Skyworks Solutions, Inc. (SWKS) Earnings Call Transcript & Summary

Yes. No, it's a great piece of technology. And so the way I look at it, we don't sell discrete solutions, right? We don't sell discrete filters or discrete PAs. We used to do that, but we no longer do that. We sell integrated solutions. And again, to be successful on that and to drive the performance on these integrated solutions, you need to have the necessary building blocks to support that. And so you need to have world-class power amplifiers, you need to have world-class filter in the different flavors of filters from SAW to TC-SAW to BAW. Then you need to have access to SOI with third parties, and then you need to have world-class assembly and test capabilities. We have all of that. Of course, we always continue to look at opportunities to expand our reach, and we are making the necessary technology investments in all those areas to continue to expand our reach. And we're making some good progress there.

Okay. And then sort of points of differentiation in BAW relative to some of the incumbents, is there anything that you can kind of speak to at this point in time?

So there's multiple ways of playing that, right? There is BAW on the transmit side. There is BAW on the receive side. There is BAW that goes into WiFi. There is BAW that goes into the infrastructure business as well, right? And again, we feel really good about our position to deliver integrated solutions with whatever technology building blocks that are needed to deliver the best in class, best performance at the size and scale that is required by our customers.

Okay. Is it fair to assume that initially, it's more sort of on the receive side and WiFi, where you start to see your BAW content show up in teardowns? And transmit is more of a multiyear...

I think that's fair, yes.

Okay. Got it. And then I guess on the competitive landscape, Huawei, as you know, is being pretty aggressive in trying to in-source as much as possible. What parts of your business do you feel like they're growing to become a credible threat? Outside of Huawei, you've got Qualcomm and some local Chinese suppliers emerge as well. So ex, I guess, your 2 big competitors in the U.S., how do you feel about some of the newer -- I guess, Qualcomm's not new, but some of the other competitors?

Yes. First of all, we feel really good about our competitive position. And again, it's something we have been working on for the last 20 or 10 years or so right? And we are the clear technology leader, again, working in close collaboration with the large customer and all our customers, right? We are driving and pushing the performance and the technology all the time. And so when it comes to the Chinese players there, they -- it's well-known that China is trying to catch up and all of that. And in certain areas, I think they do. Again, here in RF, it's really hard and complex the stuff that we do, right? And do you really rely on U.S. technology to be able to deliver and manufacture world-class smartphones, right? And we see that with Oppo, Vivo and Xiaomi, right? Great relationship. They rely on U.S. technology. There is other technology available from non-U.S. suppliers, but they buy it from us because they know it's best-in-class. That's what they need to be successful. Similar with Huawei, we had a great relationship with that customer. At a certain point, just before the ban, it was a 15% of total revenue customer and growing. And they liked our technology, right, and they were really relying on us. Unfortunately, the ban happened, and so they had to look for alternative sources. And there are alternative sources, but not at the same performance level that we have. So unfortunately for them, it's hard to engage with us due to the restrictions of the ban. The security of supply is not guaranteed, right? And so they would love to design us in, but they don't know 3 or 6 months down the road if we really are going to be able to ship, right? Today, we are able to ship some of the parts, but it's at a de minimis level, right, for sure compared to what it was historically, unfortunately. I think if the ban gets removed, we will be back in business very quickly with them. And again, because they want us to be part of their overall product road maps. But unfortunately, that's still not the case. So again, we feel good about our competitive position. There's a couple of other competitors out there, right? And it feels like everybody has a little bit its own niche in that whole RF landscape. It's clear that we have a great position in the low-band pads. We are very strong on the DRx. We're very strong in WiFi and GPS, and so that's kind of like our areas where we're very strong. You have Avago-Broadcom, who plays mostly in the mid-high band pad. And then of course, you have Qorvo, who's out there with some of the envelope tracking and antenna tuning and all of that, and they have a great spot there. There is Qualcomm. There's a lot of noise about that, I would say. They talk a lot about it. It's a little bit unclear where they are today. I think they have a lot of discrete business, some of the discrete filters and/or PAs. We -- honestly, we don't see them that much, right? We don't see them at the large customer in RF. We don't see them at many of the other Chinese players that are more and more so using MediaTek basebands. Of course, there is Samsung, who is using a combination of Samsung LSI and Qualcomm basebands. But even when there is Qualcomm basebands, we do have some nice RF in those devices as well. And so again, we take every competitor serious, and we look at their road maps, and we look at what they do. But overall, we feel really good about our leadership position, our technology road maps and being able to deliver best-in-class performance at the size and scale required by our customers.

