TriQuint Semiconductor Inc. Q1 2009 Earnings Call Transcript

Transcripts

TriQuint Semiconductor Inc. (TQNT) Q1 2009 Earnings Call April 22, 2009 5:00 PM ET

Executives

Ralph Quinsey - President & Chief Executive Officer
Steven Buhaly - Vice President of Finance & Chief Financial Officer

Analysts

Kamal Das - Barclays Capital
Steve Ferranti - Stephens Inc.
Edward Snyder - Charter Equity Research
Quinn Bolton - Needham & Company
Nathan Johnson - Pacific Crest Securities
Aalok Shah - D.A. Davidson & Company
David Dooley - CACI
Bill Dezellem - Tieton Capital Management
Tony Ryall - Unidentified Company

Operator

Good afternoon. My name is Kayla and I will be your conference operator today. At this time, I would like to welcome everyone to the TriQuint first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Mr. Steve Buhaly, Chief Financial Officer. Sir, you may begin you conference.

Steve Buhaly

Thank you. Good afternoon and welcome to our first quarter 2009 conference call. This call will include forward-looking statements about TriQuint’s projected financial and operating results. Results could differ materially based on various factors, including those described in our reports on Forms 10-K and 10-Q and other filings with the Securities and Exchange Commission.

This presentation also includes non-GAAP financial measures, which exclude equity compensation charges, certain impairment charges and charges associated with the acquisition of WJ Communications. These non-GAAP measures are provided to enhance overall understanding of our core operating performance. A full reconciliation of these non-GAAP measures is in our press release.

Ralph, will now provide an overview of the quarter.

Ralph Quinsey

Thank you, Steve. As expected Q1 revenue was seasonally down compared to Q4 in a challenging environment of inventory correction and reduced short term demand. The reduction of both channel and TriQuint inventory drove fabulization to 35% and pushed gross margin down resulting in a non-GAAP loss of $0.07 per share on revenue of $119 million, both at the favorable end of our expectations.

Our earnings benefited from aggressive short term operating expense control in Q1. Cash was slightly down, helped by solid inventory reductions that was offset by capital expense committed last year for technology development. It should be noted that in an inflection point of increased demand occurred late in the quarter as handset inventory normalize, supporting higher revenue expectations in Q2.

Total revenue was up 7% as compared to Q1 2008, led by handset growth up 24% and defense and aerospace growth of 23%. Our growth was supported by market strength in SmartPhones, the addition of WJ Communication and positive momentum in major defense and aerospace programs.

Additionally, TriQuint is benefiting from China’s investment in 3G infrastructure, offsetting reduced infrastructure spending in other region. We saw reduced demand associated with wireless LAN, standard handsets, cable and optical products. Wireless LAN channel inventory remains high, which held our wireless LAN revenue in Q1 to very low level. Steve will provide detailed Q2 guidance shortly.

In general, I expect strong handset revenue in Q2, driven by our successful new products, inventory restocking and the popularity of SmartPhones. Handset mix continues to shift from 2G to 3G, driving improved handset margin and more content for phone. I expect non-handset revenue to grow modestly in Q2, with strength in defense and aerospace and stability and recovery in some of our other submarkets. I will now provide some detail into our major markets of networks, handset and defense and aerospace.

Our networks revenue was down 29% sequentially with large declines in most submarkets, slightly offset by growth in 3G infrastructures. Wireless LAN revenue in the quarter was negligible and inventory reductions will continue through Q2 with demand expected to return in Q3.

Networks revenue decreased about 21% in Q1 of 2009, as compared to Q1 2008. The largest delta is in wireless client, down approximately $12 million as compared to the year ago quarter due to the inventory overhang discussed earlier. This is partially offset by a roughly $8 million increase in base stations revenue with the addition of WJ and the Chinese investment in 3G offsetting reduced revenue from GSM and CDMA infrastructure.

Transport revenue was down approximately $4 million as compared to Q1, 2008, with the shortfall being driven by optical and cable, both attributed to the economic slowdown. Uncertainty remains in our transport market, but I believe we have reached the bottom. Recent order pooled activity is encouraging.

We are forecasting renewed demand in transport, but are conservative in our estimate of future revenue until there is more certainty in the economy. Looking beyond the short to medium timeframe, increased demand from applications like social networking, Voice over IP and streaming video is expect it to drive sustained growth in the transport market, where TriQuint is well position to benefit.

I would like to turn your attention to our handset market now. Our handset revenue declined approximately 14% sequentially in Q1, which is typical for this seasonally down quarter. Revenue grew roughly 24% as compared to the year ago quarter, with growth of approximately $25 million in 2.5/3G, offset by roughly $10 million decline in 2G revenue. This shift from 2G to 3G has been favorable to margins.

While the overall handset unit market is expected to be down approximately 10% in 2009, SmartPhones volume is expected to be up. I expect TriQuint to grow handset revenue in Q2, with improved mix and supply chain costs. I have low visibility into the complete year, but believe we have the design wins in place to grow our handset revenue in 2009, as compared to the previous year.

