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Chinese Handset Makers Send RFMD Tumbling

The GaAs chip company loses a quarter of its stock market valuation in a single day after weak demand for GSM handsets forces it to revise its revenue forecast downwards.

RF Micro Devices has warned the Nasdaq stock market that its sales during the last three months of 2007 were only $268 million - four percent below its previous lowest estimate.

The statement, made on Friday January 11, then prompted a sharp sell-off of RFMD s stock that resulted in the company s share price closing down 25.7 percent at $3.73.

The GaAs power amplifier specialist s strongest quarterly sales traditionally come in the last three months of the calendar year. However, RFMD s previously confident estimate of $0.06 to $0.07 net income per share for this period, using official GAAP accounting methods, have now slipped back to a $0.04 to $0.05 loss.

While the company s pipeline of new products appears to be performing as expected commercially, it seems the damage was caused by its business in chips for older 2G GSM technologies.

“Our 2G business was down approximately $20 million over the September quarter," said RFMD s chief financial officer Dean Priddy.

A portion of this shortfall derived from slow business in GSM technologies with RFMD s large handset manufacturing customers, which include Nokia and Motorola. Beyond this, what seems to have particularly wrong-footed RFMD was a big surge in demand from China at the beginning of the quarter that then unexpectedly slowed again.

“Asia was the weak spot during the quarter," Priddy explained. “We began the quarter scrambling to keep up with Asian customers, particularly Chinese handset manufacturers and distributors. [By] about Thanksgiving we began to see weakness coming out of Asia and again in particular the Chinese manufacturers - and this is specific to 2G, GSM handsets."

RFMD now believes this surge has caused a stockpile of its products at its Chinese customers, who themselves may also have stockpiles of handsets to run down. Although it expects that this backlog will diminish over the next quarter, the consequence for RFMD is a less prosperous new year than it would otherwise have hoped.

“The first indications going into early January is that we're seeing continued weakness from the Chinese handset manufacturers," Priddy said. “We expect [revenues from] our cellular products group to be down, quarter over quarter, in March."

Investment analyst John Lau, of Jefferies and Company, responded to this news by downgrading his prediction of RFMD s total fiscal year 2008 sales from $1.18 billion to $0.99 billion "“ less than the company s total sales for fiscal 2007.

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