Qorvo (QRVO) Tops Q2 Earnings, Revenue Guidance Unimpressive

Qorvo Inc. QRVO reported second-quarter fiscal 2018 non-GAAP earnings of $1.52 per share, which beat the Zacks Consensus Estimate by 8 cents. The figure jumped 17.8% from the year-ago quarter.

Revenues on a non-GAAP basis declined 5% year over year to $820.6 million. However, the figure was slightly better than the high-end of management’s guidance of $800-$820 million.

The results reflected an improved demand environment in China. The company benefited from increasing dollar content across power amplifiers, switches, tuners and Wi-Fi in flagship smartphones from Huawei, Xiaomi, Oppo, Vivo and others.

Management stated that the unit growth is primarily driven by strong demand in India. Qorvo expects India to be an almost $1-billion opportunity for RF products by 2020.

However, mix remains a drag in both regions as consumers are favoring mid-tier phones, which have lower dollar content.

Revenue View Unimpressive

For third-quarter fiscal 2018, Qorvo expects non-GAAP revenues between $830 million and $850 million. The mid-point of the range missed the consensus mark by almost $50 million.

Qorvo cited delayed product cycle at its largest customer to be one of the multiple reasons that will hurt Mobile Products (MP) revenues in the current quarter. However, Infrastructure and Defense (IDP) revenues are projected to grow mid-single digits on a year-over-year basis.

Moreover, fourth-quarter fiscal 2017 revenues are projected to decline sequentially.

Qorvo fell almost 3% following the results. Notably, the company’s shares have returned 41.2% year to date, underperforming the 44.4% rally of the industry.

Quarter Details

Segment-wise, MP revenues were $630 million, which surged 38% sequentially, driven by robust performance in China.

Qorvo’s BAW filters, antenna tuners, RF front end modules and envelope tracking power management solution were used in Huawei’s flagship Mate 10 device. Moreover, the company shipped more than $9 of RF content into Xiaomi’s Mi Mix 2 device.

Infrastructure and Defense (IDP) revenues grew 21% year over year to $190 million. The growth reflects strong demand for the company’s solutions in defense (advanced radars and other electronic warfare products) and connectivity (Wi-Fi and emerging IoT applications).

IoT revenues surged 50% from the year-ago quarter. During the quarter, Qorvo won a RF front-end module design, which supports the Tile tracker family. Moreover, dollar content per car from automotive IoT applications increased to $7 due to multiple design wins in the quarter.

Moreover, Qorvo experienced strong demand for its 900 megahertz narrow band IoT infrastructure in China.

Qorvo stated that its RF solutions are being selected at majority of the baseband platforms like Intel Corporation INTC, Qualcomm Inc. QCOM, HiSilicon, MediaTek, Samsung, and LSI. This is proving to be a key catalyst for the company’s top-line growth.

Operational Details

Non-GAAP gross margin expanded 460 basis points (bps) from the year-ago quarter to 47.4%, lower than management’s guidance. This was primarily due to unfavorable mix and negative impact from an isolated air contamination issue in the company’s Florida fab.

Non-GAAP research & development (R&D), as percentage of revenues, increased 70 bps from the year-ago quarter to 13.5%. Selling, general & administrative (SG&A) expenses, as percentage of revenues, remained flat at 6.7%.

During the quarter, Qorvo reduced head count, which was primarily aimed at reducing cost and improving operating efficiency.

As a result, non-GAAP operating margin expanded 530 bps to 28.1%.

Balance Sheet & Cash Flow

As of Sep 30, cash and cash equivalents were $574.9 million compared with $512.6 million as of Jul 1. Long-term debt was $989.7 million as compared with $989.4 million at the end of the previous quarter.

Net cash provided by operating activities was $220 million up from $104 million in the previous quarter. Capital expenditures declined sequentially to $68 million.

Further, Qorvo has returned $57 million to shareholders under its ongoing $500 million repurchase program.

Guidance

For third-quarter fiscal 2018, gross margin is anticipated to be almost 47.5%, almost flat sequentially, primarily due to unfavorable product mix.

Operating expenses are forecast to remain flat at approximately $158 million for the third quarter. Moreover, earnings are projected to be $1.60 per share at the mid-point of the company’s target range.

Management’s guidance reflects strength at customers' flagship models and continued strength in IDP.

Qorvo doesn’t expect 50% gross margin, while exiting fiscal 2018. However, the company anticipates gross margin expansion to restart in the fourth-quarter of fiscal 2018 and continue throughout the next fiscal driven by improving mix, ongoing productivity efforts and increasing fab utilization.

Qorvo now expects revenues to decline less than seasonally over the December to March time-frame. In the second half, management expects double-digit year-over-year growth, with gains on new mobile platforms and continued strong IDP growth.

Operating expenses in dollar terms are expected to decline from fiscal 2017 level. The company remains on track to achieve operating margin of 20% or lower in the long haul.

Management expects capital expenditure to trend lower through the rest of the year, ending the full year below $300 million or less than 10% of sales.

Zacks Rank & Key Pick

Qorvo carries a Zacks Rank #4 (Sell).

Advanced Micro Devices AMD with a Zacks Rank #2 (Buy), is a stock worth considering in the broader sector. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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