Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Ralph Quinsey – President, CEO

Steve Buhaly – Chief Financial Officer, CAO

Analysts

Matt Ramsay – Canaccord Genuity

JoAnne Feeney – Longbow Research

Anne Edelstein – Bank of America Merrill Lynch

Dale Pfau – Cantor Fitzgerald

Tavis McCourt – Raymond James

Aalok Shah – DA Davidson

Blayne Curtis – Barclays

Mike Burton – Brean Capital

Tyler Radke – Lazard Capital Markets

Brad Erickson – Pacific Crest

Jason Schmidt – Craig-Hallum

Bill Dezellem – Tieton Capital Management

Robert Bobo – Millenium

Edward Snyder – Charter Equity Research

TriQuint Semiconductor, Inc (TQNT) Q4 2012 Earnings Call February 6, 2013 4:30 PM ET

Operator

Good afternoon. My name is Laportia and I will be your conference operator today. At this time I would like to welcome everyone to the TriQuint Semiconductor Fourth Quarter Earnings Conference Call. (Operator Instructions) After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Mr. Buhaly, you may begin your conference.

Steve Buhaly

Thank you for that introduction. And good afternoon and welcome to our fourth quarter and fiscal 2012 conference call. With me today is Ralph Quincy, our President and Chief Executive Officer.

During the call we will make forward-looking statements about TriQuint’s business and projected financial results. Please note that actual results could differ materially from our projections based on various risk factors including those described in the press release we issued earlier today and our reports on Forms 10-K and 10-Q, and other filings with the Securities and Exchange Commission.

All numbers during the call will be presented on a non-GAAP basis. Non-GAAP financial measures report tax on a cash basis and exclude equity compensation charges and those associated with acquisitions and other specifically identified non-routine items. These non-GAAP measures are provided to enhance understanding of our core operating performance. A full reconciliation of these non-GAAP measures to our GAAP results is in our press release and in the Investor section of our website. I will now turn the call over to Ralph to provide an overview of the quarter.

Ralph Quinsey

Thanks, Steve. And welcome, everyone. On today’s call I will summarize our Q4 and full year 2012 results, followed by an overview of our major markets. Steve will provide a detailed look at Q4 and specific Q1 guidance. I will then summarize and open the call for questions. TriQuint’s revenue for Q4 was $233.6 million and EPS was $0.04, both above the high end of our guidance. Revenue grew 16% sequentially with 19% growth in mobile, a 36% increase in defense and a slight increase in networks. Gross margin was 31.7% and operating expenses were $66.6 million. For the full year 2012 revenue declined 7.5% to $829.2 million. EPS was a penny loss and cash flow from operations was $81.1 million.

TriQuint closed the year with no debt and $139 million in cash and investments. $50 million in cash was used during 2012 for stock repurchase. For full year 2012 defense product revenue grew approximately 18%, networks grew 8% and mobile devices revenue declined 15%. Although revenue declined in 2012 with disappointing financial results we aggressively worked to improve both our new product and design win pipelines.

Additionally we are continuing to expand capacity specifically for high performance filters in anticipation of strong demand in the second half of 2013 and beyond. Based on our current forecast I am very happy with our second half outlook. In fact I believe we are entering the year with one of our healthiest new product and design win pipelines in place. I expect a slow start to the year due to seasonality and customer program timing, and our investments in capacity and R&D will remain a financial headwind during the first of the year. Even so based on our current outlook I believe these investments will lead to improved financial results to the company in the second half and position us well for 2014 and beyond in what remains an opportunity rich marketplace.

I am not providing full year revenue guidance for the company, but I do believe there is a clear opportunity for this to be one of TriQuint’s more successful growth years. Let me provide some additional color on each market starting with mobile devices. Mobile devices revenue for Q4 2012 grew 19% sequentially over the prior quarter. Connectivity revenue was up sharply, 66% sequentially with increased demand for our industry leading wireline devices which support primarily five gigahertz smartphone applications. Our revenue for 3G/4G products increased 12% sequentially with very strong year-over-year growth in LTE revenue. Our 2G revenue was down both sequentially and year-over-year, primarily the result of declines in our legacy CDMA and GSM revenue.

We believe the total available market for Mobile Devices RF will continue to grow with increased smartphone adoption and increased RF content as multiple bands of 3G and LTE are added to devices. Worldwide spectrum availability for wireless communication is fragmented, with over 30 frequency bands currently defined in the standard and growing. Smartphone platforms now require multiple amplifiers, a variety of RF switches and an ever rising number of filters for RF functionality. RF front ends are becoming increasingly complex. Customers must balance performance, size flexibility and cost with their next generation applications.

Our approach to the mobile market is three fold. We offer a broad suite of RF capabilities to address the complete RF front end. There are few suppliers that offer such a complete capability, including amplifiers, switches, filters. Of those few, TriQuint is a leader. Secondly, we develop differentiated products that offer our customers improved size, cost and performance. Discreet components still serve a large portion of the $6 billion mobile TAM, but future applications are demanding less complexity, smaller size and better performance. TriQuint is an innovator, and we continue to invest in critical technology such as advance bar and soft filters, wafer level packaging, flip-chip interconnect, bi-hem and highly-integrated high-performance broadband amplifiers for our solutions.

And lastly, we are investing in capacity for long-term growth, but we’ll avoid filling up factories with undifferentiated products that tend to be low margin. Our duplexers and high-performance soft filters have limited suppliers worldwide, and these products are currently the fastest growing portion of the market. TriQuint’s ability to supply hard to find advanced filters is binding us closer to our customers.

Across the board, phone designers are interested in size, flexibility and battery life. Light development engineers are looking for flexible RF solutions to displace complex, discreet layouts. Phone suppliers are eager to work with innovators like TriQuint, because RF design is a challenging enterprise. TriQuint has been and will continue to be a pioneer in this market.

