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

Great. Well, good afternoon, everybody. Thanks for joining us. We're pleased to have Skyworks join us this afternoon, and we're happy to have Phil Brace, recently appointed CEO with us. Welcome, Phil.

Great. Thank you. Thanks for having me.

Great. So Phil, you've been CEO of Skyworks for about 6 months now. Obviously, it seems like you probably had a good chance to kind of assess the attributes of the company. I'm just wondering if you could just give us your perspective of what you feel the company's strengths are and where do you see opportunities for improvement?

Yes, it's great. I mean, one of the first things that really impressed me as soon as I got there was the depth of the engineering talent. I really think we've got some of the smartest RF engineers on the planet and that's a really good spot to build from. And we have just very core deep technological expertise across a wide range of products and platforms spanning multiple generations. And so that gives me a lot of confidence for where we're going in the future.

Great. I know you talked about some of the things that you're looking to address, but I'm wondering if you could just kind of articulate your strategy of how you plan on turning things around maybe in a little bit greater detail. I know you mentioned some things in terms of addressing customer and product diversification, but maybe if you could lay things out a little more in detail for us, that would be great.

Yes. Obviously, when you step back and look at the company, we've got a company that's really positioned at center of the wireless space, right? And obviously, we've got a large concentration customer, a very large customer. We're highly concentrated in the mobile space. Someone joked at internal staff meeting the other day, happiness is an upward sloping line. And so I think to the extent we've got some content that hasn't been upward sloping, I think we've got to turn around the content space. And how do we do that? We put the best engineers and we work on it. We're competing for a wide range of sockets. I feel good about where we are. Having said that, it's highly competitive, and we just need to continue to execute on that day in and day out. When we look broadly, right? We've got a fantastic platform beyond the mobile handset that I think is really underappreciated, right? We've got -- if we look at our nonmobile business, right? It's about $1.5 billion business, higher than corporate margins, higher than average corporate gross margins, growing nicely. We've got WiFi tailwinds, auto tailwinds, industrial IoT tailwinds, timing, power products. I think it's a very diverse business. It has a lot of interesting technology and a lot of secular tailwinds. So I'm feeling pretty encouraged about that. So the internal kind of mantra of the team inside is you got to walk and chew gum at the same time. You've got to walk, execute and deliver on our mobile products, continue to earn the business there and then chew gum, how to continue to grow this business outside the mobile space. And we've got to really increase some focus on that.

Great. That makes a lot of sense. One of the questions that I've been getting a lot from investors in general is just kind of the impact on kind of near-term earnings results related to kind of pull-ins related to tariffs. I think one of your peers who also supplies to your large customer had come out and basically said that a lot of the upside in the near term were due to pull-ins and kind of talked about the second half being a little bit more sub-seasonal. How are you kind of assessing and looking at this pull-in dynamic in your results?

Yes. If we -- just I'll answer the question very specifically, and then we'll step back and zoom out a little bit. Just very specifically, we are seeing broad strength across the board. Mobiles came in stronger than expected. Book-to-bill is stronger than expected. Channel inventories are low. We're seeing lead times longer than they have been. Inventories low. And I think you heard our largest customer had a call, they talked about very strong iPhone 16 demand, which is where we've got good content. So we're seeing better units than expected, better sell-through than expected. Our customers don't tell us why they're ordering. All we can do is kind of keep the inventory low and manage that, and that's what we can do. And I think we came out with a very strong earnings report, a very strong guide. One thing I'm just trying to remind people here of the conference I'm going through, when we came out in February, all of the kind of content losses and all the stuff were already baked into the numbers, right? We already kind of set them low. So to some extent, they're doing a little bit better than expected, and that's some tailwinds. So that's great. We're just going to continue to try and execute. But the way we see it right now is inventories are low, strength in mobile, strength in broad markets. We're just keeping an eye on it. But right now, it's solid.

