New customers could offset Filtronic's RFMD loss
by Michael Hatcher
Despite the impending loss of a major GaAs PHEMT supply deal with its number-one customer RF Micro Devices, the chip foundry owned by Filtronic can still be a successful business.
That s according to Nick James, an analyst with the UK stockbroker Panmure Gordon & Co. He believes that Filtronic is involved in "significant activity with new customers", which could allow the company to reach a break-even run-rate next year.
Responding to news of the RFMD cancellation, James said that a focusing on broader markets beyond handset switches would allow more favorable pricing for Filtronic, which "should allow the business to become profitable at a smaller scale".
And although it will be cold comfort for the 115 people set to lose their jobs at the GaAs facility between now and October, James believes that the emotional response to the restructuring actually represents an opportunity to investors.
Its stock is trading at just 118p following the RFMD news, but James is maintaining a "buy" rating on the company, with a target price of 210p.
"The heavy reliance on RFMD was always a concern, and a plan to move forward without it is positive," said James, adding that the decision by RFMD to stop the supply deal was not entirely unexpected, given the US chip manufacturer s significant capacity ramp over the past year.
"It is clear that [Filtronic] prepared well for this scenario, as the cash cost [of restructuring] is likely to only be around £0.5 million," said James. "The company has been working hard to broaden its customer base and addressable markets in compound semiconductors, and is beginning to see the benefits."
James had been forecasting fiscal 2008 revenues of £31.5 million ($63 million) for Filtronic s compound semiconductor business, but has now revised that estimate down to £21.8 million.
Despite the large dent in sales, he expects minimal effect on the division s profitability after its restructuring.
Should Filtronic s management, currently considering options that include disposal of the GaAs facility, decide to sell, James values the compounds business at £15 million. "There doesn t appear to be a reason to change that following this news," the analyst said.
RFMD stays tight-lipped
RFMD s VP of investor relations Doug Delieto would not confirm Filtronic s assertion that its "predominant customer" had made a decision to "in-source all production".
Instead, Delieto reiterated the guidance given at RFMD s most recent investor call back in late April, when the company said that it would possibly reduce the amount of PHEMT material that it was sourcing externally.
Rumors that RFMD is looking to gain extra fab capacity in the form of an acquisition have also surfaced, and leant some credence by the company s recent raising of $375 million in a private placement of convertible subordinated notes - a move that boosted its total cash balance to around $700 million.
Although Delieto made no comment on the possibility of acquiring an existing fab, he did say that RFMD would be looking at how to "streamline" its supply chain.
