Qorvo Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2021

There are 15 speakers on the call.

Operator

Good day, and welcome to the Qorvo Inc. Q1 2022 Conference Call. Today's conference is being recorded. And now at this time, I'd like to turn the conference over to Mr. Douglas Toledo, Vice President of Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thanks very much, Cody. Hello, everybody, and welcome to Qorvo's fiscal 2022 Q1 earnings conference call. This call will include forward looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release published today as well as the risk factors associated with our business and our annual report on Form 10 ks filed with the SEC because these risk factors may affect our operations and financial results. In today's release and on today's call, we will provide both GAAP and non GAAP financial results.

Speaker 1

We provide this supplemental information to enable investors perform additional comparisons of operating results and to analyze financial performance without the impact of certain non cash expenses for other items that may obscure trends in our underlying performance. During our call, our comments and comparisons to income statement items will be based primarily on non GAAP results. For For a complete reconciliation of GAAP to non GAAP financial measures, please refer to our earnings release issued earlier today available on our website at qorvo.comunderinvestors. Joining us today are Bob Brecklewirth, President and CEO Mark Murphy, Chief Financial Officer James Klein, President of Qorvo's Infrastructure and Defense Products Group Eric Creviston, President of Qorvo's Mobile Products Group as well as other members of Qorvo's management team. With that, I'll turn it over to Bob.

Speaker 2

Thank you, Doug, and welcome everyone to our call. First, the Qorvo team delivered an exceptional June quarter. Revenue, gross margin and EPS were each above guidance. Customer demand during the quarter was broad based and included recently released product categories, including 5 gs diversity receive modules, MEMS based touch sensors and WiFi 6 eSIMs to name a few. Our R and D teams are relentlessly advancing technologies and enable more complete integrated solutions and increase our differentiation.

Speaker 2

We are partnering with leading customers, serving them where we are most valued and introducing new products and technologies that expand our addressable markets. We are pleased with ongoing design activity. We are locking in wins and we expect the demand environment to remain robust. In the smartphone market, 5 gs devices are adopting new architectures and adding functionality that enhance performance and create new challenges related to current consumption, board space and handset design resources. To address these challenges, Handset manufacturers are selecting more highly integrated solutions that deliver superior performance.

Speaker 2

For Qorvo, The content opportunity in a 5 gs device increases by $5 to $7 when compared to a 4 gs device. We expect handset units to grow 5% to 10% this year with 5 gs doubling to around 550,000,000 units. In 2025, 5 gs units are expected to be approximately 80% of total units. In other connectivity markets, new applications are proliferating, supported by generation over generation advancements in WiFi, Bluetooth, ZigBee, Thread, Ultra Wideband and other wireless protocols. And a growing number of applications, multiple wireless standards coexist and operate concurrently.

Speaker 2

As an example, one of the largest smart home providers recently integrated numerous low power wireless protocols into its distributed WiFi 6 Router, creating infrastructure for seamless whole home operability. We expect this integration trend to continue. Our expertise in areas including product design, software support and system solutions enable us to simplify our customers' product development efforts, while significantly enhancing the end user experience. Outside of connectivity markets, the expanding opportunities are driven by diverse set of underlying upgrade cycles. Rushless DC motors are replacing larger, less efficient conventional DC motors.

Speaker 2

Solid state drives are replacing slower and less reliable hard disk drives and touch sensor solutions are replacing less functional traditional buttons. We also expect RF based biotechnology testing will enable central lab performance at the point of care. We expect our first commercial orders for OmniTest platform by the end of the year. Turning to the June quarterly highlights. In 5 gs handsets, customer demand for highly integrated modules is expanding.

Speaker 2

During the quarter, we launched our next generation complete main path solution, which includes low band, Mid high band and ultra high band modules offering higher output power and enhanced MIMO support for upcoming 5 gs phones. For the diversity path, we began sampling our first 5 gs DRX, a sub-six ultra high band placement, offering best in class receive sensitivity. These Main Path and Diversity Path solutions Integrate filtering and amplifiers that were formerly discrete, helping our customers to save board space, improve device performance and accelerates product development efforts. Also during the quarter, we announced the interoperability of our family of ultra wideband products with Apple's U1 chip and the Nearby Interaction protocol. Qorvo's ultra wideband solutions provide a superior level of accuracy, reliability, latency and security when compared to traditional technologies like WiFi, BLE and NFC.

