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

Good afternoon, everybody. Welcome to the Goldman Sachs Communacopia 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 stage. Welcome, Phil.

Thanks, Jim. Thanks for having us. Always a pleasure to be here.

Great. Phil, you're in the final stages of closing our proposed merger with Qorvo. This is some of the investors has been very focused on as a landmark event for the industry. I know you expect the transition to close relatively soon a year, you completed the financing to permit the disclosure, where do we stand today in terms of finalizing close any remaining conditions?

Yes. Thanks for the question. Pretty consistent with what we said in the last earnings call. Certainly, we are very confident that we're going to close this calendar year. We're preparing to close this fiscal year. And then subsequent to the earnings call, we talked about the fact we kind of issued an 8-K said that we -- the HSR waiting periods and the waiting periods for the U.S. FTC had expired without further action. We then also went out and raised the debt. It actually turns out to be pretty good interest rates since we raised it since then. I wish to say that was with foresight, but sometimes it's better lucky than good. And we're just waiting right now. I would say these things are never certain, and we're kind of -- we're around the airport just waiting for permission to land. So hopefully, it comes soon, and we're chopping it a bit ready to go.

[indiscernible] I guess.

Yes.

Nice. So step back for a moment, what does success look like, say, 2, 3 years after the close of the transaction, more importantly, more tactically what are sort of the key milestones investors should be tracking to evaluate the success along the way?

Yes, it's great. Look, I really think this is a transformative deal for both the company and the industry. We talked about -- you mentioned it in your opening remarks. I mean this company coming together really does 2 things. So it has a scale play and a diversification play. And the scale play really gets us significantly more revenue. And then we're able to really financially do $500 million of synergies, which we get there. So we should have, I think, of around roughly $5.5 billion mobile business and then a $2.5, $2.6 nonmobile business. The mobile business should be -- have higher stability, better mix because inside the mobile business, we're going to be skewing towards more of the tier -- the premium tier side. And then on the nonmobile side, we have super attractive segments like aerospace and defense, which I'm really excited about. As a matter of fact, that one could be the grabbing the tiger by the tail from that side. So 2, 3 years from now, you'd expect us to see kind of certainly get into our business model target, 50%, 55% gross margin, 30%, 35% operating margin, 40% EBITDA margins, very attractive capital structure, large and growing markets. And milestones look along the way. We're obviously getting to close will be one thing. OpEx synergies, how we're doing on that. We talked about $500 million total 24 to 36 months, probably front-end loaded OpEx side, the factory consolidation will take a little more time to go do that. So right, are we able to close, right? Are we able to start implementing some of the synergies is the broad markets growing faster than the mobile side? Are we generating some stability on the mobile business? And then ultimately, what are we delivering the financial performance we talked about. I mean it's an unbelievable transformative opportunity, and I can't wait to get started.

Yes. Now from a product and technology perspective, -- what are the things that the combined company can do, they couldn't have done as independent analog companies in terms of -- and it doesn't mean for the product portfolio going forward?

Yes, I think that's a really important question and something that we really haven't underwritten at all. I mean, when we looked at the deal and how we put it together, we're really just focused on the synergies and what are the synergies we got we haven't really talked about anything at all of what we can do at the 1 plus 1 equals 2 scenario. Some of that is because we still need to get under the covers and figure that all out. But I'll give you an example. Like if we just look at the handset side today, right? Qorvo, the product lines are very overlapping, right? They have antenna tuning envelope tracking in PMIC. We don't have any of those technologies. And so when you think from the receiver all the way to the antenna, you might believe that bringing thousands of RF engineers might allow us to do things differently. And we know there are certain customers today where we have RF front end, and we know we can do things differently. So I'm excited about that opportunity. The other one is that I'm equally excited about or more excited about really is some of the GaN technology because today, our technology kind of caps out at about 12 gigahertz and with GaN, both Power GaN and RF GaN, we get up to 20, 25 gigahertz, which gets us into a lot of the radar and a lot of the defense space that we don't have today. And you might imagine there's some cross-selling opportunities that we could have the timing products and power products in the defense space that we haven't even explored. So to me, there's just a tremendous runway of just opportunities, both on the cost synergy side, but also as we bring the companies together to look for new innovation, new capabilities that we haven't even explored.

