Is RF Micro Devices Ready to Takeoff?

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Radio frequency components maker RF Micro Devices (NASDAQ: RFMD) posted mixed results in the fourth quarter. The company managed to trump the Street’s revenue estimates but fell short on bottom line expectations.

Let’s take a look at the quarter that was and what lies in store for RF going forward.

A snapshot of the quarter

Revenue slid roughly 12% to $188 million in the quarter from the year ago period. The drop in revenue was primarily a result of greater than expected seasonality at original equipment manufacturers (OEMs) in China and also at RF’s major European customer. RF derives a major portion of its revenue from the Chinese cellular market and I believe this hurt the company in the quarter as sales to these customers declined a whopping 40% sequentially. Lack of geographical diversification remains to be an area of concern for the company as it had faced similar difficulties in the third quarter.

The road ahead looks bright…

However, there were some positive takeaways in the quarter. The company saw a 15% improvement in its power amplifier business sequentially. More importantly, sales of 3G/4G components grew in leaps and bounds. They now constitute more than two-thirds of the company’s cellular revenue as compared with 25% in the same period last year, a staggering jump of around 160%. This is a very positive sign if we consider that 3G is expected to grow at a good pace in the country with subscriber base increasing to 29% of all mobile users this year, which is more than double the number of 3G users last year. Again, as 4G is rolled out in China this year, one can expect RF to tag along and reap the benefits.

But the possibility of good times ahead doesn’t end here. RF is looking to cash in on the 3G/4G boom and it seems it has got the right partner. Its chips will be used in most of the marquee phones to be released by Samsung this year and that will, in all probability, provide upward momentum to RF’s top line. In addition, management said that the company has won designs for a number of flagship smartphones and as such expects them to drive growth.

…but performance is yet to be seen

However, to put things in perspective, I would want to see RF step on the gas like its peer Skyworks Solutions (NASDAQ: SWKS). Skyworks supplies its chips to Apple and it seems this is one of the many reasons why investors would choose it over RF Micro Devices. Additionally, Skyworks is also into supplying chips for tablets, e-readers, LED TVs etc. and this helps it to earn some brownie points over RF in terms of diversification. Moreover, the stock price performance of Skyworks and RF are poles apart so far this year. As a result, a lot will depend on Samsung, RF’s largest customer, to help the company in replicating Skyworks’ success.

The Foolish takeaway

RF Micro Devices hasn’t set the Street on fire in the quarter. It might also lag behind on your priority list in case you are looking to make money from the smartphone revolution. However, one needs to keep in mind that RF is growing its business slowly but steadily and expects to return to sequential growth in the current quarter. Moreover, the cellular industry in China, its key market, is expected to grow rapidly and the company’s growing relationship with Samsung might also come in handy. Keeping these in mind, RF might just about make for a good investment in the long run.

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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