Communications chips maker Qorvo (NASDAQ: QRVO) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue down 6.75% year on year to $1.03 billion. The company expects that next quarter's revenue would be around $1.13 billion, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Qorvo made a GAAP profit of $68.8 million, down on its profit of $285.6 million, in the same quarter last year.
Qorvo (QRVO) Q1 FY2023 Highlights:
- Revenue: $1.03 billion vs analyst estimates of $1.02 billion (small beat)
- EPS (non-GAAP): $2.25 vs analyst estimates of $2.12 (6.33% beat)
- Revenue guidance for Q2 2023 is $1.13 billion at the midpoint, roughly in line with what analysts were expecting
- Free cash flow of $229.5 million, down 22.3% from previous quarter
- Inventory Days Outstanding: 117, up from 115 previous quarter
- Gross Margin (GAAP): 36.2%, down from 49.1% 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 14.1% annually. Last year the quarterly revenue declined from $1.11 billion to $1.03 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 6.76% revenue decline year on year.
Revenue growth went from positive to negative this quarter, and Qorvo expects it to stay negative next quarter with an estimated decline of 9.58% YoY and analysts think the declines will continue.
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 117, 22 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 36.2% in Q1, down 12.9 percentage points year on year.
Despite declining over the past year, Qorvo still retains industry average gross margins, averaging 45.9%, pointing to a good competitive offering, decent cost controls, and only modest pricing pressure.
Qorvo reported an operating margin of 27.4% in Q1, down 5.6 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.
Operating margins have been trending down over the last year, averaging 31.9%. 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 6.51% 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 $229.5 million in Q1, down 16.9% year on year.
Qorvo has generated $788.9 million in free cash flow over the last twelve months. This is a solid result, which translates to 17.2% 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 11.6%, 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 Q1 Results
Sporting a market capitalization of $10.6 billion, more than $858.7 million 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.
We were impressed by how strongly Qorvo outperformed analysts’ earnings expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see that the revenue growth was quite weak and gross margin deteriorated. Overall, it seems to us that this was a complicated quarter for Qorvo. The company currently trades at $84.2 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 9.9x. 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.
To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds from the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.