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

Good afternoon, everyone. This is Vivek Arya, Senior Semiconductor Analyst at Bank of America Securities. Really honored and delighted to have Liam Griffin, President and CEO; and Mitch Haws, Head of Investor Relations from Skyworks Solutions, join us this afternoon. The format will be as follows. We will start with some opening comments from Liam, then we will go through a Q&A session. But if you have any questions in between, please feel free to e-mail them to me through that [ Viera Cast ] console. But with that, welcome, Liam. Delighted to have you at our conference, and I'm going to turn it over to you for opening comments.

Great. Thank you, Vivek, and thanks for the BofA team for hosting here. Obviously, we're working through a virtual environment. Again, we look forward to a rich dialogue with Q&A. Let me just start by saying we are, certainly, in the middle of something that is unprecedented for all of us. We're dealing with the challenges of COVID-19. And with Skyworks, we have over 7,000 people employed globally, a number of those folks working in manufacturing and also in technology environment. So we're doing everything we can to keep our people safe and provide solutions to our customers. We continue to make great progress on design wins and technology execution. We are definitely seeing improvements in the demand outlook, some of that we communicated in our last conference call. But we continue to see the appetite continue to grow for the products that we develop. And we're starting to see that getting a little bit warmer now as we get into the middle of the year and as we look out into the second half. As you know, those that have followed Skyworks, I mean, we're not new to this. We're a technology leader and a connectivity leader. We've been doing this for 20 years, advancing technology, delivering higher speeds, lower latency, moving from 3G, 4G to now the beginning and early stages of an incredible launch in 5G technology, and we'll certainly speak more to that during the dialogue here today. But as we look out, what I'd like you to think about with Skyworks is that our opportunity is not bounded just by the cell phone. Our technologies are essential, they're critical. We're seeing them being used in ways that we never imagined, whether it's Zoom video or FaceTime, or direct delivery to your home touchless. All these great applications that have been borne out of this very, very challenging pandemic, and we hope to continue to support our people. We continue to support connectivity and the safety protocols around that as we move forward. So as much as this is a very difficult, challenging time for everybody on the planet, Skyworks is 100% committed to making this as seamless as possible to connect people, to connect things, create a safe environment and bring some very rich technologies to the consumer along the way. So that's kind of my opening statement here. Vivek, we can take a Q&A from here.

Okay. So maybe let's start with the few near-term issues, and then we will go to the longer-term growth drivers. On the near-term issues, give us kind of a state of the union, Liam, in terms of the supply chain, because I imagine like most of your peers, you were impacted by these COVID-19 shelter-in-place headwinds, right? Parts of the supply chain were paused for some period of time. How would you characterize your supply chain readiness at this point?

Sure. Well, supply chain is very critical. And one of the things, I think we all understand this, but if we look deep at what our end devices look like, whether it's a smartphone, or an element, an autonomous vehicle, or an IoT device, these solutions are made up by thousands of individual elements, supplies, whatever it may be, a PCB, a diode, an LED. A number of elements have to all come together to create a finished product for our customers. So -- and if you think about any slippage in supply chain, whether it's within our own factories, whether it's in a third-party, or whether it's an assembly and test site that we have no direct investment in, if there's any breakdown in the supply chain, the entirety of that end item could be impaired, right? So one of the things that we have endured, and it's getting much better, is that volatility of supply, the elements that will make up a smartphone, the elements that will make up an IoT device, if any of those elements are not there, even if they're not Skyworks', they're something else, the demand can't be executed. So we've worked really hard to create that intersection between supply and demand, and all the critical elements that are needed to deliver a finished good. And I will tell you that over the course of the last month or 2, our position has gotten much better, the execution in our own factories, which is incredibly important for us, and we'll talk more about that through the conversation today, but having the ability to own and develop core technologies, proprietary, unique technologies, customized solutions in our own facilities has been an incredible advantage, and we're going to continue to do that. So we're able to control most of that. And some of the third-party materials that we needed are starting to now come through. So I really believe that the worst is behind us in that end. Like I said, we have a very large footprint in manufacturing, great partners in Mexicali, Mexico. We go to Japan. We go to Singapore. We have 2 fabs in the United States. So very well diversified, but the supply chain issues were absolutely an impact on, I think, our whole ecosystem. But I can tell you, from our perspective, right now, what we see and what we're executing to today is definitely better than it was 30, 60 days ago. Still a little bit of room to improve, no question about that, but we're ready and positioned to support a strong second half.

