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

Good morning, and welcome, everyone, to the Future of Technology Series. This is John Vinh, senior semis analyst at KeyBanc Capital Markets. We are pleased to have Kris Sennesael, CFO; and Mitch Haws, the VP of Investor Relations from Skyworks joining us. The format of this session will be a Q&A fireside chat. If you have any questions, please feel free to submit them at the bottom of your web page.

And with that, maybe I'll -- we can start off. Kris, can you give us an update regarding your supply chain issues? You mentioned that was going to be a headwind in the September quarter. I know there's obviously a lot of concerns out there that we could have more of a relapse, and things could potentially get worse from a supply perspective. What sort of progress are you making in terms of clearing this up? And if you do clear this up, could this be a tailwind for your gross margins in the December quarter?

Yes, John, and thanks for having us here at this virtual event. So this is some very unprecedented times that we all live in. I've never seen any like this before. And rest assured that at Skyworks, and as a company, of course, we're trying to do everything to stop the spread of the pandemic. And we have some very robust health and safety protocols in place to protect our employees, to protect our customers, our suppliers, our partners and the communities that we work in. Of course, all at the same time, of course, while we continue to provide essential services to this communication ecosystem. And so when it comes down to COVID-19, as you know, we have a pretty complex supply chain, right? We're not like a standard semiconductor company that makes wafers and cutters and dies and assemble and test it. We have a very complex supply chain. We provide complex but highly integrated solutions that consist of a small PCB that is stuffed with power amplifiers, multiple filters, some SOI and switches that we buy from third parties as well as some passive components. That's all being assembled with some advanced complex packaging technology and then we do RF testing. And so that's a pretty complex supply chain. But we've been managing very well through that. We're actually really good at that. It's one of our competitive advantages that we have. And so all our factories are up and running. The 2 power amplifier, gallium arsenide fabs in the U.S.; the 2 fabs in Japan, where we do the filter from them; as well as the fab in Singapore, where we do the back end. We have no issues with our suppliers. We've actually increased some of the buffer stocks to be able to handle the demand from our customers. And we have our back-end operation in Mexicali. That was, in April, shut down for 2 weeks, but then the government realized that we are providing an essential business, and so we reopened that factory. Having said that, there is some inefficiencies, right? We do social distancing. We don't have overlapping shifts. There is some additional sanitation and cleaning. We actually also do a little bit more of outsourcing, especially in the back end, and there is an increased level of logistic cost as well. If I have to estimate that, it's all or about 50 to 75 basis points from a gross margin point of view, and it's hitting us a little bit in June. Of course, it's hitting us full impact in September quarter. And to be honest, I don't know when it's going to go away. I assume that we will get better at it and try to drive efficiencies to deal with those inefficiencies. And hopefully, the pandemic eventually will go away. But for now, it's like a 50, 75 basis point headwind. And I said like, hopefully, over time, that will go away. In the meantime, of course, we will continue to work hard on further improving our gross margins. We feel good about that. As you know, our target model is to get to 53% gross margins, and we will continue to make good progress quarter-after-quarter towards that target.

Great. Thanks, Kris. Maybe we could dive into 5G right away. I think several of your peers have talked about the 5G market, and not seeing a lot of change there in terms of the overall market, 225 million to 250 million units. How does this compare to what you guys are seeing? And maybe what's baked into kind of your expectations in the back half of this year? Also, obviously, there's an anticipated flagship launch in the second half. Significant amount of units are also going to be generated at the lower -- mid- to low-end price tier points. Can you just talk about how your content opportunity differs in a flagship versus a mid-tier client asset as well?

