思佳訊 (SWKS) 2006 Q2 法說會逐字稿

Good afternoon and welcome to Skyworks Solutions second quarter fiscal 2005 2006 earnings call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you Amy.

Good afternoon everyone and welcome to Skyworks' second fiscal quarter 2006 conference call.

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

Dave will begin today's call with a business overview followed by Allen'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'll 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 section of our Company Web site for a complete reconciliation to GAAP.

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

Thank you, Tom and welcome everyone.

Today we announced our second fiscal quarter 2006 earnings, and I'm pleased to report that we exceeded our revenue and operating income guidance and as a result, achieved better-than-expected bottom-line performance.

Specifically for the quarter, we delivered revenue of $185 million versus our guidance of 180 million.

We generated $7 million in operating income and $0.03 of earnings per share.

And we retired $51 million of convertible debt below par in an accretive transaction that Allen will describe.

Overall this was a solid quarter, given the seasonally weak timeframe and the fact that we are in the midst of our Company's most aggressive new product ramp on multiple fronts.

I will get into those in a moment.

In fact, we're making substantial progress with each of the tier one handset OEMs while expanding our product pipeline with highly profitable analog semiconductors or our linear product business unit.

Now, before I go in to address more details regarding the quarter, I would like to take just a moment to discuss two major trends in the market.

These trends are shaping our business and changing the way our customers engage with us.

As the industry transitions from 2G voice centric handsets, 2G voice-centric to 2.5 and 3G multimedia, I think it's helpful to understand our business model in this context.

First, there is a clear marketshare consolidation underway.

By virtually all analyst estimates, 80% of the handset market is controlled by five OEMs, up nearly a full 10 percentage points over the last several quarters.

With the size and scale advantages of that tier ones possess, we believe they'll continue to dominate the mobile platform handset, (technical difficulty) significant trend.

Second and perhaps even more dramatic is the rise in the percentage of handset that are requiring voice and high-speed data functionality in the same phone.

Now, whether it's EDGE, WEDGE, wideband CDMA, this trend significantly influences what our customers need.

The relative complexity is much higher, much higher.

Maintaining data integrity while at the same time handling a voice session is a significant challenge.

There is a greater need for compatibility among the RF, the analog mixed signal, and the system software to help maintain the quality of both the voice and data transmissions simultaneously.

And now, as a result, OEMs today are engaging us and engaging suppliers as partners and much, much earlier in the development process.

By contrast in the past, handset manufacturers could mix and match power amplifiers with transceivers much more readily using various suppliers and they did so in 2G rather routinely.

Now going forward, the link between the front end module, the amplifier, the switches, the filters, the radio and the software is increasingly critical and can no longer be easily decoupled, favoring suppliers with technology breadth that encompasses analog, mixed signal, and software in addition to RF.

These market shifts are having a profound impact on our design win momentum and the visibility we have into our OEM platform strategy.

And we feel we are uniquely positioned to capitalize on these twin trends and I will give you more details in a moment.

Now, to that end and consistent with these comments, let's spend some time on the highlights by key account.

I will first begin with Motorola, our largest customer.

Today, Skyworks is the leading power amplifier supplier at Motorola spanning GPRS, CDMA, iDEN, TETRA, and WCDMA, including the incredibly popular RAZR series in GPRS, and now the CDMA and 3G versions.

At the same time, we are supporting their ODM partners, most notably [Kompow], who are providing ultra low cost models including the C-113, targeting several emerging market segments.

Recently, we began ramping our newest wideband CDMA transmit front-end modules to complement our GPRS socket in Motorola's latest 3G phones.

And we are working very closely with Motorola on front-end modules for their current EDGE architecture.

Further, as Motorola has announced, we have been selected to provide a digiRF version of our Helios radio what their next generation of EDGE phones.

This collaborative effort is more than just a design win and we believe our architecture will drive a number of platforms next year that optimize the EDGE feature.

When you combine our support of their run rate business, their ODM partners, and the forthcoming radio opportunity which until quite recently was captive, our position at Motorola is certainly on the rise.

Likewise at Sony Ericsson, we are supporting all of their high runners, including entire Walkman series of platforms across GPRS, EDGE, and WCDMA.

In light of their recent success, we're pleased to be participating within their recently announced lineup of phones, including the K-610, the K-800, the M-600, and the Z-530 series.

Now, as we move from supplying GPRS power amplifiers to more recently multimode front-end modules which incorporate several additional bands, our average selling price is rising substantially higher.

To illustrate in the case of the P-990, another recently launched multimedia phone, we're capturing a full $4 of front end content.

