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TriQuint Semiconductor Inc. (NASDAQ:TQNT)

Q4 2007 Earnings Call

February 20, 2008 5:00 pm ET

Executives

Steve Buhaly - VP-Finance, Secretary and CFO

Ralph Quinsey - President and CEO

Analysts

Amit Kapur - Piper Jaffray

Pierre Maccagno - Needham & Company

Jeff Kvaal - Lehman Brothers

Larrisa Talisha - JPMorgan

Pete Schleider - Peninsula Capital

Neil Wagner - Stephens Incorporated

Ed Snyder - Charter Equity Research

Drew Bark - Century Hill Partners

Operator

Good afternoon my name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the TriQuint Semiconductor Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Buhaly, you may begin your conference.

Steve Buhaly

Thank you. Good afternoon and welcome to our fourth quarter 2007 conference call. Intention of this call is to comply with Reg FD and to discuss matters the might effect TriQuint's business in the future. Forward-looking statements, such as about TriQuint's projected revenues, growth rates, gross margins, operating expenses, operating results, and earnings per share and risks and uncertainties.

Results could differ materially based on various factors, including TriQuint's performance, demand for its products, ability to develop new products, improve yields, maintain product pricing, reduce costs and win customers, the results of its independent auditors quarterly review and annual audit, and the market conditions. In addition, historical information should not be considered an indicator of future performance.

This presentation includes non-GAAP financial measures which exclude equity compensation charges and charges for in cost research and development resulting from our acquisition of Peak Devices. These non-GAAP measures are provided to enhance the users' overall understanding of our core operating performance.

A full reconciliation of these non-GAAP measures can be found in our press release. Additional considerations and important risk factors are described in TriQuint's reports on Form 10-K and 10-Q and other filings with the SEC. Any forward-looking statements made in this call are based on expectations as of today and TriQuint cannot provide any assurance that future results will meet expectations.

Ralph will now present an overview of the quarter.

Ralph Quinsey

Thank you, Steve. TriQuint finished 2007 strong with solid Q4 results. This was a record revenue year for TriQuint, exceeding our previous high point in the year 2000. We again achieved revenue gains across all of our markets and improved gross margin performance 450 basis point sequentially to 36.7%.

We generated GAAP earnings of $0.10 and non-GAAP earnings of $0.11, both just above our previous guidance. We closed the year increasing our cash and investments by $29 million, yielding a cash and investment total of approximately $204 million. Steve will provide details of our GAAP and non-GAAP financial performance during his comments.

TriQuint continues to penetrate the high-volume mobile phone market and expand our leadership position in the military and networks market. Our handset strategy leverages our technology portfolio the broadest in the industry providing our customers with better performance and lower cost in their applications.

As the world transitions from mobile voice to mobile data, TriQuint supplies the market with some of the most highly integrated front-end modules. This reduces our customers' time to market and minimizes the broad space required for the RF section in the phone.

As announced at the recent mobile phone conference at Barcelona, our second generation Quantum and third generation Premium modules provide an elegant 3G solution in a flexible space saving form factor. Using the TriQuint solution simplifies the design of the RF section in the phone, enabling faster time to market for our customers.

3G phones are the fastest growing portion of the market today, as the world upgrades from 2G phones to 3G phones, our dollar content is increasing. I expect to continue to grow our 3G business in 2008 at a very fast pace. The mobile data market includes laptop computers and other mobile appliances wirelessly enable laptops are now our second largest RF market estimated to be approximately 300 million in 2008.

Similar to handset, the RF content is increasing due to the popularity of new standards that provide greater bandwidth, higher data rates, and better quality of service. This transition to 802.11n is well underway and TriQuint recently announced a highly integrated module that represents our strategy to integrate component content into a module solution. This platform product uses TriQuint technology to fully integrate the LNAs, amplifier and switches for a dual-band MIMO application on to a single gallium arsenide die. This chip is the core of our module solution.

Three of these front-end modules provide a complete RF front-end for 3/3 MIMO architecture. Executing this product roadmap raises TriQuint’s content in laptop from less a dollar to over $4. I expect significant near term revenue growth for this product. Together 3G and wireless LAN represent the two largest growth opportunities for TriQuint in 2008.

New product revenue defined as revenue from products introduced within the previous two years returned to approximately 50% in the quarter. It was another record quarter for new product revenue in the absolute dollar terms.

Handset revenues increased approximately 13% in the fourth quarter of 2007, as compared to Q4 of 2006. Our handset gross margins improved sequentially due to volume based efficiency gains and improved yields. Transmit module revenues grew 44% over Q4, 2006, CDMA transmit modules grew 10%, and GSM transmit modules grew 59%. Our 3G revenue grew 59% over Q4, 2006.

