思佳訊 (SWKS) 2004 Q3 法說會逐字稿

Good afternoon and welcome to today's Skyworks Solutions third quarter fiscal year 2004 earnings call.

Just a reminder that this conference is being recorded.

At this time I will turn the call over to Tom Schiller, Skyworks Investor Relations.

Please go ahead.

Good afternoon everyone, and welcome to Skyworks' third fiscal quarter 2004 conference call.

With me today are Dave Aldrich, our President and Chief Executive Officer, Allan Kline, our Chief Financial Officer, Paul Vincent, our Vice President of Finance, and Liam Griffin, our Vice President of Sales and Marketing.

Dave will begin today's call with a broad overview of our third fiscal quarter business highlights followed by Allan's financial review 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 there 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 website for a complete GAAP reconciliation.

I will now turn the call over to Dave for his comments on the quarter.

Thank you Tom, and welcome everyone.

Today we announced third fiscal quarter 2004 earnings.

And I'm very pleased to report that Skyworks has achieved record top and bottom line results, well exceeding our guidance and consensus estimates.

Specifically we achieved quarterly revenues of $207 million, that is up 38 percent year-over-year, and 13 percent sequentially.

This is versus our gardens of 5 percent growth quarter to quarter.

We expanded our gross margins by 70 basis points to 39 percent.

And this is even as we outsourced production in support of our turns business in the quarter.

We delivered operating leverage with a 41 percent sequential growth in operating income versus our guidance of a 15 percent sequential improvement.

We doubled our earnings per share sequentially to 10 cents.

And this is 3 cents better than First Call estimates.

We generated $18 million in cash flow from operations.

And we converted $45 million in long-term debt in an accretive transaction during the quarter.

But perhaps most importantly, we gained market share across virtually all major product areas and captured a number of key EDGE and 3G wideband CDMA UMTS design wins.

Now I would like to discuss some of the elements driving last quarter's performance and our business moving forward.

First, I know that there is often a great deal of confusion concerning actual power amplifier market share data, so I will be as specific as possible.

Our PA unit shipments were up over 75 percent year-over-year this quarter, bringing our cumulative unit volumes to over 500 million power amplifier modules.

From a Tier 1 perspective, starting with Motorola, we continue to enjoy success with their flagship family of GPRS triplets by delivering a combination switch, filter and power amplifier functionality in a single package.

We're now pleased to report that we're also shipping this transmit module into over a dozen models including the V-180, the V-220 and the new entry-level camera phone, the C-650.

We're also the majority supplier across Motorola's family of Idon handsets.

And we have recently established a CDMA footprint with their first camera phone for Verizon, the recently announced V-710, just launched yesterday.

At Samsung we continue to support virtually all of their CDMA phones.

And in less than one year from initial design in, we're gaining significant traction with our portfolio of stand-alone, highly integrated GPRS power amplifier modules.

To be clear these are those modules sold without our baseband solution.

And this is now within 10 of their handsets, including the SghX-450, the E-300 and the E-310 phones, as well as several new models that have yet to be announced.

And these wins represent a brand-new event for Skyworks.

At LG, much like Samsung, we're moving from our leadership position in CDMA power amplifiers to satisfying a growing portion of their GPRS EDGE and wideband CDMA business.

In particular we're supporting a suite of new handsets, including the L-1150, the C-1300 and the G-4015 platforms, which were recently introduced at AT&T Cingular here in the U.S.

In addition, we continue to realize the gains from handsets sold into India.

Meanwhile at the world's largest handset OEM, we support the majority of their CDMA platforms including popular models at Verizon and Sprint as well as those targeting India and China.

And finally, with Sony/Ericsson we're across their family of GPRS phones including their flagship T-610 and the F-500i, as well as their advanced multimedia K-700, P-800 and P-900 platforms and the new K-500 camera and gaming model.

From a key product perspective, we recently exceeded 10 million cumulative RF transmit module shipments following the launch of this product just a year ago.

Now this particular product raises the front end integration bar to include all switching, filtering, controlling and power amplifier functions in a single laminate package.