Speaker 2

In addition to remote access to our cars and homes, Ultra Wideband will enable new applications in the connected home, indoor navigation, contactless payment, Factory Automation and other use cases. With more in house software capabilities from our recent 7 Hubs acquisition, We now offer a complete solution and we're working with customers on products combining our ultra wideband hardware with our latest software release, shortening their time to market. We see a growing set of applications for our Ultra Wattband solutions and customer design activity is accelerating. In WiFi for handsets, we secured new reference design engagements with our WiFi 6E FEMs. These chip onboard fans reduce insertion loss and enhance handset design flexibility versus system in a package solutions by enabling placement closer to the antenna.

Speaker 2

Leading Android manufacturers are moving from system and a package placements The best in class RF solutions and Qorvo is winning on the strength of our product design, performance and customer support. In automotive, we achieved record revenue, up more than 80% year over year in support of automotive OEMs in the U. S, Europe and in Asia. Growth was driven primarily by the increased demand and expanding connectivity requirements for WiFi, V2X, LTE and 5 gs. Content growth was also included our touch sensor solutions, which automotive OEMs are using to enable smart interiors.

Speaker 2

This is a new growth category for Qorvo We have secured design wins in support of multiple automotive customers. To enhance the functionality of our touch sensor solutions and fostered new use cases, we have integrated infrared capabilities, a milestone achievement for our sensor team. For the smart home, we partnered with a leading supplier of home mesh networks to introduce the 1st Wi Fi 6 router with integrated BLE THREED and Zigbee multi protocol operation. This leveraged our concurrent connect technology. We also secured a BAW filter design win with a leading supplier of high end audio speakers to support the pairing of Bluetooth Low Energy and WiFi 6.

Speaker 2

As a member of the Connectivity Standards Alliance And an early participant in the upcoming matter connectivity standard, Qorvo stands to benefit as multi protocol Seamless interoperability drives IoT adoption and growth. In power management, We released a 40 volt motor control solution that supports the ongoing transition to higher voltage battery power tools. Demand for our motor control and power management products has been very strong, driving growth in applications from appliances and battery powered tools to enterprise compute, laptops and gaming. We are seeing demand for brushless DC motors expand into lower cost power tools and smaller appliances, given the advantages in efficiency, size and reliability. We are also leveraging the configurability of our power management solutions to address new applications in defense and other markets.

Speaker 2

In infrastructure, We increased shipments to multiple OEMs in support of 5 gs sub-six gigahertz, massive MIMO and macro deployments in the U. S, Japan, Korea and Canada. We also achieved initial design wins supporting a massive MIMO deployment in India And we secured BAW filter design wins for 3.5 gigahertz and 4.9 gigahertz 5 gs small cells with a major China based OEM. New product launches included GaN integrated PA modules for massive MIMO systems and a family of high efficiency power amplifiers for 5 gs small cells serving densely populated areas. Across our markets, there are strong secular tailwinds.

Speaker 2

Connectivity is proliferating and complexity is increasing, which is expanding our growth opportunities. We supply best in class products and our investments in new product areas and differentiated technologies are extending our technology leadership and broadening our reach. As our June results and September guidance demonstrate, End market demand is broad based and robust, and our outlook is strong. And with that, I'll hand the call over to Mark.

Speaker 3

Thanks, Bob, and good afternoon, everyone. Qorvo's revenue for the fiscal year 2022 First quarter was $1,110,000,000 $30,000,000 above the midpoint of our guidance and $323,000,000 or 41 percent higher than last year. Mobile Products revenue of $836,000,000 was up 79% year over year on the growth of higher content 5 gs smartphones. Infrastructure and Defense Products revenue of $274,000,000 was down year over year due to especially strong infrastructure demand during the June 2020 quarter. But the segment was up sequentially as WiFi and Programmable Power Management growth continued and infrastructure growth resumed.

Speaker 3

Non GAAP gross margin was 52.5% and above our guidance on more favorable mix and pricing, Improve manufacturing yields and lower inventory charges. Non GAAP operating expenses in the first quarter for $216,000,000 or 19.4 percent of sales and in line with expectations. Sequential and year over year increases in OpEx were driven by technology and product development expenses associated with key organic growth programs and recent acquisitions. Non GAAP operating income in the June quarter was $367,000,000 33.1 percent of sales. This was the 3rd consecutive quarter of operating margin over 33%.

Speaker 3

Non GAAP net income in the first Quarter was $323,000,000 and diluted earnings per share of $2.83 Was $0.38 above the midpoint of our guidance. Cash flow from operations in the Q1 was over $341,000,000 and CapEx was $65,000,000 consistent with the level of spend we've discussed previously to support our outlook. Free cash flow was $276,000,000 and we repurchased $300,000,000 of shares. The Q1 share repurchase was the largest dollar amount since an ASR in the March quarter of 2016. Since the company's formation and through the June quarter, we have repurchased $3,700,000,000 of shares at an average price of approximately $71 On the balance sheet, cash decreased to $1,200,000,000 following the close of our Next Input acquisition and the share repurchases.

