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

Good afternoon, and thank you for attending JPMorgan's 20th Annual CES Virtual Technology Forum. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst here from the firm. Very pleased to have Liam Griffin, Chairman, President and Chief Executive Officer of Skyworks. I've asked Liam to start us off by reflecting on 2021 fiscal or calendar year, strong record year for the business, right? On a fiscal '21 basis, Skyworks delivered 50% growth. On a calendar year basis, it's going to be up almost 30%. And more importantly, discuss the longer-term growth setup for the team as wireless connectivity, complexity and application penetration continues to grow. So Liam, thank you for joining us this afternoon. And let me go ahead and turn it over to you.

Great. Harlan, thank you for the introduction, and thank you for the JPMorgan team setting this up. As you noted, Skyworks just finished a record year where we grew revenues by more than 50% and large scale. We're talking about a $3.3 billion top line going to $5.1 million in a fiscal period. So great performance there, and that follows through with earnings per share and margins and other financial measures. But what's really great about it, Harlan, is that the demand for connectivity in multiple forms continues to grow and I think the space that we're in, and we have competitors and we have peers, this is the market you want to be in right now. Connectivity is vital. It could be IoT, it can be cellular, it could be Zigbee, it could be GPS, but underneath all of it is complexity. So one of the themes around Skyworks in our business is that we love complexity. We love the challenges. We have teams of people that have been working in these areas for years and years and years and really focused on making those technologies grow. And oftentimes and you see within our business, we do it in-house, we do it in our own factories, what I call the labs-to-fabs environment where engineers in production co-mingle to develop products that are purpose-built for end market solutions. So it's a great opportunity for our customers to engage with us and an incredible opportunity for our team all the way from production, all the way to R&D across the board to lead. So we're really excited about it. The numbers that we talked about here at the open, quite substantial driving multiple scales of not only EPS but also margin and also top line. So lot of good stuff there. Tremendous opportunity ahead for us that we haven't yet captured. We're really excited about that. Our broad markets business continues to grow. It's $1.4 billion revenue right now in that portfolio. Again, mobile itself continues to get more complex. We love that. And our ability to execute and these supply chain headwinds has also been unique. A long way to go there, but we really are doing better than peers in terms of how we're managing that in-house in leading the challenges. So we're really excited. We're just now moving into our fiscal 2022 year, excited about that and excited about the growth that we see ahead.

Great. And I guess, maybe on that note, given the flare up of the Omicron variant, has that put any pressure on your internal operations kind of near term?

Well, no, actually, it's certainly a risk. And I think everybody in this industry, we've been through it now it since 2, 3 years and so we found ways to overcome the obstacles. So again, we're a manufacturer, so we do quite a bit of our work in-house. It's fortunate that we've learned quite a bit in 2020 and 2021 to put ourselves in a position to manage some of the headwinds that we're seeing. Now it's disappointing, I think, for everybody. And I think, again, the early stages of COVID brought some lessons for us. It changed some of the market opportunities, but having our people fully understand the complexity and navigating operationally is unique. And I think we'll continue to do well, but also be very careful and respectful for our employees and do whatever we can to keep safety high.

Perfect. So as we head into calendar '22 and as you mentioned, I mean, wireless and connectivity is pervasive, right? The market tends to always want to maybe focus more on your smartphone franchise. But your business is much more diversified and the applications that you're going after are much more diversified, right? 5G smartphone units, yes, expected to grow 40%, somewhere in the neighborhood of $700 million-plus this year. 5G infrastructure deployment is expected to increase 20%. Broadband gateway deployments up double digits this year and auto production is expected to increase 9%. So combined with your content gains and proliferation of connectivity into more applications, it really seems that the team should be set up to drive double-digits percentage type of growth profile on revenues this year in both your mobile and your broad markets business. So help us understand sort of the puts and takes on your revenue growth potential here this year?

