思佳訊 (SWKS) 2003 Q4 法說會逐字稿

Good day everyone and welcome to today's Skyworks Solutions Fourth Quarter FY 2003 Earnings Conference.

At this time I would like to turn the call over to the Skyworks' Senior Director of Investor Relations, Mr. Thomas Schiller.

Mr. Schiller, please go ahead sir.

Thank you Jayson.

Good afternoon everyone and welcome to Skyworks fourth 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 the review of our fourth 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 from those projected as a result of certain risks and uncertainties including 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 have used in the past.

Please refer to our press release within the investor relations area of our Company's website for a complete GAAP presentation.

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

Thank you Tom and welcome everyone.

Today we reported fourth quarter fiscal '03 revenues of $150m and a net loss per share of 7 cents.

As we expected and discussed at our last quarterly conference call, during the quarter we experienced dramatic revenue growth and new product traction with virtually all key customers, while reaching the final stages of excess channel inventory burn primarily in China.

More specifically, our performance was driven by four key factors; first, record direct conversion transceivers' shipments, almost 8m units and up 30% sequentially.

Second, significant GPRS cellular system ramps at our lead customer Samsung.

Third, CDMA PA module and RF subsystem traction at a tier one handset OEM as new phones are launched at Verizon, Sprint, and internationally.

And fourth, volume production of the world's most highly integrated GPRS front-end module at another top-tier customer.

From a key account perspective, we grew aggregate revenues as the world's top five handset OEMs namely Nokia, Motorola, Samsung, Siemens, and Sony Ericsson, by more than 25% sequentially.

Our revenue growth was tempered by what we had anticipated when we entered the quarter, primarily the China market as second tier OEMs and ODM's depleted excess handsets and component inventories and a 20% sequential drop in our non-strategic assembly and test services area as connects sources from additional suppliers.

When excluding assembly and test activity, our wireless gross margins were 38% during the quarter, while aggregate gross margins were 35% and inline with our guidance.

Operating expenses were $57m and slightly better than our forecast as strong cost structure management allowed us to dampen the impact of an additional week of cost during the quarter.

In turn our operating loss of $4.8m resulted in a net loss per share of 7 cents and that's ahead of our consensus estimate.

On a full year basis, 2002 combined Company revenues were $543m and grew to $618m in 2003.

More noteworthy, operating income improved from a loss position of $72m in '02 to operating profitability of $3m during '03.

This dramatic operational improvement exemplifies the hard work our team has invested in focusing our product portfolio, our organization structure, and our financial model since launching Skyworks now just over one year ago.

With the challenges of fiscal year 2003 behind us, we entered the first quarter of '04 with strong visibility and a record backlog for us and that record backlog is driven by four things, first of all, normalized inventories levels; second, an exciting product pipeline; third, the ramp of new design wins; and fourth an accelerating wireless handset market.

I'd like to now review some drivers behind this improving business outlook and as usual I'll characterize our business along four strategic product areas and I'll comment briefly on each.

First, front-end modules; these encompass our portfolio of Power Amplifier and Switch Solutions.

RF subsystems, which includes the world's most highly integrated direct conversion transceivers and single package radio.

Our Cellular Systems business where we offer the industry's most comprehensive solution including base band, mixed signal, and protocol software.

And finally Cellular Infrastructure and Wireless Data which includes base station components in our emerging lineup of leadership 802.11 front-end modules and product.

Okay, first within our front-end module area.

We continue to gain ground in virtually every major account including Nokia, Motorola, Samsung, Siemens, Sony Ericsson and LG.

While scoring some key design wins with ODMs such as Appeal, [Arema], BenQ, Compal, Chi Mei and Quanta.

And I am especially pleased that we can now include [Quesera] among our list of leadership handset customers as just last month we began volume CDMA shipments supporting a number of their new models.

At the same time, we launched volume shipments of our complete GPRS front end module at a tier one OEM.

Now this particular win leverages a longstanding relationship and takes advantages of our unparallel level of RF integration where we combine our power amplifiers, switches, in-house multi chip module capability and systems expertise to complete a -- to create a complete RF solution in a form factor today that is 40% smaller than existing implementations.

More specifically, this win represents a tremendous volume opportunity for us on the order of tens of millions of units as we will support a large number of their new handsets slated for introduction this quarter and throughout 2004.

