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

All right. Welcome back. I'm Blayne Curtis, semiconductor analyst at Barclays. Very happy to have with us for our next presentation, Liam Griffin. He's President and CEO of Skyworks.

Liam, I'd like to start these things off with a very high-level question. Obviously, lots of moving parts in this year. You saw a reacceleration in mobile and broad markets. So maybe kind of just reflect on us here a bit. And I'm curious, I know it's early, but as you look into next year, just your perspective as to what tailwinds kind of continue next year and anything new that you see?

Yes. Sounds good. Well, great, great to see you again, Blayne. I appreciate Barclays hosting today. We're certainly in an unprecedented environment. We've had some real challenges globally at the beginning of the year, getting through the summer, and I will tell you that the demand environment has improved dramatically over the last couple of months. You saw our Q4 results were very strong. We grew revenue over $200 million. We grew broad markets revenue sequentially about 30%. And, just now, just now, in the quarter we're in now, you're starting to see that real acceleration of leadership in mobile with incredibly rich, complex content. And I know you've heard me say this before, but I mean, we really are at the beginning of this. Certainly, the mobile phone is going to lead, but we have an incredible tail of new applications. A lot of these applications are really borne out of the environment we have here in the pandemic: telemedicine, video conferencing, Peloton, Zoom, all these new applications we're now supporting, and it's adding a great list of new customers that we would typically not have. So there's a lot of good things happening there. There's a little bit of kinks in supply chain, but we're getting through that. And fortunately for Skyworks, as you know, we invest in our own technology. So the lion's share of the production that you see, that goes to our customers is curated and configured within our own fab. So we have more of an advantage there, but there's been a bit of a global pinch point here in supply, but I think that's starting to abate. And the demand environment looks really good at this point.

Great. I did want to -- we'll get to mobile, but maybe just starting on the broad market side, a reacceleration as well. You mentioned some applications like Peloton and that's got WiFi in it. So maybe you can just talk about broad markets and then drill down on WiFi as a tailwind? You're seeing work from home, learn from home be a catalyst kind of visibility into that continuing? And then as you look at WiFi, there's WiFi 6 that's happening, you want to succeed that adds content, too.

No, absolutely. And as you know, we're a multi-protocol play. We'll go all the way from Bluetooth to GPS, took 4G to 5G and WiFi. WiFi has been an incredible catalyst in this environment. When we think about work from home or work from anywhere, there's a number of new applications that are ported there with our WiFi technology. We're now going through -- like the 5G cycle in mobile, there's a unique cycle in WiFi right now, where we're going to WiFi 6 and WiFi 6 Extended. That's been very good for Skyworks. We've always been a player in WiFi, but now we're seeing MIMO content in WiFi and new applications that are being driven in WiFi. A typical household today could have 2 parents on a Zoom call, they could have their kids in education. There could be store-to-door delivery coming through with groceries. There's just a tremendous amount of data, digitalization and need for performance that we're able to capture. So with that, we've seen a really good push in new customers. So our current customers are upgrading and looking for new technology, but then we have that opportunity of new accounts and new usage cases that just weren't on the table a year or 2 ago.

It's really surprised me the strength that you're seeing. I thought maybe once your kids go back to school, you'd see the learn from tail off, and the strength seems to be continuing. And now people are saying well into next year into the first half. So just kind of curious, your perspective, have things changed? Is now this connectivity is so much more important that people are going to continue to upgrade? Or are you -- kind of how long does your visibility extend for all of this strength that you've been seeing from this?

Yes. I really believe this is sticky and sustainable. I think this is a kind of just a new way this world is working, this digitalization, right, thinking about how we communicate in new ways. You see, funny enough, some of the younger demographics are hailing it better than people like me, I'm 50. And you look at the younger generation and they're living on this and the digitalization that they're able to monetize is going to be really good for us. And we're at a tipping point now where the WiFi 6 phenomenon is coming in, 5G is going to be more than just a handset play. We have the IoT tail behind that. So this whole push for touchless, high-speed connection is going to continue, and it's just a matter of how it is ported. And again, I'll just harken back to our opportunity and our business model is to support any of those protocols, dependent upon the data rate that's needed, the cost profile, the range that, that device needs to carry, the signal and then offer the customer the best possible solution for their usage case and application.

