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Executives

Robert Van Buskirk - Corporate Vice President, President of Multi Market Products Group and Head of New Multi Market Products Group

Eric Creviston - President of RFMD's Cellular Products Group

William Priddy - Chief Financial Officer, Corporate Vice President of Administration and Secretary

Robert Bruggeworth - Chief Executive Officer, President, Director and Member of Strategic Development Committee

Doug DeLieto - Vice President of Investor Relations

Analysts

Cody Acree - Williams Financial Group, Inc.

Blayne Curtis - Barclays Capital

Sujeeva De Silva - ThinkEquity LLC

Scott Searle - Merriman Capital, Inc.

George Iwanyc - Oppenheimer & Co. Inc.

Vijay Rakesh - Sterne Agee & Leach Inc.

Edward Snyder - Charter Equity Research

Dale Pfau - Cantor Fitzgerald & Co.

Aalok Shah - D.A. Davidson & Co.

Jason Rechel

Michael Burton - Kaufman Bros., L.P.

Harsh Kumar - Morgan Keegan & Company, Inc.

RF Micro Devices (RFMD) Q1 2012 Earnings Call July 26, 2011 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the RF Micro Devices Q1 2012 Conference Call. [Operator Instructions] The conference is being recorded today, Tuesday, July 26, 2011. At this time, I'd like to turn the conference over to Doug DeLieto, VP Investor Relations. Please go ahead, sir.

Doug DeLieto

Thanks very much. Hello, everybody, and welcome to our conference call. At 4:00 today, we issued a press release. If anyone listening did not receive a copy of the release, please call Samantha Alphonso at the Financial Relations Board at (212) 827-3746.

Sam will fax a copy to you and verify that you're 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 be materially different 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 this 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.

In fairness to all listeners, we ask the participants please limit themselves to one question and a follow up. Sitting with me today 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.

Robert Bruggeworth

Thanks, Doug, and welcome, everyone. RFMD's June quarterly results demonstrate how RFMD has been transformed into a highly-diversified growth-oriented supplier of RF components.

On our previous earnings call, we projected the decline of up to 5% in June quarterly revenue. As expected, sales to our largest customers did decline sharply. However, we more than offset this decline with higher margin revenue across a broad set of customers and end markets.

Also consistent with our guidance, RFMD's core revenue in the June quarter, that is revenue excluding transceiver sales, achieved another quarter of double-digit sequential growth. That strong performance is a credit to the entire RFMD team and it highlights the strength of our new products and 3G/4G market share gains. RFMD supported the ramp of multiple new products and technologies during the quarter. These included our PowerSmart power platforms, our ultra-high efficiency 3G/4G PAs, our switch and single conditioning products and our GaN technology for high-power applications. We're especially pleased with the sequential growth achieved across our product portfolio for 3G/4G smartphones, along with wireless infrastructure and CATV providers.

In the smartphone market, RFMD is clearly gaining share as sales of RFMD's 3G/4G cellular products for smartphones and tablets increased by more than 50% sequentially. This is the beginning of a multiyear product cycle as we focused the full strength of our R&D on solving the RF challenges confronting smartphone manufacturers.

The explosion and demand for mobile data is driving a unique opportunity for RF component suppliers with comprehensive product development capabilities and broad technology access. RFMD's product leadership strategy is helping industry leaders solve critical issues like thermal management and high-power data sessions, MultiMode complexity and solution sites, as evidenced by our strong growth in smartphones and tablets.

Our newest products are driving growth and diversification, and we see significant traction across all smartphone manufacturers and platform providers. These include Samsung, HTC, LG, Motorola, RIM, Huawei, ZTE, as well as others. Our newest wins greatly expand our content in smartphones interlope without new exposure for RFMD to the industry's leading mobile operating systems.

Our growing business at HTC is worth highlighting because of the success they are enjoying in the marketplace and because of the scale of our opportunities across the full range of HTC's smartphone portfolio. In addition, to the multiple switch-based solutions that are already in production and growing in volume today, we very recently began volume shipments of our ultra-high efficiency 3G/4G PAs or Phenom for multiple smartphones based on our Qualcomm platform. We also have design wins for 2G transmit modules supporting our Qualcomm platform and we expect to ramp PowerSmart with HTC later this fiscal year as well.

At RIM, we recently began our first production shipments of Phenom and we're forecasting a significant program expansion supporting additional smartphones this calendar year. RIM has also selected PowerSmart, as well as our switch-based solutions to support multiple devices across their smartphone portfolio, including devices featuring Qualcomm and Marvell basebands.

On the baseband side, RFMD is expanding our content on referenced designs of Qualcomm, Intel Mobile Communications, ST-Ericsson, MediaTek, Spreadtrum and others. Regarding Qualcomm, we're pleased to announce another high-performance RFMD component has been selected for a 3G/4G reference design. RFMD has substantially increased our global design and field support for Qualcomm and we look forward to announcing addition reference design wins with Qualcomm later in this fiscal year.

Another growth driver worth highlighting is our expanding portfolio of switch and signal conditioning products. In addition to HTC and RIM, the customer list for these solutions include Samsung, Huawei, LG, Motorola and others in Europe, Asia and North America. This positions RFMD extremely well in cellular applications in the coming quarters, both in terms of product mix and customer exposure as we are either currently supporting or will soon be supporting each of the world's leading smartphone manufacturers. In MPG with multiple growth drivers, we're viewing fiscal 2012 as the breakout year for our gallium nitride or GaN technology.

