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RF Micro Devices, Inc. (NASDAQ:RFMD)

December 07, 2011 12:00 pm ET

Executives

Unknown Executive -

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

Analysts

Unknown Analyst

Unknown Analyst

Good morning. We’ll go ahead and get started. Starting off the day, I'm very happy to have RFMD. We have Dean Priddy who's the CFO, as well as Doug DeLieto from Investor Relations. We're going to do a shortened presentation, leave some time for Q&A. But there's also a breakout session immediately following this. So thanks.

William A. Priddy

Hey, good morning, everyone, and good morning to the people listening to the webcast today. I'll be relatively brief. I'm going to give an overview of our calendar year '12 growth drivers and provide a brief snapshot thus far on the December quarter and finish up with why invest in RFMD?

This is the usual Safe Harbor statement, which covers any forward-looking statements that may be made during today's presentation.

Just quickly, how is RFMD structured? Three business units. You're familiar with our Cellular Products Group. It makes up roughly 75% of the total revenue of the company. Our Multi-Market Products Group, which is just about everything else wireless, which is roughly 25% of the company's revenue. And the newly formed Compound Semiconductor Group. Its charter is to leverage our industry-leading technologies, in particular, our gallium nitride and some of our GaAs and MBE technologies into new non-RF industries.

So jumping right into the calendar year '12 growth drivers. I think in the history of the company, these are the strongest lineup of products that we've ever had at one single time. We've got 2 products on this list that are already at the $100 million run rate, annualized run rate, within about 4 quarters of production. And the ultra-high efficiency PAs, which we believe are going to be on that same path during calendar year '12. And then finally, gallium nitride, which is a new, emerging technology used primarily in the Multi-Market Products Group. It's a very, very high-power, high-performance technology.

So jumping into PowerSmart. I wish I had a laser pointer. And this is -- some new information on this slide. It shows a Galaxy Nexus phone manufactured by Samsung that was recently introduced and I think this slide visually shows the power of the platform approach and what PowerSmart brings to the cellular industry.

In the early days of the Galaxy, it was a triple-band, wideband CDMA with plus 2G. About 150 square millimeters, and it was an alternative for a competing solution. Then came PowerSmart, which basically changed your game with converge architecture, quad band, wideband CDMA plus 2G, about 82 square millimeters or just about 1/2 the size of the predecessor in terms of RF. So PowerSmart has really become the Holy Grail of the cellular industry in terms of converged power amplifiers. It's achieving narrowband performance with a broadband power amplifier. And the way we've been able to do it is marrying the RF power management with the power amplifier. We're the only ones in the industry doing it. Quite frankly, I'm still a little surprised that competition hasn't made more inroads than what they have.

But going into the future, I think it will surprise the audience how many new design wins we're picking up with PowerSmart. And it's not just with one channel partner. We're adding new channel partners as well. So we're adding both channel partners and new customers for PowerSmart. Even with our existing customer base, we continue to add new handset models such as the Nexus, which you see is a penta-band, wideband CDMA implementation. And it only requires 7 more square millimeters to scale up to 5 bands versus 4. So this is, once again, extremely powerful from a platform approach for the handset market.

Our CMOS-based switch is something that, internally, we are extremely excited about. There's 2 major drivers here. The first, as the complexity of the RF continues to increase and you have more bands, you have more functionality within the handset, the switch that's located near the antenna that serves as the traffic cop becomes the -- gets additional throws, if you will. So it's not uncommon now for us to be developing 10, 12 or 14 throw count switches. Some of these switches sell for over $1 ASP. And obviously, the linearity and isolation are extremely important to the performance of these switches. They can actually help, while you're in data mode -- the user experience can be enhanced because of the linearity of these switches, allowing real-world data throughput to actually increase. So you got that phenomenon going on of increased throw count switches and RFMD is participating very, very nicely in that but a segment that is really just emerging, that is probably going to represent a $500 million to $600 million TAM over the next 3 years or so is our antenna control solutions. So what is this? It really is a new area for the RF industry. The smartphone has multiple antennas. And as you're using your phone, you're talking on it or you're using it in data mode and turning it around in your hand and so forth, there's one antenna that's doing better at picking up the signal from the cell tower. Well, now phones are able to intelligently switch antennas to optimize the RF performance, and we're at the core of enabling that. Also, we have the ability to utilize multiple antennas at once with some of our CMOS-based switches. And then finally and maybe most importantly, we're going to have the opportunity to actually tune the antenna with the CMOS space products. So again, RFMD has a clear lead in this area and it's based primarily on the advanced development work that we've done with our CMOS-based switches.

