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RF Micro Devices, Inc.

F3Q2011 Results (Qtr End Jan. 1, 2011) Earnings Call Transcript

January 25, 2011 5:00 p.m. ET

Executives

Doug DeLieto - VP of IR

Bob Bruggeworth - President and CEO

Dean Priddy - CFO

Eric Creviston - President of Cellular Products Group

Bob Van Buskirk - President of Multi-Market Products Group

Participants

Edward Snyder - Charter Equity Research

Ittai Kidron - Oppenheimer

Harsh Kumar - Morgan Keegan

Mark McKechnie - Gleecher & Company

Parag Agarwal - UBS

Quinn Bolton - Needham & Company

Aalok Shah - D.A. Davidson & Company

Venk Nathamuni - JPMorgan

Nathan Johnson - Pacific Crest Securities

Tim Luke - Barclays Capital

Scott Searle - Merriman Capital

Jason Schmidt - Craig-Hallum

Sanjay Devgan - Morgan Stanley

Erik Rasmussen - Stifel Nicolaus

Vijay Rakesh - Sterne Agee

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the RF Micro Devices Third Quarter 2011 Conference Call.

During today's presentation all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. If you have a question, please press the star followed by the 1 on your touchtone phone. Please limit yourself to one question and one follow-up question and re-queue for any additional questions. If you're using speaker equipment today, please lift the handset before making your selection.

This conference is being recorded today, Tuesday, January 25, 2011.

At this time I'd like to turn the conference over to Doug DeLieto, VP of Investor Relations for RF Micro Devices. Please go ahead, sir.

Doug DeLieto

Thanks very much, Vent [ph].

Hello, everybody and welcome to the conference call. At 4:00 p.m. today, we issued a press release. If anyone listening did not receive the release, please call Samantha Alfonso at the Financial Relations Board at 212-827-3746. Sam will fax a copy to you and verify that you are on our distribution list. In the meantime, the release is also available on our website, rfmd.com, under the heading, Investors.

At this time, I want to remind our audience that this call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release published today as well as our most recent SEC filings for a complete description.

In today’s release and on today’s call, we provide both GAAP and non-GAAP financial measures. We provide the supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses for unusual items that may obscure trends and our underlying performance.

During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our corporate website, rfmd.com, under Investors. Similarly, for an explanation of how RFMD calculates return on invested capital, free cash flow and positive net cash position, please refer to today’s earnings release. In fairness to all listeners, we ask that participants please limit themselves to one question and a follow-up.

With me today on the line are Bob Bruggeworth, President and CEO; Dean Priddy, Chief Financial Officer; Eric Creviston, President of our Cellular Products Group; and Bob Van Buskirk, President of our Multi-Market Products Group, as well as other members of RFMD’s management team.

And with that, I’ll turn the call over to Bob.

Bob Bruggeworth

Thanks, Doug; and welcome, everyone.

During the December quarter, RFMD continued to deliver robust financial performance supported by product and technology leadership and the strength of our new financial model. Gross margin was 38.7% and operating margin was 19.4%. Our core business which excludes the impact of our transceiver business achieved gross margin and operating margin of approximately 41% and 18% respectively. RFMD generated $54 million in free cash flow and we remain on a pace to achieve free cash flow of $180 million to $200 million this fiscal year.

The March quarter represents an inflection point for RFMD as we close out our legacy transceiver business and begin the ramp of new higher-margin component solutions including our PowerSmart power platforms, our industry-leading high-efficiency single-mode PAs, our silicon-based switches, our GaN components and our high-performance WiFi components. These new product ramps support our expectations for broad-based share gains and position RFMD to grow sequentially and expand gross margins throughout fiscal 2012, outpacing our core markets.

To that end, we're very pleased to report today that we've received our first volume production orders for PowerSmart in support of a highly-anticipated flagship 3G/4G smartphone and tablet product family that will feature not only PowerSmart but also RFMD WiFi components. These orders validate the numerous customer benefits PowerSmart delivers in cost, size, performance and platform flexibility. We expect PowerSmart will proliferate across our lead customer's 3G/4G portfolio with the first tablet and smartphone to be unveiled at the Mobile World Congress in Barcelona in just a few weeks.

To give you an idea of the opportunities we're capturing for incremental growth, we expect additional PowerSmart orders later this quarter from our second customer, and we're confident we'll ramp 3G/4G smartphones featuring PowerSmart at an additional leading smartphone OEM each quarter this calendar year. We expect significant sequential growth in PowerSmart revenue each quarter in fiscal 2012. Based on existing design wins, we forecast PowerSmart revenue in fiscal 2012 can exceed $75 million.

Our 3G/4G design win momentum extends beyond our multimode PowerSmart power platform to include our high-performance switch-based products and our recently launched industry-leading high efficiency single-mode PAs. The lead customer for our new single-mode PAs is a leading North American smartphone manufacturer. We're supporting a high-volume smartphone beginning in the June quarter and we're forecasting a significant program expansion supporting additional smartphones later this calendar year. As the mix of design wins continues to shift aggressively towards 3G and 4G, we are forecasting significant share gains in fiscal 2012 in both smartphones and in 3G feature phones.

During the December quarter, our multi-market products group continued to see an upturn in high-performance WiFi driven by the convergence of wireless and networking devices. We supported a number of new smartphones and we're forecasting robust growth in smartphones and in tablets where two-band WiFi is in the early stages of adoption. We also saw a continued growth in smart energy driven by expanded collaboration with our channel partners and new program wins in support of leading smart energy customers. In the infrastructure market, we achieved strong sequential growth in point-to-point backhaul and we're forecasting continued strength with the global migration to LTE.

During the quarter, we also won a high-power socket for LTE infrastructure with GaN technology. We're supporting expanding customer engagements related to GaN in cable infrastructure, military communications, private mobile radio and military radar applications. While GaN revenue is in the low single digit millions today, we're posting strong sequential growth and we expect to exit the fiscal year with GaN product revenue and margins making a meaningful contribution to RFMD's financial performance.

