TriQuint Semiconductor's CEO Presents at Bank of America Merrill Lynch (BAML) 2013 Global Technology Conference (Transcript)

Jun. 5.13 | About: Qorvo, Inc (QRVO)

TriQuint Semiconductor, Inc. (TQNT) Bank of America Merrill Lynch (BAML) 2013 Global Technology Conference June 5, 2013 4:45 PM ET

Executives

Ralph Quinsey - President & CEO

Analysts

Vivek Arya - Bank of America/Merrill Lynch

Vivek Arya - Bank of America/Merrill Lynch

To this session with TriQuint. I’m Vivek Arya, Semiconductor Analyst at BFA Merrill Lynch. An absolute pleasure to have Ralph Quinsey, the CEO of TriQuint Semiconductor and welcome Ralph.

Ralph Quinsey

Thank you, Vivek.

Vivek Arya - Bank of America/Merrill Lynch

And what we will do is, we will start with a quick overview and presentation from Ralph, then we will allow questions for 15-20 minutes and open up to the floor for the Q&A. With that, Ralph welcome.

Ralph Quinsey

Thanks, Vivek. So quickly before I start, I’d like to highlight that I could and possibly will be making some forward-looking statements. Actual results may vary from those statements and I would refer you to our SEC filings for more discussion on our risk factors.

When I step back, I look at the Company; I see a strong market, $8 billion addressable market, growing at a 10% to 15% rate, so it’s a very good time to be in the [indiscernible] business. As we go to market, we bring what we think is broad technology and broad product portfolio, broader than most of our competition, including the fact that we have expertise in both active and passive components. I think that’s a very important point of the story, particularly for mobile devices, particularly with the adoption of LTE, the expansion of LTE in the market today. I will talk more about that. We intend to position ourselves as an innovation or integration leader, taking the broad expertise that we have across multiple markets, deep understanding of RF and leveraging that across several markets.

Currently the results of the business are disappointing. We expect to see a significant ramp in revenue in the second half. I will talk more about that and we’re highly leveraged in our cell manufacturing base. So we drive about a 50% fall through on incremental revenue dollar and we manage a fairly tight ship on the balance sheet. Last quarter we had $141 million in cash, no debt moving forward.

Our major markets, we divide into three categories. Mobile devices, the largest part of our market; Network Infrastructure, which is really a collection of many smaller markets, we subcategorize that into base station and transport and then the Defense market, which is primarily focused on radar and communications. I will go through each of these markets and talk about them in little bit more detail.

In mobile devices, as I said, the larger opportunity about $6 billion of the $8 billion and the story of the adoption of smartphones and the expansion of smartphones is really what’s driving this market and now with the inclusion of 4G or LTE we’re seeing good uptick particularly for our filter business. Some of the trends in the market is some integration around the – some of the active parts of the market, broadband amplifiers are replacing many of the satellites into digital amplifiers. With the inclusion of a broadband amplifier though you will also add the content necessary to switch that between the filters or you add switch content. And like I said, the premium filter content is just growing much faster than the overall market and I will give you more details on that.

What we focus on in the business is high performance and adding value to our customers. As I said the markets growing at about a 10% to 15% rate, and we're also known as an innovation and integration leader in this space. Some examples of that are in the areas of what we do for Flip-Chip copper interconnect and Wafer Level Packaging. And I’ve listed here several of our larger customers in the mobile devices space we got fairly wide penetration in the space.

If you look at this graphic, it shows where the – where we show up in the phone board and what’s distinctive is five years ago, eight years ago basically it was a power amplifier and maybe a switch opportunity in 2G phone. Now you can see that there is multiple opportunities for highly integrated devices, we brought in Wi-Fi, two band Wi-Fi and MMPAs and so, a lot of opportunity. Our primary focus is on premium products in the space, its high efficiency amplifiers, which is virtual MMPAs, high performance filters, and high performance Wi-Fi.

