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TriQuint Semiconductor, Inc. (NASDAQ:TQNT)

Q2 2009 Earnings Call

July 22, 2009 05:00 PM ET

Executives

Steve Buhaly - Chief Financial Officer

Ralph Quinsey - President and Chief Executive Officer

Analysts

Steve Ferranti - Stephens Incorporated

Edward Snyder - Charter Equity Research

Anthony Stoss - Craig-Hallum

Aalok Shah - D.A. Davidson & Company

David Duley - Steelhead Securities

Tim Luke - Barclays Capital

William J. Dezellem - Tieton Capital Management

Jon Gruber - Gruber & McBaine Capital Management

Operator

Good afternoon. My name is Justin, and I will be your conference operator today. At this time, I will like to welcome everyone to the Second Quarter Earnings Conference Call for TriQuint Semiconductor. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you.

As at this time, I would like to turn the call over to Steve Buhaly, Chief Financial Officer. Sir, please go ahead.

Steve Buhaly

Thank you. Good afternoon and welcome to our second quarter 2009 conference call. This will include forward-looking statements about TriQuint's projected results. Results could differ materially based on various factors including those described in our reports on Form 10-K and 10-Q and the other filings with the Securities and Exchange Commission. This presentation also includes non-GAAP financial measures which exclude equity compensation charges, a charge for the anticipated settlement of a lawsuit and charges associated with the acquisition of WJ Communications. These non-GAAP measures are provided to enhance understanding of our core operating performance. A full reconciliation of these non-GAAP measures is in our press release.

Ralph will now provide an overview of the quarter.

Ralph Quinsey

Thank you, Steve. Our industry has experienced significant demand volatility over the last six months. The slowdown of the economy and the inventory adjustments brought to TriQuint in Q1 was followed by a solid recovery in Q2. I am happy to report the company results in Q2 were above expectations with revenue of $169 million up 33% from Q2 of 2008 resulting in $0.03 GAAP earnings and $0.08 non-GAAP earnings, also above expectations.

Revenue strength came from handset and defense products. Our networks revenue grew sequentially in Q2, but remained below historic levels as conservative inventory management and slow capital spending on infrastructure worldwide was partially offset by 3G expansions in China.

Our increased revenue drove significant sequentially improvement in non-GAAP gross margin from 21% to 33% as improved factory utilization of 66% in improved handset margins offset the low mix of networks products.

Some highlights in the quarter include being named RF Supplier of the Year for the third year in a row by Kyocera Wireless Division formally announcing the DARPA contract award of $16.5 million for Phase III and begin development program and the signing of the strategic framework agreement with ZTE targeting $50 million of revenue for 2009.

Operating expenses were back to historic levels following Q1 with the company imposed very strict expense guideline. We will to continue to fund growth opportunities and gross margin improvement with keeping our sights on the goal of 25% for non-GAAP operating expense as a percentage of revenue. Inventory and cash were flat sequentially with the increase in AR in line with the revenue increase.

During the quarter we reached a preliminary settlement of the derivative lawsuit to avoid the cost and distraction associated with trial. The lawsuit alleged improper options backdating between 1998 and 2002. Our option granting practices were reviewed by both the SEC and The Department of Justice and each closed their files with no finding of wrongdoing. Defendants continue to deny the allegations.

Steve will provide detailed Q3 guidance shortly.

In general, I see sustained demand for handset and defense products and continued recovery albeit slow in the health of our networks market. I expect solid handset revenue in Q3 supported by the popularity of Smartphones and continued stability in defense. I expect networks revenue to grow in Q3 with renewed shipments of wireless LAN products and its other sub-market edge back to traditional level.

I will now provide some detail into our three major markets. Starting with our networks market; our networks revenue was up 16% sequentially showing growth across most major sub-markets. Wireless client revenue increased significantly compared to Q1, but remained below the levels we saw in Q2 of 2008. Downstream, wireless LAN inventory has largely normalized as TriQuint shipments of wireless LAN products resumed late in Q2.

Transport revenue including optical, cable, point-to-point radio and VSAT was up about 11% sequentially but down approximately $4 million as compared to Q2 2008 with the majority of the shortfall coming from optical and cable products.

Infrastructure markets remained soft, with capital expenditures from North American carriers down 15 to 20% as compared to last year. Our healthiest network sub-market in Q2 as compared to a year ago levels continued to be point-to-point radio and 3G base station, with cable revenue lagging the most.

With our recent product announcement TriQuint is well positioned to take advantage of the migration of the Opto Metro market to 40 gigabits per second and long haul to 100 gigabits per second. Overall, I expect continued softness in the infrastructure markets this year as compared to last with sequential revenue gains for TriQuint, as new price gain traction in the industry investment returns.

I'd like to turn your attention to our handsets market now. Our handset revenue was up significantly as we managed through an extraordinary period of economic and seasonal slowdown followed by equally incredible rebound on the strength of our 3G and EDGE products. Our handset revenue increased approximately 56% sequentially from Q1, it is up 77% from the year ago quarter.

