思佳訊 (SWKS) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, we would now like to welcome you to the Skyworks second quarter earnings conference call.

I would now like to introduce Thomas Schiller, Executive Director, Investor Relations of Skyworks, who will chair this afternoon's conference.

Mr. Schiller?

Thank you, Operator.

Good afternoon, everyone, and welcome to Skyworks' second quarter 2003 conference call.

With me today are Dave Aldrich, our President and Chief Executive Officer, and Paul Vincent, our Chief Financial Officer.

Dave will begin today's call with a review of our second quarter business highlights followed by Paul's financial overview and outlook.

We will then open the lines for your questions.

Please note that our comments today will include statements relating to future results that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially and adversely from those projected as a result of certain risks and uncertainties included, but not limited to those noted in our earnings release and those detailed from time to time in our SEC filings.

I would also like to remind everyone that the results we will discuss today are from our pro forma income statement, before special items, consistent with the format we've used in the past.

Please refer to our press release within the Investor Relations area of our company website for a full reconciliation to GAAP results.

I will now turn the call over to Dave for his quarterly review.

Thank you, Tom, and welcome, everyone.

I'm quite pleased with the performance of Skyworks during the quarter, given the current market environment.

Of note, we first avoided seasonality in the March quarter to aggressive market share gains.

We've ramped our direct conversion transceivers and cellular systems solutions to several new and existing customers.

We've captured a number of design wins and ultimately improved upon our operating performance.

More specifically, our aggregate revenues for the second fiscal quarter were $157 million dollars, up 22 percent on a year over year basis, and down slightly on a sequential basis as a result of a decrease in assembly and test revenue from Conexant, and in line with our expectations entering the quarter.

Our gross margins expanded to 44 percent, when we exclude assembly and test service activity, and to 40 percent on an overall basis.

This was driven by the leverage of our vertically integrated manufacturing model, higher levels of semi-conductor integration, increased factory utilization, and strong execution to our set of cost reduction initiatives.

And with respect to the consolidation plans we outlined to you back in June, we have successfully completed the shift of our gas HBT production from Sunnyvale, California to Newbury Park, California, and we've transitioned our manufacturing from Haverhill, Mass., to our assembly and test facility in Mexicali, Mexico.

All the while, improving on our operational performance and meeting our customer commitments.

As a result, I am absolutely convinced that we have established one of the lowest cost structures in the industry, and are now seeing opportunities to expand margins even further -- one of the overriding justifications, by the way, for our merger.

We will use this cost structure as a competitive weapon to take share as we move forward.

Meanwhile, in the quarter, we increased our research and development to accelerate additional mass sets on several new designs, and to qualify our GPRS system solution on networks around the world.

These actions were in support of customers expected to ramp during the second half of the year.

The bottom line is, we ultimately improved upon last quarter's performance, and delivered $4 million dollars of operating profitability.

I'd now like to review several business highlights.

As we previously outlined, we characterize our business along three strategic product areas, and I'll comment on each.

First, front-end modules.

These encompass our portfolio of power amplifiers and switches.

Second, RF subsystems, which include the world's most highly integrated direct conversion transceiver, and finally, cellular systems, where we offer the industry's most comprehensive solution, including base band DSP and protocol software.

First, within the RF front-end module area, our portfolio of power amplifiers was up roughly 50 percent on a year over year basis, clearly underscoring our market share gains.

During the quarter, we reached a key milestone.

We shipped our 275 millionth power amplifier -- 275 million.

And our early investor in power amplifier module technology has clearly set the industry benchmark in terms of functionality, performance and cost.

Today we are well down a long learning curve, and are now exploiting the unique cost and logistical advantages of our back-end integration strategy.

In particular, we're leveraging the proximity of our world-class Newbury Park, California HBT fab to our state-of-the-art Mexicali, Mexico module manufacturing operation.

And we're now maintaining a one-week lead time edge or advantage, relative to our competitors, who typically use Far East packaging vendors and then bring the product back into the United States for test.

We don't have to do that.

We're capitalizing on our low cost, in-house laminate manufacturing capability for the highest possible level of semi-conductor integration, and we're consistently now achieving module manufacturing yields of over 95 percent.

Consistently.

And we delivered gross margins above our corporate average.

Our power amplifier products exceeded the 44 percent wireless margins for the quarter.

We're quite proud of this particular accomplishment.

As you are all well aware, where you have capacity and where we have high contribution margins, and elasticity in demand – all of which exist in our business today – it's a marvelous opportunity to take share, and we're exploiting our advantages to do just that.

To date, this technology leadership and cost advantage have translated into significant traction at LG, where we today supply roughly three-quarters of their CDMA volume; at Nokia, where we are supporting half a dozen new CDMA 1x phones going into production this quarter; at Samsung, across virtually every single CDMA handset they offer, plus several new GPRS phones.