Yes. No, we're really excited about the transition to 5G. And as you know, we are a technology leader and have been working really hard on that for the last 20 years. And we transitioned really well from 2G to 3G and then from 3G to 4G, the different flavors of 4G with LTE, LTE Advanced, LTE Advanced Pro. And so now finally, we are getting to 5G. And it's happening as we speak. I know there is a lot of -- if you look at the units, there's a lot of headlines about total units are down 10%, 15%, 20%. And to be honest, I don't care too much about the total units. As you know, there is 1.7 billion phones being manufactured or sold every year. But there's still a couple hundred million 2G phones and a hundred million 3G phones. And then in 4G, you have low-, mid- and high-end phones. And now, of course, you have the new group of 5G phones. And so we really play, of course, now in the 5G phones and in the mid- to high-end 4G phones. And there, we have seen some really stable demand. Of course, there is some impact from COVID-19, but I would say it's a good place to be in. The demand is relatively stable. You've seen the earnings report of our large customer, which is doing really well. And so yes, now you have the 5G. It definitely has started in China. If you look at in the month of June, 6 out of 10 phones which were being purchased in China were 5G phones, right? And so the China OEMs as well, of course, as the telecom operators, they're really pushing those 5G phones not only on the flagship level, but also on the cheaper models all the way down in what we call the mass tier. And so of course, the large customer haven't launched yet. They will, later this year. And so most of the estimates are still for this year, for 5G, 200 million to 250 million phones, potentially doubling next year into the 400 million to 500 million phones. Again, doubling the year after into 1 billion phones. There's like 5 billion, 6 billion phones out there. They all need to be upgraded to 5G over the next couple of years. And so that's the big market opportunity for us. So that's from a unit point of view. From a content point of view, it's a little bit a different story when you look at the flagship model versus the mass tier. On the flagship, we already, historically in 4G, had some great content. In some cases, approaching up to $10 of content per phone. And that content has been growing on or about 10%, 15% year-over-year, if I compare a new model that come out with the model that came out the year before. Obviously, here now, we have 5G, which is a big boost in terms of complexity, performance, higher data speed, lower latency. And it's being layered -- 5G is being layered on top of 2G, 3G, 4G. So that adds a lot of complexity even on the legacy parts, which are becoming a lot more complex. And then you get new hardware to support the new bands in 5G that are being added. And so that's a big boost, adds a couple of dollar of content even in the flagship phones, and we'll continue to grow from there as more complexity and more bands is being added. In the mass tier, it's a little bit of a different story because in the mass tier 4G phones, especially with some of the China players there, they were resisting the integration. And they were spending maybe $7 or $8 of RF, but only $1 or $2 or $3 for Skyworks with some very light integration and then a bunch of discrete components that are wrapped around that. Now as we move to 5G, it's game over with those discrete architectures. They are moving to fully integrated architectures because they were running out of board space -- physical board space to cram it all in there. They couldn't get to the performance requirements for 5G. And so they are adopting now integrated architectures, which for Skyworks now, we are getting $6, $7, $8 of content in those mass tier 5G phones that are driving a lot of units.

Great. Just a follow-up on that. I know historically, the high-end or flagship side of the market is always remaining discrete, but they're also facing some of the space constraints and limitations as well. And you guys, I know, typically have very good visibility [ solve those ] out to kind of platform decisions. Do you expect the high end of the smartphone market to remain discrete? Or is there also a shift towards integration there as well? And how does that benefit you?

Yes. No, we see a shift to integration across the board, right? And it's all, again, driven by higher complexity, multiple bands and frequencies that all coexist. And so you see that in all the markets that we play. You see that actually playing out in cellular with 5G, you see that playing out in WiFi, where we have now an adoption from WiFi 5 or a shift from WiFi 5 to WiFi 6 and 6E, adding a lot more complexity. You also will see that in some of those IoT markets. Whatever cell or whatever wireless connectivity protocol they will use, WiFi or CP or Bluetooth and in the future, more and more cellular, including 5G, that all drives a lot higher complexity, and as a result of that, more integration.

Great. I wanted to ask you about the impact of the U.S.-China trade relations. And most notably, the export restrictions really the most recent to high silicon. How do you see this impacting your business? Perhaps maybe looking at Huawei and the need for them to adopt merchant silicon, right? It -- obviously, it looks like they're going to start pivoting to MediaTek. And with the recent licensing agreement with Qualcomm, it seems like there's a potential that it could be a mix of MediaTek and Qualcomm. When you look to kind of a shift towards merchant silicon, can you maybe talk about how that impacts you? And then maybe also compare to that to -- how that compares to kind of your positioning on HiSilicon previously?