Yes, absolutely. Great, great question. First of all, in the core mobile side, we see a great deal of complexity, increase in complexity, driving at higher data rates, more efficient roaming in different markets. And those mobile devices don't have to be handsets, right? That mobile engine that we develop, our Sky5 engine, for example, is a purpose-built solution that can be brought into an IoT application, an automotive application, or a high-end handset. And Harlan, we also can create unique bundles and unique connections given our expertise and our ability to make it in-house. So if you look at a Sky5 solution that we could bring, it could be different from every customer. And that is one of the unique attributes of Skyworks. So we feel really good about that. We have a great partnership with some of the very best companies on the planet, specifically in mobile even. And you see that those customers are actually doing well. So that's a great theme for us. We're going to continue to ride that in developing internal solutions. As I may have said already, complexity is our friend at Skyworks. We want to do the hard things well and that continues to move. Now adjacent to that, the growth in our broad markets portfolio, which includes IoT and automotive and infrastructure has really done well, really done well in this last year. We put a lot of energy into this to do it differently. We know there's strong competitors there, but our style and our approach of really getting under the covers, working with our customer and having crafted purpose-built solutions for those applications. So we're making progress in that area. Infrastructure is getting stronger. We did our acquisition with the I&A portfolio from Silicon Labs, opens up a whole new aperture of opportunities. Not only a product opportunity, an inbound product opportunity, but there's also -- the corollary of that is the Skyworks sales team and the Skyworks reach and our supply chain prowess to bring that together. So there's going to be some really interesting unique upsides in that combination, and we're just starting to see that now, but very, very excited about where that's going to take us.

Perfect. So maybe starting off with your mobile business. Aside from your #1 customer in mobile, you've indicated, the team has indicated, you're making progress at Samsung as well as in the Android ecosystem in China, which will drive diversity to your smartphone business and you're benefiting from the content gains there as well. Can you just share with us your expectations on the team's momentum in the Android smartphone market in this upcoming year?

Yes, absolutely. And obviously, we have a great position with some of the leading players in the U.S., but we also do very, very well in APAC. Samsung is a significant player with Skyworks. Worked with them for years, and we've been a great partner to their portfolio. And they have some very high complexity, really high-quality products that we're engaged with. So that continues to grow. Moving into the broader Android, your Oppo, Vivo, Xiaomi, we've got a phenomenal partnership with that portfolio. And going back to what I had said earlier, for us, it isn't just solutions. It's engagements, it's partnerships. Working with companies like Oppo and Vivo are a little different than some other larger players. Oftentimes, the human capital matters, the FAEs that we bring to the table, the flexibility in the architectures that we can bring to the table to our customer, all of that stuff is very unique with Skyworks. We have that approach. It's not a one-stop shop. We go out and try to figure out exactly what the customers want, how to make it better, how to win today's design but also put ourselves in a position to have a multiple-year portfolio with some of these leaders. So doing well there. Also doing well with baseband partnerships, names like MediaTek who's a very influential player in Android and in APAC with really strong baseband portfolios that we can match and made up with and collaborate so that a baseman from MediaTek and a great solution from Skyworks can go to end markets and Android or others to deliver the best solution. So lot of flexibility, a lot of resolution of challenge and Skyworks trying to put the best solution in the hands of the customers. That's really the theme that we're working on. And behind that is all the technology and all the hard work we do in R&D to set ourselves up to provide those solutions.

And so as the team continues to drive success in the Android market, first half of the calendar year is typically when the Android ecosystem does tend to be stronger. New Samsung, new China handsets start to ramp and given the traction, given the growing design win pipeline, the content increases. Do you expect over maybe the midterm, longer term, do you expect positive changes to your mobile revenue seasonality profile on a go-forward basis?

Yes, I do. I think as the -- if you think about the Android portfolios today, great position, a lot of opportunity, but the content lift hasn't yet inflected in a way that we expected, right? It's getting better. But the key -- and we've seen this for years, right? It's the applications and the usage cases that actually drive -- they're the catalyst for the content gains, right? And the content gains really, we think about that is complexity. The more demand, the usage cases expansion, the data rates going, all of those challenges create complexity in the device. And so our products resolve that complexity. So we see that happening more and more. We've also been a partner with companies and just explained to them what the merits of a high-end solution can be. And incrementally, that might be $3 or $4 in a phone, but the user experience, it's off the scale difference between a lower end and a higher-end platform. And as we go through these situations we're in right now, whether it's COVID or some other reason, connectivity and the value that it provides to really make our economies work is vital. So we like to be in the fulcrum of that and Skyworks has done quite a great job of not only providing our products, but also working shoulder-to-shoulder with our customers so they have the opportunity to kind of really engage in a better way.

