Qorvo, Inc. (NASDAQ:QRVO) 6th Annual Wells Fargo TMT Summit November 29, 2022 11:40 AM ET
Bob Bruggeworth - President & Chief Executive Officer
Philip Chesley - President of Infrastructure & Defense Products
Conference Call Participants
Gary Mobley - Wells Fargo
Morning, everybody. My name is Gary Mobley. I'm one of the Semiconductor Analysts at Wells Fargo Securities. And with us today is our feature company, Qorvo. With us today, we have Bob Bruggeworth, CEO; and Philip Chesley, who's Head of the High Performance Analog Business group at Qorvo, which is one of the three new business groups and segments within the company.
And before we get started into the questions, I'm going to turn it over to Bob, who has some opening comments.
Thanks, Gary. I really appreciate you having us here. It's also great to see you in person. We've done a few of these I know via Teams Meetings, et cetera, but it's really great to be here. Also want to just remind all those in the audience here today and online that the Safe Harbor language that applies to our press releases applies to our comments here this morning as well.
I think what I'd like to do is just remind everyone that we're now organized in three business segments; one being High-Performance Analog, which you mentioned, Philip heads up -- another is our High-Performance Analog is the one that Philip's here representing.
The second one is Connectivity and Sensors business unit headed by Eric Creviston and our Cellular business unit -- Advanced Cellular business unit, headed up by Frank Stewart. So, we're separated -- now organized in three business segments. And just to kind of look back at the September quarter, high-performance analog had tremendous growth year-over-year, a lot of that was led by the strength that we saw in our Defense business, also in Infrastructure business and our Power business, that being in the sili-carbide area. So, we're real pleased with that business, how it's performing. Philip don't get a big head; I'll give you a tough time later.
On the Connectivity and Sensors business, primarily the consumer side of that business, that being Wi-Fi, was really off year-over-year. Some of that is the Wi-Fi that goes into handsets, along with access points. And that business is recovering. We're under-shipping to the demand and that one as well as we adjust to the inventory that's in the channel.
Now, in our Advanced Cellular business unit, we saw a large ramp with our largest customer. We were up year-over-year at our largest customer. And unfortunately, what we said is the Android ecosystem is really a large headwind for us. And I'll talk a little bit more about that.
The Android Ecosystem today, only about 40% of that is 5G, where on the iOS, it's 100% 5G. So, when we look at the opportunities for growth, we see that as significant growth that we expect it to get to about 60% of the Android ecosystem to be 5G in a few years. So, that's a tremendous number of units of growth. And we get somewhere between $5 and $7 worth of opportunity for us in added content. So, that's a big growth driver for us.
I know there's a lot of concerns about the Android ecosystem. And as we look at things out there, from a 5G perspective, we started the year thinking it was going to be over 700 million units, now we're closer to 600 million units. Okay. Clearly, what's impacting that is the shutdowns in China, Gary, I'm sure we're going to have questions about that as well, and the war in Ukraine has really also impacted Eastern and Western Europe, and consumer confidence is not anywhere near where it used to be. So, that's put a lot of pressure on it. But we view these as temporary, not a structural change in the outlook that we have and the opportunities.
And you mentioned MediaTek, that's a great example where during this time, we're seeing tremendous opportunities to lock in future wins. Feel good about that. We also talked on the call about we want a low-band pad in a marquee phone at Samsung. That's a major milestone for us. We've never had that opportunity before.
So, we're continuing to see great growth at Samsung. We also said we're going to do well at Honor, that's continuing to ramp. Google is another great opportunity for us along with the rest of the Vivo-OPPO-Xiaomi in China. So we feel good about where we're positioning the business there. So if I also step back and then look at the long-term growth drivers of our business, as I stated, 5G is clearly one. The migration from Wi-Fi 6, 6E to Wi-Fi 7 is added content for us as well, that looks great. The continuation of defense funding growing and supplementing a Philip's business. We're seeing the rollout of 5G infrastructure in India, which, again, Philip's business is positioned extremely well. I look at what's going on with ultra-wideband, the work we're doing there and matter. So we see a lot of opportunities for growth as we look forward.
Q - Gary Mobley
Thanks for those opening comments, Bob. I wanted to double-click on your brief comments in reference to MediaTek. I think that announcement that came out yesterday morning, perhaps if you can share with us the importance of that relationship. Is it new? And how deeply penetrated are you going with the various products?
We've been partners with MediaTek since they really begin their baseband business. In fact, when they launched 2G, we were the only supplier that was on their list that could work with their baseband. And actually, several years ago, we were the first to have our own lab inside MediaTek offices in Taiwan. So we've got a long history with them.
