RFMD announces March quarterly results

RF Micro Devices, Inc. reported financial results for its fiscal 2012 fourth quarter, ended March 31, 2012.

RFMD's fourth quarter revenue was $187.9 million, a decrease of approximately 16.6% sequentially, versus $225.4 million in the December 2011 quarter. The sequential decline in revenue reflected greater-than-seasonal declines among manufacturers of handsets in China and at a leading European handset manufacturer. These were offset partially by sequential increases in sales of RFMD's PowerSmart power platforms and RFMD's ultra-high efficiency 3G/4G power amplifiers (PAs), as well as better-than-seasonal performance in MPG revenue. On a GAAP basis, gross margin equaled 30.1%, quarterly operating loss totaled ($11.0) million, and quarterly net loss was ($13.0) million, or ($0.05) per diluted share. On a non-GAAP basis, gross margin equaled 32.4%, quarterly operating loss totaled ($2.9) million, and quarterly net loss was ($5.4) million, or ($0.02) per diluted share.

During the March quarter, RFMD generated approximately $20.5 million in cash flow from operations and $10.9 million in free cash flow.

Strategic Highlights

• CPG achieved greater than 15% sequential growth in sales of both PowerSmart power platforms and ultra-high efficiency 3G/4G PAs
• CPG unveiled its second-generation ultra-high efficiency LTE PAs and its second-generation PowerSmart LTE power platform and secured majority LTE share on an upcoming smartphone family
• CPG launched multiple new 3G/4G antenna control solutions and gained significant design win momentum in this emerging category
• CPG demonstrated industry-leading performance in an advanced envelope tracking (ET) power management system for LTE power amplifiers
• CPG achieved multiple design wins at leading OEMs with highly integrated RF semiconductor solutions containing all 2G PA, 3G PA, and switch content for the entire cellular RF front end
• MPG reorganized to drive growth in three major markets: Wi-Fi front end modules, wireless infrastructure and GaN power
• MPG released six new Wi-Fi front end modules for consumer premises equipment (CPE) and mobile applications
• MPG revenue offset seasonality during the March quarter, with particular strength in smart grid, CATV broadband, and catalog products

Financial Outlook and Business Commentary

RFMD is winning share on multiple flagship smartphones and projects continued sequential growth in 3G/4G components during the June quarter. Among handset manufacturers headquartered in China, RFMD sees strengthening demand and projects sequential growth during the June quarter. In the markets served by MPG, RFMD sees stabilizing demand and improving order visibility and expects MPG revenue in the June quarter to be approximately flat, versus the March quarter.

RFMD currently believes the demand environment in its end markets supports the following expectations and projections for the June 2012 quarter:

• RFMD expects June quarterly revenue to grow approximately 8% sequentially to approximately $202 million
• RFMD expects gross margin to improve approximately 100-200 basis points
• RFMD expects non-GAAP per share results of breakeven to $0.02, reflecting increased legal fees and incremental R&D investment targeting customer diversification

RFMD's actual quarterly results may differ from these expectations and projections, and such differences may be material.

Comments From Management

Bob Bruggeworth, president and chief executive officer of RFMD, said, "RFMD is growing with the industry's leading smartphone manufacturers and diversifying across a broad set of customers serving all geographies and segments. We anticipate sequential growth in the June 2012 quarter, supported by increasing sales of our 3G/4G components and a resumption of growth among handset manufacturers in China.

"As we begin fiscal 2013, we are especially enthusiastic about RFMD's incremental growth drivers in new segments, including antenna control solutions, 802.11ac front end modules and GaN power devices, where RFMD's proven technology leadership and early mover advantage position us to capture market share leadership as these markets grow."

Dean Priddy, CFO and vice president of administration of RFMD, said, "RFMD's March quarter reflected market share gains in smartphones, offset by forecasted weakness in China and at a leading European handset manufacturer. Despite the sequential revenue decline and lower factory utilization, RFMD expanded non-GAAP gross margin by 220 basis points and generated free cash flow of approximately $10.9 million.

"In the June 2012 quarter, we expect a stronger, more diversified customer base will support a resumption of sequential revenue growth and continued margin expansion. We have structured the RFMD operating model to deliver significant leverage, and we anticipate our product portfolio and R&D investments will continue to drive revenue growth and margin expansion throughout calendar 2012. Importantly, we're confident the targeted, incremental R&D investments RFMD is making in 2012 will generate incremental revenue beginning as early as the September 2012 quarter."

Non-GAAP Financial Measures

In addition to disclosing financial results calculated in accordance with United States (U.S.) generally accepted accounting principles (GAAP), RFMD's earnings release contains some or all of the following non-GAAP financial measures: (i) non-GAAP gross profit and gross margin, (ii) non-GAAP operating (loss) income and operating margin, (iii) non-GAAP net (loss) income, (iv) non-GAAP net (loss) income per diluted share, (v) non-GAAP operating expenses (research and development, marketing and selling and general and administrative), (vi) free cash flow, (vii), EBITDA, (viii) return on invested capital (ROIC), and (ix) net debt or positive net cash. Each of these non-GAAP financial measures is either adjusted from GAAP results to exclude certain expenses or derived from multiple GAAP measures, which are outlined in the "Reconciliation of GAAP to Non-GAAP Financial Measures" tables on page 9 and the "Additional Selected Non-GAAP Financial Measures And Reconciliations" tables on page 10 and 11.

