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Executives

Doug DeLieto - Vice President of Investor Relations

Robert A. Bruggeworth - President and Chief Executive Officer

Dean Priddy - Chief Financial Officer and Corporate Vice President of Administration

Eric Creviston - President of RFMD's Cellular Products Group

Robert Van Buskirk - President of RFMD's Multi-Market Products Group

Analysts

Edward Snyder - Charter Equity Research

Uche Orji - UBS

Harsh Kumar - Morgan, Keegan & Company, Inc.

Vijay Rakesh - ThinkEquity LLC

Todd K. Koffman - Raymond James

Aalok K. Shah - D. A. Davidson & Co.

Stephen Ferranti - Stephens Inc.

Tim Luke - Barclays Capital

George Iwanyc - Oppenheimer

Venk Nathamuni - JPMorgan

Nathan Johnsen - Pacific Crest Securities

RF Micro Devices, Inc. (RFMD) F1Q10 Earnings Call July 23, 2009 5:00 PM ET

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the RF Micro Devices Fiscal 2010 First Quarter Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today Thursday July 23rd of 2009.

At this time, I would like to turn the conference over to Mr. Doug DeLieto, Vice President, Investor Relations, RF Micro Devices. Please go ahead sir.

Doug DeLieto

Thanks, Ben. Hello everyone and welcome to our conference call. At 4:00, we issued a press release. If any one listening has not received a copy of the release, please call Janet Jasmine at the Financial Relations Board at 212-827-3777. Janet will fax a copy to you and verify that you are on our distribution list. In the meantime, the release is also available on our website rfmd.com, under Investors.

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

You should be aware that the forward-looking statements included herein represents management's current judgment and expectations, but our actual results, events and performance could differ materially from these or those expressed or implied by forward-looking statements. We do not intend to update any of these forward-looking statements or publicly announce the results of any revisions to these forward-looking statements, other than as is required under the federal securities laws. Our business is subject to numerous risks and uncertainties, including risks associated with the recent worldwide economic turmoil and it's affect on our business and the business of our suppliers and customers.

Variability in quarterly operating results, the impacts of global macroeconomic and credit conditions on our business, the rate of growth and development of wireless markets, risks associated with the reduction or elimination of our investments in our wireless systems business, risks that restructuring charges may be greater and that the cost savings and other benefits from our restructurings may be lower than originally anticipated, risks associated with the operation of our wafer fabrication facilities, molecular beam epitaxy facility, assembly facility and test and tape and reel facilities, our ability to complete acquisitions and integrate acquired companies, including the risk that we may not realize expected synergies from our business combinations, our ability to attract and retain skilled personnel and develop leaders, variability in production yields, our ability to reduce costs and improve gross margins by implementing innovative technologies, our ability to bring new products to market, our ability to adjust production capacity in a timely fashion in response to changes in demand for our products, dependence on a limited number of customers, and dependence on third parties. These and other risks and uncertainties, which are described in more detail in our most recent annual report on Form 10-K and other reports and statements filed with the Securities and Exchange Commission, could cause actual results and developments to be materially different from those expressed or implied by any of these forward-looking statements.

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

During today's call, our comments and comparisons, income statement items would be based primarily on non-GAAP results. For reconciliation of GAAP and non-GAAP financial measures, please refer to our earnings release issued to earlier today, available on our corporate website Rsmd.com, under the heading Investors.

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

Finally, as indicated on the last quarter's conference call, our fiscal 2010 is a 53-week fiscal year and our September quarter has 14 weeks.

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

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

Robert A. Bruggeworth

Thank you, Doug. Welcome and thank you for joining us. Throughout the June quarter, we indicated during various financial conferences and press releases that our expectations for greatly improved financial performance, primarily is a result of significant financial leverage and our new operating model.

Today, we're very pleased to report quarterly results that not only demonstrate the earnings power in our operating model, but highlight the outstanding execution of the global RFMD team. The entire RFMD organization has worked to enhance our quality of profits by focusing on our largest competitive strengths, compound semiconductors and RF components.

Within this new strategic mission, we set clear financial targets for double-digit operating profits and return on investment capital or ROIC. Our June financial results speak for themselves. With June quarterly revenue of $212.5 million, gross margin improved over 17 percentage points to 37%. Operating income totaled $24 million or 11.3 % of revenue and earnings per share was $0.07.

On the balance sheet, free cash flow was $34.5 million. Free cash flow grew over 36% sequentially, even as we ramped production and as revenue increased over 23% during the same period. Operationally, the RFMD team executed very well during the quarter, on our efforts to launch new products and diversify our business.

In CPG, we grew our 3G business sequentially and key targeted accounts, including Nokia, Samsung, Sony Ericsson. And we won new component qualifications on reference designs from Qualcomm and Infineon. Sales of our 3G finance increased sequentially by more than 50%, and revenue related to 3G smartphones increased significantly as a percentage of CPG revenues.

Additionally, design win momentum for our new GSM GPRS transmit modules continued to increase across top tier handset OEMs in both Korea and Greater China.

We introduced 12 new products during the June quarter, keeping us on a record pace and continue to expand our content opportunities across cellular finance, receiving first production orders for GPS LNA filter modules and sampling switch duplexer modules to leading customers.

While, cellular handset units may be down year-over-year, RFMD increased opportunities for growth, led primarily by the increasing our content opportunities in 3G multi-mode smartphones. And MPG, we introduced 18 new products and 51 derivative products in the June quarter and we are on track to release more than 250 products this fiscal year.

