思佳訊 (SWKS) 2005 Q3 法說會逐字稿

Good afternoon, welcome to the Skyworks Solutions third quarter fiscal year 2005 earnings call.

Today's call is being recorded, and at this time I would like to turn the call over to Mr. Tom Schiller, Investor Relations for Skyworks.

Mr. Schiller, please go ahead.

Good afternoon, everyone, and welcome to Skyworks' third fiscal quarter 2005 conference call.

With me today are Dave Aldrich, our President and Chief Executive Officer;

Allan Kline, our Chief Financial Officer; 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 third fiscal quarter, 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 events 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 have 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 third fiscal 2005 quarter earnings.

And I'm pleased to report that the Skyworks team delivered another solid performance, beating top line expectations, exceeding (technical difficulty) gross margins and (technical difficulty) exceeding bottom-line (technical difficulty) while strengthening our balance sheet.

Specifically for the quarter, we delivered $192 million in revenue.

We expanded our gross margins to nearly 41%.

We delivered operating income of $12 million, which is up 26% sequentially.

We achieved earnings per share of $0.06, ahead of consensus estimates of $0.05.

We generated $25 million of cash flow from operations and we increased our cash balance to a record high of $235 million.

Now before I begin our business overview, I would like to spend a moment highlighting our gross margin performance, which again during the quarter we improved by 250 basis points sequentially.

As you may recall, at the time of our last earnings announcement we outlined our path to improving gross margins.

Quite simply, we recognized that volume alone will not drive meaningful margin accretion.

And thus we initiated an aggressive plan for improvement.

Today, I'm pleased to report meaningful progress towards this end.

Now to briefly restate our strategy, there are three key drivers.

In addition to increasing volumes, which will enable Skyworks to achieve our 45% target model next year, the first is to diversify further into our linear products markets.

Second, increasing the content of our wireless platforms as a means to provide more value to our customers, while avoiding aggressive component price erosion.

And third, decreasing the cost of our products and streamlining our manufacturing operations.

Now I will elaborate a bit on each aspect of this three-pronged approach.

First, growth of linear products.

Our linear products business' clear charter is to be a leader in innovative analog solutions.

Here we continue to develop and deliver differentiated products that leverage our core skillset.

Including product design, we now have over 80 dedicated engineers supporting this effort, our experience base in critical process technologies, models, simulation and the like, and very strong catalog and specialty distribution sales channel.

Towards this end, during the quarter we ramped production on several linear products, ranging from a suite of CMOS switches with integrated logic for satellite receiver applications, to precision analog products in support of the Fortune 500 medical technology company, and automotive tire pressure sensing devices.

During the quarter we also introduced several new linear products, including a suite of highly linear game blocks that support multiple applications spanning medical equipment, test and instrumentation, cellular infrastructure and broadband communications.

We also introduced an ultra-compact dual mixers and DCOs for the 3G infrastructure market, and advanced ceramic solutions that are ideally suited to support very low-cost RFID applications in consumer and industrial.

The common thread here is that all of these products have longer product lifecycles, they have high barriers to entry, and in turn have substantially higher gross margins than our Company average.

Second in our three-prong approach, in our core wireless business we are developing products of higher levels of integration, more value.

And I will briefly touch on a few examples.

In our front-end module line, here we are offering modules that incorporate amplifiers, power amplifier control circuits, switches, discretes, passives in a single package.

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

We are well down the learning curve with high production yields and shipments today of over 65 million units cumulatively from the product introduction that is just one-year-old.

Further, we already released versions supporting CDMA, EDGE, and wideband CDMA applications that provide more functionality and are fully half the size of alternative devices.

On a related note, last quarter we discussed our entry into the high growth and highly synergistic bulk acoustic wave or BAW filter market.

Our program, incidentally, is proceeding ahead of our plans.

And we recently successfully introduced our very first complete filters for UMTS.

We believe BAW is an enabling technology to low-cost RF solutions for next generation providers (ph) (technical difficulty) and we're quite pleased to have developed this capability internally.

Now let's move up the value chain.

Here we are gaining market acceptance and share with our Helios EDGE radio, as LG and Samsung ramps phones based on this solution.

It is the world's smallest complete EDGE radio, and by combining our front-end module with our single-chip direct conversion transceiver, we have significantly cut RF space, board space while improving performance and reducing our customers' bill of materials.

Now the concept here is very simple.

We provide higher levels of integration and more features.

This enables our customers to lower their overall bill of materials and get to market more quickly.

We in turn receive additional dollar content per phone, and thereby avoiding some of the ASP erosion.

This is a true win-win relationship.

Now the third element in this three-pronged approach to improving gross margin is to decrease the cost of our products while streamlining our manufacturing operations.

Specifically, we have recently appointed Bruce Freyman as our Vice President of Worldwide Operations.

