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The Starting Line: RF Micro broadens wireless horizons

RF Micro Devices has always reaped the benefits of Nokia's gains, but the cell phone maker won't have such a heavy influence in the long run if RF Micro gets its way.

    RF Micro Devices has always reaped the benefits of Nokia's gains, but the cell phone maker won't have such a heavy influence in the long run if RF Micro gets its way.

    As the biggest customer of RF Micro's power amplifiers--circuits that handle signals flowing through the antennae in wireless handsets--Nokia generates more than half of RF Micro's revenue. So when Nokia on Tuesday predicted sales of its wireless products would rise 25 percent from the September quarter, shares of RF Micro shot up 8 percent. When Nokia talks, RF Micro shareholders listen.

    Yet the phone giant might not stay in such a lofty position in RF Micro's universe. RF Micro wants to get away from its overwhelming reliance on Nokia.

    No one expects Nokia to stop being RF Micro's largest client anytime soon. But it's one thing to be someone's largest customer and quite another to generate almost three-fifths of that company's revenue; at least one analyst, Friedman Billings Ramsey's Chris Versace, estimates Nokia made up 59 percent of RF Micro's sales last year.

    The challenge for RF Micro is diversification. No technology company wants to rely heavily on one product, let alone one customer.

    RF Micro believes it can grow 10 percent to 15 percent faster than the wireless handset market's expansion. That would require market gains and expansion into new markets.

    The company eventually could get at least half its revenue from semiconductor parts other than power amplifiers, said Doug DeLieto, RF Micro's director of investor relations.

    RF Micro in recent quarters has expanded its customer base and product lines--and shareholders have noticed. The stock gained 19 percent over two days in November after Merrill Lynch analyst Christopher Danely reported that RF Micro won contracts to supply next-generation components to Siemens and Motorola.

    Another contract involves the next version of wireless phones using the code division multiple access standard (CDMA). This could give RF Micro a strong lift, analysts said, because the company has agreements to supply CDMA components either to or with Motorola, Samsung and Qualcomm, the main driving force behind CDMA wireless.

    Those are expansions within the handset business, but ultimately, RF Micro wants a larger percentage of its revenue to come from its nonhandset business--for example, circuits for printers and network interface cards.

    Such products could comprise 20 percent of RF Micro's overall revenue next year, Versace said.

    Only 6 percent of RF Micro's third-quarter revenue came from markets besides wireless phones, but analysts believe that will not increase until demand grows for wireless local area networks and products based on the Bluetooth wireless standard. RF Micro's wireless LAN circuits are mostly used for printers and network interface cards.

    Other recent wins outside of handsets include a deal to supply Hitachi with wafers to make chips out of gallium arsenide, which is widely considered a better material than silicon for making chips that can be used in the 2.5G systems that are supposed to represent the next step for wireless systems.

    In addition, RF Micro last week announced a deal to buy IBM's global positioning system division. GPS is mainly used for ships and other transportation markets, but RF Micro eventually plans to introduce it in wireless phones.

    Even though Nokia had RF Micro investors smiling this week, RF Micro's long-range plan requires far more than a Nokia rebound.

    "We continue to believe that market share gains, rather than an increase in mobile handset penetration, will be the driving force behind RFMD's future growth," Thomas Weisel Partners analyst Jeremy Bunting said last week.