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Qorvo (NASDAQ:QRVO) Reports Q2 In Line With Expectations But Stock Drops


Full Report / November 03, 2021
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Communications chips maker Qorvo (NASDAQ: QRVO) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 18.3% year on year to $1.25 billion. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $1.1 billion, or 11.7% below analyst estimates. Qorvo made a GAAP profit of $319.1 million, improving on its profit of $136.9 million, in the same quarter last year.

Qorvo (QRVO) Q2 FY2022 Highlights:

  • Revenue: $1.25 billion vs analyst estimates of $1.25 billion (small beat)
  • EPS (non-GAAP): $3.42 vs analyst estimates of $3.25 (5.3% beat)
  • Revenue guidance for Q3 2022 is $1.1 billion at the midpoint, below analyst estimates of $1.25 billion
  • Free cash flow of $197.5 million, down 28.5% from previous quarter
  • Inventory Days Outstanding: 86, down from 92 previous quarter
  • Gross Margin (GAAP): 49.5%, up from 46.3% same quarter last year

Formed by the merger of TriQuint and RF Micro Devices, Qorvo (NASDAQ: QRVO) is a designer and manufacturer of RF chips used in almost all smartphones globally, along with a variety of chips used in networking equipment and infrastructure.

Qorvo’s peers and competitors include Broadcom (NASDAQ:AVGO), Cirrus Logic (NASDAQ:CRUS), MACOM Technology (NASDAQ:MTSI), Qorvo (NASDAQ:QRVO), Qualcomm (NASDAQ:QCOM), Skyworks (NASDAQ:SWKS) and Texas Instruments (NASDAQ:TXN).

Processors and Graphics Chips

Chips need to keep getting smaller in order to advance on Moore’s law, and that is proving increasingly more complicated and expensive to achieve with time. That has caused most digital chip makers to become “fabless” designers, rather than manufacturers, instead relying on contracted foundries like TSMC to manufacture their designs. This has benefitted the digital chip makers’ free cash flow margins, as exiting the manufacturing business has removed large cash expenses from their business models. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. Digital chips derive their processing power from the number of transistors that can be packed on an individual chip. In chip design, nanometers or “nm” refers to the length of a transistor gate – the smaller the gate the more processing power that can be packed into a given space. In 1965, Intel’s founder Gordon Moore famously predicted a doubling of transistors on a chip every two years. The concept, known as Moore’s Law, was based on his belief that the technology used to create semiconductors would improve continuously, allowing chips to become ever smaller and ever more powerful.

Sales Growth

Qorvo's revenue growth over the last three years has been solid, averaging 14.8% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.06 billion to $1.25 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Qorvo Total Revenue

This was an OK quarter for Qorvo with revenues growing 18.3%, ahead of analyst estimates by 0.34%. This marks 8 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

However, Qorvo believes the growth is set to continue, and is guiding for revenue to grow 14.3% next quarter, and Wall St analysts are estimating growth 7.57% over the next twelve months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Qorvo Inventory Days Outstanding

This quarter, Qorvo’s inventory days came in at 86, 6 days below the five year average, showing no indication of an excessive inventory buildup at the moment.

Pricing Power

Qorvo's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 49.5% in Q2, up 3.2 percentage points year on year.

Qorvo Gross Margin (GAAP)

Over the past year, Qorvo has seen its already reasonably high gross margins continue to rise, averaging 49.2%, indicative of a solid competitive offering, efficient cost controls, and relatively low pricing pressure.

Profitability

Qorvo reported an operating margin of 34.6% in Q2, up 3.6 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Qorvo Adjusted Operating Margin

Operating margins have been trending up over the last year, averaging 34.4%. Qorvo's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to be fairly flat over the next twelve months, although estimates are likely to change post earnings.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Qorvo's free cash flow came in at $197.5 million in Q2, down 16.8% year on year.

Qorvo Free Cash Flow

Qorvo has generated $1.16 billion in free cash flow over the last twelve months, translating to 26.1% of revenues. This is a great result; Qorvo's free cash flow conversion was very high compared to most semiconductor companies, in the last year. This high cash conversion, if maintained, puts it in a great position to invest in new products, while also remaining resilient during industry down cycles.

Qorvo has an average return on invested capital (ROIC) of just 9.6%, over the last 5 years. This is fairly low compared to many other semiconductor companies, and suggests the company will have to tie up a lot of capital to achieve significant profit growth..

Key Takeaways from Qorvo's Q2 Results

Sporting a market capitalization of $19.1 billion, more than $1.15 billion in cash and with positive free cash flow over the last twelve months, we're confident that Qorvo has the resources it needs to pursue a high growth business strategy.

A strong point from the quarter was Qorvo’s material improvement of its inventory levels. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's weak guidance overshadowed a reasonably solid quarter. But investors might have been expecting more and the company is down 7.17% on the results and currently trades at $165.27 per share.

Is Now The Time?

When considering Qorvo, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Qorvo we will be cheering from the sidelines. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there.

Qorvo's price to earnings ratio based on the next twelve months is 14.5x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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