Perfect. So maybe moving to handsets and expectations for 5G. I think estimates are 200 million, 250 million units this year, maybe doubling next. Kind of just curious, your perspective where this year shakes out and then next year?

Yes. I think this year, we had a unique cycle where the players, the Android players kicked off and did very well, and they're still accelerating. And the largest customer just now coming through with their incredible flagship lineup. So I think we've got numbers in the 200 million or so for this year. I think you're going to see that accelerate dramatically into 2021. And there was some data I just looked at here last night on -- it was an Ericsson report that was showing an estimate of about 3.5 billion 5G subs by 2026. Think about global subs today are probably about 6 billion. So even though this is a great opportunity right now, and I think, as I said, the demand environment is great, it's still extremely early. You've got 6 billion subscribers, less than 10% have a 5G phone today. As more applications and usage cases emerge, that need for upgrade is going to continue. So it's very early in the cycle, albeit we're really pleased to see the initial kickoff.

I want to ask you, obviously, you have a very strong cycle with that largest customer. On the Android side, obviously, not that you didn't need another challenge, but Huawei was a challenge for your business, obviously, a headwind for everybody. But I think even share beyond that had a little bit of a lapse, seems like it's coming back. So maybe you can just talk about your traction kind of gaining back share on the Android side?

Yes. No, good point. So we have been able to -- first of all, on the Huawei case, we've done a really good job of just managing through that customer, and it was a very large customer for Skyworks a year or 2 ago. And our teams have done a great job of really transferring that revenue across other accounts in the Android space. So the Oppo, Vivo, Xiaomi crew, all doing well with a tremendous amount of opportunity and embracing really high-end solutions, embracing our Sky5 platform, leveraging our BAW filter and TC-SAW capabilities and really gaining the benefits that, that provides vis-à-vis a discrete implementation, which had really been kind of the bridge between the Huawei before and the Huawei after. So we've done a really good job with those accounts. Samsung has been stepping up quite a bit. I mean, certainly, they're a big, big player in mobile and a big player in 5G. So those portfolios are looking really good. And again, 5G adoption is still a major, major catalyst. And then beyond that, what's important for us, Blayne, is the content and really kind of the performance that we bring into the devices. So if we think about what's really happening under the hood is a tremendous amount of device complexity, just a tremendous amount, whether it's extended bands, data rates, current consumption, the ability to have backward compatibility from 3G, 4G and 5G all in 1 handset, MIMO, multiple regions, it's a really, really complex problem. And for us, that's great. That's what we want. We want to solve those problems. We want to create elegant, integrated platform solutions that are easy for our customers to digest. We've been investing in this technology for 20 years, leveraging TC-SAW, leveraging BAW, our own in-grown, in-house gallium arsenide and in our ability to assemble tests uniquely. So all of that complexity and challenge, it's needed to make these 5G phones work, but for us, it's great that we've made those investments. And we can diversify within technologies even, across the 5G landscape.

I want to ask you, the first 200 million, 250 million units of 5G kind of comes in from the high end, I think the next 250 million will be lower end. I'm just kind of curious, as you think about the content that gets added to make that a 5G phone, does it change as you look with the ones that were delivered this year versus the ones that you'll see next year?

That's a great question, and I'll tell you that I think we're going to see sustainable content. It may change in shape as we start to have more regions adopt 5G. There could be new frequency bands that we need to deal with, new spectrum could be opening up. But the overall content opportunity, the TAM and content, I actually think will continue to rise. I think the usage cases that we talked about at the beginning of the discussion will continue to grow and become more valuable, and that, again, will push players like Skyworks to upgrade and drive more and more technology. One of the things, and you can see this in tear downs, it's a guarantee that the year-over-year technology bar that we see in mobile goes up. It doesn't go sideways and it doesn't go down, it actually goes up. And that's just a matter of how each company can play that, how do we work through it, how do we deliver great performance and still post high levels of profitability. And each 1 of the players in our space has a different approach, but what we try to do is just maximize the opportunity, work with the customer and come up with a solution that is best-in-class, highly differentiated and our customers just love. So it's -- that's the road map for Skyworks. And we haven't seen things flat here in terms of the technology bar, and the 5G space, as we said, is just so new that this is a tremendous amount of opportunity from here.

