Back in August 2014, when board dwellers here and a TMF pay site were going gaga over Skyworks Solutions (SWKS), I posted the following at the Value Hounds board concerning RF Micro Devices Inc. (RFMD) that historically experienced a dead cat bounce and near death spiral, falling from a high $184.50/share in March 2000 to a dreadful nadir $0.70/share in December 2008. Thereafter, RFMD roared back to life, closing the 2014 year at $16.59 - a whopping 2,270% gain over a 6-year period.
In that post, I provided a snapshot comparison with some of its top notch brethren, i.e., SWKS, Broadcom (BRCM) and Qualcomm (QCOM). I decided to stick with my RFMD holdings for several reasons:
• RFMD met my criteria as a value investment at that time, e.g., trading substantially less than 7 times EV/EBITDA, having a highly favorable low PEG 0.62, and with zero debt.
• RFMD successfully fended off a major technological assault by gorilla competitor QCOM in February 2013.
• RFMD announced a highly advantageous merger with TriQuint Semiconductor Inc. (TQNT), a top notch provider in the supply chain of Apple and other OEMs. According to a tear-down review of the latest iPhones by Pacific Crest Securities, TQNT “achieved more meaningful dollar content gains vs. SWKS on overall up PA content in the iPhone 5s.” This merger would be completed at year end.
• In pursuit of its corporate strategy to be the premier supplier of low-cost, high performance integrated circuits and solutions for wireless communications application, the RFMD/TQNT merger would capture a larger share of the radio frequency chips market and would create one of the biggest players in the market for connectivity chips.
• Although RFMD operated in a lower margin business, its management expected the total RF content to increase substantially. In a 2014 earnings call, RFMD President/CEO Robert Bruggeworth commented: “Looking first at handsets, half of the world’s handsets shipping today average less than $1 of RF content and that’s increasing to several dollars over a multi-year period as the demand for data requires incremental RF content. Whether you look at entry level devices or flagship smartphones, the RF content is growing generation over generation across market segments and geographies.” Subsequently, an investor day presentation (which revealed in detail RFMD and TQNT merged as QOVRO) clarified Bruggeworth’s previous comment by showing the following increasing value with more and better RF in smartphones (page 21).
TYPICAL TYPICAL REGIONAL GLOBAL 2G 3G LTE LTE Filter Content $0.25 $1.25 $4.00 $7.25 Switching/Tuning $0.00 $0.25 $1.50 $2.25 Power Amplifier $0.30 $1.25 $2.00 $3.25 Other $0.00 $0.00 $0.50 $0.50 TOTAL RF CONTENT $0.55 $2.75 $8.00 $13.25
Relevant for this board, the presentation also provided the following pro-forma financial results and guidance for a combined RFMD/TQNT as QORVO (page 51 and 52):
QORVO DEC MAR JUN SEP DEC(2) TARGET (4) RESULTS & GUIDE (1) 2013 2014 2014 2014 2014 REVENUE $556 $434 $547 $634 $720 (5) GROSS MARGIN % 38.5% 39.3% 44.8% 47.4% 47.5% 50% OPERATING EXPENSES $146 $145 $142 $149 $149 OPERATING EXP. % 26.2% 33.4% 26.0% 23.4% 20.7% 20% OPERATING MARGIN % 12.3% 5.8% 18.8% 24.0% 26.8% 30% EPS (3) $0.42 $0.16 $0.63 $0.94 $1.18
(1) Combined, pro-forma results presented on a non-GAAP basis; $ in millions
(2) Dec 2014 quarter represents combined guidance at the midpoint of provided ranges
(3) 150M shares assumed in all quarters
(4) Target percentages are two years after close and presented on Non-GAAP basis
(5) Revenue growth target > market; industry growth rate projected to be 10%-15%
On January 1, 2015, the RFMD/TQNT merger closed and made me a stockholder in the newly created QORVO, Inc. (QRVO). After opening the year at $69/share, QRVO hit a YTD high $85.63, a 24% gain; currently, it’s trading around $77 due to a sharp pullback. I’m looking forward to the release of the very first QRVO quarterly report.
Both QRVO AND SWKS must stay ahead of the technological curve and be vigilant of competitors, especially in the ongoing rapidly growing, fiercely competitive smartphone arena. Vigilance is also a must for investors in such companies. Giant competitors like QCOM do not go away and remain a serious threat. In a recent post here, anthonyms said it best:
Semiconductors are notorious for producing shooting stars that are designed in, selling like hot cakes, then designed out.
What they do sounds completely ordinary …
There are honestly not that many chip suppliers that are worth $20bn+. At some point customers or competitors are going to squeeze the value out of the market.
I’m appreciating more and more my investments in companies with simpler, easier-to-understand business models like United Rentals (URI).
As always, conduct your own due diligence.