Turning now to our RF systems business, GPRS single-chip direct conversion transceivers were up again strongly to almost 8m units this quarter.

Now this represents more than 300% year-over-year growth and is driven by ramps at BenQ, Chi Mei, Compal, LG, Quanta, [Seism], Siemens, among others.

Building on this success, we've scored several key design wins last quarter with are complete quad capable RF subsystem for EDGE applications.

This highly integrated chip set includes our single-chip direct conversion transceiver housed in an 8x8 package, our power amplifier module and our PA controller all optimized to save handset designers significant space, cost and design-time to market.

At the heart of our solution is the patent pending Polo Luke transmit modulation architecture, which minimizes the number of external components required to build a mobile handset.

This product interfaces to virtually every E-GPRS baseband solution.

I'll give you a brief update on our single package radio, you might remember that this product represents, I believe, [deep] fusion, the quintessential fusion of our core capabilities including leadership components, process technologies and packaging.

Specifically this product includes our PHEMT switches, detectors and filters, Gas HBT Pas, BiCMOS Direct Conversion Transceiver Technology, and packaging and testing in our Mexicali Module manufacturing operations.

I'm pleased to report that last month our SPR successfully passed field type approval with one of our leading ODM customers.

Now by knocking down this key gate, we're clearing the way for a number of follow on ODMs, contract manufacturers and OEM to design in what is today the highest level of integration on the planet.

Next, within our cellular systems business, for on the one hand we supported GPRS ramps at Samsung including models now targeting Europe, Russia, South East Asia, South Africa and the Middle East, at the same time we scored follow-on design wins with the Telecom to augment their line of phones based on our systems solution including GPRS TSM 3, TSM4 and TSM5.

These models are targeting Telefonica subscribers predominantly in Europe and Latin America.

Now as strong as these trends were and as we anticipated and guided when we entered the quarter.

We did experience softness across our base of second-tier OEM and ODM customers, who spent the quarter burning through excess handset and component inventories in China.

Keep in mind; we now support the majority of the nation's leading suppliers with our complete system solution and today eight out of ten of the top domestic handset suppliers with our RF product in China.

Now, while this market is experiencing some growing pains, we remain convinced that in the long run, the long-term opportunity is within China.

Accordingly, we will continue to invest engineering, marketing, and financial resources particularly as this class of customers is demanding higher levels of system integration.

At a time when in the case of indigenous suppliers, their government mandates with an increasing amount of handset volumes originate locally.

Skyworks will be the beneficiary of these trends, and further we expect sequential growth from this customer base beginning in Q1 and accelerating throughout FY '04.

Finally, with our cellular infrastructure in wireless data business, we continue to expand our footprint on the wireless LAN front.

During the quarter we shipped our 75m switch and control solution for 802.11 applications and captured several significant design wins with the introduction of the world's first front-end modular for wireless LAN.

Much like our integration strategy within our handsets, here we are combining our leading power amplifiers, switches, and filter functions into a low cost 8/10 millimeter package.

But unlike our handset strategy, within wireless LANs, we are focusing on participation on the front-end domain only and partnering with leading transceiver and baseband suppliers on reference design, while also selling directly to networking customers.

Just earlier this week we introduced a complete family of front-end solutions for every 802.11 standard in application.

And given our early participation on virtually all high volume reference design with components, we see tremendous opportunity to capture additional RF semiconductor content and I -- and look forward to this particular product, driving significant volumes next year.

Okay, let me recap.

First, more than 25% sequential growth at the world's top five handset OEMs in the quarter; we expanded our front-end modules across all key accounts, launching our front-end modules at a tier-one and adding [Queasera] to our volume customer list.

Our direct conversion transceiver units were up 30% sequentially.

Our Single Package Radio, SPR passed our FTA, and we are now designing in new customers.

Our cellular systems are ramping at Samsung and the Telecom, and I anticipate a China uptick in Q1, accelerating throughout '04.

In our wireless LAN business we shipped our 75m switch and PA solution, and we are now expanding our wireless LAN front-end module portfolio in the more integrated front-end modules.

Okay, I will now turn the call over to Paul for his comments.

Paul.

Thanks Dave.

Revenue for the fourth quarter fiscal quarter were $150m.

Gross margin for the quarter was 38% when excluding Mexicali assembly and test services.

On an aggregate basis, gross margin was $53m or 35%.

The sequential contraction was a result of increased overhead cost from the fourteenth week in the quarter.

