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RF Micro Devices, Inc. (NASDAQ:RFMD)

F2Q09 Earnings Call

October 28, 2008 5:00 pm ET

Executives

Doug DeLieto – Vice President, Investor Relations

Robert A. Bruggeworth - President, Chief Executive Officer & Director

William A. Priddy, Jr. - Chief Financial Officer, Corporate Vice President, Administration & Secretary

Steven E. Creviston - Corporate Vice President & President, Cellular Products Group

Robert M. Van Buskirk - Corporate Vice President & President, Multi-Market Products Group

Analysts

[Ubi Orgi – UBS]

Ittai Kidron – Oppenheimer & Co.

Edward Snyder - Charter Equity Research

Craig A. Ellis - Citigroup

[Banc Nothomooney] - J.P. Morgan

John P.E. Lau - Jefferies & Co.

[Mark Keller] - Merrill Lynch

Harsh Kumar - Morgan, Keegan & Company

[Aaron Huson - Lenexa Globe]

Mark McKechnie - American Technology Research

Analyst for Brian T. Modoff - Deutsche Bank

James E. Faucette - Pacific Crest Securities

Tim Luke - Barclays Capital

[Dan Berkley - O’Conner]

Analyst for Todd K. Koffman - Raymond James & Associates

[Alain Shaw] - D.A. Davidson

Analyst for Tore Svanberg - Thomas Weisel Partners

Operator

Welcome to the RF Micro Devices second quarter earnings conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference call is being recorded today, Tuesday, October 28th of 2008. I would now like to turn the conference over to Doug DeLieto, VP of Investor Relations.

Doug DeLieto

Welcome to our conference call. At 4 o’clock today we issued our earnings release. If anyone listening did not receive a copy of the release call Samantha Alfonso at the Financial Relations Board at 212-827-3746. Samantha will fax a copy to you and verify that your name is on our distribution list. In the meantime the release is also available on our website www.RFMD.com under Investor Info and on PR Newswire.

At this time I want to remind our audience that this call includes forward-looking statement, within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and contentions and are not historical facts and typically are identified by use of terms such as may, will, should, could, expect, plan, anticipate, believe, estimate, predict, potential, continue and similar words although some forward-looking statements are expressed differently.

You should be aware that the forward-looking statements included herein represent our current judgment and expectations but our actual results, events and performance could differ materially from those expressed or implied by forward-looking statements. We do not intend to update any of these forward-looking statements or publicly announce the results of any revisions of these forward-looking statements, other than as is required under the federal securities laws.

Our business is subject to numerous risks and uncertainties including variability in quarterly operating results, the rate of growth and development of wireless markets, risks associated with our planned exit from our wireless systems business including cellular transceivers and GPS solutions, the risk that restructuring charges maybe greater than originally anticipated and that the cost savings and other benefits from the restructuring may not be achieved, risks associated with the operation of our wafer fabrication facilities, molecular beam epitaxy facility, assembly facility and test and tape and reel facilities, our ability to complete acquisitions and integrate acquired companies including the risks that we may not realize expected synergies from our business combinations, our ability to attract and retain skilled personnel and develop leaders, variability in production yields, our ability to reduce costs and improve gross margins by implementing innovative technologies, our ability to bring new products to market, our ability to adjust production capacity in a timely fashion in response to changes in demand for our products, dependence on a limited number of customers and dependence on third parties.

These and other risks and uncertainties which are described in more detail in our most recent Annual Report on Form 10-K and other reports and statements filed with the Securities and Exchange Commission could cause actual results and developments to be materially different from those expressed or implied by any of these forward-looking statements.

In today's press release and on today's call we provide both GAAP and non-GAAP financial measures. We provide the supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or unusual items that may obscure trends in our underlying performance.

During tonight's call our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures please refer to our earnings release issued earlier today which is available on our corporate website www.RFMD.com under the heading Investor Info.

In fairness to all listeners, we ask that participants please limit themselves to one question and a follow-up. After each person in the queue has received a turn we will give the participants an opportunity to ask a second question. Finally as a reminder our Analyst Day for institutional investors will be coming up in a few weeks on November 12th in New York City.

With me today on the line are Bob Bruggeworth, President and CEO; Dean Priddy, Chief Financial Officer; Eric Creviston, President of Cellular Products Group; and Bob Van Buskirk, President of Multi-Market Products Group as well as other members of RFMD's management team.

And with that I'll turn the call over to Bob.

Robert A. Bruggeworth

Welcome everyone and thank you for joining us. Two quarters ago we announced a strategic restructuring that positioned RFMD to deliver the largest increase in profitability in our company’s history. Today we are announcing another very favorable assessment of our progress to date including expense reductions, market share gains and operating income of approximately 7%.

In two quarters RFMD has improved its operating margin by nearly 13 points. Our financial performance and greatly improved company fundamentals are the direct result of solid execution by the entire RFMD team. We are sharply focused on our most profitable business RF components where we are the recognized leader and where our unique combination of core competencies provide a clear competitive advantage.

We are number one in compound semiconductors and we are number one in RF components. With our strategic restructuring now complete and our successful integration of our acquisitions now complete we’ve improved both our operating model and our projected free cash flows while also enhancing our competitive position. We are enjoying the benefits of new product cycles and market share growth and our new product introductions and design wins are accelerating giving us confidence in support of future revenue opportunities.

In the September quarter revenue grew 13% sequentially to $271.7 million. Gross profit increased to $85.8 million and gross margin was 31.6% reflecting an unfavorable product mix. We reduced our operating expenses by 16.2% versus the March quarter. Consistent with prior commentary operating income improved sequentially from $2.3 million in June to $18 million in September and net income increased over 100% to $18.6 million compared to $7.9 million in the June quarter.

In cellular handsets RFMD once again expanded its front end market share as revenue increased sequentially faster than the handset growth rate. Our strongest front end sales were in edged handsets, we are reducing costs, we are gaining share and we are revitalizing our product portfolio for higher margins and increased market share at leading handset manufacturers.

We enjoyed excellent design activity at the world’s leading handset manufacturers. For example at Samsung we locked down significant new 3G design wins including 10 new handsets ramping this quarter and a major new 3G platform ramping in March. The 3G handset volumes are meaningful today and we expect to grow in both the December and March quarters.

We also expect to capture additional handsets at Samsung in 2G including narrow band CDMA and GPRS as many of our new standard products are released. Despite speculation about weakness in 2G during the quarter we solidified our position on a major handset platform at our largest customer on the strength of a newly introduced 2G transmit module. This is a major 2G handset platform and the design win represents a significant for our 2G product portfolio.

We are also beginning the ramp of a next generation 3G platform. Again production volumes for both these programs are meaningful and both are expected to grow in both the December and March quarters. In the coming quarters we expect to continue to be a share gainer and our most enthusiastic about our 3G multi-mode handsets. This is especially meaningful as wide-band CDMA handsets are forecast to grow approximately 30% in calendar year 2009 and RFMD is the industry leader in wide-band CDMA.