Bruce came to us from a leading, very high-volume, low-cost assembly and test supplier where he held top executive positions.

Bruce brings both experience and a true passion for driving cost of out of our operations.

This is particularly given his background in the intensely competitive merchant market.

We also announced we have exited the assembly and test services business, supporting Conexant’s product.

This was a legacy of the merger after we fulfilled a three-year obligation at the end of June.

As a result, we have restructured our Mexicali assembly and test facility.

We have re-laid out the factory floor with high efficiency pull system-based cells, manufacturing cells.

And we recently reduced our Mexicali workforce.

Now operationally and in parallel, we have improved yields on our high runner products and we created very focused tiger teams to accelerate die shrinks, improve factory linearity and increase our inventory turns.

Our focus is on improving our business fundamentals -- our operational fundamentals, to enhance our flexibility while lowering our manufacturing costs.

At a higher level, we believe these three initiatives, the three-pronged approach to improving margins will allow us to create a sustainable competitive advantage.

We will continue to focus on the high value, highly integrated architectures such as front end modules, multimode radios, multimedia systems, that offer differentiated (technical difficulty) lines to our customers.

Now to this end, we truly don't see much benefit from pursuing a commodity-based product where pricing is the determining factor.

We believe we can and will strike the right balance among gaining market share, maintaining pricing power, and delivering superior value to our customers.

Okay, just to summarize on these initiatives.

Diversifying our business with our linear products portfolio, increasing the content of our wireless products, and decreasing the cost of our products are setting the stage for further gross margin expansion not only this next quarter, but also this year in the realization of our target model of 45% in 2006.

Okay, now let's shift gears and discuss some of our last quarter's customer highlights.

From a key account perspective I will start with Motorola.

Our front end module is now proliferating across their refreshed line of GPRS phones.

This is highlighted by their flagship ultra-thin RAZR V3.

At the same time, we're making strong inroads into their 3G platform supporting a handful of new models, as well as across CDMA, 1x and EVDO applications.

With the MP3 capable E815 phone and a CDMA version of this highly popular RAZR platform.

We anticipate continued growth from Motorola in the current quarter, and fully expect to participate with their 2006 EDGE offerings with both our front end modules and our radio solutions.

Turning to Samsung.

In addition to being the leading supplier of CDMA power amplifiers, we're now capturing share in stand-alone GPRS power amplifiers. --and last quarter won a strategic design win with our Helios mini radio solution for EDGE platforms.

Meanwhile at LG, we're satisfying an increasing portion of their CDMA, GPRS and wideband CDMA phones, including their u8130 3G handset.

And we are also supporting the complete line of their new EDGE models with Helios, highlighted by the A7110 and A7150 phones.

At Sony Ericsson, we're migrating from simply providing stand-alone GPRS amplifiers to supplying complete EDGE front end modules.

A special note, we're in their award-winning D750i imaging phone which features a 2 mega pixel camera with video streaming and auto focus.

And we are across their family of upcoming Walkman platforms, all the while increasing our dollar content per phone, while again reducing their cost and reducing their footprint.

At the same time, our PA, RF and system platforms are supporting a wide range of models from other leading OEMs.

These include the world's largest and others such as Kyocera, Lenovo, NEC, Mingobird (ph), Panasonic and UTStarcom.

As well as the world's leading OEMs, including an Comal (ph), BenQ and Qantas (ph).

Looking forward in fact, we're encouraged in we are encouraged by the design opportunities resulting from the BenQ/Siemens deal, as BenQ has been a very strong and long-standing PO and radio customer of Skyworks.

Meanwhile, I am pleased to report that Broadcom has recently selected our internal front-end module for 802.11 wireless LAN applications as a reference design for use in conjunction with their 54G chip set.

This module builds upon our core analog technologies, integration expertise and multi-chip module packaging capabilities that were developed and perfected in the cellular handset.

We're equally encouraged about the prospect of our new EDGE multimedia systems (technical difficulty).

This contains our latest generation baseband Helios radio, front end module, power management and mixed signal as well as class 12 protocol stack, which is currently sampling.

Now with regards to cellular systems, during the past several quarters we have developed partnerships with technology companies like Arm (ph) and StarCorps to provide a state-of-the-art baseband while at the same time lowering our investment in DSP technology.

We're lowering our R&D investment in DSP.

And in addition, we have improved our contribution margin in this segment with the introduction of much smaller silicon designs.

This reflects our strategy to focus where we add significant customer value.

And in the case of cellular systems, to be clear, it is regional customer support and very deep customer relationships.

It's analog and mix signal systems integration.

It's our ability to enable a whole suite of multimedia features (technical difficulty), our systems knowledge and software, and our ability to put it all together and accelerate our customers' time to market.

So while we're not modeling growth from our cellular systems customer base in the near-term, it will provide an increasing contribution margin while complementing our analog and RF product offerings.

