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TriQuint Semiconductor, Inc. (NASDAQ:TQNT)

Q3 2009 Earnings Call Transcript

October 21, 2009 5:00 PM ET

Executives

Steve Buhaly - Chief Financial Officer

Ralph Quinsey - President and Chief Executive Officer

Analysts

Steve Ferranti - Stephens Incorporated

Aalok Shah - D.A. Davidson & Company

Edward Snyder - Charter Equity Research

Nathan Johnson - Pacific Crest

Anthony Stoss - Craig-Hallum

David Duley - Steelhead Securities

Tim Luke - Barclays Capital

Richard Shannon - Northland Securities

Aaron H. - Lenexa Global

Dan Berkery - O’Connor

Operator

Good afternoon. My name is Allie and I will be your conference operator today. At this time, I will like to welcome everyone to the third quarter earnings call. (Operator Instructions). Thank you. I would like to turn the call over to Steve Buhaly, CFO of TriQuint Semiconductor. Sir, you may begin your conference.

Steve Buhaly

Thank you. Good afternoon and welcome to our third quarter 2009 conference call. This call 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 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 acquisitions. These non-GAAP measures are provided to enhance understanding of our core operating performance. A fuller conciliation of these non-GAAP measures is in our press release.

Ralph will now provide an overview of the quarter.

Ralph Quinsey

Thank you, Steve.

Revenue for the quarter was $173 million with GAAP earnings of $0.07 per share and non-GAAP income of $15.7 million or $0.10 per share. Comparing the most recent six months to the previous six months, TriQuint revenue was up 28% demonstrating a strong rebound from the economic slowdown.

All three of our markets experienced growth this quarter with the largest increase coming from the wireless client submarket following the resolution of an over-inventory position at one of our wire LAN customers.

Handset revenue was up slightly and defense and aerospace group 6% sequentially.

Non-GAAP net income was up 37% sequentially and we finished the quarter with a strong cash position of $135 million dollars.

Our cash utilization was up from last quarter at 75% and revenue from products released in the last two years reached 61% of total revenue.

Steve will provide detailed Q4 guidance shortly. In general, I see modest revenue growth, primarily in handsets and improved margin performance in the fourth quarter.

I will now provide some detail into our three major markets. Starting with our networks market. Our networks revenue was up 13% sequentially driven by a strong increase in wireless client revenue. Wireless client revenue increased 83% sequentially due to increased demand in wireless LAN as excess inventory was cleared by a key customer.

Transport revenue was down sequentially with weakness in point-to-point radio, VSAT, and cable offset by growth in optical and some growth in our emerging markets, particularly in automotive radar with the launch of a new program.

General weakness persists in the transports submarket as carriers remain cautious to 2009 capital expenditures. Paystation revenue was flat to slightly down sequentially with some slowing in wideband CDMA demand.

I believe the fundamentals for network growth remain healthy. Overall consumer demand from network capacity remains robust with the popularity of streaming video, social networking, and other bandwidth intensive applications creating sustained demands for long-term investment in infrastructure.

Due to economic conditions, carrier spending has slowed in 2009, but I believe TriQuint has done well in this down market. Excluding the anomaly of wireless LAN inventory and the normalization for acquisitions, I believe TriQuint is holding or increasing our share during this period.

TriQuint is well positioned to benefit when infrastructure spending returns to improve and expand network performance.

The quarter includes the acquisition of TriAxis Technologies, a leading provider of cable and fiber home devices and an agreement with Y-Way Technologies to supply green optical products. Both of these actions enhance our growth opportunities for 2010.

I would like to turn your attention to the handset market now. Our handset revenue was up slightly sequentially and up 11%$ from the year ago quarter. Comparing to Q3 of 2008, EDGE grew 136%, CDMA grew a 6%, and Y Band CDMA was up slightly as compared to an extraordinary strong year ago quarter, during which we completed a major 3-G program launch.

GSM revenue declined approximately 22% from Q3 of 2008, but this decline contributed to improved handset margins.

While handsets units are down approximately 7% in 2009, TriQuint is benefiting from healthy demand for 3G products, estimated to be up 15-20%.

I see no significant inventory problems in the handset market, although inventory adjustments at specific customers happen regularly.

Looking forward to Q4, I see one of our handset customers making a material adjustment in their demand to bring out excess inventory. While this may have influence on the quarter for TriQuint, I don’t anticipate impacting our ability to grow our handset revenue sequentially.

Finally, turning to the defense and aerospace market, where revenue increased 6% sequentially and 40% compared to Q3 2008. The strong growth comes from existing and new radar programs, such as Joint Strike Fighter, HTM 4, B2 Bomber, Volume Search Radar, and EQ 36. We are also see increased R&D revenue as compared last year, where we saw pause between phases of a major program.