Now, these new PA designs for GPRS are part of our own system solution, and also, for the first time, designs based upon competing base bands.

At Sanyo, within a number of CDMA handsets, including their flagship 5300 series with integrated camera, as well as their newest 8100 series.

And at Sony Ericsson, we're supporting basically all of their high volume GPRS phones.

And of course, across a growing list of ODM's, including [Appeal, VenQ, ComPow, ChowMay, Pantek and Quanta] [phonetic].

On the CDMA side, our 4x4 mm power amplifier module volume eclipsed our 6x6 modules for the first time last quarter.

This is just as our competitors are beginning to ramp 4x4 millimeter devices.

And now we're supplying the world's smallest CDMA PA in a 3x3 mm footprint.

We're the only people in the world to have that size.

On the GSM front, PA module design win activity has been robust, particularly with our recently released 8x10 mm quad band solution, featuring integrated power control.

With over 20 design wins, we intend to commence initial shipments in the current quarter, and ramp strongly during the back half of the year.

Further, we have once again pushed the envelope of front-end integration; this time, by combining our leadership amplifier, our switch, and our in-house LTCC capabilities, to create a GPRS RF transmit module, in a form factor that's 40 percent smaller than existing implementations.

Here again, we're well down the learning curve, and we're exploiting our cost advantages to drive a lower overall cost [filler] [phonetic] materials for our customers, while raising the integration level and the corresponding barriers to entry, through smaller and more highly integrated solutions.

And speaking of switches, while our core switch business was not immune from the seasonality given its leadership market share, we continue to gain ground in the 802.11 space.

During the quarter, wireless LAN-oriented shipments were up another 25 percent sequentially to greater than 10 million units, on the back of participation with Atheros, Broadcom, and Intercell reference designs.

It is particularly important that the industry migrates to higher day rate applications requiring compound semi-conductors.

Now, moving from RF modules to our RF subsystems business.

During the quarter we delivered a record number of GSM, GPRS, DCR's, growing north of 30 percent sequentially.

We've now surpassed the 10 millionth shipment mark, from the time of our product launch nearly a year ago.

This dramatic growth is being powered by several key OEM's and ODM's, including [VenQ, ComPow, LG, Panasonic, Quanta, SeyJem, Samsung and Siemens] [phonetic].

With over 15 customers in all, we anticipate our DCR will be the heart of some sixty handsets this year.

And I think even on a more exciting note, following our Single Package Radio launch last quarter, we are now gaining customer momentum.

I'm especially pleased to report that we have secured our very first set of SPR design wins, from three leading ODM's, and they're targeting handset launches early next year.

Our dime-sized Single Package Radio represents, we think, the ultimate fusion of Skyworks' core capabilities, including leadership components, process technologies, and packaging.

It encompasses our P-Hemp switches, detectors and filters, our gas HBT power amplifier, and our bisemous direct conversion transceiver.

This is all on a single substrata package that is manufactured and tested in our Mexicali module manufacturing operation.

As one of our highest product development areas, I believe that this radio in a package solution best exemplifies the synergy we created during the merger.

And finally, within our cellular systems business, our compete chip set solution units grew by 15 percent sequentially.

This was driven by multiple phone launches at several new ODM's and contract manufacturers.

Some models have already arrived on store shelves, and in virtually all cases, they are branded by our customers' customer, and then some of the models include [K-Jian K-508 phone, Mikaka D108, the Soundtech GPRS 699, and the Vitelcom GPRS TSM3] [phonetic], to name a few.

All of the phones I've just mentioned are based upon Skyworks' complete antennae to microwave systems solution.

And based on the current design wins, we anticipate ramping to over forty phones exiting this year.

This growth demonstrates the traction of our approach, particularly in addressing the increasing trend of traditional OEM's shifting to low-cost suppliers around the world, at a time when ODM and contract manufacturers are seeking partners with system level expertise.

In fact, our sequential growth would have been far greater, were it not for our product transition at Samsung, one of our largest system customers.

This was a transition from high-end feature-rich, yet low volume GSM models, like the T-208 in China, to higher volume GPRS models.

As we've discussed in the past, we commenced initial GPRS volumes to Samsung last quarter.

They're now ramping, and we anticipate a very strong second half in support of more than 10 models this year.

And building on our earlier five-chip antenna to microphone system, last quarter we began sampling a three-chip complete GSM GPRS system, incorporating our base band processor, mixed signal device, and the signal package radio, as well as our own software protocol stack, which has now been approved on 70 networks in 50 countries.

This level of hardware and software integration is simply unparalleled, and is enabling both established OEM's like Samsung, as well as new ODM's and contract manufacturers, to move from zero start to handset production in six months.