Today, we have about 10% market share in this space. We're targeting 40%. It's going to take us a while to get there, but this is -- this TAM, we think, is about doubling over the next couple of years. So it's certainly something to watch. And again, our CMOS-based switches, or our switch business, will pass the $100 million annualized run rate this December quarter.

The ultra-high efficiency 3G/4G, quite simply, we challenged our Advanced Development Group to go off and break record, break the record in efficiency, and they came back with huge upside. The competition has been nowhere close to the type of efficiency levels that we've seen out of these PAs. And they're being broadly adopted by the marketplace. Just like our switches, which are showing up in all the world's leading smartphone manufacturers, we're seeing widespread engagements and adoption of our Phenom high-efficiency PAs. I'd like to point out, in particular, Samsung and their LTE lineup for calendar year '12 is going to utilize these products very, very heavily. So -- and once again, LTE is going to be driving, I think, a lot of the industry's TAM growth in calendar year '12 as we expect upwards of 100 million total units of LTE devices to be shipped. So again, clear performance leadership. And clearly, that performance leadership is getting us access to the smartphone manufacturers, and they're adopting these high-performance PAs at a rapid rate.

When you think of MPG, you think of power devices, and those power levels can range from extremely low-power game blocks to extremely high-power cellular PAs or military radar implementations. Where we're using gallium nitride is more in the real high-power area. We have devices up to 250 watts. We're, today, receiving orders for military radar implementation and also working very closely with base station providers for high-power amplifiers. This business will about double this year. We're also using gallium nitride for our cable TV hybrid PAs, the line amplifiers. So again, this business will about double this year, and we think will about double next year to the $30 million or so level. So a key revenue driver for our Multi-Market Products Group.

So the December quarter snapshot, I don't think it's any secret that the macro environment has been somewhat challenging. And I don't think the cellular industry is immune to that. In fact, we could construct a model this quarter where the cellular industry may be flattish as compared to last quarter. But with that said, the products that we're really betting on for calendar year '12, our PowerSmart products, our switch-based products, antenna control solutions, ultra-high efficiency PAs, those in aggregate, we believe, are going to grow this quarter. So clearly taking industry share as they did last quarter.

However, in China, we're seeing mixed signals. And sometimes, the lead times in China are very short and you don't have the visibility that you would like to have. And we're kind of in that position in the quarter where we're past the peak of the traditional Christmas holiday build, but we're ahead of what would be the Lunar New Year build. So I think over the next 2 to 3 weeks, it's really going to say a lot about the overall industry, and certainly, RFMD's results as well. So I would have to say, though, that the China quarter to date has been running below expectations. But we also have seen China move very quickly in both directions.

I will say that the 3G activity, design activity, is accelerating in China. I don't think any company is better positioned with all the major channel partners doing 3G value phones in China. And we expect this could be roughly $0.5 billion TAM for the RF industry in calendar year '12. So we think that's going to grow a good solid 50%, both in units and in TAM from calendar year '11 into calendar year '12, and I think we're getting more than our fair share of that design activity.

We get a lot of questions about the pricing environment, and it's the same as usual. It's a competitive industry, always has been and probably always will be with these types of volumes. I think the big difference today is that there's been some public comments being made about pricing that has created some uncertainty in the eyes of the investors. For us, it's business as usual. We haven't seen anything abnormal in terms of ASP erosion. And we'll wait and see how things play out. But again, I think it's been more because of public commentary than on business as usual.

And then finally, MPG. We had guided MPG revenue to be down this quarter and that is tracking to our expectations. But we're seeing signs of stabilization. In fact, we're starting to see a tick-up in some of the order rates. I think it's really too early to call the turning point for MPG, but I don't think it's too early to call a stabilization of MPG. So we'll see how that progresses going into the March quarter.

