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Peregrine Semiconductor Corporation (NASDAQ:PSMI)

Q2 2014 Results Earnings Conference Call

July 28, 2014 4:30 PM ET

Executives

Jonathan Goldberg - Senior Director, Corporate Development

Jim Cable - President and CEO

Jay Biskupski - Chief Financial Officer

Analysts

Brian Modoff - Deutsche Bank

Harlan Sur - JP Morgan

Doug Freedman - RBC Capital Markets

Sid Sinha - Canaccord Genuity

Jay Srivatsa - Chardan Capital

Quinn Bolton - Needham

Shawn Simmons - Oppenheimer & Company

Operator

Good day, ladies and gentlemen. And welcome to the Peregrine Semiconductor Second Quarter 2014 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 call is being recorded. I’ll now introduce your host for today’s conference, Jonathan Goldberg. You may begin.

Jonathan Goldberg

Thank you, Ashley, and good afternoon, everyone. Thank you for joining us on today’s conference call to discuss Peregrine Semiconductor’s second quarter 2014 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 be making 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 these 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 the 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.

And 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 joining us on the call this afternoon. Peregrine reported revenue of $47.1 million in the second quarter, ahead of our guided range. We also reported a non-GAAP loss of $0.12 per share.

The improvement in our earnings from the $0.23 per share loss last quarter demonstrates that we are taking concrete steps to return to profitability. We are ahead of plan in improving our cost structure.

I’d like to begin our call with an overview of the industry. Demand for LTE smartphones remains healthy globally. We are seeing some signs of share shift among OEMs as price points decline. This is occurring at a pace similar to the past transitions in wireless technology. We continue to see growing complexity of RF requirements for 4G phones as wireless operators continue to push OEMs for support for more frequency bands.

Turning now to our mobile business, we are benefiting from the overall industry trends, I mentioned. We have design wins across almost every major OEM shielding us from share shift in the end market.

OEMs continue to seek out our parts to solve the challenges of supporting LTE. We think this trend will continue for some time as a growing number of carriers are planning to launch of LTE advanced carrier aggregation networks and are looking to push into ever more frequency bands.

As I mentioned last quarter, we are seeing very strong growth in design activity from OEM customers in China. These customers are in an early stage of rolling out LTE smartphones.

We expect this to continue as they expand sales beyond domestic consumption and star shipping to export markets later next year. We participate in this market through our inclusion in the number of reference design and with our leading cultural module partners. We are seeing an expanding number of opportunities here and we believe the long-term trend here is very positive.

Our UltraCMOS 10 is now in volume production. Customer adoption has been strong due to the performance it offers and it has a very positive impact on our gross margins. We remain confident that UltraCMOS 10 is the highest performance RF SOI technology on the planet and we are confident that it positions us very competitively for key design sockets in the future.

Our Global One integrated RF front-end family continues to advance. We are building on our progress as we have support for more frequency bands and expand the targeted portfolio of product that make use of our power amplifier, which has gallium arsenide levels of performance with all the benefits of standard silicon.

Our product development remains on track with the update I provided last quarter and we continue to receive very positive feedback from all the leading platform vendors we have now sampled and tested our PA.

Turning to our high-performance analog business, for those of you less familiar with the analog side of our business, we sell a set of very diverse product to over 1,500 customers in a dozen end markets, ranging from wireless infrastructure to broadband, to test and measurement.

In the quarter, we again achieved substantial growth of our overall sales funnel, design wins in the quarter grew over 200% from the second quarter of 2013. Interest in our HPA products is driven by the transition from gallium arsenide to silicon. Although, this transition is in early stages, its impact to the growth of the sales funnel is significant.

Customers are looking for alternatives to gas and Peregrine’s UltraCMOS technology can meet the performance requirements of our customers with all of the benefits of CMOS including improved quality and reliability, scalable technology roadmap and improved cost structure.

I would like to share a few of our recent HBA wins. In the wireless infrastructure market, we continue to benefit from the LTE build-out not only in China but around the world. We secured several new design wins at leading infrastructure equipment OEMs in the quarter.

