Triquint Semiconductor Q1 2009 Earnings Call Transcript Introductory Remarks

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Triquint Semiconductor (TQNT) Q1 2009 Earnings Call April 22, 2009 4:00 PM ET


Steve Buhaly – Chief Financial Officer

Ralph Quinsey – Moderator



Good afternoon. My name is (Kayla). And I will be your conference operator today.

At this time I would like to welcome everyone to the TriQuint First Quarter Earnings 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. If you would like to ask a question during this time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you. I would now like to turn the call over to Mr. Steve Buhaly, Chief Financial Officer. Sir you may begin your conference.

Steve Buhaly:

Thank you. Good afternoon and welcome to our First Quarter 2009 conference call.

This call will include forward-looking statements about TriQuint’s projected financial and operating results. Results could differ materially based on various factors including those described in our reports on Forms 10-K and 10-Q and other filings with the Securities and Exchange Commission.

This presentation also includes non-GAAP financial measures which exclude equity compensation charges, certain impairment charges, and charges associated with the acquisition of WJ Communications. These non-GAAP measures are provided to enhance overall understanding of our core operating performance. A full reconciliation of these non-GAAP measures is in our press release.

Ralph will now provide an overview of the quarter.

Ralph Quinsey:

Thank you Steve. As expected Q1 revenue was seasonally down compared to Q4 in the challenging environment of inventory correction and reduced short term demand.

The reduction of both channel and TriQuint inventory drove fab utilization to 35% and pushed gross margins down resulting in a non-GAAP loss of 7 Cents per share on revenue of $119 million both at the favorable end of our expectations.

Our earnings benefited from aggressive short term operating expense control in Q1. Cash was slightly down helped by solid inventory reductions but offset by capital expense committed last year for technology development.

It should be noted that an inflexion point of increased demand occurred late in the quarter as handset inventory normalized supporting higher revenue expectations in Q2.

Total revenue was up 7% as compared to Q1 2008 led by handset growth of 24% and defense and aerospace growth of 23%. Our growth was supported by market strength in Smartphones, the addition of WJ Communications and positive momentum in major defense and aerospace programs.

Additionally TriQuint is benefiting from China’s investment in 3G infrastructure offsetting reduced infrastructure spending in other regions. We saw reduced demand associated with wireless LAN, standard handsets, cable and optical products. Wireless LAN channel inventory remained high which held our wireless LAN revenue in Q1 to a very low level.

Steve will provide detailed Q2 guidance shortly.

In general I expect strong handset revenue in Q2 driven by our successful new products, inventory restocking and the popularity of Smartphones.

Handset mix continues to shift from 2G to 3G driving improved handset margin and more content for phone. I expect non-handset revenue to grow modestly in Q2 with strength in defense and aerospace and stability and recovery in some of our other submarkets.

I will now provide some detail into our major markets of networks, handsets and defense and aerospace.

Our networks revenue was down 29% sequentially with large declines in most submarkets slightly offset by growth in 3G infrastructure. Wireless LAN

revenue in the quarter was negligible and inventory reductions will continue through Q2 with demand expected to return in Q3.

Networks revenue decreased about 21% in Q1 of 2009 as compared to Q1 of 2008. The largest delta in wireless clients down approximately 12 million as compared to the year ago quarter due to the inventory overhang discussed earlier. This is partially offset by a roughly $8 million increase in bay station revenue with the addition of WJ and the Chinese investment in 3G offsetting reduced revenue from GSM and CDMA infrastructure.

Transport revenue was down approximately $4 million as compared to Q1 2008 with the shortfall being driven by optical and cable both attributed to the economic slowdown. Uncertainty remains in our transport market but I believe we have reached a bottom. Recent order pull-in activity is encouraging.

We are forecasting renewed demand in transport but are conservative in our estimate of future revenue until there is more certainty in the economy.