Meanwhile, operating expenses of $57m, increased just $1m a quarter from $56m a quarter, as a strong management lessened the impact of the additional weak cost within the period.

In turn, we've recorded a $4.8m pro forma operating loss during the quarter.

Interest expense through the quarter was $5.6m, while net other expenses was approximately $400,000 with a tax credit of roughly a million dollars.

As a result our pro forma net loss was $10m, or 7 cents per share and ahead of the first call consensus estimate.

Turning now to our balance sheet, we strengthened considerable through on the quarter.

We exited the quarter with cash and cash equivalent of $171m, a $106m sequential improvement driven by $102m from an equity offering, $42m from our credit facility, $2m from net CAPEX as $7m of capital additions were offset by depreciation of $9m, less a $10m pro forma net loss and $30m in support of working capital.

On the working capital front, we've lowered our inventory by $4m sequentially and increased turns to 6.7 times, which is solid progress towards our goals of 10 times, particularly considering we expect much higher revenues with end of December quarter.

Meanwhile, accounts receivables increased by $8m sequentially, as September was our strongest month of the quarter ahead of the Christmas selling season, handset build.

And Far Eastern customers who constitute about 60'% of our revenue have longer payment cycle.

And now our first quarter fiscal 2004 outlook.

Based on strong design activity and order trends across business, we expect to grow revenues 10% sequentially in the December quarter.

Assuming revenue of $165m, operationally, we anticipate that our gross margin will expand to roughly 40% within the wireless business and 38% on an aggregate basis as revenue from the assembly and test services remain flat sequentially at approximately $10.5m.

At the same time, we are forecasting a sequentially decrease in operating expenses as our prior quarter level was unusually high given the additional weaker cost within the quarter.

In turn, we expect to begin to demonstrate our business models leverage with an expansion to a 4% operating income margin.

And for the first time in Skyworks, bottom-line net income of 1 cent per share.

And with a significant sequential improvement in DSO this quarter, we intend to generate positive cash flow.

That wraps up our prepared remarks, operator let's open the lines for questions and answers.

Thank you sir.

The question-and-answer session will be conducted electronically today.

If you do have a question please signal by pressing "*" "1" on your touchtone telephone, and also please limit your line to everyone, that given time constraints you will be allowed to ask one question plus one follow-up question.

Once again, that's "*" "1" to ask a question to ask a question.

We will go now first to Dale Pfau with CIBC World Markets.

Good afternoon gentlemen.

Hi Dale.

Hi.

If you could help me out here and give us some indication of what percentage of revenue is your Chinese ODM -- OEM customers were in the third quarter and then in the fourth quarter, so we can get idea of the sequential drop and then what percentage were the top five handset manufacturers in the quarter?

And then Paul just for a reference, what was the Conexant packaging revenues in the quarter, I missed that?

Okay, let me start with that.

In the quarter the revenues for Conexant were $10.5m, approximately.

Dale, the -- we were roughly 15% of our revenue, was attributable in the June quarter to these OEMs and ODMs orienting their business either in China or selling into China, about 15% in June, that number was down by about 50% in September to around 7-8%.

As I mentioned, right now order flow looks to be up somewhat in December and then accelerating in the March through the balance of the year timeframe.

I apologize -- your top five customers, did you -- were you taking about for the total company or in China?

No that I was -- I was referring to -- you said that your top five handset manufactures revenues grew 25% sequentially, were they as a percentage of revenues in June and September?

As the cause was Nokia, MOT, Samsung, Siemens, and Sony, Eriksson.

And Samsung was north of 20%;

MOT was 11, north of the 10%.

And the remaining three were all close to 10 but none of them hit the 10% range, Dale.

And next we will take a question from Chris Caso with Soundview Technologies.

Yes, I wondered if you could breakout percentage of revenue by Air Interface, CDMA versus GSM and then sometimes you also breakout by product segment also.

By Air Interface standard, it's about two-third GSM and one-third CDMA.

Of course, by product line it differs from that and from a product line standpoint, we're just under half front-end modules now, about 45% and our RF subsystems and cellular systems are [inaudible] silicon product areas are around 40% and wireless infrastructure and data are the balance in the mid-teens.

Right, did you see any shift in any of those numbers during the quarter as resulting from the inventory burn and I guess, you know, the rebound of that coming this quarter?

