Qorvo, which frequently launches acquisitions, has some little-known financing capabilities?

Earlier this month, Qorvo, a US RF industry giant, announced the acquisition of Nextinput, a semiconductor startup headquartered in Mountain View, California, which provides force sensing solutions for human-machine interfaces (HMIs).

On the social media platform Linkedin, it can be found that after the official announcement of the transaction between the two parties, Nextinput CEO and founder Ali Foughi's identity has been changed to Qorvo's General Manager. Under the comments of the relevant news, Ali Foughi's colleagues and friends in the industry have congratulated him on the upcoming completion of the transaction.

Compared with competitor Skyworks' acquisition of part of Silicon Labs' business a few days ago, Qorvo's acquisition this time was relatively low-key and the specific amount of the acquisition was not announced.

In a media interview in 2019, Ali Foughi intentionally highlighted Nextinput's "turnkey" rather than BTO post-customer acceptance model, and stated that the company aims to achieve 40 million shipments in four major vertical fields, including mobile phones and wearable electronics, automobiles, medical care, and the Internet of Things, by 2020. From Qorvo's perspective, the acquisition of NextInput expands the technology application scope of the company's mobile division and enables Qorvo to accelerate the deployment of force sensing solutions using MEMS-based sensors.

Qorvo has launched at least nine acquisitions in the past six years.

After RFMD and TriQuint merged to form Qorvo, Qorvo has also launched some other important acquisitions in the past six years, such as the acquisition of GreenPeak, a Dutch short-range RF communication technology company in 2016; in 2019, the company acquired Cavendish Kinetics, a San Jose-based antenna tuning application technology supplier; last October, Qorvo also acquired Sevenhugs, a manufacturer of ultra-wideband smart home remote controls. Since 2015, Qorvo has launched at least nine mergers and acquisitions, constantly enriching its product line and business scope. It is worth noting that Qorvo often does not officially announce the amount of the merger in the first place. When faced with questions from reporters, the press officer usually just responds, "Let's wait for the earnings conference." 

Last October, Qorvo acquired sevenhugs

So, how much is the specific amount of money that Qovo paid to acquire Nextinput? Jiwei.com noted that Jefferies LLC provided financial and financial advice to Nextinput in this M&A transaction, and Perkins & Coie provided legal assistance. After the acquisition, Nextinput will be integrated into the "mobile business" department by Qorvo as a whole. According to Nextinput, the main direction of the cooperation between the two parties is to "design highly differentiated sensing solutions for the next generation of 5G smartphones and high-performance True Wireless Stereo (TWS) headphones among major global OEM manufacturers." From this point of view, although the company has been deeply involved in the MEMS field for a long time, after the acquisition, it will be incorporated into Qorvo's core business areas: 5G, mobile phones, consumer electronics, etc.

In the earnings call for the most recent quarter, Toshiya Hari from Goldman Sachs Group asked a very clear question, "How much money was used to acquire Nextinput?" Qorvo's chief financial officer, Mark Murphy, also gave a very clear answer: "More than $15,000, close to $175 million." Mark Murphy also pointed out that although the acquisition is beneficial to the company's long-term gross profit margin, it will inevitably lead to huge operating expenses in the short term and a lower operating profit margin, which will be reflected in the next financial report.

Qorvo's integration of RF MEMS technology

This transaction with Nextinput is not the first time Qorvo has been involved in the acquisition of RF MEMS companies. RF is an important application field of MEMS. Since 2016, the mature RF MEMS market has occupied a large share of the overall MEMS market, which is also due to the steady growth of 5G mobile device shipments. Mobile terminals will be the market leader of RF MEMS. The military market also has a huge demand for RF MEMS devices and subsystems due to the development trend of miniaturization and intelligence. In addition, RF switches and derivative devices are widely used in the field of radio frequency microwave units and systems. Its products are widely used in military equipment and systems led by DARPA and NASA, as well as smart phones, navigation terminals, the Internet of Things, etc. Based on the basic structural unit of RF MEMS switches, phase shifters, adjustable filters, variable beam antennas, etc. can be constructed.

Compared with its competitors such as Skyworks, Broadcom and Murata, Qorvo's product line is relatively more concentrated and vertical. Its business is basically divided into two areas: MP (Mobile Product) and IDP (Infrastructure and Defense Products). Since the latter includes power management chip solutions, military semiconductors, smart homes, automotive semiconductors and the Internet of Things, its product life cycle is longer than MP, and its revenue is less seasonal.