In managing RFMD's business on a consolidated basis, management develops an annual operating plan, which is approved by our Board of Directors, using non-GAAP financial measures. In developing and monitoring performance against this plan, management considers the actual or potential impacts on these non-GAAP financial measures from actions taken to reduce unit costs with the goal of increasing gross margin and operating margin. In addition, management relies upon these non-GAAP financial measures to assess whether research and development efforts are at an appropriate level, and when making decisions about product spending, administrative budgets, and marketing programs. In addition, we believe that non-GAAP financial measures provide useful supplemental information to investors and enable investors to analyze the results of operations in the same way as management. We have chosen to provide this supplemental information to enable investors to perform additional comparisons of operating results, to assess our liquidity and capital position and to analyze financial performance excluding the effect of expenses unrelated to operations, certain non-cash expenses and share-based compensation expense, which may obscure trends in RFMD's underlying performance.

We believe that these non-GAAP financial measures offer an additional view of RFMD's operations that, when coupled with the GAAP results and the reconciliations to corresponding GAAP financial measures, provide a more complete understanding of RFMD's results of operations and the factors and trends affecting RFMD's business. However, these non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP.

Our rationale for using these non-GAAP financial measures, as well as their impact on the presentation of RFMD's operations, are outlined below:

Non-GAAP gross profit and gross margin. Non-GAAP gross profit and gross margin exclude share-based compensation expense, amortization of intangible assets, other non-cash expenses and adjustments for restructuring and integration charges. We believe that exclusion of these costs in presenting non-GAAP gross profit and gross margin gives management and investors a more effective means of evaluating RFMD's historical performance and projected costs and the potential for realizing cost efficiencies. We believe that the majority of RFMD's purchased intangibles are not relevant to analyzing current operations because they generally represent costs incurred by the acquired company to build value prior to acquisition, and thus are effectively part of transaction costs rather than ongoing costs of operating RFMD's business. In this regard, we note that (i) once the intangibles are fully amortized, the intangibles will not be replaced with cash costs and therefore, the exclusion of these costs provides management and investors with better visibility into the actual costs required to generate revenues over time, and (ii) although we set the amortization expense based on useful life of the various assets at the time of the transaction, we cannot influence the timing and amount of the future amortization expense recognition once the lives are established. Similarly, we believe that presentation of non-GAAP gross profit and gross margin and other non-GAAP financial measures that exclude the impact of share-based compensation expense assists management and investors in evaluating the period-over-period performance of RFMD's ongoing operations because (i) the expenses are non-cash in nature, and (ii) although the size of the grants is within our control, the amount of expense varies depending on factors such as short-term fluctuations in stock price volatility and prevailing interest rates, which can be unrelated to the operational performance of RFMD during the period in which the expense is incurred and generally is outside the control of management.  Moreover, we believe that the exclusion of share-based compensation expense in presenting non-GAAP gross profit and gross margin and other non-GAAP financial measures is useful to investors to understand the impact of the expensing of share-based compensation to RFMD's gross profit and gross margins and other financial measures in comparison to both prior periods as well as to its competitors. We also believe that the adjustments to profit and margin related to other non-cash expenses and restructuring and integration charges do not constitute part of RFMD's ongoing operations and therefore the exclusion of these costs provides management and investors with better visibility into the actual costs required to generate revenues over time and gives management and investors a more effective means of evaluating our historical and projected performance. We believe disclosure of non-GAAP gross profit and gross margin has economic substance because the excluded expenses do not represent continuing cash expenditures and, as described above, we have little control over the timing and amount of the expenses in question.

Non-GAAP operating (loss) income and operating margin. Non-GAAP operating (loss) income and operating margin exclude share-based compensation expense, amortization of intangible assets, other non-cash expenses, restructuring and integration charges, (gain) loss on PP&E and start-up costs. We believe that presentation of a measure of operating (loss) income and operating margin that excludes amortization of intangible assets and share-based compensation expense is useful to both management and investors for the same reasons as described above with respect to our use of non-GAAP gross profit and gross margin. We believe that other non-cash expenses, restructuring and integration charges, (gain) loss on PP&E and start-up costs do not constitute part of RFMD's ongoing operations and therefore, the exclusion of these costs provides management and investors with better visibility into the actual costs required to generate revenues over time and gives management and investors a more effective means of evaluating our historical and projected performance. We believe disclosure of non-GAAP operating (loss) income and operating margin has economic substance because the excluded expenses are either unrelated to operations or do not represent current cash expenditures.

