Since my recommendation earlier this year, shares of chip maker RF Micro Devices (RFMD) have appreciated more than 100%. Much of the rise can be attributed to the news that RF Micro is merging with fellow chip maker TriQuint Semiconductor (TQNT). But the good thing is that more upside cannot be ruled out as the combined company will enjoy strong synergies.
Already in good shape
In addition, RF Micro is already seeing good growth. In the first quarter of fiscal 2015, it reported adjusted earnings of 13 cents per share as compared to a loss of 7 cents per share in the year-ago quarter. Net income came in at $38.6 million, way better than the previous year quarter's $1.6 million. The company posted an 8% year-over-year increase in overall revenue, amounting to $316.3 million, and beating the average estimate of $305.7 million. More importantly, its gross margin increased to 45% from 31.9% a year earlier.
RF Micro is enjoying strong sales of its chips due to an increase in the adoption of 3G and 4G smartphone designs, which account for more than 90% of its cellular products sales. Moreover, the company's outlook is quite strong, as RF Micro, for the second quarter, expects adjusted earnings of $0.27 per share and revenue of about $345 million, both of which are ahead of analysts' estimates of $329 million in revenues and $0.21 in earnings.
On track to get better
RF Micro Devices and TriQuint Semiconductor announced that they are merging in order to command a larger share of the RF chip industry and become the leader in connectivity chips. In a merger of the equals, TriQuint investors will receive 1.675 shares of the new entity and RF Micro's investors will receive 1 share for each TriQuint or RF Micro share held.
The merged company will deliver about $150 million in cost synergies. Also, the recent cost cutting initiatives by both RF Micro and TriQuint will result in greater earnings growth. This merger will target the high-speed broadband wireless connectivity market and drive economies of scale. The newly merged company will become the biggest RF chip manufacturer in the combined infrastructure and defense industry.
Both companies have a lot of similarities and complement each other in the smartphone space with high-volume module manufacturing, strong client list, and a wide, resonating product portfolio. Thus, the combined entity will deliver better earnings performance in the long-run.
RF Micro supplies components to the mobile industry's giants, namely Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF), while TriQuint also supplies to Apple. RF earned double digit revenue from Apple in the quarter. RF Micro largely benefited from strong sales of Apple's iPhone 5s and 5c.
This will benefit both companies, as after the merger they will benefit from Apple's two new versions of the iPhone to be launched later this year. Moreover, reports suggest that around 80 million iPhone 6 handsets are expected to be manufactured this year.
The iPhone 6 is expected to surpass its predecessor by 20% in terms of sales, and this should benefit RF Micro Devices. Moreover, RF Micro's dollar content in Apple's upcoming devices also is expected to increase, which is another plus for the company as well as investors. RF Micro also derives a big chunk of its revenue from Samsung. Samsung contributed to around 22% of the company's total revenue in fiscal 2013.
In addition, RF Micro is witnessing broad-based design traction in new growth areas such as antenna tuning, impedance tuning, diversity switches, power management circuits, highly integrated antenna switch modules, and RF Fusion. RF Fusion is a highly integrated RF front-end solution that features the industry's leading components in one very small placement.
The company is gaining more and more customers for RF Fusion and plans to begin the production early next year. The company also is seeing increased demand for discrete PAs, multi-mode PAs, antenna switches, discreet switches and power management chips.
Moreover, as LTE content increases in China, RF will benefit from the deployment of LTE infrastructure, while the broadband connectivity market, driven by PCs, PC peripherals, routers and access points, consumer devices, automotive, industrial and home automation and medical applications will be another catalyst.
RF Micro Devices counts upon a number of catalysts to drive its long-term growth. The merger with TriQuint will lead to strong synergies, while also increasing its addressable market through the addition of more products. So, investors should remain invested in RF Micro Devices as it hasn't run out of potential yet.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.