In our recently completed quarter, we were awarded 2 DARPA contracts valued at approximately $3 million through fiscal 2013 for the advancement of thermally-managed GaN RF power technology.

We see this as a strong third-party endorsement by government technology experts regarding the strength and maturity of our current GaN technology and production capabilities. Additionally, we expect our GaN technology to drive incremental growth opportunities this fiscal year and next-generation military radar and public mobile radio applications.

In CATV, we're supporting industry leaders like Motorola, Cisco, Eris and Aurora Networks in North America and leading equipment providers in Europe and Asia. In Defense and Radar, our lead customers include Ethercom, Elta, Raytheon and Rockwell. In WiFi, we are seeing an expansion of our addressable market as performance requirements drive the need for high performance stand-alone front-end modules. We are directing an expanding lists of applications including smartphone, tablets, automotive, ZTE, as well as home and business networking.

In handsets, we support Wi-Fi applications with a wide array of products covering both single and dual band architectures. Our customers are industry leaders like Samsung, LG, Cisco, Motorola, Nokia and RIM and our high performance components can be found today in top-tier devices like Samsung's Galaxy Tab and LG's Optimus. In wireless, we continue to expand our portfolio of point-to-point radio chipsets in support of cellular backhaul. The point-to-point radio market is growing rapidly as the proliferation of smartphones and the increasing demand for mobile broadband data for cellular operators to expand capacity in their cellular backhaul networks.

We launched several highly-integrated radio chipsets in the June quarter that help our customers reduce design time and lower overall bill of material costs when developing next-generation point-to-point radio solutions.

We also expanded our portfolio of Zigbee front-end modules for SmartEnergy and AMI applications, including safety and security, home automation and SmartEnergy management. Looking into the September quarter, previous revenue headwinds are behind us, our markets are growing and we have exciting new product cycles with growth opportunities extending well into the future.

By continuing to execute on our proven growth and diversification initiatives, we expect continued improvement in our financial performance. In summary, we believe we are at the beginning of several multi-year product cycles that leverage our product and technology leadership. This will reinforce our position as a highly diversified growth-oriented supplier of RF components and Compound Semiconductor technologies.

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

William Priddy

Thanks, Bob, and good afternoon, everyone. First, a quick reminder of the income statement result from comparisons will be non-GAAP. Revenue for the June quarter was $214.2 million. Revenue exceeded the first call consistent estimates as double-digit sequential revenue growth in our core business, that is excluding transceivers, outpaced our addressable markets and more than offset a steep decline in legacy transceiver revenue, which is now expected to remain immaterial to our financial results.

In CPG, sales of our 3G/4G cellular products for smartphones and tablets grew more than 50% sequentially. And in MPG, our sequential growth was double-digit across this diversified market. Exciting new product and technology cycles, including PowerSmart, high-performance switches, Phenom and GaN, all contributed nicely to our better-than-consistent revenue performance.

From a customer market diversification standpoint, we've never been better positioned. Gross profit was $82.6 million with gross margin expanding 100 basis points to 38.5%. Operating expenses were $57.4 million, with G&A of $9.6 million, sales and marketing of $12.7 million and research and development of $35.1 million.

Operating income improved to $25.1 million, representing 11.7% operating margin. Non-cash share-based compensation expense, which is excluded from non-GAAP results, totaled approximately $5.4 million, of which approximately $900,000 was in cost of goods sold.

Other expense was $316,000 and non-GAAP taxes were $3.5 million. Net income for the June quarter was $21.3 million with earnings of $0.08 per diluted share, based on 283.3 million shares.

Now going to the balance sheet. During the quarter, RFMD retired 22 million par value of convertible debt and repurchased approximately 945,000 shares of common stock at an average price of $5.93. Total cash, cash equivalents and short term investments were $255.6 million. RFMD's inventory was $163.2 million with 3.3 turns. The primary reason for the increase in inventory is to ensure the ramp of several new smartphone models, many of which have longer lead time silicon content.

Net PP&E was $214.8 million compared to $209.5 million last quarter. Capital expenditures during the quarter were $19.9 million with depreciation of $14.6 million and intangible amortization of $4.6 million. We continue to expect FY '12 capital investment of approximately 4% of sales. RFMD's return on invested capital was 21% for the June quarter.

Before I go to the business outlook, I'd like to provide additional color about our outlook for continued margin expansion and earnings leverage.

Margins improved 100 basis points in the June quarter despite flattish revenue and historically low fab utilization rates. The margins improved because we're selling more industry-leading products. We believe we are in the early stages of this favorable mix shift that PowerSmart, switch-based products, Phenom and new MPG products are forecasted to provide a greater percentage of our total revenue going forward.

Regarding fab utilization, our internal focus is on capital efficiency. In some cases, we're simply designing smaller die. In other cases, such as PowerSmart and our switch-based products, we're changing the game and relying more on outsourced silicon technology. We refer to this business model as a fab right strategy. We believe utilization rates have bottomed and expect this metric to improve this year and into next year. Improving factory utilization, combined with exciting new product cycles, gives us confidence to project an optimistic long-term outlook regarding margin expansion and the resulting earnings leverage.