When you look at the Wi-Fi, you can see that with 802.11ac we bring in a standard that is really well suited to support streaming video. And now that smartphones are really the primary access to the internet, we’re seeing more and more dual-band, both low-band and high-band opportunities. TriQuint focuses primarily on the high-band amplifiers and front-end modules of 5 GHz band for Wi-Fi.

This graphic shows the opportunities in the filtering space, primarily with duplexers, but also with what we call co-existent filters. If we look along the horizontal axis, it shows frequency from low frequency to high frequency and above the middle of our 2.4 GHz important because that’s where the low-band of Wi-Fi is and then the vertical axis shows complexity or difficulty of building filters. And then that chart is shaded in the lower left hand corner where the SAW opportunities are, low complexity, low frequency, moving into the more difficult products to build that require technologies beyond high volume commoditize SAW and those fall in the categories of advance SAW or temperature compensated SAW. It basically gives you a better capability to select a band or frequency without preventing bleed over into other bands and of course BAW that also for high frequency and for very high performance, very tightful activity to prevent bleed over into adjacent bands.

And LTE as it turns out has created a very crowded spectrum, particularly around 2.4, but a very crowded spectrum and there is a lot of demand for these very tight skirts and high selectivity. And you can see that although most of the volume is down in the lower left hand corner with the commodity bands at 1, 5 and 8, most of the opportunity for a company like TriQuint is with this expanding LTE opportunity. Commodity filters could sell in the range of $0.15, $0.18, as you move up chart in complexity and into the more advanced technology filters are will sell for $0.30, $0.50, $0.70 and up to and over a $1 depending upon the complexity of the filters.

So not only expanding content, more bands are being brought into the platform, but also expanding ASP because of the high performance and the value associated with these filters and it has a fairly limited amount of suppliers out there in the space that supply filters basically TriQuint is one of only two companies that can really support the high performance BAW sockets.

Just looking at the market quickly an overview, this is the total filter market on the right and then the very top part of the stacked chart the light blue is the premium filter market, largely BAW, but also includes a band SAW and you can see we believe that’s growing at 25% to 30% rate. Again, crowded spectrum is driving the requirement for these type of filters.

Moving now to the Infrastructure space, and as we said break that down into Base Station and Transport. I will talk about Base Station first. Slower growing market about a 2% compound annual growth rate over the next couple of years, about a $1 billion, -- $1 billion TAM for us. We focus on high-linearity and high-power efficiency. We’ve been quite successful in multi-chip module and we do offer a fairly broad product breadth in this space as well.

Again, I’ve listed some of the customers for this market. We have good penetration with all the major players in this market. And just graphically looking at where the opportunities are, where we offer a product, whether its tower mounted, in the receiver – transceiver cards or on the power side, both active and filter component. And where we’re really seeing good traction recently is with the integration of multiple technologies into multi-chip modules to service the needs of our customers.

Another opportunity in this area that’s growing is small cell. As networks get more crowded, particularly in high population areas, airports, urban centers, athletic events, the installation of small cell has been a great opportunity for TriQuint to leverage our technology into higher volume applications.

Looking now to Transport really smaller market, about $0.5 billion. Transport is just the market where you move data around the planet. Optical electronics for long-haul and metro, point-to-point radio, cable, fiber to the home, these are some of the markets that we put into Transport. And again, a list of the customers for those markets and then a graphic of where some products, whether its VSAT, point-to-point optical networks, cable to the home etcetera.

One thing that’s really driving the demand for this type of infrastructure as we bring more mobile devices, mobile connectivity online, we’re just dumping much – increasing amount of data into the network and that drives an upgrade cycle into the infrastructure where the old electronics is removed, the new electronics is put in across the same fiber network, if you will. That will create opportunity for TriQuint and what’s driving our business in optical so strong in the last several years is the first the long-haul transitions from 10 to 40 and now we expect it to transition to 100 gigabit per second, then it moves into metro and closer to the consumer.

