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Peregrine Semiconductor Corporation (NASDAQ:PSMI)

Q4 2013 Earnings Conference Call

February 3, 2014 16:30 PM ET

Executives

Jonathan Goldberg - Senior Director, Corporate Development

Jim Cable - President and Chief Executive Officer

Jay Biskupski - Chief Financial Officer

Analysts

Brian Modoff - Deutsche Bank

Harlan Sur - JPMorgan

Mike Walkley - Canaccord

Rick Schafer - Oppenheimer & Company

Quinn Bolton - Needham & Company

Alex Gauna - JMP Securities

Doug Freedman - RBC Capital Markets

Operator

Good day, ladies and gentlemen and thank you for your patience. You joined the Peregrine Semiconductor Fourth Quarter and Full Year 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 be given at that time. (Operator Instructions) As a reminder, this conference maybe recorded.

I would now like to turn the conference over to your host, Senior Director of Corporate Development, Mr. Jonathan Goldberg. Sir, you may begin.

Jonathan Goldberg

Thank you, Latif. Good afternoon everyone and thank you for joining us on today’s conference call to discuss Peregrine Semiconductor’s fourth 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 the 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 own 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 in the 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.

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

Jim Cable

Thanks Jonathan and thank you to everyone for joining us today. Peregrine reported revenue of $43.3 million in the fourth quarter within our guided range. We also reported a non-GAAP loss per share of $0.16. As discussed in our press release, gross margins were negatively impacted by much larger than normal inventory write-downs and our OpEx was higher than expected due to increased legal expenses and restructuring charges. Jay will walk through the numbers in more detail.

I would like to begin my comments with our view of the mobile industry. From our conversations with OEMs and other partners, we believe 2014 will be a tough year for the smartphone industry. The end market for LTE devices remains highly concentrated between two OEMs and one modem vendor. We think that will start to change in 2015 as new modem vendors reach volume allowing for greater diversification among the OEMs. In addition in 2014, we expect to see stronger growth in the low and mid-range of device price points with OEMs watching their cost [models] [ph] closely. We think this will create some challenges for the component supply chain, which will be somewhat offset by growth of LTE unit volumes as network deployments expand.

For Peregrine, we see a number of dynamics playing out. First, the expansion of LTE and the anticipated launch of a number of LTE advanced networks will support our core switching product line. Second, we have a very healthy number of design wins across the OEM landscape. That being said, we now believe our sales to a major smartphone OEM will be meaningfully lower in the second half of this year. This will result in an overall decline in our mobile products revenue for the full year. Owing to customer confidentiality, I cannot provide much more detail on this. We believe there are few factors that led to this.

Over the past year, we have seen OEMs emphasizing supply chain diversification over best-in-class engineering performance with purchasing managers pushing for supplier diversity solely for the sake of diversity. In addition, design wins were affected by product cycles and decision timing. Finally, strategic issues around IP play a role. This does not affect existing design wins at this customer and we continue to engage with them directly giving us hope of regaining share in the future. We are taking steps to reduce our cost structure, to accommodate near-term conditions and Jay will provide more details in his comments.

In light of this I want to touch briefly on our approach to strategic decision making. One of the challenges of being the technology leader is that we are regularly faced with touch choices about which opportunity to pursue, which customer to focus on and which path to take. However, there has always been one factor that is constant. I will never allow Peregrine to take a course of action that would jeopardize our core intellectual property position. We have spent 25 years building our fundamental patent position and no one customer is worth risking that, no matter how large. That may mean sacrifices to near-term business but we believe there is deep value in our IP and the strategic value of this will come – will become more apparent as the RF industry evolves.

So while I see a number of headwinds in 2014, I am actually very confident in our outlook for 2015. We believe we are about to see a major technology transition for the industry. Peregrine is entering a new stage in its strategic development. We have been preaching the benefits of silicon in the RF front end for years and we see concrete signs that this will become a reality soon. Chief among these signs is our own progress in developing an integrated silicon front end and the interest we see in this solution from the market.

Last quarter I told you that we had begun sampling our power amplifier or PA to a number of partners. I can now share more details about this with you. Beginning tomorrow, we are launching a broad marketing campaign to share the results of our integrated front end with the industry. This is more than just the PA, it’s an entire RF front end which we are calling Global 1 or G1. Built on our UltraCMOS 10, SOI technology at Global Foundries, we believe G1 as a true industry first. In the past all silicon PAs have suffered from a noticeable performance gap with incumbent gallium arsenide or GaAs components. So I am pleased to report that our power amplifier is delivering performance on par with state-of-the-art GaAs parts.

