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

Good morning, everybody. Welcome to the Goldman Sachs Communacopia and Technology Conference. My name is Jim Schneider. I'm the semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome Skyworks and CEO, Phil Brace to the stage today. Welcome, Phil.

Good morning. Thanks for having me.

Thanks for being here. I've known you for some time now, back your days at LSI. You step to be the CEO of Skyworks. And while it's not even been a year since he joined, maybe just give me your first impressions of the business and what has surprised you positively?

I think the thing that surprised me the most positively is the caliber of the engineering talent. I mean I used to get shivers up and down my spine when I still talk about it. I mean the stuff we do, the complexity of what we do, the caliber of the engineers. I just it's really a stimulating environment to be in, and I'm just incredibly proud of it. And I look to the future, I see 99.999% of the devices connected to Internet or connected wirelessly. And I think that will be true for as far as I can see, and so I feel good about the spot we're in as well.

Yes. And on the flip side, maybe what are the kind of 2 or 3 biggest areas of focus you're looking to improve in terms of the company's execution?

Yes, I mean, obviously, we've got to do better at our largest customer. I mean, it's a very competitive environment. We have a great relationship with them. I don't think anyone's put in more RF component than we have $25 billion or more since in iPhone 1. Having said that, there is any favors, right? We've got to deliver better parts and we live in a very competitive environment, and that's just what it is, and we've got to execute and deliver better. I think the other part for me is that on our broad markets business, we can do better there, too. We can do better telling the story. We can do better executing. That's a $1.5 billion business and growing. I got some really nice secular tailwinds, and I just don't -- I think it's underappreciated by the market. So I think we need be better there, too.

Fair enough. When I speak with investors, the question asked most frequently is whether the RF semiconductor space is ripe for consolidation? And if they can actually physically happen from a regulatory or other perspective, maybe give us a perspective on that question.

Yes. Look, I think in general, when you just zoom back out, semiconductors is an industry that has been driven by consolidation over many, many years, right? And I think that -- it is a business that requires a certain amount of scale in order to afford the R&D that's necessary to continue to push the boundaries of innovation and technology. So I think to that extent, with that clear eye, you're looking to go, okay, certainly, there's some industrial logic to have, some sort of consolidation across the board in the semis. And I think right now, I mean, there's a question of can it be done accretively? Is there the right path to regulatory? Do you have willing parties on the other side depending on what's happening in their strategic ambitions and goals, and so look, I certainly think it's something certainly considered -- certainly thinking about, but a lot of conditions have to be right to kind of make that happen.

And maybe give your perspective, I mean, are you kind of a willing party there? And maybe you have any perspective on the regulatory question.

Yes. Look, my #1 goal, I view myself as a steward of shareholder capital. So I'm looking to do things to grow the share price and grow the return for the shareholders. And so to the extent in that environment, certainly, I look at all elements on that, that'd be crazy not to. In terms of regulatory, look, I think the view is that the current situation tends to be -- they tend to be more constructive to deals and work on work on things that can make things happen versus blocking things. So I think we're probably in a slightly more favorable environment for that, but I'm not an antitrust regulator and I didn't sleep at a Holiday Express last night, so I'm not sure I would claim to be one either.

There you go. Away from consolidation, I mean, how would you characterize your appetite for M&A? And what might you look for in a potential target in terms of expanding your portfolio?

Yes, that's a really good question. I mean look, we've got a very solid foundation for our business. If you look kind of where we are, we feel really good about our technology position and you look at our ability to generate cash and return cash and return capital to shareholders. I think we've done an excellent job over the past few years. Having said that, I think there's a pretty clear argument that you might have used some more of that capital to invest in some other businesses to change the shape of the business, right? I think today, our concentration on one particular customer and the handset market is results in suppressed PE compared to other players. And so what would I look for? Technology adjacent things, I like things that are hard to do. I like things that are complex. I'm going to look for things that are -- give me some stickiness, long-term longevity versus the volatility that can come from having a handset market. I look for things that are accretive and gross margin are attractive. So that lends itself things to things like infrastructure, lends itself to, lots of things like that. You probably won't see me focused on the consumer side just because that gets me more volatility, which I think is a bit of a problem. Having said that, my #1 focus is kind of do things that are accretive and our technology adjacent and have a strategic fit. And so the aperture for me is pretty wide in that area. And you might imagine that I've got every -- lots of people coming through my door and knocking on my door all the time. So we're just -- I don't feel like I'm in a rush. So we're taking a deliberate focused view of that. But it's certainly fair to say that M&A is probably higher on that prior list than perhaps it has been in the past.