Now, this is up from just $1 for a stand-alone GPRS power amplifier.

To be clear, this average selling price increase is driven by our latest content rich front-end modules that leverage our unique linear amplifier multifunction switch and filter technologies.

This combination is absolutely essential in managing the complexity of multiple bands and modes in these new 2.5 and 3G handsets.

And while our content is moving up, Sony Ericsson's overall bill of materials is actually declining, creating a true win-win.

Now, in parallel to our success across their handset business, we're also supporting Ericsson with a suite of infrastructure solutions developed by our linear product segment, including attenuators, synthesizers, and diversity mixers.

Now, as Ericsson represents one of the leading suppliers of wideband CDMA bay station equipment at a time when carriers are accelerating their investments in deploying 3G, we're delighted to have Ericsson as our lead infrastructure account and a 10% customer of Skyworks overall.

Let me move to LG.

LG is the world's largest supplier of CDMA handsets, and our growth in LG is being fueled by the initial success of their 5900 model or "Black Label" series of handsets.

Providing features such as touch sensitive keypad, camera, MP3, tri-band and EVDO capability, the 5900 or branded The Chocolate Phone is already a bestseller in Korea with more than 300,000 units sold domestically since its launch a few months ago.

Now, here were the exclusive supplier in delivering a complete CDMA radio solution in two chips, complementing Qualcomm's baseband processor with our direct conversion transceiver, low-noise amplifier, power amplifier, SAW filters and passive components.

Together, they provide all the necessary functionality for a complete transmit and receive chain and reduce our customer, in this case LG's, RF printed circuit board space by more than 75% versus discrete implementations.

This allows for smaller, slimmer feature rich handsets consistent with this model architecture.

As you can imagine, at $6 per phone of content, Skyworks content, we are excited about this opportunity and we're excited to be participating with the world's largest CDMA handset supplier.

Now, even more recently, LG has released a GPRS version of the Chocolate family, in this case supported by our single chip direct conversion transceiver and power amplifier.

At the same time, LG is a Helios customer for their initial EDGE models including the A7110 and the A7150, and is utilizing our complete RF subsystem in support of ultra low cost GPRS handsets including the P7200 for application in emerging markets.

Okay, finally, at Samsung, in addition to our leadership in CDMA, GPRS, and wideband CDMA power amplifiers, and in particular our support of their new ultra thin V740 and Z510 models, as well as the slim Z150 3G platform, we have now begun volume production of our Helios EDGE radio solution.

Marking the first time Skyworks has delivered stand-alone radio functionality at Samsung -- the very first time.

Given our participation which has now expanded to 16 new EDGE models, including the new E900 slim music phone and the E770 and S400i, we expect to be in nearly half of Samsung's latest EDGE offerings with our Helios system.

Okay, so if we step up to a higher level, let me try to put this position in context.

As I mentioned earlier, the reason that Samsung has designed Helios into their system, that LG is leveraging our CDMA system, that Motorola has selected us for their EDGE digiRF platforms and Sony Ericsson is utilizing our modules across all of their high runner phones, the reason is our differentiated set of capabilities.

And these capabilities are backed by nearly 1000 engineers capable and able to design and launch field-proven radio solutions.

These are systems that sleep in higher levels of multimedia integration.

We support all leading air interfaces including both CDMA and GSM, very unique in the space.

And we have aggressive roadmaps to complement multimedia solutions and multimedia radios.

This in turn is allowing us to raise the dollar content per handset, and more importantly raises the bar on our PA and transceiver centric competitors, as we move from a more commodity based product market called 2G to highly customer specific and specialized platforms for 2.5 and 3G.

So in short, our offering is pushing the integration envelope and proving to be the radio of choice with three of the top five handset OEMs, namely Motorola, LG, and Samsung, who have adopted Helios.

And when we couple this with our CDMA radio customers, our solutions are now at the heart of four of the top five OEMs.

All right, let me now switch gears and discuss our linear products business, which was up a little more than 5% sequentially driven by the release of our newest solutions.

In particular, we ramped our CMOS switch and control logic solutions with several broadband customers, DBS customers.

We commenced production of a very low-power transmit chain for cellular 3G infrastructure applications at Alcatel and elsewhere.

We've introduced a suite of very low insertion loss high isolation switch modules, or bay station systems, and we launched ultra compact 802.11 front-end modules in support of the newest WiLAN specifications.

Additionally, we are introducing a portfolio of higher margin Analog semiconductors targeting broadband medical and automotive end markets.

We feel that these analog programs that have in common fewer competitors, much higher margins, longer product lifecycles, in addition to our progress at each of the top tier 1 handset OEMs, is setting the stage for solid growth and operating margin leverage moving into the June quarter and even more predominately into the back of '06.