Switching to our network’s infrastructure in defense markets, our approach is firmly rooted in high-performance differentiated products built on world class RF technology. These markets are much broader than mobile from many perspectives, including a much wider array of applications, a larger set of customers and many more individual products and product types. The majority of the applications in these markets require very high-performance solutions for key characteristics, such as high-power density, increased bandwidth, better linearity and overall improved efficiency.

These markets represent about 2 billion in TAM for TriQuint. These are slower growing markets, but due to high performance requirements these products typically deliver higher margins. Our network’s market revenue was up slightly from the third quarter and up 8% for the full year. Transport revenue was flat sequentially and up 8% for the year. Optical product revenue was up significantly in 2012 as we captured a large portion of the high performance drive wire amplifier market but down sequentially coming off of very strong quarters. Our single, dual and multi-channel products offer best in class performance for the 40 gigabit and 100 gigabit markets.

Within Radio Access bay station revenue was up 30% on strong demand from design winds early in the year to support TD-LTE development in China and LTE expansion in North America. This was offset by lower demand from our commercial founded customers. Both VSAT and Automotive had strong sequential growth quarters and healthy full year performance as we ramped production to support a major KA band VSAT ground terminal program and increase shipments into healthy automotive radar demand.

During to Defense and Aerospace, revenue was up sharply 36% sequentially in Q4 and up a solid 18% year-over-year. The Defense market is characterized by large and somewhat irregular order patterns tied to major program timing. Q4 revenue was higher than expected on strong demand for packaging services we now offer our Defense founded customers. In addition some of the strength was a result of demand shifting from 2013 into Q4. Our strategic focus in this market remains Radar and Communications and we believe we have a technology lead as compared to our competition.

Sales of Radar products increased 86% sequentially and 29% in 2012 as compared to 2011. While there is uncertainty over federal defense budgets we set conservative forecasts and they remain consistent. In fact active phased-array radar demand is expected to grow with new flight systems such as the F35 joint fighter and unmanned aerial vehicles. Additionally new ground base radar applications for troop protection are being deployed such as the TPQ-53 counter target acquisition radar which entered full ray production during 2012.

We also anticipate retrofit demand for a large number of domestic and international aircraft such as the F15, F16 and FA-18. There are several thousand of these aircraft deployed worldwide and a healthy percentage will need upgrades to active phaser ray radar.

I am happy to report we continue to increase the rate of standard products launch for this market. This quarter we release 31 new products resulting in a record 79 new products launched in 2012. We also continue to ramp production of our Diontab units in support of key defense programs. Diontab is a relatively new product line for TriQuint that includes additional manufacturing steps and increased ASPs for some of our high-volume rated R programs.

Additionally we are in production with our second generation of GaN. This updated technology has best-in-class reliability and has achieved manufacturing yields equivalent to GaAs while delivering top RF performance. We remain closely involved in a portfolio of contracted research and development programs sponsored predominantly by AFRL, the Air Force Research Lab and the Office of Naval Research. Contract awards and funding was up 16% in 2012 primarily related to the development and manufacturing of GaN technologies for future DoD programs.

In a moment Steve will walk through our financial results for the fourth quarter of 2012 and our guidance for Q1. Before Steve’s update, I would like investors to be aware that we are currently investigating a potential scrap issue related to the ramp up of new GaAs capacity. This issue impacts a small number of mobile customers, none of which are greater than 10% of revenue. We are dual sourced and have kept capacity to support demand while we work through this issue. We expect to have resolution in Q1, and we are alerting investors to a potential charge of roughly $5 million that is not included in our guidance.

Steve?

Steve Buhaly

Thank you, Ralph. For the fourth quarter of 2012 we generated revenue of $233.6 million. Revenue increased 16% sequential and 3% from the fourth quarter of 2011 with all markets growing sequentially. Our fourth quarter revenue split the end markets as Mobile 64%, Networks 22% and Defense and Aerospace 14%. Revenue for 2012 was $829.2 million, down 7% from 2011 driven by a decline in mobile devices. Please refer to the supplemental data posted on the Investor section of our website for a more detailed breakdown of our revenue by end market.

Revenue from Foxconn Technology Group comprised 32% of our total revenue during the fourth quarter and 31% of total revenue for 2012. Foxconn was the only customer with revenues above 10% for the fourth quarter and fiscal year. Please note that Foxconn is a subcontract assembler. High volume electronics companies maze multiple subcontractors to build their products, and the mix of firms may vary over time.

Our book-to-bill ratio for the fourth quarter was 0.81. Gross margin for the fourth of quarter 2012 was 31.7%, down from the third quarter’s gross margin of 32.5%. Sequentially higher revenue was offset by inventory reductions leaving utilization down slightly. For the full year gross margin ended at 30.7%, down from the prior year’s 37.2%. Utilization declined as we completed long planned capacity additions during the year, had lower revenue and reduced inventory.

Operating expenses were $66.6 million for the fourth quarter of 2012 and $254.4 million for the full year of 2012. Operating expenses increased $4.6 million sequentially due primarily to the growth in engineering expenses. While some of these expenses hit earlier than expected due to the timing of hiring and programs, increased spike in other costs will likely keep Q1 engineering expenses at similar or slightly higher levels.

Net income for the fourth quarter was $6.2 million or $0.04 per diluted share, exceeding our guidance and reflecting strong revenue results. For the full year net loss was $2.2 million. Average diluted shares outstanding in the fourth quarter was $164.2 million. This is expected to drop to about $161 million in Q1 as the full effect of the Q4 share buyback is felt. Total cash and investments declined $5.6 million to $139 million during the fourth quarter. Cash flow from operations was offset by capital expenditures of $29.3 million and cash used to buy back stock of $29 million. Our largest capital expenditure in the fourth quarter was for expansion of our BAW Filter capacity.

