RealMoney Silver - RFMD's Puzzling Warning

RFMD's Puzzling Warning
By Tero Kuittinen
RealMoney.com Contributor
1/11/2008 10:10 AM EST

The timing of RF Micro Devices' (RFMD) warning is exquisite -- one of the big Nasdaq enigmas of the past week has been why the handset sector has behaved so badly. We may be on the verge finding out.

Crosscurrents

RFMD is the drama stock of the telecom sector: it has a tendency to deliver Lindsay Lohan-like swings between box office smashes and rehab stints. The company rode the big wave of Motorola's (MOT) epic Razr success story and then got caught in the crosscurrents of the Razr bust of 2006. Surprisingly, it clawed back strongly in early 2007, possibly due to catching the big Korean wave of handset market share gains.

The latest warning is difficult to read. It's relatively substantial, knocking off 2 cents from the former EPS range of 7 to 9 cents for the fiscal third quarter of 2007. RFMD seems to be very careful to pin most of the blame on Asia. It also cites several top-tier customers using inventory hubs.

This combination of comments seems to indicate that the warning is not primarily attributed to Motorola. Motorola's volumes have already declined sharply from year-ago levels, and the new phone platform still wasn't announced at this week's CES conference. The demand curve of Razr2 is quite likely a disappointment, but it's unlikely RFMD was counting much on Motorola in this quarter's guidance.

The curious thing here is that the recent product launches of Samsung and LG have been smash hits. Phones like LG KU990 and Samsung G900 are vying for No. 1 position in the high-end camera phone niche in Europe and several Asian countries.

Just six months ago, both Korean makers were floundering in the high-end market as Nokia's (NOK) N-95 monopolized the 5-megapixel camera phone niche. LG and Samsung have both made the transition to the post-QVGA display era -- they managed to launch big-display phones well ahead of Nokia, Motorola and Sony Ericsson, and these phones are now flagship products from Verizon (VZ) (LG Voyager) to Orange and T-Mobile in Europe.

It is hard to understand why LG and Samsung orders would have disappointed, because they seem to be gaining market share. It is also hard to see how Nokia would be the weak link. As I've written before, I think Nokia is losing market share in Europe and some parts of Asia, but the N-95 and 6300, the summer's monster hits, are still going strong.

And that's why the RFMD warning may be a particularly nasty curveball; one plausible reading is that the handset upgrade sales have finally started softening. An industrywide disappointment in upgrade markets of Asia and Europe might explain why the wording of RFMD's warning seemed designed to spread the blame instead of pinpointing one or two sources of trouble. Another possibility is that RFMD is losing market share relatively abruptly -- not the most convincing theory.

RFMD warns just as concerns about consumer weakness contaminating new sectors are reaching a fever pitch. Last week, DSG warned about British computer sales and on Tuesday, AT&T (T) pointed out that American consumers may be cutting back on landline and broadband spending.

The backdrop for RFMD's warning is notably bleak. If that triggers another telecom selloff today, we may finally be on the verge of a kind of short-term sentiment bottom that could create a telecom rally that lasts a week or two.