MPG also launched a Gallium Nitride or GaN foundry business unit which features our state-of-the-art high power GaN process technology. During the quarter, MPG outpaced the rate of growth of its primary end-markets and supported increased customer activity related to 3G cellular infrastructure in China, WiFi, WiMAX, defense and commercial power and other wireless applications. Of note, MPG received its first production orders for electronic toll collection applications in China. And MPG sales related to smart grid applications, including Automatic Meter Reading or AMR grew by more then 50% sequentially.

On the strength of customer design activity across both MPG and CPG, we expect continued share gains and targeted accounts and growth in total revenue in the September quarter.

In summary, our RFMD today is flexible and agile. In the June quarter, we were able to ramp production to support share gains or closely managing expenses and costs. Our leadership and RF components is driving our financial performance. Over the next year, as we extend our leadership and in RF components, we will also begin to capitalize on our industry leading manufacturing advantages with the ramp of our breakthrough GaN technology.

Longer-term, we will leverage the same advantages and drive incremental growth with Gallium Arsenide for the die size in conjunction with our partnership with the National Renewable Energy labs. RFMD's mission is to extend the leverage, our leadership in RF components and compound semiconductor technologies into multiple industries. We're confident in our ability to leverage our competitive strengths and grow faster in our primary markets.

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

Dean Priddy

Thanks, Bob and good afternoon everyone. RFMD delivered on our commitment to significantly improved financial results despite a reduced year-over-year demand environment. In fact, with revenue down approximately 12% year-over-year, our non-GAAP operating margin improved from 1% of sales to 11.3% of sales year-over-year.

Now additional color on our non-GAAP P&L. Revenue for the June quarter increased 23.3% sequentially to $212.5 million. Gross profit was $78.5 million or 37%, a sequential improvement of over 17 percentage points. As we indicated on last quarter's conference call, in the very financial conference during the quarter, we anticipated substantial and sustainable improvement gross margin as a result of higher utilization rate and the affect of previously announced cost reduction efforts.

Operating expense were 54.5 million with G&A of $9.6 million. sales and marketing, $11.4 million and R&D of $34.2 million. Operating income was $24 million or 11.3% of sales, reflecting a sequential improvement of $45.4 million.

Other expense was 1.9 million, consistent with last year's quarter. Non-GAAP net income for the June quarter was $18.9 million or $0.07 per diluted share, based on 296 million shares using if converted in assets. GAAP net income was 4.8 million or $0.02 per diluted share, based on 269.3 million diluted shares. Return on invested capital using non-GAAP net income was 17.5%.

Now going to the balance sheet. Cash flow from operations was 36.4 million, compared to 29.7 million last quarter. Total cash, cash equivalents and short-term investments increased 45.3 million to $311.8 million. During the quarter RFMD repurchased approximately $2 million par value of outstanding convertible debt.

In addition, approximately $17.7 million related to auction rate securities moved from long-term assets to short- term investments. RFMD currently has approximately $540 million par value of convertible debt. RFMD's free cash flow of $34.5 million represents $0.13 in free cash flow per diluted share.

We're definitely tracking ahead of the 80 to $120 million free cash flow guidance for the fiscal year. And over the past four quarters, RFMD has generated over a $120 million in free cash flow, demonstrating how our new business model allows RFMD to generate cash.

Net accounts receivable was $98.1 million with DSO of 42 days. RFMD's inventories declined approximately $6.6 million to a $107 million, representing turns of 5.2. We believe inventory levels throughout the entire value chain are lean.

Net PP&E was 296.4 million, compared to 315.1 million last quarter. CapEx during the quarter was 1.9 million, with depreciation of 19.2 million and intangible amortization of 4.7 million. From additional commentary on CapEx, we signaled CapEx with the 10 to $20 million this fiscal year and we're currently tracking to low end.

You may ask us reduced levels of capital investment are sustainable, as revenues increases and as our end-markets return to growth, the answer is yes. For the foreseeable future we can maintain low levels of capital investment and there are three primary reasons.

First, we outsourced the vast majority of the supply chain for MPG, which represents approximately 25% of total revenues. Second, reduced die size products have been ramping for lees than a year and they will effectively increase our fab capacity by up to 50%. So, they become a larger percentage of our revenue. And third, RFMD has implemented a hybrid manufacturing model for assembly. And we're in the process of implementing that model for gas manufacturing. We intend to make capital investments only in cases where the return on invested capital and payback period are compelling.

Now some comments to assist you on modeling the September quarter. RFMD is currently booked for revenue growth. Factory utilization rates are expected to be consistent with the June quarter. Operating expenses are projected to be consistent with the June quarter, net of the additional week. Cash taxes are projected to be approximately 3.5 to $4 million in the September quarter and we currently expect RFMD's earnings per share will grow sequentially.

Regarding the balance sheet, we currently expect cash, cash equivalents and short-term investments will increase in the September quarter. CapEx is targeted at $3 million or less in the September quarter and inventory turns should be consistent to up in the September quarter.

Now, for some housekeeping items. We have included additional information in today's press release to help reconcile GAAP to non-GAAP results. And we hope, you'll find that information useful. Also, during the June quarter, RFMD adopted APB 14-1, which applies to the companies with outstanding cash settlement comfortable debt. APB 14-1requires companies to recast GAAP financial statements for the most recent financial year and will be following an 8-K reflecting the APB 14-1requirements. Of note, prior year GAAP results will updated to reflect APB 14-1, but our June quarter results as presented today will not change.

And with that, I'll open your call up to questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we'll now begin the question and answer session. (Operator Instructions). Please ask one question and one follow-up question and then requeue for any additional questions. (Operator Instructions). And our first question is from the line of Edward Snyder with Charter Equity Research. Please go ahead.

Edward Snyder - Charter Equity Research

Thanks. Good quarter guys. Specifically, interested in utilization which you indicated will be flat suggests that most of the big gains are probably behind you here. I'm curious what should we look forward to in terms of next step-up in gross margins, if utilization is going to be flat and your OpEx is going to be about the same?