Not a major shift, I think the impact of China was felt more dramatically in our systems business, but we participate in eight of ten of the top Chinese ODMs, OEMs with RF and/or systems product, it was more of an impact in our cellular systems revenue stream.

And overtime for the last few quarters, Chris, we have seen more total revenue in the RF subsystems and in cellular systems business, but it's been a fairly graceful change.

And of course, by the way, the vast majority of our RF subsystems today and cellular system include our RF product.

So I think about it -- we move up the food chain and we don't typically lose the PA, we gain a DCR customer.

But the DCR has a higher revenue right?

Next with Credit Suisse First Boston we have Max Schuetz.

Hi guys.

I had a question on the outlook going forward, it seems like, you know, looking at the guidance for your top five customers, which looks like that's about 50% of your revenue, you know, it seems to be suggesting a little more aggressive than the 10% of your guiding, especially if the China business which looks like it got cut in half in this quarter, started to go back into growth mode, so I just was wondering if you could give us a little more color on how you are building up to that 10% sequential growth?

Well, I'll try to answer this and probably Paul can add some color.

While we will grow strongly across those tier-1 accounts, we continue to take a somewhat conservative stance on the ODM side in general, you know, there are lot of new ODMs, a lot of -- several contract manufactures entering this space.

It's a fairly complex supply chain, there was inventory built, particularly in Asia.

So we're taking on fairly conservative stance on the ODM front.

The visibility is very strong among our top-tier customers, in that we are entering the quarter with very solid backlog.

We still believe that in -- the ideal in China would be to have perhaps as much as 1.5-2 months of inventory and we think that's still today around a quarter, around 13 weeks or so.

We've seen a lot of evidence of that, is still the case, it has come down by the way, I think it was substantially more than that.

And is very much a mixed bag, you got some customers who have obviously more than the average who are going to take some time to burn that down, others that are gaining orders for new phone design and so we see that mix.

It's a complex model, but that's the rationale, strong visibility strong backlog build at the top-tier and some conservatism still with our ODM and CEM channel, particularly as it relates for the Fareast.

Okay, does that mean China will be down again next quarter or flat or what will's your assumption there?

I think some of the ODM customers will be up, some we just don't have terrific visibility as we do in the rest of our business.

Now we will take a question from Ambrish Srivastava with Harris Nesbitt Gerard.

More light on the charges and what is the rationale behind combining the two biggest be two different businesses, either subsystems and the -- excuse me -- and the front-end, and also what are the charges that relate to the business impairments and infrastructure?

Okay, really with the -- let me answer the first question -- part of the question, if I understand the question because I think you were cut off at the beginning and it was regarding those charges -- the restructuring charges of $30m.

As that relates to it, it was a combination of both the intangible and fixed assets of our traditional infrastructure businesses.

You can recall last year in the merger, the -- it was a reverse accounting and Alpha was the acquired company, there were intangibles that were put on the books as a result of valuation of some of our traditional business.

As we looking moving forward and evaluate as we are expecting to do each year and look at that particular type of business, it became apparent to us that the recovery of those assets, both the intangibles and the fixed assets, were impaired and that's what caused a majority of that write-down.

With regards to the second part of the question, we recently have had merged from a customer point of view -- customer facing the front-end module in the RF Systems, which gives us the synergistic value in doing that, whenever you do that you get some valuation.

That's the minor part of that restructuring cost.

Okay.

Let me comment on the why, the RF -- what we are calling this business here as our RF Solution business, that clearly encompasses our power amplifier and front-end module technology in our RF subsystems and think about that as our DCR, and then our CDMA RFICs.

And there are a number of reasons for this change.

You know, we have now been a company combined for a little bit over a year and I see more and more that there are tremendous product, market, and application synergy to approach the market with an arsenal that includes best in class components as well as higher levels of integration for all things RF.

And so when we think about our roadmap today, if the customer wants to buy a TX module best in class, we want to be there with it.

They want to buy a single chip DCR and architect around a more discrete front-end, we will be there as well.

If they want to buy a single package radio, we want to be there with leading class components.

So having one application and marketing team face the customers is less confusing and more seamless to our customer base, thereby improve customer satisfaction and service and having a combined roadmap application and marketing team, we get tremendous leverage.

One of the leverage for us -- one of the significant reasons for the merger is as we drive the combination of things analog and RF or power amplifier switches and radios, on our [laminate] module capability, where we are vertically integrated with a very low-cost structure, we think we can put products on the table that our competitors can't touch from a cost and performance standpoint.