Having the vertical integration, you guys clearly were investing in capacity at a time when maybe your competitors weren't, and that's why you guys feel like are in a much better position today. But the supply chain impacts do seem to have an impact with the Android ecosystem and with some of your competitors, maybe their ability to supply into some of these customers. Number 1 is, have you seen an improvement in supply chain to the Android smartphone players with non-Skyworks components? And has this actually opened the door for potential share gains for the Skyworks team?

Yes. Quite frankly, it has. And the main reason is you get certainty with us. We will tell you exactly where we are. We're making our products in-house. I know you've heard this, but I mean, literally, we have gallium arsenide in Massachusetts. We have gallium arsenide in Thousand Oaks, California. We have a great site in Mexico. We have sites in Japan and in Singapore. These are our factories. These aren't just locations. These are Skyworks-owned facilities, and that's where that CapEx came in. And the CapEx wouldn't be available if we didn't have the financial muscle to deliver and deliver that cash flow. So when you think back to what I said at the outset, the $3.3 billion to $5.1 billion, you can't do that overnight. We forecasted, we worked with our customers, we developed the product and put ourselves in the position to do that. So even now, right now, we have a great opportunity on supply chain. The challenges that we have is that last 1% or 2% of the bill of material we may not control. And so you could be putting everything in a great position, but your customer needs the full finished set, whatever that may mean in each market, right? It's unique. But I will tell you that owning your supply chain is a great, great thing. And it's not just about scale. It's also about the ability to bob and weave and drive in ways that you can't do if you're a third party. So we've seen that change. And that's won us new business. I can tell you right now, there are more companies that we're dealing with today as a result of the supply chain issues that no one wanted as a result of COVID, which no one wanted. But Skyworks has the resilience to really mitigate some of those challenges. And again, it comes down to making the investments in your company and having the financial powder to go big when it comes to capital and when it comes to scale.

Let's talk about some of the emerging opportunities. As I mentioned before, obviously, the market does tend to focus quite a bit on your smartphone franchise -- your leadership smartphone franchise. However, there's all these other opportunities, right? And a good example is with the potential faster time to enablement of private and brownfield 5G networking deployments driven by virtual and open RAN, right, V-RAN and O-RAN architectures, it could drive faster adoption of wireless broadband connectivity into new areas, right? Like the factory floor, retail warehouses, cloud and enterprise data centers and into automobiles, right? And the Skyworks team I feel like is positioned very strongly here because edge applications are going to be a combination of cellular but also wireless connectivity technologies like Wi-Fi 6, all area of ZigBee, as you mentioned, I mean, all areas where you guys have RF leadership. So when do you expect to see the inflection in cellular, Wi-Fi and other connectivity in these new use cases? And how big is this opportunity from an RF connectivity franchise perspective?

Yes. Yes, that's a great question. So I mean, one of the simplest ways to think about it is when you look at mobile, right, mobile phone, it's really bounded by the population theoretically, right? I mean, everyone maybe has 1, maybe they have 2, but there's not an infinite number of devices out there. When you go to the real broad markets, when you go into the applications that you just mentioned, we're talking tens of billions of potential connections in nodes. And also devices that need to be able to work in different environments, devices that are you powered, are you tethered, how -- where is the energy consumption coming from, right? All of that stuff. So we're very much in tune with that. And our business outside of mobile, we talked about that at the beginning, we call it broad markets, has been growing extremely fast. Now we have a big mobile business, but the other side of our portfolio at $1.4 billion right now and a run rate that's clearly double digits is going to do some remarkable things. Not only are we getting into new markets, we're getting into new customers, we're dealing with the best and the brightest in EV. We're involved with companies like Honeywell and Netgear and Amazon and Google and Facebook. Names that you wouldn't think would be part of Skyworks ecosystem, but they are. So -- and again, the products that we make, it's pervasive. They're necessary, they're needed, they're essential. And as we get deeper and deeper into this engagement and expansion, you see our product line doing better. And so that's one of the reasons why we stepped up with the I&A deal because we saw great technology, really strong but maybe not the scale that we needed to really move the needle. So it's a combination of the operational scale, customer engagements that we have already and great technology that we bring forth to really round out that opportunity.

I've got a question from an investor. So when does Skyworks see a meaningful design win cycle for the internal BAW in mid- to high-band platforms in Android?