Okay. Maybe shifting to the current business. Last quarter, you reported a strong quarter and guided above the Street. What drove the strong results? Can you unpack that for us in terms of, is that the smartphone market getting better? Was your biggest customer doing better? And how much was idiosyncratic for Skyworks specifically?

That's a good question. I mean, look, I think we saw strength across the board. You saw it was a very strong results in the quarter and a strong guide going forward. And there are lots of questions around tariff impact and the like. And I'd like to point out that I got that question in the prior quarter as well and we ended up doing pretty well. Across the board, we saw a solid demand on the handset space that's both at our largest customer as well as a ramp in a new customer. Google, I know someone saw the Pixel 10 launch. We have a very good RF position there. And then in our broad markets business, it's multiple quarters of successive sequential growth, year-over-year growth, book-to-bill better than one and inventories at low position. And so that guidance hasn't changed and those conditions continue to persist at this point. So broad-based strength.

Great. I think on the call, you talked about Edge AI potentially having an impact on smartphone sales. What did you mean by that exactly? And do you expect AI to kind of catalyze sort of a multiyear replacement cycle for smartphones? Or maybe just talk a little bit about what you --

It's a great question. It's something we got lots of times. I mean if you look at the -- there's a great gold rush going on to the AI data center, right, billions and billions of dollars of capital going in there. My own view going back to the statement I made at the beginning is ultimately, all that data needs to get out to the edge and to the consumers someone here. And I guess everyone in the audience, where do they get it. They get it on this device. That's how that edge AI data, that's how that data in the data centers, gets to the end consumer. And so myself, when I look at -- I mean, I have a 16, I love the intelligence that cleans up the phones and things like that. So I think that is actually going to drive it. If you look at some of the replacement rates right now, the installed base certainly larger customers over 1 billion units. The replacement rate is about 4.5 years longest as it's ever had been. All you need is a short compression to that and your results in hundreds of millions of units. And then furthermore, what we're seeing out in time is the more RF complexity and you might ask yourself the question, okay, why is that? Well, one, people are uploading more data. So they are for that. And then two, the upload is actually one of the things that drives battery life because the transmit power is kind of defined the distance from the cell phone. The carriers don't want to deploy more CapEx. And so having more complexity in the phone, and they don't want sort of battery life either. And so to some extent, what we've seen in some of the future generations, more RF complexity. And so I think that some of those things really result in a tailwind for us going forward.

Maybe just kind of following on that past wireless cycles. There's usually a time when RF content tends to reinflect upward. Maybe talk about on-device AI and whether you think that's going to be a catalyst for this next wave? You talked about upline complexity, but maybe just talk about build materials and where you think it's going?

Yes. Historically, like if you look over the past -- I think you're right, over the past several years, the actual bill of materials has actually come down in the RF space, primarily due to integration and there hasn't been a ton of innovation in that space. And so that's been a bit of a headwind. What we've seen going forward is an increase in RF complexity in some of the RFIs and RFQs that are coming from our customers, which tends to leave there's a little bit of tailwind on the RF content. So when I look at the handset space in general, what do I see? I see there's some tailwinds that we have for any sort of potential unit increase, whether that's from a new form factor, whether that's from new features on the A side, I see more RF complexity, potentially driving an increase in TAM. I see socket availability coming back as people move to the internal modem and then I see us being able to compete effectively as such we have. So for me, I kind of think that we are at the -- hopefully, we're at the bottom of where we were right and still producing a lot of cash and where we're going, which is why I have the sense of optimism the way I do. Is it a done deal? No, absolutely not. We still got to compete. We've got to earn it every single day, but the conditions are right in my mind.

Yes. And I know it was asked about on the call and maybe you can't provide too much detail on this. But if your largest customer, Apple, were to use a larger share of internal versus external modems, how does that impact content for you on the margin?

On balance, it's a tailwind for us as some of the sockets that were previously integrated with the external modem now become available for us, and it represents an opportunity of about $2 a phone.