Speaker 3

That remained unchanged at approximately $1,700,000,000 Our leverage remains low, our revolver is untapped and we have no material near term maturities. Yesterday, Fitch initiated a credit rating on Qorvo at BBB plus This, along with S and P's upgrade of Qorvo to investment grade in April, highlights the quality of Qorvo's business, Now turning to the current quarter outlook. We expect revenue between 1,235,000,000 and $1,265,000,000 non GAAP gross margin between 52 and 52.5 percent non GAAP diluted earnings per share of $3.24 at the midpoint of guidance. Our September quarter revenue outlook reflects sustained and broad based customer demand, driven by multi year technology upgrade cycles. Qorvo revenue of $1,250,100,000 at the midpoint is up 13% sequentially, 18% year over year and approximately 27% year over year, adjusting for last year's 14 week quarter.

Speaker 3

As a reminder, our fiscal year 2021 was a 53 week fiscal year And the September quarter last year was a 14 week quarter versus this fiscal year's more typical 13 week quarter. We forecast mobile revenue in the current quarter to be approximately $985,000,000 at the midpoint or up 31% year over year and 18% sequentially. In IDP, We project revenue to decline slightly to approximately $265,000,000 in the current quarter on defense program timing and continued supply constraints. We expect IDP sequential and year over year growth to return in the December quarter. Our September quarter gross margin guide of 52.25 percent at the midpoint and sustained strong operating performance.

Speaker 3

In the second half of the fiscal year, we currently Gross margins to remain around 52%, resulting in full year gross margin above 52%. Non GAAP operating expenses are projected to increase in the September quarter to approximately $233,000,000 on added labor and other development expenses associated with recent acquisitions and key growth programs. At the midpoint of our September quarter guidance, operating margin is forecasted to remain over 33% for the 4th consecutive quarter. We now project our current quarter and full year non GAAP tax rate to be approximately 9%. Capital expenditures are projected to increase to around $75,000,000 in the September quarter as we work to intersect demand and support long term supply agreements with multiple customers.

Speaker 3

We are off to a strong start in fiscal 'twenty two and we are well positioned to continue delivering premium technology to an Now, I'll turn the call back over to the operator for questions.

Operator

Thank We'll take our first question from Blayne Curtis with Barclays. Please go ahead.

Speaker 4

Sorry about that. Nice results and guide. I'll work better on the mute button. But the maybe just a high level, you talked about The strong growth you're looking at in mobile, up 15% or teens sequentially. Just kind of curious, I think the Android market is still growing.

Speaker 4

You're seeing a nice mix of 5 gs. But I think a lot of people are kind of seeing more Vlad, it's going to trend in the back half of the year. You seem to be doing a bit better. Maybe just walk us through the puts and takes in the mobile guidance for September?

Speaker 2

Thanks, Blayne. Eric, you want to take that one?

Speaker 5

Sure. Yes, we're continuing to see really strong design activity for our highly integrated full Main Path Solution, we introduced Fusion 21, more capability, more band coverage and more MIMO support in particular. We've entered the diversity market as you saw in our strategic highlights. And really a lot of the Next generation 5 gs phones is around antenna management. So that part of our business, which has been strong for some time, Continues to see a lot of design interest and customers out here, so even step up and take a maybe a larger role in terms of determining the antenna control Interfaces, the tuning and the antenna flexing and so forth in and out of the antennas.

Speaker 5

So really as you're looking to build the next generation of

Speaker 4

And then maybe a question for Mark just on gross margin. You had thought maybe the June quarter would be a bit lower. Can you just walk us through what came in better for you? And then as you look out, I guess you're kind of talking about more flattish for the rest of the year. Any kind of puts and takes as to that?

Speaker 4

I mean, I know IGP is down, but I guess You're saying it should come back, so that should help.

Speaker 3

Yes. Blaine, you pointed to one of the issues We're delivering these sort of margins with a weak infrastructure business in IDP. So I think that speaks to the quality of Yes, the rest of the business. Yes, the June quarter, another strong beat and things are just going really well. I would say that combination of the environment we're in, which makes can be challenging in the forecast, but also Our improvements are outrunning even our own high expectations.

Speaker 3

So, we're doing the Oregon is operating very well and we're in the right places and that's paying off. As it relates to the June beat, We did have the higher volumes and that was favorable, it skewed favorable on the mix, those higher volumes relative to the guide. We're still supply constrained, so that allows us some tactical opportunities either Yes, types of products and price. And then again, we're just operating exceptionally well. Yes.