Obviously, this year has brought a lot of challenges. One unique challenge was that your facility in Mexicali was shut down for a while and you had to scramble to catch up. You did a great job doing such. Now we're seeing COVID spike back up, I don't know if we go back to where we were with full shutdowns. But kind of curious, one, kind of how you think about that facility operating if we -- through the next several months and then your diversification strategy?

Yes. Yes. No, great question. And as you know, we are a technology manufacturer. It's just not simple stuff that we do. It's very difficult, very challenging. The lion's share of our portfolio and production is done in our own factories, whether it's in Woburn, Massachusetts, Newbury Park, Mexicali, we have sites in Japan, we have sites in Singapore, but they're all our sites. So we can control our manufacturing. It's another reason why our portfolio is so directed to the things that we do well. We know what we're making and where it's going. So our production needs all the way from the capital equipment that we bring in, they're purpose-built for what we want to do at Skyworks. So that's a unique differentiator. And if we think about what happened in Mexicali, I mean, really, the team did an unbelievable job turning around a difficult situation. There were mandatory shutdowns over a period of time, 100% COVID-related. Our teams did a great job working with local authorities and communities in bringing in very, very high levels of safety protocols and cleanliness. So we're, today, up and running, nearly full speed. There's still a little bit of a gap in terms of our ability to get fully utilized there, but we made that happen pretty quickly and get back on track. So it hasn't been an impediment at all. And if you look at, again, what we did in our Q4, where we delivered $220 million sequentially, sequentially, still with some of that headwind, some of that headwind in COVID. And I think now, we're going through another potential opportunity to grow as we get into 2021, but there's a lot of learning that came through that process last year, and our teams have done well. We've configured our facilities in the right ways, and we don't expect that to be an impediment as we go into 2021.

I was curious, I mean, obviously, you had great guidance for December. I actually think you could do better in that. Curious how supply factors into that, and if you had to -- you said it's tight, so is there any kind of hedge you have to make in terms of the ability to supply to this good market you're seeing?

Yes. Yes. No, great question. And I think the supply tightness goes way beyond Skyworks. I think it's a global thing. It's being worked through. It's also a testament to the desire to own these new technologies. I mean customers want it. There was a pretty long time between 4G and 5G. And now finally, we're here, so there is a bit of a supply tightness. We're working through that, as I said. We're in a much better position, having our own facilities, our own factories, our ability to lay out our production the way we want to using the technologies and capital that we have in-house. So we know how to run that, and we'll do that better than anybody. But I think the upside to it is, there's more likely to be demand that hasn't been met that maybe goes further into 2021. We've seen nothing but strength from our customers and desire to get more. So it's a good problem to have at this point, and we expect to be able to execute fully.

I was curious if you've seen the supply chain or the customers react to the tightness in the supply chain. All we hear, tightness in the foundries, your tightness across the board through the supply chain, image sensors or whatever, and I'm kind of curious whether the customers, what kind of lead times they're doing, not only for your components for others and whether you're starting to see some motor patterns change given the strength?

Yes. We are -- some of our customers are in hub and consignment, and things are just moving quickly. There's not a lot of -- I'd tell you, there's not a lot of inventory in the channel, which is good. There's definitely demand that needs to be delivered, the urgent demand that we're trying to work towards. So it's an opportunity for us. Again, having our own operational footprint and knowing how to drive that for mobile device and for IoT and the things that we do are going to put us in better position than being just kind of a merchant fabless play. So we're taking advantage of that. When we deliver a product like a Sky5, it has a fully-integrated system. It's not a chip, it's not a filter, it's a fully-integrated solution that's made customer-by-customer, for each customer. And that's compelling, and it shortens the customers' lead times, it just makes it easier for them. They don't have to take an assembled bag of chips and then configure that in their own sites, we deliver that to them. So that's 1 of the advantages that we can do to mitigate that supply and demand in balance. But I do think that the strength that we're seeing right now will continue. We feel really good about that. We'd like to be able to do more faster if we could, and we're working to do that. But again, it's early innings in 5G. We think it's clearly going to be a multiyear lift.

want to I ask you in China, obviously, Huawei restrictions mid-September, I think most have a 4G license, but it doesn't mean that much. It seems like now the Honor brand's spun off, is that something that you could eventually shift to? And have you seen any share shifts with the box or Samsung from Huawei, given this resection?