And where do you think most of your gains are coming from as you probably know, Trico and Scallis (ph) also put up really good numbers and really good growth and the end-markets are not growing. I'm just curious you mentioned share gains in the press release. Who you think will gain share gains and is it sustainable at least, for couple of more quarters? Thanks guys.

Dean Priddy

Ed, I'll take a shot at the utilization part of the question and then will pass the share gains over to Eric Creviston. When I said flat, it was more flat with exiting the quarter, I think. And when we talk about utilization rates, you have to look at both installed equipment capacity and labor capacity.

So, we're only at 70% or so of installed equipment capacity and with our reduced die size products going into production, we have ample capacity to meet all of our customer needs for the foreseeable future. So, actually equipment capacity is not apples-to-apples, because if the die gets smaller that's give us more throughout through our existing facilities.

Secondly, especially early in the June quarter, we were running very tight with labor capacity. And we were running fast to catch up with demands, extremely fast to catch up with demand. We added to our workforce and we've taken steps to ensure we have adequate capacity to meet all of our customer needs going forward. So, utilization rates I think while we're saying they are consistent with the June quarter, definitely you have to look at both the labor capacity, and all know that and the equipment in solid equipment base percentage capacity.

Eric Creviston

Okay. Hi, Ed, this is Erik. Regarding the... what's driving our share gains with Nokia we're certainly winning in both the smartphone category as well as the entry category. Samsung was up strong as well both in smartphones and entry with a lot of new design and share gains there.

Sony Erickson, we mentioned that was up strongly as well. That's primarily in t 3G or smartphone category. And then, DTE as well, we're getting to chip away and make some progress, they were up nicely as we're beginning to enter their business really for the entry level and we certainly expect that to grow considerably next year.

And also, just broadly through Greater China, the entry level, we've been talking a lot about the new products being released. They are getting tremendous traction. We saw a designing activity, in fact, in the June quarter, nearly triple versus the March quarter. So, we certainly think that's sustainable for several quarters going forward.

Regarding, who we're winning from, the consolidation seems to be clearly happening around the top three front-end providers. So, that's good news. The strong Yen has put pressure on Renasis. And I think we're certainly expecting share gains against them currently and to continue. And then, other smaller players that just don't have the broad portfolio just can't... won't be able to keep up I think as we consider, as we continue to see the growth in the complexity of the 3G smartphone markets.

Edward Snyder - Charter Equity Research

So you are point on gaining against Renasis, especially last time you gained a lot of share against them. It really spun your margins, because typically there are 2G and lower entry level products. Should we expect a little dilution in the gross margin, if that becomes a big part of the story in the next couple of quarters or is there something's changed?

Dean Priddy

Well, I think and like we've said before the gross margin for us is really about the new product introduction and even in the low tier, the entry products were releasing have higher gross margin across our entire customer base, than our previous product line, we've had. So, we can continue to win share in the low tier without the evolution of the margin

Robert Bruggeworth

And as far as the gross margin, the 37% I think the we've to go back several years in the company's history to see a time when we had gross margin at that level or above and in my opening comments, I mentioned that we felt we can consider that we could sustain the gross margin performance. We are not getting to the individual line item guidance that if we're saying that EPS is going to grow during the quarter, in your modeling, you will have to do some assumptions about gross margin and we don't see any major downward movement in gross margins in the September quarter.

And I think attribute to the CPG organizations, the reduced die size products are delivering even in the low end, much higher margin opportunities than what you maybe modeling.

Edward Snyder - Charter Equity Research

And, if you go back to '03, I mean your old model, way back in '02 and '03 when we used to talk about them, was a high 30s, maybe 40% and then when Polaris came out with the margins, this one's going to get there. So, is it safe to assume what kind of shifting back to that model with that and ultimately if everything works out?

Robert Bruggeworth

Yeah. You're bringing up a good point, because the Polaris business, the transceiver business; the margins there this quarter were in the mid teens. So, if you back that business out, I mean you get a margin profile that's exactly overlaid on what you just mentioned.

So, yeah I mean as we continue to utilize our factories and these reduced die size products continue to represent a greater percentage of our revenue and as we use our supply chain strategically and competitively, I don't see any reason why we can't begin to converge on our long-term model of 40% gross margins. We mentioned that last quarter that that was going to be happening this year.

Edward Snyder - Charter Equity Research

Well, thanks a lot. Thanks also for pro forma breakup on OpEx. That's hugely helpful.

Dean Priddy

Thanks, Ed.

Robert Bruggeworth

Okay. Thanks. Thank you.

Operator

Thank you. Our next question comes in a line Uche Orji with UBS. Please go ahead.

Uche Orji - UBS

Thanks for taking my question and great quarter guys. Just wanted to dig further into gross margins. Firstly, can you give us some color as to what would be the key drivers of gross margin going forward, whether it would be utilization versus the die size and do you have further headroom after 40%?

Dean Priddy

Yeah, well remember last quarter we signaled that just improvement and utilization rates we probably bring back at least 10% or so, 10 percentage points of gross margin. And then we also said that that definitely we're taking in the supply chain and not even been factored into our margin calculations yet. So that was several million dollars of additional margins.

MPG is definitely contributing to accretive margins. We've maintained all along, but the gross margins there are around the 50% levels. During the June quarter, the growth rate was not quite as high in MPG as in CPG, but later in the year, we expect that growth rate to accelerate.

So that's also a very major driver. And obviously, mix is going to see a big factor in gross margin and utilization rates. And again, we expect to see our utilization rates being consistent with the numbers that we posted or perhaps even higher as the year progresses. And so a lot of this will go down to mix. And if the mix is... smaller die size products, they have an inherently higher margin.