Speaker 3

The product test yields are better than expected. Manufacturing costs are in control. We've got good utilization. The fixed cost absorption is predictable or better than expected. And then we had other inventory charges, which were lower than expected.

Speaker 3

So, again, really pleased with the quarter. Now, we are Dividing down a bit, we're still going to be up 55 basis points year over year. Some of that is, Yes. We just believe that some of the price effects will begin to moderate a bit. The inventory charges we expect But I think it's hugely important to keep in mind that we're Stabilizing around 52%.

Speaker 3

And structurally, this is a better business than it was years ago. And that's so it's sustainable. It's been driven by a number of efforts on dimensions we've laid out before. We are definitively a leader across a number of technologies, have very broad portfolio, Yes, there's flexibility in the products and opportunities we pursue. We've actively managed the portfolio.

Speaker 3

We picked the right products. We've got broad customer exposure and pick the places where they're going to value us the most. You've already done a terrific job on productivity and the culture has matured here around Cost savings and just getting more done with less and getting it done more efficiently, which benefits customers and all, and those are ongoing. It's allowing us to manage risk better, which I think is proven in this last year and a half. And that we're being just very disciplined about our capital spend as we are picking up spend, but it's to serve what we believe is a very clear and compelling outlook.

Operator

Thank you. We'll take our next question from Vivek Arya with Bank of America.

Speaker 6

Thanks for taking my question. For the first one, I think last quarter, Bob, you gave us this kind of 15 ish percent sales growth for the full year fiscal 2022. I was hoping you could update that number and just give us some perspective on what that range implies for the back half of the

Speaker 2

Sure, Vivek. Thank you for the question. Actually, I think it was Mark that gave it, but I'll go ahead and give you my answer for the year. Last quarter, when we gave you the year, we were giving you guys an idea that we thought we could grow about 15%. And I think now it's safe to say we're going to grow well north of 15%, but probably less than 20%.

Speaker 2

So I put it in that range now, Vivek. And Really pleased with how the mobile business is running, how the team is going on. Mark mentioned that supply constraints, The team is managing the complexity of the business with the constraints that are out there that all of you know about. But clearly, we're not demand constrained, it's on the supply side, Vivek. So obviously, if we can continue to do an extremely good job, We'll keep you updated.

Speaker 3

And maybe I'll just add to Bob's comments Vivek on maybe to get a little sense of the profile. As Bob said, We see revenue now between 15% 20% versus around 15%. If we look at the year, Yes. We look at 2nd and third quarter as being flattish, maybe down if the Macro situation erodes, but right now, we're not seeing that. We're still in a supply constrained environment.

Speaker 3

We do, as I mentioned, see IDP Growth resuming in the Q3 sequentially, but the business will still be less than 300,000,000 in the December quarter. That would imply then that mobile is down a little bit sequentially. And the 4th quarter is just too early at this point to really call definitively. We think that IDP will be over 300,000,000 in the Q4, so continuing to grow through the year, and then mobile be down a bit seasonally. We do just on gross margins to be clear, see those sort of leveling out around 52% and in the back half for a total year of a little over 52.

Speaker 6

Very helpful. And then for my follow-up, I was hoping you would give us your perspective on the China Smartphone market, how much of your mobile business is exposed to the Chinese smartphone makers kind of on an aggregate? How much of it is 5 gs versus 4 gs. And what have you seen recently? There have been kind of mixed data points about sell through and Some deceleration in units, perhaps more to do with export markets than anything else.

Speaker 6

But just give us your overall perspective on the China smartphone market, level of exposure, 5 gs versus 4 gs and any trends that you're seeing there versus your expectation 90 days ago? Thank you.

Speaker 5

Sure. Vivek, this is Eric. Yes, so we're very pleased with our business in China and working with The major OEMs there to continue to even help them build out their 5 gs portfolio. And as you pointed out, Their markets, not just China domestic, but also to a large extent, international shipments now in exports. So they've got a Broad and growing portfolio of really leading edge technology handsets and doing very well in Europe, for example, and other places.

Speaker 5

So, It's a vibrant design opportunity for us using leading edge technologies, continuing Stick with the roadmap around highly integrated products that we're supporting and very much adopting our antenna control solutions and so forth. So The environment for design in terms of relationships and so forth is fantastic. The product Portfolio turns over fairly often, which gives lots of opportunities for new functions and new integration levels and features and so forth, which is Always great for us. So in terms of recent slowness in the sell through, You see some noise in the data. It's still great sell through.

Speaker 5

The 5 gs phones are on track this year. The vast majority of what we're shipping To our Chinese customers today is 5 gs components and of course the sell in into China domestic as well as vastly 5 gs already. But even for the export market, they're transitioning rapidly to 5 gs. So it's a great opportunity for Qorvo going very well.