And this is our core cellular system value proposition.

So to recap the quarter, our power amplifier modules were up more than 50 percent on a year over year basis, and our margins were north of our wireless average of 44 percent.

Our 802.11 switches grew, with participation on several major reference designs.

With our direct conversion transceivers, our units were up more than 30 percent sequentially, and our Single Package Radio gaining design momentum in our first production design wins.

In cellular systems, we're launching new customers and successfully transitioning our lead OEM, Samsung.

I'll now turn the call over to Paul for his comments.

Thank you, Dave.

Revenues for the second fiscal quarter were $157 million dollars, up 22 percent from combined company year-ago levels.

Revenues from our wireless business were $144 million dollars.

In the context of the current market, we maintained revenue in what turned out to be a weaker environment than originally anticipated.

Although we experienced softness in CDMA at the tail end of the quarter, we were able to rely on our broad base of business to avoid seasonality.

More importantly, we successfully ramped in the key areas of direct conversion transceivers and complete cellular systems.

Meanwhile, assembly and test service revenues from Conexant were down more than 15 percent sequentially as expected, and as a result, aggregates revenues were down 2 percent sequentially.

Gross margin for the quarter was 44 percent, excluding Mexicali assembly and test services.

On an aggregate basis, gross margins were 64 million dollars or 40 percent.

This 270 basis point sequential expansion was achieved, as Dave has earlier mentioned, resulting from increased factory utilization, higher module yields, and stronger than anticipated execution to our set of cost reduction initiatives.

Research and development increased from $37 million dollars to $40 million dollars sequentially as we accelerated mass sets in preparation for various product launches, and completed some field testing of our GPRS solution in multiple geographical areas.

Meanwhile, SG&A expenses remained essentially flat quarter to quarter.

Pro forma operating income for the second quarter improved to $4 million dollars, versus $3.7 million dollars last quarter, and combined company losses of $23 million dollars during a year-ago period.

Interest expense for the quarter was approximately $5 million dollars, offset by interest income as well as other income of roughly $600,000, and provisions for taxes were $600,000 related to foreign income.

Accordingly, our net loss was roughly $1 million dollars, or 1 cent per share, and in line with consensus estimates.

Turning now to our balance sheet, we exited the quarter with cash and cash equivalents of $84 million dollars.

This was driven by positive cash flow from operation, offset by $13 million dollars of capital expenditure.

During the quarter, receivables of $122 million dollars increased $12 million dollars, as we launched several new Asian customers in a seasonally non-linear quarter.

Remember, seasonality is driven by traditionally low activity during the Chinese New Year, and an industry pause following a December quarter push.

Net inventories increased by $9 million dollars during the quarter, driven by three factors.

First, as we consolidated our Sunnyvale facility to Newbury Park, California, we built buffer stock to support one of our leading customers.

Second, we experienced a temporary product mix away from CDMA products near the end of the quarter.

And third, we're already planning for ramps of several new products over the coming months, particularly our front-end module and GPRS solutions.

Now, looking forward for the third quarter.

There are obviously unknowns surrounding the worldwide macro economy.

At the same time, several of our customers are facing lower Korean handset subsidies, slower than expected subscriber growth in China, and delayed launch in the India CDMA network.

Despite these uncertainties, we are planning for our wireless business to be flat to down 5 percent sequentially, with $11 million dollars contribution from our Mexicali assembly and test operation.

Assuming $150 million dollars in aggregate revenue, we would expect our gross margin to be roughly 41 to 42 percent within our wireless business and 38 percent overall.

Meanwhile, we are projecting operating expenses to decline slightly less than $57 million, as we continue to execute our cost reduction initiatives and tap additional merger synergies.

In turn, during a time of market uncertainties, we intend to maintain operating profitability.

Below the line, net interest expense in 'other' should be approximately $4.8 million dollars based on our outstanding debt, with taxes of $700,000 related to foreign income, all against approximately 140 million shares.

I'll now turn the call back over to Dave.

Thank you, Paul.

Well, overall I'm quite pleased with the team's performance last quarter.

And while the current environment presents challenges, the product traction I outlined earlier, coupled with the depth of our new customer engagement, sets the stage, we believe, for a particularly strong half of this year.

This wraps up our prepared comments.

Operator, let's open the line for questions.

Thank you.

At this time, we will open the floor to questions.

If you would like to ask a question, please the * key, followed by the 1 key (*, 1) on your touchtone phone now.

Questions will be taken in the order in which they're received, and if at any time you would like to remove yourself from the question in queue, simply press *, followed by 2.

As a reminder, please limit your questions to one, and one follow-up.

Our first question comes from [Cody Akery from Legg Mason] [phonetic].

Thanks.