Great. Yes, that was actually my other question is you kind of addressed it, right? You put out really strong numbers and results and guidance. It didn't seem to suggest you're losing share, but obviously, you had kind of talked about how it already encapsulates it. But just at a high level, are you able to just articulate kind of how much share you're losing this year? And maybe just talk about kind of share relative to the 2 platforms that are going to be ramping.

Yes. I mean if you look at what we talked about in February, we talked about content in next year should be down 20%, 25%. The reality is we don't exactly know. That's our best guess based on what it is. Because what happens is there are discrete decisions on what silicon they put in what models of the phone. And it depends on the sell-through of the models and what's happening. So in this particular quarter, the sell-through of the iPhone 16 was where we happen to have high content was better than expected, and that seemed to work out pretty well. But that's kind of how we do that. When we look going forward, right about how I think about the business going forward, I think there's 4 major tailwinds that we have, and I'll talk about the headwinds, too, but the 4 major tailwinds. First, you look at our largest customer having an installed base of over 1 billion units. It's the longest refresh rate in the history of the product. It's over 4.5 years now. Just a small increase in the refresh rate results in hundreds of millions of units that will flow to everyone's boat. And the latest report from our largest customer suggests that some of that is happening. Last big cycle is an iPhone 12. Okay. Is it unreasonable to assume we'll have a little more tailwind on that. So that's item number one. Item number two is we got to compete and win for the sockets we're competing for. Item number three is we should have a tailwind as they move more to the internal modem because we've got more sockets come available on the MIMO side. And long term, we're seeing more complexity in the RF side coming on the transmit side. And why is that? You may ask. Well, there's 2 reasons to that. One, more people are uploading things. So there's a little bit more focus on the upload side. And the second thing is some of the new frequency bands are higher frequency. The good news of higher frequency is more data, more bandwidth. The trade-off for that is shorter distance to the tower. The way you compensate for distance of the tower, increase the transmit complexity, which should be favorable for us. So look, we've got 4 major things that should help us. Of course, it's a highly competitive market, and we compete for it every single year. And it's the analogy I've been using with the investors, it's like the Super Bowl. You hire super, super talented engineers, and they just love the fight and it's an aggressive competitive thing and you play to the Super Bowl. And if you win or lose, the next morning, you're up in pads practicing again. And you got to love that environment, and that's just -- that's the environment we play in. And so that's what it is. And that's what I'm trying to foster that kind of edginess, competitiveness. I like that actually. It's okay. Pickup -- it's like a basketball team. Pick up the ball, let's go. Let's play again. Great. I like that. They are not down in the dumps. We're not like [meh, meh, meh]. Let's go. Let's go freaking win.

Okay. Thanks for kind of laying that out. That was very helpful. Maybe I'm just wondering if you could just lay out what are the steps that you're taking to ensure that you're going to win back share next year? And I know, obviously, no decision has been made, typically gets made later in the year, but what's your level of confidence of being able to win back here next year?

Look, I feel -- in general, if you ask me, what are the things I think we could be doing better long term. I think we could probably be doing better long term, doing more upfront engineering. I think right now, we probably have more than I would like of just-in-time engineering, right? If you think about the 2 buckets of engineering, you have core like fundamental technology development, right, transistors, filters, resonators. And then you have the people that integrate all those things into products. We've got both of those trains running pretty much in parallel. I'd like to be able to get the point where I've got more upfront stuff. So it's not quite as -- and that will take a little bit of time, I think. But overall, I'm feeling good about where we are. I'm happy with the team we got in the field, and it's a competitive environment. We'll just have to see where it plays out.

Great. Historically, as you know, the company has spent a lot of time focused on diversification, on M&As, as you know. Broad markets is now 40% of your revenues, right? Do you think this increased focus on the diversification had led to some of this share loss for your customer? You talked about the need to walk and chew gum. How do you kind of balance that plan going forward? Will you continue to invest on both fronts? Or are you going to focus more on mobile, at least in the near term to win back share?

