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

Okay. Great. Good morning and good afternoon, everyone. Welcome back to day 3 of our tech and Internet conference. My name is Toshiya Hari. I cover the semiconductor and semiconductor capital equipment space here at Goldman Sachs. Very excited and very honored to have Liam Griffin, President and Chief Executive Officer, from Skyworks with us today. The fireside chat will be about 40 minutes long. I'll go through a list of questions I put together. But also -- I'll also do my the best to try to weave in any questions we get from the webcast. With that, I'd like to get started. Liam, first of all, thank you so much for joining us today and supporting the conference. Always great to see you, albeit virtually.

Yes, absolutely.

Liam, before jumping into specific questions, I wanted to ask you for an overview of the business, maybe reflect on 2020. It was a bit of a roller coaster ride, but you definitely finished on a very high note in Q4. And more importantly, if you can kind of speak to sort of the near-term and long-term drivers of your business and perhaps give sort of an overview on 2021 as well, that would be great.

Absolutely. And thank you for -- Goldman Sachs and team and you, Toshi, for hosting here today. So yes, you're right. I mean 2020 was an unprecedented year. We entered the year, everything seemed fine. And then obviously, we had the pandemic and the COVID situation. So a couple of things there. One of the challenges that we faced and met were the issues around people, factory utilization. We did a lot of really good work with our teams. And as you know, we're a company that makes things in-house. And we own our assets, and we hire really good people. We have a lot of control over the supply chain, which turned out to be a really significant lever for us as we moved into the back half of the year. But alongside those dynamics, we invested aggressively in technology. We have been a believer -- I have been a believer in 5G technology for quite some time. Obviously, connectivity at large is a significant upside for us, whether we go WiFi, whether we go GPS. But 5G is something that we spend a lot of time and energy on. And as we got into 2020, even with the headwinds that we saw in the market and the headwinds that we saw in the economy, what resonated was connectivity. Connectivity was essential: work from home, educate from home or anywhere. Think about the usage cases that have emerged in this year. Interesting dynamics: Zoom calls, Microsoft Team videos, Peloton, store-to-door delivery, touchless payments, interesting markets and usage cases that we would never participate in, but now we're significant in those companies and those roles. And we think it's going to continue to move. So that's really interesting for Skyworks. And we'll talk a little bit about classic mobile and 5G and content. But what's really been special about the year is our ability to grow the customer base, extend the technology reach and capture more innovative use cases. So that's been really exciting for us. As we moved through the year in 2020 and to the back half of the year, we certainly met an unbelievable opportunity, one that we knew was coming. One that we knew was coming, but a very unique opportunity, where we had the confluence of significant unit launches with Tier 1 customers. Within those devices, the complexity was substantial. I mean really substantial, high complexity. Doesn't mean you win it, but that complexity was really, really high. But what we were able to do over the years and years of shoulder-to-shoulder, engineer-to-engineer development, working with customers, working with the ecosystems, we were in fabulous shape to capture that complexity and turn it into opportunity. So that was really special for us. And I think we did that better than anyone in our space. So that created this incredible revenue upside that we had in Q1. And again, hats off to our operations team, given all the challenges that we see in the world for our company to step up and deliver $1.5 billion in a 90-day quarter, blew away all of our records. But the technologies behind that revenue was -- were the things that we've been working on for years, and it was nice to see that follow through with mobile. But, Toshi, the other side of the trade, which is just as special, is our broad markets business. So you take our business absent mobile, and we grew about 35% year-over-year. So really unique stuff for us, but it's sustainable. This is what we've been working on. This is how we've invested. This is where we put our people and our customers first, and having it all come together is great to see. But we're still in the very early innings. This is the first real big quarter for 5G. And 2020, maybe, yes, 220 million, 230 million 5G units were sold. If you look at the opportunity out next 5 years or so, you're getting into the billions. You're getting into the 3 billion and higher opportunity. So great start to the year, a good look at what we're capable of doing as a company, but the outlook further into the future is what's really special here.

Super. Thanks for that overview, Liam. So just on the 5G smartphone cycle, as you just noted, we're in the very early innings. We're in quarter 5 or quarter 6, clearly long runway ahead. How are you thinking about -- and I guess you sort of answered this, but how are you thinking about the unit upside in 5G? And more importantly, how are you thinking about the content opportunity? Again, to your point, the opportunity that you captured in the second half of 2020 was very big. But from there onward, how do you think about the potential upside from a content perspective?