Now some comments to assist you in modeling our September financial performance. We currently expect the following: RFMD expects quarterly revenue to increase approximately 6%; RFMD expects to further diversify its revenue base in the December quarter; RFMD expects most of its growth in the September comp quarter will come from 3G/4G smartphone and tablet products; RFMD expects gross margins to expand sequentially, approximately 50 basis points; RFMD expects non-GAAP operating expenses to be approximately flat to up $1 million; and finally, RFMD expects its non-GAAP tax rate to be approximately 15%.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Harsh Kumar with Morgan Keegan & Company.

Harsh Kumar - Morgan Keegan & Company, Inc.

Question on guidance first. When I look at your guidance of 6% and I compare it to what your core business did in March, I think it was 8% to 12%. And again, it was 8% to 12% in June looks like and I compared it to historical seasonality. 6% seems to be a little bit low. I'm trying to understand if I'm missing something or it's a case where you're being cautious. If you can provide some other color, maybe some other parts of the business that are rolling up, I'd appreciate that.

Robert Bruggeworth

Harsh, Bob Bruggeworth. Thanks for your questions and joining us today. I think it is safe to say that our largest customer is still quite challenged in the marketplace. And I think we have decided to take a conservative view with them and actually have decided to model them down somewhat quarter-over-quarter. That might be a little bit contrary to what the rest of the industry feels but we are taking a, like I said, a cautious view of that. With that said, also as you pointed out, both our business units grew very nicely in our core business last quarter. And I think what we also looked at was just what's been going on in China, also as we commented since March that, that also has been a little bit soft. So if you want to assume that we're taking a very cautious view, you can do that. But I think we're trying to ensure that we've got a good feel for our business and you've got a good understanding of the moving parts.

Harsh Kumar - Morgan Keegan & Company, Inc.

Bob, that was very helpful. In terms of PowerSmart, $10 million in revenues is a very good number and what I'd call as a second quarter production. I think you have a goal of $25 million March quarter, March '12. How do you feel about that goal or being able to get to it at this point in time?

Robert Bruggeworth

I think Mr. Creviston is so excited about this product. I would be remiss if I didn't let him answer that.

Eric Creviston

Yes, PowerSmart had a great, great quarter, we easily exceeded $10 million in revenues. As a matter of fact, growing faster than even we had projected last quarter. A lot of that's on the strength of Samsung, of course, the Galaxy S II product line, we continue to pick up handset models there. We have over 2 dozen models now that were designed into Samsung alone. Ramping LG as well strongly, that was just becoming material in the June quarter, it'll ramp more strongly this quarter. And, of course, in this quarter we're learning on RIM as we've discussed. So we're very excited about the potential there. And there's no question that we're still very comfortable with the earlier guidance of a total of $75 million in revenue this year and exiting at $100 million a year run rate.

Harsh Kumar - Morgan Keegan & Company, Inc.

Got it. And my last question and I'll get out of the floor, a switch win at Qualcomm, can I assume that that's for the large U.S. smartphone manufacturer?

Robert Bruggeworth

We're referring to with that bullet is the fact that we've won another reference design slot at Qualcomm. It applies to many customers both North American and globally and it's a high-performance antenna switch module, so it's got a fairly high dollar content, helped solve a lot of the multimodal LTE integration problems.

Operator

Our next question comes from the line of Mike Burton with Kaufman Bros.

Michael Burton - Kaufman Bros., L.P.

Your switch in signal and conditioning business, can you talk a little bit about the growth that you've seen there? How big a piece of revenue is this now? How big can it become? And your average content per phone?

Robert Bruggeworth

I'll go and begin with the answer Mike, and I appreciate your comments. As far as switch and signaling conditioning, last quarter, we spoke we said that the business stood about 5 million to 6 million and we expected it to more than double or about double this quarter being the one we just completed in June. And in fact, it definitely stayed on track for that. The other thing that we had commented on is that we thought we could exit the year at $100 million run rate and we also feel very comfortable with that this time as well.

Michael Burton - Kaufman Bros., L.P.

Okay, great. And then for Dean, gross margin's up obviously very nicely on flat revenues and guided up for a very high contribution margin going into this next quarter. How should we think about that going forward? Is it going to expect to see north of $0.50 of revenue drop to gross profit going forward or how should we model that?

William Priddy

I think our contribution margin has been averaging over 50% and I think, in terms of where the gross margin can head, it's very much a revenue base model at this point is the new higher margins becoming increasing percentage of our portfolio and its revenue increases and our fab utilization increases, really have a one-two punch, if you will, for our margin improvement. So we can see margins break into the 40% barrier this fiscal year.

Michael Burton - Kaufman Bros., L.P.

Great. And then last one, what percent of portfolio right now in CPG is feature phones versus smart last quarter? Where do you see that going forward in coming quarters?

Eric Creviston

Yes, this is Eric. Obviously, with our smartphone portfolio growing more than 50% sequentially, you could imagine that makes the shifting pretty rapidly. We had said last quarter, I think, that only about 25% of the Cellular business was exposed to the smartphones and so forth. And so with that kind of growth, we're mixing much more toward the 50-50 split which we intend to get to by the end of this fiscal year.

Operator

Our next question comes from the line of Edward Snyder with Charter Equity Research.

