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1 February 2008


RFMD loss follows dip in China GSM/GPRS demand

For its fiscal third-quarter 2008 (to end-December 2007), RF Micro Devices Inc of Greensboro, NC, USA has reported revenue of $268.2m (including a partial quarter of revenue from Sirenza Microdevices Inc, acquired on 13 November for $900m to expand beyond handset markets). This is up 4.8% on $255.8m sequentially, but down 4.6% on $281.1m a year ago. Excluding Sirenza revenue of $14.7m, RFMD revenue is 4% below the low end of the original guidance given in late October (of 4-9% growth to $265-280m).

Gross margin has fallen from 35.8% a year ago and 32.2% last quarter to 26.2%, due to lower production volumes and a high reliance on outsourcing pHEMT production to Filtronic (about a $7m drag on gross margin). Compared to net income of $ $59.3m a year ago and $14.5m last quarter, RFMD made a net loss of $15.1m.

The results are consistent with updated guidance that RFMD gave on 11 January, and reflect late-quarter reductions in demand mainly for GSM/GPRS cellular front-ends (down $20m sequentially).

Revenue for the Cellular Handset Products Group (CPG) was $232.8m (down from $238.3m last quarter). Sequential growth in EDGE and WCDMA was offset by reduced GSM/GPRS demand from customers in China (which represents more than 10% of RFMD’s total revenue) and from the high concentration of top-tier customers that use inventory hubs.

RFMD started EDGE front-end shipments to a leading top-tier handset maker and expects the volume ramp to contribute to the diversification of its revenue base in cellular handsets. The firm also completed the expansion of its Beijing facility (doubling RFMD’s assembly capacity), which is expected to contribute to gross margin improvement throughout fiscal 2009.

Revenue for the new Multi-Market Products Group (MPG) was $35.4m. Record quarterly sales of wireless LAN front-ends were driven by RFMD’s leading position in WLAN-enabled handsets and shipments of 802.11n WLAN front-ends for notebook computers, offseting weakness in infrastructure, broadband and consumar markets. MPG also started shipments from its Shanghai production facility, contributing to gross margin improvement.

“While we were disappointed by the weakened demand environment experienced late in December, we made progress during the quarter executing on our strategies to drive diversification, grow earnings per share and generate free cash flow,” says president and CEO Bob Bruggeworth. “We improved margins on Polaris 3, and we expect this trend to continue in the March quarter,” he adds. “We also completed the acquisition of Sirenza and expect non-GAAP earnings accretion beginning in the current quarter, a full quarter ahead of schedule.

Also during the quarter, RFMD announced the acquisition (due to close in March) of Filtronic Compound Semiconductor for £12.5m. This is expect to expand RFMD’s installed capacity by 30% [not including a possible doubling in Filtronic’s available cleanroom space], cut GaAs pHEMT manufacturing costs significantly and improve gross margins throughout fiscal 2009. Especially since the fab is currently under-utilized, and after transfer of RFMD’s ‘much simpler’ GaAs pHEMT process technology, the fab should support RFMD’s expected capacity demand with significantly reduced capital expenditure, says Bruggeworth.

For the March quarter, RFMD expects revenue of $215-230m (down 14-20% on the December quarter). CPG will be down more than seasonally due to excess GSM/GPRS front-end inventory in China and delay in a top-tier customer’s platform ramp, offset by relative strength in EDGE and WCDMA. However, after the excess inventory is consumed and after the start in March of an expected new platform ramp by a major customer, CPG should rebound to sequential growth in the June quarter.

MPG is expected to be flat to up, as a result of strength in WLAN front-ends, wireless infrastructure and broadband/consumer components, including WiMAX and CATV.

“In the March 2008 quarter, we expect the MPG product mix and supply chain synergies will result in higher margins, and we anticipate quarter-over-quarter growth in sales of Polaris 3 as the high-volume ramp continues,” says Bruggeworth. “Our March guidance reflects improving market dynamics for MPG, and relative softness in CPG as GSM/GPRS front-end inventories are consumed in a seasonally down quarter. EDGE and WCDMA are expected to be less-than-seasonal in March,” he adds.

“RFMD projects gross margin improvement in the March 2008 quarter, driven by our diversification strategy, and continued gross margin improvement in the June 2008 quarter, supported by the closing of the pending Filtronic acquisition,” says Dean Priddy, CFO and corporate VP of administration. “Synergies associated with the Sirenza acquisition are currently ahead of plan.”

Indeed, now that the first quarter of partial revenues from Sirenza has been completed, for MPG in fiscal 2009 RFMD forecasts revenue of $250m (up 10-12%), with gross margin of 50% (recovering from 26.2% last quarter, compared to 35.8% a year ago). RFMD is also still targeting gross margin of 35% for CPG.

Overall, for fiscal 2009, based on current customer forecasts, RFMD expect strong year-over-year growth, beginning in the June quarter. “RFMD anticipates strong cash flow in fiscal 2009 [which should be one of the lightest years for capex], giving the company the flexibility to continue to drive diversification and execute on our announced share repurchase program in order to improve our capital structure,” says Priddy.

RFMD’s board of directors authorized the firm’s first ever share repurchase program: of up to $150m of its common stock over the next 24 months. The firm will repurchase shares through solicited or unsolicited transactions in the open market or in privately negotiated transactions. The number of shares and the timing of the purchases will be based on market conditions and other factors. The program may be discontinued at any time.

*Regarding talk by Motorola (RFMD’s second biggest customer, after Nokia) of possibly selling its handset business, Bruggeworth pointed out that Motorola’s handset business is not as big as it used to be. Motorola loses market share in high-end phones (EDGE) to Nokia, but RFMD has high dollar content there. Also, in low-end phones, RFMD is starting to ramp into other, mid-tier customers as well as Nokia, and starting to regain market share with Korean handset makers that it lost in 2007 (with several design wins in second-half 2007 expected to ramp in second-half 2008). So, the impact of Motorola putting its handset business up for sale “may not be so bad” for RFMD, Bruggeworth reckons.

See related items:

RFMD reports late-quarter drop in demand

Filtronic sells Compound business

RFMD completes Sirenza acquisition and launches Multi-Market Products Group

RFMD’s 21% sequential growth driven by Polaris 3 shipments to Nokia and Motorola recovery

RFMD expands to accommodate cellular and multi-market demand

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