This steep growth trajectory has been driven by Motorola, and also Ningbo Bird and others.

And it really underscores two factors.

First, our truly innovative architecture and unparalleled level of integration with these complete TX modules -- the first in the world by the way.

And second, the benefits of in-house laminate module production.

This in-house module production is positioning us better than anyone, we believe, in our space to profitably build such a solution.

Given this product momentum we've recently recorded 3G wideband CDMA UMTS complete RF transmit module design wins, including one with a Tier 1 handset OEM, supporting half a dozen new phones.

Now we expect this particular architecture to gain increasing acceptance with leading handsets OEMs and ODMs.

I hope all this detail helps to explain the year-over-year and quarter-to-quarter growth in power amplifier module business, and helps clear up some of the market share questions.

Now let's move up the integration ladder to the complete RF system.

During the quarter we captured several new phones with our Helios EDGE radio solution.

Now Helios integrates the entire RF section of next generation handsets by bundling the power amplifier, the power amplifier controller and the direct conversion transceiver, utilizing our patent pending polar loop transmit modulation technique.

This closed loop approach has proven to be more robust, more efficient, --that is linear -- more stable and more reproducible relative to competing solutions.

We're now in the process of migrating our 25 current DCR customers, to whom we have now shipped well over 50 million units, to Helios customers.

Clearly our customers find our evolutionary path from GPRS to EDGE easier to implement as compared with the adoption of a new approach coming from a new supplier, or simply in those sockets entrusted with very high-volume production already to date.

And as recent examples of this, we have recorded a key win at a large Korean handsets OEM, and added Quanta to our growing list of EDGE customers.

Okay, now let me switch to our cellular systems business.

In this business we offer the industry's most complete semiconductor and software solution.

And I'm delighted to report that in addition to our existing leading systems customers, which includes Samsung, NEC, Arima and CEC Telecom.

During the quarter we secured two new strategic accounts.

The first is Sanyo, one of Japan's fastest-growing handsets suppliers and a leading international consumer brand name.

Beginning with CDMA power amplifiers shipments in support of their line of highly successful camera phones, we have extended the engagement to our complete GPRS system level offering, encompassing our leadership front end module, our complete radio solution, mixed-signal, power management, baseband and protocol stack, increasing our addressable semiconductor and software content with Sanyo 10-fold.

That is the delta between shipping a single PA and the complete system solution -- 10-fold.

Now the second new customer is Lenovo, a division of Legend.

You may know legend, they are the largest high-technology company in China, and one of the most recognized brand names in the Far East.

Here we're at the heart of a number of next generation handsets beginning with the increasingly popular G-811 phone for China.

So in addition to adding Sanyo and adding Lenovo, we have Ningbo Bird, ZTE and TCL already utilizing our front-end systems.

And as of today we now support 60 percent of China's domestic GPRS license holders.

And those are -- include Konka, Fageein (ph), CECT, Higher (ph), Eastcom, Panda, Southtech and now Lenovo.

Now our success in China hasn't come easily.

In fact it recently required us to modify the way in which we address customers in this market.

Quite frankly, we've gotten smarter over the past twelve months.

With the large number of license holders and perspective market entrants in China, the cost of technical engagement is increasing.

In response to this, Skyworks has created a very strong local presence, and we have now partnered with two highly advanced and well-equipped custom-design centers or ODEs, for original design engineering firms, better aligning us with second and third tier OEM's and improving our penetration rate without requiring significant upfront investment.

Now finally within our infrastructure and wireless data product area, our base station portfolio, which consists of linear transmit receivers, modulators, amplifiers and direct conversion mixers is seeing strong demand really driven by three factors.

First, large OEM contracts as China, South America and Eastern Europe build out their cellular networks.

Second, opportunities in developing nations for wireless local loop applications.

And finally, domestic and European carriers as they prepare for EDGE and 3G service roll outs.

Following a few years of market downturn in this space, or in the infrastructure segment, we're encouraged by recent positive order patterns across our lineup of base station customers.

And these include Ericsson, our largest account in this segment, then Nokia, Motorola, Alcatel and Lucent.

