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Executives

Doug DeLieto - Vice President of Investor Relations

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

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

Steven E. Creviston - Corporate Vice President and President of Cellular Products Group

Norman Hilgendorf - Vice President of Corporate Development

Analysts

Cody G. Acree - Williams Financial Group, Inc., Research Division

Edward F. Snyder - Charter Equity Research

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Parag Agarwal - UBS Investment Bank, Research Division

Blaine R. Carroll - Avian Securities, LLC, Research Division

Blayne Curtis - Barclays Capital, Research Division

Aalok K. Shah - D.A. Davidson & Co., Research Division

Vivek Arya - BofA Merrill Lynch, Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Jaeson Schmidt - Craig-Hallum Capital Group LLC, Research Division

RF Micro Devices (RFMD) Q4 2012 Earnings Call April 24, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the RF Micro Devices Fourth Quarter 2012 Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, April 24, 2012. I would now like to turn the conference over to Douglas DeLieto, Vice President, Investor Relations of RF Micro Devices. Please go ahead.

Doug DeLieto

Thanks very much, Alicia. Hello, everyone, and welcome to our conference call. At 4 p.m. 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 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 this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain noncash 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. [Operator Instructions]

Sitting with me today are Bob Bruggeworth, President and CEO; and Dean Priddy, Chief Financial Officer. I'm also joined by Eric Creviston and Norm Hilgendorf, who lead our Cellular Products Group and Multi-Market Products Group, respectively, as well as other members of RFMD's management team.

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

Robert A. Bruggeworth

Thank you, Doug and welcome, everyone. RFMD's revenue performance of $188 million during the March quarter reflected greater than seasonal declines among handset manufacturers in China and in the leading European handset manufacturer. Partially offsetting, this RFMD's ultra-high efficiency power amplifiers and PowerSmart power platforms achieved greater than 15% sequential revenue growth. As a percent of revenue, 3G/4G components represented more than 2/3 of cellular revenue during the March quarter versus approximately 25% 1 year ago. RFMD expanded gross margin by 220 basis points versus the prior quarter and generated approximately $11 million in free cash flow. This is despite reduced revenue and lower factory utilization.

As we begin our June quarter, we're forecasting a return to diversified sequential revenue growth and improving financial performance. Order visibility into China has improved, and we are forecasting sequential growth in the June quarter. It's especially noteworthy that the March quarter represented a turning point for RFMD in China with CPG revenue now split approximately 50-50 between 3G and 2G. This speaks directly to RFMD's greater content opportunity and higher market share in 3G devices.

As a result of key program wins in both CPG and MPG, our 2012 growth drivers are more aligned with the market-leading customers and channel partners. From a market perspective, we continue to enjoy positive secular growth drivers. The overall TAM expansion for 3G/4G is in the early stages of a multiyear cycle, and it is supported by the complementary macro trends of mobility, broadband data and energy efficiency.

In LTE, we are forecasting accelerated global adoption this year as consumers demand higher mobile data rates and as our customers launch new iconic LTE devices to satisfy this demand. In China, RFMD has a broad set of growth drivers in place, with reference design wins in wideband CDMA and TD-SCDMA and with essentially all baseband providers. The China market is transitioning now to 3G, and this has the effect of tripling RFMD's dollar content opportunity in that key market.

In the markets served by MPG, we've seen a stabilization in the macro environment, and we continue to launch new products and technologies to deliver revenue growth. We sharpened our MPG focus to drive growth in 3 major markets: WiFi, wireless infrastructure and GaN power. MPG will continue to reach a broad range of markets and customers with these 3 categories, the most important drivers of MPG's future success.

Across both MPG and CPG, RFMD is transitioning to a highly diversified growth-oriented supplier of RF components and compound semiconductors, and we're doing this by leveraging product and technology leadership. To illustrate this, I'll use our largest customer as an example. Samsung relies on RFMD to reduce complexity, shrink product footprint and improve performance in their most popular flagship devices. This is across all product tiers, geographies and inclusive of all baseband chipset providers. RFMD wins because of the breadth and depth of our product portfolio and our performance leadership across key RF metrics like efficiency, linearity and isolation. In the market for converged power amplifiers, RFMD's PowerSmart supports Samsung across multiple basebands, and we are engaged with Samsung to supply our next-generation PowerSmart LTE, which enables a greater number of bands and band combinations.

On Samsung's LTE smartphones featuring discrete PAs, RFMD is capturing the majority share with our ultra-high efficiency 3G/4G PAs, which are optimized for high-speed data and provide improved talk time and thermal performance demanded by today's smartphone users. In fact, RFMD will support the majority of Samsung's flagship smartphones this year with either PowerSmart or our ultra-high efficiency 3G/4G PAs, and many of these devices will also contain our switch and signal conditioning components.

So from a high level, RFMD is wining at leading smartphone providers by leveraging technology leadership to deliver best-in-class products and solve our customers' increasingly complex RF challenges. Looking forward, we are making incremental investments in R&D, targeting continued growth and diversification. These include advanced power management systems like envelope tracking for LTE and other products and architectures that enable more cellular bands at even smaller form factors. These investments and our proven technology leadership across all active RF semiconductors are leading the smartphone providers to increasingly look to RFMD for complete RF front end reference designs. In fact, CPG achieved multiple design wins during the quarter at leading OEMs with highly integrated RF semiconductor solutions containing all 2G and 3G PAs and switch content for the entire cellular RF front end. This is a growing trend where RFMD can capture all of the active RF semiconductor dollar content.