Maybe, guys, you can go through a little bit of a breakdown on the disappointment for next quarter.

Are you seeing more weakness specifically continuing in CDMA?

Are you not seeing the ramp in the systems solutions that you expect?

Is it more Samsung?

We're just going to have some more detail in really why the decline and not the growth next quarter.

Well, I think if I were to try to characterize it in general, what we're seeing is with the local demand in Korea, from our vantage point, is low compared to what we had expected.

There are some subsidy issues there that you may have heard about.

With a change in regime, there's some uncertainty as to exactly which systems, which standards, are going to be underwritten.

We're seeing slower than expected subscriber growth in China.

And in fact, in India, where we saw our strong growth potential in CDMA network – that's still, we believe, going to happen; we're excited about it, but it's been a bit delayed.

So I think a lot of it has to do with the subsidies in Korea, as well as what we expected to see in China.

The other issue that we're, quite frankly, dealing with, is an awful lot of our product today is going into hubs, or it's going into consignment.

And so, as we see our customers' forecasts, those forecasts are now rolling up to the numbers we've discussed.

With respect to the cellular systems, our cellular systems ramp is really a second half of the calendar year event.

In the June quarter, we are going through the transition.

We've successfully gone through field trials, and those products are ramping as we speak.

They begin to accelerate at the very back end of this quarter, and we expect them to ramp strong in September and December.

So how much would you characterize your issues, whether it be declines or just flat next quarter, from CDMA versus GSM?

I would characterize the vast majority of it to be CDMA.

And then, can you give us just a little more detail on what is going on at Samsung specifically?

Obviously, the increase in the systems solution – it sounds like maybe there's a volume issue there as well, as you're going through this transition?

Well, in Samsung, it's kind of an interesting dynamic, and we've talked about this in the past.

Let me just give you a little bit of flavor.

First, on CDMA, we continue to support virtually every single Samsung phone with the power amplifier module, and now several of the products have our switch.

So from that point of view, we have a strong footprint.

On the GSM side, obviously we sell our power amplifier along with our cellular systems solution, but we're now beginning to ramp our GSM amplifiers with other people's baseband, so we view that as a positive.

It is a fact that in 2002, we expanded our GSM portfolio with Samsung, with several new color screen feature-rich high-end phones – the P202 is a good example – that's a family of phones.

And that product ramped.

While these phones are selling reasonably well, they're priced quite high.

They are feature-rich, high end phones, so the volumes tend to be lower.

Our competitors were, in parallel, ramping GPRS products which were priced at a midpoint, or at a lower point, in their product portfolio and therefore generating much higher volume.

But we have been engaged with Samsung for some time on GPRS, with the expectation that we would ramp several GPRS platforms.

We're doing that right now as we speak.

They've gone through field trials; we have orders, and we're ramping those beginning this quarter, with the expectation there will be at least 10 models in production for GPRS by the end of the year.

But it is a case that we're going through a transition this quarter.

Thank you.

Our next question comes from [Michael Masdea] [phonetic], from Credit Suisse First Boston.

Hi, this is Natalie Reagan for Michael Masdea.

Expanding on the Samsung question, I was just wondering if you could possibly give us an idea of what the incremental dollar was that has been delayed?

The dollar amount to your revenue.

I'm not sure I understand the question.

It's not a dollar delay; it's a transition from the GSM products, where the unit volumes are relatively low, quite frankly – we'd hoped they'd be a bit higher – but these are high-end phones, high-end color screen phones – and the ramp of the new GPRS model.

So I can't put a dollar figure on the delay.

It's really not a delay; it's more how they are positioning their product line-up, and those phones in which we participate versus our competitors.

Maybe if I can adjust it to say, what was your market share on the GSM side last year, when the GSM phones were running well?

And what do you anticipate by year-end for the GPRS phones at Samsung?

I think in the past, our GSM -- we've been engaged with Samsung for years on GSM -- and it's typically been about a third.

About a third.

Now, currently, GPRS, admittedly, we're not in high volume on GPRS at all.

So our GPRS share today – because we were ramping and participating in these high-end GSM phones – our GPRS share today of what is currently in volume production is low, and that is changing, as we spoke, as we go into those ten models.

So we're going from no models to ten.

Thank you.

Our next question comes from [Chris Castle] [phonetic] from Soundview.

Yes, hi, good afternoon.

Could you provide a breakout of revenue by product segment?

And I guess, if you could possibly do that for the March quarter and what your expectations are for the June quarter?

The product segments we talked about are -- our RF front-end is slightly over 50 percent.

Our systems product silicone based are roughly a third, a little over a third, and that's our cellular system and DCR.

And the balance being infrastructure and 802.11.

And that's this quarter.

