Feb 11, 2009
Executives Steven J. Buhaly - Vice President Finance, Chief Financial OfficerRalph G.
Quinsey - President, Chief Executive OfficerAnalysts Tim Luke - Barclays CapitalNathan Johnson - Pacific Crest SecuritiesSteve Ferranti - Stephens, Inc.Quinn Bolton - Needham & CompanyKevin Wincheck - P. Capital Management Aalok Shah - D.
A. Davidson & Co.Bill Develum – Tiatum Capital ManagementsDrew Burke - Century Hill PartnersOperator Good afternoon.
My name is Don and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter year end conference call.
All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session.
(Operator Instructions)Mr. Steve Buhaly, CFO, you may begin your conference.Steven Buhaly Good afternoon and welcome to our fourth quarter 2008 conference call.
This call will include forward-looking statements about TriQuint’s projected financial and operating results. Results could differ materially based on various factors including those described in our reports on forms 10-K and 10-Q and other filings with the Securities and Exchange Commission.
This presentation also includes non-GAAP financial measures which exclude equity compensation charges, certain impairment charges, and charges associated with the acquisition of WJ Communications. These non-GAAP measures are provided to enhance overall understanding of our core operating performance.
A full reconciliation of these non-GAAP measures is in our press release.Ralph will now provide an overview of the quarter. Ralph?Ralph Quinsey Thank you, Steve.
Investors should consider three areas to understand our recent quarter and outlook. First, we saw slowing demand in Q4 and now expect more unseasonable decline in Q1.
Demand slowed abruptly during the quarter impacting our commercial markets, in particular handsets and wireless LAN. With an increase level of backlog rescheduling or pushups, these pushups have subsided and normal demand pull is returning.A significant amount of wireless LAN inventory remains in the system.
I expect strong demand the second half of 2009 after inventory has worked through the system.Secondly, we are experiencing lower factory utilization as a result of slowing demand, inventory adjustments and normal seasonality. Customers are aggressively de-stocking to bring down inventory levels built up in anticipation of a strong Q4 that did not materialize.
These inventory reductions amplified the slowdown seen by companies like TriQuint. I expect this to continue through Q1 putting pressure on gross margins.
Finally, we continue to see solid momentum from design one traction and important gains in our growth market. We are one of the few handset suppliers achieving year-over-year growth with continued adoption of our highly integrated modules and growing applications such as Smart phone.
We are also benefiting from our diversity with strength in markets that appear somewhat insolated from the economic slowdown, such as military. Finally, I expect the anticipated 3G expansion in China to create market opportunity for TriQuint in 2009.Looking at the year in total, 2008 was a record year for TriQuint delivering 21% revenue growth as compared to 2007 and an 18% increase in non-GAAP operating income resulting from successful penetration of key markets and customers.
These are solid results with the events of Q4 brought rapid change and muted what was to be an extraordinary year for TriQuint. Our revenue was sequentially down in Q4 following a strong ramp in Q3, but we reacted quickly keeping our internal inventory levels essentially flat with reductions in raw materials and offset by an increase in finished goods.
We expect to reduce finished goods inventory in Q1. The double impact of slowing demand in inventory reductions throughout the supply chain has driven our utilization rates much lower than we originally planned.
In our large fine factory, utilization was 45% during the quarter, down from 83% in the prior quarter.I expect utilization will drop further in Q1 as we and our customers continue to reduce inventory, with utilization improving in Q2 and the second half of 2009. Underlying the slowdown, we have positioned ourselves in growth markets and where we have expanding content.
In particular, handsets, Smart phones, broadband wireless, and military. We saw growth in Q4 with key customers, such as Rim, Erickson, ZTE, LG, Queserra, HTC.
In each case, we were either gaining share or benefiting from our customer’s success in a slowing economy. I expect 3G and Smart phone unit sales to be up in 2009 and we are well positioned for the great product lineup for these markets.
Infrastructure spending varies by region, but the expected investment in China’s 3G infrastructure to benefit TriQuint. Point-to-point radio largely used for bay station back haul remains a healthy market.
We had a strong quarter in military with timing of our major programs favorably impacting Q4. The 2009 outlook for military market remains healthy and I expect 2009 will be another record year.
In summary, we are clearly seeing the unfavorable impact of slowing demand and aggressive inventory management driving lower utilization in our factories. In this environment, we are maintaining solid new product momentum with new product revenue at 45% of total revenue in Q4.New product revenue was relevant from products lost within the last two years.
We anticipate growing share in our key markets during this slowdown and have the technology, capacity, and momentum to capture opportunity in 2009. We have significant curtailed spending, including a reduction in workforce to the release of temporary workers, sustained cost reductions by process improvements in major spending areas such as mass and supply chain costs.
