思佳訊 (SWKS) 2005 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to the Skyworks Solutions Second Quarter Fiscal Year 2005 Earnings Conference Call.

Today's call is being recorded.

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

Mr. Schiller, please go ahead.

Thank you, operator.

Good afternoon, everyone, and welcome to Skyworks Second Fiscal Quarter 2005 Conference Call.

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

Dave will begin today's call with a broad overview of the highlights from our second fiscal quarter followed by Alan'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 and adversely 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 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 complete reconciliation to GAAP.

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

Thank you, Tom, and welcome, everyone.

Today we announced our second fiscal quarter 2005 earnings, and I'm pleased to report that the Skyworks team delivered solid performance in a challenging market environment.

This marks the 12th consecutive quarter in which we have met or exceeded our revenue and earnings guidance.

Specifically, for the quarter we delivered $191 million in revenue, that's up 4 percent year-over-year.

We achieved earnings per share of 4 cents, which is one penny ahead of our guidance and in line with consensus.

We increased our cash balance to $219 million, and we added Sony Ericsson as our newest 10 percent customers, accompanying both Motorola and Samsung.

Before I provide our business overview, I'd like to take a moment and address our gross margin guidance, which we anticipate to be in the 40 percent range or an almost 200 basis point sequential improvement in the June quarter.

As many of you recall, when we created our Company in 2002, we established a target model of 45 percent gross margin.

While we have not yet achieved this performance, I'd like to discuss our path to getting there.

Quite simply, we recognize that unit volume alone will not drive meaningful gross margin expansion.

So in addition to increasing volume, we believe that there are three key drivers that will enable us to achieve our gross margin goals.

First, as we discussed last quarter, we've created a linear product business segment whose clear charter is to become a leader in innovative analog components that deliver high gross margin, have long product life cycles, and utilize our core capabilities.

Leveraging our existing analog product portfolio, our mixed signal design and engineering skill sets, our strong catalog sales, and specialized rep and distribution networks.

And to that end, during the quarter, we introduced a suite of innovative CMOS switches with integrated logic for satellite receiver applications, offering customers a lower cost alternative when compared to existing gallium arsenide or discreet components.

Additionally, we are ramping ultra linear control and amplifier ICs across research and motion's 7100CDMA Blackberry series, and have begun shipments of precision analog and precision area networking products in support of a Fortune 500 medical technology company.

The common thread is that all of these applications leverage Skyworks' existing core analog competencies, have longer product life cycles, and high barriers to entry.

They in turn have substantially higher gross margins than our Company average.

Second, we're developing products in our core wireless segment with much higher levels of integration and lower manufacturing costs.

These range from our 3 x 3 CDMA PA to front end modules to our latest Helios radios.

These latest designs have more than offset the expected ASP declines with a much lower manufacturing cost.

I'll talk about a few of them.

Our CDMA PAs and CDMA VCRs.

We're now in the midst of [indiscernible] and moving key customers from our 4 x 4 PAs to our 3 x 3 solution, the world's smallest, and are matching our CDMA PA with a newly released CDMA direct conversion radio.

Even in a very aggressive pricing environment on point products, given the reduction in dye size, we can maintain high contribution margins.

We're now literally getting nearly 10,000 devices on a single wafer.

Our front-end modules.

Here we're offering front-end modules incorporating power amplifiers, PA controllers, switches, and discreets into a single package.

This solution is gaining market acceptance moving from one leading OEM just last year to five today.

We are well down the learning curve with high production yields and shipments of over 50 million units cumulatively from its introduction last year.

And now we've already released version supporting CDMA Edge and wideband CDMA applications that provide more functionality and are half the size of alternative devices.

Moving up the value chain, our Helios mini product that we just introduced is now the world's smallest complete dual chip radio system for Edge multimedia mobile platforms.

By combining our front-end module with our single chip direct conversion transceiver, we have significantly cut space requirements for radio circuitry while improving performance and reducing cost.

This solution incorporates our patent pending Polar Loop transmit modulation technology and builds upon the success of our first generation Helios solution.

This sample of key products recently introduced demonstrate our unique ability to deliver smaller RF footprints and lower build and material costs to our customers while providing us with more dollar content per platform and an increasing gross margin.

This represents we believe a true win/win relationship.

The third element behind our gross margin initiative is to increase our serviceable market by introducing products that complement our existing platforms.

Our recent entry into the high growth BAW acoustic or BAW filter market is an example of this strategy in action.

BAW devices are integral components of radio frequency architectures.

Given their particular combination of small footprint, low profile, and high performance, they are extremely valuable in enabling next generation wireless products, particularly cellular handsets, which increasingly require greater multi [indiscernible] in reduced form factors.