We also expect a stable revenue stream from POLARIS 3 for the coming quarters as we are in multiple handsets and high volume production. Now let’s look at our multi-market products group which represents approximately 25% of total revenue. In MPG we’re diversifying our business into high growth RF millimeter and microwave components that enjoy longer product cycles and expanded margins.

MPG saw a modest decline in sequential revenue in the September quarter as strength in standard products, wireless LAN and WiMAX was offset by a decline in cable TV. After a sold first six months of the year the CATV infrastructure business is experiencing seasonality that is more than last year. however we see a trend in 2009 toward higher amplifier content in the next generation optical modes and this plays into our strength as we launch our high performance Gallium Nitride based products announced in June.

I should point out that within cable TV we are seeing strength in certain broadband and consumer applications including set top boxes where expected to grow in the December quarter. In wireless infrastructure we anticipate growth as a result of favorable market dynamics in the China market as well as the new opportunities for RFMD in point-to-point radio applications.

We also expect to grow our wireless productivity business as a result of increased wireless LAN adoption in handsets, new standards such as 80.211N that increased content and increased market share in notebooks and numerous other consumer devices. MPG introduced 18 new products in the September quarter and is on track to introduce over 100 products in fiscal 2009. Given our September performance and our outlook going forward we remain confident MPG will exceed our original revenue target of $250 million in fiscal 2009.

Now a few comments on the macro environment, there is understandably much discussion regarding overall demand and growth rates in our end markets. However we would like to remind our listeners that RFMD is a highly diversified supplier across all geographies, air standards and customers. In addition RFMD is diversifying its business not only with the synergies between CPG and MPG but also within CPG with an aggressive slate of new product offerings including a major product refresh of our standard products.

We are also expanding our share at key accounts, increasing our participation on new programs and enjoying the benefit of new product cycles. As we’ve indicated previously there are a number of trends working to our advantage not only 3G which is associated primarily with Smart Phones but also in GPRS and edge where the adoption of our transmit modules is favorably impacting our content opportunity.

It’s also significant that RFMD is re-entering the narrow band CDMA standard products market beginning next year. This implies incremental market growth of approximately 10% for RFMD and an additional serviceable market of approximately $150 million. It’s comprised of power amplifiers and complementary cellular components such as switches, DC to DC converters and various low noise amplifiers.

We’re also launching new narrow band CDMA power amplifiers beginning in the March quarter and customers are expediting the ramp of these products. Through MPG we serve dozens of markets with very low customer concentration. As I stated previously our acquisitions have been fully integrated and MPG is now realizing significant supply chain and scale manufacturing synergies.

We are also capturing a wide range of technology and product based synergies as MPG takes advantage of RFMD’s industry leading technology and very high levels of RF component integration. We’re especially excited about opportunities presented by our maturing GAN technology which is exploitable in many of our primary MPG end markets including CATV, wireless infrastructure and aerospace and defense.

We’re also excited about our increasing presence in the expanding point-to-point radio end market driven by increasing wireless data and cellular back haul applications. In summary our September results demonstrate the benefits of our strategic restructuring and our increasing diversification. Our revenue reflects our sharpened focus on RF components for both cellular front ends and a wide range of multi-market applications and our operating margin expansion reflects revenue growth along with the significant expense reductions we committed to earlier this year.

Viewed in succession over the first three quarters of calendar 2008 there is a very clear trend in operating profit and operating margin from negative 6% in March to 1% in June to nearly 7% in September. RFMD is delivering greatly improved profitability and we will see the full benefit of the $75 million in annualized expense reductions in the December quarter. We committed to improve operating margin and return on invested capital. Implicit in this commitment is strong cash flow which we delivered in September and expect to continue to deliver.

We’ve completed our restructuring and the integration of our acquisitions and as a result we’re a much stronger company. With that I’ll turn the call over to Dean for more detail about our financial results and our outlook.

William A. Priddy, Jr.

Just as a reminder as Doug pointed out earlier in the call my comments and comparisons to income statement items will be based primarily on non-GAAP results. Today I’ll cover the September financials and December guidance. Our execution on improving profitability and return on invested capital has been rapid, easily measured and ahead of schedule.

Revenue for the September quarter grew 13% sequentially to $271.7 million well beyond the $260 million top end of our revenue guidance. MPG clearly remains on track to exceed our previously stated goal of $250 million of revenue for FY ’09 this year. The integration of acquisitions has been successfully completed and profitability has been enhanced. In CPG the restructuring has been successfully completed and profitability has been enhanced.

RFMD was clearly a share gainer in the September quarter as our cellular front end business outpaced the growth of the overall handset market. Our transceiver business also showed strength with revenue growing significantly quarter-over-quarter. Gross profit was $85.8 million with gross margin of 31.6%. The gross margin reflects the increase in POLARIS 3 revenue. Operating expenses were $67.8 million compared to operating expenses of $77.1 million last quarter.

We have executed on our targeted $75 million expense reductions and we will see the full benefit reflected in December quarter results. Our P&L demonstrated exceptional financial leverage in the September quarter with operating income of $18 million or 6.6% of sales compared to operating income of $2.3 million last quarter. With a 13% increase in revenue our operating margin improved 565 basis points.

Over the past two quarters our operating margin has improved nearly 13 points. Other income expense was negative $288,000 and non-GAAP net income for the September quarter was $18.6 million or $0.07 per diluted share based on 295 million shares using the if converted method. GAAP loss was $11.8 million or $0.04 per diluted share.

Going to the balance sheet cash flow from operations is $39.6 million. Total cash and short term investments increased $22 million to $219.3 million. We are delivering on our commitment to improve RFMD’s free cash flow. Free cash flow was $21.4 million in the September quarter and continues to trend positively. Net accounts receivable was $122.6 million with DSOs improving to 40.6 days from 43.9 days last quarter.

Consistent with projections made last quarter inventory declined nearly $15 million to $165.5 million resulting in turns of 4.7 up from 3.7 turns the previous quarter. Net PP&E was $401.6 million compared to $417.7 million last quarter. Cap ex during the quarter was $18.1 million with deprecation and amortization of $29.1 million. We expect roughly $50 million in cap ex for fiscal 2009 with approximately $15 million remaining in the last two quarters of the fiscal year.

Now for the December guidance, our guidance is for revenue to be flat to down 7%. While the book-to-bill ratio for the September quarter which was well above 1 and current customer demand would suggest potentially higher revenue we believe conservatism is prudent given the current macro environment. Based on projected customer and product mix along with reduced expenses we anticipate operating margin will improve in the December quarter.

We currently project GAAP earnings per share of break even to $0.02 and non-GAAP earnings per share of approximately $0.05 to $0.07 using the if converted method and a 20% tax rate. For those of you modeling cash flow we anticipate a strong December quarter with free cash flow exceeding the September quarter by $10 million to $15 million. Going into calendar year ’09 and into fiscal year ’10 we expect continued strong free cash flow as we project profitability will be maintained.

Capital expenditures will be minimal and we will pursue business opportunities that are incremental to operating cash flow. Working capital management will also contribute to free cash flow as we adjust production to match the business environment. We currently project $80 million to $120 million in free cash flow in fiscal year 2010.

