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

Hi, good morning, and good afternoon. And thank you for attending JPMorgan's 19th annual CES Technology Forum. My name is Bill Peterson. And I'm pleased to have Liam Griffin, Skyworks' CEO here with us today. Thanks for joining us virtually. And hope we can see each other in Las Vegas next year or soon. I've asked Liam to provide a brief introduction, and then we'll move on to Q&A. So with that, thanks for joining, Liam.

Great. Thanks, Bill. Appreciate the time, and thank you for JPMorgan for hosting. As we've discussed in the past, we are in a cycle now that we've waited for, for a long, long time as we move into 5G and some of the other connectivity protocols. We are seeing a tremendous opportunity as device complexity increases. The usage cases get more and more complex and the opportunity for Skyworks to deliver the unique solutions that we've been working on for years, for decades even, to really come to market. So we're thrilled with the opportunity. We see these trends translating directly to the unique opportunities that we bring. I know you know that we've invested it for years in these solutions. We built an incredible ecosystem in supply chain to support our customers from temperature compensated SAW filters, bulk acoustic wave, crafted gallium arsenide, and then the ability to deliver these solutions in a format that is easy for our customers to go to market. So we're really pleased with the early results of 5G. And also our broad market portfolio. So I think that the business is starting to really hit stride, lots of investments, lots of technology, great work on the R&D front, fabulous engagement with customers, collaborative engagement, it's putting us in a really good position to win as we move forward. And just to keep perspective on this, we talked before about units, 5G units. High-level view, you've got 6 billion mobile subscribers on the planet. And we're probably at 250 million right now in 5G in terms of units, 250 million exiting 2020. So we have a long, long, long way to go. The opportunity is expansive, at the same time, challenging. And we're ready to go-to-market on this. So really thrilled. It's a great time to talk with you and kick off a new year.

Okay, great. Thanks for the introduction. You just mentioned 5G reaching around 250 million units. There's -- most of your peers are expecting the market to double this year. Does -- or more than double. Does -- I mean, just at a high level, does 500 million-plus feel about right? Or does it feel conservative? Just for this calendar, how should we think about it from your perspective?

Yes. Well, I mean, certainly, we've only hit stride with our largest customer here in this last quarter or so, right? So there's a tremendous opportunity as we go forward. And it's going to be measured in hundreds of millions of units of growth rate. So how it all partitions out, whether it's 400 million or 500 million, the trajectory is certainly up and to the right. And those that are going to win here, this is not going to be an easy feat for our peers, even for our customers. I think you're going to see some consolidation and opportunity. The bar right now has really been raised. You've got a confluence of great technology, high units and complexity. And it's not with a pain of heart. And again, I harken back to the work that we've done at Skyworks, the years the decades of investment in readying ourselves to deliver the kind of performance that our customers want. This has been going on forever, and we'll continue. So it's a great opportunity. The units will go up, but the challenges will also be increased. The other part of the discussion, I know we'll get into it in the discussion today is where these units are going to go. So we like to think of 5G as a technology, not a product, not a slogan, not a brand. And we believe we can take that technology to multi markets. Certainly, a smartphone, what you're seeing now. Often now, we're seeing more opportunities in things like automotive, which is interesting in this case today with your automotive side. Thinking about autonomous vehicles, thinking about industrial IoT, still levering a 5G connection. So we see our opportunity to be quite unique, where we're really going to be the connection that can drive so many unique applications. We've seen the usage cases expand tremendously, often due to COVID. The downside of the pandemic, we all understand. But for our business, we actually had benefited in many ways by being flexible and allowing people to connect essentially. But that's not easy. And as we see this world change, we think there's going to be just kind of a new phase in growth in connectivity. It will be 5G. It will be WiFi 6. Still continuing to use things like Bluetooth and GPS, but connectivity is going to be front and center in technology as we go forward.

Yes. Starting to get into some of these content opportunities, one question we've been asking all the participants, it's pretty wide reported, is industry-wide supply constraints. You guys obviously have a lot of captive facilities. Your compound semiconductor assembly tests, your filter is all captives. You have a lot of things under your control. I know there's been challenges to keep your Mexicali fab going which you've done a great job on. I guess where are we currently now on supply constraints? And I do know you do source some silicon-based or SOI-based products, so how is that going for your own supplies? And I guess, maybe what is the potential that supply constraints in other parts of the chain could actually impact your business as we look out ahead?