So, I think we have several things in our favor, but we definitely will have some ASP erosion. We think that is about normal as in previous years, somewhere in the 10 to 15% range. So, we're bringing out new substrate technologies, we've got new test methodologies. I mean we are extremely focused on the supply chain in NPG and CPG to reduced cost structures and outpace the ASP declines.

Uche Orji - UBS

Ok, great. Second question is about visibility you have into the second half of the year. I mean you provided a guidance for CPG that it will grow in line with the industry. But, just wondering, what you're hearing in terms of the growth from your customers for the industry?

Robert Bruggeworth

On the MPG Bob.

Robert Buskirk

Sure. Hi, this is Bob Van Buskirk. I think our visibility right now is good and frankly has improved. We generally talk for our model from a MPG standpoint about what kind of turns business that we would expect at this point in t quarter. And all-in-all, it's a pretty good and solid turns number for us. Meaning that, we're not expecting a lot of turns in order to meet the sequential growth that we've talked about it.

And then, we expect sequential growth in line with frankly, what we saw in the June quarter. So, I would say right now, certainly, into the September quarter, I think the visibility is good and has improved.

Eric Creviston

And for the CPG side, we have several scope for sequential growth. We actually expect to outpace the growth in the market. We think the component marketplace in general will rise a little faster than the end-market, as the inventory kind of becomes to a neutral place. So, we're feeling pretty solid with the visibility in September, in our December quarter. A lot of people in the handset industry are still having a vacancy. I think people being very, very cautious about t December quarter and keeping inventories lean. So, we will see three moths from now how that's working.

Robert Bruggeworth

Yeah, I think that's a good news. As we look to across the entire supply chain other competitors, customers, the in-channel inventory; it all appears relatively lean to us.

Operator

Thank you. Our next question comes from the line of Harsh Kumar with Morgan Keegan. Please go ahead.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Hey, guys. First of all, congratulations very, very strong number. Question for you kind of... around the growth guidance. You automatically should see about our call it a 7 to 8% growth from the extra week in the quarter. Would it be fair to say that you are looking to grow net of that in the September quarter?

Robert Bruggeworth

Absolutely, in fact when we say we are booked for growth. You can normalize the quarter 13 weeks, 14 weeks, whichever way you want to do it. We are booked for growth on top of that.

Harsh Kumar - Morgan, Keegan & Company, Inc.

I got you. That's very helpful and then Dean, question for you. Cash flow, 35 million. Would it be fair to say as you build out for the quarter that number got a little lower and should be able to expand pretty significantly?

Dean Priddy

Yeah. I think we could see some acceleration as the year progresses in our cash flow. I think if you just take a look at our P&L and look at the non-GAAP results and add back approximately $20 million of depreciation, you can kind of see what kind of what kind of cash flow that the income statement produce. So, then you have changes in your balance sheet accounts. But, you could definitely construct a model where we blow way past our 80 to a $120 million free cash flow guidance per year. And we're definitely on track to do that.

Now if you're a little more conservative in your modeling, I still think it's hard to model something that's less than about the high-end of about 80 to a $120 million range, because our business itself is generating cash and then it's the change in the balance sheet accounts, but then all that simply becomes a timing issue. So, between now and the end of this fiscal year, we expect cash flow and free cash flow to actually accelerate from the level it was in the June quarter.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Got it. Very helpful again. Last question, I didn't see in this in the press release Dean, but housekeeping CPG versus MPG as a percentage of revenue?

Dean Priddy

Yeah, you're still roughly in that 75-25 range. I mentioned that CPG and as we all know, the cellular industry came roaring back a bit faster and within the MPG, we had some nice areas of growth, but and we'll probably comment on this a bit later, but we're still waiting to see the cable TV and some of the broadband markets come back, anyway that's about it.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Got it. And last one from me. Polaris, was it significant in the quarter in terms of revenues?

Dean Priddy

Yeah, it was around 10% of revenue range, like I said, once again that the gross margins there were in a mid teen. So derivative margins contributed a little bit to our operating income, and it contributed a little bit to cash flow but, without it, we would have missed it, that much over the P&L.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Got it guys. Congratulations again fellows.

Robert Bruggeworth

Thank you, Harsh.

Doug DeLieto

Thanks, Harsh.

Operator

Thank you. Our next question comes from the line of Vijay Rakesh with ThinkEquity. Please go ahead.

Vijay Rakesh - ThinkEquity LLC

Yeah, hi guys. Good work here. I just wanted to catch up on this, on the MPG groups did it grow in line with the top-line and what are the drivers in that segment?

Robert Buskirk

Yeah. This is Bob Van Buskirk. Yeah, we also grew substantially from the sequential standpoint. Well in excess, quite frankly and certainly where we thought we are going to end up when we entered the quarter. So, we did see some acceleration through the quarter. A couple of bright spots for us in terms of revenue growth. 3G in China was strong and just to remind everyone, we're not tied to any particular standard there. So, when we say 3G, we're talking about TD-SCDMA or WCDMA or even the CDMA EVDO track.

We also saw some pretty strong sequential growth in what we call wireless connectivity. If you actually put together on our WiFi and WiMax sales, they grow extremely well, frankly in the range of almost 40%, sequentially. So, both WiFi and WiMax also grew.

Also, another area for us in terms of driving that growth within our smart grid and AMR, AMI end-market segment. I think we... Bob said in his prepared remarks that we grew in excess of 50% in that area with some key customers growing quite nicely. So, all-in-all, I would major growth drivers 3G China, wireless connectivity and smart grid AMR.

Vijay Rakesh - ThinkEquity LLC

Alright. And then one follow-up is, who are your 10% customers on the quarter?

