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Executives

Steve Buhaly – CFO

Ralph Quinsey – President & CEO

Deborah Burke – VP, Human Resources

Analysts

Nathan Johnson – Pacific Crest Securities

Patrick Newton – Stifel Nicolaus

Jason Schmidt – Craig-Hallum

Mike Burton – FBN Securities

Todd Koffman – Raymond James

Aldrin Chang [ph] – Barclays Capital

Edward Snyder – Charter Equity Research

Steve Ferranti – Stephens Incorporated

Bill Dezellem – Tieton Capital Management

Colin Denman – D. A. Davidson

Richard Shannon – Northland Securities

Quinn Bolton – Needham & Company

David Duley – Steelhead Securities

TriQuint Semiconductor, Inc. (TQNT) Q1 2010 Earnings Call Transcript April 28, 2010 5:00 PM ET

Operator

Good afternoon. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the TriQuint Semiconductor first quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ prepared remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

It is now my pleasure to turn the conference over to our host, Mr. Steve Buhaly. Sir, you may proceed with your conference call.

Steve Buhaly

Thank you, Ashley. Good afternoon and welcome to our first quarter 2010 conference call. This call will include forward-looking statements about TriQuint's projected results. Results could differ materially based on various factors, including those described in our reports on Forms 10-K and 10-Q and other filings with the Securities and Exchange Commission.

This presentation also includes non-GAAP financial measures, which exclude equity compensation charges and charges associated with acquisitions. These non-GAAP measures are provided to enhance understanding of our core operating performance. A full reconciliation of these non-GAAP measures is in our press release and in the Investors section of our Website.

Ralph will now provide an overview of the quarter.

Ralph Quinsey

Thank you, Steve. This was another great quarter for TriQuint, with revenues at $181 million, improved gross margin and non-GAAP earnings of $0.12 per share. We achieved 52% revenue growth over the first quarter of 2009, with Networks at 42%, Mobile Devices at 63% and Defense and Aerospace at 35%.

These results are a solid start to 2010, our 25th anniversary year. Steve will provide more details on financial performance during his comments. The major themes of the quarter are a rebounding infrastructure market and continued strong smartphone demand. Our Q1 Networks revenue was above original expectations, as demand returned to this market. The increased percentage of Networks revenue for the company is favorable to overall margins. The Networks recovery appears to be broad-based across many of our network customers.

In Mobile Devices, we are benefiting from the rising tide of strong smartphone demand and expansion of our content required for 3G data. We expect sales of smartphone units to increase by more than 20% this year and require four to six times the RF content per device as compared to voice-only phones. In Q1, our GaAs factory utilization was 76% and new product revenue defined as revenue from products introduced within the previous two years was 60% of total revenues. Investors should be aware our utilization metric is not a good indicator of growth or growth potential as we have been and will continue to increase capacity.

Looking more closely at Mobile Devices, the largest of our three major markets, revenue in Q1 increased 63% over Q1 of 2009 and decreased 14% sequentially. Mobile data is the demand driver for Mobile Devices, with 3G revenue up 85% in Q1 2010 over Q1 2009. Growth is being helped by the expansion of 3G to new mobile devices such as data cards and electronic readers. Additionally, the industry appears to have avoided any excess inventory buildup post-selling season and through the winter New Year as our order rates remain very healthy. Other strong submarkets compared to Q1 2009 are wireless LAN and EDGE, where 2G revenue was about flat compared to the same period last year.

Smartphone revenue represents approximately 65% of our total Mobile Devices revenue, with the remaining revenue coming from CDMA, EDGE and GSM, primarily from voice phones. From a product perspective, fully-integrated transmit modules, a product category where TriQuint is a leader, was 58% of our Mobile Devices revenue in Q1 2010 and power amplifier modules was 24%. I continue to expect solid revenue growth in Mobile Devices driven by ramping new opportunities and unit growth of existing platforms and products.

Now, switching to our Networks market, I am happy to report continuing signs of recovery in demand. Our Networks revenue was up 27% sequentially and up 42% over Q1 2009. Radio access revenue, which is large base station infrastructure was up 23% sequentially and 22% from Q1 2009. Transport was up 26% sequentially and 35% compared to the year-ago quarter. This represents a broad recovery in Networks, with each of our submarkets and many of our customers participating. Our strong sequential growth was well balanced between our major markets of base stations, transport and emerging. I expect increased spending in North America infrastructure will offset some softening in China.

TriPower, an innovative gas technology that increases efficiency for high power RF is one of the most exciting opportunities in this market. Customer interest is high for TriPower, and I expect will play a material role in future revenue growth. More immediately, we are seeing healthy order rates broadly in the Networks market. Our new products in table that support video data and voice, data and voice to home are expected to continue with strong momentum in the second half of the year building on nearly 100% growth we saw in Q1 of 2010 as compared to Q1 of 2009.

We have seen good execution and healthy uptick of our optical drivers for the 40-gigabit metro market. Additionally, I am pleased to highlight our participation in Europe’s first 100-gigabit network. I expect to see continued growth in transport revenue through the year.

Lastly, our Defense and Aerospace revenues were up 35% in Q1 2010 compared to Q1 2009. Direct R&D investment from government and industry partners was up 37% over Q1 of 2009 and radar was up 70%. All other submarkets combined were up 5%. TriQuint has focused successfully partnering with the industry leaders creating mission-critical next-generation solutions. Long-term trends remain favorable for our Defense and Aerospace market. We have strategically ourselves in surveillance and communications which we believe are growing portions of this market. Key revenue programs in 2010 included advanced radar systems for Joint Strike Fighter, Unmanned Aerial Vehicles, and radar retrofits for F-15, F-16, and F-18.

