Third Quarter Results – Key Takeaways
Corvo Co., Ltd. (Nasdaq: QRVO), a company that provides semiconductor solutions for the wireless, power and wireline markets, recently announced third quarter 2023 earnings.
Given the weakness of Qorvo’s key end markets, particularly on the consumer side, Business, revenue growth was expected to take a hit.The company ultimately brought in the following group revenues $743 millionThat’s a 35% decline, much worse than the 8% decline we saw in the second quarter.
QRVO continues to be adversely affected by developments across its largest division, the Advanced Cellular Group (approximately 66% of group revenue). Revenues here were down 13%, but management’s long-term ambition for this business is to reach a mid-to-high single-digit growth business.
For starters, ACG is involved in supplying cellular RF solutions for smartphone and consumer electronics companies.bad macro has constrained demand, and client-side inventory adjustments still need to be optimized.For example, QRVO’s channel inventory in the Android ecosystem is 20% We still have a lot of work to do in the December quarter and normalization is likely later in the calendar year. It doesn’t help that IDC considers his FY23 global smartphone forecast lukewarm (just 3% growth) faces ample downside risks.
In such an unfavorable inventory scenario, gross margin increases are unlikely to occur immediately. In Q3, GM said he came in at 40.9% (continuous decline of over 800bps) and management expects Q4 to be on a similar pace, which isn’t great. A supplier related problem occurred at his 30bps rate and this probably won’t be repeated.
If there’s a bright side here, China-based weakness appears to have bottomed out (business was down 45% year-on-year in Q2 and down 20% QoQ), and the company is now We expect a flat trajectory on the earnings front for the fourth quarter. Qorvo is poised to profit from a smartphone rebound as his Android devices in China reportedly have 30% of his exposure.
In the medium term, Qorvo looks very well positioned to benefit from the ongoing migration of Android devices to 5G. Last year, less than half of his Android smartphones in the world were 5G compliant.
The buyback theme is still an underrated part of the QRVO story. They are now executing on his new $2 billion buyback plan announced on November 22nd. This represents about 17% of QRVO’s market capitalization. Note that buyback momentum increased another 25% in Q3. After buying back $160 million in the second quarter, we increased that to $200 million in the third quarter.
Given the weakness in the share price, much depends on QRVO’s asset base being able to generate historical levels of FCF, but investors expect further buyback support in the coming quarters. The share of FCF generated by QRVO’s assets has trended downward since mid-2021 (Q3: $203 million; Q2: $220 million), even before recent results. This was below the five-year average of 12.24%. This is disappointing because subdued market dynamics should not require large investments in inventories. We also reduced our CAPEX levels (capex was down 27% between Q2 and Q3).
Nonetheless, investors should also be enthusiastic about the idea that Qorvo will likely bring in additional cash through the potential sale of its Farmers Branch facility and biotech business. Both of these businesses now account for his Qorvo costs of about $44 million annually.
Finally – Should I buy, sell or hold QRVO shares?
The sell-side community was somewhat cautious about Qorvo’s outlook ahead of its third-quarter results (78% of the 27 analysts covering the stock had a HOLD rating), and given the outlook, they are It’s hard to see being optimistic. It’s also worth noting that QRVO stock is already trading above his average price target of $99.50.
QRVO’s management currently expects revenues for the March quarter of just $600 million to $640 million. The consensus is that earnings estimates should be lowered by an average of about 15%, given that the forecast before the third quarter results was $726.3 million for him. On the non-GAAP EPS side, a more drastic adjustment needs to be made given that the consensus is looking at $0.63, but management currently only puts out numbers in the $0.1 to $0.15 range. I expect.
Clearly, all of this has an impact on the FY23 EPS estimate, which was $6.289 prior to the outcome. Even before the potential EPS adjustment, that EPS was looking at a significantly more expensive future P/E for him of 18x (which equates to a premium of about 23% over the five-year average To do). After analysts adjust for Q3 and Q4, its P/E could look much more exorbitant, potentially weakening the buy case.
Even on the charts, there is no compelling evidence to pursue QRVO at this time. First, QRVO is unlikely to top the list as a rotation play within the midcap space. The ratio that measures the strength of the QRVO and the Vanguard Mid-cap ETF (which QRVO is included in) has recently reached the midpoint of its long-term range and is showing normal conditions.
Next, moving on to the price imprint on the QRVO weekly chart, we can see that it spends most of its time in an uptrend in the form of a faint ascending channel. From August 2020 to January 2022, the euphoria surrounding QRVO far exceeded the limits of this channel. Since then, the stock has regained support at the lower end of the channel last October, returning to the average. Keeping the rising channel boundary as a useful guidepost, it doesn’t make much sense to take a long position at this point as the balance between reward and risk is currently less than 1x.
In conclusion, I feel the HOLD rating is appropriate.