Yes. Yes, great question. So the BAW portfolio has really been a strategic move for us. We have been working on this for years and years. And we have incredible solutions today that are in products today with very, very high performance. And we continue to move our needle from mid-band, high-band and combinations in between with our own technology as well. So our -- we're not fabbing BAW. BAW has done in-house for Skyworks and we can create exactly what frequencies, what nodes depending on what bands we need to be in. So today, the top tier players are all over that. We're in, we're doing great and we have design win opportunities in Android as well. I mean, there's no reason why those opportunities don't fall through. There's more upside for us on the Android cycle because that portfolio is still a little bit behind the performance curve, not with us, just in general. And if you look at just the last report in China, the leading provider in the last couple of quarters was not an Android play even though we were in China, right? So the leading U.S. company still leads even in China. So that is what it is. But on the Android side, I think there's more opportunity from baseline today to go stronger in the performance category as we move out. And back to what you said before, the way we think about 5G, for example, it is a universal connector. That universal connector can be a phone, it could be an IoT device, it could be in an electric vehicle. Those are the types of nodes that the 5G engine can provide in support. So over time, kind of the -- we're going to have blurred lines on what the market is, but we know that the core is going to be around connectivity, wireless connectivity and the performance needs, the current consumption needs, the range needs, the size, all these intricate challenges that come about are all great for us because we live and breathe in that world, and we have the nodes and the elements and the operational scale to kind of pivot and play. We're the best customers out there and we learn from each other as we go forward.

So on the -- we're seeing a big adoption of WiFi in everything. But you've -- your team has had some nice content gains with the Wi-Fi 6 RAM and it looks to be similar for the WiFi 6E ramp as new spectrum gets added to the standard, right? Can you just remind us content gains between going from 802.11ac to Wi-Fi 6 to Wi-Fi 6E, what are the content gains that Skyworks has seen? And where are we in the 6 ramp? And how do you see the 6E ramp progressing?

Yes. Yes, great question. And it actually -- you nailed it. The WiFi cycle, the same way we talked about 3G, 4G, 5G, the WiFi cycle now has been on a tear. It really has going from traditional 802.11 to 6E and 7E and beyond. And that's another parallel universe here that we populate really well. We've had great technology in WiFi with our silicon germanium technologies and other co-mingled portfolios. But that's in parallel opportunity that we play in very well. WiFi has been one of the big drivers for broad markets. It's another version of that universal connector. We've seen that again as we went through COVID and some of these challenges that we're going through right now. The ability to communicate in different ways. WiFi has been a major, major element. And the demand in WiFi has gone up. So there's an appreciation around that. You can see it everywhere you are, whether you're in an airport, whether you're in an enterprise situation, wherever you may be, the WiFi portfolio continues to grow. And I don't think people are still satisfied with the speed, right? Everybody wants it faster, we all do. So that demand for that and that leads us in the companies that we hadn't worked with before looking at the names, as we talked about before. Look at companies like Ring or look at the Microsoft and some of these companies that have been a little bit more consumer-oriented, but now we're playing in with WiFi with really good value and really good revenue growth.

So you've got -- one of the distinguishing characteristics of the leadership in connectivity is you've got very strong partnerships with the guys that design the chips that sit right next to or utilize your RF front end, right? You've got a strong partnership, for example, alongside the #1 supplier of Wi-Fi 6 and combo connectivity digital chipset solutions that powers the world's leading smartphones, broadband, residential, commercial gateways. So best-in-class, best-in-class, right? What's the biggest differentiator that has allowed you to become a strong partner to the #1 digital connectivity supplier in the market?