With that I’ll open the call up to questions.

Question-And-Answer Session

Operator

Ladies and gentlemen at this time we will begin the question-and-answer session. (Operator Instructions) Once again please ask one question and one follow up. One moment please. Our first question comes from the line of Ubi Orgi – UBS.

Ubi Orgi – UBS

Let me ask you regarding your guidance, you talked about even though current orders would suggest a higher level thus you are being prudent. Can you just tell us where you see the upside and downsides to current outlook? And if you can provide a breakdown of the guidance by various operating segments, CPG and MPG that would be helpful please.

William A. Priddy, Jr.

First of all we’re not going to give a lot of detail on the MPG, CPG but clearly there’s been a lot of chatter about the handset industry in general. Some people feel that the handset industry will be up in the December quarter, some people feel flattish, some people feel that the industry could be down. Our customers are currently suggesting that the industry will be up quarter-over-quarter and as I pointed out we had a very strong book-to-bill in the September quarter and actually would have customer forecasts to indicate growth for the entire RFMD business for the December quarter.

However given the macro environment we factored customer forecast down across the board whether in the cellular products group or in the multi-market products group. Once again this is strictly a product of the environment, it’s not based on direct customer feedback but we feel it’s prudent given certainly all the chatter out there about the potential softness in the economy.

Ubi Orgi – UBS

In terms of what you’re seeing in terms of channel inventory especially out of the OEMs as well as within distribution, can you give us some insight as to what that is now and how you think inventories will look exiting December based on the guidance you gave?

Robert A. Bruggeworth

As far as channel inventories go for handsets I’ll answer the largest market first, from that perspective we believe the industry is pretty healthy right now and I think if you listen to several of our customers conference calls along with many of the other analysts that cover the industry from a handset OEM perspective it looks pretty healthy but what’s going to determine what the inventory is really has more to do with what the demand is at the end of the period which I think from Dean’s comments you see we’re taking a cautious view.

Not that we expect inventory to build up. We think our customers are very much paying attention to this and from that perspective we don’t expect ending a quarter in a bad inventory position. We just think people are going to be prudent and it’s just going to be a quarter that customers are going to slowly book and take what they need.

Operator

Our next question comes from Ittai Kidron – Oppenheimer & Co.

Ittai Kidron – Oppenheimer & Co.

Dean going back to the guidance again, I guess if things don’t change we assume that you’ll be a very cautious, conservative kind of a guy the next time you guide on the March quarter as well?

William A. Priddy, Jr.

Certainly we’ll review the environment when it comes to the March quarter. I think one thing that we’re not being conservative on is our ability to generate cash both in the December and March quarters and we expect very strong free cash flow and net cash flow in those two quarters. We’ll see how the overall demand environment plays out but we’ll be adjusting to match the environment.

Ittai Kidron – Oppenheimer & Co.

Just going back specifically to your December guidance on the top line, can you correlate that to a specific handset market growth sequentially? Meaning does this correspond to your expectation of a flat handset market or down? Can you be more specific?

William A. Priddy, Jr.

Actually I think Eric Creviston from our CPG group will take that question.

Steven E. Creviston

I think it’d be hard to correlate specifically to a handset rate because what we’re really trying to do here is factor the expectations in terms of volatility in the demand. I think the question on inventory was good in terms of what we expect might happen is that there might be some expected softness in the March quarter.

In fact it could cause people to really skinny down on the inventories at the end of the quarter. So it could be pretty volatile at the end of the quarter and that’s what we’re saying. It’s not any one segment or any one customer or any one region particularly. Just looking at the bookings rate we think it’s the right thing do.

I think mix will also impact us potentially as well as people potentially at least the low tier and the high tier, we’re seeing a lot of efforts right now in our customers to really continue to drive those segments and potentially the mid tier could be affected. We’re basically right now just factoring across the board.

Ittai Kidron – Oppenheimer & Co.

Lastly for me on the margin side, Dean assuming MPG margins held up on the gross margins at 50% where you’ve told us they’ve been, and stripping out POLARIS out of the equation it looks like your core CPG outside of POLARIS is still sub-30% gross margin, very little actually to no progress over there.

How should we think about that? When would CPG gross margins grow above 30%? Also going to the guidance you provided a quarter ago about reaching 10% operating margin in December you haven’t mentioned it now. Are you just giving your top line guidance also pulling back from that one?

William A. Priddy, Jr.

First of all, Ittai, as you’re aware we have positioned the company as an operating margin story and also one that will be generating significant cash flow. In terms of gross margins you’re right, MPGs gross margin profile remains very high and steadily on track. I think where you’re model may be a bit off would be a portion of POLARIS revenue and the dilutive effect to margins because of the POLARIS margin profile.

I think in the components business unit or front ends, if you will, margins are above 30% and the outlook for margin expansion there continues to be good for a host of reasons including completion of our Beijing assembly, smaller die size products being introduced and gold prices have moderated. We’ve got new sub-straight technologies coming out and I think as much as anything the customer diversification aspects where we grew at four of the five top handset manufacturers in the September quarter.

I think that’s where you could probably do a little tweaking on your model and really the margin decline can be attributed to POLARIS 3 gross margins.

Ittai Kidron – Oppenheimer & Co.

And the operating margin, the 10%?

William A. Priddy, Jr.

Excuse me, what was the question there?

Ittai Kidron – Oppenheimer & Co.

Last quarter you guided to reaching 10% operating margin in December. Are you sticking to that?

William A. Priddy, Jr.

Clearly that is an internal goal and when we gave our guidance of 10% operating margin back on May 6th I don’t think anyone envisioned the turmoil and the world economies that we’re seeing now. But we’re absolutely not giving up on achieving 10% operating margin as a company. We are guiding to operating margin improvement and if customer demand comes in as it’s currently forecast we’ll easily hit the goal.

But that’s the if, if it comes in as forecast. So we’ll wait and see. We’re guiding to improved operating margins and internally we continue to execute and are working hard to meet that goal.

Operator

Our next question comes from Edward Snyder - Charter Equity Research.

Edward Snyder - Charter Equity Research

Your cash flow has really improved nicely here and you’re guiding for even better in the coming quarters and next year. What does this do for the share buyback? I know you’re not committed to it but given that you’ve already made a couple of big acquisitions and you’re digesting those now, can we expect that you’ll favor that more than M&A?

Robert A. Bruggeworth

From the perspective of why we’re focused on cash flow, there are a couple different reasons. Number one is obviously we want to maintain our flexibility given the macro environment and what potential scenarios could unfold. Number two as you pointed out, we have the opportunity with our stock buyback still in place to purchase back our stock along with the opportunity to buy back bonds. At this point in time I think we’ve been saying we don’t expect any major acquisitions in the short term.

As I’ve said we completed the acquisitions that we’ve made. We’ve got our restructuring behind us. We’ve got lots of opportunities with the new product introductions to drive our growth, and we’re focused on the execution of developing those new products to diversify our business within our customers in cellular along with in multimarket product areas.