No, actually, I think -- I think that was the story coming into that. I actually think it's the other way around. I actually think the gravity of that largest customer caused us not to focus as much on some of the other customers. I think that's the most underappreciated story of the company. I mean it's a $1.5 billion business that's growing nicely in great customer segments. I mean, Tesla, SpaceX, Juniper, Cisco, you name it. And we have a bunch of interesting technologies that, that alone is an interesting business that's growing. And I don't think we do a good enough job either getting out there with our customers talking about it as much, talking to the industry about it as much. And so for me, it's a little bit of the other way around. I don't think that having any less focus on that, I don't think that would have changed the outcome because if you look at the outcome of what happened on the last cycle, another sports analogy is you have the best part, you win. You have a split part. It's a jump -- you have a jump ball, it's a split and you have bad part, you lose. Okay, in that particular case, we had a competitor that had a good part. And so they split. It's going to -- that's the nature of the game. That's what they're going to do. So I'm not sure any less focus on that. As a matter of fact, I'd argue that we should be accelerating more in that space while continuing to focus there. So I don't buy that thesis. I think we're going to focus on both.

Okay. And then going forward, to what extent are you going to be focused on M&A? And what's your kind of framework?

Yes. I mean, look, I think that if you look -- just zoom back out, I mean, obviously, our customer concentration, our concentration in one particular handset space results in a depressed multiple compared to others, given that potential volatility. So clearly, increasing our diversification is an important factor for us. And I think that just in general, it's going to be very difficult to really move the needle significantly on that just organically. So it's likely there's going to be some M&A in a higher order space. A lot of people are asking me about what my priorities are and those kinds of things. I would say, in general, I'm going to look for things that are accretive, things are technology adjacent and probably have a different profile that can help dampen some of the volatility associated with some of the handset business we're in. So that might suggest that I'm probably not looking at consumer-oriented spaces, as an example. Another area that gets a little bit tricky is today, our data center exposure, if you think about it, is limited to -- not limited to, we have timing products that go in there, and we have power products that go in there via [indiscernible]. So power supplies and timing products. And we are seeing some growth in there as they go to like 800 gig and 1.6 terabytes lower, lower power. I think there's some tailwind there, but it's still a very small business. Other companies that have higher concentrations in that space are trading at incredible multiples that would be really difficult for me to acquire and make it accretive. And so I'm going to be focused on things that are -- I can do accretively, technology adjacent, sticky, have a different revenue profile than [indiscernible]. That's probably how I look at that.

Okay. What about would you consider M&A within mobile and potentially within RF?

Yes, I got some questions around consolidation in the industry and things like that. Look, I think you could argue just from the industrial logic perspective, you could argue that 4 years ago, 5 years ago, 5G was ramping and 4G was going crazy and 5G is ramping and there's all that China customers -- I mean I think I'm looking at Raji, we probably had a $1.5 billion business in China alone and everybody else. So I think you could argue that there's some industrial logic for some consolidation in the space. Having said that, a lot of things need to be -- the conditions need to be right in order to make that happen. You got to support the customer, antitrust environment. You got to make sure -- there's just a lot of pieces. So I think from an industrial logic perspective, you could argue it makes sense. Is it actionable? I think that remains to be seen.

Obviously, there are headwinds with your China Android business. I think they're largely out of the numbers at this point in time. What do you think about just the sustainability of the remaining Android franchise going forward? Is that something that you think you can grow?

Yes, it's a good question. I think Android right now is about $100 million a quarter for us. The biggest growth this past quarter has actually been a ramp at a large Mountain View-based customer for which we have 100% RF content. And that particular customer, Pixel, I mean they like having the halo phone because they don't want the operating system just to be relegated to the low-end phones. So they are very focused on that. The reviews of that phone have been great, and we've got great engagement and great focus there on that. That's probably our strongest Android engagement. We obviously have a presence still in the Korean phone manufacturer and then a little bit of dribs and drabs with respect to the Chinese players. We're going to be disciplined about how we focus on those. Those are not the most economically attractive things to do. And so there's an opportunity cost. There's a balance of do we have the capacity? Does it fit right? We're just going to be disciplined about how we do that. So I think just going into next quarter, Android should grow again, probably not at the same rate it grew this past quarter just because of the initial ramp. But...

