In February, RF Micro Devices (NASDAQ: RFMD ) and TriQuint Semiconductor (NASDAQ: TQNT ) announced that they are merging to capture a larger share of the radio frequency chips market. Shares of both companies rose sharply after the announcement, as the merger will result in the creation of one of the biggest players in the market for connectivity chips. But, even after the announcement, shares of both companies have risen 25% on the back of terrific results.
Both RF Micro and TriQuint supply components to the biggest names in the mobile devices industry: Apple (NASDAQ: AAPL ) and Samsung (NASDAQOTH: SSNLF ) . As such, the merger of the two will create a powerhouse that will deliver terrific revenue and earnings growth in the future.
More efficiently tapping the Apple universe
In the first quarter, TriQuint derived 26% of its revenue from Apple contractor Foxconn. Even RF Micro's revenue from Apple was in the double digits, although the company didn't disclose an exact percentage. What stands out is the fact that both companies gained dollar content in the latest iDevices.
According to Michael Walkley of Canaccord Genuity, RF Micro was a winner with the iPhone 5s and 5c. In fact, the company seems to have strengthened its position with Apple by taking business from Peregrine Semiconductor. TriQuint, meanwhile, probably outpaced another Apple supplier, Skyworks Solutions. According to Pacific Crest Securities' teardown review of the latest iPhones, TriQuint "likely achieved more meaningful dollar content gains vs. Skyworks on overall up PA content in the iPhone 5s."
So, it is quite clear that both companies have been gaining more business at Apple. This will be a big advantage for the combined company, as Apple is likely readying its newest groundbreaking iPhone for release this year, reportedly in August, according to supply chain rumors. The first, a 4.7-inch version, will probably be released first, followed by a bigger 5.5-inch or 5.6-inch model in September, according to Reuters.
Also, according to the Economic Daily, a total of 80 million iPhone 6 handsets will be manufactured this year. Apple might be finally making a bold move to address the needs of customers who have wanted a bigger device, so the next product transition could bring new users into the Apple ecosystem.
A Kantar survey reveals that devices with a screen size greater than 5 inches accounted for 40% of shipments in the world's biggest smartphone market, China. Hence, a bigger iPhone, or rather an iPhablet, should help Apple generate more sales, ultimately benefiting the combined RF Micro and TriQuint.
RF Micro's Samsung clout
While TriQuint's top line is skewed toward Apple, RF Micro generates most of its revenue from Samsung. In fiscal 2013, Samsung accounted for 22% of its revenue. The company has been landing more dollar content in Samsung's phones and saw a ramp up in sales as the South Korean company increased production of its latest flagship, the Galaxy S5. RF Micro saw increased demand for discrete power amplifiers, or PAs, multi-mode PAs, antenna switches, discreet switches, and power management chips.
The good news is that sales of the Galaxy S5 are tracking ahead of its predecessor. According to Chitika, within 25 days after its launch, the Galaxy S5 accounted for 4.3% of all continental Samsung smartphone web traffic in North America. In comparison, the Galaxy S4 accounted for just 2% of web traffic in the same time frame last year.
Thus, RF Micro's growing clout at Samsung and the strong performance of the smartphone giant's latest flagship should lead to solid gains for a merged RF Micro and TriQuint.
The combined entity expects $150 million in cost synergies after the merger. In fact, both RF Micro and TriQuint have been undertaking cost-cutting moves in recent quarters, and this added synergy could lead to greater earning power in the future. In their respective last-reported quarters, earnings guidance of both companies was way ahead of consensus estimates.
TriQuint expects to post earnings of $0.06-$0.08 per share in the ongoing quarter, well ahead of the $0.04 consensus. Similarly, RF Micro guided for an EPS of $0.17, blowing past the $0.11 Wall Street estimate. This is a sign of greater things to come, as the merger would enable RF Micro and TriQuint to further amplify their earnings growth.
The merger of RF Micro Devices and TriQuint Semiconductor is a win-win situation for both companies. They will benefit from the two major yearly smartphone launches, and the combined efficiencies of both will enable them to lower costs. As such, if you own shares of either company, you would be better off holding them instead of booking profits after landing terrific gains this year.
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