For instance, a key Figure of Merit is power added efficiency or PAE. For WCDMA, our measured PAE is 50% and we are measuring that before the addition of digital pre-distortion or envelope tracking which can deliver even further improvements and that is just one metric; we are matching GaAs on every key metric.

G1 includes a full multimode system with multi-band support of 40 3G and 4G frequency bands. G1 includes three PAs and a single chip covering every band used for LTE today. The system also includes all the switching and tuning elements enabling a single SKU truly global phone. We will be showcasing our integrated RF front end solution at Mobile World Congress later this month.

We think this signals a major transition for the entire industry. History and our own experience shows, that when a silicon part can match the performance of GaAs, the industry shifts rapidly. Five years ago, our switch parts achieved GaAs comparable performance and today there are essentially no GaAs switches to be found in handsets. We do not know how quickly we will see the same transition for power amplifiers, but we strongly believe that this shift will take place. Prepared and this is exciting news and I am very happy with the results we are seeing from G1.

Beginning with our IPO I have shared with you our vision of the RF front end that is integrated and all silicon. This is now not a long-term vision, it is on the horizon that we are one of only few companies who can deliver on that vision today. Last year I noted that our strategy for the integrated front end is to work with partners rather than sell discrete parts. From a development standpoint we could have begun shipping our PA earlier, but we feel it is best to work with partners so that we can leverage their resources to deliver a more far-reaching solution.

However, working with partners takes more time. In terms of timing of this product because of the scope of the change involved it will likely be a few quarters before our partners and other end customers are ready to ship. We expect to be shipping G1 for revenue in late 2015. We have recognized that for investors this is still some time away to help you bridge this gap we plan to regularly update you on milestones for G1, including performance improvements, new configurations, partnerships and design wins. While we see G1 in our PA as major strategic developments, we are also seeing steady progress for the rest of our mobile products line up.

During the quarter, we secured our first design wins and orders for some of our new parts. We continued to secure design wins for our intended tuning solutions, the number of customers sampling our tuning parts increased again this quarter. We anticipate a number of OEMs will begin shipping our tuning solutions in the first half of 2014 and continue to believe these products are on track to reach material revenue this year.

In Q4, we won our first order for our own antenna switch module or ASM from a global smartphone OEM. The product has just launched so we expect small amounts of revenue this year that we are encouraged by the early interest in the product. We see this as a step up to value chain that broadens our product offering and positions Peregrine as a more strategic supplier for OEMs.

Turning to our non-handset markets, we are feeling very good about our prospects in this business and had several significant achievements in the quarter. We are beginning to see solid orders for wireless infrastructure vendors selling into China Mobile’s TDD-LTE build-out. This has been anticipated for sometime and we are encouraged by the orders we are seeing from some of the leading participating OEMs. These customers are engaging us because they see clear benefits in using our silicon parts to displace incumbent GaAs solutions.

In 2013 we launched a record number of new products and we are seeing the benefits of this already. For instance we have a number of new design wins in broadband and wireless small cell markets utilizing our latest products. As a reminder in these markets we tend to have a very high win rate. There was a growing understanding that GaAs does not have the reliability and repeatability required for many applications. As a result when we have new products here we win.

Finally I want to touch on our IP position. We continue to expand our patent portfolio and engage the industry with our IP proposition. We’re still scheduled to begin the trial in our litigation against RFMD in November this year. You should anticipate seeing some headlines around pre-trial motions ahead of that and we will keep you up to-date on any developments as things continue to progress.

To conclude we acknowledge that 2014 will have its challenges for the industry and for the company. Nonetheless I’m encouraged by the progress of the Peregrine team. I believe that with G1 we will alter this strategic landscape for the entire RF industry. We are in very early stages of that transition but its importance will come in a foreseeable timeframe with dramatic impact.

With that I will turn it over to Jay for a discussion of our financials.

Jay Biskupski

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

To start I’d like to note that Peregrine Semiconductor follows a 52 week fiscal year ending on December. Our fourth quarter and year ended on December 28, 2013 and our fiscal year covers the period from December 30, 2012 through December 28, 2013.