Inventory turns for the quarter were up sequentially to 4.6 and our days sales outstanding in accounts receivable returned to a normal 52 days. Moving to our outlook, we believe first quarter 2013 revenue will be between $180 and $190 million. Gross margin is expected to be about 25% to 27% due to lower revenue and utilization. Operating expenses are expected to grow from $67 million to $69 million. The cash tax rate for 2013 is currently expected to nominal. First quarter of 2013 net loss per share is expected to be between $0.12 and $0.14. This guidance excludes the potential scrap issue Ralph mentioned earlier in the call.

As of today we are 98% booked to the midpoint of our revenue guidance. Franklin will be at the Mobile 1 congress initiative Barcelona the week of February 25th and we look forward to meeting many of you there. Our Q1 2013 earnings conference call is scheduled for April 24, 2013. I will not turn to Ralph for closing comments prior to welcoming your questions.

Ralph Quinsey

Thank you, Steve. Low factory utilization remains the dominant financial headwind to TriQuint’s near term performance. Seasonal swings are getting larger but I see a solid opportunity for profitable growth in coming quarters. More quadrant spectrum is driving high demand for high performance filters such as BAW. Integration for size, cost and performance remains a persistent trend in this multibillion dollar market. RF complexity is increasing. As discreet components give way to integrated modules the list of competitors that are able to fully support this market is shrinking and the value proposition for those that remain if they have the right products, is improving.

Underlying these transitions is an ongoing market that continues to grow. Worldwide smartphone penetration remains less than 20%. The fastest growing portion of the smartphone is an area where TriQuint has a distinctive confidence, premium filters. Long term success in this market requires investments in capacity, technology and product R&D. These are investments TriQuint is making.

Turning to Infrastructure and Defense markets the surge in mobile computing is driving data traffic growth in the form of streaming video, location services and social networking. Consumer demand for bandwidth continues to outpace infrastructure capability worldwide. Billions of terabytes of electronic data move around the globe today and traffic continues to expand at an unprecedented rate. This is an opportunity for TriQuint. Our products support the upgrades and build outs of the worldwide wireless and wireline networks. Big data, more data and fast data fuels demand for our infrastructure products.

Lastly TriQuint is the industry leader for defense related RF products. High performance technologies we develop for defense migrate to other markets and allow TriQuint to expand the commercial applications we support with value added solutions. TriQuint is a leader in a world that needs RF solutions for a broad array of growing applications including communications, data transport and high performance radar. We remain committed to the innovation, speed and the fundamental thesis that we are in the early innings of RF content expansion.

TriQuint expects to leverage our investments into revenue growth and improved financial performance. I’d like to open up the call for questions now please, operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Mike Walkley with Canaccord Genuity.

Matt Ramsay – Canaccord Genuity

Yes. Thank you very much. Good afternoon. This is Matt Ramsay on for Mike today. Thanks for taking our questions. I guess the first question that I wanted to address is obviously the Q1 guidance relative to some of your competitors. Obviously you guys have a significant wireless revenue concentration with a particular OEM that guided weak for Q1. But I just wanted to talk – maybe you guys could talk a little bit about your traction with some of other handset OEMs, particularly Samsung and maybe RIM and Nokia that are also ramping in Q1? And guess why maybe your guidance for Q1 is down sequentially a bit more than some of the competitors that also have some pretty high Foxconn exposure? Thanks.

Steve Buhaly

Yes, Matt. We will see a strong seasonality in Q1. We do have our customer base is probably seeing more seasonality in the mix than some of our competition. Specifically on Samsung, we are growing nicely with Samsung year over year. We flattened somewhat in Q4, and I think that will probably offset a little bit of the seasonality at Samsung in Q1, but again we’re not large enough there to offset some of the other swings. So net, net our customer mix is going to drive us a little lower, and we’re also coming off of a fairly strong Defense quarter in Q4.

Ralph Quinsey

The other thing I’d like to add is we were about $10 million above our revenue guidance in the fourth quarter, and just to the timing of customer needs I think that came out of Q1 by and large. So to some degree that’s an offset between the two quarters that we didn’t see coming, but was dictated by the needs of customers.

Matt Ramsay – Canaccord Genuity

All right. Thank you very much for that. And just one follow-up from me, I was pretty encouraged in the prepared remarks, Ralph, about how you talked about your position for growth in the back half of this year. Maybe you could talk a little bit about the drivers of that growth? Whether it be A, expansion of your customer base? B, growth in your LTE portfolio? Maybe C, how we could expect your BAW filter contribution for the back half of the year? And what percentage of revenue that could be in your wireless mix? Thanks.

Ralph Quinsey

You’re right, Matt. I am excited about the second half of the year. Early last year we reinvested in our product roadmap and really focused on differentiated products. And to be quite honest, we just executed better than we had the previous year. Over the last 12 months we’ve just executed better on the new product development and design win pipeline. So I feel fairly good about the pipeline going into the year. We need some more time for that to roll out, and I expect it to hit sometime in the second half.

Mobile Devices is a big part of that, and our premium filter products are also a big part of that. But we also have – we were a little late to the market with our broadband MMPA products, what we call the 90/50, but when we launched it and compared to the competition, clearly it’s the best product out there with the best efficiency or current drain performance across all the bands. So I think we are getting traction, and I feel quite happy with the second half outlook.

Matt Ramsay – Canaccord Genuity

Thank you very much. See you in Barcelona.

Ralph Quinsey

Great.

Operator

Your next question is from the line of JoAnne Feeney with Longbow Research.

JoAnne Feeney – Longbow Research

Hi. Thanks, guys. If we could go back a little bit to the guidance question, I guess one thing I’m wondering is that $10 million in extra sales you saw in the fourth quarter, could you elaborate on where that came from? Was that in Mobility? Was that in Defense? Or elsewhere?

Steve Buhaly

It was probably a mix proportionate to the mix of businesses we have. So a majority Mobile.

Ralph Quinsey

A little bit Defense.

Steve Buhaly

Yep.