To briefly cap, in the quarter we achieved all-time high revenues, up 38 percent year-over-year and 13 percent sequentially.

We expanded our gross margins.

We delivered record operating income.

We netted a 100 percent sequential improvement in earnings per share.

And in turn we exceeded consensus estimates by 3 cents.

And here is what you should expect to see from us in the near future.

First, the introduction of our highly integrated next generation RF transmit modules, expanding what we call the Sky 77500 family.

The second thing you should expect to see us in the near future is the production ramp of our Helios polar loop EDGE radio, and rapid adoption as we transition our DTR customers to Helios.

You should expect to see increasing shipments of our single package radio.

Again for those of you who may remember, this is the world's most highly integrated RF solution.

And finally you should expect to see the ramp of our complete cellular system solution at Sanyo, not at Lenovo, as well as a number of domestic Chinese handsets OEMs and ODMs.

Now at a higher level, to move out of the quarter for a moment, as we have discussed from time to time since the launch of our Company just 8 quarters ago, to differentiate ourselves we are executing a fairly simple and straightforward strategy.

First, leveraging our set of analog, mixed-signal and digital integration core competencies across next generation cellular handsets, network infrastructure and wireless data applications.

Second, reducing our customers' time to market by simplifying design architectures, improving system efficiencies and reducing their overall bill of materials.

Third, outpacing the growth of the wireless semiconductor market through market share gains and through the capture of higher average selling prices.

Now as our customers bill of materials decline, our revenues in total and in on a per phone basis are increasing.

We provide more of the solution in a true win-win relationship.

And finally, as a result of the prior three, steadily marching towards our model of 15 percent operating margins off a $1 billion annualized revenue base.

As last quarter's performance exemplifies, this approach we believe it is working.

And I must say I am particularly proud of our team's progress over these past two years as we are positioned to continue to outpace the wireless market growth rate.

And we expect to deliver a very strong 2004 and beyond.

I will now turn this call over to Allan, our CFO, for his financial review.

Revenues for the third quarter were $207 million, up 13 percent sequentially, and 38 percent year-over-year, fueled by strong demand across the business, as Dave described.

Gross margin for the quarter was 39 percent.

That is a 70 basis point sequential margin expansion.

And that was driven by higher factory utilization and improved operational efficiencies.

Operating expenses increased to $62 million, driven by IT conversion costs, higher sales commissions and incentives related to the larger revenue base.

Despite these sequential dollar increases, operating expenses continued to decline as a percent of sales, in line with our guidance, allowing us to improve operating income by 41 percent sequentially.

Interest expense for the quarter was 3.6 million.

That was down 1.8 million sequentially as we described last quarter related to the conversion of the 15 percent note.

And that is offset by interest and other income of $400,000.

Provision for income taxes was $600,000.

And that is related to our foreign income.

Accordingly, our net income for the third quarter was 14.8 million, 10 cents a share, as compared to 5 cents in the prior quarter and a loss of 3 cents a year ago.

Some comments on our balance sheet.

Cash and cash equivalents increased to 202 million.

Of note, we generated $18 million of cash flow from operations.

We invested $19 million in capital expenditures as we procured additional equipment to meet increasing demand for our portfolio of front-end modules and single package radios.

We recorded $9 million of depreciation.

We improved DSOs by 2 days.

And we increased inventory -- inventory of long lead silicone-based products in support of a strong expected fourth fiscal quarter and the back half of 2004.

While this broad inventory turns to 6 times, I would like to elaborate on this particular metric for moment.

At Skyworks we view inventory turns as an absolute indicator of operational excellence.

We expect this number to improve this quarter and in subsequent periods, and remain committed to an internal goal of 10 turns.

Finally, during the quarter, as I mentioned, we also converted the $45 million 15 percent note to equity in an accretive transaction.

Now to our physical fourth-quarter financial outlook.

Continued market share gains, led by front-end modules and cellular systems, along with the early ramp of our Helios EDGE radio subsystems are contributing to strong visibility.

Accordingly, we're forecasting our top line to grow approximately 5 percent sequentially in the September quarter.