According to Prismark Partners in 2004, the mobile phone market consumed approximately 2.3 billion filters, of which only 65 were BAW based.

However, given the performance, size, and manufacturing benefits of BAW devices, they expect a significant portion of the overall filter market to migrate to BAW acoustic wave solutions in the current years--in the coming years, which obviously should translate into substantial growth to Skyworks.

When combined with our switches, amplifiers, front-end modules, transceivers, and in-house BAW capability, we're allowed--allows us to uniquely offer our customers the solution they need to support a wide array of system architectures.

And at a higher level, and consistent with our linear products business strategy, our decision to enter the BAW filter market reflects our commitment to developing high margin products that support a myriad of wireless applications and across diverse markets.

So just to summarize, our product diversification strategy, higher levels of product integration, and expanding our serviceable market via investments like BAW, are providing the path to achieving 40 percent gross margin in the current quarter and moving us towards our 45 percent target.

This is our most important internal initiative, which we believe will provide top line growth along with expanding gross margins.

Let me shift gears now and discuss some of last quarter's highlights.

First, in our mobile platforms business, that's power amplifiers and front-end modules, unit volumes were up more than 30 percent year-over-year, once again, outpacing the growth of the overall handset market.

Our gains were driven by three factors.

First, the strong uptake of front end module architectures across multiple leading handset OEMs.

Second, the momentum of our [indiscernible] GPRS IPAC higher amplifier modules.

And third, the increasing adoption of our wideband CDMA solutions, including our load insensitive PA or LIPA module.

To further illustrate our gains, according to a report recently published by the Market Intelligence Center, Skyworks now holds 56 percent share--that's 56 percent share of Taiwan's power amplifier module market.

Now this is just up in the same source from over 20 percent in 2003.

Given the trend towards handset outsourcing, Taiwan represents a key industry proxy.

MIC correctly notes that our share increases have been driven in large part by the successful bundling of our IPAC power amplifier with our direct conversion transceiver solutions.

The tax rate continues to increase sequentially.

From a key account perspective, I'll walk through a few.

At Motorola, our front-end module is now moving across their refreshed line of GPRS phones, highlighted by their flagship ultra thin razor V3.

At the same time, we are making strong inroads into their 3G platforms supporting now a handful of new models as well as across their CDMA 1X and EBDO applications with their recently introduced E815 feature it's called.

At Samsung, in addition to being the leading supplier of CDMA PAs, and a systems supplier [indiscernible], we are capturing share in standalone GPRS power amplifiers, and just recently won a strategic design win with our Helios mini radio solution for Edge platforms.

The adoption of Helios Mini by one of our largest customers reveals a significant event for our Company.

Likewise at LG, we are satisfying an increasing portion of their CDMA, GPRS, and wideband CDMA phones, and are now supporting a complete line of their new Edge models with Helios.

At Sony Ericsson, I'm just delighted to announce that they have now joined Motorola and Samsung as a 10 percent customer driven by their migration from power amplifiers to complete front-end modules, increasing our dollar content per phone while reducing their overall cost and footprint, another true win/win example.

And at Siemens, much as in the case with Sony Ericsson, we've won key front-end module sockets, expanding our power amplifier module footprint with complementary--while complimenting our transceiver solution.

Finally, our PA, RF, and systems solutions are supporting a wide range of platforms from other leading OEMs, such as Kia Sera, Panasonic, Sanyo, NEC, Mitsubishi, UT Starcom, as well as the world's leading ODMs, including Ben Q, Shemay [ph], Compel, and Quantum.

Most importantly, we now fully expect to have our Helios Edge radio design win--to have an Edge radio design win with a third top tier handset OEM this year.

Before I conclude my comments, I'd like to spend just a moment on the overall market.

Currently, we are seeing strength at top tier handset OEMs as they solidify their market share, particularly at low-end segments and in China where foreign brands are doing quite well.

We see strong demand for low cost, highly integrated modules, current modules, and radios driven by the migration to next generation platforms which require multiband radio architectures.

In turn, we are also seeing market softness across tier three handset OEMs and ODMs.

And we're seeing today a slower than planned uptake in solution supporting third generation services as operators are refining their networks and marketing strategies.

And that is that we believe that the overall market for cellular handsets will accelerate in the back half of the year to roughly 725 to 750 million units for 2005.

To recap, we delivered solid performance, we achieved revenue and earnings guidance for the 12th consecutive time, we gained market share and captured a higher content, we increased our serviceable market with the entry of BAW filters, we captured a strategic Helios Edge win at Samsung, and we are intensely focused on driving gross margin improvements to 40 percent this quarter and toward our long-term model of 45 percent.