But also we want to keep that cash flow and again as I said focus on the cash flow to improve our working capital so that we have flexibility if we want to do any one of those four things. That’s weather a potential macro economic slowdown, look at the opportunity to buy back our bonds or buy back stock, or later on potentially look at acquisitions, but we don’t see any of those any time soon.

Edward Snyder - Charter Equity Research

You’ve gained a lot of share across the industry but even at Nokia you landed the [ritza6] platform, both the Edge and the [wide band] slots, and most taking Polaris 2 again. Are we seeing a rebound in the transceiver business that maybe nobody expected?

Robert A. Bruggeworth

As far as the transceiver business goes, I would say as of this point in time through the September quarter it’s playing out as we expected. We had commented two quarters ago that we expected to be in multiple insets in our largest customer with Polaris 3 along with Polaris 2 at Motorola. I know I publicly commented many times that there were handsets yet to be launched. They have been launched. So from our perspective transceivers are playing out much like we expected.

Operator

Our next question comes from Craig A. Ellis - Citigroup.

Craig A. Ellis - Citigroup

Dean, can you please clarify what you’re expecting with gross margins in the December quarter? Are you expecting them to be flat, up or down?

William A. Priddy, Jr.

We’re expecting operating margins to improve. We haven’t commented on gross margin.

Craig A. Ellis - Citigroup

But that’s the question. Can you comment on gross margin?

William A. Priddy, Jr.

We expect operating margins to improve. We’ve maintained since the restructuring that we were going to focus on operating margin and ROIC, and that’s what we’ve done and what we continue to do.

Craig A. Ellis - Citigroup

Let me go down that path a little bit then. If we look into the March quarter which would typically be a down quarter and where from an economic standpoint maybe we’re even more vulnerable to some of the weakness that we’ve seen recently, how should we think about the company’s ability to protect operating margins?

William A. Priddy, Jr.

I think the company will remain profitable and generate significant cash flow. In fact someone asked the question that when we hit 10% operating margin as a percent of sales, I think the 10% cash flow as a percent of sales is certainly going to be true for both the December and March quarters.

Craig A. Ellis - Citigroup

I know after the Sirenza deal, originally the long-term targets were 41% gross and 17% operating. But should we really take a look at that operating margin target as being a 10% longer-term target now given what the macro economy has dealt us and where things are with handset unit growth looking into next year?

William A. Priddy, Jr.

If you think the macro environment is going to be gloom and doom forever, then I guess that’s possible but we actually think in the handset market if we see some softness for a while, it’s probably going to snap back even faster. Those that have capacity such as RFMD are going to be able to be the beneficiaries. I think if you’ve been following the company, the new product cycles with the significantly reduced cost structure, reduced die sizes, reduced substrate costs; these are going to be much lower cost higher margin products so we absolutely should not revisit our long-term model for the company.

Operator

Our next que4stion comes from [Banc Nothomooney] - J.P. Morgan.

[Banc Nothomooney] - J.P. Morgan

Congratulations on beating the top line and again as other people have asked with regards to the gross margin, there’s a substantial dip. I suspect that that’s going to continue for a few more quarters. Is that right and is that primarily because you expect more revenues from your Polaris product line than you anticipated?

William A. Priddy, Jr.

I don’t know how you want to model gross margin and I guess you can model it however you would like, but if we’re guiding to operating margins improving again in the December quarter, I think that would suggest that we’re not expecting a precipitous drop-off in gross margin. So I don’t necessarily think you’ve seen a trend. Just like last quarter when our operating income was $2.3 million our gross margins actually expanded that quarter. This quarter our gross margin has actually contracted and our operating margins were $18 million. So I believe I’ll take the $18 million over the $2.3 million and a little bit lower gross margin.

[Banc Nothomooney] - J.P. Morgan

On the top of your operating expenses you had said given that you’re targeting close to 10% whether or not it’s a specific target for the coming quarter and now that the macro economic situation seems to be worsening at best, would you comment on whether or not you would be looking into perhaps cutting operating expenses even further going forward or are you at a level where you think it’s appropriate for the current size of business?

William A. Priddy, Jr.

We believe that the current operating expense model roughly around 25% as a percent of sales in the September quarter is a good model for the company. We would wish to maintain that type of level for whatever business environment that we’re faced with over the coming quarters.

Robert A. Bruggeworth

We do expect our operating expenses to decrease in the December quarter.

Operator

Our next question comes from John P.E. Lau - Jefferies & Co.

John P.E. Lau - Jefferies & Co.

Great quarter and guidance especially in this environment. A lot of questions on Polaris 3 but in terms of the unit growth, can you tell us how strong Polaris 3 was for the September quarter and will you continue to see the dollar content and units increase for the December quarter? That’s just more of a macro type of question.

Steven E. Creviston

We did see significant growth. I guess we’re not quantifying Polaris 3 growth specifically but this was the major ramp quarter certainly, the September over June quarter for the Polaris 3 product. It is now at a point where we believe we’ll continue to see slight growth in the December quarter and March quarter over December based on current customer forecasts. There are still a few more insets to ramp that we’re aware of and potentially more coming throughout next year.

But we think most of the headwinds in gross margin we experienced in the September quarter with this ramp and from here expected to be pretty stable really for the next four to six quarters based again on the forecast that we’re currently seeing.

John P.E. Lau - Jefferies & Co.

I think one of the disconnects that many people have been asking is with the environment weak over there, has the Polaris 3 been able to offset that with more significant dollar content? Is that the way we continue to look forward on it also?

William A. Priddy, Jr.

I think the dollar content is not only coming from some of the Polaris products but also transmit modules which we continue to see in power info [fire] modules to make the transition to transmit modules which have higher dollar content and also in multimode phones where we have multiple power amplifiers including [Warner 2] wideband CDMA, the Edge PA and in many, many cases the wireless LAN PA as well. So that’s something that’s clearly in our favor going into calendar ’09 as well.

John P.E. Lau - Jefferies & Co.

Dean, one final question for you. You know I always ask this. What’s your percentage book for the guidance this quarter?

William A. Priddy, Jr.

We’re very well booked for the low end of our guidance. In fact it’s not really a meaningful number since we’re so far ahead of that but once again we’re simply being conservative and prudent in this environment.

Operator

Our next question comes from [Mark Keller] - Merrill Lynch.

[Mark Keller] - Merrill Lynch

Dean, I was wondering if you could talk about again your tax rate expectations for Q4 and going forward?

William A. Priddy, Jr.

As you’ll recall last quarter we mentioned that we’d be moving to cash taxes for our non-GAAP reporting. We feel like there’s going to be increased emphasis on the company’s cash flow and we feel like reporting cash taxes brings better clarity to what’s actually going on with the tax rate. We currently anticipate something in the 20% or so range in terms of cash taxes in the December and roughly also in the March quarter as well.

[Mark Keller] - Merrill Lynch

Can you tell us what the non-GAAP R&D and SG&A numbers were for the last quarter?

William A. Priddy, Jr.

$8.8 million for SG&A combined.

Doug DeLieto

Does that answer your question Mark?

[Mark Keller] - Merrill Lynch

Maybe I better follow up with you on that. My last question is, what are the 10% customers for each segment?