In the broadband market, a new focus market segment for Peregrine, we recently won a multimillion dollar lifetime revenue design win with the major provider of cable TV set-top boxes in support of the rollout of DOCSIS 3.1 equipment. We believe our PE42723 single pole double throw switch is the only product on the market that can currently meet the stringent linearity and insertion loss requirements for DOCSIS 3.1.

In the test and measurement market, we secured design wins at several leading OEMs. And finally in the enterprise Wi-Fi market, we have one reference design sockets from several of the leading platform providers in the field. During the quarter, we participated in the International Microwave Symposium show in Orlando, Florida where we had strong customer interest in our new products and demos.

That we can -- prior to IMS, we held our annual worldwide sales conference. Over 120 of our sales team and channel partners attended. They loved the show, very enthusiastic about both the market traction of our HBA products and our new product plans for the various market segments.

Finally, I want to touch on our IP position. As we announced on July 22nd, we have settled all outstanding litigation with RFMD and entered into a license agreement with them. There's not much more that we can discuss about this agreement and the financial terms are going to remain confidential.

However, I can say that we are pleased to see the value of our IP validated again in our position of the inventors of RF SOI acknowledged. We have now signed up two of the world's largest RF module makers. And we will continue to evaluate the best strategy for positioning our IP portfolio.

In closing, I would like to thank all the Peregrine employees for their hard work and dedication this quarter. And with that, I will turn it over to Jay for discussion of our financials.

Jay Biskupski

Thank you, Jim. I will first provide the summary of our second quarter 2014 results and ending balance sheet, adding a little color to the factors underlying those results. I'll then provide our business outlook.

I’d start to remind you that Peregrine Semiconductor follows a 52-week fiscal year ending in December. Our second quarter ended on June 28, 2014 and covers the period starting March 30, 2014.

As noted in our press release, revenue for the second quarter was $47.1 million, a decrease of 10% from the second quarter of 2013, up 14% on a sequential basis from the first quarter this year and above our guided range of $42 million to $46 million provided in May.

Revenues came in stronger than expected, driven by stronger shipments, handset switches for all major OEMs as we benefited from the extended life of previous design win. OEMs are increasing their shipments of midrange LTE smartphones, expanding demand for our products and extending the life of many design wins.

Murata revenues represented 68% of revenue, up from 61% in the first quarter, driven partially by seasonal trend as handset OEMs start building inventory ahead of phone introductions in Q3. Within our revenues with Murata, we continue to see diversification of revenues from an end customer viewpoint.

GAAP gross profit for the quarter was $18.1 million or 38.4% of revenue and 39% on a non-GAAP basis, which was at the top of the range we provided in May. Gross margin increased 270 basis points from the first quarter of 2014 as the benefit of improved production volumes and lower excess inventory cost more than offset an unfavorable product mix from a higher portion of shipments for mobile markets.

We expect gross margins to continue to improve throughout the year as UltraCMOS 10 contributes the growing share of our revenue. GAAP operating expenses decreased to $24 million in the second quarter from $24.7 million in the first quarter. During the second quarter, we incurred significant legal costs of $6.2 million, especially related to the litigation we had against RFMD.

Higher legal costs almost completely offset the reduction in operating expenses we achieved as a result of the restructuring effort implemented the last quarter of 2013 and the first quarter of 2014. But they announced RFMD settlement last week, we expect legal cost to come down significantly in future quarters.

Research and development costs decreased from $11.4 million in the first quarter of 2014 to $9.1 million in the second quarter, with the elimination of $1.1 million of costs incurred for restructuring in Q1 and the full quarter benefit of those costs reduction efforts. We believe we have now changed the alignment with our targeted R&D spending levels.

Sales, general and admin costs increased to $14.9 million from $13.4 million in the first quarter of 2014, as all legal costs including our litigation and export compliance investigation matter more than offset reductions than other SG&A costs. Again, we expect these costs to come down significantly in the third quarter.

On a GAAP basis, we realized a net loss of $6 million, versus the loss of $400,000 in the second quarter of 2013, when compared to a net loss of $10 million for the first quarter of 2014. We recognized the GAAP loss per share of $0.18 on the basic and diluted basis. On a non-GAAP basis, we recognized net loss of $4.1 million or $0.12 per share on a fully diluted basis.

