Welcome to the RF Micro Devices third quarter 2010 conference call. During todays presentation all participants will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Tuesday January 26, 2010. At this time I would like to turn the conference over to Doug DeLieto, Vice President Investor Relations for RFMD.

 
Doug DeLieto


At four oclock today we issued a press release. If anyone listening did not receive a copy of the release please call Samantha Alfonso at the Financial Relations Board at 212-827-3746. Sam will fax a copy to you and verify that you are on our distribution list. In the meantime the release is also available on our website www.RFMD.com under investors.
 
At this time I want to remind our audience that this call includes forward looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include but are not limited to statements about our plans, objectives or presentations and contentions and are not historical factors and typically are identified by use of terms such as may, will, should, could, expect, plan, anticipate, believe, estimate, predict, potential, continue and similar words although some forward-looking statements are expressed differently.
 
You should be aware that the forward-looking statements included herein represent managements current judgment and expectations but our actual results, events and performance could differ materially from those expressed or implied by forward-looking statements. We do not intend to update any of these forward-looking statements or publically announce the results of any revisions to these forward-looking statements other than as is required under the federal securities laws.
 
Our business is subject to numerous risks and uncertainties including risks associated with the impact of global macroeconomic and credit conditions on our business and the business of our suppliers and customers, variability in operating results, the rate of growth and development of the wireless markets, risks associated with the reduced investment in our wireless systems business, our ability to execute on our plans to consolidate or relocate manufacturing operations, our reliance on inclusion in third party reference designs for a portion of our revenue, our ability to manage channel partners and customer relationships, risks associated with the operation of our wafer fabrication facilities and molecular beam epitaxy facility, assembly facility and test and tape and reel facilities, our ability to complete acquisitions and integrate acquired companies including the risks that we may not realize expected synergies from our business combinations, our ability to attract and retain skilled personnel and develop leaders, variability in production yields, raw material costs and availability, our ability to reduce costs and improve margins in response to declining average selling prices, our ability to bring new products to market, our ability to adjust new production capacity in a timely fashion in response to changing demand for our product, dependence on a limited number of customers, dependence on Gallium Arsenide or gas for the majority of our products and dependence on third parties.
 
These and other risks and uncertainties which are describe in more detail on our most recent annual report on Form 10K and other reports and statements filed with the Securities & Exchange Commission could cause actual results and developments to be materially different from those expressed or implied by any of these forward-looking statements.
 
In todays press release and on todays call we provided both GAAP and non-GAAP financial measures. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or unusual items that may obscure trends in our underlying performance.
 
Now, for some housekeeping, during tonights call our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measure please refer to our earnings release issued earlier today on our corporate website www.RFMD.com under the heading investors. Similarly, for an explanation for how RFMD calculates return on invested capital or ROIC, please refer to todays earnings release.
 
Finally, during tonights call all references to normalizing RFMDs September 2009 quarter to 13 weeks implied dividing dollar amounts by 14 and multiplying by 13. In fairness to all listeners, we ask that participants please limit themselves to one question and a follow up. After each person in the queue has received a turn we will give participants an opportunity to ask a second question as time allows.
 
With me today on the line are Bob Bruggeworth, President and CEO; Dean Priddy, Chief Financial Officer; Eric Creviston, President of our Cellular products group and Bob Van Buskirk, President of our Multimarket Products Group as well as other members of the RFMD management team. With that Ill turn the call over to Bob Bruggeworth.
 
Robert A. Bruggeworth
 
The global RFMD team delivered an outstanding December quarter highlighted by great execution across our organization on a diversification and margin expansion plans. The December quarter was RFMDs second consecutive quarter of record operating profitability and the third consecutive quarter of sequential and annual increases in gross margin, operating margin and earnings per share.
 
Quarterly revenue was $250.3 million representing an increase of approximately 24% on a year-over-year basis. Viewed sequentially, RFMDs gross margin expanded 30 basis points to 38.4% and our operating margin increased 140 basis points to 17.8%. Viewed in absolute dollars results are equally as impressive, quarterly operating income was a record $44.6 million and earnings per share totaled $0.14 which underscores the earning power in our operating model and speaks to our ability to deliver record results going forward.
 
On the balance sheet free cash flow in the December quarter was $41.9 million and RFMD has generated approximately $122 million in free cash flow through the first three quarters of fiscal 2010. We continue to forecast being net cash positive by the end of fiscal 2011. In CPG, order trends were strong throughout the quarter with particular strength with Smartphones and 3G devices.
 
Sales of Y band CDMA front ends including the rapidly growing TD-SCDMA segment increased approximately 80% year-over-year and sales in to Smartphones and 3G devices approach 50% of our cellular front end revenue. RFMD is enjoying broad strength in cellular handset supported by strong unit forecasts, expanded participation across customer programs and increasing adoption of connected devices whether they be data cards, netbooks or Smartphones. We are a primary beneficiary today as our customers expand the Smartphone experience from the upper tier to the mid tier and we continue to forecast being in production in support of all the major Smartphone manufacturers over the next 15 months.
 
Across all our markets our success relies heavily on innovation and RFMD is sharply focused on R&D. We lead the industry in R&D and were on a record pace of new product introductions. Our cellular products group introduced 14 new products during the December quarter and CPG is on pace to introduce more than 40 new products this fiscal year driving our customer diversification and margin expansion.
 
We also expanded our portfolio of process technologies with a qualification and release of a CMOS technology optimized for cellular switches and switched base products. RFMD CMOS switches switch filter modules and switch duplexer modules deliver meaningful performance, size and cost benefits in Smartphones and 3G devices and we expect significant customer adoption driven by leading Smartphone manufacturers.
 