I will now turn this call over to Alan for his financial review.

Thanks, Dave.

Revenue for the second quarter was $190.5 million, up 4 percent year-over-year and down 13 percent sequentially, reflecting market seasonality and the transition of certain tier one accounts in the HUB arrangements in line with our guidance.

We believe the one-time impact of the HUB activity was approximately $4 million and at the low end of our expectations.

Gross profit for the quarter, $72.8 million, or 38.2 percent of revenues, and that was within the range that we had provided to you 90 days ago.

Operating expenses were $63 million and that's better than the $64 million we guided to, yielding operating income of $9.8 million.

With interest expense for the quarter at $3.6 million, offset by interest and other income of $1.1 million, and our tax provision was $1.2 million.

And that tax provision included $550,000 related to a U.S. alternate minimum tax calculation with the balance being foreign taxes.

Net income for the quarter was $6 million or 4 cents a share, 1 cent better than our guidance and in line with consensus estimates.

Some comments on our balance sheet.

Cash and cash equivalents increased to $219 million.

We generated $11 million of cash flow from operations.

We invested $7 million in capital expenditures.

We had $9 million of depreciation for the quarter.

Our inventories increased $1 million and we decreased accounts receivable $5 million.

Now I'd like to comment on our business outlook for the third quarter.

We anticipate revenue for the third quarter to be up slightly in the low $190 million range.

Our guidance is the net effect of two dynamics.

On one hand, we're experiencing softness at a subset of tier three cellular systems customers who are working through excess inventory in the channel.

We're also forecasting a slower than planned uptake of our solutions supporting 3G services as operators refine their networks and marketing strategies, as Dave mentioned.

On the other hand, we are seeing strengthening demand across our tier one handset customer base, along with a ramp of our newest analog devices.

In fact, as we launch new more highly innovative products, we expect gross margins to be in the 40 percent range.

More specifically, here's how we're getting to our sequential improvement in the current quarter.

We are lowering gas wafer costs.

We're streamlining production flow and efficiency through putting in our Mexicali assembly and test facility, and we're benefiting from and realizing price reductions from key suppliers on components, including silicon wafers.

Turning to operating income, we're targeting a 25 percent sequential improvement.

Below the line, we suggest that you model net interest expense and other expenses of $3 million, that should provide taxes of $1 million, and if you use 160 million shares which will translate into 5 cents a share.

As Dave outlined, the gross margin improvement toward our longer-term goal of 45 percent is being driven by our mid-60 percent blended product contribution margins Company-wide, by higher levels of product integration, which generate higher ASPs and lower cost, and by striking the right balance of volume products driving higher utilization in our facilities with very high margin products produced at lower volumes.

That completes our prepared comments.

Millicent, let's open the line for questions.

Thank you. (Caller Instructions.) Our first question today will come from Blaine Carroll with Oppenheimer.

Hi, guys.

How you doing?

I guess a couple of questions, if I can.

First of all, Dave, can you talk about the ramp that you see on the Helios Mini, particularly in the second half of this year?

And then, I guess the follow-up would be, the inventory within the Asian market, that's been out there for a while, this excess inventory.

And I'm wondering what the age of that product is and whether it's just a matter of time before a lot of that stuff ends up getting written down by the Asian manufacturers?

Blaine, I think that's--I think you're on to something.

Let me answer the second question first.

You're right that a lot--some of this inventory--we support about 24 customers in China, for example, today.

And some of those customers are turning the inventory very rapidly and other customers are not turning their models and some of that product has been sitting there for months.

So I suspect that those products will never sell.

But the other--some of them anyway.

Some of them will never sell.

The other dynamic though is that the top tier OEMs with great brand recognition have been able to make an inroad there so that the share gains among those indigenous OEMs in China in the aggregate haven't mounted up to what we would have expected or what the industry would have expected.

Now I believe over time you will see that situation will stabilize and you'll see that group of licensees within China begin to see volume uptake.

But right now, we're seeing strength from our--fortunately for us, the top OEMs into that market are our customers as well.

We're seeing strength with those customers and relative weakness with the licensees or with the indigenous OEMs.

With respect to Helios and the Helios Mini, by the way, which is a far less complicated packaging scheme and IC development for our customers to integrate, has fewer passives, and it's a couple of chips.

It is a higher margin product for us and we think a much simpler product for our customers to integrate.

It is now in a couple of top tiers, too.

We are moving that product heavily throughout Taiwan and into our Chinese channel and into our Latin American channel as well.

So I expect that you're going to see the back half of the year very strong sales for that product.

