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27 July 2009


Greater-than-expected revenue returns RFMD to profit

For its fiscal first-quarter 2010 (ended 27 June), RF Micro Devices Inc of Greensboro, NC, USA has reported better-than-expected revenue of $212.5m, up 23.3% on $172.3m last quarter (though still down 11.6% on $240.5m a year ago).

The firm says that both its Cellular Products Group (CPG) and Multi-Market Products Group (MPG) - which represented 75% and 25% of revenue, respectively - outpaced growth in their primary end markets.

In particular, CPG outpaced cellular component market growth, driven by market share gains. Consolidation seems to be happening around the top three front-end providers, says CPG president Eric Creviston. Sales of 3G power amplifiers increased sequentially by more than 50%, while revenue related to 3G smart-phones increased significantly as a percentage of CPG revenue.

MPG experienced increased customer activity in multiple markets, including 3G cellular infrastructure in China, WiFi, WiMAX, defense and commercial power. In addition, sales related to smart grid applications, including automatic meter reading (AMR), grew more than 50% sequentially.

“Despite the reduced year-over-year demand environment, we are pleased to have delivered on our commitment to significantly improved financial performance,” says chief financial officer Dean Priddy.

Gross margin has rebounded from a low of 17.3% last quarter to 34.8% (up on 30.1% a year ago), including about 50% for MPG. “We anticipated substantial and sustainable improvement in gross margin as a result of the higher utilization rate [recovering from an unusually low 25% last quarter to a more normal 70%] and the effect of previously announced cost-reduction efforts,” says Priddy. Operating expenses were $54.5m, cut from $82.9m a year ago. Reflecting the increased revenue, gross profit and expense management, net loss of $26.5m a year ago and $58.7m last quarter has been turned into net income of $4.8m.

Cash flow from operations rose from $29.4m last quarter to $36.4m. Capital expenditure was $1.9m (tracking to the low end of the forecast $10-20m for this fiscal year). Such reduced levels of capital investment are sustainable, as revenue increases and end-markets return to growth, says Priddy. “For the foreseeable future we can maintain low levels of capital investment,” he adds, citing three main reasons: outsourcing most of the supply chain for MPG; reduced-die-size products have been ramping for less than a year and will effectively increase fab capacity by up to 50% (becoming a larger percentage of revenue); and implementing a hybrid manufacturing model for assembly. “We intend to make capital investments only in cases where the return on invested capital and payback period are compelling,” Priddy stresses.

Free cash flow (cash flow from operations minus property and equipment expenditures) was $34.5m, up 36% sequentially, even as RFMD ramped production. This is ahead of the $80-120m free cash flow guidance for the full fiscal year. Total cash, cash equivalents and short-term investments rose by $45.3m to $311.8m.

The results demonstrate the earnings power in RFMD's operating model, says president & CEO Bob Bruggeworth. “We made significant progress in the June quarter toward our financial model, and RFMD today is structured for significant financial leverage.”

Regarding orders, RFMD says that it is seeing improved visibility in its primary markets. Design-win momentum for CPG’s new GSM/GPRS transmit modules continued to increase significantly across top-tier handset OEMs in Korea and Greater China. The group won new component qualifications on reference designs from Qualcomm and Infineon. It also introduced 12 new products and continued to expand its content opportunity across cellular front ends, sampling switch duplexer modules to leading customers, and receiving first production orders for GPS LNA/filter modules (which should ramp from less than 2% of CPG revenue currently to replacing revenue from low-margin Polaris transceivers - which represent about 10% of overall revenue - over the period of the latter’s phase-out in the next fiscal year). MPG received its first production orders for electronic toll collection (ETC) applications in China. The group launched 18 new RF components and 51 derivative products during the quarter, and is on track to release more than 250 products this fiscal year.

On the strength of customer design activity across both MPG and CPG, RFMD expects continued market share gains in the September quarter. Specifically, it is booked for sequential revenue growth in both MPG and CPG (in excess of the projected handset industry growth rate for CPG), driven by the increasing RF content opportunity in 3G smart-phones and market share gains. “Smaller players that just don’t have the broad portfolio won't be able to keep up as we continue to see the growth in the complexity of the 3G smart-phone markets,” says CPG president Creviston.

RFMD forecasts factory utilization rates level with the June quarter (although the introduction of reduced-die-size products into production effectively increases throughput). Operating expenses are projected to remain level. Gross margin should be boosted by the proportion of inherently higher-margin smaller-die-size products growing (from less than 10% of shipments currently to about a third of the product portfolio by the end of the fiscal year) as well as the outsourcing in the MPG supply chain. Although MPG's revenue growth in the June quarter was not as high as CPG's (with cable TV and some broadband markets still to recover), this is expected to increase, boosting margin further.

“RFMD’s business model is structured to enable us to grow revenue rapidly, improve earnings significantly and generate substantial free cash flow,” says Priddy. “We expect continued strong return on invested capital (ROIC) as our reduced-die-size products represent a greater percentage of revenue, thereby reducing the need for significant additional capital expenditures into the foreseeable future,” he adds. CapEx is targeted to be $3m or less. “As we continue to utilize our factories and these reduced-die-size products continue to represent a greater percentage of our revenue, and as we use our supply chain strategically and competitively, I don’t see any reason why we can't begin to converge on our long-term model of 40% gross margins,” adds Bruggeworth.

Also, after launching its gallium nitride (GaN) Foundry Services business unit in June, RFMD expects its high-power GaN process technology, which uses its existing high-volume manufacturing facilities, to contribute to improved ROIC this calendar year, continues Priddy.

See related items:

Skyworks’ revenue rebounds by 11% from March-quarter dip

Skyworks surpasses RFMD in power amplifier market share

RFMD seeing better-than-expected order activity

RFMD still generating cash despite further 15% drop in revenue

RFMD’s fab utilization rebounding as orders improve

RFMD generates cash flow despite 25% revenue drop

RFMD generates $40m free cash flow; March quarter to be free cash flow positive

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