News: Microelectronics
11 November 2024
Qorvo quarterly revenue falls 5% year-on-year as Android smartphone mix shifts from mid-tier to entry-tier
For its fiscal second-quarter 2025 (ended 28 September 2024), Qorvo Inc of Greensboro, NC, USA (which provides core technologies and RF solutions for mobile, infrastructure and defense applications) has reported revenue of $1046.5m. This is down 5.2% on $1103.5m a year ago due mainly to a hiatus in Android smartphone revenues, following ramps in first-half calendar 2024 for key models including both Samsung’s S24 (involving over $5 of content) and Google’s Pixel ($15 of content). However, revenue has rebounded by 18% from $886.7m last quarter. It also exceeds the $1025m guidance, driven by double-digit sequential growth in all three operating segments.
By business segment, revenue comprised:
- Advanced Cellular Group (ACG) $751.4m, down 11.6% on $850.1m a year ago but up 17% on last quarter’s $642.3m, as Qorvo supported the seasonal smartphone ramp at its largest customer;
- Connectivity & Sensors Group (CSG) $146.8m, up 27.8% on $114.9m last quarter and 41.7% on $103.6m a year ago;
- High-Performance Analog (HPA) $148.3m, down 1% on $149.8m a year ago but up 14.5% on last quarter’s $129.5m.
HPA plus CSG represented about 28% of total revenue, up sequentially and up from 23% a year ago. “In HPA, we continued to expand our defense & aerospace (D&A) business while building a broad-based business in power management. In CSG, we maintained our leadership in Wi-Fi applications while investing to grow in diverse growth businesses including an expanding portfolio of automotive solutions and SoCs for ultra-wideband and Matter,” says president & CEO Bob Bruggeworth.
On a non-GAAP basis, gross margin was 47%, down from 47.6% a year ago but up from 40.9% last quarter (which is expected to be the low point in fiscal 2025), and at the high-end of the 46–47% guidance range. This is due mainly to the product mix (since inventories of low-margin, higher-cost Android 5G mass-market product - manufactured during periods of lower utilization - have now sold through) but is also aided by the impact of under-utilization halving from last quarter to about 100 basis points (then becoming negligible for the second half of fiscal 2025). “The September quarter and, to a lesser degree, December quarter will benefit from a higher mix of customized solutions for flagship-tier phones,” says chief financial officer Grant Brown. “That product mix generally includes a higher amount of externally sourced silicon and SOI [silicon-on-insulator] content. It is not impacted by internal utilization levels,” he adds. “That compares to our prior two quarters where revenue was comprised of a larger mix of high-cost standard products that were burdened by prior periods of under-utilization.”
Driven mainly by R&D expenses rising from $163.4m a year ago and $174.9m last quarter to $187.6m, total operating expenses have risen further, from $245.8m a year ago and $264.5m last quarter to $279.8m (above the expected $275m). However, this includes about $7m of spend associated with Qorvo’s digital transformation project (a three-year initiative to modernize the firm’s core systems and business processes, to increase operational efficiency, unlock internal data to leverage new software capabilities including AI, and support broad-based growth objectives in diverse dynamic markets).
Net income is still down year-on-year, from $235.5m ($2.39 per diluted share) a year ago, but has rebounded by more than doubling from $83.5m ($0.87 per diluted share) last quarter to $179.8m ($1.88 per diluted share, above the midpoint of the $1.75–1.95 guidance range).
“We exceeded the midpoint of guidance in revenue, gross margin and EPS,” summarizes Brown.
Operating cash flow has rebounded from $81.1m last quarter to $127.8m. Capital expenditure has been cut from $38.2m to $33m. Free cash flow has hence more than doubled from $42.9m to $94.8m. Also during the quarter, Qorvo repurchased about $81m of stock at an average price of $110 per share. Cash and equivalents hence rose by $14.1m, from $1082.4bn to $1096.5m. Long-term debt remains about about $1549m About $412m of 2024 notes remain outstanding, which Qorvo expects to retire in December.
After supporting the seasonal ramp at its largest customer last quarter, Qorvo ended the quarter with a net inventory balance of $694m (the lowest in three years, reflecting ongoing inventory reduction efforts), down by $32m sequentially and by more than $145m year-on-year.
For fiscal third-quarter 2025 (to end-December 2024), Qorvo expects revenue to fall back to $900m±$25m. Gross margin should fall sequentially to about 45% (although this will be up year-on-year, despite revenue being lower). Operating expenses are expected to be reduced to about $265m. This includes about $15m for Qorvo’s digital transformation project (although the total for full-year fiscal 2025 is still expected to be about $40m). Diluted earnings per share should fall to $1.10–1.30.
“The Android dynamic is having an impact on us as we intentionally pivot away from the entry-tier areas that are more margin compressed and focus ourselves on the higher tiers and the areas of the mid-tiers where we see the most value for us and our customers,” says Brown.
CSG will also be down quarter-over-quarter, but this just matches the seasonality of the last three years because of the profile of the largest customer.
March-quarter company revenue is expected to fall seasonally by 5–10% sequentially, but this is driven by the more-than-seasonal decline in ACG, counteracting sequential growth in both HPA and CSG. In particular, HPA is expected to grow substantially, driven by record design activity and billings.
“HPA and CSG are on pace to achieve mid-teen year-over-year growth in fiscal 2025,” says Bruggeworth. “In HPA, we’re investing to grow in defense & aerospace and power management. In CSG, our growth investments are focused on automotive, next-gen Wi-Fi and Matter and ultra-wideband SoCs,” he adds.