Now, Steve will provide our results for the first quarter of 2010 and our guidance for Q2. Steve?

Steve Buhaly

Thank you, Ralph. For the first quarter of 2010, we reported revenue of $180.8 million. Revenue decreased 6.5% sequentially, but increased 52% over the first quarter of 2009. All markets enjoyed strong growth over the first quarter of 2009.

For the quarter, our revenue split to end markets was

Mobile Devices, 62%; Networks, 25%; and Defense and Aerospace, 12%. Please refer to the supplemental data posted on the Investors section of our Website for a detailed breakdown of our revenue by market. Note that we moved wireless LAN, laptop revenue and the wireless client submarket in Networks and combined it with wireless LAN in Mobile Devices. This reflects our belief that the Mobile Devices application will dominate our wireless LAN opportunities going forward.

During the first quarter, Foxconn was our only customer comprising 10% or more of our revenue. Our book-to-bill ratio for the quarter was 1.3 to 1, with strong performance in all three markets. Note that bookings in our military market often cover longer periods of time and that Q1 was somewhat of a catch-up period for bookings as our Q4 book-to-bill ratio of 0.88 was lower than the sequential revenue decline.

Our gross margin for the first quarter of 2010 was 37.9%. First quarter non-GAAP gross margin was 39.0%, up from 38.4% in the fourth quarter of 2009 and 21.0% in the first quarter of 2009. Networks rebounded to 25% of total revenue, the highest in the last year, driving improved company gross margins. Factory utilization was much better than a typical first quarter, due to better-than-seasonal revenue and expected strong revenue growth into the second quarter. Operating expenses were $55.3 million for the first quarter of 2010. Operating expenses were $52.4 million or 29.0% of revenue on a non-GAAP basis, up from $51.0 million in the prior quarter.

Planned increases in marketing and R&D drove the increase. Net income was $13.7 million, or $0.09 per diluted share for the first quarter. Non-GAAP net income grew by $29.7 million over the first quarter of 2009 to $18.7 million or $0.12 per diluted share. Diluted shares increased to 159.5 million shares in the quarter. Cash flow from operations was $12.1 million in the first quarter of 2010. Total cash and investments increased to $159.6 million or $1 per share.

Capital spending was $12.9 million compared with depreciation of $11.6 million. During the quarter, accounts receivable increased to $99.1 million with DSO at 50 days. Inventory turns were 4.9 for the first quarter of 2010. Net working capital increased $6.5 million to $140.5 million on lower revenue, due primarily to seasonal factors.

Non-GAAP financial measures exclude stock-based compensation charges and certain charges associated with acquisitions. Complete reconciliations of GAAP to non-GAAP results are available in our press release and in the Investors section of our Website.

Moving to our outlook, we believe second quarter revenue will be between $200 million and $210 million, reflecting over 13% sequential growth at the midpoint of guidance. We expect continued solid performance in our Networks market and strong factory utilization will lead to a non-GAAP gross margin of about 40%. Non-GAAP operating expenses are expected to grow to between $57 million and $58 million. Within this, we expect about $3 million of legal expenses from our litigation with Avago, up from about $900,000 in the first quarter.

The remaining expected increase is attributable to growth in R&D and selling expense. Second quarter net income is expected to increase about 28% sequentially to about $0.15 on a non-GAAP basis. Growth in cash is expected to be modest due to increased capital expenditures and working capital. As of today, we are 92% booked in the midpoint of our revenue guidance.

During the quarter, we plan to participate in a number of Investor Relations events. On May 4th and 5th, I will be in the Mid-Atlantic area marketing with Stifel Nicolaus. Ralph will be in San Francisco marketing with Merriman on May 18th, and later that month, on the 26th, he will be presenting at the Barclays Tech Conference. On June 2nd, I will be in Minneapolis for the Craig-Hallum Conference and will then travel the following day to Kansas City and Denver to market with Stephens Incorporated. At the same time, Ralph will be in New York for the D.A. Davidson Technology Forum on June 2nd.

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

Our second quarter 2010 conference call is scheduled for July 28th, 2010. I will now turn to Ralph for closing comments prior to welcoming your questions.

Ralph Quinsey

Thanks, Steve. TriQuint has been successfully executing a growth strategy that leverages our broad technology portfolio in multiple markets for scale and profitability. The results in Q1 demonstrate the strength of this strategy and give us a solid start to an exciting year for TriQuint.

The RF industry is enjoying a rising tide of demand with 3G content expansion, healthy smartphone unit growth and a rebounding infrastructure market. I do not believe this is a short-term trend. While we remain cautious and prudent looking forward, I see enduring opportunity for TriQuint. Wireless connectivity and consumer demand for bandwidth remain an early-stage opportunity for RF suppliers like TriQuint. New and exciting mobile devices and expansion into machine-to-machine communications and continued long-term investment in infrastructure are fundamental and capable trends for TriQuint.

I believe we are well positioned to benefit from these trends. I would like to open it up for questions at this time. Ashley?

Question-and-Answer Session

Operator

(Operator instructions) Your first question will come from the line of Nathan Johnson with Pacific Crest. Please go ahead sir.