Additionally, TriQuint was recently awarded $16.2 million dollars over four and a half years for the next program supporting nitro electronics next generation technology. This is a three-faced program with milestones targeting 500 gig performance.

The long anticipated flattening in the department of defense is certainly upon us, but TriQuint continues to benefit from new program ramps, our ability to attract new research revenue, and our investments in new technologies. These efforts have allowed us to produce record revenue quarters in this environment by focusing on the future needs of the defense and aerospace market. Our customers have also recognized our commitment to this industry and I’m proud to announce we have received our second annual four-star supplier excellence award from R. Space and A. Systems.

Now Steve will provide our results for third quarter of 2009 and our guidance for Q4. Steve?

Steve Buhaly

Thank you, Ralph.

For the third quarter of 2009, we reported revenue of $173.0 million dollars. Revenue increased 2% sequentially and decreased 7% from the third quarter of 2008. All markets enjoyed sequential growth with networks growing at 13%.

For the quarter, our revenues split-to-end markets was handsets 63%, networks 25% and defense and aerospace 12%.

Our revenue by geographic region was Asia 58%, Americas 37%, and Europe 5%. 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 third quarter, Foxconn was our only customer comprising 10% or more of our revenue.

Our book-to-bill ratio for the quarter was 0.94. Large military bookings in the second quarter led to low bookings in Q3. A normalized book-to-bill ratio for the quarter would be about 1.08.

Our gross margin for the third quarter was 33.8%. Third quarter non-GAAP gross margin was 35.0%, up from 33.2% in the second quarter.

Improved utilization and elimination of inefficiencies associated with very high sequential revenue growth in the second quarter were primarily responsible for the improvement.

Operating expenses were $47.7 million for the third quarter and $44.8 million or 25.9% of revenue on a non-GAAP basis.

Better than expected medical costs and the timing of certain program expenses helped keep operating expenses comparable with Q2.

Net income was $10.5 million or $0.07 per diluted share for the third quarter.

Non-GAAP net income grew 37% sequentially to $15.7 million or $0.10 per diluted share.

Diluted share count rose from 149.9 million shares in Q2 to 157.3 million shares in the current quarter due to our increased share price and option exercises.

Cash flow from operations was $45.7 million in the third quarter of 2009.

Total cash, short-term and long-term investments increased to $134.6 million dollars. The primary sources of cash flow were operating income, improved working capital of $19.5 million, and $11.6 million from option exercises and ESPP contributions.

Primary uses of cash or capital spending of $14.8 million and the purchase of TriAxis Technology were $8.0 million dollars.

Accounts receivables improved to $100.4 million with DSO at 53 days, while inventory was slightly up with terms of 5.1.

Non-GAAP financial measures, exclude stock-based compensation charges, a charge for the anticipated settlement of a lawsuit, and certain charges associated with acquisitions.

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 estimate that fourth quarter revenue will be between $175 million and $185 million.

Non-GAAP gross margin is expected to be about 35% and 37% and non-GAAP operating expenses are expected to be between $46 and $48 million.

Fourth quarter net income is expected to range between $0.07 and $0.09 per share with non-GAAP net income ranging between $0.10 and $0.12 per share.

Cash is expected to increase by about $15 million in Q4. As of today, we are 90% booked to the midpoint of revenue guidance for the fourth quarter.

Each quarter, TriQuint's management team participates in a number of Investor Relations activities. This quarter, Ralph will be marketing on the east coast with Barclays Capital and will be in in Boston and New York on November 10th and 11th. During this same time period, I will be in Kansas City, St. Louis, and Chicago marketing with Northland Securities. On December 9th, we will be participating in the Barclays Capital Tech conference in San Francisco. Finally, we will kick off the new year by presenting at the Needham Growth Conference in New York on January 13th.

In addition to these activities, we will continue our bi-monthly update webinars for investors that are new to TriQuint or those investors that have not had contact with us in the recent past and would like a quick update with our management team. Please contact Heidi A. Flannery, Investor Relations, if you are interested in participating in any of these events.

Lastly, I am very pleased that we have two new research firms following TriQuint. This month, Richard Shannon of Northland Securities and Todd Kaufman and Melissa Fairbanks of Raymond James initiated coverage of TriQuint. We welcome their coverage and look forward to working with both firms.

Our Q4 2009 conference call is scheduled for February 24, 2010.

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

Ralph Quinsey

In summary, TriQuint turned in solid results in Q3. Network infrastructure spending softness remains a headwind but the company is poised to benefit when carrier spending returns.

We announced a key optical opportunity, the TriAxis acquisition bringing attractive cable products and technology, solid progress in our defense market, and success in the growing Smartphone market.

