Communications chips maker Qorvo (NASDAQ: QRVO) reported results ahead of analysts' expectations in Q3 FY2024, with revenue up 44.5% year on year to $1.07 billion. Guidance for next quarter's revenue was also better than expected at $925 million at the midpoint, 1.2% above analysts' estimates. It made a non-GAAP profit of $2.10 per share, improving from its profit of $0.75 per share in the same quarter last year.
Qorvo (QRVO) Q3 FY2024 Highlights:
- Market Capitalization: $9.76 billion
- Revenue: $1.07 billion vs analyst estimates of $1.00 billion (7.1% beat)
- EPS (non-GAAP): $2.10 vs analyst estimates of $1.66 (26.7% beat)
- Revenue Guidance for Q4 2024 is $925 million at the midpoint, above analyst estimates of $914.1 million
- Free Cash Flow of $466.5 million, up from $64.4 million in the previous quarter
- Inventory Days Outstanding: 96, down from 125 in the previous quarter
- Gross Margin (GAAP): 36.1%, down from 36.5% in the 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 unimpressive, averaging 1.3% annually. As you can see below, this was a weaker quarter for the company, with revenue growing from $743.3 million in the same quarter last year to $1.07 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 had a great quarter as its 44.5% year-on-year revenue growth exceeded analysts' estimates by 7.1%. Qorvo's growth inflected positively this quarter, suggesting a new upcycle as we come off the trough from the recent downturn.
Qorvo returned to positive revenue growth this quarter and its management team expects the trend to continue. The company is guiding to 46.2% year-on-year growth next quarter, and analysts seem to agree, forecasting 20.9% growth over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 96, which is 16 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Qorvo's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 36.1% in Q3, down 0.4 percentage points year on year.
Qorvo's gross margins have been trending down over the last 12 months, averaging 35.9%. This weakness isn't great as Qorvo's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Qorvo reported an operating margin of 22% in Q3, up 8.8 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Qorvo's operating margins have been trending down over the last year, averaging 15%. This is a bad sign for Qorvo, whose margins are already below average for semiconductor companies. To its credit, however, the company's margins suggest modest pricing power and cost controls.
Earnings, Cash & Competitive Moat
Analysts covering Qorvo expect earnings per share to grow 158% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Qorvo's free cash flow came in at $466.5 million in Q3, up 130% year on year.
As you can see above, Qorvo produced free cash flow of $567.7 million in the last year, which is 13.8% of revenue. It's good to see Qorvo generate positive free cash flow since it allows the company to strengthen its balance street, but we'd be uncomfortable if its FCF margin dropped any lower.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.
Understanding a company’s ROIC (return on invested capital) gives us insight into this because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also a management team's ability to allocate limited resources.
Qorvo's five-year average ROIC was 9.8%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable growth initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, Qorvo's ROIC has averaged a 5.3 percentage point decrease each year. In conjunction with its already low returns, these declines are a red flag and suggest the company's profitable investment opportunities are fewer than in the past.
Key Takeaways from Qorvo's Q3 Results
We were impressed by Qorvo's strong improvement in inventory levels, and its revenue, EPS, and free cash flow topped Wall Street's estimates. These beats were driven by strong performance in its advanced cellular group segment ($846 million of revenue versus consensus estimates of $753 million). Looking ahead, next quarter's revenue and EPS guidance also beat expectations. Zooming out, we think this was a great quarter that should delight shareholders. The stock is up 6.3% after reporting and currently trades at $106 per share.
Is Now The Time?
When considering an investment in Qorvo, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Qorvo, we'll be cheering from the sidelines. Its revenue growth has been weak over the last three years, and analysts expect growth to deteriorate from here. On top of that, its relatively low ROIC suggests it has struggled to grow profits historically, and its gross margin indicate some combination of pricing pressures or rising production costs.
Qorvo's price-to-earnings ratio based on the next 12 months is 14.3x. 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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