Yes. Yes, great question. I think that this is something that has affected everyone in the ecosystem beyond even the connectivity players, everybody. And so there have been supply constraints and challenges. Fortunately, as you noted, we are, for the most part, vertically integrated at Skyworks, and vertically integrated at scale. So just as an example, if you look at a part like a low-band pad, which we've been an incumbent on with all Tier 1 customers, there's 8 to 10 unique TC-SAW filters in each module. We deliver 10 billion TC-SAW devices a year in our factory in Osaka. And behind that was probably about $2 billion of capital investment to make that work. You go to Singapore, assembly and test. You go to Mexicali assembly and test in-house. Our own in-house crafted gallium arsenide, Boston and California. We can control our supply chain. So despite the issues with tightness in global supply chains, and that's still there, it's mitigating, but it's still there, we can outperform. We're still not 100% where we want to be. There's still COVID risk out there that sometimes we can't control. Our teams are doing a great job of executing. And I still -- we're very comfortable with our opportunity to grow the business even with these headwinds. But having that investment and putting those dollars of CapEx behind the business early has definitely been a benefit and a differentiator for us.

Yes. So just coming back to the market and, I guess, the potential for content gains from here. Your largest customer, you get on the website, you see they add 17 to 20 new 5G frequency bands in their second headphones. There has been some concerns in the market that a lot of the big content opportunities have played out. So we're hearing about newer opportunities like carrier aggregation in 5G. But besides positive mix benefits, what is Skyworks seeing? What is the team most excited about? And how should we think about content opportunities longer-term even beyond this year?

Well, it really comes to the performance. The drive for connectivity, speed, latency performance, band count is expanding. Spectrum is expanding, complexity is going up. So again, we see the appetite for the technology to continue to rise. We see the usage cases that are on the table today that weren't not even part of the business 1 year or 2 ago. I mean think of all of the usage cases, we're working with companies like Eero and Amazon, Eero, we're working with Ring, we're working with Peloton, Zoom technology. All of these new areas where we have great, great customers but haven't embraced connectivity until the last year or 2, right? These are new, new functions. And we're ready to go. And we're able to go in with our know-how, our people skills, our applications engineers, and offer a menu, a set of choices to deliver a solution for their application, right, whether it's a Sky5 platform for 5G, whether it's a WiFi 6 platform, a GPS platform or Bluetooth. So we want to come to market, delight our customers, put them in a position to win and then import our technology behind their applications. And that's working well. And I think the opportunity now is bigger than ever. These names that I just rattled up, they were not customers of ours a year ago.

And an important set of customers is, in fact, we call sometimes Oppo, Vivo, Xiaomi or Vox, there's different ways people call them. And now you have Huawei spinning its Honor brand. When we think about China specifically, how do you view your opportunities there? And I guess, importantly, we have seen with Huawei with the bands that there has been somewhat of a localization effort to cultivate some companies like Maxon or Vanchip. How should we view the competitive landscape within China? And we know that 5G creates a lot of opportunity because of the complexity, but we do obviously know there's some competitors out there as well. If you can help frame the China opportunities for us.

Sure. Well, the China opportunity is definitely a meaningful driver in the Android cycle. So the names that you mentioned, Oppo, Vivo, Xiaomi, even the Honor brand, we're all playing in that ecosystem right now and delivering great solutions. The interesting thing there is, on a relative basis, the move to 5G in China is very substantial because oftentimes their 4G content fill was a little bit lower than what we would see with some of the flagship players in the U.S. But the incremental move from 4G to 5G in China, actually on a percentage basis is higher than what we would see with some of the flagship players here. So that's a great opportunity. The second thing is the complexity bar continues to be very high. And you've heard us talk about this before. We don't just sell product. We work with customers, literally, shoulder to shoulder, we're in the labs. We help design with them. All of that work, that application's knowhow goes a long way to winning business and also driving our customers' output and driving their success. So we do that. So we're working with all of those companies including Samsung, too, by the way. So we've got China. We've got Korea, we've got the U.S. We've got other markets. But it's the technology wrapped around with great application support and knowhow of where this is going to be, how it's going to be used, what regions are you going to roam, what bands are important to you, that kind of customization is very unique. We wrap that up into a bite-sized Sky5 underpinned by incredible technology and make it easy for the customer. And that's one of the things that truly does separate Skyworks from the pack. So we see that continuing to move. We think the content lift in China will be very meaningful for us on a dollars per dollars, but also on a unit basis on the net sales side. So that's just coming to fruition. And again, back to the beginning of the discussion, you've got 6 billion global subscribers, maybe we count 250 million this year. Maybe next year, it's 400 million to 500 million. You still have billions and billions and billions of units, just smartphone, jump over to IoT, the numbers could be even higher.