As I said earlier, the March quarter represents an inflection point for RFMD as we leave behind our legacy transceiver business and capture new growth opportunities across multiple markets. In the December quarter, RFMD delivered over 60% year-over-year core business growth outside our largest customer, and we look forward to delivering continued growth without the revenue headwind associated with the roll-off of legacy products.

In fiscal 2012, beginning in April, we expect favorable market share dynamics in 3G/4G smartphones and our multi-market product business to create a much more diversified revenue mix, supporting expanding margins, increase earnings per share, and superior free cash flow.

And with that, I'll turn the call over to Dean.

Dean Priddy

Thanks, Bob, and good afternoon, everyone. Before I cover the details of our December quarter, I'd like to provide some color regarding the share repurchase plan announced today.

As Bob pointed out, legacy products are rapidly becoming immaterial and several new growth drivers are beginning to ramp as we exit the March quarter and in our fiscal year 2012. This positions RFMD for revenue growth, margin expansion and continued superior free cash flow.

RFMD's capital efficiency model enables long-term revenue growth by investing much less than historic levels in capital equipment. This model predicts a superior free cash flow and our results back that up. Fiscal year '10 free cash flow was $177 million. This fiscal year we're projecting free cash flow of $180 million to $200 million, and we believe FY'12 will be another strong year. Over the past eight quarters, RFMD has improved its net cash position by $405 million.

We're confident in our ability to grow, in our capital-efficient business model, and in our ability to maintain superior free cash flow to fund our internal growth and potential acquisition. Based on this outlook and other factors, our board of directors has authorized a two-year $200 million share repurchase plan. The primary purpose of the share repurchase program is to control share dilution resulting from convertible debt and equity-based compensation plan.

Now moving to the December financial results, with a quick reminder that income statement results and comparisons will be non-GAAP. Revenue for the December quarter was $278.8 million, up 11.4% year-over-year and down 2.4% sequentially, reflecting a decline in 3G revenue at a large customer, offset partially by transceiver revenue above original estimates and sequential growth in high-performance switch-based products.

Gross profit was $107.9 million and operating expenses were $53.9 million, with G&A at $9.1 million, sales and marketing $12.3 million, and research and development of $32.5 million. Gross margin was 38.7% compared to 39.8% last quarter, with lower margin transceiver business remaining dilutive to core business margins.

Operating income was $54 million, representing a solid 19% operating margin. Non-cash share-based compensation expense, which is excluded from non-GAAP results, totaled approximately $5.6 million, of which approximately $1.1 million was in cost of goods sold. Other income was $23,000 and taxes were $1.3 million.

Net income for the December quarter was in line with last quarter at $52.6 million with earnings per share of $0.19 per diluted share based on 284.2 million shares. RFMD's core business excluding the impact of transceivers saw growth in operating margin at 41% and 18% respectively.

Now going through the balance sheet. Free cash flow was $54.2 million with EBITDA of $64.1 million. Total cash and cash equivalents were $304.3 million. RFMD's inventory was $133.4 million with turns consistent with last quarter's at 5.3.

Net PP&E [ph] was $220 million compared to $227 million last quarter. Capital expenditures during the quarter was $9.2 million with depreciation of $15.5 million and intangible amortization of $4.6 million. RFMD's return on invested capital was 49.3%, up from 34.3% last year.

Now some comments to assist you in modeling our financial performance. We currently expect the following. Total revenue in the March quarter is expected to decline seasonally approximately 10% to 15%. We expect an additional decline of approximately $25 million in transceiver revenue in the March quarter, consistent with the anticipated end-of-life legacy transceiver products. Transceiver products are expected to be immaterial to financial results in the June 2011 quarter and thereafter.

We expect to comment volume shipments of PowerSmart in the March quarter and we expect March quarter gross margin to be flat to down 200 basis points compared to December quarterly gross margin. For fiscal year '11 we continue to expect free cash flow in the range of $180 million to $200 million.

And with that, we'll open the call up to your questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. As a reminder, if you do have a question, please press the star followed by the 1 on your touchtone phone. Also as a reminder, please limit yourself to one question and one follow-up and re-queue for any additional questions. If you are using speaker equipment, please lift the handset before making your selection.

And our first question comes from the line of Edward Snyder with Charter Equity Research. Please go ahead.

Edward Snyder - Charter Equity Research

Thank you. I've got one question for each of you. Bob, last quarter, on the comments you had said that -- I think Dean had said -- that the core products operating gross margins were 19% -- or above 19% and above 42, and this quarter of course it's 41 and 18, your revenues only up about 3% sequentially. So, is it price or mix, or what's occurring here that the core margins seem to drop?

And then, Eric, I don’t know, could you possibly get specific, a little bit more specific, on POLARIS this quarter either as a percentage of revenue and actual number, so we know how the guidance affects what's left of it? And the same on your largest customer, if we could.

And then finally, Dean, OpEx for next quarter, you've been aggressive in the past when you've seen the revenue drop. Are we looking at flat total OpEx in this case or are you going to continue to drill through this king of bump? Thanks, guys.

Bob Bruggeworth

Yes. Ed, in terms of your recollection of the core business gross margin and operating margin, you're exactly correct. And this quarter we did see about a point drop in the core business gross margin which also translated to about a point in the operating margin.

And it was based on mix. So we mentioned that our 3G business was down and one of the reasons, one of the primary reasons for the gross margin reduction in our core business. And also, in fact, our utilization rate in our fab were just a bit down this quarter compared to last quarter as well. So those two things really combined for roughly a point in gross margin reduction on our core business.

We do see that, though, once it gets past the March quarter and the seasonality going into June, we see our margins rebounding pretty quickly back into that type of range as the year progresses.

Edward Snyder - Charter Equity Research

Was it 3G share loss or was it just seasonal?

Bob Bruggeworth

I think it was more about legacy -- it's more legacy type products. Eric probably has more color to add on that, but I'll turn it over to him for the second part of the question.