Yes. Well, first of all, I mean, Huawei was a great customer. It was our second largest customer prior to the ban that was put in place in May of 2019, right? We did $125 million of revenue a quarter with them and growing. Roughly $25 million of that revenue was in the infrastructure business, which unfortunately by now is almost down to 0. And $100 million was in mobile connectivity segment. When the ban was established -- or prior to the ban being established, again, great relationship. We have a lot of RF wrapped around their -- whatever baseband they used. And they used multiple basebands from HiSilicon to MediaTek to Qualcomm, we had a really nice RF position around that. Because keep in mind that our RF solutions are baseband-agnostic. It doesn't matter really what baseband is being used. Then, of course, the ban was installed. Our revenue went almost down to 0, Huawei was trying to work with domestic solutions, not relying on U.S. technology. I don't think it worked out well for them. I mean they have to compete in their market against Oppo, Vivo, Xiaomi, who does have access to U.S. technology as well as Samsung, and of course, the large North American customer. And so that didn't really work out for them. And so now when they were switching to 5G, we started having some -- can you still hear me?

Yes. I can still hear you. It looks like you disappeared, but we can still hear you.

Right. So I'll just keep talking. I don't know what's in -- but so with 5G, we started seeing some good traction there with our RF solutions being wrapped around their HiSilicon baseband, which was sourced at TSMC. With the new band and the restrictions, TSMC apparently can no longer supply to HiSilicon and Huawei. And so Huawei will have to redefine that architecture and find a new baseband. A lot of rumors are out there. One of them is, of course, they might be switching to MediaTek, which would actually be very favorable to Skyworks because we have a great relationship with MediaTek. We have a very strong position on that reference design with MediaTek. But if they -- but they might switch to some other baseband providers as well. And again, for us, it doesn't really matter because we are fundamentally baseband-agnostic.

Great. Maybe talk about Qualcomm. I think they were extremely bullish about their RF position. I think last quarter, they disclosed that they're planning on shipping $750 million in RF-related revenues in the September quarter, and believe that they're still on track to gain share to 20%. When you talk to your customers, I think the general feedback is that there's still a pretty big performance gap and that you're still very much kind of best-of-breed. Wondering if you could just reconcile kind of maybe the feedback we're getting from your customers and your investor brief performance versus kind of the numbers that have been put forward by like Qualcomm on the RF front end. Is this a situation where they're benefiting from just the overall TAM expanding like you are? Or are there some share shifts there? And then by the way, we can see your video feed again.

Yes. No, it's great, it's great. So I mean we take all our competitors very serious, right? And so we study their technology road maps and product road maps and study their success or failure in the marketplace. And in the case of Qualcomm, I mean, again, there, we take them very serious. But we don't see them, that merch in the marketplace, right? In where we play. Again, Skyworks, we have a very strong position on the transmit side, in the low-band path. We have a very strong position on the receive side with the DRx functionality. Strong position in WiFi, GPS and some other areas. And honestly, we don't see them that much. Not at a large customer or Samsung and the Chinese players out there in the areas that we play. So -- but I think there's a big opportunity here with 5G. There's going to be multiple players that benefit from that. I know in the case of Qualcomm, they have been investing in millimeter wave, and so I suspect that a lot of their revenue is going to come from the millimeter wave solutions as well as, of course, the envelope tracking, which is being integrated into the baseband, which typically was a Qorvo solution. We didn't do much there, so we didn't lose much there. As well as some of their discrete filter business that they have. So again, we feel really good about our competitive position, the design win momentum that we have in mobile as well as in broad markets. And so I think it's a big market, we continue to expand our reach in that market and we feel good about our position.

Great. You touched on millimeter wave. I think, obviously, it's a very controversial topic within 5G. I'm wondering if you could give your view on millimeter wave within handsets. How are you positioning and investing for it going forward?

