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RF Micro Narrows Loss

Alexei Oreskovic

RF Micro Devices(RFMD Quote) narrowed its losses in its fiscal fourth quarter, as strong sales of the company's radio chips for advanced cell phones generated better-than-expected results.

In the three months ended March 31, RF Micro posted sales of $226 million, up 50% from the year before, and above the company's guidance of $200 million to $215 million.

RF Micro had a net loss of $1.6 million, or a penny a share, largely as a result of a share-based compensation expense arising from the impact of variable accounting associated with the company's option-exchange program. In the fourth quarter of 2005, RFMD lost $63 million, or 34 cents a share.

Excluding the charge, RF Micro earned 9 cents a share. On that basis, analysts polled by Thomson First Call were expecting the company to earn 6 cents a share on sales of $210.4 million.

The company said its growth was driven by all three of its business units: cellular, wireless connectivity and infrastructure.

With worldwide sales of cell phones growing at a brisk pace, companies that supply chips for the handsets such as RF Micro and Texas Instruments(TXN Quote) have seen their fortunes rise. Last week, TI reported strong financial results, as revenue from chips for advanced 3G cell phones doubled year over year .

RF Micro executives said that the top-tier cell phone handset makers are consolidating their suppliers -- a trend that is helping the chipmaker.

"We are deepening our very strong relationship and growing our dollar content with the world's leading OEMs," said CEO Bob Bruggeworth in a conference call with analysts following the release of the financial results.

During the fourth quarter, Bruggeworth said average selling prices in the company's cellular division rose 8% sequentially, as the company sold higher-margin chips like its Polaris product, which acts as a transceiver on new, high-speed cell phones.

Sales of the company's Polaris chips for cell phones grew 78% sequentially in the fourth quarter, making up more than 25% of RF Micro's overall revenue.

The company added two new Polaris customers during the quarter, bringing the total number of cell phone companies using the product to 12.

Despite the strong Polaris sales, gross margin levels in the fourth quarter dipped to 35%, from 36.2% in the third quarter. The decline was due to manufacturing inefficiencies associated with the company's moves to increase its chip-building capacity, according to the company.

In March, RF Micro announced that it will spend $80 million to expand its chip manufacturing capacity by 40%.

As RF Micro works out the kinks in getting the new capacity online, and increases its internal assembly operations in China, the company expects margins to grow later in the year. In the current quarter however, gross margins are expected to remain flat.

RF Micro is also planning to raise prices on certain of its products, executives said.

"We want to make sure that the investments we are making in our capacity are ones that we can afford to make and get a good return on," said Bruggeworth.

The company projected that sales in the current quarter would range between $230 million and $245 million, with EPS between 5 cents and 7 cents, or 8 cents to 10 cents excluding the stock compensation expenses.

On that basis, the average analyst expectation called for first-quarter sales of $200 million to $215 million, with EPS between 6 cents and 7 cents.

"We enter fiscal 2007 with a robust handset market, exceptional customer relationships and a broad-based product portfolio," said Bruggeworth in a statement.

Shares of RF Micro recently rose 3.6%, or 30 cents, to $8.58 in extended trading.