Eric Creviston

Sure. First, regarding POLARIS shipments, they're pretty consistent with our view was last quarter. We had said last quarter that -- in September it was roughly 15% of revenues and in December it would be heading towards 10% then towards 5% in March. In reality it was a little stronger than we expected to gain in December, but still under the 15% mark. And now end March we're definitely seeing it head to 5%, as we discussed. That's why the roll-off is as dramatic as what we're projecting here.

That could always change, of course, but the view with our customer, we have weekly calls, really managing this very, very closely, the ramp down. And we also said last quarter, we had already begun ramping down our supply chain. So we're confident that we're going to see a dramatic falloff in the transceiver revenues this quarter, and as we said, it'll immaterial in June and forward.

The other question you asked I think was about Nokia in particular, just picking up on the 3G comments from Dean. The Cellular Products Group in December had some real bright spots. We grew nicely for Samsung. Our switch and signal conditioning business was a real breakout quarter for those guys there, they're taking off now and growing as we expected. But we did see our 3G business at Nokia in particular was off quite a bit. And I think we've talked about the share situation there, in particular, over the past few quarters coming down to a more sustainable level. And it's definitely making that transition now, it's going to accelerate I think through the March quarter. And as we said last quarter, we think that bottoms early in FY'12, we started growing throughout the fiscal year from here. So we're actually excited to be continuing to ramp that business throughout FY'12.

Edward Snyder - Charter Equity Research

Is that just a platform transition then? It's pretty well-understood that the (inaudible) competitors and then you've talked about for several quarters now record or tremendous design win starting I guess in about midyear last year. Are the design wins continuing or do you think they're going to come to fruition in terms of production? And would that be what you're talking about in terms of hitting midyear as a pickup with Nokia?

Eric Creviston

Yes, exactly. To your first question, the December results are absolutely, no change at all in terms of the platforms that we're on and the ones we're not on, and it's just mix shift between those platforms I think simply. And not terribly surprising I guess, but going forward then what we're looking forward to all these new design wins across the 2G, the entry business all the way up to the very highest level with Migo [ph] and so forth and several platforms in between for 3G and so forth. And those are beginning to ramp in the second half of our fiscal year and of course throughout FY'13 in particular.

Dean Priddy

And Ed, in terms of operating expenses, if you go back the last couple of years, you'll notice that December has been kind of the low watermark for the year, then we tend to step up a bit in the March quarters, payroll taxes and so forth really have somewhat of an impact on the expenses for the quarter. This year we do expect some step-up in the March quarter, it's probably not significant in the big scheme of things, but if you want to model, a couple of million, $2 million to $3 million. But really pretty much flattish type operating expenses after that, maybe $1 million or so a quarter.

I think if you look back over the past eight quarters or so, our average has been slightly under $55 million a quarter, and we don't see any major departure from that type of expense burn rate over the next few quarters.

Operator: Thank you. Our next question comes from the line of Ittai Kidron with Oppenheimer. Please go ahead.

Ittai Kidron - Oppenheimer

Dean, just to clarify on the guidance, doing the math I'm ending with a range of 2.12 to 2.26, with a 2.19 midpoint. Am I about right?

Dean Priddy

Yeah, that's about what the math would suggest, Ittai.

Ittai Kidron - Oppenheimer

Okay. And if we can go into the reason you're seeing the down 10% to 15% on your core business, x POLARIS, what can you tell me about China, the softness that you're seeing in China? Is that a factor also in the first quarter?

Bob Bruggeworth

Ittai, let me take the question a little bit different. I'll get there. But first, I think we commented last quarter, we thought it would be 8% to 10%, would be seasonally down. We're pretty much sticking with that for both our businesses. In MPG, Bob's business, we're trending a little bit less than 8%. In Eric's business, outside of Nokia, we're actually at about the 8%. So when I then look at where's the decline, and we touched on this in answering the first question, it's in our front-end market share at Nokia, is actually declining significantly greater than seasonality.

Ittai Kidron - Oppenheimer

Okay.

Bob Bruggeworth

And again, last quarter we did talk about we expected our share to bottom in a quarter or two at Nokia and then start to pick up, and Eric just went through the breadth of our wins and what will pick up in the second half of fiscal 2012 with 2G, 3G entry along with their high-end smartphones. So --

Ittai Kidron - Oppenheimer

Okay. So it sounds like Nokia is the main impact, outside of POLARIS, just in your core cellular business, it seems like Nokia, the mix of the platforms hasn't been favorable, and that's what's going to impact you in March. But do you feel -- how comfortable do you feel that March is the bottom on the Nokia business?

Bob Bruggeworth

I think, Ittai, it's going to be probably one more quarter but it's not going to decline much. I mean what we're really excited about though is the growth that we're seeing outside of Nokia. As I said in my opening comments, we grew 61% year-over-year outside of our largest customer, and that's an increase from the quarter before where we grew 54%. So I think what's important is we believe we can get back on a real strong growth rate as these headwinds that we were facing at our largest customer are now subsiding and we're going to be growing. So I would really say, as we begin fiscal 2012, and probably the second quarter is when we really start to see that turnaround in any meaningful way at our largest customer.

Operator

Thank you. Our next question comes from the line of Mark McKechnie with Gleecher & Company. Please go ahead.

It looks like we lost him. Our next question is from the line of Harsh Kumar with Morgan Keegan. Please go ahead.

Harsh Kumar - Morgan Keegan

Hey, guys. If I can just ask you straight up how much Nokia was down, is it about in the 4% to 5% range sequentially?

Eric Creviston

Probably a little more than that, Harsh, sequentially.

Harsh Kumar - Morgan Keegan

Fair enough. And then I had another question. With respect to PowerSmart ramp, can you give us some idea or help us think about how we should think about ramp? You obviously got a couple of design wins coming on now and significant ramp, but will it be more front-end-weighted you think with this flagship customer coming on? Or will it continue to gather momentum toward the year? And I got one more.

Eric Creviston

Sure. The PowerSmart ramp is very much on track for what we talked about last quarter. We just, coincidentally, received first production orders today. We were already of course ramping our production line based on forecast, so we'll actually capture production shipments this quarter in line with what we said last quarter which was single-digit millions of dollars of revenue this quarter growing to roughly $10 million in the June quarter to start off our fiscal '12, and it will pick up steam throughout the year as we ramp a new major smartphone OEM each quarter throughout the year. So we're going to see that kind of build the kind of steam we talked about, finishing the year at roughly $25 million per quarter in revenue.