I personally meet with their CEO several times throughout the year. It's been virtual lately, although Taiwan is opening up. So I look forward to meeting them face-to-face. So we've had a long history with them. And if you look at the breadth of that announcement in cellular, in Wi-Fi, in automotive, all different types of parts for all different types of applications, it's really just the confirmation of a long-standing relationship and what we've been able to do with them.
Okay. Thank you for that. On the topic…
Sorry, if I could add one thing. The other thing I want to make sure people recognize is MediaTek is broader than just China. And they're continuing to grow their business outside of China. So I just want to make sure that's noted.
It is noted and much appreciated. And so with respect to COVID in China, we see headlines on a daily basis about more stringent lockdowns in the impact this is having on production of smartphones, in particular, with your largest customer. So my question to you is, to what extent did you factor that into your outlook and under a backdrop where seemingly the China policymakers are unrelenting to their zero COVID stance, how does this affect the recovery or not in the Android system?
Yes, I think two questions there and both Android, iOS and we'll just take it up a level to smartphones. When we gave our guidance, we said we will be down at our largest customer. We said, we'd be down in the Android ecosystem as well. So we factored in that this was most likely going to be a tough quarter for 5G handsets in general. And then we also added, we were under shipping to demand.
Now what we'll have to find out is, what was the actual demand in the December quarter to be able to answer the question everybody wants to know is how far under demand are you shipping? Unfortunately, over the last few quarters, we've been bringing down our production, and our customers are bringing down their production. However, they've been overshooting demand. So we'll have to wait till the end of the quarter.
Now we do have people there that are in country now today. I was reading some e-mails this morning. Shenzhen seems to be running fine. Yes, there's some challenges in certain areas with certain companies. But various areas are being played up maybe a little too much in the press for what's actually going on everywhere. But with all that said, it's still an important market to us. And it's just our belief like anything that we've talked about, all this is temporary and it's going to return. And we're working on is positioning the business so that we're going to be in a good position when it does return.
Okay. Thanks, Bob. And long-term, your view on the Advanced Cellular Group’s growth is what, roughly high single-digit percent growth? And many would argue that the market backdrop or for mobile handsets, smartphones in general is flattish. So, maybe you can just sort of deconstruct the algorithm for that high single-digit percent growth assumption?
Sure. Number one, our assumption is, to your point, market is going to be flat, but the percentage of 5G phones is going to increase. And I talked about the Android ecosystem being 40% 5G, moving to 60% in just a couple of years. So that's a lot of units being added, and that's in that $5 to $7 opportunity of added content. Also, I talked about, our share, we're still gaining share at Samsung. And we've touched on that, we have not just talked about the big wins that we had in many different components in their next marquee phone launching in the first quarter – calendar quarter that is, Honor, very underrepresented there, because as most of you recall they were spun out of Huawei, who we were not allowed to sell to, and now they're coming back to our integrated modules.
And I remind the Group here, we were recognized last year as their only RF strategic supplier, and I expect any day now, we'll be once again named one of their strategic suppliers, the only one in RF. So that's just beginning growth there as well. And then we talked about the added content that's still continue to go in there. We mentioned on this call that, our most recent call that we had a mid-high band pad that we integrated in what was the DRx, which was not part of the market we were chasing.
So that adding to what is now our serviceable available market, and that's adding content. So that's another example. And then, if I look at our largest customer, we do very well in our tuner business there. Obviously, when they migrate to the new baseband, we'll do well with our envelope tracker, but there's opportunities there for us to grow. So what we've called our shots, if you look at what we've said is we will win Samsung, we will win Honor, and then we will continue to grow our share at our largest customer. So that's how we get to the mid- to upper-single digits growth for that business.
Okay. And my next question really is about the debate, cyclical versus structural change in the mobile handset market. And it relates to your manufacturing footprint, clearly, your advanced cellular Group business is facing a tough period as you're under-shipping in demand. But when things normalize, do you see that you have the right manufacturing footprint, or does that need to be modified at all?
As far as the manufacturing footprint, on assembly and test to remind the audience, we have two factories in China. They do extremely well, and they're much broader than just the advanced cellular. So, a lot of our WiFi products are in there, and some of Philips other products. So it's a fairly large operation for us, but we still outsource quite a bit. So it's probably more like that 70-30 range. So we outsource quite a bit there. So as we grow, we'll be able to continue to diversify our business there.
