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Technical Insight

Analyst community groping for bottoms (Portfolio)

Are we seeing signs of the beginning of the end of the wireless slump? Marie Meyer reports on the recent earnings announcements from RFMD, Alpha and others.
During the wonderful run of the five-year bull market, many investors seemingly lost sight of the old adage that "what goes up must eventually come down", believing that share prices would continue to rise indefinitely. Evidence to the contrary is now all around us. Happily, no one seems to have lost the hope that things will go up again. It is just a question of when. Hence one hears a great deal of talk about bottoms these days, as analysts search for indications that the current slump has reached its nadir. Only a few early earnings announcements were available when this issue went to press, and while they present a mixed outlook, one can see in them the first signs of the possibility of a recovery (see ). The reaction to Nokia s earnings announcement demonstrates just how mixed the current sentiment is. When the top mobile phone maker announced on July 19 that its sales had fallen just 8%, its share price jumped instantly from its 52-week low of $17 to over $20 investors apparently believing that things could have been much, much worse. But over the next few days the share price began to slide back down, as "the glass is half empty" thinking seemed to take hold. It didn t help that analysts were disagreeing over whether Nokia s "guidance" for the next few quarters was good news or bad news. Basically, Nokia believes that the mobile phone industry will show little or no growth this year compared to last year, but did indicate that it expects to see a rebound in 2002. For anyone hoping for an immediate turnaround, this is disappointing news; for anyone who has already written off this year and is focusing on the future, Nokia s statements provided a confidence boost supported by positive news from RFMD and Alpha. RF Micro Devices RFMD was one of the first companies to be battered by the slowdown in the wireless industry, and they now look like they are among the first to bounce back. Revenues for the June quarter were $70.1 million, down 28% over the year-ago quarter but up 27% over the March quarter. This result was better than expected, as RFMD had been predicting sequential growth of approximately 20%. Power amplifier (PA) module revenues increased 29% sequentially and represented 33% of revenues in the June quarter. Underscoring their commitment to module manufacturing, RFMD took special charges totaling $18.1 million in the quarter relating to obsolete chip inventory and MMIC testing equipment. The company also took a $4 million "asset impairment charge" as a result of its decision to outsource all production packaging, and convert the current packaging line in North Carolina to an R&D facility. Commenting on these activities, the CFO of RFMD, Dean Priddy, stated, "recent forecast analysis and customer inputs indicate a strengthening of our module business and continued strength in certain MMIC products but an overall excess of MMIC products in totalThe shift in our business from MMICs to modules has happened rapidly, and we anticipate module revenue will represent approximately 50% of total revenue in the September quarter. The write-down of production packaging equipment reflects the growing industry trend to outsource non-core manufacturing. Our assembly partners have capacity and are working to reduce costs, so economically it now makes sense for us to outsource all packaging. However, based on customer input, we believe it s also a competitive advantage to maintain a strong packaging R&D group, which drove our decision to transition our packaging line to an all-R&D facility." Excluding the effect of the special charges, net loss for the quarter would have been $7.5 million. With the one-time costs added in, the net loss for the quarter was pushed to $33.5 million. Looking ahead, the company indicated that it is "fully booked to support approximately 10% sequential revenue growth in the September quarter". The company expects the loss to narrow to around $5 million in that quarter, with a return to profitability in the December quarter. Commenting on the results and the overall outlook, David Norbury, president and CEO of RFMD, said, "We are very pleased to report better-than-forecasted sequential revenue growth particularly since the macro environment remains challengingDuring the June quarter, the company experienced increased order activity and growth in backlog. Given these factors, and our ongoing communications with customers, we believe our visibility has improved into the September quarter. We continue to expect near-term revenue growth and market share gains, and we are optimistic about multiple opportunities in handset and non-handset markets." Alpha Industries Like RFMD, Alpha is heavily dependent on the wireless handset business, and they also had encouraging news to report. As expected, the results for the quarter were not stellar. Net sales were $32.2 million, down 50% from a year ago and down 40% from the previous quarter. The company reported a net loss of $3.9 million, compared with net income of $7.8 million from the year-ago quarter. But all of this was expected company management had warned of a sharp drop-off in revenue six weeks ago. What did come as a pleasant surprise was the assertion by president and CEO David Aldrich that the June quarter "represents the bottom in terms of inventory correction in the handset supply chain". In a conference call with investors he stated, "We ve seen during the quarter and specifically in the latter half of the quarter, a significant reduction in the number of cancellation and order push outs. That had been a real problem for us at the end of [the March quarter] and into [the June quarter], and we ve seen that abate by a lot recently. That s obviously a prerequisite to greater visibility and improvement going forward." He went on to say that Alpha anticipates a recovery in the September quarter, led by a 30% increase in revenue from the handset business. As for other areas, Aldrich predicted that recovery in the wireless infrastructure business would take hold later in the year. However, it is expected to lag behind the performance of the handset sector in the September quarter. He cautioned that visibility for Alpha s broadband business remains poor. Aldrich also said that "the excitement for us really begins in [the December quarter]", because at that time the company s recent PA module design wins will be entering volume production. He predicts that volume orders for GPRS (2.5G) phones will start in the December quarter and gain momentum in calendar 2002. He also predicted a return to profitability in the December quarter. TriQuint/Sawtek Not all the news from the RF sector was good. TriQuint Semiconductor had little to offer in the way of guidance for the next few quarters. The close of the June quarter represents the first time that TriQuint and Sawtek jointly reported their results since their merger was announced on May 15. TriQuint reported revenues for the June quarter of $60.7 million, down 14% compared to $70.6 million for the same period last year. Net income, however, was off 86%, with $2.3 million reported for the June quarter compared to $16.4 million for the comparable quarter last year. Sawtek has seen a much larger drop-off in sales. For the June quarter the company reported revenues of $18.8 million, down 57% compared to $44.1 million for the same period last year. Net income for the quarter was $2.4 million compared to $14.9 for the comparable quarter of 2000. Commenting on the results, Kimon Anemogiannis, president of Sawtek, stated, "Our results for the [June quarter] reflect the slowdown that affected nearly every company in the wireless and communications markets. During this past quarter, we took numerous steps to place ourselves in a better position when the markets recover." Those measures included lay-offs in the company s plants in Orlando and Costa Rica, as well as disposing of an unprofitable sensor business. The merger of the two companies is now complete and Sawtek shares have ceased to trade. Stanford Microdevices The mood was also downbeat in the earnings announcement for fabless RFIC manufacturer Stanford Microdevices. For the June quarter the company reported revenues of $5.4 million, compared with $7.9 million for the second quarter of 2000 and $7.8 million for the first quarter of 2001. The net loss was $1.5 million, compared with net income of $118 000 for the year-ago quarter and a net loss of $580 000 for the prior quarter. "Despite recent encouraging signs from both direct customers and distribution channels, our near-term market visibility remains impaired," said Robert Van Buskirk, president and CEO of Stanford Microdevices. "The combination of the weak economy, inventory reductions and wireless network build-out deferments continues to impact component requirements and production plans for telecommunications equipment manufacturers worldwide." The company s revised outlook for 2001 includes total net revenues declining approximately 2030% from the $34.6 million reported for 2000.
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