Got it. The other near-term topic has been just the impact of U.S.-China trade tensions, and there is talk of additional restrictions from the Department of Commerce. How do you holistically look at your Chinese customer base? And how much of that opportunity do you think can be impacted if these new Department of Commerce restrictions go into place?

Sure. Well, the restrictions are very specific with certain product codes, and there's a lot of detail underneath all this. And certainly, we're all working towards resolution. But I will tell you that we've weathered most of the storm already today with the larger player in China. And then the other kind of second-tier players, the Oppo, Vivo, Xiaomi, we have incredible relationships with. And so we're seeing excellent uptake in 5G in China with a number of the brands. The largest customer in China, we've weathered some discounts already. Our revenues have already been discounted with them. And we see opportunities to move forward. So China is very strong for us. It's also unique because you've got an incremental content gain in China that, on a percentage basis, is quite significant, the Oppo, Vivo, Xiaomi type of product has inherently less content than what you'd see from a flagship Tier 1. But when you move to 5G, the incremental semiconductor technology is absolutely necessary. So there's going to be that core 4G engine with those accounts. And now think of that with an overlay, which is probably 50% more incremental content, to that device. So -- and China is the fastest out of the gate in 5G. So I think that's also important. Our portfolio, as you know, is baseband agnostic, it's interoperable with anybody. And that's one of the strategies of our business in creating technologies like SkyOne and now Sky5 that create unique integration and unburden those customers. And I think some of those players in China really appreciate that the shoulder-to-shoulder engineering work that we do to help those customers launch 5G and the readiness to really scale. So that business has been solid. There's certainly some room to do better on the infrastructure side. As I said, I think that's where maybe the trade issue has been more of a headwind, but it's already reflected in our outlook and our guidance.

Got it. Maybe just the one follow-up there is, given that China has been, at least from the outside looking in, a little bit earlier to recover from the pandemic. They have also been very strong in the 5G market. But because of trade tensions, there's always the risk of pulling of orders or double ordering. Have you noticed anything abnormal in terms of demand from Chinese customers over the last 1 to 2 quarters?

No. I mean we certainly saw a lackluster environment in February and March at that time. A lot of that was supply chain driven. If you look at the demand profile today, it's definitely improving. We have incredible data and analytics on inventory through the channel, and we have a pretty good read-through on that end. And we're not seeing any abnormality. In fact, there's still -- look, if you think about where we are, we're still below where the market had been 1 year or 2 ago. So there's a lot of room to move from here. And the demand curve is getting better, the book-to-bill is getting better, all the signals that you would want to see, but we still have a lot of room to grow from this base.

Got it. Now let's move to the longer-term drivers, Liam. If I look at the last 3 or 4 years, the overall radio frequency chip market has kind of been plus/minus in a range. What's so special about 5G that you think the content opportunity will become much better over time?