Switching to Defense, in Defense we really bring a unique characteristic to the Defense industry. Again, listed our major customers largely North American, about a $0.5 billion TAM and we were focused on is just bringing a very distinctive competence in Gallium Arsenide and other Department of Defense type of services to this marketplace.

If you look across the marketplace, whether its radar, defense, and commercial satellite systems, navigation, communications or electronic warfare or space applications, TriQuint participate – we participate in this market both with products and as a services supplier as I said on the services supplier, we have a strategic relationship with this marketplace.

Our revenue is dominated by airborne radar. About half of our revenue comes from airborne radar and we do see a fairly long lifecycle – upgrade cycle for airborne radar, whether it is the new F-35 Lightning Joint Strike Fighter or the upgrade of the internationally deployed F-16 to new face of a radar, we see a fairly strong market going forward for airborne radar.

Some of the directions in the market as far as really needing more radar, more communication, coordinated communication, navigation etcetera and then some of the programs that we participate in. I mentioned a couple of these the F-16 Falcon and the F-35, but also the growing need for ground-based radar to protect troops that are deployed into dangerous areas in the world. And we collect about $15 million to $20 million from the Defense industry and the government a year purely to use for research into new material. Over the last several years that’s been focused on Gallium Nitride. Gallium Nitride offers a significant improvement in power density to – as compared to Gallium Arsenide.

And so we believe that we now have the world’s best Gallium Nitride technology with the benchmark reliability for this space and we’re now starting to see our penetration in Defense market move out into the commercial markets primarily we’re ramping a product for the cable market and we expect to see this move into other commercial markets as well.

Some quick financial highlights. I said our current results are somewhat disappointing because we have invested in both R&D and capacity in preparation for a fairly strong second half ramp. Our guidance for the current quarter is about $187.5 million in revenue and $0.11 loss. If you look at the performance in Q1 and the guide for Q2, that’s a $0.28 loss, but we had in the last earnings release said that we expect profitability for the full-year. And so that would imply at least a $0.29 profit in the second half of the year, which is a significant change from the first half.

Typically we see more revenue in the second half, 55% to 60% of our revenue fall in the second half. We do expect 2013 to be a growth year. We do expect it to be a profitable year. I would say at this time in the cycle as we get close to the second half, confidence is increasing on those results.

Design wins are by and large won for Q3 and I would say 95% won for Q4. We still have the uncertainty associated with the end volume of our customer’s application, but we feel we’ve taken a fairly balanced approach to that with upside and downside balance and so we’re comfortable with the expectations that we’ve set. And again those are expect full-year growth and profitability overcoming a first half loss. And for modeling purposes about a 50% fall through on GM with incremental revenue.

And balance sheet is strong, $141 million in cash, no debt and a $200 million untapped credit line. I will mention, we also announced that for our shareholders meeting on May 15th a share repurchase program, we’re authorized to repurchase $75 million of TriQuint shares. We have that – we won’t report activity until the end of the quarter, but I will say we have been active in the market since we announced the program.

So in summary, great exposure to what I think is one of the most exciting markets on the planet. Wireless connectivity, good revenue growth and we’re well positioned now to take advantage of the investment we’ve made over the last few years in premium filters. We represent a company that has the broadest portfolio technology and really compliments both active and passive devices in this marketplace and it has – and participates in many, many markets, so we can leverage our RF expertise across many markets. Revenue growth really improves the bottom line. It’s a good leverage growth and a strong balance sheet.

Vivek Arya - Bank of America/Merrill Lynch

Thank you very much, Ralph. Maybe let’s jump to a few questions. So first is I think you mentioned that you expect much better prospects in the second half. How broad based is that, is that one customer, multiple customers, one device, multiple devices, if you can just give us some color on that?

Ralph Quinsey

Sure. That the large majority of the dollar revenue growth comes from mobile devices. Mobile devices has a fairly narrow set of customers, high concentration of revenue and so the – that most of the growth is coming from our top two customers in that space and that’s Foxconn and Samsung.

