Steven Buhaly - Chief Financial Officer
Frank Teller - Barclays
TriQuint Semiconductor (TQNT) Barclays Global Technology, Media and Telecommunications Conference Call May 23, 2013 9:00 AM ET
Frank Teller - Barclays
Good morning, everyone. Thanks for joining us for Day 2 of the Barclays conference. My name is Frank Teller. I work with Blayne Curtis. Thanks for joining us today. It is my pleasure to introduce the CFO of TriQuint, Steven Buhaly. He will walk us through his presentation here. They have got a very exciting outlook for the second half of this calendar year. So we would be interested in what Steve can provide us since the most recent earnings call. So, he will present and then we will have time for Q&A afterward. Then we will head to the breakout.
So thank you very much. Steve? Thank you.
Thank you, Frank, and thanks to everybody here for their interest. It is good to be here. I am a Steve Buhaly with TriQuint Semiconductor. First, I will present the exciting safe harbor statement. It says that I am going to be speculating about the future. I will probably be wrong on certain accounts and please be advised of that. Although, I will give you my best forecast possible.
TriQuint is a technology leader in the RF space with a broad technology and product portfolio and expertise in both active and passive components, or said otherwise, amplifiers and filters. We are an innovation and integration leader. We have the privilege of serving a large and growing market. The wireless communications market is, for us, roughly $8 billion in size and growing at a rate of 10% to 15% per year.
We have significant financial leverage, primarily due to excess capacity in our fabs. We see a roughly 50% operating margin fall through on incremental revenue as utilization improves, and we enjoy a strong balance sheet, just under (inaudible) in cash, no debt.
I am going to roll through our three primary markets, mobile devices, which is driven by the proliferation of smartphones primarily and wireless devices in general, network infrastructure being driven by the explosion in demand for data and defense where advancement in radar and communications systems are key issues.
Starting with our largest market, mobile devices. This market is roughly $6 billion in size driven by continued growth in smartphones and other connected devices such as tablets. 4G or LTE and Wi-Fi are driving content expansion per phone and the industry is moving over time to broadband PAs, maintaining a balance between multiple frequencies served by PA and the power efficiency of that PA and there is a balancing point between those two. Then premium filter content is growing faster. There is still a requirement of one filter per band on the filter side unlike that in the PA space.
TriQuint's mobile devices solutions are helping to drive next-generation wireless communications. Higher performance, smaller size and flexibility are key drivers for customer value. Of course, lowering overall cost for customers is always a perennial objective. We are an integration expert. We have the RF industry's broadest technology portfolio combining both filters and amplifiers, often in to small thin packages for our customers using technology such as CuFlip and Wafer Level Packaging.
One of the more recent demands for size is really the Z-axis or a height requirement now as our customers get increasingly focused on providing customers with very thin cellular devices. At the bottom of the slide, you can see our top customers, Foxconn has been our only 10% customer for the last few quarters with Samsung, HTC, Sony, Motorola, ZTE, Huawei amongst the others.
We are one of the few suppliers with the ability to provide complete RF solutions to our customers combining high-efficiency amplifiers, versatile multimode PAs and high-performance filters for a single customer on a single device. As you can see from this stylized image, there is a variety of BAW filters sometimes used a coexist filter, sometimes for specific frequencies that require it, Wi-Fi and regular MMPAs serving multiple frequencies.
Dual band applications fuel WiLAN growth. Most smartphones now serve both the 5 GHz and the 2.4 GHz frequencies. We do expect that AC or of multiple-in multiple-out type devices will be shipping in volume by 2015 and maybe next year. Though wireless LAN SAM is growing at about 24% a year driven first by the dual band and then second by the emergence of AC into volume applications.
One of the real strengths that TriQuint has, is we produce probably the broadest variety of filters and filtering technology in the industry. With SAW being the older technology that is at the low-end commoditized, at the high-end still has some design value in their pricing power. Temperature Compensated SAW or TC SAW which is a premium filter application. Then BAW, our bulk acoustic wave filters where we are one of only two suppliers.