Operator

Thank you. We'll take our next question from Karl Ackerman with Cowen and Company. Please go ahead.

Speaker 7

Yes, good afternoon. I had a clarification question and a follow-up. My Question is how many 10% customers did you have in the quarter? And my second question is on IDP. Some of your peers in the supply chain Have noted Wi Fi modules for automotive and industrial electronics are seeing lead times extend as part availability is in tight supply.

Speaker 7

I was wondering, are you able to fully meet demand and are conservative on broader supply chain constraints? Or are you So seeing tightness for substrates in our IoT business. And if you are seeing tightness, what steps have you or could you take to alleviate some of those constraints over the next couple of quarters? Thank you.

Speaker 3

Maybe I'll start and then James can kind of round out the answer. On the Number 10% customers, Carl. We tend not to do that during the quarters and give you the disclosure in the full year. But I will say, just like last quarter, we had a number of 10% customers and an additional customer that was very close. So, I think I can say that we have, for our space, a relatively broad customer set.

Speaker 3

On the business and constraints and WiFi in particular, IDP would be growing and and it's WiFi and Programmable Power Management and some other areas. IDP will be growing sequentially, but we've got, I'd say the supply constraints are in actually three areas. We've got some internal constraints. As you know, we have In house capacity for certain components and we're tight there. We've got external and that can be either incoming material and or outside service providers and there are some constraints there.

Speaker 3

And then finally, the third one, we do have some, what I would call maybe kitting issues where a customer may not be able to get all their parts, so it impacts our demand, Sort of a derivative effect for us, but with that change.

Speaker 5

Yes, Karl. And I think

Speaker 8

all of that Mark talked about is on a little bit different timeline. We To start at the fact that some of the kitting things appear to be getting better. And so I think as we go into our Q3 and Q4, those start to get better. We are bringing on internal capacity that really does start to help us as we go into the end of the calendar year. And sort of the same note on our supply constraints from outside, those start to get significantly better as we go into our Q4 with some improvement in the December quarter as well.

Speaker 8

So as Mark talked about, I think That really allows us to move back into starting to grow in Q3 and Q4 for IDP. Now, there's a couple of other things that are going to help us get back into growth as we enter the back half of the year. Part of that is, as we get beyond a really, really high growth that we had last year in the 1st two quarters with base station. And so that will be part of what allows us to get into that growth area. But also, We see significant strength and pretty good visibility as we go in the back half in power management and in our Wi Fi business.

Speaker 8

And the base station business continues to sort of distribute or have a recovery.

Speaker 7

Very helpful. Thank you.

Operator

Thank you. We'll take our next question from Gary Mobley with Wells Fargo Securities.

Speaker 9

Hey, guys. Thanks for taking my question. I'll ask a 2 part question because I think the answer may be the same. Curious to know Your largest customer, I think, is expecting some lower unit volume, some supply chain constraints. And I'm wondering if you factored in those Extraneous factors into your September quarter guide to presume you have?

Speaker 9

And then as well, are you sort of walking back The second half or even the second quarter gross margin guide a little bit because of perhaps

Speaker 3

No, actually Gary, I would say our gross margin guide is up for the year. So Yes, the profile may be a little bit different. Yes, we exceeded in the second quarter, but I wouldn't read into that. And then on the we guide with what we believe is Our best read on the demand and any of these isolated supply chain constraints And we give the best view we can. And I can't add any more than that.

Speaker 10

Okay.

Speaker 9

Just my follow-up question I'd like to ask about These lower inventory charges have been a tailwind for you guys for several quarters now. I understand it's a supply constrained environment. Are those lower inventory charges a function of just the demand environment exceeding supply? Is it as simple as just less obsolescence and being able to sell perhaps some products that were borderline obsolete?

Speaker 3

I think it starts with we're operating better and better matching what we're building to customer demand. And the tightness in the market can help clarify that. But I think we've just Over the years, they have gotten better operationally and that's helping us. We've seen our inventory charges sort of Trending down and I'd say at this point, we just probably need to do a better job of building it into forecast and that it's a more durable level, which we're of course happy about.

Operator

Thank you. We'll now take our next question from Edward Snyder with Charter Equity Research. Please go ahead.

Speaker 11

Thanks a lot. So your margins are looking excellent and I know you broke down a bit Mark on how that's all shaking out between operational efficiencies And mix, I mean, with IDP down and the margins up, it was certainly, I think, kind of surprising. Is that largely due to the mix coming out of mobile because given what's happening in China, which I know is very large for you, we're seeing a lot more in kind of tuning, we're seeing a lot more demand For BAW, both products which are accretive to corporate margins. I was just trying to get an idea, is this driven largely by What's the technology evolution in the Chinese phones coupled with better operational performance or is there something else going on? Then I have a follow-up.