As noted in our press release and by Jim revenue in the fourth quarter was $43.3 million, a decrease of 31% for the fourth quarter of 2012 but within the revenue guidance range provided in October. The fourth quarter brought our revenues for the fiscal year to $202.3 million which was about flat compared to fiscal 2012. On a sequential basis our revenue decreased from the third quarter of 2013 by 28%. The revenue decrease was due to decreased demand for antenna switches used in handset applications for the reasons outlined in our last call. That decrease was partially offset by modest increased revenues for parts used in non-handset applications.

[Inaudible] revenues as a percentage of sales for the fourth quarter declined to 67% of our revenue from 76% in the third quarter of 2013, and was flat at 69% of our revenues for 2013 versus 2012. Within our revenues for handset applications we’re pleased by the diversification of end OEM using our products.

GAAP gross profit for the quarter was $15.6 million or 36% of revenue. Gross margin decreased 610 basis points from the third quarter. We recorded inventory write-offs of $3.1 million during the quarter as a result of lower demand from OEMs for certain parts used in handset applications. This write-off was larger than usual in part due to transition to our UltraCMOS 10 SOI products. GAAP gross profit - gross margin, sorry, did improve to 40.2% in 2013 from 2012 at 39.1%.

Operating expenses increased to $22.4 million in the quarter up from $21 million in the third quarter this year. Our research and development spending was flat in the fourth quarter from the third quarter of 2013 at $10.8 million. Sales, general and admin costs, or SG&A increased to $11.7 million for the fourth quarter from $10.2 million in the third quarter of 2013. Within SG&A, we had higher legal cost during the quarter due to two factors. First, we now have a trial date for our litigation with RFMD in the fourth quarter causing an increase in attorney activity. Second, the U.S. custom service launched an investigation of our compliance policies in regards to ITAR export regulations resulting in higher legal expenses also. The investigation had minimal revenue impact, because it covers a small number of parts and we are cooperating fully with the government.

On a GAAP basis, we incurred a net loss of $6.8 million versus an income of $4.4 million in the third quarter of 2013 and compares to a net income of $5.6 million for the fourth quarter of 2012. We recorded a GAAP net loss per share of $0.21 on a diluted basis in the quarter. On a non-GAAP basis we incurred a net loss for the fourth quarter of $5.1 million, or $0.16 per share on a fully diluted basis. For the fiscal 2013 period, we recognized a non-GAAP net income of $2.6 million, or $0.07 per share on a diluted basis. The non-GAAP figure only excludes stock-based compensation and determining income and the share count used in this calculation was 32.7 million shares for the fourth quarter of the year and 35.7 million shares for fiscal 2013.

I’d like to now touch briefly on the highlights of our year end balance sheet. Our ending cash resources including both long-term and short-term marketable securities totaled $63.2 million, which was flat from our ending Q3 2012 cash and marketable securities position. As I outlined in previous quarters, a significant portion of our cash reduction from the end of 2012 occurred in the first quarter as a result of the wind up of our order prepayment agreement with Murata and the start of refunding capacity deposits to Murata. We have now largely completed that arrangement and do not anticipate further significant outflow in regards to customer deposits.

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 margin for the upcoming quarter. As Jim mentioned in his comments, we now expect a decline in our mobile wireless business this year. In addition, we expect to see some seasonal Q1 decline and demand for our products used in handsets. As a result, we are guiding the first quarter of 2014 revenue to be down from the revenues in the fourth quarter of this year and to be in the range of $33 million to $36 million.

For the fourth quarter, we noted that inventory write-offs and lower production levels with the largest impact affecting our gross margins. For the first quarter, we expect gross margin improvement as a result of reduced inventory write-offs from the fourth quarter of 2013 to be offset by the impact of reduced seasonal volumes. As a consequence, we expect gross margins to be in the range of 36% to 38%. In light of our revised revenue outlook for the year, as Jim indicated, we are taking steps to reduce our cost structure. First, in December 2013, we made reductions to operations in SG&A staffing them resulted in additional expenses of $700,000 in the quarter.

We made further reductions to staffing and spending levels this quarter and we will incur additional restructuring costs of $1.5 million to $2 million in the first quarter of 2014. These actions are expected to reduce our operating expenses by a similar amount to our $1.5 million to $2 million beyond this first quarter this year. We believe that as we move through the year we can bring our fixed cost structure in line with our expected revenue base. We also anticipate seeing further fluctuations on working capital needs as part of our ongoing ramp of Ultra CMOS 10, but we will manage our cash balances conservatively.

