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

Good day, and welcome to the Skyworks Investor Update Conference Call. [Operator Instructions]. As a reminder, this call may be recorded. I will now turn the call over to Raji Gill, Vice President of Investor Relations and Corporate Strategy. Please go ahead.

Thank you, operator. Good morning, everyone. With us today are Phil Brace, Chief Executive Officer and President of Skyworks; and Bob Bruggeworth, Chief Executive Officer and President of Qorvo. This call is being broadcast live over the web and can be accessed from the Investor Relations section of Skyworks website at skyworksinc.com and Qorvo's website at ir.qorvo.com. Before we begin, I'd like to remind everyone that during the course of this conference call that management of Skyworks and Qorvo may discuss forward-looking statements reflecting their views with respect to the proposed transaction between Skyworks and Qorvo. Please note that today's discussion will include forward-looking statements and as such, are subject to risks and uncertainties. These risks and uncertainties include those risk factors discussed in the most recent reports on Forms 10-Q and 10-K filed by each company as well as those discussed in the joint press release announcing the proposed transaction. These and other risks and uncertainties could cause actual results to differ from those contained in our forward-looking statements. Please review the disclaimers in today's press release and investor presentation and in the SEC filings, including the Form 8-K and Form 425 furnished today. Both companies have also posted a detailed investor presentation to their respective Investor Relations website. I encourage you to download the slide deck and follow along during today's call for additional context on the transaction. In a separate press release issued today, Skyworks announced preliminary financial results for its fourth quarter and full fiscal 2025, available on Skyworks' IR website. Also in a separate press release issued today, Qorvo announced preliminary financial results for its fiscal 2026 second quarter available on Qorvo's IR website. With that, I'll turn the call over to Phil Brace.

Thank you, Raji. Good morning, everyone, and thanks for joining us today, especially on short notice. Today, we announced a transformative milestone for our industry and both Skyworks and Qorvo. I'm glad to be joined by Bob to discuss this exciting transaction.

It's great to be here with you, Phil. As Phil just noted, today marks a remarkable moment for both our companies and our customers. Phil and I will take you through the benefits of the combination on this call, and we'll both be available for questions at the end.