Robert Buskirk

Well, if you are talking about for the entire company, we had one. In CPG, we had three MPG, I think it was just very, very evenly dispersed. I am not sure that any one customer represented greater than 10% of revenues.

Vijay Rakesh - ThinkEquity LLC

And within CPG, in addition to Nokia, where should it be?

Robert Buskirk

Nokia and Samsung in Greater China.

Vijay Rakesh - ThinkEquity LLC

Okay. Thanks a lot guys.

Operator

Thank you. Our next question comes from the line of Todd Koffman with Raymond James. Please go ahead.

Todd Koffman - Raymond James

Thank you very much and congratulations on the greatly improved results. You had mentioned that Polaris is about 10% of revenue. What's the timing for the Polaris platform in shipments to ultimately come to end of late at your customers? Is that quite a few quarters away?

Robert Bruggeworth

Yes, it is the current plans, we actually continue ramp our new handsets there, certainly fewer per quarter than in the past. That's indicating that we'll have pretty long tail to this business. We expect it to roll off slowly speaking sometime in our next fiscal year. Or really speaking, that's the level we're at now and beginning to roll off the next fiscal year.

It's probably important to note, that we're backfilling that revenue with a lot of other component business that we're working hard to sell it now. We're seeing great opportunities, power management opportunities as well as switch based products such as antennae switch modules and so forth. We mentioned, we're entering production now with GPS on the filters. So, we think these products which are now literally less than 2% of our revenues in CPG, could easily grow to the levels if they could replace their transceiver business, over the roughly the same time line.

And I should come to your question accretive margins compared to even the CPG business on average, certainly compared to transceivers.

Todd Koffman - Raymond James

Thank you very much. Good luck.

Robert Bruggeworth

Thank you.

Doug DeLieto

Thanks, Todd.

Operator

Thank you. Our next question comes from the line of Aalok Shah with D. A. Davidson. Please go ahead.

Aalok Shah - D. A. Davidson & Co.

Hi, guys couple of quick questions. First, I know you don't want to give specific revenue guidance, but in terms of your competitors everyone has growing about 10% sequential. It sounds like that time where the industry might be a little, maybe around that level. Is that kind of what which we are thinking about for you guys?

Dean Priddy

I am sure who are you putting our competitors. I know we had one that was 10%, one that's midpoint was 3 or 5%. We got inside customers unfortunately that can't agree on the end-market either, some stay flat, some stay up 6 or 7%. So, factoring all this in it's a few percentage points growth. We think the industry is going to be 3%. We'd have to wait and see how it operates out.

Aalok Shah - D. A. Davidson & Co.

Okay. so 3% plus or extra, we kind of say you are at in as well?

Dean Priddy

No, we said the industry was 3%.

Robert Bruggeworth

Correct. Yeah.

Dean Priddy

We didn't comment on what our growth rate would be.

Aalok Shah - D. A. Davidson & Co.

I am assuming you're growing your growth faster than the industry or not?

Robert Buskirk

Sorry, that was a cellular comment or...

Aalok Shah - D. A. Davidson & Co.

Yeah.

Robert Buskirk

MPG, again you got to remember the base in MPG, we're not expecting I'll talk about the cable business right now and some of your market growth.

Aalok Shah - D. A. Davidson & Co.

Okay.

Robert Buskirk

Like we said, I think we do expect sequential growth from MPG. We have a couple of markets that we're trying to get back from a recovery standpoint. One of them is cable, we're just kind of disappointed frankly with the lack of any meaningful recovery and that market especially in North America, but we do expect I think as Bob said, we're actually booked for growth net of that additional week in the quarter.

Aalok Shah - D. A. Davidson & Co.

And I want to point on the gross margin, but at the same time is there a revenue levels that is takes to get to that 40% over your customer?

Robert Bruggeworth

Yes, I mentioned last quarter some companies, because of revenue level where they obtained certain gross margins and I don't know exactly what the mix is going to. So, it is depended on net and a lot of other factors. But, I think we did comment that anything in the level that we are now in terms of revenue and above is going to produce very strong gross margin performance because of factory utilization and we've got some very exciting new products rolling that have accretive margin.

Aalok Shah - D. A. Davidson & Co.

Okay.

Robert Bruggeworth

And I said we reiterated our long term models last quarter of 40% gross margin for a reason and we expect to continue converging on that model over the relative near term.

Aalok Shah - D. A. Davidson & Co.

Okay, then last question from me. In terms of your mix in CPG, WCMA, I know you talk about a little bit. But, is there saving, anywhere you are really taking a lot of share that we should be paying attention to at this point. I know your WCMA growth is course strong, but is there anywhere else we should be paying attention to yet?

Robert Bruggeworth

Really, that both our smartphone and the entry level, we are the leader in our finance for smartphones. That trend has benefited us quite a bit. We have just tremendous opportunity to grow outside of our largest customers. Of course, we are quite strong. But, we see is the lot of other opportunities opened up for us. We mentioned, last spring we began to redo our product portfolio to really focus on customer diversification and our return on invested capital, our goals with actuaries (ph). Those products are not coming out. We talked about the number of products we released in CPG, because we think that is key competitive weapon we have.

We've really focused on the velocity of our products. And by far the majority of those are really focused on smartphone growth and customer diversification. But in the entry level as well, we had historically been very strong there. Our share there was quite low last year. It's clearly been to grow now, but we got lot of legs here, lot of room to grow as we really extend that portfolio with the customer base.

Aalok Shah - D. A. Davidson & Co.

Okay great. Thank you very much.

Unidentified Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Steve Ferranti with, Stephens Inc. Please go ahead.

Stephen Ferranti - Stephens Inc.

Thank you. Good afternoon, guys. Great job on the operational front during the quarter.

