Communications chips maker Qorvo (NASDAQ: QRVO) reported Q2 FY2024 results exceeding Wall Street analysts' expectations, with revenue down 4.71% year on year to $1.1 billion. The company also expects next quarter's revenue to be around $1 billion, in line with analysts' estimates. Turning to EPS, Qorvo made a non-GAAP profit of $2.39 per share, down from its profit of $2.66 per share in the same quarter last year.
Qorvo (QRVO) Q2 FY2024 Highlights:
- Revenue: $1.1 billion vs analyst estimates of $1 billion (10.1% beat)
- EPS (non-GAAP): $2.39 vs analyst estimates of $1.77 (34.7% beat)
- Revenue Guidance for Q3 2024 is $1 billion at the midpoint, above analyst estimates of $991.8 million
- Free Cash Flow of $64.4 million, up from $5.4 million in the previous quarter
- Inventory Days Outstanding: 125, down from 207 in the previous quarter
- Gross Margin (GAAP): 44.4%, down from 46.5% 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 has been declining over the last three years, dropping by 0.28% on average per year. This quarter, its revenue declined from $1.16 billion in the same quarter last year to $1.1 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).
Even though Qorvo surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 4.71% year on year. This could mean that the current downcycle is deepening.
Qorvo looks like it's on the cusp of a rebound, as it's guiding to 34.5% year-on-year revenue growth for the next quarter. Analysts seem to agree as consesus estimates call for 31.8% 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 125, which is 13 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
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 44.4% in Q2, down 2.2 percentage points year on year.
Qorvo's gross margins have been trending down over the last 12 months, averaging 36%. 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 25.3% in Q2, down 3.8 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 12.8%. This is a bad sign for Qorvo, whose margins are already among the lowest for semiconductors. The company will have to improve its relatively inefficient operating model.
Earnings, Cash & Competitive Moat
Analysts covering Qorvo expect earnings per share to grow 209% 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 $64.4 million in Q2, down 70.8% year on year.
As you can see above, Qorvo produced free cash flow of just $304.1 million in the last year, resulting in a measly 9.73% free cash flow margin. Qorvo will need to improve its free cash flow conversion if it wants to stay competitive.
Over the last five years, Qorvo has reported an average return on invested capital (ROIC) of just 12%. This suggests it struggled to find compelling reinvestment opportunities within the business.
Key Takeaways from Qorvo's Q2 Results
With a market capitalization of $8.56 billion, Qorvo is among smaller companies, but its $706.8 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by Qorvo's strong improvement in inventory levels and Q3 revenue outlook that topped expectations. We were also excited its revenue and EPS outperformed Wall Street's estimates, driven by strong results in its high-performance analog and connectivity divisions. On the other hand, its operating margin fell and its gross margin decreased. Overall, we think this was still a strong quarter that should satisfy shareholders, especially when other semiconductor companies reported weak earnings. The stock is up 1.72% after reporting and currently trades at $89.5 per share.
Is Now The Time?
Qorvo may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
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 poor over the last three years, and analysts expect growth to deteriorate from here. On top of that, its operating margins reveal subpar cost controls compared to other semiconductor businesses 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 13.6x. 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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