Speaker 3

I think you've got it directionally corrected. I mean, we've got, of course, some highly differentiated discrete parts, but A big move here for us is the move to integrated modules, more sophisticated modules and then just our operational performance and driving cost out, better utilizing our factories, getting that fixed cost absorption, spends in control And then just having a good roadmap to drive costs down and pick the right places to compete. So It's a collective effort, right? It takes early R and D many years ahead of time and having an advantage in design and good portfolio management. And at the end of the day, we got to be able to Produce things efficiently and everyone is doing a great job across the board and you are seeing the results.

Speaker 11

And if I could maybe dig in with Eric a little bit on mobile. When When you merged with when TriQuad and North Micro moved way back when we were on the road, you were talking about not really wanting to put a Tiger team on the largest customer Because you didn't want to get the revenue concentration. At that point, if you took a snapshot of what happened back then, you were spread around 20% for each of the Major groups including IDP, which you seem to be happy with now. It seems like we're kind of returning back to that kind of a model with multiple 10% customers. What I'm wondering is with the push of 5 gs into lower cost phones, which is capturing more of the Sweet market.

Speaker 11

Is that going to change? Because if you look at China as a total, it must be a very large portion of your total revenue Or are you counting in 10%? I mean, is the blend across China if you had multiple 15% customers, which you know of the VOXX guys, Doesn't that expose you to the swings in China maybe a little bit more than would you be comfortable with?

Speaker 5

So I guess we need, 1st of all, to differentiate our business in China to our with our Chinese handset OEMs is not, As we said, by any means entirely China domestic consumption, of course, right? I think roughly half their volumes are now being exported around the world and selling into high mid and even ultra high tier phones across many countries today. So, Yes. I think that the biggest thing that's changed me over the 5 or 6 year period you're referring to is how much like their phones are becoming like the true flagships of the world, implementing the latest features and sometimes ahead of the bigger guys, if you will, because they're fast, they've got a portfolio that turns over, They're shipping all over the world. So adopting our new highly integrated things like 5 gs DRX modules, like the dual connect modules And a lot of what we're doing in the antenna systems, I mean, that's they're early movers in that new technology.

Speaker 5

And I think Yes. Again, we're very pleased to be working with these guys.

Operator

Thank you. We'll take our next question from Chris Caso with Raymond James.

Speaker 9

Yes. Thank you. Good evening. The first question is on the supply constraints. And if you give us some sense of for how long you expect these constraints to last, obviously the mobile business Has a seasonal aspect to it in the first half of the year.

Speaker 9

I imagine that the answer would be different for IDP. And perhaps as you catch up on some of these constraints, does that affect the seasonality of the business such that if you're catching up on supply, We catch some better than seasonal quarters as you're able to catch up with some of the demand that you perhaps weren't able to fulfill.

Speaker 2

Chris, this is Bob. Thanks for the question. Like I said earlier, the team has worked extremely hard to manage through all this complexity and to forecast what's unknowable at this time would be quite challenging. And I'm pretty pleased with how the team has been running the operations and chasing demand and product mix. And James and Mark both talked about The kits and our customers are matching things up and everything like that.

Speaker 2

So, I think there's been a lot of smart people out there that have forecasted This thing that's going to go on for years, some say quarters, and I think it's not in our place to forecast this. What I can tell you is, today, we are clearly capacity constrained on demand. James pointed out, we're adding capacity, our suppliers are adding capacity and we'll have to see how some of these Great products that we support in both IDP and mobile continue to sell. Mark also commented about the global situation and what's going on and how the world recovers And has it spikes with what's dealing with the virus and we've got to factor all those things in and for me to sit here and give you Specific date, I think, would not be smart on our part. But what I do feel good about is the progress we are making And the demand just continues to grow.

Speaker 2

And I think that's what's important.

Speaker 9

Got it. Thank you. As a follow-up, perhaps you could talk a little bit about uses of cash and the cash flow has improved pretty nicely You spoke about repurchases in your prepared remarks. Now that you're generating this cash, what are your plans for it?

Speaker 3

Chris, I'd say that our plans are we're going to Operator, we have been and we've been a pretty balanced company around deploying capital. We're thrilled with the June quarter, the start to the year, dollars 276,000,000 of free cash and We actually deployed 467. So, I'd say very strong deployment out of the gate. If you look at Last 12 months, we generated $1,200,000,000 of free cash. We deployed about 80% of that, of which 3 quarters of that was on repurchase.

