(By Mani) Shares of RF Micro Devices (NASDAQ:RFMD) would have a tough time ahead to regain lost ground as the company is facing share headwinds at its largest customer Samsung as competition for sockets intensifies on the new generation of platforms.
North Carolina-based RF Micro Devices is a leader in wireless semiconductors, such as power amplifiers and front end modules. The company is a key supplier to Tier 1 wireless handset OEMs, including a Nokia Corp. (NYSE:NOK), Research In Motion (NASDAQ:RIMM) (TSX:RIM.TO) Motorola, Samsung, SonyEricsson, and LG.
RF also addresses other markets, such as wireless LAN, cable TV, broadband, wireless infrastructure, and aerospace and defense.
Though, it recently secured wins for a few LTE sockets on US Galaxy S3 platforms, share dynamics at its key customer Samsung are changing, and a rapid spike in RF Micro's share is improbable.
Though RF has talked about opportunities on Broadcom's (NASDAQ:BRCM) 801.11ac reference design, the revenue contribution in the near term is not likely to be significant given that sockets are likely to be shared among a few players.
"With a narrow product line, high customer concentration, and a history of volatile results, RFMD is no longer perceives as a strategic partner by the baseband players and OEMs. Consequently, the company will not be able to win sockets on the premium platforms, and will have to compete for low margin sockets with other players," UBS analyst John Hodulik said in a client note.
Moreover, though RFMD had gained significant momentum with its PowerSmart product line, its growth remains tied to a specific baseband platform and a specific OEM. This strategy is risky given that baseband market is getting increasingly competitive, and share shift among baseband players could lead to revenue decline.
In addition to revenue headwinds, margins may be under pressure, as well. Mix shift, which is likely to be the primary margin driver, may not materialize. The company may look for revenue growth in the entry level 3G/smartphone market, which may limit margin upside.
"We further believe that given historic volatility in results, investors are likely to stay on sideline till the company exhibits a sustained execution record and a well diversified revenue stream," Hodulik noted.
RF's fortune dwindled with Nokia, which in its heydays used to be RF's largest customer accounting for twothirds of its revenue. With Nokia's fortunes fell apart, it hurt revenues of RF. Offlate, RF is diversifying its revenue and reduced its dependence on Nokia to as low as 15 percent. In addition, another customer RIM is also struggling with its BlackBerry smartphones losing share against iPhone and other Android-based handsets.
Consequently, shares of RF dropped 45 percent in the last one year and trading near its 52-week low of $3.45, a far cry from October 2011 levels of $7.5.
For the first quarter, RF Micro Devices reported first quarter net loss of $19 million or 7 cents per share, compared to net income of $8.9 million or 3 cents per share last year. Excluding items, it earned a penny in line with Street view. Quarterly revenues fell 5.4 percent to $202.7 million, while analysts expected revenues of $201.95 million.
RF Micro Devices expects second quarter adjusted earnings of about breakeven to a profit of one cent per share. Revenues are estimated to be nearly flat to down sequentially about 5 percent for the quarter. Analysts polled by Thomson Reuters currently expect breakeven per share on revenue of $198.05 million for the second quarter.
Meanwhile, RF sees multiple new customer product launches later in the second quarter that is likely to support sequential revenue growth beginning in the third quarter. The company is hoping that its stint with Samsung and recently Apple, Inc. (NASDAQ:AAPL) would take it out of the troubled waters.
However,, the upside to RFMD's margins may not be sizeable as mix shift to higher margin products may not fully materialize and pricing pressure would prevail in the market as OEMs try to contain the increasing RF content in the devices.
"We believe that its challenges will likely increase going forward. We think investors are likely to stay on sidelines till the company shows sustained execution track record," Hodulik said.