Harsh Kumar - Morgan Keegan

Fair enough. And help us think about, Eric, help us think about the content. Previously you were selling discrete PAs, I don’t know, $0.80 to $1, and now you're selling kind of modules, big-buck modules in a couple of dollar range. How does that affect, A, your content story, and then B, also things like what you're able to capture in terms of just the entire slot [ph]? And just help us with some color on that.

Eric Creviston

Sure, I'd be happy to. So, as you said, today a lot of these smartphone designs are discrete-based and they sometimes mix and match components from various suppliers, from 2G to 3G, various bands, and so forth. And typically a supplier like RFMD would get on the order of $2 maybe out of the four to seven in total RF content. And some of that is power amplifiers, there's also switches of course, and in some cases filters and duplexers. But at least in our case, we see a large variations, centering around $2 in content in the smartphones on what you actually capture.

With PowerSmart, of course all the power amplifiers and the power management block that comes with it are all in one placement, or one footprint. And so we get about half of that content, all the PA content comes at one [ph] there. So we're looking in the order of $2 to $3.50 in content with just the PowerSmart block.

In addition to that, of course we have the opportunity once we're in there to address the switch block as well which is on the order of another $1 worth of content. And in the example of the ones we're launching, both the tablet and the smartphones we're launching today and the production orders we received, we also have the WiFi content on that module as well. So we're easily pushing $4 worth of content in each of these slots.

Operator

Thank you. Our next question comes from the line of Mark McKechnie with Gleecher & Company. Please go ahead.

Mark McKechnie - Gleecher & Company

Great, thanks. I got dropped off there. So, can you give us a couple of housekeepings, the mix, MPG versus CPG in the quarter?

Bob Bruggeworth

Sure, Mark. Last quarter we talked about MPG being a little bit greater than 20%. That trend improved, became a little bit greater than the mid-20s. So we're approaching that 75-25 split. And I think as the fiscal year rolls out and the race begins in the growth in the two businesses, we'll definitely be in that 25-75 or potentially 30% MPG, 70% CPG.

Mark McKechnie - Gleecher & Company

Got you. And then on your top customers, Nokia, the Chinese, Samsung, I'm assuming Nokia is still greater than 10%. Can you give any more quantification of how big these groups were?

Dean Priddy

Yeah. Nokia was the only 10% customer for the company and also I don’t think that individually there were any business unit 10% customers other than Nokia and CPG. And I guess if you grew to all of China in together, that would be greater than 10%, but there's certainly no single customer that is greater than 10%.

Mark McKechnie - Gleecher & Company

Okay, got you. And then, I wasn't clear on the overall OpEx for March. Do you think that will be flattish sequentially or you're looking at that being down along with seasonality?

Dean Priddy

Historically, Mark, the expenses are actually up in the March quarter because of payroll taxes and -- primarily the cost of payroll taxes. And we're looking at something maybe in the $2 million to $3 million range in terms of an expense increase in the March quarter.

Mark McKechnie - Gleecher & Company

Okay. And then one for Eric, on the PowerSmart, or for Bob on your lead customer. Do you feel -- are you single-sourced for that or are they going to be splitting that business across different skews, or how -- what kind of market share do you see in these major platforms?

Eric Creviston

Yeah, we're certainly single source today.

Mark McKechnie - Gleecher & Company

Single source, okay, got you. And then one final question, just a sense, you just did, what, almost $280 million, you're looking at $220 million here for March. It sounds like you're feeling pretty good about the back half of the year. Do you see yourself approaching that 280 level again in the back half of fiscal '12?

Bob Bruggeworth

Mark, there's no doubt in our mind that we didn't get back to the level of revenues that we've enjoyed the last couple of quarters in fiscal 2012.

Dean Priddy

Yeah, I think the only difference, Mark, you're going to have a higher quality of profit at that. If we ran $275 million or $280 million through the new mix x transceivers, you're going to get something in at least the low 40% range in terms of gross margin. So I think that is one of the big differences between RFMD's model going forward and what it has been when transceivers has been such -- around 15% or so of revenue. So that's going to be a major change to the operating model as we get through fiscal year '12.

Operator

Thank you. Our next question comes from the line of Parag Agarwal with UBS. Please go ahead.

Parag Agarwal - UBS

Thanks for taking my question. Just a question on PowerSmart, you talked about all the wins with smartphone and other customers. What gives you confidence that these wins will not cannibalize your existing revenue at these customers?

Eric Creviston

Well, the primary reason is the fact that most of this is incremental customer revenue, for the most part. We've talked about targeting North America and other customers where we have not had traditionally a lot of 3G content, and so that's I think the primary reason. Today, frankly in the smartphone space, to be honest, we've not been getting our fair share. And we're about to change that I think with this solution. We're going to be growing share significantly in smartphones throughout FY'12, and in a lot of cases these are customers that we've not been getting any 3G business with despite that they've been a large part of that space.

Now it also, by the way, when we talk about these share gains, I want to talk a little bit about the single-mode amplifiers that Bob referenced in his comments. We're complementing PowerSmart which is a full converged power amplifier solution. As you know, converged amplifiers and those architectures are relatively new, and something less than 30% of the market today will, in this year at least, will be addressable with that sort of architecture based on what transceivers and base bands [ph] are ready for that. So the vast majority of the volume still is based on more discrete types of design.

So to address that and pick that up, we'll be announcing in Barcelona a very powerful new line of single-mode power amplifiers that actually take a lot of the learning from PowerSmart and brings it to the rest of the market, where if a customer is working with a transceiver that doesn’t support converged amplifiers, for example, we'll have single-mode amplifiers they can use that comes with a DC to DC converter which will still allow them to get a lot of the benefits of PowerSmart even in those sort of architectures that are more traditional. So we're very excited, very, very excited about that new line of products as well, really complementing PowerSmart, allowing us to address the full market this year. That's why we're very confident in the share gains in this space throughout the year.