Comparing to Q2 of 2008, Wideband CDMA grew a 181%. EDGE grew 355% and CDMA grew 42%. GSM revenue declined approximately 30% from Q2 of 2008, but this decline contributed to improved handset margins. So the overall handset unit market is expected to be down approximately 10% in 2009. TriQuint is benefiting from healthy demand for 3G products from broad base of customers.

Our highest volume product in the quarter was our TQM7M5012, Polar EDGE transmit module. This is a highly integrated transmit module built using our copper flip interconnect technology. This technology allows TriQuint to build small, robust and power efficient solutions like the 5012 which has one design sockets and dozens of customers.

Finally, turning to the defense and aerospace market. Our revenue increased approximately 25% sequentially and 41% compared to Q2, 2008. The strong growth comes from listing a new radar program such as Joint Strike Fighter, HTM 4, B2 Bomber, VSR and EQ 36. We also enjoyed approximately $3 million per quarter in R&D funding for research sponsored by the U.S. government and defense industry. This funding is up compared to last year, where we saw a Q2, Q3 pause in the funding between phases for the major program.

Our backlog in defense and aerospace was up nicely in the quarter, and I expect to maintain revenue at or above the current levels for the second half of 2009, resulting in another solid growth here for defense.

Now Steve will provide our results for second quarter 2009 and our guidance for Q3. Steve?

Steve Buhaly

Thank you, Ralph. For the second quarter of 2009, we reported revenue of $169.1 million. Revenue increased 42% sequentially and 33% from the second quarter of 2008. Both handsets and defense entered a strong year-on-year and sequential growth. Networks declined from last year, but did improved sequentially.

For the quarter, our revenues split-to-end markets was handsets 65%, networks 23% and defense 12%. The second quarter revenue mix contained more handset and less network revenue than had historically been the case. Our revenue by geographic region was Asia 59%, Americas 35% and Europe 6%. Please refer to the supplemental data posted on the Investor Section of our website for a detailed breakdown of our revenue by market.

During the second quarter, Foxconn was our only customer comprising 10% or more of our revenue. Our book-to-bill ratio for the quarter was 1.22. Our defense bookings tend to fluctuate and were unusually large in the second quarter. Adjusting for this, would result in a normalized book-to-bill of about 1.10.

Our gross margin for the second quarter was 32.3%. Second quarter non-GAAP gross margin was 33.2%. A shift in mix to more handset and less networks revenue, inefficiencies associated with the very high sequential revenue growth and ramping of our new RF filter line negatively impacted margins.

Operating expenses were $50.3 million for the second quarter and $44.3 million or 26.2% of revenue on a non-GAAP basis. GAAP operating expense includes $2.95 million to the anticipated settlement of the lawsuit discussed earlier. Q2 non-GAAP operating expenses were up $7.0 million from the prior quarter, due to the end of short-term expense control measures imposed in the first quarter.

Net income was $3.9 million or $0.03 per share for the second quarter. Non-GAAP net income in the second quarter was $11.5 million or $0.08 per share. Cash flow from operations was $9.6 million in the second quarter of 2009. Cash, short-term and long-term investments remained constant from the prior quarter at $99.4 million.

Accounts receivables grew by $27.0 million with DSO at 58 days due the increased shipments in the last month of the quarter. Inventory was held roughly flat despite strong revenue growth resulting in turns of 5.2. Shortened factory cycle times drove the improved performance. Capital spending was $12.5 million in the quarter and $24.1 million year-to-date, roughly equivalent to depreciation and amortization in the same periods.

Non-GAAP financial measures excludes stock-based compensation charges, a charge for the anticipated settlement of a lawsuit and certain charges associated with the acquisition of WJ Communications. Complete reconciliations of GAAP to non-GAAP results are available in our press release and in the Investor Section of our website.

Moving to our outlook; we estimated that third quarter revenue will be between 170 million and $180 million. Non-GAAP gross margin is expected to be about 35% and non-GAAP operating expenses are expected to be between 46 and $48 million. Third quarter net income is expected to range between $0.05 and $0.07 per share with non-GAAP net income ranging between $0.08 and $0.10 per share. Cash is expected to increase by about $10 million in Q3. As of today, we are 89% booked to the midpoint of revenue guidance for the third quarter.

Each quarter TriQuint's management team participates in a number of Investor Relations events. On July 29th and 30th, we will be traveling with Craig-Hallum for a non-deal road show through Southern California. On August 10th, Ralph will be in Vale for the Pacific Crest conference and then he'll head east for the Oppenheimer conference in Boston on 12th followed by two days of marketing with Charter Equities through the Mid-Atlantic. On September 10th, we will be hosting a tour of our Richardson, Texas facility as part of the Stevens Inc. Annual Technology Tour. And on September 16th, we will be participating at the ThinkEquity Growth Conference in San Francisco.

Finally, we will continue our newly implemented virtual visit program which is a bi-monthly webinar for investors new to TriQuint or those investors that have not had contact with us in the recent past. Please contact Heidi A. Flannery, Investor Relations if you are interested in participating in any of these events. Our third quarter 2009 conference call is scheduled for October 21st.

