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Peregrine Semiconductor Corp. (NASDAQ:PSMI)

Q3 2013 Earnings Conference Call

October 28, 2013 / 4:30 p.m. E.T.

Executives

James S. Cable – Chairman, President and CEO

Jay C. Biskupski – CFO

Jonathan Goldberg – Senior Director of Corporate Development

Analysts

Harlan Sur – JP Morgan Securities

Brian Modoff – Deutsche Bank

Quinn Bolton – Needham & Company

Doug Freedman – RBC Capital Markets

Michael Walkley – Canaccord Genuity

Rick Schafer – Oppenheimer & Company

Operator

Good day ladies and gentlemen and welcome to the Peregrine Semiconductor Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

Now, I will send the conference over to your host, Jonathan Goldberg, Senior Director of Corporate Development, please begin.

Jonathan Goldberg

Thank you, Operator. Good afternoon everyone and thank you for joining us in today's conference call to discuss Peregrine Semiconductor's third quarter 2013 financial results. The webcast of this call maybe accessed through our website at psemi.com and will be archived for one week. Today's call is being hosted by Jim Cable, President and CEO; and Jay Biskupski, CFO.

During this conference call, we will make forward-looking statements regarding future events or results of the company. Actual events or results could differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, which contain important factors that could cause actual results to differ materially from our forward-looking statements.

In addition, Peregrine reports gross margin, net income, basic and diluted net income per share in accordance with GAAP and additionally on a non-GAAP basis. Management believes that non-GAAP information is useful because it can enhance the understanding of the company's ongoing economic performance. Peregrine uses non-GAAP reporting internally to reevaluate and manage the company's operations.

Peregrine has chosen to provide this information to investors to enable the comparisons of operating results in a manner that the company analyzes its operating results. A full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings press release issued earlier today, and we ask that you review it in conjunction with this call.

As we have mentioned on previous calls, you should be aware that we are located within a flight path, the Marine Corps Air Station, Miramar and cannot predict the timing of flights. If we do have a flight coming over head, we’ll just pause and then continue once the jets have passed.

With that, let me turn the call over to Jim Cable, President and CEO of Peregrine Semiconductor.

James Cable

Thanks, Jonathan and thank you to everyone for joining us today. Peregrine reported revenue of $60 million in the third quarter in the middle of our guided range. That is up 15% from the second quarter and down slightly from Q3 of last year. We also reported adjusted earnings per share of $ 0.17, which compares to $ 0.03 last quarter and $ 0.17 in the third quarter last year.

Normally, at this stage in the call I would turn to a discussion of current industry conditions. But, we tear down reports now available from Chipworks on the new iPhone’s 5S and 5C, I want to first address that topic.

This teardown show that as expected, we did not maintain a 100% share of the high performance switch content. And, as we have said, on numerous occasions, we did not expect to hold onto that share indefinitely.

From these teardowns, we secured the diversity switch socket on all models, while the main switch is shared by two other vendors. This share shift and industry seasonality are the major factors affecting our Q4 outlook. Jay will get into more detail about this in his comments.

We think it’s important to keep this market share shifting perspective. So, I want to spend a few minutes talking about the dynamics we are seeing in the market for RF content and the strategic trends in the industry. And, we do some silver linings in these latest teardowns.

We often get asked how the rapid growth in low cost LTE smart phones will affect us. The answer is, we believe this growth is additive to our addressable market. LTE poses serious technical challenges, which will require complex RF front ends.

Based on the latest teardowns, RF content in the iPhone 5S and the lower priced iPhone 5C appears to be identical. Even lower-priced LTE phones need a large amount of RF content.

Both iPhone variants are available in five SKUs. And, from what we can tell, the only difference between skews if the RF content. As LTE become more global and the standard advances – we think the complexity of the front end will continue to grow.

This creates a significant burden for OEMs.

It takes considerable engineering time to design these front ends and only ends after maintaining sizeable inventory of each RF model for each color and form factor they build. This all adds up to significant cost. On the other hand, we do continue to see evidence that for the moment, purchasing managers are driving OEM, RF decisions toward prioritizing diversity of suppliers for diversity’s sake – often at the cost of the lower performance.

We have been commenting on this trend for some time. If you look at the latest LT smart phones, you’ll also see a wide range of suppliers. We remain confident that our products offer the best performance in the industry and we are highly competitive on cost as well.

And, while we expect the smart phone market to remain volatile in the short term, the growing complexity of LTE points to a future in which much of the front end is integrated.

And, this can only happen using silicon. This is a major strategic and transition for the industry and today, Peregrine is one of the only companies that can speak about building an integrated silicon RF front end.

We believe this is a significant long-term strategic advantage for us. So, while the near term realities of the smart phone market are very concentrated between two large OEMs, we think our segment of the industry is changing in ways that favor Peregrine. Other industry trends also favor us. The wireless operators remain highly motivated to launch LTE advanced networks because they can better utilize the various bands through carrier aggregation techniques.