Our Q4 outlook is positive with guidance of increased revenue, improved margins, and growth in earnings.

I will provide some insight into 2010 during our February earnings call, but early indications are continued momentum in revenue growth and earnings expansion. TriQuint is well positioned as a technology leader to serve growing opportunities in a market of expanding wireless applications.

Allie, we are now open for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from line of Steve Ferranti of Stephens Inc.

Steve Ferranti - Stephens Incorporated

I was wondering if you might be able to provide some additional commentary around the handset customer that you think could making some inventory adjustments in the December quarter. Did you see any impact to that in the December quarter? Then, any idea that you can give us in terms of air interface, where that might take place? Then, any quantifications in terms of how much impact that might have?

Ralph Quinsey

As I mentioned in the prepared comments, we see adjustments for inventory on a regular basis. I don’t see Q4 being out of character in total from a typical quarter. We do see one customer that is taking action to reduce inventory. That is I think significant. It’s a customer in Korea and I don’t see it as being a significant enough headwind to slow our growth in handset revenue. I still feel it will grow nicely.

So by and large, I don’t believe that it’s a major contributor going forward.

Steve Ferranti - Stephens Incorporated

Ralph, were they concentrated in one particular interface with you or is it sort of widespread?

Ralph Quinsey

It’s across the board.

Steve Ferranti - Stephens Incorporated

Just looking at the WCDMA and EDGE segment, just given the really strong I guess anecdotes we’ve had thus far in terms of Smartphone growth and I don’t know if you’ve seen the stock in the after market, but it’s off in the after market. I’m wondering if you could give us a sense of what you’re seeing in the WCDMA market.

Ralph Quinsey

I can’t speak to expectations, but I can say that I’m still very confident that there is an expansion of opportunity going around Smartphones and looking at at least year-to-date the TriQuint handset business, we’ve done quite well. We’re up approximately 30% and a big part of that growth is in the wideband CDMA area.

So I think the story is still exciting about growth in Smartphones. We had just a terrific bounce back from the downturn, much better than the industry. As I mentioned, we’re up 28% in the last six months as compared to previous six months.

I think when you step back and look at the overall market, I believe it’s still quite strong for Smartphones and when you look at TriQuint’s performance in that market, clearly growing faster than the market.

Steve Ferranti - Stephens Incorporated

Last one for me, on the CDMA side, you had a nice spike in revenues in the June quarter. How do we think about it going forward. Was the June quarter somewhat of an anomaly and how do we think about this particular air interface for you guys going forward?

Ralph Quinsey

Again, if you step back and look at the broader picture for CDMA, we’re up about 12% year-to-date, not bad performance in this economy. Same quarter over same quarter, we’re up about 6% and you can get this information off our website and certainly sequentially we’ve seen some up and down, but in the larger scope of things, I think that the CDMA market is still a great market for us and I think we’re doing quite well in the CDMA market.

Operator

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

Aalok Shah - D.A. Davidson & Company

First question on the major handset customer that Ralph alluded to. Did you see cancellations from that customer during the quarter and also when you talk about infrastructure being a little bit softer, was that primarily because of China infrastructure?

Ralph Quinsey

No cancellations in the current quarter, so what I believe will be the inventory adjustment is for fourth quarter compared to original forecast.

Infrastructure, we did see some wideband CDMA demand in the middle of year and that’s tailed off somewhat. Overall, Paystation is one of the markets that’s held up quite well.

For us, the markets that are down below our original expectation and remain down are the markets of point-to-point radio, VSAT, cable, to a certain extent optical. Optical in the most recent quarter has shown some uptick.

So the transports markets are the markets in our original expectation we thought would be much stronger by now. They have not come back. I’ve not lost enthusiasm for those markets and with the demand that’s on the infrastructure, I do believe that they will come back. I think there’s just an apprehension and constraint spending by the major cap ex spenders waiting until they feel comfortable to continue to invest in the infrastructure, but I believe investment in the infrastructure still another market for TriQuint.

I think we’re better positioned now than we were six months ago with the agreement we signed with Y-Way and with the addition of TriAxis to really when the demand returns we will see the benefits of it.

Aalok Shah - D.A. Davidson & Company

On the handset customer, you said there was only one, I’m assuming from your numbers it’s a CDMA based customer. Was there any other color you could provide around that customer?

Ralph Quinsey

The short answer is no, I don’t think you should be thinking of bigger issue. I mentioned to compartmentalize the concern. I don’t think there’s a broader issue. I don’t think you should assume that the CDMA customer, Q3, and this is a Q4 impact that I’m talking about, and I did say it was a Korean customer. So again, in short, I’m responding to the fact that there was a change by one of our customers that had gotten a lot of news and I don’t think that’s going to be a major impact to TriQuint. Certainly it impacts our numbers, but I still am forecasting growth in the handsets going forward and I think most of our growth in Q4 is going to come from handsets.