Got it. And just kind of wondering, as the quarter has gone, any notable change in terms of the guidance you provided a month ago? Or as things more or less tracking as expected?

Yes, things are tracking as expected, no changes.

Okay. About your largest customer for a moment. You ship a lot of parts to them, 9, 10 parts per phone, I think, probably more than anybody else. From a competitive standpoint, what areas do you think you're most differentiated in when it comes to that customer? And where do you feel kind of the most security market position?

Well, that's a good question. Me being paranoid, I'm never going to say I feel secure. I think we've got to compete for it every single time. And I think that's perhaps the lesson that was learned over the past couple of down selections maybe. So I don't like that, we need to own our own destiny. I don't feel secure in any one of them. We got to earn them every single time. Having said that, you asked me an initial question about what inspired me the most. I've had the opportunity to go around and meet just a bunch of different engineers and a bunch of different stuff that we do. And the thing that really is interesting to me is, I mean, we're literally doing innovation around elements that we put in the transistors. We're doing really core innovation all the way up to devices, resonators, filters and then advanced RF packaging, and we have a very, very broad wave of innovation all the way to super, super complex in-house manufacturing in Mexicali. So when you look at our ability to innovate at every level from device all the way up to package, it's pretty impressive. And then our ability to deliver that incredibly high volume and sell it very effectively, sometimes less than a chocolate bar, right? You kind of go, wow, we're in a pretty good spot. So having said that, right, our competitors, they are tough competitors, right? We're not -- we're in the big leagues. So our competitors have some good strengths too, and we just need to continue to innovate them.

And then maybe just talk about how you characterize your relationship with your largest customer. I know you've worked closely with them since joining, but maybe talk about how that relationship has developed over your time here?

I would say it's a super strong relationship. We have -- it's an incredibly tight relationship. We have people that go in and out of both our facilities daily. It's a very tight relationship. We've been working with them for many, many years but they don't do us any favors, right? I mean it's not their job to do us any favors. They wear a certain color badge, and we wear a certain color badge, and our job is to deliver the best part, and I want to make it impossible for them to choose anybody else. And that's my job to do that. And so having said that, obviously, there's a certain familiarity you get when you have worked for someone for so long. And I think that, that at the end of the day, we've got to deliver the right parts, but certainly up until that point, it's a very collaborative relationship I mean it's -- they have a lot of respect for us, and we have a lot of respect for them. As a matter of fact, when I first went there, they wrote down some people's names on the board on a whiteboard and said these are the best people in the RF industry. And they didn't have to do that. And the fact that they did was like, okay, that give me a lot of confidence of the technical capability I have with the company.

Yes. Great. And then you noted earlier this year, you had lost content with your largest customer, that's well understood by the market at this point. But sort of going forward, how do you think about mitigating further losses? But more importantly, sort of how would you gauge your prospects at this point of regaining content that you may have lost based on what you've seen?

Yes, it's a good question. I get asked that question a lot. I mean I use a couple of analogies along the way. This is -- it's a very competitive environment. You really don't know until the end. There's 2 ways to look at it. When you have a winning -- if you have a winning product, you win, you get it all, if you have a jump ball, you split, and if you have a bad product you lose. And as you go along, it's almost like you're in a horse race. So you're the first for long, you're up by the nose. You're the second for long, you're behind by the nose. And one thing that people who aren't familiar with the business I don't really understand, it's not sufficient to meet their specs, right? You actually have to beat their specs, and you beat their specs by a bunch, and you don't really know where your competitor is. And so you have some feeling of where you are based on the limits of physics and where you are. And I would say right now, I feel really confident. I think we've continued to execute well, and we do that. If you look at, I think we've still got some -- there are some areas where we haven't played historically that we're working to gain some ground on that will probably take a little more time. But I feel good about it. But results will be -- we've got to work hard. So yes, it's not done.

Makes sense. We'll move to the Android market and talk a little bit about it because I think it's somewhat neglected market. There seems to be a lot of good opportunities there. A lot of investors have mixed views on it. From what I understand, there are some opportunities in that market where you maybe have more content potential per phone than your largest customer. So maybe take us through how you view this market, what trends you're seeing and maybe as a follow-on, talk about your customer relationships in China and how you're managing those given the current geopolitical environment?

