Oct 24, 2007
Executives Ralph Quinsey - President and CEOSteve Buhaly - CFOAnalysts Steve Ferranti - Stephens Inc.Amit Kapur - Piper JaffrayMellisa- JPMorganOperator Good afternoon. My name isTheresa, and I will be your conference operator today. At this time, I wouldlike to welcome everyone to the TriQuint Semiconductor Third Quarter ResultsConference Call. All lines have been placed on mute to prevent any backgroundnoise. After the speakers' remarks, there will be a question-and-answer session(Operator Instructions) Thank you. Mr. Quinsey, you may begin your conference.Ralph Quinsey Thank you, Theresa, and welcome,everybody to the call. I have with me both Stephanie Welty and Steve Buhaly.I'd like to thank Stephanie for her many years of service, and introduce SteveBuhaly to our first earnings call, Steve?Steve Buhaly Thank you, Ralph, and goodafternoon, everyone, and welcome to our third quarter 2007 conference call. I'dlike to remind everyone that the intention of this call is to comply with RegFD, and to discuss things with all of our shareholders that might affectTriQuint's business in the future.To do this, we may makeforward-looking statements, such as statements about TriQuint's projectedrevenues, growth rates, gross margins, operating expenses, operating results,and earnings per share. These are statements that involve risks anduncertainties.The results could differ materiallybased on various factors, including TriQuint's performance, demand for itsproducts, ability to develop new products, improve yields, maintain productpricing, reduce costs and win customers, the results of its independentauditors quarterly review and annual audit, and the market conditions.In addition, historicalinformation should not be considered an indicator of future performance. Thispresentation includes non-GAAP financial measures, which exclude equitycompensation charges from our adoption of FASB statement Number 123R, andcharges for in-process research and development resulting from our acquisitionof Peak Devices.These non-GAAP measures areprovided to enhance the users' overall understanding of our core operatingperformance. A full reconciliation of these non-GAAP measures can be found inour press release. Additional considerations and important risk factors aredescribed in TriQuint's reports on Form 10-K and 10-Q and other filings withthe SEC.Any forward-looking statementsmade in this call are based on expectations as of today, and TriQuint cannotprovide any assurance that future results will meet expectations.Ralph will now provide anoverview of the quarter.Ralph Quinsey Thank you, Steve. I am verypleased with our Q3 results. We achieved revenue gains across all of ourmarkets, and improved gross margin performance well reducing inventory.Excluding the non-cash charges related to the acquisition of Peak Devices, wegenerated earnings above the range of our previous guidance.Our bookings for the quarter at$144 million were an all time record, positioning the company for a solid Q4. TriQuint benefited from ourexpanding portfolio of transmit modules for the handset market. Unit growth oftransmit modules continues faster than the market, and provides increasing RFcontent in multimode phones. The wireless local area network transition to802.11N is driving increased GaAs demand, by doubling or tripling the RFcontent per application. Integral to TriQuint's strategy isour broad technology portfolio, the broadest in the industry. This includesmultiple compound semiconductor technologies, SAW filters, BAW filters, andhigh-volume module capability. Customers and partners are increasingly seeingthe benefit of the TriQuint solution.Handset revenues increasedapproximately 35% in the third quarter of 2007 as compared to Q3 of 2006. Ourhandset gross margins improved sequentially due to efficiency gains andimproved yields. The margin improvement was achieved despite a greater mix ofGSM revenue than originally expected. Transmit module revenues grew 185% overQ3 of 2006. CDMA transmit modules grew 440%, and GSM transmit modules grew110%. Our wideband CDMA/EDGE revenue grew 102% over Q3 of 2006. We are currently shippingproduction volumes of our EDGE transmit module and I expect to ramp thisproduct further in 2008.Our handset product pipeline ismore exciting now than it has ever been, due to persistent focus onhigh-performance products built to design value and cost out of our customers'applications. This is a winning strategy for our customers and a financial winfor the company, as new products drive improved gross margin performance in thehandset market.Our networks market is creating agreat deal of excitement both within the company and with our customers. We areincreasing R&D investments for networks, expanding our ability to serve thegrowing needs of this market.We are meeting or