Finally, I would like to spend just a few minutes discussing our relationship with Qualcomm.

We have settled the patent infringement litigation that began in federal court in 2002.

In connection with the settlement, we have granted Qualcomm a worldwide license to manufacture and sell integrated circuits under Skyworks' patents at issue in litigation.

And likewise, they have granted us a worldwide license to manufacture and sell RF integrated circuits under their patents.

As a result, all claims and counterclaims have been dismissed.

Now in parallel, we have established intellectual property licensing business with our patented Selectable Mode Vocoder technology.

This technology will bring capacity and quality improvements to CDMA carriers and consumers worldwide, and we granted Qualcomm a worldwide license for SMV for use with their baseband and software.

We look forward to generating royalty revenue in 2006 as we begin to license this technology worldwide.

The bottom line is we're very pleased to have settled our differences and moved forward with Qualcomm under these new and we think mutually beneficial agreements.

Okay, to summarize, we delivered strong performance.

We met top line expectations, we exceeded bottom line estimates.

We gained traction with our linear products portfolio and our Helios EDGE radios.

We expanded gross margin by 250 basis points to nearly 41%.

We strengthened our balance sheet and we drove our cash balance to nearly $235 million, all towards the realization of our target of 45% gross margin in the year 2006.

I will now turn the call over to Allan for his financial review.

Allan?

Revenue for the third quarter was 191.5 million, consistent with our guidance and reflecting the ramp of our newest linear products and share gains in RF solutions.

This was offset by softness from a subset of tier 3 cellular systems accounts.

Gross profit for the quarter, 77.9 million or 40.7%.

And that is above the 40% guidance we provided 90 days ago.

It resulted from higher product contribution margins and improved product mix, supplier cost reductions, operational efficiencies, including higher yields and die shrinks, especially as we moved down the front end module manufacturing learning curve, and crisp execution of the internal initiatives which Dave described.

Operating expenses were 65.6 million, yielding operating income of 12.3 million, a 26% sequential improvement.

Meanwhile, interest expense for the quarter was 3.7 million, offset by interest and other income of 1.5 million with a $700,000 (technical difficulty) for income taxes.

In turn, net income for the quarter was 9.4 million or $0.06 a share, ahead of consensus estimates of $0.05.

Turning to our balance sheet, which strengthened considerably during the quarter, cash and cash equivalents and short-term investments increased to 235 million.

Of note, we generated $25 million of cash flow from operations.

We invested 11 million in capital expenditures.

Depreciation was 9 million.

And we reduced our accounts receivable by 4 million.

Now to our business outlook for the fourth quarter.

We anticipate revenue for the fourth quarter to be up 4% to 8% sequentially off the base of 187, million which excludes the third quarter assembly and test service revenue of $5 million for Conexant.

As previously announced, at the end of June we fulfilled our obligation to provide these assembly and test services.

Our revenue growth in the fourth quarter is being driven by the ramp of our linear products portfolio and traction with our EDGE and WCDMA solutions.

Operationally, we expect gross margins to expand another 75 to 100 basis points, with essentially flat operating expenses.

As a result, we plan on delivering approximately 40% sequential improvement in our level of operating income.

And this is on top of the 26% growth performance this quarter.

Let me take a moment to reemphasize some of the key points that Dave made.

The entire management team is committed to showing improved margin performance.

We have identified paths and developed technical and strategic action plans to this end.

And we look forward to sharing our progress with you as we further execute these initiatives, particularly as we move into 2006.

Below the line, we suggest modeling net interest expense and other expenses of 2.5 million and using a provision for income tax of $1 million on a base of 161 million shares.

As Dave mentioned, we downsized our Mexicali operation by roughly 250 people following our extra of the Conexant business, and consequently we intend to take a $2 million charge related to severance costs in the fourth quarter.

This charge will not impact our pro forma results.

In closing, and perhaps most importantly, we're forecasting another quarter of strong cash flow generation from operations.

That completes our prepared comments.

Let's open the line for Q&A.

(OPERATOR INSTRUCTIONS) Ittai Kidron, CIBC World Markets.

Congratulations on a good quarter.

A couple of questions from me.

First, on the past few days we have heard from many OEMs and declining ASPs and pricing pressures.

When you sell a solution into a low-priced phone, what is your content typically over there?

And what are the margins on those types of solutions relative to your average in the Company?

Well, we see very little difference in the ASP when we have a lower end, mid-tier or a high-end.

I think as we are increasingly seeing on the high-end we tend to be enabling and providing hooks for more and more multimedia-rich, which of course has the potential for more content.

But at the end of the day for a front end module, they are quite similar on the low, mid and high tier.

Several on the low-end where we have more baseband (technical difficulty) than we do on the high-end, where we may with top tier customers be focused more on RF solutions, radios and front end modules.

The net effect is they are quite similar.

Okay.