Yes. So that's a good question. Android business for us now is about $100 million there. So that's about what it is. About half of that is Google. And you saw that, some of you may have seen the Pixel launch. I think that some of those features there were pretty darn compelling, right, real-time voice translation, stuff like that. I think they're doing a really good job. Google is an interesting story because they really, I think their phone and what they're trying to do is kind of keep the halo around Android not relegated to the ultra low-end stuff, right? So they're very technology-oriented and obviously, I wish they ship more phones, but I mean they are very technology oriented, and they're smart in the way that they engage with some of their partners, including us, where they have kind of more than one generation of phone, right? Because they know that they're simply, there's an opportunity cost to the engineers there. So I would say it's a very tight, very collaborative ship from that side, and we're optimistic and bullish about that. On the other side, obviously, Samsung and the China players, we're going to be a lot more opportunistic there. Those businesses tend to be a lot more margin challenged from that just based on what they do. I mean -- and you may ask why is that? One of the reasons is -- we -- what we have is very high performance, very tightly integrated products. And so customers that value that are willing to pay for that, great. If you're not, you just want to phone, you have thousands and thousands of SKUs and you do it per country, and you don't care about battery life and stuff like that. There are cheaper alternatives for that, and we're just not going to go compete at that level. So we'll be opportunistic about those spots.

And on the China piece? Or is it just kind of like...

It's limited. It's opportunistic. It's down to de minimis now. I'm not ruling it out, but it's not an area of focus for us, and it's going to be very opportunistic.

And just inherently or philosophically, maybe, do you think the Android market is more competitive than the iPhone market or not? And maybe what are the key differentiators in terms of competition at customers? Is it kind of a customer-by-customer battle and a focus on commodity versus high-end features? Or how do you see it?

Yes. Well, it's a great question. I mean, if you look at what we do, we deliver incredibly complex RF components at a very high level of integration that are optimized for performance and power to enable long battery life. And those customers that are willing to pay for that level of technology, we're a great fit for that. There's a vast number of phones that they don't care about that kind of stuff, and we're not going to go down and compete at that level. So the level of competition is, I would say, it's different in that the high end, the premium space where we play, it's a technology-oriented game and you need to deliver the best parts. And the other segments, it's also hypercompetitive, but you need to deliver the lowest cost solution, and that's not an area where we necessarily want to focus. So I would say -- it's hard for me to judge the other space because you don't compete there too much, but that's probably why we haven't just because that's not a game we want to play.

Yes. And you cited the $100 million figure in terms of your exposure now. Would you say you want to kind of like trend that up, down or sideways, if it's up to you?

I want to grow all my businesses. So look, I think that to the extent that we've got some customers there like Google that we hope they continue to do well and push it really well. So I hope that grows, but it's still an area of demand for us.

And then I guess just if you think about the sort of flagship or premium Android smartphones and the kind of feature differentiation, or technology you're providing into those versus the one that your largest customer -- the ones at your largest customer, maybe talk about the things that might be different in the Android space.

Yes, one of the things that's different. If you look at the particular one we were talking about, we actually have 100% of the RF content in that particular model. And having the entire signal chain there allows us to do different things than we might otherwise do. And we actually find that one customer to be particularly innovative in that spot. They're actually not -- they're pretty smart guys up there, and they do some interesting things. So you might imagine that having all of the ships allows you to do different things in respect to how you partition devices, how you modulate the power, how you do some other things. So I would say there's some innovative things when you're not constrained by having individual pieces. There are some things you can do in the system level that are interesting and valued by the customer in that space.

Maybe shifting to the broad markets business, which I think is a favorite topic of yours. We would love to sort of get your view, I mean it's been a big outperformer of both sequentially and year-over-year. Maybe level set, just how do you unpack the business in terms of the large buckets of revenue within it and the percentage they contribute?