We recently announced eight exciting new handset products. These include an extension of our low-cost family to include two new products for the ultra low cost markets. The first is the low costs solution for North America, this addition to our Quantum module family is to complete RF front-end for the GSM/GPRS dual-band solution.

The second is a low cost CDMA solution for emerging markets around the world. This TRITIUM module is the complete transmit chain for a single band CDMA phone. Both of these modules are designed to support popular low cost radio architectures. The lower end of the handset market is sizable and continues to grow.

Our products at the lower end market have been some of our most successful. TriQuint remains committed to this market as a driver for volume and cost effective design. We also introduced our Hedron II to EDGE solutions which are 50% smaller than the previous generation. These modules are offered for polar and linear architectures. By supplying the smaller solutions available for EDGE, we are optimizing board space and helping our customers design sleeker phones with more room for features.

Lastly, our recently announced QUANTUM II and TRITIUM III modules together create a complete Quad-Band, Tri-Band solution for full featured 3G phones. These media-intensive phones require an extremely complicated RF section to achieve Quad-Band Tri-Band performance. As customers strive to improve their phone development time, this solution for highly integrated modules simplifies the task.

Using our solution customers can avoid re-engineering the complex matching of the RF section with each new platform or phone launch. TriQuint has integrated that complexity within our modules. This allows for faster time to market for our customers. Our 3G solutions are also extremely space efficient, allowing for smaller phone design and more space available for added phone features.

This is a winning strategy for our customers and a financial win for the company's new products to have improved gross margin performance in the handset market. We have largely completed the qualification stage and our in pre-production for these products as several customers. I expect to see a significant ramp in volume during the second half of 2008.

In our networking markets, we are increasing R&D investments and expanding our ability to serve the growing needs of these applications. Wireless connectivity is an exploding opportunity across the many front segments of this space. Our wireless LAN revenue was up a 143% over Q4 of 2006, driven by high demand for wireless laptop connectivity. We recently announced a major design win of our 802.11n platform solution. I expect this product which is now shipping and others launching in 2008 to accelerate our growth in the wireless LAN market.

Revenue for point-to-point radio products was up 20% in Q4, and as compared with the same quarter last year. GPS products were up 173% in the quarter, as compared to Q4, 2006. Early in 2007, TriQuint shifted our focus to increasing our standard product portfolio. We have demonstrated our ability to be a reliable standard product supplier with sustained investment in new high performance packaged product. We are increasing the output of our new product development engine, leveraging our broad technology portfolio.

We are beginning to see the benefit of that investment as we gain traction in the multi-market space for standard products. Our strategy simplifying RF is all about bringing leading technology, ease of design, and superior value to our customers. This is creating solid financial performance for TriQuint.

Our defense related revenues were up 10% sequentially and approximately flat to a very strong Q4 of 2006. For the year, military revenue was up 7% from the prior year. TriQuint has a terrific engineering capability focused on the military market and leadership technology spending compound semiconductors, BAW and SAW filters.

Our team of trusted engineers are successfully partnering with industry leaders creating critical next generation solutions. We are shifting our strategy in military to emulate our successful module efforts in the commercial market. This involves creating complete RF solutions as high performance, cost-effective modules for military applications. For example, module integration can increase the functionality of the active component in a high density phased-array antenna. This will provide additional data to process, enabling radar system to significantly improve overall acuity.

In addition, for the same reason that modules make sense in cellular phones today, they make sense in military radios. These radios must be multi-mode and multi-band to allow productivity between a variety of separate communication systems. The RF complexity of these radios is immense and TriQuint is well positioned to provide simplified RF modules for these complex problems. These are the types of military application TriQuint is targeting.

In just a moment, Steve will provide specific guidance for Q1 and full year guidance for 2008. Prior to that, I would like to overview both 2007 and 2008 for investors.

Last year was a record revenue year for company. We are penetrating high-volume markets and leveraging our technology in high-performance markets. This is creating a scale we need for sustainability and the financial rewards and performance driven products bring to the company.

Our non-GAAP gross margin for Q4 was over 37%. This is evident of the potential of the company and in line with our strategic goal. I am confident 2008 will be another record revenue year with solid improvements in margin structure, operating income, and earnings. We have good visibility into several large opportunities ramping in Q2 and beyond. That said, I expect revenue in the first quarter to be down sequentially. I encourage investors to look closely at both our Q1 and annual guidance to fully understand the discontinuity.

Our Q1 revenue will be impacted by general seasonality and inventory burn down at multiple customers. It is typical for some portions of our business to experience a 10% to 15% sequentially decline from Q4 to Q1. This is due to increased demand for the holiday season, followed by some level of adjustment in post-selling season. We are seeing normal seasonality in Q1.