JoAnne Feeney – Longbow Research

Okay. Then on the margin front, it’s clearly going to see a steep drop in the first quarter on the lower volume. But in the past you talked about your standard margins, excluding those underutilization charges. Could you elaborate on where those went in the fourth quarter? They’ve been up in the third, and where do you expect them to go in the fourth quarter – sorry the first quarter?

Ralph Quinsey

Yeah. They were slightly better in the fourth quarter sequentially. I think that mix probably reverses in Q1. So a little bit of a downtick in mix of products in Q1 relative to Q4.

JoAnne Feeney – Longbow Research

Okay. Then finally on inventory, so you accomplished quite a lot it seems in the fourth quarter, what do you foresee here for the first quarter?

Ralph Quinsey

We were largely got the amount, and I was thinking in the $15 million to $20 million range. We got $16 million. I’m pretty satisfied with that. I wouldn’t expect anything significant that would impact utilization further than building to the revenue demands we have.

JoAnne Feeney – Longbow Research

Okay. Great. That’s all for me. Thanks.

Operator

Your next question is from the line of Vivek Arya with Bank of America-Merrill Lynch.

Anne Edelstein – Bank of America Merrill Lynch

Hi, guys. This is Anne Edelstein calling in for Vivek. We wanted a little color on your strategic decisions to right-size your fabs? I know that you guys have invested quite a bit into those advanced filtering capacity for that technology. And your CapEx has continued to grow substantially. I think it’s about 10% of sales right now. So can you just provide a little color to justify those strategic decisions?

Ralph Quinsey

So are you talking about our investment of capital in the BAW and advanced SAW capacity?

Anne Edelstein – Bank of America Merrill Lynch

Right.

Ralph Quinsey

Yeah. So we think those are terrific markets. Demand for BAW and 2C SAW is fundamentally being driven by LTE in a more crowded spectrum out there. There are very few players. There’s only one other player that can provide that full suite of advanced filters. And we see a pretty significant growth in the opportunity, and it’s part of what gets us excited about the second half of the year. But clearly our capacity investment is in these specialty filters, it is not in the other areas of our business where we have suffered from excess capacity.

Anne Edelstein – Bank of America Merrill Lynch

Okay. And then to follow from that, can you – obviously competition is going to head up in the BAW and SAW filter production area with, as you said yourself, limited supply. So I was wondering if you could talk a little bit about how you see the shift in the competitive landscape playing out? Then also how the introduction of more supply for those advanced technologies might affect pricing?

Ralph Quinsey

Yeah. Anne, I would differentiate between commodity filters and premium filters. In the commodity filter area certainly there’s many suppliers out there. In the premium filter market it’s a fairly limited group of suppliers. Others have tried and continue to try. They have not made a big move into the market, and TriQuint has continued to keep ourselves ahead of the pack with improved performance on the products that we offer. The products are fundamentally BAW and advanced SAW technologies, and they address this growing class of filters associated with 4G or LTE expansion and the intersection of crowded spectrum, particularly wifi.

So at least for the foreseeable future we think we’re well positioned. That market is just starting to open up. Our revenue for LTE products in 2011 was in the range of $1 million, and in 2012 that grew to in the range of $6 million to $7 million. And again, we’re very early in that space. A lot of that was specialty premium filters, and that will continue to grow I think for TriQuint in 2013 and beyond.

Anne Edelstein – Bank of America Merrill Lynch

Great. Thanks for that additional color.

Operator

Your next question is from the line of Dale Pfau with Cantor Fitzgerald.

Dale Pfau – Cantor Fitzgerald

Yes. Good afternoon, gentlemen. As we look forward – well, maybe retrospectively could you tell us how much revenue in the fourth quarter was just filter and not integrated components?

Ralph Quinsey

Difficult question to answer. A small amount of the revenue was discrete filters only in the grand scope of things. Much of our filter revenue is part of a more complex module that integrates a lot of content.

Steve Buhaly

One of the things that’s actually good about this story is that because LTE tends to show up in the more complex phones, those customers are short of real estate and tend to drive a demand for an integrated solution versus a discrete one. So when we do have an opportunity to sell a BAW filter in one of those applications, we often get the chance to take along some GaAs content as well in an integrated solution.

Ralph Quinsey

In anticipation to your next question, going forward we do see the growth of more discrete filter revenue, particularly like I said some of these premium filters, GaAs filters, new bands, et cetera, and we will both support and supply into that market, but the dominant theme over the long trend is as Steve just mentioned the complexity of the RF front and will migrate customers towards integrated solutions. And that will have the tendency to pull through other capacity pools, such as GaAs. And having that complete portfolio of both capability, high performance leadership capability and the ability to supply it all in unison I think will be a tailwind for us in the coming years.

Dale Pfau – Cantor Fitzgerald

So in the second half what could I expect in terms of percentage that might be discrete filter?

Ralph Quinsey

I think they’re both going to grow, but I think integrated solutions will still be the large portion of our revenue.

Dale Pfau – Cantor Fitzgerald

And you say on execution over the past year, clearly it looks like you’ve missed a few sockets here, and your bullishness on the second half, does that imply that you think you’ve come up to speed and you’re now competitive on some of those socket wins that we won’t see until the second half?

Ralph Quinsey

Yes. Short answer is yes. Full disclosure, we have improved our execution in many areas, not all, but in many areas. Some of the results of our improved execution are not visible yet, because those programs are still being locked down. There’s still some work to be done and in some cases we have improved our execution on the performance side, specifically as I mentioned for our broadband MMPA, best product out there by far, but we didn’t really hit the time window that we wanted to hit. So we are missing some of the opportunity in Q1 for example, but I’m confident that particular product will continue to – it is gaining design traction now and will continue to gain design traction for later in the year.

Dale Pfau – Cantor Fitzgerald

And one last question, Steve, I think I ask this question every quarter. At this point what kind of revenue run rate do we have to get to, to get to a 40% gross margin.

Steve Buhaly

Same answer, about $300 million per quarter depending on mix and other things, but as a modeling number that’s still a good one.