And this product line while giving us remaining -- will continue to give us focus at the component level is going to facilitate faster introduction of innovative RF solutions.

Next we have a question from Blaine Carroll with Adams Harkness and Hill.

Hi, guys it's actually Jed Dorsheimer for Blaine.

Just a quick question.

Could you talk a little bit about your supply agreement with [Copen] and there seems to be a little disconnect with respect to what they reported annual guidance of 10% sequential growth for your business?

I really don't want to comment on specific contract, but [Copen] is a major supplier in transforming to the majority supplier for these materials and we have had inventory balances of another supplier's wafers, I'm not sure what they said, but that's the story.

Alright, thank you.

You're welcome.

We'll now take a question from Cody Acree with Legg Mason.

Thanks.

Maybe you can go back and talk a little bit about how you see yourself exposed during the third quarter different from some of your competitors and may be even some of your customers?

Obviously it sounds like the OEMs did very well, but we have seen that now that you are kind of a ramping up the wireless earning season, we have seen some of your peers come in significantly different during the third quarter even those that have had OEM and second tier ODM, excuse me, ODM and second tier, third tier OEM leverage, can you tell me what your opinion is of why the difference in Q3 performance?

Sure, there are couple of, Cody, I think marked differences between ourselves and many of, I think, the folks that you are thinking about.

First of all, more than 60% of our revenue is shipped into Asia, we -- what we are talking about here is weaknesses within the Chinese ODMs, many of whom are complete cellular systems, procure our complete cellular systems.

So, you know, it's anywhere from mid to upper-teens in terms of dollars per phone.

So it's high revenue content.

We have much more China activities than any of our component competitors.

As and as I mentioned, we now support the majority of that nation's top ten local suppliers, people like [GAN] [Conca] [Soutech] and they are still experiencing some excess inventory burn and down quite a bit from the summer timeframe.

Now, I do expect this to -- you know, what's going to happen in the short-term is this inventory is either going to get burned or it will become obsolete phone, I mean, you are not going to sell a phone next year that was produced a year ago.

So I think one way or another either through pure demand or obsolescence of the phone level, those customers will begin to buy more componentry, but that's really the fundamental difference, I think, we have seen a very strong growth among our top handset OEMs; we have got some strong traction that bodes well for '04.

But, we had to work through this issue that we talked about last quarter in fact in this conference call.

Can you talk about that kind of order of activity, the momentum, the linearity through the quarter, it sounds like there is still inventory to go through in Asia, but what about your booking trends, your kind of weekly booking rates, or at least your backlog coverage to your current guidance?

Well, the booking rate has been very strong.

And in fact in the December quarter you typically see a reversal of the September quarter.

September quarter, customers tend to back-end load that quarter.

They are looking for products, particularly, new phone launches going into the Christmas selling season, and the high seasonal quarter.

So you tend to see back-end loaded September and a more front-end loaded December.

We also had the impact of the Chinese New Year for us which is quite significant given our customer set.

So, we see terrific visibility, a strong order flow, highly booked entering the quarter.

And we will take a question from Kalpesh Kapadia with CE Unterberg Towbin.

Hi.

Good afternoon Dave and Paul.

Hi.

Hi.

You said that Samsung was a greater than 20% customer, and as I recall from the past Samsung is used to be a mid-30% customer not too long ago, and has over the past year or so grown their handset unit volumes significantly, and you had four flat quarters, yet you say that you rent aggressively at Samsung and GPRS, can you explain the variability?

And then I have a follow-up.

Yes.

In fact if you look at Samsung, September over June, it was up very strong, so our Samsung revenue was growing.

You may recall -- let me give you snapshot for Samsung;

I am glad you asked the question.

We are in the vast majority of their CDMA phones and in fact their recent design spend have seen every bit as much as much our normal pattern which is we could have the vast majority of CDMA with our power amplifiers.

We have -- and in GSM we were very strong, and when you are talking about being 30% of our business that was when we had a strong line up of black and white screen GSM phones in production at about the time of the merger, let us call it a year or so ago.

Then, we've talked -- as we have talked about in the past, Samsung directed our design teams to work on high feature rich color screen, new GSM phones; we have done that throughout the last year and introduced in the number in the T208 family derivatives.