Let me now turn the call over to Allan for his financial review.

Thanks, Dave.

Revenue for the second quarter was 185.2 million versus our guidance of $180 million, reflecting a stronger than planned demand for our portfolio of front-end modules and linear products as well as from IP revenue.

Excluding the baseband products and legacy assembly and test services, revenue was up 11% on a year-over-year basis, growing from $155 million to $172 million.

Gross profit for the quarter was $69.9 million or 37.7% of revenue as compared to our guidance of 37.5%.

Operating expenses were 63.2 million with R&D at $39 million and SG&A at $24.2 million for the period, driving operating income of $6.7 million.

Meanwhile, net interest expense for the quarter was $1.6 million.

And our provision for taxes was $600,000, yielding net income of 4.6 million or earnings per share of our $0.03, $0.01 ahead of consensus estimates.

Cash and cash equivalents and short term investments were at $183 million exiting the quarter.

Of note, we used $51 million to retire a portion of our convertible debt below par in an accretive transaction not only delevering our balance sheet, but also avoiding potential future dilution.

And as we generated positive cash flow from operations over the last ten quarters, we thought now was a good time to retire some of our 4.75, 4.75 coupon debt.

We generated $1 million cash flow from operations after building $14 million of inventory to support our ramp in the second half of the year.

We recorded $9 million in depreciation and invested 12 million in capital equipment as we expand our internal capacity at our HBT and [P-HIM] fabs as well as our assembly and test operation.

Now, to our business outlook for the third quarter, we are forecasting June quarterly revenue to be up more than 5% sequentially driven by increasing demand across our EDGE, CDMA and wideband CDMA portfolio coupled with the launch of our newest linear products.

Assuming a revenue level of 195 million for Q3, we plan on delivering a 50 to 60% sequential improvement in pro forma operating income, highlighting our operating leverage driven by gross margin in the current range and operating expenses of between $62 to $64 million.

Below the line, we suggest modeling 1.5 million of net interest and other expense, down slightly from prior quarters after our convert retirement, along with $1 million of tax provisions, translating into pro forma diluted earnings per share of $0.05 off a base of 160 million shares.

Incidentally, we expect to record approximately $4 million in non-cash share based compensation in the GAAP income statement in Q3 in accordance with that FAS 123R.

That completes our prepared remarks.

Amy, please open the line for the question-and-answer session.

(OPERATOR INSTRUCTIONS).

James Faucette, Pacific Crest Securities.

Good afternoon.

I wanted to ask just quickly if you look at your guidance at 195 million and bottom line number of $0.05 and we compare that to the December quarter just passed, we're in pretty much the same range at 198 million, but were able to deliver $0.07.

Can we think about you being able to deliver $0.01 to $0.02 of incremental EPS for every -- I guess million dollars, $2 million worth of incremental revenue?

Is that the kind of leverage that we are looking at here?

Well I think the -- I'm not sure about that specific metric.

The leverage is both at the gross margin line as we utilize capacity, I think more importantly as we increase the learning curve and we move up the learning curve on our newer solutions, [a rather] a significant ramp quarter.

So the gross margin leverage will -- is driven by the revenue and volume.

We also have a significant amount SG&A and R&D leverages.

Those expenses will be relatively flat and you'll see great deal of leverage below the gross margin line.

So we expect significant earnings leverage as the revenue line increases.

I think, if I understand the question correctly.

Yes that's right, but getting into -- how should we think about what kind of -- particularly -- obviously I think operating margin is fairly obvious.

So what about -- what kinds of increases in gross margin improvement can we see, I guess as you get -- approach $200 million per quarter and beyond?

Yes, Jeff, you know we're committed to expanding gross margins and we said that.

And as we come up the learning curve on the number of new products that Dave talks about, we expect to see gross margin expansion.

We're also managing our product portfolio and because of some of the constraints in the industry, we are also considering some pricing actions later in the year.

So we expect to leverage our fixed costs, but also the R&D, SG&A, as we grow the business.

And we think we're going to grow the operating income as well.

Todd Koffman, Raymond James.

Yes, thank you.

When you went through the overview by customer of which products you're in and how you are doing, specifically on Motorola, it seemed as though you incorporated into your comments how you are doing -- expectations of forthcoming products.

And as a result, it wasn't clear to me in the just-reported March quarter how your performance was at Motorola.

I was wondering if you could at least give some sense as how big a contribution Motorola was or what sort of sequential trends you've seen, maybe how the share shifts might have occurred.

Thank you.

Great question.

Let me answer that for you.

