Lehman Brothers Remains Upbeat On TriQuint, Despite Margins Concern (TQNT, RFMD, SWKS)

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 |  Includes: QRVO, SWKS

Triquint Semiconductor (TQNT) fell about 15% on Friday, following its quarterly earnings report that came in at the upper end of guidance, but included weak gross margin figures. But Lehman Brothers analysts Jeff Kvaal and Tim Luke are upbeat on the company. They sent a note to clients following TQNT's report -- key excerpts:

Investment Conclusion: Excellent GSM sales growth into 2006 lifts our ests despite weak margins. Our target rises to $5.

Summary:

* TriQuint's GSM PA sales nearly doubled to $20M in 4Q05, allowing it to meet guidance of $85M despite soft base station sales. EDGE sales remain modest.
* Yield challenges and filter price pressure dropped the gross margin to ~29%, below our 32% est. Yields are now improving.
* Continued GSM strength allowed TriQuint to guide 1Q06 sales flat. Mgmt indicated 2006 sales could rise 20% - though its 1Q guidance suggests this is conservative. Mgmt expects gross margins to reach 35% on $90-$100M in sales in 2H06, though we have modeled more cautiously.
* Our 2006 ests rise from $337M/$0.07 to $360M/$0.08, including ~$0.08 in options dilution. Our target is $5 or 1.5x CY06 sales plus $1.30 in cash. Our prev target of $4 was 1.2x CY06 sales of $337M.
* Risks remain GSM price pressure, improving yields, and execution on market share gains.
* We note that RFMD and Skyworks are currently seeing healthy EDGE demand and believe that while TriQuint is moving in the right direction, they are still largely in lower tier phones that do not typically use the cutting edge technology. We believe EDGE and WCDMA will not be large revenue drivers for several quarters.

TQNT 1-yr chart: