Qorvo (NASDAQ:QRVO) investors have been lucky this year as the company’s shares have made impressive gains despite inconsistent results. The chip specialist had started 2017 on the wrong foot as its fourth-quarter guidance didn’t match up to Wall Street’s estimates. The trend continued into the next quarter, with Qorvo setting weak guidance for the upcoming first-quarter fiscal 2018 results.
Still, Qorvo shares are up close to 30% this year as investors are betting on the possibility of windfall gains from Apple‘s next iPhone. This is quite possible given that the company gets around a third of its revenue from Cupertino. But Qorvo could give investors a harsh reality check when it releases its first-quarter results on Aug. 2. Here’s why.
Another weak performance is on the cards
Qorvo’s revenue is expected to drop almost 10% year over year to $631 million. Analysts were originally looking for $698 million in revenue, but they have since dialed back expectations as Qorvo seems to be losing ground to rival Skyworks Solutions.
What’s more, Qorvo’s profitability has taken a hit in recent quarters as its margins have come under pressure. The company’s gross margin dropped 3.8% year over year during the fourth quarter to 46.2%. The company expects further gross margin erosion of 120 basis points in its upcoming results, which clearly indicates that it is facing pricing pressure from its rival.
As a result, Qorvo’s earnings per share is anticipated to drop to between $0.70 to $0.90 from $1.08 per share last year, which is lower than analysts’ initial expectations of $1.02 per share. The company should be able to meet Wall Street’s expectations, though this shouldn’t be a cause for celebration for investors as the targets have been substantially lowered.
Gauging the guidance
Investors have been oblivious to Qorvo’s guidance so far this year in the hope that the company will make it big with the next iPhone. But the basis for the chipmaker’s rally will be put to test this quarter because Apple usually starts ramping up production of the iPhone from June or July. There might be a delay this time according to a report by the Economic Daily News of China, which believes that the next-generation iPhones will only go on sale in November or December.
This would constitute a red flag for Qorvo as Apple’s production delay will take a toll on its results. Investors will be looking for an update on this from management. It seems as though analysts are already anticipating bad news as they are expecting the company’s revenue to drop 2.3% year over year during the second quarter (which ends in September). This is uncharacteristic for a company that gets a sizable chunk of its revenue from Apple.
Qorvo investors will be hoping for some good news from the company’s smartphone business in China, which has faced a slowdown so far this year. The company boasted of several design wins at Chinese customers last quarter, stating that it is now shipping bulk acoustic wave filters to the likes of Xiaomi, Vivo, and OPPO. Additionally, Qorvo expects to grow its dollar content at Huawei devices — the Chinese smartphone maker is its second-largest customer.
It remains to be seen whether Qorvo has landed these design wins at the expense of its margins — given its lack of pricing power in the light of competition from Skyworks. If this is indeed the case and the company issues yet another tepid gross margin forecast, investors could have cause for concern.
Qorvo needs to offer investors insight into the supply forecast for Apple and guidance to justify its stock price rally. But this seems difficult given the conditions emerging in its end-markets, and the stiff competition that it is facing from a potent rival that’s making significant inroads into the Chinese smartphone space.
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: short November 2017 $95 calls on Skyworks Solutions and short November 2017 $92 puts on Skyworks Solutions. The Motley Fool has a disclosure policy.