Unidentified Analyst

Thank you

Stephen Ferranti - Stephens Inc.

Can you give us any sense in terms of I guess, in the Cellular Products Group, how far or long we are in the dye-shrink product roll out? In other words, maybe rough order of magnitude, what percentage of your shipments are the smaller dye-product today?

Eric Creviston

Sure. This is Eric. It's less than 10% of our shipments today. And we are expecting that it will penetrate through roughly a third of the portfolio by the end of the fiscal year.

Stephen Ferranti - Stephens Inc.

Okay. And I guess it just strikes me you are 300 basis points away from your target gross margin. Seems like you've got a lot of levers left to pull on the gross margin line.

I guess so, are there any factors assuming that revenue stay consistent where they were in the first quarter, are there any factors that would potentially lead us to gross margin slipping from here or I guess conversely it seems you could easily see a path to 40% from here given where we are this quarter. What are your thoughts on once we get to 40%? Is there potential for beyond that?

Robert Bruggeworth

This is Bob Bruggeworth. I'll take that. Number one, I think that's same is if you listen to what Dean has been commenting about our POLARIS business, being that if the gross margin there is in the teams and being a reasonable amount of the business, it's disproportionate way. So, if for instance it's business drops-off, yeah you'd see what I think Dean was saying go up and model and calculate what's going on there.

The second point is it could also to your point, yeah, if doubled overnight, yeah that would be a negative. But, I think mix is probably why we would be in little bit cautious here because we have one product line that's so disproportionate gross margin to the rest of the company and unfortunately it could influence that.

Now, but the one thing that we didn't talk about that we yet have to continue to reduce our manufacturing cost is the consolidation work that we're doing in our China operations with moving our work out of Shanghai to Beijing. So that's build for MPG's margins.

And again as Bob said, as the CATV line amplifier business, if that was to come back we've got some factories that are running full right there very underutilized factories that would actually be helpless to our margin as well.

So I can give you a real positive one if CATV comes back. And again our POLARIS business, we just have to watch. So that's why we say mix is pretty important to us on that margin, but we still have levers yes to improve the margins.

Dean Priddy

Yeah, and I think a lot of questions within strictly on gross margin. I think the operating margin is where we have a lot of focus. And actually that's where the lever hits the road in terms of driving the EPS. And I see continued leverage on the operating margin lines. I mean for instance even if POLARIS with the lower margin structure, it exceeds expectations, then that's going to help our operating margin because we had very little expenses and supporting that businesses. So even though it is gross margins products, we're holding the line of expenses.

I mean, then your models, you probably wanted to adjust it for the extra week, for the September quarter. But we said we're going to be at 55 million basically for this entire fiscal year.

So, as sale increased, you get the additional benefit of leverage on the expenses. And on the expense side too, if you look at our R&D, we're investing about as heavily as anyone in our space for future growth. And so, we're not eating our Seacorn here so to speak. Yeah, we've got lot of new technology and product cycles on the horizon. Again, being the one, the near term ones that could drive so many different business segments. And then all the product development that we talked about.

So, I think you continue to see leverage both at the gross margin lines, but it goes a little deeper than that when you talk about the true leverage to the operating income and operating margins and finally the EPS and cash flow EPS.

Stephen Ferranti - Stephens Inc.

That's very helpful. One last one for me. Can you refresh us on the timeline for the Shanghai facility consolidation?

Unidentified Analyst

Yeah. That's going to be about the end of September, October timeframes. So we will began to seeing in the December quarter.

Stephen Ferranti - Stephens Inc.

Okay, terrific. That's it for me. Thanks guys.

Eric Creviston

Thank you.

Operator

Thank you. Our next question is a follow-up from the line of Edward Snyder with Charter Equity Research. Please go ahead.

Edward Snyder - Charter Equity Research

Thanks. Really strong top line obviously. I know we've talked about share gains, but if you could break this down and maybe just wait these forming, so we'll get a sharper view of where the revenue streams comments. If you had to put in three buckets, your share gains against competitors which Eric you talked about, but then also the strength in your OEM clients, special exempts and their share gains in the market and then higher contents because I know you talked about 3G and all that? So if we could break down that into three sections because there is already much the way of inventory restocking, that will be very help in predicating the mix in your several quarters?

Eric Creviston

Right. I guess I'm not ready to approach that kind analytically, so I'll give you my feeling for it. But you have to settle for that maybe. I believe that the accounting group was by far probably the bigger part of the story. Secondly was our share gains, and then thirdly would be OEM mix shift.

Edward Snyder - Charter Equity Research

So mostly when you mentioned 3G, that's were you talking about or are you doing more in the 2.5G and 3G with more modules stuff?

Eric Creviston

Right. It's mostly in the 3G today. And in terms of the 2.5G like EDGE and when it's part of the story, I think we'll begin to actually benefits from the new product cycles which are coming later this fiscal year there. Currently, we're seeing a lot of excitement around our actual Wi-Band CDMA trend in part.

Robert Bruggeworth

But I'll our 2G business was up significantly throughout last quarter.

Edward Snyder - Charter Equity Research

In terms of revenue right?

Robert Bruggeworth

Yeah.

Edward Snyder - Charter Equity Research

And, so that must have been more share gains against competitors?

Robert Bruggeworth

That's correct.

Edward Snyder - Charter Equity Research

Because again you are getting share Samsung and then against competitors there too?

Dean Priddy

Ed, I think you hit on a major secular trend though. When we reported and some of our competitors reported, maybe everyone was kind of claiming share gains. Then obviously, that's kind of hard to obtain. Perhaps, the entire RF component market is gaining same and value. And I think that's one of the major investments thing to here is, this whole mobile data secular trend in the increased RF content and complexity adds more dollars available for companies like RFMD and other RF component companies as well. So I think that's a rising tide scenario that I think we can all embrace.

