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30 January 2014

RFMD’s revenue hit by weakening at two largest customers

For its fiscal third-quarter 2014 (ended 28 December 2013), RF Micro Devices Inc of Greensboro, NC, USA has reported revenue of $288.5m. This up 6.4% on $271.2m a year ago (due mainly to dollar content increases in smartphones) but down 7.1% on last quarter’s record $310.7m (rather than the expected “flat to up 5% sequentially”).

Fiscal Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014
Revenue $271.2m $280.6m $293m $310.7m $288.5m

“We saw gradual erosion in order activity and customer pulls fell short of their forecasts,” says president & CEO Bob Bruggeworth. “The reductions in demand were primarily related to the very low end in China, where RFMD has the majority share, as well as progressive weakening throughout the quarter related to our two largest customers.”

Cellular Products Group (CPG) revenue was $238.7m, up 7.2% on $222.6m a year ago but down 6.6% on $255.4m last quarter. CPG revenue is now 80% 3G/4G and under 20% 2G.

Multi-Market Products Group (MPG) revenue was $49.8m, up 2.6% on $48.6m a year ago (with growth across multiple markets, including high-performance Wi-Fi, CATV networking, and wireless infrastructure) but down 9.8% on $55.2m last quarter.

Despite the drop in total revenue, RFMD delivered record gross profit. On a non-GAAP basis, gross margin has risen from 35.5% a year ago and 36.2% last quarter to as much as 39.7% (despite the quarter normally being seasonally down). Representing 530 basis points of margin expansion since three quarters ago, this is one quarter ahead of RFMD’s targeted margin improvement of 300-400 basis points by the end of the March 2014 quarter. “This is the direct result of our intense focus on cost reduction and our ongoing efforts in support of multiple gross margin expansion initiatives,” says chief financial officer Dean Priddy.

“To achieve our margin targets we’ve implemented a flexible sourcing strategy that is reducing our GaAs and silicon costs, and we’ve added assembly capabilities that have reduced our packaging costs,” Bruggeworth continues. “We are reducing our usage of precious metals in our manufacturing processes and leveraging our new higher-unit volumes across our supply chain to reduce costs,” he adds.

“RFMD’s flexible sourcing strategy is providing multiple points of benefit,” says Priddy. “Over the past few years we have reduced our manufacturing footprint and our fixed asset base significantly. We sold our MBE [molecular beam epitaxy] facility and our gallium arsenide fab in the UK [in Newton Aycliffe] and we’ve expanded our external sources of supply. We’re better able to balance internal and external resources with fluctuations in demand, and this supports a more predictable margin profile. The combined capabilities of our GaAs fab and our external foundries satisfy the full breadth of our customers’ performance, size, and cost requirements,” he adds.

“Second, we have installed and qualified additional assembly capacity in our Beijing facility. We’re seeing a margin lift today as we reduce our reliance on external suppliers, and we’ll get an additional lift as our internal assets are fully loaded,” continues Priddy.

“Third, we’re seeing continued adoption of our ultra-low-cost CMOS power amplifiers in next-generation handset platforms for emerging markets. We’ve seen an initial lift in margin as many smaller customers have migrated and we anticipate further margin expansion as our largest customer for CMOS PAs migrates to our ultra-low-cost product. We also anticipate a benefit as we commence shipments to an additional tier-one customer,” he adds.

“These are structural changes in various stages of implementation that target fixed and variable costs. They will impact margins favorably in the March quarter and beyond.”

In fiscal Q3/2014, operating expenses have fallen slightly from $75.1m last quarter to $74.6m. Of this general & administrative (G&A) has been cut from $12m to $10.7m and sales & marketing from $16,2m to $15.9m while R&D has grown from $47m to $48m.

Operating income has risen from $26.8m a year ago (an operating margin of 10% of sales) and $37.2m last quarter (12% of sales) to $40m (13.9% of sales). Net income has risen from $21.3m ($0.08 per diluted share) a year ago and $33.9m ($0.12 per diluted share) last quarter to $36.4m ($0.13 per diluted share, achieving the target, “reflecting the changes we’ve incorporated into our operating model”, says Bruggeworth).