Now turning to the defense and aerospace market; our defense and aerospace revenue decreased, approximately 16%, but grew 23% compared to Q1 2008. This sequential decline was predominately due to a customer program timing that pulled some planned Q1 revenue into Q4 of last year. The year-over-year growth was in radar, R&D and satellite revenue.

Lastly, I would like to update investors on our key product and technology progress. We continued to enjoy success with our highly integrated module products for 3G handsets. We have successfully penetrated key SmartPhone manufactures with these products. TriQuint is a pioneer in integrating more than just power amplifier functionality with control functions as found in typical power amplifier modules.

TriQunit integrates the entire transmit chain of a specific band in the phone creating transmit modules. These complex, highly integrated products provide our customers with very small form factor solution that is easily incorporated into an already crowded SmartPhone; and these products provide benchmark efficiency giving the user longer battery life.

In the networking market, we are executing our development and launch plan for TriPower. This base station power technology will significantly increase power efficiency, creating a greener wireless communication infrastructure that requires less energy for our power and cooling. I am happy to report we have achieved our first design win for this technology. We are shipping initial production volumes now and expect to ramp additional customers in the future.

In the optical market, we recently announced the worlds first surface mount solution for 40 gigabit long haul communications. This product expands our successful family of modulated drivers for both 10 gig and 40 gig network. TriQuint has established itself as the performance leader in this market.

In the defense and aerospace market, after a many years of technology and product development, we are moving into the early stages of production for the F-35 Joint Strike Fighter. This program follows a very successful engagement with the F-22, now near end of life. I estimate the F-22 program generated approximately $40 million of revenue for TriQuint spread over the last seven to 10 years and supported the build of approximately 180 F-22 aircraft.

The forecasted aircraft build for the F-35 is expect it to be significantly higher, north of 3,000 total aircraft with demand spread over 30 years, coming from the U.S. and multiple partner countries. Content per aircraft is lower but the overall forecast for TriQuint revenue per year is significantly higher for the F35 as compared to the F22.

In the area of military communications, strong interest continues for Power band. This revolutionary, wide band amplifier solution allows designers to significantly reduce the complexity and size of military radios and jammers that have multi-band or wide band requirements.

For the company in total, our metric for tracking the success of new products is the ratio of new product revenue to total revenue, with new product revenue defined as revenue from products entering production in the last two years. This metric was a solid 50% in Q1, 2009.

Now, Steve will provide results for the first quarter of 2009 and our guidance for Q2. Steve.

Steve Buhaly

Thank you, Ralph. For the first quarter of 2009, we reported revenue of $118.9 million. Revenue decreased 20% sequentially, but increased 7% from the first quarter of 2008. Economic weakness, seasonal softness in the handset business and the reduction of channel inventory caused the sequential decline. Excluding our wireless LAN products, most channel inventory appears to have returned in normal levels.

For the quarter, our revenue split to end markets was handsets 58%, networks 28% and defense and aerospace 14%. Our revenue by geographic region was Asia 53%, Americas 38% and Europe 9%. Please refer to the supplemental data posted on the investor section of our website for a detailed breakdown of our revenue by market.

During the first quarter, Foxconn was our only customer comprising 10% or more of our revenue. Our book-to-bill ratio for the quarter was 1.14. Our gross margin for the first quarter was 19.6%. First quarter non-GAAP gross margin was 21.0%.

Lower sales combined with a $19.8 million inventory reduction significantly lowered factory utilization and were the primary cause of the quarter’s poor gross margin. A shift in our mix towards more handset and less networks revenue, also negatively impacted overall margins.

Operating expenses were $40.0 million for the first quarter and $37.3 million or 31.4% of revenue on a non-GAAP basis. Q1 non-GAAP operating expenses were down $2.5 million from the prior quarter, as the company reacted to the changing demand picture. Specific actions in the quarter included mandatory time off for most employees, no bonus or profit share payments and restrictions on hiring, travel and other discretionary expense areas.

We recorded interest income of approximately $300,000 and a tax benefit of $800,000 in the quarter. Net loss was $15.6 million or $0.11 per share for the first quarter. Non-GAAP net loss in the first quarter was $11.0 million or $0.07 per share. Cash flow from operations was $7.1 million in the first quarter of 2009.

Total cash, short term and long term investments dropped $2.9 million in the quarter to $99.0 million. Accounts receivable grew slightly with DSO at 61 days due to heavy shipments in the last month of the quarter. We made excellent progress reducing inventory to appropriate levels, decreasing the balance by $19.8 million to $88.5 million. Capital spending of $12.2 million was the primary use of cash in the quarter.

Non-GAAP financial measures exclude stock-based compensation charges, impairment charges and certain charges associated with the acquisition of WJ Communications. Complete reconciliations of GAAP to non-GAAP results are available in our press release and in the investor section of our website.

Moving now to our outlook; we estimate that second quarter revenue will be between $140 million and $150 million. Non-GAAP gross margin is expected to be between 30% and 35% of revenue and non-GAAP operating expenses are expected to be between $40 million and $45 million.

Second quarter net income is expected to range between a loss of $0.01 and net income of $0.01 per share, with non-GAAP net income ranging between $0.02 and $0.04 per share. Cash is expected to increase by $5 million to $15 million in Q2.