Yes. I mean at a high level, I mean the thing when I get passionate about that. I mean that's a $1.5 billion business growing nicely accretive gross margin to the company. I mean if that business alone is an attractive, nice business is there. And the 3 major components of that, there's the edge IoT stuff, which is really WiFi, when you think about that. The biggest part of that is WiFi and you think about WiFi 7, just starting at the really forefront of the WiFi market. But both on the retroside, the enterprise side, that one is going quite well. we see a long runway there with WiFi even under development now. So that one, we think we've got some systemic kind of tailwinds behind us there on that. The other one is automotive, right? And automotive, right, $200 million a year kind of business. We see that growing and we see that growing regardless of the engine, right, whether it's a combustion engine or not. Why is that? Because you see all of those in vehicle, right, whether it's ADAS and vehicle entertainment, what's happening there online downloads, over-the-air downloads. Whether it's 5G connectivity, WiFi connectivity, all the ADAS stuff that's happening, I mean, we see that move. And frankly, we're starting to see that. We've got big wins at BYD and Nissan and others that really kind of support that. So that's going quite well. And then the other side is the infrastructure side, which includes some timing products. That's an area where we've continued to have up until recently, still inventory overhang code, if you can believe or not because some of those products are so inexpensive that it was easy for the customer to go by 5 years of inventory. We've actually seen that kind of behind us now. The book-to-bill is better than one, and we've got some great design wins there. Think of like Cisco, Juniper, Space-X and the like, that gives us some exposure into some of the data center market that for us is we have under exposure there. And so to have kind of a nice window there is also another green shoot for us. So Edge IoT, automotive and then infrastructure.

Yes. And I guess, with which would you say, in terms of the overall growth profile going forward, are you seeing the strongest kind of cyclical recovery of the type you mentioned versus which ones are more secularly driven, whether that's automotive data center or otherwise?

Yes. I think that's a good question. In terms of cyclical recovery, it's probably on the infrastructure side just because we've had so much inventory that we burn through there now. So we're starting to see that come back. Secular tailwinds actually, I think all 3 of them have secular tailwinds for that, right? I mean, obviously, on the WiFi 7, you just -- you see that continue to grow. You could argue there's some cyclicality there, too, as you go from 6% to 7%. And when you go through a transition like that, there's more RF content initially. So there's some good tailwinds there. And then I mentioned the secular stuff on autos, which that -- we're probably more secular on that than we are cyclical simply because we're such a small portion of it. But when you look at the secular trends of ADAS and nickel entertainment, and all the things I talked about. That's probably just -- if you ask yourself the question 5 years from now or more or less, car is going to look like that, you probably go more. And so therefore, that's the way to about that one.

Yes. And you touched on WiFi a minute ago. Where are we in the WiFi 7 upgrade cycle, talk about the content uplift you see from 6 to 7, and sort of talk about the competitive environment in the space too.

Yes, it's a material upgrade. I mean a nice content uplift for us. We are early innings. I think it's probably $100 million or something like that. That's where we've got. We've got a good tailwind on that. It's barely started really from that. So we think we've got hundreds of millions more dollars to get that we should see over time, get that going forward year-over-year. And we see that with more antennas, more mesh capability, more power, more performance. So I think that that's a tailwind for us, a secular tailwind. There should be a tailwind for us going forward in multiple years out.

Yes. And then I guess, as we think about broad markets broadly, bad choice of words, maybe should we think about -- or how are you thinking about the growth that we're expecting in that market? Are we going to get back to more typical seasonality over the next few quarters? Or do you think we can still see sort of accelerating year-over-year growth in the out quarters?

Yes, it's good. I mean, typically, there is some seasonality with that business just based on the ebbs and flows of the purchase cycle and what's happened. I think that, that seasonality has been muted by inventory correction and some of the other things we've been having. So we continue to expect to see sequential and year-over-year growth. But I mean, we likely will see some sequential effects probably in next quarter or 2. It just depends on purchasing cycles and things, right?

Yes. Okay. Maybe kind of rounding out on some operational and financial questions, if we could. You talked about optimizing your manufacturing footprint, consolidating operations in Woburn to Newbury Park, that should help drive improved utilization, obviously, it lowers your fixed cost. Maybe give us any hint you can in terms of what the cost savings might be eventually?