Dale Pfau – Cantor Fitzgerald

300 or 350?

Steve Buhaly

Not 350, but probably in that 300 to 325 range.

Dale Pfau – Cantor Fitzgerald

Okay. Thank you very much.

Operator

Your next question is from the line of Tavis McCourt with Raymond James.

Tavis McCourt – Raymond James

Hey, guys. Thanks for taking my question. First, Steve, can you repeat the cash flow from operations this quarter?

Steve Buhaly

Yeah. Cash flow from operations let me look at that, that was $47 million in the fourth quarter.

Tavis McCourt – Raymond James

Got you. And in terms of capital spending plans for 2013, so do we think of those as being higher than 12, lower than 12 or any kind of range you can give us?

Steve Buhaly

Yeah, sure. The 12 ended up at about 75 million by the way. Next year I’m guessing about 100 million, that’s below the rate of deprecation I expect to have and the spend will probably be front loaded this year as we ramp that capacity for BAW and advanced SAW filters.

Tavis McCourt – Raymond James

And I think you may have answered this before, Ralph, but I want to make sure I understand clearly. It sounds like most of the capacity you’re building for the advanced filters is to satisfy internal needs with TADs, how much of that would you expect to be discreet to be able to sell on the open market?

Ralph Quinsey

As far as the capacity breakdown, like I said, the majority of it is going to be for integrated solutions. Hard to really forecast. Call it 80% of the capacity for integrated solutions, and 20% for discrete solutions.

Tavis McCourt – Raymond James

Got you. And you mentioned a couple of times in the prepared remarks about growth. And I’m wondering if I heard correctly, do you expect full-year growth year-over-year in 2013 versus 2012? Or is that still too hard to say at this point?

Ralph Quinsey

No. That is our expectation, full-year growth compared year over year with a fairly weak first half. I don’t expect to see growth in the first half, and fairly disappointing financial performance in the first half, driven by the fact that we are committed to the long-term growth of this market and this business and really feel good about the second half. So we are pushing through that first half, maintaining R&D investments, expanding our product portfolio, expanding our customer base and investing in capacity to set up what I think will be a fairly strong second half, yielding full-year growth.

Tavis McCourt – Raymond James

Thanks a lot.

Operator

Your next question is from the line of Quinn Bolton of Needham & Co.

Ralph Quinsey

Quinn, are you there?

Operator

Mr. Bolton, your line is open.

Ralph Quinsey

Let’s move onto the next caller.

Operator

Your next question is from the line of Aalok Shah with DA Davidson.

Aalok Shah – DA Davidson

Hi, guys. Just a couple quick questions. Steve, when you entered Q4 you said that inventory was a little bit bloated and you were going to work down some inventory. Are you feeling pretty comfortable with the current inventory levels? And do you feel like you need to start to build some buffer as we go through the rest of this year?

Steve Buhaly

Well, I think I’ll let the rest of the year take care of itself, but with respect to – before I think we’ve got the job done, I was looking for $15 million to $20 million to come out. We got $16 million, so that’s a reasonable resolve. Our turns are 4.6. Obviously the turns will deteriorate a little bit in Q1 due to revenue, but we’re reasonably comfortable with that outcome. And then as we see that second half that we expect growth and get closer, we’ll probably try to maintain good turns. But if we have a ramp, we’ll build for that.

Aalok Shah – DA Davidson

Okay. And Ralph, the Connectivity business was up pretty nicely in the quarter. I’m trying to figure out exactly how you guys are positioned now as we go forward, especially with H7 AC ? How shall we think about your position there? It seems like some people are winning one band not both. Is there a real takeaway for you guys as to how you’re positioned in that space?

Ralph Quinsey

Yeah. So our connectivity or wireline focus is primarily on smartphones. We think that that is the biggest opportunity. We have last June we launched AC products, but the market is still dominated by end products, and that’s what we saw benefit from in the most recent quarter. We had strong seasonal demand from several customers, but I would say that our customer base is fairly narrow right now for wireless LAN. So I think we will be seasonally down in Q1, but good progress on wifi expanding our customer base again, and we’re focused on the high-performance sockets. It’s the 5-gig sockets. It’s both PAs and front-end modules that may include switch and LNA.

We also sell dual-band products. One of the better demand products we have right now is a dual-band product. So where customers want that size integration and performance, we’ll play. Not as much demand in the, for us at least, in the 2.4. When customers want high performance 2.4, we’re there to play.

Aalok Shah – DA Davidson

And then last question, in terms of how you’re positioned, I know the new MMPA is out there, but when the first Galaxy phone came out, you guys were pretty well represented and have since lost some sockets. How do you feel about your position with Samsung as we go forward?

Ralph Quinsey

I feel good about it. We’re growing year over year. I expect to grow year over year again this year. We did plateau in Q4 somewhat, but I think that we will buck seasonality, or have a chance to buck seasonality in Q1. And the outlook is good. We’ve got good products, both on the MMPA side, really good performing products, a lot of interest across the marketplace, and then in premium filters, again lots of interest and in some cases we’ve got not only the best product, but it’s the only product out there.

Aalok Shah – DA Davidson

Great. Thank you.

Operator

Your next question is from the line of Blayne Curtis with Barclays.

Blayne Curtis – Barclays

Hey. Good afternoon, guys. Ralph, I just want to go back to your comments and just make sure I understand what you’re exactly saying. Obviously the second half better than the first, but you said one of the best growth years. I mean you’ve had substantial growth years. So I just want to make sure that what you’re exactly saying in that comment, you definitely expect growth, but are you implying that you’re back to 20% or 30% year-over-year growth?

Ralph Quinsey

Yeah. So I wasn’t guiding a percentage, but I was leading towards a healthy growth year. That was the intent, Blayne. So it’s an opportunity. It’s a target. A lot of uncertainty around the second half, but we’ve got one of the healthiest new product lineups in Mobile Devices and one of the fullest and healthiest design win tunnels that I’ve seen for some time. We’re going to have a fairly mediocre depore first half. So it’s a little bit a function of how the first half goes, but I am trying to lean forward a little bit and let people know I think it could be a fairly strong year based on a strong second half.