As of today, we are fully booked to the midpoint of revenue guidance for the second quarter. Reduced visibility and greater than normal volatility in demand cause us to be more cautious in translating this backlog into expected revenue.

Each quarter, TriQuint management participates in a number of Investor Relations events. This quarter we will be on the East Coast from May 28 through June 2. During this time, I will be in Boston and will be presenting at both the Barclays and D.A. Davidson conferences in New York. At the same time, Ralph will be traveling through the Midwest with Stephens and Company June 1 through the 5.

Lastly, we’ll soon begin a marketing program called TriQuint Virtual Visits. The Virtual Visit will be a by monthly webinar designed for investors new to TriQuint or those investors that have not had contact with us in the recent past. Please contact Heidi Flannery, Investor Relations if you’d like to participate in any of these events. Our Q2 2009 conference call is currently scheduled for July 22.

I will now turn to Ralph for closing comments prior to welcoming your questions.

Ralph Quinsey

Thank you, Steve. In summary, the economy remains the largest source of uncertainty in our business today. Q1 was an inventory correction quarter and I believe the handset inventory adjustment is largely behind us. The network’s market is reacting more slowly to the down cycle than handsets and I believe it will be slower to normalize.

Inventory in wireless LAN remains high, but I expect it will be consumed during Q2 allowing a resumption of shipments in the third quarter. New opportunities in networks such as the 3G China investment are partially offsetting economic weakness, but overall this market remains sluggish.

Our defense and aerospace revenue is healthy and currently looks insulated from economic drag. As a company, we are on track with strong products and solid customer engagements across multiple markets, with our current guidance estimating 18% to 26% growth sequentially in Q2 and a return to non-GAAP profitability.

Kayla, please open the line for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Tim Luke.

Kamal Das - Barclays Capital

This is Kamal Das for Tim Luke. Congratulations on the great quarter.

Ralph Quinsey

Thank you.

Kamal Das - Barclays Capital

I just had question on visibility. You suggested that inventory had gone down quite a bit and you’re expecting things to trend a lot better; you’ve guided up 22% at the midpoint. How do you see visibility right now and how is the linearity in quarter one?

Ralph Quinsey

So, visibility remains clouded. We have seen, since the close of the quarter and early in this quarter, some pull-in activity from our non-handset markets and late in the quarter, as I mentioned in the prepared comments, we did see an inflection point in our handset market.

So at the very short term look at it, things looked pretty encouraging. It’s not clear to me, though, if the market is reacting in an oscillation to the inventory declines or if we have fully embraced some sort of recovery. So we’re being cautious about our outlook.

Kamal Das - Barclays Capital

Okay; what’s your expectation for utilization levels in quarter two and how much is that helping you with the gross margin improvement from 21% to 30%, 35%?

Steve Buhaly

I’ll take that. Clearly, utilization will be substantially better. I would guess it would be roughly comparable to what we experienced in the fourth quarter; say somewhere between 50% and 60% and it is the primary driver of improved margins that we expect in the second quarter.

Kamal Das - Barclays Capital

And the last question, if I may. On your operating expenses you guided to around $40 million to $45 million, which is at a midpoint around 14% increase quarter-on-quarter. What are the key drivers for that?

Steven Buhaly

Sure, there are a couple key drivers. First, we enforced mandatory time-off during the first quarter for many employees and that had the effect of reducing our expenses by about $3 million in the first quarter. We don’t think that’s sustainable and we don’t expect to do that again in subsequent quarters.

Second, we are leaving open the possibility of returning to normal bonus and profit share arrangements in the second quarter. We did not have any in the first quarter. So, those are a couple of significant changes.

Kamal Das - Barclays Capital

Thank you. Congratulations again on the great quarter.

Ralph Quinsey

Thank you.

Operator

And your next question will come from the line of Steve Ferranti.

Steve Ferranti - Stephens, Inc.

Hi, guys great job managing through a very challenging environment.

Ralph Quinsey

Thank you, Steve.

Steve Ferranti - Stephens, Inc.

Just a follow-up question on the gross margin guidance; can you guys sort of contrast for us if we look at the second quarter guidance, 30% to 35%, non-GAAP versus where we were, say a year ago, in your second quarter where we had revenues in the mid $120 million level and gross margins I guess a little north of 35% on a non-GAAP basis, you kind of compare sort of where we are today versus where we were then? I’m just trying to get a sense for structurally, what are the determinants of gross margin and how much of it’s due to sort of spring back from a very challenging first quarter?

Steven Buhaly

So Steve, to make the comparison clear, we’re comparing Q2 a year ago with $127 million of revenue, with projected Q2 with the midpoint of guidance with 145. Q2 a year ago had 34.6%, 37% on a non-GAAP basis and that we’re projecting more like 33 in this quarter.

I think the two big difference is we’ve added significant amounts of capacity over the intervening 12 months with the fixed expenses that go with that and secondly, we anticipate having more handset product in the mix than we did a year ago.

Steve Ferranti - Stephens, Inc.