Yes. Now you previously outlined the cost synergies. What about the revenue synergy side of things? What is that short term and long-term?

Yes. I mean, look, we've been -- I've been cautious about doing that because, I guess, Jim, I meet potatoes kind of guy, do what to say what we're going to do and deliver that. And I think it was very quantifiable to do the cost synergies. The revenue synergies are something we need to work towards. I mean I -- the magic of this is we're bringing together thousands of RF engineers that are super hard to get very talented people. And I'm just excited about that opportunity. I mentioned some of them. Can we expand our defense business? Can we really expand the combination? Are there additional things we can do on the RF side, both on the WiFi and the handset side now that we've got all the way out to the antenna tuners. Are there -- is there new capabilities we can do with our BAW filters and other capabilities as well. And then you've got the manufacturing and the assembly test -- what can we do with new advanced packaging and other technology we haven't been able to do before. So I mean I've barely even scratched the surface. So I can't wait to get our PhD engineers out talking about things and what we could do, and it's exciting. I mean at the end of the day, there's a lot of excitement about data centers. I love our data center business as well. But it is a wireless world, and all that data center data has to get out to somewhere, and that somewhere is going to be done wirelessly. And I think we're going to be in a really good spot for that.

Yes. So now I ask you bought a product portfolio, but competitively, how does the merger change your position versus Qualcomm, Broadcom, Maranto, et cetera?

Yes. Look, I think this is always going to be a super competitive market, right? Our customers are not just going to hand this business. But clearly, this results in a different competitive landscape and the landscape is changing, right? And it's changing certainly at our largest customer has changed with respect to right, our position vis-a-vis Qualcomm and others, right? And I think that competitive landscape changing, and that should benefit us. But it's still -- it's a situation where we have to execute and deliver, right? No one's going to just give us a pass just because we've consolidated with Qorvo. I do think that the improved technology base should allow us to compete. And I think that one of the things that I would say that I'm going to look to do is future technology development. Today, I probably don't spend as much as I'd like to on some future technology development. And so one of the things I'm hoping to do is -- you might imagine that how can I take some of the synergies that I'm going to get and actually further develop the road map further out in time. And so we'll be looking to do things like that.

Yes. Okay. So data centers emerged as one of your fastest-growing end markets, along with many others. What specific problems are you solving to position the company to participate better in AI infrastructure spend?

Yes. So we've got 2 major -- you're right, that's one of our fastest growing. We said we're growing at least 50% year-over-year. And actually, those businesses are supply constrained right now. We can be shipping a lot more. The book-to-bill is greater than 1 on that. Two particular areas where we've got one of those on data center power and this is really around power isolation. So when you think about back plan changes going from 400 volts to 800 volts, you want to make sure that power is isolated from your very expensive GPUs, and we have specific technology to do that. That really comes from the heritage of the Silicon Labs acquisition we made many years ago, and they've got a long history of doing safety-related power devices. And so they've got a good track record there, and that seems to have gone quite well. The other one is on the timing side, which are super high performance, very low jitter and jitter how much does the clock move around clocks, which is super important for high-performance things. And so when you think about some of the technology here, it's like Black Magic, right, femtoseconds, which is light travels in a foot or something like this. It's some crazy, crazy thing. And those are really geared towards the optical 400 to 800 gig to 1.6 terabit kind of transitions with some of the big customers there, some of the big optimal networking guys. So those are the 2 spots we've got. I wish the biggest businesses were bigger. They're growing really nicely. They are great. We just got to continue to grow.

How big can it be in 3 to 5 years?