Blayne Curtis – Barclays

Got you. Helpful. And I apologize if you answered this before, Steve, but the capacity that you’re adding and the CapEx, if you took Q4 in the first half it seems like it’s $75 million or maybe even $100 million, can you relate that back to the BAW capacity that you have today? And how much you’re actually adding for that money?

Steve Buhaly

You bet. We’re spending about $50 million to roughly double our BAW capacity, which should be largely finished by midyear 2013.

Blayne Curtis – Barclays

Okay.

Steve Buhaly

On top of that we’re spending a smaller amount to increased our advanced SAW capacity.

Blayne Curtis – Barclays

Great. And then the Defense business, it sounded like you had the big sequential uptick that you think some business pulled in. Does the Q1 level go back to kind of Q3 levels? Or are you still at a higher base of that business?

Steve Buhaly

It will step back down. I think it’ll step back down to a level above the average of the first three quarters of the year, I mean really strong Q4, so it will step back down. I think the way you should think about the Defense business year over year, as you know the order patterns are somewhat irregular. Year over year I still look at that as a mid single-digit kind of growth business.

Blayne Curtis – Barclays

Okay. And just a final question, Steve, your doubling your BAW capacity. Clearly you have a line of sight into some growth there. I’m assuming that that carries a better gross margin. Can you just talk about that as a driver? Obviously utilization in volumes will help as well, but do you see mix as a tailwind for you?

Steve Buhaly

Yeah. BAW filters are clearly accretive to margins even when bundled into a PA duplexer type format. So yeah. I think that is going to be helpful.

Blayne Curtis – Barclays

Okay. Any way you can quantify it?

Steve Buhaly

You know your mileage varies with each situation, so Ralph, unless you want to add something? I think I would leave it at that.

Ralph Quinsey

Yeah. It’s – we’ll leave it at that.

Blayne Curtis – Barclays

Okay. Thanks, guys.

Operator

Your next question is from the line of Mike Burton with Brean Capital.

Mike Burton – Brean Capital

Hey, guys. Thanks for taking my questions. Could you provide some color on the decree of declines between the segments, clearly mostly driven by Mobile, and you just touched on Military, but maybe on the Network side?

Ralph Quinsey

And for what time periods are you interested, Mike?

Mike Burton – Brean Capital

For Q1.

Ralph Quinsey

So I haven’t guided specifically market segment in Q1. We will see some seasonality in mobile devices, and we think that because of our mix of customers we’re going to see a little bit more seasonality than our competition. Defense is going to come down I believe after a very strong Q4. Some of that is demand shifting 2013 into Q4, but a very strong Q4. And then our Networks business, taking the commercial foundry out of it, because that’s also quite irregular, I think that’s going to be a fairly strong – let’s break it down into pieces. The base station market I think is going to have a fairly strong year, again driven by LTE and TV LTE deployments worldwide and some really good design wins we had with some key customers; base station, taking the commercial foundry portion out, is going to have a fairly strong year and Q1 should kick that off nicely.

Optical, the biggest part of transport, that’s just been on a tear the last three years. We grew that business about 50% year over year last year, and towards the end of the year we’re seeing that plateau. And we think that that will stay plateaued somewhat into 2013 just as the market digests a lot of growth. And as the market matures and volumes go up, ASP reduction, volume-driven ASP reductions are a headwind to revenue growth. So we’ll see some of that in 2013 as well.

Steve Buhaly

But net, net the majority, the significant majority of the decline is in Mobile. That’s an area with both seasonality and customer concentration. It’s just a more volatile part of our business.

Mike Burton – Brean Capital

Sure. Understood. And connectivity had a big step up in December. Should we expect that to be leading the decline on the way down? Maybe to your comments about some demand shifting between the two quarters?

Ralph Quinsey

Hard to say. I think it’ll be in the mix.

Mike Burton – Brean Capital

Okay. And last one from me, there’s a good deal of excitement about emerging market smartphone growth this year. What percent of your sales goes into Chinese handsets? And do you expect that to rise this year relative to your business? And maybe you could help us with just highlighting some of the lead customers you have out there? Thanks.

Ralph Quinsey

Yeah. So we don’t track it by emerging markets the way you asked the question, but let me see if I can give you some color on that. We’re not widely penetrated in the GSM market worldwide and particularly in China, but we are engaged with major players on 3G and now 4G applications, players like ZTE and Huawei. And I would say in the grand scope of things it’s still a relatively small portion of our business, but I agree with you, it will be a growing part of the business.

Mike Burton – Brean Capital

Thanks again.

Operator

Your next question is from the line of Ian Lee Ing with Lazard Capital Markets.

Tyler Radke – Lazard Capital Markets

Hey, guys. This is Tyler Radke in for Ian Ing. Thanks for taking my question. I just wanted to touch on your comments again for 2013. How should we think about the likelihood of another 10% customer in the second half of the year?

Ralph Quinsey

Oh, boy. That’s too far to guide and too specific. So I’m going to just stay silent on that. We do expect to grow overall revenue, and we do expect to grow across multiple customers, but I’m not ready to call which one will cross over the 10% hurdle.

Tyler Radke – Lazard Capital Markets

But I guess it’s not out of the question? Is that fair?

Ralph Quinsey

Nothing is out of the question.

Tyler Radke – Lazard Capital Markets

Okay. And then going back to your Defense business certainly can be lumpy at times. Can you help us understand two things? One, was the OpEx increase, and I think you guys guided 62 to 63, was that related at all to the Defense lumpiness? Or is that more of engineering increases gearing up for capacity increases and that sort of thing?