Additionally, we expect inventory burn down from some specific customers for independent reasons. In one case, this burn down is due to an error in Q4 ordering ,rates and another is due to a new policy to reduce waste of material on hand. I do not believe the impact of these issues will persist beyond Q1, nor do I believe they represent a general softness in our market. On the contrary, I expect solid growth in Q2 accelerating in the second half of the year. I believe we have good visibility of these issues.

While Q1 will be a disappointing revenue quarter, I am committed to the successful ramp of these large programs in support a Q2 and beyond. We intent to maintain our spending level in support of these important opportunities.

Now, Steve will provide the results for the fourth quarter of 2007 and our guidance for Q1 and full year 2008. Steve?

Steve Buhaly

Thank you, Ralph. For the fourth quarter of 2007, we reported revenue of $128.5 million, an increase of 12% over the fourth quarter of 2006, and up 5% sequentially. Please refer to the supplemental data posted on the investor section of our website for a detailed breakdown of our revenue by market.

For the quarter, our revenue to end markets was as follows. Handsets 53%, networks 36%, and military 11%. By geographic regions, our revenue split was Asia 65%, Americas 26%, and Europe 9%.

Our revenue for handset was broken down in to the following standards; GSM/GPRS, 47%; CDMA, 30%; WCDMA/EDGE/other, 23%. For the sixth quarter in a row Samsung contributed more than 10% of our revenue. There were no other customers with more 10% of our revenue during the quarter.

Our book-to-bill ratio for the quarter was 0.95 to 1. Net income was $13.8 million or $0.10 per diluted share for the fourth quarter of 2007, up from $0.04 per diluted share in Q4 of 2006 and $0.01 in the third quarter of 2007.

Excluding equity compensation expense of $2.3 million, net income was $16.1 million or $0.11 per diluted share. Excluding equity compensation of $2 million in Q4 of 2006 and $2.3 million in Q3 of 2007, and the in-process research and development charge of $7.6 million due to the acquisition of the PeakDevices, diluted earnings per share was $0.06 and $0.08 for each period respectively.

Our gross margin for the fourth quarter of 2007 was 36.7% up from 29.4% in the fourth quarter of 2006 and 32.2% in the third quarter of 2007. Capacity utilization in Oregon of 85%, better yields, and favorable product mix drove the sequential improvement. Fourth quarter 2007 gross margin excluding equity compensation expense was 37.5%.

Operating expenses were $35.4 million for the fourth quarter of 2007, an increase of approximately $8.4 million from the fourth quarter of 2006, and a decrease of $4.1 million from the third quarter of 2007. Excluding the in-process research and development charge of $7.6 million in the third quarter of 2007, operating expenses increased $3.5 million sequentially. The primarily driver of increased sequential expense was R&D spending.

Fourth quarter operating expenses excluding equity compensation expense were $34.2 million or 26.6% of revenue, slightly above our long-term business model. We recorded net interest income of approximately $2.3 million and net tax expense of approximately $400,000 in the fourth quarter of 2007.

Cash flow from operations was $29 million in the fourth quarter of 2007, due primarily to solid operating results. As a result, our cash balance grew by $28.8 million to $203.5 million at the end of the quarter. Capital expenditures of $8.4 million slightly exceeded depreciation and amortization expense of $7.3 million. We are actively seeking accretive M&A opportunities, but have not elected to pursue a share buyback at this time.

During the quarter, net inventory decreased $1.2 million to $67.2 million. Inventory turns were $4.8 in the fourth quarter of 2007 compared to $4.9 in the third quarter of 2007, calculated using the ending inventory. A complete reconciliation of GAAP and non-GAAP results is available on our press release and in the investor section of our website at www.triquint.com.

We estimate that Q1, 2008 revenue will be $110 million to $115 million. Seasonality and inventory reductions of some customers are expected to significantly affect revenue primarily in the handset business.

First quarter earnings are expected to range between breakeven and $0.02 per diluted share. Excluding estimated equity compensation expense of approximately $2.4 million, we expect earnings to range between $0.2 and $0.4 per diluted shares.

As of today, we are approximately 89% booked for the first quarter. For all of 2008, we expect revenue of between $540 million and $580 million, an increase of 18% over 2007 results. Revenue growth will be driven by strong wireless LAN opportunities in our network business and share growth in our handset business. Earnings per diluted share are expected to range between $0.30 and $0.40. Non-GAAP earnings are expected to be between $0.35 and $0.45, an increase of 43% over 2007's results.

Our next conference call, the Q1, 2008 earning's release is scheduled for Wednesday April 23, 2008 at 2:00 p.m. Pacific time. We will also continue our virtual visit program, which is a biweekly introductory conference call for investors who are new to TriQuint. Please contact Heidi Flannery, investor relations consultant for TriQuint, if you'd like to participate in any of those events.

