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

Welcome, everyone. My name is Atif Malik. I cover U.S. Semiconductors and Equipment stocks here at Citi. It's my pleasure to welcome Liam Griffin, President and CEO at Skyworks. The format of today's discussion is fireside chat. I will go with my questions first. And then if you have any questions for Liam, please e-mail it to me that's atif.malik@citi.com. Welcome, Liam.

Thank you, Atif.

Liam, my first question is on broad smartphone demand trends. You guided to a strong 14% sequential growth in the September quarter, driven by China and Korea 5G. With North America more of a December quarter event based on public news of a delayed flagship launch this year, we are hearing that the demand for the legacy phones, like iPhone SE 2 is quite good. What do you see in the market? Does the 200 million 5G phones still sound like a reasonable estimate for this year?

Sure. We actually are seeing continued strength in smartphones. There's some incredible 5G products that are in the market right now that are shipping. And then there's some incredible solutions that we won't see for the next month or so. But I will tell you that the common theme is really around incredible performance, very, very high speed, low latency, higher capacity solutions, underpinned by incredible technology and the kind of things that we do at Skyworks. So we definitely see the demand profile coming together, some of that may be more towards the back end of the calendar year. The technologies that support these mobile devices will be like -- unlike anything that we have seen so far in mobile cycle. So we're really excited by that. I'm proud of the work our team has done to position our company to deliver. And you know that we've been in this industry for years, about 20 years, working on wireless technologies, and it's taken all of that energy and effort and know-how to put us in a position to lead as 5G comes to market.

Great. And Liam, in terms of your content growth, I think you're expecting a bigger bump this year. Can you just talk about how you benefit from strong content growth in flagship models? And also, what's different, I think, the team feels like about 5G is that you're also getting a nice content bump in Chinese handsets going from 4G to 5G from $1 to $3 to $5 to $7. So can you just talk about the dynamics that what's different this time? You've been a growth stock for multiple years, but unfortunately in the last few years, because of Huawei restrictions or whatnot, the growth hasn't really transpired?

Yes. So if you look at what's unique here in this cycle, and it is very unique, is that you've got an incredible 5G solution that requires unique technologies, right, unique technologies, operating in spectrum that we haven't operated in before. So there's a great deal of complexity in the devices. There's new frequency bands that we have to work on in the filtering side. We have Sky5 platform that really integrates complex, challenging issues within the mobile phone and consolidates that into an integrated full solution. That's really cool. We're also seeing the need for these devices to be smaller and more compact and more efficient. That's been unique for us right now. The usage cases that we're seeing that are going to emerge around 5G are going to continue to push the technology envelope. And then also think about the backward compatibility that you have, so you have the new 5G content, which is unique to the spectrum in 5G. But we also have to have backward compatibility to 4G. So that requires a lot of unique initiatives. Size reduction, conservation of current and energy and still be able to deliver that bandwidth in a price and a form factor that's desirable to the customer. So there's a lot of interesting things with complexity going way, way up, our knowledge, our know-how and the ability for Skyworks to bring all the individual elements from the RF chip to the mid-band to the high band, to the DRx solutions to GPS, WiFi, all of those devices come together to provide a market-leading 5G phone.

Great. And as we look into millimeter wave part, how should we think about your content bump going from sub-6 gigahertz phones right now to millimeter wave bump?

Yes. So the millimeter wave bomb is kind of an incremental piece of high-band spectrum, right? So it's typically 6 gig and higher. And that's a unique area right now that is probably going to be first launched in the U.S. with maybe a subset of phones. We've done a really good job of managing and developing solutions that are going to cover all of the phones, U.S., Europe, Asia, wherever it may be. So our footprint is extremely broad in terms of technology, and the devices that we have to underpin these phones is quite compelling as well. So there's a lot of investment that we've made in bulk acoustic wave, in mid-band filtering and low-band filtering to try to drive this. And we're still working with the millimeter wave side as well. So today, for us, that's not been a leading part of our story. We'll continue to develop on that. But if you look at low, mid, high band from transmit to receive, there's an unbelievable amount of complexity that's brought to market to our customers.