Non-GAAP net (loss) income and non-GAAP net (loss) income per diluted share. Non-GAAP net (loss) income and non-GAAP net (loss) income per diluted share exclude the effects of share-based compensation expense, amortization of intangible assets, other non-cash expenses, restructuring and integration charges, (gain) loss on PP&E, start-up costs, loss on retirement of convertible subordinated notes, non-cash interest expense on convertible subordinated notes, loss (income) from equity investment and also reflect an adjustment of income taxes for cash basis. We believe that presentation of measures of net (loss) income and net (loss) income per diluted share that exclude these items is useful to both management and investors for the reasons described above with respect to non-GAAP gross profit and gross margin and non-GAAP operating (loss) income and operating margin. We believe disclosure of non-GAAP net (loss) income and non-GAAP net (loss) income per diluted share has economic substance because the excluded expenses are either unrelated to operations or do not represent current cash expenditures.

Non-GAAP research and development, marketing and selling and general and administrative expenses. Non-GAAP research and development, marketing and selling and general and administrative expenses exclude share-based compensation expense, amortization of intangible assets, other non-cash expenses and restructuring and integration charges. We believe that presentation of measures of these operating expenses that exclude amortization of intangible assets and share-based compensation expense is useful to both management and investors for the same reasons as described above with respect to our use of non-GAAP gross profit and gross margin. We believe that other non-cash expenses and restructuring and integration charges do not constitute part of RFMD's ongoing operations and therefore, the exclusion of these costs provides management and investors with better visibility into the actual costs required to generate revenues over time and gives management and investors a more effective means of evaluating our historical and projected performance. We believe disclosure of these non-GAAP operating expenses has economic substance because the excluded expenses are either unrelated to operations or do not represent current cash expenditures.

Free cash flow. RFMD defines free cash flow as net cash provided by operating activities during the period minus property and equipment expenditures made during the period. We use free cash flow as a supplemental financial measure in our evaluation of liquidity and financial strength. Management believes that this measure is useful as an indicator of our ability to service our debt, meet other payment obligations and make strategic investments. Free cash flow should be considered in addition to, rather than as a substitute for, net income as a measure of our performance and net cash provided by operating activities as a measure of our liquidity. Additionally, our definition of free cash flow is limited, in that it does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statement of cash flows.

EBITDA. RFMD defines EBITDA as earnings before interest expense and interest income, income tax expense (benefit), depreciation and intangible amortization.  Management believes that this measure is useful to evaluate our ongoing operations and as a general indicator of our operating cash flow (in conjunction with a cash flow statement which also includes among other items, changes in working capital and the effect of non-cash charges). The amounts shown for EBITDA as presented herein differ from the amounts calculated under the definition of EBITDA used in our equipment term loan agreement.  The definition of EBITDA as used in the loan agreement is further adjusted for certain cash and non-cash charges, including stock compensation expense, and is used to determine compliance with financial covenants.

Non-GAAP ROIC. Return on invested capital (ROIC) is a non-GAAP financial measure that management believes provides useful supplemental information for management and the investor by measuring the effectiveness of our operations' use of invested capital to generate profits. We use ROIC to track how much value we are creating for our shareholders. Non-GAAP ROIC is calculated by dividing annualized non-GAAP operating income, net of cash taxes, by average invested capital. Average invested capital is calculated by subtracting the average of the beginning balance and the ending balance of current liabilities (excluding the current portion of long-term debt and other short-term financings) from the average of the beginning balance and the ending balance of net accounts receivable, inventories, other current assets, net property and equipment and a cash amount equal to seven days of quarterly revenue.

Net debt or positive net cash. Net debt or positive net cash is defined as unrestricted cash, cash equivalents and short-term investments minus the principal amount of RFMD's convertible subordinated notes due 2012 and 2014. Management believes that net debt or positive net cash provides useful information regarding the level of RFMD's indebtedness by reflecting cash and investments that could be used to repay debt.

Limitations of non-GAAP financial measures. The primary material limitations associated with the use of non-GAAP gross profit and gross margin, non-GAAP operating expenses, non-GAAP operating (loss) income and operating margin, non-GAAP net (loss) income, non-GAAP net (loss) income per diluted share, free cash flow, EBITDA, non-GAAP ROIC and net debt or positive net cash, as compared to the most directly comparable GAAP financial measures of gross profit and gross margin, operating expenses, operating (loss) income, net (loss) income, net (loss) income per diluted share and net cash provided by operating activities are (i) they may not be comparable to similarly titled measures used by other companies in RFMD's industry, and (ii) they exclude financial information that some may consider important in evaluating our performance. We compensate for these limitations by providing full disclosure of the differences between these non-GAAP financial measures and the corresponding GAAP financial measures, including a reconciliation of the non-GAAP financial measures to the corresponding GAAP financial measures, to enable investors to perform their own analysis of our gross profit and gross margin, operating expenses, operating (loss) income, net (loss) income, net (loss) income per diluted share and net cash provided by operating activities.

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