First of all, we are the highest -- we're in the highest volume phones at Motorola right now and have been in the March quarter, supporting reporting virtually all of their RAZR phones in GPRS, CDMA and 3G.

We also launched in the last quarter and see a pretty strong increase throughout '06, increases in wideband CDMA power amplifiers, front-end modules.

Our business with [Kompol], which supports virtually all of the emerging markets platforms, is looking very strong.

We have an opportunity to support a front end EDGE device that would be complementary to a competitor's transceiver.

And then finally, we have the launch of digiRF EDGE, which we expect to occur late in '06.

So the business for Motorola right now is very solid.

We expect to be sequentially up in June and sequentially up again in September.

And let me add to that, I think because we get a lot of questions on Motorola.

June quarter, as Liam mentioned, will be up versus March.

And our second half of the year comments as we talked about growth in our business top and bottom line, is not factoring in digiRF for the second half of '06.

We view that as more of an '07 event.

Very helpful.

Just a quick follow-up.

You're providing great insight into how you're doing in what you expect for the June and September quarter.

I was trying to get some insight in -- what were the trends during the March quarter sequentially?

The March quarter was in line with our expectation, and this is not all future looking business.

These phones we are talking about right now with the exception of digiRF and the exception of an EDGE [FEM], we are designed in.

These are not all forward-looking events.

These are current design wins that bring with them forward-looking revenue.

Terence Whalen, Citigroup.

Thank you for taking my question.

This is Terence Whelan for Craig Ellis.

I may have missed this one, but could you please explain the inventory trends in the quarter?

Was the inventory growth a work in progress or finished goods?

And what are your plans going forward for inventories?

And I have a follow up.

Thanks.

Sure.

We [billed] $14 million of inventory.

The turns were still over five, down a little bit from last quarter, but that was a planned build because of the back half of the year.

And it was -- there were some raw materials because we were getting some board increases so we bought ahead, but most of it was [within] finished goods.

Okay great.

And then secondly, on utilization, you mentioned utilization would be a gross margin driver going forward.

What was utilization in the quarter between front end and back end?

And then perhaps if you could list in order what will be the largest gross margin drivers, whether it be product mix towards analog, cost reduction, favorable yields and volume utilization.

Thank you.

I think the utilization in our foundry is a lot of the $12 million in CapEx is quarter is going in increasing relative short leadtime items in our foundries.

So we have plenty of bricks and mortar capacity, the big dollar items, a clean room and so on.

What we're expanding is equipment at bottleneck stages.

We have also brought on a second source in the last year and a half or so to provide surge capacity for HBT, which is working very well for us, so yes, we have capacity there.

In the back end assembly and test we have added capacity and we have room to add more.

That equipment is relatively short leadtime and relatively inexpensive.

So utilization is high in the fabs, but we are creating capacity by beefing up the bottlenecks.

The utilization is lower in assembly and test because we're able to add short leadtime equipment.

And Allan can help me with this, but I think of the gross margin drivers are first getting these newer products into volume production in the traditional semiconductor learning curve, which we're quite comfortable with.

But in fact, were going for a great number of product transitions and ramps right now at each and every one of the top tier OEMs and linear products.

So I would have to say number one is marching up the learning curve as we're beginning to do this quarter and next.

And then would be what you would expect traditionally in a semiconductor business, which would be gross margin leverage through capacity utilization and operating income leverage by driving a disproportionate increase in revenue versus R&D and SG&A spending.

That -- it -- Terence, you're going to see -- agree with Dave.

You're going to see more of the impact from the yield curve on the new products and some of the mix in the linear products because some of the overhead absorption.

While we get it, we do flex our capacity.

So we always have some outside capacity, so that would be third.

Brian Modoff, Deutsche Bank.

Can you talk about what you expect on EDGE?

You just got some volume rump at Samsung.

One of your competitors this morning was talking that they thought EDGE wouldn't be as big an event this year as originally anticipated.

What is your view on EDGE overall for -- as a percent of handset shipments in GSM?

And how do you see that ramp moving through this year?

Well, we're still very much committed to EDGE and we're going to play in all air interfaces of course.

And we think the EDGE business is going to be over 100 million phones this year, well over that number.

We feel that our current customers right now have meaningful demand for that architecture.

We talked a lot about Samsung.

That is one of our strongest ramps right now with Helios.

We look forward to Motorola.

We have LG in the bank right now and we're sampling all of our current GPRS transceiver customers and some others, so we don't feel that there's going to be a meaningful delay at all in EDGE.