Edward Snyder - Charter Equity Research

So Nokia, your modeling down, did it achieve what you thought it would, like 15% of revenue, and can you can give us any idea of where it's going to be next quarter? And then, in terms of margins for PowerSmart, I know you've just started ramping it. Is it meeting your expectations? I know previously you talked about the low 40s OE. Are you still comfortable with that, and will it improve much at all? And then on tax rate, Dean, you're moving to 15% this quarter, should we model that for the rest of the year? And previously, you'd said $260 million revenue for 20% operating margins. If you look at your OpEx now, you have to be at almost 42% gross margin or so to hit that unless OpEx drops. Are you still comfortable at $260 million and 20% operating margin?

William Priddy

Ed, I'll begin, your comments were around Nokia, they did play out pretty much like we expected. I think we commented, we took a conservative view of what we thought Nokia's revenue with us would be in the June quarter. And I would say it pretty much played out as expected. So and they did approach 15%, like our comments last quarter. Obviously, with us modeling them down and us saying the business is going to grow, they are going to decline as a percent of sales. And we continue to make great progress on our diversification through many of the products that we already spoke about. So from that perspective, Nokia's going to be down.

Eric Creviston

And regarding our margin question, this is Eric. It has ramped very much on plan. In fact, exceeding plan in terms of our internal cost structure so it's exceeding our goals for gross margin so far. It's doing well and it's accretive to the company average.

William Priddy

Yes. And finally, in terms of being able to achieve 20% operating margin, I think I gave a range of somewhere between $250 million and $270 million. And if I look at that now, the $250 million type revenue level, I think you're around that 40% gross margin and well into the double digit above 15% and operating margin and towards the high end of the $270 million, I think you break through the 40% and you're able to achieve roughly that 20% operating margin.

Edward Snyder - Charter Equity Research

Great. And then on the Qualcomm reference design, I know you've got the high performance switch there. Have any of your wins been outside of the switch business in the PAs modules, duplexes or any pads? Any other technologies besides the switch so far?

Robert Van Buskirk

Yes. We're seeing a lot of traction for our Phenom product family. Now, specific Qualcomm reference design. We're not announcing that yet, but in terms of their customer base picking up Phenom, that pull is very, very strong. We mentioned that we ramped with multiple customers already in the June quarter that was RIM as expected, but HTC is also in our ramp a little ahead of schedule. So the pull is very strong for high performance. And again, what we've done here is we've changed the game just that the game is kind of changing towards our sweet spot and maximizing the efficiency of the power amplifier or lowering the current consumption at high data of rate modes and high power. And what that really does is it makes the phone run much cooler in high data rate session. You'll be able to feel it with the palm on your hand what Phenom does.

And especially as we move into LTE, there's LTE variance coming as well, that we're already shipping to those lead customers. We'll be seeing those ramp by the end of this fiscal year. And so I think there's a lot of attached coming to Qualcomm in various product families, not just switches.

Edward Snyder - Charter Equity Research

And then finally, and I apologize for the last one. But Bob, for you, Nokia you're guiding down, it sounds like at an absolute basis. And it sounds like visibility as everybody kind of knows this is poor there. Any feelings on that bottoming or even turning around? I know we talked about late last year, early this year that, that would happen about midyear and clearly things have changed at Nokia. But trying to get a feel for where it settles in and when you can expect it to stabilize, if not rise, any guidance at all in that?

Robert Bruggeworth

Well, actually, Ed, I think on the last call, what we tried to get across was that our share was going to bottom, which we do believe it has and it's holding steady. And we'll start to increase later in the fiscal year. But when I said a conservative stance, I think that has more to do with their business in the marketplace. So for us to predict how successful they're going to be with their new launches, as we've said before, wherein their Windows phone, that's Windows 7 phone, it's going to be launched later this year, we'll have to see how successful that is to determine if they start growing back in the percentage of sales. But what's, I think, most important from our perspective is the penetration in what we're doing as far as gaining business at places like HTC and RIM and others where we've got such a low share and we're on such a great growth trajectory. That's another reason their percentage will come down.

Operator

Our next question comes from the line of Vijay Rakesh with Sterne Agee.

Vijay Rakesh - Sterne Agee & Leach Inc.

It looks like on the 3G/4G side, growing about 50% sequentially, but now with LG, Samsung, HTC all ramping to see that kind of nearing to grow 50% [indiscernible] as you look at the second half here on the 3G/4G side?

Robert Bruggeworth

Well you were a little bit unclear. I want to make sure we understood the question. So the question is, we've kind of grown the last couple of quarters at about 50% in the smartphone 3G/4G space. Your question was do we think we can keep that up, or what was the question?

Vijay Rakesh - Sterne Agee & Leach Inc.

Yes. Do you see that accelerate as the Samsung, HTC all start to pick up?

William Priddy

I don't know about accelerating in terms of the sequential rate, because we're getting in some pretty big numbers here but we certainly expect to outgrow that market handily throughout the year gaining share each quarter during FY '12.

Vijay Rakesh - Sterne Agee & Leach Inc.

And that should mix into the [indiscernible] where you see margins exiting the year?

William Priddy

I'm sorry...

Robert Bruggeworth

The question was, where do we see margins ending the year as the mix improves?

William Priddy

I think it's very much a revenue-based model. Like I said, I think somewhere around the $250 million level, we reached the 40% mark. And then as we go from there, you can model $300 million, you're probably in the -- pushing the mid-40s in terms of gross margin.