Restrictions on new hiring and plan reduction to capital expenditures of approximately 50% year-over-year.These actions are prudent moves in the current environment. Additionally, I’ve asked the team for an increase sense of urgency in two areas.
First, aggressive reductions in cycle time within our factories and throughout our supply chain. During slow times, we can reduce our inventory risks and better position ourselves for an upturn by increasing the velocity within our factories and reducing the complexity of our manufacturing flow.
Our short cycle times helped us manage inventory in Q4, but continued focus will position us for better performance in the future. Secondly, invest where it makes sense.
Dynamic times create unique opportunities. TriQuint can gain from adverse market conditions by investing in operational efficiency and future opportunities.
Spending with nature in payback improves long-term efficiency. Given TriQuint’s strong balance sheet, I’ve asked the team to continue to invest in cost reductions, process improvements, supply chain consolidation, and designing cost out of our products.
Additionally, we will keep strategic focus on 3G, high margin network products, new technology such as tri-power, power bin, and our military model strategy, which will allow us to raise ASPs and maintain margins when lowering our customers’ costs. I will now provide some detail into our major markets of networks, handsets, and military.
In the network markets, we saw significant reduction in demand for wireless LAN products. We believe the wireless LAN market is robust long-term, but near term demand has been impacted by the economy and inventory reductions.
Our major wire customer built inventory prior to the slowdown and as a result we saw significantly lower demand in Q4 and I anticipate lower demand in Q1. Our networks revenue was down 28% sequentially primarily due to wireless LAN.
I am confident we are improving our share position in wireless LAN. Specifically, I anticipate design wins in wireless LAN for handsets with revenue growth for this sub-market in the second half of 2009.
In total, networks revenue grew about 4% in Q408 as compared to Q407. Point-to-point radio enjoyed healthy demand in Q4.
Optical was down following a strong Q3 and bay station revenue remains healthy offset by inventory reductions of WJ products in the channel post acquisition.In 2009, the bay station market should be stronger, led by the 3G investment in China. Additionally, I anticipate the growing importance of tower module radio head, 3G infrastructure, and multi channel GSM.
This market is ideally served by our introduction of Tri Power. Tri Power is a new generation of gas technology that enables bay stations by raising RF power efficiencies.
We are actively working with eager prospective customers to launch this technology. I expect formal design wins in 2009 with production revenue beginning near the end of the year.
I would like to turn your attention to our handset market now. We are clearly gaining share in handsets, but we are not immune to rapid changes the industry experienced during the quarter.
The industry was building inventory for a normally strong December quarter and mixed drive adjusted order and backlog down and reaction to the unexpected decline in demand.Our handset revenues declined approximately 21% sequentially in Q4 following an extraordinarily high Q3. Q3 was lifted by a large initial stocking order from major 3G platform.
Handset revenue was up 30% in Q4 as compared to Q208. That is 30% growth in two quarters within a challenging economic environment and approximately 16% higher than the year ago Q4.
In fact, year-over-year, our handset revenue grew approximately 19% in spite of the economic slowing. To date, we have shipped over half a billion modules into the handset market growing from approximately $140 million in 2007 to nearly $200 million in 2008.
Additionally, we were delighted to receive in Q4 the 2008 supplier of the year award from ZTE Corporation.We are increasing our contact with [phones] as our customers incorporate our products, which fully integrate the duplexer and power amplifier functions into a single transmit module.We expect to increase our share with Trillium modules in 2009. W/3G revenue was up significantly as compared to the year ago quarter and remains a strong growth engine for the company.
In fact, we had a record quarter for handset design wins in Q4 as measured by the expected three-year revenue of the design wins. Over half of these design wins were for our 3G products.
While overall handset unifying is expected to be down, approximately 10% in 2009, Smart phone volume is expected to be up approximately 7%. I expect Q1 handset revenue will be down 10 to 15% with some customers continuing to reduce inventory during this seasonally down quarter.
This will result in Q1 handset revenues similar to what we saw in Q208. I anticipate a healthier Q2 as customer inventory levels return to normal and demand rebounds from seasonality.
I have low visibility into the complete year, but believe we have the design wins in place to grow our handset revenue in 2009. There are two areas within the handset market that I believe will show relative strength this year.
GSM phones for emerging markets and Smart phones. Our product focus for 2009 is to launch a very low cost transit module for GSM and expand our product offerings to 3G and T.
Platforms. We are continuing to see solid adoption of our 3G products within multi band Smart phones driving content in excess of $6 dollars per handset.
These highly integrated modules deliver high efficiency enabling longer battery life and faster time to market for our customers. Last week, we made public our road map for standard setting converged architecture, Triumph.