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

Ralph Quinsey

Thanks Steve. In summary, I am very pleased with the results in Q2. Revenue and earnings were above expectation and the company responded well to a roller-coaster ride of uncertainty and demand volatility. Looking forward, we have our self set on a non-GAAP goal of 40% gross margin, 25% operating expense and 15% operating income.

Clearly demand volatility and the softness of our networks market have been headwinds to these goals. Uncertainty remains in the macroeconomic outlook, I am confident TriQuint is growing our share of the networks market. I anticipate steady and improved demand throughout 2009, '10 and beyond as the optical and cable markets recover and we execute our ramp of our TriQuint products.

Our sequential revenue guidance are flat to up about 6.5% for Q3, with improved earnings upon such a strong Q2 is the reflection of the momentum the company has generated. It is an exciting time for the RF industry. We are seeing spend in our content and applications, such as Smartphones and in the future netbooks and mobile unit devices driven by the increasing consumer demand for mobile broadband connectivity.

This in turn drives the increased demand for technology and high performance products in the infrastructure markets build to serve 3G and 4G networks. Additionally, the company continues to invest in next generation technologies such GaN and Power Band to service the needs of the defense and aerospace markets. TriQuint is well positioned as a technology leader to serve these growing opportunities.

We are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from line of Steve Ferranti with Stephens Incorporated.

Steve Ferranti - Stephens Incorporated

Hi guys, good afternoon and congratulations on a tremendous quarter.

Ralph Quinsey

Thanks Steve.

Steve Ferranti - Stephens Incorporated

I want to get a sense from you, to what extent do you think that there was any effects such as channel loading or maybe certain customers accelerating particular orders in the second quarter as they try and ramp up demands and meet -- ramp up inventories to meet their own demand?

Ralph Quinsey

I would say those effects are probably not predominant trends. I think there is good healthy demand for Smartphones, where we participate. When you go through demand observation that we did, I think you going to see undershoot and overshoot. I really don't think that was the dominant thing.

Steve Ferranti - Stephens Incorporated

Okay, that's great. And then I guess just turning to the third quarter guidance, it implies a fairly meaningful uptick in operating expenses there. I guess first how do you anticipate that breaking out between R&D and SG&A suite and then sort of what if the maybe you can give us some sense for some of the investments that are driving that uptick?.

Steve Buhaly

Sure. I think the uptick is roughly split between R&D and SG&A. The R&D side it's going to be increased investment primarily in engineering materials as we bring some important products to market. And on the G&A side, we tend to see our medical expenses pick up in the back half with our self insured with that kind of a feeling above that as individuals use up their personal deductions. We end up picking up the full amount for the balance of the year. And so we just see kind of a seasonal uptick there, as a primary driver. Those are the two big items.

Steve Ferranti - Stephens Incorporated

That's fair. And then I guess Ralph, you had touched upon the longer term operating model of 40% gross margin and 15% up margin. Can you give us a sense for sort of what revenue run rate you're expecting that at these days? And then I guess related to that, how do you expect or what do you think is the most dominant drivers to getting gross margins up to that level, I mean we're obviously out of the through the OpEx spend level, what are the drivers that get itself to the 40% on the gross margin line?

Ralph Quinsey

Of course mix has a big impact. Right now our mix is more heavily weighted to the handset market than the networks market then we would like it to be. I see great opportunities in the networks market particularly in optical over the next 18 months; good opportunities in cable and TriPower is ramping up for the base station market, so I think we can manage our mix, but mix is probably the biggest impact.

So depending upon mix we still believe that if we can get into that 190 to 200 range we should be pushing on 40% gross margin. I also believe that there continues to be opportunities for cost reduction within manufacturing and efficiency improvements. I think the the team has responded just wonderfully through the last several quarter where we were, and we hit 186 in Q3 and we dove down, sold out the inventories and factories and assets in Q1, we're seeing a run rate of about 100 million.

And then we jumped back up to close to 170, that's hard for factories to do and not grow inventory. And I believe, once we can stabilize, we'll see some efficiency gains in the factory as well. And the last thing Steve mentioned, we are bringing out some new products in Texas, a new filter capacity and there is always cost associated with that type of ramp up in -- that will be behind us over the next couple of quarters.

Steve Ferranti - Stephens Incorporated

That's great. I appreciate the color and congratulations once again, great job.

Ralph Quinsey

Thanks Steve.

Operator

Our next question comes from line of Edward Snyder with Charter Equity Research.

Edward Snyder - Charter Equity Research

Thanks, several questions here. Before I move on to the answer you just gave, can we dig into that a little bit more your 35% gross margin now you are targeting 40%, you gave three or four different factors. Can you just kind of weight those, it sounds like mix is the biggest? How much can you get from better efficiencies and lower cost of manufacturing versus a mix versus lower cost after you added new capacity?

Steve Buhaly

So I'll touch in there. I think there is actually four factors. The one I didn't mention is additional volume; as we go from 169 up to the 190 to 200 million, there is a significant fall through from that, because we can do with our current capacity. Second, improved efficiencies certainly with a couple of points where we are at right now maybe a bit more, it is very difficult to go from a 100 to 170 and be as efficient as you want to be -- we do need networks to comeback to be a more normal part of our revenue and we see that happening as time goes on I would say steadily.

