RF Micro Devices, Inc. F4Q09 Earnings Call Transcript

 |  About: Qorvo, Inc (QRVO)
by: SA Transcripts

RF Micro Devices, Inc. (RFMD) F4Q09 Earnings Call April 28, 2009 5:00 PM ET


Welcome to the RF Micro Devices fourth quarter earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to Mr. Doug DeLieto, Vice President Investor Relations of RF Micro Devices.

Doug DeLieto

Hi everyone and welcome to our conference call. At four o'clock today we issued a press release. If anyone listening did not receive a copy of the release, please call Janet Jasmine at the financial relations board at 212-827-3777. Janet will fax a copy to you and verify that you're on our distribution list. In the meantime, the release is also available on our website, rfmb.com under investors.

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

You should be aware that the forward-looking statement included herein are management's current judgments and expectations but our actual results, events and performance could differ materially from those expressed or implied by forward-looking statements. We do not intend to update any of these forward-looking statements or publicly announce the results of any revision to these forward-looking statements other than as is required under the Federal Securities laws.

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

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

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

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

In fairness to all listeners, we ask that participants please limit themselves to one question and a follow-up. After each person has received a turn in the queue, we will give the participant the opportunity to ask a second question.

Finally I'd like to take this opportunity to tell our audience that our fiscal 2010 will be a 53 week fiscal year. Accordingly, each quarter will have 13 weeks except September which will have 14 weeks.

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

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

Robert Bruggeworth

Welcome and thank you for joining us. On April 6, we indicated in a press release that our business environment had improved and our expectations were for greatly improved utilization rates heading into the June quarter.

Today, we're very pleased to report that our business environment continues to improve as evidenced by order flow and bookings. For RF Micro Devices the environment began strengthening in mid to late February as channel inventories were reduced and as our customers began to better understand actual levels of real normalized demand.

As you recall, our December quarter results were characterized by muted consumer activity that triggered aggressive cuts in inventory across the supply chain. Our customers were unable to calibrate their sourcing requirements and nearly all of them reacted to the uncertain economic environment by dramatically curtailing purchases.

Before we drill down into what's changed since December, I'd like to step back and quickly recap how our RFMD has been totally reshaped over the past two years. RMFD today is at an inflection point and we believe the best way to understand our opportunities going forward is to understand what we've done to get here.

Approximately two years ago, RFMD made the strategic decision to diversify our customer base and end markets. At that time, we announced the formation of RFMD cellular and multi-market product groups. Soon after, we completed the acquisition of Sensor Micro Devices. Sensor's product portfolio coupled with RFMD's legacy multi-market products quickly made RFMD one of the world's leading suppliers of multi-market RF components and was supported by the scale advantages of our cellular products group.

On May 6 of last year, we announced RFMD would exit its systems businesses and focus on our two large competitive strengths; compound semiconductors and RF components. Our intent was to enhance our quality of profit by focusing on a core competency and we articulated very clear goals for double digit operating profits and significantly improved return on investment capital or ROIT.

We executed well on the strategy and our financial performance improved significantly through the September quarter. We were set to achieve our stated goals and carried our improved financial performance into the December quarter.

Then, as we're all aware the severity of the global recession hit and unfortunately our markets were not immune. With the onset of the macro economic downturn, we adjusted our goals to match the environment's immediate requirements. We focused on cash flow and structured our manufacturing costs and operating expenses in a manner that allows us to achieve our target operating model at significantly reduced revenue levels while still investing in our growth.

So how have we done? First, let me address our cash flow. Over the past three quarters, RFMD has generated over $85 million in free cash flow and reduced our net debt position by $125 million. Inventory levels have fallen dramatically and we expect the improvement in inventory turns is sustainable with our new business model.

At the same time, our requirements for future capital investment have been significantly curtailed and we continue to expect capital expenditures of $10 million to $20 million this fiscal year. At our analyst day in November, we projected $80 million to $120 million in free cash flow for fiscal 2010 and we are confident we will achieve this goal. Our focus on cash flow and return on invested capital has been and will continue to be relentless.

Now turning to our P&L, as I mentioned RFMD had double digit operating margins squarely in sight until the economic downturn impacted demand in the December quarter. The right thing to do was to focus on our cash flow. This caused significant under utilization of our factories and a resulting negative impact of gross margin.

This brings us to our current business environment. From September to March, macro forces caused RFMD's revenues to drop more than 35%. We don't anticipate our major end markets declining near these levels in fiscal 2010 so we have confidence RFMD can experience upside to current end market demand as inventory continues to clear and demand normalizes.

Additionally, our operating expenses have decreased by more than 30% year over year and we're making measurable progress converging on our expense model of 25% of sales. In total, we have taken at least $130 million out of annualized manufacturing overhead and operating expenses and we structured the company for enhanced profitability and return on invested capital even at reduced revenue levels.