But, building a front-end capable of handling these requirements is very challenging. And, Peregrine is one of the companies that offer products which can meet these requirements. Publicly available teardowns of the LTE advanced phones on the market today show Peregrine in the main antennae switch in every model.

The latest of these is the Samsung Galaxy Note 3. In here – I am again, referring to a Chipworks teardown. The Galaxy Note 3 is for sale now at AT&T and is the first carrier aggregation capable device for sale in the U.S.

We provide a truly differentiated performance needed for the carrier aggregation elements of LTE advanced. This should help drive revenue in 2014 as LTE Advanced Networks get deployed in many new markets.

I would now like to turn to some important events that are taking place at the company. First, we continue to see solid progress for our tuning products.

During the third quarter, we began full commercial production of our aperture tuning switches. We also saw another sequential increase in the number of customers sampling our tuning products in Q3. I believe we are now poised to gain share in the tuning category, which we created and we are on track for our tuning solutions to reach material revenue next year.

As the second major event, we began showing our LTE power amplifier to partners this quarter. As many of you are aware, we have shifted RTA strategy this year as market conditions changed. Our go-to market strategy is now to work directly with partners rather than selling discreet components. Working partners always takes longer than selling on our own. But, we think the opportunity is here to provoke dramatic industry change.

We are demonstrating outstanding LTE PA performance, and think this marks a strategic milestone on the road to the integrated silicone RF front end. We have the power amplifier, the tuners and the switches – with those pieces, we can now build a fully integrated front end.

Last, but not least, we are launching the next step in our process technology. This week, we are formally unveiling our Ultra CMOS 10 platform. Ultra CMOS 10 gives us the highest performance SOI products on the market and keeps us a step ahead of the competition in cost and performance.

Importantly, the addition of Ultra CMOS 10 gives us greater flexibility to offer customers what they want. Whether that is the best performance, lower cost, or smaller board area. Our new note also opens a door to a considerable increase in production capabilities. With Ultra CMOS 10, we are moving to the 130 nanometer technology note using 8-inch wafers on an enhanced SOI substrate.

This month we are celebrating our 25th anniversary, and that history matters. We introduced RF SOI to Hansa a decade ago. Without Peregrine’s SOS, there would be no SOI in RF today. I believe that with Ultra CMOS 10, we are delivering a process that truly stands out with performance over 50% better than what our competitors are capable of.

It’s the first SOI technology in the marketplace to warrant the ultra CMOS’ brand. Ultra CMOS 10 opens a door for us to a range of new opportunities. For instance, it allows us to use new packaging technologies and we are now sampling chip scale packaging or CSP products. This is an important strategic milestone for Peregrine as it expands our addressable market.

Using our own branded products, we can now go directly, after many more sockets in low cost handsets. We are already sampling the first of these CSP products into the marketplace. We think Ultra CMOS 10 is a major strategic advance for Peregrine. But, is also just one in a series of advances we have been steadily delivering over two decades.

As part of this advance, we have added a development and supply relationship with GlobalFoundries. We are very happy to be working with them and see this transition to partnering with a tier one foundry as a further sign of our growing maturity as a company.

I want to point out that our new partnership with GlobalFoundries is already underway and we are already sampling Ultra CMOS 10 products to our key module and OEM customers. We already design wins for these new products with volume production ramping in the first quarter of 2014.

This has been a quarter of remarkable technological achievements for Peregrine. I want to comment on our approach to such strategic initiatives. The management team here believes the best way for us to deliver value to shareholders is to invest heavily in our technology. However, the nature of this work often have to remain highly confidential for competitive reasons.

We recognize that this makes it harder for investors to measure our progress. There is the Peregrine that you know and then there’s the Peregrine that you do not know. All that investors can see is the R&D and litigation expense every quarter. But, the value of this works takes many quarters to become visible. Ultra CMOS 10 and our partnership with GlobalFoundries are the latest examples of this. Fortunately, today, we can now talk about both and show this as tangible proof of what we have been working on.

Turning now to our non-handset markets, we have several notable achievements here as well during the quarter. Revenue was affected to some degree by ongoing budget issues in Washington and a seasonal slowdown in our test and measurement business.

That aside, we made considerable progress on a number of fronts this quarter. We believe this side of our business remains poorly understood by investors. One of the key determinants as success for this business is the number of new products we release each year.

So, I am happy to say that we have already launched a record number of new products this year. We have more to come in Q4 and expect a launch even more next year. This will drive revenue from these markets for many years to come, as these are long lifecycle high margin products.

We had to spend a decade convincing handset OEMs that CMOS was superior to gallium arsenide or GaAs. By contrast, in our non-handset markets, customers are asking us for more ways to replace GaAs for use and applications where it’s not reliable or repeatable.

As a result, when we have products, we win. All in all, we continue to push ahead in launching new products and expanding the on handsets several high performance models.

