News Article

RF Micro: Demand Plunge Now Leveling Out

Fab utilization plummets to just 30 percent and write-downs prompt a huge net loss, but the world's leading maker of GaAs components is finally seeing some stability amid the global turmoil.

RF Micro Devices, the leading manufacturer of GaAs-based RF components, says that demand for its products is stabilizing, following a precipitous drop at the end of last year.

Reporting a 25 percent decline in sequential revenues to just over $202 million and massive write-downs relating to acquisitions and the closure of its 4-inch wafer fab in Greensboro (see related stories), CEO Bob Bruggeworth told investors:

"Muted consumer activity in November was particularly challenging, with orders dropping week-on-week. This was compounded by excess inventories due to the [previously] expected December growth."

"In the first weeks of December, there were signs of improvement and, today, inventories are beginning to level off. However, visibility remains very limited and our customers are unable to pinpoint any return to normalized demand."

Normality returns
Bruggeworth went on to say that the company was no longer seeing any cancellations or order push-outs, with a semblance of normality returning to the cell phone handset supply chain "“ albeit at much lower volumes than previously.

The dramatic slow-down in the December 2008 quarter have pushed the firm s fab utilization levels below 30 percent. RFMD closed its 4-inch GaAs facility and cut production at its 6-inch fab in Newton Aycliffe, UK, in response to that, and the impact was reflected on the balance sheet.

Taken at face value, RFMD s net loss for the December quarter "“ more than $813 million "“ looks shocking.

However, the vast majority of that loss relates to non-cash charges reflecting adjustments to the firm's balance sheet.

And when those charges are stripped out, RFMD s net loss for the December quarter shrinks to just under $13 million.

Of the non-cash charges, by far the most significant is the write-down of goodwill relating to the company's 2007 acquisition of Sirenza Microdevices, which at the time cost RFMD $300 million in cash and $600 million worth of stock.

With Sirenza s paper value dropping along with virtually everybody else s in the intervening months, this change had to be reflected on RFMD s balance sheet.

This “goodwill" write down accounted for $673 million out of $754 million in exceptional charges. An additional $47 million related to the write-down of the 4-inch wafer fab and equipment, which RFMD has “no plans" to re-open currently.

The remaining charges related to inventory reserves, which RFMD expects to ease as demand flows from its customers return to something like normal in the coming months.

Die-shrink and GaN orders
Thanks to its new, slimline, structure RFMD is still managing to generate plenty of cash amid the global downturn, cash with which it is able to pay off long-term debts.

The company is also accelerating its introduction of smaller GaAs die, a technological innovation that it claims will yield the industry s lowest-cost RF components while maintaining healthy profit margins.

In other positive news, RFMD has received initial production orders from a European customer for GaN-based line amplifiers to be used in cable TV infrastructure applications.

Bob van Buskirk, the former Sirenza CEO who now heads up RFMD s multi-market products group, said that with GaN components now in the final stages of reliability testing procedures, these products should start to make a real impact on sales within a year.

Although more usual order patterns have returned, prompting Bruggeworth to say that demand has “found the bottom", the company declined to give any detailed guidance for the current quarter "“ other than to say that revenues would be down by more than the usual seasonal decline seen at this time of the year.

With production levels being kept low to help reduce inventories in the cell phone supply chain currently, Bruggeworth and colleagues are hoping to begin increasing manufacturing output during the June quarter.

• In early trading following its results announcement, RFMD stock had fallen by around 11% to $1.08.

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