Operator

Our next question comes from the line of George Iwanyc with Oppenheimer & Co.

George Iwanyc - Oppenheimer & Co. Inc.

Eric, following up on your Phenom comps, can you give us an idea of relative to that like $25 million per quarter run rate you're talking to for PowerSmart and the Switch business in March of next year, how does Phenom stack up against that?

Eric Creviston

Sure, I'd be happy to. We mentioned before that the Phenom ramp, of course, is a couple of quarters behind PowerSmart but roughly the same shape and in fact, the total sales funnel for Phenom is quite a bit bigger than PowerSmart, of course. The PowerSmart is addressing certainly the high tier and multiband phones. Phenom is more of the traditional discreet PA architecture which is prevalent today. And we see variants of Phenom that will include duplexers, pad variants coming early next year. And then also broadband and multiband variants to Phenom as well as LTE bands all being supported. So it has a huge, huge sales funnel behind it. So it'll easily cross that hurdle as well. But we haven't really put a date on that yet, I guess, but it's growing very, very rapidly.

George Iwanyc - Oppenheimer & Co. Inc.

Okay. And Bob, can you give us an idea of what the MPG and CPG split was? And how the GaN ramp is doing on it for MPG?

Robert Bruggeworth

As far as the split goes, I think we commented last quarter that MPG, just because of the roll off of the Transceiver business would increase as a percent. So it's between that 25% and 30% and both businesses grew very nicely last quarter and we'll have to see how thing play out this quarter to see how much that moves. But as I've said before, let the race begin. They both got great markets and great opportunities to grow. So probably staying in that 25% to 30% range for a while. And I'll let Bob Van Buskirk talk a little bit about the GaN ramp and some of the targets he's got out there for that.

Robert Van Buskirk

As I said on the last call, we continue to be very enthusiastic and excited about GaN. We put a target out there of about $15 million to $20 million in revenue for GaN in FY '12. And that's roughly double what we did last year and we expect that to double again in FY '13. And it's across a range of end markets and applications. The 2 leading areas right now would be high-power applications initially military radar systems. That'll be roughly half of RF high-powered products will be about half of our sales this year, about 1/4 of our sales this year will be in Cable TV. And that is actually ramping very nicely. We're about 30% of our cable amplifier shipments in Q1 were GaN based and we expect that to accelerate. We actually have end operators, end-users in Europe speccing in GaN for cable upgrades in Europe. And so we're extremely well positioned there. And the other 25% of that $20 million roughly this year is made up of government contracts and foundry services, including as we announced in our press release, our first technology contracts that we've won from DARPA, 2 different GaN-based contracts, worth about $3 million in revenue over fiscal '13, which is to drive, enhance, advance thermal management of GaN-based RF power, which we feel is a strong endorsement from government experts and the maturity and the producibility of our GaN today. So pretty excited about the whole breadth of the program in GaN. And as Bob said, we see this as a breakout year.

Operator

Our next question is from the line of Aalok Shah with DA Davidson & Co.

Aalok Shah - D.A. Davidson & Co.

A couple of quick questions. Around the conversed PA solutions and some of the competition that you have right now, can you give us a take of what your base end partners are saying right now in conversed solutions? Are they starting to implement? Are they starting to ask for more conversed PAs? And kind of what your thoughts are about getting qualified with other base end providers? And then secondly, Eric, maybe just in terms of PowerSmart as well, do you automatically get the Switch and Filter business given that you get a PowerSmart win? And sort of hour of content kind of -- should we think of about maybe $6 or $7 around PowerSmart?

Eric Creviston

Sure. That a lot to cover here. Let's start with the first question about kind of integration with other baseband suppliers and so forth. We definitely see that the trend is in that direction for a lot of reasons. But I think what a lot of people are waiting for was to find out whether it was real. So now that you can go out and buy a Galaxy S II phone and open it up and see the performance and see the size and just how incredibly simple that RF section has been put together compared to the competing handsets on the market today. I can assure you the interest in PowerSmart has gone up considerably since that phone has started shipping. A lot of people are now benchmarking that. Size, cost complexity and performance and coming to us. So right now there's still no real serious contenders in terms of competition to PowerSmart and true converged, we have others trying to build hybrid solutions to fit in, in second sources, which is good. But in terms of true conversed, I think we're clearly the industry leader now with our integration of the power management piece, as well as the power amplifier. So we're helping a lot of the baseband suppliers now work on next generation systems, both for 3G still continued a real match for 3G, but a lot of the attention now is in LTE. And for that, we're working on specific derivatives of PowerSmart, which will be focused on LTE band. We also have additional LTE amplifiers for some of the new bands that are coming up that are a little bit off for our field from the normal bands. So that will drive a lot of further content expansion for PowerSmart going forward. And then, to your question on the switch and filter, we don't automatically get it. And in fact, for the versions that are shipping today, it's not shipping with our front-end switch yet. And so that's going to be changing going forward, I think, we have a very competitive switch portfolio that we didn't have when PowerSmart was first put in the reference designs a couple of years ago. And so we will be adding switch content, in fact, and filter content to the PowerSmart offering going forward. We also have some other power management for the transceiver IP that is being used in several cases. And in a lot of cases, we have the WiFi front end as well. So you're right, we get up into some very, very large content. There's no doubt that the total hour of content in some of these platforms is well over $6 worth of opportunity.

Operator

Our next question comes from the line Dale Pfau with Cantor Fitzgerald.

Dale Pfau - Cantor Fitzgerald & Co.

I want to follow up a little bit on your Phenom part. Can you give us an indication of, do you say, it's lagging a little bit behind PowerSmart. Can I assume that maybe we did $5 million in the quarter. And then could you talk a little bit about the progression? You mentioned that maybe early next calendar year, we could see a pad variant? Could we see hybrid variants based on the Phenom technology sooner than that? And talk about, maybe, who else you're engaged with where we might see some of those pop up?

Eric Creviston

Yes, sure. So it was -- Phenom was really just beginning its ramp last quarter, so it was well under $5 million last quarter. It will be growing again at a pretty high rate. And we haven't really set, I guess, a specific hurdle for it. But it will be a significant contributor exiting the fiscal year for sure. We're not currently planning to build hybrid versions around that technology. The customers are really focused right now, I think, on the street versions, particular for LTE bands where they get a lot of performance benefit. Pad versions for certain 3G amplifiers and bands and one particular customer that's very interested in that. And then, really, just having the full suite of capability and the power management. Again with Phenom, we have a DC-to-DC converter that comes along with it as well. And what customers are really, I think, excited about is that you can use Phenom as is and get incredibly good current consumption at high data rate modes. You can add the DC-to-DC converter and then also get the best-in-class performance at low data rate, low voice modes and so forth. So it gives them a lot of portfolio flexibility, I think. So the guys could have a broad portfolio on one end design and one solution use it across many tiers beyond is a very, very good fit for them.

Dale Pfau - Cantor Fitzgerald & Co.

And then one follow up. With the total LTE shipments, were they significant in the quarter?

Robert Van Buskirk

LTE shipments were very low last quarter. They're beginning to get this quarter into the single-digit millions of dollars, so it's beginning to take off. I wouldn't call it a hockey stick by any means. We're shipping into some USB modems for example, today. Handset shipments really begin in earnest next year. And certainly next fiscal year we're projecting very significant dollars for the LTE portfolio.

Robert Bruggeworth

I might add on the infrastructure side of things that, of course, LTE is ramping. A lot of our OEMs through their use of remote radiohead, architectures and multi-standard base stations are incorporating LTE functionality and what we're supporting today.

Operator

Our next question comes from the line of Cody Acree with Williams Financial.

Cody Acree - Williams Financial Group, Inc.

Really for Dean and Bob, could you give us a little bit of help on the breakout of the guidance between Nokia and non-Nokia? I know you're obviously handicapping your overall rub. But if you can kind of give us that non-Nokia recently some directional guidance.

William Priddy

Well, yes, I think -- one change that you may see in our business as soon as the September quarter that we could have a new largest customers. So I think that gives a sense to the magnitude of the growth trajectory that Samsung is on. Now, I do believe that Nokia will remain a 10% customer in the September quarter. It's just that we've got other customers that are ramping just so much faster than Nokia. So you can get to very, very solid increased growth rate if you didn't account for the fact that we are taking a conservative stance on the Nokia business, which may actually turn out to be better than some people expect. So and also, the success of their portfolio in the future, like Bob said, we feel that our share has stabilized there and is actually set to increase as the year progresses. So it's more of a wait to see, but we're not counting on it to give accounted growth that the -- or exceed the growth of the industry.

Cody Acree - Williams Financial Group, Inc.

And Dean, maybe on another point, with inventories up 9%, and I know you're still on some initial staging of variant with Phenom and getting a little faster. How much of the gross margin improvement in this current quarter was on that first -- or excuse, that's to build? And then depending on growth trajectory in September and December, do you see the utilization rates really continues upward or do they start to settle out and start to see a little flatter those margins set on?

William Priddy

If anything, I think the utilization rates in our fabs went against us in gross margin this quarter. Most of the inventory build that you saw were for products that we don't even manufacture in our own life or fab facility. So as you can see, we've been very, very tightly managing the business expenses and keeping a very keen eye on DSOs and DPOs and so forth. At the end of the day, we've got some very marquee customer ramps coming and we absolutely have to protect those ramps. And the way to do it is to make sure that the supply chain is robust and you got products in-house and ready to ship. Because in some of these cases, the ramps are going to be very, very fast and very furious. So we need to make sure we've got product in-house to support all of our customers. Because if you think about it, 1 year or 1.5 years ago, some of our competitors got caught in a situation where they were very short on the inventory and capacity and they're still trying to recover from that today. We don't plan on getting into that situation.

Cody Acree - Williams Financial Group, Inc.

And then one last, if I may. For Eric, on Phenom, Eric in the past you guys have talked about PowerSmart, the main customers and then talked about other customers that you earned wins with that you were not really -- numbers of customers that's not able to name [ph]. Can you just give us a similar look in the Phenom?

Eric Creviston

In terms of the customer base for that?

Cody Acree - Williams Financial Group, Inc.

Yes, the customer base that you've already earned wins with maybe outside of RIM.