Robert A. Bruggeworth

10% customers for the company were Nokia and Motorola, Motorola for MPG, Nokia for CPG, and Nokia also for MPG.

William A. Priddy, Jr.

The $8.8 million was percentage of sales of SG&A. We had $10.4 million of G&A and $13.7 million of sales and marketing in total, so the percent of sales of SG&A was $8.8 million for the quarter non-GAAP. I wanted to clarify that.

Operator

Our next question comes from Harsh Kumar - Morgan, Keegan & Company.

Harsh Kumar - Morgan, Keegan & Company

Congratulations. A very good quarter and a very good range of guidance. Most of my questions have been asked, but let me ask you about cost reduction. Basically at this point in time you’re one quarter away. Can I ask you what’s left to do? Maybe you can just start off there?

William A. Priddy, Jr.

Basically everything has been done. There’s still a little bit of cleanup in terms of some leases and so forth. We haven’t actually been able to take the full action on those yet because of the way lease accounting is done. So we may have $2 million to $3 million of restructuring expense in the December quarter but everything else in terms of the restructuring is completely behind us and nothing remaining to do.

Harsh Kumar - Morgan, Keegan & Company

Having said that then as I look forward at your company, would we expect op ex to be more or less staying at the 25% range that you talked about so this then becomes a sort of a growth story you expect to get leverage in the future primarily from revenue growth?

William A. Priddy, Jr.

Right. To grow expenses we would have to see revenue growth for us to feel comfortable in growing expenses.

Robert A. Bruggeworth

I want you to think about this two different ways. One is clearly expenses are not going to grow faster than revenues as Dean pointed out, but also we see gross margin expansion plans as what Dean and Eric talked about earlier with the work that we’re doing in bringing out some of our next generation products that are just beginning to hit the market as they become a greater percentage of our product portfolio going forward. So when we talk about a lot of these new design wins at some of the major OEMs and again diversifying our customers along with these new products.

I also want you to think about we will expect whether we’re staying flat, growing or even declining we can make improvement in our gross margins over time. That’s not a comment about December or potentially March but clearly as most products become a larger percentage of our production and our revenues, you’ll see that in our P&Ls.

Operator

Our next question comes from [Aaron Huson - Lenexa Globe].

[Aaron Huson - Lenexa Globe]

I was wondering if you could talk a little bit about the placing environment on the PA side of your business, and just looking forward whether you think one of your competitors being shall we say severely underutilized is going to have an impact there?

Robert A. Bruggeworth

As far as ASPs go for the September quarter is what we’re expecting in the December quarter. They’ve been very consistent with the plan we’ve had all along this year of 10% to 15%. To your point, we have seen a very rational pricing environment. We haven’t seen any changes and we think that should be consistent moving forward.

In regards to one of our competitors, I don’t think and even they might have commented on their conference that even if they gave the product away in many cases, the customers wouldn’t use it today. It is things that you have to earn at the design end; not just in price. Really with a lot of these phones it’s becoming the performance and that’s why we’re locking in a lot of the next generation 3G applications in phones that we talked about. So it’s not a price game in a lot of the higher end phones.

Clearly in the low end which they didn’t participate in, it is a little more price competitive and that’s where we believe through the die size reductions that we talked about and some of the new substrate technologies that we’re bringing out along with our capacity, if it does get into a little more competitive environment than what we’ve experienced, we feel very confident in our ability to gain that business and still make significant improvement in our operating margins.

[Aaron Huson - Lenexa Globe]

In kind of working with your customers on upcoming generations of wideband CDMA phones? Can you talk about what you’re seeing there in terms of the number of bands of WCDMA that they want to support and what that’s meaning for your dollar content, not in what’s in production now but looking out 12 to 18 months?

Steven E. Creviston

It is pretty encouraging. We’ve been talking for some time about the content multiplier effect of these multimode phones and it continues to be on track and definitely coming through. What we’re shipping today we’re actually measuring about a 2.5x multiplier for a multimode phone versus a 2G or single mode phone. That’s just real data on what we’re shipping today and that’s where with most of the wideband CDMA phones being essentially single band wideband CDMA with of course a full three or four bands of GSM.

But going forward we are seeing a triple band wideband CDMA being very predominant and a lot of the R&D and customer product plans now looking at [Pintaband] wideband CDMA and of course in all cases we’re pairing that with quad band GSM or edge in the Fuji side of it. That’s continuing to proliferate.

I think what’s particularly exciting is the technical challenges there for us to solve. The switches in particularly are really gaining a lot of value here. Clearly the power amplifiers as well handling the multibands and all of that and the linearity and continuing to drive down current consumption is always important. But the switches as well is a real opportunity to differentiate and really with the harmonics and linearity and so forth. So those are great challenges. They add a lot of value.

We believe our products are really showing that when we include microshield as well as an RFMD differentiator. It really helps I think get a lot of these products to market. So we’re definitely seeing the proliferation of the value in the content in the multimode as expected.

[Aaron Huson - Lenexa Globe]

In your prepared remarks you talked about solidifying your position on a major 2G platform in your largest customer. Can you just clarify, is that [Getheon] and is that still a forward-looking comment, because I thought that program would be revved up for you at this point?

Robert M. Van Buskirk

As you know we don’t comment specifically on customer platforms directly. It is a very large scale GPRS platform and it’s the TX module for us. We have both ongoing business and then a product refresh. We’re speaking now specifically about a product refresh which is a cost reduction of a product which is already beginning to ramp in product now. We expect this product refresh to continue to grow quarter-over-quarter for the next several quarters in very high volume.

William A. Priddy, Jr.

You’re right. In one of the headwinds I think we faced in the September quarter was surrounding this platform. We are still gaining share in this platform and still growing this platform. It grew in the September quarter and is expected to grow in December and also in the March quarter. I think a couple of the notes might have gotten that one wrong.

Operator

Our next question comes from Mark McKechnie - American Technology Research.

Mark McKechnie - American Technology Research

This is for Bob Van Buskirk. Any interruption or pattern from the Chinese Olympics in the most recent quarter and then as part of your guidance for December are you starting to see some of the pull from some of these big scale projects that are going on over there?

Robert M. Van Buskirk

There was a little bit of a lagging effect in the September quarter from the “moratorium” they had on going out and actually touching networks throughout China. I don’t think it was as significant as some people anticipated. It seemed to go through pretty smoothly.

The answer to the second part of your question is yes, we are starting to see some uptake from the operator reconsolidation that they’ve done in China. We actually have some pretty good signals and some good feelings about calendar ’09 in China for wireless infrastructure.

Mark McKechnie - American Technology Research

And Bob, do you feel pretty well represented not only in the western suppliers but in the [Waways] and the ZTEs?

Robert M. Van Buskirk

Historically [Waway] has been one of our largest customers so probably no one would ever say that they’re perfectly represented or that they’re satisfied with where they’re represented. But I would say if anybody’s going to sell hardware into China, we’re going to be with them.