Well, I mean, I think the future continues to be pretty bright. We talked about that being growing greater than 50% year-over-year. We're ahead of that. I don't expect that to be slowing down anytime soon. So you kind of continue to grow at that space. And I think when you take that, some of those businesses, combined with some of the aerospace and defense business, combined with some of the auto, some of the WiFi, you can really see how we can end up in a situation where we're getting into that -- into the zone where we got 50%, 55% gross margin growing nicely and good operating income. And that's going to be part of the strategy for how we get our blended mix up.

Okay. Excellent. [indiscernible] we haven't talked about smartphones yet. So let's do that. That's a pretty large business part of your business today. Talk about some of the dynamics you saw in smartphones for the first half of the year, how do you think that plays out into year-end?

Yes. Look, I think that -- it's funny to say the beginning part of the year, I think I'll probably always remember the CS of 2026. It was kind of -- that was the day that the memory -- all the memory issues came to his head, and I think I've been dealing with memory issues ever since that time. In every quarter, we've done nothing but beat expectations and continue to get ahead of plan. We've been fortunate. If you look at where we play mostly, it's in the premium handset space. And I think our largest customer has done a really good job of actually frankly, gaining share versus Android in that space. And that actually should benefit us in the long term. The more devices that are in the ecosystem, the better it is long-term for us because -- do you think there's probably 1.2 billion to 1.5 billion devices out there. And the [indiscernible] is anywhere 4-ish years. Well, any sort of shrink of that refresh rate just results in lots more units so we can refresh. So that one has been going pretty well. And I think that our guide reflects that continued strength. So from us, we haven't seen some of the other turbulence that other people have, primarily because our exposure to the premium segment.

Yes. Past wireless cycles every several years, there's usually a moment where our content sort of spikes upward. Do you think an on-device AI could be that inflection point some place where uplink complexity and build materials starts to step up again?

Yes. And we have seen it. And this is one thing that's important to note. I think in the past call, I talked about a multigenerational design win with a large U.S. Android provider that takes us through 2030, probably products that are shipped in 2031. That was significant for a couple of reasons. One, the customer had belief in our technology through that time. Two, we had a partnership with another baseband provider, which demonstrates that collaboration that we have. Three, we have visibility through that. And then four, we see that RF increase. And we see it today. We see it with increased filters, increase transmit power, more off-line channels, direct to satellite lengths and then that's not even before you get to increased power levels in PC2 and 6G. So we're seeing it today. So for the first time in many years, we're seeing increased RF complexity driven by some of the things you talk about.

Yes. If your largest customer continues to use a larger share of internal mograms on their products in the coming quarters. What does that mean for you on content on the margin more or less?

Like generally, that's a tailwind because when you use external modem, there was a certain products that are bundled with them. And so generally, it's a tailwind to do that. But once they transition completely off that, then that effective that relative tailwind is behind us, right? But I think for us, when we look at what we're trying to do in the mobile segment, it's really continue to focus on the premium tier, so we'll have Android continue to win off. Our largest customer, right? The more that they use our internal modem, the better it is for us, and then the more technology that they put in there in terms of transmit capability and all those things should be a tailwind for us as well.

Got it. I mean, you sort of addressed this before, but if you take that kind of multigenerational design when you mentioned ramping fiscal '20 to '30, you talked about $1 billion opportunity there. So what does that win tell you about your portfolio and about content trends in the premium market?

Yes. I think it tells us a lot. I mean, first off, I would say that one particular customer is astute in that they recognize that they there's opportunity costs that some of their partners have for their engineers and their capabilities and their talent. So for them, this is also about securing a partnership with us for a long period of time. So it's a mutually beneficial relationship, and we work really, really hard at it. In many ways, their products are excellent products. And so we've been working closely with them. I think it says a lot about our technology, our capabilities and what we want to do, and I think it bodes well for us.

And so then we set aside any one individual platform, sort of what are the structural drivers of content growth at the premium segment over the next sort of few cycles, especially in terms of like the modes of wireless communication you see kind of playing out and especially if we kind of really finally do get AI at the edge.