Yes. So as you know, I mean, there's multiple elements to 5G, right? And so we really focused on the sub-6 gigahertz opportunity in 5G which, again, is being layered on top of 2G, 3G, 4G, adding more complexity to the legacy part, adding new hardware to support the new bands, 77, 78, 79, band 41 and so on, that is all sub-6 gigahertz. And so far, most of the action has all been in that area. The U.S. is a little bit special. Unfortunately, we try to be a technology leader in the world. But when it comes to 5G, you need multiple elements to come together. The first one is you need to have spectrum. Unfortunately, in the U.S., we don't have a lot of 6 or sub-6 gigahertz spectrum or new spectrum available. And different operators -- some operators have some spectrum, some operators don't have a lot of spectrum. And so -- but they do have millimeter wave spectrum. And so they are pushing for now the millimeter wave spectrum. Millimeter wave, I think it's a great technology, but -- for fixed wireless, right, where you have a small cell tower and a CPE box on top of your roof. And not too far away from each other, perfect line of sight, unlimited power and you can spend $50 or $100 on the bond cost. It works well. Pushing it down all the way to the handset, there's still some technology issues that needs to be resolved. I mean you're sitting inside a building with four walls, you wrap your fingers around your antennas, you don't have perfect line of sight, you have limited power consumption budget, you have heat dissipation issues and so on. So I think there's still some issues that needs to be resolved. At the same time, of course, in the U.S., we need to resolve the spectrum issue. And I think it will be, the C band or CBRS bands will come up for action. And so once that happens, I think that's going to really drive forward the 5G revolution. Having said that, millimeter wave, we made some investments there. We do have solutions. If some of the technology issues are getting resolved over time, we will be ready to jump in it and grab our market share in that area as well.

Great. You recently had highlighted a few milestones in regards to BAW crossing 100 million and 150 million, respectively. But by your own admittance, those are pretty modest numbers compared to your established incumbents out there. What's kind of the main message or takeaway that we should have in regards to your BAW positioning? And I'm just wondering, as this continues to ramp, similarly, when you saw TC-SAW in-house, does this also benefit your gross margins from an accretion perspective as well?

Yes. No, that's a great question. And so again, as you know, we are a technology leader, right? And we have world-class gallium arsenide PAs. We have world-class TC-SAW filtering. We did have access to BAW through third parties but maybe it wasn't world-class, right? And so we have access to the SOI, and then we have world-class advanced packaging and testing. And you need to have all of that. And so we realized that, hey, there is a big market there for integrated solutions with BAW filters inside, that we didn't really have a good technology and product offering. So a couple of years ago, we made major investments. We've acquired some IP, we developed most of our IP itself, we created our own unique recipe and then we leveraged our world-class TC-SAW manufacturing assets, right? The management team, the facility that we have. And so we build out -- we put CapEx dollars to work. We build out the manufacturing line. And then we're never going to sell discrete BAW filters, right? We sell integrated solutions that integrate one or more of those BAW filters, together with a lot of other stuff. And we had major success with that. Obviously, you're not going to wake up one day and get $1 billion revenue, right? You have to grow into it, right? And so there's multiple ways to play BAW. Of course, there is the transmit side. We have the mid-high band pad, which is a huge market, dominated by 2 players. We do have solutions today out in the market there. We have design wins, and we will start ramping revenue there, and so that will grow over time. Of course, you have integrated solutions on the receive side, including the ultra-high bands, where we have a very strong position. And actually, today, most of the revenue is in that area, but we are growing into those other areas. You will find integrated solutions in WiFi that have BAW filters inside. Eventually, you will have infrastructure devices that have BAW filters inside. You have the antennaplexers. So it's a huge multibillion-dollar market. And we've made the investments, we are ramping up, we have major success. And so we will continue to expand our reach with multiple customers in multiple areas over time. From a gross margin point of view, yes, of course, as we ramp up and scale that business, we will have a better cost structure there. But again, we're not really selling a discrete filter, right? We're selling an integrated solution that has a lot of stuff inside. The filter content is sometimes 10%, 15%, 20% of the overall [ BOM ]. So it doesn't really have a big impact on the gross margin. But again, as -- because we are leveraging our TC-SAW filter operation, the cost structure right from the beginning is good. Of course, as we scale and ramp up, it will even get better.