Vivek Arya - Bank of America/Merrill Lynch

Got it. And one of those customers has always had a very broad product profile right, in the high-end, mid range and low-end, but the other one there are some expectation that they might diversify. So, if -- I don’t know whether they will or not, but if they do go towards lower priced models what impact does that have on TriQuint?

Ralph Quinsey

I really can’t speak to what might or could happen based on our largest customer. I can say that our positioning now in the market place with all of our customers including our largest customers is very favorable because some of the requirements that the market will need for smartphones particularly in Asia, say that the premium focus on this requirement and for premium products we continue to see high demands for premium Wi-Fi. And we’ve had very good success with our MMPAs across multiple customers, pretty wide accepted, because we’re offering again a premium solution, and that’s the shift that TriQuint has gone through in the last 18 months with our product line. It was really getting back to our roots and focusing on performance. The MMPA for example we press released in Q1, and we did what I thought was a fair apples-to-apples comparison to the other suppliers in the market and across all five bands of the solution a much better performance in efficiency and a much better – much better battery life, that’s why we’re winning business in MMPAs, premium filters the same thing, Wi-Fi the same thing. So independent of how the market partitions right now getting back to the original question, I think that we’re well positioned to participate successfully in it.

Vivek Arya - Bank of America/Merrill Lynch

But just conceptually, if the market migrates strong $500 to $600, $700 smartphones to $200, $300 smartphones why won't that put more pricing pressure in your market?

Ralph Quinsey

Well, first of all we don’t focus so much on the very low-end of the market, and we believe in the consumer cycle that if consumers get a less expensive solution it's still a good solution, it just creates more volume. I can’t see that being a bad thing for us. And we’re in a position now where many important customers are trying to put more content into a smaller package and not only is battery life a premium, but also size. That where TriQuint really shines as far as our ability to integrate multiple technologies all of which we control and design them to work together, control the manufacturing mostly of it with things like Copper Bump Interconnect, like the smaller low reliable Wafer Level Packaging, the transition we’ve done in our (indiscernible) from Ceramic package solutions to Wafer Level Packaging and TC-SAW. It's still our valuable products and commodities for anybody that’s building a smartphone.

Vivek Arya - Bank of America/Merrill Lynch

Good. And then one question on diversification among your customer base, so of course right given the market conditions two players dominate the market and others come and go, could we see different number three player right in every quarter. But first how do you react to that – when you have to run the company, how do you react to that kind of a market, and number two, why has it been difficult to really expand a lot more outside of your largest customer, is it a technology issue, is it a competitive issue, what have been the gating factors?

Ralph Quinsey

Yeah, good question. Actually we’ve done quite well as I reported in Q1 which is typically a seasonally down quarter. We actually grew in all of our customers from number two to number three to number four to number -- we grew with those customers really bucking the trend. So, I agree with you it's important to diversify to the rest of the market, and I think we are successfully doing that and we’re doing on the strength of the products I talked about, high performance, high efficiency, MMPAs, high performance Wi-Fi particularly high bands and then the premium filter standing on a relatively small base but getting good traction in the market. The total market is $6 billion, it is what it is that I believe it's hard to measure those type of things but based on how we measure it includes the whole RF solution. We think that there’s two players out there that supply products that probably represent at least 60% of that market, and so that’s just going to be what it is.

Vivek Arya - Bank of America/Merrill Lynch

Got it. And one thing that investors often grapple with this that if they look at the RF market there are four very strong players right, Skyworks, yourself, Avago, RF Micro Devices, there are other smaller players as well. And how to differentiate between then because every player right claims to have certain advantages, so Skyworks presented this morning, they claim to have a lot of system advantages, it's a very profitable company. Avago claims to have leadership in BAW, FBAR Technology. RFMD claims to have very high efficiency power amplifiers. So what is TriQuint’s differentiator in this market that you think can really help you gain market share from where you are now?