And finally there are lot small opportunities that put it in the blocking and tackling range that we need to capitalize on. And then I think Ralf mentioned our BAW filter RAM's that has obviously a fairly inefficient process when you start, we’re probably half way through that that period of time.

Edward Snyder - Charter Equity Research

So just to be a little more accurate here, so a couple hundred basis points from volume, a couple hundred from efficiency maybe, and then the rest from mix and you both go through?

Steve Buhaly

Yeah, I am not going to give an exact quantification of as each, but I think those are the four factors that will drive it.

Edward Snyder - Charter Equity Research

Okay. And then where are your utilizations at this point, you snapped back pretty hard here?

Steve Buhaly

66%.

Edward Snyder - Charter Equity Research

Okay. And you don't anticipate higher CapEx in immediate future it's probably about plenty to deal with the next quarter or so?

Steve Buhaly

We expect CapEx to continue to run roughly equivalent to our D&A rate for I'll call it 11 to 12 million last quarter.

Edward Snyder - Charter Equity Research

Okay. So that you've seen a pretty big rocket here in handset revenues and market is still down probably around 10% year-over-year, so we've not seen a snapback in end market demand. Certainly there's a question of inventory versus native demand. And add to that, there is a share gain thing, so Ralph if you have to guess, where is most of this amazing strength coming from? Are you gaining share on other competitors at OEMs and do you think its native, we saw Apples results, they took a lot of (inaudible) and I know I that you may, may not be an Apple, but if you were an apple that would be an upside just from higher sales to your end market. So I'm just trying to get you idea how much is the share gain, how much of this is native demand, how much of this is inventory?

Ralph Quinsey

sSo I think that one of the dominant theme is although the handset market is likely be down about 10% this year. I think the 3G market and in particular the Smartphone market is still quite robust. And we're fortunate to have just a good footprint in that market. So we've been very successful in that market.

I believe we are growing in the EDGE market. It's smaller amount of revenue for us. And based on good strong products of 5005, for example, build on a copper flip technology as well. So we are probably gaining some share there.

And then in CDMA, we're continuing the transition to modules versus just selling components. And as you are well aware and you've watched us do this, as we transition our business from just selling filters or just selling power amplifiers to transit modules, our ASPs go up significantly and the content goes up and so I think we're seeing that in the CDMA market.

Edward Snyder - Charter Equity Research

So -- you there? Right. So if you had to, I mean are you getting a big boost from the transition of modules or is it mostly sounds like native demand for Smartphones, these are the really good mix of customers in that area?

Ralph Quinsey

So in CDMA I think we're gaining some better shift in the transition modules. In EDGE, we're largely selling power amplifier modules still component power amplifiers, so that's probably increased penetration in the market. And for Wideband CDMA 3G, I think that market is still quite robust and demand for that market is still quite robust.

Edward Snyder - Charter Equity Research

Okay. And a final question. Your wireless LAN business has a lot of inventory out there and so I acknowledge that. It sounds like several of the people think most of that is burned off. I think you mentioned for the end of quarter you started shipping again, is that and do you expect to be back at your run rate, in discussions Intel they said that you're just going to keep rolling on for the next project; you're not going to extend the life of that and might be the platform just because they had a whole created by the recession.

So the next platform is coming up right on time. So basically how do you anticipate your shipments for the existing platform and what is the look like in terms competitive environment for the next one when do you think you might be able to get a slot there to or you already on the next one?

Ralph Quinsey

Great. So just to remind the other listeners, we do publish our data on our website and this particular data is listed under Wireless Clients. Wireless clients in Q1 was about 7% of our networks revenues so do the math, that's about $2.5 million down significantly from our traditional run rate. And update from our last call is that, we sold more than we thought we would Q2 in the wireless clients space and so its up to 16%. If you do the math on that, that's about 6.5 million. And for wireless client, I had been trying to guide people to an area of seven to 10 on the last call. And I still think that that's probably be where we will come in Q3 for the wireless client revenue.

Edward Snyder - Charter Equity Research

Great. And then next platforms at wireless clients?

Ralph Quinsey

Yeah. So we're continuing to engage with multiple customers and our large customers as well as other customers; we're excited about this business and we certainly intend on continuing to grow the business.

Edward Snyder - Charter Equity Research

Great. Thanks Ralph

Ralph Quinsey

Yes.

Operator

Okay. Our next question comes from the line of Anthony Starks with Craig-Hallum.

Anthony Stoss - Craig-Hallum

Great job. Before my getting a little bit more detail on maybe you can quantify your ramping (inaudible) line Ralph or Steve, kind of what you expect per quarter and the next quarter to and then I got a couple of other follow-ons?

Ralph Quinsey

You know I really can't qualify that for you. And we are transitioning from our previous supply to internal supply and it's a dynamic situation probably there is really not much I can qualify there for you. Other then to say that it should have beneficial impact once we get through the start up phase on margins which is probably,I think Steve said its going to take a couple of quarters.