Yes. That's a great question. So I'd look at it this way, we can go deep as well, but I'll give you a very high level view. You've got today, the vast majority of units today are still forged 3G or 4G. So 5G is incredible, we're going to talk a lot about the performance benefits, the latency, the speed, the ability to enable new technologies, all that's great. But if we think about units and content for a minute, you've got a global installed base, 5 billion to 6 billion units that are literally, for the most part, carrying 3G and 4G devices. 5G is just getting started, just getting started. So you've got an upgrade cycle and a turnover cycle with 4G going to 5G, so that's one. So there's an impetus for the subscriber to move to that technology, so that's one. And we really do believe that's going to happen. And the unit numbers and the penetration of 5G, if you go out 2, 3, 4 years, you're going to see 5G penetration go way up. So that's one important thing. And I think that would resonate with our peer group, that would probably resonate with your research, but I think we believe with conviction that there's going to be a real meaningful move from 4G to 5G. But you always carry that 4G technology, in even 3G, so it's an incremental move. The second thing, and the part that really excites Skyworks, is 5G complexity is on a whole another level to what we've seen in 3G and 4G. It is significantly more challenging, it has technology requirements that are very difficult, current consumption, latency, physical size. When you bring all of these technologies under one roof, one physical smartphone, that's really hard. And so that's what we do well. And so products like Sky5, platform-based products that harness all of this integration, and not only integration but customizable, configurable for each account, that's what's unique. So you've got a unit uptake that everybody will see. Everybody will benefit from the units, but we believe we'll uniquely benefit because the complexity is daunting and our customers love the support that we can bring to them so they can win in their market. So that's what's exciting for us. It's obviously the unit uptake that we see, and it's still early, but then there's a content gain with unique complexity, and that's where we can add real value to our customer.

Got it. When we look at just from a 2020 perspective, it's interesting that even though overall industry smartphone units have been -- have come down just because of the headwinds we have in the first half, but market expectations for 5G volumes have not really changed that much, i.e. that there is a greater makeshift towards 5G. Is that consistent with what you're seeing? Just in general, how is your visibility into your second half, right, which tends to be a seasonally stronger part of the year for Skyworks?

Yes, absolutely. So a couple of things. I mean we are seeing that the 5G number move up. There's a lot -- again, as a percentage of total units, it's still a small percentage. But we see that accelerating. We see that moving up. And also, I think it's important, and I know you understand this, but there's some very, very big players that move this market, that lead this market, that haven't yet put a 5G phone on the shelf. And that's going to change. And I think we're going to see the value and the benefit with the high-end players, that's going just be off the scale, the performance is going to be incredible, and the consumers are going to line up to get it. It's going to be the biggest incremental performance change that we've seen in cellular. So I'm excited about that. And we've been looking at our opportunity with the major players. We feel really good about our position. We feel really good about the technology challenges that, quite frankly, limit the ability for certain competitors to really get in the game. So we feel better about that. And I think there's just another really, really big leg here that hasn't really happened, and it's going to drive the business in the second half for us and for others.

Got it. So I know you haven't really given any specific outlook for the second half. But if you were to just conceptually look at how Skyworks is positioned for the second half of this year versus what you thought a few weeks ago, how would you kind of describe that?

Yes. I would say, incrementally, we feel better than we were, let's say, a month ago. The couple of things. We are definitely -- our engineering teams are working 24/7, executing key programs and designs. There's a lot to do with executing programs that we've already won that haven't hit the shelves yet, and so we're working on that. There's also some nice incremental broadening gains in markets outside of mobile phone, that are very interested in cellular IoT, leveraging 5G engines and even the broad markets business right now. I mean everyone was impacted by the pandemic, there's no question about -- every single market. But what is unique about our technology is that we're playing in the places that are most essential, the mobile device, security, IoT, GPS. These are essential technologies that were pushed during this period, still being pushed. And I don't know what your experience has been, but I still feel that the video calling, et cetera, we're still not where we want to be. So the technologies that we're talking about are very much in demand. Consumers want them. And the benefits are going to be immediately apparent when they get their hands on what a 5G type of solution can provide with the speed, with the latency, with the performance. So all of that is ahead of us. So that makes myself and our company feel much better about an outlook. It's not just the second half, but we're talking about a thematic move with a new technology that's just hitting the market, incredible complexity, incredible challenge, and those are the things that really turn the wheel for Skyworks.

Got it. You have one sort of newer competitor this year, who also has a lead on the modem side. And there is a feeling that if you can kind of control the modem, you are better able to bundle in 5G RF components. So that's the position, right, from that competitor. What have you actually experienced in, right, as you have dealt with customers? Do customers make decisions about the modem and RF separately? Do they make them together? The fact that somebody else can bundle the modem and RF, does it give them a competitive advantage in this market?

