RF Micro Devices (NASDAQ: RFMD) reported strong earnings during its first fiscal quarter, with revenue growing and earnings handily beating analyst estimates. The provider of radio frequency solutions also provided solid guidance, with the gains in both gross margin and operating margin during the first quarter expected to continue into the second quarter.
To get a sense of where the company is headed in the long term, the post-earnings conference call is a good place to look. Here are five quotes from CEO Robert Bruggeworth and his management team that provide some insight into the future of the company.
An explosion of data will spur demand
Looking first at handsets, half of the world's handsets shipping today average less than $1 of RF content, and that's increasing to several dollars over a multi-year period as the demand for data requires incremental RF content. Whether you look at entry level devices or flagship smartphones, the RF content is growing generation over generation, across market segments and geographies.
RF components allow devices to connect to wireless networks, and as both the number of Internet-enabled devices and the amount of data consumed by those devices grows, demand for RF components will grow as well. Cisco estimates that by 2016, annual global IP traffic will surpass 1 zettabyte, or 1 trillion gigabytes, and the number of connected devices will be about twice as high as the global population by 2018.
As the amount of data used by each mobile device grows, more complex RF components are required, and RF Micro is banking on this explosion of data to increase the amount of revenue it derives from each mobile device.
RF Micro is getting efficient
We have streamlined our manufacturing footprint and we are laser focused on achieving the lowest possible cost structure. In short, we've seen expanding TAM, coupled with much lower fixed cost and intense focus on all areas of products or costs. We believe the stage is set for continued strong margin performance at or above model, and significant leverage to the bottom line.
RF Micro's rapid earnings growth during the first quarter was due to both revenue growth and a more efficient cost structure. While revenue grew by about 8%, operating profit increased by a factor of 14 because of dramatically lower costs. The cost of goods sold decreased by nearly 13% thanks to the manufacturing streamlining mentioned in the above quote, and total costs as a percentage of revenue declined from 98.9% during the first fiscal quarter of last year to just 85.4% during the first fiscal quarter of this year.
The company's guidance suggests that these newfound efficiencies are here to stay, with both gross margin and operating margin expected to remain roughly flat sequentially.
Merger with TriQuint will give the new company scale
We see NewCo unlocking significant shareholder value over multiple years in the form of cost, expense and revenue synergies. Looking at our markets, we see increasing revenue opportunities in the deployment of new communication protocols in both handsets and in underlying networks to support them, this robust environment is increasingly favoring the RF suppliers that can meet our customers and platform providers' most critical requirements relating to performance, cost, budget and scale.
RF Micro announced that it was merging with TriQuint earlier this year, and when the deal closes, the new company will have annual revenue close to $2 billion. RF Micro expects to realize about $150 million in cost synergies within two years after the merger, and the combined company should be more competitive against larger rivals.
Growth of 4G in China driving strong results
Yeah, so China was certainly strong in the June quarter of course based on the rollout of the 4G systems, and when we look at the kind of China white box, it's still roughly about 20% range. There are a few of the -- like the top five China OEMs are really becoming much more like all the other global OEM.
4G is a recent development in China, and surging growth was one of the drivers behind RF Micro's strong performance. China Mobile, the largest carrier in China, has nearly 800 million customers, and so far, just 2.6% of those customers use 4G data.
This number has been growing rapidly, though. The company first started offering 4G in February, and the number of 4G subscribers jumped by 6.5 million during the month of July to 20.4 million. Over the next few years, it's not unreasonable to expect China Mobile to add hundreds of millions of 4G subscribers, and each additional device with a 4G modem is an opportunity for RF Micro to grow its revenue.
The barrier to entry is getting larger
In response to a question regarding a hypothetical situation where a large company with plenty of resources wanted to compete in RF Micro's core markets:
I think, Harsh in 2G I would say the barrier was a lot lower. 3G maybe a little bit higher, 4G much higher, and now as we -- now bring together, as you pointed out, all these different technologies and capabilities.
As the technology behind RF Micro's products becomes more advanced, the amount of effort required to enter the market grows. While this doesn't mean billions of dollars in R&D spending can't produce competitive products, the return on investment gets less attractive as the technology becomes more complex.
The RF Micro and TriQuint merger is likely only the beginning of consolidation in the RF component market, as smaller companies will have a tough time competing against larger rivals. Whether the combined company will be able to win and maintain a large, defensible market share is an open question, but the progress made by RF Micro during the first quarter is certainly a step in the right direction.