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, sir. (Operator Instructions) Our first question comes from Brian Modoff of Deutsche Bank. Your line is open.

Brian Modoff - Deutsche Bank

Hey guys. Couple of things. Can you kind of talk about, you talked more about the tuner side of your business ramping more, can you give us an idea in terms of percent of revenues where you think that will be this year, will it be more meaningful than it was last year? And then in talking about customer diversification, obviously a couple of large vendors have been pretty predominant in your revenues, can you talk about efforts with some of the other rising vendors in Asia, particularly some of the ones that Jay knows well Xiaomi and others in China and your efforts to gain share inside of that group? Thanks.

Jay Biskupski

Well, this is the first question, Brian concerning the expectations. As Jim indicated in his script, we do expect the antenna tuning products to be material this year. So for me, that’s high single-digits as a percentage of our overall revenue for the year, somewhere in that range. And so it certainly will be much larger than what we did in 2013.

Jim Cable

Yes. So to the second question, we had quite a bit of success in customer diversification in 2013 away from the two dominant OEMs. And we believe that with the UltraCMOS 10 and the fact that it allows us to address markets at different price points, we think that there are opportunities to expand into those markets that you are referring to, Brian. We do think that as LTE launches in China, that’s a very good thing for us. And we talked about this in the last earnings call that we tend to believe that we win an LTE period and whether it’s $150 or $200 LTE phone or $600 LTE phone, it still requires a high-performance RF front-end solution. So we do see that as an area that we anticipate some growth in.

Brian Modoff - Deutsche Bank

Okay. And would you be able to quantify that at all and attribute what do you think that business could represent as a percent of revenues this year?

Jim Cable

Well, I don’t think we have done that analysis yet, Brian, but I would say the following that our first ASM design win that I did refer to in my prepared remarks was for a China OEM. And again, we believe that – we believe that there are additional opportunities for ASM sales in China throughout 2014.

Brian Modoff - Deutsche Bank

Okay. Can you talk a little bit about you mentioned kind of late 2015 [before you see] [ph] the ramp on your front-end products, can you give us a little bit of a rundown on how you are designing the front-end product, are you designing it to work with the OEMs who can then integrate it with a modem and transceiver and modem or you are working with specific modem vendors that want to integrate it as a platform, how we should go-to-market strategy in terms of getting that product adopted?

Jim Cable

I think as we begin rolling out this campaign that I mentioned we are starting tomorrow you’ll learn a little bit more about what we are intending to do, but I would say the short answer is both. We believe that the features that we have included in Global 1 allow for either of those particular business models to make sense. And as I said, you will be hearing a lot more. We agree that 2015 is a long time for people to just kind of wait and wonder. So we will be more communicative on this as we go forward. In summary, I would say that what we are talking about with respect to Global 1 is it’s multi-mode, multi-band and really kind of all-in-one. The associated switching and tuning elements are all built in and it makes extensive use of reconfigurability, reconfigurability of modes, reconfigurability of bands. And so it has been very well received from the folks that have actually seen the data. And as I mentioned on the call, we anticipate doing quite a substantial number of demos at Mobile World Congress to showcase the capabilities of Global 1.

Brian Modoff - Deutsche Bank

Okay. Well, I look forward to learning more about the product. I will pass on to the next caller. Thanks.

Jim Cable

Thanks Brian.

Operator

Thank you. Our next question comes from Harlan Sur of JPMorgan. Your question please.

Harlan Sur - JPMorgan

Hi, good afternoon. Jim, you talked about a number of challenges facing the smartphone industry, but if I look at the sweet spot of your business, I mean, 4G smartphone shipments are going to double this year. We should see more shipments with LTE advanced phones, where at least up until this point you guys have had a performance edge capturing 100% share on the main antenna switch. I assume that this one customer that you are talking about, where business is going to be meaningfully lower this year, is going to also be adopting an LTE advanced architecture. So help us understand how it is that you have been able to capture majority share on LTE-A smartphones up to this point, but not with this one particular customer?

Jim Cable

Yes, I would say that we do see that we participated in that LTE growth that you referred to earlier Harlan. And I think that if you look today, we probably have 100% market share in LTE-Advanced phones that are currently shipping. But as I said repeatedly, we have seen that trend several times before we saw in the 3G new standard rolls out, we end up with a very, very significant share initially and then good enough becomes good enough. We certainly saw that in LTE where back in 2012 we had a very, very significant market share and obviously that’s come down a little bit in 2013. And we think that the same will happen in LTE-Advanced in 2014. We think certainly that by the end of 2014 there will be at least one competitor that has an LTE-Advanced switching solution that’s good enough.