Great. Are there any questions? Right. So switching to broad markets. What are -- can you just kind of walk us through and just highlight what the primary growth drivers of that broad markets portfolio is?

Yes. I mean if you look at the big driver is WiFi 7. That's probably our biggest business. That's earliest in the ramp in terms of the adoption rate. We're starting to see that being widely proliferated across both the enterprise and consumer segment. That's good from a unit perspective and adoption perspective, but also a content perspective. It's about 20% to -- 15% to 20% more RF content for WiFi 7 than it was the prior generation. So we've got a unit tailwind and a content tailwind that's happening there. Automotive right now is interesting, too. Automotive is about $60 million a quarter for us. And really, what we're seeing there is, if you look out in time, okay, more vehicles need to be connected wirelessly via 5G for infotainment, over-the-air updates, vehicle-to-vehicle communication, WiFi, Bluetooth. And we're actually seeing some pretty good traction on that front, right? The IoT space and the industrial space is an area where we've actually seen some inventory digestion over the past several years. We've actually started to see that normalize and start to start to grow. So we're feeling pretty good about those spaces right now.

What about AI and RF complexity changing the uptick in dollar content? Just what does that world look like?

Yes. So when I look at that, so I think that the way that I think about that is related to the -- there's 2 areas that it's related to, in my opinion. One of the areas -- and I just want to be clear, like this is us inferring things and thinking about it, right? We don't have direct conversations with a particular customer, but that for obvious reasons. But when you think about just long-term trends, we'll talk about the transmit side for a second. So the idea that you are transmitting more data up there now, the transmit is actually a very power-hungry part of the phone. And so you can imagine that how did transmit more and do it in a power-efficient manner requires more complexity on the res side and may include things like for years on the receive side, you've had multiple antennas, MIMO. You may start seeing some of that on the transmit side, increased power, things like that. So that's -- and there's another factor there as well. It has to do with the frequency bands. As you go higher in frequency, you get more bandwidth, so you can download and upload more stuff. The trade-off for that is it's -- you can't go as far from the tower. So the way you compensate that is by having more transmit capability in the phone itself. Now the customers aren't going to want decreased battery life. So there's going to be lots of complexity for how to get that transmit done right, keeping the battery life the same. And so those would be some areas. And then frankly, as the inexorable march of integration and performance continues to be there, right? As the cameras and the processors and the displays get bigger and more powerful, it's not like people are getting tolerant with less battery life. So you've got to continue to provide that level of functionality and more in highly complex packaging, and that's where we think we've got an advantage as well.

If you're successful in your core markets, do you think that, that opens up new applications that maybe you guys haven't even...

Absolutely, it does. I mean one of the things I think about just long term is when you think about -- go back and one of the things I just get most excited about, and I get shivers when I'm just even talking about this, 99.99999% of the devices connected to the Internet are connected wirelessly. And that's going to be true for as far as the eye can see. And there's only a few people in the world that develop the technology we do. So yes, I mean, I think we don't even know what's going to happen. And that's where the IoT comes into play, the auto comes into play, the WiFi, the devices, there's even some new take of some new devices. They're not talking about plugging those into it, right? So that's what I get excited about.

Just a follow-up question on that is, I think historically, I think there was a WiFi asset that you historically had tried to bid on, but you talked about all those wireless assets. Does it make sense for you to maybe kind of go vertical a little bit and acquire some of these wireless radio assets to complement your RF front end out there? I mean there's a lot of different protocols in...

I'm going to answer it in a tongue-in-cheek manner. You might imagine that since I took over, I have every single investment bank on the planet is coming through and try to pitch new ideas for me. There's a range of ideas I'm considering. I tried to answer the M&A one the best I could before. So lots of different things on that. I'm just trying to keep close to the core technology, focus on making it accretive and help me diversify from my core handset base.

Okay. I think as part of the [OBBBA], there's new spectrum coming up for auction in the next 2 years. Is that going to be a tailwind for you guys?