Mark McKechnie - American Technology Research

The next question’s probably for Eric or Bob Bruggeworth. You mentioned some comments on CDMA1 which has been an area that you really haven’t played much, the Qualcomm flavor. Did I get that right? You’re pretty low share there now but you’re expecting to ramp some of that up? You did some projects for the March quarter?

Steven E. Creviston

I’m glad you brought that up. We do have a new focus and really what you’re seeing is the result of a couple of things. With our reorganization we kind of really revitalized our product portfolio. Beginning a year ago in September we really started working on bringing out a lot more standard products and again the customer diversification, low cost initiatives and so forth.

What’s happening now is we’re really beginning to see customers pulling us into that narrow band CDMA segment. You’re right. We hadn’t actually participated there for several years as we’ve been focused a lot more on some of the other parts of the market. But we have the bandwidth now, we have the resources and we have again significant customer pull so what we’re doing is taking a lot of the R&D that we had targeted in wideband CDMA and obviously a lot of the same challenges exist in narrow band in CDMA.

We see a very healthy product segment there so we’re able to take some of our investments again in wideband CDMA, leverage them into the narrow CDMA products and bring out some products relatively quickly that we’re sampling today. We’ll be in preproduction next quarter. We have a lead customer that is absolutely pulling those out of us as fast as we can get them done and we think we’ll be in full production in the June quarter with those. We’re following up with more purpose-built even lower cost narrow band CDMA parts throughout next calendar year.

Operator

Our next question comes from Analyst for Brian T. Modoff - Deutsche Bank.

Analyst for Brian T. Modoff - Deutsche Bank

I just want to dig down a little bit more into some of the pro forma adjustments you’re making. It seems like the bulk of your profitability this quarter on a pro forma basis was driven by that $18 million add back for 2009 restructuring. What’s getting included in that $17.6 million figure?

William A. Priddy, Jr.

There’s severance expenses, there’s some lease expenses, there’s asset impairment, reduction of depreciation. Those are the primary with asset impairments being probably in Q2 the biggest of the numbers and it has to do with the capital equipment that was associated with the RS Systems businesses.

Analyst for Brian T. Modoff - Deutsche Bank

Earlier in one of the answers you were giving, you seemed to categorize reduction in die size as part of your restructuring initiative. Are there any new product costs included in that add back?

William A. Priddy, Jr.

I wouldn’t say it was part of the restructuring initiative. I’d say it’s part of the profit improvement initiative. Now I think because of the reorg and because of the restructuring, we’ve been able to shift some engineering resources that perhaps were working on PAs for the transceiver or chip sets if you will into some of these new products and also focus on reduced die size products. That doesn’t really have a whole lot to do with the restructuring. That’s more of a focus on cost reduction and profitability improvement in the PA area.

Robert A. Bruggeworth

Stated a little clearly, all the expenses in the restructuring are associated with the engineering that was in our RF Systems business that Dean talked about.

William A. Priddy, Jr.

We have maintained all resources associated with our front end business through the restructuring so none of that has been impacted at all.

Analyst for Brian T. Modoff - Deutsche Bank

So your convert matures I think in 2010. What are your plans for refinancing that given the way the credit markets are now and likely for some time? Is it possible to refinance? Is it going to be expensive to refinance?

William A. Priddy, Jr.

If you’d listen to the guidance and take that plus our cash balance, we can pay off the convert with cash out of the bank. So there are no plans to refinance the convert. That’s pretty much it. We’re very comfortable with our ability to generate free cash flow. We’ve generated $22 million in net cash in the September quarter. We said that December would be stronger, we would have a strong March and that we would do $80 million to $120 million in free cash flow in fiscal year 10. That easily gets you the $230 million plus adequate cash to run the business.

Analyst for Brian T. Modoff - Deutsche Bank

Given the divergence between your book-t-bill and your guidance, you seem to be indicating a degree of caution. Should we apply that same degree of caution to your cash flow estimates?

Robert A. Bruggeworth

Number one, you seem confused on the first point and I want to make sure we’re perfectly clear. The restructuring charges have nothing to do with the work that we talked about in reducing our die sizes. You mixed those two and I wanted to make sure we’re clear.

Analyst for Brian T. Modoff - Deutsche Bank

I heard you.

Robert A. Bruggeworth

Your question in regards to cash flow and conservatism, if you understand how businesses grow, they consume cash and obviously if we are conservative in being flat we could actually free up some cash as we work on improving our working capital because we’re not funding the growth. So we gave a range that I think represents we can grow or stay flat or even decline a little bit and we’re comfortable with that range. If that’s conservative, I’ll accept that but that’s how the business would play. So if we’re growing significantly we still think we can hit those numbers and if we’re not we still believe we can hit those numbers.

William A. Priddy, Jr.

If you’d like to give me a call, I can take you through some of the puts and takes of the cash flow statement since you seem to have a little bit of a difficulty understanding some of the basics here. If you’d like to give me a call, that’d be great.

Operator

Our next question comes from James E. Faucette - Pacific Crest Securities.

James E. Faucette - Pacific Crest Securities

I just wanted to get a sense or a little more detail on how you factored your orders for the December quarter, just getting a sense as to if you factored things across the board by 5%, 10%, 15% and as part of that can you give us a little color on what you’ve seen from order behavior over the past few weeks? Have orders been generally steady or have they been bouncing around a fair amount hence your motivation for wanting to factor your order book for the December quarter?

Robert A. Bruggeworth

Just to be clear we had a pretty good book-to-bill that Dean mentioned in his script from September greater than one. We anticipated that order rates would slow down some with such a strong book-to-bill into December heading towards what’s typically a seasonal down march. We were not fully booked for the quarter as we talked about to the if you will what you said was our conservative guidance there.

What we have seen is order rates that are steady. We just are not seeing order rates potentially matching what some of our customers believe they’re going to end up with. You can obviously understand that our customers are being very conservative as well. With a company that has a pretty quick cycle time, customers don’t need to place all the orders now even to hit what we believe we can deliver in December. So I think we’re taking a cautious stance and it’s across like we said all areas of our business; not just our cellular handset business but also some of our multimarket products group as well.

James E. Faucette - Pacific Crest Securities

I think that’s pretty clear. I guess what I’m trying to get a sense of is how much you factored that customer demand and how much conservatism you built in? Or to put it another way, if you were building your guidance as you normally would in the absence of headlines, what kind of growth would you be looking at in the December quarter?

Robert A. Bruggeworth

When Dean commented earlier, I think several of us kind of laughed a little bit. We are booked above the low end so that would tell you that obviously we have some conservatism built in there already. If you’re going to try and pin us down to a numbers, I don’t believe we’re going to do that. It is extremely difficult now to project. I think you’ve seen many companies go before us with people asking about the next quarters including December. I think we’ll just stand with what we’ve done and that’s what we believe is going to happen.

James E. Faucette - Pacific Crest Securities

Looking at the op ex you seem to be targeting pretty close on operating expenses to revenue target. I’m just wondering as we go into the March quarter and if that quarter is indeed down, do you expect to match those op ex targets to revenue on a quarter-to-quarter basis or should we think about that being a range over a period of quarters? I’m just wondering how closely we should expect you to manage your op ex from quarter-to-quarter versus your revenue?

