TriQuint Is A Smartphone Play You Would Regret Missing

Nov.14.13 | About: Qorvo, Inc (QRVO)

Chipmaker TriQuint Semiconductor (TQNT) has done admiringly well this year. Despite releasing tepid first-quarter results in April, TriQuint's management was confident that the company will be profitable in the second half of the year. It looks like TriQuint is all set to do that, driven by customers such as Apple (NASDAQ:AAPL), Samsung (OTC:SSNLF), and increased spending in the telecom industry by the likes of AT&T (NYSE:T) and Sprint (NYSE:S).

A solid performance

TriQuint's total loss at the end of the second quarter stood at $0.24 per share, but the company posted robust third-quarter results recently with earnings of $0.16 per share. Given that the outlook for the final fiscal quarter calls for earnings between $0.12 and $0.14 per share, it can be said that TriQuint is firmly on track to achieve profitability.

TriQuint's convincing performance this year has led to gains of 56% as management has delivered on its promise so far. But shares took a heavy beating after TriQuint's outlook failed to satisfy Street estimates.

Taking a hit due to BlackBerry

TriQuint had crashed 15% after releasing earnings as investors panicked. But given the company's prospects and its solid client base, it won't be a surprise if TriQuint bounces back.

The weak outlook for the current quarter was due to reduced orders from BlackBerry (NASDAQ:BBRY). According to CEO Ralph Quinsey, BlackBerry used to be a 10%-plus customer earlier, but now its share has come down to the mid-single digits. This isn't surprising as BlackBerry's woes are well-known -- the company incurred a loss of $965 million in the previous quarter as sales plunged 45%. The loss was mainly due to a write-off of a whopping $934 million of unsold Z10 handsets, and revenue was just $1.6 billion.

BlackBerry is now looking to focus on its business customers, with the consumer space being dominated by Apple and Google. BlackBerry's flagship device -- the Z10 -- reportedly witnessed return rates of as high as 20% in the U.S. and Western Europe. Thus, as BlackBerry bails out of the consumer market, it would probably see a decline in device sales and could be expected to hurt TriQuint's business.

BlackBerry also recently fired CEO Thorsten Heins while also abandoning a $4.7 billion rescue bid from its biggest shareholder -- Fairfax Financial. BlackBerry is now looking to raise $1 billion to stay afloat, but it would be foolhardy to expect it to compete against smartphone biggies considering the condition it is in.

Not much effect

But BlackBerry's decline won't have a substantial impact on TriQuint's performance in the long run as BlackBerry's revenue share at TriQuint is already reduced. TriQuint also saw a 42% year-over-year jump in mobile revenue in the last quarter, with the segment accounting for 72% of total revenue. So, investors should forget BlackBerry and instead focus on heavyweight clients such as Apple and Samsung.

Apple contractor Foxconn (OTC:FXCOF) contributed 35% to TriQuint's revenue in the previous quarter. As Apple ramped up production of its latest iDevices, TriQuint saw its order book overflowing with a book-to-bill ratio of 1.11. This was the third time this fiscal year that TriQuint has seen a book-to-bill ratio of more than 1, which means that it is consistently receiving more orders than it can satisfy.

TriQuint supplied the power amplifier module for the iPhone 5s and the iPhone 5c. The iPhone 5s was the best-selling smartphone in the U.S. in September, and Apple still has a strong backlog of orders to satisfy for the device. This is certainly a positive for TriQuint, as the backlog indicates that Apple still expects strong sales of the device going forward. The recent launch of the iPhone in 35 more countries should aid Apple's sales further, with the new iPads providing more tailwinds.

Apple's tablet fortunes are looking bright. Gartner expects that Apple's iPad will retain more than 50% share of the tablet market in the future. Gartner's research vice-president, Carlina Milanesi, forecasts that Apple will sell 148 million iPads in 2015. Such solid projection means good news for TriQuint as it supplies chips for the iPad as well.

After Apple, Samsung is the next important customer of TriQuint. TriQuint has supplied content for the last two Samsung flagships. With rumors flying about that Samsung might release its Galaxy S5 as early as March next year, TriQuint might start seeing more orders from the South Korean giant pretty soon.

Networking providing a boost

TriQuint has seen strength in sales of it networking products as its various customers ramp up deployment of new products. The company is of the opinion that an increase in data traffic will lead telecom carriers to continue investing in a faster technology such as LTE, and help sales of TriQuint's products in turn.

The trends in the telecom industry are positive. Telecom giant AT&T is aggressively rolling out LTE and has earmarked $20 billion as capital expenditure as it upgrades its wireless and wireline networks. Its Project Velocity IP program is progressing well as AT&T has accelerated the rate of deployment of LTE.

AT&T is the provider of one of the largest wireless networks in the U.S., providing coverage to around 308 million people. It has 107 million wireless subscribers as recorded at the end of December 2012. Around 99.8% of the U.S. mainland population is covered by AT&T's wireless network.

The company had reported total revenue of $127 billion at the end of December 2012, out of which 52% was accounted for its wireless services. AT&T is looking to increase its influence further in the wireless market as it challenges others.

But, Ma Bell isn't the only player deploying LTE networks across various markets in the U.S., as Sprint is also now in the game big time after its acquisition by SoftBank. Sprint will have $16 billion from SoftBank to invest in base stations to boost its LTE network in the next two years as it looks to use its big spectrum hoard. Sprint's subscriber base might be well behind the leading telcos in the U.S., but given its spectrum bank and capital, it should make things interesting from here.

Sprint is aggressively expanding its LTE coverage and recently stated that 45 new markets are now covered by its LTE network.

Now, TriQuint's revenue from base station transceiver cards have more than doubled in 2013, and as these telcos continue to invest in LTE, things should get even better.

Conclusion

TriQuint's business is growing at a pretty good pace and investors should look beyond just one bad outlook. Also, the fact that TriQuint's revenue grew an impressive 25% from the year-ago period while non-GAAP gross margin expanded 5.5% in the previous quarter shouldn't be ignored either. The stock trades at a forward P/E of around 16, which seems reasonable, and it has a pretty strong order backlog as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.