Yes. So twofold. So on the unit side, again, scratching the surface, right? And if you look at estimates from Ericsson and others, they have -- by 2026, they're looking at about 3.5 billion 5G phones, where today, we've sold 200 million to 300 million, right? So you've got a very significant opportunity for upside in units as we progress through the upgrade cycles, right? So that's happening. In parallel, and as demonstrated by the products that are out there today, the technology reach has really expanded. Now we knew this was coming. We really -- we knew this was coming, but it hadn't yet met revenue, right? It hadn't really met the customer demand. So in 5G, you've got unique spectrum. You have more bands, higher band count, substantially more rigorous filtering. And with Skyworks, adding new technologies like Bulk Acoustic Wave, our high-performance TC-SAW filters and then our standard SAW filters as well, the packaging that we offer, the miniaturization and customization of a Sky5 platform. It's not the same part for everybody. We can customize and configure. We have our own gallium arsenide, which is the critical semiconductor ingredient to deliver RF signals. We have that in-house, and we have it with great scale, both in Boston and both -- and out here in California. So the complexity has never been higher. The way companies and competitors try to go at the complexity is different. We're all doing it differently. I like the playbook we have. We've worked incredibly hard to put the assets in place. We scaled CapEx, which allowed us to put numbers up like $1.5 billion. We were not constrained. It was tight. It wasn't easy, but the muscle that we put forth in operations, the capital that we put forth, targeted capital, technology-driven capital really, really resonated well for our customers. And that's something that's going to continue. So we see the content moving up. We -- and that's based on complexity moving up, that's content. And then the ability for Skyworks to do things that are innovative and customized, configurable, what we call labs to fabs. We develop it, we curate it in the lab, and we take it to our own fabs. So we know at inception where these parts are going to end up. And I think that has been a unique element in our strategy, and we're going to stick with that.

Great. And Liam, within the context of 5G smartphones, I think we spend a lot of time thinking about what's happening at the very high end, content going from $30 to $30 plus, and so on and so forth. We spend less time thinking about the mid-tier phones going from 4G to 5G and perhaps content going from mid-single to double digits, and that's a huge increase. For that specific segment, how are you thinking about the opportunity? What are customers telling you? How are you positioned there?

Yes. That's a great question, and it's often overlooked. If you look at China, and China is advancing, and smartphone opportunities are really unique there and important. I think that the device, the opportunity with usage cases, the utility and the value of a high-end smartphone in China is very important. It's very important. And we've been working with the customers, Oppo, Vivo, Xiaomi, the Honor brand, all of those folks. But the thing that you hinted at here is with respect to content, premium Tier 1, yes, there's an opportunity for $25, $30. But in entry-level 5G in China, you could take a $3 opportunity and bump it up to $6. And that's 2x, right? So there's a great inflection at the mid-tier and even the low tier of 5G that is just starting as well. So you've got premium devices with very rich, high-performing -- and great, great performance across the board, right, great utility. That's wonderful and we're working on that. But then we can take some different architectures, more flexible architectures and deploy them into markets where maybe the needs are a little bit different, but there's still incrementally better than what we would see in a 4G phone. So you've got 2 sides of the equation. They will converge. I think the mid-tier in China will continue to advance and ask for more, look for more performance, drive more applications, more utility. And they'll continue to bump up in content. And in parallel, the high-end brands continue to move up. And the applications that we see, the things that I talked about at the beginning, the demand for the technology is really driven by the applications that are being thrown upon these devices. And that's what stimulates the upgrade cycles. And that's what stimulates the economics for both sides. For the suppliers, for the customers, for the carriers, those wheels all turn when there's a need for data and a need for performance. So that's how we see it. And there's a lot we're doing right now in China. We have great relationships, Oppo, Vivo, Xiaomi, the Honor brand, we mentioned. Tight relationships with MediaTek, that is a -- really kind of serves all of the emerging markets with their baseband. We have reference designs around that ecosystem very well. Samsung has been stepping up for us now lately, a lot of good demand there. And all that comes together, again, in unique ways that are really focused on customer performance.

Got it. And then, Liam, as a follow-up, I know it's really hard to give one specific number when you think about content growth. But when you put those 2 things together, those 2 things being what's happening at the very high end plus what's happening at the mid-tier, which you just described, is 10-ish percent content growth, 5G -- within 5G in 2021 versus 2020 a fair starting point? Or could it be higher? Could it be lower? Any sort of color on that?