Nathan Johnson – Pacific Crest Securities

Yes. Hi, I appreciate you taking my questions. A couple of things, one, I wanted to talk about linearity of the Networks business throughout the year, obviously Q1 saw a pretty strong sequential increase, how should we anticipate that business progressing throughout the year, do you expect a bit of a pause over the next quarter or do you see continued growth?

Ralph Quinsey

All right. Looking specifically to Q2, the growth percentage business is going to be shared by Mobile Devices and Networks. So, I think you should expect some decent growth sequentially in Q2. From a dollar perspective, more of the growth is coming from Mobile Devices because of the size of the business. And in the second half, still a little early, but again, I see fairly broad growth from Networks throughout the year. And then Mobile Devices, I remain excited about that opportunity. Our largest market will continue to grow there.

Nathan Johnson – Pacific Crest Securities

And could you just provide a little bit of an update on the TriPower business? You know, at the Analyst Day, it seemed like the opportunity had pushed down a little bit, would just hope to get an update on that business?

Ralph Quinsey

As I discussed and Brian discussed at the Analyst Day, that opportunity has pushed out a little bit, but I want to reiterate that it remains one of our most exciting opportunities and clearly a material part of our growth story in the future. As it turns out that, that slight pushout has been more than offset by other opportunities from virtually all of the markets, I have talked about optical, we actually had a plan on optical, cable looks very exciting. We are seeing some of the opportunities that could be exciting later this year. And in emerging, automotive radar looks like a solid growth here.

Nathan Johnson – Pacific Crest Securities

Great. That’s very helpful. Thank you very much.

Ralph Quinsey

You bet.

Operator

Your next question comes from the line of Patrick Newton with Stifel Nicolaus. Please go ahead.

Patrick Newton – Stifel Nicolaus

Hi, thank you for taking my questions. First one for Ralph, I guess with better-than-normal seasonal first half of 2010 inclusive of the current guidance, how would you anticipate growth relative to normal seasonality in the back half of the year, because if I run the midpoint of your guidance in the June quarter, it would appear that your full year 20% growth is conservative with seasonality pointing to about 30% growth for the full year.

Ralph Quinsey

Well, I agree with you that based on a strong start that seems conservative, we don’t update the annual growth, we give that guidance at the beginning of the year and we don’t update it, but you are absolutely right. We are off to a good strong start. I would add further color as I see nothing slowing down in the opportunities for us, and I expect it to be a solid growth year.

Patrick Newton – Stifel Nicolaus

Thank you. That’s helpful. And then I guess one for Steve, on the operating expenditures front, the increase to $57 million to $58 million seems a little bit, Steve, even if I back out the incremental $2.1 million from legal expenses. And I guess previously, you talked to OpEx being in the low $50 million through 2010, and obviously high revenue growth, but can you walk us through some of the puts and takes and maybe specifically into R&D and SG&A, how that has changed since the last quarter?

Steve Buhaly

Yes, you bet. You take out the litigation expense I referred to and you end up in Q2 looking something more like $54 million to $55 million and obviously my prior comments were exclusive of that. So, with that set aside, Q1 to Q2, we see research and development continuing to grow between $1.5 million and $2 million. The growth is coming from that. And it just reflects some absolutely terrific opportunities in the market for us to go after. Selling expense is going up a bit with revenue, and the rest of the areas are flat.

Patrick Newton – Stifel Nicolaus

And should we expect this elevated legal expenses to run through 2010 or what kind of timeframe are we looking at would you imagine? I realize it’s not known.

Steve Buhaly

It’s probably going to run five or six months at this elevated level as we go through document production and processing fees, this litigation. The timing of that is squishy, the absolute amount is squishy, that’s the nature of the beast, but we will give you an update every quarter on where that stands and make our best estimates possible. We are transparent and we will call it out, because it’s a large kind of unique item. So, that’s what I know about it at this point.

Patrick Newton – Stifel Nicolaus

All right. And then just one last one if I may, given SEC filings, I believe it’s well known that you guys have some match dollar content in this 3G version of the iPad that’s being released on Friday. I was wondering if the device contributed to March quarter results, and interested if you had any upside impact to the June quarter outlook?

Ralph Quinsey

Hi, I appreciate the question and I apologize I am not going to answer that question. We are just not going to discuss our largest customer.

Patrick Newton – Stifel Nicolaus

I figured that’s worth a shot. Thank you, gentlemen.

Operator

Your next question is from the line of Jason Schmidt with Craig-Hallum. Please go ahead sir.

Jason Schmidt – Craig-Hallum

Thanks for taking my question. Wondering if you could talk a little bit of margins going forward, it’s like so you guys guiding for above 40% of the June quarter. Should we kind of look at that as the normal target or kind of low 40%? And then can you talk a little bit about if you guys are seeing any component shortages and overall pricing environment?

Ralph Quinsey

So, from a margin perspective, yes, we are excited that we are approaching our target model. If you take out the legal expenses, both gross margin and operating income, it could be very close to our target. And we are evaluating what the next milestone is. Clearly, we don’t think that is the end of the road, but it’s much more leveraged this business, we see the opportunity starting to really present themselves in the Networks and Defense and Aerospace side of the business with our higher margin opportunities. So, we will try to give some visibility on that, on the next call. Right now, we are still focused on meeting that original goal. On the second question, yes, we are experiencing the problems of success, good growth and good growth outlook.