Its also worth noting that these new products and our entire switch and signal conditioning product portfolio are growing RFMDs serviceable market and expanding our dollar content opportunities per device. Equally important, our CMOS based products support further improvement on our return on invested capital or ROIC and provide greater supply chain flexibility as we continue to grow our business.
 
For MPG, customer demand and order activity improved quarter-over-quarter and is seeing an improved demand environment going forward. Each of MPGs four product lines grew sequentially in the December quarter. In cable TV, which declined the most through last years down turn were seeing the beginning of a recovery. Quarterly sales I to our largest cable TV customers more than doubled sequentially in December and we are forecasting continued growth in cable TV revenue in to the March quarter.
 
We saw growing momentum behind our GaN technology in December bolstering our diversification strategy and setting up another leg to our gross margin expansion plans. We completed our first GaN foundry shuttle run and a major North American cable TV customer continues to move forward with broad based adoption of our GaN technology.
 
In terms of product introductions MPG introduced a total of 86 new and derivative products from the December quarter and MPG is on track to release more than a product a day this fiscal year. RFMDs industry leading R&D and our steady flow of new product introductions give us increasing visibility and enthusiasm for the upcoming fiscal year.
 
In addition to product revenue RFMD continues to pursue R&D contracts with the United States Department of Defense and Department of Energy related to multiple end product applications. The RFMD team also continues to make measureable progress in our efforts with the National Renewable Energy Lab to commercialize our compound semiconductor technology for concentrated photovoltaic cells.
 
We believe the combination of NREL and RFMD brings unique and defensible competitive strengths to the solar industry and our efforts to date suggest we can achieve the industrys lowest cost and highest efficiency concentrated photovoltaic cell. To that end, the first technical milestones we set for our team is manufacturing the worlds first photovoltaic device on a high volume commercial Gallium Arsenide six inch line. We look forward to announcing this industry leading achievement in the near term and subsequent milestones as we achieve them.
 
Turning to our outlook, RFMD is capitalizing on major global secular growth trends such as mobile broadband, smart grid, AMR and green technologies while entering lucrative new product segments like switched based products for Smartphones and Gallium Nitride based amplifiers for communications and defense systems which expand our serviceable market, diversify revenue and expand our margins.
 
As the global demand for data mobility accelerates, the adoption of Smartphones, netbooks, data cards and other connected devices is significantly increasing the available RF dollar content to RFMD. In addition, the increasing demand for smart grid applications and green technologies is creating new incremental opportunities to diversify revenue and expand margins by leveraging RFMDs leadership and RF components in compound semiconductors.
 
With that, Ill turn the call over to Dean for a detailed look at our financial results.
 
William A. Priddy, Jr.
 
First a quick reminder that the income statement results in comparisons will be non-GAAP. RFMDs business model continues to deliver strong operating results and superior capital efficiency. Last quarter RFMD set targets to sequentially grow revenue and earnings per share normalized to 13 week comparisons, maintained consistent gross margins and continued generating strong free cash flow. Were very pleased to report that RFMD delivered on all these important financial metrics.
 
Revenue for the December quarter was $250.3 million up 24% year-over-year and normalized 6% sequentially. Our cellular products group delivered another very strong quarter. RFMD is capitalizing on several secular growth trends within the handset industry. These include the proliferation of data enabled wireless devices and increased RF dollar content per device. The multitude of RFMD new product releases are driving revenue growth and diversification at the customer and product segment level with margins that are accretive to corporate average.
 
MPG posted solid 16% normalized sequential revenue growth with all business units growing. As Bob indicated the end markets served by MPG are beginning to recover but MPGs revenue growth continues to lag the cellular industry in year-over-year comparisons. With that said, MPGs backlog is strong and we expect solid year-over-year growth in our March quarter.
 
Gross profit was $96.2 million yielding an expansion in gross margin to 38.4% compared to 38.1% last quarter. RFMDs improved margins continue to be fueled by customer and product diversification. Operating expenses were $51.6 million with G&A of $8.7 million, sales and marketing of $11.4 million and research and development of $31.5 million. Normalized expenses were essentially flat compared to the September quarter.
 
Operating income was a record $44.6 million or 17.8% of revenue. RFMDs core business defined as RFMDs total business less the impact of cellular transceivers saw both gross and operating margins expand to above 41% and approximately 17% respectively. Our core business is growing profitability and continues to support our immediate and longer term expectations for strong growth in earnings per share.
 
Other expense was $1.1 million with lower interest expense as a result of the purchase and retirement during the quarter of convertible bonds. Non-GAAP net income for the December quarter was $38.8 million or $0.14 per diluted share based on 286 million shares using the if converted method. GAAP net income was $24.9 million or $0.09 per diluted share.
 
Now, going to the balance sheet; cash flow from operations was $44.5 million. Total cash and equivalents was $202 million. During the quarter RFMD purchased $197 million of convertible notes through July 2010. RFMD expects to become net cash positive by the end of our upcoming fiscal year. December free cash flow was $41.9 million. During the first three quarters of fiscal year 10 RFMD has generated $122.2 million in free cash flow. Also, Id like to remind our audience that RFMD has active bond and stock buyback programs in place.
 
RFMDs inventory was $121.5 million with 5.2 turns consistent with last quarter. Net PPE and was $262 million compared to $278 million last quarter. Capital expenditures during the quarter was $2.6 million with depreciation of $18 million an intangible amortization of $4.7 million. RFMDs return on invested capital or ROIC improved to 34.6% in the December quarter from 30.6% in the September quarter.
 