Now, on what most people don't understand is, we still buy quite a bit of silicon for our tuner business, in our integrated modules, there's control chips, there's LNAs, things like that, that are also outsourced. So when you net all this together, I think we have the right factory footprint, because the filters, we continue to grow, but we continue to improve our productivity by reducing the die sizes, the number of die we can get on the wafer, we're still all the way to 8 inch. So I feel very good about our manufacturing footprint.
Okay. I will get to Philips in a second. I just want to ask one last question. On the cellular side. So, you just hinted on this. I think Qualcomm is already conceded the idea that, they might not be in iPhone 16 and subsequent versions to that. And so you hinted that maybe you can take back the Envelope Tracker, which they currently supply as part of their cellular solution.. But what about some of the millimeter wave opportunity there, as they're designed out?
Yes. I think, what's interesting is the market adoption and how long that's going to stay in handsets and really no one else has really significantly followed Apple in that juncture. But what I do feel good about is that, we have -- we've got feedback from several customers that the process technology, the designs we have, the millimeter wave are the best out there and can actually have about half to a quarter of the current consumption that's currently out there. So, all just have to wait and see what architectures are chosen by any of our customers. But I feel very good. The same thing happened in the cellular. When I joined the industry almost a long time ago, it was all silicon-based PAs, which then went to Compound Semi [ph] and Galway Marson [ph], HBT. And I think, same thing is going to happen in millimeter wave over time. It will go back to a compound semi.
Got it. Thank you, Paul [ph]. I'm sorry. Thank you, Bob. I wanted to bring Phil into the discussion, if you could give us an overview of the high-performance analog business group, I believe, is what, roughly 20% of revenue, maybe sort of deconstruct what's within that?
Absolutely. So, I'll start with the largest business in HPA, which is our defense and aerospace business. This is a market where we have a strong brand name. We've been in this business for a long period of time. And I think what's exciting about the DNA space is, there's really three growth drivers that, I don't know if we get a lot of attention in the industry of what's really driving the growth in that space. The first is what you see similar like in automotive, the electrification trend, you're seeing that same trend in the defense space. Existing systems getting upgraded. There's just a lot more semiconductor content being put into these assets.
The second is the trend that I call the one-to-many, right? You're going from one satellite to mini satellite. You're going from one aircraft to many drones, right? And that is driving not just content gains, but that's also driving higher volume, if you will, for that business. Now, the challenge and then the opportunity for kind of the third growth driver for the DNA space, is really around, how do you put all of the stuff into a smaller area, right? And that's where our investment in our ship program that we have, where we do advanced packaging for the US government, onshore in Texas is such a real valuable asset for us and we see as a real exciting growth opportunity. And I do want to highlight one thing. A lot of that advanced packaging technology that we have with our ship program, leverages the technology that we had in our advanced cellular group, right? So there's this natural capability set that we're able to kind of extend to the US government that they value in a meaningful way. So that's the first business.
The second business is, what we call the infrastructure business. There are two business groups, if you will, market segments to that. The first is our base station investment. And the second is, what we call broadband or cable access business that we have there. Maybe some color around our base station investment and what we're doing there and why we're excited about it. So, obviously, there's a lot of press in terms of the 5G deployment. And we still see a lot of opportunity for growth in the US and the Europe markets in particular. But India, in particular, is moving at a pretty fast speed. I think the model that they're trying to deploy is similar to how China rolled out the 5G spectrum and their base stations that they built out. So we see a real opportunity for our small signal business, both in the 32TR and the 64TR market, but also in our GaN PA technology that we have. And that's an area that we see a lot of growth opportunity for us, not just in the PA, but we also have a technology called PAMs, where we take the technology -- the module technology in our mobile business, and we move it over and we start doing the same thing. We integrate, right? And we have a lot of excitement around that. And -- so, we see a growth vector from that.
Our broadband and cable access business doesn't get a lot of press, but it's actually a real nice business that we see, will continue to grow for the foreseeable future. Obviously, the cable business is fighting fiber and they're fighting fixed wireless access and all these other things.
And so, they're constantly trying to come out with new standards that kind of maximize the bandwidth of the existing pipes that they have, the cable. So you see DOCSIS 3.1 today, moving to DOCSIS 4.0. We have solutions that we've just announced on the DOCSIS 4.0 side. So we see that as a solid business as well.
And then last, I'll just kind of lump two business units into one, we call it our power management business. And that consists of our -- what we call, high power and -- which is our silicon carbide investment that we have with the United Silicon Carbide acquisition that was done a little over a year ago.
