Communications chips maker Qorvo (NASDAQ: QRVO) announced better-than-expected results in the Q4 FY2022 quarter, with revenue up 8.7% year on year to $1.16 billion. However, guidance for the next quarter was less impressive, coming in at $1.02 billion at the midpoint, being 8.71% below analyst estimates. Qorvo made a GAAP profit of $212.2 million, down on its profit of $298.7 million, in the same quarter last year.
Qorvo (QRVO) Q4 FY2022 Highlights:
- Revenue: $1.16 billion vs analyst estimates of $1.15 billion (1.38% beat)
- EPS (non-GAAP): $3.12 vs analyst estimates of $2.94 (6.22% beat)
- Revenue guidance for Q1 2023 is $1.02 billion at the midpoint, below analyst estimates of $1.12 billion
- Free cash flow of $295.4 million, up from $66.5 million in previous quarter
- Inventory Days Outstanding: 115, up from 114 previous quarter
- Gross Margin (GAAP): 48.9%, in line with 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.
Qorvo's revenue growth over the last three years has been mediocre, averaging 15.6% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.07 billion to $1.16 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).
While Qorvo beat analysts' revenue estimates, this was a very slow quarter with just 8.7% revenue growth. This marks 10 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.
Qorvo's revenue growth is expected to go negative next quarter, with the company guiding to decline of 7.68% YoY next quarter, but analyst consensus sees growth of 7.2% 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.
This quarter, Qorvo’s inventory days came in at 115, 21 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
Qorvo's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 48.9% in Q4, down 0.4 percentage points year on year.
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.
Qorvo reported an operating margin of 32.3% in Q4, down 1 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.
Operating margins have been trending up over the last year, averaging 33.3%. 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 $295.4 million in Q4, down 9.24% year on year.
Qorvo has generated $835.7 million in free cash flow over the last twelve months. This is a solid result, which translates to 17.9% of revenue. That's above average for semiconductor companies, and should put Qorvo in a relatively strong position to invest in future growth.
Qorvo has an average return on invested capital (ROIC) of 11.2%, over the last 5 years. That's not bad, and suggests the business can grow profits, but it isn't particularly impressive compared to other semiconductor companies.
Key Takeaways from Qorvo's Q4 Results
With a market capitalization of $13 billion, more than $972.5 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We were impressed by how strongly Qorvo outperformed analysts’ earnings expectations this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue growth was quite weak. Overall, this quarter's results were not the best we've seen from Qorvo. The company currently trades at $98 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 mediocre, and analysts expect growth rates to deteriorate from there.
Qorvo's price to earnings ratio based on the next twelve months is 9.2x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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