Speaker 3

Now, keep in mind, beginning of the year last year was Everyone is hunkered down with COVID. So, I think 80% is pretty good, all things considered. And then, the last eight quarters, We've generated $2,000,000,000 of free cash. We've actually deployed $2,100,000,000 and 60% of that was repurchase, about 40% Well, 40% was acquisitions. Now, we just got out of the quarter where we the 9th quarter was active So if you included that, we actually had deployment of about 50% acquisitions, 50% repurchase.

Speaker 3

So I think we're going to the whole management team is focused on a long term free cash flow generation. We believe we're going to continue to grow free cash flow. We think we will this year. Our priorities, organic investment, Continuing to have a technology lead, we've got all the capacity we need for the markets that we feel confident about. And then we look at inorganic opportunities where it makes sense.

Speaker 3

And we've been fairly active. Of the $1,200,000,000 that we've spent on acquisitions in the last nine quarters, We're really excited about the markets that we have exposure to. We think that we've brought on over $4,000,000,000 in TAM With that, that's conservative and that's excluding bio. And then several years out, We would see the TAM being north of $10,000,000,000 for what we bought. And again, that's excluding bio, which is an exciting, completely new market for Qorvo.

Speaker 3

So I think we'll continue to look at things that make sense for CorVel on markets, customers, technology differentiation, financials of course, and then

Operator

Thank you. We'll hear next from Timothy Arcuri with UBS.

Speaker 12

I had 2 as well. I guess, Mark, the first Question is on gross margin. I think you've beaten the last four quarters by about 200 basis points each of those quarters and then even before that you were beating by about 100 basis points. So I guess the question is like, is this just consistent conservatism or is there something that's kind of surprising you inter quarter that's making it better? I mean, if I apply that same level in September, you'll do 54%, which is like 70% drop through.

Speaker 12

That's like super good given that it's a down IDP quarter. So I'm just trying to handicap your guidance versus the fact that you've Been beating by a lot during the past 4 quarters? Thanks.

Speaker 3

Yes. Tim, I alluded to this earlier. We admittedly haven't been great at forecasting. Fortunately, it ended up on the right side and we Yes, I think that I certainly would not add 200 basis points. You can't do that because we're trying to Obviously, Refined Things.

Speaker 3

I would say that, yes, this has been a very difficult period this past year, year and a half to forecast. And the markets tightened up quickly and of course there's a lot of operational consideration. So I think you've got to factor some of that in It's been difficult to forecast and you tend to in periods like this be a bit more conservative or more cognizant of the risk, I should say. But the other thing is, we're just, the improvements that we're making, We had great expectations and we're doing even better. And it's just, it's emboldening us to do more of the same.

Speaker 3

Our operating leverage, which is kind of one of your points, does slip As we look out to the December quarter March quarter, but you've also got to consider that that's on very difficult comps the prior year. And at the time, when we were putting up those numbers, We said that it really showcased what the business could do, but we guided down. So, And we did come down some as you know, as you see here. But again, I'll repeat something I said earlier. I think it's important to keep in mind that we stabilized around 52% and that the business is structurally better than it was.

Speaker 12

Awesome, Mark. Thank you. I guess my second question is really on the shape of the business for fiscal Q3 and Q4. It might be splitting hairs maybe a little bit, but the comments seem to imply maybe a little below seasonal in mobile products for fiscal Q3 and fiscal Q4. Is that supply constraint, maybe some concern around China?

Speaker 12

And I guess maybe a different way of asking the question is, if the constraints didn't exist, How much better would fiscal Q3 and fiscal Q4 be? Like is it having a material effect on the guidance? Thanks.

Speaker 3

Yes, Tim, it's Mark. I think as you go out, we're in the September quarter Trying to give you guys a sense of the profile. I think we have a decent view on December. As you know, it starts to It's a ways out. There aren't many companies, if any, guiding out in March.

Speaker 3

I'm trying to give you just a sense of things. On the supply constraints, we are clearly supply constrained at the moment and it gives us confidence in the near to medium term demand. And we feel confident in the long term demand just given our market position. Now, There are some green shoots around the sort of pricing has Moderate a little bit, a few less expedites. We see some channel, It's lean to the point of unhealthy and we see a little bit of that recovering.

Speaker 3

So I think those are signs, early signs that The industry will work through this and at this point, I think it's prudent just to Yes. We've given you the best view we can.

Operator

Thank you. We'll take our next question from Ambrish Srivastava from BMO.

