RF Micro Devices, Inc. (RFMD)

[eastunder]

RFMD: Davenport Ups to Buy; Better Mix of Phone Customers.

By Tiernan Ray

http://blogs.barrons.com/techtraderdaily/2012/06/06/rfmd-davenport-ups-to-buy/?mod=yahoobarrons

Drake Johnstone of Davenport & Co., who’s had a Neutral rating on shares of wireless chip maker RF Micro Devices (RFMD) since November of 2010, this evening raised his rating on the stock to Buy, with a $6.50 price target, following what he views as a positive presentation this morning by RF’s chief financial officer, William Priddy, at the Stephens Inc. Spring Investment Conference at the Palace Hotel in New York, where he was introduced by Stephens analyst Harsh Kumar.

Priddy spent some time discussing the company’s announcement last night that it will give its “molecular beam epitaxy” technology for making some kinds of chips to a third party, IQE plc, a wafer supplier in the U.K.

Priddy emphasized today that the move will save the company money by reducing fixed costs to make its chips, even though it will still own chip-making facilities:

This has significant benefits to our shareholders [...] we will have the lowest cost starting material in the industry, both for MBE-based starting material and MOCVD-based starting material. Secondly, we have a joint research and development agreement, where we will have access to the world’s leading material scientists in developing new epistructures to drive future generations of advanced products for RFMD. Thirdly, we’re going from more of a fixed-cost model to a variable cost model.

Among other topics, Priddy also talked about how the rise of 4G-enabled smartphones should help the company to sell more bundles of power amplifiers and switches for handsets, thus increasing its share of the overall bill of materials of phones.

Writes Johnstone, the company has a good chance of seeing quarter-over-quarter revenue growth in each quarter of the current fiscal year ending in March of 2013.

He models the company making $905 million in revenue this year and 9 cents a share from a prior $892 million and 8 cents, which includes the expense of granting stock options. The Street is modeling $890 million and just 2 cents on a GAAP basis.

Johnstone sees the prospect revenue could rise by 18% next year, as RF chips find their way into some of Nokia‘s (NOK) Windows-based phones. But he also sees much less risk to RF, as the company’s customers concentration is not what it was even a year ago:

RFMD indicated that new smart phones powered by Intel (INTC) also incorporate RFMD’s PowerSmart solution. While Nokia represents significantly less than 10% of RFMD’s revenue in the current quarter (down from 50% in prior years), RFMD could benefit from new Nokia’s Windows based smart phones incorporating its PA solutions in late 2012. RFMD is a leading supplier of RF solutions to Chinese smart phone manufacturers, with 25% of its recent quarter revenue obtained from these manufacturers. The company generates one-half of its revenue in China from 2G solutions (stable revenue) and one-half from 3G solutions (significant revenue growth). China’s 3G cellular subscribers represent only 11% of its billion cell phone users. RFMD should benefit from its leading position in China and the tremendous growth in China’s 3G market over the next few years.

Johnstone also believes RF supplies Apple (AAPL) for the iPhone, noting that Priddy’s “reported that RFMD has contracts with every smart phone manufacturer, which implies that the company also has contracts with Apple (we believe that RFMD’s potential revenue per iPhone is less than a dollar).”

RFMD shares today rose 12 cents, or 3%, to $4.15.