My expectation is going forward, that the second half of the year, you will see a stronger ramp in our silicon-based systems products, including our DCR, and including our cellular systems.

So you will see a disproportionate growth in those two areas.

Okay, but is it safe to say, with the majority of the weakness that you're seeing for the June quarter being CDMA-based, that revenue is coming out of the PA and switch business, basically?

I think that that's fair.

Remember, we have a very large footprint.

We've got about 60 percent market share in CDMA power amplifiers, and a strong footprint in switches as well.

And that is in the back half of the March quarter, and in the June quarter, where we see the least visibility and the slowest order flows.

So I think your assumption is exactly right.

Okay.

And were there actually cancellations during the quarter, on that CDMA business?

Or was it just turns didn't show up?

Well, at the tail end of the quarter, we saw turns that didn't show up, and we saw, in some cases, hub poles that didn't materialize to the extent that we had hoped.

Our next question comes from [Kalpesh Kapati from CE Unterberg] [phonetic].

Hi.

Question for Paul – how much was the gross margin benefit due to zero cost versus inventory?

You had about $2 million left on the books.

Right.

And Kalpesh, good question, because none of that benefited from this quarter.

In fact, we've dispositioned all of that inventory that was still remaining through a scrabbage.

Again, virtually those emanated from back a couple of years ago, in which there was a write-off, a substantial write-off, and over time, there has been some sales – some last quarter, as you know, and also some were scrapped.

And then we finally scrapped the residual amount.

And then the next question, Paul, is, can you walk us through the cash flow statement?

You mentioned that you were positive cash flow offset by $13 million in cap ex, to get $10 million down in cash?

Well, essentially, just starting with the operating, the working capital, combined, made it such that the cash flow was positive.

And then cap ex – taking into consideration depreciation – is part of the overall contribution to cash from operation, as a traditional statement is developed.

Thank you.

Our next question comes from Dale Sou from CIBC.

Yes, a follow-on here on your CDMA.

Could you give us an indication of what percentage of your revenues were CDMA related in your first quarter?

And then what you anticipate that going to in the June quarter, so we can get a feel for how much of this softness is associated with CDMA?

Our CDMA volume today is around a third.

Around a third.

And that's down slightly from what it had been in the past, but it's running about a third today.

And so we can anticipate that almost all of the difference, the down flat plus to minus 5, is going to come out of the CDMA portion, and therefore if indeed you're flat to slightly down, the GSM portion could grow in the June quarter?

I think it's the right assumption that the majority of the change is CDMA-based.

But I do want to highlight, Dale, that in this quarter, with flat revenue and a seasonal down quarter – it is a different dynamic for our company today.

There are visibility issues on CDMA, and I believe that most of the issues we're facing today are CDMA based, and the Far East.

Thank you.

Our next question comes from Blaine Carroll from Adams, Harkness & Hill.

Yes, just real quickly, Dave – any issue with SARS as you're talking about the Asian market?

I don't think so.

I mean, there's nothing specific about SARS.

I think what we can really get our arms around is the fact that again, in this last quarter, as Paul talked about, we did see, in the second half of the quarter, as others have seen, a rolloff in our CDMA book and ship in some of the polls.

Our expectations for CDMA weren't met.

Quite frankly, we were fortunate where we have enough diversification in other products that were ramping to offset the down in CDMA.

So as we look at the June quarter, I think that SARS is not one in which I would be able to hang our hat on in any meaningful way as impacting operations.

It's much more the situation where we believe in the short term, the local Korean government needs to sort of those areas and standards that are going to be subsidized.

I think India, there are some roaming agreements that need to be settled within India, and that has impacted the launch of some of these CDMA products.

I believe that is absolutely short-term in nature.

Okay.

That was actually just a quick question, so I'm hoping that didn't count as one of my questions.

One of the things you mentioned is that you're going to use your cost reductions in order to gain share.

Could you talk about the pricing environment and where you see prices going forward, and if that is sort of what you're alluding to on the gaining share due to cost reductions?

Well, the pricing environment has been fairly consistent.

It has been in the teens, overall.

However, in the single-point product, that is, the power amplifier module, there are competitors that are looking to gain market share.

And my comments about having a low cost structure is, we do in fact have capacity.

We have very strong margins, very high yields, and that gives us a marvelous opportunity to continue to expand gross margins and bottom-line profitability in an environment where there is elasticity.

And there is, in fact, elasticity in the power amplifier module.

So that's what I'm talking about.

Okay.

And then on the ODM side, what percent of your business is ODM's?

And where are the ODM's ramping to from an industry standpoint?

That's a good question.

We're north of 20 percent today.

A little over 20 percent in our total ODM space.

You know, I'm a real proponent of the fact that not only ODM's but contract manufacturers are going to continue to grow.