I see. That certainly makes sense and then I guess looking ahead, I think 40% has sort of been the bogie that’s been out there in terms of gross margins. How are you guys feeling about sort of the ability to get there over the next few quarters?

Steven Buhaly

It continues to be our goal. I think it’s a reasonable goal. I think at least one of our competitors is achieving that level of performance and we believe with additional volume and some improvements elsewhere in our business including yields and our supply chain that we’ll be able to get there.

Steve Ferranti - Stephens, Inc.

Very good and Ralph, in terms of your prepared remarks, the inflection point that you just talked about in terms of late in the first quarter saw an inflection point in demand picking up, do you think that’s the result of channel restocking or is it a true end market demand pick-up?

Ralph Quinsey

Don’t have great visibility on that. I believe it is a function of too much inventory burned down, so some channel restocking as well as we are seeing good demand for Smartphones holding up in an overall down market for handsets. As you know, we’re fairly well penetrated on Smartphones and content expanse.

So for TriQuint, I feel as though our demand is picking up. I don’t know if you can equate that to the total market, perhaps. The only other comment I would make is that we did see a significant slowdown in Asia, particularly with our Chinese customers and those customers now are quite strong.

Steve Ferranti - Stephens, Inc.

Okay and do you guys have any sort of sense of weeks of inventory that are in the channel right now and maybe where they are today versus a quarter ago?

Ralph Quinsey

Well, I think they’re lower than they were a quarter ago and they’re at nominal levels probably now, that’s my best guess.

Ralph Quinsey

Excluding the wireless LAN segment…

Steve Ferranti – Stephens

Right, I understand. Okay, that’s it for me. I’ll jump back in the queue. Thanks, guys.

Steve Buhaly

Thanks, Steve.

Operator

Your next question will come from the line of Edward Snyder.

Edward Snyder – Charter Equity Research

Thanks guys. Okay a couple of questions here. Talk about a snapback demand being seen in the quarter, at least the forming of it, but all the reports of the OEMs don’t show really a pickup in the end demand from the users. So, it seems like it might be the whiplash effect of other food chain. You’re hubbed with some of the OEMs, is that correct. Were you running kind of on a hub inventory basis?

Ralph Quinsey

That’s correct.

Edward Snyder – Charter Equity Research

So, in those situations you control your inventory on the floor of the manufacturing plant for the OEM itself so you have good visibility into the actual production line on that side. So, I guess the question is when you see this increase in demand is it at hubbed inventory logistics or is it more the traditional kind of distributors where there’s a buffer between you and the customer?

Ralph Quinsey

It is fairly generic; the demand has comeback. There are still some customers that aren’t as strong as others, but predominantly in handsets we have a fairly broad strength. I don’t discount your input, Ed. This maybe an adjustment for over shooting inventory levels too low, therefore we are being cautious going forward.

I do believe our ability to penetrate new customers, particularly with our 3G products, both our GSM EDGE based 3G products, as well as our PA duplex integrated modules is helping our demand picture. Maybe not the total demand picture for the marketplace, but it’s certainly helping our demand picture.

Edward Snyder – Charter Equity Research

Yes, it sounds like there’s a number of moving pieces, including share gains there. Now your book-to-bill, your backlog, conforming orders at the end of the quarter, also kind of signaled a rebound and demand you expected share gains or just affirming.

You were generating some cash on the down side as working capital played out, but we should have consumption increase on the rebound, outside of this one-time CapEx thing that we saw this quarter that I think you committed to earlier last year.

Is there anything we should be looking at in terms of big cash consumption? I mean, more than enough capacity at this point, so you shouldn’t expect a big CapEx spend there. I’m just trying to get an idea of what your cash profile looks like as your cash rebound the working capital is definitely going to increase right.

Steve Buhaly

Not as much as you think. This is Steve. We were pretty back end loaded in Q1 as business came back to life and so that caused our accounts receivables to be higher than they would normally be; either at 61 days. I think given a more normal kind of loading in the quarter, which we expect this quarter, AR doesn’t really need to increase at all to handle it.

Likewise, inventory I think is sized about right. For our expected level of revenue, it would translate to somewhere just over four turns, which I think is pretty comfortable. So net-net, I think working capital will be pretty flat and I think we’ll generate earnings and CapEx spending will be quite limited in the second quarter.

Edward Snyder – Charter Equity Research

And then part of your (Inaudible) just announced today at the same time your call was that they’re finally exiting the cellular business they’ll be out by the end of December. Does that impact you much at all? I though you compared with them very often, but is there any ripple effect from gains that some of their competitors are going to get from this; Insignia here is picking up such; does that have any impact on you at all?

Ralph Quinsey

I hadn’t heard that news. I probably should take a few moments to digest it, but my response is I don’t think it’s going to have a significant impact to our business, either positive or negative.

I think longer term, consolidation in this industry is healthy and I think TriQuint has demonstrated we’re going to be a survivor as we continue to grow, not only our revenue facet of the market, but we continue to grow margins in this market by offering more innovative products. So, consolidation is going to make it easy for us to partner with those players that we need to partner with to create those innovative solutions.