Regarding capital expenditure modeling for future years; RFMD is currently running at about 70% fab utilization. Our smaller dye sizes are driving significantly more saleable units per wafer giving us a meaningful increase in fab capacity and we will ramp CMOS based switches in our fiscal 2011 giving us the added flexibility to outsource or in source switches. Accordingly, were confident we can significantly grow our front end business without additional capital expenditures for at least the next couple of years.
 
In other areas of the supply chain capital investments will be made on a make versus buy analysis using return on invested capital as the metric. As long as our suppliers are in line with pricing well continuing using the outsource model. If pricing isnt in line then well in source. For capital expenditure modeling purposes we think a range of 2% to 4% of sales for cap ex is appropriate going in to FY 11 and 4% to 5% of sales longer term.
 
Now, for the business outlook and financial targets and comments to assist you in modeling the March quarter. Early data points for the March quarter our encouraging. In CPG, quarterly revenue is expected to be better than normal seasonality in the March quarter. In MPG, quarterly revenue is expected to be flat to up sequentially in the March quarter. Non-GAAP operating margin for the fiscal 2010 full year period is expected to approach RFMDs annual target of 15%.
 
RFMD expects strong free cash flow in line with recent quarterly performances and cash taxes are expected to be in the range of $4 to $5 million. In terms of share count we anticipate approximately 278 million shares outstanding of common stock at the end of our fiscal 2010 using the if converted method.
 
With that, well open the call up for your questions.
 
Question-and-Answer Session
 
 
Operator
 
 
(Operator Instructions) Your first question comes from Ittai Kidron Oppenheimer & Co.
 
Ittai Kidron Oppenheimer & Co.
 
Dean, I wanted to drill a little bit in to your guidance on CPG for better than seasonality, is this handset market seasonality or your own historical seasonality that you are benchmarking against?
 
Steven E. Creviston
 
Were benchmarking against the handset industry seasonality which we would say looking over the past five to 10 years has been 10% to 15% down in March averaging about 12% on average so were confident were going to beat that.
 
Ittai Kidron Oppenheimer & Co.
 
Focusing on the cost side of the equation Dean, gross margin since youre going to have a change in revenue mix in the March quarter in favor of MPG, which correct me if Im wrong is a higher margin, is there an opportunity for your gross margin despite a decline in revenues to actually stay flat? If not flat, actually move up? Then also on the op ex should we assume flat heading in to March?
 
William A. Priddy, Jr.
 
Theres always an opportunity for the margin to stay flat but I think in terms of more conservatism and given our view of current product mix we would expect some decrease in gross margin in the March quarter versus the December quarter.
 
Ittai Kidron Oppenheimer & Co.
 
And the operating expenses?
 
William A. Priddy, Jr.
 
Operating expenses will probably tick up somewhat in the March quarter. Were probably looking somewhere in the 3% to 5% range.
 
Ittai Kidron Oppenheimer & Co.
 
Why would they go up from March to December?
 
William A. Priddy, Jr.
 
For one thing we recently reinstated our 401K match. We also took a year off from giving salary increases and that will be layered back in to the March quarter. So nothing major in terms of expense increases. Theres always the increase in FICA taxes every year beginning in the March quarter for those people who may have maxed out on FICA taxes during the year.
 
Operator
 
 
Your next question comes from Analyst for Uche Orji UBS.
 
Analyst for Uche Orji UBS
 
I just wanted to drill down on your CPG revenue for the December quarter. Im just wondering if you can provide some color as to sequential growth from the September quarter? And also if you could provide some color as to some areas of strength or weakness from various customers or geographies?
 
Steven E. Creviston
 
I can say that the December quarter for CPG was really very stable. It was broad based I think in terms of the growth and we were obviously up sequentially on a weekly run rate or normalized basis, 13 weeks to 13 weeks and it really was across China and Korea as well as our leading OEM customers so I would say it was very broad based, no particular pockets to point out either way.
 
Analyst for Uche Orji UBS
 
There have been some reports of shortages in the component for the handset, Im just wondering if you were impacted by any of the shortages or did you benefit from shortages at your competitors?
 
Steven E. Creviston
 
I think that was more a factor in the September quarterly probably than the December quarter and certainly today going in to March again as Dean said, were seeing a very strong start to the quarter and dont appear to be impacted by any supply shortages.
 
Operator
 
 
Your next question comes from Edward Snyder Charter Equity Research.
 
Edward Snyder Charter Equity Research
 
Several questions here actually, Im trying to dig down in to some of the strength that you see and you mentioned in the press release that you gained a lot of ground on the media tech references designed in to China, is that ongoing? How much do you think you have gained and is it ongoing basically? Then the flip side of that is of course it seems to be no secret that one of your competitors is gaining some ground as Nokia is trying to diversify their supplier base a bit. Any indication on how far that will go? In a perfect world what would you have Nokia as a percentage of revenue? I know you guys felt it was a bit high at certain points too and then how are these two going to balance themselves out? Then, I have a follow up.
 
Steven E. Creviston
 
There was a lot there, I guess let me take it this way, it should be very clear that were confident that we will remain the top supplier to the worlds largest handset manufacturer so speaking of share transitions there I think were very confident in our position there over the long term horizon so well remain number one there. Beyond that, as you point out the reference design opportunities in China have gone extremely well for us. I think we have been talking for about two years now about our focus really in China and Korea and weve been showing how weve really been delivering results there and executing demonstrating the diversification and so that is on track as well.
 