The TriQuint unified mobile front end or Triumph module family streamlines the radio frequency footprint combining GSM, Edge, CDMA, and HSPA transmit functionality into a single module. This convergence of functionality into one power amplifying module significantly reduces size and cost for handset manufacturers as compared to today’s multi band module solutions.
Lastly, I will update investors on our military market. We achieved another record revenue quarter in Q4 benefiting from the timing of major programs.
Overall, military revenue grew approximately 39% in Q408 as compared to Q407. Major revenue drivers include [Hopajudy] ship base radar, [D.
Straight fighter] preproduction, the HTM four common radar chips used in new and retro fitted radar systems, and new programs such as the B2 Bomber are expected to ramp in 2009.Last quarter, I announced several major customer quality and service awards. TriQuint is proud of our service to the military market.
In this quarter I’m happy to report we’ve received accreditation as a Department of Defense trusted foundry. This designation is sure as our customers at TriQuint operates with the highest standards in service to our military customers and solidifies TriQuint as a premiere RF technology supplier in the military market.
Additionally, we were honored by Rathium’s space and airborne systems division with its top four star supplier excellence award.We continue to invest in our technology and leadership products. We are currently executing phase three of our D.
Gan contract, which represents approximately $16.5 million dollars of R&D investment over two years and a $4.5 million two-year program from the Office of Naval Research for high frequency, high voltage PM technology and product development. Additionally, I am very excited about our power band announcement.
Power band is a disruptive new technology enabling exceptionally wide band without the power and efficiency performance previously restricted to narrow bed amplifiers. This technology will first be targeted at Broadband defense applications, especially radar, single jammers, and wireless communication.
Overall, the military market is one that currently provides better visibility and stability than our other markets. We anticipate that Q1 will be down slightly as compared to a very strong Q4, but I expect military revenue to grow in the high single or low double digits in 2009.Now, Steve will provide our results for the fourth quarter of 2008 and our guidance for Q1.
Steve?Steven Buhaly Thank you, Ralph. For the fourth quarter of 2008, we reported revenue of $149.0 million.
Revenue increased 16% from the fourth quarter of 2007, but declined 20% sequentially. Exceptionally strong volume associated with 3G and wireless LAN product introductions in the third quarter combined with economic weakness in the fourth quarter caused the sequential decline.
For the full year, revenue in 2008 grew by 21%. For the quarter, our revenues split to end markets was handsets 54%, networks 33%, from military 13%.Our revenue by geographic region was Asia 55%, Americas 35% and Europe 10%.
Please refer to the supplemental data posted on the investor section of our website for a detailed breakdown of our revenue by market.During the fourth quarter, Foxconn was the only customer comprising 10% or more of our revenue. Our book-to-bill ratio for the quarter was 0.69, reflecting the inventory correction we are working through, anticipation of seasonal weakness in handsets, and lower end user demand.
Our gross margin for the fourth quarter was 30.1%. Fourth quarter non-GAAP gross margin was 31.5%.
Gross margin was impacted by significantly lower factory utilization and higher inventory reserves. Non-GAAP gross margin for 2008 was 33.9%, up from 32.5% in 2007.Operating expenses were $75.9 million for the fourth quarter and $39.9 million or 27.1% of revenue on a non-GAAP basis.
Included in GAAP operating expenses was a $33.9 million charge for the impairment of goodwill. We performed our annual impairment test in November when TriQuint’s market cap was substantially below the book value of the company.
Because we are reporting that we completed a fair value analysis and determined that the value of our good was impaired. Q4 non-GAAP operating expenses were down $4.2 million for the prior quarter as the company reacted to the changing demand picture.
We recorded interest income of approximately $0.5 million and tax expense of $1.0 million. Also included in other income and expense was a charge of $1.9 million reflecting a reduction in the value of an equity investment.Net loss was $33.8 million or $0.23 per share for the fourth quarter.
Non-GAAP net income in the fourth quarter was $6.6 million or $0.05 per diluted share, down from $0.12 in Q3.Cash flow from operations was $33.5 million in the fourth quarter of 2008. DSO at 52 days was down five days from the prior quarter, but will likely be under pressure over the next couple of quarters.
Inventory was flat, despite the rapid mid-quarter drop in demandCapital spending of $16.7 million and repayment of the $13.0 million dollar balance or line of credit were the primary uses of cash in the quarter. Non-GAAP financial measures excludes stock based compensation charges, impairment charges, and certain charges associated with the acquisition of WJ Communications.
Complete reconciliations of GAAP to non-GAAP results are available in our press release and in the investor section of our website. Moving to our outlook, we estimate that first quarter revenue will be $110 to $120 million.
The first quarter net loss is expected to range between $0.10 and $0.14 per share with non-GAAP net loss ranging between $0.07 and $0.11 per share. Cash flow is expected to be roughly neutral in Q1.