Thanks, Bob. Skyworks and Qorvo are combining to create a U.S.-based global leader in high-performance radio frequency, analog and mixed-signal semiconductors with a combined enterprise value of approximately $22 billion. The transaction will bring together 2 of the most respected names in RF, combining complementary product and technology portfolios, enhancing R&D scale and expanding customer reach. At closing, Skyworks and Qorvo shareholders will own approximately 63% and 37% of the combined company, respectively. Qorvo shareholders will receive 0.96 shares of Skyworks common stock for each share of Qorvo common stock plus $32.50 per share in cash. The Boards of both companies have unanimously approved the transaction. Before we get into the details, I want to take a moment to highlight the key takeaways from this compelling combination. Together, we will have enhanced scale with revenue of $7.7 billion and adjusted EBITDA of $2.1 billion. A $5.1 billion mobile business positioned to innovate to address rising RF complexity across a broad range of complementary technologies, a $2.6 billion diversified broad markets platform with a growing and profitable TAM. An advanced domestic manufacturing position and improved factory utilization. Additionally, this transaction will be immediately and meaningfully accretive to non-GAAP EPS post close with $500 million or more of advanced cost -- annual cost synergies within 24 to 36 months post close. Now let me walk you through some of the key points in further details. Scale. With revenue of approximately $7.7 billion and adjusted EBITDA of $2.1 billion, the combined company will have broader R&D resources and a stronger manufacturing platform to compete against larger global players. In addition, we will have a more balanced revenue debt base across markets, including mobile, defense and aerospace, edge IoT, AI data center and automotive. The combination strengthens our customer set, improves efficiency and enhances predictability through the cycles. Looking ahead, our healthy balance sheet and favorable capital structure will enable us to continue to invest in the business and drive shareholder value over the long term. In mobile, the combination will create a $5.1 billion business with complementary technologies, expanding our reach into areas such as antenna tuning, envelope tracking and power management. This best-in-class RF portfolio will increase our SAM across platforms, driving greater revenue stability while strengthening our position as RF innovation accelerates into the future. In broad markets, the combination diversifies our revenue and customer base and increases our TAM by creating a $2.6 billion business across multiple end markets. In defense and aerospace, Qorvo brings a long-standing relationships with Tier 1 defense primes and deep expertise in GaN and GaAs across mission-critical applications, including land, sea, air and space radar systems, drones, electronic warfare and satellite communications. In Edge IoT, the combination allows us to deliver a complete portfolio of connectivity solutions for broadband infrastructure, industrial automation and smart energy. In AI data centers, we see compelling opportunities with power management, along with precision timing solutions to enable customers to meet the escalating power and performance demands of accelerated AI workloads. In automotive, we'll have complementary product lines in connectivity, power and digital radio that can unlock design wins for next-generation vehicles. Broad markets will be a key platform for the company in the future. Financials. We expect the transaction to be immediately and meaningfully accretive to non-GAAP EPS post close. We expect to achieve $500 million or more of annual cost synergies within 24 to 36 months post close when the companies are fully integrated. The synergy opportunity is both meaningful and actionable. In manufacturing, we can drive fab optimization and higher utilization rates to support healthy gross margins through the peaks and the troughs of the business. In SG&A, we plan to simplify operations and eliminate unnecessary complexity and duplication. Lastly, the combined entity can improve R&D efficiency by focusing resources on strategic growth areas and accelerating new product development. Turning to regulatory approval. We've considered the landscape carefully and have major customer support. We're confident that the transaction enhances customer choice by delivering competitive solutions in applications where complexity is only increasing and the competitive landscape remains intense. We expect the transaction to close early in calendar year 2027, subject to the receipt of required regulatory approvals, approval of both companies' shareholders and the satisfaction of other customary closing conditions. In closing, I'd like to acknowledge Bob for his leadership and role in building such an exceptional organization with a rich heritage of innovation. We look forward to Bob's continued guidance and engagement as a member of the Board of Directors. We're excited for the future together with Qorvo.

Thanks, Phil. We are bringing together 2 organizations with a shared culture of innovation and commitment to technological excellence and industry leadership. Qorvo's technology has been at the heart of systems that connect, protect and power the planet. We have a proven track record as innovators of new RF and power technologies and have made advancements in design, manufacturing and communications. This combination creates a pivotal moment for our combined customer base and the shareholders of the future company. The RF semiconductor industry has changed significantly over the past decade with customer consolidation and growing competition from international competitors. In this environment, scale matters. Through this transaction, our combined company will have the size, scope and technological breadth needed to compete effectively around the world in mobile and broad markets. As one company, our world-class engineering talent will include approximately 8,000 engineers and technical experts and over 12,000 issued and pending patents. With our enhanced scale and combined product and technology portfolios, we can develop advanced system-level solutions even faster, expand customer reach, meet growing customer demand and make an even bigger impact in both mobile and broad markets. Touching more on the mobile and broad markets businesses. We're excited for the combined company to build on Qorvo's unique mobile capabilities with expanded R&D scale to invest in next-generation technologies for our customers. We also expect the combined company's broad markets platform to benefit greatly from Qorvo's deep experience in defense and aerospace industry with a significant product portfolio of space, military communications, electronic warfare, radar and drone solutions. We've also received support for this transaction from Starboard Value, one of our largest shareholders. As we look ahead, we're confident this transaction is the best path forward for our stakeholders, and we're excited for what's in store.

Thanks, Bob. We're excited to see all that we can accomplish as a combined company and look forward to sharing more in the future as we move towards closing. Operator, let's open the line for questions.

[Operator Instructions]. Our first question coming from the line of Christopher Caso with Wolfe Research.

Congratulations on getting the deal done. I guess for the first question, you mentioned that you had support from customers in this deal. Can you elaborate that a little bit to what's been the feedback from customers so far? And obviously, it's probably somewhat limited in terms of what you can talk to them about, but just some more detail on that matter, please?