As we enter the June quarter, our expectations are playing out. Order activity since February has been stable and while it's reduced year over year, the rate of reduction implies our year over year performance will ultimately track more in line with our end markets. This is an important point that speaks to the enthusiasm we have for both our growth and profitability going forward.

Our factory utilization rates improved as we exited the March quarter and our utilization rates are quickly approaching historical averages. In the June quarter, we expect our gross margin will expand dramatically. In fact, we anticipate continued gross margin expansion beyond the June quarter and we reiterate our gross margin target of 40%.

We have reduced our break even point for cash generation and we have reduced our break even point for operating income. We are managing to a tight operating model that we expect will deliver significant leverage.

We continue to be encouraged by incremental indicators suggesting improved demand and we expect approximately break even operating profitability on a non-GAAP basis. As always, all success flows through the customer and the RFMD team executed very well during the quarter on our efforts to diversify our customer base and expand our product portfolio.

In CPG, we introduced 14 new products in the March quarter and we plan to introduce a record number of new products in fiscal 2010. In FPG, we introduced 24 new products and 59 derivative products in the March quarter and we currently expect to release more than 100 new products in fiscal 2010.

RFMD is introducing new products for new markets and refreshing products in existing markets. Our customer design activity has been robust and we have increased our share at key accounts while expanding our exposure to large growth markets.

At MPG, we enjoyed favorable design activity across a broad cross section of market segments including automated meter reading, electronic toll collection, defense radar, commercial power applications, CATV amplifiers and 3G infrastructure.

As you know MPG is enjoyed by thousands of customers across more than 30 end markets. With a represented list of customers in these markets include, Silver Springs in Census, ANMR, V TV in China, an electronic toll collection, Motorola, Arise, Collesta, and cable amplifiers and Ericson, Nokia, Siemens, and 3G infrastructure.

In CPG we're very pleased to have been recognized by QualComm as an approved supplier for high performance cellular switches and we're working hard to achieve broader participation with additional components. We grew our 3G business sequentially at Nokia and Sam Sung during the March quarter and we expect to grow our 3G business sequentially in these accounts in June.

Finally, we expect our existing design activity for new open market products will generate near term market share gains in China, Korea and Taiwan. Many of our new cellular products leveraged the die shrink technology we highlighted at our November analyst day. For our customers, the benefit of this technology includes the reduced size and a better performing solution.

For RFMD, we lower our product cost and improve our return on invested capital by generating more revenue from existing manufacturing assets. We've already began ramping up our first die shrink products for 2G handsets and we are accelerating the implementation of our die shrink technology across our product portfolio.

Before handing the call over to Dean, I'd like to highlight a few additional opportunities that we expect will enhance shareholder value. We continue to expect our technology will reset the bar for performance in a number of RFMD's target end markets including cable TV, wireless infrastructure and aerospace and defense.

We will complete the qualification of our process this quarter and we are very encouraged by the design activity and customer feedback we've already received. We have formed a foundry services business unit with many customers expressing interest to do their own designs in our state of the art semiconductor technology.

We're also excited about growing participation in the point to point radio markets driven by the increasing demand for wireless data and cellular applications. Finally, RFMD at a national energy renewal lab, NERL, recently entered into a cooperative agreement to develop a commercially viable high volume capable compound semiconductor based process for high performance for photovoltaic or PV cells.

RFMD's industry leading fabrication capability and the expertise and commercializing compound semiconductors combined with NERL technology leadership resulting from decades of research will uniquely position RFMD to accelerate the commercialization of high performance photovoltaic cells. We are very pleased to be collaborating with NERL to leverage our wafer manufacturing expertise and cost structure to make high performance photovoltaic cells.

In summary, RFMD today is flexible and agile. In the March quarter, we successfully managed our manufacturing capacities and expense structure while focusing on cash flow. In the June quarter we are ramping production to capture the new incremental demand and support share gains while closely managing expenses.

We are very confident in our ability to leverage our expertise and our components and compound semiconductors in multiple markets and we expect our strategic focus will serve us well whether the environment presents unprecedented challenges as it has in the current downturn or presents us new opportunities for growth and profitability as it does today.

With that, I'll turn the call over to Dean for more detailed look at our financial results.

William A. Priddy Jr.

Good afternoon everyone. Just as a reminder, as Doug pointed out earlier in the call my comments and comparisons to income statement items are based primarily on non-GAAP results. Also, as Doug indicated RFMD's fiscal 2010 will be a 53 week fiscal year. June, December and March will be 13 week quarters and our September week quarter will be a 14 week quarter.

Now I'll start with a few comments reconciling GAAP to non-GAAP P&L results. Included in GAAP results but excluded from non-GAAP results were the following items and amounts. Non cash impairment charges of $13.5 million related to finalizing our goodwill and intangible valuation, Restructuring charges of $12.4 million of which $5.7 million was cash, non cash share based compensation expense of $5.3 million of which $1.2 million was in cost of goods sold, $2 million in G&A, $1 million in sales and marketing and $1 million in R&D, non cash intangible amortization expense related to previous acquisitions of $3.9 million and finally $11.5 million gain related to the repurchase of a portion of our convertible subordinated notes due 2014.