I would say that the supply chain is getting tight. We are working a few issues. We did recognize and start investing in capacity internally some months ago. It’s a relatively easy investment because as you know, we have the floor space and the clean room, it’s a matter of adding equipment. So, we will work through some issues and manage through that tightness over the next three to six months.

Jason Schmidt – Craig-Hallum

All right. Thank you.

Operator

Your next question is from the line of Mike Burton with FBN Securities. Please proceed with your question.

Mike Burton – FBN Securities

Hi guys, thanks. I was wondering if you can talk a little bit about the converged pay market or (inaudible) a little bit at the Analyst Day. One of your competitors was talking about it last night and looking at it for next year, I am wondering if your outlook has changed a little bit, that sounds like it’s a little earlier than where you had positioned that?

Ralph Quinsey

So, allow me a short tutorial for those in the call that may not understand the concept. Solutions are in several major categories, component PAs, integrated transmit modules and then we moved into what’s lumped together under the name of converged, but really is what we call multi-mode first and then converged PAs. The market is going to be a mix of all of those solutions, but right now, it’s dominated by component PAs and then highly integrated transmit modules is the transition we are going in here. And again, TriQuint has been a leader there with a highly integrated transmit module. We had been one of the first to really take that type of architecture to the marketplace. We are happy that most of the competition has followed our lead, and we are unique because we set up a strategy where we have a broad technology power to work with. We have all the different filtering components as well as the active components, but it allows you to build these very complex transmit modules for 3G,.4G, and beyond.

The filtering component becomes very important when you transition from 2.5G to 3G. So, we will transition, as I said, in the Analyst Day, the next step is going to be multi-mode. It’s by and large similar content inside the solution as you see today discretely, but packaged all together. So, the innovation there, the creativity there is in the packaging, not so much in the die. The next generation is what we call converged. That’s when you truly take multiple modulation schemes through the same hardware. You truly reduce the amount of die. I think multi-mode, the repackaging exercise will be a material revenue event in 2011, consistent with what other competitors are saying, and true converge will be a material revenue event in 2012. So, sorry for the long answer, but that’s how I see it consistent with how we talked about it on the Analyst Day.

Mike Burton – FBN Securities

No, that’s helpful. And are you already seeing design activity for your multi-mode products and then last is just on taxes, Steve, if you could kind of walk us through how you expect taxes to trend in 2010 and 2011? Thanks again.

Ralph Quinsey

Yes, there is. It is an interactive design in process for multi-mode as we speak. I will just go over to Steve for taxes.

Steve Buhaly

Taxes for 2010 are going to look just like they did in 2009, inconsequential. And that pattern will continue midway into 2011 at which time we will exhaust our federal NOLs and begin paying at a more statutory rate. Not quite ready to comment yet on that, we are going through some tax planning and some analysis, but certainly as we get closer, I will have more to say about that.

Mike Burton – FBN Securities

Okay, thanks again.

Operator

Your next question is from the line of Todd Koffman with Raymond James. Please go ahead, sir.

Todd Koffman – Raymond James

Thank you very much. Within the Mobile Device segment, I know you called out Foxconn being greater than 10%, but in the quarter, was there any major shift in customer dependence or customer mix amongst your other, say, top five or six customers within the Mobile Device segment?

Ralph Quinsey

I wouldn’t say there was any significant shift out of the ordinary that we see quarter-to-quarter. So, I guess the short answer is no.

Todd Koffman – Raymond James

And is it fair to say that when you look at the – you said you are 90 something, 92% fully booked for June and there is no major shifts as well looking into the bookings for June or not clear yet?

Ralph Quinsey

I guess the answer is no. No major mix shifts, I still think that we have a fairly healthy backlog and fairly healthy growth Q1 to Q2 in the plan for Mobile Devices. So, the shift is good uptick of our products. It’s coming fairly broad-based.

Todd Koffman – Raymond James

Thank you very much. Good luck.

Ralph Quinsey

Thanks.

Operator

Your next question is from Tim Luke with Barclays Capital. You may proceed with your question.

Aldrin Chang – Barclays Capital

Hi guys, this is Aldrin Chang [ph] in for Tim Luke. Thanks so much for taking my questions. It looks like you had a really strong quarter in the Networks business, could you just walk us through where you are seeing the most amount of growth there?

Ralph Quinsey

Right. So, it’s actually been fairly broad-based and across our major submarkets, emerging, transport and base stations. In base stations, I believe it’s hard to track because we have got lots of products that go to a lot of different solutions, lot of the WJ products sell into the base station market, reducing some building of equipment in anticipation for buildout in India. So, that’s the trend. We also think that there could be some softening in China based on their announcements recently, but that should largely be offset by increased investments in North America. So, net-net for both the quarter and the year, base station looks pretty good.

On transport, it’s what’s driving as optical, VSAT, cable of very healthy growth on those sub segments for transport sub market, both sequentially and for the year. And then in emerging, automotive radar, smaller based percentages are larger, but still pretty good business. That could get up to $5 million to $6 million business for us for the year, which is pretty good business when you start from ground zero last year.

Aldrin Chang – Barclays Capital

Great, thanks so much.

Operator

Your next question comes from the line of Edward Snyder with Charter Equity Research. Please go ahead.

Edward Snyder – Charter Equity Research

Thank you. Revenue run rate at your current capacity, you said you had a little bit of a tightness in the factory, where can we go without any insignificant CapEx, I know it’s fairly easy upgrade, but clearly not – you don’t’ have a throughput that you would like?