The non-GAAP EPS figure only excludes stock-based compensation in determining income and the share count used in this calculation was 33.3 million shares for the second quarter of this year.

Turning to our balance sheet, our ending cash resources including both, long-term and short-term marketable securities, totaled $68.6 million, which was up $9.7 million from the end of the first quarter this year and up $5.4 million from the end of 2013. We believe this demonstrates our ability to return the company to profitability and conservative management of our cash balance.

The improvement in cash position resulted from sell-through of our existing inventory and improved inventory holding by our distributors. Other improvements in our working capital position this quarter from higher accounts payable and accrued costs, especially legal costs, are expected to be offset in the third quarter as we set a lead in the quarter legal costs.

Now, I would like to discuss our business outlook. We expect revenue in the third quarter to be in the range of $40 million to $43 million as we start to realize decline in shipments of switches for cell phones. This is consistent with the warning we gave during our first quarter conference call. We expect gross margins for the upcoming quarter to improve modestly from the second quarter of 2014 and be in the range of 39% to 41%.

We do not provide specific guidance for operating expenses due to fluctuations that it can occur and the timing of product development efforts. However, we do provide declines in SG&A costs as a result of the favorable resolution of the RFMD litigation, which will lead to a reduction in legal costs in the quarter.

That concludes our prepared remarks. I would like to now turn it over to the operator, Ashley, for questions.

Question-and-Answer Session

Operator

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

Brian Modoff - Deutsche Bank

Yeah. Just walk through a little bit of the settlement you have with RFMD. Kind of give us an idea on the IP side. Obviously, they acknowledged your position with SOI designs. Can you give us a little more detail around the settling self and how you plan to go forward with other companies that you think might be infringed on your IP? Thanks.

Jim Cable

Sure, Brian. I will take that question. There is really very little we can say about the settlement, but I will put a little color on it that we are pleased with the outcome. We do think it reflects very well on the importance of our IP for RF SOI. As I mentioned in the prepared remarks, we think now we are doing with both Murata and now with RFMD. We signed up two of the biggest RF module companies in the world.

But with respect to commenting on what we are going to do in the future, we are not going to comment on that. Suffice it to say, we continue to believe our IP position is important, but we are not going to publicly comment anymore than that at the present time.

Brian Modoff - Deutsche Bank

Okay, but, Jay, would say though that you will -- your legal expense though given this situation will go down after this?

Jay Biskupski

Yes, we fully expect the legal costs to come down drastically in the Q3 time period. Of course, the settlement was partially way through -- partially through the course of the some costs incurred and certainly we would expect to be up by the time we get Q4.

Brian Modoff - Deutsche Bank

Okay. Can you give us -- Jay just remind us your switching business being down sequentially in the quarter, give us a little more -- the color again on that as to why that’s the case?

Jay Biskupski

The outlook you are talking about in Q3 versus Q2?

Brian Modoff - Deutsche Bank

Yes.

Jay Biskupski

It’s really -- what we’re seeing there is the design win effect that we talked about earlier in the year. As that ramps up we expect to see decline and we’ve offset that considerably with additional design wins did not completely as we see expansion in some of the other markets that we’re addressing.

Brian Modoff - Deutsche Bank

You are talking about outlook in other words.

Jay Biskupski

Yeah.

Brian Modoff - Deutsche Bank

Okay. Perfect. I’ll turn over to the next caller, please. Thanks.

Operator

Thank you. Our next question comes from Harlan Sur of JP Morgan. Your line is open.

Harlan Sur - JP Morgan

Hi. Good afternoon. Thanks for taking my question and nice job on the quarterly execution. You guys came in $3 million above the midpoint of your prior guidance range? Can you just help us understand what drove the upside, seems like it was LTE and midrange smartphones? Did the HPA segment contributed to the upside as well and did HPA grow sequentially in the June quarter?

