Steve Buhaly – Chief Financial Officer
Steve Eliscu – UBS
TriQuint Semiconductor, Inc. (TQNT) UBS Global Technology Conference Call November 15, 2012 10:00 AM ET
Steve Eliscu – UBS
Good morning. Welcome to UBS’s Global Technology Conference. My name is Steve Eliscu UBS Semiconductor Analyst. I would like to welcome Steve Buhaly, Chief Financial Officer from TriQuint Semiconductor.
Thanks, and it’s good to be here. I am with TriQuint Semiconductor and I’ll take you through our presentation. Safe Harbor statement upfront, you can read the details. But essentially I will be making some speculation about the future. That might be wrong. I’ll do my best to get it right. But, there could be some wide range of errors in there and possible reasons for that, you can find in our SEC filings.
TriQuint is a technology leader. We have a broad technology and product portfolio spanning both power amplifier and filter technology. We are an integration leader, both designing and manufacturing our own filters and power amplifiers. We are a solution provider serving very attractive RF markets estimated at roughly $7 billion in size with a CAGR of 10% to 15% in dollars. Unit growth will be a bit higher.
Good, even great financial leverage. Roughly 50% fall-through on an incremental basis on long-term basis. And roughly $1 per share in cash with no debt. I’ll speak briefly about our market drivers in four areas, mobile which constitutes about 70% of our revenue, 65% in the most recent quarter. Base Station and transport, and then finally defense.
Turning first to mobile devices. This is roughly a $6 billion market. It’s still expanding, driven by 2G moving to 3G in emerging economies primarily India and China. And the emergence of LTE or 4G which I think will really begin in earnest in 2013. Transition to broadband PAs is an ongoing response to the need for phones to carry a large number of frequencies within the same amount of real estate and technology development amongst the suppliers. Filter content will grow faster as those do not consolidate as PAs do. And then customers are clearly consolidating in the space.
We have a variety of significant customers in the mobile devices market. Our largest are Foxconn and Samsung with ZTE and Huawei is also important customers. Good growth over time in this marketplace. And TriQuint has had its share we are an integration expert and integration is increasingly in demand as again phone suppliers have to create an architecture which allows more bands to be serviced within a finite amount of board space if you will.
And then our solutions are focused on customer value where on size on flexibility improved performance, which is typically designed – defined as less real estate per band, better power utilization and then better fundamental performance in areas like linearity. Ultimately, lowering the cost for customers on a per band basis. We really service four basic interfaces, wireless LAN which is 100% correlated with smartphones and it’s showing some decent growth.
2G which is declining and it’s a very small portion of our business. It’s roughly 2% of our overall revenues in the last quarter. 3G which is the bread and butter today that’s the vast majority of our mobile revenue other than WiLAN and 4G which is beginning to gain some traction but honestly is more of a 2013 story and we’ll probably continue seeing growth in 2014.
Looking back, originally in smartphones you had a discrete architecture or a power amplifier duplexer architecture where there was one filter and one amplifier per band of content and in an advanced smartphone, maybe you had four bands. Wireless LAN has come into play as carriers have a need and a strong urgency to shift demand from their network on to the wireless LAN grid. Those are almost entirely correlated with smartphones today.
And then, architecture has clearly moved into a broadband or multi-band or architecture on the PA side where filters still remain discrete to each frequency. You see a couple of – a variety of architecture is actually in low band kind of phones, you still see discrete in PA duplexers as the primary architecture. Higher band kind of phones, you either see MMPAs or some form of broadband phone mixed with filter banks, or sometimes an antenna switch or antenna duplexer module type architecture.
And in many phones, you see all of the above. You would continue to see a variety of architectures in a single phone. But clearly the dominant trend is towards higher levels of integration. It’s an old story in semiconductors. It’s been going on for a long time. In WiLAN, we expect about 1 billion devices to ship in 2015, not only is the unit count going up, but complexity is going up. The new architecture AC will add more opportunities for our RF suppliers as these are MIMO architectures adding channel count to the WiLAN module that provides better service, higher speed better quality for the customer and a bit more RF content for suppliers such as TriQuint.
So we see two good growth drivers of our units going up roughly in parallel with smartphones and higher content per unit. Some of that growth will be offset by price erosion, again as it’s typical in our business. Something that is relatively unique to TriQuint. There is one other RF supplier who provides these types of filters. Our BAW filters and specialty SAW filters which are not discretely called out in the slide but they are a small portion of the SAW.
BAW filters in very rough terms, we think have a market today of just under $400 million. Nobody measures that market, so it’s entirely TriQuint estimates. And we think that market has a potential of doubling over the next two or three years. We see a very, very healthy growth driven primarily by LTE and by the fact that the spectrum is getting more crowded and these more precise filters such as Bulk Acoustic Wave filters are in increasing demand.