Ralph Quinsey

So, we started to expand capacity several months ago. We will start to see some impact of that expansion in June, and we will probably finish that, this is largely Oregon-based for gallium arsenide towards the end of the year, and we will be adding in the range of 15% to 20% capacity on our Oregon site. We still have capacity upside and headroom in Texas GaAs site, and as you know we expanded capacity for our ball line [ph] in Texas. That’s come up nicely now and on plan. It’s turned to a nice favorable impact on the business.

Edward Snyder – Charter Equity Research

Just bookkeeping, where are you out utilization-wise in Texas, now?

Ralph Quinsey

In Texas, we are now at approximately 46% utilization.

Edward Snyder – Charter Equity Research

Okay. And then book-to-bill was substantially higher this quarter, how much of that was military versus commercial stuff?

Steve Buhaly

If you took military out, the book-to-bill would – actually I haven’t done the math, so I am not going to speculate. But military played a role, but it wasn’t the dominant role in that fairly large number. The other part was, in Q4, book-to-bill was only 0.88 and as it turns out, revenue was only down about 6% instead of the 12 projected by that book-to-bill. So, there is catch-up on the bookings that we took and shipped in Q1.

Edward Snyder – Charter Equity Research

And then, the Korean market, I mean, you have had a presence there for quite a while, there has been some chatter out that there may be some struggles for your OEM partners there. Any color at all, is it a technical issue, is it pricing, is it just a mix shift of products out of there that maybe causing some disruption?

Ralph Quinsey

No, I think we will do quite nicely with Korea this year. I am excited about Korea. So, I am not sure exactly what you are referring to, Ed, but I think that we will do quite nicely with Korea this year.

Edward Snyder – Charter Equity Research

Okay. And then on the 3G front, I heard from everybody on the OEM side, how all pushing into that space, your product – correct me if I am wrong, you are tending to lead a little bit on the technical side in terms of performance and size. That’s been, I think you would know a bit by some of the product offerings and some of the competitors, (inaudible) last night, where do you feel your position now, do you feel very comfortable with your product offering given all that’s going on in 3G, most of your major competitors to feel the new products that are in smaller die size etcetera. Are you still waiting for OEMs to take advantage, which you already feel like you are going to need to spin things in order to stay competitive.

Ralph Quinsey

Let me be very clear that we are very comfortable with our product roadmap. We are going to our fourth generation of these highly integrated transmit modules and there are some incredibly exciting products. We are bringing in technology shifts like copper bump, significant impact, vertical level packaging, significant impact moving to multi-mode and then converge. We develop very exciting product roadmap and I am very comfortable with our positioning.

Edward Snyder – Charter Equity Research

Okay. And then my final is just to kick the cart, guess I have been kicking for a year-and-a-half now on the inventory. There was a few large semiconductor manufacturers who are talking about longer lead times etcetera. What would you want channel inventory and your customers that you are seeing lead times move substantially and issue a double ordering?

Ralph Quinsey

So, you are talking about lead times to us or our lead times to our customers?

Edward Snyder – Charter Equity Research

Your lead times to your customers.

Ralph Quinsey

So, we are seeing, first of all, I would say the large part of our majority, large majority of our revenue is coverage. So, the largest portion of our revenue is covered by either hub arrangements or volume purchase agreements. And so, really lead times, it’s no more there. We deliver to the requirements of our customer. For some of our other customers, in particularly some of our commercial quality customers, lead times have walked out several weeks recently.

Edward Snyder – Charter Equity Research

And then obviously it does not mean not as much channel inventories if you would, maybe normal.

Ralph Quinsey

Targets figure out channel inventory with regards to the foundry business. We are talking specifically to handsets. I think that there have been some disparity in the reaction to the discount last year and we are still seeing partly some reflection, certainly year-over-year comparisons are hard to make, because of the ramp. We actually think that from a handset perspective people went through this and the year cycle, fairly lean inventories. We are seeing good strength, good backlog, good healthy bookings and good growth, good seasonal growth in Q2, bounce back up from Q1.

Edward Snyder – Charter Equity Research

Great. Thanks guys.

Operator

Your next question is from the line of Steve Ferranti with Stephens Incorporated. Please go ahead.

Steve Ferranti – Stephens Incorporated

When you look at the upside you saw in the first quarter results relative to the raised guidance you gave near around mid-quarter timeframe, can you put maybe a fine point in terms of where the incremental upside may come from in the quarter?

Ralph Quinsey

Yes, it was Networks.

Steve Ferranti – Stephens Incorporated

Okay. And within that, anything specific you can give?

Ralph Quinsey

You know it was fairly broadly shared across to a base station to transport and emerging. In base station as I said earlier, we have a fairly broad-based standard products business there, so it’s hard to pin it down to one area, but we do think that there is some pre-building for India releases, and we do think that there is some activity, increased activity in North America, that’s more than offsetting the weakness in China. And transport clearly came from point-to-point radio, optical, and cable. In emerging, probably automotive was the larger impact.

Steve Ferranti – Stephens Incorporated

Okay. Fair enough. And I guess question on sort of March quarter seasonality that you guys saw on the handset side of the business, you saw some modest seasonality, I think certainly within what would be considered normal range, but some of our your competitors have reported already that actually saw a sequentially up quarters in the handset side. Do you have any thoughts in terms of you know, seasonality trend that you saw in the March quarter?

