Winds of change blow through fabs

Worries over risky loans to US homeowners and the threat of an ensuing "credit crunch" sent an ill wind through global equity markets in August, ensuring that pretty much every stock was buffeted down, up and then back down again.

Compound semiconductor stocks were no exception, so the effect of some strong trends in the broadband network and handset sectors may well have gone unnoticed in all of that volatility.

First of all there was the Motorola effect. Hit by well-documented problems selling its low-cost handsets at any kind of profit and its failure to come up with a handset to match the phenomenal success of its RAZR, Motorola has ended up stockpiling millions of phones that nobody wants to buy.

The result, according to Neil Mawston from Strategy Analytics, is that Motorola s share of the global handset market has plunged from 22.3 to 13.8% over the past 12 months. With overall shipments still growing steadily, all of Motorola s rivals have benefited. Finland s Nokia has extended its lead as the number-one vendor and Korea-based Samsung has overtaken the US firm for the first time to take its number-two ranking (table 1).

What does all of this mean for makers of the GaAs-based HBTs and PHEMTs that feature in the vast majority of handsets in the form of power amplifiers (PAs) and switches? There are no clear-cut answers. As the leading PA and front-end module vendor, RF Micro Devices is perhaps more exposed than most to these fluctuations. In its latest quarter it saw sales slump by nearly 20% sequentially as Motorola made a drastic cut in orders.

This slump was partly offset by the market share swing to Nokia, RFMD s biggest customer, but was also felt by TriQuint Semiconductor, which is more exposed to fluctuations in consumer goods markets following its successful targeting of the handset space over the past couple of years. Thanks in no small way to its success in Samsung phones, TriQuint still managed to post a sequential increase in sales revenue in the latest quarter, but it felt the Motorola effect on its bottom line in the form of a $3 million excess inventory charge. Net profits were pegged back to just $1.4 million as a result (from $6.4 million in the previous quarter).

TriQuint CEO Ralph Quinsey remains cautiously optimistic about the remainder of 2007, as do all of the other players in the GaAs RFIC business, largely because of the fast-growing 3G sector. TriQuint has seen revenue from sales of high-speed WEDGE (combined wideband-CDMA/EDGE) chips more than double year on year and the deployment of 3G technology in all parts of the world now looks like boosting the coffers of all of the key suppliers.

Skyworks Solutions is one of those suppliers and CEO David Aldrich highlighted the key trend in the Woburn, Massachusetts, company s latest investor conference call. "The transformation from a voice-centered business to multimedia devices is finally a reality in our industry," he said.

Analyst Aaron Husock, of Morgan Stanley, agreed with Aldrich, saying: "Skyworks design win activity highlights increasing traction in the move toward more integrated power amplifiers and in 3G, both of which offer meaningfully higher dollar content per handset."

The acceleration of 3G adoption has narrowed down the field of suppliers that can provide the technology, giving Skyworks – and of course its rivals – more opportunities with different handset manufacturers and perhaps even the hope of an upward trend in average selling prices.

"It is a very, very small, we think elite, group of folks, who can compete," explained Aldrich, "so therefore there should be much less long-term price pressure and more stability in this market."

Aside from 3G, Skyworks is continuing to diversify beyond handsets with its linear amplifier products.

Fabless Hittite, which is also based in Massachusetts, registered a pre-tax profit of $18.5 million on sales of $36.7 million in the latest quarter, demonstrating once again that lacking ownership of a fab is no hindrance to financial success. Hittite CEO Stephen Daly reiterated Aldrich s sentiment, saying that the build-out of cellular infrastructure to support broadband communications in Asia was one of the key revenue drivers in the last quarter, along with microwave and military applications.

Like TriQuint, New Jersey s Anadigics has been setting the pace in the development of handset PAs for 3G applications and high-end focus is continuing to improve the company s financial results. In its last quarter, Anadigics registered a record sales revenue of $53.9 million and posted its first net profit in years.

CEO Bami Bastani, the architect of Anadigics 3G strategy, described the three specific "mega-trend" growth markets impacting his business at the moment – 3G cellular, broadband wireless LAN and the widespread upgrade of cable TV networks.

The Korean firms LG and Samsung, both major Anadigics customers, are winning market share (largely from Motorola) with their high-end handsets and smart phones, for example. The 3G market dominates Anadigics wireless product sales, accounting for the vast majority of the business segment s quarterly sales of nearly $26 million – 48% of total revenue.

Another major sales driver is Intel. Its latest mobile computing chipset – codenamed "Santa Rosa" and sold under the Centrino Pro banner – is ramping much faster than initially expected, which Intel has said is one of its fastest chipset ramps ever.

Intel s Santa Rosa products support the 802.11n broadband wireless LAN standard, which offers a far better coverage, range, connection speed and battery life than previous generations of the technology. Crucially for Anadigics and its suppliers, it also requires multiple RF chains, which demands several PAs and a much higher GaAs content. The broadband Wi-Fi sector, which includes WiMAX applications, accounted for 22% of Anadigics sales in the last quarter. With strong traction in the CATV sector (28% of sales), things are looking good for an even better performance in the rest of 2007 and into 2008.

Significantly, RFMD is now set to grab a piece of this action, with an eye on widening its product portfolio to make it less dependent on the handset PA sector (currently 94% of sales) and on improving its profit margins. The North Carolina company is all set to acquire its Colorado-based namesake Sirenza at a cost of nearly $1 billion.

Sirenza Microdevices looks like a hybrid of Hittite and Anadigics. Fabless, it focuses on high-end applications of RFICs – including silicon CMOS, SiGe and III-V designs – and is witnessing great demand driven by the build-out of broadband cellular and cable TV networks, wireless connectivity protocols like 802.11n and WiMAX, as well as lucrative, high-margin contracts in the aerospace and defense sectors.

With quarterly sales in the $45–50 million range, Sirenza has not come cheap, and RFMD will use a major chunk of its war chest in the proposed deal, spending $300 million in cash as part of the $900 million cash-and-stock transaction.

Once the deal is closed, which is expected by the end of the year, Sirenza s existing business will add quickly to RFMD s bottom line, and with little or no overlap in products or sales revenue, the combined company operations should fit together smoothly.

On the share price front, Anadigics continues to be the star performer of the GaAs companies, pushing up to the $16 mark before the credit crunch worries of mid-August. After such a remarkable turnaround in fortunes, it is easy to forget that Anadigics stock was trading at only just above $1 as recently as May 2005. A 1000% gain over that time is a huge credit to Bastani and his management team.

Not surprisingly, given that RFMD s offer represented a 17% premium on its August 10 closing price, Sirenza s value also shot up in the last quarter, while all but one of the major GaAs companies in the US trod water. The exception was TriQuint, which shed around a quarter of its stock value between mid-July and mid-August as the market digested the impact of Motorola s stale inventory on TriQuint s profit margins.

But aside from that, things are looking good. Strategy Analytics maintains that the combined impact of the continued 3G build-out, WiMAX deployment, cable TV infrastructure upgrade and rapid growth in wireless connectivity will see the market for GaAs devices balloon from $3 billion in 2006 to $5 billion in 2011. RFMD and Sirenza expect to see the market for GaN-based RF components take off over that time frame, adding further to the market opportunity.

With so many of the key companies looking well positioned to exploit that expected growth, it looks like we are now truly in the midst of the broadband era for RFICs – and the leading positions are still up for grabs in what should become a much more valuable market for GaAs and GaN ICs.

Michael Hatcher does not own or intend to purchase any of the stocks in this article.