I will now turn back to Ralph for closing comments prior to welcoming your questions.

Ralph Quinsey

Thanks, Steve. I’m excited about 2008 and I am seeing solid demand for our products this year. In fact, our two largest markets, cellular phones and wireless LAN are growing in unit demand with expanding RF content. The efforts of the TriQuint team are clearly getting results. We have leveraged our capabilities and technology to product compelling wireless LAN in 3G products, some of the most integrated, smallest and highest performing solutions available. We are ramping output for these products to meet demand for major new programs in 2008.

Our strategy of replacing components with highly integrated RF front-end modules across all of our markets is working and will accelerate in 2008. TriQuint is unique in the industry; it's the only high volume supplier of both active and passive devices. This is critical for high performance, cost effective module integration. We are investing in R&D to fuel our in-product development engine enabling us to retain our product and technology leadership. These are exciting times; TriQuint is well positioned to benefit from the wireless explosion.

I anticipate our successful 2008 with emphasis on the following highlights. Growing revenue in the networks and military markets, first with wireless LAN module integrations followed by exciting new defense opportunities. Solid revenue growth from 3G QUANTUM and TRITIUM modules for the handset market. Focused and discipline R&D spending, expanding our technology edge and product strength, and steady execution of our road map to margin expansion.

We appreciate your interest in TriQuint. Now we'll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Amit Kapur from Piper Jaffray.

Amit Kapur - Piper Jaffray

Great- thanks a lot guys. A couple of questions to begin with: obviously, a strong gross margin performance during Q4. Can you maybe talk about how we should think of gross margins in Q1 and what are some of the main factors that are impacting some of the change given where the EPS segment is?

Ralph Quinsey

Sure I will take that. I think that Q4 is a great example of what we can do when we run some volume through the factory and we get our utilization up. We also had some pretty good yield performance in the fourth quarter. Clearly Q1 margin percentage is going to regress based on loading in the fab with the revenues of a $1.10 to $1.15 range. I would expect it in the low 30s. But for the full year, I'd expect to make strong progress towards our strategic model of non-GAAP gross margins of 40%.

Amit Kapur - Piper Jaffray

Great. And then kind of related to that: What is the expected product mix in Q1 versus Q4 and then what kind of products mix trends are you expecting for the (inaudible)?

Ralph Quinsey

Product mix, if you look at its trending over the last several quarters, has stayed fairly constant. And again I expect it to stay fairly constant. I think you will see the impact of seasonality and inventory adjustments that I spoke of largely in the handset space. And as I mentioned you will see disproportionate growth in the networking space, particularly wireless LAN. So the mix should shift slightly.

Amit Kapur - Piper Jaffray

Okay. And may be one final question before turning it over. In terms of your comment I am taking 89% booked for the quarter. Can you remind us again what level that normally ranges or even what it was last quarter?

Steve Buhaly

Yeah, we are pretty much in the normal range. I think at this time a quarter ago we were at 87%. So this is pretty typical and obviously played a role in setting the guidance that we did.

Amit Kapur - Piper Jaffray

Great, thanks a lot guys.

Operator

Your next question comes from the line of Pierre Maccagno with Needham & Company.

Pierre Maccagno - Needham & Company

Congratulations on the quarter, Steve and Ralph.

Ralph Quinsey

Thanks Pierre.

Pierre Maccagno - Needham & Company

So, could you explain a little bit more on the wireless LAN business; this is going to be mostly for DCs, correct? Is it with one customer or several customers that you are looking at expanding your business there?

Ralph Quinsey

You're correct, Pierre, it is for laptop computers. I estimate that that opportunity, well that opportunity now it is about 300 million and growing. It is for multiple customers that we have products, but it's dominated by one large customer.

Pierre Maccagno - Needham & Company

And are you consider their second source or are you equal to your competitor?

Ralph Quinsey

You know it's really hard for me to tell you what's in the minds of our customers. I would only provide the color that we have a significant part of the business. And so it would lead me to believe that we have a good share position, but again it's up to my customers to decide who's the first source, who is the second source, and I guess that we have a significant opportunity and we believe a large opportunity- it would lead me to believe that we are a major supplier.

Pierre Maccagno - Needham & Company

Is this for design when, with the latest microprocessor?

Ralph Quinsey

It’s a platform product force Pierre. I think that it matches up well with industry-leading products. I think it's a great opportunity for TriQuint. It's for a MIMO solution. As you know, MIMO is in its second generation for most of the suppliers, at least the second generation. And it's a solution where it's a very elegant, highly integrated 6 x 4 module that takes three per laptops. And so if you think about business prior to us becoming a module integrator, our content was less than a $1 per laptop. And we did quite well with that.