So finally, why invest in RFMD? The strong global secular growth trends of mobile broadband data are still very much driving this industry. RFMD is participating in very diversified growth. In fact, our customer diversification is probably the best in the recent history, or at least over the last 10 years of the company as a public company. And our calendar year '12 growth drivers are all very much intact. You’ve got the wonderful product portfolio of PowerSmart, our ultra-high efficiency PAs, our switch-based products, our gallium nitride. And you've got the benefit of a huge uptake in LTE devices and a huge increase in the 3G value segment. And remember, these people that are upgrading to 3G value were previously using a 2G phone. Inside the 2G phone, there's well under $1 of content. So we're going to see a 2 to 3x multiple as the industry and as China, in particular, migrates to 3G value phones.

Position for margin expansion in calendar year '12. As we get alignment with more of a percentage of our revenue being 3G/4G products, as fab utilization rates begin to improve and as MPG represents an increasing percentage of our total revenue, we got all the major margin drivers in place, as those things begin to happen in calendar year '12. And the same capital-efficient business model that we've had for the last 3 to 4 years is going to continue producing strong free cash flow for RFMD.

So with that, I'll be happy to open the call or the presentation up for questions.

Question-and-Answer Session

Unknown Analyst

Okay. I'll take the first question. You talked about pricing in China. Obviously, that's going to be the big area for growth, talk about 3G transition. You've enjoyed a high share in 2G. Can you talk about how that competitive landscape is going to look like, where you see your biggest opportunities and whether you'll be able to maintain your share or improve [indiscernible]?

William A. Priddy

Yes. We think our share in the 3G value area could be higher than our 2G share because of the across-the-board alignment that we have with the major channel partners there, including Qualcomm, MediaTek, Spreadtrum and down the list. So that looks like a real growth area for us in calendar year '12. In 2G, we -- our market models have always projected that the actual 2G units will decline in calendar year '12 over calendar year '11. But we do have one more family of products coming out to address that market that is a much lower cost. We have reduced the die size by another 25% or so. And we think it'll be a competitive product with anything on the market for the 2G marketplace. But in terms of investment dollars, we're kind of weaning ourselves off of that and moving more into the 3G/4G area in our Cellular Products Group.

Unknown Analyst

One more, you showed the new Samsung phone with PowerSmart. I think there's some debate as to whether this will be successful. I think, at this point, it should bring in major volume. Can you talk about what your competition is doing to address this hybrid approach, the differences and then how PowerSmart addresses LTE as you’re adding more benefits?

William A. Priddy

Yes. We have 2 ways of addressing LTE, both with PowerSmart and with our ultra-high efficiency 3G/4G PAs that we call Phenom. So we're in extremely good shape. We're waiting for channel partner alignment with PowerSmart to address the LTE, but we're already locking down significant design spots. I think with Samsung, opportunities have been timed with their procurement of both a few weeks ago. And they verified what we already knew is that we’re their #1 RF supplier. And from what I could see of product roadmaps, design wins and where we're positioned for calendar year '12, we will be their #1 RF supplier in calendar year '12 as well. And it's very, very broad based. It's PowerSmart. It's the switch-based products. It's the Phenom PAs. And it's across multiple segments. So our market share is holding up extremely well with Samsung. It may even tick up a few points.

Unknown Executive

If I could clarify something for the audience on the webcast. The phones we're talking about, with the -- the Galaxy S II, which already has PowerSmart, and the Galaxy Nexus, which was just announced which also has PowerSmart, which is a penta-band phone, which will be ramping next year.

Unknown Analyst

Looking at next year, you called out a scope for margin expansion. Can you say what you think are the biggest drivers are to that, whether it's mix or whether it's utilization or 3G or 4G?

William A. Priddy

Yes. I think they're all equally weighted. Today, utilization rates are running more at historical lows. And we see that increasing as volumes increase in the industry. Obviously, product mix, as MPG begins to grow revenue again in calendar year '12, that's going to help the margin profile. And all the products that I had listed that are key growth drivers are today currently accretive to company gross margins. Really, the only way -- the only place that we see diluted margins are in the 2G area.

Unknown Analyst

Maybe you can talk about -- you were one of the first to talk about switches as an important growth driver. I think others are talking about that. Can you just talk about, one, where your opportunities for next year are on switches, and then whether you expect the other players to also -- this space?