Yes, we kind of avoided talking about that. One, it's going to take a little while to get that done. Second off, the ultimate costs are going to be driven by the ultimate utilization, which will depend on content, right? So it's a little bit of -- it's going to, it will be difficult to actually parse that out when it's done, but it should be tens of millions of dollars a year minimum. It will be a tailwind to both gross margin, CapEx, OpEx and our utilization should get better. So I mean, there's all metrics that should get better for that. I'm very confident we have sufficient capacity to meet whatever content needs we have there. Frankly, it's probably a decision that should have been made a while ago in terms of that. So I feel good about that. We started that process now, and we're going to be deliberate and methodical how we do that just because we've got some parts. Most of our parts are dual source between the 2 facilities, but there are some parts particularly in the broad market space that are not, and we're going to need to go through kind of a PC notification for that. So that will take some time, and we just want to make sure we're doing the right thing for the customer.

Yes, and give us any kind of commentary you can in terms of the timing of this. I don't think anybody is expecting to show up in the numbers in the next few quarters, but maybe talk about is this thing you could see inside of 2 years?

Yes, you should start to see some of the benefit inside 2 years.

Okay. You've consistently generated pretty strong free cash flow. Looking ahead, any reason that doesn't continue and maybe talk about -- do you have a long-term view on steady-state free cash flow margin for business?

Yes, it's a good question. I mean if you look over the past years, I mean, we've certainly done a really good job of turning earnings into cash. I mean some of that was driven by working capital utilization. We did a good job of driving our inventory down, which actually enabled us to go back and take advantage of some what we thought was crazy time in the market. So we've put some of that capital to use and bought some of the shares back. I think going forward, we're probably not going to see that same level of cash generation primarily because we've got our working capital down. Having said that, we continue to focus on cash flow, cash flow generation and share returns to -- returns of capital to shareholders. So some remains focus of ours. I think we've done a good job at the company for that, and we'll continue to focus on that going forward.

Yes. And then maybe around -- you touch on capital allocation. How do you see the balance between sort of dividend growth and then buybacks going forward for the company?

Yes. I think we've taken advantage -- if you look over the past several years, we've probably returned over $5 billion of capital to shareholders in the combination of share repurchase and growth. It goes back to the discussion on M&A. You might argue that we should probably increase a little bit of that capital on M&A going forward. And I'll probably look to that. Having said that, I think the company is always disciplined. I'm looking to make sure I view myself as a steward of shareholder capital, and I'm going to be really focused on how to do that. You saw us take advantage of what we thought were or some crazy dislocations earlier in the year and put some of our capital work to take our share count down. And so not opposed to doing that when the time is right. But I'm also going to be looking to make sure I build the business long term and look for things that I can grow accretively, and help provide me with some diversification, which I think will benefit all shareholders.

Yes. And then just to close out, I mean stepping back and you've been in the company for some time now, and you've been in a lot of investor meetings, including one player today. Talk about sort of your view on investors, view of the company, what's the thing that you think is most understood by the investment community? And if we sit down again in 5 years, what are the things that people would be most surprised by looking back?

That is a really good question. What's most understood, obviously, like every single investor call I go to, they all ask about what's happening with content, right? That's the most -- I think that one is probably one of the most tracked tech things on the planet. So sometimes, it's hard to know whether people are asking about Skyworks, so they're asking about some other read-through on Apple. But look, I think that's very understood. I think that one of the things that has been interesting, obviously, we had a disappointing result in the last down cycle. Most of the investors, I mean, it's kind of -- it's one of the reasons why we trade a little bit just kind of multiple like people get it. It's a game we're in, it's competitive. And you have a choice as a leader, you have a fruit treat. I use a fruit tree analogy with you all the time. Okay, you got -- you didn't get as much -- it's a bad one grown. I didn't get as many apples off the tree this year as I did last year. Well, choice A is I can cut down the water and fertilizer. But that pretty much guarantees I won't get as many apples next year or choice C, I can go, you know what, we're going to keep going because I believe in this, and that's kind of what we're doing. So I think a lot of investors understand that. I think what investors don't understand we need to do a better job of it and frankly, better execution is how to grow our non-mobile handset business. I mentioned before, it's a $1.5 billion business growing in really attractive segments, right? WiFi 7, automotive, infrastructure, timing, space. No one even talks about that. We don't ask about that. And I think that in 5 years from now, I think I'd like to see us have a much more balanced profile that is growing, generating returns for shareholders that results in share outperformance. And right now, we're kind of in the do-loop of what's happening in the next down selection cycle. So that's what I'd like to see.

Very good. Well, thanks very much for being with us today. We appreciate it. Thank you very much.