In MPG, we're focused on the same product and technology leadership to drive revenue growth. As I said earlier, MPG is now focused on 3 major markets: WiFi, wireless infrastructure and GaN power. Similar to cellular, the demand for higher data rates and WiFi is driving up system requirements related to power output and linearity while also accelerating the rollout of more complex systems and modulations schemes. This is increasing the demand for RFMD's high-performance standalone front end modules while also effectively expanding our TAM.

For next-generation WiFi, we are heavily involved with the leading WiFi channel partners for 802.11ac developments, which are expected to be in shipping in late 2012. This is especially noteworthy because this is one of the areas where we've made significant progress in our alignment with the industry's leading channel partners.

In wireless infrastructure, telecom operators and OEMs are developing a variety of small cell base stations to extend wireless infrastructure capacity. This is driving up RF component volumes and placing greater emphasis on integration. MPG is targeting base stations and microwave backhaul with a growing portfolio of power amplifiers, general purpose RF products, microwave mimics and integrated multichip modules.

In GaN power, RFMD's GaN power products deliver advances in power efficiency over a wide bandwidth and our GaN is a key differentiator for high power at 5 watts and above. We're targeting high-power applications including military radar, broadband communications and cable TV networks.

Overall, RFMD is leveraging product and technology leadership to deliver best-in-class products to the world's leading wireless and wireline device manufacturers.

In the June quarter, we anticipate sequential growth in 3G/4G components as we continue to win share on flagship smartphones. Amongst handset manufacturers in China, we project sequential growth for the June quarter as a result of market share gains and the transition to 3G. RFMD today is a highly diversified with greater alignment with the industry's leading customers and channel partners and our opportunities in 3G and 4G have never been better. We are returning to sequential growth and we are forecasting continued sequential improvement at our financial performance.

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

William A. Priddy

Thanks, Bob, and good afternoon, everyone. Revenue for the March quarter declined 15.6% sequentially to $187.9 million. As anticipated, sales to handset manufacturers in China and to a large European handset manufacturer were down more than 40% sequentially in March, offset somewhat by sales of 3G/4G components and better than seasonal performance in MPG.

3G/4G components now represent over 2/3 of CPG's revenue compared to 25% of CPG's revenue 4 quarters. In only 1 year, RFMD has transformed itself into a highly diversified 3G/4G supplier through keen focus on product and technology leadership. We should see continued improvement in this key metric as 2012 progresses.

Gross profit was $60.9 million with gross margin improving 220 basis points to 32.4%. Improved mix more than offset the impact of lower factory utilization.

Operating expenses were $63.8 million with G&A of $10.2 million, sales and marketing of $14.5 million and research and development of $39.2 million. RFMD is investing for product and technology leadership in 3G/4G, in WiFi and in a multitude of switch-based applications. We expect the payback on these increased investments to begin as early as the September quarter.

Operating loss was $2.9 million. Other income was $243,000 and non-GAAP taxes were $2.8 million. Net loss for the quarter was $5.4 million or $0.02 per diluted share based on 276.3 million shares.

Now going to the balance sheet. Total cash, cash equivalents and short-term investments improved to $300.4 million. Subsequent to the March quarter, RFMD paid off the remaining $26.5 million principal balance of its 2012 convertible debt and currently has $134.9 million par value of convertible debt due April 2014. DSOs were consistent with the past 4 quarters at 49 days, and RFMD's inventory declined $17.5 million or 11.8% to $130.4 million resulting in 4 churns. Net PP&E was $197.9 million compared to $202.5 million last quarter. CapEx during the quarter was $9.6 million with depreciation of $14.5 million and intangible amortization of $4.6 million. The capital expenditures during the quarter were targeted primarily at test stations to support high-volume opportunities for switches and antenna control solutions. Production on these new testers will begin ramping this quarter. Cash flow from operations was $20.5 million and free cash flow was $10.9 million.

Now the business outlook and financial targets. RFMD is wining share on multiple flagship smartphones and projects continued sequential growth in 3G/4G components during the June quarter. Among handset manufacturers headquartered in China, RFMD sees strengthening demand and projects sequential growth during the June quarter. In the market served by MPG, RFMD sees stabilizing demand and improving order visibility and expects MPG revenue in the December quarter to be approximately flat versus the March quarter.

RFMD currently believes the demand environment for its end markets supports the following financial expectations and projections for the June 2012 quarter: RFMD expects June quarter revenue to grow approximately 8% sequentially to $202 million; RFMD expects non-GAAP gross margin to improve approximately 100 to 200 basis points, driven primarily by improved mix; and RFMD expects non-GAAP EPS of breakeven to $0.02 per diluted share, reflecting increased legal fees and incremental R&D investment targeting product leadership and customer diversification.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Cody Acree with Williams Financial Group.

Cody G. Acree - Williams Financial Group, Inc., Research Division

Maybe if we could start up with [indiscernible] market share gains, could you maybe give us as much detail as possible, maybe either by handset or even if you can, by baseband, do you think you made strides in the last 6 months and where do you think we'd start to see that in the income statements first?

