EUR 850.00 For Business Accounts Only

Morningstar | Qorvo Remains Well-Positioned in 5G Despite an Ugly Smartphone Market; Maintaining $86 FVE

Qorvo reported predictably soft fiscal third-quarter results and provided investors with a gloomy fourth-quarter forecast below our prior expectations due to well-known weakness in the smartphone market, both at Apple and at Chinese handset makers. Nonetheless, the company's 5G prospects remain encouraging, and we believe that Qorvo's near-term troubles are cyclical (in terms of muted smartphone demand) rather than structural (as we don't believe Qorvo is losing sockets or market share). We will maintain our $86 fair value estimate for no-moat Qorvo, as we are optimistic about the firm's investments in BAW-based filters and the company's seemingly strong position in 5G radio frequency content, both in phones and, perhaps more importantly, within wireless infrastructure products.

Revenue in the December quarter was $832 million, down 6% sequentially and down 2% year over year, but above the midpoint of the firm's revised outlook from early January, which called for revenue of $800 million-$840 million. Mobile RF revenue was the culprit, with revenue down 10% sequentially and 6% year over year due to lower-than-expected smartphone demand in China, as seen by Apple, Samsung and domestic OEMs. On the bright side, revenue in Qorvo's infrastructure and defense business, or IDP, rose 6% sequentially and about 13.5% year over year. Adjusted gross margins expanded by 180 basis points to 49.5%.

For the March quarter, Qorvo expects revenue of $660 million-$680 million, which would represent an 18%-21% sequential decline and only 0%-2% growth year over year. Similarly, adjusted gross margin should dive to 47% due to lower factory utilization. We view the forecast as a bit uglier than our prior expectations but not overly alarming. Mobile revenue should decline by 25% or more sequentially, again due to smartphone weakness, while IDP revenue should be flattish sequentially, which implies about 9% growth year over year.

Looking at 5G, the company is starting to see nice adoption in 5G infrastructure products, noting that 5G base stations may use up to $1,200 of RF content per box, versus $100 in a 4G base station. We also note that Qorvo's revenue in Europe, home of 5G equipment leaders like Nokia and Ericsson, almost tripled sequentially and exceeds what Qorvo earned in the first nine months of fiscal 2017, which we attribute to the firm's 5G RF content gains. Between Qorvo's IDP business and its position as one of the few RF chipmakers that can support leading smartphone OEMs, we think Qorvo remains well-positioned to prosper from ongoing 5G demand and any recovery in the smartphone market.

For further insight into the 5G RF landscape, please refer to our October 2018 special report, "Filtering the 5G Radio Frequency Landscape."