairment of acquired goodwill. Regarding inventory, we ended the quarter at $756 million, which is near the higher end of our historical range. The inventory balance will be reduced over time. But while supply and demand and macro factors persist, our inventory is expected to remain elevated. Looking at the full year, Qorvo reported strong results, having achieved record revenue and earnings per share. During fiscal 2022, we reported revenue of $4.6 billion, up 15.7%; gross margin of 52.4%, up 30 basis points; operating margin of 33.4%, up 120 basis points; and earnings per share of $12.35, up 26.8% from the prior year. Qorvo's full year fiscal 2022 performance demonstrates our ability to provide differentiated solutions for our customers' most challenging technology and product needs. As connectivity and electrification trends accelerate and product performance requirements increase, we're expanding our growth opportunities through technology leadership, portfolio management, sustained productivity, reduced capital intensity, and broadening market and customer exposure. Now turning to current quarter outlook. We expect revenue between $1 billion and $1.5 billion, non-GAAP gross margin of approximately 50%, non-GAAP diluted earnings per share in the range of $2 to $2.25. Forecasted revenue of $1.25 billion at the midpoint incorporates our current view of the COVID lockdowns in China, the war in Ukraine, and existing industry supply chain constraints. We estimate IDP revenues of approximately $300 million, reflecting strong year-over-year growth and in line with our commentary last quarter. Since the COVID lockdowns occurred at the end of March, we are revising our forecast of 5G handsets in 2022 to between $650 million and $675 million, which represents a reduction of 50 million to 75 million units. Given our share in average content, we expect the impact to Qorvo to be approximately $250 million. This revenue impact is expected to occur over this quarter and next as we adjust to demand and responsibly manage inventories. We project non-GAAP operating expenses in the June quarter to be approximately $245 million due to the impact of acquired company OpEx, higher employee related expenditures, and investments in product development, including high-performance BAW-based integrated products. Below the operating line, other expense will be approximately $17 million, and our non-GAAP tax rate in the current quarter is expected to increase to approximately 9.5%, up from 7.7% in fiscal year 2022. Capital expenditures are projected to be approximately flat on a sequential basis as we continue our discipline around capital intensity while expanding BAW and GaAs capacity in support of long-term supply agreements with multiple customers. As we have discussed on past earnings calls, looking at our business by end market helps to highlight our long-term growth drivers. As a leading supplier of advanced cellular solutions for smartphones, we're positioned for years of content expansion as advancing technology standards drive RF complexity and integration trends. In broader connectivity solutions, we anticipate strong double-digit growth as connected devices increase and use cases proliferate. We have broad exposure across high-growth IoT markets, including industrial automation, connected home, wearables, and automotive, where our product portfolio features a unique combination of technologies. Finally, we anticipate double-digit growth in infrastructure, defense, power management, and power conversion as 5G deployments increase outside of China, defense budget mix to higher performance electronics, and requirements for power semiconductors supporting renewable energy and electrification trends. At this time, please open the line for questions. Thank you.

Good afternoon. Thanks for taking my question. On the last call, the team was pretty confident given your pipeline of new customers and content gains in mobile, combined with the sustained strength in IDP that you guys would get back to year-over-year growth in September. And I know the COVID situation in Eastern European conflicts are new dynamics. You guys talked about sequential growth in September with a lower 5G TAM outlook. So, taking all of this into account, do you guys expect to get back to year-over-year growth in the September or December quarters?

Yes. Thanks for the question. Given the temporary issues you mentioned, and as we already discussed, we're limiting visibility across the industry, which prevents a precise view of timing. So given the inventories and the situation in China related to the COVID lockdowns, we're not providing any longer-term guidance until the continuing uncertainty around the world clears. Thank you.

Okay. I appreciate that. I guess, along those same lines, I know the forward outlook is a bit cloudy, but you do have some visibility on customer ramps, design wins? And like I said, IDP is sustaining pretty strong strength there. And I think you're anticipating double-digit growth for IDP this year. But do you guys anticipate with the pickup in the second half? Are these driving back the 52% gross margins?

This is Eric. I'll begin. We are very confident and pleased with the content gains we're experiencing, and we have a broad diversification across all customers adopting our fully integrated portfolio of RF solutions, along with increasing Wi-Fi content and advanced tuners. The portfolio we've assembled over the past few years is maturing nicely. As we look toward the second half of the calendar year, there are no issues with content gains. It comes down to how many units will be sold, particularly in the 5G market where RF content is more significant. We're currently focused on resolving material sourcing issues and getting consumers, especially in China, back to purchasing phones. Lockdowns are impacting end market demand, making predictions for the second half quite uncertain. However, we are very pleased with the design wins we currently have.