That's good.

Second, looking into the second half, what do you expect with regard to the big industry itself?

And also looking into '06 how quickly the linear business need to ramp in order for you to reach your 45% target?

Those are great questions.

Certainly with respect to the industry at-large, we're going with consensus view.

Third party data from Gartner’s suggests about 750 million units for the calendar year, which would imply a pretty strong second half.

We're modeling numbers in that range.

As we look at linear products, as Dave outlined, this is certainly an area that we are going to invest in heavily on the product development side.

On the sales and marketing side with my team, we're very excited about the opportunities.

We're starting to see some traction in markets like Europe and Asia.

Traditionally this has been more or less a North American-driven business for us.

So we think that business is going to grow faster than the market in '06 and going to be a big driver in our 45% margin plan.

Sandy Harrison, Pacific Crest Equity.

Could you talk a little bit more about some of the importance of the Qualcomm.

That's -- it sounds pretty intriguing, the fact that they have sort of -- you could argue capitulated on the technology.

And that said, how hard was it selling some of your WCDMA ideas and products with the overhang of the Qualcomm.

And has this opened up some doors for you now that it has cleared the air?

It is important in that it was a distraction to us to be battling with Qualcomm.

That is behind us.

The relationship from our perspective now is quite good.

It was beneficial, we think, to both parties.

We believe we are in a position in to begin to see a revenue stream over the long haul for some real fundamental technology that we have in CDMA, basically this Vocoder technology.

So we think that is upside for us.

We're quite fortunate to have a very broad patent portfolio.

Much of it, quite frankly, came over from the Conexant Rockwell days when we merged our business Alpha with Conexant.

We have a broad and deep technology portfolio.

It gives us an opportunity to take a defensive posture with some companies, and also allows us, we think, over time to begin to generate an IP licensing business and revenue stream.

And when do you see the -- I am assuming that this business, given it's IP, is pretty strong gross margins.

When do you expect to see it trickle in?

When you think that Qualcomm will have some of this out?

It is a technology that is just being released in new bay stations.

It is SMV or 4GV technologies.

And it begins to trickle in in early '06.

And this technology is typically good for many years.

Jeff Kvall, Lehman Brothers.

Thanks very much.

Allan, a quick question for you.

I'm wondering if you could talk a little bit about the gross margin expansion in the third -- or the September quarter, and clarify how much of that comes from operational improvement and to what extent the cessation of your agreement with Conexant factors into that improvement?

Thank you.

I mean, Conexant will help us but more of it is still the improved contribution margins in each of our products, the cost reductions and the efficiencies, the packaging, the die shrink we talked about, the operational efficiencies is more of it.

Ahmed Kippur, Piper Jaffray.

I was just wondering if you could comment broadly on how customers are ordering these days.

Are they still taking advantage of your short lead times and your ability to deliver products to them quickly?

Or with global stamping units rising amongst many of the major OEMs, are you starting to see order flows starting to become a little bit more stable?

Yes, we are very proud of what we can do operationally.

So we leverage our short lead times and cycle times as a competitive advantage, and we encourage that.

But on of the things we are seeing, we talked a lot about it in the last few calls is, our major customers are really moving towards hub model with Skyworks, which has quite a few benefits for us.

We get excellent visibility.

The order flow comes in through a consignment operational system, so it's a little bit of a different play.

But we get quite a bit visibility there.

If you look at the top four or five handset OEMs, the majority of those are going to be using that model.

And when you move in the second and third tier, it still does get to be kind of a short lead time play.

And to the extent we can compete on that aspect and we do very well, we can pick up market share.

Great.

A quick follow-up.

In terms of (indiscernible) the royalty revenue that you talked about that should start trickling in 2006, strategically, how do you think of this business?

Do you think it is something that may be measured in hundreds of thousands of dollars or millions?

Or can you give us an idea of the magnitude of how you view this business longer run?

It is a strategic to us, I think, in that it positions us as an IP leader in an industry that will grow as we move into more and more third generation technologies, multimedia services.

We've a strong patent portfolio.

That is an opportunity to be both defensive and offenses with it.

The agreement itself is confidential, and in fact we are required by the terms of the agreement not to disclose anything specific.

So I can't get into the financial terms.

But it is strategic to us and we think, again, a win-win for ourselves and Qualcomm.

Cody Acree, Legg Mason.

Over the last couple of quarters you have been spending a lot of time talking about things outside of the wireless market.

Obviously a lot of things going on.

What can we look for Skyworks to look like over the next couple of years as far as R&D intensity?

Where is the money going to be spent?

How are you going to keep this many irons in the fire?

What is the effort to make sure you maintain your traction in wireless and continue to grow in the new areas as well?

You asked a lot Cody.

Let me see if I can dissect it a little bit.

What you should expect to see from Skyworks is growth in both the top and the bottom line going forward.