Sure. You partially sort of answered in your prior response, but there has been some concerns about large smartphone customers potentially in-sourcing RF. How should we think of the likelihood for -- to sort of any large smartphone maker to really do that? We've seen them source digital products and so forth and bring that internally. But what would be the challenges associated with the smartphone maker to bring, really, the RF functionality in-house?

Yes. I mean the business that we're in, it's very unique. I talked about it before, there's billions of dollars of capital investment over the last 8 to 10 years to put ourselves in position to do this. It's not a fabless play. You can't take the technologies that we have and import them to TSMC or someone like -- it just doesn't happen. I mentioned the $10 billion TC-SAW factory in Osaka. Pretty hard to build a factory like that and also very necessary. You think about gallium arsenide in the way that we craft that technology and the unique packaging that we bring to market with our BGA capabilities. And so we're purpose-built to deliver in wireless. That's just what we do, right? And if you go and look at Skyworks 4 or 5 years ago, we would get knocked for it. We'd be knocked for the concentration. And so what's happening now is that the world is changing. We're unwiring the world. It's going to be seamless. It's going to be -- whether it's WiFi or whether it's Bluetooth or 5G. That's going to be our business, and we've been there before. I don't think our customers want to get into that business. I think they want to take advantage of the work that we do, partner with us, let us do some of that work that we know how to do best and make their solutions as powerful as possible. So that's the way I see it. This is not a fabless outsourced type of market. And there aren't any merchant players out there where you can buy this technology. It's very unique. And it's something that's often overlooked in our industry that the RF world is a little bit of a different play. It's a little bit different play from memory or CPU. And it's a great business, but it also takes some fortitude in capital spending and investments, which we've done.

Yes. I mean similarly, I mean, now you have your BAW capacity. You mentioned TC-SAW. You're really now a plethora of that filter types. Can you update us on the status of your BAW products, and in particular, more complex multiplexing? How should we think about your opportunities in some areas where you maybe haven't competed in the past, mid-high or in a large way? Can you update us on where you stand with your BAW and your multiplexing?

Sure. Well, as you know, we started conservatively, we communicated conservatively and started to put points on the board the last couple of years. And our growth continues to go up. We understand filters. At the essence, we understand what a low-band pad looks like and the bands that we need there, a mid-band, high-band and ultra-high band. We understand the whole spectrum there, and we know where we can play and where we need to go. The good news right now is we're delivering products across the entire board. Low-band pads, mid-band, ultra-high band, hitting all that spectrum right now at various levels of content. The opportunity continues to go up. The challenge continues to go up. Our investments in bulk acoustic wave now are really scaling. We've shipped, I think, roughly $400 million worth of new designs over the last year or so, with more to come. So the bulk acoustic wave area, a lot of growth, a lot of opportunity, continue to see gains in low band, continue to see gains in mid-band, continue to see gains in high band. So for us, we've been -- we're probably a little bit more overweight in the low bands early on, still have that, still an incumbent -- leading incumbent in that area, but we've continued to move upscale, not only on the transmit side, but also on the diversity side with our DRx portfolio. So think of it as you've got your Tx with the traditional bands that you know, but then you also have the downlink. And we created a great category with our DRx portfolio that provides great speed and lower latency on the downlink side. So all of that's coming together. And again, if you look at some of the products that we have, you can see the real complexity of semiconductor and filter aggregation and how we couple that together to create highly efficient, very, very lean current consumption devices also with incredible densification in the physical form factor which is also important here when you get into 5G. So there's a lot going on. We're making great strides in bulk acoustic wave. We're not a filter provider stand-alone, but we integrate that with our solutions as we've done in the past.

So with that answer, you kind of outlined some of the nice opportunities you see in the sub-6 gigahertz space. We've seen now the C band auction here recently. And I guess, exceeding close to $80 billion and there's a lot of assumptions that Verizon, of course, is involved and spending quite a bit on that. So they came to market first when your large customer announced -- they're on stage talking about ultra-wide band and millimeter wave. But I mean if you spend tens of billions of dollars on this type of spectrum one would assume they're going to put that to work. They did announce yesterday they're going to try to build out some stadiums and things like that. But I guess how should we think about the investments in millimeter wave and versus sub-6? And I guess, along with that, what would make you more constructive on millimeter wave in terms of your own efforts? Would it require more modem makers coming to market? Or I mean, again, I would almost think with that investment in C band, there's going to be a lot more efforts on putting that spectrum use by that carrier. But love to hear your perspective on millimeter wave.