In fact there is one dynamic that we don't talk a lot about, is with a couple of our customers and our largest EDGE system customer today, our customers are looking at the EDGE system solution as a blanket technology and actually utilizing it for GPRS only markets.

So our largest EDGE customer today, we believe, is pretty much done designing GPRS only phones, but rather will design for a GPRS market using the EDGE system simply not using the EDGE port.

And so when do you expect to see significant volume with EDGE in Motorola?

Is it Q3 or you think more Q4?

We're seeing it at LG and Samsung today.

We expect it to be late in this year, late in this year for the digiRF.

But as we mentioned in the prepared comments, we have an opportunity to pick up on the current generation of Motorola EDGE product.

We have an opportunity to pick up the front end module with a competitor's radio that will be a transition to the digiRF solution.

So we'll see an increase in edge, but the real inflection point will be in radios in '07.

But our commentary about growth in June and then accelerating September in December has nothing to do with digiRF and Motorola.

It's driven by Motorola, other programs, and LG, Samsung, and linear products.

Sandy Harrison, Pacific Growth Equity.

Just kind of a follow up to that prior question, what's the -- it's the second time we heard this focused opportunity in digiRF and things like that.

Maybe if you could spend a second talking about why this is all of a sudden issue and why customers are now looking at this product when this a technology we were talking about a year or two years ago.

Are you talking about digiRF specifically?

Yes, and why it is all of a sudden a big opportunity at a number -- that not only you guys are talking about for '07, but some other players are talking about it maybe the end of this year.

The largest single OEM who has announced specifically supported of the digiRF standard is Motorola.

And we were in the lab with them very early designing the specifications around this system many quarters ago.

So that is one of the issues perhaps you are referring to.

We were the first with a digiRF radio, but more importantly is that these solutions for -- let me back up a little bit.

The very early EDGE or data centric phones used solutions that, as it turns out in retrospect, didn't play very well when they moved from the lab into the real world environment and were dealt issues like changing voltages or changing temperatures or a thing called (indiscernible) when you move the antenna around, your head around an automobile or obstruction.

And for that reason, the data handling performance was weak, was poor.

So the industry has been looking for solutions that were designed from the bottom up to be data friendly.

DigiRF is an elegantly simple solution in that it handles the drivers and all of the complicated mix signal functionality and analog functionality to compensate for all of the real world problems that radios encounter or phones encounter.

And the data performance we're seeing with our product is extremely high compared to what is out there today.

So it's an elegantly simple solution that you're going to hear a lot more about.

And just to add to that, one of the other real important features is that DigiRF creates a software bridge or a standard where multiple basebands get made up with different RF transceiver programs or products.

Today, that is very difficult to do.

So there's a lot of flexibility that the customer can derive by using a digiRF based solution.

Okay, and a quick follow up.

Dave, you were talking about the linear product introduction this quarter and that this will be sort of the coming out party, if you will.

What are some of the products specifically that we are looking at that should be being rolled out and picked out?

The earliest products that we are seeing very high volume on, one is a -- for digital broadcast satellite, one of the challenges when you have -- when you're driving a [block down] converter for lots of tuners in the home, that's a very complicated discrete implementation.

And we've taken extremely inexpensive CMOS solution, older technology, and integrated the control logic for those switches in the individual switch function, but we've done it in an inexpensive solution.

We think we'll be in the vast majority of digital broadcast satellite boxes over the next twelve months.

That's ramping nicely right now.

We have got some products are being used in tire pressure sensors and in monitors in the automobile.

We like that market a lot.

In wideband CDMA infrastructure we've got some components that -- or if you will, solutions that were integrated, much of it in silicon, for -- to compensate and provide ultra-linear output and performance in processing signals for wideband CDMA.

That's another.

Those are a few.

Jeff Kvaal, Lehman Brothers.

Thanks very much.

Dave, I'm wondering just [furthering] on your gross margin targets, I'm wondering if you have a revenue level where you folks might [crest] back through 40%.

And then Allen, my follow up was actually a follow-up to other folks' questions, but on the inventory, it sounds as though you have a decent amount of finished goods in inventory at the moment.

And I'm wondering if that's for the second half ramp, why are they finished goods at this stage rather than say two or three months from now?

Thanks.

To answer last one, I said [within] finished goods, so it's a combination of both.

And with -- I'm sorry, the question was when do we bust through a certain margin threshold?

Is that the question?

Is it revenue dependent?

Yes.

I would go back to the earlier commentary because the fact is that the leverage -- the business model is exactly as we described and have had for the last several quarters.

What is unique right now, honestly, and it's something that we've -- that we are encountering at a rate that we never have in the history of the Company, and that is the percentage of our products or the revenue that's been derived from brand-new solutions.