As you saw in Q4- really good growth in Q4 based on those older products with content of less than a $1. Now, our content goes up arguably over $4, to maybe about $5 or $6, right. So, there's a significant increase in revenue because of the fact that we are a module integrator. It takes three of these to do the 3 x 3 solution. And like I said, we are shipping that product now.

Steve Buhaly

And we probably should say that the quantities in the first quarter are quite modest from a financial standpoint. They are more in the pre-production (inaudible) that kind of thing, but we expect this opportunity to ramp throughout the year and probably be at its peak in the fourth quarter or may be a year from now.

Pierre Maccagno - Needham & Company

Okay. So the peak is mostly end of the year then?

Steve Buhaly

Yeah, that's our speculation and customer speculation, but it's a pretty good ramp. It really starts to pick-up the pace in the second quarter, but is conceivably a year from peaking.

Pierre Maccagno - Needham & Company

Okay. And here what you're shipping is basically a front-end module, a power amplifier, the filter- the whole solution correct?.

Ralph Quinsey

This is again the wireless LAN solution.

Pierre Maccagno - Needham & Company

Yeah.

Steve Buhaly

Yeah, so that is the LANs, switches, PAs for dual-band MIMO one channel solution, right? It's really three modules for a 3/3, but it integrates all that PA, LANs, switch, some filtering as well.

Pierre Maccagno - Needham & Company

Do you see a little competition coming about here or are you quite unique…

Steve Buhaly

This is the second largest market in the world for RF products, cellular phones being the first. We see lots of competition. I’m confident that TriQuint technology and great engineering from the TriQuint team will allow us to prevail in these markets.

Pierre Maccagno - Needham & Company

And what about wireless LAN in handset, is that something that you are also looking into?

Steve Buhaly

Yes, and if you look at our supplemental data, I have updated how we break that out and we do track now wireless LAN in handset along with wideband CDMA, EDGE, CDMA and GSM. So a relatively small percentage of our overall handset revenue, but certainly becomes a more material part of our business.

Pierre Maccagno - Needham & Company

Okay, my last question. In terms of wireless handset, did you experience any weakness from China?

Steve Buhaly

In general no. In general we saw relative strength across all of the handset business in Q4. We are seeing the specific inventory issues that are going to move into Q1 and amplify seasonality. But I would say Asia in Q4 was fairly healthy for us.

Pierre Maccagno - Needham & Company

And in Q1 do you see any specific, geographic weakness, or is it just…

Steve Buhaly

I think the general as would be expected seasonality, that I think in our space is quite well understood, and then over and above that I see some specific point issues associated with the inventory burn down I talked about. The largest part of that is in the handset space.

Pierre Maccagno - Needham & Company

Well thank you very much.

Steve Buhaly

You bet Pierre.

Operator

Your next question comes from the line of Jeff Kvaal with Lehman Brothers.

Jeff Kvaal - Lehman Brothers

Thanks very much. Ralph, a follow-up there a little bit on the handset side. Are these Tier 1 OEMs that you are referring to in talking about inventory overhang?

Ralph Quinsey

Yes.

Jeff Kvaal - Lehman Brothers

Okay. And it sounds as though you are saying that they are making progress on that overhang at the moment?

Ralph Quinsey

I don't expect the issue to persist beyond Q1.

Jeff Kvaal - Lehman Brothers

Okay. All right. Is it clear at the moment?

Ralph Quinsey

I think we have fairly clear visibility. I think that it will continue to impact through the quarter. I think we're starting to see evidence of it correcting in Q2 and again, just to be clear it is only, it's a "materials on hand" inventory issue of our products that they are adjusting.

Jeff Kvaal - Lehman Brothers

Okay, makes sense. And then Steve perhaps if you could just give us a little bit more sense of how we should expect the OpEx trajectory rates to be through 2008. Thank you.

Steve Buhaly

Yeah sure. I think it's actually a very good point you bring out. We are holding our OpEx in the first quarter fairly leveled with the fourth quarter. We are continuing to invest on the premise of a very strong 2008, where alternatively we could have backed off. We think we really have some terrific opportunities that will produce very good results since we are maintaining our investment levels in the first quarter despite relatively disappointing top line performance in the quarter. For the full year, we are adhering to our strategic model where we intend to spend about 25% OpEx as a percent of revenue, and strive to obtain 40% gross margins. I am not sure we'll quite get there during this year, but we will definitely make progress over 2007.

Jeff Kvaal - Lehman Brothers

Okay. It seems though from your EPS guidance for the year that you are leaving yourself a bit of room there to come up short of the 4% by the fourth quarter?