Yes. I think most of -- a lot of that spectrum, I think, they talked about, I think if -- I'm not an expert necessarily in this field, but they talked about reharvesting some of the digital TV spectrum, which I think is lower frequency bands. And then there's also some higher frequency bands that come available. Look, more complexity on the RF side is definitely a tailwind for us, right? The harder it is to do, the more stuff there is to do, the better it is.

I had a follow-up question. You talked about WiFi 7. I think on your call that you said that you're already starting to invest in WiFi 8. What inning are we in the WiFi 7 cycle? And what's the timing for when we can expect to see kind of meaningful revenues for WiFi 8?

I think we are in maybe the second inning of WiFi 7, maybe second inning. And we're not even in spring training for Wi-Fi 8. So I mean, I think WiFi 8 is probably '28, '29, and we got WiFi 7 until then, right?

Okay. And is the expectation for WiFi 8 is you're also going to see an ASP uplift there relative to WiFi 7. Is that...

I think that remains to be seen. But I mean, I think that when we look at more -- I mean, if you look at kind of what's happening on the Wi-Fi side, more power, more range, more spectrum, more mesh capability, more back channel capability. I think just in general, there's going to be more RF content there. So that would be my expectation, still early days.

Okay. So just maybe switching to OpEx and your op margins. It seems like you're going to be in a situation where, obviously, we'll find out about next year's smartphone towards the end of this year, but potentially you're going to be running a little bit more subscale than you historically have run. How do you kind of think about just balancing kind of the right trade-off between investing for continued growth and making sure that you're not going to lose share again versus maintaining good operating leverage?

Yes. So you've seen me take some steps in the area. Kind of what -- we have made a big investment over the past couple of years. And I think that what I've been telling people is that we expect that rate of increase to moderate significantly. Where I am going to be focused on is key engineering talent where I think we need it. As I look at balancing that, what I've tried to do is you saw me take some steps in the earnings call where we consolidated some of our factories. Basically, that helps get us better fixed cost leverage, better utilization, lower CapEx and frankly, reduce OpEx over time. So we're going to take some steps like that. To your point on the content, the story I use is like a fruit tree. Sometimes in a particular season, you may not get enough fruit off that one or you may not get the same amount of fruit you got the prior year. Well, I have a choice. I can take down the water fertilizer, but that pretty much guarantees that I'm not going to get to the same amount of fruit next time. And there's no other opportunity we have. So the thing you love and you hate about the industry we're in, it's hypercompetitive. But as soon as it's over, you suit back up and you got a chance to win it again. And look, if we go and -- if I don't start changing the slope of the line with respect to content over some period of time, then you start having a discussion, okay, we like losing the football, right? We're not making any progress despite this investment. But I think at this point now, right, this is -- we're in a core space, it's hypercompetitive. We've got fantastic technology and there's no other opportunity we have that can generate the returns that we have. The path to glory here is back to growth. It's not around cutting OpEx.

Just a follow-up on some of the consolidation you've talked about the Woburn facility closure and the Newbury Park consolidation. What's the timing and benefit of those? And are they primarily an OpEx or COGS benefit?

We'll do both. I mean it will result. I mean it's going to take a little time because -- and ultimately, what's going to happen is the way I would say it is apples-to-apples, it's going to be a tailwind for both gross margin as a result of fixed cost utilization, lower CapEx, and it allows us to invest more in advanced technologies at the Woburn site. So in general, it's going to be a tailwind. That's actually going to be reflected as we give quarterly guidance going forward. It's going to take a while to close those factories, don't happen overnight. So it will take a little while. And ultimately, the utilization of the factory and the OpEx and the gross margins and things are going to be determined by the content wins and what we have. So I would say it's going to be a natural tailwind for us. And I think the way that I talk about to investors is have confidence that we're taking steps to make sure that we are allocating capital investments appropriately to make sure that we've got our assets positioned the right way to try and generate maximum returns for us and our shareholders.

Great. Thanks, Phil. Appreciate it.

Awesome. Thank you very much.

Thank you.