Helios, linear products, wideband CDMA, FEMs, these CDMA transceivers or direct conversion products in the Chocolate "Black Label" series at LG as an example, and they're complicated.

They're heavily silicon based.

They have great contribution margins, and they're already ramping into production simultaneously going to the back half and into '07.

We have been aiming our R&D dollars, and we have spoken to you folks on conference calls over the last several quarters.

We've moved from the strategy of creating more market share and leverage in 2.5 and 3G and more integration to committed phone designs, to backlog and now we're being -- transitioning into production.

And that is a far bigger component of the gross margin story than any other factor, and that will get better as we move through the year.

Okay.

Is it possible that 40% is in the range of feasibility in this calendar year?

We won't talk about -- we're not providing guidance beyond the next quarter.

But not only is it in the range of feasibility to drive beyond 40%, we're very committed to seeing our gross margin exceed 40% with the introduction of linear products, utilization, and higher yields on these newer systems.

Satya Chillara, American Technology.

Dave, maybe on the EDGE, you guys are talking a lot about LG, Samsung, and some other customers.

Is there a way you can quantify your market share at LG and Samsung for 2006 please?

Sure.

Liam?

Yes, well first at LG, LG our marketshare is actually quite high.

Unfortunately, their phone launches haven't been as successful as some others.

Our marketshares LG is about 80%.

But at Samsung, we have ramped to very quickly and now support 16 phones.

We believe we have about 50% share at Samsung.

We see that shows based on design wins and known phones, and we expect the revenue behind that to really accelerate into the back half of the year.

We have gotten a lot of questions recently about Samsung in particular because that's a new event for us to have stand-alone radios versus power amplifiers or complete systems.

And to be clear, I believe today we're on every one of the [year's] baseband-based platform.

So every phone where there's -- that is EDGE, that is in a [gear baseband], every one of them I believe it is a Skyworks radio systems solution.

Now, they have another baseband solution; that is Phillips.

And we understand that there is some mixing and matching going on with that platform.

But with the gear, it's us, and we think that's about 50% of the phones.

It's 16 phone models from zero a quarter ago, so the ramp is pretty darn steep.

Great.

Second, like to follow up -- WCDMA (indiscernible) exactly you guys are -- when would you sample it, either in Q3 or Q4?

Can you give us the status please?

I'm sorry; you broke up a little bit.

The WCDMA transceivers.

The WCDMA transceivers will be in the second half of 2006.

The product is running well through design, and you should see it by the second half.

Amit Kapur, Piper Jaffray.

I was wondering if you could give an update on the cellular baseband business.

Last quarter you had mentioned some possibility of stabilization, but it looks like during the March quarter it kind of -- you continued to transition away from it.

How should we think of the business going forward?

It is not that we transitioned away from it in the quarter.

As tier 1 handset OEMs have gained market share, our baseband segment has declined over the course of the last year and half, so we've attempted to map that out and provide transparency to that event.

However, there is -- we don't see any inventory issues in China today to speak of, and our business there is quite solid was predictable, we believe.

And we have launched, are in the process of launching, we have sampled our multimedia EDGE based baseband solution.

We're not going to pursue wideband CDMA basebands.

We think we're far better off aiming our R&D dollars at radio systems solutions, digiRF or analog interface.

There is more dollar content and we are much more highly differentiated.

So we think the baseband revenue is running at a stable run rate.

There's some opportunity for upside, but not much opportunity for downside at these revenue levels.

Great.

And just a quick follow up, Allan.

I think you mentioned the IP revenue had some impact during the quarter.

How should we think of that revenue stream kind of looking forward?

Yes, we're -- as you know, we do not segment the IP revenue in part because of the NDAs that we have, but we do have a new initiative.

We're really focused on IP licensing.

Each transaction is unique but it's difficult to forecast going forward, but it's in the level it's been.

You won't notice it.

One of the things perhaps you don't realize is by virtue of the merger between Alpha and Conexant, we now have patents -- exclusive mobile rights to the patents of Conexant with [tail] -- with a -- that reaches back into the Rockwell portfolio in fact and the Alpha patents.

We have over 500 patents today, over 500, which is really quite astounding for a company of our size in this space.

We've gone through a pretty methodical analysis of how to monetize those patents, how to use them defensively, offensively, and also how to monetize them through a licensing program.

We're just beginning there, but I actually am becoming more and more encouraged with just how powerful that 500 patent portfolio is.

So you will be hearing more about that going forward.

Ittai Kidron, CIBC World Markets.

Congratulations on a good quarter.