Yes. The answer to that is because we can pivot, we can drive a solution for each and every account. That's kind of the way we look at it. So the difference for us is you're not buying an off-the-shelf solution. You're working with us. We're going to craft something that you need and your need is going to be different than someone else's to create the best solution with the highest performance, best range, lowest current consumption, all the key nodes that are required to make these wireless engines work. And because we have the building blocks around it, we can be really focused and crafty in making that work. So a 6E solution for a low-end consumer model could be one thing. But now you want an enterprise great WiFi. That's another thing. You may want to have a solution that has WiFi, ZigBee, Thread, all of these technologies and 5G co-mingled. We know how to do all that. So that's what makes us a great partner. And we do it obviously to help our customer, but also to formulate a great relationship. So it's very helpful with some of the smaller names that don't have the engineering prowess. They'll come to us and leverage our people skills and our technology and the know-how, how to put things together. If you think about markets like -- interesting markets that you wouldn't think about, the washers and dryers or looking at remote cameras and all of the sensing, and that just wasn't around a few years ago. It's getting better and better and better. But behind the curtain, there's technology. And that technology is really driven by great products having the ability to weave those connections together and be flexible about the architecture. So that's what's allowed us to grow in those areas. And within that, there are still huge opportunities and lanes for us to go through that. We're underrepresented. Automotive, for example. Tremendous opportunity, thinking about ADAS and just autonomous driving in general. Think about the performance needs that we really need. No, we're not there yet, but think about what we really need. Connectivity is going to be at its best. Zero latency, super high performance, highly efficient, always on, sensing, turning, all that stuff. We're not there yet, but that's going to be a huge, huge lift for this industry. And then within this industry, who are the players that have the know-how and the experience. You look at the automotive markets, they want to go deep into your supply chain. It's -- they want to go into your factory, and they want to know exactly what you're making, where you're making it. There's all kinds of incredible hurdles to even be a supplier. So you take that know-how and you bring -- you think about what we actually have in our clean rooms and our factories, you look at these markets that are critical like auto, it's a great match, great match, and we're starting to move in that direction. So we see that happening. And back to what you said earlier, the broadening of connectivity. Thinking about whether we call it metaverse or whatever terms we want to use for this tremendous diversification and expansion of connectivity in all of its forms. And so we don't want to be wedded to any 1 form factor, but we are a company that really does drive the connectivity solutions in a way that we don't think anyone else can. And it comes from the product, but also comes from the people and the know-how and the ability to be trusted as we go forward.

Perfect. I've got another question from an investor. Follow-up to the BAW question. So I realize the opportunity is greater on the Android side for BAW. However, it seems like Corvil, your competitor is taking majority of the share. Why is that the case? What haven't you gotten your fair share of mid- to high-band PAD design wins if you have a competitive solution?

Yes. I mean, we absolutely have a competitive solution. There's no question about that. It's just more about where we're going to allocate the effort. It's clear that some of the highest-performing solutions are underpinned with us. That's a fact. And working on that channel and making sure that the highest levels of technologies are delivered. From there, it's a lot easier to go downhill. I mean, in our company, we talk about complexity is our friend, challenge is our friend, we want to hit the fast fall. We don't start slow. We actually -- in our labs, we work on the hardest things first and then get those market ready to go downhill and downstream. So if you think about BAW, we're selling BAW to engaging in BAW and delivering significant portions of the technology to the most discerning customers in the world. We absolutely can do the same thing in APAC. We can absolutely do the same thing in Android. There's no question about that. It's more about the choice and how we want to move it forward. So that continues to improve. And even more important, the technology behind it, the true bulk acoustic wave technology that we've developed in-house is incredible. And I'm really proud of the team's work there. So that's not easy to do, but that filtering play is going to continue to grow. And I think everyone in the space in mobile will recognize that.

So your CapEx to sales ratio in fiscal '21 was about 12.5%. It's been in that sort of 10% to 12% range. You increased your investment in your manufacturing footprint, smartly so ahead of the component shortages that some of your other peers succumb to. So what is the team's CapEx strategy going forward?

Yes. We invest to grow technology. So most of this -- this is important -- I'm glad you asked that, when we think about capital, it isn't -- we have 100 pick-and-place machines, and then next year, we're going to have 120. I like that. We actually think about our manufacturing in our R&D in a unified way. We have a leader in that team, it's co-mingled, it's operation and technology together. So when we're building out our CapEx, it isn't just to make more. It's to actually expand the aperture on the technology side. So when we were developing BAW, that's a technology development, but at the same time, we created it so that it could scale very quickly. And our financial powder has been outstanding in this company and underrated actually. If you think about where we are with our EPS model, where we're headed, we're at 15 multiple right now, which is not good, right? And that's something we're going to work on. A lot of room from there. But the point is, technology and scale go hand in hand. They're not 2 different companies, not 2 different businesses. There's 1 leader in that portfolio to do that. And so it's been working out really well, and we're going to continue to follow that curve and also take in feedback from our customers and having the openness to have those -- that conversation with the best and the brightest to learn and make us a better company.

Great. Well, we're just about out of time. Liam, thank you very much. Great insights from you. And we look forward to the strong financial performance from the Skyworks team this upcoming year. So thank you, and thank you for the support.

Great. Thank you, guys, and Happy New Year. Take care.

Happy New Year.