Anthony Stoss - Craig-Hallum

Okay. Ralph if you won't mind commenting on any unusual material costs that affected your gross margins in the past. Obviously it's been effective but is there any thing unusual in the quarter?

Ralph Quinsey

No. No unusual charges, in the past we've had precious metal charges both positive and negative and that really wasn't a material impact this quarter, so no unusual material charges this quarter.

Anthony Stoss - Craig-Hallum

Okay. Remind us what you think your factories are capable of producing per quarter?

Ralph Quinsey

At the end it dependent upon mix and very dependent upon mix and so my expectations right now assuming a typical mix would be somewhere in the range of 200 to 250 million a quarter, that the factories could produce. It might involve some level of capital test equipment if there's not, certainly not a significant capital investment. And as Steve has pointed out we think we're comfortable with our OpEx spend rate equal to D&A going forward that will allow us to continue to grow.

Anthony Stoss - Craig-Hallum

Okay. Any unusual pricing pressures there, what's your view on how the pricing environment's been lately and what you expect towards your end?

Ralph Quinsey

Well, I think its no surprise that some parts of this market have gotten more aggressive as the economy slowed down. So I would say pricing is aggressive right now and we're very lucky that we have a cost structure that we can stay in again there.

Anthony Stoss - Craig-Hallum

Yeah, you were talking about Wi-Fi going in the handset I would love to hear your view, I know you guys believe it’s a trend longer term, want to hear your current thoughts on that?

Ralph Quinsey

Yeah, I’ll reference other listeners I know you noticed Tony to our supplemental data on our website, but if do the math on those percentages you'll see that our wireless LAN and handsets revenue got a nice pick up. And I see that is a growth area for us next year. I think the transition point for ramp is going to be probably in the Q4, Q1 kind of timeframe. But I see great opportunity for wireless LAN in mobile devices certainly for 2010.

Anthony Stoss - Craig-Hallum

Okay. Just a housekeeping for Steve, and I am almost done. Headcount over January quarter?

Steve Buhaly

23-30-ish.

Anthony Stoss - Craig-Hallum

That's it for me, great job guys. Thank you.

Steve Buhaly

Thanks Tony.

Operator

Our next question comes from the line of Aalok Shah with D.A. Davidson.

Aalok Shah - D.A. Davidson & Company

Great. A couple of quick questions, 10% customers Steve?

Steve Buhaly

Foxconn would be the only one.

Aalok Shah - D.A. Davidson & Company

Okay. And then Ralph, you mentioned that 5012 was the highest volume, has that been consistently the case now for a couple of a quarters?

Ralph Quinsey

Yes it has.

Aalok Shah - D.A. Davidson & Company

Okay. And in terms of the strength adds, I know its an EDGE module or EDGE PA but, do you expect your EDGE business, you guys don't break it out between WCDMA and EDGE, but is EDGE definitely higher than your WCDMA business at this point?

Ralph Quinsey

Just to be clear it's the EDGE Module, so we do consider that a 3G product. We also sell for the EDGE only business, a product called the 5005, it's a Polar amplifier also built on the copper flip; that's been a very successful high volume product for us the last couple of quarters as well. And that's been the product that's really driven our EDGE business, so at a smaller base, better than 350%.

Aalok Shah - D.A. Davidson & Company

Okay. And in terms of next quarter, do you guys expect the network business to be stronger than the handset, how should we be thinking about that during the next quarter?

Ralph Quinsey

So I think the handset business is going to grow probably in line with the growth of the company. And the networks business is probably going to grow a little faster percentage wise. And our defense business and our foundry business are expected to be fairly flat.

Aalok Shah - D.A. Davidson & Company

Okay. And then I know it's been kind of a unusual few quarters, but how should we be thinking og seasonality now and I know you won't give guidance for Q4 but how should we be thinking about from the seasonal standpoint. Is that seasonal factors that come into play here for you guys and any kind of color that would be helpful?

Ralph Quinsey

Well let me first put my disclaimer on there that there is still as a quite bit of uncertainty in the economic outlook, so I don't know. But to add color to that I think there is good reason to believe that we will have a strong second half. And we will see healthy seasonality in Q4. And then I have no reason to believe why we wouldn't see typical down seasonality in Q1.

Aalok Shah - D.A. Davidson & Company

Okay. And my last question is on the OpEx side. And Steve, can I ask you a question? Your R&D was up $4 million sequentially, I know, you mentioned that you're spending on the bulk of this side, but is there a way to control that or how should we be thinking about that now going forward, should we creep it up every quarter? And it seems like it grew lot this quarter. And I know you said that it's going to continue to do but how should we be thinking about that now beyond just Q3?

Steve Buhaly

I think, first of all, we had some very stringent cost control measures in place in Q1, mandatory time-off, serious restrictions on all manner of discretionary spending that we could not and did not maintain for the long-term. So we saw significant bounce back off at Q1. Back to levels that were actually the same as we were at last Q3 for example.