Speaker 10

Thank you. Mark, I just wanted to come back to the longer term gross margin. And you actually have been very candid about The uneven performance on the front on that front as well as on the free cash flow side. So Could you just remind us what are the big heavy lifting? I know it's easy for us to just model it out, but it's 500 bps versus where it used to hover around, and obviously the business is bigger.

Speaker 10

But can you just help us understand what are the changes you've made that has allowed you to structurally be 500 bps above where you used to be. And then I had a quick follow-up, please.

Speaker 3

I think we've talked about this for years and going back to the Investor Days. And it sounds repetitive at this point, but I mean it starts with that both the companies that came together were Yes, technology leaders in their own right on some different products and created enterprise that was going to be A leader is 5 gs hit and it took a few years to get legs under the org, but that technology advantage and this Wide suite of technology to serve customers' problems is foundational to The rest of it, and we continue to maintain that lead. And then that gives us the opportunity to Make good calls on where to play, where to compete, where the Customers are going to value us most, so we've been very active in portfolio management. We've driven productivity and we've talked about that over the years, the wafer Size expansion, the die shrinks, myriad of other productivity programs, not only in the factories, but in R and D and and then we've been very mindful about capital spend. Our CapEx as a percent of sales was almost 20% at one point.

Speaker 3

We've driven that down to mid single digits, expected to stay around there and hence the as 5 gs hit, our factories I've gotten loaded. We're getting great fixed cost absorption and costs are in control. And then we've got this great pipeline of products that Eric has talked about and James. So It's all those things, taking all the people in the company and that's allowed us this, I think structurally higher gross margin.

Speaker 10

Got it. And my quick question on the gross margin, I just want to make sure I understood this. You mentioned pricing as one of the factors in the reported quarter. But then you said the pricing environment I'm not sure I caught the term, but whether you meant that pricing is not as strong as it was In the reported quarter or pricing is not really that much of a factor in your guidance for us?

Speaker 3

It's still very constructive environment and the market is still tight. I was just saying on a relative basis, it's less tight than it was a couple of quarters ago. And it's Yes, still a very constructive environment. I mean we're still Eric and James can talk and Bob can talk about long term Agreements with customers and that's still going on. I was just making a relative comment, Enbridge.

Speaker 10

Got it. Thank you very much.

Operator

Thank you. We'll take our next question from Chris Rolland with Susquehanna. Please go ahead.

Speaker 13

Congrats on the quarter and thanks for the question. You guys had a lift in your own internal inventories in the quarter and I was just wondering, was that just to service upcoming demand? Or do you guys plan to have a little bit of a buffer there, maybe even use it Strategically, just wondering what that was about?

Speaker 3

Yes. We've been performing really well on inventories and we're near working capital overall, we're near historic lows. And then on inventory itself, we're still close to 4 turns. We went down a little bit as you mentioned, But it's in part to support seasonal ramp or primarily to support seasonal ramp. And we're basically as we make it, we ship it.

Speaker 13

Yes. Okay. And then from recollection, I think you mothballed one of your facilities. Is there a point here in

Speaker 3

I think you're referring to Farmers Branch and that is one of the aspects of trying to grow capital efficiently and we would expect to utilize that facility next fiscal year.

Operator

Thank you. We'll take our next question from Vijay Rakesh with Mizuho.

Speaker 14

Yes. Hi, guys. Thanks for letting me ask a question. Just Looking at I know you talked about 2021, about 550,000,000 5 gs handsets. Just wondering what your take would be on 2022 if you to take a stab at what 5 gs units should look like.

Speaker 14

And my follow-up, just if you could give some color to what the puts and takes would be to the content growth On 5 gs handsets looking out? Thanks.

Speaker 5

Yes. So, this is Eric. Yes, we're not commenting formally on 2022 yet. At this level, Once we get through, we'll be at still under half of the handsets that we're shipping or smartphones that are shipping will be 5 gs. We did say that we think price will be up to 80% by 2025.

Speaker 5

So you can kind of maybe connect the dots there and make an estimate.

Speaker 14

Got it. And in terms of the content growth opportunity into next year?

Speaker 5

Yes, it continues. And some of the what are advanced features this year drop down into the other tiers as you go forward, right? So you're getting a lift not only on the say $250,000,000 a year of additional phones, but also the other 5 gs phones that are shipping are also having higher content. That helps to support the overall TAM growth.

Operator

Thank you. And that does conclude today's question and answer session. I I'd like to turn the conference back over to management for any additional or closing remarks.

Speaker 2

We want to thank everyone for joining us tonight. We look forward to speaking with you again at upcoming investor conferences. Thanks again and have a good night.

Operator

Thank you. That does conclude today's conference. We do thank you all for your participation and you may now disconnect.

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Earnings Conference Call
Qorvo Q1 2022
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