Yes. No, that is a great story. I mean millimeter wave definitely has some unique features and benefits, point-to-point, high data rate. But it still has some challenges, line of sight challenges, current consumption challenges, cost and size in the phone. So it's going to be a challenge. Now it's possible that we could get -- obviously, the C band auction that you mentioned, I think, is really, really important. It's going to open up a lot of spectrum and it's going to require a lot of technology from us to ride that. And we're looking forward to it, and at our roam university, so you're not going to have the issues of line of sight. It's going to be true 5G. And that's going to be, I think, a really meaningful pop to the ecosystem. Having said that, I think, millimeter wave could be an augmented opportunity in stadiums, campus environments, where you can create a point-to-point opportunity with very, very high-speed. Still have to deal with things like current consumption cost and size, but if you can -- if we can find a way to do that line of sight, that would be good. But I don't think that that's going to be as mainstream as opening up C band where you could really step up right now and hit the ball out of the park, right, with speed and data rates. So we're very constructive on those -- on the news around that. I think it will be beneficial for 5G rollouts. But at the same time, we can play across the spectrum end-to-end. But the more bandwidth, the more bands that are opened up, I think there's more opportunity for us to fill.

Before moving on to broad markets because I think there's just a lot of great opportunities there, I do have a question coming in. So I understand the 5G market is growing, but can you confirm you will see content growth this year at your largest customer? Just bringing it as it's coming through.

Yes, I mean the expectation is always to grow. We feel really good about it. And I'll tell you, the aperture is widening for us. The investments that we're making are creating new opportunities, more diverse opportunities. One of the things that we were saying is that -- with our team, the technology bar has never been higher. It's never been higher. So this is the time for the leaders to really step up. And we're one of those. And it's going to be very, very difficult for kind of the next set to step in. So complexity is going to go way up. The opportunity is going to go up, and that drives content. That drives content. And not only does it drive absolute content, it drives content in ways that are more challenging, which is what we want. We love that. We love technology challenges. That's what we go for. So the confluence of units and opportunity with a high-technology bar, that's our sweet spot.

Yes. Great. So the broad markets -- business returned to year-on-year growth after several challenging quarters, a lot of which related to Huawei bans. It looks like for the full year it's roughly model flat, but we see some strong double-digit growth this year. Can you discuss some of the -- what are some of the drivers from a higher level? How should we think about the growth over that segment over the next few years? And what are the key growth areas you see?

Yes. So again, if you look at Q4, with the last reported quarter, we had a great record broad market opportunity in print. We continue to see them in high double digits. I think we're about 30% sequential in broad market. So we are -- what's changing, Bill, is the usage cases that I mentioned. We were -- as I said, I won't go back to the comments we had earlier in the discussion, but the customer opportunity has grown. So mobile is a great business. We know where the players are. It's difficult. It's super challenging. There's a finite number of players. When we look at our IoT business, when we look at our broad market business, there are so many accounts that we can go after. We're clicking that now. We're working with Honeywell. We're working with Bosch. We're working with Amazon Eero. We're working with Google. We're working with Microsoft. I mean these are names that you look at Skyworks 3 or 4, 5 years ago, these companies weren't on the list at all, and they're growing. And they're embracing the technologies that matter. 5G is a technology that matters. And the applications could be so far afield and unique, but the technology core that we bring is consistent. So I think it's going to continue to fuel. The WiFi portfolios right now are going through a tremendous upside, and it's one of the -- one of the outputs of the challenging pandemic in the work-from-home or from-anywhere theme is that people were spending a lot more time with WiFi and upgrading their systems, whether it's a NETGEAR or whether it's Amazon, Linksys, all those players. We've done great work with that. And then the applications behind that with Zoom and Peloton and touchless transactions, PayPal, the whole experience is changing. Consumers want a digitized, clean, safe, connected, reliable experience. And that's what we want to bring to them. That was not the business case for Skyworks 2 to 3 years ago. It wasn't. So this is a whole new area that we can play in. And we're a trusted brand. We have great technology, super high-quality and specific design-by-design application, so what we can deliver to one account can be very different than what we'll do with someone else. So we're looking forward, that's a lot of fun. A lot of new brands that we're working with right now, really interesting companies. Jumping into our audio business, so the Avnera acquisition going incredibly well, incredibly well, a lot of new names, a lot of interesting companies embracing the technology. And sometimes, we work with a customer that wants audio and the next thing you know we're embedding WiFi into the same account. So it's a great combination as we try to drive what the consumers want, what the consumers want today.