Ralph Quinsey

First of all, speaking to the market, the mobile devices or handset market, clearly there was seasonality, right. If you look at the major handset suppliers, they talk to it. Not all handset suppliers were affected the same way, but clearly it was typical seasonality. And then as far as the performance of one of us in the supply chain versus the other in any particular quarter, that’s more a function of inventory fluctuation, that brings you whatever position their customers took as far as leaning heavy on inventory. And then the wins and losses across customers. So, quarter-to-quarter, if you look at Q1, yes, we did not grow as fast as some of our other customers.

If you look at a longer period, which I think takes out the inventory fluctuations, it gives you a better share answer. I think the inventory fluctuation is probably overwhelmed quarter-to-quarter, any type of share information you get. Clearly, we are on a long-term tear of share gains, and clearly I am confident we will continue that streak.

Steve Ferranti – Stephens Incorporated

That’s a good point, Ralph. You guys have certainly been a great revenue growth story here and good to see the growth continuing there. Last one for me, you mentioned some increased R&D investments, sort of targeted at some specific opportunities, I am sure you are not getting any specifics there, but could you at least sort of steer us in terms of what segment those opportunities might be in?

Ralph Quinsey

Sure. I mean we are saying, again fairly broad-based within the network space, everything from AMI MR to WIMAX filters to optical opportunities really are strengthening. It’s starting to blossom out and cable, we feel very good about the tracks, its performance tracks is being on the most recent acquisition. Great products, great traction, good part of the story.

Mobile Devices here really is about smartphones, that wireless content and 3G for smartphone, a lot of content and 3G for smartphones, we are seeing good uptick there. And then Defense and Aerospace, that business has continued to move along nicely. We still haven’t reached what I figure is going to be the sweet spot of this strategy as we expand into complete RF solutions. Keep in mind, we currently sell most of our revenue in the form of wafers of die. And as we have done in other markets, expand anything to our RF solutions. That will be a growth accelerator for that business.

Steve Ferranti – Stephens Incorporated

I was actually more specifically on ad-hoc, so thank you for that and thanks for taking my questions. Good luck going forward.

Ralph Quinsey

You bet, Steve.

Operator

Your next question comes from the line of Bill Dezellem with Tieton Capital Management.

Bill Dezellem – Tieton Capital Management

Thank you. We have a couple of questions. First of all, let’s follow-up on the last question, relative to defense why isn’t that you would anticipate that you would be providing the RF solutions rather than just wafer level of product.

Ralph Quinsey

All right. So, what that looks like, Bill, as we move back, as I said (inaudible) amend to more complex RF solutions and that process is happening as we speak. So, to answer your question specifically, we will be shipping products like that this year in low volume. This is not a fast-moving market. I think it will become an exciting and material part of our story, you know, through 2011 and 2012 is really a more appropriate way to think about that being a major material theme.

Bill Dezellem – Tieton Capital Management

That is helpful, thank you. And then shifting to a couple of other questions, first of all, the network business, would you please highlight how you feel your growth is put between the market growing and market shaping and maybe do that in light of your comment about the mobile business where you have been on a long-term gain of market share point.

Ralph Quinsey

Yes, and I appreciate the question and I can give you maybe a qualitative answer, but certainly don’t have as greater visibility into this very fragmented complex market to give you good analytics on that. I do think that we are better fitting from rebound in that market. Clearly, there was a slowdown in spending in 2009 and Networks is back and it backs strong, but we did the right things in 2009. We doubled down on our investment. We reduce our work force, we didn’t’ flow down, our product development cycles were actually increased and we did acquisitions specifically to try axis in this marketplace. I think we are better fitting from them. So, qualitatively, I would just pick a number of 50-50, to answer your questions on market rebound and grow beyond the market rebound, and I feel good about the traction we are getting in Networks. And I would paint the closing picture I paid for you, Bill, is that we are starting to reach critical mass with the customer base. When they look at us and they end-to-end communications customers. They look at us and say, you are end-to-end. You have got all of these technologies, all these products. We focus on all these areas. We would like to do more business with you. That’s exciting.

Bill Dezellem – Tieton Capital Management

That will be great to see that happen. And I guess continuing down this pattern trying to understand it better, many years ago, you embarked on a path with the Mobile Business, which you felt would create significant share gain, and it seems as though that strategy is pointing out just as you had at home. To what degree have, you have been doing similar things on the network front and if so, where do you feel you are at in that process relative to where you are at with the mobile process?

Ralph Quinsey

Yes, you are right, Bill. We did embark on a path to be a major player in the Mobile Devices over the last five years, and I am happy to report that I believe we are considered now a major player. I would only highlight, we are still not number 1 or number 2. We have got quite a bit of headroom and there is quite a bit of opportunities still in Mobile Devices, and we will remain aggressive.

In the Networks space, we started off in a little bit different position. In some cases, we had very high share and other cases, there was share opportunity. What we have done in Networks is taken a strategy that say we are just going to make it simple, because it’s very complex fragmented marketplace to get their job done. So, our strategy in the Networks space is where people lead high-performance technology, we are the go-to company. In fact, many of our competitors come to TriQuint, as you know we are probably supplied to this industry because of our strong technology space. So, from a technology perspective and a performance market, will go to supplier. That’s a critical part of the strategy. If our customers need integration, we have demonstrated we know how to do that in a high volume Mobile Devices businesses. So, that skill, that capability transitions over to those markets quite easily. So, high performance or high integration, we offer the solution, make the job simple. That’s our strategy, and we think that we can continue to expand out our footprint in Networks.