So I will say pretty much a return back to normal business in the second quarter. I do see some creep in Q3, I would characterize it as probably a little bit more of seasonal factors particularly and with respect to the cost of the medical expense we have. We still expect to get to our 25% target. We think we'll do that with a combination of some top-line growth and continued management of operating expenses. So I am not going to give you a long-term trend number. But I will tell you we'll be working very hard to get that to that 25% metric.

Aalok Shah - D.A. Davidson & Company

Okay. So just be clear; to get that 25% metrics, you do need the top-line to be around 190 to 200 million?

Steve Buhaly

Yeah, I'd say that's a pretty good number. I'd like to say it's a lower end of that range, but if you ask me a couple of quarters then I probably would have guessed 180 to 190, so lets call it 190.

Aalok Shah - D.A. Davidson & Company

Okay, great. Thanks a lot guys.

Ralph Quinsey

Yes, you bet.

Operator

Our next question comes from the line of David Duley with Steelhead Securities.

David Duley - Steelhead Securities

Congratulations on a nice quarter.

Ralph Quinsey

Thanks.

David Duley - Steelhead Securities

Hey a couple of clarifications. You mentioned you had a 10% customer, what percentage was that customer?

Steve Buhaly

They were over 10%

David Duley - Steelhead Securities

Will you put that in your Q or your K what percentage they were?

Steve Buhaly

No. We'll just identify them as being in access of being 10%

David Duley - Steelhead Securities

Okay. And what half of your legal cost been running and so we see a savings from not having to spend on those losses going forward?

Steve Buhaly

The legal expenses have been pretty erratic on this particular lawsuit and they were relatively low in Q2 in the most recent quarter.

David Duley - Steelhead Securities

So and not alot sequential savings?

Steve Buhaly

It's not much there.

David Duley - Steelhead Securities

Okay. And when you look at your handset business if I'm not mistaken I think four of the top five 3G manufacturers or Smartphone manufacturers are customers of yours, what is the opportunity to penetrate that, one that you're not in, in the top five, I think they are actually the biggest?

Ralph Quinsey

I would say that we, this is abroad statement I'm sure, but we participate with all the manufacturers with the exception of the largest player in the market. And clearly we think that it will be great if we were participating with the largest player in the market. We’ve got great products and it's a great company.

We have history with that company and if you ask my opinion is, at some point time, there will be an alignment, we will work together. I am not trying to guide anybody in investment community and that's going to happen in the near future. And that's clearly up to that customer, but I think, we are on their trend line, because we've got great products, they have got great demands, at some point, we will just match up.

We're going to do really well and we are doing really well without that and so I think, that we're in a solid position based on the strength of our penetration and very robust, small, efficient, complete RF Solutions with the 3G phone that allow some of these manufactures to save space and put even more feature on these appliances.

David Duley - Steelhead Securities

Okay. And Steve, what should be the difference between GAAP and pro-forma net income going forward?

Steve Buhaly

Typically it's about $0.03.

David Duley - Steelhead Securities

And that should be consistent?

Steve Buhaly

Yeah, yeah this quarter was an outline because of the lawsuit settlement,anticipated settlement expense.

David Duley - Steelhead Securities

Okay. So I'll go back to where I was before.. Alright, one final thing for me and this is for Ralph, you guys mentioned a couple different times that you had products that you were copper wire bonds and now in gold and I'm wondering, what percentage do you think of the overall volume for copper versus gold and is that a cost advantage for you versus the Skyworks and the RFMD's of the world?

Ralph Quinsey

Yeah, just to be clear, its a copper bump stud versus a wire bond, typically a gold wire bond. And there are several advantages where copper bond allows you to a flip chip. So you actually have no wire bond that is involved in the manufacturing process and yes that is a cost saving. We also have no backside vience typically for these HPT power amplifiers that are the generators creates a wheel or a whole in the back end plated with gold and use that to help draw heat out of the device.

All the heat is generated as you know on the surface so when you put copper studs on it, flip it, it's a much better heat path, thermal path actually makes the devices more rock solid, more robust. Then the last advantage of copper what we call CuFlip technology is you don't need a stand off area of a wire branded device. So it allows you to make modules a little slower.

So absolutely we think that that's an advantage. A significant portion of our product revenue in handsets now comes from copper bond and I would give you a rough estimate that at sometime next year we'll cross over more than 50% of our handset products will in some way be using our copper bond technology.

David Duley - Steelhead Securities

How does that compare to the other guys, do you think?

Ralph Quinsey

I am not aware of any other suppliers for the CA space shipping that has the technology in high volume.

David Duley - Steelhead Securities

Great, thank you.

Operator

Our next question comes from the line of Tim Luke with Barclays Capital.

Tim Luke - Barclays Capital

Thanks so much. I was wondering if you could help us frame how you perceive expectations to the seasonality as you move broadly into the calendar fourth quarter? You were inferring that you would expect to see a stronger second half and healthy seasonality, maybe for example you could just remind us what normal seasonality might be in the December period?

And separately, I was wondering how you would think about your inventory going through the quarter. Would you expect to build a little inventory as you move through the third quarter or do think there is room for it to stay flat? Thank you.