Robert A. Bruggeworth

Eric, why don't you go ahead and take that?

Steven E. Creviston

Sure. I think some of the pockets of strength for us, we've kind of highlighted in the comments already, but Samsung for sure has been a clear area of strength for us. We see that continuing throughout the year as we're broadly represented across their entire portfolio, all basebands and all tiers. And as Bob mentioned, we are beginning to just beginning to sell switch contents as well. They haven't even been a part of our switch store to this point, so that's expanding there as part of the overall market share gain, I think in 3G/4G. And then the entry category in particular in China we did grow nicely even in the March quarter in 3G components into the China market. And so I think that's another area that overall, we're clearly picking up share.

Robert A. Bruggeworth

That's across all the primary baseband manufacturers for that marketplace.

Cody G. Acree - Williams Financial Group, Inc., Research Division

I know recently you have had a growing relationship telecom [ph] . You made some announcements around Mobile World Congress. Can you just talk about your relationship with Qualcomm and what that might turn into as far as revenue contribution through the year?

Steven E. Creviston

The relationship continues to grow and be very healthy and that is not only in the reference designs for China, but of course, in their main market smartphone references designs as well now engaging beyond switches including power amplifiers for current generation and very close engineering engagement for follow on platforms and new generation designs. So we expect to -- continuing to increase our exposure to that platform and grow our revenues with them throughout the year.

Cody G. Acree - Williams Financial Group, Inc., Research Division

And then maybe lastly, you talked some about your switching. It sounds like the antenna control modules are creating a nice opportunity. Do you have any targets on the switching side? You gave some last year as far as PowerSmart and Phenom about an end of the year run rate. Would you like to talk about any kind of thresholds or targets you'd like to see in switching and control modules?

Steven E. Creviston

We said now that overall, the switch business is greater than the $100 million run rate per year, and antenna control solutions within that category is one of the fastest growing, certainly, throughout this year. It's emerging from a business, which really was zero for the industry last year for the most part. We believe it could be a $500 million total opportunity within 3 years, and it'll be well on its way to that by the end of this year in terms of – for the total industry, and we believe our cut of that will be significant and we certainly will be the largest in that category, clearly.

Operator

The next question is from the line of Edward Snyder with Charter Equity Research.

Edward F. Snyder - Charter Equity Research

Just a couple of housekeeping, if you could, how large were your 2 largest customers as well as we could 2G in dollars and then MPG also? And then any color on the higher R&D, Dean, should we expect this level, as percentage of revenue, from here on out?

Robert A. Bruggeworth

Ed, I'll go ahead and take the largest customers. We only had one 10% customer this quarter. As I said in my comments, our largest customer was Samsung so we really had one 10% customer. I'll let Dean comment on the MPG revenue side. I think it was roughly flat and we disclose what that was.

William A. Priddy

Yes. It was just a tad over $45 million.

Robert A. Bruggeworth

And as far, Ed, as R&D dollars go, we've been invited to participate in some pretty nice sockets to continue our diversification with customers and baseband manufacturers so we do expect the R&D to stay at this level.

Edward F. Snyder - Charter Equity Research

Okay. And then in terms of PowerSmart, you had growth, which was impressive this quarter. Is that due to expansion in your partners beyond Intel? Or is that still mostly concentrated on Intel? And then a same kind of question with regard to the OEMs, I know Samsung was probably your biggest customer for PowerSmart last year. Is that still the case or do you see diversification into RIM and other OEMs? And then you mentioned the second gen high-efficiency, your Phenom product. What does that offer that the first one doesn't? And is it sampling designed in or in production at this point?

Robert A. Bruggeworth

Ed, I'll do my best to start answering your question, and I'll let Eric finish out. The growth that we did see in PowerSmart this last quarter was across multiple baseband manufacturers as you've suggested, but clearly, the largest one still is the Intel Mobile Communications baseband. We did continue to see growth outside our largest customer for PowerSmart so again, the diversification there continues across multiple customers and multiple basebands. Your next question I believe was on second generation Phenom and where we stand in that. And Eric, why don't you go ahead and go into some of those details.

Steven E. Creviston

Yes. Just to follow-up a little more detail on the PowerSmart question, expanding beyond Samsung as you mentioned, RIM is now fully in production and several other handset OEMs, but we've also began to ramp now into other applications. The Machine-To-Machine communications market, we had 2 new product ramps with 2 different suppliers for Machine-To-Machine with PowerSmart last quarter. Several Chinese manufacturers also taking into production and a lot of sampling activity across the Intel standard application module market, which could go into the many different industries, obviously, into ultra-books and so forth. So really seeing PowerSmart broaden out and diversify nicely in the quarter. Regarding the second generation ultrahigh efficiency 3G/4G power amplifiers, the second generation essentially expands the portfolio to pick up even more band coverage. We now have released products covering 10 bands of 3G/4G, and we're adding 8 more bands in the next 2 quarters. We're expanding it to all LTE bands. Everything will be covered within the next 2 quarters and increasing the efficiency in LTE data mode.

Edward F. Snyder - Charter Equity Research

So this is mostly a band expansion effort versus a push in the efficiency higher than what you had published in the past or a combination, or how would you characterize that?

Steven E. Creviston

It's a combination.