And as I alluded to in the script, we believe we will secure a third top tier OEM shortly this year for production volumes of that Helios design and that will have important volume implications for us.

Okay.

And I guess to follow-up, how much was total Helios during the quarter?

What was the contribution to the revenue there?

Well, the Helios design is ramping.

We don't comment on individual quarter product-by-product performance.

But it is ramping and it's becoming significant now.

Okay.

If my line is still open, I'll keep going.

Our next question will come from Cody Acree.

Thanks.

I'd like to just follow-up there on Blaine's question a little bit about that Chinese inventory.

As Blaine said, this has been around for a little while.

Is it--are we still building assumptions of contribution from some of these customers in that can continue to bite us in future quarters or have we shaken out this from expectations finally?

Well, clearly we've shaken it out of the expectations for the June quarter.

So that's absolutely the case.

And we are--obviously, this has--you're right.

This inventory has been out there for a while.

Fortunately, we're seeing an uptake in some of the top tier OEMs to offset it.

But if you are asking are we counting for growth in that channel over the short term, the answer is no.

All right.

Very good.

How about the HUB inventory adjustments?

You said it was only 4 million.

I think we'd earlier thought it was going to be 9 or 10 million.

How much of the June quarter's low 190s is an assumption of a reversal or an unwinding of that and how much is organic growth?

Cody, this is Allan.

We had forecast a range of 4 to 8 million and it came in at the bottom of the range.

And actually, we think it's normalized and won't have an effect on the June quarter unless we sign up another customer to HUB.

There is no question that as we progress through the quarter and toward the very end of the quarter that there were pockets of softness in this industry.

So I think that the HUB holes were not on the high end of our range and as a result the net effect was less than what it could have been.

So Allan is right.

It was on the low end, an impact of roughly 4 million.

Our next question will come from Asai Kidron, CIBC World Markets.

Hey, guys.

Good quarter.

A couple of questions for me.

You mentioned the three ways to get to the 45 percent gross margin on linear products and the complementary markets, which is the BAW filters that you just announced.

What percent--what contribution do these products need to have as a percent of total revenue to hit that target?

Well, in the current quarter, the BAW filters are not generating revenues.

That's going to generate revenue on the backend of the year.

We're producing those products in our fab here in Wilburn [ph], so we're using existing facilities.

We've already facilitated it or we've capitalized it.

And we're beginning to--we're producing resonators and we're beginning to develop high frequency filters for introduction shortly.

But there is no revenue contribution now.

We expect it to have a contribution in the back half of the year.

So what you're seeing immediately is you're seeing the positive benefit of a smaller dye size and fewer passives in our front-end modules, smaller dye size in our radios, and a fairly significant increase in these products that we have developed as we've directed our linear product segments towards some of these niches.

So we've moved some products into the sales and distribution channel.

Those products are beginning to generate orders.

And that--some of these products have 65 percent gross margins.

So that's what you're seeing currently.

The back half of the year and into '06, you'll see, we believe, some reasonable normalization and an uptake in the handset market that will be aided by lower cost products for us that are more highly integrated, such as Helios Mini.

So the idea here is that we are assuming in the wireless handset market that there will be aggressive pricing.

But within that aggressive pricing, we can add more content by integrating passives, filters, and the like, at the IC level, at the module level, so that in spite of lower pricing our contribution margin should improve so that we see an improvement in gross margin because we have higher dollars per blended device.

And that's quite a different trend than we think folks who are shipping point products or individual function components will be able to achieve.

Okay.

And can you give us a little bit more color on the tier three OEMs that had an impact?

Can you tell us what percentage of revenue they were this quarter and the previous quarter?

And how do you expect that will shape up over the next couple of quarters?

Yes.

Let me comment on that.

This is Liam.

Those accounts are largely indigenous Chinese and actually a few smaller players in the OEM channel in Korea.

And they have largely been systems customers for us.

So we really don't want to comment on the magnitude or the percentage of revenue.

But directionally, we're taking a less aggressive view on that and that's part of the reason why we talked through the guidance at the low 190 level.

And your next question comes from Randy Abrams, CSFB.

Yes, good afternoon, guys.

In your gross margin comments at the beginning, one other point I wanted to see if you could bring up is the back end assembly, just bringing it more in-house.

Just wanted to see where you're at as far as in-sourcing some of that and what kind of margin improvement you could get from that activity.

Yes, Randy.

This is Allan.

No, that was one of the items that actually this quarter we're expecting improvement, because we're actually reassembling the factory floor as we speak and it's going to enable us to bring in some of the outside assembly and tests that we have into the factory and it's going to contribute to getting that 40 percent this quarter.

Our next question today will come from Karl Motee with Wachovia Securities.