Now moving to the P&L, revenue for the March quarter declined 14.7% sequentially to $172.3 million. Gross profit was $34.1 million or 19.8%. As we indicated on our April 6 press release, factory utilization rates were unusually low for most of the March quarter. This alone impacted gross margin by more than 10 points.

I don't want to jump too far ahead into our June quarter, but we see significant improvement in gross margin as demand improves, utilization rates approach historical levels and we realize the benefit of idling our less efficient four inch facility along with other supply chain actions.

Operating expenses were $55.5 million with G&A $8.9 million, sales and marketing $12 million and research and development $34.6 million.

Since the March quarter a year ago, our operating expenses have been reduced at an annualized run year rate of $102 million for a reduction of 31%. This is the direct result of RFMD's strategic restructuring and proactive steps to managing expenses in line with our financial model. Combined, manufacturing overhead and operating expenses have declined greater than the annualized rate of $130 million since the March quarter of last year.

Other income expense was negative $2 million as interest income declined. Non-GAAP net loss for the December quarter was $25.4 million or $0.10 per diluted share based on 263.4 million basic shares. GAAP loss was $49.4 million or $0.19 per diluted share.

Now I'm going to the balance sheet. Cash flow from operations was a strong $29.4 million compared to $45.7 million last quarter. Total cash and short term investments increased $28.3 million to $266.5 million. During the quarter, RFMD repurchased approximately $22 million par value of outstanding $214 million convertible debt.

In addition, RFMD received approximately $13 million in cash related to option rate security holdings. During the past three quarters, RFMD has generated approximately $86 million in free cash flow. In addition, net debt has decreased by approximately $125 million.

Net accounts receivable was $90.2 million with DSO's of 47.6 days. The increase in DSO's reflects how strong the month of March was for shipments. RFMD's inventory declined approximately $38 million to $113.6 million from $151.3 million in the December quarter. During the March quarter, finished goods inventory declined by 48.2% sequentially and inventory turns were five.

Net PP&E was $315.1 million compared to $337.8 million last quarter. The decline in PP&E was mainly caused by the impairment of wafer fab facilities. CapEx during the quarter was approximately $4 million with depreciation and amortization of $25.7 million.

Now for the business outlook and some comments to assist you in modeling the June quarter. RFMD is currently booked for growth and we currently anticipate RFMD's total revenue will outpace the sequential growth rate of our end markets. Because of improved demand, RFMD has aggressively increased factory utilization rates in our six inch fabs.

At the same time, by idling our less efficient four inch facility, we have reduced our total gas capacity by only 10% while reducing manufacturing overhead by a much higher percentage. These factors coupled with proliferation of new product cycles are expected to result in significant margin expansion beginning in the June quarter and continuing throughout fiscal year '10.

Operating expenses on a quarterly basis are expected to remain consistent with March levels throughout fiscal year '10. Cash taxes are projected to be approximately $3 million in the June quarter and should be consistent or up slightly as the year progresses. We currently expect RFMD will achieve approximately break even profitability in the June quarter.

Regarding the balance sheet, we currently expect cash will increase in the June quarter. Inventory dollars should remain consistent with March levels, returns improving. CapEx during the June quarter should be less than $5 million.

In the June quarter, we should get a good start on delivering the $80 million to $120 million of free cash flow we were forecasting for fiscal year '10. And with that, I'll open the call up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Timothy Luke – Barclays Capital.

Timothy Luke – Barclays Capital

I was wondering, in characterizing your growth going forward as being above market rates is you had a range of growth that you would expect for the market as you look into the calendar second quarter. I was also wondering in characterizing and describing growth in the June period if you could give a sense of whether you expect the growth to be outpaced in the handset area over the MPG area or whether you would expect broadly similar rates. And then lastly in describing the improvement could you give us a sense of where you see that improvement being most pronounced in terms of the mix either in terms of the range of the portfolio or maybe just regionally. Is it for example China?

Robert Bruggeworth

I'll address the beginning of your question then I'll ask Eric Creviston to speak to the cellular where we're seeing the strength then Bob Van Buskirk on the MPG side.

First I'll start off, we're expecting both our businesses to grow in the June quarter and as far as end markets go, I think several of our customers have said they expect the handset market to grow a few percentage points so let's call it somewhere between 0% and 5%. I'll let Eric talk about where we are seeing strength in the cellular business.

Eric Creviston

I guess the key point is we saw a clear inflection point about midway through the March quarter in terms of demand at the component level, demand for our products directly which implies that the excess inventory in the channel had been taken down to a level where you're beginning to see the balance there. And I think that's really the key point.

When we look at our growth in the June quarter, it's not even dependant upon end market growth there necessarily as we see component pulls begin to get equalized or normalized as we said to the end market levels.

Now specifically where we are seeing strength is our portfolio and I think it kind of tracks the end market as well is both in the higher tier sequentially in 3G quarter over quarter and also in the mass market phones as well. We also grew sequentially with our GSM transit modules in the quarter as well with our top customers and overall in that portfolio.

So I think you're beginning to see just continued bifurcation in the market with the mass market growth and the smart phones driving the 3G and multi end category.

Robert Van Buskirk

In MPG, some of the end markets that we're expecting to grow with the 3G infrastructure led by what's going on in China of course through a legacy of MPG business, we've been selling to Lawry and GTE for many, many years over there and of course also to people like Erickson and Nokia Siemens.

Kind of a shining star growth for us just coming on the horizon is in as Bob mentioned in his prepared comments is the automated meter reading area. We are seeing some nice traction there and some accelerating in business into the June quarter. Also in WiFi applications both in access points and hand sets and we also see our catalogue business coming back a bit in the June quarter.

In defense and point-to-point, they're kind of holding their own quarter to quarter, but that's kind of the landscape.

Timothy Luke – Barclays Capital

As you see your utilization come back, I think you talked about how the lower utilization had a 10 point impact on the gross margin. As we see it come back, do you think you could see the return of that double digit difference come back in the June quarter?

William A. Priddy Jr.

I think that's very well in the realm of possibilities just to get utilization grades back to more historical averages should provide about that kind of uplift. I think we're looking for other things though to assist in gross margin. As we mentioned, the idling of our four inch wafer fab and steps that we've taken in the U.K. and then a little later in the year, the consolidation of our Shanghai assembly into Beijing so all the things are kind of combining with the reduced die string technology and new product cycles to create a very healthy environment for margin expansion.


Your next question comes from Ottai Kidron – Oppenheimer.

Ottai Kidron – Oppenheimer

I wanted to dig in a little deeper into your gross margin comments and also tie them to what Bob said that you're looking now at 40% as kind of a longer term gross margin target. It's been more than three years since you've managed to get your gross margin above 33%. What is your level of confidence that you'll be able to get above that level sometime in the fiscal '10 time frame. And the second question related to that would be what is the, nothing is easy but what would you call a low hanging fluid gross margin you can get to fairly quickly versus what is the level of gross margin increments that will just take a long time to get to in your pursuit of 40%.

William A. Priddy Jr.

Could you clarify the first part of your question? What level did you say?

Ottai Kidron – Oppenheimer

The last two or three years your gross margin has peaked around 33%. Is there a chance we'll see more than that over the next four quarters within the fiscal '10 time frame?

William A. Priddy Jr.

If you go back to fiscal year '07 and the fourth quarter and third quarter we did 36.1% and 35.7% respectively, and 40% has been our target gross margin for quite awhile now. It's just we believe more strongly in our ability to converge on the model given the steps that we've taken and the supply chain that I just outlined.

Plus gross margin is definitely a by-product of new product cycles and with all the new products that we released and the traction that we're getting there and the fact that our portfolio will represent probably 35% of our revenue will be on the reduced die sized technology in the next two to three to four quarters.

We definitely are much more constructive on converging on our long term model as the year progresses. So something in the mid 30's we have publicly stated that we feel is definitely achievable this fiscal year and we certainly wouldn't rule out converging on our model in the four to six quarter type planning horizon.

However, one again, it does depend on the rate and pace of getting the new products into production because the other things, the supply chain action, the idling the four inch facility, what we've done in the U.K. and also by the December quarter the consolidation of Beijing will be behind us.

We see a richer mix of MPG revenue which has an inherently higher margin and can also provide a lift to margins as the year progresses.

Ottai Kidron – Oppenheimer

On the optics side, how far can you ramp revenue without having the need to raise OpEx?

William A. Priddy Jr.

We can easily achieve our target operating model which if we stay in the mid 50/s that would imply $220 million of revenue to get to 25% of sales. So that is very, very achievable with the current business model.


Your next question comes from Mark McKechnie – Broadpoint Amtech.

Mark McKechnie – Broadpoint Amtech

I wanted to ask do you break out your mix for the Polaris 3 and how do we model that going forward and did that have an impact on the gross margin this quarter?

William A. Priddy Jr.

If anything it negatively impacted gross margin because the gross margins there are well below company averages and even below the reported number that we had for the company this quarter. As far as revenue, we don't typically break that out specifically because of customer related considerations.

However going forward we expect unity will continue to be a revenue driver for the company. In terms of profitability we'll have a positive impact but not substantial. For instance if you were doing roughly $20 million a quarter in revenue there, something in the mid teens of gross margin you can see that from a profitability standpoint, you burden that with corporate expenses, it wouldn't be that much.

It does have a slightly favorable impact on cash flow but it is a program that we're definitely going to continue to support the customer and it's actually a program that continues to have legs with new products being introduced just this quarter.