As you move from left to right, you have frequencies that tend to be in more crowded parts of the spectrum and you have higher frequencies in general. Moving up the graph is complexity. So you can see the map we have of different frequencies. Band 7, for example, is the band used in Europe to support LTE. That’s a BAW filter requiring frequency. If you are in the middle, Band 20, Band 26, we think those are best served by TC SAW and then you have your traditional filters down in the lower left part of the graph.
Many of our competitors produce maybe only one of these technologies and for them any band they will attempt to serve with that existing technology or they will not be able to participate. In our case, as a provider of all three, we are able to really select the best fit for a given frequency and design on that process. So we see significant opportunities with the emergence of LTE for our filtering business. The good news there is that filter win often translates in to additional content as manufacturers of these complex phones do require integrated solutions.
Taking a shot at the market size for premium filters is difficult, it is speculative and this is probably one of the areas where the safe harbor statement is right on the money. There is no real external research to gauge this. So we are making our best shot. But specialty filters look like they are over $500 million a year business today, growing rather rapidly driven by LTE and the coexistence applications. We think the CAGR for TC SAW and BAW which we call premium filters probably is about 30% a year over the three years here. SAW filters, on the other hand, substantially less driven more by simply the volume of smartphones out in the marketplace.
I will move now to our network infrastructure business. Starting with base stations. Base stations is a fairly large but rather slow-growing market. It is estimated to grow around 2% a year. Our solutions have high linearity and power efficiency. We provide them in a multichip module capability with a broad range of products supporting this group. We acquired a company called WJ Communications about four years ago now that added substantial content and breadth to this portfolio. Key customers, for us, are Huawei, Ericsson, ALU and Nokia Siemens Networks.
This slide shows the breadth of the product portfolio that we provide for the base station market, ranging from LNAs or low noise amplifiers to transmitters, power amplifiers and receivers. This is a business the runs in fits and starts driven primarily by carrier capital spending but we do expect some opportunities as LTE capabilities are rolled out throughout the world.
The other thing going on the base station market is the emergence of small cells. I would say that’s an area that is emerging versus has emerged. The biggest issue there appears to be getting the data traffic from the small cell in to the network and that’s slowing down the emergence of this approach, but we do see opportunities there over time with RF integration, high-efficiency, low-cost, all serving the small cell opportunity.
Moving now to our transport segment. This is really all about data traffic. We see about a 9% growth per year in this market, relatively small between $400 million and $500 million today, growing at just under 10% a year. This is an area where differentiated products really make a difference both in performance and in reliability. Reliability standards in this business are close to the defense standards. We serve optical, cable, point-to-point radio and VSAT solutions. We are leader in both 40G and 100G optical drivers. Outside surveys indicate that the 40G market maybe starting to peak in terms of unit volume and that we will see the beginnings of a transition to 100G and higher value applications which will probably pick up speed in 2014. Similar set of top customers here, Huawei, Ericsson, Alcatel-Lucent, Ciena, and others.
Again, we produce a wide variety of products for the transport market. Optical networks is the largest revenue portion of that for us. So I will highlight that. Amplifiers, dual channel amps, control products, and then TIAs which we recently introduced five new products for. The driver for transportation and our transport infrastructure is all about traffic growth which Cisco has estimated at 72% a year and that’s driving the demand for network capacity, both for metro and long haul networks. Of course, there is always a new generation and in this case 200G that is the starting to come out of the lab and is in the very, very early days of sampling. TriQuint's performance leadership and broad product portfolio address these key needs.
Now moving to our smallest area, defense. This is typically about 10% to 15% of our revenue depending on the level of revenue elsewhere in the business. This is really all about connecting the next generation battlefield and space. We provide superior performing packaged RF. We have comprehensive gallium nitride and gallium arsenide foundry. It is a trusted foundry in the vernacular of the Defense Department, meaning we have passed a variety of security and quality screenings to qualify as a trusted provider. We are a gallium nitrate innovator and a leader in government funded and industry focused R&D programs.
This area is a great example of technology that we learn and develop in a high-value application in the defense market and over time are able to productize it, make it more efficient, bring it into your network infrastructure business. We are beginning that now in the cable market of networks. Then, in a long period of time, measured in a number of years maybe 10, that same technology will make its way into the mobile device market where the power density of gallium nitride can pay real dividends.