Thank you.

Regarding the gross margin target, what kind of timing should we look at?

Well, you'll see the number in the 40 percent range this quarter.

We're not putting a specific marker out there.

So we have set internal goals, targets, milestones.

They're well defined for both product introduction for new product releases, redesign of products to a lower cost structure, and an improvement in our manufacturing throughput that are sequential quarter-over-quarter.

So it is our expectation you will see sequential improvement in gross margins starting this quarter in the 40 percent range.

Great, thank you.

(Caller Instructions.) Our next question will come from Sherry Prinz, D. A. Davidson.

[Indiscernible - microphone] business.

Were they a current power amp customer and the additional business came from adding on the front-end modules?

Or did the up tick in their business come from both of those product lines?

Sherry, we only got half of your question.

You only--you came in halfway through it, I think.

Could you repeat it?

I'm sorry.

Certainly.

On your Sony Ericsson business, I'm just wondering if they were a current power amplifier customer and the up tick in their business was due to the add on front-end modules or was it a combination of both products?

Sherry, hi, this is Liam.

Yes, that's a great question.

First of all, we really are excited about moving Sony Ericsson to the 10 percent level.

We like what they are doing as a company.

They've been very innovative on the imaging side of the business and they're taking a pretty broad stance in audio.

So we're excited about the application.

But from a product perspective, it's exactly as you articulated.

They've been a reasonably high or very high share GSM GPRS power amplifier account for us with product roughly in the $1.50 range.

We've been successfully--we've successfully been able to move those folks up now to a $2-plus transmit [indiscernible] module that integrates switch-in discreets, passives, etcetera.

So it not only elevates the revenue for that customer, it gives them increasingly lower builds and materials, allows them to do more innovation on the multimedia side, and meets our gross margin goals.

And quite frankly, we're not finished with GPRS.

We hope to be talking more about Sony Ericsson and Edge and 3GR protectors as we move forward.

Great, thank you.

And my follow-up question is on the China market, which is I believe very important to your strategy going forward.

Is there any sense as to when that market will start turning around?

Have you gotten any sense from your customers?

Yes, I think it's really a company-specific phenomenon there.

There are definitely individual customers that look very good.

LeNoble [ph] looks very good.

Engleburg [ph] looks very good.

We participate across a broad swap and we actually have pretty wide penetration across the tier three.

So I think what you're looking at is some weakness in the lower tier, but some of the second tier accounts are starting to consolidate a little bit and strengthen towards the second half.

And our next question comes from Brian Modoff with Deutsche Bank.

Yes, a couple of questions.

One, how many or what vendors do you consider top tier?

Which ones specifically?

Nokia, Motorola, Sony Ericsson, LG, Samsung.

I mean, and that's our definition and also the industry.

But I will tell you that some of the ODMs that we deal with in Taiwan, companies like Compaul [ph], Arima [ph], and Quantum are quite substantial and we have very high share there--.

--But Brian, I think what you're getting at, when we refer to securing a top tier win, we're talking about that former growth that [indiscernible - background noise].

And given you already have LG and Samsung, can we assume the next one is going to be a larger market cap or a larger percent of market share or smaller from those two?

We haven't commented.

We can't.

But it will be significant and it's a big player.

Okay.

Well, given Nokia doesn't buy from anyone externally, we can kind of draw our own conclusions.

The second question, on WCDMA, when do you anticipate having a transceiver type product for that market?

Well, we have a--let me just roll it out a little for you.

We have the LIPA power amplifier.

We're moving into the front-end module with that LIPA power amplifier to integrate up with in the transmit chain.

We now have, as we said, Edge gaining traction.

We are developing wideband CDMA transceiver as we speak and will be mating those two in the near future.

And then, what's your--kind of, given some of the vendors like Walcom [ph] are attempting to integrate that product, how are you trying to penetrate that market?

Who are you targeting in terms of winning business in--?

--Well, we're targeting--remember--I'm glad you asked me because we're unique in this regard.

We are a transceiver company for both CDMA and GSM and I think most of the suppliers out there--Walcom is the only--Walcom is the CDMA supplier and everyone else is in the GSM space for the most part.

So the fact that we do both, moving to wideband CDMA, is an enormous technical advantage, because we can tell you with the scrapes and bruises to prove it that a CDMA direct conversion transceiver is not something that is simple to do.

It takes a very long time and a huge investment in engineering resources.

And wideband CDMA obviously is the amalgamation of things CDMA and GSM, with backward compatibility presumably for both standards.

So we think we have an enormous advantage and a big install base of CDMA and GSM.

And the way we will compete is that we can offer functionality that has terrific performance.