Okay. One trend we're seeing in the smartphone market, Liam, is that the demand is moving towards kind of mid- to low-tier 5G phones, particularly in China. I mean how does that trend bode for the pricing power or the kind of profitability of the component suppliers that play into the smartphone market?

Well, it's all good. I mean, it's very early for 5G. So it's -- these phones are really just getting launched now. And however, you measure the content, it's significantly higher than what a 4G device would be. Harkening back to what I said earlier, there's unique spectrum in 5G that just is not in your 4G phone. So if you've got roughly 5 billion mobile subscribers today on the planet, I would tell you that 99% of them are using 4G or 3G phones. 5G is still really early. And it provides the most compelling uplift in technology and performance that we've seen in mobile. And we're going to use all of our 20 years of experience at Skyworks to make sure that those technologies launched effectively and provide the desired benefit to our customers. So there will definitely be an incremental content bump with every one of our customers. And I think what's important, Atif, is the diversity of the Skyworks offering allows us to come to the table, work with our customers who also have challenges trying to deliver these very complex phones and have our engineering and our know-how and our choice of technologies, our choice of technologies, made within our own fabs, so that we can craft and configure a unique solution for anyone of those accounts, whether it's a lower end player in China or a large flagship player in the U.S.

Great. Liam, another effect we're seeing in the smartphone market is the kind of the share shift from Huawei to whether Samsung or other MediaTek modem-based phones in China. How does the demand shift impact you guys? I mean I assume it's probably a tailwind at this point because your Huawei sales have been fairly limited in the last 12 months or so. Can you just talk about how does the geopolitical kind of situation with Huawei impacting your numbers, both come near term and then longer term, too?

Yes, that's a great question. Fortunately, for us, we have been minimizing our exposure to Huawei. And basically, at this point, there's not a significant revenue loss that we could see despite what occurs here in the trade environment. Obviously, there's a continued ban on certain technologies. And we're not too surprised by it and fortunately, we've managed through this for the most part, and we don't expect it to be much of a hit at all to our financials. But at the same time, we think that -- and we really truly believe that this 5G technology is so vibrant and vital to the world, to the economy, that whatever handset units were lost with 1 customer in China perhaps will get redistributed with others or even redistributed to Korea or back to the U.S. So the overall uptake in 5G and units in 5G, although the mix may shift a bit here with Huawei, the total volumes, I don't think are going to change. I think we'll continue to see the upside in the growth curves that we've expected.

Great. Liam, Skyworks is a very broad connectivity company, in my view, and this whole work-from-home kind of demand that we're seeing right now, how are you guys participating in different areas from the work-from-home effect?

Yes, that's great. I'm glad you asked that question. At a high level, we're really proud to play a significant role and connecting anyone, everyone all the time. I mean that's been our slogan. And that could be from home. It could be at the beach. It could be your office, wherever you may be. And we've seen through the challenges of this pandemic, the ability to be connected anywhere really, really matters. We've had an incredibly effective workforce with largely at-home workers, but you have to have the right technology and the right technologies are the kind of things that we've been working on for years. So we see a tremendous change an economic change, a usage-case change that I think is sustainable and could grow. Look at some of the companies that have benefited, companies like Zoom, companies like Peloton, companies like Amazon, with store-to-door delivery, just an incredible amount of new applications. But you and I both know, it's not just software. At the end, there's hardware, right? There's hardware to transmit and hardware to receive. So that often gets lost when people talk about tech and they talk about communications. The things that we do at Skyworks, we actually create that connection, we create that signal to allow all of that usage-case dynamics in the software dynamics that go on under the curtain. So there's a lot of interesting things happening. We're excited about it. We think that this is a sustainable, growing opportunity for Skyworks that wasn't contemplated 3 or 4 years ago, where now we think it's going to be vital. So we're excited. It's also going to allow us to get into more end markets. We talked a little bit about 5G, but we also have an incredible WiFi 6 portfolio, which is propelling a lot of these applications. We have precision GPS that we've designed and honed in. We're very, very incredibly tight GPS spectrum. So there's a lot of stuff that's coming through, but the underlying theme is connectivity. It's connectivity, right? And that's been the bread and butter of our company for 20 years. So we're really excited about that. And also excited about our company doing great in handsets, but there's so, so much more that we can do with the technologies we have.