Okay. On the broad markets business, you've talked about the WiFi 6 transition as a driver, I think IoT just holistically driving your business over the long run. Can you kind of remind us how you think about the growth profile of broad markets? And what the key drivers are, I guess, both near term and long term?

Yes. So again, our broad markets, it's running at more than $1 billion on an annualized basis. It's thousands of products over thousands and thousands of different customers. So it's a very diversified business. The way I look at it, roughly 80% of that is IoT, roughly 20% is infrastructure. And maybe I'll start with the smallest part, on the infrastructure side. We are very well connected to the 4 or 5 major players in that industry, right, from Nokia and Ericsson to Samsung, who is making some good inroads into that business as well as the 2 Chinese players, Huawei and ZTE. Unfortunately, with Huawei, we are very much restricted in shipping to Huawei, and that's why that business has been down year-over-year with Huawei. If I strip out Huawei, that business is growing nicely. And for me, this is a multiyear tailwind. I mean there's going to be a lot of 5G infrastructure build-out over the next 2, 3, 4, 5 years. It tends to be a little bit lumpy. In some quarters, it's stronger than other quarters, and then it accelerates and slows down a little bit. But it's a multiyear tailwind, and we're very well positioned and strongly positioned there. Then, of course, we have the IoT markets. In the IoT markets, the way I think about it, there's multiple end markets in that area, right? There is the connected home. There is the connected car. There is industrial IoT, and then there is more consumable applications. And in all those areas, we see a lot of strength. In the connected home, a lot of that is driven by WiFi in the WiFi 6 adoption. If I look back at last year, that was maybe a little bit of a disappointment. I would have thought that WiFi 6 was going to take off in 2019. It was a little bit delayed, and it took off in the -- towards the end of 2019. But now it's in full swing, right? And so we have strong design wins and shipping in high volume to the router guys, all the key router guys there, and then all the access points into the routers, from your Ring doorbell to your Nest camera or other security cameras, your Sonos system, all those access points are all upgrading to WiFi 6 as well, of course, as an upgrade of WiFi 6 in the smartphone as well. So a lot of positive momentum there. In the connected car, we are placing 4G RF with WiFi Bluetooth into the car. You get $4, $5, $6, $7, $8 of content in the car. For us, of course, there, the ultimate goal is to have autonomous cars, right, where you might have more than $50 of RF in the car, right? And that's -- we're working very closely with all the key partners in that industry to make that happen. Industrial IoT is another area where we had a lot of short distance, WiFi, Bluetooth, Zigbee, LoRa, Thread, whatever wireless connection you have there. There as well, with 5G being introduced, we see a lot of opportunities in factory automation, where you will have stand-alone 5G radios in your factory connecting all your equipment. And then of course, a lot of positive momentum as well in more consumable area, where you have wearables, with watches. We have our audio play with the Avnera acquisition. And there as well, you will see over time, more and more opportunity as a result of 5G. We've been talking a lot about AR/VR, and it didn't really take off that well in the 4G area. Part of the reason was, well, the latency and the speeds in 4G are not as good or were not good enough. Now that you have 5G with lower latency and higher throughput and data speeds, there's a lot of positive momentum going on in that AR/VR section. And so again, when you put it all together, our broad markets business in the March quarter will be growing on or about mid-single digits year-over-year. And then towards the second half of the year, we will be back to double-digit year-over-year growth in our broad market business.

Okay. Great. Thanks for the thorough response. In terms of your gross margin profile, I think you guys have done a good job sort of holding 50%, despite the impact from the Huawei export ban. At the same time, you continue to talk about this 53% medium- to long-term target for your business. When I think about the drivers, I think, broad markets, mix potentially growing, your in-source filters with volume, hopefully, should drive some accretion there. Anything else in terms of levers that can potentially help you get to that 50% or 53%?