Ralph Quinsey

And I think you set that question up perfectly, because we’re not solutions supplier and we have great systems expertise. We have BAW, we have SAW, we have high efficiency amplifiers. We don’t have to parse down selectively what we do or don’t have and we’re seeing increasingly that customers are coming to TriQuint because of that, where they’re trying to get a complete solution that’s highly integrated and it's something that they can help make a better product for their customers.

Vivek Arya - Bank of America/Merrill Lynch

Got it. Maybe let me just pause there and see if there’s any question from the audience. Just one second for the mike please. Okay.

Question-and-Answer Session

Unidentified Analyst

Just quickly Qualcomm has announced they’re going to enhance the radio frequency capability, they could become the one stop solution since they have the chip and you combine it, is that going to preempt you and other people like RF, Microwave and Avago, displace you in the business or not?

Ralph Quinsey

Yeah, so the – when a company like Qualcomm, an important partner, makes an announcement that they would – that they intend on having a what could be a competitive offering in the market it certainly gets the attention on the market place. It looks to me as though the solution, as I understand -- I haven't seen the market place yet, I haven't seen any adopted by any customers, and so I only know what I’ve learned in Barcelona and what I hear from our customers. It appears to me that the solution is not yet ready for high volume production. So other than that it's hard for me to comment on it. I’ve got lots of opinions about what are the best ways to architect a front end and what are the best materials to use and clearly my opinions are not the as Qualcomm’s opinion. I wouldn’t use CMOS for the PA and I wouldn’t architect a solution that was, is all encompassing as that because I think it's problematic. But I mean, Qualcomm is a competent and capable company, we just differ on how we would approach the market.

Vivek Arya - Bank of America/Merrill Lynch

Maybe just to expand on that question, so Skyworks I think a few years ago had an acquisition or a partnership with Axiom. We have seen Avago acquire Javelin. We have seen RFMD acquire Amalfi. Where does TriQuint sit in terms of the CMOS, let’s assume CMOS power amplifiers become more important for whatever percentage of the market. If they do then how do you react to that?

Ralph Quinsey

Yeah, so little known fact but TriQuint has broad experience in RF across many different markets as you know. Back in the 2004 kind of timeframe we commercialized the CMOS power amplifier for the CDMA space and marketed it, and spend a lot of time and energy learning a lot about silicon and how that could – it was a silicon based, it wasn’t CMOS it was silicon based and how that material structure compared silicon versus Gallium Arsenide. And when we came away from that was an understanding that there’s a lot of things you have to do to make a good enough silicon amplifier compared to an already good material structure and great HPC GaAs amplifier. Then I also, it occurred to me that I wound never benefit from the shrink capability, and that’s what make semiconductors great, silicon is the optical shrink where you get better functionality, better performance, lower cost every two year, every shrink now. RF power amplifiers don’t shrink, a matter of fact they aren’t older technologies. And so it's absolutely true over the last five years silicon based amplifiers have gotten better, their performance is better but it's then based on really smart designers coming up with creative circuit techniques to build better amplifiers. Well it's raised the performance of the whole market place because those same circuit techniques many of them if not most of then can be used on Gallium Arsenide based [HPC] [ph] amplifier. And so the industry is getting better but they’re not closing the gap.

Vivek Arya - Bank of America/Merrill Lynch

So what proportion roughly do you think CMOS power amplifiers represent today and where do you think that proportion can get to over the next few years?

Ralph Quinsey

I think that they’re probably in that 10% or less portion of the market and I think they’ll service that part of the markets for some time. I don’t think the lever is all main stream or at least not for a long time.

Vivek Arya - Bank of America/Merrill Lynch

And do you see any specific requirements for that, because I am sure you respond to a lot of RFP from your customers, are you seeing an increasing requirement for those filters, whether explicitly or implicitly to some cost metric or some integration metric.

Ralph Quinsey

Those filters or we’re talking about CMOS …?

Vivek Arya - Bank of America/Merrill Lynch

Yeah the filters or CMOS power amplifiers.

