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Clear Connection: RF Micro Expands Reach With Motorola, Ericsson Deals

For the wireless-phone chipmaker, there's a world beyond Nokia.

SAN FRANCISCO -- Wireless communications chipmaker RF Micro Devices (RFMD) is expanding its reach in the cellular phone market.

North Carolina-based RF Micro has been one of the

darlings of the semiconductor sector this year because it supplies


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, the world's top maker of handsets. But RF Micro's battery-powered amplifiers have enabled the company to attract the attention of other phonemakers as well.

RF Micro plans to announce soon that it has snagged contracts to supply the No. 2 player,



. A well-placed executive at RF Micro acknowledges that the company has been quietly working for at least a month to clinch a deal with Motorola for cell-phone chips. RF Micro has kept mum at Motorola's request not to make any public announcement of the deal.

The company already supplies Motorola with small volumes of chips for wireless phone networks, but the revenue from these sales will be dwarfed by the potential higher volumes from Motorola's handset market.

RF Micro shares' yearlong rally

Source: BigCharts

The deal could eclipse a similar arrangement RF Micro announced last week with Sweden's



, the No. 3 cell-phone maker. Taken together, Nokia, Ericsson and Motorola account for more than 55% of all handset sales worldwide, according to market research firm

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The Motorola and Ericsson deals should put to rest investors' fears that RF Micro has become too dependent on Nokia, which accounted for $41 million, or 75%, of its sales in the first half of 1999.

Shares of RF Micro dropped sharply April 22 after warnings from Nokia that it would seek a second communications-chip supplier.

"There was a story that

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RF's competitor



would get in there as a second supplier," says Wojtek Uzdelewicz, Nokia analyst at

SG Cowen

. "That's what every company does. You don't want to be dependent on one player." Cowen has not performed underwriting services for RF Micro.

By May 27, RF Micro had lost 40% of its market cap, closing at 39 7/8. But the stock has since bounced back. On Monday, RF Micro closed up 3 at 63 3/4.

RF Micro's gains at Ericsson would likely come at the expense of Anadigics, which is already the existing supplier to Ericsson. Breaking into Motorola, meanwhile, will likely put RF Micro up against chipmaker

Alpha Industries


, Motorola's prime supplier. Anadigics closed Monday off 1/8 at 33, while Alpha closed up 3 7/8, or 10%, at 43.

Ryl Ashley, an analyst at

Needham & Co.

, wonders how much more new business RF Micro can handle. Ashley says until now Nokia has bought all that RF Micro could supply. "They've been ramping that

new plant as fast as they can," she says. Needham has not done underwriting for RF Micro.

That's a problem RF Micro can handle, says CEO David Norbury. He says demand from Ericsson will heat up early next year, and by then the company's new plant, which opened in September, will be able to handle it.

"We expect this relationship

with Ericsson will result in a fair number of their phones," Norbury says. But he expects the plant to reach full utilization within 18 months. At that point, it would generate about $450 million in additional annual revenue, Norbury says. That's three times the $152 million in revenue for the fiscal year ended March 1999.

Those are numbers that please people like Ken McCain, portfolio manager of

Wall Street Associates

, which has held RF Micro shares since it went public at $12 in June 1997. "I'm a happy camper," McCain says. "They have done really, really well. I've been hearing of Ericsson for some time. Motorola and other customers will be in the cards for them."