These filters often will pool a power amplifier or other content with them; again as our customers have a desire to integrate them into other elements of the device. Specialty SAW filters are a small portion of the overall SAW market. We call it as temperature compensated SAW. There is a variety of terms but to have the same characteristic of operating more precisely, but typically in a lower frequency portion of the spectrum than BAW filters. A very good business, great opportunity for TriQuint here.
Turning now to Base Stations. TriQuint works with the top customers in this market, Ericsson and Huawei are two good examples. We believe the market is about $1.3 billion in terms of opportunity with modest growth. Like TriQuint, we offer high linearity and power-efficient solutions in a multi-chip module and have excellent product breadth. About three years ago, we acquired WJ Communications which is one of the market leaders in supplying the base station market augmenting our existing portfolio.
The big driver as you probably will know in Base Stations is increased data capacity; data growth is pretty relentless driven by the proliferation of smartphones and tablets. Couple of responses, the biggest I think is the emergence of small cells and the second is driving as much traffic on to the WiLAN network as possible.
So we see good growth in PICO cells and other small cell opportunities also good opportunities to grow as these Base Stations have to accommodate the LTE frequencies. TriQuint’s broad portfolio in multi-chip module integration efficiently addresses operator needs.
Turning now to our transport business, our top customers here are many of the same in Base Stations with a few additions. So just Cisco where we supply cable devices. TriQuint again offers superior performance with a very differentiated products, optical is our strongest offering in this rather diverse area. We think the overall market is $400 million to $500 million and with optical we are a leader in the 40G and 100G optical modulator business that’s been our best growth area in this segment.
And there is not a whole lot of competition there. There are a couple of competitors that TriQuint has a very strong offering. Our optical transport network market direction is really driven by the 40G and 100G opportunities. These are being deployed both for metro and long haul networks and increasingly in datacenters due to the volume of data traffic and continued cost reduction.
Data traffic growth is pretty incredible. Actually, this is a graph comes cursive, Cisco, anyway you measure it, data traffic is a big driver of the opportunity for us and network capacity is being well served by the growth in the optical network. Our positioning, as you can see is not only in telecom, but it’s beginning to move into the Datacomm space due to the volume of information.
TriQuint’s advantages are low jitter, low power consumption, and high-voltage swing. The other thing that’s interesting here is the demand for our reliability is really at a military level. These devices are expected to last 10 years to 20 years. They are embedded, they very tough to fix if there something does go wrong. So reliability is a much, much more important, more like in a radar system than in a cell phone.
40G today is the bread and butter. The market is gradually moving to 100G; probably see more pronounced movement over the next 18 months or so. So our four transport applications, optical, cable, millimeter wave, which is point-to-point radio and VSAT combined, are each roughly about a third of the overall transport business.
These are small parts of the overall RF business, but they are very good gross margin opportunities and good growth fundamentals as they are driven by increases in data traffic.
Turning now to defense. Different set of customers here. Our customers are both the US government where we do a fair amount of primarily gallium nitride contract research for DARPA, the air force, the naval weapons lab, a variety of government customers and then primarily airborne radars sold through Raytheon, Northrop Grumman and Lockheed Martin.
We think the market opportunity here is also about $500 million, growing modestly. We supply very high performance package to RF solutions. We are a trusted foundry. One of the very few if not the only gas foundries with that accreditation in the United States and we are a gallium nitride innovator and a leader in the government funded and industry-focused R&D programs.
Our drivers here in this market are network communications, electronic warfare systems, and ISR, intelligence surveillance and reconnaissance. The largest portion of our business and a continued good opportunity for growth is airborne radar. We have a bit of a natural hedge in this market and that if new programs are curtailed, such as the joint strike fighter, due to budget constraints; demand for upgrades in retrofits to existing jet fighters grows. It’s clearly lots expensive to upgrade the electronics of an F-16 fighter than it is to produce a new joint strike fighter.
So we are more comfortable in fact, and some of our customers are in this uncertain environment because we think we will have attractive airborne radar business regardless of how the budget issues workout. In addition to our radar business, we have significant participation in the TPQ53 which has now moved into full production.
That’s a next generation shipboard and ground-based radar system. Some business providing jammers, that’s probably our only real war theater driven business and then handheld and satellite communication systems which we think is a real growth opportunity to make those light enough to be carried conveniently but robust enough to serve the military field needs.
And then finally, gallium nitride applications, beginning to ship some products there. But clearly, we are at the very beginning of a transition from gas devices to gallium nitride devices which I believe we will see first in the military market with a small exception for cable where there is a little bit gallium nitride business.
I’ve talked already a fair amount about government funded gallium nitride R&D. That’s about $70 million opportunity. We have good business there. We have more than $45 million in funding secured to leverage this technology and we are pretty excited about it. This is an area of real interest and focus for TriQuint in a broad variety of markets.
And it’s a terrific opportunity for us to partner with the government and to further develop and enhance this process technology.
And military is clearly a great opportunity to begin producing products, where the customer is really performance-oriented and is clearly willing to pay a premium for that performance. It’s a good opportunity for us with a relatively modest volumes to come up the learning curve and become more efficient in producing these products.