The problem for us was that during the same period of time, Samsung made a marketing decision, and that decision was to push very hard on GPRS during the course of last.

That was not what our original expectations were, so based upon that marketing change, there were others like Nokia, for example, who ramped very, very quickly as they had GPRS Phone, we had high end -- what turned out to be high end now.

Because they put GPRS into the mainstream.

So, we saw a reduction in our cellular systems business, which has now reversed itself.

We have released the C100, there are another half a dozen phones in production, we will have 10 by the end of the year.

That phone is now selling very well, thus the sequential increase between June and September.

And I guess a third point which we are excited about is we have not typically at Samsung sold our amplifiers with a competitors baseband.

And for the for the first time we got the design win last quarter.

We were beginning to ramp production; we have power amplifier modules complementing a competitor's baseband in GSM/GPRS.

So CDMA we've maintained commanding market share.

GSM revenues dropped as the competitor ramped GPRS, the phones we were on simply weren't marketed at low price point and so quite as well, now our GPRS is in the mainstream line up or gaining back that share; and we're now gaining GSM power amplifiers with a competitive baseband.

Samsung relationship remains very strong Kalpesh.

Sure and Paul a question for you on the receivables.

Receivables have growing 50m in last one year, and revenues are 150m versus 150m year-over-year, you were now assuring us that you will have sequential down in receivables, you know if December you're ramping and your lead times or payments from customers as far longer, is it going to be possible to have receivables reduced this quarter?

Yes Kalpesh, I think it will because as Dave indicated and I think it might have been a prior question, December tends to a flip-flop of what September was, that is linearity shifts more to the front-end as the industry is building from the seasonal high and so therefore compared to last quarter in which we had the seasonal being just beginning in the September, so I think most of, you know, a higher concentration will come earlier on and even though that some of the receivables and the people that pay are much slow we still believe in analyzing what we have out there currently, and what the profile is our shipments that we expect to be able to reduce our overall receivables in this current quarter.

And now with Piper Jaffray we'll hear from Sam May.

Hi first question, can you comment on ASP declines for the quarter what they were on average?

And then can you give us any variables or outlays by complete system solution DCR etc?

Thanks Dave.

Hi Sam.

I would say that in general, it has been tracking at around let us call it 12, 14% total product portfolio.

If you look at the mix the least price, the lowest price pressure has been in the more highly integrated products.

So, we've seen less than that company average, fairly significantly less than that in cellular systems and in our DCR product line, we've seen more than that in the point products, the power amplifier, the single function switch.

So you know, it has been the classic model for us, which is when we think about power amplifiers there are a number of competitors who can make a power -- although painfully now -- painfully few who can make up really competitive power amplifier module.

We think that's a good thing.

But, our cost structure with our reasonably high factory utilization of semiconductors, we our very high in yields and extra quality, the fact that we are vertically integrated at packaging allows us to take share with power amplifiers and contribute and increase our gross margin.

But more importantly when we push up the food chain it begin to combine a PA with a DCR or cellular system solution.

Not only have the -- is the ASP declines lessened but with a very high contribution margin across all these product line more than 60%; we improve our gross margin, we improve our contribution margin, we improve our bottomline, while our customers saves money by buying a higher level of solutions product.

And did you see greater than a 13% decline in DCR in the quarter?

No.

No.

And how about March, Dave do you expect March to be sort of a normal seasonal weakness, or would you anticipate it to be greater than or less than, than what you have experienced historically for Q1 calendar Q1 weakness?

Well last year, we didn't experience seasonality because -- I'll tell you what I tell our folks internally. first of all Sam it's a little early to tell.

But I tell you -- give you the same description that we talk about internally.

For those product lines that have a broad and deep customer base, where we have meaningful market share we will expect to have a seasonal decline, we'll expect to see some level of seasonality.

For those business units that have high investment that our growing market share, cellular systems, DCR, single package radios, I really don't except a market share based seasonality.

So, for us I would expect to see seasonality in the high market share product lines.

I don't accept that argument for the growth business.

And Joseph To with Lehman Brothers has the next question.

Hi guys.

A question on the cellular systems; can you guys give us a rough numbers in terms of maybe having units you sold, I mean, you are trying not to give us number on the DCR, just trying to get a handle around cellular systems?

Well, we don't give a breakdown, a unit volume quarter-over-quarter by product lines.