Robert A. Bruggeworth

I don’t think we’ve got a magic plan for how we can match exactly operating expenses to every quarter when you look at what’s in our operating expenses, but I think where we will be prudent is in the investments we make and how we match to the revenues. I think a lot of things would depend on as you said March to be seasonally down we surely wouldn’t do anything short term. If we believe that the rest of the year is going to grow significantly and we’ve got new product that we are launching, we sure wouldn’t hold those back.

I don’t want you to think we’re going to fine tune this thing each and every quarter. What we are saying is we believe we’ve got the proper expense levels today to carry the business forward and grow it. If it doesn’t grow, then we’ll make the adjustments we need to.

Operator

Our next question comes from Tim Luke - Barclays Capital.

Tim Luke - Barclays Capital

To clarify with respect to the revenue guide for December in saying that it’s flat to down a bit, are you seeing the same trends in both of the core units or is CPG seeing more of an impact than MPG?

Robert A. Bruggeworth

Actually we’re seeing it in both of our business. Again just to be clear, we do have some businesses in MPG that we do believe are going to grow very nicely and we’ve got some that we’ve factored but I think macro view we’re just being very cautious.

Tim Luke - Barclays Capital

With respect to March seasonality, could you just remind us what you’ve usually seen in terms of the seasonal trend there?

Robert A. Bruggeworth

As a company our seasonality has probably been all over the map. In MPG sometimes we see some of those businesses actually up in March. In the handset industry we see anything from down 10% to 15% and then it gets to what new programs and product launches do we have that can offset some of that.

Tim Luke - Barclays Capital

But you would be expecting yourself to be largely in line with industry trends?

Robert A. Bruggeworth

I think it’s very, very premature for us to make any comments about March.

Tim Luke - Barclays Capital

With respect to the gross margin, you’ve been touching on this but I was just wondering if you could highlight what you think the key variables are going to be as you move into calendar ’09 and how you anticipate the shape of that trend being?

Robert A. Bruggeworth

Number one would absolutely be how much of our business is MPG versus CPG. That impacts gross margin because as we’ve discussed they’re significantly different. When we get into operating margins there’s a little more alignment.

Tim Luke - Barclays Capital

What do you think is going to be the trend in terms of which might grow faster?

Robert A. Bruggeworth

I think projecting anything forward is going to be a little premature. We’re making investments in both. We’ve talked a lot about the new products and what we’re releasing in both segments. I think as we look at calendar 2009 it will be a little difficult for us to project.

I think what also will impact our gross margins after that will be how much is Polaris of our business going forward in 2009 and 2010 as well.

The third impact which we touched on is the rate that we can introduce the new products in CPG that have the smaller die sizes to improve our margin along with get a more balanced and diversified customer base. I would put those three things out there as what’s probably most important to drive our margin improvement.

Tim Luke - Barclays Capital

With respect to the third point then, when do you see that beginning to have a material benefit?

William A. Priddy, Jr.

I think over the next 12 months we’re going to see a significant increase in the number of smaller die sized products in our revenue stream. We’re already releasing products. Some of these products could have a similar type effect to what the PowerStar type products did a few years ago in terms of our market share particularly in the lower end market place. We think in calendar ’09 and fiscal year 10 we’re going to see a significant percentage of our products being the smaller die size and also lower substrate costs as well. We’re hitting it from multiple fronts.

Tim Luke - Barclays Capital

With the focus being on by the middle of next calendar year, you think it’s going to have a significant impact?

William A. Priddy, Jr.

We have already launched one and we’ll be launching another major one the end of this calendar year. There does require some time to ramp if you will. So a six to nine month timeframe gets you well into a ramp.

Tim Luke - Barclays Capital

Just to be clear again on the mix, the point one of your factors on gross margin, the largest variable that you see is what sort of things?

Robert A. Bruggeworth

You mean as far as the mix between MPG and CPG?

Tim Luke - Barclays Capital

In outlining that as the key variable? Do you think it’s really the pace of the overall market or the pace of the success in the new offerings?

Robert A. Bruggeworth

Given the market environment, it could be the market first and what happens with the handset market versus a lot of MPG’s business as you know is on infrastructure and big capital spending potentially. So understanding what’s going to happen in both those segments and which one comes back first, the consumer or some of the infrastructure spending and things like that.

Tim Luke - Barclays Capital

On the tax you outlined the fact that a 20% tax rate in the next couple of quarters, I think December and March. For the four prior quarters I think you’ve had a tax benefit looking at the pro forma numbers. Why would it move now to a 20% tax rate?

William A. Priddy, Jr.

For one thing we think cash tax is a lot more transparent to the investment community when we report our non-GAAP earnings. But as we move into profitable GAAP we would expect the tax rate to be positive and we’d likely no longer have a tax benefit if you will. Even though the magnitude is debatable we think the two are roughly similar in the December quarter where our GAAP taxes would have been and what the cash taxes would be.

Operator

Our next question comes from [Dan Berkley - O’Conner].

[Dan Berkley - O’Conner]

Two questions for you. The first one, you talked at the beginning of this call about fixing the operating margin, fixing the businesses. Could you address what you think you’re going to do to fix the balance sheet and is this a near-term event or are we going to wait till the July 10 maturities? And then I have a couple of follow ups.

William A. Priddy, Jr.

For one thing we think our balance sheet in terms of versus our costs is in relatively good shape. The only area I guess that you’re referring to is the convertible debt that we have.

[Dan Berkley - O’Conner]

Maybe I’m alone in this thought but I think some of your investors and I think you could even hear it in one of the questions questioning your amount of debt to your amount of cash and your ability to pay it off. I’m just wondering, with your debt trading in the market substantially below PAR, wouldn’t it make sense to fix the balance sheet by buying back some of those earlier maturities out in the open market?

Robert A. Bruggeworth

Earlier I commented when one of the other analysts asked whether or not we were going to buy back stock, I think he had an opinion that maybe we have some cash and he believes were’ going to have future cash flows.

I commented that we’re going to maintain cash balances that allow us the flexibility to weather a downturn. We have a lot of people out there that think the world’s going to end, think that handset markets are going to decline significantly; capital’s going to be spent. So keeping cash to weather that I think is an extremely prudent thing.

You pointed out that our bonds are trading at a very nice discount and given future cash flows so having the flexibility to purchase some bonds. I think several of us sitting around the table also believe that our stock is undervalued and having cash to be able to buy back stock is an opportunity.

I also commented that further out if the world doesn’t end and things do improve, there are acquisitions out there that could be attractive. We don’t have any planned in the short term. I think we are maintaining that flexibility as we move forward.

We have shared with you and Dean has commented that we believe our future cash flow for the next calendar year will be in a very healthy range for our company of $80 million to $120 million. I think we’re trying to signal to you we’re going to have good cash flows. We had a good quarter in September. We commented we’re going to have a good quarter in December. So we’re going to maintain that flexibility. But absolutely it’s an option for us.

[Dan Berkley - O’Conner]

Could you weigh the pros and cons of buying back stock versus buying back the convertible debt?

