Friday November 02, 2012
by Paul McWilliams, editor Next Inning
TriQuint Semiconductor (TQNT) is an abundantly simple story and its Q3 report remains very well aligned with our expectations.
The company has expanded its capacity significantly during the last year or so and, with that, its fixed cost structure.
Operating just above breakeven now, TQNT's marginal gross profit is about 50%. With its 12%+ sequential revenue increase, TQNT boosted its non-GAAP gross profit margin for calendar Q3 to 32.5% from only 27.9% last quarter.
This illustrates the leverage has for revenue growth. The problem here is TQNT forecasts that trend will reverse in Q4.
For calendar Q4 TQNT forecasts revenue will increase by 10% to 12% sequentially, but that its non-GAAP gross margin will fall to about 30%.
This appears to be what is disturbing Wall Street. However, as I see it, Wall Street is overlooking the fact TQNT will substantially reduce its inventory level during calendar Q4.
This might seem subtle, but in reality it is a big deal for TQNT at this juncture. This means TQNT will not only substantially reduce the capacity utilization of its foundries and, therefore, not absorb its fixed costs as efficiently as it did during calendar Q3, but also ship more parts that were fabricated during the start up phase of its new Texas fab.
As I've noted in past reports, early production at a new fab is commonly at a higher cost than subsequent production. The point here is this should be a one-time event and that reducing inventory is logical for TQNT at this juncture.
Clearing the deck of excess inventory positions TQNT to enter 2013 with much more healthy inventory level and, with that, to better utilize its fabrication capacity.
At the bottom line my thesis for TQNT, simply stated, is that I believe TQNT will grow earnings faster than it grows revenue.
Given its marginal gross profit of 50%, TQNT should be positioned to report non-GAAP gross profit in the low 40% area once its revenue reaches about $300M.
If we use the midpoint of calendar Q4 2012 guidance as a baseline that implies once TQNT increases its revenue by 35% (from $222.5M to $300.0M) it will increase its non-GAAP gross profit dollars by nearly 90% (from $66.75M to $126.00M).
While I'm not expecting TQNT to report a $300M quarter until sometime in 2014, I think the current 2013 earnings consensus of only $0.18 discounts the ramp in gross margin we'll see during the coming year.
Due to this I continue to believe TQNT will report 2013 non-GAAP earnings in the range of $0.40 to $0.45. If I'm anywhere near correct in this projection, I think the price of TQNT has the potential to double before the close of 2013.
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