Edward Snyder – Charter Equity Research

Then you guys gained some ground here in the share gains, especially in the 3G side of the business. I don’t know how closely you mark-to-market with this, but how far ahead or do you think from most, your average competitor; I know this is kind of a difficult question, but in terms of the technology, in terms of the physical form factor of your solutions, the FEMs and the functionality that you can put into a device now. There is a lead here I’m just trying to gauge how long that’s going to last, especially during this expansion period for SmartPhones?

Ralph Quinsey

Well, we have worthy competitors. They work very hard to launch their own innovative products. As you highlighted it, I think we positioned ourselves to do very well in this portion of the market for handsets called transmit modules. Even for GSM, GPRS, we’ve been an early size and performance leader in that market. I think transmit modules in GSM, the low end of the market, 2G is going to get very competitive.

When you start moving up to the 3G market and you start integrating both active and passive components, duplexers and filters and interstage filters and couplers and very complex, it becomes more difficult to execute the product and I think there’ll be more limited suppliers there and I think we will be able to preserve a lead for a little longer in that end of the market.

Edward Snyder - Charter Equity Research

Great. Thanks guys.

Operator

Your next question will come from the line of Quinn Bolton.

Quinn Bolton - Needham & Company

Hey Ralph; hey Steve. First question, just wanted to sort of follow-up on the visibility. It sounds like March and April are pretty good months, especially in the handset space, but your guidance, if you’re fully booked to the midpoint, it seems to be fairly conservative.

So I’m just wondering if you’ve seen anything that might indicate sort of a leveling off of business in May and June. I know in Asia May and June can be seasonally slower months, so just kind of curious if you have any hard visibility as to how orders look for at least the next 30 days into May.

Ralph Quinsey

No, to be honest Quinn, it’s the opposite. As I said, the most recent activity has been favorable. We are being cautious. As I’m sure you are aware, it’s not untypical for backlog to move around in a business, in and out of quarters. Typically that normalizes out. Over the last quarter or so we have seen quite volatile movement in backlog, forward and back and the net effect had been negative.

So, we are being conservative. We are fully booked for our guidance and if the backlog performs as you would think it should perform, in a more normal market; that will be favorable and positive news for TriQuint. If the backlog performs in a way that it has performed over the last couple of quarters, we were appropriately conservative.

Quinn Bolton - Needham & Company

Okay. It maybe still a little early to be talking about end of the quarter visibility, but my understanding from seeking other companies is, a fair number of the OEMs or distributors had placed orders right around the end of the quarter in Q1, that ended up getting pulled in. Are you seeing sort of a similar setup to Q2, where a fair amount of the backlog is scheduled to be shipped right around the end of the quarter; that if demand remains strong or channel replenishment or restocking activity continues that that’s likely to get pulled in?

Ralph Quinsey

Yes, we have seen that type of behavior from some customers, where they positioned backlog near the end of the quarter, really on both ends of the bucket, so it allows them to adjust either way. That has contributed to the volatility and the lack of visibility going forward. It works well for our customers for insurance of supply and gives them some flexibility.

Quinn Bolton - Needham & Company

That’s great. Second question for Steve; maybe I misheard or misunderstood, but I think you said the first quarter you saw about an $18 million charge to cost of goods. I wasn’t sure if that was just a straight out inventory write-down or whether those were simply fab underutilization charges giving you a run in the fab to 35%. I was wondering if you could talk to that or just give us a little more detail on that charge?

Steve Buhaly

Yes sure. There was not a charge. I think the number you are referring to was a $19.8 million reduction in inventory in the quarter.

Quinn Bolton - Needham & Company

Okay. So there is a low utilization then with just a reflection of the low capacity utilization?

Steve Buhaly

Correct; which was caused by (1) low revenue and (2) compounded by the reduction in inventory, since we didn’t build everything we shipped during the quarter.

Quinn Bolton - Needham & Company

Yes, okay. I thought I heard something about an inventory write down and I just wanted to clarify that.

Steve Buhaly

Definitely don’t want to get a rumor like that going.

Quinn Bolton - Needham & Company

No, no, no I understood. Lastly, just on the China 3G some of the other participants in this space have talked about potential for lumpiness in that businesses. There maybe a couple of phases of deployment of this equipment. Do you guys have any sense as to whether this is going to be fairly lumpy or sort of more of a first half event than a second half event or any color you could provide on the China 3G opportunity?

Ralph Quinsey

Sure, I agree, it’s likely to be lumpy, it’ll be measured. I’m unable to provide any more detail than that. We are seeing the benefits of that now and we are being cautious about the opportunity moving forward.

Quinn Bolton - Needham & Company

But I guess as it would pertain to your networks business, then I guess the good thing is you’re seeing the strength now in that business to the extend it does roll off in the second half, that’s when the wireless LAN business sounds like it should start to come back.

Ralph Quinsey

Yes, I expect the wireless LAN business to come back either in Q3 or very late in Q2.

Quinn Bolton - Needham & Company

Okay, great. Thank you.

Operator

And your next question will come from the line of Nathan Johnson.

