RF Micro Devices Earnings: Returning to Profitability

RF Micro Devices posted a huge increase in profits during its first quarter, and the upcoming merger with TriQuint could help profitability further.

Aug 13, 2014 at 4:45PM

RF Micro Devices (NASDAQ:RFMD), a provider of cellular radio frequency solutions, easily beat analyst estimates when it reported earnings recently. Revenue increased, but the real story was a dramatic rise in profitability, pushing the operating margin up to nearly 15%. Guidance was strong, reflecting upcoming smartphone launches, and the company expects another quarter of substantial earnings growth. Here's a deeper look at RF Micro's earnings.

Earnings rundown
RF Micro beat analyst estimates for both revenue and EPS during the first fiscal quarter:

 

Average analyst estimate

Actual results

Revenue

$304.86 million

$316.32 million

Non-GAAP EPS

$0.17

$0.24

Revenue rose 23.6% sequentially, and 8% year over year, driven, in part, by the ramping up of various smartphones. Gross margin rose to 45%, up from just 31.9% during the same period last year, reflecting both the revenue growth and a significant reduction in the cost of goods sold. Operating income, which was a negligible $3.2 million during the first quarter of 2013, rose to $46.1 million.

RF Micro operates with two main segments, the cellular products group, or CPG), and the multi-market products group, or MPG. A third segment, the compound semiconductor group, produces negligible revenue. Here's a breakdown of how each main segment performed during the quarter:

Segment

Revenue ($millions)

YOY Revenue Growth

Operating Income ($millions)

YOY Operating Income Growth

CPG

$261.1

9.8%

$69.6

217.1%

MPG

$55.2

(0.2%)

$10.9

58.5%

Source: RF Micro Devices

CPG, which includes products that go into smartphones, tablets, and notebook computers, represented the bulk of both revenue and operating profit for RF Micro during the quarter.

Guidance from the company for the second-fiscal quarter was strong. Revenue is expected to be $345 million, a year-over-year increase of 10.9%, while operating expenses are expected to remain flat. The high gross margin from the first quarter is expected to continue into the second quarter, and guidance for a non-GAAP EPS of $0.27 is more than double the result from the second quarter of the previous year.

A fast-growing industry
The market for RF components was more than $27 billion in 2013, and Strategy Analytics expects this number to rise to $45 billion by 2018 due to the continued growth of cellular devices. Earlier this year, RF Micro announced a merger with TriQuint Semiconductor (NASDAQ:TQNT). When the deal closes later this year, the result will be a larger component supplier that should have more pricing power. The combined company will be similar in size to competitor Skyworks Solutions (NASDAQ:SWKS), which not only grew revenue faster than RF Micro in its most-recent quarter with year-over-year growth of nearly 35%, but also managed an operating margin in excess of 25%.

RF Micro's revenue is actually growing slower than the RF component market as a whole. According to TechNavio, the RF component market will grow at a CAGR of 12.5% through 2016, a bit higher than RF Micro's recent 9.8% revenue growth for its cellular segment.

Scale may be what is holding back RF Micro, and the merger with TriQuint has a good chance of fixing this problem. During the past decade, RF Micro's profitability has depended largely on revenue. In fiscal 2007, 2010, 2011, and 2014, RF Micro averaged $1.05 billion in revenue, with an average operating margin of 9.2%. In the other six years, the company averaged just $847 million in revenue, and a negative operating margin of (3.75%), excluding large asset and goodwill impairments in fiscal 2009.

Scale will become increasingly important as the RF component market continues to grow, and smaller suppliers unable to effectively compete for large design wins will suffer. RF Micro's growth during the first quarter has allowed it to return to profitability, and the combined company after the TriQuint merger is completed will be better positioned to consistently turn a profit.

Key takeaways
RF Micro returned to profitability in a big way during the first quarter, and it expects to continue this trend into the second quarter. Its merger with TriQuint will increase its scale, allowing it to better compete against rivals like Skyworks Solutions. The continued growth of the RF component market offers plenty of opportunity for the company going forward.

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Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, Skyworks Solutions, and TriQuint Semiconductor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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