RFMD: Oppenheimer, Davidson Say Hold; Margins a Mystery

Shares of wireless chip maker RF Micro Devices (RFMD) are down $1.07, or almost 19%, at $4.58, and traded as low as $4.45, after the company last night said its December-quarter fiscal Q3 revenue will miss analysts’ estimates on weakness in sales of 2G cellular handsets, as well as its “multi-market products group.”

The stock got two downgrades this morning, one from Oppenheimer & Co.’s Ittai Kidron, who cut his rating on the stock to “Perform” from “Outperform,” and by D.A. Davidson’s Aalok Shah, who cut his rating on the stock to Neutral from Buy.

Shah, who also lowered his price target to $5 from $7, writes that the weakness was not totally unexpected, as the company had warned about “mixed signals” in the market for its chips in China, and at customers HTC (2498TW), and MediaTek.

But the mystery, writes Shah, is the company’s warning that gross profit will decline by nine percentage points. That may mean competition is heating up for chip business in the cheaper 2G phones:

The 900 basis point decline in gross margin is a big surprise. We understand mix and under-utilized assets have an impact, but to see this level of a decline, given that MPG revenues were already down 10% in the September quarter and gross margin in that quarter actually managed to increase sequentially. The company did not hold a conference call to explain this but it is possible that it is taking some inventory write-downs. If this is mostly related to weakness in the 2G market, this worries us even more, given that we see increasing competition in this space and pricing pressure will become an even bigger concern. This could lead to several quarters of depressed gross margin.

RF Micro didn’t’ offer an outlook for the quarter’s but profit, but Shah estimates it will probably be 3 cents a share, down from his prior expectation for 11 cents a share.

Kidron writes of the margin issue, “We believe ~3 pts. relates to inventory absorption with China (a false recovery in September) and potentially Samsung (channel fill) contributing factors. We expect only slight improvement in March as seasonality weighs further on utilization.” He cut his Q3 EPS estimate to 2 cents from 10 cents.

On the other hand, Cody Acree with Williams Financial Group writes that there’s better times ahead:

We are obviously disappointed by the news,�particularly as macro China issues are obscuring the company�s substantial progress with multiple new products into multiple new leading OEMs. Although the Chinese inventory correction will likely linger into�the March quarter, we do not believe this issues changes anything about RFMD�s opportunity to perform through 2012/13 as new product growth begins to eclipse legacy revenue, driving gross margins and profitability.