So, in that sense, we are gaining share, but think of it as many small markets where in some markets we have low share and we can climb the mountain, and other markets, we have relatively high share and we will grow with unit volume.

Bill Dezellem – Tieton Capital Management

That’s helpful, and if you would indulge with one more entirely different question please, your gross margin in the first quarter as a percentage was higher again in Q1 than it was in Q4, so higher sequentially and yet that was on lower revenues sequentially. And usually, the leverage works the other way, what is it that you all did that allowed the gross margin to grow in Q1 with revenues down versus Q4.

Steve Buhaly

I will take that. Two reasons, one is Networks’ revenue as a percent of total company revenue was significantly higher in Q1 due to growth in networks and a bit of a decline, seasonal decline in Mobile Devices. So, that was a big factor product mix. The other was our utilization in our GaAs fab was actually slightly better in Q1 and in Q4 as we didn’t give too much in revenue, Q4 and Q1, and I also had a change to start building head for what we think will be a strong second quarter.

Bill Dezellem – Tieton Capital Management

Thank you both.

Ralph Quinsey

Thanks Bill.

Operator

Your next question is from the line of Aalok Shah with D. A. Davidson. Please go ahead.

Colin Denman – D. A. Davidson

Hi guys this is Colin Denman in for Aalok. Just a couple of questions, kind of relate to last one, the gross margin. I think you previously you said that nearly $180 million revenue level that you could get closer to 40% gross margin. So, I was just wondering with the better networks business and the things that (inaudible) has been doing, I was just wondering what’s preventing us from seeing even higher gross margins and how much room do you think there is left to optimize the operations?

Ralph Quinsey

You know, we think there is plenty of room. We think we will be able to get to 40% next quarter, with our product mix. And in terms of how much room is there left, Skyworks is going to report now. Today, they have been the leader in terms of gross margin performance in our industry and I think that’s probably a fine benchmark. And we have got planning more opportunities for improvement.

Colin Denman – D. A. Davidson

Okay, great. Thanks. And then just to Wi-Fi, I was wondering would you be willing to classify the dollar amount wireline that was reclassified to the mobile devices from Networks in Q1?

Ralph Quinsey

You know, I think that in effect we have done that. We have put a note out on the Website that covers that. You have to do some math. And so in the interest of not typing up a lot of math on the call, take a look at that, and if it’s not that clear, give Steve a call, and he will help you.

Colin Denman – D. A. Davidson

Okay, thanks. And just related to the Wi-Fi business, you are reclassifying into the Mobile Devices business and it sounds like that’s (inaudible) the growth is going to come from. So, I was just curious, we heard a lot of your competitors also talk about that opportunity. I was just wondering how do you see your competitiveness there relative to some of your competitors, and how do you expect that opportunity to ramp and what kind of – can you size that at all for us?

Ralph Quinsey

Sure, and you are specifically talking about wireline in handsets?

Colin Denman – D. A. Davidson

Yes.

Ralph Quinsey

I think we are dominant. I think we have a dominant share position in wireline and handsets. I think we sell or will sell to virtually all of the top players for wireline in handsets, and I think that’s going to be a crawling business for us this year.

Colin Denman – D. A. Davidson

Okay guys. Thank you very much. That’s all I have got.

Ralph Quinsey

All right.

Operator

Your next question is from the line of Richard Shannon with Northland Securities. Please proceed with your question.

Richard Shannon – Northland Securities

Hi guys. I guess my kind of high level question, kind of following on one of your competitors, reporting early this week, they mentioned that the pricing dynamics in discussions with their customers indicated less than the usual declines they have seen in panels [ph], what are you seeing in terms of pricing going forward?

Ralph Quinsey

Yes, contractual arrangements aside and roadmap arrangements aside. I think that the theme this year in semiconductors is going to be more assurance to supply than driving prices down. I think this market particularly the Mobile Devices market as a tradition of lowering prices, but I think some of the tightness in basically whole semiconductor chain this year is going to mitigate that somewhat.

Richard Shannon – Northland Securities

And just a follow-up to that comment, Ralph. How much of your business has contractual versus on-the-go?

Ralph Quinsey

A large part of our business is contractual, but the contracts cover many, many subjects. So I don’t mean to imply that. Having a large prices being contractual, that includes ASP reductions or not. A large part of our business is contractual.

Richard Shannon – Northland Securities

Following on one of the previous questions regarding Wi-Fi and smartphone, you said that you expect a dominant share virtually all those spaces dressing there, what do you attribute your success to there? Are you just early to market with products or just kind of describe with the situation because it sounds like things are going very well there.

Ralph Quinsey

It’s very specifically, we have a strong partner on the solutions, strong reference design partner. So, as you know how we go to market is we work with the mixed signal and digital content across all of our markets and all of our applications right, we match up. We are the RF that connects that world to the wireless network and so we have a very strong partner in the wireless line area.

Richard Shannon – Northland Securities

Most if not all your business going to that single partner or is there some breadth to that?

Ralph Quinsey

No, not all of our business goes to that partner, but I would say, a big piece of our business goes to that partner and it’s given us the volume and the wherewithal to learn and grow that business beyond that partner.

Richard Shannon – Northland Securities

Okay, great. Thanks a lot.

Ralph Quinsey

Yes.

Operator

Your next question is from the line of Quinn Bolton with Needham & Company. Please go ahead.

Quinn Bolton – Needham & Company

Hi guys, thanks for squeezing me in. Ralph, can I just follow-up on that wireless LAN question? Are you seeing a trend towards sort of component PAs in that business or I think you recently introduced that front-end module. Is that going more towards the FEM business over the next couple of years.