As of today, we are approximately 90% booked to the midpoint of revenue guidance for the first quarter. We are not guiding for full year performance due to uncertainly caused by the current economy, but expect 2009 to be a moderate revenue growth year.We hope you will be able to attend our annual investor’s conference to be held in Manhattan on February 26.
Please contact Heidi Flannery for more details.Our Q209 conference call is scheduled for April 23. We look forward to speaking with you then.
I will now turn to Ralph for closing comments prior to welcoming your questions.Ralph Quinsey Thanks, Steve.In summary, the slowing worldwide economy is the largest single factor impacting our business today. We have strong positions across many of our markets, but the economic outlook remains cloudy.
Customers have been reducing inventory levels in response to the slowdown. The combination of lower end demand and inventory reductions are driving our factory equipment utilization lower and putting pressure on gross margins.
I expect inventory reductions in Q2 and anticipate improving demand the second half of 2009.TriQuint has a very strong pipeline of design wins across all of our markets. Underlying the slowdown, I remain excited about the expanding content of RF and Smart phones, wireless broadband, and military applications.
I have low visibility into 2009, but we will remain focused on innovation, efficiency, and growth. This focus will allow us to take advantage of opportunities we have and emerge from these troubled times as a stronger company.
Don, we’re ready for questions.Question-and-Answer Session Operator (Operator Instructions) Your first question comes from Tim Luke – Barclays Capital.Tim Luke – Barclays Capital I was wondering if you could provide some color on how you have gained linearity as you went through the calendar fourth quarter and how you see the beginning of this quarter with January or February showing any signs of any improvement from the pressures that you seen in November and December. Separately, I was wondering how we should think about you planning your operating expenses given that you are suggesting that you think the full year calendar 09 you anticipate actual revenue growth year-over-year.
How you are thinking about your headcount and your operating expenses going forward and when would you anticipate moving back towards a break even level in terms of net income. Ralph Quinsey Tim, first of all, as far as linearity, absolutely saw some improvement in the first part of January as compared to the darkest days of Q4.
As I’m sure you’re aware, we went into Q4 and as the quarter progressed the situation deteriorated. We saw a lot of activity from our customers as far as request for backlog rescheduling or push-outs largely in the handset and the wireless LAN area.
It’s in an improved condition now as opposed to that period. As far as operating expenses, we are looking very closely at expenses throughout the organization, not just operating expenses, but also our manufacturing costs.
Our strategy is two-fold. We want to be very prudent as far as where we spend money and really tighten controls, but we also want to be very focused as far as investing in things that give us relatively fast return on that investment.
And so, we’ll watch it very closely and be responsive to changing conditions in the market. I do think there’s opportunity in the second half that I don’t want to miss.
As far as revenue break even, we’re not guiding beyond Q1, but I expect Q2 to be much improved from Q1 and to be a profitable quarter. Steve, you want to add something?Steven Buhaly In terms of operating expense throughout the year, we continue to have an objective to have our operating expenses at 25% of revenue on a non-GAAP basis and we will be looking to work our way back to that number as the revenue picture improves.
So we will be very deliberate and cautious with operating expenses until we get back to that point. Tim Luke – Barclays Capital Do you feel that the network and the handset businesses have the potential to be higher on a year-over-year basis?Ralph Quinsey Overall growth, other than military, I’m not really guiding particular percentages for handsets and networks.
I think handsets and networks has the opportunity for growth. Handsets has a very strong lineup in products.
Networks is going to be a function of the inventory burn down. We don’t know exactly how much inventory is out in the channel to burn down.
I do see some growth in wireless LAN in our networks, but large LAN and handsets, that will be in the second half of the year and right now don’t have enough visibility to give good color on that. Tim Luke – Barclays Capital China, 3G.Ralph Quinsey Right now, we’re still sorting through the opportunities for 3G in China, who’s getting what awards and how that will roll into our products and talking with our customers and sales force.
I think it could have impact as soon as Q2. I feel comfortable we’ll have good impact in Q3 and Q4.
Operator Your next question comes from the line of Edward Snyder – Charter Equity Research.Edward Snyder – Charter Equity Research Obviously we’ve got inventory issues, particularly on your wireless LAN you mentioned there was a big stocking in Q3 anticipation of the launch of the commercial release of that product. How much visibility do you have into that market in terms of weeks and any feeling on when they’re going to burn through it so the channel tightens up so that you might start seeing more demand?Days of sales in inventory, do you expect to burn through most of that?Ralph Quinsey I don’t have great visibility into wireless LAN, but for that market I estimate it’s going to be all of Q1 and into Q2 to burn through all of the inventory and get back to normal run rate.