I guess the way we see it unfolding is best summed up by just saying that we expect in FY 11 that were going to grow our front end business in balance. Were quite confident that as a matter of fact and going forward year-over-year we believe in balance well continue to grow.
 
Edward Snyder Charter Equity Research
 
In that regard, why the big change in China? I know youve been targeting it for several years here and its been an area where years ago you actually played more strongly than you had in recent times, is it just that youve had more compelling designs? Is it a price issue because youve got extra capacity now? Why the gains in China and why do you think theyre going to continue to grow, not just that you are shipping product but that you can continue to grow there?
 
Steven E. Creviston
 
I wouldnt call it a price issue by any means based on extra capacity. We talked at our analyst day actually in 2008 I suppose, we showed a picture of the 716X family of products that we were bringing out and how we expected to achieve product leadership both in the cost to produce the product but also in its functionality. Since then weve talked many times I think about how we brought out a complete product family about that pin out so our customers can develop one board layout and then release anything from a dual band GPRS up to a quad band edge solution with that same phone board. That concept is really catching on and were seeing to your first question that this is definitely continuing. Were making a lot of progress. We think weve got a long way to go there as well.
 
Edward Snyder Charter Equity Research
 
Then finally just one quick one for Dean, obviously with all the upheaval in late 08 and all of 09 most everybody has gotten away from any kind of detailed guidance but youve had kind of a real stable run here improving performance overall, do you see yourselves going back to giving more specific guidance or are you guys comfortable with this approach and just going to take the volatility? Then, I want to clarify you said in the coming quarter that 15% target operating margin is where you think you might head, is that GAAP or pro forma.
 
William A. Priddy, Jr.
 
To clear up the guidance for the coming quarter we said that for the full fiscal year 10 timeframe that we would converge on 15% non-GAAP operating margin. So I guess youll have to maybe do a little bit of modeling to come up with your expectations for the March quarter but clearly were very confident of converging on that 15% type operating margin for the full fiscal year 10 and thats about a year ahead of where we thought we would be converging on that type of performance. Were actually looking to be able to exceed that 15% operating margin in the fiscal year 11 timeframe. Im sorry, the first part of the question again was?
 
Edward Snyder Charter Equity Research
 
Guidance, do you see yourself going back to giving more specific guidance or are you guys comfortable with this approach forever?
 
William A. Priddy, Jr.
 
We already given an awful lot of guidance on the call and at various conferences and throughout the quarter so I think the days of RFMD giving revenue will be X and earnings will be Y, I dont see a need to go back to that kind of old fashion way of giving guidance.
 
Operator
 
 
Your next question comes from Mike Burton FBN Securities.
 
Mike Burton FBN Securities
 
Can you talk a little bit on the CPG guidance from a geographic perspective where some of that strength is coming from and if it is outside of some of your hub customers, your level of comfort maybe you could talk a little bit about your visibility in to those businesses?
 
Steven E. Creviston
 
I think the March quarter so far is shaping up to look a lot like the December quarter. Really again, the demand is pretty broad base, certainly theres strength in 3G, I mean thats growing much faster than the market obviously in terms of dollars in particular as well as units so were seeing strength there but it is also across many, many different customers? Also I guess maybe something specific to RFMD we have talked about launching our switch and signal conditioning product line so those products are getting in to the market now and were definitely expecting that to have huge sequential growth in the March quarter and then throughout FY 11 as well. I think that its really across the board.
 
Mike Burton FBN Securities
 
Than on margins, you mentioned that the new products are going to help out going forward with your margins, should we expect to see that on the gross margin line? Then on the operating margin side with the aggressive product launch plans that you have, youre obviously talking about even exceeding your 15% operating margin target but do we kind of see that as a little bit of a headwind that maybe as we start to look in to fiscal year 12 we can see even further upside?
 
William A. Priddy, Jr.
 
Im not quite sure I understand the part about the headwinds but clearly whats driving the margin performance is number one how we structure the business and number two is the resulting customer and product diversification that were seeing across the business whether its in the cellular products group with some of the products that Eric had mentioned in 2G and 3G, new customers that were bringing on going in to production with all the major Smartphone manufacturers.
 
MPG has not realized its full potential coming out of the downturn. Most of this market has been a little slower to recovery so were seeing those markets begin to pick up steam and as you know the margins in the MPG business are quite a bit accretive to corporate margins. So just about everywhere we look we see room for margin improvement. We mentioned that for every $1 of incremental revenue that we expect in fiscal year 11 were going to be dropping 60% plus to the bottom line so thats pretty good fall through.
 
Robert A. Bruggeworth
 
Just to clarify something, what we said was for fiscal 10 for the entire fiscal year we would approach 15% and what Deans comments were earlier in fiscal 11, I know you mentioned 12, in fiscal 11 we should be able to exceed the 15%.
 
Mike Burton FBN Securities
 
Then just lastly, 10% customers in the quarter?
 
William A. Priddy, Jr.
 
Within CPG we had two and there were no 10% customers in MPG during the quarter.
 
Operator
 
 
Your next question comes from Mark McKechnie Broadpoint AmTech.
 
Mark McKechnie Broadpoint AmTech
 
Can you help out just the mix of MPG versus CPG in the quarter?
 
William A. Priddy, Jr.
 
That was roughly 80/20.
 
Mark McKechnie Broadpoint AmTech
 
Then by technology can you break that out for CPG?
 
William A. Priddy, Jr.
 
Well we mentioned that Y band or 3G was about 50% of the cellular front end business so the rest of the cellular front end business would be 2G technologies and the transceiver business was in a range between 10% and 15% of revenue.
 