Tax Shields and Hidden Government Subsidies from Defense Business

According to the latest financial report, Qorvo's revenue in the fourth quarter of fiscal 2021 was US$1.073 billion, US$33 million higher than the midpoint of guidance and a year-on-year increase of 36%. Mobile product revenue was US$808 million, a year-on-year increase of 45%. It can be seen that the mobile department's revenue accounts for three-quarters of Qorvo's total revenue, while the infrastructure and defense departments account for only one-quarter.

Qorvo was formed in January 2015 through the merger of TriQuint Semiconductor and RF Micro Devices. At the beginning of the merger, Qorvo very shrewdly built a tax self-protection system and constructed a "tax shield". From a time perspective, we will see this more clearly in the third quarter of fiscal 2022.

In terms of geography, Qorvo's business is mainly in Asia and the United States.

Unlike Skyworks, Qorvo's departmental divisions and business divisions do not have a particularly clear sense of separation. In addition to the overall need to expand the scope of business, there are deeper financial considerations - after all, the RF field involves a lot of military and civilian conversions. Compared with other competitors in the market, Qorvo will participate more in the military projects of the US Department of Defense in terms of the proportion of business scope. To give just one example, Roger Hall, general manager of Qorvo High Performance Solutions, said many years ago: "Using Qorvo's field-proven GaN technology, customers can solve many challenges related to the design of AESA radar systems, including improving power output and reliability. The newly launched GaN modules meet export requirements." It is estimated that by 2022, the demand for RF front-end components suitable for radar applications will exceed US$1 billion. Deep participation in certain contracting projects of the US Department of Defense DARPA (Department of Defense Advanced Research Projects Agency) can obtain many implicit subsidies from the federal government and reduce the financing costs of the capital market.

Looking at past financial reports, we can find that Qorvo's (2018-2021) annual free cash flow compound growth rate increased by 130% year-on-year, while the compound annual growth rate of EBIT during the same period increased by 88% year-on-year. The secret of the difference comes from the tax shield protection pursued by Qorvo. We can simulate the differentiated competition between Qorvo and its competitor Skyworks in terms of EBIT and tax rate.

Assuming that Qorvo and Skyworks both have EBIT of $100, and their income tax rates are exactly the same, both 25%, the difference between them is that the former frequently raises funds for M&A, while the latter (Skyworks) is very low-key in initiating mergers and acquisitions. Qorvo borrowed money from the bank, so it paid $20 in interest to the bank, while Skyworks did not, so the net profit of the two companies can be simply calculated as follows: Skyworks did not borrow money from the bank, and after deducting $25 in income tax, the net profit was $75. After Qorvo paid $20 in interest to the bank, it paid $20 in income tax on the remaining $80 in profit, and finally got a net profit of $60.

Qorvo seems to have paid $20 more in interest than Skyworks, but its profit is only $15 less than Skyworks. The reason is that they paid $5 less in income tax. Of the $20 in interest, the company actually only borne $15 in costs, and the remaining $5 was borne by the government. In other words, Qorvo has been eating the "scissors gap" between bank interest and income tax; and since fiscal year 2016, Qorvo has been protecting taxes (or avoiding taxes) by amortizing intangible assets, as shown in the following figure:

From the above figure, we can see that the annual amortization value is decreasing, and the wall of the "tax shield" is getting thinner and thinner, but it still contributes 23% of the free cash flow in fiscal 2021. How much impact will the presence or absence of a tax shield have on the company's cash flow? As shown in the following figure:

We can infer that due to the fact that the impact of tax protection has dropped by half year-on-year, Qorvo's free cash flow growth in fiscal 2022 will be weaker than before. According to the company's official financial outlook, free cash flow in fiscal 2022 will be US$1.3 billion (a year-on-year increase of 16%), the same growth rate as in fiscal 2022.

Qorvo also benefits from a lower effective corporate income tax rate starting in fiscal 2018, specifically to 9.2% in fiscal 2021 (and 15.4% in fiscal 2020), compared to the standard tax rate of 31.5% in 2018 and 21.0% in 2019. Free cash flow generation is likely to remain high despite the reduced impact of tax protection. Qorvo is likely to see limited capital expenditures and less-than-guided working capital buildup, and the effective tax rate is likely to remain below 10% in fiscal 2022.