Finally, I want to touch on our intellectual property or IP. We believe that our IP position covers fundamental patents required for all RF front end components using SLI. Many of our 150 patents are foundational, covering key building blocks that we continue to expand that patent portfolio.

We anticipate receiving our first royalty payment from Murata in Q4, and while we do not anticipate this being a material amount, we reiterate that the world’s leading RF module maker has validated the value of our patents in the open market.

In regards to our litigation with RFNB, we now have a fixed start date for the trial in November of next year. And, we will continue to file updates on this suit when we can. To conclude, we acknowledge that the handset market dynamics are going to remain volatile for the near term. That being said, I believe deeply that Peregrine has a true strategic advantage. Our design capabilities, our R&D, our patents and our 25-year history in perfecting these have created a very strategic asset. And, with time, the value of all this will become more apparent.

Before I hand over the call, I want to thank all Peregrine employees for their hard work this quarter. And, with that, I’ve turned it over to Jay Biskupski to walk through our financials.

Jay Biskupski

Thank you, Jim, and thanks to all for joining us today. I will first provide a summary of our third quarter 2013 results and ending balance sheet, adding a little color to the factors underlying these results. I'll then provide our business outlook.

To start, I'd like to remind you that Peregrine Semiconductor follows a 52-week fiscal year ending in December. Our third quarter ended on September 28th then covers the period start of June 30th through that date.

As noted in our press release and by Jim, revenue in the third quarter was $60 million, a decrease of 1% from the third quarter of 2012, and at the midpoint of revenue guidance range provided in July. On a sequential basis, our revenue increased from the second quarter of 2013 by 15%.

The sequential revenue strength was as a result of an increased demand for our switch products used in handset applications for Murata and higher shipments of broadband and general purpose switches.

The sequential increases in our revenue for switch products used in handsets was also largely from deliveries and support of a major handset release in the quarter. While, switch product revenues from other OE – for other OEMs was up only slightly.

The increase in revenues from handsets was partially offset by a small decline in shipments of products sold in other markets. Murata revenues as a percentage of our sales for the third quarter increased to 76% of our revenues from 71% in the second quarter of 2013.

This increases in part, a seasonal trend as handset OEMs have grew phone introductions during the third quarter. Based on teardown reports and our shipment of custom versus standard products, we believe that we are continuing to diversify revenues that end OEMs within our revenues with Murata.

GAAP gross profit for the quarter was $25.3 million or 42.1% of revenue. Gross margin decreased 250 basis points from the second quarter of this year. They were a product mix, higher production level and continued cost reduction of our products throughout our supply chain.

Partially offsetting gross margin improvements in the third quarter, the impact [INDISCERNIBLE] of $1.4 million as a result of lower cost or market valuation reduction on certain inventories as demand of our products ship.

Turning to operating expenses, on a GAAP basis operating expenses remained flat from the second quarter of this year, $21 million, as we continue to carefully manage expenses. We did increase research and development spending slightly to $10.8 million for the third quarter from $10.5 million.

Sales, general and admin costs decreased from $10.6 million in the second quarter of this year to $10.2 million for the third quarter with increases made to build our direct sales staff more than offset by reductions in G&A related cost. Within SG&A, our cost related to litigation activity remain flat.

On a GAAP basis, we realized a net income of $4.4 million versus net income of $4.7 million in the third quarter of 2012. And compared to a net loss of $448,000 for the second quarter of 2013. We recognized the GAAP net income per share of $0.14 on a basic basis and net income per share of $0.12 on a diluted basis in the quarter.

On a non-GAAP basis, we realized the net income of $6.2 million or $0.17 per share on a fully diluted basis. The non-GAAP figures only exclude stock-based compensation in determining income and the share count used in this calculation was 35.8 million shares for the third quarter of this year.

I'd like to now touch briefly on the highlights of our third quarter balance sheet. Our ending cash resources including both long-term and short-term marketable securities totaled $63.1 million, an increase of $6.3 million from the end of Q2 this year.

For the third quarter, we generated $10 million in additional cash resources as a result of our higher revenues which was partially offset by continued return of deposits received in 2012.

As I outlined in previous quarters, a significant portion of our cash reduction from the end 2012 occurred in the first quarter as a result of the windup of the order prepayment agreement with Murata, and the start of refunding capacity deposits to Murata and the impact on working capital from the decline in production levels in the first quarter.

Now I'd like to discuss our business outlook. Consistent with previous quarters, we are providing guidance for the next quarter with each earnings release. In addition to revenue guidance, we are also providing a range of the expected gross margins for the upcoming quarter.

We have noted previously that we’re seeing a shift in seasonality patterns as a result of timing of major OEM handset releases. Consistent with that, we are guiding the fourth quarter of 2013 revenue to be down from the revenue in the third quarter of this year and to be in the range of $43 million to $47 million.

