Qorvo Inc QRVO is set to release third-quarter fiscal 2018 earnings on Jan 31.
Notably, the company beat the Zacks Consensus Estimate in each of the trailing four quarters with an average positive surprise of 6.16%. Last quarter, the company delivered a positive surprise of 5.56%.
For the third quarter of 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. The guidance reflects strength at customers' flagship models and continued strength in IDP.
Management expects non-GAAP revenues to be approximately $830-$850 million. Earnings are anticipated to be $1.60 at the midpoint of the guidance.
The Zacks Consensus Estimate for earnings is currently pegged at $1.60 on revenues of $841 million.
Notably, the stock has returned 5.7% in the past year, substantially outperforming the 1.2% gain of the industry.
Let’s see how things are shaping up for this announcement.
Improving Demand in China to Boost Top Line
Notably, China accounts for almost 30% of Qorvo’s Mobile Product revenues. Per market research firm GFK, smartphone demand in China decreased 3% in fourth-quarter 2017, while average selling price (ASP) jumped 17% year over year. The improving price environment bodes well for Qorvo’s top line. However, the product mix will continue to be a drag as consumers are favoring lower content phones, as witnessed so far in the cycle.
Qorvo’s results significantly depend on the performance of Apple Inc’s AAPL iPhone. We believe that higher dollar content iPhone X will drive top line growth. Additionally, improving market share at Samsung and Huawei is a positive.
The Zacks Consensus Estimate for Mobile Products is currently pegged at $642 million.
Key Factors
We believe IDP will be the key growth driver for Qorvo in the soon-to-be-reported quarter. The company is benefiting from strong demand for its high-powered Bulk Acoustic Wave (BAW) for the 3.5 gigahertz band for 5G massive Multiple Input Multiple Output (MIMO) antennas.
The defense business was strong in the last quarter as reflected in the 25% surge in GaN and BAW revenues. Multiyear defense contracts supporting programs like F-15, 16 and F-35 also aided growth.
Management expects double-digit year-over-year growth in IDP, given its broad customer base in smart home IoT, base station, Wi-Fi and optical.
We expect the company’s top line to benefit from the launch of its multi-stack, multi-protocol chip in the HUMAX voice assistant. This will help the company advance in the Internet of Things (IoT) and enable integration of voice assistants in a smart home system. Per market research firm Gartner, global spending on Voice assistants is forecast to reach a level of $3.52 billion by 2021.
During the quarter, Qorvo was selected as a provider of front-end power amplifiers (PA) to Qualcomm for its Cellular Vehicle-to-Everything (C-V2X) Reference Design. This will help the company to penetrate deeper into the automotive industry, driving top-line growth.
Moreover, the company is working toward a connected ecosystem of devices as evident through its expansion of distributed Wi-fi mesh solutions for homes. The company is witnessing increased demand for these Wi-fi mesh solutions owing to wider frequency coverage and reduced power consumption.
The Zacks Consensus Estimate for IDP is currently pegged at $197 million.
Unfavorable Rank, Negative ESP
We believe that Qorvo is unlikely to deliver a positive earnings surprise in the third quarter due to an unfavorable combination of Zacks Rank #5 (Strong Sell) and an Earnings ESP of -0.19%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
We don’t recommend Zacks Rank #4 (Sell) or 5 stocks going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are a few stocks you may want to consider as our proven model shows that these have the right combination of elements to beat on earnings this quarter.
Kemet KEM has an Earnings ESP of +2.94% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
NVIDIA NVDA has an Earnings ESP of +4.71% and a Zacks Rank #2.
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