Yes. Thanks for the question. You might imagine that we wouldn't kind of undertake a transaction of this magnitude without having through first checked with some of our largest customers. And we might imagine that we've had some discussions in this area in that regard, and we certainly have their support in this area. So I think that's about all I can say on that topic.

Got it. Okay. With regard to the synergies, could you go into a little more detail on -- in the $500 million of synergies, where is that coming from with regard to both OpEx and some manufacturing consolidation that might be achievable through this?

Yes. I think as we mentioned, we've got $500 million or more of annual cost synergies within 24 to 36 months of close, I would say more than half of them are likely OpEx synergies, the other half or the other a little less than half will be COGS synergies. The timing of that synergy realization is really going to be dependent partly on when we close and then some of the decisions we need to make to kind of maintain customer continuity through that period. So I'd say it's slightly weighted towards OpEx, driven by duplication really in SG&A. And then on the COGS side, optimizing our combined manufacturing footprint increasing utilization and supply chain efficiencies. We have a high degree of confidence in these synergies and a high degree of confidence in our ability to deliver them.

Our next question coming from the line of Krish Sankar with TD Cowen.

I have 2 of them. First one, Phil or Bob, kind of curious what do you think on China SAMR approval? Do you feel confident it's going to get through? And then I had a follow-up.

Yes. Thank you. Go ahead...

Yes. I think -- look, I think that we feel we're well advised on this process. We have strong customer support. The product lines are much more complementary than it might exist on this -- might believe on the surface. We believe the competitive landscape is intense. And frankly, this combination gives us the scale to invest R&D to compete against much larger global players. So we believe ultimately, this will get approved, but we've got a long process to get through all those hurdles.

Got it.

Bob, do you want to add anything to that?

Nothing to add, Phil. You nailed it.

And then a quick follow-up, Phil or Bob. I mean the product overlap, et cetera, all makes a ton of sense. I'm just curious, I think in the past, you've spoken about the RF TAM for Skyworks is roughly $20 a phone. You're probably at $8 a phone today. Is there a way to size it for the combined company, what it is, the TAM available and where you are today?

Well, I think, look, the way to size it -- I think the way that we're looking at it certainly increases our SAM. If you look at the combined company today, like just compared to Skyworks stand-alone today, we don't do many of the things that Qorvo does in that environment, including envelope tracking, including antenna tuning, including some of the power management solutions. So from our perspective, the combination is incredibly complementary, opens up new SAM, decreases potential volatility with respect to single-socket opportunities, allows us to innovate at the system level. And so this really grows our SAM. We think the RF complexity is going to increase. We think that there's potential for refresh cycle upgrades across the board. And frankly, we've got good customer support on it. So we're excited about the opportunity at our largest customer and certainly at other customers also.

Our next question coming from the line of Christopher Rolland with Susquehanna.

Congrats. I guess first is, I feel like the direction of travel was really diversifying outside of handsets. So I guess, first of all, are you guys still open, interested and desiring to do that? And then secondly, would you guys consider additional RF opportunities, consolidation in this space from other names if you think that would pass regulatory muster as well?

Yes. Look, I mean, the way that I look at this, this transaction's combination actually brings both scale and diversification. And frankly, I don't look at it as uniquely a handset opportunity. I look at it as a wireless opportunity in that space. I think I've said publicly, the vast majority of devices connected to the Internet and connected wirelessly. That will be true for as far as the eye can see. And I think this combination on the RF side brings together 2 leaders in the space to make us more competitive. Specifically with respect to handsets, I think it opens up our SAM, decreases our volatility, increases our customer stickiness. So I kind of view that as the wireless space. And then in the non-wireless space, really expanding our TAM. We just mentioned one in aerospace and defense, which is a huge one. And so we've got lots of other growth opportunities that I think could be additive that we haven't even talked about today. In terms of us doing more things in the future, frankly, the capital structure of the combined company is going to be really favorable to allow us to invest both organically, shareholder -- capital returns to shareholders and frankly, incremental M&A should we see fit from a strategic point of view. So really, I think this is a scale plus diversification, a very attractive way to structure it financially, synergies to shareholders and puts us in a position to continue to grow from there.