A great deal of concern in this industry has been around is it the case that you can grow unit volumes and at the same time expand margin.

And I would put forth to you that is absolutely possible if you have the breadth of technology and the manufacturing muscle to integrate upwards in a way that adds value to your customers.

The products we have today, the R&D we're spending today in wireless is providing products that are smaller than the competition or smaller than the combined discrete implementations that are in place today.

They are therefore lower cost from a bill of materials standpoint for our customers to integrate on their board.

Fewer moving parts is usually lower cost.

Much smaller.

Highly efficient.

Again, the name of the game today is they're adding a lot more and more features, which in a fixed volume of cellular telephone is putting a great deal of pressure on the existing chipset functionality.

So our R&D is going into areas that add value.

And as we do that, we do get paid more per dollar per phone because we our customers receive less BOM cost per phone.

So you will see us investing very heavily in there.

That is what our customers need and want, and what I think in many ways we are uniquely capable to do.

And you will see us, as I mentioned we now have 80 engineers strong, we're going to take that core capability that is very much a requirement in these broader analog and linear markets, and we like those markets a lot.

We have an arsenal of people in application support.

We know how to move those kinds of products.

So you are going to see us spending in both areas.

But we will not take our eye off the ball on innovation in wireless.

You will see us pushing less and less the single function components, where the ASP is most aggressive as competitors who really don't have the capability to move up the food chain really have no choice but the lower ASP on a shrinking piece of the pie.

We've got low cost structure there, but that's not where putting any R&D for the most part.

Randy Abrams, Credit Suisse First Boston.

Yes, good afternoon guys.

First question on the cellular system.

I wanted to see if you could elaborate a little bit.

In the prepared remarks, you mentioned you were not modeling growth in that segment.

Could you talk about trends there?

Is that a function of the tier 3s just not coming back, more competition, or any other factors going on in that side of the business?

I think Liam could help you with this question.

It is clear that the top tier OEMs, with the strength of their brand have moved heavily to regain the shares that had begun to be lost let's say a little over a year ago.

And that is old news, but that has been a factor.

And operationally, what we have chosen to do there is we don't see ourselves differentiating Skyworks as a leader in DSP technology.

We are, however, a leader, we believe, in our ability to support customers with a broad portfolio of technology.

We have deep customer relationships.

Our people are where our customers are.

They're in all four corners of the earth.

We are able to take our RF, analog, radio, mixed signal and digital capability and put together a shrink wrap solution that many customers need.

So we're differentiating in those areas rather than, as we had in the past, trying to be -- investing heavily in core DSP technology.

In terms of the market?

It's also been for us kind of a very specific play into the China market.

We are doing still quite well there, but there's limits to the growth we can enable given the market share gains by companies like Motorola, Nokia and Sony Ericsson.

So on one hand, we may be seeing some softening or flattening on the DSP side.

But if you look at what we are picking up on the power amplifier and RF side, it is still a strong market for us.

Maybe on Motorola, I think in the remarks you mentioned about EDGE potentially getting in with transceiver and front-end module.

Maybe talk about that.

I think that is the first time you mentioned that.

But what is the magnitude of that design win momentum there, and just timing of when some of that will start to ramp?

Sure.

First of all, before we get into the EDGE business I want to tell you that our business at Motorola today in GPRS has never been better.

We are in every RAZR phone right now on the GPRS side.

We're moving into the CDMA RAZR.

And our plan for the next couple of quarter looks very strong at Motorola.

So we feel very good about that.

Certainly on the EDGE side, it's been business we have been pursuing for quite a while.

Our traction and our performance looks better and better, and we're very close to be able to put that one on the board as a design win.

Brian Modoff, Deutsche Bank Securities.

A couple of questions.

First what do you see on the WCDMA side in terms of volumes in the back half of the year for your business there?

When do you expect to have something on the transceiver side for WCDMA?

And then when are you -- what is the pricing environment looking like out there, particularly on the PA side with the likes of (indiscernible) (technical difficulty) being pretty aggressive?

Let me first answer the pricing.

It's the last and perhaps the easiest one.

We are seeing the pricing quite aggressive in the single function products.

That might be a single function power amplifier, for example.

The pricing there is quite aggressive.

There is competition.

And the dynamic we discussed before is that there is competition with capacity, in some cases lots of capacity.

So that's where it's the most aggressive.

It is not nearly as aggressive when you move up the integration food chain.

So as you move into TX front-end modules, it is -- we're so unique in that regard that it really is more about how much functionality can we continue to offer.

BAW filters, for example, bandpass filters, switches.

We're really -- the play there is we are adding more content and shrinking the footprint, and as a result we are able to do pretty good job of maintaining ASPs.

And then the further you move up the food chain the more that is the case.

You have fewer competitors with the capability to address it, and therefore classically you have less competition.

So that is how pricing moves.