Ralph Quinsey

I am not seeing any request from CMOS power amplifiers from my customers at all. I think that that’s a part of the market that typically services the low-end of the market, CMOS power amplifiers are the low-end of the market and we don’t address that part of the market.

Vivek Arya - Bank of America/Merrill Lynch

Got it. Maybe let’s go to the more premium filters that you mentioned before where there is I think 30% plus growth rate.

Ralph Quinsey

Yeah, that’s a $500 million, $600 million market growing at 25% to 30% both BAW and advance SAW, largely BAW. And what's really driving that market is the adoption and now the inclusion of new LTE band in the market. Very crowded spectrum requires filtering to keep adjacent bands from interfering with each other. And there’s a particularly crowded spot around 2.4 GHz, and so even in a low-end smartphone, a very low-end smartphone although we won't address the PA. If you have a low-end smartphone that has a band, 38 band, 40 band 7 and also Wi-Fi and I would argue that all smartphones will have at least 2.4 gig Wi-Fi in it then it just wont operate without what we call a coexistence filter that allows both Wi-Fi and those particularly bands that are adjacent to Wi-Fi to operate. Again in Asia and Europe it's predominately where they are. So I think that there is a premium product opportunity for TriQuint in a non-premium low-end phone and we’ll continue to be a good supplier for that, but it's not going to be on the PA side.

Vivek Arya - Bank of America/Merrill Lynch

So that’s I think one of the more interesting opportunities that you have which is more unique to the company. Now, Avago of course that claims to have 70%, 80% market share and they are -- they have said publicly that they are quadrupling their capacity. So first, what do you think is your rough market share in that whatever $500 million, $600 million market and do you really believe that a competitors like Avago because of the capacity they’re deploying does it put those big barriers to entry for you or others in that market?

Ralph Quinsey

I think we have about 25%, 30% call it a 30% market share, a very difficult market to measure and to track. We’ve grown right, since we’re winning business. Five years ago we had zero, and so we’ve grown, it's a very good market for us. We feel we have a great technology. I do think there’s a couple of premium suppliers out there, TriQuint, Avago other people have tried and other people are trying to be in this market, I had been trying for a long time and I’m struggling. So I don’t see that dynamic changing very quickly. And I believe as you know Avago and TriQuint went through a fairly expensive legal battle and concluded that with a broad cross licensing agreement and between us I think we have a fairly strong intellectual property position. And so in combination of IP, know-how and head start I think this will be a very attractive market for some time.

Vivek Arya - Bank of America/Merrill Lynch

Do you see any of the Japanese players cancel because for people like Skyworks that partnership is what they rely on to address some of these LTE events?

Ralph Quinsey

To best honest with you, we really haven't seen anybody address a highly integrated device that would include what would be a classic BAW program. We haven't seen that from anybody, but Avago. We just haven't seen them participate.

Vivek Arya - Bank of America/Merrill Lynch

What's so hard about manufacturing it, I mean is it some intellectual property that you have or is it just experience, what is so hard about making a BAW filter?

Ralph Quinsey

So it's a difficult question to answer without trying to explain what a BAW filter is and how you make it, but I would describe it as, when you do digital electronics you can go to anybody and get that build, right? Go to a foundry, anybody can build, because it's fairly standard two-dimensional [property], ones and zeros. As you move to mix single it gets a little bit more difficult, because there’s some parametric interaction between the design and the process, where in the digital world there’s basically no parametric interaction. As you move to the analog world that increases, all right so all the nuances of analog design gets harder. As you move to the RF space it gets even more difficult because you’ve got harmonics and difficulty et cetera. I would say BAW filters are beyond that, there’s a high interaction between the process and the design, which brings together a very complex solution. And then there is a considerable amount of trimming that’s involved where you have to interact with the design and make adjustments to it to get the precision on the output. And so it's a, I guess a high IP and high know-how type of business.

Vivek Arya - Bank of America/Merrill Lynch

Just one question on financials; your margins peaked at 40% plus a couple of years ago, now they are sort of in the high 20s. The market is getting a lot more competitive. So as you look out over the next few years, what is the kind of operational metric that the company is driving toward in terms of growth and operating margins?