Edward F. Snyder - Charter Equity Research

Okay. And then in PowerSmart, it sounds like you've done a lot of expansion beyond just Intel or certainly beyond Samsung. You mentioned Machine-To-Machine. Is there a lot of sampling in that area right now and should -- would it be reasonable to expect to see, I don't want to say similar growth. I'm not looking for guidance outside of this quarter, but I'm just trying to get an idea of what you feel the profile for PowerSmart. Are we still in the early days of a ramp? Or is it maturing a little bit more and you think growth will slow in -- for the rest of the year?

Steven E. Creviston

We certainly it to grow sequentially throughout the year, and as you know, in Barcelona we rolled out as well the LTE version of PowerSmart, which will expand that family as well, and we're in very advanced stages of product sampling and design wins with PowerSmart 4G today. We expect it to be in production by the December quarter, engaged with many baseband manufacturers, I think, as many as 6 guys now working on integration for LTE systems to launch next year. So we'll continue to see sequential growth for it, and we'll probably take it again next year to a new level.

Edward F. Snyder - Charter Equity Research

And then, Eric, you didn't mention much about -- I mean, we talked about SoC or the switch business in terms of getting new test equipment up and running. But we didn't see it in the press release in terms of quoting growth or as such. Is it meeting expectations in growth, and more importantly, with this new suite of tests and measurement stuff, it sounds like you purchased some CapEx for the quarter, is that going to provide a leg up and a more aggressive ramp in revenues? Is that correct interpretation of what's going on now or is it just going to take longer to maybe build that business?

Steven E. Creviston

First of all, the switch business is absolutely meeting expectation, so no question about that. The new testers will give us more capacity to support continued revenue growth as we have planned and also a new capability. And the switch business is becoming quite diverse, not only in terms of products and basebands that we’re aligned with but in terms of functionality. Switch modules are becoming 12 T to 14 T switches that in often cases now, we’re also including diversity mode switches in the same package. It also has multiple, maybe 4 or 5 paths of received diversity as well in the package, combining that with the other signal routing switches now adding to that, the antenna control solutions, which is a whole new category of switching that is embedded into the antenna in these phones. Those as well have a very broad diversity in terms of the functions that they play from aligning the antenna to certain frequencies to tuning the antennas real-time for better data throughput, and all of that requires new testing capability, which we've had in engineering, obviously, for a couple of years now. It’s now becoming mature enough to move into the production stage of test.

Edward F. Snyder - Charter Equity Research

Okay. And one more question, I apologize so many. But Dean, back to R&D, sounds like the expansion was due mostly to capture some high-volume programs. Should we then reasonably expect maybe either growth to slow down or actually flattening in OpEx for the rest of the year? Or is business expanding so quickly that we can expect more of the same thing?

William A. Priddy

Yes. I think we'll probably see another quarter of some R&D growth and then probably flattening out from there. Also somewhat dependent on what legal fees will do over the next 12 to 15 months or so. But on the R&D side, I think we've got another quarter of tremendous customer pull and staffing up to meet some pretty big engagements with customers. So, probably another quarter and then flattening out from there.

Operator

The next question is from the line of Ittai Kidron with Oppenheimer.

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

But I was hoping we can dig in into China. I'm glad to see that you're finally seeing a bottom there and hopefully that business picks up in June as you've guided. But can you talk about, when you talk about the sequential growth into the next quarter, if you look at the guidance that you provided, Dean, you're looking at $15 million sequential increase. How much of that is China versus the rest of your CPG business contributing, ballpark?

William A. Priddy

I don't think we want to break it out quite in that much detail, Ittai, but I will say that we're overweight in China in terms of market share particularly as it applies to 3G. So as 3G phones continue ramping in China, we benefit disproportionately, if you will, and as we already said, our 3G revenue in China is already equivalent to our 2G revenue and still growing very rapidly. So I think suffice it to say, of that the amount, you will see 3G in China contribute to our growth nicely in the June quarter.

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Okay. Well, if that being the case, I'm trying to kind of tie up the data points here. You're talking about multiple ramps with different vendors, new programs that you're being called into to which you pointed out that you expect to see upside within the fiscal '13 timeframe, correct me if I'm wrong. Does that mean that we should see an acceleration really of your revenue into the September and December quarters?

William A. Priddy

We can definitely construct the scenario where revenue, except revenue growth, accelerate in the September and December quarters as compared to the June quarter, hence, the significant R&D investment and the investment in test equipment to support this business.

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Okay. Very good. And lastly, on Nokia. It seems that like finally, that customer is below 10%. I'm just trying to get a sense of what's the level of conservatism you've built around that vendor heading into the June quarter. Is the assumption thereof and other sequential decline in revenue?

Robert A. Bruggeworth

Dean, if you don't mind, I'll go ahead and take that. Nokia was significantly less than 10% in the March quarter, Ittai. I think all the way down over the last few quarters, we've taken a conservative stance and they roughly come in line with estimates, with what we thought was going to happen with them. We expected a significant decline in the March quarter, and we saw that. As far as the June quarter, yes we're expecting another decline with them.

Operator

The next question is from the line of Vijay Rakesh with Sterne Agee & Leach.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

It looks like when you look at the -- look at Samsung and you have been the #1 supplier to them for some time now. Do you expect, as you look at this year, do you expect to grow your share there as they bring out new skews to this year?