Edward Snyder - Charter Equity Research

Well, actually it's interesting because if you look at someone more concentrated just in the smartphone side and this is like TriQuint, the biggest part of your upside was in fact content increase and they are giving more money for module. So, it's kind of hard getting back you remember, Dean in 1799 when HBT started showing up and you start getting a much better ASP for those parts and have been messaged, it sounds like the whole industry is got in this transition. But you are right because everybody is claiming share gains and a couple of these competitors don't even report. You're not going hearing us, just talk about share losses because you don't see anything. So, it's hard the way how much of this is everybody has a 150% of stamp at this point or something?

Dean Priddy

Yeah. I guess the only thing is that we extend to our content into some of the other components that we talked about in our opening comments along with Eric's color around some things. There are players like Sony, another Japanese competitor you are never going to find how much business they were doing on the Qualcomm platforms and in switches and things like that. And it's hard to look at switch filter modules. And it is a little bit more difficult to understand where the shares coming from, when you look at lot of the companies that are big and don't report, that kind of information. So that's also out there.

Edward Snyder - Charter Equity Research

And then to laid it on top of all this, we're obviously talking handsets here too, you've guided in the past that MPGs gross margins are well above corporate averages in the past, that's still out there if we get a kind of a macro boost in that and it becomes a larger share no deviation there right?

Dean Priddy

Absolutely correct.

Edward Snyder - Charter Equity Research

Great. Thanks guys.

Robert Bruggeworth

Alright. Thank you.

Operator

Thank you. Our next question comes from the line of Tim Luke with Barclays Capital. Please go ahead.

Tim Luke - Barclays Capital

Thanks so much. Just in term of the seasonal patterns going forward, should we now having seen an improvement in stabilization in the market continues to expect a more seasonal kind of December period and then a more seasonal decline in March. And secondly there been some investments by some types of industry in CMOS based solutions and I was just wondering on how you perceive upgrades in that arena?

Dean Priddy

As far as the seasonality comment goes, I'd really think it's just the, our economy the way it is around the world and people are still trying to figure out where we are initial cycle. Then coupled with you listen to what many our customers have said and they all have different views. I don't think we're going to add much to that party other than what we're preparing for, is if industry is up, we're going to chase the demand up. If the industry is down, we're going to chase it down, if its flat we're kind of stay where we are.

But what we are very confident in is our ability to generate cash and make money no matter which one of those scenarios play out. So we're not really ready to comment on any seasonal prints right now. But other than we're prepared to do deal with whatever it happens. And as far as the, I think your follow-up question was on silicon PA is that correct?

Tim Luke - Barclays Capital

Yes exactly.

Dean Priddy

I'll let Eric Creviston to address that one.

Eric Creviston

So certainly post Renaissance, it's been shipping with a LDMOS sort of silicon tape for a long time. It's been a third part of the market. I think you are probably referring more the CMOS power amplifiers which has certainly found a niche and kind of large niche, but it's found a niche in the market in the past where customers are really willing to make a certain sacrifice on performance for a cost benefits.

We haven't seen that particular niche growth. We made its entry kind of leveled out at a certain points. It seems to be staying there. And potentially going down. In fact we've done a lot of working in CMOS ourselves for so many years. And frankly we're not sure of performance cost benefit is really the right one. But we continued to do research and try to advance the technology and when we get to there to a point, we'll be sure to release ones.

I think the key trend that we're seeing in the industry more and more though is we need to solve compared to central problem, not the cost problem. So even in the low tier and certainly if you are not all tier, it's a power consumption issue now. And so we're real happy with the investments we've been making for many years in power management as well as our new semiconductor technologies truly advanced us.

Tim Luke - Barclays Capital

And seeing the strong upsides the revenue that you've guided and then think by the great in September, should we think about the linearity being something that's strengthened as you went through the quarter or how you've seen the linearity develop?

Dean Priddy

The linearity is shrinking some during the quarter, but it started off relatively strong. I did mentioned that with initially we were chasing demand pretty hard and trying to respond by adding back labor resources into our factories. I think our operations teams did a really a good job of doing that. If we could obtain comment just a little bit earlier, we probably would have evolved in better off. However, looking at September quarters, linearity looks pretty good. It maybe just a little bit stronger towards the backend at the quarter, which you will expect in any states of quarter, September quarter. But so far that's the quarter got also a great start both from a billing standpoint and from a working standpoint.

Tim Luke - Barclays Capital

Thank you so much.

Eric Creviston

Thank you.

Operator

Thank you. Our next question comes from the line of George Iwanyc with Oppenheimer. Please go ahead.

George Iwanyc - Oppenheimer

Yeah, thank you for taking my questions. Dean, falling upon your OpEx comment just a little while ago, you mentioned adding some people on the production side. Do you see any need at all add head count in any other areas or do you think that's something that can be held steady at current level?

Dean Priddy

Like I said, I think we're the leader in terms of R&D investment in the industry. And we think that's going to produce great benefits for the company in the future.

Over the near term, at least through the end of this fiscal year, no, we do not see the need to add additional expenses or head count to support the current business plan.

George Iwanyc - Oppenheimer

Okay. And a question for Bob Van Buskirk. On the smart grid side, how big of a contribution is that right now to MPG, and is this one of the bigger growth areas that you see for MPG?

Robert Buskirk

Yeah, I think on last quarter's call, we talked about the fact that we sell to 10 of the leading AMR/AMI suppliers literally across all three types of meters that electric gas and water.