Nathan Johnson - Pacific Crest Securities

Hi thanks for taking my question and congrats on the progress on inventory. I was wondering if you could talk a little bit about market share. You guys have highlighted quite a bit, and your last conference call was just about market share gains you’ve made to key customers. I wanted to know if you guys felt that you had continued your share gains into Q1 or whether that was more of a period that’s kind of digesting those gains and then what you guys see in terms of gains at key customers going forward?

Secondly, I was wondering, obviously you guys have quite a bit of excess capacity right now, but I was wondering at what revenue level you guys think you could reach before you have to add additional capacity beyond that and then lastly, much has been sort of talked about in the press about the changing budget priorities for military spending in the U.S. I just wanted to see what impact if any, you guys thought there would be from that?

Ralph Quinsey

Sure, let me start with the military question. I think we’re insulated from any short-term impact in the military, changes in the military budget, quite a bit of momentum in that whole process and some impacting 2009 and 2010, probably difficult to do with any kind of decisions made in the near term.

When you look at the comparison of F-22 versus F-35, that’s an example of just our growing content in that marketplace and I still feel very good about continuing to grow military and that will expand it into a module business. We’re investing in module that allows us to lower the cost for our customers, raise our ASPs and maintain strong healthy margin. So I’m quite bullish about the military business going forward.

From a capacity perspective, how much could we build with our current capacity, lot of variables there with mix etc. It would be in excess of $200 million a quarter, easily and then I’m sorry, your first question was share gains and specifically in handsets or across the board?

Nathan Johnson - Pacific Crest Securities

In handsets specifically.

Ralph Quinsey

So maybe a little premature, because we are the first to report, but I suspect based on my understanding, that we are growing our handset revenue year-over-year in the mid-20s, faster than the rest of the competition and so either the market is expanding or we’re taking share. I think a little bit of both is going on, because we’re growing and expanding part of the market, 3G and I do think that the market continues to consolidate.

Nathan Johnson - Pacific Crest Securities

I guess along those lines, I mean do you get a sense that customers that you guys have particular strength with and I guess I’m thinking particularly Korean customers, are getting some benefit from currency tail winds compared to maybe some other handset OEMs that you guys don’t have a presence with?

Ralph Quinsey

I think that could be a scenario. I think that certainly the Korean suppliers have been doing very well and putting us in good numbers.

Nathan Johnson - Pacific Crest Securities

Great. Well, thanks for taking the questions.

Operator

Question will come from the line of Aalok Shah.

Aalok Shah - D.A. Davidson & Company

Hi guys, a couple quick questions. Steve, on the income statement, I know you made comments about the OpEx, probably going up from here in Q2 up to the $40 million range. I’m curious, how should we be thinking about the breakdown? Is it more R&D? Is it more SG&A at that point, or how should we be thinking about that in general?

Steven Buhaly

Roughly I would say the increase will be pro rata. The imposition of time-off requirements in Q1 was pretty democratic. Everybody had to participate and to the extent we pay a profit share or any bonuses next quarter, which we obviously did not in Q1 that too would be pretty much salary-based. So, I think if you took a pro rata swipe at it; that would be a fair thing to do.

Aalok Shah - D.A. Davidson & Company

Okay and then on the gross margin side, have you guys made any improvements? I guess I know weak utilization rates were persistent in Q1, but have you made any improvements to try and get utilization rates better when we do see a more pronounced churn?

Ralph Quinsey

I think that there were two big drivers of the poor utilization in Q1 that are going to be eliminated in Q2. First is, we had much lower revenue. We went from close to $150 million in Q4 down to 120 and we’re coming close back to the same level we were in Q4. Then additionally, we burned off $20 million of inventory last quarter, much of which was finished goods or semi-finished, i.e. had already been through our fab.

So in effect, our fab saw utilization more like $100 million in revenue. We expect to be back up to $145 million in Q2. That’s really a substantial difference in demand on the factories.

Aalok Shah - D.A. Davidson & Company

And Steve, on that line then, inventories definitely worked down quite a bit in the quarter and I’m curious as to what level of inventory do you guys feel comfortable with going forward?

Steven Buhaly

I think churns in the four to five range is appropriate for our business and at the midpoint of our guidance, returns would be somewhere around 4.2.

Aalok Shah - D.A. Davidson & Company

Okay, and then Ralph on the mix of revenue on the handset side, looks like you’ve done a really good job on the WCDMA and hedge business and GSM continues to tail off. Do you think GSM virtually stays on a dollar basis roughly the same going forward; keep coming from our network is their rooms actually to still pick up some revenue in the GSM side?

Ralph Quinsey

Well, I believe there’s a room to pick up revenue depends upon your timeframe. I think we’ll be positioned well to a product portfolio, to pick up revenue in GSM towards the second half of the year. As I mentioned earlier, that market remains very competitive and it’s fairly elastic. So, we will make those decisions when we get to the second half of the year as far as what type of revenue do we want in GSM.

On the other hand, the 3G products, we’ve been able to innovate and really provide some advantages to customer, particularly customers building Smartphones that need the small form factor, that needs the ease of use, that need the high efficiency battery life, long battery life. We like those products and our customers like those products and we’re really focused on those products.