That includes the channel inventory and our inventory. I would say that the channel inventory for handsets is not in as bad a shape as wireless LAN right now.
A lot of that was taken care of in Q4. There’s still some to go, but relatively speaking, not as bad a shape as wireless LAN.Steven Buhaly I’ll add to that.
I think with respect to the TriQuint inventory picture, we are pretty happy to be able to hold things flat in Q4 given the abrupt decline we experienced. We should be able to burn $5 to $10 million dollars in Q1.
I’d like to be at the high end, but we’ll see. Some of that depends on customers demand for us and I hope early in the second quarter we’ve got inventory back to a more appropriate level in terms of days of inventory.
Edward Snyder – Charter Equity Research In this period, where you cut utilization and you burn off finished goods inventory, you’re going to generate more cash than you would normally expect, because you’re just converting everything to cash, right?Ralph Quinsey That’s right. Some would offset by the drag on margins and therefore profitability.Edward Snyder – Charter Equity Research Right, but on a cash basis, we should see a nice performance for the next couple of quarters.
That’s going to help your balance sheet. Ralph, you talked about investing in cost reductions, but you were doing that anyway, correct?
Is there anything new that you’re looking at if you build up your balance sheet or are you just going to keep your powder dry for when demand picks up and work in capital is going to have to go up as demand starts picking up.Ralph Quinsey There’s no new significant investments for cash, if that’s what you’re asking. Cash in Q1, based on the investments we made to date, I think will likely be a push.
We are rounding out our investment for our filter capacity in Texas. Maybe in the range of $10 million CapEx in Q1.
Then CapEx falls off and I don’t see any new large investments, but I do want to keep the powder dry, as you say, to take advantage of opportunities going forward. I think 2009 will be a year of opportunities for TriQuint.
We’ll go through a difficult period where our effective revenue and utilization is exaggerated to the low side down, because of the conditions we talked about and with a relatively stable second half, as you articulated, we can make some significant transitions and improvements in our financials even if the market doesn’t grow.Edward Snyder – Charter Equity Research So given the cash profile, probably a dividend in 2009, right?Ralph Quinsey Maybe not a dividend in 2009.Operator And your next question comes from Nathan Johnson with Pacific Crest. Nathan Johnson - Pacific Crest Securities Just wanted to follow up on Tim’s question regarding linearity.
You mentioned that January you had seen improvement compared to the dark day of Q4. I was wondering if you have seen any additional change for the better since then.Secondly, just wanted to get some color around the current pricing environment.
Handsets, but there seems to be a lot of excess capacity between you guys and your competitors. Just get some color around that.
Finally, on the Triumph announcement, could you expand a little more on that. When you expect to ramp that?
Do your competitors compare in terms of providing that similar solution. Finally, what we could expect for dollar content per phone for that type of solution versus your existing solutions?Ralph Quinsey My comments reflecting January compared to Q4, you should extend those through to today.
We see an improving environment compared to an environment where we were dealing with customers asking for push-outs or backlog rescheduling primarily around wireless LAN and handsets. As far as pricing, our ASP sequentially actually is up for the company and for many of our businesses.
We’re not seeing anything extraordinary or out of norm as far as pricing yet. We are certainly keen to watch for the reasons you described as far as the slowing economy could create price inflections.
We’re not seeing that yet. Then the Triumph product first of all, that’s targeting 2010 design wins in revenue.
That was a road map announcement. We’ve got group products that we are gaining design wins, 15% over our last quarter, which was also a record and probably 30% above our trend line in handsets.
So really strong design win and we’ve got new products that we’re releasing this year. So Triumph is really that next level of solution and what I believe is unique about the TriQuint solution, other than being very size competitive and very performance competitive, is that it really is the solution that will preserve battery life.
I think there’s other solutions out there that can do converge, but really at the price of penetrating battery life, I’m really feeling good about the Triumph solution and where we’re targeting our performance characteristics. Then your last question about what should we expect for content in that solution.
It’s really hard to make a comparison, because we are increasing bands right now. Content is going up as we speak.
It should be about 25% less than comparable multi-band solution of previous generations, about 25% less. Operator Your next question comes from Stephen Ferranti – Stephens, Inc.Stephen Ferranti – Stephens, Inc.
Just following up on some of the inventory related questions. It did look like inventories actually kicked up a bit in the December quarter.
Can you give us some idea for how much you would like to see inventories decline in the March quarter? Steven Buhaly Inventory was almost flat quarter-on-quarter.
So far so good. The mix shifted a little bit as the early quarter starts.
If we’re good and we’re lucky, we’ll get $10 million off of it. Some of that depends on our execution.
Some of it depends on the right to which our customers burn their inventory and start taking ours off our hands. So if all goes well, I’d like to get $10, I think we’ll certainly get $5 or better.