Jim Cable

Yeah. Thanks for asking Harlan. Yeah, the quarter was -- the revenue was stronger than we guided to you obviously. I think we hit it at a couple other reasons in the prepared remarks. Certainly, we saw strength out of China. Certainly, as we said for some period of time that LTE adoption whether it would be high-end midrange or low tier, is good for our business than we certainly are seeing that. Continued strength at all the other OEMs and the growth we saw, the exceeding the guidance in Q2 is really driven by strength in the mobile business.

Harlan Sur - JP Morgan

Okay. Got it. And then just focusing on the HPA business? Is the team expecting sequential growth in Q3 and to the second half of this year, and if so, can you just talk about some of the applications and market drivers?

Jim Cable

Yeah. We do expect some growth through this -- into the second half of the year. The challenge with HPA as we’ve alluded to you before is simply the exact timing when some of these opportunities ramp.

We talked a fair amount about how the pipeline has grown dramatically. The number of design wins that we’re seeing there has grown dramatically. We’ve got products now that are targeting new market segments.

The challenge we face there is only in kind of determining when new design wins translate into production volume. But, certainly, as that pipeline of new products continues to rollout, we feel very good about HPA going forward.

Harlan Sur - JP Morgan

Got it. And then my last question. Good to hear the ramp of UltraCMOS 10 products, maybe if you can just give us a sense for how much they are contributing to the growth in the second half and any sense on what percentage of the mix your SOI products will represent exiting this year?

Jim Cable

Yeah. The contribution in Q2 from a total volume standpoint was pretty minor in the sense that we really only began shipping in volume in the month of June. Certainly, as we go through the remainder of the year that percentage will increase. Hold on, we have.

I will say that as we exit 2014, a substantial amount of our mobile product revenue is UltraCMOS 10 base and as we mentioned in my comments, the transition to our UltraCMOS 10 has a significant impact improving our overall gross margins.

Harlan Sur - JP Morgan

Got it. All right. Thanks a lot guys.

Jim Cable

Thanks, Harlan.

Jay Biskupski

Thank you, Harlan.

Operator

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

Doug Freedman - RBC Capital Markets

Great. Thanks for taking my question guys. Jim, I just want to talk a little bit about the settlements and I know you’re limited on your commentary? But if I could take a tag here, one of the concerns I can see investors having is that you invested quite a bit of money in terms of not just your IP development but in the legal fees and yet, we’re not really seeing any financial benefit? And yet to your own comment, you’ve just signed two of the largest players in the market? What type of opportunity do you think is really in front of you to recover the company’s investment?

Jim Cable

I think that, as I said, we’re not going to talk about any specific of the settlement, those are confidential. But I think it’s fair to say that the whole front-end of the cell phone is go in the RF SOI route today.

And I would say, we are really quite early in that transition today and we are talking about discrete switches from discrete tuner product, but certainly, if you look at people’s roadmap and where they are trying to drive this.

It’s really all going to convert we believe over the course of time to an RF SOI-based front-end and we consider that us getting recognized early on here is having the fundamental IP in RF SOI will pay dividends into the future. And as I said, we are not going to comment publicly about the details of what our IP strategy is going forward other than to reiterate again that we do believe it is important.

Doug Freedman - RBC Capital Markets

All right. I will leave it there. Could you comment a little bit on what you are seeing over in the China market? I believe there is concern with China based LTE sell-through? And just maybe if you guys have some sort of an estimate of what size market we are looking at this year and I have a follow-up?

Jim Cable

Yeah. I think, we certainly have seen China be strong. We certainly saw it strong in Q2. We certainly have a lot of design wins there. I think that, we hear the same rumors that you hear about is there going to be an inventory correction coming as it getting overheated. Obviously, we have seen that sort of thing before, so we are tending to be cautious in terms of how we are forecasting what’s going on in China.

But, certainly, from the number of design wins that we have and the number of different product types that we are now selling in there, we do feel pretty about what’s happening there with the caveat that we are keeping close tabs on it.

Doug Freedman - RBC Capital Markets

Can you give us the sense of what percentage of the LTE market you think is going to adopt in LTE bands solution and maybe some idea, how much market share in that market you think you might be able to capture?