We’re guiding for growth at the midpoint in the range of 4% sequentially. If you annualize that, that’s not bad growth for this time of the year, and we’re up 20% from Q4 last year. So I think the company is in good position. Increasing revenue, increasing earnings, in our guidance if we hit our midpoint.

Operator

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

Edward Snyder - Charter Equity Research

So third quarter, in line with guidance, but a little lower to some of the more aggressive expectations, it looked like the handset revenue was maybe a little bit light to what a lot of investors were expecting. So are we to assume that the inventory adjustments that you’re talking about in Q4 had no impact on Q3 at all? If that’s the case, would you characterize the handset business as a little bit lighter and if so where did you think it was light?

Ralph Quinsey

I would say that our handset business year-to-date is up about 30%.

Edward Snyder - Charter Equity Research

I’m just talking about the third quarter.

Ralph Quinsey

We’re on a bit of a chair in our handset business and I think that momentum is continuing. Our growth slowed in Q3 and projecting growth in Q4. So I think the best way to look at that is to back up and look at a broader timeframe.

As far as the specific inventory issue, as I said, I don’t see that as a major impact to our business going forward. In fact, with this customer, I anticipate fairly healthy growth in 2010. I think that they have made a decision to do some adjustments in their inventory and part of doing business in this marketplace is to respond to those customers.

Edward Snyder - Charter Equity Research

I think it’s pretty well known. The question is it’s already quantified in your guidance and you believe that inventory adjustment will play out completely in Q4 and we’ll get back to normal growth profile after that or is it big enough that it may bleed into the Q1 of next year?

Ralph Quinsey

No, I believe it will play out in Q4. We haven’t guided for Q1. Q1 is typically seasonally down but I would not call this issue as a cause for that. I think it will be seasonally down, because it’s seasonally down, and I’ve given indication 2010 we will continue our momentum for revenue growth and earnings expansion. So net and net, I think it’s a short-term focused issue with one customer and the business is healthy overall.

Edward Snyder - Charter Equity Research

You saw no impact or little impact of that in Q3 it’s going to be clear.

Ralph Quinsey

That’s correct.

Edward Snyder - Charter Equity Research

Then, in terms of more granularity on the whole handset business here, you’ve done a pretty good job of landing some of the Smartphones, and a few of the big names, can you speak to real quickly any other gains that you’ve made recently that haven’t been as well publicized?

Ralph Quinsey

We have a very wide participation in virtually all Smartphone manufacturers and so I feel our penetration into Smartphones has been quite successful.

We are privileged to have very strong positions on both the (?) and opinion reference design and we have benefited from those positions in working with our partners. I see this as a growing market and I see our ability to continue to penetrate this market as very achievable. So again, I think the business is healthy and the market is healthy.

Edward Snyder - Charter Equity Research

You kind of outlined it in your description of the technologies, EDGE being up very significantly year-over-year. The other two somewhat flattish. This has caused a lot of concern on the investor side of it. You’ve won a lot of edge slots in 3G phones, but there’s still edge slots, correct?

Ralph Quinsey

That’s correct.

Edward Snyder - Charter Equity Research

And then, why then CDMA? Have you won many and do you hold much share wideband CDMA slots and wideband phones?

Ralph Quinsey

We have a very strong position in the edge slots, as you’ve said. Our 50-12 is our largest selling product. By comparison, everything else is going to be smaller penetration, because the 50-12 is so wide. At last count, we had over 20 customers for that. So by comparison, it has to be less, but we see a growing strength in our wideband CDMA products on the linear bands and for RPA duplexes, very similar products in the CDMA space. So I would say less penetration on the linear bands, but growing.

Edward Snyder - Charter Equity Research

Leading Smartphone manufacturer, do you see that going up, staying flat, or going down next year?

Ralph Quinsey

As you know, this is a sensitive customer, so I don’t want to make any specific comments about individual customers. I would say that we welcome the competition of the space. We think that’s good for the industry and good for TriQuint, and we think that we’re well positioned to fair well with those competitive offerings.

So I anticipate to continue to grow our position across the entire space. As you know, I’ve long not focused on one customer or the other, but focused on great products and platform wins where we can improve the performance of our customers’ applications or lower the cost of their application. We’re going to continue to do that.

Edward Snyder - Charter Equity Research

Military side of the business, (?) is a pretty big program, I think 2,500 planes over six to ten year period? Your content for plane?

Ralph Quinsey

Rough estimate of content is approximately $100,000. In layman’s terms, we’re still in pre-production. We’re in low rate initial production.

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When will you think that’s going to get to steady state production?

