Who does Q buy thier components from??
RF Micro Devices hears the call of the wireless
With its stock price leaping 1,100% in the past year, this parts maker for the booming wireless phone industry has reason to be a Wall Street darling.
By Tricia Serju-Harris
Take your cellular phone apart, and you're likely to find at least a couple of components built by RF Micro Devices. A further search around your house would uncover its components inside your electric and gas meters and your cordless telephone.
The company's impressive line of wireless communication products and astounding stock performance have made it a darling of Wall Street analysts. Over the past year, the stock is up more than 1,100%, catapulting from a low of $3.06 a share last September to an astounding $45 on Sept
"It's one thing to just have good technology and to be conservative," says Charlie Glavin, vice president and senior semiconductor analyst at Credit Suisse First Boston. "It's another to learn from your mistakes. And that's what RF Micro Devices (RFMD) has done," Glavin says. "The mistakes of the past have made them a stronger company."
Off to a rough start
When the company went public in 1997, it had some trouble gaining focus, Glavin says. As a result, it didn't deliver on some expectations.
"They had the technology and they made reasonable guidance," he says. "But they realized they weren't able to execute (with) the demands outstripping their capacity. Deliverability of the product is every bit as important as the technical capabilities of the chip."
The company, based in Greensboro, N.C., eventually became adept at managing its capacity without draining its near-term revenue.
One key to RF Micro Devices' success has been a critical piece of technology called a power amplifier, which can increase battery life dramatically in cellular and digital phones. This technology allows clients such as Nokia (NOK), which accounts for 57% of RF Micro Devices' revenue, to produce wireless phones with battery lives of at least five hours.
"Power amplifiers will grow faster than 20% by 2001 because handsets are being created in dual-band mode, which needs more complex amplifiers on the phone," says Ryl Ashley, an industry analyst at Needham.
And with the cellular phone industry growing by 30% to 40% a year, the demand for power amps just keeps growing.
"Our power amplifiers are more efficient than our competitors'," says Jerry Neal, vice president of sales and marketing for RF Micro Devices. "They consume less battery power to do the same job, which results in longer talk time."
The lower battery drag also generates less heat, which keeps the handset from getting too hot, he says. "Our parts are also smaller than the competition's, which means we can produce it at a lower cost and give cellular-phone manufacturers greater flexibility in assembling their phones," Neal says.
A cut above
Even with rivals Alpha Industries (AHAA), TriQuint Semiconductor (TQNT), Anadigics (ANAD) and Conexant Systems (CNXT) nipping at its heel, RF Micro Devices continues to distinguish itself from the rest. An upcoming deal to supply components to Motorola (MOT) and Ericsson (ERICY), the No. 2 and No. 3 wireless phone makers in the world, speaks for the company's ability to attract major players.
While the company declines to give specifics on either deal, it acknowledges that it is shipping products for Motorola's handsets. Likewise, the company is expected to begin shipping products for Ericsson's phones around Christmas.
What's driving growth at RF Micro Devices is the extraordinary demand for wireless phones. The market has grown rapidly and manufacturers have had to keep pace with this growth just to stand still.
"We really have seen a tremendous growth with Motorola," Neal says. "The business we do with them this year I'm sure will be at least three to four times what we did last year. So, its very steep growth."
RF Micro Devices is also one of the fastest growing companies in the wireless chip component industry.
"It's a great company with great products," says Samuel May, senior wireless research analyst at U.S. Bancorp Piper Jaffray. "They've got a lot of momentum, a strong lead customer in Nokia and they're looking to make inroads with other customers."
Revenues for the first quarter were about $62 million, an increase of 165% over revenues of $23.4 million for the corresponding quarter of fiscal 1999 and an increase of 10% over the previous quarter's revenues of $56.5 million. The increases are attributed to strong demand for its amplifiers.
David Norbury, the company's president and chief executive, says orders from and shipments to its largest customer, Nokia, were at an all-time high during the quarter.
May believes the growth has just begun, as he expects earnings this year will be about 110% higher than last year. Not surprisingly, he rates RF Micro Devices a "strong buy."
"Earnings have been just shy of meteoric," he says.
Growth from the wireless phone boom
What's driving growth at RF Micro Devices is the extraordinary demand for wireless phones. The fight for market share in the mobile-telephone market has been a fierce one. The market has grown rapidly and manufacturers have had to keep pace with this growth just to stand still, say industry analysts at the research house Dataquest.
RF Micro Devices' products are now or will be going into Motorola cellular handsets, two-way pagers, digital base stations, wireless local loop and fixed wireless terminals, cable access units, and digital and analog industrial radios.
Another area providing growth opportunities for RF Micro Devices has been the demand in Asia for wireless products. The company reports that shipments to major customers in Korea have increased 104% from fiscal 1998 to fiscal 1999. The number of CDMA (the technology that spreads a cellular signal over wide areas) subscribers worldwide now exceeds 30 million, with more than half of those subscribers in the Asia Pacific region, according to the CDMA Development Group. That number is expected to exceed 50 million worldwide before the end of 1999.
This growing world market for wireless technology was the primary reason behind RF Micro Devices' expansion of two existing test facilities in North Carolina and the opening of a new design center in Scotts Valley, Calif., in April.
The opening of the design center has assisted the company's search for experienced technical workers. In fact, RF Micro Devices would consider "opening design centers wherever we can find a critical mass of talent," Neal says.
The company's new fabrication facility in North Carolina has allowed RF Micro Devices to accelerate customer shipments, a problem it first experienced soon after going public.
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So far, the expansions have allowed the company to kick out products more quickly, thus meeting increased customer orders, says Mark McKechnie, vice president of wireless technology research at NationsBanc Montgomery Securities.
High expectations from analysts
RF Micro Devices was founded in 1990 as a spinoff from Analog Devices (ADI). It claims that its design approach offers significant advantages for its customers: high performance using low-power, smaller devices and standard device packaging that makes its products compatible with different phone systems.
"Many of our competitors try to force the technology they have into the customer's (products)," Neal says. "We go the other way around and let the (product) form drive our business."
James Moeller, an analyst at Dain Rauscher Wessels, says he's raising revenue and earnings estimates for RF Micro Devices throughout fiscal 2000. He expects the company will earn 94 cents a share on $253.2 million in revenue.
McKechnie raised his estimates from 73 cents a share to 95 cents a share for fiscal 2000. He also increased his target price from $45 to $70.
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