Looking beyond the short to medium timeframe increased demand from applications like social networking, Voice over IP and streaming video is expected to drive sustained growth in the transport market where TriQuint is well positioned to benefit.

I would like to turn your attention to our handset market now. Our handset revenue declined approximately 14% sequentially in Q1 which is typical for this seasonally down quarter. Revenue grew roughly 24% as compared to the year ago quarter with growth of approximately $25 million in 2.5/3G offset by roughly $10 million decline in 2G revenue. This shift from 2G to 3G has been favorable to margins.

While the overall handset unit market is expected to be down approximately 10% in 2009, Smartphone volume is expected to be up. I expect TriQuint to grow handset revenue in Q2 with improved mix and supply chain cost.

I have low visibility into the complete year but believe we have the design wins in place to grow our handset revenue in 2009 as compared to the previous year.

Now turning to the defense and aerospace market, our defense and aerospace revenue decreased approximately 16% but grew 23% compared to Q1 2008; the sequential decline was predominantly due to customer program timing that pulled some planned Q1 revenue into Q4 of last year. The year-over-year growth was in radar, R&D and satellite revenue.

Lastly I would like to update investors on key product and technology progress. We continue to enjoy success with our highly integrated module products for 3G handsets. We have successfully penetrated key Smartphone manufacturers with these products. TriQuint is a pioneer integrating more than just power amplifier functionality with control functions as found in typical power amplifier modules.

TriQuint integrates the entire transmit chain of a specific band in the phone creating transmit modules. These complex highly integrated products provide our customers with a very small form factor solution that is easily incorporated into an already crowded Smartphone and these products provide benchmark efficiency giving the user longer battery life.

In the networking market we are executing our development and launch plan for TriPower. This bay station RF power technology will significantly

increase power efficiency creating a greener wireless communication infrastructure that requires less energy for RF power and cooling.

I am happy to report we have achieved our first design win for this technology. We are shipping initial production volumes now and expect to ramp additional customers in the future.

In the optical market we recently announced the world’s first surface-mount solution for 40 Gigabyte long haul communication. This product expands our successful family of modulated drivers for both 10 Gig and 40 Gig networks. TriQuint has established itself as the performance leader in this market.

In the defense and aerospace market after many years of technology and product development we are moving into the early stages of production for the F-35 Joint Strike Fighter. This program follows a very successful engagement with the F-22 now near end of life.

I estimate the F-22 program generated approximately $40 million of revenue for TriQuint spread over the last seven to ten years and supported to build approximately 180 F-22 aircraft. The forecasted aircraft build for the F-35 is expected to be significantly higher north of 3,000 total aircraft with demand spread over 30 years coming from the U.S. and multiple partner countries. Content for aircraft is lower than the overall forecast for TriQuint revenue per year is significantly higher for the F-35 as compared to the F-22.

In the area of military communications, strong interest continues for PowerBand. This revolutionary wide band amplifier solution allows designers to significantly reduce the complexity and size of military radios and jammers that have multi-band or wide band requirements.

For the company in total our metric for tracking the success of new products is the ratio of new product revenue to total revenue with new product revenue defined as revenue from products entering production in the last two years. This metric was a solid 50% in Q1 of 2009.

Now Steve will provide results for the First Quarter of 2009 and our guidance for Q2.


Steve Buhaly:

Thank you Ralph. For the first quarter of 2009 we reported revenue of $118.9 million. Revenue decreased 20% sequentially but increased 7% from the First Quarter of 2008.

Economic weakness, seasonal softness in the handset business and the reduction of channel inventory caused the sequential decline. Excluding our wireless LAN products most channel inventory appears to have returned to normal levels.

For the quarter our revenues split to end markets was handsets 58%, networks 28% and defense and aerospace 14%. Our revenue by geographic region was Asia 53%, Americas 38% and Europe 9%.

Please refer to the supplemental data posted on the Investor Section of our web site for a detailed breakdown of our revenue by market.