Mark McKechnie – Broadpoint Amtech

In the handset space any material changes in your top customer mix this quarter? Maybe you could talk about where you think you might be gaining some share and also I think you announced a smart phone design win for switches earlier in the quarter, and I don't know if you could give us an update on that.

Eric Creviston

We mentioned sequential growth in 3G and also in the low tiers I mentioned with both Nokia and Samsung. I think we are pretty confident in our strategy in terms of holding our position at Nokia while growing beyond Nokia and diversifying our customer base.

As you know we've been talking a lot about this. The new product portfolio we're launching is heavily biased towards that goal of achieving customer diversification and we're doing it on those two axis. The product portfolio is really well timed in terms of what's going on in the industry because a lot of new products in 3G that are also targeting to open market or non Nokia customers and platforms, and also in the GSM transit modules in greater China, the alignment that we announced with Idiotech is really taking hold.

We couldn't be happier with the traction there in terms of design win traction and actual production traction as well ramping this quarter. So I think both that low tier and the high tier is where we're growing right now.

Mark McKechnie – Broadpoint Amtech

On the China 3G build any status update on that? It sounds like that helped you here in March. You're looking at it helping you in June. Any sign of a pause or is that going to be full guns blazing throughout the year.

Robert M. Van Buskirk

I read recently some reports where people are posturing that it could in fact peak in calendar '09 and tail off in 2010 but then I went back and researched the leading customer there, China Mobile and they indicated that they're going to spend $19 billion or $20 billion on infrastructure, the majority of which is on 3G in each calendar year '09 and calendar '10. So we expect that it will have legs.

It has been a little bit choppy because it's our indication that the competitive bidding has been fierce and city by city and region by region which is putting a premium on flexible and agile behavior in your supply chain in order to respond to the customers I think we're doing a pretty good job there.

I haven't really seen any abatement in the orders other than getting through the Lunar New Year and all that sort of thing but I expect it will be on balance strong throughout calendar '09 although there will be little bits of demand and pauses as is typical in that region.


Your next question comes from Uche Orji – UBS.

Uche Orji – UBS

Let me be sure I understand your booking and your description of your outlook. Can you just talk to me about what the backlog coverage is or better if you can tell what the book to bill was and also in terms of the delta in utilization rate, what was that in the last quarter? You described it as unusually low but is there any way for us to get a sense of what is supporting the gross margin driver improvement that you guided to?

Robert Bruggeworth

What we commented on about our bookings is we are currently booked for growth so we've already got coverage to grow this quarter and yet several of our businesses do usually enjoy some drop in business. But we are currently as you said, covered for growth.

As far as the book to bill goes, we don't normally report that so we're not going to do it right now. All I can tell you is we're enjoying a pretty good demand environment right now and we all hope it holds.

William A. Priddy Jr.

Utilization rates for the quarter were in the 25% range so they were very abnormally low compared to historical averages. And now they're trending back closer to the 65% to 70% type range. That would be enough to provide a very meaningful uplift in our gross margin structure because of reduced costs.

Uche Orji – UBS

Let me ask about the foundry business model. How are you going to first of all report this in terms of revenue specifically how are you going to balance the fact that you are going to be essentially competing with your customers? You have your own business and you're running a foundry. Is there any way to believe this would be [inaudible]?

Robert M. Van Buskirk

I think there is a competitor in our space, TriQuint that really is the proof of concept here. They've had a very viable foundry business for years and years along side a product business. So I personally had some experience doing that from a prior life way back in the micro electronics businesses that I supported inside of a company called TRW.

So I believe it can be done. I know it can be done in fact, and we're setting out to do it. We'll talk about signposts or mileposts along the way. When the revenue gets material then obviously we'll talk about it but until that point I think we can talk about key or significant milestones that we achieve and you'll get a sense for how we're progressing.

Uche Orji – UBS

Within the European customer and CPG at Nokia we've seen the addition of the [inaudible] platform. Can you speak to how you're positioned with all the suppliers now into Nokia and essentially if you can just talk about your competitive positioning? Are you able to hold onto market share with all that happening within that customer base?

Robert M. Van Buskirk

Obviously it's an intense competitive environment there. However we've been number one there for a long time and we're used to the competitive pressure. We still are very dedicated to taking care of Nokia. We've got other product resources on it and we're pleased with our positioning there.

In 3G like you said, we're continuing to see growth. We're holding on. We're in the right products that are ramping throughout this year so we're pleased with our share there. And as we commented on the call last quarter, we believe that we're a clear share gainer in GSN there in this quarter and last quarter and into this year. So those are filling in nicely now.

And edge there, of course we're supporting the complete radio system and as Dean indicated our solution there of Polaris 3, our unity solution is continuing to get new business there. Actually I think that's all we can say. We expect new handsets to continue to launch on our edge platform.


Your next question comes from Harsh Kumar – Morgan Keegan.