Parag Agarwal - UBS

Okay. Second question for Dean. Dean, you talked about gross margins, and just wanted to get more clarity. Now, from what you said, that you expect a letdown in Nokia revenue. So do you think that gross margins are going to trough in June and then we should see upwards trends? Is that how we think about it?

Dean Priddy

No, in June we expect both revenue will increase and gross margin will expand.

Parag Agarwal - UBS

Okay. Thank you very much.

Operator Thank you. Our next question comes from the line of Quinn Bolton with Needham & Company. Please go ahead.

Quinn Bolton - Needham & Company

Hi. I just wanted to follow up on that last question, Dean. Can you just sort of walk us through the puts and takes gross margin guidance in March. I mean you've got the transceiver business rolling off pretty heavily which should be margin accretive, obviously your core business steps down, so you have lower absorption on that, and I think you've talked about your 3G business at your largest customer becoming a smaller percent of mix? Are there other factors or are those kind of the three main drivers of margin quarter to quarter?

Dean Priddy

Well, those are the big drivers of the margin, but (inaudible) influenced our factory utilization rate, so both in our wafer fab facilities and also in our assembly operation in Beijing. So we're taking kind of a conservative stance there.

And we're also ramping several new products in the March quarter, and we don't want to get ahead of ourselves in terms of yield expectations because we all know that sometimes when you ramp new products, the yields aren't maximized, stay out of the block. So those two things combined, the utilization and factoring down yield somewhat, we're going to take a more conservative stance on margins. And so they could be flat to down a couple of points in the March quarter.

Quinn Bolton - Needham & Company

As revenue begins straight cover later in the fiscal '12, do you think you can get back to that kind of core 41% gross margin that you did in the December quarter?

Dean Priddy

Absolutely. We look at the ramps that we got in front of us and the direct margins and projected margins on those products and product mix, and we absolutely see ourselves in any given quarter achieving the kind of core business margins that we've been reporting for the last few quarters.

Quinn Bolton - Needham & Company

Great. Thanks, Dean. And then just one quick one for Eric. You mentioned a number of the single-mode PA design wins. You gave us a pretty detailed sort of view of your PowerSmart ramp. Could the single-mode PA business, does that sort of follow a similar ramp pattern? Or can you give us any sort of sense what your expectations for the single-mode PAs that you're introducing now and talked about in the prepared comments, how that business ramps?

Eric Creviston

Sure. It is behind PowerSmart obviously being released later. But we have actually have our first production design win already and production will be imminent. I think the ramp will be a little slower but it will pick in the second half of FY'12 and get into those same kind of levels that we're at with PowerSmart at the beginning of FY'12, so about two quarters behind. And I think once we have this as well, it's got a lot more flexibility in terms of what we can address obviously. Once we have the world's leading efficiency engines for 3G and 4G, if you will, we can then build those into hybrid implementations for some customers and also pads [ph], duplexers as well by the end of next year.

So we're going to have a real flourishing portfolio by end of next year across all architecture types.

Quinn Bolton - Needham & Company

Thank you.

Bob Bruggeworth

Thanks, Quinn.

Operator

Thank you. Our next question is from the line of Aalok Shah with D.A. Davidson & Company. Please go ahead.

Aalok Shah - D.A. Davidson & Company

Hi, guys. Just a couple of quick clarifications, if I could. Bob, you mentioned, when you're going through the PowerSmart discussion that you expect -- that you've received your first volume orders from your lead customer, in terms of that especially, do you expect revenue, I'm sure you said this, but do you expect revenues this quarter for PowerSmart? And is it meaningful? Is the product actually that you're going into going to be shipped this quarter or is it next quarter?

Bob Bruggeworth

The revenue this quarter will be meaningful because we're coming off a base of obviously nothing, so it'll be in the millions. And they'll be shipping to our customer and they will be, as I said, showing off and showcasing their products at Mobile World Congress, and you should be able to buy these devices by the end of the March quarter.

Aalok Shah - D.A. Davidson & Company

Okay. And then in terms of just the quarter, December quarter itself, can you give us a sense of how the low-end GSM market look for you, guys?

Bob Bruggeworth

As far as the low-end market for GSM and the handset industry, I'll let Eric go ahead and address that.

Eric Creviston

Yeah, it was an okay quarter. It was maybe a bit soft, but nothing dramatic. It didn't necessarily drive our performance either way.

Aalok Shah - D.A. Davidson & Company

Okay. Thanks a lot. That's it for me.

Bob Bruggeworth

Thank you.

Operator

Thank you. Our next question comes from the line of Venk Nathamuni with JPMorgan. Please go ahead.

Venk Nathamuni - JPMorgan

Hi, yes. Thanks for taking my question. I think, if I'm not mistaken, in the last quarter's call you talked about your antenna switch module running at about a $10 million run rate by December of calendar '11. Is that still the right way to think about it in terms of its contribution?

Eric Creviston

Yes, absolutely. I think we're very much on track actually that it will be at that rate, for that family -- there's not one product of course, there's a whole family of switch-based products -- will be at that revenue level very shortly.

Venk Nathamuni - JPMorgan

Okay. And a follow-on question about the China market, obviously there's a lot of perturbation in the market with regard to the share shifts and so forth. And also it appears that companies like Nokia and Samsung are increasingly focusing on China at the expense of perhaps MediaTek spectrum designs. What is your view of that market in terms of your growth opportunity there, because I know that in the past quarters you've had significant share gains in that space. How do you see that going forward?

Eric Creviston

Yeah, absolutely. We're very, very excited about China this year of course, and we do see a proliferation I think of opportunities there as we transition from 2G to 3G. We are very well-represented both in the 3G entry category products from the large customers like Nokia and Samsung as well as across the domestic manufacturers, we're represented with TD-SCDMA as well as wide-band CDMA amplifiers in several local-based band reference designs including of course MediaTek. So as we see the transition from 2G to 3G throughout this calendar, in fact in 2011 our data says that you could see well over 150 million handsets in that kind of 3G entry category or emerging 3G in China. So we expect our leadership there, we're the number one provider in China in 2G, we expect that to transition into market leadership as well in these 3G opportunities. So we're very excited about this year in China.