Net cash provided by operating activities has risen from $21.5m last quarter to $70.4m. Capital expenditure was $15.6m (down from $16.7m). Consequently, free cash flow was $54.8m. Cash, cash equivalents and short-term investments hence rose from $149.5m to $205.5m. During the quarter RFMD repurchased about 200,000 shares of stock at an average price of $4.99.

Capital expenditure included investments in assembly equipment to reduce usage of precious metals. RFMD also made a multi-million dollar investment to secure bulk acoustic wave (BAW) filter capacity and now has preferred access to surface acoustic wave (SAW), temperature-compensated (TC)-SAW and BAW filter capacity from multiple sources.

During fiscal third-quarter 2014, CPG launched a broad family of envelop tracking (ET)-capable RF solutions in support of multiple next-generation smartphones featuring 4G LTE baseband. CPG also experienced strong design activity for its antenna control solutions for leading smartphones and tablets. Meanwhile, MPG secured a major contract funding gallium nitride (GaN) process transfer and development.

“RFMD is executing on multiple opportunities to increase our dollar content generation-over-generation in the world’s leading smartphones and tablets while materially enhancing our operating model,” says Bruggeworth. “In the March quarter, we anticipate another quarter of margin expansion and year-over-year improvements in operating income and earnings per share.”

For fiscal fourth-quarter 2014 (to end-March), although RFMD expects sequential drops in revenue to $250-260m and earnings per share to $0.09-0.10, EPS will be up year-on-year from $0.08 a year ago. Gross margin should rise further, to 40%.

“We expect MPG to grow sequentially in the March quarter and in CPG we’re forecasting growth at one top-tier customer and many mid-tier customers and across our China-based entry-tier customers,” says Priddy. “In fact, if not for a substantial sequential decline at one large customer, we believe RFMD’s revenue would be growing sequentially,” he notes.

“Customer order activity is strengthening,” says Bruggeworth. “Our confidence in our financial performance is tied closely to ongoing design-win activity related to the industry’s marquee smartphones and tablets, for which volume ramps will begin in the spring, accelerate in the September quarter and continue into the December quarter,” he adds.

“While the launch of marquee smartphones and tablets is weighted toward the back-half of this calendar year, our visibility into design-win activity gives us confidence,” continues Bruggeworth. “We are forecasting annual revenue growth of approximately 10%, supported by multiple growth drivers. RFMD’s underlying markets continue to expand, driven by global macro trends like the Internet of Things, which can be viewed as a massive, overarching movement comprising multiple high-growth trends including embedded connectivity, connected home, automotive WiFi, and wearable technologies,” he adds.

“To accommodate the increasing requirements for always-on broadband data, the top tiers of our market are adopting new technologies like envelope tracking, carrier aggregation and transmit MIMO that increase our dollar content opportunities. The carriers are deploying TD-LTE and LTE Advanced as well as driving more LTE content in mid-tier smartphones, while in developing geographies consumers are continuing to migrate from 2G voice phones to high-dollar-content 3G entry smartphones,” says Bruggeworth. “We are also capturing incremental content in new and expanding categories like antenna control solutions, power management circuits, diversity switches and a variety of new products integrating filters and duplexes.”

For the coming fiscal year, RFMD expects gross margin of greater than 40%, expanding operating margin, and significant EPS growth. “Our organization has identified over 75 initiatives to continue improving gross margin, and we are executing on these initiatives today,” says Priddy. “We are targeting industry-leading gross margin, with more predictability and less volatility in our operating results,” he adds.

“With this, RFMD expects to deliver robust growth in operating income along with return on invested capital (ROIC) well above our cost of capital,” concludes Bruggeworth.

See related items:

RFMD's quarterly revenue grows 48% year-on-year to record $310.7m

RFMD begins high-volume production of envelope tracking power amplifiers and power management ICs

RFMD expands assembly capacity in China to accommodate product demand

RFMD ships millionth RF7196D CMOS power amplifier

RFMD’s quarterly revenue rises 45% year-on-year to a record $293m

RFMD selling UK GaAs fab to Phoenix-based Compound Photonics

RFMD announces flexible GaAs sourcing strategy

RFMD’s quarterly revenue grows greater-than-expected 49% year-on-year

RFMD enjoys 29% sequential revenue growth

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