Jim Cable

I don’t know that we’ve quantified at that careful. I will say though that in some of these previous earnings call, we pass it out our primary play into the cell phone market with our switches was through FEMiDs. And we have talked about how if architecturally the end customer picked a PAM or an ASM, it wasn’t -- it didn’t put us in a stronger position. I will say that we are having good -- very good success today not only in FEMiDs but also in ASMs partnered with Murata.

So, I feel that, we have got this sort of second leg that the Chinese OEM seen like, a lot of those LTE phones they are dropped -- they are adopting ASM and we are getting a nice piece of that share it looks like.

I think that, pretty much all the models we are seeing, they are having, using our parts, so when you teardown phones or we watch, we don’t do them ourselves but when we see other people doing. We certainly do seem to have healthy content in those LTE phones in China.

Doug Freedman - RBC Capital Markets

Great. Thank so much for all the answers.

Operator

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

Sid Sinha - Canaccord Genuity

Hi. Thanks for taking my questions. This is Sid on for Mike. A couple of questions, just one on the Global One platform solution, could you perhaps give us an update on where you stand respect to something evaluation with customers or qualification with baseband reference designs? And then when you, whether -- I’m wondering with you and your customers have benchmark this solution with other integrated offerings from Qualcomm and Skyworks and others?

Jim Cable

Yeah. I think that, yeah, that was several questions in one, so let me start with the latter one and work my way back. I think that we have had benchmark comparisons made by some of folks who have sampled our Global One in particular comparing at a silicon-based solution like RF 360.

I will say that, we have now sampled Global One to large variety of potential partners, chipset partners, module partners and the feedback that we get continues to be extremely positive.

In terms of being able to announce design wins in specific partners as I’ve said in the previous call, I think we’ll be in a position to do that before the end of 2014 but we still are on schedule to be shipping that product by the second half of 2015. So the schedule has remained intact. We continue to make great progress toward achieving that and again we continue to get very positive feedback about the performance of the Global 1 platform.

Sid Sinha - Canaccord Genuity

Great. Thanks. And then just staying on the Global 1 platform, would you perhaps be open to marketing the UltraCMOS standalone PA or other components individually, something similar to what Qualcomm is doing with the RF360 solution or do you prefer the integrated solutions, given this is where the two differentiation lies, I guess?

Jim Cable

You know, we get asked that question pretty regularly and I would say that my answer is going to be a little bit of it dependents. Certainly, we see the biggest benefits of Global 1 being the integration and that’s been our primary thrust to date. And we see that there’s some integration features that you can do, that you simply can't do with the discrete solution. And so that's really been the principal focus.

That being said, some of the potential partners that we’re discussing Global 1 with, are interested in getting more of the discrete type solution. And we’re certainly not going to say that we will not do that but at the present time, the majority of the focus remains on the fully integrated solution.

Sid Sinha - Canaccord Genuity

Great. Thanks. And if I can squeeze just one more, this is with respect to filters in the consolidation that’s taken place in the RF space. I know you have access to SAW filters through your partnership with Murata but thinking about the DC, SAW and the BAWfilters, how this Global 1 access this especially with certain LTE band needing this. And do you work with the module manufacturer or perhaps use filters qualified with the base band reference design or would you directly work with the handset OEM out here?

Jim Cable

I think the answer is all of the above. I don’t think that in any scenario -- it's a scenario where we’re going to go out, procurer discrete filters and bundle it into some sort of module product -- I'm sorry. So does it mean it’s a DIE sale to a potential module partner or is it partnering with a baseband partner or a handset OEM.

I think that we’re not focused on us having access to the filters ourselves. But we think there's some things we can do again with the integration that we have in Global 1 to make that kind of filter trade-off a little bit more interesting with some of the features that Global 1 have.

Sid Sinha - Canaccord Genuity

Great. Thanks for taking my questions.

Jim Cable

Thank you.

Operator

Thank you. Our next question comes from Jay Srivatsa of Chardan Capital. Your line is open.

Jay Srivatsa - Chardan Capital

Yeah. Thanks for taking my question. Jim, shifting back to China, looks like China Mobile is shifting a lot of the subsidies from 3G to 4G which suggests that the LTE business should continue to ramp up pretty nicely. Given that backdrop, what are you seeing out there today to give you concern beyond just the inventory levels that might be a little bloated?