exceeding ourplans to accelerate growth on several fronts, including RF power forinfrastructure, complete RF solution for wireless LAN, filter products for GPS,RF products for point-to-point radio communications, and V-set groundterminals. The acquisition of Peak Devicescomplements our strategy of simplifying RF. Peak Devices brings discreet RFpower products and wideband technology to the TriQuint portfolio. SimplifyingRF is all about bringing the leading technology, ease of design, and superiorvalue to our customers, resulting in solid financial performance for TriQuint.Revenue for point-to-point radioproducts was up over 46% in Q3 2007, as compared with the same quarter lastyear. Overall unit demand is up for this application, with increases inbackhaul demand for remote locations.Additionally, we are expandingour product offering, with new multifunction devices and application-specificfilters for the radio and bay station markets. These integrated RF solutionsare reducing system design complexity, and improving performance for ourcustomers. I expect revenue for these products to ramp in Q4, and Q1 of 2008.Our ground station productrevenue is up over 52% in Q3 year-on-year, and we continue to be a leader inthis market. We have demonstrated our ability to be a reliable supplier, withsustained investments for new high-frequency package products.Additionally, we achieved fivedesign wins in the cable market during the quarter, and have recorded solidsequential cable revenue growth. TriQuint has an unmatched capability focusedon the military market, with the broadest offering of compound semiconductortechnology, BAW and SAW filters in the industry.Our team of trusted engineers aresuccessfully partnering with industry leaders, creating next generationsolutions critical to future programs. I am delighted our military revenue hasgrown 10% from prior year's Q3, and faster than our original expectations. Ihave raised my expectations in general for this market based on theopportunities before us.Quoting activity remains veryactive, with specific interest in upgrades for existing airborne radar systems,technology migration to non-airborne radar systems, and opportunities incommunications, and electronic counter measures. The addition of widebandcapability gained from the Peak acquisition also creates exciting opportunitiesin the military market.We continue to attract fundingfor our Gallian Nightride program, and continue to successfully complete keymilestones for this important technology. The GaN development program with astable reliable process technology now in place is moving into the productdesign phase. New product revenue, defined as revenue from products introducedwithin the previous two years, was in the mid-40% range for the corporation asa percentage of total revenue. In absolute terms we achieved record new productrevenue in the quarter for handsets, networks, and military products. Myassessment of our new product pipeline is that it is very healthy, and I expectnew product revenue to grow in the upcoming quarters.Factory utilization wasessentially flat to the previous quarter because we supported revenue gainswith inventory reductions. GaAs equipment utilization was approximately 70%,below the target range of 85% to 95%, leaving capacity available for continuedgrowth.Now, Steve will provide resultsfor the third quarter of 2007 and our fourth quarter guidance. Steve?Steve Buhaly Thank you, Ralph. For the thirdquarter of 2007, we reported revenue of $122.9 million, an increase of 19% overthe third quarter of 2006, and 8% sequentially. Please refer to thesupplemental data posted on the investor section of our website for a detailedbreakdown of our revenue by market.For the quarter, our revenue toend market was comprised of 54% to handsets, 35% in networks, and 11% military.By region, the breakdown was Asia 65%, Americas24%, and Europe 11%. Finally, revenue breakdown forwireless handsets broke down as follows; GSM/GPRS 43%, CDMA 39%, wideband CDMA,EDGE and other 18%.For the sixth quarter in a row,Motorola and Samsung each contributed more than 10% of our revenue. Ourbook-to-bill ratio for the quarter was 1.16
1. With bookings at $144 million,the third quarter of 2007 was an all-time record.
Net income was $1.9 million;or $0.01 per diluted share for the first and third quarter of 2007, $0.06 perdiluted share in Q3 of 2006, and $0.01 in the second quarter of 2007. Excludingequity compensation expense of $2.3 million, and in-process research anddevelopment charges of $7.6 million due to the acquisition of Peak Devices, netincome was $11.8 million or $0.08 per diluted share, exceeding expectations.Excluding equity compensation of$2.2 million in Q3 of 2006, and $2.1 million in Q2 of 2007, net income was$0.07 and $0.02 per diluted share for each period respectively.