Yes, I think, actually, the most important lever for us there is what I've been talking about here in the last 20 minutes, right: 5G, higher complexity, higher performance requirements, a lot harder to do. And that's where we excel. That's what we like, right? And we add more value to our customers' products. But we want to get paid for that as well, right? And so -- but that's a big part as we see that with 5G or WiFi 6 and all of that higher gross margin profile of the business. In addition to that, of course, yes, we will continue to execute and drive operational efficiencies in our supply chain and our factories, working with our vendors. There's some good progress there. We had a little bit of a setback there because all of a sudden, a 15% customer get ripped out of your factories, and now you have 15% of factory utilization that's not being utilized. But as our business is growing and we are starting to backfill all of that that will help margins. And then as you pointed out, yes, we have our broad markets business, which is at above-average gross margins and operating margins, will help us as well there to further improve the gross margin.

Okay. Great. I still have a couple of questions, but we do have 5 minutes left. I just wanted to pause there to see if we have any questions from the audience. All right. If not, I'll keep on going. So on the capital allocation front, obviously, you guys continue to be very free cash flow generative. How are you thinking about the balance between investments in your business? I think CapEx is still 10-ish percent of revenue between those and shareholder return and M&A.

Yes. Yes. So first of all, we are a very strong, consistent, reliable cash generator, right? And last year, we -- our free cash flow was on or about 30%. This year, we're well on track to do 30, 30-plus percent free cash flow margin, which is great. Of course, we will continue to invest in the business, right? And so we do spend a lot of money on R&D, advance in the technology, working closely together with the customers, bringing new advanced products to the market. That's -- we'll definitely continue to do so. In addition to that, we spent, as you pointed out, on or about 10, 10-plus percent to revenue on CapEx, right? And some of that is capacity related as we continue to expand the capacity to support the growth. But a lot of that as well is technology related, right, where we expand our reach, add more new technology building blocks to support the advanced road maps of our customers. And -- but free cash flow is after CapEx, right? So we have 30% of free cash flow. We have been returning most of that free cash flow back to the shareholders. On a last 12 months basis, approximately 90% of the free cash flow has been returned to the shareholders. It's a combination of our dividend program that, over the last 3 or 4 years, we have been improving and have been increasing the dividend as well -- in dollars as well as the dividend yield. And we have been very active from a buyback perspective as well. Having said that, we have $1.2 billion of cash on the balance sheet and no debt. And so we always will continue to look at opportunities on how to accelerate the growth of our organic business, right? And so we have an active process in the company where we look at multiple M&A opportunities, small, medium, large, that can strengthen our position in the mobile ecosystem that we really like as well as potentially accelerating our diversification play.

Okay. I guess on that last point, between strengthening mobile versus diversification, is there a stronger emphasis on one over the other? Or it doesn't really matter if you think about those goals you...

No. It's equal weight. I mean we love the mobile ecosystem. As I said, like we are at the beginning here of a 5G multiyear strong cycle, which will not only be necessarily within mobile, right? This will spill over into IoT and other form factors than a smartphone. But yes, at the same time as well, we do understand that becoming a more diversified company is -- it could potentially unlock a lot of value and create a lot of shareholder value. And so we look at both opportunities.

I mean if you had to guess, I guess, today, mobile is 75% to 80% of your business. You've got broad markets, which is obviously the balance. If you had to guess, 3 years out, 5 years out, broad markets, you talked about double-digit growth. But in the mobile, you've got 5G, which is a pretty powerful cycle. So are we still kind of in the 75% to 80% mobile balance, do you think? Or is there a strong kind of focus within the company to bring that down, to your point, improve -- or improve the valuation?

It's also -- currently, and last year, it was on or about 70-30, right? 70% mobile and 30%. Yes, there is a strong focus to become a more diversified company organically. But at the same time, we are having so much tailwind in mobile, right, that actually, yes, it's growing on or about the same speed. And so if you look at what the guidance that we just provided in March, excluding Huawei, right, because that was a little bit of a setback, we are growing mid-teens year-over-year in the March quarter. We didn't guide for June in September and December, but we are -- and I feel comfortable that for many quarters here, we are growing ex Huawei mid-teens year-over-year by a lot of strength in our mobile segment and a lot of strength in our broad markets business.

Okay. Great. With that, we're out of time. Kris, again, thank you very much for the time. Really appreciate it.

Thanks.

Thanks a lot.