Ralph Quinsey

It’s really all the above, Quinn, – part of that business is done purely in CMOS, part of that business I done with component PAs. And part of that business is done with more of a FEM approach. And again, I am specifically to handsets wireless LAN, if that was how your question was directed.

Going forward where you have performance requirements, range requirements, I think our materials and our solutions are advantaged. And clearly with the advent of mobile data and just the need for that connectivity, it’s a tailwind I think for our business in connectivity.

Quinn Bolton – Needham & Company

Thanks and just a clarification. I think you had said that about 50 something percent of your handset business was TriQuint modules and I think it was 24% PA modules, would the device like the 5012 fall into that transmit module?

Ralph Quinsey

The 5012 fall into PA module.

Quinn Bolton – Needham & Company

Okay, the 5012 falls in the PA module. Is it then mostly the transmit modules in switches and 3G transits.

Ralph Quinsey

It’s a combination depending upon the modulation scheme. If the frequency delaying or – duplex your filter in the transmit module. And if it’s the time to main duplexing, there will be a switch. For example, 3G (inaudible) frequency demand to plugs and GSM and EDGE is time – GSM EDGE would have a switch and a PA that would be a transmit module, and the 3G band would have a – there are more complexity with duplex and other circuitry in the PA and that would be a transmit module in that category.

Quinn Bolton – Needham & Company

Great, thank you.

Operator

Your final question will come from the line of David Duley with Steelhead. Please go ahead.David Duley – Steelhead Securities

Yes, thanks for taking my questions. Just a couple of clarifications. Steve, what would you expect, I know you don’t want to raise your target on your gross margins, but just going forward, whatever revenue you do get, what should be the incremental drop rate on that revenue?

Steve Buhaly

Yes, typically we think of it as about 50%, but it is mix dependent.

David Duley – Steelhead Securities

Okay. And another clarification, can you – you disclosed what the percentage of your largest customer was in the March quarter?

Steve Buhaly

It will be in the filing.

David Duley – Steelhead Securities

And when does that come out.

Steve Buhaly

Deborah?

Deborah Burke

Steve?

David Duley – Steelhead Securities

It’s hard to say?

Steve Buhaly

May 13th? May 13th is the correct timing.

David Duley – Steelhead Securities

Okay, thank you. And on, someone else asked you, but as far as tablet or iPad revenue or however you want to classify that, will that be in the mobile phone device bucket?

Ralph Quinsey

So, the way we classified our revenue and I am glad you asked that. Good question, David, because we did make a change. The way we are classifying anything that is mobile like a laptop or a mid or an e-reader or anything of the client base is going to be under Mobile Devices. So, we took the wireless LAN, largely laptop related wireless LAN and moved it up to Mobile Devices. There was revenue associated with WIMAX, Wi-LAN, broadband wireless access type of access points, i.e., the box. That stays, it’s the smaller portion now of radio access. Radio access is largely base station, but there is a small amount of revenue there for access point type of products.

David Duley – Steelhead Securities

Okay, and you mentioned your overall utilization rate was, I think 76% or whatever that number was, why would you be adding capacity at this point?

Ralph Quinsey

That number is correct, 76%. That’s an average for the company. Oregon was at 78% and typically we are adding capacity based on demand in the future, and we feel that we have got great opportunity for growth.

David Duley – Steelhead Securities

Well, if your utilization in Oregon is 78%, right, you could take it to 100%, then before you needed to add capacity, you could go by 22% theoretically, or probably more. So, clearly you are expecting strong growth in the mobile business.

Ralph Quinsey

Yes, I think analytically you are very correct on that, but keep in mind the real world, it comes in different mix. We would like to have some surge capacity available, which doesn’t come all uniform, and so managing to 100% number really is impractical.

Steve Buhaly

Certainly once you get close to 90%, you get nervous, right. If we make a mistake, if some customers doesn’t forecast correctly, we will have some cushion. So, either of us can recover.

David Duley – Steelhead Securities

And what growth rate are you guys signing off on now for the 3G handset market, for the smartphone segments?

Ralph Quinsey

So, in my prepared notes I said north of 20%. I have heard numbers as high as 40%, I would agree that 20% is somewhat conservative.

David Duley – Steelhead Securities

And I got some kind of like poking around on your annual guidance again, as it just seems pretty low given if you are gaining share in a marketplace that’s growing by more than 20% and you get two-thirds of your revenue from that marketplace, and Networks are growing, how can you only grow by 20%.

Ralph Quinsey

As I said, Dave, we put out annual guidance at the beginning of the year, at that time, we were fairly comfortable with 20%, we are off to a good start.

David Duley – Steelhead Securities

And obviously much more comfortable about 20% now.

Ralph Quinsey

And much more comfortable about 20% now.

David Duley – Steelhead Securities

All right. Again congratulations on a nice quarter and we look forward to more coming.

Ralph Quinsey

Thank you.

Operator

And there are no further questions in queue.

Ralph Quinsey

So, that ends the call. I want to thank all the participants and listeners for their interest. I am excited about 2010 and about our opportunities going forward and look forward to updating you on our results in the coming quarters. Thank you very much.

Operator

And this does conclude today’s conference call. You may now disconnect at this time. We thank you for your participation.

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Source: TriQuint Semiconductor, Inc. Q1 2010 Earnings Call Transcript
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