Aalok Shah - D.A. Davidson & Company

And then last for me on the wireless LAN side, I’m sure you guys track this as well, but if we start to see notebook shipments picked back-up and is there a way to start thinking about a correlation between back-to-school and you guys or any kind of historical metrics that we can start to look at and say okay “This is when we should start to see the wireless LAN business start to pick back up?”

Ralph Quinsey

Yes, what I’ve taken from all the public announcements recently is that that market isn’t as bad as some think it is; maybe it’s not as good as some think it is, but there’s still a decent market there. We’re going to be the victim of inventory reductions well through Q2. So I don’t expect to see much revenue from wireless LAN in Q2. I believe it will be flat at best. Q3 though, I expect that that inventory worked through and will be selling our products again and we’ll get a good lift from that. So that will be a Q3 lift.

Steve Buhaly

One of the drawbacks we have is because of this channel inventory; we’re isolated or insulated from the end user demand. It’s gone on, but it hasn’t reached us yet because of the inventory burn. So we’re a little less well informed than we normally would be.

Aalok Shah - D. A. Davidson & Co

Okay great. All right thank you very much guys.

Operator

Your next question will come from the line of David Dooley.

David Dooley - CACI

Congratulations on a nice quarter. I had a couple of questions. When you think of and you kind of addressed this, but I just wanted to have you kind of flush out a little bit more. When you think of your three major buckets of revenue going into this second quarter, clearly it sounds like the phone business is going to be up. It sounds like wireless LAN is flat or down. The overall infrastructure business, would that be flat or up? So I’m kind of wondering what the direction of each segment is for this upcoming quarter.

Ralph Quinsey

Sure, let me just partition it as handsets, yes I think that will be up and that will be up nicely; military and aerospace, I think that will also be up; networks, I think it will be up modestly and parts of networks will be recovering and parts of networks will continue to say at somewhat low levels. Wireless LAN for example, somewhat low levels, but other parts of the market, point-to-point radio and optical for example, I expect to see some modest recovery from very low levels.

David Dooley - CACI

Okay and so most of the growth that you are guiding to is coming from your handset business?

Ralph Quinsey

From a revenue perspective, I think that’s a fair statement.

David Dooley - CACI

Okay and inside handsets, you have good content and some really nice 3G hot selling phones and those phones are refreshed on a fairly consistent basis and I think we’ve got our new Apple phone coming out sometime here in the next couple of months. How do you make sure that you secure those slots for the next phone that comes out and have those decisions already been made?

Ralph Quinsey

Yes, so I’ll speak in generalities as far as multiple customers. Most decisions about any program launch in the next three months or six months, those decisions have been made prior. Typically, decisions related to any phone launch, probably the quickest customers are nine months and the slowest customers are a year and-a-half. So, we’re winning design wins now for programs in 2010 and beyond.

David Dooley - CACI

Well, let me put it another way, so new phones that are coming out in June of this year and you hold the slots in them; now you’re going to continue to hold the slots?

Ralph Quinsey

Not making any specific comments about that particular question and we’re, as you’re probably aware, we’re a conservative company, we really don’t announce any design wins until they’re in the public sector; I can give you this color though.

We are very focused on SmartPhones and we are working very hard with all of our SmartPhone customers to not only preserve our presence in platforms that we’re in, but to try to expand our presence and I think we have demonstrated success in that area. So, we’re excited about the SmartPhone market.

David Dooley - CACI

Okay, final question from me; it’s kind of gross margin related. I guess from what I’m hearing you’re clearly not starting a lot of wireless LAN wafers at this point, because there’s inventory in the channel, but when you do, that would provide higher levels of wafer starts and utilization in your factories and when you sell the product, it’s got higher gross margins as well. So wouldn’t we think when the wireless LAN business turns back on, you start to start more wafers in that area and sell the product that we would see another up-tick to the gross margins?

Steve Buhaly

I’m also saying you’re absolutely right. That would be a good thing and we’re looking forward to it.

David Dooley - CACI

And you’re still pretty much on track. You thought that the inventory in the channel would be consumed throughout Q2 and you would start wafers late Q2 or Q3. Is that what you’re still thinking?

Steve Buhaly

For wireless LAN, yes; that’s our best understanding.

David Dooley - CACI

Okay. Well, thanks again and congratulations on a nice quarter.

Operator

Your next question will come from the line of Edward Snyder.

Edward Snyder – Charter Equity Research

Thanks, just a follow-up. Steve I just want to be sure here. Did margins do any help in the quarter or as far as you can tell in the next few quarters from unloading inventory that’s already been written off? I want to be very clear.

Steve Buhaly

We probably sold a couple hundred thousand dollars last quarter of stuff that we had written off and found a home for. So, a little help, but I would say that’s typical of any quarter.

Edward Snyder - Charter Equity Research

Nothing unusual?

Steve Buhaly

No, I wish we could find a nugget in there, but no, just the normal.

Edward Snyder - Charter Equity Research

And then Ralph, you landed a number of 3G contracts in handsets in one of your higher profile wins that’s currently shipping and will be until 2010 I expect. Are you running into any problems at all with that part or with that vendor at all, that may be out of the ordinary in terms of either production or technical or issues like that? We’re getting feedback that there is some sort of trouble going on. Is there anything out of the ordinary in terms of that account at all?

