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7 November 2019

Qorvo’s quarterly revenue well above guidance, driven by integration-related content gains in 5G mobiles

For its fiscal second-quarter 2020 (ended 28 September 2019), Qorvo Inc of Greensboro, NC, USA (which provides core technologies and RF solutions for mobile, infrastructure and defense applications) has reported revenue of $806.7m, down 8.8% on $884.4m a year ago but up 4% on $775.6m last quarter, and $52m above the midpoint of the $745-765m guidance.

This was driven by stronger-than-forecasted Mobile Products revenue of $623m, down 6.6% on $667m a year ago but 12% up on $556m last quarter.

In particular, revenue exceeded expectations at the three largest customers, including China’s Huawei (about 5% of total revenue, rather than the 3-4%). “While staying completely consistent with export regulations, we’re able to ship highly integrated modules across all frequency bands to Huawei’s handset division,” notes Eric Creviston, president of Qorvo’s Mobile Products Group. “In China the dollar content for 5G phones is significantly increased over 4G phones,” says president & CEO Bob Bruggeworth. “Integration was key and being able to integrate the components that are needed for 5G phones. We’re taking some share there from discrete players. You’re seeing the integration coming together in the 4G portion of a 5G phone, plus for 5G, and that’s what’s really driving,” he adds.

“Leading Korea-based smartphone maker Samsung was a standout, as Qorvo secured new design wins and expanded its participation in their mass-market phones,” notes Bruggeworth. “We got out of alignment with the product roadmap and their architecture for a cycle or two, but we’re fully back in alignment across not only the flagship or marquee tier but also the mass tier of handsets there,” says Creviston.

Revenue for Infrastructure & Defense Products (IDP) has fallen by about 16% from $218m both a year ago and last quarter to $184m, due mainly to the effects of export restrictions. Nevertheless, Qorvo has been able to ship some components into Huawei’s infrastructure side, notes Bruggeworth.

On a non-GAAP basis, gross margin was 46.5%, down from 47.7% a year ago but up from 46.2% last quarter and at the top end of the 46-46.5% guidance range. This was a result of better-than-expected manufacturing costs, partially offset by about $10m worth of excess inventory charges due to (i) some excess parts on older-generation handset products, (ii) a very isolated quality issue in the non-core market, and (iii) being unable to repurpose a portion of a customer-specific product.

Operating expenses (OpEx) have been cut further, from $168.3m a year ago and $167.9m last quarter to $166.7m.

Despite still being down on $224.9m ($1.75 per diluted share) a year ago, net income has grown further from $165.3m ($1.36 per diluted share) last quarter to $181.2m ($1.52 per diluted share, exceeding the $1.30 guidance).

Cash flow from operations was $173.4m and capital expenditure (CapEx) was $38m, so free cash flow was $135.4m (contributing to free cash flow for fiscal first-half 2020 of a record $342m). “We expect to maintain strong free cash flow through the fiscal year,” says chief financial officer Mark Murphy. During the quarter, Qorvo repurchased $165m of its stock. Overall, cash and cash equivalents overall hence fell by $42.8m, from $629.6m to $586.8m.

Over the past 12 months, Qorvo has deployed over $500m with the purchases of two companies. In May, Qorvo completed the acquisition of Active-Semi International Inc of Dallas, TX, USA, a fabless supplier of programmable analog/mixed-signal power management integrated circuits (PMICs) and power application controllers (PACs).

Qorvo hence expanded its portfolio of integrated motor power management control solutions supporting brushless motor applications in white goods, power tools and other products. “Our power management solutions enable smaller, lighter devices that charge faster and operate longer with between charges,” claims Bruggeworth. “On the design front, programmability enables our customers for lower product development costs and reduced time-to-market. We expect to leverage our scale to drive growth in power tools, light goods, industrial equipment and other product categories.”

Also, after the quarter closed, Qorvo completed the acquisition of the remaining equity in Cavendish Kinetics for $203m, adding RF MEMS capabilities and expanding its technology portfolio for switches, tuners and other product applications. “We intend to optimize and scale our RF MEMS technology for smartphones and ultimately apply to other growth segments,” says Bruggeworth.

“Our technology investments, portfolio management and operational discipline continued to yield strong and consistent performance,” he adds. “During the quarter, we successfully integrated our programmable power management products and technologies into IDP.”

“Qorvo’s broad portfolio of enabling technology, coupled with a robust supply chain and solid product execution, is allowing us to solve our customers’ most challenging problems across all tiers of their portfolio,” Bruggeworth says.

“In Mobile products, the trend toward integration is driving our industry, and integration is all the more important with the interaction of 5G,” he notes. “Qorvo is securing significant content in 5G smartphones with our premium technologies and our highly integrated modules, enabling our customers to enhance system performance, overcome design challenges and bring their smartphones to market faster than ever,” Bruggeworth adds. Qorvo has correspondingly been selected by the top four China-based smartphone OEMs to supply low-, mid-high- and ultrahigh-band power amplifier duplexer (PAD) and other highly integrated solutions for their upcoming 5G smartphones. “Our wins are broad-based and our solutions are mated with all the major chipset providers including SLSI, Qualcomm, MediaTek and HiSilicon.” In mobile Wi-Fi applications, Qorvo is ramping its recently launched Wi-Fi 6 front-end modules (FEMs) in support of multiple leading China-based smartphone OEMs.