I also said last time from a quantum planning and standpoint that we did about 5 million in revenue in AMR in FY '09 and that have things broke our direction in FY '10 we could double that and we are on to a great start. In fact we've already put in the bank 50% of what we did in FY '09 just in Q1.

So, it is accelerating. And the one we did end to it, today it's mostly front-end modules that we are selling. We are finding opportunities to sell, in some cases more content within the same. Some of the industrial partners were working with or actually deploying more than one radio for meter and looking for diversity switching and some other things, so the content is growing. We're also looking and I know Eric's group is participating in this.

Looking at both cellular and non cellular other components that we can sell for back hole application, some would be cellular standards, some would be non-cellular proprietary standard. So, we really starting to look at it more from a smart grid standpoint than just AMR node. But, it's a pretty exciting area for us and so far we're doing pretty well.

George Iwanyc - Oppenheimer

Thank you.

Operator

Thank you. Our next question comes from the line of Venk Nathamuni with JPMorgan. Please go ahead.

Venk Nathamuni - JPMorgan

Hi guys. Good afternoon. Thanks for taking my question. So, another question for Bob Van Buskirk on MPG. In terms of the quarter you said you had pretty good sales from China Wireless infrastructure spending.

Now, first of all I want to know is that a significant percentage of MPG revenue and so, what is that your expectation for wireless infrastructure spending in the next couple of quarters? Because we've heard that it tends to be very lumpy and that could be some slowdown coming up in the next quarter or so?

Robert Buskirk

Yeah. We, about within my group I have a business genome we refer to as wireless products, which is made up of wireless infrastructure type products as well as our catalog RF component business. And that's the group this last quarter was about a third of our sales to give you an idea. Within that group, about one third of their sales was in wireless infrastructure and then about a half of that had to do with China.

So, you can kind of break it all the way down and you find it's in the single digits in terms of total contribution to RFMD certainly. It's meaningful for me and it's a very good and longstanding business we've had. So, it's meaningful, but not significant enough to make a major difference in the overall needle for RFMD today.

I would say in terms of 3G in China, as I said earlier, we're standards neutral to... in terms of wireless infrastructure. So, we're not leveraged to one particular standard, even though about a third of our China infrastructure sales, this last quarter was actually in TD-SCDMA. But, I think we're in a period right now where they're going to be digesting some of the base station deployment that was done in 3G in China. We have had some of our leading customers over there to tell us that their profile for infrastructure revenue would be 60% in the first half and 40% in the second half, they are second leading customers that was more like 55, 45.

So I think, we probably will see some lower revenue in the second half of the year. But it's not a huge step function downward. I guess that's the message that I am trying to get across. And as far as it being lumpier and consistent, that's been sort of the signature of China for many years, quite frankly. So, I don't see that as that different.

Unidentified Analyst

Okay great. Thanks it's very helpful. Then a question for Dean. Dean, can you comment on what the outstanding balances is on the 2010 convert?

Dean Priddy

Yeah, we have a 270 million on the 2010 calendar year, August calendar year 2010 that converts at 763.

Unidentified Analyst

Okay, good. Alright, thanks a lot.

Operator

Thank you. (Operator Instructions). And our next question is from the line of Nathan Johnsen with Pacific Crest. Please go ahead.

Nathan Johnsen - Pacific Crest Securities

Yeah. Hi, just want to step back on the smart meter business. You talked in the press release about AMR and just want to get some clarification on whether you differentiate your commentary on AMR and AMI. And whether from your guidance perspective, if you're anymore less represented in AMI business, so that the industry makes that transition?

Robert Buskirk

Well, I think a lot of people just in general collectively refer to the end-market of AMR. We weren't differentiating or trying to signal anything related to AMR, AMI in our in a prepared comments of the press release. But, as I said before, we're really starting to expand our view into that market. And we're preferring to refer to it more like smart grid now, because we are not only in meter node application, but we are also in local area networks, as well as the wider area networks potentially, for backhaul application.

And that's why I mentioned that CPG is looking at cellular components through that transceivers that could be used in cellular or other types of radio components. So, we're preferring to broaden out our view of that whole segment in terms of energy management, if you will and efficiency and look at opportunity to RFMD and smart grid.

Nathan Johnsen - Pacific Crest Securities

And. Are you guys seeing any impact or do you expect to see any impact from stimulus money been made available for these kind of projects?

Robert Bruggeworth

We have a group of people off exploring a range of opportunities for us in new business developments and energy efficiencies and that sort of thing saying. So, we are looking to partner with government organizations where in some forms of government money or stimulus would be available to us actually within RFMD, we have a range of several initiatives underway, the deal with if you will green technology or energy management, energy efficiency. Specifically, our business though is going to the people that are deploying the networks for the large public utilities and the public utilities, they're of course availing themselves the stimulus money. And it would come through the customers that we sell to who are actually deploying those networks for the utility.

Nathan Johnsen - Pacific Crest Securities

Great. Thanks for taking my questions.

Operator

Thank you. And we have no further questions at this time. I would like to turn it back to management for any closing remarks.

Robert Bruggeworth

Thank you. RFMD is benefiting today from continued improvements in our end-markets, a record year of new product introductions and continued market share gains. We reduced our manufacturing cost and operating expenses substantially and we anticipate continued financial leverage as a result. We thank you for joining us and we look forward to reporting our progress as the quarter unfolds. Thank you.

Operator

Thank you sir. Ladies and gentlemen if you'd like to listen to the replay of today's conference. Please dial 1800-406-7325 or 303-590-3030 using the accesscode of 4106018 followed by the pound key.

This concludes the RF Micro Devices fiscal 2010 first quarter results conference call. Thank you very much for your participation and for using ACT conferencing. You may now disconnect.

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Source: RF Micro Devices F1Q10 (Qtr End 3/28/09) Earnings Call Transcript
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