And we can do it at an extremely attractive cost price point for these customers.

There isn't enough competition in CDMA and we provide it and we provide at our customers' benefit through pricing.

Your next question today comes from Sandy Harrison with Pacific Growth Equity.

Thanks.

Good afternoon, guys.

Dave, just to build on that last--following up on that last question you were answering, given the fact that you guys do provide to both sides, CDMA and GSM camps, what do you think or if you had to estimate how far of a lead do you have on your competitors as far as having the CDMA products in that area?

Well, it's difficult for me to comment competitor by competitor.

But if you look across the space and ask yourself the question.

When we move to highly integrated architectures, in semi-conductor based highly integrated analog RF architectures, if you look at the competitive base, who has the capability to integrate in the IP and CDMA.

And I think if you go down the list you'll check the box GSM, GSM, GSM.

Sometimes Edge.

Never, almost never, CDMA.

So I think we're ahead by a lot if your assumption is highly integrated at the semi-conductor level transceivers for wideband CDMA.

A lot of what's--most of what's being deployed today obviously is a discreet based solution.

Lots of competitors, including us, with bits and pieces of it.

Our goal is to be integrated in a way that our competitors aren't and perhaps can't.

Right.

And going forward, what you're going to see is a technology called wedge where you have wideband CDMA and Edge in one phone.

Today, we're at introduction with our Helios solution.

We've talked about what we've done in wideband CDMA.

But we feel like the available [indiscernible] for us is going to expand substantially.

Got you.

And then my final question, what are you guys seeing over in the infrastructure side of the house?

A lot of focus on the handset side.

But how's the infrastructure side and how's your read on the health of that market right now?

It's okay right now.

I would say modest growth in that segment.

But if you look at the linear products business at large, which includes markets that go far beyond infrastructure.

We talked about medical.

There's some automotive business there.

There's even applications that are very strong in the satellite receiver market.

We're finding that product line in total looking very good going into the second half of the year.

And it's safe to assume that the structure is still 15 to 20 percent of rev?

About 15 percent of revs right now total?

Well, the linear products business, which includes infrastructure--infrastructure is not the total part of that business.

A linear products business which includes infrastructure in those other segments is about 20 percent.

And our next question today will come from Ahmed Kippur, Piper Jaffray.

Thanks a lot, guys.

I'm wondering if you could maybe talk about capacity utilization during the quarter, whether it went up or down?

And then, follow-up--you mentioned you saw some near-term weakness in WCDMA.

Are the delays you are seeing more demand driven or is it just a timing issue of when the carriers are launching that work?

Thanks.

Ahmed, I'll take the capacity one.

Not a lot of change.

Blended average is about 80 to 85 percent, a little higher in Mexicali, and as I mentioned, we're doing some things this quarter.

They're going to release some of the constraints there and have us bring things in house.

We're actually increasing some of the capacity, HBT and Newbury Park through--that's what some of the capital was about this quarter.

With respect to the wideband CDMA, this has been so hard to really nail the actual inflection point.

Looking very much like wideband CDMA was going to perhaps see some explosive sequential growth about this time frame.

And then, as it turned out, you started to see some real traction in Edge.

And so the debate has been does Edge delay in certain markets and networks the adoption rate of 3G technology, wideband CDMA.

And so I don't think our crystal ball is any better or worse than anybody else's.

We did expect more, substantially more, 3G revenue in the June quarter moving into September.

You're going to see it.

It's going to be there.

It's going to happen.

But it's significant.

It's significant impact on this guidance.

And our next question comes from Shawn Slayton, S. G. Cowen.

Yes, thanks.

Good afternoon, gentlemen.

This is Deepak Seiter.

I'm in for Shawn.

Could you provide us with the revenue mix between OEM and ODMs during the quarter?

Yes, I'm sorry.

The ODM mix was around 20 percent plus or minus a couple of points.

Okay, great.

And what about the revenue mix between front-end modules, RF subsystems, and linear products?

Deepak, the front end modules was just a little north of 50 percent and the RF subsystems, including cellular systems, a little bit higher than 30.

And as Liam mentioned, the balance was the linear products, including infrastructure.

Okay, great.

And lastly, Allan, in terms of the tax rate, for our model should we just maintain the status quo going forward?

You should.

We still have that NOL, and on a GAAP basis, it depends on how much of the mix goes to goodwill.

But basically, we'll see that AMT in the second quarter come down a little bit.

So it's the foreign taxes.

And that was the million--I'd still use the $1 million for your models for Q3.

Our next question comes from Edward Snyder, Chart Equity Research.

Thank you.

Generally, how large is the percentage of revenue with the Edge and wideband CDMA shipments in the quarter?