Ralph Quinsey

It was more the latter, and specifically more to deal with mobile devices, product development, sampling, et cetera. We had a lot of activity in Q4, and this is good activity, around product development, product validation, product verification, et cetera. And that forecast good activity in design wins in 2012. So it was more around that and more in the mobile devices area.

Tyler Radke – Lazard Capital Markets

Okay. So we should expect – I mean the extra OpEx there, it’s not coming out of the first quarter like we saw some of this additional revenue?

Steve Buhaly

You’re right. It was – I was a little bit surprised in Q4 at the level of spend, but it was done for good and reasonable reasons. But in Q1 we’ve got some FICA pickup and some of the increase in Q4 was hiring that came in earlier than I expected, but those people are still here. So I expect engineering expense to be flat to up a little bit Q4 to Q1.

Tyler Radke – Lazard Capital Markets

Okay. And last question, then I’ll jump back in the queue. Can you just provide a little more color on the scrap issue? And just help us understand exactly what went on? The potential for this to occur again? And then what exactly the charge? Where we stand on the outcome of that resolution?

Ralph Quinsey

Well, to be straight up, we’re being transparent, but any comments on particulars at this point would be purely speculative. I can tell you that it’s isolated to a very few amount of products and customers, about a handful each. No 10% or greater customers are impacted or involved. We have dual-source supply, and this was associated with bringing up a line associated with that dual-source supply. And we need to work through it. Like I said, it’s just too early in the process and in the discovery phase. It would just be too speculative.

Tyler Radke – Lazard Capital Markets

Okay. But we should expect, I mean if the charge were to occur, it would happen you said in the next quarter?

Ralph Quinsey

I think this will be totally resolved and understood within the next quarter, within this quarter, within Q1.

Tyler Radke – Lazard Capital Markets

Okay. All right. Thanks for the clarity. Good luck.

Ralph Quinsey

You bet.

Operator

Your next question is from the line of Brad Erickson with Pacific Crest.

Brad Erickson – Pacific Crest

Hi. Thanks for taking my questions. I just have a couple. First off, when you talk about feeling good in terms of the pipeline, particularly in handsets, is that largely figured into your call for the strong second half and overall growth in 2013? Or were you more speaking of more recent design win activity and those ramping through the second half?

Ralph Quinsey

I’m not sure I understood your question. Yeah, they’re related. I feel good about the second half based on our execution and success in tabling new products, and in some cases design wins, and then again full disclosure. There is still a lot of work to be done and design wins to be completed and locked down. But I believe in total we went back to our roots in mobile devices of good execution on high performance, differentiated products.

We lost our way a little bit in 2011, and we just refocused on doing what we do best, figuring out how do we get the best performance, crazy-great products out of great technology. And we focused on that, and we did much better on our execution. Mixed results, in some cases we got great products but not in the time window we wanted. So we’ll see more design wins, but also many successes. So I feel good about the second half based on that.

Brad Erickson – Pacific Crest

Got it. That’s helpful. Then well obviously that is clearly the expectation for 2013, but a fairly steep ramp there coming off what’s going to be a little bit disappointing in the first half. If and as a portion of some of that business ramps a little bit more slowly, can you talk about how you might manage OpEx levels going forward, just given the fairly elevated levels as of late?

Ralph Quinsey

Yeah. So we did make a commitment to invest in R&D to expand our products, our customer base and the applications we support in 2012, particularly towards the end of 2012. We just don’t want to miss the opportunity. We think we’re in a fairly good place right now. I believe we’ll continue to incrementally go up in R&D, but our goal is to grow back into our model, and if for some reason we don’t see the revenue coming, we would try to slow that growth or adjust that intercept so we get back down into our model.

Brad Erickson – Pacific Crest

Great. That’s helpful. Thank you.

Operator

Your next question is from the line of Jason Schmidt with Craig-Hallum.

Jason Schmidt – Craig-Hallum

Thanks, guys, for taking my questions. Just a few quick ones from me. Steve, I’m wondering if you can give the utilization number for Q4?

Steve Buhaly

Sure. We were on a weighted average basis we were around 55%.

Jason Schmidt – Craig-Hallum

Okay. And then how should we look at gross margins trending throughout this year? Still sort of a depressed level in Q2? And then probably significant snapback entering the back half of this year?

Ralph Quinsey

That’s a reasonable model.

Jason Schmidt – Craig-Hallum

All right. Thanks.

Ralph Quinsey

You bet.

Operator

Your next question is from the line of Bill Dezellem with Tieton Capital Management.

Bill Dezellem – Tieton Capital Management

Thank you. It’s Tieton Capital. A couple of questions, first of all relative to the second half of the year success that you anticipate, you partially addressed this in a prior answer, but to what degree are these design wins already locked in that gives you the confidence in the second half versus those that you are close to winning that gives you that confidence in the second half?

Ralph Quinsey

I would characterize the whole cycle as in process, going well.

Bill Dezellem – Tieton Capital Management

Can you be more explicit than that? That gives a lot of room for interpretation?

Ralph Quinsey

Yeah. And I’m sorry, Bill, it’s hard to be more specific than that.

Steve Buhaly

We try to give some general direction, but avoid guidance and try to navigate those waters.

Bill Dezellem – Tieton Capital Management

Great. Let me shift then and ask relative to the doubling of the BAW capacity by midyear that you reference earlier in the call, to what degree is this tied to that strong second half, because it seems rather coincidental that, that capacity is going to be in place by midyear, which is approximately the timeframe when you expect your business to ramp.

Steve Buhaly

I think there’s a high correlation between those events. We’re looking at market trends and design funnel, design wins, all of those factors and they’re all in addition to the margin profile and all for that is supportive of investing added capacity for specialty filters primarily BAW in that timeframe.

Bill Dezellem – Tieton Capital Management

Thank you both.

Ralph Quinsey

You bet.

Operator

Your next question is from the line of Robert Bobo with Millennium.