And speaking of synergies, just from the manufacturing side of this, I think Qorvo had a bigger manufacturing footprint. And I think there were some utilization and capacity opportunities there filling those fabs. Can you talk about that and maybe what percent of synergies might be coming from manufacturing?

Well, look, I think both companies independently are working to kind of rationalize some of their capacity and do some things there. You've seen what Skyworks has announced on our own facility. I think that Bob can comment about what they're doing. I think both companies operate independently. Both companies are going to try and continue to do that. The synergies I talked about there should be incremental to what both companies are doing together. I think long term, it's probably too premature to really talk about how we're going to do that. A lot of work underway there. I think there was an earlier question with regard to the splits of synergies. More of the synergies will come out of OpEx than manufacturing side. So I think more of them will be -- we can implement more of them a little bit sooner than the manufacturing side from that side so. I don't know, Bob, if you want to comment on your own manufacturing plans from your side.

Yes. Thanks, Phil, and thanks for the question. I mean, clearly, we've been moving -- we've talked about Costa Rica shutting that down and moving it to our supply base. We also have already moved our gas into Oregon to improve the utilization there. And then the last step we're doing in North Carolina is transferring our SAW filter technologies into Richardson, Texas. So we're working on that. But I believe, and just like what Phil said, bringing the 2 companies together, we can certainly improve our manufacturing footprint and reduce our costs and create those synergies.

Our next question coming from the line of Harsh Kumar with Piper Sandler.

Congratulations, Phil, Bob. Bob, you had created Qorvo in a very similar transaction more than a decade ago and created a lot of value for stockholders. I look forward to working with you both on this company, the new entity. So typically, Bob, question here is typically deals like this, 2 plus 2 equals way more than 4. When you just look at what you're talking about, $2.1 billion EBITDA plus $500 million, that gets you to about 34% or so implied EBITDA 2 years out when everything is supposedly on paper is worked out. Let's say you and I are talking 2 years out and everything is working out, you're winning new business, et cetera. What can the optimized EBITDA profile or operating margin profile of this company look like?

Yes. Thanks for the question, and I certainly appreciate the support and look forward to it. And as you noted, semi industry has really been defined by growing scale and certainly improving diversification, and that's really what this transaction does. On the -- both of our companies' websites, we put kind of a long-term, at least a target model out there from what this could be. And the adjusted EBITDA range could get 35% to 40% kind of in the outer range is kind of what we're looking at.

Fair enough. And then my second question is competitively, the joint entity you will have, Skyworks will have everything you need to be the best RF player. You have the high band, you have competency mid. You guys are already pretty strong in low band. Can you talk about the joint entities with the big scale, the ability to win new business and actually grow from where you will be entering this transaction at.

Yes, that is exactly right. You nailed it because actually, that was the thing for me as Bob and I started talking, I've known them for a long time, and these product lines are way more complementary than one would think about. And I think the combined opportunity gives us the opportunity to innovate across the signal chain, maybe in ways we haven't done before. And I think really, when you look at the advance -- the scale, it allows us to put more R&D in certain areas that can allow us to continue to extend our lead. So I think you're 100% right. I think this should be -- enable us to open up new opportunities for us to continue to grow, not just in handsets, but in wireless overall as well as some of the other exciting broad markets we talked about. And we haven't even talked about what we could do in aerospace and defense, in WiFi, in IoT, in automotive, in all the other segments that this has opened up to. I mean I just go back to billions and billions of devices are connected wirelessly, and that will remain true for as far as I can see. So for me, it's incredibly exciting. I think this is not just about us in handsets. This is about wireless, expanding our scale and diversifying our business.

Our next question coming from the line of Tom O'Malley with Barclays.

Congrats on the deal. I had 2 really quick. The first is that you seem pretty confident on customers supporting this and then getting through the regulatory approval process. If the approval process does require some divestiture of businesses, are you open to moving out of China? You both had kind of gone on for the last several quarters, winding down the Android businesses. Is that still the intended target? Or do you think that you will go back and reinvest in that market given the larger scale?