And we're really excited about that piece of the business. Obviously, silicon carbide gets a lot of press and a lot of coverage. And Qorvo probably today isn't one of the top names that come to mind when they're talking about that technology. But for us, we see power management, not RF power, but DC to DC and AC to DC power as a natural extension, especially as compound semi technologies like silicon carbide and GaN are used more and more in that area.
And our silicon carbide technology that we have, why we're so excited about it is, today, we actually have industry-leading RDS(on) performance. Okay? RDS(on) is the metric that everyone cares about. It's what drives battery life, right, or more miles you can drive on the charge. It's what drives how fast you charge a car, how much power you use in a data center.
And our JFET architecture that we have in silicon carbide is unique. We actually can get 2x the number of die for a given RDS(on) and voltage level than you can out of a MOSFET out of a competing solution. So this drumbeat of you got to get to 8-inch, you got to do all these different things. We don't necessarily have that drumbeat necessarily.
And we can leverage, what we see, as a lot of the supply base out there like the announcement that we made with SK Siltron and there's others that are in the works, so where we get this really nice capability without a huge CapEx.
And then last but not least, we have our -- what I call, our low power business, which is our traditional PMIP [ph], and we have a motor control capability. Qorvo is not known as a power management company, obviously. You think of the TIs and you think of maybe the ADIs, the power integration companies like that.
I've been in the power business, where I don't -- like, Bob, I don't really want to say how many years I've been doing this. What we have is actually a really solid set of intellectual property and capability. And our plan with that business is kind of what the mobile or the Advanced Accelerator [ph] Group did as they moved into envelope tracking and average power tracking.
We're going to leverage that into the markets that we're strong in today, whether that's defense, whether that's in mobile, whether that's in some of our consumer IoT businesses. And so, we're really excited about that. We think we have a strong capability, and we see that as not only a diversification, but also a growth engine for us.
I appreciate that overview Philip. And I just want to give a plug here for one second. We just started publishing our compound semiconductor quarterly research piece and we can verify your strong competitive position in things like GaN RF and your beachhead and silicon carbide in the power management area as well. And -- but I wanted to go back to your overview and sort of deconstruct your long-term view on the growth rate of the business, which I believe you guys peg it roughly a double-digit percent. What are the bigger contributors to that double-digit percent growth rate?
So I think our fastest growing business will be the power management business, just given the opportunities that we see there, our design-in funnel, which is pretty significant. I think after that, I would move it over to really a tie between our DNA and our base station business. Again, DNA people think that they look at the budget right from the US government 2% growth is they don't see it as fast growing. But as you filter it down to kind of the trends that I talked about, we see that as a solid double-digit growing business for us. And we see that in the continuing in the future. I think our broadband business will probably be the slowest growing single-digit kind of growth, but growth nonetheless. So that's kind of the way to take the different pieces of the business.
Got it. And if I'm not mistaken, most of your M&A activity is focused in your group, correct? And so to what extent does inorganic growth play into that?
Actually, just to make a comment there, give you a chance to catch your breath -- you've done very well. The acquisitions that we've made have been actually in all three groups. The connectivity and Sensors group is primarily acquisitions, mostly except for the WiFi part. And the other one that we had is the Cavendish Kinetics, which is the RF MEMS for switches, that actually is in the advanced cellular. But the others, yes, Phil has done a good job on those as well.
Got it. And the program mobile power management solution that you have. What is the key differentiator that you anticipate giving you a stronger market position from a relatively low starting point?
So what the technology brings is what I would call fast time to market. So envision you're at a company and you have a new Board with a new digital ASIC or digital processor that comes out. And I can tell you from way too many years of experience, the bringing up of that system from a power management perspective. The only guarantee is there's changes. You're going to have to do something. You're going to have to change a rail, you're going to have to change timing on one of your -- how you bring up one of the different voltages. What we offer is an ability for our customers to get those changes done in the fastest possible way. And that is truly valuable, right, kind of money.
And we see that benefit, in particular in some of the markets that we're in today with our PMIC technology. We also have another technology in motor control. And really, that's an efficiency story. We have a capability where between some of the algorithms and some of the digital control aspects that we have with that technology. We lead in efficiency. And obviously, in any kind of battery-powered tool market, things like that, efficiency battery-life right? So the customers really value that.
Okay. And with respect to your RF GaN business, there's kind of a changing competitive landscape with a few companies who are here, notably NXP has been investing in their capacity. Sumitomo, I guess, is the juggernaut of the industry. And we have Wolfspeed, which has deferred its transition to 150 millimeters, which presumably will put them at a competitive disadvantage. So, how do you see that changing landscape benefiting you organically or inorganically?