Mark McKechnie Broadpoint AmTech
 
When youre looking out to March, maybe this is for Eric or Dean, hows the visibility relative to normal times? Are you giving yourself a bit more backlog coverage or is it about in line? Whats the visibility however you can quantify it?
 
Steven E. Creviston
 
It is a little hard to quantify it, youre right. We believe the visibility is very good right now looking in to the March quarter. Certainly, the order patterns are very strong, lead times are very good and so it appears we have very good visibility in CPG.
 
Robert M. Van Buskirk
 
In MPG I think along the lines of the prepared comments as youve already heard weve actually seen some strengthening across a broad range of our end markets and our order book reflects that. Were off to a really good start for this quarter especially as compared to last quarter.
 
William A. Priddy, Jr.
 
In other words Mark were 100% booked for the type of revenue guidance that we have laid out.
 
Mark McKechnie Broadpoint AmTech
 
Just a housekeeping question, for the full fiscal year fiscal 11 if you look out, Dean what should we think about in terms of tax rate?
 
William A. Priddy, Jr.
 
We dont really look at it as a percentage basis. I think it all depends on how much money that were making when you compute the cash taxes and we expect to be more profitable in fiscal year 11 than we were in fiscal year 10 so you can expect cash taxes will be going up. Youre probably still in the range of maybe another $1 million to $1.5 million a quarter on top of what youve seen on average this quarter. But once again, it all depends on the profitability and where that profitability occurs because there are different tax rates in different countries.
 
Mark McKechnie Broadpoint AmTech
 
Is the relatively lower tax rate are there NOLs that are being absorbed there or is it just based on where you bill?
 
William A. Priddy, Jr.
 
A couple of reasons why we use cash taxes, for one thing we do have considerable NOLs, we have federal NOLs of about $100 million, $97 million to be specific and federal R&D tax credits of $41 million so we still have quite a bit of those to work through on a GAAP basis. So, we thought the investors would be interested in cash taxes and how it would impact the companys free cash flow.
 
Mark McKechnie Broadpoint AmTech
 
One last one and if its too much you can take it offline but just the remaining convert schedule, I guess you paid off your10 when are the next ones do and how do they ladder out?
 
William A. Priddy, Jr.
 
Weve got a small amount of 10s left, about $10 million due the first of July and then in 2012 theres about $198 million and 2014 roughly $135 million.
 
Operator
 
 
Your next question comes from Tore Svanberg Thomas Weisel Partners.
 
Tore Svanberg Thomas Weisel Partners
 
First of all Dean I think you mentioned 2% to 4% cap ex as a percentage of revenue in fiscal 11, how much revenue would that potentially support?
 
Robert A. Bruggeworth
 
With our factories running roughly 70% coupled with the increasing dye per wafer that weve got planned, we can grow significantly. A lot of that capital will be continuing to expand our engineering capabilities for new products and new technologies along with Dean pointed out some of our backend processes that has our suppliers, we grow with them well make versus buy decisions.
 
William A. Priddy, Jr.
 
Remember a large part of MPG is outsourced so its a completely different model in many regards than our cellular products group. Within CPG I mentioned that our fabs are operating at roughly 70% capacity utilization and were only in about the fourth inning of the dye shrinks actually having an impact so we could easily increase our front end revenue by 50% or so without adding wafer fab capacity. A lot of this gets back to the strategic decision to buy what was formally the Philtronics six inch facility in the UK about three years ago. Thats really paying off big time for the company.
 
Tore Svanberg Thomas Weisel Partners
 
Just looking more in the near term it looks like youre already booked for the quarter. Hows linearity? Are you expecting turns orders to maybe slowdown a little in the quarter? Im just trying to understand why youre being a bit more conservative if youre already very much booked for what your goal is?
 
William A. Priddy, Jr.
 
I think theres no uncertainty, I think most companies are a bit conservative on their guidance. In terms of linearity we expect a strong first half of the quarter, probably take a little breather during the lunar New Year time frame as most companies would expect and then our customers are telling us to expect a strong back half of the quarter.
 
Robert M. Van Buskirk
 
MPG typically has some turns business during the quarter. My comments earlier about order strength would lead you to believe and I think properly lead you to believe that were expecting fewer turns as a percent this quarter as we have seen over the past few quarters.
 
Tore Svanberg Thomas Weisel Partners
 
Finally for Bob, Bob you mentioned shuttle run of GaN already going on right now. When would you expect to start to see some revenues?
 
Robert A. Bruggeworth
 
We actually have some pretty insignificant level of revenues already. Its going to slowly build, the foundry business takes a while to get the funnel filled. The funnel is pretty full right now at more than 20 customers in that funnel right now. We have quite a few design kits out there and were interfacing on a daily basis. I would say that the meaningful revenue would start to come in over the next few quarters. I might also mentioned that because weve opened the doors as a foundry, were also engaging with large customers and large potential strategic partners about actually sharing our GaN technology not only as a product but perhaps as a foundry or a technology. So weve got some interesting dialog going there also.
 
Operator
 
 
Your next question comes from Tim Luke Barclays Capital.
 
Tim Luke Barclays Capital
 
I was wondering if maybe Bob might be able to provide some color on which areas with MPG are helping to deliver sort of sequential growth or flat to slightly up revenue in the March quarter? It sounds like the CATV business is coming back a bit.
 
Robert A. Bruggeworth
 
We actually are expecting I think we said in the prepared comments that all the business units that we have, the four major areas, should grow but were looking for continued growth in Wi-Fi access points and CPE with the opening of Wi-Fi for handsets in China. Thats an interesting development, a lot of Wi-Fi applications in handsets now are also becoming dual band which provides some opportunity for our front end modules there.
 
