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Apple's (NASDAQ: AAPL ) weak guidance is taking a toll on its component suppliers. The Cupertino-based giant called for revenue of $43 billion in the first quarter when it reported results last month, falling behind consensus estimates of $46 billion. Moreover, Apple's year-over-year revenue is expected to decline slightly when it reports earnings next. As such, it wasn't surprising to see Apple suppliers such as TriQuint Semiconductor (NASDAQ: TQNT ) and RF Micro Devices (NASDAQ: RFMD ) issue weak guidance figures of their own. But things are set to get better.
Combining forces is a good move
The market hasn't punished these component suppliers. Both have gained in the double digits so far this year as investors have probably recognized their long-term potential. And since both these companies have now decided to join forces, the reasons to buy them are stronger than ever.
TriQuint is seeing strong business at Apple and it is also a supplier to Samsung, while the build-out of LTE in China should spur demand for its base-station products. As such, the slowdown is supposed to be temporary as Apple slows down iPhone production after the peak holiday quarter.
Similarly, when RF Micro reported its results third-quarter results recently, the company's earnings outlook came in just shy of Street estimates. However, RF Micro shares have continued their journey north as the company already has several tailwinds going forward.
Strong reasons to buy already existed
For starters, RF Micro is greatly focusing on improving its margins. The company is executing various strategies, including raw material sourcing, reducing fixed costs, installing additional capacity, and higher sales of its CMOS power amplifiers. These initiatives have led to an expansion of 530 basis points in the gross margin from last year. Moreover, RF Micro is already working on more than 75 programs to further improve margins. The cost synergies as a result of the merger with TriQuint should lead to greater margin expansion in the future.
Apart from this, the company has started seeing strong customer activity. It is looking at double-digit revenue growth in the next fiscal year, driven by design wins at leading smartphone makers such as Apple and Samsung, along with the fast-growing Chinese smartphone market.
Late last year, Canaccord Genuity analyst Michael Walkley had reported that RF Micro is winning more dollar content at Apple and Samsung, placing it in a great position to benefit from the marquee devices of both companies.
RF Micro's relationship with both Apple and Samsung ensures a steady flow of orders at all times of the year. While sales of the iPhone might have peaked during the December quarter, Samsung is rumored to be preparing the next Galaxy flagship. As a result, lower orders from Apple aren't making a big dent in RF Micro's top line.
Similarly, once Samsung is through with the production of the Galaxy S5, Apple will step in to boost RF Micro's top line. RF Micro expects a ramp up in production in the September quarter this year, which should continue into the quarter ending in December, leading to a solid performance in the back half of the year.
Moreover, Apple's probable product development moves, such as the production of a larger iPhone and iPad, along with a rumored phablet, could improve the adoption of iDevices in markets where consumers prefer larger screen sizes. In addition, the China Mobile partnership could prove to be yet another tailwind for RF Micro Devices. All in all, it can be concluded that since RF Micro probably counts both Apple and Samsung as 10%-plus customers, it is well-positioned to benefit from the device cycles of the two consumer electronics giants.
But there's more to RF Micro than just Apple and Samsung. The company sees opportunity in increasing LTE content in mid-tier smartphones and the increasing adoption of 3G devices in developing countries. It is also counting on the increase in connected objects through the Internet of Things by supplying solutions for embedded connectivity, smart homes and cars, and wearable technologies. The roll-out of TD-LTE in China is resulting in design and production ramp activity of LTE-enabled handsets, while the resulting carrier aggregation will lead to more demand for switch content and tuning solutions.
What the merger means
As Fool analyst Steve Symington points out:
[T]he merger combines two companies with largely complementary product sets, which could effectively serve to boost their prospects for supplying a larger chunk of the chips required by electronics titans like Samsung and Apple.
Hence, the combined entity should continue to benefit from numerous tailwinds, and since their operations can be expected to be more efficient, it won't be surprising if the bottom line increases at a greater rate going forward.
The bottom line
It is pretty much evident that RF Micro is sitting on numerous opportunities, and they would increase after the TriQuint merger. As such, in my opinion, investors shouldn't exit their long positions and look beyond one day's pop, because the combined operations can lead to greater returns in the future.
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