Eric Creviston

Yes. I think at this time we're not announcing any further design wins. You can imagine that the entire Qualcomm ecosystem, for example, is our candidate but also MediaTek it's on all of -- not all of, sorry, it's on the MediaTek 3G reference design. And so there's Huawei and ZTE and a lot of other customers in China are already building as well with Phenom. That's one thing that kind of an interesting dynamic. As a matter of fact, being on the MediaTek reference design with Phenom has kind of set the bar now for current consumption, even in the 3G entrance category in China. And so with other reference designs there, including Qualcomm begin to ship in the 3G into China, the customers there already expect a certain level on the power amplifier. I think that's also bringing once again, bringing Qualcomm and Phenom together in the marketplace because that's now the established benchmark for performance even in 3G entry.

Operator

Our next question comes from the line of Scott Searle with Merriman Capital Management.

Scott Searle - Merriman Capital, Inc.

First, a couple of quick qualifications. Dean, on the gross margin guidance, did you indicate 50 basis points up sequentially? And then, just as it relates to some of the PowerSmart designs that are ramping up in the next quarter, I just want to clarify, are these all still baseband wins that are tied to Infineon and Intel? Because I thought there was -- you're seeing increasing traction with other platforms such as ST-Ericsson, I just want an update on that front.

William Priddy

Scott, yes, the gross margin guidance was for a 50 basis point increase, sequentially.

Eric Creviston

Yes. And regarding baseband platforms for PowerSmart, we do continue to work on integration with several other manufacturers. ST-Ericsson is one of them that we have talked about and MediaTek as well, longer term. That integration's moving forward very, very rapidly. In fact, PowerSmart derivatives are being pulled in to help with the UA500 platforms for example. We're also attached not a PowerSmart exactly, but with another derivative on the 5730 platform in ST-Ericsson. And then, of course, a longer term that the M70-400 [ph] is a perfect fit for PowerSmart. So that's all going very well in terms of alignment. As I said, other baseband manufacturers are also stepping up evaluation now since the S II is shipping, so we expect further alignment as we go down the road.

Scott Searle - Merriman Capital, Inc.

So, Eric, just in terms of when you expect to get through some of that process, should we have some better visibility come the fall time period? Or will it be before that period?

Eric Creviston

Yes, I think you'll see up ramping on U8500 with PowerSmart derivatives this calendar year.

Scott Searle - Merriman Capital, Inc.

Great. And lastly, if I could just, China. Bob, you indicated it's a little soft there. Could you provide a little bit more color in terms of what your sequential expectations are for September?

Robert Bruggeworth

As far as China goes, typically, coming into the June quarter, it's flat up a little bit, sometimes down and last quarter was actually down a little bit. This quarter, we're modeling kind of modest growth in the market. I think the big story in China is what Eric talked about is the 3G entry. And that also hadn't, I think, lived up to a lot of people's expectations for the year. And so again, we're taking a conservative view on TDS CDMA, which we've got excellent print position with the top 3 baseband manufacturers there and coupled with the work that we're doing at MediaTek and others that are utilizing Qualcomm's reference designs for 3G entry. But that really hasn't taken off as fast as we had hoped. I think at the beginning of the year, for most of us though. We're expecting it to be up this quarter. And again, last quarter, that was probably down a little bit.

Operator

Our next question comes from the line of Blayne Curtis with Barclays Capital.

Blayne Curtis - Barclays Capital

Could you just comment on the strengths on MPG up double digits kind of some color on that growth? And whether those -- and if those drivers continue into Q3? And then on PowerSmart, that ACT when you talked about, is that fiscal '12? And is that added to the goal that you had, I think you previously talked about just the 3 OEMs in that forecast.

Robert Bruggeworth

Bob, why don't you go ahead and take MPG?

Robert Van Buskirk

Yes, I I'll take MPG and start with probably the strongest sequential growth area we had in Q1 was actually our Broadband business. It generally has a little seasonal lift to the June quarter, but we grew substantially above seasonality again. That's being driven by our GaN technology. And we're getting pulled from Europe, North America and we're actually starting to see some pull materialize from price conscious even Asia-Pacific. So broadband would be number one. Number two, would be our wireless products area, which includes wireless infrastructure and also our Catalog business. Actually, our catalog, Standard Catalog business showed some real strength. And then what's really good news there for us is it's one of our higher margin product lines. And thirdly, our defense group saw some nice attraction in the GaN or our power products I mentioned.

Eric Creviston

And regarding your PowerSmart question, the HTC business is modeled to ramp at the end of our fiscal year, so it's a March quarter opportunity. And it was known about for some time, so it was included in our guidance.

Operator

Our next version comes from the line of Sujeeva De Silva with ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC

How should we think about off of the PowerSmart run rate of $25 million a quarter, how that would grow the next year? Maybe qualitative, I don't think you'll throw a number out there, but qualitatively?

William Priddy

Yes, just qualitatively, I think we've said before we think converged architectures will address maybe 10% to 15% of the smartphone market right now this year based on the transceivers that are compatible and so forth. And that could easily grow to 25% of the smartphone market next year. So that probably gives you an idea qualitatively how to grow.

Robert Bruggeworth

Yes, just year-over-year comps, the growth rate just maintain and grow 5% to 10% or whatever percent a quarter off of $25 million then your fiscal year '13 or fiscal year '12, it's going to be tremendous growth rate for fab and our switch and signal conditioning product line and Phenom and our GaN products. So we've got multiple growth drivers here that have, really, a multiyear type time horizon.

