Will This Company Finally Deliver?

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

TriQuint Semiconductor (NASDAQ: TQNT) never fails to surprise me. There was a time when I’d expected the company, and its stock, to really set the Street on fire. Under this belief, I initiated an outperform CAPS call on the stock in November last year, and I’ve seen my pick appreciate more than 18%.

However, the ride hasn’t been easy, and I’d lost all hope from the company after it had sounded out a poor outlook back in February and the stock took a massive beating. TriQuint was at its outlook-missing game again last week, when it reported first-quarter results, which were once again poor.

Another miserable performance

TriQuint’s revenue declined 15% from the year ago period to $184.2 million and it turned in a loss of $0.17 per share. Analysts expected the company to post revenue of $185.7 million and lose $0.13 a share, but TriQuint missed on both counts. On outlook, the Street was looking for revenue of $192.4 million and expected the company to lose $0.10 a share.

However, TriQuint expects revenue in the range of $185 million to $190 million in the ongoing quarter, while loss is expected to be between $0.12 and $0.10 per share. This completed a very poor report from the chipmaker, but despite so many shortcomings, its shares jumped more than 10%. Surprised? Well, even I was.

Surprise, surprise!

Management is confident that TriQuint will be able to achieve profitability in the second half of the year, and this belief sent the stock soaring. However, as Titan Capital’s Bill Dazzlem pointed out on the conference call, this means that TriQuint needs to earn $0.28 to $0.30 per share in the third and fourth quarters.

This is a pretty tall task for a company that has just reported a loss and expects to post one more in the ongoing quarter. So, what makes management so confident about TriQuint turning profitable in the second half of the year? Let’s check.

TriQuint CEO Ralph Quinsey stated that the company had to incur an incremental cost in order to address a quality issue and the problem has already been addressed. Thus, we can expect the company’s margin to return to normal levels after it slid to 22.8% in the previous quarter from 30.4% in the year-ago period.

Why so buoyant?

The company is primarily counting on its mobile business to provide the much needed thrust to turn profitable. TriQuint boasts of several high profile clients such as Apple (NASDAQ: AAPL), Samsung (NASDAQOTH: SSNLF), BlackBerry (NASDAQ: BBRY) etc. The slowdown in demand from Apple, which is one of its largest customers via Foxconn, led to a sequential decline of 30% in revenue from the mobile business.

However, the company exited the quarter with a book-to-bill ratio of 1.08, which means that it is witnessing demand for its products. In addition, as Apple would be refreshing its product line up later this year, TriQuint should turn in a better top-line performance. The iPhone 5S is expected to launch this September, and as such, it can be expected that TriQuint will see its order book swell further from next quarter onwards.

Moreover, the addition of a rumored cheaper iPhone will increase Apple’s, and TriQuint’s, addressable market. Apple is looking to establish its dominance in the emerging markets and a low-cost iPhone might serve the purpose. Considering the fact that consumers in emerging markets are switching to smartphones, most of which are low-cost, a cheaper device targeted at these markets should do well.

Also, TriQuint’s customer diversification is a strength which shouldn’t be ignored. The company has close ties with Samsung as well and the Korean behemoth used its chips inside the latest Galaxy S4. According to reports, Samsung’s latest flagship is witnessing very strong demand and deliveries of the new phone might get delayed as Samsung tries to match up to the demand. So, if sales of the S4 exceed Samsung’s own estimates, then TriQuint might be in for some more orders from the company.

Also, since TriQuint was already booked 92% to the mid-point of its top-line guidance, there’s enough time before the quarter ends for TriQuint to actually exceed the original consensus estimate. Moreover, the company has landed quite a few design wins across a broad range of customers, which include a few Chinese phone makers and BlackBerry.

The addition of BlackBerry to TriQuint’s clientele is also a vote of confidence in the company’s products. According to Chitika Insights, sales of the Z10 have gradually gotten better as more carriers in the U.S. started carrying the handset. Also, as the Canadian company starts to aggressively market the device, sales could improve further. While the fate of the flagship Z10 is still quite unclear, the presence of one more smartphone maker that is trying to cut its teeth in the market might turn out to be advantageous in the long run.

Benefiting from the data boom and more

Apart from the mobile business, TriQuint’s networking and infrastructure business has been doing well, and grew 8% in the previous quarter. Going forward, TriQuint expects this business to grow further on the back of a jump in shipments of 100 gigabit products. Also, TriQuint has landed design wins at important infrastructure clients such as Huawei, ZTE, and Ericsson, and they should help TriQuint ride the improvement in infrastructure spending.

TriQuint believes that it is well positioned to benefit from the data boom, and the growth in connected devices will open up more markets for its products, such as Wi-Fi modules and RF solutions. In addition, TriQuint also supplies chips to the defense industry and this business grew 32% in the previous quarter. Going forward, the company expects upgrades in fighter aircraft and radar applications to help it derive more revenue from this segment, despite the near-term uncertainty over defense spending.

The takeaway

The Street is elated at TriQuint’s optimism but the company needs to deliver. After the pop, TriQuint shares are up around 13% so far this year, and if the company’s prospects materialize, they can go even higher. However, I think it would be prudent to not go overboard and initiate a big position in TriQuint, as the company needs to deliver a solid quarterly report at least once. One might scoop up some shares at these levels, and hope that TriQuint is able to deliver what it promised.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and TriQuint Semiconductor. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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