Harsh Kumar – Morgan Keegan

Not to get too picky here but could you talk a little bit about the way the quarter ended. Did you see increased momentum at the end of March and perhaps so far in the month of April?

William A. Priddy Jr.

I think our DSO's is as much of an indication of momentum of the way the quarter tracked of anything. Historically our DSO's track somewhere in the low 30's to mid to upper 30's and they actually peaked a bit. It wasn't because customers weren't paying their bills. It's because shipments came in so rapidly through the month of March. So I think that's a testament to the strength of what we were seeing during the last month of the quarter and that momentum has carried into the June quarter.

Harsh Kumar – Morgan Keegan

I think you might have talked around this a little bit earlier. To get to the 40 odd percent gross margin that you're goal is set at is there a top line number that we can think of that it takes for you to get there given your current cost structure?

William A. Priddy Jr.

I know some companies throw out very specific top line numbers to achieve target gross margin models but in reality it depends on many factors like utilization rates and product mix and so forth. As I mentioned, it's very important for us to get a richer mix of the new products that are being released that have an inherently higher gross margins; those in MPG and CPG.

But I'll throw out a number of $220 million as the number that would achieve our expense model if you will, 25% of sales. Suffice it to say with the actions that we've taken in the supply chain in idling our four inch facility and transitioning all production to six inch, plus what we're doing in Shanghai, and some other actions combined with the new product cycles, that type of revenue will go a long way to get you to that type of gross margin.

Harsh Kumar – Morgan Keegan

What kind of cash do you need for your working capital on a quarterly basis and what are your plans for any extra cash now that you're getting a pretty healthy cash flow?

William A. Priddy Jr.

The plans for the cash, be very happy to generate cash, put it on the balance sheet and as our bonds reach maturity if they don't convert, then we'll simply pay the bonds off. Now if we can opportunistically repurchase bonds on the open market, I also wouldn't rule that out.

If we happen to see our share price get unusually attractive and we had excess cash, then that's always a possibility for the company. However I think I would rate that third on the list.

In terms of how much cash would it take, it depends on how steep the revenue ramp is. As you know, revenue and growing revenue is the first approximation of future cash flow so we'd like to really be chasing a steep revenue ramp. But something somewhere in the $50 million to $75 million range of cash is definitely sufficient to support any type of revenue ramp that we see and run the business.


Your next question comes from Edward Snyder – Charter Equity Research.

Edward Snyder – Charter Equity Research

ASP pressure, a lot more competition in Nokia than we've seen in the past [inaudible] gaining some share here and obviously gotten a little more traction back. Are you seeing any impact to the ASP's that would be abnormal? And onto the P3, you mentioned you're gaining ground with a major customer, I'm assuming it's a major customer, but the more you gain with P3, the more pressure on margins.

Are you able to hit your gross margin mix if P3 continues to remain strong longer than you expected into next year? And finally, would you be founding anything six inch, four inch, any product or are you going to focus in one area?

Eric Creviston

In terms of price pressure, so far at least we can reiterate what we said on the last call which is continuing to see historical norms in terms of price pressure. Truly nothing out of the ordinary, no irrational pricing across the industry really in all sectors. It's a bit surprising given the environment but I think basically what happened is the end environment eroded so rapidly and so publicly and clearly, I think all the competition knew that pricing wouldn't get you the business back. So we really haven't seen anything out of the ordinary there.

The question about Polaris, I used the word gaining ground and maybe that's a difference in perception. I don't think we're gaining ground with Polaris at our lead customer as much as we continue to get new business which will prolong the production life. We still don't expect it to increase from where it is today in terms of absolute dollars so we expect it will decrease as a percentage of revenue kind of gradually. This new business just continues the life and that's really the impact of that.

Robert M. Van Buskirk

On the foundry question I want to make it clear if we didn't, we're offering gallium nitride foundry services only, not access to our other gallium arsenide technology, although as Bob indicated with our partnership that's where we're actually exploring a manufacturing partnership with industries where we can move PV cell production forward. But right now the foundry services we're offering is gallium nitride only.

Edward Snyder – Charter Equity Research

Can you expand on what you did there? If P3 continues, extends its life, would you be able to achieve 40% gross margins even at a higher revenue run rate level? I know it all depends on the actual numbers you're talking about here, but as long as P3 continues to be a significant mix of your revenue, you mentioned it was below recorded margins now. It doesn't seem likely that you're going to see much of a change of hitting 40% on gross margins.

William A. Priddy Jr.

Any guidance that we have given on gross margin and improvement in gross margin factors in what we believe to be the lifetime revenue and margin structure of P3 so that is, we expect significant margin expansion even with the continuation of a nice healthy P3 business that does have lower margin structure.

I think it speaks to the margin structure, the products in MPG and the front end products at CPG that are going into production today and also again the supply chain actions that have already taken place.


Your next question comes from Neil for Stephen Ferranti – Stephens Inc.