Our grossprofit margin for the third quarter of 2007 was 32.2%, an increase offour-tenths of a percentage point over the third quarter of 2006, and 5.7percentage points over the second quarter of 2007. The sequential increase ingross margin was primarily due to excess inventory charges of $4.1 million, or3.6% of revenue in the second quarter of 2007.
Third quarter 2007 gross profitmargin, excluding equity compensation expense was 32.8%.Operating expenses were $39.5million for the third quarter of 2007, an increase of approximately $13.9million from the third quarter of 2006, and an increase of $8.9 million fromthe second quarter of 2007. The sequential increase was primarily the result ofthe in-process research and development charge of $7.6 million, and increasedspending of approximately $1.5 million for research and development.As a percentage of revenue, ouroperating expenses for the third quarter of 2007 were 32.2% compared to 24.8%and 26.9% for the third quarter of 2006, and second quarter of 2007respectively.
Third quarter operating expenses, excluding equity compensationexpense and a charge for in-process research and development were $30.3 million,or 24.7% of revenue, which is consistent with our long-term business model. Werecorded net interest income of approximately $2.2 million in the third quarterof 2007.
We recorded a net tax expense of about $0.5 million in the thirdquarter of 2007. The third quarter tax expense was primarily related to foreignoperations, and a true up of the 2006 tax provision.Our balance sheet remains solidwith cash, cash equivalents, and short-term marketable securities at $174.7million as of September 30, 2007,an increase of approximately $20 million over the cash and investment balanceas of June 30, 2007.During the quarter, our netinventory decreased $11.2 million to $68.4 million, due to focused reductionsthroughout the business.
As a result of this inventory decrease, our inventoryturns increased to 4.9 in the third quarter of 2007 from 4.2 in the secondquarter of 2007, calculated using ending inventory.Cash flow from operations was$39.5 million in the third quarter of 2007. Solid operating results, combinedwith working capital improvements, drove cash flow in the quarter.
As a result,our cash balance grew by $20 million, despite capital expenditures of $5.6million, and the net cash payment to purchase Peak Devices of $14.7 million.Depreciation and amortizationexpense for the third quarter of 2007 was $7.1 million. Our trade receivableswere up approximately $6.3 million for the third quarter of 2007, driven byincreased revenues resulting in a DSO of 57, as of September 30, 2007.A complete reconciliation of GAAPto non-GAAP results is available in our press release, and in the investorsection on our website at www.triquint.com.Fourth quarter 2007 outlook, weexpect that revenue in the fourth quarter will be between $125 million and $130million.
Fourth quarter earnings are expected to range between $0.07 and $0.09per diluted share. Excluding estimated equity compensation expense of about$2.4 million, we expect earnings to range between $0.08 and $0.10 per dilutedshare.
As of today, we're approximately 87% booked for the fourth quarter.Our next conference call, the Q12008 earnings release is scheduled for Wednesday, February 20, 2008 at 2:00p.m. Pacific Time.
During the coming quarter, we will be presenting at thefollowing conferences; UBS and Stephens, November 13th and 14th; LehmanBrothers, December 5th; and the Needhamgrowth conference, January 9, 2008.Information on these events can be found in the investor section of ourwebsite. TriQuint will be hosting ananalyst day in New York on November 15, 2007, and we hope allof you will be able to attend.We will also continue our virtualvisit program, which is a biweekly introductory conference call for investorswho are new to TriQuint.
Please contact Heidi Flannery, investor relation’sconsultant for TriQuint, if you'd like to participate in any of those events.I will now turn back to Ralph forclosing comments prior to welcoming your questions.Ralph Quinsey Thanks, Steve. These are excitingtimes for TriQuint.
Our industry is experiencing both unit growth and contentexpansion. TriQuint has positioned itself as a technology leader with thebroadest RF Portfolio in the industry.
Our new product engine, which haspropelled us into the handset market, is now driving expansion of our militaryand network opportunities. Our near-term outlook is for healthy growthsummarized as follow.Growing handset revenue driven bymultiple standard, expanding our growth drivers into non-handset markets.Continued efficiency improvements and improved product mix yielding improvedmargins.