The AMR smart grid area is an area that we should see some growth sequentially as well as our defense and power applications. Our defense and power business has been growing quite nicely over the past few quarters and actually on a year-over-year basis. We also indicated that cable TV should also see some growth. So I think as Bob may have mentioned in his prepared comments, it is very broad based. Were starting to see quite frankly all of our diversified end markets heal and recover and start to show some opportunity for growth.
 
So its not one particular market. Thats the message Id like to leave you with. It is across a broad range of our end markets but we do expect all of our major end markets to grow quarter-over-quarter. Theres been a pause as you know from a wireless infrastructure standpoint the second half of last year which we forecasted. We are even starting to see some indication that that might also start to return to growth in the first half of this year.
 
Tim Luke Barclays Capital
 
For Eric or for Dean, when you say that CPG is expected to be better than normal seasonality, could you just remind us what normal seasonality has been and any framework around what that may mean?
 
Steven E. Creviston
 
I think we commented earlier that we are comparing ourselves to the handset industry seasonality which we would benchmark it as 10% to 15% typically, about 12% on average and thats what we intend to do.
 
Tim Luke Barclays Capital
 
So you think youll be at the lower end of that decline scale of 10% to 15% or you think that youll be better than that?
 
Steven E. Creviston
 
At the lower end of that I think.
 
Tim Luke Barclays Capital
 
Maybe just a broader question for Dean, clearly just with respect to the linearity of the December quarter, the overall revenue seemed to come in slightly below the consensus number for the revenue, what was the delta there with that although you had improved margins?
 
William A. Priddy, Jr.
 
 
The consensus was probably within a million or so dollars. Linearity was actually pretty good during the quarter. I would say if there was any one area that was a bit of a headwind actually goes back to the September quarter and some concerns about inventory build with a particular customer in Korea. So, if there was any short fall that probably accounted for that million or couple of million or so eroding. It was pretty much in the noise but I think maybe what is more important is the run rates have been established subsequent to the December quarter the [pull] rate has been pretty strong.
 
Tim Luke Barclays Capital
 
I wouldnt like to close out without providing you guys the opportunity just to clarify on the relationship that you have with the large Scandinavian handset manufacturer and how you see your position there given the recent ebb and flow in terms of reports on different market share changes within Nokia?
 
Steven E. Creviston
 
Maybe you were offline for a bit, we did answer that question earlier and essentially were very confident in remaining the top supplier with our largest customer and the worlds largest handset manufacturer. Were very confident in that position in the long term and beyond that weve got a lot of products coming out that weve been talking for a couple of years now about our ability to continue to gain in the rest of the market. Were demonstrating those gains so were confident were going to grow, net/net in balance were going to grow year-over-year.
 
Operator
 
 
Your next question comes from Harsh Kumar - Morgan, Keegan & Company.
 
Harsh Kumar - Morgan, Keegan & Company
 
A couple of questions, can you remind us how long you expect the POLARIS tail to last? Also, I think you said your core business margins of 41% or thereabouts, what will that do to your margins in the near term lets just say six to nine months out and then ultimately longer term?
 
William A. Priddy, Jr.
 
Harsh, I can comment on the gross margins a little bit longer term. What may appear to be a bit of a headwind is actually a tailwind to gross margins longer term. The POLARIS business up against the roll off were going to see an improvement in our gross margin for a couple of reasons, number one it is low margin business, very low margin compared to company averages and number two, were picking up significant new product design wins both with cellular front ends and also with switch and signal conditioning products and MPG coming back that are all very much accretive to corporate margins.
 
So were replacing low margin business with high margin business so as POLARIS rolls off its a three margin point drag today basically is what it is. So with that Eric can speak to how long POLARIS is going to last.
 
Steven E. Creviston
 
Customer forecasts continue to show that well have about two more quarters of roughly the same absolute dollar level that were in today and then it will ramp down over about a four quarter period.
 
Robert A. Bruggeworth
 
The one thing I want to comment on there Harsh, its something I know we take questions from time-to-time, why dont we end of life it. I think whats most important is our customers can determine at the rate it can decline and goes to end of life and were going to support them the whole way through whether they need more or less, were in lock step with them and were going to support them through this. So, given the visibility that we have today, thats the view we see that Eric gave you.
 
Harsh Kumar - Morgan, Keegan & Company
 
Now that you are very, Id say today, very close to cash breakeven on a per share or per stock basis net, what is your game plan for cash? Is it to kind of continue to build it and then eat away at this debt that youve got? Any kind of color will be helpful.
 
William A. Priddy, Jr.
 
Well, I think all options are on the table Harsh. Yes, I mentioned that we continue to have an active share buyback and bond buyback program in place. Were not going to rule out strategic options that would be accretive to the companys earnings so basically everything is I feel like for the first time in a good year, year and a half, that all of our options are open to us.
 
Harsh Kumar - Morgan, Keegan & Company
 
If I can squeeze in one last question, are you guys concerned at all, weve seen this from a lot of companies here recently having better than excepted March. Is there any concern within your management team that this may be coming at the expense of the June quarter or even quarters beyond?
 
Robert A. Bruggeworth
 
 
I think I can speak for both Eric and Bob Van Buskirk, were not seeing any indications of that. in fact, were really looking forward to calendar 2010 growth in many of our end markets. Bob listed several that were expecting to be up quarter-over-quarter and we think thats going to continue. Clearly, when we look at the handset market were expecting double digit growth coupled with as you know Smartphones and the number of 3G phones continue to grow in their percent of the cellular market that significantly increases our dollar content coupled with the new product segments that we talked about in the switch and signal conditioning product line driving a lot of our growth in the Gallium Nitride in our MPG business.
 