Ralph Quinsey

So I guess my reference point for seasonality broadly speaking in first and second half are 40-60%. And that's back from my days of working with Motorola, just how the handset market seemed to operate. It starts to kick in depending upon how the days match up in Q3, building for the holiday season.

In Q4 -- and then again depending upon the market strength and the timing of holidays, it can persist into Q1 or it can shutdown hard at the end of Q1 for the down season, the post holiday season where everybody reevaluates where their inventory is. So I think, we have definition of normal, I think us going and guiding up about 6 to 7% 6.5% on the high-end of our guidance for Q3 is pretty good guidance considering what we look kind of this quarter.

Tim Luke - Barclays Capital

And can you would infer progress for you till December period?

Ralph Quinsey

I would expect that if we again my disclaimer is uncertainty, but the timings et cetera, et cetera. But I would expect in this cycle that Q4 would be slightly stronger than Q3. So some good growth in Q4 and then I would expect Q1 to come back down.

Tim Luke - Barclays Capital

That's very helpful indeed. And maybe just a comment on the inventory and maybe you if you could just remind us, what where you booked as you started the last quarter, what percentage were you booked?

Ralph Quinsey

We were booked a 100% to the mid-point of our guidance last quarter. For reference we are booked 89% to the mid-point of our guidance, historically we're in that 85 to 90% range in this period of time. Last quarter we were -- there was a lot of uncertainty in last quarter, so we took a more conservative position. We are back to more of a normal booking rates and percent of the total quarter.

And as far as your inventory question, our goal is to manage inventories as this turns better. And so we're at 5.3 turns right now, I certainly think the organization would do a little bit better than that. And I would be disappointed if they do a little worse and we continue to grow revenue that would imply some growth in gross or net inventory.

Tim Luke - Barclays Capital

And could you give us any color on how July has been just today's vis-à-vis how June was? And then maybe just or say you had a slightly lower tax rate than one might have been expecting. How should we model tax going forward?

Ralph Quinsey

Yeah no comment on the inventory for July. We haven't fully analyzed that. I'll let Steve comment on the tax rate.

Steve Buhaly

Yeah tax rate is just in a part around right now. Since and allows better a level and that instead of -- it just depends on which municipality or country we happen to have income recorded in the period. And so it's actually very hard to predict that but it will run at a low level.

Tim Luke - Barclays Capital

And we should think about couple of hundred thousand of interest income?

Steve Buhaly

Yes, on a good day, maybe a hundred thousand on a bad day. Pretty small number.

Tim Luke - Barclays Capital

Thank you very much guys.

Ralph Quinsey

You bet.

Operator

Our next question comes from the line of Bill Dezellem with Tieton Capital Management.

William Dezellem - Tieton Capital Management

Thank you. We have a couple of questions. First of all, relative to the agreement with ZTE would you please provide some more detail behind that? And then secondarily, what was the change in foundry revenue in the second quarter versus the first quarter please?

Ralph Quinsey

Sure. The ZTE agreement is a framework agreement that outlines a desire to have the company engage in business. And it targets a level of $50 million for this calendar year. There is no binding conditions either way on that. But clearly a statement of intent by both the ZTE and the company.

And for the foundry business, the foundry business, it typically runs in the 10 percentage range of our total revenue and its spread across our typical markets. And it was probably a little bit above that and not much and it sequentially was up.

Steve Buhaly

It's probably benefited from the handset end market as our direct handset sales did.

William Dezellem - Tieton Capital Management

So it was sequentially up how much?

Ralph Quinsey

We don't typically guide to details of it. Our foundry business we try to manage that separately from our normal business because many of our customers are also our competitors and we intentionally just to leave that as a broad statement of how that business is up. So its sequentially up and handset dominated as Steve said and about 10 or 11% of our total revenue.

William Dezellem - Tieton Capital Management

And then circling back to the ZTE agreement, it is targeting 50 million for 2009. How much revenue have you had from them so far, and the orientation of the question is to try to understand if it's somewhat linear throughout the course of 2009 or whether because we now have that agreement. Because there could be a pretty big bump up in the second half of the year?

Ralph Quinsey

I would say that we are on track to do that level of revenue and remain on track to do that level of revenue for 2009.

William Dezellem - Tieton Capital Management

So reasonably linear agreement or flow of revenue is the way its working out?

Ralph Quinsey

Yes reasonably linear.

William Dezellem - Tieton Capital Management

Its helpful. Thank you both.

Operator

Our next question comes from the line of Jon Gruber with Gruber & McBaine.

Jon Gruber - Gruber & McBaine Capital Management

Great quarter guys, but a question on the guidance another one, with iPhone up 3 million in September. That's a big plus for you with the comeback of the Intel business and the Wi-fi, why are we only guiding for up in the middle of 6 million, that doesn't make sense?

Steve Buhaly

Well, I'll just put it in perspective...

Jon Gruber - Gruber & McBaine Capital Management

Or what are the offsets, what do you think is going to be down?

Steve Buhaly

Let me just back up, try to put it in perspective. And then if I have answer your question, please ask a follow-up question. All right, I mean, if we did 6% in the range of 3% to 6% every quarter continuously that would -- in a down economic year, that wouldn't be a bad year and in fact we are significantly out growing our competition in this space.

