Communications chips maker Qorvo (NASDAQ: QRVO) reported Q2 FY2023 results topping analyst expectations, with revenue down 7.74% year on year to $1.15 billion. However, guidance for the next quarter was less impressive, coming in at $725 million at the midpoint, being 25.5% below analyst estimates. Qorvo made a GAAP profit of $188.6 million, down on its profit of $319.1 million, in the same quarter last year.
Qorvo (QRVO) Q2 FY2023 Highlights:
- Revenue: $1.15 billion vs analyst estimates of $1.13 billion (2.45% beat)
- EPS (non-GAAP): $2.66 vs analyst estimates of $2.54 (4.84% beat)
- Revenue guidance for Q3 2023 is $725 million at the midpoint, below analyst estimates of $974.2 million
- Free cash flow of $220.4 million, roughly flat from previous quarter
- Inventory Days Outstanding: 124, up from 117 previous quarter
- Gross Margin (GAAP): 46.5%, down from 49.5% 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 14.2% annually. Last year the quarterly revenue declined from $1.25 billion to $1.15 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).
Despite Qorvo revenues beating analyst estimates, this was still a slow quarter with a 7.74% revenue decline.
Qorvo's looks headed into the trough of the semi cycle, as it is guiding to revenue declines of 34.9% YoY next quarter, and analysts are estimating 8.59% declines 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 124, 26 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 46.5% in Q2, down 3 percentage points year on year.
Despite declining over the past year, Qorvo still retains industry average gross margins, averaging 45.2%, pointing to a good competitive offering, decent cost controls, and only modest pricing pressure.
Qorvo reported an operating margin of 29.1% in Q2, down 5.5 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 down over the last year, averaging 30.5%. However, Qorvo's margins remain one of the highest in the industry, driven by its strong gross margins and economies of scale generated from its highly efficient operating model.
Earnings, Cash & Competitive Moat
Wall St analysts are expecting earnings per share to decline 27.3% 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 $220.4 million in Q2, up 11.5% year on year.
Qorvo has generated $811.8 million in free cash flow over the last twelve months, translating to 18.1% of revenues. This is a strong result; Qorvo's free cash flow conversion was higher than most semiconductor companies, in the last year. If it maintains this level of cash generation, it will be able to invest plenty in new products, and ride out any cyclical downturn more easily.
Over the last 5 years Qorvo has averaged a 12.6% return on invested capital (ROIC), implying it has has a defensible competitive position and can invest in profitable growth.
Key Takeaways from Qorvo's Q2 Results
With a market capitalization of $8.92 billion Qorvo is among smaller companies, but its more than $911.5 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
We liked to see that Qorvo beat analysts’ earnings expectations pretty strongly this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was less good to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Qorvo. The company currently trades at $96.12 per share.
Is Now The Time?
Qorvo may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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, but at least that growth rate is expected to increase in the short term.
Qorvo's price to earnings ratio based on the next twelve months is 10.8x. 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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