Blayne Curtis - Barclays Capital

Great. And on the LTE 4G, can you talk about your design win share and remind us of your approach on filters, given saw versus volume [ph]?

Eric Creviston

Yes we could use the rest of the time on those. So let's see. In terms of LTE and 4G share, it's design, it is a little hard to tell. There's so little volume actually shipping right now in the marketplace. We think we're definitely getting more than our fair share. It's really, in fact, great to see that the product leadership we've been investing in for over 4 years now. And in fact, if you look at the power management piece, we've been investing for 8 or 9 years in building a patent portfolio there, that's all beginning to hit, especially in LTE. I think we were behind the ball in the open market 3G business when it started ramping a few years ago. Since we are very customer centric, we've caught up our 3G portfolio here in kind of the second half of its life. But as LTE ramps, we are hitting on all cylinders and we have the products, they're a leading industry at the beginning of the LTE ramp. So we're very, very confident in getting more than our fair share in LTE going forward. The second part of your question was our philosophy on filters and saw versus volume, and so forth. The way we see the RF front end and we think it is our job to architect the entire RF front end and offer complete solutions to the platform providers and end customers as well. As we look at that, we see it basically sitting around 2 strategies. One is the switch-based part of the market, which will lead based on our leadership in switches, which we've established today. And the other part is power amplifier based component. And so filters, we see as falling as a passive component that can go potentially combined with PAs and pads or combined with switches and switch duplexer modules. And for the most part, we expect to combine them with switches and switch duplexer modules. Because we think the PAs will become more and more converged or packaged together in multi-band or broadband solutions. And so the duplexers will most likely get combined with switches. And that's our growth path for the part of it going forward. Not to say, as I've said earlier, that we won't do some pads and we'll do -- where our customers ask specifically for pads we will do them as needed. As we think the long-term roadmap will be to integrate duplexers in with our switches and that's what most of our customer base is asking for in next generation. So in terms of saw versus bought, we have always had a strategy of optimum technology matching here, and that is playing out in our power amplifiers today. You're already seeing that, and I think in our switches, as we're bringing up SLI very, very rapidly. When it comes to filters and duplexers, we're going to use the best technology for each individual slot. Now today, about 85% of that is saw and about 15% roughly is bought. And we have access to both technologies from multiple suppliers. There's no slots that we can't address because of technology concerns. Today, we are fully outsourced. Although we've qualified an internal technology for saw, that could be very compelling once the volumes get high enough to justify internal manufacturing. But for now, we're very pleased with our external sourcing strategy of multiple technologies for duplexers and we don't see anything limiting our growth in that area.

Operator

Our next question comes from the line of Quinn Bolton with Needham & Company.

Jason Rechel

This is Jason Rechel calling in for Quinn. Just to follow up on a couple of the questions about your Qualcomm reference design, does the switch -- is that going to go into an antenna switch module from another vendor? Or is it a discrete component that maybe we can see popping up in tear downs down the road?

Eric Creviston

Yes, it's a discrete component it will not go into another module, at least I'm not aware of any request for that to date. It is a standalone antenna switch module all on its own.

Jason Rechel

And then, last week, Skyworks had talked about some converged PA wins in the Galaxy II S platform. So could you guys just maybe talk a little bit about that? And where you see your share within a platform shaking out relative to Skyworks, maybe heading into the end of the calendar year?

Eric Creviston

Absolutely, I'd be happy to. So Samsung, of course, is a very mature supplier with many, many different models and they have a supply chain strategy for high volume, flagship models of having 2 sources, of course, and have for years. So we have always expected that we would be the first a source. But there would be a second source for those platforms and indeed that's playing out. Frankly, I think we expected to have less share than we have today. We're still picking up by far the vast majority of the handset models. And I think the best way to look at it, because it is hard to tell, I know because Samsung has just a plethora of different models and variances that come out, and so it is a little hard to track, maybe. But I think the bottom line, if you look at Samsung's spend for RF power amplifiers this year, RFMD will be the number one supplier of RF power amplifiers to Samsung for the year. Last year, we weren't. Someone else was. And so I think at the end of the day, that will tell you how things are settling out.

Robert Bruggeworth

I also think, Eric, commenting on that the second source opposed to a truly converged PA being a single PA, not a hybrid that is in a footprint that is close enough there are compromises in the performance and the size. So I think as Eric commented, it's a second source on a platform, which is what they require for their high-volume phones. So it's not truly a drop in converged solutions.

Operator

And that is all the time we have for questions today. I'd like to turn the conference back over to management for any closing remarks.

Robert Bruggeworth

Thank you very much for joining us tonight. In closing, I'd like to reiterate that RFMD is leveraging product and technology leadership to capture market share and expand across diversified growth markets. We have exciting new product cycles extending well into the future, and we seek continued sequential revenue growth enabling broad improvement in our financial performance. We thank you for your interest in RFMD. And we look forward to sharing our progress with you as the quarter unfolds. Good night and thank you.

Operator

Thank you, sir. Ladies and gentlemen, if you'd like to listen to a replay of this conference, please dial 1 (800) 406-7325 or (303) 590-3030, using the access code 4454639, followed by the pound key. This does conclude the RF Microdevices Q1 2012 Conference Call. Thank you very much for your participation. You may now disconnect.

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