And with respect to WCDMA in general, we're very well-positioned right now in the front-end module area.

We have going into production in September and further out in December four major OEMs with multiple phones that will be supported by Skyworks solutions.

So we feel very good about that going into the back half of our calendar year and also into '06.

Would that include things like the Motorola WCDMA RAZR?

We are in Motorola -- yes.

I am not sure if it's actually a RAZR phone or not, but we certainly have content at Motorola.

We have content at LG, Samsung, several others.

Jim Faucette, Pacific Crest Securities.

Great, just a couple of questions.

First of all, in looking at some of the products that you're looking -- that you're hoping to use to expand upside, just your traditional wireless business, how should we think about the ramp in those and their opportunities to be significant revenue and earnings contributors going forward?

I guess I'm asking how soon can they get to 10% of revenues or 20% (technical difficulty)?

The linear products segment today is high teens.

It is growing.

It's growing sequentially and is beginning to get -- I guess it would call it ahead of steam.

The way this works is a little bit different.

You tend to have a broad product portfolio, which we are developing.

We have an ever-expanding catalog.

We introduced many products, in fact, in the current quarter.

We tend to have a broad product portfolio.

And over time, it's a snowball effect when you begin to address more and more applications, more customers, and it builds.

And as you capture a socket, you tend to stay in that socket four (ph) years, in some cases many years.

Product lifecycles are very long.

It's a little bit less the case, as it would be, in wireless where you're out looking at $20 million, 10 million, huge opportunities.

It's more a slow, steady increase in the amount of applications you can address through the expanding of the product portfolio and more and more customers.

But it is growing in an expanding way this quarter.

It will grow next quarter.

In '06 you will start to see more and more improvement in that business.

And it has a very different pattern.

Most of these markets are not terribly seasonal and not as cyclical.

And just along that line, do you have to spend as much in terms of sales support, etc. and getting the components into designs?

Or is that something you can do more through the indirect distribution and sales channels?

Definitely a change in the way we go to market on the sales side.

There's two schools here.

There is a distribution play that is very -- a very standardized product that we will go after.

Some of the portfolio would include devices like game blocks that were just released in the last quarter.

But we also have a highly specialized team that will pursue precision analog solutions that will go in a variety of applications -- medical, automotive, etc.

Those types of products also give us very long cycle times.

You have four or five year or longer runs than the customer and super margins.

Incidentally, from a research and development or an investment standpoint, it is lower research and development because not all that much of it is incremental.

The core platforms we developed and perfected for handsets, for wireless infrastructure and so on are the very same capabilities, the analog mixed signal modeling, the semiconductor process technology.

Some of the specialty processes we developed or relationships we have in the wireless are exactly what many of these customers and products require in linear.

Most people do not realize that.

But it's a pretty -- it's not a big R&D burden.

It is the sales channel diversification that Liam is managing.

Jason Tsai, ThinkEquity Partners.

Just a couple of quick housekeeping questions.

Can you give us a breakout of the front-end module versus cellular versus linear this quarter?

Sure.

The front-end modules were more than half.

The RF systems and cellular systems more than a quarter.

And as Dave mentioned, the linear products high teens.

High teens.

Okay, great.

Last question here, just a breakout between CDMA, GSM, EDGE and perhaps WCDMA as well if that is even a part of it yet?

Well, the GSM and the CDMA is about 80/20.

Shawn Slayton, SG Cowen.

No, this Deepak Citaraman (ph) for Shawn.

Just a follow-up on gross margin.

You identified three areas you expect would drive gross margin improvement.

Can you perhaps qualitatively talk about which of these three areas made the biggest contribution to the gross margin improvement during the June quarter, and also what you would expect going forward?

It's hard to do, but I think we can qualitatively.

Clearly -- Bruce Freyman and his team, the focus on shrinking the die on our high runners, improving factory utilization and yield is a huge initiative in our Company.

It benefits not only gross margin, but in those more efficient operations comes shorter cycle time, which allows you to react to market swings and upside opportunity.

So it's good all-around.

That is a big focus in our Company and that is impacting this quarter.

It impacted last quarter.

The linear products contribution margins are a full 20 points higher than what we have in wireless.

So we grew that sequentially this quarter.

We'll grow it again sequentially, albeit of a small base.

But we have been at this now for -- moving on a year.

So you are starting to see some snowball effect there.

So I have to say that it is being impacted by all three.

And also, we continue to have cost reductions from suppliers and we were able to increase our efficiencies.

So we had more product manufactured in-house, which is lower cost to us, rather than the variable cost outside as well.

Great.

Could you just remind us what ODM revenues were for the quarter as a percentage of total?

Also, if there were any changes to your 10% customers?

On the ODM front, the number is still (indiscernible) roughly in the 15% to 18% level per quarter.

And the 10% customers (multiple speakers) Sony Ericsson.