Robert A. Bruggeworth

Thank you for pointing that out. We believe in calendar year 2011, we were their #1 supplier and based on everything we see today in our current design wins and momentum, we expect to be #1 again in 2012.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

All right. And when we look at 2G and 3G, obviously 3G keeps the volume very nicely for you, but the 2G market is bottoming too. How you see that mix through the year, and would you still be a player in the 2G market if that's the course?

Robert A. Bruggeworth

We expect to remain a player in 2G. Clearly, there are many benefits to that, but as far as what we think the mix is going to look like, over the next few quarters, we do believe our business will go to about 75% 3G versus 2G. But we still have products scheduled to release later this year to remain competitive in the 2G market.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Okay. And lastly -- last question here, when you look at the gross margin, obviously, nice rebound there. How do you -- can you clear the roadmap on how do you -- how you see that obviously, to get dunk in December kind of coming back now. How do you see that through the year?

William A. Priddy

We think the gross margin is very much a revenue base type of model. As we pointed out before, we haven't installed any [indiscernible] wafer fabs or anything like that. If anything, our overhead structure is actually a little bit leaner than been -- historical standards. So as utilization begins to pick up and also as mix improves to 3G/4G products and also to the switch-based products and we see a return to growth in MPG, I think that the wind is very much at our backs in terms of ability to expand margins, really dependent on the revenue growth. Get the revenue and the margins will follow.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

So somewhere in the low 40s in a couple of quarters or in the high 30s. Is that feasible?

William A. Priddy

Well, we have a target model of somewhere in the low 40s. But I think achieving that in the next couple of quarters might be a little bit of a stretch, but nonetheless, as revenue expands, we can continue expanding our gross margin and converging on our targets.

Operator

The next question is from the line of Parag Agarwal with UBS.

Parag Agarwal - UBS Investment Bank, Research Division

First of all, the rectification of customers exiting this year, how -- I mean, how many major customers will be 10% of those do you expect to have? And as we go forward into the year, what would be the key drivers of revenue in the sense that if you could [indiscernible] that would be great.

William A. Priddy

I tell you, you were really breaking up. I don't think -- I don't know that we want to forecast our number of 10% customers or not because it really just tips our hand as to where we have significant design wins and where we're going to be growing. So suffice it to say, Samsung is going to remain clearly in that spot and it is a very real possibility to add at least one and possibly another as well, but not going to predict that one and sorry, about the second part of the question?

Parag Agarwal - UBS Investment Bank, Research Division

Yes. So basically, if you were to rank order the key revenue drivers heading into the remainder of the year, I mean, which -- from which particular business or product of customers do you expect the most upside?

Robert A. Bruggeworth

Yes. I think we'll rather not talk about customers for the various reasons Dean talked about. But from a revenue growth in CPG, we're clearly expecting the growth to come from PowerSmart, Phenom and our switch-based products that we've been talking about, that being switches and some of the antenna control solutions. And all 3 of them, we expect significant growth. And then in MPG, we've talked about the 3 areas that we're looking at but clearly in WiFi, we're expecting to be able grow our business significantly this fiscal year, coupled with growth of about 50% in our gallium nitrite business as well. So that's a couple of the drivers in MPG. And the other area at MPG that we're looking at is in some of the high-frequency area that we're working on for backhaul, the chipsets that we're releasing there.

Parag Agarwal - UBS Investment Bank, Research Division

Okay. Secondly, on the China market, if you could give some color on the type of engagements you're having in the sense that within China, are you engaged with the Tier 1 OEMs like Huawei and ZTE and also with the local Chinese vendors? So if you could give some color as to what is the degree of engagement between the various tiers of customers?

Steven E. Creviston

Sure. This is Eric. We have very broad engagements and have for many years there. We are a leading supplier to Huawei and ZTE today across most of their business segments. And that applies both in 3G and CPG. And in the handset side, we're also, of course, widely represented across all the white-box manufacturers as well the reference design customers, and again, applying to all tiers. So our business in China is very broad. We have R&D. We have product development in China, in Shanghai, which we use to bring local variants to that market. That's really helped us in that area, so that's speaking for the CPG side. I think, Norm will probably want to speak to the MPG as well.

Norman Hilgendorf

Yes. On the MPG front, we've been very focused there for a number of years. We actually installed local support there for Huawei and ZTE in their China office areas 10 years ago. So we've been clearly targeting that area and have been growing right along with them for many years.

Operator

The next question is from the line of Blaine Carroll with Avian Securities.

Blaine R. Carroll - Avian Securities, LLC, Research Division

I guess for Bob or Eric, could you talk about sort of the expectations in the market for the Galaxy S III platform. I think the S II was originally sole-sourced when the platform came out, and sort of the rhetoric out there seems to be that the Galaxy S III will be dual-sourced. I'm just wondering what your opinion is on that. And how well positioned you would be there with Samsung? And then Bob, I think we chatted about this over in Barcelona, but when do you start to get nervous about Samsung as a percentage of sales? We sort of had this situation with Nokia in the past. And I'm just wondering if -- it's great to be hooked up with Samsung. But do you start to get nervous as they become too much of a percent of sales? And a couple of follow-ons for Dean if I could.