Stephen Ferranti – Stephens, Inc. If demands stays where it is today and you reached a point where you’re through the inventory burn process, what level do you think you can get utilization rates back up to?
Ralph Quinsey To be clear, we think utilization will go down further in Q1 and then we’ll start climbing in Q2 and I think we can get utilization back up into an area north of 60%, depending upon the growth of demand. We did add some capacity in 2008.
I’m glad we did. It has created more opportunities for us.
Increasingly we’re working with customers that can have explosive requirements and having that capacity in place and it was relatively cost effective. Stephen Ferranti – Stephens, Inc.
Ralph, just related to the wireless LAN picture. You guys on both a performance platform with the 3 x 3 module as well as I guess a more value platform there.
Was the slowdown that you saw at that particular customer across the board or more significantly weighted in one of those than the other?Ralph Quinsey I would characterize the slowdown as affecting both of those products. The larger impact on our slowdown was the fact that we had shipped a lot of product to our customer anticipation for a product ramp and a strong Q4 and then things changed.
And so, in that case and in the case of a ramping handset market, also anticipating Q4, we were hit with a severe case of too much inventory in the channel. Stephen Ferranti – Stephens, Inc.
The newer design wins that you have in the second half of 08, you know, we’re starting to reach a point where I think folks are starting to wonder about the next iteration of those products and the Smart phone and Notebook platforms. Is there anything you can share with us in terms of your engagement with these particular customers in terms of once you win that socket, how engaged are you with these particular customers in terms of their future design iterations?Ralph Quinsey I think our engagement is strong and the interaction with the engineers is active and my confidence level on continuing business in some of our major programs is high.
Focus on performance and technology and engineering responsiveness and we’ve worked very closely with some of our major customers and I feel very good about our positions going forward. Stephen Ferranti – Stephens, Inc.
You introduced now the Triumph module, how fast do you see the industry moving towards more converged architectures on these platforms versus individual power amplifier modules for given WC to [may bans]. Ralph Quinsey I still think convergence is 2010-2011 play.
It’s a dramatic shift in some cases in RF structure and that takes time and we’ve got some great products on the road map between now and 2010 that are just now launching and being launched. So the Triumph announcement gives visibility of the opportunity in 2010-2011.
So I think you should expect design wins early 2010 and revenue late 2010-2011. Operator Our next question comes from Quinn Bolton - Needham & CompanyQuinn Bolton - Needham & Company First question for Ralph.
You talk about a lot of the design wins in the second half. Just wondering is it more broad based?
I mean your 2008 revenues seem to be driven by a couple of particular programs, one in handsets, one in wireless LAN. Is 2009 a much broader set of design wins, no single design win being the same level of magnitude, but just gives you much better breadth.
Ralph Quinsey I think that’s an accurate view, Quinn. It’s more broad based and lifted greatly by our relationship and our position on [callcomm] reference design.
Quinn Bolton - Needham & Company The two big programs in 2008 both seem to be going through some inventory correction. Your outlook for 2009, is that partly based on those programs coming back to some steady state volume or is your outlook really more driven by these new design wins that you won in the second half of 2008.Ralph Quinsey I didn’t mean to imply that those big programs were going through inventory correction.
I think the clarity on wireless LAN business is going through a significant inventory correction and I believe the handset industry is going through the inventory correction. I wouldn’t take any more information than that out of that statement.
Does that help?Quinn Bolton - Needham & Company It would be safe to assume though that particular programs are probably seeing similar trends to the overall industry?Ralph Quinsey We have a major customer that is probably walking the trend of the industry because of the nature of where the industry is and how much inventory there is in the line. Steven Buhaly I think it’s fair to say both programs created a big part of the sequential decline Q3 to Q4, but the wireless is more seriously impacted by the inventory accumulation.Quinn Bolton - Needham & Company You guys talked last quarter, if you backed out the changes and platinum pricing of about a 35.7 tight gross margin.
Obviously you’re down to 31.5 in the Q4. Is that pretty much entirely due to the lower fab utilization or were there other changes in product deals or mix shift that we should be thinking about.Steven Buhaly There’s about $1.2 million and 80 basis points of precious metal impact in Q4.
Obviously a lot less than in Q3, but there was a residual effect, again mostly platinum. We had a similar amount of about $1.2 million.
Additional impact from excess and obsolete inventory, partly attributable to some of the softness we saw in the handset market. Then the remainder is due to lower capacity utilization.
Our utilization dropped dramatically from 83% down to the mid-40’s sequentially.Quinn Bolton - Needham & Company Do you think as you try to work on the inventory that there’ll be additional inventory right down in Q1?Steven Buhaly I can tell you that part of our process is we go through the quarter. We take everything we know that is at risk at the end of the quarter.
