RF Micro Devices
suffered a painful slide Tuesday after warning Monday that its quarterly loss will be substantially greater than expected.
The news prompted several analysts to downgrade the stock, with one bank also dropping its rating on rival
, saying it's vulnerable to similar pressures.
Shares of RF Micro lost 56 cents, or 9.3%, to $5.49, while Skyworks dipped 45 cents, or 7.5%, to $5.58.
Analysts fixated today on RF Micro's severe slide in gross margins. "By our estimates, gross margins dropped a whopping 10% from the prior quarter" to around 28%, said Satya Chillara, an analyst at W.R. Hambrecht, who downgraded the stock to hold from buy.
The dropoff reflected stronger sales in relatively low-margin GSM components, according to the company. Management said the strength in GSM came partly from market share gains, while sales of higher-margin CDMA components were hurt by weakness in Asia, particularly Korea.
GSM components account for the majority of RF Micro's sales, with an estimated 59% piece of the revenue pie in the March quarter. About 19% of revenue comes from CDMA and 11% from TDMA.
The latest take from RF Micro "is really just showing consumers are not willing to spend a whole lot of money on phones," says Thomas Sepenzis, an analyst at ThinkEquity Partners.
"People are still replacing their handsets. There was decent volume, which is how they were able to beat on the topline. So I don't think it will be a bad unit picture for the major manufacturers," he says. "But obviously people are paying $100 or less with one-year signup for a newer color phone. Color is the driver, whereas data is not so much an issue for people."
Part of RF Micro's problem is company-specific, he adds, because it has only recent begun taking orders for its high-margin Polaris chipset. Nearly a dozen vendors have started ordering the chipset, which could help margins going forward. Sepenzis' company has no banking relationships with RF Micro.
Still, on a deeper level the gross margin decline "may be indicative of a long-term trend," wrote Chillara. "Although we expect to see continuing solid topline growth, we believe gross margin pressure in the wireless business coupled with heavy R&D investment in WLAN will continue to weigh on RFMD's near-term profitability." Hambrecht has no banking relationship with the firm.
Sepenzis, likewise concerned by the margin slump, downgraded both RF Micro and rival Skyworks from an overweight to equal weight rating, cautioning that Skyworks may also be susceptible to pressure on average selling prices.
Skyworks has actually managed to increase its margins for the past few quarters, but Sepenzis says that merely reflects benefits from the integration of Alpha and
wireless business, which merged last year to form the new company.
The increasing margin pressure at RF Micro, he wrote in a research note, "underscores that the overcapacity in the industry and the prevalence of low-cost handsets may continue to pressure ASPs, and may force OEM and ODM vendors to cherry-pick cheap components rather than look to new integrated devices."