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Thrifty RFMD says 'cash is king'

Reduced capital expenditures and ever-shrinking die sizes will allow the GaAs chip manufacturer to significantly improve its debt position over the coming year.

RF Micro Devices, the world s largest producer of GaAs-based RF components, will significantly improve its finances over the coming year, despite the uncertainties surrounding the mobile handset industry.

Speaking at the Needham Growth Stock Conference in New York on January 8, senior executives Bob Bruggeworth and Dean Priddy from the company stressed that measures already put in place would ensure that RFMD is able to strengthen its balance sheet.

"In a downturn, you need to have your hands on the controls," said CFO Priddy. "The old adage that cash is king definitely applies."

The good news for RFMD and its investors is that the company is already seeing its cash-flow accelerate, meaning that it has been able to offset substantial liabilities by re-purchasing convertible debt. RFMD s stock price rose strongly on the suggestion of a much-improved balance sheet, and finished the day up 43 percent.

Cash held by the firm now exceeds debts due in 2010 by $30 million, with overall net debt reduced by $50 million during the latest financial quarter.

And because RFMD has now dramatically reduced its capital expenditure following 18 months of heavy investment, it should be able to further reduce that debt - despite the inevitable challenges of the year ahead.

Capital expenditures for the next two years will be in the region of just $5 million each quarter.

Coupled with lower spending thanks to a temporary wage and recruitment freeze "“ until market visibility improves "“ and the GaAs fab consolidations recently announced (see related stories), Priddy is expecting to deliver between $80 million and $120 million in free cash-flow during fiscal year 2010.

RFMD s technologists also have a further reduction in GaAs die size up their sleeves, which should help to further improve profitability in the second half of 2009.

CEO Bruggeworth said that having already cut GaAs die by upwards of 40 percent compared with previous technology generations, its engineers have now figured out how to deliver a further 30 percent shrink.

Largely aimed at the GPRS transmit module sector so far, products featuring the smaller die will now also start to appear in CDMA and wideband-CDMA applications.

While Bruggeworth and Priddy both maintained that RFMD begins 2009 in rude financial health, the CEO did admit that predicting the true level of demand for cell-phones at the moment would be foolish.

"Many of our customers are still struggling to find that out," he remarked, adding that sales had weakened across the board before some "signs of life" were seen at the end of the most recent trading quarter.

Despite the uncertainty, Bruggeworth does believe that there is relatively little build-up of stock in the handset industry's supply chain, saying: "We feel good about channel inventories."

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