Ralph Quinsey

Again, as you said, between 2000 and 3000 planes spread over 30 years, I think it will continue to grow from where we’re at.

Edward Snyder - Charter Equity Research

These projects are pretty long tailed and they take a long time to ramp and they last a long time, so visibility tends to be a little bit better than the commercial side. Are you going to grow sequentially every quarter from here on to let’s say a year from now, two years from now? Do you have any feel at all?

Ralph Quinsey

No, I don’t have a sense for that, Ed. I apologize. I think that is one of many radar programs. So I would more key off of my comments that we have been turning in record quarters for our revenue in defense and aerospace and we would like to grow that business, so we’re going to turn in record quarters. That’s our target, that’s our goal, and we have invested in technology. We’re in good position on attracting new R&D dollars and good timing on ramps on several programs. So our focus is to grow that business.

Edward Snyder - Charter Equity Research

Texas, what’s the utilization there now?

Ralph Quinsey

As I mentioned, our overall utilization was 75% and our Oregon utilization was 77% and our Texas utilization was 39%.

Operator

Your next question comes from the line of Nathan Johnson of Pacific Crest.

Nathan Johnson Pacific Crest

I was wondering if you could elaborate a little bit on the wireless LAN client business and what we should expect in terms of linearity there and seasonality in Q4. I’d anticipate you guys beyond the inventory burn-off a little bit of an impact for windows launch. Could we essentially expect for a weaker than typical Q4 in terms of sequential growth?

Ralph Quinsey

It turns out I don’t have that great of visibility on that market, as you might suspect. Our customers have taken that way up and then way down and then back up over the last several quarters.

We had a fairly strong quarter this quarter. I don’t anticipate it staying that strong in Q4, but I don’t have great visibility on that.

Nathan Johnson Pacific Crest

I was wondering if you could talk in the handset space, it seems like the pricing environment has generally been benign throughout most of the year compared to historical year-over-year declines. Have you guys seen those pricing declines return to more normal levels or still in an environment where pricing declines is lower than typically expected?

Ralph Quinsey

If pricing was benign earlier in the year, I would say that it is moving into a position of being more normal.

Nathan Johnson Pacific Crest

It seems like a lot of handset OEMs. I was wondering for Smartphones, you guys anticipate to still be able to get the same economic that you’re currently seeing on Smartphones?

Ralph Quinsey

What timeframe are you interested?

Nathan Johnson Pacific Crest

2010 really.

Ralph Quinsey

I think multi-banded, multi-PA Smartphones will be dominant of the Smartphone category in 2010. I think the content expansion is still there. We’ve all talked about trying to help our customers converge a bunch of PAs into a single device. I think that’s a 2011-2012 production impact.

Operator

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

Anthony Stoss - Craig-Hallum

Just want to confirm a couple of things. So you’re up 4% to the midpoint of your guidance that is handsets, the rest you would assume flat to the rest of your businesses?

Ralph Quinsey

That’s correct.

Anthony Stoss - Craig-Hallum

Then also if you were 89% at the mid-point for Q3, clearly orders kind of trailed off in the quarter. Give us a sense of how much visibility you think you have now. Is it less than you had in Q3 for Q4?

Steve Buhaly

Most often we end up guiding at the midpoint to we’re about 90% booked. We were only $2 million dollars short of the midpoint. So I would say that’s a pretty close number and this quarter we happen to be 91% booked to the midpoint of our guidance, which is 180. So I would say it’s very, very similar to where we were three months ago.

Anthony Stoss - Craig-Hallum

Also, I don’t need a number, but if you could give us a sense of how big a cut the customer gave you. Would you expect that customer to be half of what they were in Q3, in Q4?

Steve Buhaly

Again, the reductions are compared to our expectations in our forecast. So it’s going to be reduced from the original expectations and forecast. I don’t know what it’s going to be compared sequentially until it happens.

Anthony Stoss - Craig-Hallum

Ralph, you made a comment about March seasonality, would you think we’re still down in that 8 to 10% range? Do you think March might be better than normal seasonality?

Ralph Quinsey

Tony, I really have no good information about the seasonality in Q1 yet. Typically, the handset business is down in that 5 to 10% range, on a bad year 15%, but I don’t have any visibility.

Anthony Stoss - Craig-Hallum

Where are you at now for capacity on a quarterly basis?

Ralph Quinsey

Our total capacity hasn’t changed.

Operator

Your next question is from the line of Quinn Bolton - Needham & Co.

Quinn Bolton - Needham & Co.

Just wanted to follow up on the networks business. It sounded like Paystation kind of flattish transport pretty soft and wireless client you talked about being down. So I guess I’m trying to reconcile your comment about business in handsets being flattish. Is it possible that networks is actually down quarter-over-quarter in Q4?

