Starboard takes a stake in Qorvo. How the activist may help improve margins

Business: Qorvo is a global provider of semiconductor solutions. The company operates in three segments: High Performance Analog (HPA), Connectivity and Sensors Group (CSG) and Advanced Cellular Group (ACG). The HPA segment is a global provider of radio frequency (RF), mixed analog signal and power management solutions. The CSG segment is a global provider of connectivity and sensor solutions. The ACG segment is a global provider of cellular RF solutions for smartphones, wearables, laptops, tablets and other devices.

Stock Market Value: ~$8.41B ($88.94 per share)

Qorvo was formed as a result of a merger of equals in an all-stock transaction between RF Micro Devices (RFMD) and TriQuint Semiconductor (TQNT) that was announced in February 2014 and fill in January 2015. Starboard is quite familiar with Qorvo, considering that the company was a 13D filer on TriQuint in 2013. On October 29, 2013, Starboard sent a letter to TriQuint outlining the undervaluation, the underperformance of the company, and presents value propositions. December 2, 2013, Starboard appointed a majority list of six director candidates to the board for the 2014 annual meeting. However, the engagement never went to a proxy fight, as Starboard issued a letter supporting TriQuint’s proposed merger with RFMD in March 2014 and dropped the so 13D. In less than a year of commitment, Starboard made a return of 113.15% on its investment versus 23.80% for the Russell 2000.

The merger was presented to shareholders as an opportunity to create new growth opportunities in mobile devices, network infrastructure and aerospace and defense, enhanced by the scale advantages of the new company, the product portfolio, improved operating model and $150 million in cost synergies. The announcement was met with tremendous excitement, as the shares of TriQuint and RFMD rose approximately 200% from the day before the announcement until their combination. However, a year after the transaction, the newly formed Qorvo declined by 27.7%. Functionally a decade, from the combination of the merger to the day before Starboard Value disclosed its participation of 7.71%, the stock market traded flat, only a 4.5%. This is quite an underperformance when semiconductors have been the beneficiaries of tremendous secular winds in recent years. In the same period, the Index of Semiconductor Philadelphia SE is more than 650%.

The opportunity to improve value at Qorvo is simple, focused on performance and something Starboard has done many times at many semiconductor companies: margin improvement. Despite Qorvo’s excellent product portfolio and competitiveness with peers Broadcom and Skyworks Solutionsthe company’s gross and operating margins have been lower. Last fiscal year, Qorvo had a gross margin of 39.5% and an operating margin of 8.3%, while its peers Skyworks boasted margins of 44.2% and 24.9% respectively. Despite having nearly similar revenue levels ($4.7 billion for Skyworks and $3.8 billion for Qorvo), Qorvo spends 10.3% of revenue on selling, general and administrative expenses versus 6.6% for Skyworks and 18.1% of R&D revenue versus 12.7% for Skyworks. Additionally, Qorvo spends $104 million (2.8% of revenue) on “other operating expenses.” This is a sign of a board and management team in need of discipline and one of the main reasons Qorvo received such a high vulnerability rating in 13D Monitor’s Company Vulnerability Assessment database.

Each activist has a different style with different levels of success in industries and strategies, but it is difficult to find a more successful combination than Starboard in a semiconductor company with opportunities to improve margins. Starboard has already started activist campaigns at the following 13 semiconductor companies: Actel, Microtune, Zoran, DSP Group, MIPS Technologies, Integrated Device Technology, Tessera, TriQuint Semiconductor, Micrel, Integrated Silicon Solution, Marvell, Mellanox Technologies and On Semiconductor. In all these campaigns, Starboard had a positive return on its investment and its average return on 13 is 85.87% versus an average of 28.91% for 13. Russell 2000 during the same periods. Starboard’s modus operandi in these situations has been to take board seats if necessary, institute a philosophy of discipline that leads to more efficient SG&A and targeted R&D and helps improve operating margins. Also, at companies like On Semiconductor that were operating at low utilization levels, Starboard helped size capacity for more realistic manufacturing levels by consolidating fabs and using external foundries for flexibility. The same opportunity exists here, which could lead to additional margin improvement.

We have no doubt that Starboard will want board seats, and we believe this should be a quick fix for several reasons. First, Starboard’s experience and track record with the semiconductor companies described above is unassailable. Second, it is indefensible to be a semiconductor company in 2025 that has deprived its shareholders of any real return in the last ten years. Third, Starboard already has relationships with three of Qorvo eight directors including its chairman, all of whom were directors of TriQuint when Starboard engaged there: Walden C. Rhines (chairman), David HY Ho and Roderick D. Nelson. Fourth, of the company’s eight directors, five have been on the board for the 10 years since the TriQuint / RFMD merger, and one (David HY Ho) reported to the company of his company. intention to retire and cannot be re-elected at the next annual meeting of the company. Once on board, the representatives of Starboard and the rest of the board will have the opportunity to assess whether it is the right management team to restore Qorvo’s recent performance. If they decide that new management is necessary, it is important to note that there has been a tremendous amount of consolidation in the semiconductor industry in recent years, which has resulted in many senior and talented operators on the side.

Qorvo’s director appointment window doesn’t open until March 16, 2025, and we’ll be very surprised if a deal isn’t reached before then.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of investments 13D activists.