Robert A. Bruggeworth

I'll make a couple of comments about Samsung and Eric will add a little color. But we do not comment about our customers' sourcing strategies. So we're not going to be able to give you too much color there as far as what's going on in any of that Galaxy phones. And as you know, they caught on. They got a good name in Galaxy, and there's all different -- Galaxy this, Galaxy that. But we're well represented across the platform as we -- as their smartphones. And I think we're going to do extremely well. But to get in to say what their strategy is with any given handset, we're not going to get into that. As far as when we were worried about Samsung is when our business starts to decline with them, we think they're doing extremely well, and we're looking to grow. And when you and I did talk, we talked about when Nokia was 65%, 70% of our business, they're nowhere near that size of our current products. And what's more important, I think, Blaine, is the investments that we are making are continuing to diversify our business and continue to gain share where we're not. We spoke earlier about the work that we've been doing with Qualcomm to again, increase our exposure there and clearly, there are smartphone manufacturers that we have not reached our target share and that's also where we're investing. So I would say from that standpoint, we think the percentage will come down as we continue to execute on our customer diversification and grow our business within CPG. And then MPG returns to growth as we talked about our 3 growth drivers there being on the infrastructure side, WiFi and the GaN power business. That's what's going to drive Samsung's percentage down while we're still growing there.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Okay. Fair enough. And then, Bob, you mentioned Qualcomm, that kind of spooked the market last week when you're talking about issues with the 28-nanometer and capacity constraints there. Do you or Eric have any sort of opinion on that? And then, Dean, just 2 quick follow ups for you. On the gross margins, is there a way of looking at what the contribution margin is as your revenue starts to grow, and then what should we use for a tax rate in fiscal '13?

Robert A. Bruggeworth

Well, I think I'll go ahead, and let Eric talk a little bit about Qualcomm, and I guess your concern is their concerns about being able to keep up with demand and is it going to impact our business. Is that what you would like us to address?

Blayne Curtis - Barclays Capital, Research Division

Yes. Yes, please.

Steven E. Creviston

Sure. As we've already talked about, Qualcomm is a growing part of our business, and we're very well aligned with them on new platforms. Having said that though, I think their announcement about shortages on 28-nanometer and so forth, for the most part, is planned into our customers’ plans by now. I'm sure it had effects in terms of grant timing of various platforms and so forth. We're broadly represented, of course, across many, many smartphone platforms, and believe that for most part, these constraints are already planned in.

William A. Priddy

Yes. In terms of the contribution margin on our products, it depends a bit on mix of the products whether they're in-sourced or outsourced. I think the baseline though is going to be something around the 50% range. And you could definitely see something higher than that especially as the gallium arsenide base parts that we manufacture our own fabs are ramping as well. Regarding the tax rate, depending on the mix of where profits are recognized, you could see tax rates as low as say, the 15% maybe slightly below range up to as high as maybe 20%, somewhere in the 15% to 20% range.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Okay. So we should put 18% into our models, Dean, somewhere around that?

William A. Priddy

I think it'd be safe.

Operator

The next question is from the line of Aalok Shah with D.A. Davidson & Co.

Aalok K. Shah - D.A. Davidson & Co., Research Division

Dean, a couple of quick questions, housekeeping. I know you've already said this a couple of times, but 10% customers in the quarter were Samsung and someone else?

William A. Priddy

Samsung and Samsung. Just one.

Robert A. Bruggeworth

Just one.

Aalok K. Shah - D.A. Davidson & Co., Research Division

Okay, perfect. And then in terms of how we should be thinking about the revenue and the gross margin, if mix stays relatively where it's at are right now, is there a revenue level that you think we should start to think about to get towards the 40% gross margin number?

William A. Priddy

Yes. There is definitely a revenue number where we can achieve 40%. I think for now though, we're going to keep our head down and execute on growing the business sequentially throughout calendar year '12 and expanding margins throughout calendar year '12 and see how quickly we can converge.

Aalok K. Shah - D.A. Davidson & Co., Research Division

Okay. And Eric, just a quick one for you, in terms of the Chinese market, we keep hearing about the 2G market being very price competitive. And I know you guys are talking more about 3G right now trying to ramp for you guys. But the 2G market is equally important still, I would bet and just curious to getting comments about the pricing pressure on that environment right now.

Steven E. Creviston

Sure. The China market is very exciting. There are a lot of competition and pricing pressure there for sure, but it definitely keeps us sharp, keeps our focus on cost reduction, continues to drive our technologies, which we apply across our product lines for new low-cost technologies and assembly in semiconductors and so forth. So it's a great market for us. Now we think the 3G handset market in China was roughly 20% of that market in terms of units. But as we said, we got half of our revenues from that 20%. So that indicates 2 things, one is, as we've talked about the dollar content there is definitely higher 3 to 4x higher in a 3G handset versus 2G, and our share is higher in 3G than it is in 2G today. So we're going to continue to see, as that growth of 3G accelerates, we're going to continue to see a disproportionate business. But as; we said earlier, we have no intention of exiting 2G. We have another whole new, even lower cost product family coming out next quarter -- or excuse me, during this quarter, it will be released and sampled and ramping new production middle of the year. So we're going to continue to stay in and earn our place in that market.

Aalok K. Shah - D.A. Davidson & Co., Research Division

And Eric, just to followup on that, have you seen kind of major pricing pressure yet in the 3G space in China? Or is that still kind of more just such a nascent market that maybe we won't see it for a couple more quarters?