Steve Buhaly

Actually wireless client was up sequentially in Q3. It was the strongest up we had. So Q4, we had a very strong quarter in wireless client. I just don’t anticipate maintaining that in Q4. If you pull out the wireless client impact, the rest of the business is I think flattish is the way to think about it.

Quinn Bolton – Needham & Co.

So transport is not getting worse, it’s just not getting any better is kind of the way to look at that?

That’s correct.

Quinn Bolton – Needham & Co.

You sort of touched on the converged KA opportunity being more 2011-2012. So maybe a little bit early, but are you starting to see more design activity around converged PAs or is that something you expect to start to happen in earnest more next year?

Ralph Quinsey

More in earnest next year, I would characterize that as something the marketplace experts have been working on, but it’s probably going slower not faster. There’s different versions of converge. There’s converge that reduces the footprint, the cost, and the size in the unit area of active device. And then, there will be products out there that are more multi-mode, which is a repackaging exercise. We’ll participate in some of those multi-mode products and so will our competitors, but I wouldn’t put that in the same category as a converged solution.

Quinn Bolton – Needham & Co.

Lastly, it looks like the wireless LAN in handsets, it’s a small part of the handset business, but it seems like it’s been on an upward trend over the last four or five quarters? Any comments?

Ralph Quinsey

That’s been a strong business for us. I expect to see it grow faster than most of our other businesses going forward.

Operator

Your next question is from the line of Tim Luke with Barclays Capital.

Tim Luke - Barclays Capital

If you look at the beginning of next year, networks in defense…or how you might see that?

Ralph Quinsey

I don’t see a lot of seasonality in the networks in defense business. What happens in that business is big pieces of business cross the quarter boundary. If you remember a year ago, Q4 we had a fairly strong Q4 and a weak Q1, because the customer took a major piece of business across the boundary. I think those crosses could go either way.

Tim Luke - Barclays Capital

Operating expenses, how do you see that going forward into the beginning of next year and you guided it within a range of $2 million for Q4, what are the variables there?

Steve Buhaly

The variables in Q4 range from how much vacation time people take to how much our medical expenses are and the timing of engineering materials in development programs. Medical tends to be a bit higher in Q4, because individuals exhaust their personal deductibles and the company pays the whole freight, and so you just have some fluctuations in Q4.

Looking into next year, our long-term goal is to have OpEx at 25% of revenue and I would expect we’ll be budgeting in that range.

In Q1, it’ll run a little hotter, because revenue is typically a little bit lower, but for the full year I think we would shoot for the 25ish range.

Tim Luke - Barclays Capital

With respect to the segment within the handset business, can you give us a sense of how you would see the sequential development for WCDMA and EDGE in Q4?

Ralph Quinsey

So if you’re asking the mix, if you will, within EDGE Q4. I think you’ll see strength in the 3G products. I think CDMA remains a good market for us and depending on how some of our customers do it could be strong and then GSM continues to be the lagger.

Tim Luke - Barclays Capital

Could you give us color on customer concentration?

Steve Buhaly

We only had one 10% customer and that was Foxxconn. I don’t speculate going forward.

Tim Luke - Barclays Capital

Could you give us how we should think about tax for Q4 and maybe rates for next year and then what you think the other income number is going to do?

Steve Buhaly

I think it’ll be a lot like Q3. I’d like to think all that extra cash would drive a lot of interest income, but rates are so low, it doesn’t really matter. Tax will be similar and I would say looking at 2010, again I expect similar low tax rates and small amount of interest income just due to the very low interest rate environment.

2010, we may be in a position where we start paying a more substantive tax rate, but I won’t go beyond that at this point.

Tim Luke - Barclays Capital

Growth margin for next year, key variables, do you have a target you might be able to share?

Steve Buhaly

It’s pretty much unchanged. Our target is 40% on a non-GAAP basis. Some of the things we need to do to hit that, networks revenue needs to recover. That’s a very important part of our story that has been slower to recover than we had anticipated and hoped for, but we believe it will. The carriers will spend money, because the demand is certainly increasing.

There are consistent opportunities in execution and fine tuning. We are becoming more efficient with our bob filter production, but we’re still in a learning curve and in a ramp situation and that creates an opportunity for us to improve as well.

Finally, utilization. I think we still have a bit more room to go before we’re really taking the maximum advantage of the opportunity there. We finished the quarter at about 75%.

So I think those are the keys to achieving the 40% targeted goal.

Tim Luke - Barclays Capital

Why is the cable and VSAT business slower than you thought?

