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Qorvo Inc. (QRVO - Free Report) reported second-quarter fiscal 2017 non-GAAP earnings of $1.09 per share (including stock-based compensation), which missed the Zacks Consensus Estimate by a dime but increased 11.6% from the year-ago quarter.

Earnings (excluding stock-based compensation) were $1.29 per share, which missed the company’s guided range of $1.35–$1.45.

Shares plunged more than 10% in after-hour trading.

Non-GAAP revenues improved 22.1% year over year to $863.7 million. The increase in revenues reflected better-than-expected customer demand due to strength in Mobile products in China, a large customer smartphone ramp along with growth in Infrastructure and Defense products (IDP).

Revenues beat the Zacks Consensus Estimate of $834 million. Further, the figure was better than the management’s guided range of $820–$850 million.
 

QORVO INC Price, Consensus and EPS Surprise

 

QORVO INC Price, Consensus and EPS Surprise | QORVO INC Quote

Segment Revenue Details

Segment-wise, Mobile Products (MP) revenues increased 22% year-over-year to $706.1 million, driven by solid growth in premium-tier and mid-tier 4G LTE mobile devices. The segment enjoyed strong demand for BAW-based multiplexer solutions and delivered module prototypes containing BAW-based hexaplexers during the quarter.

Qorvo’s RF Fusion high-band, mid-band and low-band 4G LTE solutions were selected by a number of China-based smartphone OEMs for their upcoming flagship smartphones.

Mobile Products is gaining in China as smartphone manufacturers migrate from three-mode to full-mode devices. By the end of this year, Qorvo expects more than half of all 4G smartphones manufactured for the China market to be full-mode.

Huawei was one of two 10% customers for Qorvo in the quarter. The Chinese OEM is Qorvo’s largest customer in China.

Revenues from IDP grew 22% year over year to $157.6 million due to design wins and robust customer activity, especially in GaN (gallium nitride) power amplifier. Qorvo continues to reposition its IDP product portfolio to support high growth markets that is forecast to grow at a CAGR of 17% to $7 billion by 2020.

In September, IDP released 49 new products including power amplifiers for small cell, dual and quad linear drivers for optical applications, LNAs and filters for automotive and integrated front-end modules for Wi-Fi.

Qorvo stated that the TC-SAW process in Greensboro has started ahead of schedule that will aid the company cater to additional customer demand going ahead. Additionally, the company is increasing the mix of 6-inch TC-SAW in Florida while moving all gas capacity to Oregon. It is also transitioning all GaN products to Richardson.

Qorvo is focused on ramping production in its new assembly and test facility at Dezhou, China.

Operating Details

Non-GAAP gross margin contracted 600 basis points (bps) from the year-ago quarter to 42.1%, impacted by lower than expected manufacturing yields during a steep product ramp to a large customer.

Non-GAAP research & development (R&D) and marketing & selling (M&S) expenses as percentage revenues declined 250 bps and 70 bps, respectively. General & administrative (G&A) expense as percentage of revenues was flat on a year-over-year basis in the reported quarter. The line items included stock based compensation expense.

As a result, operating margin contracted a modest 130 bps to 19.7%. The figure includes stock-based compensation expense.

Balance Sheet & Cash Flow

As of Oct 1, 2016, cash and cash equivalents were $469.2 million down from $433 million as of Jul 2. Long-term debt was $988.6 million as compared with $988.4 million at the end of the previous quarter.

Net cash provided by operating activities was $250     million with free cash flow of $130 million at the end of the quarter. Capital expenditures were $120 million, primarily due to growing premium filter demand.

Further, Qorvo announced a share buyback program worth $500 million.

Guidance

Qorvo expects non-GAAP revenues in third-quarter fiscal 2017 to be approximately $800–$840 million. The company anticipates gross margin to expand 100–200 bps.

Earnings are expected to be in the range of $1.15 to $1.35 per share. Management expects operating expenses to remain near 20% of sales in the third quarter.

For the rest of fiscal 2017, Qorvo anticipates margins to improve as operations stabilize and low-band PAD mix declines. The company expects gross margin of 46% at the end of the fiscal 2017.

Management believes that additional yield improvement, factory loading, sourcing and other productivity initiatives will help drive margin expansion in fiscal year 2018.

Factory yield improvements from process maturity and larger wafer production in Surface Acoustic Wave (SAW) and Bulk Acoustic Wave (BAW)are expected to add approximately 100 bps to gross margin in fiscal year 2018. Higher volumes are projected to add over 150 bps driven by higher utilization of BAW, SAW, and gas lines as well as fast ramping of the company’s new Dezhou assembly and test facility.

Finally, Qorvo expects ongoing supply chain consolidation and procurement initiatives along with additional efforts to wring out merger savings should drive another 150 bps of gross margin expansion.

Together, by the end of fiscal year 2018, Qorvo anticipates these efforts and a more favorable mix of higher margin products to result in greater than 50% gross margins.

For fiscal year 2018, operating expense is anticipated to be fewer than 20% of sales and operating margin of 30%.

Zacks Rank & Key Picks

Currently, Qorvo carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the semiconductor space include Amkor Technology (AMKR - Free Report) , Cirrus Logic Inc. (CRUS - Free Report) and FormFactor Inc. (FORM - Free Report) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Current year earnings estimate for Amkor and Cirrus have surged 20% and 29% to 53 cents and $3.73, respectively over the last seven days. Current year estimates for FormFactor has remained steady at 26 cents over the same period.

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