Assuming revenues of $217 million, we would suggest modeling gross margins of between 40 to 40.5 percent.

And that is driven by another 50 basis point improvement from higher factory utilization and better operational efficiencies, with a bAllance related to certain administrative and engineering costs previously recorded as COG, that going forward will be included in operating expenses.

As a result, we anticipate operating expenses of between 65 to 67 million, reflecting increased employee incentive accruals and sales commissions, again associated with higher revenue levels, as well as the addition of the operating costs I just mentioned that previously had been included in costs of sales.

This change from cost of sales to R&D and SG&A will have no impact on operating income.

And we intend to improve our operating income by another 15 percent this quarter.

Below the line we're forecasting interest expense of 3.2 million and foreign taxes of 600,000.

And we would suggest you model 159 million shares in your EPS calculations, as we will have a full quarter of the note conversion shares in the fourth quarter.

That completes our prepared comments.

Allan, let's open the lines for their question-and-answer session.

(OPERATOR INSTRUCTIONS).

Cody Acree, Legg Mason.

Congratulations on a great quarter.

You mentioned specifically -- went through quite a few examples of increasing dollar content per phone.

Can you give a little more clarity as to where you sit today as far as your blended average revenue per phone?

Where you expect that to be in the near-term and what are your long-term targets as we work towards more complete cellular systems solutions?

Well, maybe Liam can help me with this answer.

The expectation and our experience has that our average blended selling price is increasing.

And that is in the face of price competition, particularly at the single point product, the power amplifier, the single function switch.

We mentioned earlier that, for example, Sanyo, Arima, to some extent LG, but certainly Sanyo and Arima where we started with a power amplifier, moved to a combined power amplifier radio for a complete radio solution, and then have moved those customers to a power amplifier radio baseband software mixed-signal solution.

A power amplifier is 1.5 to $2, and the complete systems solution is in the teens.

So we're selling more and more TX modules and fewer single function PAs.

We're selling more PAs bundled with a radio and we're selling more soluble systems.

So without getting any more specific, Cody, the expectation is sequential increase in blended ASP's for our Company.

And that really highlights the strategy of using that integration expertise to add more value to our customers while we add more dollar content for us.

And I would assume then does that blended ASP increase offset any normal level of pricing pressure that you would see annually?

It does to the extent that our blended ASP is increasing, yes.

Chris Caso at Schwab SoundView.

Just if you could comment a little bit about perhaps the linearity of your bookings and revenues through the quarter?

Did you see any noticeable changes in terms of the tone of your customers or pace of bookings as you went through the quarter and into early July?

It is Liam.

Yes, we had a very strong quarter for orders.

Again we expect that to support our ramp here going into Q4.

In fact if we look at it, we haven't really talked too much about actual numbers, but it was a record quarter for orders in the Q3 period.

And we expect this quarter to be on track with our guidance.

Sure.

But your guys read the paper same as we do about some of the concerns that people have had.

I guess safe to say in terms of the pace of your bookings and that, that you haven't seen anything that would indicate things slowing down for you?

Well, sure, July -- if you look at the current period we're in right now, July is typically weak in the industry and the European community is a little softer in this time.

There's a few pockets in China that are soft.

But one of the things that we have going for us here, and if you look at the momentum that we delivered in Q3, there are some share gains that are ramping.

Most of those were absorbed and you are going to see them go into Q4.

So we're very comfortable with the order trends.

And, again, they support our guidance.

Earl Lum from CIBC World Markets.

Congratulations guys.

A quick question on EDGE.

As you look forward, how many platforms do you have that you expect could be ramping in the second half?

And I'm guessing, are you seeing a priority from your OEM customers in really getting EDGE product out into the channel given the network launches that we're starting to see occur?

This is Dave.

Let me start by saying that we believe EDGE is much more of an '05 event than an '04 event.

That seems to coincide with our customers' demand forecasts and the launch of carriers who are deploying EDGE earliest.

Liam, in terms of the numbers of platforms ramping this year?

We're looking at probably 6 to 12 platforms ramping this year.

