Shares of RF Micro Devices (RFMD), which is a key supplier of Apple (AAPL), have jumped remarkably this year. Further, the announcement of RF Micro to merge with chip maker TriQuint Semiconductor (TQNT) has cheered bulls. Going forward, the cost synergies and market share gains could emerge from the merger and lead to even better share price performance.
RF Micro is making extra efforts to reduce cost and to make its processes more efficient, and is expecting additional margin expansion in the future. Moreover, the company is bound to experience robust demand in the future since it’s a key supplier to smartphone giant Apple.
RF Micro is seeing strong customer order activity which is not surprising at all. There’s healthy design win activity in flagship smartphones and tablets. That’s why management is positive regarding the company’s performance.
Apple to drive growth
RF Micro Devices is capturing several opportunities to increase its revenue in the world’s leading smartphones and tablets. For instance, according to Canaccord Genuity, the chip maker has won more content inside Apple’s latest iPhone 5S. Going forward, the launch of Apple’s new iPhone could prove to be another growth driver for the company. There’s a rumor that Apple is planning to produce bigger screen smartphones in order to win market share from Android rivals such as Samsung.
The New York Times survey reveals that bigger screen smartphones are gaining popularity. For instance, 20% of all smartphones that were shipped in China last year were five inches or larger regarding the screen size. In addition, such big screened phones, called phablets, are just 4% of smartphone sales in the U.S. Therefore, if Apple introduces a bigger iPhone, it might tap a big market. Hence, even RF Micro Devices will benefit since it is a component supplier to the smartphone giant.
Other end market opportunities
RF Micro’s addressable market should also witness growth from global macro trends. For instance, the Internet of Things is one such opportunity which is gaining popularity due to growth in embedded connectivity, connected homes, automotive Wi-Fi, and wearable technologies, and hence increasing RF Micro’s addressable market.
Moreover, telecom carriers are implementing new technologies such as envelope tracking, carrier aggregation, and transmit MIMO to cater to the increasing requirements for always on broadband data, which pumps up the dollar content opportunities of RF Micro. The usage of TD LTE and LTE advanced are resulting in more LTE content in mid-tier smartphones, whereas the consumers in developing economies are switching from 2G phones to high – dollar content 3G smartphones.
Incremental content in new and growing categories like antenna control solutions, power management circuits, diversity switches, and a variety of new products that integrate filters and duplexes is also being targeted by RF Micro.
Another growth driver for RF Micro is the continued adoption of its ultra-low cost CMOS power amplifiers in next-generation handset platforms for emerging markets. RF Micro’s profits have also lifted marginally due to the migration of many smaller customers to this platform. This margin expansion is anticipated to expand further with the migration of the largest customer for CMOS PAs to ultra-low cost products. Additionally, the commencement of the supply to an additional tier one customer is also expected to bolster growth going forward.
Making the business more efficient
RF Micro is focused on reducing gas and silicon costs by implementing a flexible sourcing strategy of raw materials. It has also targeted on reducing packaging costs by adding assembly capabilities. Moreover, it’s also focused on pushing higher volumes across its supply chain and by lowering the content of precious metals in its manufacturing process to bring costs down further.
There’re several advantages of its flexible sourcing strategy. Over the past few years, RF Micro has reduced its manufacturing footprint and its fixed asset base significantly. It has put off its MBE facility and its gallium arsenide fab in the U.K. and has furthered its external sources of supply. RF Micro maintains a good balance of internal and external resources with fluctuations in demand, and this is expected to improve the margin performance. The capabilities of its gas fab coupled with its external foundries enable it to fully satisfy customers’ performance, size, and cost requirements.
RF Micro has also delivered additional assembly capacity at its Beijing facility. This move is projected to reduce its reliance on external suppliers and allow its internal production capacity to run at better utilization rates which in turn would lead to a margin boost.
RF Micro also plans to reduce precious metals usage by investing in assembly and equipment. It has signed a multi-million dollar investment deal to capture BAW filter capacity and now has access to SAW, temp comp SAW, and BAW filter capacity from multiple sources.
The earnings of RF Micro are expected to grow at an accelerated pace of 18% for the next five years. But, its merger with TriQuint could bring in more benefits as the merger with will bring in more synergies. Finally, investors need not be paying much for this growth looking at the forward P/E of just 13 which makes RF Micro Devices an excellent investment option even after strong gains this year.