This is terrific portfolio for us and it allows us to develop these technologies with a willing partner who will pay extra for a premium performance. We produce a wide variety of products for this market. The largest piece of our business by far is airborne radar where we have been providing solutions to prime customers such as Raytheon, Lockheed for many years.
Well, while there is concern about government cutbacks in this area, we not had any real impact in our business and don’t expect to see any. Advancing intelligence, surveillance and reconnaissance solutions is a high priority for the military and to the extent that new programs are curtailed we expect to see substantial demand to upgrade the electronics and the radar systems of existing fighters.
We are working beyond that on next generation EW or electronic warfare systems, including jammers and countermeasures and navigation system enhancements and space qualified products. This slide shows a variety of programs that we participate in. From the F-22 to the Falcon to the F-35 Lightning program.
Gallium nitride is a very interesting process technology and it is really all about greater power density which allows you to either have more power output from same sized device or a much smaller sized device with equivalent power to gas. Smaller size, fewer parts, very efficient and we are producing these parts today. The 40W GaN switch and a modest variety of GaN parts are in the market today generating revenue. Exciting technology. We are still learning to build it efficiently but we are making very good progress and as noted earlier we have several DARPA and other government co-funded programs where we are jointly productizing and advancing state-of-the-art here.
Turning now to financial highlights. During the first quarter, which is been reported, we had $184 million in revenue. This is seasonally weak quarter for our mobile device business and $0.17 loss. Gross margins were low for two reasons. One is underutilization of our fabs, and second we did have a quality issue that cost us about $5 million in scrap in the quarter. That quality issue was confined to a very small number of customers and this represents the full financial impact. We did have about $5 million impact in the quarter.
Looking forward to the second quarter, guidance is given as of April 24 of $187.5 million in revenue, really $185 million to $190 million, better gross margins. Not good but better. An expected loss of $0.11.
Now moving on to our outlook for the full calendar year. We expect the second half to be significantly better and different character than the first-half. Specifically with respect to revenue we expect 2013 to be a growth year. Second half maybe 55% to 60% of the total. We do have some seasonality in mobile. I would say in typical year, the second half is more like 50% to 55%. This year, we think that it may be a little bit more than that.
Most design wins are locked in, say about four months before the customer's product begin shipping. Typically close to that for us. So we have won most, if not all design wins required, to hit the revenue expectations we have in the third quarter. Many of those are won for Q4 as well. Now design win volume is always uncertain. We are speculating there. Designs can slip and push revenue out to the right. Sometimes the phone just doesn’t sell as well as our customers expect. We make your own judgments on customer supply forecasts and try to assess those in the context of how their forecast have come out historically but that’s the variable in the equation that isn’t known until we get the business. But, by and large, the design wins are locked in for Q3 and many of them are set for Q4.
Now moving to net income. We expect a full-year profit overcoming the loss in the first half of the year. With respect to incremental revenue, we see a 50% fall through to gross margin due to utilization and mix. We think most of that fall through will come down to earnings as well. The 50% fall through in gross margin might be a little bit better depending on the level of growth we have in our higher margin areas. We have a strong balance sheet, with cash at the end of Q1 of $141 million and no debt on the books. The remaining balance sheet turns are pretty reasonable. DSO of 52 turns between the 4.2. We typically run between 4.0 and 5.0 there. The net book of $5.53 per share. I would note we have a $200 million revolver with no balance.
So, in summary, TriQuint has great exposure to high growth markets. Smartphones and tablets driving mobile device revenue growth and network expansion. The premium filter business is turning out to be a great market for us. Limited competition, a significant growth in demand with the emergence of 4G and pretty difficult products to build. So that’s becoming one of our favorite businesses.
We have the industry's broadest advanced technology portfolio, ranging from BAW filters gallium nitride to our innovative optical drivers. Revenue growth creates significant financial leverage. We have talked about that. Strong balance sheet. I will say, that strong balance sheet is allowing us to execute a buyback program this year. Those of you who follow us know that we bought back about $50 million of shares. In 2013, our board has elected to renew that authorization at a little bit higher level. We announced a plan to buy $75 million worth of the company shares back in the usual language from time to time as conditions permit with no obligation to do so but that’s our announcement and it’s a really intent. Its not a paper announcement. We think the stock has good value. We anticipate a strong second half. We have elected put some of our money where mouth is.