Great. I wanted to just touch base on gross margins and maybe just revisit some of the COVID-19 impacts. I think, longer term, you feel pretty good about presenting the 53% incremental gross margin fall-through. With the COVID-19 impacts right now in the near-term impacting Mexicali, does that still kind of hold here if we get revenue growth off of the current base at your current base? Should we still think about 53% gross -- incremental gross margin fall-through, even with the COVID-19 impact being in place here?

Yes, yes. Absolutely. I mean our longer-term target model is to get to 53% gross margin. And there's multiple elements that come into play. And I've always put them in like 3 buckets: the first bucket, of course, is bringing higher value at more complex, highly integrated devices to our customers that really improves the data speeds or the latency and increases the user experience, right? And so it's very high R&D intensive, very complex products, for which, of course, we need to get paid for. And you've seen that over time. It's because sometimes they're like at 2G, the margins were in the 20s. At 3G, the margins were in the 30s. At 4G, the margins moved into the 40s. And at 5G, the margins are in the 50s, right? As you see the increased level of complexity. So that is a big part actually of the gross margin improvement story. In addition to that, of course, we will continue to work on operational efficiencies and cost reductions in our own fabs as well as our third-party suppliers. We have a little bit of a setback there because of COVID-19 and all the inefficiencies. But there, again, I assume that over time, that will go away as well. And then third, of course, we have a little bit of a benefit from a mix point of view. Our broad markets business has above-average gross margin. And as that broad markets business grow faster than the mobile business, we have a little bit of a tailwind from a margin point of view. And I do believe that our broad markets business will grow fast, but our mobile business will continue to grow fast as well, so...

Nice. Just final question, just a follow-up there. On the broad markets business, it has been underperforming more recently despite a very strong demand for WiFi 6 here. What's your visibility and confidence and timing in terms of when you would expect broad markets to start growing meaningfully for you then?

Yes. So if I reflect about the June quarter, broad markets was slightly below our expectations. And the way I think about broad markets, there's multiple segments there, right? There is the connected home, there's the connected car, there's the connected factory, there's some consumer applications and then there is the infrastructure business. And so again, when I look at June, the connected home business is doing really well driven by the work-from-home, learn-from-home, play-from-home trends that we see. And in my view, this is not just a 1- or 2-quarter blip. This is an ongoing secular tailwind for many quarters. We actually were somewhat supply-constrained in June and still are a little bit supply-constrained to be able to handle all the upside demand in that area. And so WiFi is a big part of that, the upgrade from 5 to 6 and 6E is playing out really well for us there in that market segment. The connected car in June was disappointing. I mean a lot of car manufacturing plants were shut down for an extended period of time. They have come back up into operation. And so we do see that picking up. But then again, longer term, that's a great market. We have strong design win momentum with all the key players for now focusing on connected cars. But eventually, that becomes an autonomous car with maybe more than $50 of RF content in a car. Similar thing in the industrial segment. It was a little disappointing in June. But then again, longer term, you think about factory automation, stand-alone 5G networks that empower your wireless connected factories. That's the trend that we see, and we are well -- very well positioned to play in that. In the consumer segment, more recently, we've seen some great strength. We have design wins, bookings and backlog in our wireless audio, the smart audio business that we acquired a couple of years ago, mainly supporting the play-from-home with wireless gaming headsets, and we see really strong momentum there. And then in addition to that, you have the infrastructure business. As I said, we had some headwinds there, mainly driven by the Chinese infrastructure players there, where the revenue now is almost close to 0 unfortunately. But there, again, longer term, there's a lot of 5G infrastructure networks that needs to be built out. We're very well positioned with Nokia, Ericsson, Samsung. And so longer term, we think this is going to be a strong market, but we definitely have been suffering a little bit from the Chinese headwinds there. So when I put it all together, and I mean, we'll see double-digit sequential growth into September, and that will continue beyond that. And so that market for us should be growing year-over-year at double digits.

Great. Well, Kris, looks like we're out of time. Thank you very much for the chat. Great to see you.

No, it's great. Thanks, John, and have a nice rest of your day.

Take care.