Allan, could you comment on your capacity plans through the end of the year and what kind of cash flow will have to go to support that given the strength of the market?

I think we said that this quarter, the CapEx was 12 million.

Depreciation was 9.

I think as Dave mentioned, we're adding capacity in assembly and test.

We are actually looking at increasing both internally and externally some of our PM and HBT capacity, so I think you'll see the next quarter or two the CapEx run about where it is now.

Okay.

Are you seeing any shortages in the market for any components right now?

Not for components, but we are -- we are -- and this is good news because of the backlog for the back half of the year, we are expanding capacity internally and externally.

It is no -- there is no question that the supply chain is tighter.

Unit volumes have exceeded almost anybody's expectations.

That's I guess the good news.

We are seeing tightness in supply.

We're managing through those.

Our CapEx is aimed to deal with the bottlenecks we control, our areas where we're vertically integrated.

As Allan mentioned earlier, we are looking at -- this may be for the first time in a long time where in addition to sleeping in content to get more dollar content per phone, we're actually seeing selectively areas where we are raising prices.

That is actually a good thing long-term for this industry.

Edward Snyder, Charter Equity Research.

Do you have inventory hubbing arrangements with Nokia?

And have you seen any change in any of the metrics regarding that, like backlog or shipments of your CDMA devices as they are moving into Sanyo?

Basically, what are you expecting from the shift of CDMA to Nokia and I have a follow-up.

Yes, that's a good question.

We do have hubbing arrangements with Nokia and their CDMA family.

And at this point, Ed, the business shift to Sanyo, the joint venture that they are setting up, we think there's an opportunity for us.

We are seeing that our CDMA, RF solutions are being ported over to Sanyo designs that look quite attractive from an industrial design point of view.

The power amplifier portfolio is strong.

We have had business in the past with Sanyo independently, so we feel this could be a little bit of a shot in the arm for the portfolio in general and we'll be there to support it.

And generally how large is your business with Nokia at this point in CDMA, just in general?

You know, we really don't provide that level granularity unfortunately.

Ed, you know, the dollar content has been reasonably high.

Nokia, LG, and others have been early adopters of our radio systems solutions.

The unfortunate part, as Liam was alluding to, is the unit volumes have never been exciting.

Never.

So it's a very small piece of our revenue unfortunately.

We think, or we hope clearly that through this alliance, there's an opportunity to drive those volumes higher.

Mike Burton, Think Equity Partners.

Thanks.

If you didn't see capacity constraints in the quarter, could you give us an idea where revenues might have been?

If we didn't see capacity streams?

When I talk about capacity and [strength], I'm really talking about the volume of business and the growth in the next couple of quarters.

That's why we built inventory.

That's why we're out adding equipment.

Okay.

And then, sorry if I missed this, can you give us a breakdown of the revenues by segment in the quarter?

And then actually, can you maybe characterize going into the June quarter whether you expect linear to be above the average or is it more from mobile?

Yes, the linear is still running about 15 to 20%, and we detailed actually the basebands at 7% and the balance is the PAs, front-end modules, the RF mobile platform.

The question was I guess would the growth rate of linear products exceed the growth rate of the Company average.

Was that the question?

I'm sorry -- I will assume that it was.

The operator has gone onto the next questioner.

I think if you -- I think that was the question.

And linear products will grow sequentially.

They grew -- will grow in the 5% range, about the Company average.

As we move into late '06 and '07, we put a lot of investment in rounding out that portfolio.

We now have a pretty full catalogue.

The channel is up and running.

We think we can grow that rather substantially.

It remains to be seen whether or not it grows in fact faster than the mobile, because our mobile teams have some pretty high growth expectations for Helios.

Cody Acree, Stifel Nicolaus.

Thanks guys.

You highlighted using -- several strategic products.

You talked about differing ASPs.

You got a lot of bill of material increases throughout a lot of your different end markets.

Can you talk a little bit about stratification of what you see is differing dollar opportunities?

Is it did WCDMA?

Is it more [about] integrating the transceiver?

What do you think your greatest opportunities are?

I think Liam and I could answer that together, but the beauty of the situation we see unfolding throughout the second half of '06 and '07, a little bit of it now, is that the dynamic we talked about in the prepared comments.

And that is in the 2G world, the Skyworks that have you come to know has very much been dominated -- our business has been dominated by 2G power amplifiers, DCRs, infrastructure products for bay stations.

And while that's a great business, it is a highly competitive, tightly contested business that is becoming increasingly commoditized because our customers can say to Skyworks listen, if you don't drop the prices of your power amplifier next quarter, we're going to design in competitor XYZ if you don't drop the price.