“In IDP, our markets are supported by secular trends including the deployment of 5G, as well as the proliferation of IoT [Internet of Things], the adoption of Wi-Fi 6 and the performance advantages of gallium nitride (GaN) technology in defense, broadband and massive MIMO base-station applications,” says Bruggeworth.

“In our Defense business, we are lead participant in a US government program to advance the state-of-the-art in RF integration packaging and test. We are also increasing our GaN opportunities with the US branch and we secured wins for our GaN amplifiers and integrated front-end modules for X-band and Ka-band defense radar and communications programs.”

In Infrastructure, the ramp of 5G appears to be rolling out faster than the ramp of 4G. Activity is primarily in the sub-6GHz frequencies, and Qorvo’s GaN technology is increasingly the technology of choice, the firm claims.
During the quarter, Qorvo secured new GaN design wins for sub-6GHz massive MIMO deployments expected to span multiple years. Among China-based carriers, China Unicom and China Telecom will share cell sites to accelerate 5G deployments. This development will drive the need for broader-band and higher-power amplifiers, favoring Qorvo’s GaN solutions, it is reckoned.

In IoT, the ratification of Wi-Fi 6 is a catalyst for the industry, and design wins for Qorvo’s Wi-Fi 6 solutions are building, the firm says. During the quarter, it launched what is claimed to be the first Wi-Fi 6 dual-band front-end module and the first Wi-Fi 6 iFEM for CPE applications, expanding its Wi-Fi product portfolio for retail, enterprise and network operators.

In automotive, Qorvo commenced production shipments of its Wi-Fi FEMs supporting multiple automotive OEM platforms, and secured a design win to supply V2X coexistence 5.9GHz BAW filters to a top-tier automotive OEM for models shipping in calendar 2020.

For fiscal third-quarter 2020 (to end-December 2019), Qorvo expects rises in revenue to $840-860m and in diluted earnings per share to $1.67, reflecting “continued robust mobile demand, supported by an increase in 5G handset volumes, and a return to sequential growth for IDP,” says Murphy.

“For Mobile, we expect December-quarter sales to increase sequentially and return to growth year-over-year as 5G handset launches with our integrated solutions and a healthy channel support strong demand,” he adds. This is despite overall smartphone units being down, and Huawei becoming a significantly smaller customer year-over-year, down to no more than 5% of total revenue per quarter in the fiscal second half (making less than 10% of sales for full-year fiscal 2020, compared with 15% for fiscal 2019).

“For IDP, we project December-quarter sales to increase [showing double-digit quarter-over-quarter growth] based on higher defense business volumes, the Wi-Fi 6 ramp, and broader 5G infrastructure customer demand,” says Murphy. “While Qorvo’s current near-term outlook is strong and channels are healthy, trade and other factors contributed challenges and uncertainty forecast in the outlook.”

Due to a more favorable product mix and lower inventory charges, gross margin should rise to about 48%.

However, due to the operating costs of recent acquisitions and increased product investment costs related to growth in 5G, operating expenses are projected to increase in the second half of fiscal 2020 to $175-180m per quarter.

Qorvo continues to project capital expenditure of less than $200m in full-year fiscal 2020 as it remains disciplined on adding capacity. “Spend remains weighted towards improving our bulk acoustic wave (BAW) filter and GaN capabilities,” says Murphy.

“As our September-quarter results and our December-outlook show, Qorvo is operating well as 5G, Wi-Fi, defense and other markets strengthen,” believes Murphy. “As a result of our market outlook, operating performance, free cash flow forecast and other factors, Qorvo’s board of directors has authorized a new $1bn share repurchase program.”

For fiscal fourth-quarter 2020 (to end-March), Qorvo expects a seasonal drop in revenue of about 15% sequentially. However, while Mobile Products revenue should be down seasonally quarter-to-quarter, it should be up by double-digits year-on-year. IDP is expected to strengthen. “The restrictions on Huawei have definitely limited our ability to grow in the near-term. However, we hope to return to year-over-year growth in Q4,” says James Klein, president of Qorvo’s Infrastructure and Defense Products Group.

Gross margin is expected to fall by 100 base points or more sequentially, but that is a typical function of seasonal mix and the effects of fixed manufacturing costs on lower revenue. “We’re still working to achieve 50% or more [longer term],” notes Murphy. “We expect volume growth, so we’d expect to see better utilization,” he adds. “Next calendar year, we’re also having a consolidation of our fabs… most notably Florida will be closed and those products rolled into Greensboro, so those cost effects will subside. Also over time, we would expect the mix at IDP to improve and be a larger part of Qorvo. We’re doing a lot of product portfolio management as well. So that’ll improve that mix and that’s the purpose of our select and high-tech investments. Finally, we are operating as well as we ever have and that's allowing us to drive better productivity than we were even before and, to the extent we’re doing above-inflation price erosion, that would be incremental benefit to gross margin.”

See related items:

Qorvo announces $1bn share repurchase program

Qorvo acquires Cavendish Kinetics

Qorvo prices offering of $350m in senior notes, upsized from $300m

Qorvo’s quarterly revenue exceeds revised guidance, aided by select allowed product shipments to Huawei

Qorvo reports greater-then-expected quarterly revenue, driven by content gains

Qorvo to acquire programmable analog/mixed-signal power IC firm Active-Semi

Qorvo’s 5G infrastructure revenue growth offsets weak mobile market in China

Qorvo’s quarterly revenue rises 8% year-on-year to a record $884m

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