Samsung, LG and Nokia, very close.

Blaine Carroll, Oppenheimer & Co.

Liam can you just say that again, please, on -- you said --

Yes.

Motorola, Sony Ericsson.

Samsung, LG and Nokia are right around the 10% level but not quite there.

Okay.

So those three.

Samsung, LG and Nokia.

Yes.

I don't want that to count as one of my questions.

Okay, no problem.

Allan, a couple of quick ones.

How -- book value for the current quarter, what is the dollar content within a phone right now?

And then Dave you mentioned that some of the tier 3 players, there was some softness there.

Can you go into a little bit more detail on that?

And then one last one probably for Allan.

Have you thought about how you're going to handle the expensing of options?

123(R) requires us starting in Q1 next year to expense options.

And if we have vested options, we will start expensing them in the first quarter of next year.

In terms of booked, it is about 90%, as we mentioned, last quarter.

Because of the hubs visibility, it is a little tougher.

It jumps around a little bit.

And we don't disclose the dollar content per phone.

Did that answer -- respond your questions, Blaine?

His line has been shut down.

In fairness to him, I think it was another element.

Part of the question was what do we see in terms of these third tier customers, and I think that we are modeling that business to not show growth or flat.

And we think that is a prudent way to model it, given the aggressiveness we see on the part of the top tier OEMs and other dynamics.

So that is the way we are modeling it.

We could always be wrong, I suppose.

But we think that is a safe way to model it.

Niraj Patel, Wachovia Securities.

Just from your view and perspective, are you seeing any customer interest in wedge devices?

Absolutely.

That is certainly an avenue for investment and growth in 2006.

There is not a lot of focus in production right now with that type of solution, but multimode is probably the way we would phrase that.

Device that are wideband CDMA, backward compatible to EDGE and even GPRS is the name of the game, particularly in the tier one space.

Not only do we feel well-positioned with our power amplifier and transceiver, but our switching technology becomes a very, very key attribute on this as you need to channel among these different bands and frequencies.

So that is a real driver for the market.

You will start to see some design traction in early '06 and a lot of uptake in the back half of '06.

I would like to elaborate a little bit on Liam's comment because I don't think a lot of people realize this.

When you move into multimode, which is where this market is heading, or at least a segment of this market is heading, one of the advantages we believe we possess is that we are equally strong, we believe, in both CDMA and GSM-based technologies.

And when you go multimode, that's going to be increasingly important.

That's one of the reasons why the settlement was so important to us.

Okay, just a quick financial question.

Tax rate for '06, what should we be thinking there?

Well, we modeled for the last quarter $1 million.

We still have a $200 million NOL.

So on a pro forma basis, it shouldn't change that much.

And we will come up next quarter for you with a tax rate as we look into next year on a GAAP basis, if that's what you are asking.

It's somewhere under 30% on a GAAP basis.

Pierre Maccagno, Needham.

Congratulations on the quarter.

Could you comment on the migration of the -- you had, if this is right, 25 DCR (ph) customers, and how is that migration progressing to the single package review?

What percentage of customers us have migrated so far?

And then I have a follow-up.

What we are seeing more than -- I think we made in our prepared comments a statement we have in the release, just past the 1 million unit volume point for the single package radio.

That is the ultimate where we include the received SAWs, all transmit functionality.

It's basically everything, taking you from the baseband process or mixed signal device to the antenna and back.

But that we're seeing that -- that's a great product for certain class of customers.

What we are seeing, though, is a lot of interest in bundling.

The hooks between the power amplifier and the radio are creating some advantages, particularly when you move into EDGE and multimedia.

We think that the performance of the power amplifier and radio together can be optimized as a system better if provided in a bundled way.

So we are seeing a lot of interest in bundling.

And we will be talking and subsequent quarters about products we are -- that we have released that are somewhere in between, if you will, the bundled PA and the single-chip DCR and the single package radio, where perhaps a customer wants to source their own filter and other functionality.

So we will drive the radio through a transmit chain is another architecture that some customers use.

So I would say it is more of a bundling phenomenon than it is a single package radio today.

And then the reason for that?

It's -- I think it provides the customers a bit more flexibility.

And I think many customers, particularly the top tier OEMs, have great deal experience laying out boards.

So they have an infrastructure and the capability to do that, so it's less of an easy sell.

Okay, the linear products, are you targeting mostly the wireless market?

Or are you -- is it quite broad?

Also, are your devices necessarily based on gallium arsenide or are they mostly silicon based?

They are more silicon based, although there are gallium arsenide components.

We cut our teeth in the non-handset space on the infrastructure.

That is classically what -- that's been the level of our diversification up until perhaps a year ago.

The products today are automotive sensors.

They are silicon control circuits, things like satellite reception, video.

Some of the products are in the medical services arena, which is kind of unique for us.

We are expanding our portfolio.