Yes. A question on WiFi, and I'll tie it to my own question as well. You had a nice press release this morning on WiFi 6E. I mean really, the market is still even expanding on WiFi 6. I'd like to understand how you see the content opportunities going from, I'll call it, just call it, WiFi 5 to WiFi 6 and then now WiFi 6E, which has -- not only supports 2.4 and 5 gigahertz, but also 6-plus gigahertz as well. One, we're pursuing that really nice content adder for you, but if you can help us understand the progression of that. And maybe tied with that, how should we think about the market growth for WiFi 6E given we're just -- I mean, we're still on the WiFi 6 ramp, frankly? So help us understand the market context as well.

Yes. Well, it's funny because it almost mirrors what we've done in mobile, when you think about 2G, 3G, 4G, 5G. In WiFi, you go back to classic WiFi and then you go WiFi 6, WiFi 6E. And what's happening is, similar to mobile, you've got unique spectrum there. You've got unique bands. So you're at 2.4 gig, then we're at 5 gig. And now we're looking at 6 to 7 gig spectrum to deliver WiFi 6E, incredible. And by the way, I rolled that out this -- during the break when -- and at home, put in a WiFi 6E, unbelievable, it's a game changer. 200, 300 megabits per second in a house where maybe it was 10 to 15 megabits per second awhile back. So it's a game changer. And I think if you look again at the environment we have today, households could have 4 or 5 folks together all streaming video, work-at-home activities, who knows? And you need that technology. And so we're thrilled to be a part of it. And this is, again, it parallels what we're seeing in 5G mobile going through those steps in cadence in WiFi. So the other thing about that is not only do you have new bands, new spectrum, there's actually bulk acoustic wave technology that we deploy in the WiFi 6E. So that's a whole new area for us. We're shipping product now. In parallel, what we're doing with mobile. We've got that subset over here in WiFi, and it's been tremendous. And that's the case where the customer count is rapidly increasing, the customer count, customer acquisition engagements. We love to see it. And oftentimes, like I said, we have an audio customer that turns out to be a WiFi customer. We have a WiFi customer that likes our audio business. We have a company that has been doing WiFi, and they want more expansive, untethered connection, we go 5G. So all of those opportunities and choices we can offer to the customer, depending upon their application, their current consumption, their budget, whatever they need to put the right solution in their hands.

Yes, that's good. Look, I'm really excited to probably put one of those in my home as well as we roll out further this year. Moving to the model, gross margin has been an important topic and one where many investors have been focused on. We've seen some COVID challenges. We're still a few hundred basis points away from your target model. I would think that maybe customer concentration plays a role. But what are the puts and takes as you see it over the next 12 to 18 months or beyond to get to your target model? How much headwinds do you have from COVID right now that we'd assume would potentially be going away, and how do we get there?

Yes. Yes, great question. So I think -- we spent a lot of time on this internally as well. I think the biggest challenge for us right now, honestly, is just getting the factory utilization up to where it needs to be. I mean there are some challenges with COVID restrictions in terms of headcount in a factory. We've managed through it. But certainly, not having that headwind would be a lift to gross margin. So we continue to work on the gross margin side. 5G is definitely going to be more accretive to margins. Our disciplined approach on op margin is still very strong. Our cash flow results are great. But hitting the GM mark, I think, is absolutely within our sights, the 53% target is absolutely achievable over time. This year, again, COVID was the most significant hit to GM. It wasn't significant overall to the company but vis-à-vis where we want it to go. But we're working on that and having our own factories, knowing our people, knowing our teams, ensuring a safe work environment, taking care of our customers, it will all shine through. And we should expect improvements in the GM line. And also, again, like I said, improvements in the op margin line continue to go up.

Maybe last question for me is your use of cash, you've actually been very active repurchasing shares and growing the dividend. Your payout ratio has actually exceeded your target range, actually exceeded 100% in the past in your last fiscal year. How should we think about the growth in dividends and share repurchases and then balancing that? We've seen obviously a lot of M&A in the space, and I'd like to get your updated views on M&A. Obviously, you have great drivers in 5G and WiFi. Is there any other markets where it makes sense to potentially address inorganically? And then, of course, you have CapEx, 10% of sales. So if you can help us understand where you prioritize the use of cash.

Yes, sure. I mean we've been a consistent provider of buybacks and dividends and cash returns. 100% returns last year in cash level. And we're very disciplined on the cash line, as you know. And the business that we have right now is extremely profitable and generates a lot of cash. So we have ourselves in the right position to act when needed. If it's an M&A opportunity, if it's a buyback opportunity, we're certainly taking a long view on all of those. And you'll probably hear more over time about our actions.

Okay. Well, with that, we're out of time. Liam, it's great having you again, and best wishes and best of luck for 2021.

You too, Bill. Happy New Year.

Thanks. Happy year.