Steven E. Creviston

Yes. It's nothing at all like 2G today, many fewer competitors and also a very different kind of go-to-market strategy for the participants there, both at the component level and at the handset level, and so it's much more like the global 3G marketplace.

Operator

The next question is from the line of Vivek Arya with Bank of America Merrill Lynch.

Vivek Arya - BofA Merrill Lynch, Research Division

Just a clarification, did your Samsung revenues grow sequentially, and by how much?

William A. Priddy

Yes. Samsung did grow sequentially and we do not disclose by how much.

Vivek Arya - BofA Merrill Lynch, Research Division

Got it. And is that exposure across -- I think you mentioned that you are the lead RF vendor there. Is that across smartphones or also across their feature phones and voice-only phones? Is it across all categories or concentrated in any one?

Steven E. Creviston

Sure. This is Eric. It's across the full -- all their tiers and segments of their portfolio and across all basebands. And in fact, when Bob mentioned in his comments about some of the platforms where we're winning the entire semiconductor content, all power suppliers for 2G, 3G and all switching, several of those are in that sort of entry or featured category, the high-volume category of Samsung's portfolio. So we're really -- Samsung is really looking to us to help simplify the front end and do more consolidation, more complete reference design of the entire RF front end content there.

Vivek Arya - BofA Merrill Lynch, Research Division

Got it. And just one last one, can you talk about the factor utilization? Where is it right now? Where can it trend over the next several quarters? And how it ties to how we should think about gross margins?

Steven E. Creviston

Factor utilization did come down sequentially, and in the June quarter, we expect it to remain relatively flattish with the March quarter. Suffice it to say, we have ample capacity to significantly grow our gallium arsenide base revenue from here. And I'm not sure that disclosing an actual utilization rate would be beneficial for this call.

Robert A. Bruggeworth

As an example, the next-generation GSM PA that both Eric and I have spoke about have a reduced die size, so we'll be able to produce more parts with the same number of wafers and lower our costs. So let's just keep on that in mind as well as an example.

Vivek Arya - BofA Merrill Lynch, Research Division

Got it. And just one last one, sorry, if I may squeeze that in. What is your LTE content? I understand volumes are probably low right now, but how do you see LTE content versus 3G content? And what do you think your market share is out of all the LTE designs that are being done by vendors right now?

Steven E. Creviston

Yes. LTE is a very exciting market this year. I model still show that, that market will grow from around 20 million units last year to over 100 million units this year, so tremendous growth. And we're seeing very, very high-volume handsets that are the running in the $8 worth of total RF content. In some cases, we capture majority of that. In some cases, we don't. But overall, especially on the LTE portion of these handsets, we believe we're winning more than the others are. So we think our share will be accretive there as we ramp into LTE.

Operator

The next question is from the line of Dale Pfau with Cantor Fitzgerald.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

For my housekeeping, could you tell me, on PowerSmart, exactly how many different basebands you are now qualified with and how many customers you're shipping the PowerSmart into? And then I've got a follow-up.

Steven E. Creviston

So in production with 2 baseband suppliers to date. To be honest, I'm not even sure of the total count of end customers today as we proliferated through China and so forth, but more than 10 or 12.

Robert A. Bruggeworth

Yes, we’re in the double digits.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Okay. And then last year, when we were talking about PowerSmart and Phenom in the various ramps, as PowerSmart began to ramp, but Phenom really hadn't taken off yet. You said that the TAM on Phenom was even larger. Where are we in that ramp? Has Phenom grown to the same size as PowerSmart yet? And could you talk about the slopes of those ramp lines?

Steven E. Creviston

Yes. Your recollection is exactly correct. And Phenom is growing sequentially faster than PowerSmart today, and that is due probably to the larger total opportunity although it is not caught up. So we still have several quarters before it will catch PowerSmart in terms of total revenue level. We do expect that in the long-term it will surpass PowerSmart.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Okay. And could you just give me a rough percentage of your CPG revenues that were for China? And then if I could squeeze out of you what percentage of CPG were PowerSmart and Phenom combined?

William A. Priddy

Yes. We had this broken out in multiple ways as a percent CPG revenue and as a percent of total revenue, Dale. I think in China, you also have to ask, does it include the top-tier like ZTE and Huawei as well as what we would call other China. -- Yes. China revenue in total is close to 25%, maybe a little under 25% of revenue. And when you include the top-tier manufacturers, the Huawei, ZTE and then all the other Chinese manufacturers as well.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Is that total company?

William A. Priddy

That's total company.

Robert A. Bruggeworth

Total company.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Good, okay. And I'm very excited about what you're doing in MPG, I think that's interesting. Where are we right now on WiFi, wireless infrastructure and power GaN as a percentage of MPG total revenue?

Norman Hilgendorf

Sure. I can give you a little bit of breakdown there. This is Norm. The -- for the WiFi business, in any given quarter, that tends to run between 15% and 25% of MPG sales overall. We're seeing a lot of the activity today in the 802.11ac. And so we've got some key projects that should be ramping towards the tail end of this year. So I'd look for strong growth in WiFi, so trending towards a higher percentage as the year goes on. In wireless infrastructure, this tends to run from 10% to 20% of MPG overall, and right now, we're probably in the low range of that as wireless infrastructure has been a bit soft the last couple of quarters, especially from the low CapEx spending that we've seen with the number of carriers around the world. And then the third category, GaN or gallium nitride, that, we expect that to be in the 5% to 10% of total MPG revenue for FY '13.