Good. Liam, If I look at 5G, it's in China, went to 5G first, 60% to 80% of regions of China already have infrastructure on 5G. We're hearing about gaming becoming a bigger driver for smartphones now because of the refresh rate, and are there applications that you've heard from your customers or customers' customers that can support that beyond speed and access 5G has a much bigger role to play?

Yes. I mean, if you think about AI and virtual reality, start even looking at some of the interesting new opportunities, maybe they're drones or autonomous driving, all of that type of technology is right in the sweet spot of what we do at Skyworks. It's the high performance, high reliability, low latency technologies that we can bring to the market. And those markets don't necessarily need to be a handset. Machine-to-machine applications are going to be very, I think, incredibly impactful for the industry over time. And then in gaming, as you mentioned, we have incredible business in cognitive radios, which is really a wireless audio type product where we can do both voice synthesizing and also the audio side on the input. And again, that's been a portfolio that came through acquisition of Avnera and has been doing really well over the last several quarters, and it's another one of the themes here that goes along with connectivity into kind of the stay-at-home environment. But that's also been looking good and provides a new revenue stream for us.

Great. If you just switch to the broad markets because I've been kind of a pleasant surprise that it has quietly grown to 1/3 of the sales of the company. And the strength, obviously driven by work from home WiFi 6, you're expecting double-digit growth in September, even December quarter, auto is still small. How should we think about the growth for this set of business for the next couple of years?

Yes. No, that portfolio, as a standalone is just an incredible business. It's highly diversified, very low concentration levels, broad set of customers in a broad set of technologies supporting those customers. So it's a great portfolio of businesses that we've grown over time, and I appreciate you noting the magnitude of the revenue. But as we go forward, we really believe that, that's going to become a significant catalyst to our top line. And just think again about the technologies that we have. Many of these technologies will start perhaps in a standard mobile device. But they will move towards IoT, Security, AI, VR, advanced audio, all of those kinds of technologies. And what's great for us is at the essence, it's still leveraging core wireless connections and core wireless IP that we have and leveraging the customization that we can bring in our factories, unique technologies there. So again, 5G mobile, great, it will spawn into many, many more markets that will be broad market like. And occasionally, you step into a market that becomes really significant. And if that happens, that's great, we'll continue to put resources and people and investment in that area.

Great. And in terms of your M&A strategy to kind of augment growth, are you confident that the mobile and the broad markets that you have are enough for your future growth? Or you plan to do some tuck-in type acquisitions still like Avnera and others?

Yes. I mean, we absolutely believe we'll be able to do both. I will tell you right now, I love the background that we have right now. The demand opportunity is very solid for us. The engagement with customers that we have right now, outstanding. We've launched bulk acoustic wave technologies, which is really critical in 5G. We did all that in-house. So the organic landscape for Skyworks is very strong, and we're going to execute to that. But at the same time, our balance sheet, the financial powder that we bring, our free cash flow margins, give us a great opportunity if the right M&A prospect comes about. So we will definitely -- we have been continuing to monitor that. And if the right play works for us, we'll jump on it.

Great. And then just you mentioned that the BAW technology. I mean, I think the knock-on Skyworks historically has been that you guys are more of a SAW player or in the low to mid-end bands, but with the BAW that now you're offering a full spectrum. Can you just talk about where you are in terms of your BAW technology? Noticed a big volume number that you guys shared a few weeks ago. But where are you in terms of having kind of foolproof BAW filter?