Venk Nathamuni - JPMorgan

Okay, great. Thanks for the color. And one final question, if I may. In terms of the pricing environment, obviously last year looked like it was better because of both the market strength as well as the pricing discipline. How do you see that going forward, especially in 2011 given some of the revenues that have sort of come up?

Eric Creviston

So, for the cellular business, the ASP trends we expect to kind of be consistent with where we are now. We've got a growing market with a lot of technology requirements, so there's a lot of investment going on and a lot of new technology. The emphasis right now is on saving current consumption size and complexity primarily for our customers.

Bob Van Buskirk

This is Bob Van Buskirk. On the MPG side of things, we don't really see anything extraordinary in pricing. We have a couple of areas where pressure may increase a bit. We've been talking about gaining share in high-performance WiFi. That's an area where I think maybe some incumbents are going to try to perhaps use price as method to get back in some of the sockets.

But to give you some idea, that business is ramping pretty substantially for us in MPG. We shipped almost 20 million units for WiFi high-end applications in the December quarter and we expect to ship more than 100 million units in FY'12. So we have gained some substantial share from competitors, so we might try to come back at it through price, but in general pricing is within our expectation.

Venk Nathamuni - JPMorgan

Okay, great. Thank you very much for the color.

Operator

Thank you. Our next question comes from the line of Nathan Johnson with Pacific Crest Securities. Please go ahead.

Nathan Johnson - Pacific Crest Securities

Hi. Thanks for taking my question. Just another question on PowerSmart, I was wondering if you could talk about how broadly PowerSmart is supported by various base band platforms and whether we should be looking at the success of PowerSmart as being really tied to any particular base band manufacturer. And then secondly, I was just -- I think you guys mentioned it but I missed it, but I was wondering if you could clarify what expectations you had for seasonality in the March quarter for the MPG business. Thanks.

Eric Creviston

Regarding PowerSmart and how broadly, as I mentioned, the converged architecture space, so in other words the transceivers and base bands, that are able to work with a converged architecture who really take advantage of it are not -- obviously the whole industry has not transitioned yet. So we're definitely leading the industry in that respect. We're ramping primarily with one very important partner now obviously, and that's across multiple OEMs, as we've talked about. We're working with several other base band transceiver partners of course.

I'll stick my neck out a bit here, I believe the next ramp will probably be MediaTek. I think it will be during FY'12, we'll be ramping with MediaTek very likely with the PowerSmart family. And then once we ramp with them, that's likely going to be on an industry standard interface called MIPI [ph]. And once we're on that industry standard interface, it will make adoption to the other base bands much more rapid as well.

So we'll see. I think our answer is certainly for an FY'12 ramping with our base -- our current base band partner, and we've got a lot of new business coming our way there. But we certainly understand that we're going to be proliferating this to many other partners over the coming quarters.

Bob Van Buskirk

As to MPG seasonality, I think I've in the past indicated that March is historically the lowest revenue quarter of the calendar year for MPG. MPG has been on a pretty good run. We've actually grown revenues sequentially going back a couple of years now, and while we're not at peak revenue, we are actually at record income level. And I want to put a plug in for margins for MPG because we are at that 50% gross margin level and we in fact see that expanding into next year.

So, seasonal within normal expectations, I think as Bob indicated, kind of 8% range, and that's kind of what we see for this go-round [ph].

Operator

Thank you. Our next question comes from the line of Tim Luke with Barclays Capital. Please go ahead.

Tim Luke - Barclays Capital

Thanks so much, guys. Within CPG, could you give us some color on the split between 2G and 3G and perhaps also just generally if you had some perceptions of how you expect inventory to trend, sort of up slightly in the quarter, how do you think that that plays out through March?

Eric Creviston

So first off, for CPG, the split between 2G and 3G, we, as we have said the past couple of quarters, design activity is very strong on 3G and the mix is strongly there. The actual production revenue especially in the December quarter were definitely much higher on the 2G side. We see that definitely changing as we go forward from here, in the June quarter and on we'll start mixing much stronger toward 3G I think. But having said that, we are the leaders in 2G now, it's an important market to us, and we've got a whole new portfolio ramping this quarter. Actually we're rolling out to the market in the March quarter a brand new refresh portfolio for 2G as well. So we expect to maintain our foothold there and it's a good base to build from as we hedge [ph] our 3G share.

Dean Priddy

Yeah. And regarding inventory, inventory dollars were up kind of roughly $3 million or so, but turns are relatively flat quarter-over-quarter. In fact, turns have been pretty flattish for the past several quarters. And if we look at what we did in the March quarter last year, we were -- the inventory turn is around 5.3, just like this quarter. So I expect to stay somewhat at that level.

But I think we want to make absolutely certain of is that we have material in the supply chain to support the projected ramp of PowerSmart and some other key products. And some of these items are longer lead time items, so we're using more silicon outsourcing for one thing. So if anything, we're going to err on protecting the customer ramp more than anything else. But I don’t see any significant increases in inventory in the March quarter, even thought it could kick up some. We expect turns to remain relatively constant.

Bob Van Buskirk

Yeah, in particular MPG, we haven't talked about GaN products in the call yet, but that's an area where we are in fact selectively building some inventory. That's also a product family; it ranges in multi-hundreds of dollars in ASP and multi-thousands of units. So it can drive a significant amount of revenue, but we do need that inventory on hand to capture some of those sockets that we're working on right now. So in MPG land, the only thing that's really moving up in inventory would be gallium nitride.

Tim Luke - Barclays Capital

And can you just remind us what tax rate you want us to use for the first quarter and for the -- sorry, for the March period and going forward?

Dean Priddy

I think something consistent with the December results going into the March quarter is appropriate. And then looking at non-GAAP tax rate for fiscal year '12 or somewhere in the mid-teens, call it 15%, is a good starting point.

Tim Luke - Barclays Capital

Thank you very much, guys.

