3 August 2020
Qorvo’s COVID-19-impacted June quarter aided by 5G adoption
For fiscal first-quarter 2021 (ended 27 June 2020), Qorvo Inc of Greensboro, NC, USA (which provides core technologies and RF solutions for mobile, infrastructure and defense applications) has reported revenue of $787.5m, roughly level with $787.8m last quarter but up 1.5% on $775.6m a year ago.
This marked the first full quarter after completing the acquisitions (in February) of both Custom MMIC of Westford, MA, USA (expanding Qorvo’s portfolio of high-performance GaAs and GaN monolithic microwave integrated circuits for defense & aerospace applications) and Decawave Ltd of Dublin, Ireland (a supplier of ultra-wideband solutions for mobile, automotive and Internet of Things applications).
The fiscal Q1 revenue of $787.5m exceeds the midpoint of the $710-750m guidance by over $57m due to stronger-than-expected demand in both the Mobile Products and Infrastructure & Defense Product (IDP) segments.
Despite being down by 15.8% from $556m both a year ago and last quarter (when it comprised 70.6% of total revenue), Mobile Products revenue was a still more-than-expected $468m (59.5% of total revenue), as handset demand was more resilient and global supply-chain disruption (due to the COVID-19 pandemic) less impactful than anticipated, and 5G smartphones represented an increasing percentage of total units. Qorvo supported multiple production ramps, and benefited broadly from integration trends at multiple customers. Revenue was diversified across categories, including modules integrating power amplifiers (PAs), switches, bulk acoustic wave (BAW) install filters, as well as antenna-plexers, antenna tuners, and specialized RF power management. “Across our customers, we are engaged on the most critical 5G challenges and enabling them to introduce innovative new designs, enhance performance and bring products to market faster,” says president & CEO Bob Bruggeworth. In particular, Qorvo says that it:
- was selected by a leading Korea-based smartphone maker to supply a highly integrated high-band solution for this year’s flagship smartphone;
- ramped an innovative antenna-plexer solution addressing antenna network complexity and optimizing system efficiency for upcoming foldable smartphones;
- captured the complete main path (highly integrated low-band, mid/high-band and ultra-high-band modules) at leading Android smartphone makers for upcoming 5G product launches;
- supported customers across all major chipset providers, and began production shipments in support of leading customers using Mediatek’s 5G baseband;
- commenced high-volume shipments of ultra-wideband (UWB) solutions enabling superior accuracy and reliability in spatial awareness applications (including contact tracing/social distancing) for numerous customers globally;
- increased mobile power management shipments, driven by adoption of 4G/5G dual transmit.
Infrastructure & Defense Products revenue was a record $319m (40.5% of total revenue), up 37.5% on $232m last quarter and up 45.7% on $219m (just 28.2% of total revenue) a year ago.
Driven by the ongoing build out of 5G network base-stations, Infrastructure was a record, as Qorvo increased its support for 5G, specifically sub-6GHz massive MIMO deployments. In particular, Qorvo:
- ramped shipments of programmable power management and motor control solutions (following the acquisition of Active-Semi International Inc of Dallas, TX, USA over a year ago, in fiscal Q1/2020), improving the efficiency of solid-state drives in places like data centers and enabling brushless motors used in a range of consumer products;
- ramped the programmable power management solution, along with a Wi-Fi 6 front-end module (FEM) for a leading drone manufacturer, enabling longer flight time, greater range and larger payload;
- began sampling GaN power amplifiers for upcoming C-band spectrum allocations in the USA.
In Connectivity, Qorvo:
- experienced continued strong demand for Wi-Fi 6 products, including FEMs and BAW filters, driven by work-from-home trends;
- commenced shipments of integrated ultra-low-power, multi-protocol Zigbee, BLE and Thread IoT solutions supporting one of the largest providers of smart-home infrastructure solutions;
- requested an emergency use authorization (EUA) from the FDA for COVID-19 antibody testing using Qorvo Biotechnologies’ platform (featuring unique sensor technology, and designed to address the needs of medical clinicians for rapid and accurate results).
In Defense, gallium nitride (GaN) product revenue was also a record (doubling year-on-year), with multi-year radar programs boosted by the continued ramp of Wi-Fi 6. Also, Qorvo was awarded design wins for an integrated GaN multi-chip broadband transmit-receive (Tx/Rx) module and a 50W GaN power amplifier for defense radar programs.
“The rollout of 5G and Qorvo’s operational performance helped drive a June quarter well above our expectations,” summarizes chief financial officer Mark Murphy.
On a non-GAAP basis, gross margin was 48.6%, down from 49.6% last quarter but up from 46.2% a year ago, and exceeding the 47.5% guidance due to lower-than-expected manufacturing costs and favorable mix effects.
Despite being up on $167.9m a year ago, operating expenses have been cut from $181m last quarter to $178.7m (well below the expected $187m, due partly to discipline in spending on discretionary activities). In particular, selling, general & administrative (SG&A) expenses were cut from $60.7m to $56.2m, while R&D spending was actually raised from $85.1m to $86.6m.
Net income has fallen from $185.3m ($1.57 per diluted share) last quarter to $175.1m ($1.50 per diluted share, $0.37), but this is up on $165.3m ($1.36 per diluted share) a year ago (and well above the guidance of $1.13 per diluted share).
“Qorvo delivered an exceptional June quarter, with revenue and EPS well above guidance,” notes Bruggeworth. “We are supporting leading customers with best-in-class products, and our technology investments are aligned with long-term market drivers in 5G handsets and infrastructure, defense, Wi-Fi 6 and IoT,” he adds.