So were seeing what we believe is pretty good outlook for our markets coupled with the new product introductions and our new technologies that quite honestly 2010 calendar year is setting up to be a strong year. Dean and I have also commented, you know fiscal 11 we know is going to be better than fiscal 10 but Ill allow Bob and Eric to add any color.
 
Robert M. Van Buskirk
 
On the MPG side of things as weve indicated its been a very steady recovery in a very broad based sense. There arent any spikes that were looking for in the March quarter that would cause us any heart burn going beyond March and we havent seen any indications that anyone is doing anything in March ahead of June. So I would say because of its a broad nature for us and its steadiness were not losing any sleep over that particular item. We may be losing it over other things of course but right now it looks to be very steady and very broad based.
 
Operator
 
 
Your next question comes from Stephen Ferranti Stephens, Inc.
 
Stephen Ferranti Stephens, Inc.
 
Dean I guess one for you, the 60% contribution margin that you mentioned earlier, does that assume any material change in product mix CPG versus MPG?
 
William A. Priddy, Jr.
 
 
No, thats with the current projected product mix.
 
Stephen Ferranti Stephens, Inc.
 
Then just to clarify earlier I think you said 60% dropping to the bottom line? I just want to clarify thats correct versus dropping to the gross profit line.
 
William A. Priddy, Jr.
 
Well, its going to drop to the gross profit but we dont see any meaningful increases in expenses during calendar 10 or FY 11 so I would say the fall through is going to be pretty much one-for-one.
 
Stephen Ferranti Stephens, Inc.
 
Then just the last one for me, Skyworks is out there theyre over 20% op margin on the December quarter, is there structurally anything that would prevent you guys from sort of trending up towards that level over time?
 
Robert A. Bruggeworth
 
Structurally absolutely not, I think theres no reason why we cant trend that direction. Weve laid out our plans, you look at the fall through Dean talked about and you just discussed on our gross margin coupled with the growth that we expect in the industries and clearly we can achieve that.
 
William A. Priddy, Jr.
 
In fact, when you look at our core business our gross margins are already above 41% so thats very close and operating margins were 17% so we give it a bit of revenue growth in our core business and 60% of that falls through, it adds up real fast.
 
Operator
 
 
Your next question comes from [Banc Nothomooney] - J.P. Morgan.
 
[Banc Nothomooney] - J.P. Morgan
 
I wanted to dive in to your gross margin guidance, I think you said its going to be down sequentially. Now, is this a function primarily of lower revenue and lower utilization or do you expect the POLARIS business to be strong again which would obviously have an impact on gross margins?
 
William A. Priddy, Jr.
 
We were very vague on specific gross margin guidance. I mean we can construct various scenarios but expectations if revenue does drop and you have a certain amount of fixed expenses then gross margins are likely going to drop as well. But, I think the thing that weve been getting across to investors is dont expect any significant fall off in gross margins in the March quarter because of seasonal factors.
 
[Banc Nothomooney] - J.P. Morgan
 
Then I think Eric you already mentioned this, for the next couple of quarters youre expecting solid growth in the cellular handset market but internally for your planning purposes what is your expectation for overall handset growth in units for 2010? Is it in the area of 10% or do you think its higher than that?
 
Steven E. Creviston
 
 
Yes it is, 10%.
 
[Banc Nothomooney] - J.P. Morgan
 
Then obviously from an ASP standpoint you continue to expect ASP growth because of your penetration in to Smartphones?
 
Steven E. Creviston
 
Yes, thats correct.
 
[Banc Nothomooney] - J.P. Morgan
 
Then Dean one other question for you, in terms of the inventory obviously inventory dollars have gone up in the last couple of quarters though inventory base has stayed roughly flat, is there any concern about an inventory buildup especially if the June quarter doesnt pan out as you expect?
 
William A. Priddy, Jr.
 
 
Indirectly we answered the question because we expect a very strong January timeframe and before Chinese New Year so weve actually put inventory in place to make sure were well covered for this demand period and then we also expect a very strong back half of the quarter as well with just a little bit of a let up during the Chinese New Year.
 
Robert A. Bruggeworth
 
 
Coupled with our cycle times if youre insinuating maybe there could be changes in demand, I feel real comfortable we can adjust to that so we see our inventory levels at the right levels per Deans comments on January. And, when we looked at our end customers inventory levels we still think theyre one to two weeks below whats typical or normal. We look at the whole industry not just our own inventories.
 
[Banc Nothomooney] - J.P. Morgan
 
That was going to be my next question to see what the inventory levels at distribution and at your OEM customers were but it looks like thats at a comfortable level as well?
 
Robert A. Bruggeworth
 
 
Yes. We think its actually below what they normally run by one to two weeks.
 
Operator
 
 
Your next question comes from Nathan Johnson Pacific Crest Securities.
 
Nathan Johnson Pacific Crest Securities
 
I just wanted to come back a little bit to China and was wondering how much, if any, of the better expected seasonality for CPG is due to increasing revenue mix from China ahead of the Chinese New Year? Then following up on that, just how we should expect that end market to progress as we head in to the June quarter and pass the New Year holiday? Do you expect that market could continue to grow or do you think that well see a little bit of a seasonal decline?
 