Steve Buhaly

Yeah. I think we may get there by the end of the year, but we will not get there on average for the full year.

Jeff Kvaal - Lehman Brothers

Okay, all right. Well we'll look for better things and more progress in '09.

Steve Buhaly

Thank you.

Operator

Your next question comes from the line of Chris Danely with JPMorgan.

Larrisa Talisha - JPMorgan

Hi, this is [Larissa Talisha] calling for Chris Danely. I just wanted to see if you could give me some of your thoughts on the relative strength you are seeing in the end markets, and the confidence that you have in your fiscal '08 guidance and where you are seeing that from an end market perspective.

Ralph Quinsey

I feel very good about the full year guidance. As I said we've got good visibility on some large programs, that we are in them largely through the qualification phase into preproduction, in some cases production phases, so I have good visibility and I feel good about '08. As far as the overall market, I understand that there is concern - economic concern in North America, but for the RF space I think it's important for investors to realize, we are seeing expansion of demand based on multi-mode, multi-band phones in the transition from 2G to 3G, the transition from single band wireless LAN to multi-band wireless LAN in the form of 802.11n. This is creating a good lift for RF industry and TriQuint is seeing that and benefiting from that.

Larrisa Talisha - JPMorgan

Okay. And just regarding each of the end markets that you cover, handsets versus networking versus military, where do you see the most growth from in '08?

Ralph Quinsey

So the two primary drivers for growth in '08 plus- there are going to be 3G recently announced products and wireless LAN, 802.11n. I would say 3G opportunities probably edge out wireless LAN. I am also expecting to see better results than we have traditionally done in the military space. The military space moves a little slower and it's a little more difficult to pin-down the exact quarter when things hit, but clearly, the trends are moving out of way and we are amplifying also our opportunities in military by creating the same type of success with module integration in military that we have done in some of our commercial markets.

Larrisa Talisha - JPMorgan

Okay. And then finally to sum on the first quarter, by end market. You said the majority of the seasonality factor and the inventory burn down was in the handset business?

Ralph Quinsey

Yes.

Larrisa Talisha - JPMorgan

How do you compare, what do you see sequentially in that business versus your networking and military?

Steve Buhaly

So, this quarter I would think that handset is going to be challenged sequentially and networks will be closer to even.

Larrisa Talisha - JPMorgan

Okay, and so military?

Ralph Quinsey

Military again closer to the flat. I think both the networks and the military business has some upward lift pulling on it. I think if I understand the phasing of the program correctly, you are going to see that more in Q2, beginning in Q2 and beyond. So, Q1 again seasonally down, certainly amplified by the specific inventory burn down, but Q2 coming back quite strong, and then I expect to see a very strong second half.

Larrisa Talisha - JPMorgan

Okay, thank you.

Ralph Quinsey

You bet.

Operator

Your next question comes from the line of Pete Schleider with Peninsula Capital.

Pete Schleider - Peninsula Capital

Yeah Ralph, that was actually my question, just why you have such confidence for the year given the light quarter we're coming into?

Ralph Quinsey

Great, and I appreciate that Peter and I really encourage investors to take a closer look at the information we’re providing and look at our track record and our guidance. We’ve been fairly accurate over the last couple of years with our guidance. I do have fairly strong visibility on some material programs in the 3G space and in the wireless LAN space, and I feel good about that. Now clearly things can happen in the future, and I caution the fact that, there's things that could happen outside of our control, but right now I feel very good about the programs and I have confidence that our customers are going to be able to execute their plans and be very successful.

Pete Schleider - Peninsula Capital

Sounds great. Thanks

Ralph Quinsey

You bet.

Operator

Your next question comes from the line of Neil Wagner with Stephens Incorporated.

Neil Wagner - Stephens Incorporated

Hey guys this is Neil for Steve.

Ralph Quinsey

Hi, Neil.

Neil Wagner - Stephens Incorporated

Could you guys talk about the capacity utilization levels in the quarter, and how you see that trending throughout 2008?

Ralph Quinsey

Sure. Capacity utilization for the fourth quarter was up to about 85% for our Oregon factory which is the material factory. I think you will see utilization track closely to revenue, so I think you'll see retrenching of utilization in Q1 somewhat.

Steve Buhaly

Probably maybe down in low 70s.

Ralph Quinsey

Yeah, and then recovering quite nicely in Q2. Our target is to get up closer to about 90% utilization, 95% utilization, and we'll also highlight that we do have the ability to expand the Oregon factory approximately another 20% - 25% with some investments, and based on demand it's likely we'll do that. It's a relatively small CapEx in the numbers that we have been talking about.

Steve Buhaly

Incrementally this is probably the cheapest capacity we'll ever buy, because it's really bottleneck remediation, and really taking advantage of that opportunities and another way we are going to get our margins up to the strategic target of 40%.