Ralph Quinsey

I don’t think we have any extraordinary problems associated with our 3G products that we call PA-Duplexers. We’re running along the way we’ve always run with multiple customers.

Edward Snyder - Charter Equity Research

Okay and then back to wireless LAN real quick. There’s a lot of inventory in the channel. If you had to assign a probability of there being so much inventory that the big OEM customer moves on to the next platform before they dissipate everything that’s out there already, so there’s no real additional follow-on?

Ralph Quinsey

I think there is a possibility. I currently don’t think that’s a likely possibility. I think that platforms in the wireless LAN market, the life cycles are being extended.

Edward Snyder - Charter Equity Research

I mean normally it’s about a two year cycle, but you say this one’s stretching out because the economy is down and they’re cutting investment or slowing down development. You must be talking to them about future products, the next platform of course, where you take stuff out of the running. Do you feel like they retarding the progress on that one, so this one will be bit longer?

Ralph Quinsey

Again, in general I think that you’re absolutely correct for multiple suppliers, multiple vendors. The economic downturn has caused people to get more life cycle out of their products and for the customers that we’re working with, clearly we’re working with future generation products and we have good visibility as far as what they’re doing multi generational.

Edward Snyder - Charter Equity Research

Great. Thanks, guys.

Operator

Your next question will come from the line of Bill Dezellem.

Bill Dezellem - Tieton Capital Management

Thank you. First of all, the inventory reduction that you had in the first quarter was greater than originally planned and so we’re a little unclear relative to the second quarter inventory change. Originally I think the plan was for it to be down, but some comments you’ve made here on the call make us think that maybe you’re looking more for flat inventory on an absolute dollar basis. Would you give us your perspective please?

Ralph Quinsey

You bet. I did expect it would take us a bit longer to slim down our inventory than we did. I think our team in operations did a great job of working off the excess we accumulated during the rapid demand decline if the fourth quarter. In the second quarter, I think we have a bit of excess inventory on the wireless LAN side.

I think we’ll probably need to add a few bits of inventory to accommodate the demand in the second quarter and my guess is that will roughly be a push and that with turns just north of four, we’re about appropriately positioned for revenue at the midpoint of our guidance.

Bill Dezellem - Tieton Capital Management

That’s helpful. Thank you and then relative to the surge in demand that you saw at the end of the first quarter and then it sounds like that carried into April, but it also sounds like you had maybe some additional pull-ins in April. So, would it be a fair characterization that that surge in demand, that you had at the end of the first quarter actually accelerated further into April or is that over thinking the situation?

Ralph Quinsey

In general, yes. Let me give you a little more specific. The inflection point started in the handset market and as you suggested, gained some robustness into the subsequent quarter and started to expand into some of our other markets; albeit that, just a couple of data points in our networks markets, but a welcome sign.

Bill Dezellem - Tieton Capital Management

Okay, that’s helpful and then so with that in mind, how are you thinking fab utilization will end up being in the second quarter, assuming that demand does not continue to accelerate further, but just according to the midpoint of your guidance?

Steve Buhaly

You know right now I would guess between 50$ and 60% utilization.

Bill Dezellem - Tieton Capital Management

And then a broader question and it’s probably several quarters early, but you have made reference to I believe it was in your 10-K, to a new product that will go on the top of cell towers rather than down in the closet at the bottom. How would you characterize the significance of that product and is it in and of itself something that we externally should be focused on or is it just one of many products that will build your business in the future?

Ralph Quinsey

It’s an exciting product. That product has been branded to TriPower. The purpose of TriPower is modulation schemes get more complex. New technology is needed to increase the efficiency. For example, 3G, we think we can double the efficiency, which is fairly low in a base station in there in the 20s as far as a percent of power added efficiency.

We can significantly improve that combined with other techniques working with our customer’s, that reduces the requirement for energy consumption and in cooling, some of the tower mounted radios are enabled because they can operate without having this big infrastructure of cooling around it and it allows the whole transmit chain to be more efficient then, because you’re not transmitting RF power up a coax, which has loss associated with it.

You can for the sake of this discussion transmit a low power digital signal up to the top of the tower and preserve that loss and give more RF power out to the people that need it. So again that product is branded, TriPower. We announced our first design win for that in this call and I expect future business.

The way investors should think about that revenue, is it’s on the opposite end of the spectrum from handsets, where handsets can ramp up very quickly. This type of revenue is a slow-roller and we’ve been working on it for sometime. We’ve reached the point now where we’re going to start to generating revenue; it’s a large market for us. It’s arguably a $400 million total market for us, opportunity, and so over the next several years I think you’ll see us grow that business.

Bill Dezellem - Tieton Capital Management

And the design win that you did announce here today, when do you expect that to go into production?

Ralph Quinsey

We’re shipping production now.

Bill Dezellem - Tieton Capital Management

Great, thank you both.

Operator

(Operator Instructions) Your next question will come from the line of Tony Ryall [Ph] – Unidentified Company.