Steven E. Creviston
 
There is definitely some strength in China in the March quarter. I think your question is is that really driving our better than seasonality projection and I would say that is definitely part of it because of course China is typically down a bit in December and then comes back strong in March and were definitely seeing that pattern strong here so it is part of it. But, I would say were definitely seeing a lot of strength in Korea as well and then in 3G across all the OEMs. So its a part of it but I wouldnt say its the driver for the guidance.
 
Then looking further in to 2010 we do expect that market to stay strong. We do expect that weve got the ability to continue to take share there as well so were definitely expecting a pretty good year.
 
Nathan Johnson Pacific Crest Securities
 
Do you think potentially looking at the June quarter that share gains could potentially offset just the normal seasonal decline in that market?
 
Steven E. Creviston
 
Its definitely possible where we have a lot of new products coming out for that market. It remains to be seen exactly which products that our end customers sell and which ones dont. We should point out that TD-SCDMA as well has really, really taken off there very well and weve been working with [T3G] and others there. Weve been on reference designs for several years in preparation for this ramp and its coming in and were definitely a benefactor there. We have a very big presence in TD so as that continues to roll out that will benefit us as well.
 
Nathan Johnson Pacific Crest Securities
 
Just one other question for me, I just wanted to ask about AMR, you guys obviously highlighted that as an area of strength this quarter and I know it can be a fairly lumpy business but looking a little bit further out in to fiscal 2011 do you think thats a business that could see another doubling or do you think that theres something that will occur that will change the trajectory either to be better or worse than the year-over-year increase that you saw in fiscal 2010?
 
Robert A. Bruggeworth
 
I think your conclusion we would certainly concur with. With these often regulated mandated emerging markets they often go through what I call the deploy and digest phase. Theres a rapid deployment and then theres some digestion of the product and then they restart so maybe that gets the lumpiness youre talking about. We actually saw a little bit of that this year, as I said though we saw pretty good growth in our December quarter, were expecting to see that continue in the March quarter.
 
Were actually on a doubling track for the last couple of years in the whole AMR/AMI smart grid and now were starting to also look at some ZigBee applications because of the AMI, a lot of the ZigBee applications are migrating in to the home and spreading that infrastructure out not only to the meters but to potential appliances in the home. So going back to the beginning, we expect to be doubling this years revenue over last years revenue.
 
We will be very disappointed if we dont do that again next year. We also said in the beginning of the year that we thought we could get in the kind of double digits in the revenue and were on a kind of $8 to $10 million run rate as we exit this calendar year. So were still bullish on AMR/AMI and smart grid.
 
Operator
 
 
Your next question comes from Sanjay Devgan Morgan Stanley.
 
Sanjay Devgan Morgan Stanley
 
First question is can you give us a sense of what your internal utilization rates were in the December quarter and how you kind of project them to be in the March quarter?
 
William A. Priddy, Jr.
 
Utilization rates in the December quarter were around 70% which were roughly consistent with the previous two quarters. I dont expect any major departures from that utilization rate in the March quarter. It could tick down just a bit, I mean we dont expect to build inventory in the March quarter.
 
Sanjay Devgan Morgan Stanley
 
The second question is if you look at your kind of linearity, I think you touched on the linearity the previous caller had asked about your linearity in December and you said it was a very linear quarter. Can you compare the linearity with the previous quarter, with the September quarter? Was linear better, about the same? Im just curious how it tracked just given the disconnect in the two quarters?
 
Robert A. Bruggeworth
 
If you want to think about it, its typical that October, November, December usually increase over time and thats kind of what we saw a little trailing off in December near the end. I mean, thats pre

RFMD Delivers Third Consecutive Quarter of Sequential Growth in Gross Margin, Operating Margin and Earnings Per Share
2010-01-27 11:46:25

RFMD has generated $122.2 million in free cash flow fiscal year-to-date

December 2009 Quarterly Highlights:

* Quarterly Revenue Grows Approximately 24% Year-Over-Year


* GAAP Gross Margin Expands To 36.4%, And Non-GAAP Gross Margin Expands To 38.4%

* GAAP Operating Margin Increases Sequentially 390 Basis Points To 13.4%, And Non-GAAP Operating Margin Increases Sequentially 140 Basis Points To 17.8%

* GAAP Diluted EPS Improves To $0.09, And Non-GAAP Diluted EPS Improves To $0.14

* Free Cash Flow Totals $41.9 Million In The December Quarter And $122.2 Million In The First Three Quarters Of Fiscal 2010

* RFMD Purchases And Retires $197 Million Of Convertible Notes Due 2010

RF Micro today reported financial results for its fiscal 2010 third quarter ended January 2, 2010. RFMD's December 2009 quarterly revenue increased approximately 24% year-over-year to $250.3 million. GAAP gross margin for the quarter increased sequentially from 35.9% to 36.4%, and non-GAAP gross margin increased sequentially from 38.1% to 38.4%. GAAP operating income was $33.6 million, and non-GAAP operating income was a quarterly record $44.6 million. GAAP net income was $24.9 million, or $0.09 per diluted share, and non-GAAP net income was a quarterly record $38.8 million, or $0.14 per diluted share.

 

To view in full goto:

http://ir.rfmd.com/releasedetail.cfm?ReleaseID=440542

Zacks Equity Research highlights Cree, Inc. as the Bull of the Day.
2010-01-27 10:41:41

Cree, Inc.is one of the leading producers of SiC and GaN-based LEDs. September quarter revenue and earnings exceeded consensus estimates.

The global movement to energy efficient lighting is prompting lighting companies and consumers to look at other options. Therefore, lighting will be the strongest end market for Cree, likely followed by video displays and noteb