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12 February 2009


Impairment charges drive TriQuint into Q4 loss

RF product maker and foundry services provider TriQuint Semiconductor Inc of Hillsboro, OR, USA has reported record revenue of $573.4 for full-year 2008, up 21% on 2007's $475.8m. Market share gains drove 19% growth in handset revenue (including 254% growth for 3G). This combined with revenue from WJ Communications (acquired in Q2/2008), as well as 51% growth for wireless LAN. “In 2008 TriQuint delivered another solid growth year in spite of dramatic economic slowing in Q4,” says president & CEO Ralph Quinsey. 

Fourth-quarter revenue was $149m, up 16% on $128.5m a year ago but down 20% on $186.4m in Q3 (which was exceptionally strong due to 3G and WLAN product introductions). As the quarter progressed, the situation deteriorated, with customers requesting order push-out (largely for handsets and WLAN).

Revenue split by end market was 54% handsets, 33% networks, and 13% military. TriQuint says that this diversity gives it strength in markets that are insulated from the economic slowdown. In particular, Q4 was a record quarter for military business (up 39% on a year ago), favorably impacted by the timing of major programs (including a $4.5m, two-year contract from the Office of Naval Research). In contrast, the economic downturn and inventory reductions slowed demand abruptly in commercial markets.

The handset industry had been building inventory for the normally strong December quarter, before reacting to the unexpected decline in demand by cutting orders in order to reduce inventory levels. So, despite growing 16% year-on-year, handset revenue was down 21% from Q3’s exceptionally high $102m (which was boosted by a large initial stocking order for a major 3G platform). Despite growing 4% on a year ago, networks revenue fell 28% from Q3, due mainly to WLAN (although the long-term WLAN market is robust, reckons the firm).

In addition to normal seasonality, the slowing demand and aggressive inventory reductions throughout the supply chain have reduced factory utilization from Q3’s 83% to just 45%.

Due to the lower utilization and higher inventory reserves, gross margin has hence shrunk further, from 36.7% on a year ago and 31.4% last quarter to 30.1% in Q4. 

Net loss for Q4/2008 was $33.8m, compared to a profit of $11.8m last quarter and $13.8m a year ago. However, excluding non-cash impairment charges of $35.8m (mainly $33.9m for goodwill and $1.4m for in-process R&D) and charges from the acquisition of WJ Communications, non-GAAP net income in Q4 was $6.6m, down from $17.1m last quarter. This contributed to non-GAAP net income for 2008 of $40.2m, slightly above 2007’s $39.5m.

During Q4/2008, TriQuint generated operating cash flow of $33.5m. Apart from capital expenditure of $16.7m, the firm hence paid down the $13m balance on its revolving line of credit, while investments with a maturity of 1-2 years were $15.9m. Cash, cash equivalents and short-term investments rose by $5.9m to $86.1m. “Our healthy cash balance and absence of debt allow us to stay focused on opportunities,” says Quinsey.

“Inventory reductions throughout the supply chain will have a dampening impact on Q1 revenue,” warns Quinsey. For first-quarter 2009, TriQuint expects handset revenue to fall 10-15% sequentially (to roughly level with Q2/2008), and overall revenue to be down 19-26% on Q4/2008 and almost flat on $110m a year ago, at $110-120m (the firm is currently 90% booked to the midpoint of this range). This is down more than seasonally on Q4 due to lower demand, as the industry works through the excess inventory. Cash flow is expected to be roughly neutral.

Utilization will drop further in Q1 due to continued inventory reductions (particularly as a significant amount of WLAN inventory remains in the system through into Q2, compared to channel inventory for handsets largely burning off in Q4/2008). Consequently, as announced in mid-December, TriQuint is significantly curtailing spending, involving a reduction in the temporary workforce, restrictions on new hiring, and cost cutting through process improvements. The firm also targets 2009 capital expenditure to be no more than half that in 2008 (starting with just $10m in Q1/2009).

Low utilization due to existing inventory levels will put pressure on gross margins in Q1, before improving in Q2, when supply and demand should be better aligned, says Quinsey. Order rescheduling and push-outs have subsided, and normal demand pull is returning. “We saw some improvement in the first part of January compared to the darkest days of Q4/2008,” he adds. Quinsey thinks that TriQuint can get utilization back up above 60% in Q2.

“Strong design-wins and market share gains position us well for Q2 and beyond,” he believes, anticipating a return to profit in Q2 as customer inventory levels return to normal, followed by stronger demand in second-half 2009. 

In particular, he expects 3G and smart-phone unit sales to be up in 2009, with TriQuint's product lineup well positioned for these markets. Quinsey believes that the firm has the design wins in place to grow handset revenue in 2009, due to relative strength in GSM phones for emerging markets as well as smart-phones (for which sales volume is expected to grow 7%). TriQuint’s product focus for 2009 is to launch a very low-cost transmit module for GSM and to expand product offerings for 3G. “We are continuing to see solid adoption of 3G products within multi-band smart-phones, driving content in excess of $6 per handset,” says Quinsey. TriQuint is also expecting handset design wins to improve WLAN market share, boosting revenue in second-half 2009. Also, starting as soon as Q2, the firm expects sales of products for base-stations to benefit from China’s investment in 3G infrastructure.

Nevertheless, due to the uncertainty caused by the current economy, the firm is not guiding for full-year performance, but it expects 2009 to show moderate revenue growth overall. The military market currently provides better visibility and stability than TriQuint’s other markets. Although Q1 military revenue will be down slightly on a very strong Q4/2008, Quinsey expects it to grow in the high single or low double digits to a new record for full-year 2009.

“During this challenging business climate TriQuint will deliver innovation and operational efficiency, creating value out of adversity,” says Quinsey. “TriQuint will emerge as a stronger company.”

See related items:

TriQuint cuts Q4 revenue guidance from $160-175m to $140-145m

WJ boosts TriQuint’s 47% growth as profit triples

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