I think we've talked about it in the DCR ranks because I' m absolutely fascinated, and I think it's important for -- I think that you'd understand that the very fast shift away all the discrete designs towards DCR's in general, so it is the case with DCR'S where you will see Skyworks volume going up, and there are one or two others who have complete silicon-based low cost DCR solutions.

We don't think they are as compelling as ours, but nonetheless there is a massive shift away from discreet designs.

But we really don't want to breakdown for competitive reasons in particular, what are our unit volumes are quarter-over-quarter or by product line.

Okay just a question for Paul, you guys mentioned that your backlogs are much higher what kinds of turns we need to achieve December quarter guidance and what will they -- or just for December rather.

In December we expect it will be better in terms of less turns about 5 times because as they 5% as Dave has indicated you know the front end here is entering in to the season as we began seeing in September and now in to the first half that our order flow and our backlog and visibility is far greater and so we'll be less turn to achieve our results.

And we'll now take a question from Satya Chillara with WR Hambrecht.

Good afternoon guys.

Dave, can you talk about DCR's for the next fiscal year, what kind of shipments do you see for next fiscal year.

I think exited the year with $23m DCR so far, so what do you expect for next year?

I think we're going to continue to see a very steep trajectory for our DCR product line because it is the case today that we are seeing virtually all new designs across our customer base going to a direct conversion technology and that, you know, if you walk in to the phone store today you will still see a lot super head discrete design.

So, there is shift that's going on and our product is giving us share gains that we will share with you as we go forward.

We shipped about 30% sequentially higher last quarter DCR units about $8m.

We now support 20 customers and we are either designed in or in volume production at majority of the top 10 handset OEM, that's the majority of the top 10en with our RF sub system technology.

And our competitive advantage is size, single chip, single package, power consumption, so we believe not only will we take share but DCR technology in general will complete a transition over the next few quarters that will be as dramatic next year as it was this year.

Okay.

The average selling price on the DCR existing one as well as the EDGE transceivers that you've be talking about what's the price differential and when is the EDGE transceivers going into production?

The price is -- let's call it around $3 for the DCR product line.

I think that EDGE in general, you know, there are its very dependant upon the region in the carrier at in some cases by the way we've got couple of our cellular OEMs who are very much interested in being on the leading edge and early adopters.

They want to be in the early trial, they want to be there first to market.

So, we think that EDGE will become meaningful volume in perhaps a year but we will see EDGE production early next year.

And again some of our top customers are really leading this charge and so it becomes the enabling technology now whether or not it will in fact be the enabled as it EDGE I think what happen to GPRS right an awful lot of GPRS phones were shipped and where never enabled with GPRS they were GSM.

I think you see a very similar pattern for EDGE so we want to be there early.

We now have Chris Versace with Friedman Billing and Ramsey.

Good afternoon guys.

The question was asked before about seasonality in the calendar first quarter, I just wanted to hear you from Dave what you think the impact of the earlier then in previous years on the Chinese New Year's going to have, particular with demand and kind of a how linear do you think that would be in the calendar first quarter?

Well it is the case that the Chinese New Year does change the supply chain and the order pattern but you know these customers still have to satisfy demand.

So, but it's quite a bit different, you know, when we talk about operating our factories 24/7, we mean it, we operate our factories 24/7.

And so there is a change in supply chain but, you know, at the end of the day, it all levels out, right.

So, you just have to prepared for, they will order presumably in advance.

They will build product in advance, then they will catch up after the Chinese New Year, but it is very difficult to predict.

It's -- we saw it last year, I think you will see an impact but I don't think it will be net disruptive.

Okay.

Thanks.

You're welcome.

The next question will come from Sandy Harrison with Pacific Growth Equities.

Thanks.

Good afternoon guys.

Good afternoon.

Just a couple of follow-up questions or just some clarifications from earlier questions.

If I kind to listen David, kind of, how you bladed out including your comments just a second ago on Chinese New Year, it looks like you guys are feeling that the China inventory that overhung a little bit in September, you started to see through up but there is probably an extra month somewhere in there perhaps more than people might think.

And that you probably [achieved] to that a little bit more in December and then we get back on some sort of track on March.

And then it sound as if some of the business as Samsung, here, your largest customer, looks like you are moving towards hitting into the sweet spot.

And then the other customers will not as, where the other top four customers, I am assuming are going to be standing still you know in sort of ramp for this, I mean looking at that it sure feels as though the March quarter could be a little bit better than seasonal or a little bit better than then.