And we are coming off of just a tremendous quarter in Q2 and so I think if you kind of parse it out and say, what's happen this quarter, what's happen this quarter, you might would be over analyzing it. We're going to have a good year this year, we're having a good growth here this year. We're going to grow in 3G, we're going to grow in defense. Our networks business is the one that is suffering the most from the impacts of the economy.

Steve Buhaly

One other thing that we'd caution you on is that, we are relatively early in the supply chain. So our actual revenue in one quarter, may not show up as customer units or revenue until the subsequent quarter.

Jon Gruber - Gruber & McBaine Capital Management

Yeah, no I realize that. But I sort of took that into account because even if you look at the December forecast right following your guidance, big numbers bigger than the prior (inaudible) recorded. So anyway, what kind of increment will you get on the Intel Wi-Fi which has been dormant for you?

Ralph Quinsey

Right. And if look at it our wireless clients revenue in total which is dominated by our largest customer and we put this out on our website and if you do the math, we did about 2.5million in Q1; we did about 6.5 million in Q2 and I expect that to grow into the range of 7 to 10 million in Q3, down from the levels that we're at in 2008 but clearly we were selling in to inventory not into demand in 2008. All right?

Jon Gruber - Gruber & McBaine Capital Management

Thank you very much.

Ralph Quinsey

You bet.

Operator

And our next question comes from the line of Tony Ryall with eSure Partners .

Unidentified Analyst

Good afternoon. Could you give us a little bit of an update on the HV HBT progress, if its on schedule any new engagements with customers and existing customers where they are at?

Ralph Quinsey

Sure. The HV HBT or the high voltage HBT process. We are now trying to refer to as TriPower that's what we branded. This is a technology that allows base stations to be more efficient. Use electricity to be greener if you will. It also reduces cooling cost and enables other types of very efficient low energy use base stations.

We did announce our first design win with an Asian customer on the last earning call. And I expect to do about $1 million of revenue, maybe just under $1 million this year. And then it will start to ramp, right it will ramp to double digits and then continue to grow in subsequent years beyond next year.

It's the type of market where unlike the handset market, it doesn't sky rocket in one quarter or one short period of time, but it has very long life and will be good business for us we feel like. Long story short, I think we're on track all the things we've talked about, meeting our milestones, working with additional customers and expect to see the more significant side of ramp still in 2010, that there will be a good revenue this year as well.

Unidentified Analyst

Okay. And if I may another question outside of that, in the optical area, you said that you have very high optimism for 40 gig and a 100 gig. Can you just give a little bit of a background on what the products are that you're selling, who are the primary customers that you sell to and how you are positioned competitively in the marketplace?

Ralph Quinsey

Sure. The products we sell are drivers for a modulator, so with this high performance electronics that drive the optics. And as you can imagine if the market goes from 10 gigabit per second to 40 gigabit per second to a 100 gigabit per second just like as frequency goes up it is our sweet spot for our product and our technology as that type of speed goes up also favors our type of technologies over maybe silicon for example as a solution to that market.

And in fact a metro market is now going through a transition from 10 gigabytes to 40 gigabytes and the know-long haul market is going through a transition from 40 gigabits to 100 gigabits. And we are in the designing phase with several customers that looks like a significant opportunity will come to us in 2010. We're conservative in announcing our design wins, and so we do not design wins after we have revenue for the products.

I would anticipate in design wins for these products in Q4 and a healthy ramp in 2010. And these products have good leverage on the bottom line because they are high ASP products. 10 gigabytes devices, may sell depending upon the market in the range of 20 to a $100. 40 gig devices sell in the range of 500 to $600 per module. And so it's a good revenue leverage and we have a good cost structure, we have a significant share position clearly in the high performance for the market. We are trying to spread our footprints to some of the lower performance market but a very high shared position and we typically compete against either start ups or probably that are originally from Japan.

Unidentified Analyst

When you look at the 40 gig market are these devices are (inaudible) based?

Ralph Quinsey

Fundamentally yes. You should think of it in that way, but there are multi chip modules that have electronics and they have some pass resilience, but the important and the critical content is gallium arsenide base.

Unidentified Analyst

So that the way you have the competitive advantage over your other competitors? The product guys or the Asian competitors that you can see with because of just your foundry experience with gallium arsenide or is it that in conjunction with the other components really that you're combining?

Ralph Quinsey

Yeah, I think we have a distinctive confidence in raw technology the gas materials and the gas processors that we use. And we've developed a distinct competency in just the design of these modules.

Unidentified Analyst

Thank you very much.

Ralph Quinsey

Thank you.

Operator

(Operator Instructions). Okay. And there seem to be no further questions at this time gentlemen.

Ralph Quinsey

Well, I want to thank all the participants and colleagues for your interest in questions. We have completed a very exciting quarter, but we are even more excited about the opportunities ahead. Steve and I are looking forward to updating you on our progress in October. Thank you.

Operator

Ladies and gentlemen thank you for dialing in for TriQuint Semiconductor's Second Quarter Earnings Conference Call. You may disconnect at this time.

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