For the third quarter, we noted that the product cost reduction and higher production levels were the largest impact in improving our gross margins. With the increase in production levels that started at the end of Q2, we were able to achieve of 42.1%,which was at the lower end of the range provided in July.

For the fourth quarter, we expect these improvements to be offset by the reduced seasonal volumes and as a consequence, we expect a small decline in gross margins and to be in the range of 40% to 42%.

We do not provide specific guidance for operating expenses due to the fluctuations that can occur in the timing of product development efforts. However, we expect only modest growth in operating expenses in the fourth quarter as we continue to invest in product and technology development while working to maintain an appropriate total level of operating expenses for expected revenue levels.

That concludes our prepared remarks. I'd like to now turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. Operator Instructions).

First question is from Brian Modoff of Deutsche Bank. Your line is open.

Brian Modoff – Deutsche Bank

I got it. Yes, hi guys. So, that’s quite a bit of seasonality we’re seeing in Q4 from Q3. Can you kind of give us a little more granularity behind that? You know, I know it’s a – Samsung is an example talking about [INDISCERNIBLE] in Q4 from Q3. And then, can we agree to order – look into Q1 of next year when we expect more seasonality? In Q1?

James Cable

So, hi Brian, it’s Jim here. Let me – let me take at kind of answering your question. I think the two major factors to explain in Q4 and, by the way, we’re not happy with that number either, I can assure you. But, as we said, and prepared remarks – the two factors are really that even though we have content in every iPhone, we did have some share loss.

That being said, we do think this, with the exception of that particular OEM – we do see much better and customer diversification than we had of Q3 of last year. And, we’ve talked in the past about the seasonality issue. And, in fact, because of our position in the supply chain, when we actually ship a little bit early – and when you look at kind a where these hero launches are, late Q2 or early Q3 – we think Q3 is really the big quarter for a supplier such as ourselves.

Brian Modoff

And then, kind of looking out a little further you – is it more seasonality in Q1?

James Cable

I think seasonality will continue into Q1 again. We see that, certainly with these two big handset OEMs, it tends to be tied as their hero launches. And, as timing remains what it was this year – we certainly think that. Although, not as much as we’re used to. When Q4 was the big quarter, then there was more seasonality in Q1. So, we would expect Q1 to not have as that of seasonality of, sort of, what the historical norms have been.

Now, we’ve been talking about this change seasonality for some period of time and I think a lot of people in the industry argued. But, certainly it seems like with the state of recent earnings that have come out – I don’t think our predictions have proved wrong at all.

Brian Modoff

So, you seem too often mistake about some new products coming next year, can you give us a little more granularity around that, if it’s a – is it mainly getting say, $0.70 more per phone of a tuner content, that you’re looking at? Is it something else? And then, you mentioned your LTE PA, is it mainly for sampling next year? Or if you think this could actually into some forms of production next year?

James Cable

Yes, so let me talk about – I mentioned in tuners where we actually feel good about much tuner revenue being material for us in 2014. And, that can sit, of sort of the initial tuner products that we developed over the years. The ones we call digitally tunable capacitors but, we’ve responded as well this year with a whole bunch of new products that we call aperture tuning switches. Other people call them different things.

And then, the last product category that I would expect to have a material impact on our revenue in 2014 – and again – this is something that’s tied to the SOI announcement I made earlier – is that, with that new technology platform – it allows us to address chip scale package.

Package switches that we could have our own brand on. It gets us out of selling just known good die switches and some module manufacturers. It allows us to dress the OEMs directly. And, it really allows us to go after some more entry in mid-level markets that we really haven’t had the ability to address previously. PAs, I’m not going to talk too much more about that for competitive reasons. But, we’re not counting on that for near term revenue growth.

Brian Modoff – Deutsche Bank

Okay, I’ll pass it onto the next caller. Thank you.

(CROSSTALKING)

Operator

Next is Harlan Sur of JP Morgan. Your line’s open.

Harlan Sur - JP Morgan Securities

I didn’t catch it clearly on the call, did you say that you’re non-handset business – did it grow or did it decline sequentially in Q3? And then, how shall we think about the non-handset business in Q4? It’s roughly, what – about a quarter of your business. I know you’ve seen some weakness, I think you said, in testing measurement and maybe, some strength in wireless infrastructure? Is this business actually growing in the fourth quarter?

Jay Biskupski

We’re expecting – now, what I indicated in my script is that we did see kind of a mix in that business there – with some weakness in testing measurement, offset by what was going on with broadband switches.

So, we’re – we’re flattish is the way I would describe it in the third quarter. And, I think as we look going to the fourth quarter – we’re still not seeing the dynamic growth. We’re certainly not expecting to see a return in tested measurement, we’re certainly not yet seeing dynamic growth – in things like our base station business, and others like that. And, space tends to be a little bit more lumpy in the way it goes.