During the first quarter Foxconn was our only customer comprising 10% or more of our revenue. Our book-to-bill ratio for the quarter was 1.14. Our gross margin for the first quarter was 19.6%. First quarter non-GAAP gross margin was 21.0%. Lower sales combined with a $19.8 million inventory reduction significantly lowered factory utilization and was the primary cause of the quarter’s poor gross margin. A shift in our mix towards more handset and less networks revenue also negatively impacted overall margins. Operating expenses were $40.0 million for the first quarter and $37.3 million or 31.4% of revenue on a non-GAAP basis.

Q1 non-GAAP operating expenses were down $2.5 million from the prior quarter as the company reacted to the changing demand picture. Specific actions in the quarter included mandatory time off for most employees, no bonus or profit share payments and restrictions on hiring, travel and other discretionary expense areas.

We recorded interest income of approximately $300,000 and a tax benefit of $800,000 in the quarter.

Net loss was $15.6 million or 11 Cents per share for the first quarter. Non-GAAP loss in the first quarter was $11.0 million or 7 Cents per share. Cash flow from operations was $7.1 million in the First Quarter of 2009. Total cash short term and long term investments dropped $2.9 million in the quarter to $99.0 million. Accounts receivable grew slightly with DSO at 61 days due to heavy shipments in the last month of the quarter. We made excellent progress reducing inventory to appropriate levels decreasing the balance by $19.8 million to $88.5 million.

Capital spending of $12.2 million was the primary use of cash in the quarter. Non-GAAP financial measures exclude stock-based compensation charges, impairment charges and certain charges associated with the acquisition of WJ Communications. Complete reconciliations of GAAP to non-GAAP results are available in our press release and in the Investor Section of our web site.

Moving now to our outlook, we estimate that second quarter revenue will be between 140 and $150 million. Non-GAAP gross margin is expected to be between 30 and 35% of revenue and non-GAAP operating expenses are expected to be between $40 million and $45 million. Second quarter net income is expected to range between a loss of 1 Cent and net income of 1 Cent per share with non-GAAP net income ranging between 2 Cents and 4 Cents per share.

Cash is expected to increase by 5 to $15 million in Q2. As of today we are fully booked to the midpoint of revenue guidance for the second quarter. Reduced visibility and greater than normal volatility in demand cause us to be more cautious in translating this backlog into expected revenue.

Each quarter TriQuint management participates in a number of Investor Relations Events. This quarter we will be on the East Coast from May 28t through June 2nd. During this time I will be in Boston and will be presenting at both the Barclays and D.A. Davidson Conferences in New York.

At the same time Ralph will be traveling through the Midwest with Stevenson Company June 1st through the 5th.

Lastly we will soon begin a marketing program called TriQuint Virtual Visits. The virtual visit will be a bimonthly webinar designed for investors new to TriQuint or those investors that have not had contact with us in the recent past.

Please contact Heidi Flannery, Investor Relations, if you would like to participate in any of these events.

Our Q2 2009 conference call is currently scheduled for July 22nd. I will now turn to Ralph for closing comments prior to welcoming your questions.

Ralph Quinsey:

Thank you Steve. In summary the economy remains the largest source of uncertainty in our business today.

Q1 was an inventory correction quarter and I believe the handset inventory adjustment is largely behind us. The networks market is reacting more slowly to the down cycle in handsets. And I believe it will be slower to normalize. Inventory in wireless LAN remains high and I expect it will be consumed during Q2 allowing a resumption of shipments in the third quarter.

New opportunities in networks such as the 3G China investment are partially offsetting economic weakness but overall this market remains sluggish. Our defense and aerospace revenue is healthy and currently looks insulated from economic drag.

As a company we’re on track with strong products and solid customer engagements across multiple markets with our current guidance estimating 18 to 26% growth sequentially in Q2 and a return to non-GAAP profitability.

Question-and-Answer Session

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