Updated from 4:35 p.m. EDTSAN FRANCISCO -- RF Micro Devices ( RFMD) beat Wall Street's financial expectations in its fiscal second quarter, thanks to strong demand in the wireless phone market. But the company warned that its manufacturing operations are having trouble keeping up with the strong demand, putting a dent in profit margins in the current quarter. The news sent shares of RFMD skidding 6.2%, or 45 cents, at $6.23 in extended trading Tuesday. In a post-earnings conference call Tuesday, RFMD officials explained that the maker of cell-phone radio frequency and transceiver chips has been hit with a double-whammy. Its new Polaris 3 chip, which began volume production in its fiscal second quarter, is off to a shaky start. Demand for the chip is stronger than expected, but yields of the chip are too low, a problem RFMD blamed on a bum crop of raw material from one its suppliers. Meanwhile, strong demand for RFMD's transmit modules is outpacing manufacturing capacity, forcing the company to outsource some production. An increase in the price of the raw material used to manufacture the modules is further driving up costs. The upshot is that RFMD's profit margins will suffer in the current fiscal third quarter. While the company did not specify how large of a toll the various problems would take on the gross margin, CIBC World Markets analyst Ittai Kidron said he believed most people would model a 1% reduction in fourth-quarter gross margin.
"It's a bump in the road, but still the road is very bright for the company going into next year," said Kidron, who rates the stock a buy. Manufacturing woes aside, RFMD turned in a decent quarter. The Greensboro, N.C., chipmaker said sales in the three months ended Sept. 29 totaled $255.8 million, up slightly from the $246.9 million it rang up at this time last year. The revenue exceeded the company's guided range, as well as the $240.9 million expected by analysts polled by Thomson Financial. "RFMD's record September quarterly revenue performance was driven by share gains, new product cycles, a strong customer base and a robust overall handset market," said CEO Bob Bruggerworth in a statement. The chipmaker swung to a profit in the quarter, with net income of $14.4 million, or 7 cents a share, vs. the loss of $19.9 million, or 19 cents a share, at this time last year that resulted from a $33 million impairment charge from an investment in the chip foundry Jazz Semiconductor. Excluding stock-compensation and certain other expenses, RFMD said it earned 11 cents a share in the quarter, beating Wall Street estimates by 4 cents. RFMD appears to have benefited despite a sales slump at cell-phone handset maker Motorola ( MOT), one of RFMD's largest customers.
Sales of Wi-Fi chips outpaced the industry's growth rate, according to RFMD, while the company's sales of chips for advanced, 3G cell phones surged by more than 50% sequentially during the quarter. RFMD said the Polaris 3 chip, which integrates various functions into a single chip, had no material impact on the income statement during the quarter. But demand for the chip is running about twice the company's initial projections for the current quarter, CFO Priddy said, with millions of units set to ship. And the company is already seeing progress in improving the low Polaris 3 manufacturing yields, as most of the subpar material has now been "flushed through" the manufacturing line, Priddy said. "Going into the March quarter we'll see much more normalized margins in Polaris 3," he said. In the current quarter, RFMD projected sales of $265 million and $280 million, vs. the average analyst expectation of $268 million. The company said its EPS will range between 8 cents and 9 cents, excluding stock-option expenses as well as start-up costs related to a new facility in Beijing. Analysts were expecting 9 cents a share, although it is unclear whether the figure includes the Beijing costs.