25 January 2012

RFMD’s quarterly revenue falls 19% year-on-year to $225.4m

For its fiscal third-quarter 2012 (to end-December 2011), RF Micro Devices Inc of Greensboro, NC, USA has reported revenue of $225.4m, down 19.2% on $278.8m a year ago and down 7.5% sequentially on $243.8m last quarter (and 9.8% below the $250m that was forecast in early November). The two customers comprising more than 10% of revenue each were Nokia and Samsung.

In particular, revenue for RFMD’s Multi-Market Products Group (MPG) was $45.6m, down 13% (more than the projected 10%) on last quarter’s $52.4m, reflecting broad weakness in MPG's end markets. Cellular Products Group (CPG) revenue was about $179.8m, down 6% on about $191m last quarter.

China represented more than a third of total revenue. However, forecasted 2G product demand from Chinese cellular handset makers did not materialize as expected for the traditional lunar New Year ramp. In addition, while 3G demand in China grew 50% sequentially, it fell well short of the level customers had forecasted at the start of the quarter. This offset global market share gains in smart-phones (with sales of 3G/4G components rising sequentially to more than 55% of RFMD’s total cellular revenue, outpacing smart-phone market growth). With sales to Nokia declining, RFMD continued to diversify its customer base, with about 100% year-on-year revenue growth at Foxconn, HTC, Huawei, Motorola and Research In Motion. “Our share is still relatively small at these accounts, giving RFMD significant runway for growth,” says president & CEO Bob Bruggeworth.

The lower-than-forecasted demand resulted in an unplanned mid-quarter decrease in fab and assembly plant utilization (to lessen investment in inventory and mitigate future inventory risk), driving a disproportionate impact to gross margin. On a non-GAAP basis, after rising from 38.7% a year ago, gross margin has fallen from 39.1% to 30.2%. However, 2-3 percentage points of this decline is due to an inevitable increase in inventory reserves.

Net income has fallen further, from $52.6m a year ago and $31.1m last quarter to $5.1m. Despite this, RFMD generated $46.2m in cash flow from operations (up from $38.4m last quarter). After subtracting capital expenditure of $8.7m (up slightly from $7.8m last quarter), free cash flow was $37.5m (up from $30.6m). Also during the quarter, RFMD repurchased about 2.3 million shares of common stock and purchased and retired $6m principal amount of convertible debt. Overall, total cash, cash equivalents and short-term investments rose from $276.6m to $295.4m.

“Although RFMD’s December quarter clearly did not live up to our expectations, RFMD’s growth drivers are very much intact, led by industry-leading new products and the release of exciting new product categories, like RFMD’s antenna control solutions,” says Bruggeworth.

CPG continued to ramp its ultra-high-efficiency 3G/4G power amplifiers (PAs) across a broad range of leading smart-phone makers. It also ramped PowerSmart products with an additional base-band supplier and is engaged with leading LTE base-band suppliers to deliver PowerSmart LTE to their customers. In addition, CPG secured a major PA design win on a reference design for the 3G entry market. Also during the quarter, shipments of switch and signal conditioning products surpassed $25m, in support of Foxconn, HTC, Samsung, LG, Research In Motion and others.

MPG released a broad range of new products during the quarter, including 15 high-frequency MMICs operating at 6-27GHz for microwave backhaul (five customers have already designed two or more into their next-generation platforms). RFMD also secured major gallium nitride (GaN)-based design wins and commenced volume shipments of high-power GaN-based components to a major defense radar manufacturer.

“In the March 2012 quarter [fiscal Q4], we anticipate sales of 3G/4G components will continue to increase as a percentage of CPG revenue [to about two-thirds], and we expect MPG will outperform its underlying markets,” says Bruggeworth. RFMD anticipates further market share gains in smart-phones, but a greater-than-seasonal decline in sales to cellular handset makers in China, primarily due to the impact of the lunar New Year on order visibility and the projected impact of channel inventory. “In the near term, we are maintaining our conservative stance on the China market, and we've built this into our guidance,” Bruggeworth notes.

Also, three customers (one a top-tier handset maker in China and two top-tier infrastructure customers) are deepening their commitment to RFMD by transitioning to inventory hubs during the March quarter. “This creates a one-time impact to revenue [of $4-5m], as the normal 2-3 weeks to as much as 4 weeks of inventory the customer carries must get absorbed in RFMD’s inventory hub,” notes chief financial officer Dean Priddy.

Nevertheless, based on the demand environment and end markets (including sales to Nokia declining further), RFMD expects revenue to fall to about $185m (down 13% on $213.3m). Despite this, gross margin should improve by 200-300 basis points as inventory levels are reduced. RFMD expects to generate positive free cash flow.

“We believe our visibility into China will improve after the Lunar New Year holiday,” comments Bruggeworth. “We have begun to see signs of stabilization in customer order activity, and we believe RFMD will return to growth in the June 2012 quarter,” he adds. As revenue growth resumes, gross margin should return to historical levels, believes Priddy.

“Long term, the secular growth trends in both CPG and MPG remain intact, and RFMD’s outlook remains unchanged,” says Bruggeworth. RFMD’s 3G growth drivers in China are very much intact in wideband CDMA, in TD-SCDMA and TD-LTE. “The China market will transition to 3G, and RFMD is very well positioned to capitalize. RFMD’s key 3G/4G drivers (PowerSmart, high-efficiency PAs, switch-based products and antenna control solutions) grew in the December quarter, continue to gain key design wins, and will grow considerably during calendar 2012,” he adds. “MPG will recover as the macro environment improves, and new products and technologies will deliver revenue growth.” Norman Hilgendorf, VP of corporate development & head of MPG, concurs: “What we are hearing from our customers is to plan for a very strong year in 2012 as some of the capital spending recovers and makes up for the second half of 2011”.

See related items:

RFMD’s quarterly revenue rises 14% to $243.8m

RFMD returns to sequential revenue growth

RFMD’s quarterly revenue drops 23% to $213.3m

RFMD’s revenue falls 2.4% due to 3G drop at Nokia

RFMD’s quarterly revenue grows 12% year-on-year to record $285.8m

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