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Analyst warning as RFMD romps to record quarter

With record quarterly sales of $281.1 million, everybody agrees that RF Micro Devices is flying - but one analyst warns that there are some dark clouds on the horizon.

GaAs chip and component maker RF Micro Devices has posted another record-breaking quarter with sales of $281.1 million and a pre-tax profit of $64.8 million.

That record profit figure was more than helped by the sale of RFMD s Bluetooth business for $36.3 million but, even after all one-time transactions were stripped out, the firm's underlying profit still stood at $34.3 million.

Meanwhile, top-line revenue for the period ending on December 31 was equivalent to a 14 percent sequential uptick, in line with the seasonal nature of the handset business, and an impressive 35 percent rise on the 2005 holiday quarter.

With that momentum set to continue into 2007, and new product launches such as GaAs PHEMTs and high-voltage GaN amplifiers advancing well, RFMD looks set fair: "[Our] financial outlook has never been stronger," said CFO Dean Priddy.

Many analysts agree (see related article), but Aaron Husock from Morgan Stanley Research believes that trouble could be brewing for the Greensboro, NC, chip manufacturer.

Although he admits that RFMD is executing its current strategy very well, Husock is concerned that a change in transceiver strategy at Motorola and RFMD s weak market position on wideband-CDMA could soon have an impact.

"We are now modeling a partial shift to single-chip EDGE solutions at Motorola," said Husock in a research note. As Motorola is RFMD s key customer for Polaris transceivers, any shift in its strategy could have a major impact.

Husock added that investor expectations for RFMD's transceiver business appear too high, and that estimates likely need to come down as growth in the company s transceiver business slows down along with the market for EDGE handsets. The latter is expected to peak in the next year or so.

"Impending headwinds for the company s booming transceiver business should make it difficult to mask the slow growth in RFMD s core business any longer," the analyst suggested.

Husock also questioned RFMD's technology roadmap, saying that it may be late to market for the next product cycle: "RFMD appears poorly positioned beyond EDGE."

Whereas John Lau from Jefferies and Co believes RFMD s stock to be seriously undervalued, Husock takes a much more bearish view, and has a price target of only $6 on shares in the company "“ 20 percent lower than the current market valuation of around $7.50.

In general, however, the investment market seemed impressed with RFMD as the stock rose nearly 8 percent in value after details of the latest financial quarter were revealed.

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