We saw last year about, we think, a 50 percentage or so, in the last couple years, on a compounded basis.

The contract manufacturers are getting in here big time, and of course, they're the 800-pound gorillas with respect to high volume production.

So I think it's going to continue to grow much faster than the overall market.

There is an interesting dynamic – a lot of the ODM's we're addressing today that we're ramping are not only Taiwanese-based in Korea, but China.

So you are seeing an interesting dynamic regionally, where many competitors look to enter the ODM space.

I'm particularly intrigued and excited about contract manufacturing as well.

Thank you.

Our next question comes from [Ambrose Vribastaba] [phonetic] from GKM.

First question is actually just a checklist of things I might have missed;

I apologize if you already mentioned them, Dave.

Top customers?

And also [P-modules] [phonetic] – did I hear it correctly, P-modules gross margin was north of 40 percent?

And I'm sorry – I'll just go with my follow-up question.

The real question I had was, I would like your comments, Dave, on something that Mote said on their call this morning.

Mote has been a greater than 10 percent customer of yours.

Mote said that by the end of the this year, they expect over [35] [phonetic] percent off their GSM/GPRS handsets to use their I-250 chip set.

And if you could please comment on how that impacts your exposure to Motorola

Our top five customers are Samsung and Motorola are among our 10 percent customers.

And we're really quite pleased that we've now added LG to that list, so LG is a 10 percent customer.

So today it's Samsung, LG, Motorola, followed by Sony Ericsson, VenQ, with Nokia not far behind.

So that's the customer breakdown, and the big change there being LG entering the 10 percent list.

With respect to the I-250, you know, our relationship with Motorola has been long and deep.

We've been a competitor; we supply into their component module manufacturing group; we, for example, put switches into the front-end module that makes up the I-250 – those are our switches.

We also have a competing product with a front-end module that mates up against the baseband.

We're selling power amplifiers modules in many GSM designs, and we're looking to penetrate – we just had our first design win on CDMA within Motorola.

So we've had a marvelously complex and long relationship with Motorola, and I expect that to continue.

We're working very closely with them today on some of their newest product launches in their system redesigns going forward.

Thank you.

Our next question comes from Sam May from Piper Jaffray.

Good afternoon to everybody there.

The first question is for Paul – R&D was basically $37 million, up to $40 million, and then you're guiding for it to be back to $37 million.

Is it reasonable to model it to come back that far that quickly?

Yes, I believe so, Sam.

You know, several factors, as we mentioned, took place during the quarter that as we were developing and launching some new products, particularly in the cellular system, and also in the RF, that we had a number of mass sets that were higher than normal.

So one-time charges as well as field testing, particularly in the cellular system, where there's a lot of field testing, and multiple location took place.

So there were some extraordinary items.

As well as, as we focus various activities within the organization, we continue to look for opportunities that will reduce costs.

That combination, we feel comfortable that the costs will come down to that first quarter level type thing.

Did you not anticipate the rise in R&D for the quarter, to the extent that it did rise?

Sam, let me answer that.

No, we didn't.

In fact, it was both an opportunity – but obviously, an expense.

We have several -- several -- new customers that are ramping our GPRS chip set solution.

And we are ramping very quickly those designs going through field trials and network interoperability testing in many countries right now, and we were doing that heavily during the March quarter.

That activity was quite a big stronger than we expected.

We've also seen some opportunity, quite frankly, earlier, for the Single Package Radio than we had thought.

And we're rolling out a new higher performance design of the single package radio.

So we were running masks very aggressively and we had engineers involved in the network interoperability testing and there's cost that's associated with that.

So that was – it's both a positive in that it is all – all – oriented toward customers that realistically ought to be ramping at some level in the second half of the year.

Not June so much, but definitely September or December.

Thank you.

Our next question comes from Jeremy Bunting from Thomas Weisel.

Hi, this is Reuben for Jeremy.

I have a question on your RF subsystems.

And specifically at Samsung, I was wondering, when you mention that the DCR's are shipping into Samsung, is that as part of the complete cellular system, or are those DCR's going into handsets that are using [indiscernible].

They are incorporated in our cellular system solution and not yet mated with other basebands, like our power amplifier is.

So our expectation is that that will happen going forward.

You know, Samsung has begun to view us, on GSM, as they have consistently on CDMA, as not only a complete system solution provider, but as one who could give a best-in-class performance when they choose to use someone else's baseband.

Okay, thanks for clearing that up.

And then, it looks to me like the units shipped, actually, for the March quarter may have fallen off a bit.

Can you talk about that, and then speak about where you think what the growth could be, going forward, for the rest of the year?

Thanks.

I have to help you understand the unit volume – the fact is, the units have not declined sequentially.

The unit volume did not decline sequentially in the current quarter.