Yes. Sure. Well, I mean, we did, to your point, we did have a license granted for 4G technology. It's probably not going to be a significant impact for us. But the second part of your question is more important, and we're fortunate that, that demand that maybe would have gone to a Huawei is being distributed to others. The Oppo, Vivo, Xiaomi and Samsung, we've got a great position with Android, even leveraging MediaTek's ecosystem there, which picks up a number of players. And we've done the same kind of work with highly integrated Sky5 like solutions, making it easier for these customers to put a great product together and get it to market. And I think if you look at the launches, the initial storage in 5G, and it's still very strong, came out of the Android cycle. So we saw that break ground first, followed by the market leaders in the U.S. And again, a lot of opportunity there, a lot of demand that still needs to be met. Customers want the products. We're hoping to do better in execution. And having a great outcome across the board. But yes, the Oppo, Vivo, Xiaomi, add Samsung, all looking strong.

I want to ask you on your BAW strategy, you're in high-volume at your largest customers, so there's a lot of units attached to it. But in terms of broadening that out, I believe that's a higher frequency band that you ship it to, kind of the grander plans for BAW within your portfolio? Is it a 5G play because you actually ship it into 4G frequencies? Can you kind of just expand on where you think the BAW business can go for you?

Yes, sure. Well, as you know, I talked about it already here, but we'd like to do it ourselves. So we've been working on BAW technology for a long time, talked about it and finally ready to market about a year ago, and we started to deliver really high-end solutions. We've scaled that substantially. We've added additional capital. We've expanded our facility footprint in Japan and in Singapore. And we've shipped probably about 350 million to 400 million BAW-enabled devices now to date, and the lion's share of that has been in the last, I would say, the last 18 months, 12 to 18 months. And there's a tremendous opportunity beyond that. I mean we have a lot of upside in that area. And again, the ability to customize and configure is going to be amazing for us. So BAW filters will certainly end up in high-end 5G phones. They could end up backward compatible in 4G. We have ultra high-band, we have mid-band, there's BAW filter technology in some of our WiFi solutions. Even in our audio portfolio, which was Avnera, the AIS portfolio, there's opportunity to lever BAW into those types of solutions. So it's another slice of really critical challenging technology that we're going to bring into our portfolio. We're doing it now, we're shipping now. And then again, as we've always said, we don't sell filters. We sell full solutions, but having the necessary elements allow us to create really compelling unique solutions, leveraging the technologies that we have in-house.

I want to ask you, you had a very strong quarter. I think if there's any knock on it, people who were focused on the gross margin, the lack of leverage on the gross margin. I know the pandemic doesn't help you, everybody's dealing with higher costs, but then maybe things like BAW could help as a tailwind of gross margins. So if you walk us through, over the last 4, 5, 6 quarters almost, you haven't seen much incremental to -- in terms of incremental margins. Maybe why has that been? And kind of where do you see margins going forward?

Yes. Yes. A couple of things. I think you're right about that. Number one, there's room for us to move on the margin curve. We've been turning technology over very quickly in the last 3 or 4 years, more than at any other time. We've had a great deal of new technology launches that haven't yet reached their opportune yields and execution, so that's worked. It's going to continue to move up, and there's room for us to move there. We are getting into more diversified opportunities, so we talked about our WiFi portfolio and just the long list of customers that are adopting our solutions, whether it's companies like NETGEAR, Honeywell, the automotive players, we're working with Bosch now. We've got an IoT portfolio and WiFi. All of that stuff is going to help our gross margin. But in the core mobile, there's a great opportunity for us to execute on gross margin. I think this year, given everything that happened and having delays and shutdowns. And when you have those delays, there's also delays in capital equipment, and it's very difficult to expedite significant capital equipment in a short period of time. So there were a lot of things that made the year more difficult, a little bit more rough around the edges. And that's all gross margin, and we can definitely get back to that. I mean our business model is 53% or higher, our op margins are close to 40%. We're getting there. And our free cash flow margin, we had a year with pretty high CapEx, but our free cash flow generation has been very strong. We've got EBITDA margins around 45%, Blayne. I mean that's pretty solid. I think if we take all of that, that's great. That's all great. But we got to grow, right? I mean I think growth has been a knock, in my opinion. And gross margin is levered to that, too. So -- and I feel very good about the growth position we have now and where it's headed.

All right. With that, we're out of time. I really appreciate you always joining us. And thanks for the support of the conference, and take care.

Great. Blayne, be well. Take care.