However, overall full-year fiscal 2025 revenue and gross margin are expected to be slightly down on fiscal 2024 (by a few percentage points or so), primarily due to two factors affecting smartphone business.
“ACG’s product roadmap is focused primarily on 5G advanced products for our largest customer [Apple] and the flagship and premium tiers of our Android customers. Our growth opportunity and the flagship remains strong,” says Bruggeworth. “Our largest opportunity in ACG is with our largest customer. They represent over half of the smartphone RF TAM [total addressable market] and we are investing today to grow our share with them next year and in subsequent programs over multiple years. While challenging in the near-term, this dynamic reinforces ACG’s primary strategy of investing to grow our business at our largest customer,” he adds.
“In the near-term, the flagship and premium tiers are holding up well, but there are some unfavorable trends there in some of the variables like unit volumes, content by model, ramp profiles and other variables, across all of our customers in that tier,” says Brown. “At our largest Android customer, our revenue in their highest-volume Fall models is less than it was last year and less than the design wins that we’re actually looking at in the Spring launch. We do expect a low-single-digit decline in revenue there for that confluence of variables,” he adds. “We remain actively engaged with our Android customers for highly integrated modules where they deliver the most value and differentiation.”
Additionally, in the mass-market segment of Android smartphones, the mix has shifted away from mid-tier models (which used to be about half of the total Android 5G volumes but has declined over the last few quarters to less than a third) and towards entry-tier models (where higher price sensitivity, given competition from discrete solutions, is reducing the total addressable market and revenue opportunity as Qorvo maintains price discipline in that sub-segment).
“These factors are expected to impact our revenue and margins in the second half of fiscal 2025 and into early fiscal 2026,” Brown says.
“We don’t expect this mix shift in Android 5G mass market from mid-tier to entry-tier to reverse… This will pressure revenue, factory volumes and utilization into next fiscal year,” says Brown. This will be only partially offset by margin-accretive drivers such as strength in highly customized placements for flagship smartphones as well as D&A and other highly differentiated product areas that enhance our business mix, he reckons.
“As a result, we are taking appropriate actions, including factory consolidation and operating expense reductions, as well as focusing on opportunities that align with our long-term profitability objectives,” Brown says.
Transferring GaAs production from North Carolina fab to Oregon;
“We have highlighted multiple initiatives to drive continuous improvement in product development, semiconductor device design, process engineering, factory planning and manufacturing efficiency. The transition to 8-inch BAW [bulk acoustic wave filter] is a noteworthy example that unlocked effective capacity within the same factory footprint,” says Brown. “Furthermore, we have reduced capital intensity through the divestment or consolidation of multiple production facilities, including our [China] Beijing and Dezhou test & assembly locations and our fabs in Farmers Branch, Texas and Apopka, Florida,” he adds.
“To further optimize our internal factory footprint, we are transferring all gallium arsenide (GaAs) production from our North Carolina fab to our Oregon fab. Currently, our North Carolina fab is a dual-use facility that manufactures wafers for both GaAs amplifiers and SAW [surface acoustic wave] filters. As we transfer GaAs production to Oregon, we are working closely with customers to manage end-of-life GaAs products built in North Carolina,” says Brown.
“Our North Carolina fab will continue to manufacture SAW filter wafers, including our latest LRT [low-loss resonator technology] SAW technology. The transfer of our GaAs production to Oregon will make room for anticipated SAW filter growth in North Carolina. This is a further example of the proactive steps we are taking and continue to evaluate in order to streamline operations and improve gross margin.”
Silicon carbide business to be divested
“During the quarter, we made the decision to evaluate strategic alternatives for our silicon carbide business,” says Brown. “Our highly experienced team has made considerable strides in advancing the JFET silicon carbide technology. We believe an owner who is strategically focused on this business and can leverage pre-existing sales and support overhead will be able to create more value with the asset,” he adds. “For Qorvo, exiting the silicon carbide market will allow us to reduce operating expenses and avoid the capital expenditures necessary to remain engaged. The business remains and will continue to remain included in our financial non-GAAP guidance until a definitive course of action has been determined.”
Beyond fiscal 2025: 50%-plus long-term gross margin still targeted
“Beyond this fiscal year, we expect HPA and CSG will continue to benefit from the intersection of multi-year secular growth opportunities with our technology capabilities and product portfolios,” says Brown. “By segment, our growth targets are strong double-digit growth for CSG, and double-digit growth for HPA,” he adds.
“In terms of diversification, our long-term objective is to generate 50% or more of total revenue from HPA plus CSG [boosting margins],” continues Brown.
For ACG, mid to high single-digit revenue growth is expected. “We continue to be enthusiastic about the breadth of our opportunities at our largest customer [Apple] and we’re engaged on more programs today than ever in investing to increase our content. So we’re competing for products that we’ve supplied before and some placements that are new for us,” notes Brown.
“On gross margin in the December and March quarters and into early fiscal 2026, we do expect to see the headwind associated with the mix shift and the entry tier for those Android devices. It will cause the utilization and gross margin to come down a bit versus our prior comments,” warns Brown. However, China-based Android revenue is now under $100m (down by more than 75% from the peak, with Android revenue in general down 50%) and is expected to trend lower during fiscal 2026, so exposure to that has diminished. There is hence no change to the guidance given at the firm’s Investor Day in mid-June of about 50%-plus long-term gross margin.
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