James Cable

So, in – within our Q4 guidance, we’re expecting that to be partially flat from what it was in Q3. So, I would say, Harlan, that as I mentioned in my script – we – it felt quite good about the – that non-handset business. The challenge with it is predicting the exact timing. I mentioned that this was a record – it’s been a record year for us in terms of new product introductions, Q4 will be a record quarter for us in terms of new product introduction.

The challenges of that is timing exactly when those new products translate into design wins and when they begin to ramp production. So, the dynamics of that business are much more difficult to call from an exact timing perspective as is the handset business. Where literally, you can sample a product and ramp very, very quickly.

Harlan Sur - JP Morgan Securities

Okay. Got it. And then, can you give us an update on the fully integrated RF (Fun-in) program from, sort of, a long term perspective, right – as it relates to having all of the right building blocks, PA integration with switch and maybe DTC – about, from more of a, kind of a near to mid-term perspective. Are we going to see the Peregrine team come to the market with a product next year and how far along is the team in developing that family of products?

Jay Biskupski

Well, as I said, in the – I think, in my answer to Brian, we’re not counting on PAs for material revenue in the short term. And, we actually feel that it’s a better use of our R&D abilities, our R&D budgets – to continuing to work toward the goal of a more integrative solution.

That being said, we will continue to sell those building blocks, as I mentioned – the tuners, we actually see considerable uptake of that happening in the 2014. The new chip scale package switch products, and again, to some degree I’m reluctant to give too many details around where we are with respect to a PA activity for competitive reasons.

Harlan Sur - JP Morgan Securities

Okay. And…

(CROSSTALKING)

Jay Biskupski

We’re very happy with the [INDISCERNIBLE].

James Cable

The performance we’re – the performance we’re thrilled about but we’re not about to post it on the web right now.

Harlan Sur - JP Morgan Securities

All right. And then, my final question, as the market moves toward more LT advanced next year, it feels like you guys have the opportunity to open up that competitive gap once again against your competitors. Kind of talk about your market share in carrier AIG, maybe give us a sense on how much switch content is growing. I know that on some of the early LTE phones, the main antennae switch still count – it’s growing about 15% to 20% - is – is that how we should think about it for 2014?

James Cable

Yes, I think that – I think you’re right Harlan. I mentioned in my script the – that we think our market share for main antennae switches and LTE advanced is pretty close to a 100%. And, the – that that’s a trend that we’ve seen now few several generations. We – when 3G first rolled out and the linearity specs were tough – we captured a huge amount of share and then, we knew that that share was not ultimately stable due to sourcing dynamics. And, we saw that change down to kind of the 30% to 40% point.

Same thing happened when LTE rolled out in a meaningful way in 2012. And, we talked about how we captured a very, very significant amount of market share in those initial LTE phones. And then, again, sourcing dynamics come in and try to push the share down. And, we still have a very high share in LTE we believe. But, nowhere near kind of a 75% that we think we were at, sort of, 2012.

Now, in LTE advanced, we think we’ve won every socket that we’ve competed. And, there haven’t been a huge number of LTE phones launched yet. If you look at some of the industry projections, 2014 should be a big year. So, yes, we expect carrier aggregation in particular on the main antennae switch where the linearity requirements are very hard. We do expect that to drive some growth for us in 2014 as those networks ramp.

And, those products do, in fact, carry a bit of a pricing premium. And, because they are more complex. But, specifically, getting into the number there, I’d rather not do it on this forum.

Harlan Sur - JP Morgan Securities

Got it, all right, thank you.

Operator

And the next question is from Mike Walkley of Canaccord Genuity, the line is open.

Michael Walkley – Canaccord Genuity

Again, just a comment – you have a strong relationship with Murata and they’ve committed a sourcing, a majority of their switching requirements from Peregrine. But, with the, their recent share loss in the iPhone 5, the C and 5S models – how do you see this? Just a switch market, market share developing in the immediate term and then, obviously, the long term – given from the things you shared today.

James Cable

Yes, that’s a great question Mike. I think that the – one of the things we’ve talked about quite a bit in the past is the concept of the FEMid architecture and what our strengths are in FEMid versus other architectures that are – and OEM to choose.

FEMid, for those of you who don’t know – for, our definition of a FEMid is where the switch is combined with a soft lexers [ph] or duplexers. And, it is the architecture that is being most widely used by OEMs launching LTE smart phones today.

In the case of the recent Cupertino phones, in one version of, in one version of that phone there’s – there was an ASM in the other version of that phone was a transmit module. So, Murata law share – you should say, that Murata law shared you to the fact that architecturally they don’t have the solution that was favored by that and OEM. We believe that FEMids are going to be the third [ph] architecture, moving forward for technical reasons and, in fact, we believe that FEMids – the technical advantages of FEMids actually increase as you move to LTE advanced.

So, again, we feel we’re in good shape with Murata. We feel the FEMid architecture is the preferred embodiment, moving forward. And, as I said before, I think we feel that if we compare 2013 to 2012, we have a much broader diversification of – and OEMs this year than we did at this time last year.