Yes. I mean it absolutely could be higher. It's about advancing the technology. So you could have a finite amount of content and then how do you drive your success through that? And I think for us, one of the things that we spend a lot of time and energy on is, again, extending the reach of opportunities. So we can go and work with the customer and understand their needs, their current budget, their cost budget, their time to market, the regions in which they're going to roam and deploy the technology. All of those factors can come in and we can customize. So that's one of the things that's really special. And when you own your own factories and you have your own teams that are running those factories, it creates incredible flexibility for the customer and for the solutions. So that's why we have it. Sky5 is really a platform because it's a platform -- because it could be configured in so many different ways. So depending on the merits of the need and the customer, we can work unique solutions. So that's one of the things that's special. So we can work with an entry-level player that maybe wants to roam and deploy in 1 country. We can do something there. We can go with the premium Tier 1s and take that performance as high as we can, as high as possible. Also, bringing in other things beyond typical cellular, embedding our WiFi technologies, which are also incredibly -- incredible needs today and under a lot of demand, get that in. Our Tx-Rx, so we're really strong on the transmit side. We're also strong on the receive side. We've got uplink MIMO, downlink MIMO, just a lot of rich technologies to put that on the board. Now every customer doesn't pick every single thing, right? So we have, again, the flexibility, ask the right questions, learn about the needs of the customer, how do we craft the best possible solution for them. And that's worked wonderfully for Skyworks. And that's a game plan that our customers really do appreciate. So it's a long answer, but it really is the way we run the business.

Got it. That's helpful. And then within 5G, Liam, how are you thinking about millimeter wave as a technology, the viability of millimeter wave? And how is Skyworks positioned within millimeter wave?

Sure, sure. So if we look at millimeter wave, I mean, today, it's a unique technology. It has some benefits, very, very high data rate for one. But it also has some drawbacks that better challenges. You've got line of sight issues, pretty strong current consumption. And when you -- in this world of RF and mobile, current consumption is everything, right? That's your miles per gallon or miles per milliamp, so to speak. So you've got to have very efficient devices. So millimeter wave is kind of a pretty good consumer of current. So that's a bit of a challenge. And then you have cost. Today, those products are still very expensive. The volume hasn't really come through yet, but it could happen in time. So the way I look at it is, if you think about connectivity and the slices of connectivity, you're going to have continued growth in demand for the low band, which can carry very, very long distances, right? You don't need to worry about line of sight. It's very efficient in terms of current consumption. It can basically be the universal band, low band. Then you have mid- band that's somewhere in the middle, 3 to 6 gigs. And that will get you different lower performance. Higher performance data rates and speed, but still a little bit more current loss. So it's kind of in that happy medium zone. And then millimeter wave, great data rate, but it's highly specific, again, line of sight targeted. So going into a campus environment, millimeter wave could be nice. Going into a stadium with 80,000 people that are crashing the doors over 1-hour or 2-hour period, getting into the stadium, millimeter wave could work. But if you're looking at day-to-day performance, millimeter wave is not the ideal solution. Now in time, that could evolve. And on our end, we're doing a lot of work with the infrastructure players: Ericsson, Nokia, Samsung even and some of the folks in Japan. So we're working that with small cell, MIMO technology, uplink, downlink, DRx, hitting all the corners in that area. But there's going to be -- the usage case over time, you could have all these technologies. If the performance merits are as substantial as they could be and the utility for the client, for the customer and the willingness to consume the technology, you could have every one of these flavors in a device. So it's -- I really believe that the days of the content being flat and who's going to win, I really think that, that's not the story anymore. I think the story is really about how do we make these connections better, more efficient, more reliable? How do we broaden the reach? People want to be connected, they want to see the performance. And we've -- again, going through the challenges of the pandemic, we saw so much change and opportunity on our devices. And it's really making us think a little differently about what really is our market. Is it just a smartphone? Not really. 5G could be a universal connector that could populate multiple segments, multiple applications, some that we know of and some that we haven't even imagined. So we're really excited about that outlook as well.

And just on that point, Liam, on the 5G infrastructure side, it's an important business for Skyworks. It doesn't come up as often as the mobile business, just given the difference in size. But remind us how are you positioned there competitively. And how do you think about the demand profile going forward? I feel like we're at a pretty low point from a demand perspective broadly, but there is hope that things improve into the back half of the year.