Cash flow from operations was $214m (level with last quarter). Capital expenditure (CapEx) was $29.9m (cut further, from $35.1m last quarter and $50.3m a year ago). Free cash flow was hence $184m (up from $179.2m last quarter).
During the quarter, Qorvo repurchased $75m of shares. “We continue to invest ahead of customer and market needs while sustaining responsible capital return,” says Murphy.
Also, on 11 June, Qorvo raised over $300m through an add-on to its 2029 unsecured notes, augmenting liquidity and further extending the weighted average maturity of its outstanding debt to October of 2027. “Our leverage remains low and we have no near-term maturities,” notes Murphy.
During the quarter, cash and cash equivalents hence rose from $715m to $1136m. The firm has an untapped $300m unsecured revolving credit facility.
“With this financial flexibility, we can focus on advancing technology supporting customers and making prudent organic and inorganic investments that support long-term earnings and free cash flow growth,” says Murphy. “Our recent acquisitions have been integrated quickly and are performing well. On ultra-wideband [Decawave], we see a wide array of applications emerging with this wireless technology, and have significant customer engagement on the design of new products and solutions. We expect this business and our MEMS technology acquisition [RF MEMS antenna tuning technology provider Cavendish Kinetics Inc of San Jose, CA, USA, acquired last October] to contribute meaningfully to Qorvo over time. Our other recent acquisitions are already accretive.”
“Custom MMIC, a bolt-on to our IDP segment, exceeded plan in its first full quarter and further strengthens our defense & aerospace franchise,” says Murphy. “Programmable power management [Active-Semi] is serving customers advanced power management needs, is delivering in line with our expectations, and is on track to grow revenues strongly by double-digits this quarter versus the same period last year,” he adds.
“During the September quarter, we expect robust end-market demand and ongoing operational improvements to drive healthy revenue growth, gross margin expansion to about 50%, and continued strong free cash flow,” says Murphy.
Specifically, for fiscal second-quarter 2021 (to end-September 2020), Qorvo expects revenue to rise by 19% sequentially to $925-955m, reflecting strong sequential growth in Mobile (to about $640m, as the launch of new 5G handsets is adding more complex parts and driving higher content) and over 50% year-on-year growth in IDP (to about $300m, reflecting the timing of base-station deployments). IDP is expected to sustain strong year-on-year growth through the year, as infrastructure demand remains robust (boosted by 5G) and defense, Wi-Fi and power management strengthen.
N.B. Qorvo’s fiscal Q2/2021 is a 14-week quarter (to make 2021 a 53-week fiscal year). The effect of the extra week is over $65m, so adjusting to a typical 13-week quarter equates to about $873m revenue. This is still up by about 10% both sequentially and year-on-year, like for like.
“Our efforts to improve the portfolio and drive productivity are yielding favorable results. And we expect this progress to continue as we’re forecasting approximately 50% gross margin in the September quarter,” says Murphy. This reflects “volume growth and ongoing efforts to improve the quality and efficiency of our business. Specifically, we’ve invested early and adequately in the technologies that markets need, focused our product portfolio on where we can best serve customers, gained productivity across our operations and reduced our capital intensity, recognizing that a potential impact to our demand and supply chain remains,” he adds. “Given the uncertainty due to the pandemic, we believe our work to minimize inventories and reduce our cost structure will help us sustain approximately 50% gross margin through the balance of the [fiscal] year.”
Operating expenses are projected to rise to $207m due to the additional week in the quarter, higher personnel costs including raises increased product development activities, and the resumption of some discretionary spend. Excluding the extra week, OpEx would be closer to $196m, and is expected to remain below that level for the balance of the year. Diluted earnings per share are expected to rise to $1.90.
“While there is considerable economic uncertainty associated with the ongoing effects of the pandemic, currently, we expect end-market demand to support full fiscal year revenue growth [albeit by less than 5%],” says Murphy.
“Looking more closely at 5G, we’re in the early stages of a multi-year upgrade cycle supporting growth across both businesses,” notes Bruggeworth.
“In Mobile Products, we’re benefiting from the need for more and better RF fueled by higher front-end integration and increased complexity. This includes the move to higher frequencies, the addition of new band combinations and the adoption of dual transmit architectures to support 5G. Content expansion and increased complexity supporting 5G architectures favor our design expertise and technology at scale. We’re securing broad-based design wins. We’re seeing increased demand for a broad-based multiplexing solutions across a range of baseband, across a range of band combinations,” Bruggeworth says. “Smartphone units are forecasted to be down over 10% year-over-year. RF content expansion in 5G devices of $5-7 is mitigating the impact of fewer units. For the year, we continue to expect approximately 250 million 5G smartphones globally,” he adds.
In Infrastructure, our opportunities in small-signal devices like low-noise amplifiers (LNAs) are growing in line with the increase in massive MIMO antenna elements, while revenue related to GaN power amplifiers (PAs) is added content. Our GaN leadership and infrastructure is built on decades of advanced technology development, commercial experience in other markets and proven ability to scale. Globally, we expect 5G base-station deployments to outpace the initial deployments of 4G, with over three quarters of a million deployments this calendar year growing to more than a million in 2021. In the USA and Europe, we see deployments picking-up next year, adding to this multi-year investment cycle by the carriers. This will drive strength in IDP, given our technologies, design capabilities, and operational excellence.”
Despite rising from $164m in fiscal 2020, CapEx should remain below $200m in fiscal 2021, focused on BAW, GaN and “other areas that advance a differentiated position for Qorvo to best serve customer needs”.
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