Let me get back to you on that one.

We just don't break it down that way and I don't have the numbers at my fingertips.

It's growing and it was up substantially sequentially, but we really don't give that level of granularity on [indiscernible].

Right.

It's obviously a growth area.

Yes.

Absolutely a growth area.

And then, there are some well-publicized problems with some of your competitors in Motorola.

And it kind of seems to open opportunity there for you to win some Edge business.

Should we look that as possible upside later this year?

Or is there like little chance that you could get on it given that they're already in production with their Edge product?

No, actually that's a good question and we certainly don't comment on what our competitors are doing, but we feel very good about our solution.

We're getting design traction with Helios.

The architecture that we used is closed Polar modulation, which we feel is an extreme benefit to our customers and it's a differentiator with respect to some of our competitors.

You know, about our position at Motorola, our customer relationship is very solid.

Our business level is extremely high, and we fully expect to be a player within Edge and Motorola very soon.

But certainly you seem like your solution provides a compelling alternative to what they've been going through in the last six months or so.

I guess my question is given the inertia behind design and call and all that, is there any chance that existing designs could be migrated to Helios or would that be folly on our part to think of that as upside for the year?

We're doing everything we can to certainly move the dial in our direction, and it's really up to the customer at which the timing where they can put the product into production with us.

So we're doing all the things we can do.

Motorola is very important to us.

We're trying to find ways to help them, and we believe we'll be successful.

Your next question comes from Jeff Kvall with Lehman Brothers.

Thank you.

I have two questions, if I may.

One is on the expected linearity of the June quarter.

What percentage of booked are you folks to that--the turns required there?

Allan, maybe that's best for you.

I think we're 80 or 90 percent booked.

We have to save a little bit because so much of our revenue now is HUB based.

It's nearly 40 percent of our revenue is HUB.

So it's getting to be a metric that is so difficult to really nail at any level of clarity, because they bore it down and tell us what to record as revenue after the fact.

So is that a booking or not?

Well, that's a fair point.

So we use their forecast.

As far as the long-term margin target, what other developments and timeframes are needed to get to those targets?

Well, you're going to see--we have assembled a team, some from Skyworks, many of them outside of Skyworks, on the system engineering, the device development modeling, and P&L product line management.

So we have new leadership who have come in to augment the strong component channel that we have and the component products that we have throughout our distribution network with our infrastructure products that drive very fast with these existing building blocks into these analog--precision analog and linear markets.

It's led by our VP, a fellow by the name of Stan Swearingen.

He's been with the Company now a few--I think going a third quarter.

And they are just really driving new products into that channel, several of them this quarter.

So we are committed to seeing growth in that segment of our business.

I think you'll see modest growth in infrastructure in that segment, but you are going to see a lot of growth in linear products.

And those products, every one of them, have a much higher gross margin than our existing product portfolio.

The other thing you are going to see turning up the dial on gross margin is the Helios Mini and some of our new TX front-end modules are already running high volume.

But the level of integration at the semi-conductor level and at the multi-layer board level is now taking out many of the moving components.

So you're going to see that in spite of ASP decline there, our contribution margin is actually going to move up in some of those high volume products.

It will be the combination of those two will impact the back half of this year.

And what we're really trying to signal is that the unit volume growth that will be driven by this big second half that most people are predicting in cellular handsets, is not something that we're going to count on for improvement in gross margin.

It will be great for us.

It will increase utilization.

But we're going to go after gross margin even in the balance cycle of the wireless market.

And that's something that we haven't done in the past that we need to do going forward.

(Caller Instructions.) And we'll take a follow-up from Randy Abrams, CSFB.

Yes, thank you.

I have a follow-up on the BAW filters.

I just wanted to see if you could talk about what was holding up some of the adoption of these before with all the benefits.

And then, talk about the dollar content per phone competitive landscape and how quickly you see it ramping once you have product into volume?

That was around BAW filter?

I didn't hear the first part.

Yes, around the BAW filter.

Yes, Randy.

Well, I mean, BAW has been around for quite some time.

It's BAW acoustic wave.

You have the resonance in the body of the PA through electric [indiscernible] as opposed to SAW, which is a surface wave.

So both technologies have been available for a long time.

What's great about BAW, as you move up higher in frequency, the BAW filters become increasingly more important, more efficient, and more of an advantage versus SAW.

So the high frequency nature of our business right now, when you move to 3G frequencies or even higher points of BAW, multi-mode, multi-band products require more filtering, more duplexers, more switches, more integration.

Ball filters are smaller.

They're easier to manufacture.

We have unique capabilities in-house here at Skyworks to really put those to the test and put them into the market.

