TriQuint Semiconductor (UNKNOWN:TQNT.DL) is having a terrific run in 2014. The company's shares have gained more than 60% on the back of terrific financial results and the news of a merger with fellow chipmaker RF Micro Devices (UNKNOWN:RFMD.DL). Also, since TriQuint supplies chips to Apple (NASDAQ:AAPL) and is gaining dollar content in iDevices, its prospects look bright.
When TriQuint reported its first-quarter results, the company revealed good performance. Although its revenue declined 4% year-over-year due to program timing in the defense market and seasonality in the smartphone business, the gross margin shot up to 35% from 23% in the year-ago period. The company's guidance of revenue between $215 million-$225 million in the second quarter was also above analysts' estimates, pointing to robust prospects going forward.
Looking at the different strategies that TriQuint is undertaking to improve its bottom line, it might be a good buy before it finally merges with RF Micro.
Why the growth momentum will continue
TriQuint's excellent first-quarter results were driven by key improvement initiatives, cost reductions, and a better product mix.
This year, TriQuint plans to transition its portfolio from legacy to premium products. Along with improvements in operational efficiency and the continued growth in new products, the company's gross margins are expected to improve in each quarter of 2014. The combination of cost reduction initiatives and an improved product mix is expected to drive gross margin above 40% over the next three quarters.
TriQuint is also executing key development projects and has maintained a strong level of new product output, with 36 new product introductions in the first quarter.
TriQuint is continuously investing in technology to fuel its growth and stay at the forefront of a constantly changing RF industry. The company is trying to make its products different and efficient through different ways such as temperature compensation in passive products, lower current consumption in mobile products, and more reliable high-powered radar products. It is also creating a competitive advantage with advanced packaging expertise, such as its space-saving Copper Flip interconnect, eliminating the need for wire bonds, in small, but robust wafer-level packaging for filters.
This merger is a smart move
While TriQuint is focusing on creating a strong product portfolio with efficient solutions, its merger with RF Micro will bring more synergies. The merger of TriQuint and RF Micro is a significant event, creating a new industry powerhouse. High-speed broadband wireless connectivity is believed to be the foundation for future economies and a combination of TriQuint and RF Micro will be able to target this market more efficiently. This merger will create what is likely the largest RF player in the combined infrastructure and defense markets.
TriQuint and RF Micro complement each other in the mobile space with high-volume module manufacturing, technology leadership, and a broad, well-matched product portfolio. The new company will bring scale, technology, and product innovation to the marketplace, better serving customers and setting the standard for this industry. Moreover, the merger is expected to result in at least $150 million in cost synergies. So, the combined company will deliver better earnings performance in the future.
Mobile to bounce back
However, TriQuint's mobile devices business saw a sequential drop of 45% in revenue. TriQuint was coming off a very strong fourth quarter, but seasonality in the first quarter and a temporary inventory correction contributed to larger-than-normal revenue decline.
Going forward, a significant step up is expected in demand for mobile products. The reason behind this is simple -- TriQuint is a key supplier to Apple, but Foxconn had accounted for 26% of its overall revenue in the previous quarter. In the future, this could be a big growth driver for the company because Foxconn is an Apple contractor. Apple is now working on the next version of the iPhone, and there are a lot of promising rumors going around.
There's a possibility that the iPhone 6 could be as thin as the existing iPod touch, according to MacRumors. In addition, Apple's upcoming iPhone is expected to offer larger screen sizes. As a result, Apple should be able to capture the growing market for large-screen devices in the future. Since Apple's sales could increase with the launch of a larger device, the demand for TriQuint's chips should also see a jump.
TriQuint's merger with RF Micro, its cost-reduction plans, and a big customer such as Apple are some of the key points that could drive its growth in the long run. Although the stock has seen major gains this year, it isn't done yet and is still a good buy before it completes its merger with RF Micro Devices.
Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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.