And so again I think that there has been increased rise in sourcing some of the various OEMs, diversification of supply is important. Hold on a second we have some jet noise here. And so I would say that it’s kind of a dynamic that we have seen before and then you say well what’s kind of next. Certainly, in 2015 and ‘16 when you start moving to carrier aggregation on the uplink that resets the RF requirements again. And while I am not going to give guidance for something that’s two years out in the future, again we anticipate that the performance advantages that we have always been known by and we continued to demonstrate will occur in that timeframe again. And really I think that G1 is really going to reset the bar. I think that we see that the opportunity to compete there with a complete system solution that includes the switching, the PAs, the tuning will put us in a position that makes us quite a bit better than the folks we are currently competing with.

Harlan Sur - JPMorgan

Great. And then on the non-handset business I think you said you exited last year with a record number of new product introductions and given some of the trends that you talked about in terms of wireless infrastructure spending and maybe some pickups in test and measurement and broadband fundamentals, relative to your guidance how is this business trending in Q1 and given your pipeline do you expect the non-handset business to drive growth in 2014?

Jim Cable

Yes, I would say that if you look at sort of the ratio of those businesses we have talked about it in the past particularly in the range, the non-handset businesses typically been in the range of 25% to 35% of revenue and that’s kind of what we are seeing in Q1. We do expect with the strong design win pipeline and traction that we have, we do expect that business to grow this year. So I mentioned in the call that we expect the non-handset business to actually not grow. We do expect that this non-handset business to grow.

Harlan Sur - JPMorgan

Okay, thanks guys.

Operator

Thank you. Our next question comes from Mike Walkley of Canaccord. Your line is open.

Mike Walkley - Canaccord

Alright, thank you. Jim just following on some of your comments on the handset business not growing throughout the year, Jay made some comments about Q1 being seasonal would you expect Q1 to be kind of bottomed for the handset business or do you think that’s kind of run rate for the next couple of quarters?

Jim Cable

I think that’s probably about the run rate for the next couple of quarters. I think some of that depends on the exact timing, some of the big launches that are anticipated out there. The – it’s difficult to predict where this quarter is out in advance, but I think that’s kind of what we expect.

Mike Walkley - Canaccord

Okay, that’s helpful. And just Jim how do you manage investing for your long-term roadmap with the G1, the back half of 2015 or for Q4 of 2015, how do you manage kind of intermediate term when you would invest for growth on this important platform with the lower revenue, others expect is from the next couple of quarters?

Jim Cable

Well, that’s why we have talked about the fact that we have taken some pretty painful steps here to actually reduce OpEx across the board that we really had to prioritize those things that we felt were going to be the most important for us in the long-term. And so we kind of have the non-handset products that we’re shipping today, we have the handset products we’re shipping today, we have G1 that’s out in the future and we’ve made some really tough calls about where we put the investment dollars to make sure that, that we can in fact bring the G1 to fruition and certainly that has impact on some of the other things we’re choosing to do. So it’s – but certainly we couldn’t afford to do all those things with the sort of run rate that we see in Q1 and that’s how we made the tough decisions on the OpEx reduction.

Mike Walkley - Canaccord

Okay, thanks. You feel like you have the engineers in the team on track that you need to continue to execute on the G1?

Jim Cable

Yes, I think we’ve done some things that we believe will allow for some improved efficiencies. We obviously were looking very carefully at what are the key resources that we absolutely have to maintain. The G1 team has just made fantastic progress. We’re very, very pleased with those results and we intend to keep pushing that forward.

Mike Walkley - Canaccord

Great, thanks. And just one last question from me, with the Qualcomm's RF360 also they’re trying to make progress against their integrated solution. Is there improvement in 2015 for you depended on some other baseband partners breaking through and gaining share in LTE or do you think you can get some business direct resilience to even if Qualcomm maintains kind of its 90% LTE smartphone share?