Neil Wagner - Stephens Incorporated

Okay thanks guys.

Operator

(Operator Instructions). Your next question comes from the line of Ed Snyder with Charter Equity Research.

Ed Snyder - Charter Equity Research

Thanks. Hey Ralph.

Ralph Quinsey

Hi, Ed.

Ed Snyder - Charter Equity Research

A couple of questions. The [dot ends] products that you are about to ramp, when does it start to ramp in earnest? You said you do some equal stuff now, that it should hit its peak may be fourth quarter, or first quarter next year when you should start seeing it ramp in volume?

Ralph Quinsey

Yeah just to be clear, we are shipping production volumes now, and I expect to be relatively high production volumes as we exit the quarter. I think Q2 will start to ramp significantly after that and by the time we hit [Q2] as Steve pointed out about a year from now, it should probably peak and then have some level of sustaining. But that's the one large program that I have very clear visibility on. We have other opportunities and one is LAN. We've launched a platform product. It's a pretty attractive solution.

Ed Snyder - Charter Equity Research

Are the margins on this product accretive to corporate averages or are they diluted?

Ralph Quinsey

Accretive.

Ed Snyder - Charter Equity Research

Okay. And then obviously it's a competitive bid, you said there's a lot of competition in these area, especially I imagine large contract. Do you have any visibility at all on where your product falls? Is it more for low end products of that OEM or is that not even a realistic assessment. I mean in other words, is everybody shipping the same product, it's just mixing different vendors. Do you have any visibility to all of that?

Ralph Quinsey

No, I do have some visibility. I do want to make you aware that we are trying to address all parts to that market that are in this region. I do believe we'll be successful at the higher end of the market initially and then we will try to expand out from there. It's a solution that's focused on a 3 x 3 MIMO solution which is typically the type of solution that's used in the higher end.

Ed Snyder - Charter Equity Research

So if you have to you would say you are going to be in the high-end platform or the high-end products, and then you'll migrate down to the mid and low tier if it's possible.

Steve Buhaly

We'd like to cover the whole market. We also address some parts at the low end of the market today. A larger opportunity in front of us right now is the high end and then we would expand where we typically are at the low end.

Ed Snyder - Charter Equity Research

And in terms of the inventory adjustment of some of your large customers it's probably a CDMA or GSM?

Ralph Quinsey

It's primarily GSM, GPRS, EDGE related.

Ed Snyder - Charter Equity Research

Okay. And is this due to your – is this due to double ordering, is it due to hubbing? and why are they adjusting inventory, mostly OEMs that [we are talking] that as reported this quarter showed part shortages? So it's not unusual for them to start shutting down order from the suppliers?

Ralph Quinsey

So we have a couple of different customers for independent reasons. One of our customers has just decided to change the amount of material they would like to keep on hand, and that's impacting us, i.e. such a number of weeks less of material available for build and that's impacting us as they make that adjustment. And the other customer just over-ordered in Q4, but the larger change was that the customer wanted to just change their policy and it reflects on our raw material.

Ed Snyder - Charter Equity Research

How do you know it's not your loss?

Ralph Quinsey

I think that with this customer, we have fairly good visibility. I would say it's a good question. I believe that we are gaining share and losing share everyday across the market for this customer and other customers. I feel good about '08 and this customer. I think that clearly we will have cases where we are going to gain share and lose share and there is share shifting going around. So, yes, so there could be a little bit share loss, but I don't think it's a systemic share loss.

Ed Snyder - Charter Equity Research

Motorola did not make your top 10 customers for this quarter. Does it fall just below that or what? I am just trying to get idea what your exposure is, MOT is, given that they are clearly falling on hard times and it looks like it gets worse before it gets better.

Steve Buhaly

I will just answer that they remain a very important customer for us.

Ed Snyder - Charter Equity Research

Okay. And then would you say that you gained share from last quarter?

Ralph Quinsey

Well we had a strong quarter across all of our markets including handsets, right?

Ed Snyder - Charter Equity Research

Right.

Ralph Quinsey

I think if you look at our major competitors… I am trying to give a good quality answer Ed, but please follow up if I am not answering your question. It's hard to look at quarter-to-quarter, week-to-week what phones are successful, what times phones are not successful. So again there is going to be share shifting, but if you look at systemic share gains and losses, look at our last year, our two major competitors, their calendar year as compared to our calendar year- the way I look at, I’m sure you look at the same way, we just did much better than our two major competitors. So I think we did okay in share last year, and fourth quarter was our strongest quarter of the year.