Yes. You're right. And that's an area where there's substantial opportunity. So it was a little bit slow out of the gate to get the infrastructure players up and running, Ericsson, Nokia, doing a better job. Obviously, Huawei, there was some bumps in the last couple of years that created some headwinds. But the market is starting to really coalesce around very potent solutions today on the infrastructure side. If you look at the C-band auction, $80 billion auction, you know that the carriers are committed. So the investments are coming down to enhance that performance. And that performance even matters for the smartphone itself. You really want to have -- if you're going to spend billions of dollars on the infrastructure side, you want the handheld to be matched with the same level of technology. So there's a push and pull on that. The carriers want to see the smartphone players step up and bring the technology up while they're spending money on the infrastructure side. So there's a great balance between the 2, which is, for us, wonderful because we can play on both. So specific to infrastructure, we do a great deal of business in the infrastructure markets. We probably don't talk about it enough, but we have a great 5G small cell opportunity, tremendous deployments and massive MIMO across the board. And these are things that we've been doing for years, heavy usage of gallium arsenide, which we do in-house in our own factory, which is key. And then as we start to see new spectrum open up, more lanes, new lanes of traffic, you've got to upgrade your systems as well. So a lot of good things happening on that end. Infrastructure is vitally important. I think we're getting a nice lift now with C-band and the opportunities there. It also helps us in the classic smartphone, in the RF section. Now we're opening up new swaps of spectrum where we can drive our technology. So that's all good for the industry and very good for us.

Got it. I guess you talked a little bit about the competitive dynamics in the mobile segment. I think it's a business where you win some, you lose some. There's always something going on. And depending who you're talking to, everyone seems to be winning and it's confusing from our standpoint. I know it's hard to comment on specific customer-specific sockets, but one of the bigger kind of knocks on Skyworks when I'm debating your stock with investors is well, competitor a said this is about the next iPhone, the low band, the diversity receive, the ultra high band. I know those aren't things that you can't really speak about. But if you can kind of talk to your confidence level on how you can retain some of these sockets or even further gain share in some of these important phones, that would be super helpful.

Yes. Absolutely, yes. I call it the Coke and Pepsi story here, right? I mean honestly, the truth is this is a great market. This is a great market for Skyworks. It's a great market for the industry. It is -- if you think about the value utility and the rate of change that is going on in mobile connections, not just the phone. You can look at WiFi, WiFi 6E, GPS, Bluetooth, all these things, they're really undervalued. They're undervalued, whether they're Skyworks assets or some of our competitors, they're undervalued. These technologies are critical, they're vital, they're necessary, and consumers can't get enough. So that's one thing. And if you look at the architectures in high-end smartphones, forget about who's winning or losing. The architectures are growing in complexity. They're growing in opportunity. They're getting more challenging now. It is not a case where anybody can jump in and take share. That's not what's going to happen. The total opportunity size will grow, but for the companies that have invested and the companies that have the technical know-how, that's where the share gains will come. So it's a great market. It is growing and is not contracting. We're in the absolute early innings of 5G. And I'm sure you were there in 2G, 3G and 4G. I was. And at every cycle, the device came out and people were like, oh, this is great, nothing great's happening. And all of a sudden, applications came over, right? The Internet came in. Data transfer, work from home, whatever it may be, you had freedom. You had freedom. You were able to leverage that device to create a whole new set of experiences. And at every inflection, it starts with the hardware and then the applications come over the top. Look at the digitalization and monetization of data right now, whether it's cloud, whether it's the usage cases that we've made. Invariably, the smartphone is the quarterback. They're throwing the ball around to everybody. If you don't have a really, really strong, high-performing smartphone, it's not -- the whole ecosystem is not going to work for you. So we don't see that coming down. And we have a good walk, 2, 3, 4 years out with lead customers on what's happening. And we have good insight on the goals that our customers want us to hit. We don't have it all solved right now, but we're in very good position to do that. And that's why we talk about the years and years of investment. That's real. The technology reach, that is real. Owning your own fabs, most players don't do that today. Most people outsource. We do it in-house because we can curate and customize and make it highly efficient, purpose built. So a lot of interesting things like that go into it. But this is a very good market. There should be less swordplay about who's winning this and that because most of the time, people are flat out wrong about what the data is until they see it teardown. So we've got our head down. We're doing the work that we need to do with our customers. We have great relationships with the people that matter. We learn a lot from our customers, and that's what we do. We focus on execution, how do we make your product better, how can we serve you better, introduce you to our technology if your new, extend the reach if we need to upgrade, we'll do all of that, invite our customers in, look at our factories, all that stuff, it really doesn't matter. But this is a good market. This is -- within tech, this is where you want to be.

Liam, that's great. I guess the other question or pushback that I get from investors is, content has grown generation to generation. And to your point, the outlook is good. But the price elasticity at the smartphone level is kind of kicking in. Smartphones aren't growing all that much. And when you think about RF content and WiFi and all the connectivity that goes into the phone, the build of materials is -- it's grown over time. But to your point, do you think there's further upside from a building material standpoint just because it's so critical to the user experience? Or are you starting to feel pressure from your customers because you're a significantly bigger percentage of their costs, if you will?