William A. Priddy

Yes. Again, we've already built a $100 million annualized business in, what, 4 quarters or so of production with our switch-based products. RFMD has probably shipped more switches than anyone on the face of the planet. It's just that most of those switches are very simple, transmit and receive switches inside the power amplifier module. These are the high-performance switches that because of the number of throw counts needed in the smartphone, that sit close to the antenna. So they're stand-alone components. That's driving a lot of the uptake, and it's pretty much across the board. I mean, we're on key reference designs with Qualcomm and other partners with these switches. And -- so that business is just kind of taking off based on performance, more than anything else. But I think really underneath the radar screen are these antenna-controlled solutions, for instance in the Motorola Bionic phone, we've got over $1 content of 3 of these devices. So -- I mean, that's something that a lot of times doesn't show up in tear-down analysis of handsets because these are pretty small components. But when you have 2 or 3 or potentially even more of these devices, the dollar content starts adding up. And if you can add the multi-throw switch with that, you can get up to a couple of dollars of switch content in any given smartphone. So that's the trend that we see. And we really don't see a strong competitor in this area. It's been amazingly absent.

Unknown Analyst

[Indiscernible] questions. First is on China. Can you talk about the 2G competitive environment there and how that's changing? And the second is how the impact of Murata's acquisition of Renesas' PA business affects the industry and I think Murata's plan to integrate their PA with their front-end module?

William A. Priddy

Yes. In terms of the competitive dynamics in China, I think RFMD has the current market share leadership. I know that RDA is doing okay in that market as well. We're not seeing the combined Murata-Renesas so much. And then there are others who have announced intentions to re-enter that industry. So I don't know if they have actually given any metrics on what they expect to achieve. But today, we know that they're very small and are coming from a very, very small base. So I don't think the competitive dynamics have changed. Skyworks has historically been a player in that industry. So again, it's kind of business as usual for RFMD. We are one of only 2 companies that actually have design resources in China. So we have a major design center based in Shanghai. And I think that's really helping us with the local Chinese manufacturers because we also provide applications, engineering support for the customers. So extremely strong presence in China and a market that we see transitioning from 2G to 3G value phones. But we're not giving up on the 2G segment.

Unknown Analyst

Maybe just address the overall market. Obviously, you have rents in Q4 that help you out. But maybe you can just talk about what's going on as far as the supply chain, whether you think -- any gauges of how much inventory there is in the channel and whether you think that'll get resolved this quarter?

William A. Priddy

Yes. Addressing the overall environment, I think this quarter is going to be the haves and the have-nots in terms of phone ramps. There's clearly a couple of companies being very, very successful and some other companies being challenged. I do think we have the opportunity to grow, even with some of the challenged companies, particularly in the 3G/4G area. But again, as far as the quarter goes, I think the next 2 to 3 weeks will be a strong determinant of RFMD's ultimate revenue for the quarter because we are expecting the Lunar New Year build to begin in earnest over this time frame. So again, a lot of models suggest roughly a flattish overall cellular environment that I think is being impacted by the overall macro environment.

Unknown Analyst

What's your sense of just overall growth in the market? Granting you have a softer note, so it’s not a fair compare as to how fast this RF semi market is growing. But when you look out the next few years, is it still a 15-plus percent growth market?

William A. Priddy

Yes. When I look at the December quarter -- I mean, even if it is relatively flattish, I don't think it detracts from our view of calendar year '12 being a strong growth year for the industry, in particular, the LTE and the 3G value phone drivers. Just as there was the first billion or 2 billion people that made their first phone call on a wireless -- on our handset, I think you're going to see these same people make their first Internet connection. And that trend is going to happen. And we're seeing the design activity and the early stages of that ramp happening today. So again, I think the smartphone segment combined, value, high tier, all the above, has a 20% or better CAGR over the next 3 to 4 years.

Unknown Analyst

We have time for one more, anybody?

Unknown Analyst

With PowerSmart, can you talk about any design wins outside of Samsung?

William A. Priddy

Yes. We're ramping RIM, as we speak. HTC is a customer that will ramp PowerSmart by the end of the year. LG is currently ramping PowerSmart. We have a new channel partner that will begin using PowerSmart before the end of the fiscal year. And there's probably a couple of other customers that we haven't mentioned yet that will begin ramping. So things are definitely on track.

Unknown Analyst

Okay. Well, we'll end it there. Thank you very much. Thanks, Dean and Doug. There's a breakout following. Thanks.

William A. Priddy

Thanks a lot. Thanks, everyone.

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Source: RF Micro Devices Inc. Presents at Barclays Capital 2011 Global Technology Conference, Dec-07-2011 09:00 AM
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