Qorvo (QRVO) is trading sharply higher today (+16%) after reporting 3Q18 (Dec) results last night. In case you're not familiar, Qorvo was formed from the early 2015 merger between RF Micro (RFMD) and TriQuint Semi (TQNT). RF Micro and TriQuint were pretty similar companies. They both made components for mobile phones -- specifically, their components help mobile phones connect to cellular networks. An interesting note is that most semiconductor companies are fabless, meaning they design chips but farm out the actual manufacturing to third party foundries. But not Qorvo, it makes its own chips.
RFMD and TriQuint had highly complementary product portfolios. Together, Qorvo now has an end-to-end product offering for broadband mobile connectivity: radio frequency (RF) devices, power amplifiers, power management, antenna control systems, switch-based products and premium filters. The merger also better positioned Qorvo to develop products for the next-generation of communications infrastructure from high-speed 4G LTE networks to the optical paths that connect them. Qorvo's focus is on RF products which are made for 1) mobile devices to connect to cell towers, 2) wireless infrastructure applications (smart meters, Wi-Fi base stations), and 3) aerospace and defense systems (radar and satellites).
By joining the two companies together, Qorvo has benefitted from new scale advantages in manufacturing and R&D, as well as what the company describes as an aggressive roadmap of new products. Another key rationale for the deal was to create a bigger company. Mobile phone manufactures like Apple (AAPL) and Samsung would routinely play RFMD and TQNT off each other (and other component suppliers in this space like SWKS and AVGO) to get better prices. As a larger company and with one fewer suppliers on the market, it's now harder for Apple and Samsung to do that.
Turning to the DecQ results, non-GAAP EPS came in at $1.69, which was a good bit above prior guidance of approx $1.60. Revenue rose 2.3% year/year to $845.7 mln, which was slightly above market expectations. QRVO also provided guidance for Q4 (Mar): non-GAAP revenue of $645-665 mln and non-GAAP EPS midpoint guidance of $1.05.
Qorvo delivered what it calls an exceptional DecQ, highlighted by a strong ramp in support of its largest customer, robust growth in defense and IoT, and improved operating performance. While near-term market demand has weakened in handsets, QRVO says its longer-term outlook has improved on recent developments with mid/high-band PADs, Phase 6 design wins, and cellular IoT and other connectivity applications.
DecQ results exceeded guidance thanks to higher revenue, improved gross margin, and effective cost controls. It also achieved record free cash flow on strong operating performance and lower capital spend. However, its MarQ guidance reflects weakness in the smartphone market, but with improved operating performance and new BAW-based product ramps, QRVO expects continued margin expansion and free cash flow growth in fiscal 2019.
With that said, in Mobile, Qorvo said on the call that it's gearing up for an aggressive ramp of a custom mid/high-band PAD in the second half of the calendar year. This is the most valuable and highly integrated placement in mobile RF, representing the integration hub in the main path of the RF system. Across the mobile landscape, phone manufacturers and baseband suppliers are adopting more highly integrated mid/high-band architectures. This is increasing the customer demand for high order BAW-based multiplexing from industry leaders like Qorvo. As a result, Qorvo is migrating a greater percentage of its design resources to higher value BAW-based RF systems.
Looking ahead, Qorvo now expects the first 5G smartphones will launch as early as the first half of calendar 2019. 5G will enable new use cases by expanding data throughput, reducing latency to near zero and enabling massive machine-to-machine connectivity. 5G will require more complex and more valuable RF systems than 4G. Qorvo is uniquely positioned to accelerate the transition to 5G as it offers the industry's broadest portfolio of RF products. Qorvo introduced the industry's first 5G RF front-end nearly a year ago.
In sum, the stock is higher today on the sizeable EPS beat for DecQ and some positive commentary on the back half of calendar 2018. Also, while the MarQ guidance was tempered by a weak outlook, it seems most investors had been expecting some weakness as mobile handset sales have softened. For example, there has been a lot of press reports that the iPhone X has not been selling as well as expected and that production is being lowered, so this was probably expected. The stock has been mostly stuck trading sideways for the past year, it'll be interesting to see if this DecQ report can get the stock back on a sustained uptrend.