Jim Cable

I think that – I think a, that other baseband vendors will in fact make progress into this space. So I – in my prepared remarks I’ve talked about how we saw that changing in 2015, certainly it appears that there will be other LTE modem shipping in 2014. We actually think that – we actually are seeing our pieces of RF360 shipping today and we assume that Qualcomm will continue to put energy and investment into pushing that forward. And we think actually that’s a good development for us in a sense that we offer an alternative to RF360. So I think that again we’re very pleased with where we are with respect to G1 and I think anybody who sees the demos we have prepared at Mobile World Congress will come away very impressed as well.

Mike Walkley - Canaccord

Thanks, Jim. I look forward to seeing the demos at Mobile World Congress.

Operator

Thank you. Our next question comes from Rick Schafer of Oppenheimer & Company. Your question please.

Rick Schafer - Oppenheimer & Company

Hey guys. I have a couple of questions. I guess first just to dig a little bit more on gross margin maybe that step down, I think we understand that I guess you X out the write-down in the fourth quarter, Jay. How much of the lower gross margin of that step down was attributable to just lower volumes versus any pricing pressure that you might be seeing or how much of it is related to the move to SOI bill and then I guess the end of the question is did this longer term change your gross margin target once the business sort of stabilizes once the G1 starts to ramp?

Jay Biskupski

So a couple of points I’d like to make. First of all certainly within the handset market itself and our products headed towards those applications, there is always continual pricing pressure associated with that. But the pricing pressure remains largely within norms, that we traditionally model and we tend to get reasonable cost reductions associated with that as well. Certainly for Q1 we’re still in very early days in terms of the SOI ramp for us, so I’m not expecting an impact from that if anything SOI want to establish will certainly be a positive trend towards our gross margin. Our long-term gross margin targets remain intact at this point in time. Certainly when we start seeing G1 move to buying differentiated products as we’ve been saying all along we expect to capture good margins at that point in time and head towards our model.

Rick Schafer - Oppenheimer & Company

Okay. So really we should keep gross margin in our model sort of in the 30s probably impel maybe back half of 2015. Is that sort of the right way to look at it?

Jay Biskupski

No, I think you’ll see – I think you’ll see margins improve once we get through this seasonal low in adjustment, right, so we get back to what our average is and will be in the 40s that I expect in 2014.

Rick Schafer - Oppenheimer & Company

Okay, okay, great. And then for Jim or for Jay I guess what content do you guys expect to have at your two largest OEM customers in 2014, I mean, I know you talked about adding or seeing the DTC structure ramp and become a material contributor to the top line, but I mean, do you plan to keep or do you think you will be keeping the diversity switch at one of your customers at the end of that market, I mean, just anyway you could frame out sort of where you think content goes at the two biggest OEMs this year?

Jim Cable

Well, let me just clarify one of your comments about the DTC is I think that what we are seeing really and I mentioned that we have first design wins with new products. And those are actually tuning switches as opposed to DTC. So that’s a totality, but it’s doing the tuning function. I would just say that we are not going to comment on specific content at specific customers, but we are selling all the products we have to all the various customers. And that’s a range of tuning switches of DTCs and of switches and both the care aggregation type diversity etcetera, etcetera, etcetera.

Rick Schafer - Oppenheimer & Company

Okay. And then just maybe one more, I don’t know anybody asked about the Murata licensing and how that’s going to impact the top line in 2014? Would you guys care to kind of frame out how big of a contributor that could be for you guys this year?

Jim Cable

Yes. So we did in fact get a royalty check from Murata in Q4 of 2013. And as we have said before, we have never thought that, that would really be a material dollar value, but we think the key of that agreement is the fact that it’s also a supply agreement and it validates the value of our IP.

Rick Schafer - Oppenheimer & Company

Okay, thanks.

Operator

Thank you. Our next question comes from Quinn Bolton of Needham & Company. Your line is open.

Quinn Bolton - Needham & Company

I just want to make sure I understood your prepared comments. In the discussing the one OEM and sort of the lower content at that OEM this year, you talked about supply chain management, but you also talked about some IP and it almost – your comments almost made it sound like you felt that if they went with a certain design that it might infringe your IP, I know it’s a sensitive issue, but is there anything more you can tell us on sort of how the IP played into that decision?

Jim Cable

No, I really don’t want to talk about it any further than I did in the prepared remarks. It is a sensitive topic, Quinn and I am just going to leave it at that.