Neil for Stephen Ferranti – Stephens Inc.

What would you estimate your revenue contribution is as a percentage of total revenue and how do you expect that ratio to change over the next couple of years.

Eric Creviston

We traditionally run, we define a new product in the period as a product that has no production revenue coming into the period so you can measure it lots of ways. In a typical fiscal year, we'll have between 15% to 25% revenue contributions that don't have revenue entering that period. However in this upcoming fiscal year that we've just begun, we're actually forecasting that it will be above 30% and as Dean said, as high as 35% by the end of the year contribution from new products.

So again, we think that's a good indication of how quickly we can proliferate these lower cost products through the portfolio.

Robert Bruggeworth

Coincidentally we released a lot more products. They just don't have the same scale but as a percent it actually comes back to something roughly close to that in the 20% to 25% range.

Neil for Stephen Ferranti – Stephens Inc.

Going back to the June quarter gross margins for a moment, it sounds like capacity utilization rates are well on their way back to returning to historical levels. You've already completed a number of previously discussed cost saving initiatives. Is it fair to state that a 10% increase in gross margins in June should be a low end of our book end gross margin target?

William A. Priddy Jr.

Without giving specific guidance I think we internally would be disappointed with any thing, certainly disappointed with anything less than that.


Your next question comes from Todd Kaufman – Raymond James.

Todd Kaufman – Raymond James

Just a follow up to Ed Snyder's question, in CPG it seems as though the competitive landscape is sort of converging on two or three players. Do you think that's a fair assessment or is it just as price competitive as it ever was three or four years ago?

William A. Priddy Jr.

I think it's a pretty fair assessment for the entire marketplace really. I think we are seeing some kind of defect to consolidation where the scale players have real advantages now. I think a real differentiation is the broad portfolio as R&D resources are cut both at the platform provider as well as the handset manufacturers.

They need to work with a supplier that can provide everything they need across all tier and standards and so I think the scale players really have a big advantage there.


Your next question comes from Aalok Shaw – D. A. Davidson & Co.

Aalok Shaw – D. A. Davidson & Co.

Did you mention the 10% customers? I might have missed that.

William A. Priddy Jr.

No. Nokia was the 10% customer for the entire company for the quarter.

Aalok Shaw – D. A. Davidson & Co.

On the June quarter guidance, I know you said you expect CPG to grow faster than the market and you indicated maybe there's some channel inventory and restocking that's going on to help that, but beyond the June quarter do you expect then to grow along the lines of the industry? How should we be thinking about the competitive market for you as we exit this down period that we're in right now?

Robert Bruggeworth

I want to first address the restocking comment. What we believe is going on is we're now a little more synchronized between when a component is built and a component is bought. So we don't quite see it as an inventory restocking. We see it more matching what is actually being sold. That's what we see going on.

The second part of the question was?

Aalok Shaw – D. A. Davidson & Co.

As we get past the June quarter then do you expect to grow faster than the market and give me a sense of where you think you can go. Is it just share gains at that point or is there anything else that might be happening as well?

Robert Bruggeworth

Clearly as we pointed out, we believe there are some share gains that are going on but the other thing that is going on is the new products that we're bringing out to expand our dollar content per handset. That's another thing to keep in mind that will enable us to grow faster than the market and we talked about some of our switches and L&A's and other components to help drive the footprint expansion.

Then you also couple that with wide band may be becoming a larger percentage of the total handset market which also has a higher dollar content than a GSN phone. So there's a multiple ways that we can grow faster than the market in the cellular business.

And clearly in MPG, a lot of that growth has to do with market share gains in some markets that quite honestly we have very small positions driven by the number of new products that Bob and his team are releasing into the market.


Your next question comes from Michael Burton – ThinkEquity.

Michael Burton – ThinkEquity

Can you give us a range of what percent of revenues MPG is versus CPG and how we should expect that to trend over this calendar year given the seasonality for CPG and then also what percentage of sales is 3G right now?

William A. Priddy Jr.

The range is still roughly in the 25%/75% split. It may vary by a couple of points in any given quarter and like we said we may see a little heftier growth out of CPG in the June quarter because of some of the dynamics that Bob and Eric have already covered.

The percentage of 3G, it depends on how you want to define 3G. If you take what we believe to be our 3G business plus any component that goes into a 3G handset, you're probably pushing 50% or so of CPG sales.

Michael Burton – ThinkEquity

You're talking about matching closer to demand beginning with the June quarter, given your customer forecast can you talk a little bit about the seasonality that you're expecting and given where utilization rates are now, will that require you to bring back some more capacity in the second half and how difficult would it be to bring back that capacity on line in terms of additional CapEx.

Robert Bruggeworth

It will be very easy to add back people at our U.K. facility to ramp back to capacity. The first part of your question is what are we seeing for customer forecasts, you've heard it from all our customers. I don't think we need to comment on it and I think right now leaning too far forward and really commenting on anything past June is pure speculation at this time.