Yes. If you look at the results, the historical results in the mobile side, you see that baseband is independent of what the RF folks are doing. It's been attempted to try to integrate everything into one, it just hasn't -- it hasn't been possible. And we see it getting -- if it wasn't doable in 2G, 3G and 4G, it's certainly not going to be doable in 5G. And so what I can tell you, I've been in this business for 20 years, and working with all the customers, they want independent choice. They want independent choices. They want solutions that are incredibly strong, efficient, with the right value, but they want independent choice. That's why we want to be interoperable. We wouldn't be able to put all these technologies around with our customer if we didn't have an ability to coexist with a baseband, any baseband, whether it's Qualcomm, whether it's MediaTek, whether it's HiSilicon, whoever it may be, that's foundational for Skyworks. We're a universal supplier, and our technologies often win because the customer wants it. The customer sees the efficiency, the benefit, in some cases, even the people-to-people engagements that we have that are very important. So that hasn't changed. I mean, that has been the world that we've been in since 2000, 2001, 2002. That's been the world we've always been in. And there's always going to be competition on the baseband side. There's going to be competition in the RF side, but we're completely comfortable with that and feel like we're going to be in great position to navigate whatever baseband is out there, we are intentionally interoperable and baseband agnostic. That's always been a key competency for Skyworks. And we do it for our customer. We don't want our customers to have to struggle, we want them to make the right choice, the best choice for them. And that has worked for us.

Got it. That same competitor, I realized it's early days, but they recently reported results, and I believe they said about a 50% year-on-year growth in the RF business. So when you look at a number like that, right, obviously, the more kind of focused RF players have not grown at that same level. So how do you see the overall competitive environment progress, right, as you go through the next 1 to 3 years of the 5G cycle? Or maybe asked a little differently, how does -- what is your strategy to differentiate your products, right, versus your traditional competitors and this kind of relatively newer competitor in the market?

Sure. Well, I mean, we start at a fundamental level of developing and crafting the best technology at every turn, right, whether it's 3G, 4G, 5G. And then you kind of unpack that, Vivek, and you say, "Okay. What's necessary?" You're going to need to have high-performance TC-SAW capability to handle duplexing in the low band. And there's tremendous amount of traffic in that area. You may want to move up and develop some kind of a hybrid solution that could include bulk acoustic wave, which we are now shipping. In fact, we've actually crossed 100 million units of BAW-enabled devices. We talked about that in the last call. We'll update on our next call, but that's moving in the right direction. So again, that's going to be Skyworks DNA, Skyworks factory delivering the technology, customized and crafted for our end solutions. You take that, we have our own custom gallium arsenide. We have very, very complex assembly and test, and we bring unique solutions to the customer that resolve all of the inefficiencies of 30 or 40 vendors getting together and trying to make it work. We can craft a platform, Sky5, a platform that could be very different from customer 1, 2, 3 and 4 in China, to big accounts in the U.S., the big accounts in Korea, and we can do that. We can craft it. No one else can do that. And so when you look at the competition, you've got players that are big, that have certain areas of competency on the baseband side, perhaps. But when you move into the elemental pieces of the finished RF technology, and the nuances, and the permutations that our customers want, it's daunting. It's really hard, and you have to have made those investments. So that's what's very unique. I'm not buying third-party TC-SAW and third-party bulk acoustic wave and bringing everything together, patching it together and bring it to the customer. We're customizing and crafting an inception. And we also can take products and create derivative spends based on our own factory needs, right? We can have a solution that could be 50% universal, interoperable, but then customize. If it's a specific region or if there's a current consumption budget that's unique, we can do all that. And then again, having the operational scale and execution. It's not easy. I mean, we spend more on CapEx than some customers, than some companies. But if you look at the net-net and free cash flow, it's still a great answer. So we look through all of that. And what we hear from our customers is that this is the way they want the products delivered. They want to be part of the discussion, they want to work with us when we're making decisions on what the pros and cons are going to be for the end solution. And that's the engagement that we want to see. It isn't a platform where we say drop it in, take it to the market. It's crafted and configurable with a great deal of customer say in the final solution.