Quinn Bolton - Needham & Company

Okay, understood. And then just secondarily on the first quarter guidance for March, obviously you guys had a step down in the December quarter, which I think you sort of describe it as more normal seasonality now for the handset business. Obviously, we are taking another step down in March, do you think that step down in March has to do with purely seasonal factors? Is it more that certain OEMs may have over-ordered in the second half of the year and you are now seeing them under-ordered to get their component inventories back in line or there are other factors that maybe playing at them and it’s hard to think its market share, because platforms aren’t transitioning yet?

Jay Biskupski

I was going to answer yes.

Jim Cable

Yes. I think that remember our seasonality is generally a little bit different than others because of the fact that we sell into a module maker, so there is that additional timeframe associated with that. I actually think the answer to your question is a little bit of both. I think it’s some seasonality and I think it’s a market condition as I think that it’s been pretty widely speculated that some of the high-profile phone launches from the big OEMs this year have not met with the consumer attraction that was hoped for, but so that ends up creating the situation we are in today.

Quinn Bolton - Needham & Company

Yes. And then quickly for Jay, you mentioned the cost reduction actions both in Q4 and again here in Q1 should take some OpEx out, can you give us sort of a range of where you think quarterly OpEx will be? Is that sort of 18, 19, is that kind of about the right ballpark or is there a better number to be using?

Jay Biskupski

I think we are taking $1.5 million to $2 million is what will be coming out. So certainly if you are talking, numbers are in that approximate range, it will take a little while to take full effect, so won’t be there in Q1.

Quinn Bolton - Needham & Company

Okay. And that’s a quarterly – the $1.5 million to $2 million is a quarterly run-rate?

Jay Biskupski

Absolutely.

Quinn Bolton - Needham & Company

Great. Okay, thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Alex Gauna of JMP Securities. Your line is open.

Alex Gauna - JMP Securities

Thanks so much. Afternoon guys. I was wondering if you could go over again what you think about in terms the risk around other large customers potentially repeating what happened to you with the one, meaning is there a risk of cascading follow on of bets such that when we get to the back half of this year we find you and other handsets loosing that main antenna switch and being left with the diversity antenna or is that not in your opinion a risk and we will have some favorable seasonality for you in the back half of this year? Thanks.

Jim Cable

I would say that we don’t see that when I referred to specifically that’s an OEM specific situation, so we don’t see that as you describe it as a risk factor for the back half of the year.

Alex Gauna - JMP Securities

Contingent or…

Jim Cable

Yes, contingent I am sorry but this isn’t that…

Jay Biskupski

The contingent dollar handsets or other effects we don’t think certainly as we have talked while along. From the very high market share is quite sustainable.

Alex Gauna - JMP Securities

Okay and one other thing I know again you are limited in what you can see around this topic, but it’s somehow given your comments around IP and protecting IP it sounded like you were being asked to be part of maybe a more holistic design approach that you thought jeopardized your IP position, can you be successful with Global 1 without being a part of some holistic approaches and aren’t your potential partners rather limited in that pursuit?

Jim Cable

Yes, first of all as I have said I am not going to comment anymore about how the IP considerations factored into the statements I made around that particular OEM in my prepared remarks. And on Global 1 I don’t believe is subjective to anywhere near the same kind of dynamics. And I don’t think there is any real relationship between those two things.

Alex Gauna - JMP Securities

Okay and one last quick question on OpEx are we now up until the trial expecting similar legal expenses for quarter and then they might jump again when the trial goes or do they come back down a little bit until we get to the trial date? Thank you.

Jay Biskupski

I have – every time I try to predict what those legal costs are going to do and what the timing of those look like, it tends to be a bit more difficult than challenging, but always been a relatively narrow range. So certainly for the fourth quarter the ITAR investigation which we think will be ongoing for a few quarters but will hopefully get resolved that sort of time period will come down, more of the costs are built upfront associated with that versus the litigation trial that costs will be more significant as we get close to the trial. Now, why the exceptions with that is that you go through significant preparation periods you are doing discovery etcetera, so you see some peaks earlier than that and a slight low. But it’s all Alex within a relatively narrow range, it’s not like we were millions and millions of dollars of legal costs associated with it, it was a multiple millions will increase for a quarter or two by a few hundred thousand dollars to $0.5 million and that will come down that type of fluctuation within our operating expenses.

Alex Gauna - JMP Securities

Okay, thank you.

Operator

Thank you. Our next question comes from Doug Freedman of RBC Capital Markets. Your line is open.

Doug Freedman - RBC Capital Markets

Thank you for taking my question guys. Jim, can you give us a range of what your present content is today and what G1 will do to the potential content that you could capture?