Dean Priddy

Thank you.

Bob Bruggeworth

Thanks, Tim.

Operator

Thank you. Our next question comes from the line Scott Searle with Merriman Capital. Please go ahead.

Scott Searle - Merriman Capital

Hey, good afternoon. Just a quick couple of follow-ups. First, on the China front, did you give us a breakdown of the greater China percentage of revenues and kind of from the seasonal perspective what we're expecting in March?

Dean Priddy

We did not give a breakout of the greater China. Some of this is a little bit definitional. I mean we have top-tier customers in China, Huawei, ZTE and some others, and then we have what we call the reference design customers. So I can say that the reference design customers were in the low 20% range of total revenue, something in that range. And we typically haven't broken out specifically what Huawei and ZTE and a couple of others are.

Scott Searle - Merriman Capital

But in terms of looking to March, you would expect to be down in line with your broader comments of down 8% to 10%?

Dean Priddy

That's an Eric answer, so.

Eric Creviston

Yes. The visibility into China frankly right now is a little limited going into the new year. We've had a good start to the quarter but I think customers are right now a little conservative without knowing what the sell-through is going to be in the lunar new year. Obviously the inventory situation in China as we enter the March quarter is much better than it was last time. They're doing a lot more of their business in export mode now rather than domestic consumption, so that probably is impacting, they're uncertain a little in the March quarter as well.

I think we're definitely looking at it being down in line with what we're guiding for the rest of the business in March.

Scott Searle - Merriman Capital

Okay. And just for Bob Van B., on the GaN side, did you give a number for GaN this quarter and what we should expect over the next couple of quarters?

Bob Van Buskirk

I think what we said is it's on kind of a low single-digit million run rate right now, but that it would be meaningful to the corporation as we exit the fiscal year. We had some real big targets. We I think in our prepared comments said that we'd begun shipments of GaN-based cable amplifiers and also we're looking forward to some exciting announcements over the next couple of quarters in military radar as well as some LTD infrastructure. So we haven't given a specific number, but it'll be noticeable for sure by the time we get to the end of FY'12.

Scott Searle - Merriman Capital

Hey, Bob, LTD infrastructure, does that mean you're replacing some LDMOS sockets and finally getting some traction in PAs?

Bob Van Buskirk

Yeah, exactly. It's been -- I think what's really starting to be clear to customers now are some of the realizable benefits of using galliun nitride. It is not just a price game versus the incumbent LDMOS. So this was an important one for us and obviously we're looking for more.

But I would say most of the tonnage on GaN for us in terms of revenue will be in some of these military radar applications, then followed by cable TV, and then after that would be infrastructure.

Scott Searle - Merriman Capital

And last, for Eric, just, as you're starting to get some visibility on the PowerSmart ramp, what is the addressable portion of your customers' product portfolios that PowerSmart can address over the next maybe 12 months and 24 months? Is it 20% of the product portfolio, is it something less than that? How do you think about that within the customer base?

Eric Creviston

It's a good question, a little difficult to answer. It depends a lot on the customer's product mix themselves. One of the North American smartphone manufacturers working with us is a primarily smartphone company, and PowerSmart addresses essentially the entire portfolio in terms of what the RF front-end can do, and then it's a matter of which strategy they take in terms of base standard supplier of course. But in terms of the RF front-end capability, we address the entire portfolio.

In general, the OEMs that have a broader mix that are doing 3G entry, for example, we will be addressing lower band count, say two-band count, wide-band CDMA with a cost-reduced version of later in fiscal '12. But to begin with, we're primarily attacking the sort of mid and high-tier smartphone segment of that market.

Operator

Thank you. Our next question comes from the line of Jason Schmidt with Craig-Hallum. Please go ahead.

Jason Schmidt - Craig-Hallum

Hey, guys, thanks for taking my question. Dean, I was wondering if you could comment on your backlog coverage guidance and then your CapEx plans this year? I think in the past you said you kind of expect CapEx to trend around 2% to 4% of sales. Is that still a good range to you?

Dean Priddy

I'll come back to last quarter when we commented this, Nokia becomes less of a percentage of revenue, then we will expect a few more turns going into the quarter. Suffice it to say, we're better than 90% or so both to our outlook for the March quarter, which does reflect obviously a lower percentage of Nokia revenue and a higher percentage coming from MPG and other customers.

In terms of CapEx, we're squaring the middle of our guidance for this year, 2% to 3% of sales for CapEx. Going into FY'12, we've been saying 3% to 4% of sales in terms of capital expenditures. I will say that probably the only thing that could maybe bump that up a little bit to the 4.5% to maybe 5% range would be if we decided to invest a little more heavily in assembly operations and backend operations at our Beijing facility. I think some of that will be determined by our current suppliers and their own pricing strategy. So if they play ball on pricing, then we're probably in the 3% to 4% range. If we feel we can get a quick payback, by quick I mean well under a year payback on the CapEx, then we're probably more in the 4% to 5% range.

Jason Schmidt - Craig-Hallum

Okay, great. And then as a follow-up, Eric, could you comment on the linearity in the quarter?

Eric Creviston

The December quarter was -- yeah, I have the data, I can get that -- it wasn't particularly non-linear. I know going forward into the March quarter, we're looking at a very linear quarter this quarter. And sorry, just give me a second here. It was a little stronger near the backend of the December quarter. Not a significant non-linearity, but a little lower in the beginning and momentum picked up in December.

Dean Priddy

It's kind of like you would expect out of the China market, begin ramping out for lunar new year.

Bob Van Buskirk

And on the MPG side, it was very similar to what Eric described. The only added color I would say is that our bookings did pick up some in December. So the bookings also showed late quarter strength.

Jason Schmidt - Craig-Hallum

Terrific. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Sanjay Devgan with Morgan Stanley. Please go ahead.

Sanjay Devgan - Morgan Stanley

Hey, guys, thanks for taking my call. A question for Eric. Eric, you know that the 2G versus 3G mix kind of picked in favor of 2G a little more so this quarter. With the kind of the ramp of your SmartPower smart products kind of kicking in, and you talked about multiple customer engagements there, can you kind of give us a sense of what that mix could potentially look like exiting fiscal 2012?