Okay.

Was it 10 million total shipped for the quarter that you said?

Or did you say that it surpassed 20 million total shipped?

Are you talking about 802.11?

No, no, for the DCR's.

Oh, I'm sorry – no, no, it's over 10 million cumulatively.

The number was up 30 percent quarter over quarter.

I'm sorry – I misunderstood the question.

We were up about 30 percent in unit volume, from the prior quarter, sequentially.

But remember, this product line only shipped in the June quarter, if you think about the first – the quarter of our launch – about 500,000 units, and that launched to almost 2 million, and it's been steadily climbing ever since.

So we were up 30 percent sequentially in DCR unit volume.

Okay.

Thank you.

You're welcome.

Thank you.

Our next question comes from Mark Roberts from Wachovia Securities.

Yes, thank you, good afternoon.

Most of my questions have been answered.

I do have one question.

Recently Samsung announced that they are going to start using their own baseband processor for some of the CDMA phones.

Are they going to be using your power amplifier module in those phones?

Well, we sure expect them to.

They're using our power amplifier modules in virtually all of their CDMA phones.

It is, by the way, an opportunity for us in our FIC's, as we see them beginning to design around their own CDMA baseband solutions.

So we're a partner on Samsung on both power amplifiers and RF IC's.

Okay, but has there actually been a specific process that you've had to go through to qualify to marry up with their baseband?

I'm sorry, I just can't comment on that – that's proprietary.

Okay.

Thank you.

Our next question comes from Joseph [Toll] [phonetic], from Lehman Brothers.

Just a question, Paul, on the inventory.

I think you did a good job explaining where the increase came from.

Could you quantify how much of the increase inventory was just from CDMA products, and how much of it may be from new products like the DCR or full systems solutions?

In the CDMA, roughly a couple million dollars was related to that particular area -- $2 to $3 million dollars, roughly speaking, was in the CDMA specifically related.

And the DCR.

Of those actually in the subsystems or the systems area was probably about the same.

It was probably equally distributed now that I look at it, in terms of what that $9 million dollars consisted of.

Great, thanks a lot.

Thank you.

Our next question comes from James Faucett from Pacific Crest.

Good afternoon.

Just a couple of clarifying questions, that I guess just delve into some of the comments you made earlier.

First of all, I guess you said that about a third of your sales in the quarter came from a CDMA interface.

Can you give what the percentages were for the other area interfaces, including wireless LAN?

And then I also just want to make sure that I understood – you made the comment that you thought that there was weakness in CDMA and the Far East.

Is that specifically CDMA in the Far East, or are you saying CDMA and the Far East, which could include CDMA and GSM?

And then finally, as far as the weakness that you're seeing by geography – are you seeing weakness already in your orders and in the anticipated order pattern from customers, or are you just anticipating that those things are going to decline?

Thank you.

The balance is GSM.

We have a little bit of [indiscernible], but the balance is GSM/GPRS-related standards.

Our 802.11 and infrastructure business today is in the 10 percent range.

So that's the breakdown.

I think the softness that you're referring to – and remember that we said we were flat in revenue in a sequentially down quarter in March; in the June quarter we've guided our wireless business to be flat to down by 5 percent, and it is predominately CDMA in the Far East.

It is predominately CDMA in the Far East.

Okay, perfect.

And then as far as just to clarify – so what you're seeing then, when you say you're seeing the weakness there -- you've got customers coming back to you, whether it be hubs or end customers, coming back and saying, "Look, we just don't need as much of the product as we had anticipated over the next several weeks or months."

I think that's right.

In some cases, it's the ordering pattern you see through hub folds, and some of it is simply the cues we've got from our customers.

And as I've said, I think you can characterize most of the issues, I believe, as being short-term in nature.

But I think you've characterized it correctly.

Thank you.

Our next question comes from [Sasha Chilara] [phonetic] from W.R. Hendricks.

This is John [Indiscernible] for Sasha.

Quick question on your system solution.

Can you talk about volume projections going into '03?

Or talk qualitatively maybe about the contribution to business?

We will have -- roughly 40 million handsets have been committed to our chip set design; that's roughly doubling from today, and that's where we'll exit this year, we believe.

So that's why I commented earlier that the cellular systems business, along with our integrated front-end – our DCR and our Single Package Radio – but in this case, the cellular system – will grow faster than our component business.

So you guys are going to see 40 million handset volume on your system solution this year?

Is that correct?

It would be 40 handset models [simultaneous speakers] our system solution by the end of the year, where we have 20 today.

Okay.

Thank you.

Our next question comes from Dale Sou from CIBC.

Gentlemen, just a follow-up on your outlook for the quarter.