Controlled spending with additional investment in R&D andimproving net income.Theresa, we would now welcomequestions from the participants.Question-and-Answer Session Operator (Operator Instructions) Our firstquestion comes from Steve Ferranti with Stephens Inc.Steve Ferranti - Stephens Inc. Hi, guys, good afternoon.Congratulations on a nice quarter.Ralph Quinsey Thanks, Steve.Steve Ferranti - Stephens Inc.
It appears that you are one ofthe fewer players in the industry today that actually has equipment capacityonline that's in excess of your current needs. Do you see that as an advantagefor you today?Ralph Quinsey Yes, we do, Steve.
We haveinvested in capacity over the last several quarters. We've discussed that oncalls.
We think, we've got a great lineup of new products. We're seeing gooduptake with our major customers, and we're expanding with new opportunities.
So,I look forward to filling up this capacity, and continuing to manage thatnumber upwards.Steve Ferranti - Stephens Inc. Okay, great.
And I guess turningtoward the 3G side in your handsets business. Looked like nice growthyear-over-year, but a slight downtick sequentially.
Can you give us some colorbehind that?Ralph Quinsey Sure, if you dig into thenumbers, the 3G, the wide-band CDMA portion of the number was actually upslightly sequentially as well, and the EDGE was down slightly. If you look at Q2, where we reportcombined numbers, we jumped up and then settled back down.
Still, greatgrowth year-over-year, and I expect to see continued good growth in Q4 and in2008. So, I would read more of that into just a leveling and an adjustmentbetween Q2 and Q3 than a dominant trend.
The dominant trend remains good,strong healthy growth.Steve Ferranti - Stephens Inc. Okay, great.
And to what extentdo you see, you mentioned in the script that your EDGE transmit module businesswas ramping. To what extent do you see that as a sort of an incrementalopportunity for you?Ralph Quinsey That's certainly part of ourgrowth.
We're shipping millions of units this quarter and we will ramp up tomillions more next year. That program launched a little later in the year thanwe had anticipated, largely due to issues outside of our control, but gooddriver, good volumes, good part of the growth story in 2008 Q4 and 2008.Steve Ferranti - Stephens Inc.
And I guess, do you see theinitial opportunity there with some of maybe your existing baseband partners,or would it be with maybe some of the newer players in the space?Ralph Quinsey The initial opportunities will bewith some of our stronger customers, particularly in Korea,and so we'll see relatively quick expansion of that opportunity. But, you werevery keen, and noticed that we do expect to benefit with that device with someof our key baseband partners and single-chip radio partners.Steve Ferranti - Stephens Inc.
Okay. And I guess one lastquestion with regard to reference design and some of your existing basebandpartners today.
How do you feel competitively, in terms of where you sit today,and how much do you see some of the handset providers potentially designingaround reference designs that those baseband providers put out there?Ralph Quinsey We have partnerships withvirtually all of the chipset solution providers, and strong partnerships withthe majors. I would classify those relationships better today than they haveever been.
The market is taking advantage of reference designs, and to be quitehonest with you, we're actually seeing some of the demand for our products withspecific reference designs being [upsided] on very short notice, and we'redelighted to address that demand. As far as customers not using referencedesigns or substituting devices for reference designs, if I understood yourquestion correctly, Steve?Steve Ferranti - Stephens Inc.
Yes, that was right.Ralph Quinsey Certainly that happens. Some ofthe major customers, Nokia, number one provider in the world really do not relyon reference designs.
Although they may use products associated with areference design. And then if you work your way through the suppliers, there'svarying degrees of 100% compliance with reference designs or not.
For ourbusiness, the reference design opportunities are really the second andthird-tier opportunities. We have close working relationships with our majorcustomers where we're on their road maps, we're developing products in parallelwith their development of phones, and typically it's not a complete referencedesign play.
So I would look at that more as a Chinaand second-tier Koreaopportunity than a top-five player opportunity.Steve Ferranti - Stephens Inc. Okay, very good.