Ralph Quinsey

I could only speculate that there is less spending on infrastructure, cable. VSAT is tied to home spending. Again, I speculate that people came into the transport market this year fairly pessimistic on CapEx. Until they get the new budgets for 2010, that will probably persist. And so, demand for the infrastructure, demand for band width, has not gone done. This is still fundamentally a strong growth market. Spending is lagging right now. I thought we’d come back by now. It hasn’t. I still believe it will come back and we’ll do quite well. I think we positioned ourselves with good share gains through acquisitions and through new technology launches. When it returns, we will benefit.

Operator

Your next question comes from David Duley with Steelhead Securities.

David Duley - Steelhead Securities

Typically when your stock is down 15 or 20% as it is trading in the after market, you had a major disconnect between investor expectations in what you reported and I’m guessing it’s the top line that you reported and more likely that it’s the handset revenue which would slack sequentially. Can we talk about why the revenue was flat sequentially in Q3? And what is a typical seasonal pattern for handset in Q3 in the industry?

Ralph Quinsey

I think, David, just to frame it, the best way to look at the revenue before you talk specifically about Q3 is to look at it year-to-date, the first three quarters compared to year-to-date, the first three quarters of 2008. As I said, the business is up quite sizably, approximately 30% with wideband CDMA being up north of 60%. CDMA, in fact, is up about 10 to 12% and our GSM revenue is down approximately 30%.

So by and large, the business is healthy. I think it’s a timing of the revenue. We’ve gone through a dynamic time in the world economies and that’s rippled through several of our businesses and to be quite honest with you, David, I don’t understand it any better than the next person. I feel good about the health of the business and I feel good about the outlook of the future.

As far as Q3 being flat. We were flat sequentially. CDMA was down more than any other business. The rest of our businesses were up.

David Duley - Steelhead Securities

I know you want to lump things into six months or nine months, but investors don’t look at it that way. They look at the most recent data point and the most recent data point would certainly indicate that you aren’t growing with the market. So that’s why the Foxxconn…I’m trying to figure out, I guess your answer is there’s a timing difference and in Q2 we recognized more revenue from big customers. They built inventory and now we’re seeing this unwinding of that. I mean it’s a pretty big magnitude of change here and so I know you want to lump things together with a couple of quarters, but in Q3 your handset revenue was flat and the market grew. That indicated that you lost share. That’s what people are focusing in right now and I’m just trying to figure out what could possibly cause the overall handset revenue to be flat, given a lot of momentum with Apple.

Ralph Quinsey

I would only recognize that if we did lose share in the current quarter and I don’t believe we did. We lost much less than we gained the previous quarter. So net-net we’re doing quite well and we’re guiding for growth in Q4 that is typical of seasonal growth.

So again, I understand your frustration with the current events of the economy and I wish I could provide more clarity, but to be specific we had pretty good growth sequentially in all of our markets with the exception of CDMA.

David Duley - Steelhead Securities

When you give guidance, whatever that guidance statement equate to a sequential growth, your indications were that the network business and defense business were flat and all the growth had come from handset. So what is that implication for the seasonal pattern in handsets then? Does that imply that your handset revenue will be up obviously more than the numbers that you just gave. Can you give us a range of what you think your handset business will be up?

Ralph Quinsey

So the midpoint of our guidance is about 4% and if it all does come from handsets, which is about half our business, a little bit more than that, then the handset business would be up in that scenario about 8%, 8 to 10%.

David Duley - Steelhead Securities

That’s a normal seasonal pattern in Q4 for handsets?

Ralph Quinsey

That’s a fairly typical seasonal pattern in Q4 in handsets.

David Duley - Steelhead Securities

So really the only question remains – why was your Q2 so much stronger and your relative to the market in Q3 a little weaker and I guess you’re kind of trying to lump the two together and say that’s the way our customer’s pattern of purchasing and behavior happened for us?

Ralph Quinsey

That’s a matter of record. That is the way it happened for us. Explaining it is more difficult, because I don’t have access to all the information. But again, I understand your concern about the current quarter, but stepping back I would just reiterate – I think our handset business and our total business is quite healthy.

David Duley - Steelhead Securities

Steve, did you mention, you said that Foxxconn was a 10% customer. Will you disclose what the percentage is or not?

Steve Buhaly

We may end up disclosing it in the Q. If we’re required to, we will. If not, we will not in deference to the customer.

Operator

Your next question comes from the line of Richard Shannon of Northland Securities.

Richard Shannon - Northland Securities

If I look at the third quarter and looking at grouping customers, if you look at your top three to four handset customers, how many of them grew in the third quarter and then relative to your guidance for Q4, how many of that same set of customers do you expect to grow?

Ralph Quinsey

I’m not sure I want to try to get into that level of details, but we’re making assumptions on top of assumption. In total, as you know, our handset market was flat sequentially. We put that data out on our website. We saw some customers grow and some customers not grow. I’m looking through the numbers and I just don’t see anything material that’s going to jump out and give you any more clarity.