Some of my assumptions are little off on than and I am just trying to feel a more of a tempered view of because of cautiousness?

All right I appreciate the summaries.

It really is too early to tell;

I think you characterized it right though we have, you know, I said that I thought that they were perhaps 13 weeks of inventory.

I think ideally, perhaps that number is 7 or it may be 8.

So, I think your month is a good assessment.

However, you know, it is very, very different OEM to OEM and ODM to ODM, so it is kind of all over the map.

As you know they are just as [new] entrance in that market and that supply chain is quite complex.

But, you are right that 25% sequential growth that we experienced our top tier OEM, the new TX module that we had at our top tier, had a top tier OEM, this is going to generate millions of units next year at a fairly high ASP.

It is a very integration front-end.

Our CDMA products going into another top tier OEMs.

We are getting GPRS traction, all of that is very true and we don't expect to see the market base seasonality across some of these investment business units, although we will certainly see it where we have some businesses that have 30 as much as 40% market share.

Right, thanks for that.

You are welcome.

The next question will come from James Faucette with Pacific Crest.

Hi, gentlemen, a couple of questions.

First of all, about what percentage of revenue was wireless LAN?

And I know in the past, you've talked a little bit about that the prices declines where so substantial that it was hard to make any headway in terms of growing on that business, can you comment a little bit on that?

Then also related to just in terms of trying to build up my model, if I look at and hope that I can explain this in the way that you understand what I'm asking, but if I look at your operating expenses in the September quarter and then kind of normalize those to a 13-week quarter and then look at what kind of guidance you are giving for operating expenses and gross margin and so on for the December quarter?

It looks like on -- if on a simple basis, so weekly operating expense level it's going up a little bit in the December quarter, how should -- is that or my calculation is about correct and then how should we think about operating expense development through the rest of fiscal 2004.

Yeah, lets -- I'll handle that second question in terms of the op ex in terms of it should in fact be going down for a couple of reasons one being as you recall in this September quarter we had an additional week of expense although we did in fact manage to successfully better some it.

If you go back and just look at the quarterly run rate a quarter ago you see that it will just naturally be in a lower rate in the third quarter was something like [$56m] at that particular point in time, also that the impact of some of the impairment will have some benefit relative to related to the fixed assets will give us some benefit, a small piece.

We'll also have higher revenues.

Higher revenues will drive some variable expenses so that, certainly the fixed cost the G&A, the R&D, is not growing at all in any meaningful way there will be some variable component.

I'd like to -- let me comment on the -- I thought you have -- you have a terrific memory you are right, I have talked about the 802.11 business and I think may be a year and a half or year ago were a bit of contrarians because we look at the price decline for the overall systems solution and scratched our head and said you know should we as a company ascribe a similar strategy for wireless LAN that we did for handsets, and that is should we have a complete, you know, presumably silicon based base band as well as a radio in the front end then become a systems solution provider for 802.11.

And I look the price decline the amount of upfront investment that number of embedded competitors and came to the conclusion that that would not be a winning strategy for our company.

However, I am really excited about the fact that if you take every thing else, if you take that, you know, the radio and the base band and exclude it what you essentially have left is a front ended very much like a handset.

You have got filters, you have got switches and control circuitry, you have got a power amplifier, and when you look at these multimode and ABG kinds of formats or even AB the fact that we have our own internal vertically integrated source of supply for those components and that we have a terrific high yielding multichip module technology, we can combine and save our customers quite a bit of money with the front end module, think of it as the handset TX [inaudible] we don't think there is anybody else who can do it as well as we can.

And the contribution in the margin is quite high, so I believe what you are referring to or comments that I made about, should we be a system producer for 802.11 and the answer for our company is no.

But should we do a front end module that leverages the capability we've developed our handsets, I think it's absolutely yes and the traction we are getting is just terrific.

Okay.

And I guess can you give us any insight what wireless handsets were a substantial revenues this quarter?

Wireless LAN and infrastructure, that entire business unit is about 15% of sales, that's roughly half maybe a little more LAN but that piece is growing of course much faster than infrastructure.

And that does conclude today's question-and-answer session.

I will turn the conference back over to Mr. Aldrich for any concluding or closing comments.

Okay.

Well, thank you very much for participating.

It concludes our conference call today.

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

Once again that does conclude today's program, thank you everyone for joining us today.