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Morningstar | Qorvo Foresees a Nice Bounce Back in Revenue Next Quarter; Maintain $86 FVE

Qorvo reported solid fiscal fourth-quarter results in light of a tough demand environment for radio frequency chips used in smartphones, but more important, the company is forecasting a nice bounce back for the June quarter that implies midteens growth on both a sequential and year-over-year basis. Qorvo is optimistic about its content in 5G infrastructure, as well as rising RF content in 4G (and, soon, 5G) smartphones. We will maintain our $86 fair value estimate for no-moat Qorvo. Even with shares up as much as 9% after hours, we still view Qorvo's shares as modestly undervalued.

Revenue in the March quarter was $681 million, down 18% sequentially, but up 2% per year and above the high end of the firm's prior guidance of $660 million-$680 million as discussed in February. Mobile revenue performed as expected, down about 2% year over year, in light of worldwide sluggish smartphone demand. Meanwhile, sales in the firm's infrastructure and defense business, or IDP, rose 3% sequentially and 12% year over year, thanks to demand for RF chips used in 5G base stations. Adjusted gross margin fell 130 basis points sequentially to 48.2% due to lower sales levels but was still notably ahead of prior guidance of 47%.

For the June quarter, Qorvo expects revenue in the range of $780 million-$800 million, well ahead of Street guidance and our prior expectations. At the midpoint, revenue is expected to rise 16% sequentially and 14% year over year. The growth should stem from content gains at its top 3 customers (Apple, Samsung, Huawei) as well as 10%-plus year-over-year growth in IDP. Qorvo noted that it supplied RF parts into the world's top 6 smartphone OEMs and we still see Qorvo as having all of the necessary products to benefit from rising RF per smartphone in a 5G world.

For fiscal 2020, Qorvo currently foresees revenue rising 4%, which is only slightly above our prior expectations. We're not especially confident in Qorvo's crystal ball at this point in time, as it is quite difficult to accurately predict sell through of the world's marquee smartphone models. However, we think the guidance at least implies healthy optimism around IDP growth. We note that Qorvo will receive about $50 million of revenue in fiscal 2020 associated with recently-acquired Active-Semi.

On the downside, however, Qorvo foresees adjusted gross margins of 48% for all of fiscal 2020, up only marginally from 47.5% earned in fiscal 2019 and still below the company's long-term target of 50%-plus. We note that Qorvo's forecast for the June quarter is adjusted gross margin in the range of 45%-45.5%, which implies a roughly 300 basis point reduction sequentially due to product mix and underutilization. Qorvo hinted at margin improvement in its second fiscal quarter (perhaps to the 46-47% range), followed by 49% plus gross margins in the second half of its fiscal year. Nonetheless, as Qorvo continues to transform its manufacturing strategy and better utilize its existing facilities, we think 50% adjusted gross margins are still achievable in the long-run.