Standing here, I don’t see anything out of the norm going forward. Quinn Bolton - Needham & Company One more, on the fab.
You talk about another decline in utilization in Q1. Are you looking at idling the fabs for say a period of a week or two to help reduce some of the cost associated with the fabs or is that something not currently anticipated.Ralph Quinsey We don’t currently anticipate idle of fabs.
We’ll run it at a lower run rate. Quinn Bolton - Needham & Company In the past, you talked about seeing demand for four or perhaps five bands in some of the new 3G phones.
Have you seen designs or some of the designs you have already secured for more than three band 3G phones?Ralph Quinsey We’re absolutely seeing a lot of activity around band eight right now and launching of band eight products. Absolutely it’s expanding.
Operator Your next question comes from Kevin Wincheck with P. Capital Management.Kevin Wincheck - P.
Capital Management It says moderate revenue growth might be possible in 2009. So maybe you could help us out within TriQuint what moderate might mean.Ralph Quinsey Moderate means just that, Kevin.
Sorry I can’t give you more specifics around that. We typically would give you more specifics.
What we’re trying to do is to guide the investors that we feel positive about in 2009. Now, for reference, let’s start with Q1.
We did 110. In Q1 last year and we’re guiding 110 to 120.
So if we’re at the midpoint of that guidance, we start at least on the positive side, but fairly small. After that, if you look at our real demand run rate and take seasonality out of it and take inventory burn out of it, I think we’re probably addressing in the range of 135 to 145 type of demand.
Kevin Wincheck - P. Capital Management On the extent side, I mean what kind objectives do you have for absolute levels of extent cuts across your cost of goods sold, which really I’m talking about operating cost in the fab and then for R&D and for SG&A.Ralph Quinsey Good question.
We drive the company to a model of 40% gross margin, 25% operating expenses. We are out of whack, because revenue has gone through this curvation.
We are going to work in the second half to close the gap on our model through revenue growth and to expense control. That’s our target.
Kevin Wincheck with P. Capital Management We have a very uncertain year in economic environment currently, but would you be happy if you didn’t reach the 25% operating expense target until Q4?Ralph Quinsey Hard to say.
Q4 is a long ways away and it’s really a function of revenue. Kevin Wincheck - P.
Capital Management The guidance that you’ve given for Q1, unless you’re assuming absolutely horrendous gross margins for Q1, the only way I can get there is to hold the absolute level of operating expenses and SG&A that you had in Q4, pretty much the same in Q1, but it also sounds like you’re very actively attempting to cut operating expenses right now. So it doesn’t seem reasonable for me to hold R&D and SG&A flat.
Steven Buhaly Operating expenses are down about 10% sequentially. I think they’ll be relatively flat in Q1.
The biggest driver on the upside is we’re going to start paying a FICA on our higher paid folks in Q1 as opposed to the fourth quarter. Operator Your next question comes from Aalok Shah – D.
A. Davidson & Co.Aalok Shah – D.
A. Davidson & Co.
You had pretty good growth in the military segment this quarter. Can you outline what happened in military.
Specifically, is there anything we should be looking at there and was that kind of a one time event in this quarter?Ralph Quinsey I think you should characterize the quarter as a confluence of program timing events that made it a very strong quarter. As you know, the military market has tendency to have orders and revenue to move around in fairly large chunks.
And so, program timing was the driver of the very good Q4. I do expect in Q1, military will not repeat the Q4 performance though.
Aalok Shah – D. A.
Davidson & Co. I’m trying to get a sense of where your thought process is on that, is it a specific area that you’re seeing more strength right now?
Design wins? Or is it just a combination of all things that you’re doing right right now and gaining shares?
Ralph Quinsey It’s handset Smart phone focus. We expect that to be a growth market.
It’s 3G in China. We should benefit from that.
It’s wireless LAN and handsets, a new sub-market for us, and that’s a relatively sizeable opportunity and it’s military. It’s a year-over-year military.
If you add all those up, we could have a very good year in 2009. Steven Buhaly Q1 is we believe artificially low.
We think there is somewhere between $10 and $20 million dollars of our inventory sitting on customer shelves and distributor shelves waiting for end user demand to soak up and Q1 has seasonal impact from handsets. So even without any change in end user demand, the customers will burn through our inventory fairly quickly and hopefully in the next several months.
I think you can work your way back to a pretty respectful revenue story. Aalok Shah – D.
A. Davidson & Co.
Steve, on the clarification of the networks products, I guess that’s changed this quarter.Steven Buhaly Yes. The business unit has kind of reclassified how they look at it and yes we did change it in the supplemental records.
Aalok Shah – D. A.