Michael Walkley – Canaccord Genuity

Okay, thanks. And then, Jay, just on a – on a [INDISCERNIBLE] – on a non-handset business, when you talk about some record product launches which can be a leading indicator. Maybe, you can share with us some areas that you’re most excited about – potential growth opportunities next year, is it essentially small [INDISCERNIBLE] later in the year or is it – or is this some other that you see in some good design activity?

James Cable

Oh, I think there’s really kind of several areas. Certainly one of the things that we think will contribute in a big way next year is our space product line. Which – most people don’t view as being very sexy. We’ve gone through a pretty big transformation of that in the last two years, rebuilt the entire team. And, really have a lot of things going on in that market. We’re beginning to put some products into the enterprise WiFi market which we expect to provide a fair amount of growth as we go forward. We talked about, I think, in a few call about we had gotten one of the new automotive certifications for some of our products.

So, with that certification, we’re seeing a lot more traction into the automotive market. And, while that – generally, that’s a market that takes some time to develop. We have a pretty long history of working with the automakers. In particular, the German automakers. We have some new product areas that we’re actually beginning to push into. And, I think, these are more back half of 14 initiatives.

But, we are now sampling some switch products that take us up to the 20, 30, 40 gigahertz regime. Which was a regime that used to be solidly in the camp of only – could be done in gallium arsenide. So, it’s step by step if I alluded to in my script. We’re taking our Ultra CMOS products into markets where it was just previously thought were once and will always be the domain of GaAs. And, I think, step by step we’re chipping away at changing that perception.

Michael Walkley – Canaccord Genuity

Okay, thanks. One question, I’ll pass it on. Jay, just on the gross margins, can you talk about kind of a pulse and takes of how we should have gross margins next year with potential seasonal down queue on – but, improving cost structure, any indications on how we should think about following gross margins on incremental sales or lower sales – that would be very helpful. Thank you.

Jay Biskupski

You know, we remain very committed to our long term growth margin model – it’s in the upper 40s, so – starting at 45% and upwards. And so, we remain focused on delivering on that basis. As I indicated what we saw in Q3 – was some very positive trends there and especially, when we talk about scaling, I think about the advances that we make on our products. Certainly we expect positive trends from the gross margins coming out of the introduction of Ultra CMOS10 as well. So, I think – I think you’ll see progress through the year towards our target gross margins as we go forward.

There will be some, as I indicated in Q4, you’re seeing some seasonality in fact of that. I wouldn’t expect it to be more than that in Q1 – and then, continuing to improve margins as we go from there. Be the off the top answer of the way to think about it.

Michael Walkley – Canaccord Genuity

Great, thank you very much.

Operator

Thank you. (Operator Instructions). The question is from Quinn Bolton of Needham & Company

Jay Biskupski

Quinn is listening to the [INDISCERNIBLE] call. You’re there Quinn?

Operator

Your line is open, Quinn.

Quinn Bolton – Needham & Company

Yes. Sorry, guys. Can you hear me?

James Cable

Yes.

Jay Biskupski

Now we can, yes.

Quinn Bolton – Needham & Company

Okay, great. Sorry. Just want to start off with a clarification on the LTE PA, you said that you were delivering those to partners. By partners, you mean, mostly the module manufacturers rather than direct to OEMs?

James Cable

I would just say, we’re not going to describe exactly what we mean by partners. But, you can envision that the partner may range from OEM to module maker to potential chip set provider – so, that’s as much color as I want to put on that given the competitive dynamics.

Quinn Bolton – Needham & Company

Okay, it just – no change then in the longer term strategy of ultimately trying to integrate down to a single chip?

James Cable

Yes. I would say that as results of Quocalms [ph] announcement earlier this year, we feel that – that’s really validated that that’s the direction that people are going to take. And, so, we – I would say – we doubled our effort into turning that into a reality.

Jay Biskupski

I would say long term is no longer the applicable word Quinn.

Quinn Bolton – Needham & Company

Okay. Okay.

Jay Biskupski

We have a medium term type of activity.

Quinn Bolton – Needham & Company

Great, second question, it sounds like you’re seeing better traction with the antennae tuning and aperture tuning products. I know these are sold mostly direct to OEMs, but, can you comment on day stand partnerships and how important day stand partnerships are in the sale of those tuning solutions.

James Cable

Yes, I can talk about that. I – there’s what – there’s kind of now three big LTE day stand folks out there. There’s the one down the street that – just pushing their own tuner solutions. So, we don’t necessarily get a huge amount of traction on those reference design. We announced in Barcelona in February last year, one of our tuners being on the Intel LTE Reference Design Platform. And, we put out a press release around that. We have a long track record at working with the Broadcom guys on their reference designs for LTE and whether that’s going to undergo some changes as a result of their recent RENESOFT acquisition. I think it’s too - it’s too soon to tell.