This is Philip, on the IDP side. IDP is well-positioned in multiple market segments that are growing double-digits. And so if you look at our power management business, which I'll break into kind of two pieces, our programmable power business, we continue to see strong design-in, win, and revenue growth for that business. We have a unique digital power architecture that allows us to really add a lot of value in the motor control space, and we see that really driving our business going forward. And then on the united silicon carbide and the silicon carbide technology, we continue to see really strong design-in funnel as well as revenue opportunities in that space. That's one. On the defense side, we see that business not only with short-term tailwinds; we see that with long-term tailwinds as well. And if you look at the continued penetration of phased array radar systems in that segment, when you use phased array radar, you tend to use GaN. That's where we're positioned. So we see growth there. We have our ship program, which is really bringing packaging back to the United States, specifically for RF and defense programs. That's the growth driver for us. So we're positioned well there. And, again, automotive, I don't think I have to outline the growth that we see there. So we like where we're at, and we foresee a really strong future for the business.

That's great. So let me tackle the gross margin piece of the question. We ended the year on a pretty strong note, having achieved a 52% gross margin in Q4. Sequentially, June is typically our low point. So the decrease there is very much anticipated as we see a shift to some lower margin mix within mobile. But beyond June, I certainly expect that mix to improve throughout the year, but be tempered somewhat by lower utilization as we balance that customer demand and manage our inventory. Factory utilization will respond accordingly and likely leave some fixed costs unabsorbed. But once the near-term issues aside, there is no change to the long-term dynamics around margins. Certainly, our products are highly differentiated, and our customers value the performance advantages we help them achieve. From a cost perspective, the multiyear productivity gains that we've achieved still remain, and those benefits will be increasingly evident as volumes return.

Great. Thanks so much for taking the questions. I had two as well. My first one is on your business in China. I think based on your filings, China was about one-quarter of revenue in the December quarter. Curious how big or how small that region was in the March quarter and what you're assuming for June. And I guess, most importantly, what your thoughts are into the back half as your customer base recovers from these lows. And you've talked about some of the wins at Honor, so if you can kind of speak to that as well, that would be great.

I'll take the first part first. Toshiya, the business in China was down slightly as a percent of sales quarter-over-quarter. So just to give you that. I'm not going to quantify it that much. One thing I will tell you is, though, is Samsung is getting about as big as China right now at the levels we're at. And as far as things go forward, we're planning on it staying pretty much at historical lows. The last two quarters have been the lowest for us as China as a percent of sales since we formed Qorvo, to be quite candid about the math. So looking forward, we're not expecting a significant bounce back anytime soon. Grant mentioned already, we've got to work through some channel inventories and things like that. Their business has really slowed down, and you know what happens when they're expecting more business, and things like the shutdowns and consumer confidence in China is way down; their export market has also been impacted. Europe is not exactly firing on all cylinders right now as well. So, we've got to work through that. So, as we look forward, we're expecting it to stay low and possibly even lower than what it is now. But as far as the excitement that we have on the growth opportunities at some of those customers, I'll let Eric speak to that; it's just units, not content.

Yes, similar to what I said previously. Great relationships and very long-term roadmaps together are helping to drive our roadmap. We're responding to that. And as Bob mentioned earlier as well, great to see Honor coming back as well. They've kind of worked through the inventory that they inherited from Huawei, beginning to now move to best-in-class integrated solutions. We've got great relationships there. We've known those guys for years since they were in Huawei. So, really pleased to be bringing them back their business in the second half of the year. And notably, they'll be the launch of RF Fusion. So, they're starting with the best and latest and greatest technology from Qorvo. And so that will definitely be a tailwind in the second half for China.

Great, that's helpful. And then quickly, as my follow-up, on the inventory side of things, guys noted, inventory was up on your balance sheet on a sequential basis. I think you guys talked about inventory potentially staying elevated for the next couple of quarters. But if you can kind of confirm how we should be thinking about the cadence of any inventory drawdown on your balance sheet going forward, that would be helpful. And then, if you can kind of also speak to how you would characterize customer inventory, both smartphone inventory and component inventory that would be helpful. Thanks so much.

Sure. Let me take that one. As you pointed out, we ended the quarter with about 118 days' worth of inventory, which is near the high end of our range, around 81 to 125 days historically. So, as we look to work down the balance, we'll do so over time. But as you pointed out, while the supply and demand challenges persist, our inventory is expected to remain elevated. It is important to consider, however, that we understand why it's up and we have visibility into the demand that will consume it. In terms of your question specifically, I might try to answer it by comparing raw material and WIP. As you'll see when we file our K, those will be up, but they're based on our firm orders and supported by our largest customers' demand. Certainly beyond that, you'll see increases in our inventory related to supporting our new acquisitions in some growth areas such as power and defense, so healthy growth on the inventory side there. I think Bob touched on already the channel inventories in China, so I won't.

Yes, I can provide more information about the channel in China. We have a combination of direct and channel customers in that market, and we are making efforts to sustain that channel and keep inventory at healthy levels, which influences our guidance. However, the component inventory remains somewhat elevated compared to historical best practices. We are actively managing this with our customers to ensure that inventory is consumed properly and to avoid overbuilding. The inventory of finished goods handsets seems to be in a relatively good state, though it's challenging to assess due to significant near-term changes and disruptions in the supply chain, which are primarily specific to the local situation in China.

Hey guys, thanks for taking my question. Maybe just on IDP, I think, obviously, you saw a nice recovery in March. Just curious on the flat outlook. I think you had previously talked about it continuing to improve. So just a tease through the different segments or any color as to the flat guide in June?