Eric Creviston

That's a good question. I haven't looked at the data specifically. I would sure think it -- that would be in the order of 50/50 at least if not stronger 3G as we exit fiscal '12. There's no question the trend is going to be towards a much stronger mix of 3G every single quarter during FY'12. Our 3G business and 4G business frankly will greatly outpace 2G in terms of sequential growth throughout the year. So 50% or greater for sure 3G/4G versus 2G by the time we exit the year.

Sanjay Devgan - Morgan Stanley

Okay, great. And then as a follow-on, can you remind us or give us a sense of the margin profile for the PowerSmart products versus, I guess, versus your 3G products?

Bob Van Buskirk

Yeah, clearly the PowerSmart products are going to be at a premium margin much akin to MPG type of margins. So as they ramp, that just signifies why we're so positive about our gross margins beginning to expand and being able to get to that low 40% range that our core business has been running for the past several quarters.

Sanjay Devgan - Morgan Stanley

Great. Thank you, guys.

Bob Van Buskirk

Thank you.

Bob Bruggeworth

Thank you.

Operator

Thank you. Our next question comes from the line of Erik Rasmussen with Stifel Nicolaus. Please go ahead.

Erik Rasmussen - Stifel Nicolaus

Hey, guys, thanks for taking the questions. A lot have been asked. I'll be brief. Just real quickly on margins again, can you remind us where you target margins are both gross and operating? And when do you expect to hit those targets? I know you said you're looking to get closer to kind of your core business, but when do you expect to hit that? Thanks.

Dean Priddy

Yeah, we'll give you kind of a midterm target which I think will happen sometime during fiscal year '12. If we're at the say the same revenue level that we were at this previous quarter, we likely would have margins in the low 40s, call it 42%, and we'd have operating margins above 20%. So that's the kind of financial leverage that we see over the relatively short term. Looking a little bit longer term, I don’t see any reason why we should put a cap on margins especially as MPG becomes a larger percentage of our revenue and we're ramping accretive new products. So I certainly wouldn't cap it at 42% or 20% operating margin by any means.

Erik Rasmussen - Stifel Nicolaus

Okay. And you talked about a lot of growth coming online second half 2012 fiscal, especially as you ramp some of the PowerSmart and newer single-mode products? Do you, exiting fiscal '12, if you do a year-over-year comparison, do you think you'll be at a flat year? I know you're facing a lot of headwinds with that transceiver business coming offline, but do you see it as at least a flat year or are you seeing growth?

Dean Priddy

Yeah, actually we're positive that our total revenue will grow fiscal year '12 over fiscal year '11. And if you step back from that, our transceiver business is running at -- it's been running at close to 15% of revenue. So we've got somewhere between $120 million to say $140 million there of transceiver revenue that we won't have in fiscal year '12. So that implies that in our core business, we expect to see solid double-digit revenue growth fiscal year '12 versus fiscal year '11. And therein also lies the reason why we're so positive that we'll see gross margin expansion in fiscal year '12.

So, while year-over-year comps, unless you take into account the roll-off of transceivers, you may see relatively low digits in terms of total revenue growth, the underlying growth in the business -- in the core business we believe is at least 15% and maybe a little better than 15% year-over-year.

Erik Rasmussen - Stifel Nicolaus

Okay, great. That's helpful. And just one final question. Do you see any capacity issues as you ramp up these new products? Thank you very much.

Operator

Thank you. Our next question comes from the line of Vijay Rakesh with Sterne Agee. Please go ahead.

Vijay Rakesh - Sterne Agee

Yeah, I have a question. You mentioned just a little bit [ph] fiscal '12, your margins should rebound with the new PowerSmart family ramping up. Do you expect margins back to the low 40 that you mentioned by maybe the second half of fiscal, end of year?

Dean Priddy

Yeah, we absolutely think that's possible, given the revenue that we just had this quarter which we roughly could achieve that, certainly in the December timeframe of fiscal year '12.

And I do want to go back to the previous question though about, do we see any issues and supply chain constraints of new product ramps? And I think the answer to new product ramps is no, but there are some supply chain issues out there that are impacting this quarter's revenue for RFMD.

Bob Bruggeworth

Just to be clear, the ramp of PowerSmart and the GaN and other new products that we talked about, we don't see any constraints. We are seeing some isolated constraints at our customers, so not within our supply chain, that is having an impact on revenue in the March quarter.

Vijay Rakesh - Sterne Agee

Got it. And then as we look out here on a longer-term basis, looking out three quarters, four quarters out, where do you think your margins will be within your product mix and therefore gross and operating margins?

Dean Priddy

Well, like I said, we can see ourselves getting into the 42% level, but then it's a matter of how a big revenue growth it is. Once you get -- remember the $300 million range and above, we can certainly see ourselves to the mid-40 type of gross margin range with a favorable product mix and something certainly in the mid-20s in terms of operating margin at those types of revenue levels.

Vijay Rakesh - Sterne Agee

Okay, great. Thanks.

Dean Priddy

Thank you.

Operator

Thank you. And at this time, I'd like to turn the conference back over to management for any closing remarks.

Bob Bruggeworth

Thank you very much for joining us today. We hope our comments make it clear how confident we are in our ability to grow, in our capital-efficient business model, and in our ability to maintain superior free cash flow. RFMD continues to capture diversified revenue drivers in our core markets and soon we intend to deliver core growth without the revenue headwind associated with the roll-off of our legacy products. In fiscal 2012 we anticipate favorable market share dynamics and a more diversified revenue mix supporting expanding margins, increased earnings per share, and continued superior free cash flow.

And with that, thank you and have a good night.

Operator:

Thank you. Ladies and gentlemen, if you'd like to listen to a replay of today's conference. Please dial 303-590-3030 or 1-800-406-7325 using the access code of 4397339 followed by the pound key.

This does conclude the RF Micro Devices third quarter 2011 conference call. Thank you for your participation. You may now disconnect.

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