Turning now to financials. Looking at full years through 2011 TriQuint had achieved healthy growth, about 17% per year. I want to acknowledge that 2012 was not going to be a growth year. We had just under 35% growth in 2010. We kind of hit the wall in terms of capacity have rebuilt and added to capacity, but it did have an impact on our growth.
We still serve a very attractive growth market that company has a history of being able to actively participate and get ensure that growth and I expect we will return to growth in the future, but the last few years have been characterized by modest growth in 2011 and probably a single-digit decline in 2012.
So good history of growth, excellent capacity in place and a good market opportunity to serve growth going forward.
Looking at our P&L summary. On October 24, we gave fourth quarter guidance, which I am commenting on here. Guidance of $220 million to $225 million in revenue. You see the midpoint on this slide, roughly 30% gross margin and $0.02 per share, consistent with the third quarter.
We will be reducing our inventory in the fourth quarter and thus lowering utilization on our factories which is really the driver for gross margin dropping modestly on a sequential basis. Our inventory turns have been a little lower than they should be and the fourth quarter is a good opportunity for us to move that back to a more efficient basis, move some of those dollars to cash.
Speaking of cash, we have a strong balance sheet. No debt, just under $1 per share in Q3. I expect cash to grow in the fourth quarter. Some of which we are very likely to use in a share buyback program. Some of you may know the Board authorized a $50 million program at the end of the Q1. We used half of that in the second quarter. I think it’s fair to anticipate we’ll use the balance of that in the fourth quarter.
Inventory turns as you can see, we are in the threes, Q2 and Q3, we had a light revenue quarter in Q2 and kind of built level loaded the fabs, are resulting in what I consider pretty poor inventory turns. I expect we will get that back in the mid 4s, maybe a little better for good and lucky. But certainly back into the 4s which I think is a reasonable performance.
Net book value at about $5.60 a share currently trading well below that and as a side note, we have a $200 million line of credit with no balance. In summary, TriQuint has a great exposure to high growth markets. Smartphones and tablets are driving both mobile device growth and network infrastructure expansion.
We have the industry’s broadest technology portfolio spanning both filters, power amplifiers and network infrastructure, highlighted by our optical technology, high barriers to entry in networks, defense and aerospace and I would say specialty filters as well. We are an innovation and integration leader.
Our excess capacity provides a setting where revenue growth creates strong financial leverage. Over a long period of time and with no changes in inventory I would expect roughly a 50% operating margin fall-through on incremental revenue given our current mix of business. And finally, we do have a strong balance sheet.
Now with that, I’ll take questions for a couple of minutes and then I believe we have a breakout in the Carnegie room following this.
Steve Eliscu – UBS
Let me start it off Steve. Thank you. First of all, with regards to your growth opportunities, you laid out the growth CAGRs for respective opportunities. When you look at it on a aggregate basis, how do you think of your growth opportunity and what do you see is potential areas where you can accelerate that?
We believe the RF market as a whole is growing in the 10% to 15% range. Not wanting to guide, I will just leave you with that and I think the specific best opportunities for us do center around leveraging our specialty filters BAW and Advanced SAW and the power amplifiers that those would pull-through.
That’s our strongest area within mobile and I think we’ll see good healthy growth as we see LTE come into its own. And then I think network infrastructure is another very attractive market; our optical business is probably the most differentiated at this point in time.
Steve Eliscu – UBS
And another question, regarding your – looking at your capacity, clearly, it gives you an opportunity for leverage, but if we look at your, certainly if we look at your technology suites and manufacturing assets, you have a lot of strength there but I think we’ve seen certainly an issue in the recent past of matching those assets with the customer demands.
So what have you learned over the last couple of years with especially, the smartphones have really become – grown very quickly to better match your assets with what’s going on in the market.
I appreciate your kind phrasing of the question. Well, we clearly put too much capacity in too soon. First we ran out of capacity, then I think in hindsight we overbuilt, that was a better reaction to – and may be a necessary when we are running out of capacity to clearly demonstrate to customers that we had capacity required to support them.
I think we’ve gotten a lot better at it in terms of working lead times, cancellation penalties, all that kind of thing to be more careful and timely with capital spend on capacity. And I can tell you the only place we are investing in capacity today is BAW filters.
And there we are making some significant investments. I think, depending on business levels, there is areas and opportunity for us to double our capacity over the next year or so. We feel very good about that areas and opportunity. I think, the other silver lining to the excess capacity we have today beyond the financial leverage it gives us is there are a couple of very large mobile device platforms out there that have remarkably large and steep ramps.
And so if you win content with either of those, you’ve got to demonstrate and executing ability to ramp and execute production very rapidly and the capacity we have allows us to do that. I am not sure I would want to be with the amount of excess capacity we have today, but given what we have it’s a terrific opportunity to leverage that and support our marquee customer too.
Steve Eliscu – UBS
We are out of time, Steve, thank you very much.
It’s a pleasure, thanks for having us.
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