What I can tell you is we have our hands tightly on the controls and as we needed to ramp in March which we did as Dean pointed out, we captured it. Our cycle time was down in the teens, 16 to 18 days to respond to our customers and the organization is ready to responds.

So if there is normal seasonality that would be fantastic for the industry and absolutely fantastic for RFMD.


Your next question comes from [Banc Nothomooney – J.P. Morgan]

[Banc Nothomooney – J.P. Morgan]

You talked about inventory stocking with demand coming back. Do you believe that given the increase of inventory levels in the March quarter that inventory levels both at RFMD and the supply chain are at appropriate levels or is there some more rebuilding to be done?

Robert Bruggeworth

Let me comment on the large majority of our CPG business is on hubs so we actually see what's being built and it's pulled from the shelves on components so there's no real restocking in a lot of that business between us and our customers. And our comments are that what we believe is going on in the industry is there have been reduction in channel inventories of various customers, some more than others.

Net net for the industry, we think that's at a reasonable level. That doesn't mean that some customers may have problems and some may be running a little bit lean but when you put it all together we think its okay.

So is there some restocking going on? Yes, we could be seeing some of that in customers that are not in hubs but again that's not a large percentage of our business and the best intelligence that we can get from the industry, it doesn't appear that there's a build up of our components nor a build up of handsets.

William A. Priddy Jr.

I think one of the point that Bob made it's kind of one of the basics that we're looking at is our peak to trough revenue declined 25% from the September quarter to the March quarter and some would argue that maybe September was running a little hot so maybe that's a little bit overstated.

But if you get back to assuming that our market share is just flat and we're not even gaining market share which we think we will, then as the year progresses and the cellular industry is down around the 10% that some of our customers and others are claiming that it will be then there would have to be a natural uplift in our revenue just to make that equation close.

So there almost has to be some improvement in demand at some time during the calendar year and we say we're already booked for growth in June, and then looking out beyond that, I think the question, what's your assumption of what the cellular industry is going to do and then you can begin making some high level extrapolations and potentially what RFMD's revenue can do at least with CPG and then you can do your modeling within MPG.

[Banc Nothomooney – J.P. Morgan]

Earlier you commented on expecting CPG to grow between 0% and 5% without giving actual specific guidance. Is it safe to assume that MPG will grow slightly slower than that in the June quarter or about the same?

Robert Bruggeworth

I'd like to clarify my comments. What I said was the handset market will grow 0% to 5%. We expect to grow significantly faster than that.

[Banc Nothomooney – J.P. Morgan]

What about the MPG side of the business?

Robert Bruggeworth

Same comments.

[Banc Nothomooney – J.P. Morgan]

On the balance sheet, were there any inventory write downs in the current quarter?

William A. Priddy Jr.

No there were not.


Your next question comes from Nathan Johnson – Pacific Crest Securities.

Nathan Johnson – Pacific Crest Securities

I was wondering if we could come back to the comment on meter reading. Competitors Sky Works indicated on their call that smart grid related revenue could eventually account for as much as double their percentage of their revenue and you highlighted AMR in your press release and in your prepared comments. I was wondering if you had a similar view of the market and if you think that could be a 10% business and at least MPG and in what time frame.

Robert Bruggeworth

It is a market that RFMD decided to take the wraps off of it. It is a big market. There's something on the order of 2,5 billion meters world wide and something on the order of only 5% of them have become automated so there's a significant amount of growth there.

We've been in this business for awhile and again as I said, we've just now decided to go a little bit more public with it. We actually have nine different AMR customers spread between electric meters, gas meters and water meters. We actually sell to three of the top five in the electric space, two of the top three in the gas space and five of the top six in the water space.

Revenue for us, I can give you a range. It's kind of mid single digits in terms of millions. We actually have one customer along this year that could exceed all of which we did in calendar '09 in terms of revenue and we could easily see the revenue double or triple for us in the FY10 time frame.

So I think we would echo Sky Works enthusiasm for the market and I think definitely, easily it could be a 10% contributor to EPG probably within the next two to three years.

Nathan Johnson – Pacific Crest Securities

You've obviously made a lot of progress on your net debt. I was wondering if you could outline how much is left outstanding at each of the maturities dates.

William A. Priddy Jr.

A total of about $550 million. There's a little over $200 million in 2010. I think there's about $200 million of the 2012 and the balance would be the 2014.


There are no further questions at this time.

Robert Bruggeworth

Thank you for joining us. RFMD is benefiting today from the actions we took to reduce manufacturing costs and we expect incremental benefits beginning in the June quarter and throughout fiscal 2010. With the idling of our four inch fab, the consolidation of our Shanghai test and assembly facility, the proliferation of our die shrink technology, the increasing uptake of our new products in the open market, improving utilization rates of our six inch fabs.

We thank you for joining us and we look forward to you our progress throughout the quarter.

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.


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