Jim Cable

I think it’s really a mix feed. We’ve not seen any real concerns ourselves but we’re hearing, kind of, the chatter that’s out there. So wherever there's chatter, you mean, where there is smoke, there is usually some sort of fire. We’ve also heard some things that say that some of LTE base station build-out is going a little slower than expected due to some component shortages. So again I would say it’s just healthy guardedness on our part and no specific data that suggests there really is a problem.

Jay Srivatsa - Chardan Capital

Fair enough. In the 3G business in China, we saw the cost of handsets come down significantly just in the last 18 months. As you look out over the next two quarters and enter 2015, do you foresee similar price drops having an impact on your ASPs and consequently on your margin profile or do you have continuous season in place to counter that?

Jim Cable

We always count on a certain level of ASP erosion in our products. I would say that that tends to fluctuate year-to-year. Certainly last year for LTE components, there was quite a significant amount of ASP erosion. We’ve certainly seen less of that this year. It’s something you always have to plan for. It’s something you always have to be able to address.

I would say that on the other hand, we would say that LTE adoption period grows our TAM. Growing our TAM is good for our business. And I would also say that with the UltraCMOS 10 technology, it puts us onto a pricing roadmap that allows us to go after some of the lower cost kind of markets that previously we may have shied away from a little bit. So yeah, I think we feel pretty good about what’s going on there.

Jay Srivatsa - Chardan Capital

Okay. And, Jay, in terms of the legal costs, could you help to quantify what the savings are going to be in Q3 and Q4?

Jay Biskupski

Well, I guess, I indicated in my script that we incurred legal costs in the fixed kind of range and we know that we did the settlement probably third of the way through the quarter. So you can sort of get, and you know it’s a high activity type of thing working through all the details and continuing on to the settlements. So you know it’s going to come down substantially in the third quarter from that fixed low and it will continue to come down in Q4, as we have no activities going to Q4.

Jay Srivatsa - Chardan Capital

Okay. And then last question for me, given the improvement in OpEx going forward as well as improving margins, does this change your breakeven revenue number any way? And if so, what would be the range?

Jay Biskupski

Yeah, I think when you certainly look at what our operating results look like and the fact that we incurred $6 million of legal costs, you can see that we are in where we’re bringing costs on. You can see that we are starting -- we are bringing down that so to speak breakeven type of range of revenues and we will continue to improve on that as we go forward. I mean, I am not going to talk about a specific target, because we will see variation on what we need to do to in terms of R&D investment, etcetera but we will certainly well on our plan to where we want to be.

Jay Srivatsa - Chardan Capital

Fair enough. Thank you.

Operator

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

Quinn Bolton - Needham

Hi, guys. Let me add my congratulations on the nice June results. Jim just wanted to take a look at the third quarter guidance. Obviously, you’ve talked previously about the loss of content at one OEM. But if you were to exclude revenue from that OEM, is RF switch revenue at your other customers increasing in the September quarter? Or are you seeing some inventory issues or other ramp downs at some of the other customers?

Jim Cable

No, it’s definitely increasing in Q3.

Quinn Bolton - Needham

Okay. So excluding the one customer, the other customers are up quarter-on-quarter?

Jim Cable

That customer -- you can dig a pretty deep hole about that customer. We’ve done a pretty damn good job of filling in that hole.

Quinn Bolton - Needham

Okay. And then just switching over to Global One, you mentioned doing some work to expand the frequency band, support for that product. Can you just provide a little more detail what you’re doing there?

Jim Cable

As I said earlier, we see that as kind of family of products that I talk about. We’ve got partners, let’s say they want x low band, y mid band, z high band, and it kind of varies all over the map. But the beautiful thing about what we’ve done with respect to Global One is that kind of one architecture can support any number of SKUs and that’s really what we’re doing right now is showing that a single slice of silicon in this case can support a very significant number of frequency bands in this integrated fashion.