You're saying that when we look at this CDMA out there with your various customers, how much of this would you ascribe to your being conservative on the outlook, and how much do you ascribe to your customers actually telling you they don't want it or they're not planning to ship it in the quarter, traditionally since you don't have a whole lot of visibility.

Aren't you kind of being a little bit cautious here?

Can you give me a little bit of a better feel?

I think using the term 'being a little bit cautious' is a fair comment, Dale.

I mean, if you look at what's happening today, and what we saw materialize in the back end of the March quarter, I think that's a prudent place to be right now.

It is a fact that you are seeing the impact in Korea of the subsidy issue.

And you're seeing the impact, in some cases, although I think it's pockets, in China – again, I think related more to subsidies than anything else.

And this roaming problem in India is going to get resolved, but we've seen some impact with a couple of customers.

And we talk to our customers every day about this.

So it's a combination of the way we would roll our forecast today, given our customers' recent comments and what we're seeing in terms of hub fold.

And I think it is being cautious, but in my view, given the environment we're in right now, it's probably prudent to be cautious.

Thank you.

Our next question comes from Kalpesh Kapati of CE Unterberg.

Dave, you mentioned that you have some hub arrangement.

I recollect that you had hub arrangements in Motorola and Nokia.

Are you on the hubs with Samsung as well?

Not with Samsung, Kalpesh, but we are with several customers.

For example, Nokia is a hub customer of ours as well.

Thank you.

Thank you.

Our next question comes from James Faucett from Pacific Crest.

Thanks.

I also just wanted to ask a follow-up question.

You said in the quarter that ODM's and contract manufacturers were a little bit more than 20 percent of sales, and they're primarily out of Korea and Taiwan, with China starting to ramp.

Motorola commented earlier today that that's the one area of the world where they're seeing substantial inventories right now.

Has this started to affect at all the outlook of your ODM and contract manufacturing customers?

And if you haven't seen it yet, what's the scenario you expect to just see it play itself out as you try to navigate that situation?

Thanks.

You're welcome.

That's a great question.

You know, the fact is, there are many new ODM's in China that are entering the market, and I think the short answer is, we've taken the phenomenon you're talking about – the concerns for inventory being built with this ODM's – interest consideration as we put this forecast together.

We've at least attempted to understand that.

You know, you truly have to try to understand what the end market demand is; who are the OEM customers, or in some cases, branded by a carrier somewhere in the world – who are those customers?

And try to be certain that there is overcounting that's going on by several ODM's going after the same socket.

We think we understand that pretty well; we've got full-time residents in these countries that are dealing with these issues on a daily basis.

We understand that really quite well, and we believe we've taken all of that into consideration in providing this guidance.

Okay, and just to clarify what you're saying there – so you're taking into account what [double-counting] [phonetic] may be taking place.

Are the ODM's, from what you're seeing, specifically on this issue of branding with carriers around the world – are they finding much success in getting outside, especially the Chinese market and some of these other domestic markets, into other areas of the world, I guess across the board?

Or are they still pretty much limited to those geographies, or the countries from which they're coming?

I think there's been traction elsewhere in the world, but it is predominately, in that part of the world, and in some cases, they're selling into, for example, a Chinese handset OEM, and in some cases it's going directly to the carrier.

But I would say that the traction has been predominately in that part of the world.

But it's been elsewhere as well.

Okay, great – that's very helpful.

Thanks.

You're welcome.

Thank you.

Our next question comes from Sam May from Piper Jaffray.

On cap ex – you said $13 million during the quarter, Paul.

Can you review cap ex plans for June and September, to take us through the balance of the year, and what you think that does to cash levels?

The cap ex, we expect will be lower than our depreciation, which is currently somewhere around $9.5 million dollars, in both of the next two quarters.

And so again, as we look forward on the cash, with profits at the current levels that we're projecting, we still have interest expense that we'll have to cover, and we'll begin improving back our DSO's, as well as our inventories.

You factor those in, and that will be the factors that will go into our cash flow.

Right.

Because with a 5 percent down revenue and 38 percent margin, and operating expense at 57, that leaves flat operating profit.

And then your guidance was for, I think, maybe $4.6, $4.7 million in net interest expense.

So you're going to burn that amount of cash this quarter, at a minimum, right?

That's correct.

And you think your cap ex per quarter will be down from $13 million to a $9 million range?

Yes, it will.

But also, we'll see improvements in our DSO's, as they were exceptionally high, as well as the inventory turns should begin to be some of the offset to those factors. s

Thank you.

Mr. Aldrich, there are no more questions at this time.

Well, thank you very much.

That concludes our call today.

And on behalf of the entire Skyworks team, thank you very much for your participation, and we look forward to updating you on our performance next quarter.

We'd like to thank you for participating in today's conference.

You may disconnect at this time.