William A. Priddy, Jr.

I don’t think we want to get into that on the call. I’d be happy if you want to give me a call, we could debate those.

[Dan Berkley - O’Conner]

The last question you may or may not want to answer is, since the quarter end have you bought any debt in the open market?

Robert A. Bruggeworth

If we’ve done anything, we’ll disclose it.

Operator

Our next question comes from Analyst for Todd K. Koffman - Raymond James & Associates

Analyst for Todd K. Koffman - Raymond James & Associates

Can you give us some more detail on Polaris? I may have missed this. What was Polaris as a percentage of revenue this quarter?

William A. Priddy, Jr.

We said that our transceivers were a little above 10% of revenue for the quarter.

Analyst for Todd K. Koffman - Raymond James & Associates

And that’s up from last quarter? You said it was well below 10%?

William A. Priddy, Jr.

Yes.

Analyst for Todd K. Koffman - Raymond James & Associates

With all your recent design wins with Samsung, do you expect Samsung to become a 10% customer in December?

William A. Priddy, Jr.

It’s certainly possible.

Robert A. Bruggeworth

I think you’re right on the mark. It could be Dece3mber or it could be March. We clearly are taking a lot of share there that there’s been a lot of focus on and we do expect them to become a 10% customer along with others as the calendar year 2009 unfolds.

Analyst for Todd K. Koffman - Raymond James & Associates

Were they close to 10% in the September quarter?

Robert A. Bruggeworth

They were for CPG. Given a little rounding, we might have been able to get there.

Operator

Our next question comes from [Alain Shaw] - D.A. Davidson.

[Alain Shaw] - D.A. Davidson

I’ll just ask you some housekeeping questions. On the inventory step up costs in the quarter, I know they were there last quarter but what should we be thinking about for next quarter and into 2009?

William A. Priddy, Jr.

I would have to research what impact the inventory step up would have on the December and March quarters. I think for now you can just assume it’s consistent with what it was in the September quarter going into the December quarter if you’re doing the non-GAAP numbers.

[Alain Shaw] - D.A. Davidson

Dean, remind me again. What is the inventory step up for?

William A. Priddy, Jr.

It had to do with the acquisition of Sirenza and the step up of inventory there and also Filtronic.

[Alain Shaw] - D.A. Davidson

I know this is kind of beating on a dead horse, but on the gross margin side in this last quarter, was it materially different from what you guys were expecting entering into the quarter? It seems like it was. Was that all just because of mix or was there anything else that was happening in the quarter?

Robert A. Bruggeworth

As far as was it expected, I think we guided to EPS of about $0.05. I think if you looked at what the operating income ended up being as a percent of sales, I think it fell in line with what we expected as far as gross margin goes. We didn’t plan on MPG and CATV line amplifier business to maybe be a little bit soft in the quarter, so we expected a little bit more contribution from MPG. But as far as our mix within CPG that played out as expected.

[Alain Shaw] - D.A. Davidson

What do you think the utilization rates are and will be going into 2009 now?

William A. Priddy, Jr.

We don’t disclose utilization rates per se. Last quarter we commented that we were running at a comfortable amount of capacity and we certainly have capacity to take on additional business such as the new narrowband CDMA parts that we’ll be ramping the new wideband CDMA parts at Samsung and new 2G opportunities at Samsung and our largest customer and the wireless LAN business in MPG. We’re going to use our manufacturing capacity strategically to improve our cash flow and operating margin.

[Alain Shaw] - D.A. Davidson

I guess on the Filtronic fab itself, has the utilization rates there improved quarter-over-quarter?

William A. Priddy, Jr.

No.

[Alain Shaw] - D.A. Davidson

On the Wi-Fi side of the business we’ve been talking about maybe you guys seeing some more traction there. Is there any way to quantify how you’re doing there?

Robert M. Van Buskirk

We do expect our wireless activity business unit to grow and as Bob mentioned businesses within MPG could grow in December. That’s one of them that we do expect to grow. Actually we’re looking for very significant growth from our wireless connectivity business unit out into fiscal 10. One of the things that we’re a market leader in today is our PAs for handset Wi-Fi applications. We expect that to grow and proliferate through a wide range of Smartphone as the attach rate grows there. We also have some very interesting opportunities for Wi-Fi and also WiMax and notebooks that could become material in FY10. That’s a pretty exciting area for us.

Operator

Our final question comes from Analyst for Tore Svanberg - Thomas Weisel Partners.

Analyst for Tore Svanberg - Thomas Weisel Partners

I just wondered if you could give a little more detail on updates and progress for gallium nitride development? In the press release it mentions a government contract and in the past you discussed GaN for cable TV.

Robert M. Van Buskirk

We’re pretty excited about it. We’re actually in the very, very, very final stages as in hopefully final reports on the way for full commercial qualification of our GaN process technology. As Bob indicated in his prepared remarks, high potential for exploiting that technology in wireless infrastructure and cable TV and also in aerospace and defense. I could go on for quite a while about it but it’s very exciting. Any application that needs high frequency, high power, high linearity at the rice price, come and see us because our GaN will meet your needs.

Analyst for Tore Svanberg - Thomas Weisel Partners

Will all this GaN be run through internal foundries or will you also use external?

Robert M. Van Buskirk

Initially with Sirenza we started using an external foundry but we’ve now converted all of our design activities to internal. And in fact that’s one of the big benefits. We’ve talked about being the world’s largest compound semiconductor manufacturer so running our GaN process through that wafer fab platform is very exciting for our customers. Many of our competitors are rather small companies with very limited capacity and with very limited experience in ramping a high volume compound semiconductor technology, and that’s of course what we do better than anyone in the world. So it’ll be all internal when we get revved up here soon.

Analyst for Tore Svanberg - Thomas Weisel Partners

Will you outsource any GaN foundry services?

Robert M. Van Buskirk

You mean will we sell GaN foundry services?

Analyst for Tore Svanberg - Thomas Weisel Partners

Yes.

Robert M. Van Buskirk

That’s coincidentally something that we’re doing some thinking about right now. It does look like it might be something promising for us to do. By the way, you mentioned the government contracts. We have a Navy and an Air Force contract, two separate contracts running in parallel and we expect to get renewed contracts from both of those services, hopefully before actually the calendar year is over in one case.

Operator

Management I’ll turn it back to you for any closing comments you might have.

Robert A. Bruggeworth

Thank you for joining us t his evening. We hope it’s clear from our comments today that we are very confident in our competitive position, in our ability to maintain and grow our share and key accounts. We expect our share gains, revenue diversification and expense reductions will enable us to continue to improve our operating margins and net cash flows from operations.

Operator

Ladies and Gentlemen, that will conclude today’s teleconference. If you would like to listen to a replay of today’s conference, dial in to 303-590-3000 or 1-800-405-2236 and enter the access code of 11120298 followed by the pound sign. We thank you again for your participation today. At this time you may disconnect. Have a nice day.

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Source: RF Micro Devices, Inc. F2Q09 (Qtr End 09/27/2008) Earnings Call Transcript
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