Richard Shannon - Northland Securities

Maybe just to delve in on the fourth quarter guidance, actually mentioned one customer that is reducing inventory average, they will decline. Do you think your other top customers will be flat to at least growing?

Ralph Quinsey

I wouldn’t necessarily anticipate the customers reducing inventory to decline. It’s likely they will decline, right, but again, this is a forecast and it’s an estimate. By and large, again, the revenue in handsets is going to grow. If all of our revenue growth comes from handsets and most of it comes from handsets, we’re going to grow sequentially in that 8 to 10% range. That’s fairly good performance in the handset market. When you annualize that, that’s very good performance.

Richard Shannon - Northland Securities

One last question regarding your expectations for inventory ending the quarter on a dollar basis. Do you expect that to be flat or down or how should we think about that.

Ralph Quinsey

I think it will be flat. I think we’ll continue to enjoy turns in the 5.1 to 5.2 range.

Operator

Your next question is from the line of Aaron H. of Lenexa Global.

Aaron H. – Lenexa Global

First, just kind of a housekeeping question. How much was CDMA handsets down sequentially in Q3?

Ralph Quinsey

It was approximately 25 to 30% down sequentially. We put those numbers out on our website approximately 30% down sequentially.

Aaron H. – Lenexa Global

Earlier the question about pricing, Ralph, it was implied that pricing was benign earlier in the year and you said it’s normalizing now. If I remember, back in February when you and I met at 3GSM, the pricing environment was quite difficult. Is the pricing environment actually gotten worse?

Ralph Quinsey

As we talked earlier in the year, pricing was typically difficult. As I said, if it was benign, in the middle of the year we’re back to typical.

Aaron H. – Lenexa Global

Okay, so it was real bad in February, it got benign in the middle of the year, and now it’s normal?

Ralph Quinsey

I’m not sure it changed that much. I think it’s been fairly typical throughout the year.

Aaron H. – Lenexa Global

Lastly, on the customer in Korea where there’s a bit of an inventory issue. Your two biggest competitors have been talking a lot about gaining WCDMA share at that customer. How confident are you that part of what you’re seeing of that customer isn’t a share loss issue?

Ralph Quinsey

I feel very good with positioning with all our customers as far as our ability to satisfy their demand. I would only comment that we have a very, very large share position on our EDGE for 3G phones based on our 50-12 device and I suspect that some of our competitors will take some share there. That’s not a surprise to us and it’s in our plan. We have the opportunity on the linear bands, right? And we are gaining, I believe, in our penetration of PA duplexes and net-net I think if you look at the numbers year-to-date and the outlooks, I feel comfortable that we’re holding our own or doing better than the market and in fact everyone should be doing well, because this is a growing expanding market.

Operator

You also have a question from the line of Dan Berkery of O’Connor.

Dan Berkery – O’Connor

A couple of questions in relationship to the cash position. You said you generated $35 million of cash this quarter. Was that generated domestically or was that generated offshore?

Ralph Quinsey

Almost entirely domestically.

Dan Berkery – O’Connor

You talked also about the other income line and you talked about the low interest rates. You made an acquisition for $8 million dollars. How should we think of your usage of cash going in this fourth quarter and next year between acquisitions and share buybacks? I don’t think dividends in the works at all.

Steve Buhaly

For the shorter term, we’re just accumulating domestic cash. So we have about just over $80 million dollars offshore, about $55 domestically, and I’m comfortable with that as a reasonable liquidity position.

As we generate more cash, we’ll look at our M&A opportunities and other opportunities as well, but right now I think we have a reasonable level of domestic liquidity.

Dan Berkery – O’Connor

What would be sort of the level of domestic liquidity to that you would be sort of comfortable that you could then spend some of that money on M&A or other?

Steve Buhaly

Little deals like the one we did that we can do pretty much any time to do any, you know, I like to have $50 million dollars domestic cash available backed up by $50 million dollar revolver, which we have in place but have untapped.

Beyond that, I think it’s fair game to look for alternative uses.

Dan Berkery – O’Connor

Where would you rank share buyback in your alternative uses?

Steve Buhaly

It’s not currently part of the conversation, but we do examine it regularly with the board and we’ll continue to do so.

Operator

I’m showing no further questions at this time.

Ralph Quinsey

Thank you, Allie, and I want to thank all the participants for their questions and all the listeners for their interest. I’m proud of the results that the TriQuint employees have turned in and I’m equally enthusiastic about the future opportunities for the company.

I look forward to updating you during our call in February. Thank you.

Operator

This concludes today’s conference call. You may disconnect at this time.

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Source: TriQuint Semiconductor, Inc. Q3 2009 (Qtr End 09/30/09) Earnings Call Transcript
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