Don't Miss the Red Flags at Qorvo

By Harsh Chauhan Markets Fool.com

In the third quarter, just over a third of Qorvo's (NASDAQ: QRVO) revenue came from its largest customer. Though Qorvo didn't name this customer explicitly, it is widely believed the company's biggest account is Apple (NASDAQ: AAPL), to which it supplies radio frequency chips to enhance signals. This would make Qorvo one of the more diversified Apple suppliers, especially compared to Skyworks Solutions (NASDAQ: SWKS) and Cirrus Logic (NASDAQ: CRUS), which are reportedly dependent on Apple for 40% and 85% of their revenues, respectively.

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In that light, Qorvo seems like a diversified bet. What's more, Qorvo's second-largest customer, with 11% of revenue, is the fast-growing Chinese smartphone player Huawei. Additionally, it counts Samsung (NASDAQOTH: SSNLF) among its client list.

All this diversification, however, couldn't save Qorvo from setting weak guidance for the fourth quarter. Qorvo expects its fourth-quarter revenue to be $630 million at the midpoint of its guidance range. This is much lower than the consensus revenue estimate of $719 million, and if Qorvo manages to hit the midpoint of its guidance, its revenue will increase just 3.6% from the prior-year period.

Let's take a look at what's going on with the company and why investors should take note.

Image source: Qorvo.

The problems at Qorvo

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Qorvo's key smartphone clients are under pressure, and this is reflected in the company's guidance. CFO Mark Murphy had the following to say about the company's weak outlook during the Feb. 1 conference call (transcript via Seeking Alpha), "This guidance primarily reflects a greater than historical sequential decline in the March quarter, as two of our leading customers in China and a tier 1 customer in Korea delayed flagship smartphone launches."

The delayed smartphone launch by Qorvo's Korean customer seems to be a reference to Samsung, since the Galaxy S8 won't be launched at the Mobile World Congress happening this week, as the S7 was last year. Samsung is reportedly going to launch its flagship in April instead, as it carries out intensive testing of the device to avoid a Note7-like fiasco. There's no doubt that this delay has pushed back Qorvo's potential revenue from Samsung by at least a quarter and led to a weak outlook.

Meanwhile, Apple is believed to be slashing its iPhone production by roughly 10% in the current quarter, after producing more units than it sold during the holiday period. Supply chain data suggests that Apple placed orders to manufacture 89 million iPhone units in the December-ended quarter, while it sold only 78.3 million. This leaves Apple with a surplus of around 10 million iPhones for the current quarter, so it has reportedly decided to scale back production.

In fact, Ming-Chi Kuo of KGI Securities is of the opinion that iPhone production will decline throughout the first half of 2017, until the production cycle of the next model kicks in. So, it looks like Qorvo will not get any bump in its revenue from its largest customer in the first half of 2017. But is there more afoot here than just declining smartphone orders?

Is Skyworks eating Qorvo's lunch?

Qorvo is a direct competitor of Skyworks Solutions, as both companies make radio-frequency components for the same customers. However, Skyworks provided a strong outlook for the current quarter when it released results in January. Its revenue expectation of $840 million means that its top line could grow 8% from the prior-year period and exceed consensus analyst estimates of $818 million, while Qorvo's revenue is expected to increase just 3.6%.

As Skyworks' outlook is rosier than Qorvo's, the former could be winning market share. Mike Walkley of Canaccord Genuity (via Barron's) has a similar opinion, writing:

We also believe Skyworks is increasing content with Samsung and is well positioned for content growth with new Samsung products ramping in the upcoming quarters. We believe other Chinese OEMs will follow Huawei's leadership with increased RF content.

Additionally, Skyworks CEO Liam Griffin said that his company has seen content wins in "multiple devices across Samsung's entire portfolio, and gained momentum in China, with key wins at market leaders Oppo, Vivo, Meizu, and Xiaomi." The comments made by Skyworks after its latest results indicate that it is winning a lot of content in the same areas where Qorvo is not feeling confident.

In fact, Huawei has now become Skyworks' second-largest customer after Skyworks won almost all of the RF chip spots in Huawei's P9 flagship smartphones last year. On the other hand, Skyworks had reportedly won three spots in the iPhone 7, while Qorvo supplied two chips. In comparison, both companies had two chips each inside the iPhone 6s, according to a teardown of the device by Chipworks.

The competition from Skyworks is a red flag that Qorvo investors should not ignore.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Skyworks Solutions. The Motley Fool has the following options: long January 2018 $90 calls on Apple, short January 2018 $95 calls on Apple, short August 2017 $87 calls on Skyworks Solutions, and short August 2017 $85 puts on Skyworks Solutions. The Motley Fool recommends Cirrus Logic. The Motley Fool has a disclosure policy.