The site has a stake in Qorva. How an activist can help improve margins

Job: Qorvo is a global supplier of semiconductor solutions. The company operates through 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), analog mixed 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.

Value of shares: ~ 8.41b ($88.94 per share)

Qorvo was formed as a result of the merger of equals in a transaction between RF Micro Devices (RFMD) and Triquint Semiconductor (TQNT) that was announced in February 2014 and completed in January 2015. The joint is quite familiar with Qorva as the company was a 13D filer at Triquint in 2013. October 29, 2013, Sporow sent a letter Triquint who outlined the company’s undervaluation, underperformance and made suggestions for increasing value. December 2, 2013 nominated most slate of the six director candidates for the Board at the 2014 annual meeting. However, the engagement never went to a proxy fight, as Starboard issued a letter supporting Triquit’s proposed merger with RFMD in March 2014 and exited its 13D. In less than a year of engagement, Starboard has delivered a 113.15% return on investment versus 23.80% for the Russell 2000.

The merger is pitched to shareholders as an opportunity to create new growth opportunities in mobile devices, network infrastructure and aerospace and defense, bolstered by the new company’s advantages of scale, product portfolio, improved operating model and $150 million in cost synergies. The announcement was met with huge excitement, as Triquint and RFMD shares rocketed around 200% from the day before the announcement to their combination. However, one year post-transaction, the newly formed Qorvo is down 27.7%. For the functional decade, from the completion of the merger to the day before the value on the right, revealing its 7.71% stake, the stock traded flat, up just 4.5%. That’s a pretty staggering underperformance when semiconductors have been the beneficiaries of huge secular tails in recent years. Over the same time period, the Philadelphia SE Semiconductor Index rose over 650%.

The opportunity to improve value at Qorvo is simple, operationally focused, and something Starboard has done many times in many semiconductor companies: margin improvement. Despite Qorva’s excellent product portfolio and competitiveness with its peers Broadcom and Skyworks Solutionsthe company’s gross and operating margins were inferior. Last fiscal year, Qorvo had a gross margin of 39.5% and an operating margin of 8.3%, while its peer SkyWorks boasted margins of 44.2% and 24.9%, respectively. Although it has roughly 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 compared to 6.6% for SkyWorks and 18, 1% of revenue versus 12.7% for SkyWorks. Furthermore, Qorvo spends an additional $104 million (2.8% of revenue) on “other operating expenses.” This is a false signal from the board and management team that discipline is needed, and one of the main reasons why Qorvo received such a high vulnerability score in the 13D Monitor vulnerability database.

Each activist has a different style with varying levels of success across industries and strategies, but it’s hard to find a more successful combination than the right piece in a semiconductor company with margin-enhancing opportunities. Starboarbor previously launched activist campaigns at the following 13 semiconductor companies: Actel, Microtune, Zoran, DSP Group, MIPS Technologies, Integrated Device Technology, Tessera, Triquint Semiconductor, Microl, Integrated Silicon Solutions, Marvell, Mellanox Technologies and at Semiconductor. Across all of these campaigns, Starboard had a positive return on investment, with an average return of 85.87% on 13 compared to an average of 28.91% for Russell 2000 in the same time period. The mode on the right in these situations has taken 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. Additionally, at companies like Semiconductor that have been operating at low utilization levels, the right has helped size capacity for more realistic production levels by consolidating fabs and using external foundries for flexibility. The same opportunity is here, which could lead to further margin improvement.

We have no doubt that the right seat will be desirable, and we believe that it should be a quick settlement for several reasons. First, the experience and crash track record with the semiconductor companies described above is unparalleled. Second, it is unspeakable to be a semiconductor company in 2025 that has deprived its shareholders of any real return in the last ten years. The third, on the right, relates to three Qorvos Eight directors Including its chairman, who were all directors of Triquint when Starboard joined there: Walden C. Rhines (Chairman), David Hy Ho and Roderick D. Nelson. Fourth, of the company’s eight directors, five have sat on the board for 10 years since the Triquint /RFMD merger, and one (David Hy Ho) has notified the company of his company Intention to retire and not stand for re-election at the company’s next annual meeting. Once on the board, Starboard representatives and the rest of the board will have an opportunity to assess whether this is the right management team to turn around Qorvo’s recent performance. If they decide that new management is needed, it is important to note that there has been a tremendous amount of consolidation in the semiconductor industry in recent years, resulting in many older and talented operators being sidelined.

Qorvo’s director nomination window does not open until March 16, 2025, and we would be very surprised if a settlement is not reached by 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 activist 13D investments.