Davidson & Co. I saw that bay station was 30% of the mix this quarter.
Is there any particular reason why it’s down more than the overall revenue of the growth of the company?Ralph Quinsey We saw growth in GSM. Bay station GSM.
We saw growth in W. CDMA for bay stations and we saw growth for CDMA.
Where we lost the growth in bay stations was largely attributed to WJ products, which goes into that market and I believe that it is an artifact post acquisition coming into a tight inventory position where some of our customers and some of our channel partners had more inventory than they wanted for those products. They were apprehensive about the WJ financial position prior to the acquisition.
So I think that’s a natural working out now that they have what they feel is a trusted supplier for those products. Operator Your next question comes from Bill Develum – Tiatum Capital Managements.Bill Develum – Tiatum Capital Managements You mentioned you expect your DSOs to rise in the first quarter and in the second quarter again.
What is it that’s behind your thought process there?Steven Buhaly I do think DSO 52 will be under a bit pressure over the next couple quarters and it’s basically customers stretching out their payments to us. Some of them are sub cons who are in the middle of the inventory buildup and the end user isn’t paying them and they’re not paying us.
It’s not that they’re credit risks. They just have a liquidity problem.
I think we’re going to be seeing some of that. There will be some credit risk, but it is more likely to be the case where we will see a bit of pressure from customers who are stretching out payments and therefore I think whereas we went from 57 days to 52 this quarter, I could easily see that going back to 57.
Bill Develum – Tiatum Capital Managements To what degree does it make sense just to protect yourselves to simply put them on credit hold and they don’t get more parts until they ship you a check. Just that simple.
Ralph Quinsey Exactly what I thought of, but the sub cons who already have more of our inventory than they prefer to have are fairly immune to that tactic and you got to be working through some negotiations with. Bill Develum – Tiatum Capital Managements On the inventory front, to what degree do you see a risk of write-down or pure obsolescence coming into play?Steven Buhaly We took a very careful look at that in the fourth quarter, because we were really confronted with fairly abrupt changes in our demand.
We did step up our write-offs. We were about a million and a quarter above what we normally would do on a run rate basis and I’m feeling okay about where we’re at right now.
That doesn’t mean there won’t be some surprise. I feel as good as I can right now about that topic.
Bill Develum – Tiatum Capital Managements To what degree does return on capital enter into your thought process on a go-forward expense decision making metrics?Steven Buhaly I think return on capital is obviously one of the core financial measures that we look at. We are significantly reducing our CapEx this year.
It will be half of what we spent last year or less. So on the denominative part, that’s clearly our focus is to minimize investment in CapEx this year.
On a new side, we got to get our profitability back up. We believe Q1 is anomaly.
We think we have a pretty good chance of getting back into the black in Q2, although we’re not giving any guidance, because it’s too murky out there. Operator Your next question comes from Drew Berg – Century Hill Partners.Drew Berg – Century Hill Partners To get to moderate revenue growth, I think it might get lost in what we’re talking about here.
Q3 had almost a 50% sequential revenue jump. So when you look at your comments towards this improving demand in the second half, how much, I mean is that al coming from your own expected market share gains as opposed to any sort of end unit demand increases in the overall handset market?Ralph Quinsey To look at it simply, we think there’s $20 to $30 million in end demand right now but affected by inventory and seasonality.
So that gets us from $115 up to $140. I would say a little more than half of that is in inventory and a little less than half of that is in seasonality that we should see recovery from.
Drew Berg – Century Hill Partners So if we look at first quarter being flat year-over-year, then based on your comments, then second quarter maybe will jump a little bit more than it did in 08, third quarter less, and fourth quarter would not look anything like it did. This year, not based on end market demand, but based on your own feeling as to your improving market share in these handsets.
Ralph Quinsey I think it’s a fair characterization with the caveat that we are sensitive to end market demand on upside and downside. The fundamental assumption there is a reasonably stable economy and market in second half.
Drew Berg – Century Hill Partners But you’re using your customer’s expectations for end market demand to shape your thoughts on your year. Ralph Quinsey Yes, Drew.
Then the other thing I would add is that I believe we are still participating in some growing markets and anticipate those growing markets, Smart phones, military, will be there in second half. Drew Berg – Century Hill Partners You did say you had one over-10% customer.
How much were they?Ralph Quinsey They were over 10%. Operator There are no further questions at this time.Ralph G.
Quinsey Okay, Don, and thank you to all the listeners for your interest and questions. TriQuint is in a strong position to weather the economic storm upon us.
We will strike a healthy balance between prudent cost reductions and spending focused on the health and growth of our business. I look forward to updating investors with our progress during the next earnings call.
Thank you.Operator This concludes today’s fourth quarter year end conference call. You may now disconnect.