So, one of the things we are seeing is that the customers, in this case, often don’t want to use the reference design. And, in fact, we’re finding that in the case of really, either in the DTC’s or the aperture tuning switches or even what we call our third generation tuner. You really have to get in there with the antennae designers of the OEM. And, come up with a working solution with them.

They may start with a reference design, but, some of the design wins we have with Pantech that we’ve talked about in the past – I’ve got two FAEs in the Pantech antenna lab working with their antenna designers to co-develop a solution.

So, I think, still that the – that’s the way it’s going to go for some period of time. But, it is important for us to be working with the – with the other chipset guys. And, we do that with both our antenna tuning solutions and we do that with our switch solutions.

So, I think we sell – even if we end up selling a product to a module partner – we end up having those conversations with the chipset guys, the module guys and the OEMs, so, that everybody kind of understand the capabilities we can bring, the problems we can help solve and et cetera.

And, I think that’s especially true when tune in today.

Quinn Bolton – Needham & Company

Okay. Thank you. Third question just on the CFT switch opportunity – it sounds like you just may enable you to go after some of the lower cost or mid-range LTE phones or perhaps even 3G phones – but, are these kind of more band switches? Three, four, five throw switches or these are sort of designed for diversity or main antenna switch modules?

James Cable

Yes. So the answer to the first part of your question is, yes. It allows us to go after some of those sockets. I would look at these more as kind of like glue. You have all these signals that’s are routing around on a board, you need a two thrower ,three throw or something that just connect the signals together. So, they’re kind of a glue logic of the RF world if you will. They need to be small form factor and, again, we feel that we’re beginning to sample those right now. We’re really excited about where that can go.

Quinn Bolton – Needham & Company

Great. And then, just my last question, just on the Ultra CMOS 10, since you’ve got a wafer-size increase and a prose of note shrink, I imagine that you get much better cost. But, should we look at this more as a sort of cost-reduction step? Is it also a significant performance step?

Jay Biskupski

Yes.

James Cable

No.

Jay Biskupski

Yes.

Quinn Bolton – Needham & Company

Yes and yes, okay.

James Cable

Yes. I mean, I think that fundamentally if you look at the – I don’t remember who asked the question about the integration path moving forward – certainly, as you go to integration, you require a large die, a larger die. The economics of larger wafers begin to make much more sense. The ability to get to a more aggressive technology note starts making much more sense. So, the primary driver us doing Ultra CMOS 10 was, in fact, to be the platform for the integration products.

That being said, all from a performance and cost standpoint, we think it’s very applicable to some of the products that we’re selling today.

Quinn Bolton – Needham & Company

Do, step 8, in Ultra CMOS 10 co-exist? Or does everything sort of shift fairly quickly over to Ultra CMOS 10?

James Cable

No, we actually see complete co-existence, we see that Ultra (CMOS) 10 is just another technology offering in our quiver of offerings that we can take to a customer depending on what’s important for them.

Quinn Bolton – Needham & Company

Okay, thank you.

Jay Biskupski

Thanks, Quinn.

Operator

Thank you, and next question is from Doug Freedman of RBC Capital Markets, your line is open.

Doug Freedman – RBC Capital Markets

Great, thanks for taking my question guys. Just building on that last question, can you give us a sense of how quickly your new platform at GlobalFoundries can ramp and maybe what percentage of revenue that might support by the end of 2014.

James Cable

I won’t answer the second question, but I’ll answer the first question. We will be ramping it in Q1 of 2014. We have sample products that are in the market today with design wins already. So, this is not something that we began working on last quarter. Obviously, it’s been something, frankly, that we’ve been working for probably ten years. But, as I stated in my prepared remarks, we announce things when they’re ready. Not as when they’re kind of ideas. So, this has been long time in the making.

Doug Freedman – RBC Capital Markets

All right, thank you. And, when you look at your highly integrated strategy, I noticed you mentioned that in the FEMid architecture we need duplexers and filters, but, yet they’re not part of your roadmap? How – how do you plan to sort of fill that need to create a fully integrated front end?

James Cable

Well, when I talk about a fully integrated front end, I don’t necessarily mean that it’s all monolithic. And, I think that – I mean, I can point out reasons why that probably doesn’t even make sense. If you think about aperture tuning switches, for example, you put one right on the main antenna switch or you put one right at the main antenna and you put one at the diversity antenna. And, those two are physically separated.

But, when I think about – when I think about a fully integrated front end, I mean, you’ve designed the entire system to work in an optimal way. Whether it’s bundled on the same IC, or whether in fact the attributes are such that you’re thinking about the system all the way to the baseband of the antenna.

No, you’re correct in saying – we don’t have a way today of think about how to integrate ball or saucer alters monolithically onto an SOI substrate. So, architecturally, there will have to be some breaks in terms of going on and off chip. But, I would say the way you architect that – that is a function of the overall level of integration that you’re trying to achieve.