Robert Bobo – Millenium

Hey, thank you very much for taking my question, I appreciate it. I was wondering if you could help give me the useful life on the assets that you’re deploying your BAW filter business and if you have equation to help us understand exactly how much capacity and in terms of revenue capacity you’re gearing up for with the significant investments you made over the last quarter and what seems to be in the coming two quarters. Thanks.

Steve Buhaly

Well on the first question is tough to answer, depreciation life is five years. We have some equipment out there that’s been out there more than ten, so I don’t know but the life is, on average substantial I would say. And -

Ralph Quinsey

Let me help on the other question.

Steve Buhaly

Yeah.

Ralph Quinsey

So we are putting the path in place for multiple years, because of the long useful life and we also have – we see quite a bit of seasonal volatility in our business and that drives swings up and down, but as we go forward we will have – I don’t know if we want to put a number on what our capacity mix is going to be after the BAW installation.

Steve Buhaly

Kind of apples and oranges, we don’t really have the data handy we weighed our utilization based on dollar spend and I just don’t have it.

Ralph Quinsey

Yeah. But suffice it to say it would give us a lot of growth headroom from where we are right now, a lot of growth headroom.

Robert Bobo – Millenium

If I could ask a quick follow up then. Would it be fair to say you expect the capital intensity in the business to come down over the following years as I think you’ve discussed pretty broadly that go forward to the extent you saw growth outside of your Specialty Filter business you would largely look to flex capacity to address that. Is that fair?

Ralph Quinsey

Yeah. The short answer is yes. I agree. I think that the capital intensity will come down. I think that we peaked. The peak is behind us as far as the capital intensity. To tell the story, we went through a re-investment phase that required not only investment in GaAs capacity for dual sourcing but also new technology investment. In BAW we brought up a completely new line. And we reconfigured our SAW facilities to more advanced technologies and wafer level packaging.

So we have gone through a capital intensive phase, and we think that’ll fall off. The only thing that’s going to drive us to invest a lot of capital going forward after we get through this cycle is just the ability to grow faster than the market or have great growth. And I think as we get to that point fairly well behaved capital ratio to revenue growth. I haven’t thought through it enough to put a number out on this call, but less capital intensive than the phase we just went through.

Steve Buhaly

But I will add that we were about $15 million below the depreciation rate this year. So capital expense $15 million below depreciation in 2012, and probably $15 million or $20 million below in 2013 as well. So we will see net PP&E decline both this year and probably next year as well.

Robert Bobo – Millenium

Great. Thank you. I appreciate it.

Ralph Quinsey

You bet.

Operator

And your final question is from the line of Edward Snyder with Charter Equity Research.

Edward Snyder – Charter Equity Research

Thanks a lot. Ralph, once you get this capacity on line by midyear and fall, what was your revenue run rate in that factory? And given the total of else bands, how many bands are you saying? Like six to nine bands of the premium LTE users versus the last three or four years as maybe two or three? Could you help us scale the opportunity?

Ralph Quinsey

I’m sorry, Ed. I’m having a hard time understanding you. Did you get the first part of this question?

Steve Buhaly

Yeah. First question, I’m not – there’s definitely a modest increase in revenue run rate capability, but probably more importantly it reflects a change in mix of opportunity that is more BAW filter centric. So that allows us to play in that space. I’m sure it adds a modest increment of revenue, but we haven’t really looked at it that way I would say.

Ralph Quinsey

Sorry. And your second question?

Edward Snyder – Charter Equity Research

So the dual filters, the clasp expansion that you’re adding to BAW is for a slew of LTE filters that are going to come to fruition by the second half of the year. How does that compare to historically? It had band in the U.S., maybe a couple of the bands required law. Are we looking at a double? Triple the number of bands coming up in the next two years that require premium filters versus what we’ve seen in the past?

Ralph Quinsey

Yeah. I got it now, Ed. So traditionally if you look back pre-LTE, 4G, et cetera, BAW really was a fairly narrow market for what was known as the PCS band, which has evolved and migrated and now has various different names. But fairly small market. Now we have the added LTE bands and there’s band 3, band 7, band 38, band 40, band 41, and we have other bands that have a mix of technology that throw in sometimes BAW, sometimes advanced SAW, band 13, these notch filters.

And the way that the particular filter at duplexer is constructive is that you have a transmit and a receiver filter integrated into the same package. Sometimes these can be built with all BAW, and they’re not optimized. Sometimes they can be built with all SAW, and they’re not optimized. TriQuint uniquely can pick and choose the right technologies to optimize a specific duplexer filter. And there’s going to be at least two or three bands like that. So I would say we’re going over the long-term from kind of a one-band market to a multi-band market opportunity.

Edward Snyder – Charter Equity Research

And then GaAs seems to be the problem, not seems, GaAs is the problem child. What products can we look to for growth that’s going to be PADs? There’s only really one OEM in PADs, so are we talking about the transmit for PADs that – last year at the Analyst Day? What product is going to drive the volume in your GaAs fab?

Ralph Quinsey

Yeah. So PADs are a good solution for those players that want a lot of integration and a lot of performance. Not all players want that. For those players that don’t want that, integrated, discreet filters or integrated filter modules will be a great solution.

Steve Buhaly

I think the MMPA you were discussing earlier is a good example of something that will drive GaAs utilization for us.

Ralph Quinsey

Yeah. So as Steve eluded, as the market transitions from voice only, as you know we go from single-band to multi-band, and then we move into this broadband phase, which we reduce the number of amplifiers in a home, broadband amplifiers, but the just the expansion of the market, we’re still going from one to maybe four amplifiers instead of one to a dozen amplifiers. So we’ll see a good expansion of the market.

Edward Snyder – Charter Equity Research

Great. Thanks, guys.

Operator

There are no further questions at this time.

Steve Buhaly

Once again, thanks for your participation. I look forward to seeing many of you in Barcelona.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TriQuint Semiconductor's CEO Discusses Q4 2012 Earnings Results - Earnings Call Transcript
This Transcript
All Transcripts