Ralph Quinsey

Yeah, we grew the business at about 17% comp annual growth rate for six years and we -- the market changed, we grew much faster in 2010, we hit this plateau. We think that we could give back at a good growth track and with the same goals where we think we can get the gross margins of this company in the 40s, we would like to manage the operating expenses down to the low 20s and drive to an operating income of 20%, that still is the goals that we’re reaching for, it remains the goals we’re reaching for.

Vivek Arya - Bank of America/Merrill Lynch

And then in terms of cash you mentioned you had about $140 million -- $141 million no debt. You also have the $75 million buyback in place. What is the minimum level of cash you need to run the – is there any offshore repatriation issue with that cash or is all of it available to you for your requirement?

Ralph Quinsey

Well first and foremost we believe that we have what we think is the minimum amount or we wouldn’t have authorized the share repurchase program and we have been active in it. And as I highlighted we have $200 million revolver untapped. Another notable point is that we expect to build about $25 million of inventory in the current quarter in preparation for the second half ramp. All of that said; I believe when it comes to cash position and I believe we’ll be a strong cash generator in the second half of this year.

Vivek Arya - Bank of America/Merrill Lynch

Got it. And then let’s quickly jump to some of your other markets, so on the networking side the market has been somewhat subdued and that seems to be the whole drag going forward for a number of semiconductor suppliers. How do you see it playing out, because your equipment touches you’re in a part such a lot of different end markets within networking?

Ralph Quinsey

Yeah, the infrastructure market is a slow growing market, we have it growing at about two per base station market we’ve forgot 2% comp annual growth rate. And for us we have been quite successful in the near term. When we sit back and look at the end of 2013 I think you’ll see good year-over-year growth in our market. We had some good success towards the end of last year and into the first part of this year with some MCM in China, multi-chip modules in China, but I believe sequentially going forward [not only] we’ve seen that tick up, we will flatten a little bit in the second half in the infrastructure market. And I also look at the optical margin we’ve just been on a (indiscernible) with the 40 gig business, the optical business and that’s what we don’t do the plutonics, we do the electronics. And we think that that cycle from a unit perspective has probably peaked last year and will go through a bit of a low but we are seeing the 100 gigabit market. We think we’re well positioned to grow with that. So the cycles continue in infrastructure it's just that it's like the cycles in mobile, but in slow motion, but they last a lot longer.

Vivek Arya - Bank of America/Merrill Lynch

All right, more profitable.

Ralph Quinsey

Yes.

Vivek Arya - Bank of America/Merrill Lynch

And then finally your defense business, there’s a lot of talk of squeeze on government budgets and so forth and there was the sequestration program earlier. How is it impacting your business? How do you see the growth trajectory for that?

Ralph Quinsey

Yeah defense business is another business it took a nice tick up end of last year and will show good year-over-year comparisons too. The sequester is creating uncertainty and maybe some hesitation with our customer base, but by in large we’re tied to major programs with a lot of momentum. And so right now it doesn’t appear that it's going to have a significant impact. The reason we ticked up towards the end of last year had good growth Q1 over Q1 comparison, anyway 30% growth Q1 over Q1 comparison is because first of all the business it does come and it’ll move across – big orders will move across the boundaries of the quarter. But we’re also expanding the services we supply within industry. We were dominated by supplying just chips to the industry, now we’re supplying the equivalent of package parts what we call [die and tap]. And so we’ve been able to increase the amount of revenue we ship into the Defense industry without their demand and units changing at all.

Vivek Arya - Bank of America/Merrill Lynch

Got it. I think with that we’re almost at the end of our allotted time period. I just want to thank you Ralph, I really appreciate your comments and we appreciate your participation. Thank you everyone.

Ralph Quinsey

Thanks, Vivek.

Vivek Arya - Bank of America/Merrill Lynch

Thank you.

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