Doug Freedman – RBC Capital Markets

All right, if I could, in the past you guys have talked about what percentage of your business you were doing with FB versus bonded or any mixed shift that you’re seeing along the switch lines and the process notes.

Can you give us an update on what you saw on the most recent quarter or maybe going forward for the fourth quarter as well?

Jay Biskupski

You know, in the past, we sort of indicated that we were, of course, once upon a time, we were 100% FB introduced bonded into the process itself. It still remains there – much for the high-end requirements and things like carrier aggregation is certainly a differentiator there. I would say that we’ve seen a shift back towards FB as a portion of our revenues in the last quarter and probably going into Q4.

And then, as you’ve indicated, we certainly expect to ramp and production going to SOI, and we’ll see that starting to take a portion of our – being a portion of our production as we get into 2014 as well. So, it’s really, for us, we’re trying to offer the best technology at the price point performance that the customer’s looking for. And so, we constantly are shifting that – between the different needs. And, that’s why we have the different forms of Ultra CMOS that could meet that customer need.

Doug Freedman – RBC Capital Markets

All right, great. Thanks guys. Okay.

Jay Biskupski

Thanks.

Operator

Your next question is from Rich Schafer from Oppenheimer, your line is open.

Rick Schafer – Oppenheimer & Company

Yes, thanks guys. Yes, my first question is – how do we get or how do you guys get more directly tied into the design process at Apple and Samsung to ultimately improve your visibility there? I mean, what – what are you guys doing or can you kind of walk us through that a little bit?

James Cable

Yes, I would say that A, we’re already engaged with them. And so, that’s not really a new goal of the company. I would say, secondly, the fact that we have more and more product – and I mentioned this in the prepared remarks – that we can in fact sell directly to the NOEMs, is very useful. If you look back at 2012, the very vast majority of our products were KGD die – KGD die – could really only be sold through module guides. It wasn’t that we didn’t know, even back then, that it would be desirable to have these other products to sell directly. But, bandwidth constraints, we just weren’t able to address it.

So, with the fact that the company’s is at a different scale today, the fact that we have products that lend themselves to selling directly to the NOEMs – and the fact that we’ve now invested in the selling resources, in particular in Korea, to get those products designed in.

Clearly, that’s a major thrust for us, going forward. That’s not to say, in any way shape or form, that we’re going to abandon our KGD die business. We still see that as great business. We still see FEMids as being the architecture of choice. And FEMids favors the suppliers that have the acoustic wave filter capability who’ve been our partners for years.

But, this is just one more, kind of product offering we had in our bag that we can now bring to bare – as I mentioned, that’s one of the key aspects of this SOI. With SOI, it allows us to move into this chip scale package arena and really aggressively do new product development in that area.

Rick Schafer – Oppenheimer & Company

Got it. Could you – how big [INDISCERNIBLE] – I knew you guys are obviously are working on more direct engagements and stuff. I just – we look into 2014 as our way to quantify the expectation, basically kind of thinking of it. Sort of your Murata business versus your direct business in 2014 – can, just a rough idea of what.

James Cable

I think what I said is that tuning would be material for us in 2014 and all of that tuning business will be direct.

Rick Schafer – Oppenheimer & Company

Okay. Okay. And, then just my last question. Just on the Murata licensing, yet I talked about kicking into the model here. Can you give us – I don’t know – provide a rough range for what it could be – as a percent of revenue, next year? I mean, is this like a 2% or 3% type line item or could this be a lot bigger?

Jay Biskupski

We’re expecting it to be certainly small – as Jim said in his script. We don’t expect it to be material in Q4. Our goal is really to continue to be a great supplier to Murata and meet their needs associated with that. So, that’s really our goal. I think, I’m still expecting the amount to be relatively small, and as we get better visibility and understanding of it. Because we haven’t really seen the Murata activity, the date in terms of understanding exactly what the makeup of their switch demand is. We’ll get more visibility too, as we understand it better. But, for now, we expecting it to be quite small.

Rick Schafer – Oppenheimer & Company

Because you’re not. Okay…

(CROSSTALKING)

Jay Biskupski

We see what we can provide them – we don’t know what – we don’t know their entire supply chain and production levels.

Rick Schafer – Oppenheimer & Company

Got it. So, you’re not factoring that into the – when you talked – you talked about for getting toward that 45% target range next year for gross margins. This would be, sort of, if this became more material, then you expected this to be upside to what you’re expecting?

James Cable

Exactly.

Rick Schafer – Oppenheimer & Company

Okay. Thanks.

Operator

Thank you, and there are no further questions at this time. I’d like to turn the call over to management for their closing remarks.

Jay Biskupski

That’s it for us, thank you for joining us and we look forward to speaking you again during the quarter and…

James Cable

In February.

Jay Biskupski

In February.

James Cable

Thank you.

Operator

Ladies and gentlemen, thank you for [INDISCERNIBLE], let’s finishing in for today’s conference, this concludes the program. You may know disconnect, have a wonderful day.

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