So with that, I will open up to questions.
Frank Teller - Barclays
Thanks very much. So one of the questions we have been asking most of the companies we have sent this week is, how are general market conditions working? Particularly in the comm space where you guys are exposed. Everybody has been talking quite a while about a stronger second half. How are things working from your perspective?
By comms you mean mobile devices?
Frank Teller - Barclays
Actually more meaning wireless networking and LTE and backhaul and such.
I would say its hard to separate a forecast from hope in the second half. That so much depends on Chinese government decisions in terms of rolling out the infrastructure is one key driver that’s a little uncertain. I am in the camp that says we will probably see some modest growth just due to anticipating the data traffic associated with LTE. So I do think there will be growth. I think its modest. I think its probably maybe high single digits. Maybe 10%.
Frank Teller - Barclays
Thanks. That’s very helpful. I guess kind of further on that, more to the mobile side of things. So with that rollout of LTE, BAW is obviously going to be much more in demand in the coming years. Is that still the timeline for that rollout off for BAW uptake still roughly in line? Have you seen that accelerate at all? What's your general perspective there?
Well, I think LTE is rolling out in the expected timeframe. Every phone company has its own schedule. I don’t want to comment on anybody's schedule in particular, but I think at an industry level, I think that LTE will be in a lot of Christmas stockings this year.
Frank Teller - Barclays
Thank you. On the second half, when you talked about it being typically larger anyway, and then on top of it perhaps even larger this year, is that a statement of the traditional volume growth? Is that a statement of content growth, share gains, like how do we think about the different factors that would contribute to whatever the back half may look like?
Yes, I think the biggest variable is probably content gain with the additional frequencies served by LTE, both on the filter and the amplifier side. Share gain is really tough to gauge in looking forward because we really don’t know who has got what. But I think content gain is just the fact, and that's going to shift the whole curve up a little bit in terms of RF content.
You talked about having visibility for Q3 and Q4 design wins. Is it that you are going to be very back end loaded in Q4 or do you think Q3 is going to be very strong starting in July?
I am speculating that Q4 will be stronger than Q3 but in a fairly typical way. So I think we will enjoy a sharper jump from Q2 to Q3 and more modest from Q3 to Q4. But I do think Q4 will be the strongest of the quarters. Much of that depends on timing and all that but typically for us Q4 is a bit stronger.
Hi, Steve. Your networks business and your defense and aerospace businesses are pretty fantastic businesses. They are pretty much supporting whatever profitability you have right now, I believe. I mean if you do the math. Have you thought about breaking out the profitability of those businesses to a greater degree to highlight the value of those businesses?
Yes, good question. We have looked at that. There is enough allocations of the shared fab capacity and other overhead that makes that breakout reasonably subjective. So instead we have given estimates of gross margins but we haven’t broken out the profits. We don’t segment report from an SEC perspective.
So, given your goal to reach profitability by the back half of the year, could you talk a little bit of what the main risks you see to that objective?
Sure. The main risk we don’t achieve the revenue that we expect. Given our under load in the fabs, topline revenue is really the driver of improved gross margins. I expect second half gross margins to be better than maybe 35% or better on average for the second half. That’s all about generating more activity and more revenue in the second half. So that risk is primarily in mobile devices side. That’s where we will have a little bit more volatility. I would say primary risks would amount to either program slips or phones that don’t sell as well as we and our customers expect.
So in that worst case scenario where revenue doesn’t pick up to where you are expecting, what are your plans to address such a type of scenario?
I would rather not get in to the contingent kind of exercise here but we do have plans. We talk about them and it would clearly roll those out in the undesirable case of lack of good revenue growth. Any further questions?
Frank Teller - Barclays
Could you talk a little bit more about what you are seeing in terms of defense? You said that it has been resilient, I guess, but do you see that beginning to pick up at all?
It’s a small and lumpy business. So its difficult to say much about quarter-to-quarter but I would say that its flat to 5% up.
Frank Teller - Barclays
Thank you. If there aren’t any other questions, we do have a break out that we will be walking to. So I will be walking up there with Steve and guess you will follow along.
Thank you for your interest in TriQuint.
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