Ed Snyder - Charter Equity Research

That did look strong. And then finally on capacity, 85% , are you going to drop back? That I expect as you guided to that for sometime this year, you’re going to have to add more equipments to bottleneck. Generally this is what's wacked a lot of your competitors when they've come to the point where they bumped up against utilization limits and then they have to take a hit in margins. You say at the least expensive capacity you have to add, any guesstimate at all? First is that already incorporated in your yearly guidance, adding capacity the 20% additional capacity? And what would have been the cost in EPS?

Ralph Quinsey

So the early guidance is already as incorporated to add that capacity. As far as, what it’s going to cause to EPS, it’s a relatively inexpensive capacity add for this factory. And I would just also remind you that we have a fairly large facility in Texas, and there's very low space and equipment utilization. That probably is not as cost effective in adding capacity as the small amount, as here in Oregon this year, but it's certainly much more effective and very attractive as compared to building a new factory. The space is already there, it's already facilitized, it’s largely staffed with the overall engineering super structure. Pretty inexpensive capacity in Texas too, that would allow us to probably more than double our existing capacity.

Ed Snyder - Charter Equity Research

If and when you add the 20%-25% the Oregon factory then you will be at the wall of limits and you will have to be looking at building another building or going to Texas and utilizing some of that space and/or capacity right?

Ralph Quinsey

That's correct

Ed Snyder - Charter Equity Research

Great, thanks Ralph.

Ralph Quinsey

You bet Ed.

Operator

Your next question comes from the line of [Drew Bark] with Century Hill Partners.

Drew Bark - Century Hill Partners

Hi good afternoon.

Steve Buhaly

Hi Drew.

Drew Bark - Century Hill Partners

Just a couple of follow up questions. First, is your target for 40% gross margins still at the [$160] million to $170 million revenue range or is that changed at all?

Ralph Quinsey

No I think that's a good estimate of what we need to achieve that kind of performance.

Drew Bark - Century Hill Partners

Okay. So as I look at your full year revenue guidance that you are encouraging us to do, can we think of Q2 as being somewhere back around the fourth quarter levels?

Ralph Quinsey

You know that guidance for Q2 Drew, I can just say that if you look at our full year guidance take the midpoint, pull out the first quarter guidance at midpoint, you can do the math as well. It's about a $150 million a quarter average, and so it's a sizable increase in the back half of the year. No, I am not guiding Q2, I am not guiding the three quarters Q2, Q3, Q4 flat at 150. I am just trying to help you scale it, and help the listeners scale it. And so I do need people to understand that Q1 I believe is a discontinuity. We had a fairly strong ramp going in '07 and I expect a fairly healthy ramp in '08, and I do have a fairly good visibility on some big programs that gives me a solid level of confidence.

Things could change. I'll be diligent to stay on top of that but feel good about '08.

Drew Bark - Century Hill Partners

Okay, so just to get in to that a little bit, then what we are really looking at is quarterly revenue ramp rates in excess of 10% sequential revenue growth through the year. So you are saying since Q1 is such a disconnect, you are prepared for that considering what you produced in Q4?

Ralph Quinsey

No, we are maintaining, we made an overt decision to maintain the ability to ramp in Q2 through Q1, that's having an unfavorable impact on the organization. I understand that certainly in light of the revenue down quarter, but we are going for the brass ring in Q2 and beyond. We believe that there is good opportunity for our investors there, and we're going to get it.

Drew Bark - Century Hill Partners

Great. So you feel like you can maintain revenue growth in excess of 10% sequentially from Q2 and beyond to get that revenue guidance, so you feel good about that.

Ralph Quinsey

I am not guiding for Q2, Q3 and Q4, but I do acknowledge your math that I think if you face it off of the first quarter the 15% a quarter gross rate it is the midpoint of the guidance.

Steve Buhaly

And if it's so, as we did just under 130 in Q4, it was 85% utilization. Yes clearly we could do 135 - 140 with a little higher utilization, with the same equipment and the same people. We've kept by and large all that capacity in place so that when those opportunities present themselves we'll have the capacity to execute. Beyond that we are spending a bit of money here and think on bottleneck remediation. We are trying to shoot ahead of the bird and we expect to have a capacity to execute our full year guidance.

Drew Bark - Century Hill Partners

That's great. Congratulations, good quarter. Thank you very much.

Ralph Quinsey

You're welcome.

Operator

And there are no further questions at this time.

Ralph Quinsey

Well, I want to thank the participants and the listeners for their interest in TriQuint. I have high expectations for our business in 2008, and I am looking forward to an exciting year. We have the opportunity to produce record revenue and solid financials in 2008. As a company we are committed to producing these results. I look forward to updating you on our progress in April. Thank you everybody

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Source: TriQuint Semiconductor Q4 2007 Earnings Call Transcript
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