RF Micro Devices, Inc. (RFMD)

[eastunder]

RFMD's Weird Warning

http://www.forbes.com/sites/terokuittinen/2012/01/05/rfmds-weird-warning/?partner=yahootix

RFMD plunged nearly 16% after hours due to a stiff warning about a 10% revenue shortfall in the December quarter. What’s interesting here is that RFMD cited very specifically Chinese 2G orders that weakened abruptly towards the end of the quarter. 10% sales shortfalls are relatively unusual – even more so when a company highlights a very specific product category in a single country.

Investors have been recently mulling over the big contrasts in the handset market. HTC issued two devastating warnings in November, basically fessing up to having been far too aggressive with its volume plans for the Christmas. LG’s advances ground to a halt already last summer.

But Samsung is steaming towards as many as 35 Million smartphones sold during 4Q11 – and Apple‘s iPhone volume estimates have floated above 30 Million as well. By and large, HTC and LG warnings were interpreted as signs of their market share erosion in Western Europe and North America – an inability to keep up with the Samsung-Apple duo, which is suddenly threatening to turn the smartphone market into something of a duopoly.

There have also been suspicions about Western European demand weakness, which may have impacted HTC and LG particularly harshly due to their big presence in EU markets combined with their second-tier status. But the RFMD warning specifically cites the kind of cheap, low-tech handsets that emphatically do not belong to LG and HTC portfolios.

The curious factor here is China’s solid subscriber addition numbers from November. China has been finally – and belatedly – moving from GSM phones to various 3G technologies over the past year. But China Mobile added more than 2.5 Million new GSM subscribers in November despite the rapid growth of its advanced TD-SCDMA standard. China Unicom still added 200 K new GSM subs despite its W-CDMA growth. There haven’t been concrete signs of sudden softening of Chinese 2G market – until now.

Handset investors are now left pondering what the pronounced weakness of LG, HTC and RIM combined with the RFMD warning means. Are we facing high-end softness in EU markets combined with low-end softness in China? Could this all be mostly market share shuffling?

I argued in December that chip names such as NVDA and RFMD were going to fall – but that was based on European trends. It will be truly interesting to hear other sector names comment on the Chinese situation. Has there been a sudden shift towards 3G sales or is the low-end market softening due to economic jitters in China? Investors were blindsided by this, as the after hours action of RFMD demonstrates.