I think organically, we have, today, a factory footprint that can support two markets, which I think our customers value, right? We can do our defense GaN. We can do our non-defense GaN in the same factory. What -- we have found is that what our customers truly appreciate, because what's happening is it's not just about the GaN technology. It's about how do you integrate it. It's an integration story that I talked about. And our ability to do that, I think, is what will continue to set us apart. And a lot of that is this -- leveraging the scale that we have with our advanced cellular group, I can tell you I just got back from visiting multiple customers. And I hear that drumbeat from our customers all the time. You guys bring scale that we need in this business. And so I think those two things is really what's going to keep us on the forefront going forward.
Well, that's true. And then the filter technology as well. I mean a good point, Bob. We have both in our defense segment as well as in some work that we're doing in our base station market; our filter capability will also really differentiate us. Because, again, remember, as you start integrating into modules, it's not just the PA, power management, by the way, which we're leveraging some of the technology that we have in our power business. It's filter technology, all of these things kind of come together. And there are very few competitors out there that have all those pieces together. And I think that's what's going to keep us in the forefront.
Okay. I wanted to ask you about your manufacturing footprint in high-performance analog group. To what extent is -- I would imagine anything exotic like wideband semiconductor materials is internally sourced, maybe with the exception of your silicon carbide United SiC business. And so to what extent is this -- your supply chain supported by internal resources versus external? And how do you see that changing maybe over time?
The easiest way to think about it, I think, is power external, everything else internal would be the way to kind of to view that. As I look going forward, I don't see that fundamental changing to be honest with you. I think one of the things we'll have to look at is our silicon carbide investment in terms of -- today, it's all external. And is there some options there? We don't know. Right now, we're committed to the foundry model. But outside of that, I don't see that split necessarily changing.
Got it. And I wanted to wrap up our time with maybe a little bit of a controversial topic as it relates to capital allocation. I know you guys have been aggressively buying back your stock. It makes sense. Your stock is depressed. It's pretty low valuation multiple, and you obviously feel it's a good buy. But to what extent do you think you can enhance shareholder value by maybe favoring capital allocation and skewing it more towards M&A activity for the sake of diversification, do you think that would lead to a higher valuation multiple for your equity if you were able to diversify away the mobile handset market or away from a particularly large customer?
Thanks for the question. I'm glad you waited till the end, so I could think about it. Number one, let's just step back in time. We have been aggressively buying stock since we formed the company. Actually, since we formed the company, we've actually bought over $5 billion worth of our stock. So we've reduced our share count from over $155 million to around $100 million. So we've done that in the past.
You know, our Board was kind enough to authorize a $2 billion repurchase that we announced at last call. So lease signaling, we will continue to be buyers of our stock. Also I want to point out that since we formed the company, we spent over $1.8 billion in acquisitions and about all of those have been to diversify our business.
And if you look at with how we've reorganized the company to three segments, the two segments are now being led by two very capable leaders to -- and we put them in growth businesses that will grow much faster than the handset necessarily [ph]. Advanced Cellular business -- that we said was at mid to high single-digits. And these businesses that fill up Qorvo, we expect to be running strong double-digit growth.
So over time, the Advanced Cellular will become a lower and lower percentage of the business, while growing. So what we always say when we look at acquisitions, are there candidates out there that we are a better owner, where we can take one and scale it or in other cases, you know, significantly reduce their cost be able to drive it forward. So if I look at silicon carbide -- United Silicon Carbide acquisition, what they needed was someone who could bring that scale and balance sheet to be able to make investments and drive the growth and keep up with their business. So that's a great example. We were able to do that.
The Active-Semi was just getting them access to the worldwide sales force that we had great engineering team, great technology, as Philip highlighted. So I'll use that as an example. And then another one that we acquired, which is really in its infancy, is the MEMS Sensor business that we have.
Now that's really interesting to me because it's in automotive already. It's in touch pads. We talked about that. So I see that business growing nicely. And then the ultra-wideband, you know, we're in the Google Pixel, we're already in the Android ecosystem, and we continue to get that out. We're now in a key parts so that will drive. So I feel good about the acquisitions we've made. But in areas where we feel we're a better owner, we'll continue to make acquisitions.
Great. I think, we're out of time. I have a lot more questions I'd like to ask, but for the sake of time, I'm going to get wrap it up. And so with that, I wanted to thank Bob and Philip for the time spend here today. Thank you, guys.
Thank you, Gary. Appreciate it.