Why Qorvo Investors Need to Be Cautious After Q4 Results

Qorvo (QRVO -1.92%) investors got a reality check when the company released its fiscal fourth-quarter report in early May. The semiconductor specialist beat Wall Street expectations -- which were already dialed back -- but the weak first-quarter guidance confirmed the possibility of market-share losses to rival radio frequency (RF) chipmaker Skyworks Solutions (SWKS -0.86%).

Data sources: Qorvo's quarterly filings  and Yahoo! Finance. 

Qorvo's guidance isn't just weaker than analysts' average estimate, but also points toward shrinking top and bottom lines.

Image source: Qorvo. 

Qorvo's Chinese weakness is bad news

Qorvo management blamed tepid Chinese demand for the weak guidance, but rival Skyworks Solutions didn't have any such problem in its recently reported fiscal second quarter. Its outlook trumped estimates as the company's business gained greater traction in China, thanks to contract wins at key smartphone OEMs (original equipment manufacturers).

For instance, Huawei is now a 10%-plus customer of Skyworks (providing more than 10% of revenue). The Chinese smartphone giant's latest flagship smartphone used a number of Skyworks' products, including its China-specific front-end LTE solutions. In fact, the chipmaker believes that it's on its way to score $8 to $10 worth of content in each Huawei smartphone.

This is a big deal for Skyworks investors, as Huawei is fast capturing a greater share of the global smartphone market, thanks to an estimated 22% jump in first-quarter shipments. But this is bad news for Qorvo, since Huawei is its biggest customer in China. Moreover, Qorvo management had earlier admitted that it's been losing business at Huawei. though the company also said during its latest conference call that it had regained some of it.

Additionally, CEO Robert Bruggeworth reminded those on the call that when it comes to Samsung, "we said we were going to grow our dollar content, but we didn't think we're going to grow our share."

What's more, competition from Skyworks seems to be putting Qorvo's margin under pressure. The company's gross margin during the fourth quarter was 46.2%, down 3.8 percentage points from the prior-year period. In addition, Qorvo's guidance indicates that its gross margin will drop 120 basis points year over year in the second quarter, which is bad news for its bottom line.

Is a turnaround possible?

Qorvo, however, is telling investors to remain patient, as it touted a number of new design wins in the earnings call. Its recently launched bulk acoustic wave filters started shipping to customers such as OPPO, Xiaomi, and Vivo in March, while the company also scored multiple design wins at smartphone original equipment manufacturers such as Huawei, Xiaomi, and Samsung.

As a result, Qorvo expects dollar content growth at its second and third largest customers -- Huawei and Samsung, respectively. The company also expects a bump in business from its largest customer, believed to be Apple, later this year, thanks to higher chip content. In fact, JPMorgan's Bill Peterson believes that the chipmaker will gain business from the next iPhone.

Qorvo is also trying to control costs by reducing the die sizes of its RF filters to achieve better yields, apart from consolidating its manufacturing operations to reduce excess capacity. In all, the company believes that its cost-reduction initiatives will help it double free cash flow in the ongoing fiscal year, while pushing the gross margin to 50% by the end of the year.

But investors shouldn't take Qorvo's promises at face value right now, as it seems to be under pressure from its rival. Rather, it will be wise to wait for a couple of quarters and see if the company's design wins and cost-control initiatives are bearing fruit before making an investment decision.