Quinn Bolton - Needham

When you’re talking about frequency band support, is it less the PA being able to hit certain frequencies and really just more the number of outputs, and how many switch ports you have into different filters that need…

Jim Cable

Both of those things matter, of course. Certainly, until we come up with some concept we are doing tunable filters, you have to have a switch output for every frequency band. But depending on geography, some countries there is way more mid band than low band and vice verse. So we’ve tried to do a Global One if they come up with an architecture that could really support kind of any carriers desire for mid, low and high band -- frequency band.

Quinn Bolton - Needham

Does that include sort of super high, 2.3 to 2.7 reported drop?

Jim Cable

Yeah. We call that high. We don’t call it super high but if, yeah, we -- yeah if, the 2.3 to 2.7 is what we called the high band.

Quinn Bolton - Needham

Great. And then just last question on Global 1, some of the other RF module vendors have talked about the ability if you can to fine tune key performance to a specific filter. Is that part of the work you’re doing, are you trying to engage with various suppliers of SAW, DC SAW and BAW filters to try and optimize performance of Global 1 for those frequency bands or is that work something that would be done more by the handset or base band guys?

Jim Cable

I think the combination of thing but certainly, historically been the reference design folks. But because our Global 1 have quite a bit of tuning integrated into it, we’re doing quite a bit of that work as well, looking at how we use the tuning that’s already on the PA to compensate for some of the different kinds of filters. We think it’s a very unique and ultimately will be a very valuable capability.

Quinn Bolton - Needham

Great. And then just one last quick one for Jay. Jay, obviously the litigation expense with RFMD should go away entirely by the fourth quarter. But are there any other litigation items or ITAR type activities that would result in some base level of legal expenses going forward in the fourth quarter and beyond?

Jay Biskupski

I mean, there's always something going on, if you know, in a business. But certainly as we talked about the ITAR investigation, we continue to support that. But its not comparable magnitude as the litigation size, right.

Quinn Bolton - Needham

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from Rick Schafer of Oppenheimer & Company. Your line is open.

Shawn Simmons - Oppenheimer & Company

Hey guys, this is Shawn Simmons calling in for Rick. Most of my questions have been answered but I just have one quick one. As we go through the transition with your largest customer, how should we think about the seasonality going into the fourth quarter? Should we think about another similar step down in revenue of that customer or are we taking the biggest chunk out in 3Q? And then maybe provide any additional detail as to what you think normal seasonality would be for the rest of your business in the fourth quarter?

Jim Cable

So I would say that we’re not guiding Q4, but if the question is more broadly what do we think about seasonality say this year versus previous years and given where we are in the supply chain and given that we sell a DIE into a module maker. Historically, Q3 has been our biggest customer -- I’m sorry, biggest quarter. Again, we’re not -- so we’re not guiding Q4 at the present time but certainly that's what we've seen in the last few years, that Q3 has when things peak.

Shawn Simmons - Oppenheimer & Company

Okay. Thank you.

Operator

Thank you. And looks like we have a follow-up from Doug Freedman of RBC Capital Markets. Your line is open.

Doug Freedman - RBC Capital Markets

Great. Thanks guys for allowing me a follow-up. In the past you had stated a goal to get the cash flow breakeven in the back half of the year. I just wanted to see if you were still comfortable with that being your goal. I did notice you converted your inventory into cash for your cash balances actually risen even but the operating results haven’t supported that?

Jim Cable

Yeah, I think if you dig through the balance sheet a little bit, Doug, you see that the quarter came out pretty good from an income statement cash flow breakeven perspective with the non-cash elements in the income statement. And certainly that was helped by the inventory situation and also getting distributor inventories up as well at the same time. So we’re still quite comfortable with that project into the second half of the year. We feel like we’re really on track to where we want to be in terms of cash usage.

Doug Freedman - RBC Capital Markets

Great. Thanks so much for that.

Operator

Thank you. I’m not showing any further questions in queue. I’d like to turn the call back over to management for any further remark.

Jim Cable

We have no closing comments. Thank you for joining us today and we look forward to speaking to you again in future. Bye.

Operator

Ladies and gentlemen, thank you for participation in today's conference. This conclude today’s program. You may all disconnect. Everyone have a great day.

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Source: Peregrine's (PSMI) CEO Jim Cable on Q2 2014 Results - Earnings Call Transcript
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