And as Dave indicated, EDGE in our view is going to be an '05 event.

The design activity is very strong right now, and we are positioned well for that, and continuing to sample our current account base.

But in terms of meaningful revenue, we think it is an '05 -- an early '05 and into the mid '05 event.

Allan, as we look towards the tax rate, can you give us some guidance as to what you expect your tax rate to be going forward?

Sure, Earl.

As you know we have the anomaly in the U.S. where a portion of our U.S. taxes we get credit for with the NOLs, and a portion of goodwill we don't.

So the best way to look at it is just model the foreign taxes, which are a real cash expense.

The other is non-cash, and that is 600,000 a quarter.

Kalpesh Kapadia with C.E.

Unterberg, Towbin.

Congratulations, Dave and the team.

A question on higher level -- Q1 which is calendar Q1, you offset seasonality by coming in flat.

And also in Q2 you are offsetting some of the end market weakness.

And then the guidance seems to suggest that that is carrying on into Q3.

So if the market were to rebound in the late August, September time frame for the holiday season, should we expect that trend to accelerate for you guys given a number of pad phones (ph) that you're in?

The answer is absolutely yes.

To us it is all about share gains of existing product platforms and the ramp of our TX modules, the ramp of our new GPRS integrated radio, the ramp of Helios, the ramp of some new cellular systems customers.

And obviously that would be exacerbated or improved by a very robust second half of year.

We're so focused, Kelpesh, on share gains and ramping these new programs that the relative quarter over quarter sell through at the moment with our base business seems to be offset, or seems to be being dominated, if you will, by our ramp of these new programs.

So I think that is what you have seen this year.

And would certainly be improved by a very strong second half.

And the next question, Dave, you mentioned that you want to be at $1 billion revenue run rate, and you're not too far from it right now, and 50 percent operating margin.

What is the gross margin assumption for that to happen?

And the increased capacity that you're installing with new equipment, will it bring some of the outsource in-house to improve the margins further?

That's precisely right.

If you think about it, this quarter -- Allan and I are not going to talk much about this connection assembly and test revenue because it has become such a small percentage of our revenue.

But this quarter, since you asked the question, if we were to remove that revenue, we are about 41 percent on our wireless business.

And our wireless business is growing while that other revenue is declining.

In addition to that, we have a detailed identified gross margin enhancement program going forward that includes everything from capacity utilization, increased factory efficiencies, to die shrinks, to newer designs that have fewer moving parts at the module level, that is pure discretes and passives.

So we are very committed to both 15 percent of the bottom-line and 45 percent on the gross margin line.

Blaine Carroll, Oppenheimer & Co.

Great quarter guys.

A couple of questions if I can.

Dave, you gave a good breakout on the customer during the quarter.

Can you talk about which were 10 percent customers?

And I guess more importantly are some of the others like LG, Sony, Ericsson, Nokia are they bubbling up to that 10 percent level?

Go-ahead, Liam.

Yes, Blaine, absolutely.

Motorola and Samsung are 10 percent customers.

Sony/Ericsson, LG and Nokia are also looking very strong and nearing that level.

Are they greater than 5 or are they close to 10?

Yes, yes.

And then just a follow on.

As far as the guidance going forward, what was your turns business during the current quarter?

And how is book value to the guidance right now?

We entered the quarter about 90 percent booked to our prior guidance.

We beat that guidance, and so that was turns business.

So we're entering this quarter just about dead on the same, about 90 percent booked to our guidance.

Sandy Harrison of Pacific Growth Equities.

Thanks, guys.

And I will join the chorus of saying nice quarter.

Could you talk a little bit about utilization rates, where you are, where you think it is going?

And just from your prepared remarks, Dave, you talked a little bit that you guys were even able to drive the margins with some outsourcing to meet your turns.

So just kind of map that out a little bit for us if you could?

Allan, what do you --?

Sure, Sandy, our average utilization this quarter was between 80 to 85 percent, higher in Mexicali, a little lower in the fabs.

And we did in fact increase our outsourcing during the quarter, which is typically what we like to do.