Operator

The next question is from the line of with Suji De Silva with ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC, Research Division

At Samsung, can you talk about how well you're represented on their in-house baseband versus the merchant basebands where you have product now?

Steven E. Creviston

This is Eric. And as I've said, we're broadly represented against all basebands, that does include their internal baseband. As they look to LTE and of course, they're working with their current supply partners in the power suppliers they know, they're using the same solutions on their internal.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Okay. And then a [indiscernible] just a follow-up there. What are you seeing in terms of demand outlook and recovery for that, that end market in the second half toward the second half of the year?

William A. Priddy

Yes. Some of our largest customers tell us to expect a strong year in 2012, but this March quarter it's still been rather soft. We hear that there's pent up demand with carrier OpEx, although, I saw Verizon report lower CapEx in Q1 and AT&T reported today some increase in CapEx spending. So it's still a little bit of a mixed bag on what we see. But we do think there's pent-up demand in the second half of the calendar year, should bode well for wireless infrastructure. Longer term, we're really expecting that the small cell buildout starts to drive more volume, which is really good for us as there's a lot more volume and more transceivers to support when you look out into 2013 and 2014. So there's a lot of activity with many OEMs and manufacturers for a small cell infrastructure.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Okay. Last question on low-end smartphones. Can you give us a sense how big you think that market is -- the unit market is exiting the year and what your share can be there?

Robert A. Bruggeworth

Sure. As I said, we think about 20% of the handsets produced in China would fall in that category today, so it's running from around 150 million unit level we think growing to about 250 million units a year.

Sujeeva De Silva - ThinkEquity LLC, Research Division

And your share?

Robert A. Bruggeworth

We said it's north of our average share. It's very healthy, we believe.

Operator

The next question is from the line of Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

Just a question on the China business that you broke out, did that come in better than expected in the March quarter? And then when you're looking -- your guidance through -- for June implies about 10% growth in CPG, can you maybe breakout what's driving that growth, seems a bit better than the market? And is China part of that?

Robert A. Bruggeworth

As far as China goes, met expectations in the March quarter came in pretty much in line with what we expected. As far as going forward, driving that growth is going to be continued market share gains in 3G. We talked about 3G entry that Eric just spoke about in China. That is driving some of our growth in China and continuing to get share in our switch and signal conditioning product line. We're expecting PowerSmart and Phenom also to grow.

Blayne Curtis - Barclays Capital, Research Division

Got you. And then maybe a question for Eric. The diversity switch you talked about being combined with the antenna switch modules, as you looked for it at designs going forward here, is it kind of a package sale or are there -- do you still see discrete opportunities for that product that you're selling today?

Steven E. Creviston

In many cases, it is in the exact same package, so it is a package sell. It's one place that does both, but there is also a lot of discrete implementation still out there as well, so it's a mix of both. There's no question that a key drive and trend in the industry for the smartphones is to find ways to make the design more compact while supporting even more and more bands, right? So we're seeing much higher levels of integration and especially in switches and power suppliers.

Blayne Curtis - Barclays Capital, Research Division

I got you. Maybe I phrased it wrong, but I guess you did find a big opportunity for that diversity switch, but does that now correlate that you have to also win the antenna switch module?

Steven E. Creviston

So in some cases, not. Where they're discretely implemented, you can still get the diversity module. In cases, where they're within one package, then they do come together as a single component, so you win both at the same time.

Operator

The next question is from the line of Jaeson Schmidt with Craig-Hallum.

Jaeson Schmidt - Craig-Hallum Capital Group LLC, Research Division

Just 2 quick ones from me. It seems like you guys have a pretty good visibility into June. Just wondering what your backlog coverage to your guide is? And then secondly, if there is any CapEx guidance for fiscal '13, you guys have in your adds [ph] ?

Robert A. Bruggeworth

I think the question was backlog coverage for what we gave as guidance and the second part was CapEx guidance for the year?

William A. Priddy

Yes. As far as our backlog coverage, we're about where we were at this time last quarter in terms of percentage booked. And in terms of CapEx guidance for the year, I think we're looking at something in the 4% to 5% sales range. I think you will continue to see depreciation come down in fiscal year '13 compared to fiscal year '12 because capital isn't being added as quickly as capital is rolling off. Very targeted capital expenditures as in the switch base product testers, very, very quick payback on what we're investing in.

Operator

There are no further questions at this time. I will turn it back over to management for any closing remarks.

Robert A. Bruggeworth

Thank you very much for joining us tonight. In the June quarter, we are forecasting sequential growth and improved profitability supported by increasing sales of our 3G/4G components and a resumption of growth among handset manufacturers in China. Beyond June, we expect continued sequential growth and improving profitability, driven by continuing alignment with our industry-leading customers and channel partners and robust design activity related to our strategic investments for growth. Thank you, and good night.

Operator

Ladies and gentlemen, this does conclude the conference call. If you would like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030, and enter the access code of 4529520. Thank you for your participation. You may now disconnect.

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