Jim Cable

Yes, Doug I could you give a range on that, certainly if you look at I think we have talked in the past about kind of what we would see is the content being in main antenna switches and diversity switches. And then add to that say tuning switches or DTCs, if you look at what we think Global 1 offers if you look at 2013 and you look at what the TAM estimates are it’s about $6 billion according to mobile experts. By 2018 that grows to $12 billion, I would say that Global 1 allows us to address that entire TAM barring the exclusion of the filters which in – so if you look out in 2018 that’s about half. So it’s about $6 billion taller TAM. Global 1 has all the elements of that RF front end that makeup that TAM. So I see substantial increase in the content that we will be able to pursue.

Doug Freedman - RBC Capital Markets

Right. Jay, can you help us out on the OpEx, the split in spending has been at times sort of equal between SG&A and R&D, post your restructuring actions how should we be modeling that breakdown?

Jay Biskupski

I think it will continue to be very similar within a narrow range between this in the short term. It’s clearly as we’ve always said the thing that we want to scale is R&D associated with revenues when we get back to growth that will be guided and that’s going all containing SG&A. We are cutting both in – some in our (shorter patents) and the legal costs that are offsetting that a bit and what we see in the end that result in SG&A for this year.

Doug Freedman - RBC Capital Markets

Alright. And my last question really is on the SOI product that you introduced last quarter, I believe you had talked about it creating Revs in 1Q and now it sounds like those Revs are not really that material. What has changed there and if you could help us out understanding how the SOI product is stacking up in the market?

Jim Cable

Yes I don’t – I think what we said in the last call was that the SOI products would begin ramping production in Q1 and we still believe that. I would say that the feedback that we hear on the SOI products from customers is very, very positive, performance wise we’re being told that we’re showing better product performance than anything competing in the marketplace. So we’re very, very bullish about what we’re doing in the SOI space. And so no I don’t think there has been any push-out of that at all.

Doug Freedman - RBC Capital Markets

Alright, great. Thanks so much.

Operator

Thank you. Next we have a follow-up question from Harlan Sur, JPMorgan. Your line is open.

Harlan Sur - JPMorgan

Hey thanks for taking my follow-up call. So I missed all of these chances that you guys have talked about, obviously it seems like a more optimal way to leverage the performance in technology to driving integrated finance solutions. So I’m glad to see the announcement of the Global 1 product and the team I think has a solid track record on the product execution front. But you talked about this as being more of a driver probably in late 2015, early 2016. So help us understand and get some confidence about what are the potential drivers in 2015 while the team waits for G1 to kind of ramp early 2016?

Jim Cable

Yes I think that, I didn’t say 2016 I said second half of 2015 is when we really expected to ramp G1 in volume. And I’m throwing out that date just because I believe that it is a pretty major transition going from sort of these discrete front-ends and to something that’s much more integrated. I do think there are some platform integration challenges that have to be done and I do think those are going to take some time. So what are the drivers between now and then I think that’s a great question. Well certainly we see LTE will continue to rollout and volumes will continue to increase. As I mentioned LTE-Advanced uplink, the carrier-aggregation on the uplink we believe will start happening in earnest in 2015 which drives the whole new set of tough RF requirements.

Tuning, really tuning as we mentioned this is the first year that we believe will have material dismiss in tuning and we see tuning is becoming pretty pervasive across LTE platforms. Talked about ASM, we’ve had the first design win with our first ASM. We intend to continue to push those ASM products into other customers. And then lastly as I alluded to earlier the SOI products change the dynamics with respect to being able to go address even things like entry 3G in Asia. The price points are more attractive with SOI and so we see there is a plenty of drivers for us between now and then. And I also think that we feel that we do as we talked about we’re going to grow our non mobile business this year, we’re quite optimistic about the opportunities to continue to grow that. So those are the things that we are excited about while Global 1 is working its way through the getting ready to ship in volume.

Harlan Sur - JPMorgan

Okay, thanks a lot.

Operator

Thank you. At this time, I’d like to turn the call over to Mr. Goldberg for any closing remarks.

Jonathan Goldberg

That’s it for us. Thank you for joining us today and we look forward to seeing you at Mobile World Congress at the end of the month. Thank you.

Operator

Thank you sir and thank you ladies and gentlemen for your participation. That does conclude your program. You may disconnect your lines at this time. Have a great day.

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