Appreciate thecolor and good luck going forward, guys.Ralph Quinsey Thanks, Steve.Operator Our next question comes from AmitKapur with Piper Jaffray.Amit Kapur - Piper Jaffray Great, thanks a lot, guys. Ralph,in terms of the strong order flow you talked about, any particular strength inhandsets, network or military or was it kind of across the board?Ralph Quinsey Our book-to-bill is 1.15, 1.16, inthat range, so very strong.
If you look at the individual businesses, all ofour markets, with the exception of foundry, were above one. Foundry was veryclose to one, and we had particular strength in handsets and in military.Amit Kapur - Piper Jaffray Great.
And in the handset market,can you maybe talk about the competitive environment in the industry,particularly for WCDMA components, and how do you see module architectures maybeplaying out over the next year or two?Ralph Quinsey Sure. The market is definitelytransitioning from component products to transmit modules.
I think everyonerecognizes that transition now and supports it. TriQuint was uniquelypositioned with great products in transmit modules across multiple standards,as you know.
Right now, because of that transition and the strength, we'reseeing actually some uptake in the market that was unforecasted, and so we feelpretty good about that. The GSM end of the market has been particularly strongfor us on transmit modules.
The wideband CDMA transmit modules, as I haddiscussed earlier. I think there's some balancing between Q2, Q3.
Sosequentially the growth is not as specific as it is year-over-year, but I thinkthat's a year-over-year a good trend you will see in 2008 as well.Amit Kapur - Piper Jaffray Great, and maybe a final questionon the infrastructure market before I turn it over; some of your customers havegiven some cautious commentary, in terms of revenue growth over the next year.What are you seeing in the infrastructure market from your perspective?Ralph Quinsey Right, for our networks businessin total, it still looks fairly healthy. Q3 typically is a peak quarter and so,I expect Q4 to be about flat.
Within networks, base stations, I think, some ofthe color that we're hearing about the end market maybe more software servicerelated than hardware related, and certainly our point-to-point radio businessremains very healthy. For the other parts within networks for us, cable growth,a relatively small base, but we're excited about expanding into that market; wirelessLAN fairly stable sequentially but very exciting opportunity for us in 2008 aswe introduce our fully integrated second-generation, multiple-input,multiple-output solution.
We still feel very positive about that program andexcited about it.Amit Kapur - Piper Jaffray Great. Thanks a lot, guys.Ralph Quinsey Thanks, Amit.Operator Our next question comes fromChris Danely with JPMorgan.Lewis Felisha - JP Morgan This is [Lewis Felisha] calling forChris Danely.
I was wondering if you could give us some color on gross margintrends past this quarter. You guys had a pretty good gross margin improvementthis quarter, obviously due to the inventory charge you took last quarter, butwhere do you see these going?
Are we still making improvements and are youexpecting them to trend up going forward?Ralph Quinsey You bet. So when you look at themath quarter-on-quarter, sequentially, we have this big improvement.
But whenyou sort through the noise on that, it was still a very good quarter. If youassume the total ENO was about 3%, 3.5% of the last quarter margin, that leftus last quarter maybe in the 30% range.
So, about a 2% sequential improvement; thisis a good quarter-on-quarter improvement. That's the strength of the businessmodel going forward.
I’ve a target out there when we hit about $160 million,$170 million revenue of 40% gross margin, it's dependent upon good mix, keepinghandsets in that 54% to 58% range, which I think is very reasonable. Andgrowing in our military and networks business, which we're starting to seeevidence of based on investments, we've been making over the last 18 months.
SoI would like to think that we would have steady gross margin improvementbetween now and reaching those levels. Certainly we'll have some quarters thatseasonal quarters or quarters that we have a healthy mix of satellite productthat will drive a little variation in gross margin.
But the trend line shouldbe pretty consistent gross margin growth towards our model.Lewis Felisha - JP Morgan Okay, thank you.Operator There are no further questions atthis time.Ralph Quinsey Well, I’d like to thank theparticipants on the call. It's an exciting time for TriQuint.
We have, I think completeda very good quarter with revenue growth across all of our markets, good grossmargin growth, and earnings performance slightly above our originalexpectations. So thank you very much.
We will see you in the upcoming eventsand schedule for our next call on February 20.Operator This concludes today'sconference. You may now disconnect.