Very good. You touched on the BAW capability, which is, I think, one of the more interesting new developments at Skyworks. And I think on the last call, as you just referred to, you crossed 100 million devices. As you look at the adoption of that technology, has that been with smaller customers in China? Has it been broad-based across your customer base? How important is having that capability internally across your customer base?

Yes, it's incredibly important. And we've been working on this for a long time. And we don't want to go to market with something that is not at the top of the hill with great performance. So we've been working on this for a while. We just started talking about it because we're winning, right? So we wanted to make sure we had a ready-now product. It has been in development for quite some time, and we're happy with the early success. There's a long way to go, a long way to go. The TAM opportunity for BAW-based technologies and additional spectrum that we can address is very significant. We are making progress. There's a tremendous amount of room that we can grow into in this side of the business. So we're looking forward to it. And along the way, you should expect that the solutions and the approach that we take is going to be similar to what we've been doing in the past. It's not going to be discrete parts. Today, I don't think we've sold a discrete filter in our company. We integrate the technology to be a part -- a critical part of an end solution, an end platform, and we're doing the same thing with bulk acoustic wave. So we're going to follow what our customers want. And we're going to execute in a way that works for our company and our factories and our technology, but, ultimately, puts our customers in a position to win. And that's it. If your customer is not winning, then your product's not getting sold.

All right. Now if you look at the RF industry historically. So obviously, we have had the 3 main focused suppliers, but we have also had a very big discrete part of the market. As you go into 5G, do you think having the ability to integrate is more important? Or do you think that just given all the trade tensions and the fact that China is leading in 5G, will perhaps force them more to discrete suppliers as opposed to turning to more [ renting ]. So what is more important as we move to 5G, integration or China's kind of desire to be more sufficient on domestic suppliers? Or Asian suppliers, I should say.

Yes. Yes. It's a bit of a tradeoff. Well, I clearly believe, and hearing it from customers as well, the integrated approach is by far the most desired. These 5G solutions are really hard. We're talking about our bread and butter, which is connectivity and mobile. There's a lot of other things that need to be done on the 5G phone. There's competition for size, for current, performance across the board, and it's really difficult. So customers want the integration because it, first of all, creates more efficiency, better current consumption, better performance, better latency. All of that brought together. But it is hard to do. So the integration play is wonderful for the customer. We unburden the customer with these challenges, and we do it ourselves. We get cues, we get specs, we get demands, and we come back with a great platform that allows that customer to go-to-market quickly and have the benefit of rock-solid technology at every turn that we provide into our Sky5 engine. The discrete implementation in 5G is very, very challenging. I mean you have a number of components from multiple vendors. Now you get into 5G, you expand the semiconductor content. If you're not integrating, you have 7, 8, 10, 20 different devices that are scattered through the board. It's massively inefficient. And you also have, I know I spoke to this before, you have a size issue when you're in 5G. You're carrying 3G and 4G connectivity as a legacy, and then you're bringing this new overlay. So it's not the approach that is desired by any customer in any region. If you look back at one of the leaders in China. If you look back 6 months ago, 9 months ago and look at the approach that was used. And invariably, you're going to see the approach was more around integration, not discrete, and this is in a 4G world. So when you jump up to 5G and the complexity is absolutely real, there's no debate about how hard it is. And then you try to do it in a discrete implementation. The inefficiency is daunting. And you lose the benefit of what a great product should do. So we believe with conviction that the integrated approach is by far the preferred approach. Trade issues, et cetera, a different kind of nonmarket market, technology-driven, but trade issues can drive a customer to perhaps try to cobble together a 5G solution, but it's certainly not the most efficient, optimal way to get that job done. So we have very good insight on how that plays out. So we're sticking with our strategy with integrated solutions, happy to provide those to every customer, any customer that needs it. But our portfolio and our strategy approach with Sky5, the platform and systems level, we have conviction on that strategy.

