News

29 January 2009

 

RFMD generates cash flow despite 25% revenue drop

For its fiscal third-quarter 2009 (ended 27 December 2008), RF Micro Devices Inc of Greensboro, NC, USA has reported revenue of $202m, down 25.6% on last quarter’s $271.7m.

President & CEO Bob Bruggeworth says that November was particularly challenging as demand dropped week-over-week in response to uncertainties surrounding consumer end-markets. This was compounded by customers’ excess inventories that had been built up for expected growth that failed to materialize.

So, despite continuing to ship production volumes of cellular front ends to all of the world’s top-five handset original equipment manufacturers (OEMs), component shipments in the Cellular Product Group (CPG) fell sequentially, due mainly to reduced handset demand and excess inventories at OEMs. Likewise, in the Multi-market Products Group (MPG), shipments of RF components fell due to reduced end-market demand and excess inventories.

Due mainly to the drop in revenue as well as lower factory utilization rates (below 30%) and inventory-related charges of $24.5m, gross margin fell sequentially from 28.3% to 19%.

Net loss has risen from $11.8m last quarter to $813.3m. However, this was mainly due to exceptional non-cash asset impairment charges of $754m. These included: a drop in the valuation of Sirenza Microdevices (acquired in 2007 for $300m plus $600m in stock) that led to a goodwill write-down of $673m; a $47m write-down from closing RFMD’s 4-inch GaAs fab (by concentrating production into the adjacent 6-inch fab); plus the $24.5m for inventory reserves. Excluding these one-time charges, non-GAAP loss was $12.9m (versus a profit of $18.6m last quarter).

During the quarter, RFMD surpassed its target of $75m in annualized operating expense reductions, e.g. through cutting production and staffing at its 6-inch GaAs fab in Newton Aycliffe, UK. Overall capital expenditure has been cut to less than $6m (and should be even lower for the next 6-8 quarters, totaling $15-20m in fiscal 2010).

Hence, despite the global economic downturn, cash and short-term investments still rose by $19m to $238m. “Flexibility and agility allow us to proactively manage for cash flow and improve RFMD’s balance sheet,” says Dean Priddy, CFO & corporate VP of administration. Despite the rapidly declining demand environment, free cash flow has almost doubled from the prior quarter's $21m to $40m (operating cash flow of $46m minus property and equipment expenditures of $6m). RFMD repurchased $33m worth of its convertible debt, resulting in net debt (long-term debt minus cash, cash equivalents and short-term investments) being cut by $52m to $344m. “We are structuring RFMD for superior financial leverage and significantly improved return on invested capital,” Priddy adds.

RFMD cautions that the current market conditions have created a high degree of uncertainty regarding customer demand. “We have very limited visibility into end markets and we believe our customers are still unable to pinpoint with any certainty real normalized demand,” says Bruggeworth. RFMD is hence suspending its practice of providing detailed quarterly guidance and is instead providing insight into its internal planning assumptions related to anticipated cash flows.

For the March quarter, RFMD expects revenue to decline more than seasonally, as end-market demand remains weak. However, in the first few weeks of December it began to see early signs of improvement. “The rate of push-outs has slowed and customer inventory levels are coming down,” says Bruggeworth. The firm expects a significant reduction in its own inventory levels, which should boost operating cash flow but suppress gross margin (to below 30%) due to lower factory utilization.

RFMD expects net cash and short-term investments to rise, although it may use some cash to repurchase outstanding convertible notes on an opportunistic basis (the firm’s cash balance exceeds the remaining August 2010 convertible notes by more than $30m). RFMD continues to expect $80-120m in free cash flow during fiscal 2010 (which begins on 29 March 2009), despite the reduced demand environment.

“The fiscal discipline underlying our strategic restructuring three quarters ago is not only intact, it is central to our operating plan and execution as we manage through the current economic downturn,” says Bruggeworth. “RFMD today is flexible and agile, and we are actively managing our manufacturing capacities and our expense structure to match what we anticipate to be the near-term demand environment,” he adds.

“Despite the decreasing end-market demand, design activity for our products has remained strong,” says Bruggeworth. CPG has secured major design wins for a dual-band GSM/GPRS transmit module at leading handset OEMs and platform providers in Korea, Taiwan and China. During the December quarter, CPG supported the launch of two new mass-market EDGE handsets featuring POLARIS transceivers, as well as of multiple 2G and 3G multimode handsets at a leading Korean handset OEM (now added as a 10% customer). Sales to another top-five handset OEM continued to ramp and more than doubled sequentially.

“RFMD is firmly committed to customer and end-market diversification and continued investments in new products and new enabling technologies,” says Bruggeworth. RFMD is diversifying not only through synergies between CPG and MPG but also within CPG, with an aggressive slate of new products, including a major refresh of open-market standard products.

For example, CPG launched multiple new RF front-end and switch products targeting GPRS, WCDMA, CDMA and WiMAX (with new product introductions in fiscal 2009 expected to be up by 50% over fiscal 2008). MPG released 20 new products and more than 50 derivative products in the December quarter, and is on track to release 350 products (100 new and 250 derivative) during fiscal 2009. In particular, MPG expects to benefit from the increasing content opportunity in 3G cellular infrastructure in China, beginning in the March quarter.

MPG also anticipates increasing GaN-based revenue in 2009 related to both defense radar applications (after having signed a new government contract for additional funding for GaN process technology development) and CATV line amplifiers (having received an initial production order from a prominent European customer). RFMD’s GaN components are in the final stages of reliability qualification, according to MPG president Bob van Buskirk.

In addition, in the December quarter RFMD launched its first die-shrink GaAs-based products (for the GSM market) and is accelerating implementation of die-shrink technology across the rest of its cellular product portfolio. These products are probably more competitive than any product in the market place and have an industry-lowest cost structure, reckons Priddy. “Over the coming quarters we expect our reduced-die-sized designs will lower our product cost and improve our return on invested capital by allowing us to capture more revenue from our manufacturing assets,” adds Bruggeworth.

See related items:

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

RFMD improves operating income after restructuring

RFMD’s restructuring increases losses despite revenue growth

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