When we see a surge in capacity we would rather not facilitate in the back end of the process that surge.

We would rather use outsource partners.

But they also come with obviously a much higher -- that is all variable costs -- versus the true variable cost of producing in our our own factory.

It has nothing to do with the fab.

It is really just related to the encapsulation assembly test pay per reel (ph) on the back end.

So as we bring -- as Allan mentioned, we have increase our CapEx a bit.

We will bring some of that equipment in to take advantage of the fixed cost utilization and very low-cost variable costs when we produce our own packages.

But we intend to remain partnered with outsource suppliers, because they give us a great deal of flexibility.

And then a quick follow-on.

As far as the wireless infrastructure, this is the first time you guys mentioned it in a positive light.

What has been the turnaround here?

And it has typically run about a 15 percent of your revenues.

How is that standing now on the higher levels of revenue, the same amount or is it growing?

Well, as a percentage of revenue it is still in that 15 percent ballpark.

But as our top line in aggregate grows certainly our number in infrastructure is also picking up steam.

And we're pleased to see some our largest customers like Ericsson provide some bullish news this week.

Jane Hwangbo with Monness, Cresti & Hardt.

Actually I'm calling on behalf of Rhea Bychia (ph), but congratulations.

I just wanted to ask you, I guess, incremental gross margin, can you guys give us a sense of which segment you're getting the most bang for the buck at this point?

On our business segments, Jane?

Yes.

Like the different product lines that you have between like a PA in a system, are you're getting a big difference in terms of incremental margin?

As you know, we don't detail our margins down to the business level.

But, Jane, the fact of the matter is that we have contribution margins in the '50s to in the high 60s across all of our product lines.

And if you think of a system solution, for example, it includes a DCR, it includes a power amplifier, a front-end switch module, maybe it includes our baseband mixed signal device.

So it isn't as different from product line to product line as you might think.

The only real difference is whether or not we purchase the wafer content as we do when we design and build CMOS or silicon germanium versus our own foundry operations for PHEMT.

Aside from that it is fairly consistent.

That's really, really helpful.

Thank you.

Secondly, I guess broadband margins, are they significantly anywhere below or above corporate margins at this point?

When you say broadband, I'm sorry, what are you referring to?

Broadband and infrastructure.

Oh, the infrastructure?

No, they are actually higher.

Fantastic.

Well, congratulations.

Thank you, guys.

Pierre Maccagno at Needham & Co.

Congratulations on the quarter again.

And I guess I had several questions on the breakdown -- a breakdown by the business units, a breakdown by wireless revenues versus test revenues, and finally GSM versus CDMA.

Test revenue was low single digits.

Less than 5 percent.

The breakdown -- I'm sorry, the other question was the mix -- our mix continues to be roughly 45 percent FEM, or front-end modules, 40 percent RF subsystems and cellular systems, with infrastructure and wireless data around 15 percent.

And we remain -- we're now about 75 or approaching 75 percent GSM, GPRS EDGE base with 25 percent CDMA.

Finally, in terms of capacity, are you planning to increase capacity or are you planning to migrate to the 6 inch fab anytime soon?

We could.

We're scalable to 6 inch, but our fabs are not at full capacity.

And some of the capital we have been adding is really not bricks and mortar and people so much as assembly and test equipment in Mexicali to bring more probe and test in-house and actually enhance our margin.

Chris Versace with Friedman Billings Ramsey.

Just again congratulations.

I will join the chorus on the quarter.

Just one quick question and then a follow-up.

Since you hinted what was the test and assembly revenues were, could you just comment what the wireless gross margins were in the quarter?

I think you said they were around 41 percent, correct?

Yes, they were 41 percent.

What I'm wondering is if we look a year ago and sequentially given the really strong revenue increases you guys have achieved, why is it that the wireless margins have tracked around 41 percent?

Well, they haven't.

They are up this quarter.

They actually, pending last year, they were down at 38 and they have moved up to 40, to 41.

And as we mentioned on the guidance, we believe we're going to continue to increase those margins.

I understand going forward.