Yeah. So Blayne, this is Philip. So I think when you look at the flat guidance, I wouldn't take that directionally in terms of the rest of the year. We continue to see strong demand. I think that we still do have some supply challenges in IDP. And some of that is really regulating what we can ship in the Q1 timeframe. So I think that's probably the biggest story in terms of that number and that flat quarter-over-quarter guidance.

Thank you. I would like to revisit the gross margin and the 200 basis points. Is this mainly due to a decline in some premium products and a negative mix, or are you observing lower margins on new ramps? Could you also provide some insights on the expected recovery throughout the year? Will it return to the 52 range quickly, or will it take time to work through the fiscal year?

Yeah. So on gross margin throughout the year, we expect it to increase and improve as the mix over the balance of the year. Yields have been very good across the year. And as we look forward, we will have some utilization that will leave some fixed costs unabsorbed in the factories, and so that will weigh against the mix improvement over the course of the year. But certainly, we expect it to trend up.

Great. Thank you. I wanted to ask in terms of the thinking about the full year for mobile products, and again, I know you're not guiding beyond June, but just to sort of understand the dynamics. Understanding that 5G handsets are lower than you thought, they're still up well north of 100 million units since last year. You've talked about good content gains. Like I would think you would get pretty good growth out of mobile products with that dynamic, assuming handsets are only down slightly. Is there something I'm missing in that in terms of connecting inventory from last year, inventory from this year, as this is very back-end loaded? Just again, I'm not looking for guidance. I'm just trying to understand what the drivers are of the full year and making sure I understand them. Thank you.

Yeah, I think you're really right on the money. We've got all the right underlying business factors, right, great content, growing content, 5G will be growing year-over-year to your point; it really does just come down to managing the inventory levels. So we've said it's a bit elevated right now. So that's what we have to work down. But otherwise, no particular headwinds.

Thanks. Eric, it sounds like most of your problems in China primarily, if not exclusively, demand-driven, right, versus lack of supply? And if not, how would you split those up between the two? And Philip, was defense your largest segment again this period? And then I have a follow-up. Thanks.

Starting with China, I acknowledge that our challenges are primarily there. Currently, it's difficult to distinguish between demand and supply. Our internal supply stands in good shape, yet some customers are facing their own supply issues. The lockdowns have hindered their ability to operate, as moving people to factories and managing supply chains during these lockdowns is quite challenging. This creates a demand issue for us since some customers cannot maintain factory operations. On the flip side, while they are still producing phones, consumers in China are exercising a lot of caution. It's a tough situation with large cities facing complete shutdowns for extended periods, leading to a lack of optimism among consumers who are not inclined to purchase the latest 5G devices. This is a phase we are currently navigating as we experience a structural change, and we must find a way through it to reach a better outcome.

Ed, this is Philip. So, we don't disclose individual segments, but I will say that defense came in very, very strong, healthy, and it has a very healthy backlog to it. But it's not the only business. We see a strong backlog, as I mentioned in our power management business. We see strong backlog in our Wi-Fi business; automotive, it's pretty much most segments, we see strong growth. And so I think as we look forward, it will be a fun battle between which ends up being the biggest segment over this coming year.

I don't analyze that split personally, but I can say that we have a range of products for various types of phones. Based on the numbers and overall scale, it's likely that the mass tier is the main driver of growth. However, there are also appealing opportunities in the flagship tier, despite the lower volume numbers there. Overall, across all tiers, we offer power management, advanced tuning, band coverage, and highly integrated modules for every band. Additionally, Wi-Fi is another significant growth area for us across all Wi-Fi baseband suppliers, making our growth quite broad-based.

I'm not going to quantify it that much. One thing I will tell you is, though, is Samsung is getting about as big as China right now at the levels we're at. And as far as things go forward, we're planning on it staying pretty much at historical lows. The last two quarters have been the lowest for us as China as a percent of sales since we formed Qorvo, to be quite candid about the math. So looking forward, we're not expecting a significant bounce back anytime soon.

We'll do so over time. But as you pointed out, while the supply and demand challenges persist, our inventory is expected to remain elevated. It is important to consider, however, that we understand why it's up and we have visibility into the demand that will consume it.

Great. Thank you. I wanted to ask in terms of the thinking about the full year for mobile products, and again, I know you're not guiding beyond June, but just to sort of understand the dynamics. Understanding that 5G handsets are lower than you thought, they're still up well north of 100 million units since last year. You've talked about good content gains. Like I would think you would get pretty good growth out of mobile products with that dynamic, assuming handsets are only down slightly. Is there something I'm missing in that in terms of connecting inventory from last year, inventory from this year, as this is very back-end loaded? Just again, I'm not looking for guidance. I'm just trying to understand what the drivers are of the full year and making sure I understand them.

Yeah, I think you're really right on the money. We've got all the right underlying business factors, right, great content, growing content, 5G will be growing year-over-year to your point. It really does just come down to managing the inventory levels. So we've said it's a bit elevated right now. That's what we have to work down.

Thanks for joining us today. We appreciate your interest, and we look forward to seeing you at our upcoming investor events. Thank you, and have a good night.