So there's a lot of factors in the market that are great, but there are some specific things within Skyworks that make these an ideal complement to our portfolio.

Okay.

And just the second part of that is the competitive landscape with other suppliers there.

And then, what kind of dollar content does that represent on a [indiscernible] basis?

Well, there are competitors involved, but much less so than in the SAW market.

If you look into the opening comments with Dave, in the market today, the filter market is largely SAW based, but moving fast to BAW.

So there are competitors and we think we can be very quickly one of the leading suppliers.

And from a content perspective, if you look at some of these front-end modules right now, many of those devices will include filters.

And in some cases, you have to--if you did not have the technology in-house, you'd be procuring those devices and spending upwards of $1 for devices in some cases--50 cents to a dollar.

So that falls on in-house.

And the nature of the competition is quite different.

If you look at the transceiver companies and the RF solution companies, and even those pulling together transmit front-end modules.

So the radio folks, the front end module PA folks, they don't have BAW capability.

So the BAW is being purchased by big companies who tend to charge a lot, who aren't perhaps as responsive as we'd like them to be.

And companies who want to compete with us are going to stack margin.

We're going to do it internally.

And it's part of the strategy to be vertically integrated in areas where the merchant market doesn't get it done and the price structure doesn't work.

We are very unique from anybody who competes directly with us as a radio solution company.

And gentlemen, we do have approximately 10 minute remaining for our conference call today.

We'll take our next question from Steve Cundiff, Pacific Crest Securities.

Thanks.

I just have a question about your outlook for growth in the second half of the calendar year.

Just wondering about--just trying to figure out your ability to grow with the handset market or perhaps better than the handset market--what you need to see happen to do that.

And whether you think you need the transient customers to come back significantly to be able to do that?

Well, we believe not only will we grow with the market, but it's our charter to grow faster than the market.

What we need to do that is continue traction of our newest transceivers, a high attachment rate between our front-end modules and transceiver.

That trend is helping us a lot.

We are beginning to--we will continue to discount the uptake of those Chinese customers until we see evidence in the form of backlog and orders, because the third tiers have some work to do in competing with the likes of Nokia and Motorola in that channel.

The brand matters to those consumers and at the moment they seem to like the Nokia and the Motorola brand a lot.

So we will grow with the market.

We expect to grow faster than the market long-term.

Our next question today will come from Jeremy Bunting, Thomas Weisel Partners.

Thank you very much.

There's a renewed interest in PHS as it moves into PAS in China and other emerging markets.

You've had a historical PHS platform.

Is that platform still appropriate to emerge in PAS markets and do you intend to develop that line further?

Jeremy, yes, this is Liam.

We actually still do some low level business with our PHS platform right now.

It is not a significant percentage of our revenue within China, but there is some business with accounts like U.T.

Starcom and a few others.

So it is something that we are actually taking a look at--whether we want to put further R&D dollars into that.

But we do have some product today.

We have revenue within PHS.

It's not a real significant part of our product line, but it's something to explore.

Okay.

I think we have time for one more, operator.

Our final question today will come from Ambrish Srivastava with Harris Nesbitt.

Good afternoon.

This is [indiscernible] for Ambrish.

Just a couple of quick questions.

What is the ASP on the Helios Mini?

It will be in the ballpark of $5 per solution.

$5.

And the other question is on the CMOS switches.

How difficult or easy is it to expand your expertise into other CMOS products, like CMOS transceivers?

Well, that's--how--you don't migrate from a CMOS control circuit.

This is unique because we identified an application that no one has done in CMOS.

We applied our design expertise, our modeling capability.

We designed something that is much more highly integrated than what's out there today, works great for this application.

And so, we expect to see--to migrate.

Many of those customers were buying discreets and gallium arsenide products--into this more highly integrated CMOS.

It's cheaper for us to make.

It's cheaper for them to use.

And we get more dollar content.

The CMOS transceiver investment we have is intense in our Company.

So we have developed CMOS products, silicone-based by Polar products.

And so, I don't view them as being linked, quite frankly, although it is part of the umbrella of overall designing things--linear things and RF things and CMOS that you'll see much more of at Skyworks in the future.

When the application can be supported by CMOS, we'll design it in CMOS.

When it needs to be in a more RF friendly or a compound semi-conductor, we'll develop it in a compound semi-conductor.

And this will conclude the Question and Answer session.

I'd like to turn the conference back to our speakers for any additional or closing comments.

Thank you very much for participating in all the terrific questions.

This concludes our call today.

On behalf of the entire Skyworks team, thank you for your participation.

We look forward to updating you as the quarter progresses.

Thank you for your participation on today's conference.

You may disconnect at this time.