Got it. It's interesting that we are starting to see the start of -- we are starting at the 5G cycle, but there is also WiFi 6 that is starting to emerge. There's also the 6E, right, SEC recently announced some more spectrum for that. What do these new WiFi standards mean for your business, both on the cellular side, and also importantly, on the broad market side, where Skyworks has kind of a leadership position in the IoT market?

Yes. No, that's great. I'm glad you brought that up because we are seeing -- 5G gets a lot of attention, and it should. But behind that, there's another upgrade, and that's WiFi 6. And that has been an incredible driver for us, and I think we have a long way to go with that. That cycle is still in early innings. And so you're right. I mean you have -- so you have the WiFi 6 technology that we will certainly see, whether it be access points and routers. We look at that in IoT device. We're seeing that across the board. And it's been a nice driver for us in the broad market portfolio. We've added some strategic customers over the last couple of quarters, names like Honeywell, names like Raytheon, Bosch, of course, NETGEAR, and even players in the utility space like Itron. And then there's a whole wave of consumer opportunities that actually are very good margin. It's not a typical consumer product. When you look at things like some of the Amazon opportunities, Ring, names like that. There's just this whole home automation and connected device ecosystem that has been really, really powerful for us. Even our GPS technologies are gaining some scale. So you have all of that, but then you have WiFi 6 going into the mobile phone too. So you've got your kind of broad market piece, which is not classic mobile phone, but it's connected. And then you have your smartphone with 5G. And within that device, you could also have a WiFi 6 engine for local area networking. So there's a lot there. And we go back to the earlier part of the discussion is that one of the things -- obviously, this COVID-19 pandemic is horrific, but it also demonstrated that when all these -- all of our users want to be on video calls or high speed connectivity, all at once, we're still not ready. So there's going to be a need for continued growth on the infrastructure side, which we play in, continued pressure to improve the performance of the handheld device, whether it's the latest 5G phone or whether it's WiFi 6 being embedded into a number of connected devices, even wearables. So I think there's a broader suite of customers and opportunities that we haven't yet addressed, but we will address over the next few years for sure. So we actually do -- we appreciate that question because it does -- it matters a lot to us to advance that technology and diversify with those segments. The good news is we have the technology. This is not a case where things like bulk acoustic wave took a lot of time before we could put a product in the market. We're shipping WiFi 6 now. This is more of a customer acquisition, sales and marketing, FAE play, than how do we develop the technology. So it's a different angle, but it actually should help us bring revenue to market sooner.

Got it. And just, Liam, in the final 60 seconds or so that we have left, what do you think about millimeter wave? In that, do you think millimeter wave will be a big part of the 5G market? And if it is, how is Skyworks positioned for that?

Yes. No, millimeter wave is an interesting technology. It has some benefits. It has some drawbacks. We're not seeing it deployed in a substantial way right now. We're looking at it. We've got a couple of small bets there. I know some other players have larger bets. You have some technical challenges with millimeter wave. There's some line of sight impediments that we have to work on. The physical size of the technologies within today's smartphone is really a challenge as well. The very large millimeter wave takes up quite a large footprint. It drives a lot of current. Applications, there could be some applications, and I've said this before, going into a sporting event, where there's 50,000 people trying to go through StubHub. That's the kind of thing that maybe a millimeter wave technology could work if you have line of sight to the tower. There's some potential for that to extend in the 5G world. But I think today, there's tremendous amount of opportunity in the core devices that are being launched. And if millimeter wave heats up a little bit, we'll certainly be engaged. And we are now, but it just isn't something that we see as a big driver over the next year or so.

Excellent. With that, Liam, we are at the end of our time. Thank you so much for spending a part of your afternoon with us. Really appreciate your insight, and thanks to all the investors who joined the call. And if you have any follow-up questions, please feel free to call or write. But let's close the call there. And I really want to thank Liam and Mitch again for joining us.

Well, thanks again, Vivek and the BofA team. Good luck. Be well, and hope to see you guys soon.

You too. Thank you.