I'm just trying to look -- as you look back you just commented they were 41 percent, 40, 41 percent, with a really strong ramp in revenue.

I am just wondering if you could discuss some of the issues that were -- why they were relatively flattish, not so much why they were going to go up going forward?

They weren't relatively flattish in our view.

I think they were increasing.

I understand -- I think I understand the spirit of the question.

If you go back -- as you look back over time, during this year we have been launching some very complex TX modules, single package radios, new designs.

And we very, very much been new platform-driven.

I think if you remember the discussion in the last conference call, we were simultaneously producing and launching into production our TX module, our new Motorola product front-end, as well as a couple of other highly integrated modules.

And I was quite pleased when we entered the quarter with typical sort of learning curve introduction margins of maybe 70 percent.

We exited well into the '90s.

And I thought that was pretty good, because we had sort of a perfect storm of new stuff launching into production.

We also this quarter saw accretion of gross margin of 60 basis points.

But we outsourced that turns business.

And when we outsourced, we do take a hit in margin because buying from outside assembly and test houses is much more expensive than what it costs us to produce these products internally.

So again, we will see another increase sequentially this quarter.

And our goal remains fixed at a 45 percent gross margin at a $1 billion run rate.

Ambrish Srivastava from Harris Nesbitt.

My question has been answered.

Thank you very much.

Congratulations.

James Faucette at Pacific Crest.

This is Steve Fleming calling in for James.

I am just hoping you can talk a little bit about your position in WCDMA and what you're seeing in that market?

Yes, Steve, WCDMA is absolutely important to Skyworks.

We have a number of initiatives that we're working on.

Again, this is a market today where it is designed and concentrated with revenue into '05.

So a couple of things.

We have some power amplifiers right that are, due to some proprietary architecture, we're sampling our broad base of customers and getting very positive reception.

We have also, in addition to this we have launched a new transmit module similar to the device that we described with the 10 million unit June shipments, a new device that is going into a 3G phone with one of our leading OEMs.

So we feel like we have our bases well covered with WCDMA and UMTS.

Cheri Printz with D.A.

Davidson & Co.

Just a quick question on the wireless LAN business.

Have you begun as planned shipping your front end modules?

And have you seen any pricing pressure in that business?

Yes, absolutely.

First of all we are shipping our front-end modules in production.

And we talked about wireless LAN the last quarter.

Last quarter we talked about breaking a $5 million revenue number, which is our front-end module and some of our switch products.

We were actually up a bit this quarter in wireless LAN.

But our attempt here to manage price erosion is similar to what we have done in handsets.

We're trying to move away from point product, and in this case it would be our switch portfolio, and move into the more integrated solutions in wireless LAN, which encompass power amplifiers, filtering and other discretes in one package.

And have you been successful there?

Yes, absolutely.

We have been successful, Cheri, by blending in with the switch business these increased modules.

But let's be clear, the pricing pressure in 802.11 is very, very strong -- very high.

(OPERATOR INSTRUCTIONS).

Cody Acree at Legg Mason.

You mentioned that you were 90 percent booked going into the quarter, and obviously you had a great amount of turns business.

Was there any concentration of that turns business either geographically or on your product base?

And kind of talking to that order linearity, just what was the upside or was there any significant driver?

Cody, yes, this is Liam.

The business -- the upside was really in GSM.

It is in the market where we gained the largest percentage of share.

And some of those customers that we have outlined today really showed us some strength going into the quarter.

We were fortunate enough to be able to deliver.

Any specific product area?

The transmit product that we outlined, very strong.

Our customers are moving away.

They're moving away on the PA side.

They're moving away from the point product.

So we were able to take the ramp that we executed here over the last few quarters and delivered to a new set of customers -- many customers in China were up, and several of our Tier 1 OEMs.

Congrats.

Ladies and gentlemen, there are no additional questions holding.

I would like to turn things back to Dave Aldrich at this time.

Thank you so much for listening.

This concludes our conference call today.

And on behalf of the entire Skyworks team, thank you for participation this afternoon.

We look forward to updating you on our performance next quarter.

Thank you again for joining us everyone.

That will conclude today's conference.