We're very strong in ceramic materials and material science and some -- we have capabilities there that we are applying to automotive applications, industrial applications, instrumentation.

So it is not wireless for the most part.

The new products are not wireless for the most part.

Edward Snyder, Charter Equity Research.

Thanks, a couple.

First, I heard a lot of reports out of the OEMs about accelerating price erosions.

Nokia, Motorola, Samsung, actually everybody said the same thing.

I am just trying to get an idea of your forecast for revenue growth in the short-term, and of course with 45% operating gross margins in the long-term, what does that assume for your primary customers -- a price erosion model?

Or do you even incorporate it that far down the food chain?

Also I had a couple of questions on the Samsung win we heard about recently.

If you look at the products we are discussing, the Helios radio, the new integrated direct conversion products and CDMA, the front end modules, sticking with wireless for the moment.

Those products are geared towards allowing our customers to pretty dramatically reduce their BOM cost.

So we model an increasing content of that class of product and a decreasing content of the single function product, the simple switch in a plastic package, the simple power amplifier module.

So again, the price erosion that we are modeling and that we fully expect is that you will see aggressive pricing on the single function product, perhaps 20% or so, and you'll see much less aggressive because it is much more our ability to add functionality.

I will give you an example.

By going vertical into BAW filter technology, by producing and designing our own BAW filters, we're taking the single highest dollar content front end product today that we don't make and providing a very low-cost way to have high-performance filtering under our roof.

We can take that, along with our assembly and test capability in Mexicali, our switch passive power amplifier, and we can combine it in a way that I think is going to be very, very tough for the competition but very advantageous to our customers.

Basically you are swapping out any acceleration in your customers' price erosion by grabbing a lot greater content per phone through greater integration.

Precisely.

We're cannibalizing our own business moving up the food chain.

That is our strategy in wireless.

And the other thing, our cost reductions are keeping up with the price erosion so we are maintaining or improving our contribution margins.

Ittai Kidron, CIBC World Markets.

Just a follow-up on WCDMA.

You mentioned several OEMs you shipped to, but is that the WCDMA PA?

Or is that the 2G PA with the WCDMA handset?

No, these are WCDMA PAs.

Cody Acree, Legg Mason.

A couple of quick things.

Following up on that, WCDMA, when we look for a transceiver in WCDMA (inaudible)?

Today we have moved, as you know, into the multimode EDGE arena.

We're moving into digi RF, which is a direct conversion, fully (indiscernible) mixed signal functionality forward.

You will see that, we think in a meaningful way in '06, moving into '07.

It's about the same time you will see wideband CDMA.

The state of wideband CDMA designs and our participation, and the market for that matter, is much more of a discrete implementation.

The cost of implementation is high.

There are lots of discrete components, parallel paths for transceivers and amplifiers.

We think it's far too expensive for the market adoption of CDMA -- I mean of 3G wideband CDMA products moving forward.

But there is it an awful lot of architectural debate going on, and changes.

Our customers are implementing different system approaches.

So we think you will see meaningful transceiver, more highly integrated radio volumes late in '06.

But you will see it creeping in and throughout '06.

But will be more discreet.

Okay.

And then Dave, you had given us before a model that said 45% gross margins at about 250 million in revenue.

That was a few quarters ago when we were talking a little more specific to wireless.

With a business model that is a little more diverse, does -- are you still talking about the same revenue target?

I think the model has matured and migrated.

I think recognizing the pricing pressure on the single function products, we have really have begun to move our R&D engine more intensely towards product integration and then taking that into quite complementary diversified markets.

If you look at our high contribution and our level of capacity that we have available to us, we think we can get there with less revenue.

Which is why I said for the first time, I think, this call that we think we can get there in '06.

Because we think it's less -- it's a function of revenue, but it's also a function of these initiatives, many of which can happen with or without the seasonality in handset and some of this stuff that made it so difficult to forecast wireless handset volumes.

We want to be diversified, more predictable, a little more boring business, quite frankly.

James Faucette, Pacific Crest Securities.

I just wanted to follow-up on your commentary about the potential to get into Motorola with (inaudible) your EDGE products.

If you were able to win that design, would be a similar type platform solution do you envision, similar to the one that has enabled you to be across different models of the V series and the RAZR?

Actually this is a significantly higher ASP, so what you're looking at it is an expansion not only with the front end module which we enjoy today, but this opens up the whole radio architecture.

So it has significantly more value.

And by the way, the product we're in right now is still projected to do very well.

So we anticipate models that could have both the GPRS FEMs running along with EDGE systems business.

This concludes our question-and-answer session.

I would like to turn the conference back to you for concluding remarks.

Thank you very much for your questions.

Thank you for listening and we look forward to giving you an update next quarter.

Ladies and gentlemen, this concludes the Skyworks conference call.

We thank you for your participation and you may disconnect your phone line at this time.