Conversely they could do the same thing with the transceiver.

And while wasn't simple to do it, they could do it because 2G technology has been around a long time.

So the dollar content there was perhaps $4 between the DCR and the amplifier, somewhere around that range.

When you move into EDGE and data, because of the intimacy of the software, the amplifier, the radio in controlling the various inputs from the external environment which is so tough for data, the decoupling isn't happening almost anywhere.

Our customers simply are designing it as a system complete with software driver and they are not extracting one company's PA for another company's PA once it's designed in.

So that's giving us more -- higher price moving from $4 to say $6 because we have more content.

Far fewer competitors with less of an opportunity to shoehorn one out in favor of another.

And when you move to 3G, that technology goes from $6 or so to $8 to $10, because now you have a wideband CDMA path, you have multiple frequencies and more complexity.

And today it's still a bit more of a discrete implementation with the wideband CDMA path being separate.

So it goes from 4 to 6 to 8, but the competition goes from several to just a very small number.

And maybe more specifically, would you say -- can you maybe give some ranking on maybe -- is it the Motorola ramp, the digiRF that is going to be the largest of the opportunities that you are progressing with today?

Is it the multiple handsets in the Samsung?

Is there -- is there some stratification of all of these opportunities that you think are going to be the biggest catalysts?

Cody, they're all very significant, but I think if you look at it from a timing point of view, right now, the Samsung Helios product is a pretty substantial ASP for us.

That is in production right now and certainly takes the lead near-term.

Some other opportunities that were illustrated, Sony Ericsson is an account where we really don't have the transceiver that's captive, but we have up to $4 of RF -- excuse me, power amplifier, switch and filter content, so that's also very meaningful.

So we have those drivers and then again, this digiRF with Motorola we talked about will be late this year launch and certainly will probably be the largest design win into '07.

Ambrish Srivastava, Harris Nesbitt.

Thank you.

One quick one which is in terms of CapEx.

What is the longer-term target as a percent of sales?

And then a follow-up for you, Dave.

You have been doing this for a much longer time than most of us have.

Regarding margins and leverage and new products, and here's where I am getting confused.

Clearly, you guys have done a very good job in ramping new products and taking share.

But my question is aren't you in some sort of a conundrum here where you keep ramping new products, but you never reach a point where we can see, at least from our perspective, we can see a ramp up in margins?

Is that something you struggle with?

Or back to your prepared remarks, given the customer consolidation, has the industry changed where the customers have a lot more power than suppliers?

Thank you.

I think it's -- aside from making me sound old with your question, let me try to answer the latter part first.

You're right.

I have been doing this for a while, and it is -- let me try to describe it again, because we hit it in the prepared comments as well as a couple of the questions.

The gross margin issues throughout '05 and '04 were predominantly around having many competitors, some of whom have excess capacity, pricing on the margin such that increasing unit volumes and points of marketshare while providing leverage, the fight was can you gain enough leverage in unit volume to offset the decline in average selling prices?

And that was very true in GSM and very true in 2G CDMA.

And we gained points of marketshare in PAs and FEMs, but you're absolutely right.

Expanding margins much beyond 40% was a real challenge because of the competitive nature of the market.

And there was little to no opportunity to stabilize, let alone raise prices.

In the 2.5 in 3G world, it is very different.

There are fewer competitors.

You can count them on one hand and still have fingers left over -- competent competitors to do radio based solutions encompassing amplifiers, filters, switch banks, transceiver technology, driver set, more mixed signal functionality.

And we believe that favor is the very reason why we created Skyworks 3.5 years ago, which was to create technology breadth and depth to provide solutions that were less differentiated in 2G, more differentiated moving forward.

So as Allan and I have commented, we're going through a product transition today.

You'll see expansion in margins.

But again, we're moving up the learning curve with just a convergence of a bunch of new products.

As we move into the second half of '06 and '07, they will be entering high-volume production and we believe a more stable price environment.

Thanks Dave, and apologies.

I didn't mean to make you sound older than you are.

I had a question on CapEx please, the answer for CapEx question?

Sorry, I didn't hear the CapEx.

Yes, what is the target long-term as a percent of sales for the next two quarters?

We model them flat on an absolute basis.

Yes, no, I said depreciation is running a little over 9 and we are looking at -- we had 12 million this quarter and in Q3 we're looking at 10 to 12 million, and it might be a little less in Q4.

Mr. Aldrich, that was our last question.

I will turn it back over to you for any closing remarks.

Thank you much for participating on top of -- and on behalf of the entire team, we look forward to updating you with our performance next quarter.

Take care.

That does conclude today's conference.

We do thank you for your participation.