思佳訊 (SWKS) 2006 Q3 法說會逐字稿

Good afternoon, and welcome to the Skyworks Solutions Third Quarter Fiscal Year 2006 Earnings Call.

Today's call is being recorded.

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

Mr. Schiller, please go ahead.

Thank you, Operator.

Good afternoon everyone, and welcome to Skyworks' third 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 released and those detailed from time to time in our SEC filings.

I'd also like to remind everyone that the results we will discuss today are part from our pro forma statement consistent with the format we have used in the past.

Please refer to our press recent release in the Investor Relations section of our Company what website for a complete reconciliation our company what website for a complete reconciliation of GAAP.

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

Thank you, Tom, and welcome everybody.

I'm pleased to report today that we announced solid third fiscal quarter results.

I'd like to give a couple of highlights.

First, we generated about $197 million in revenue.

This was slightly ahead of our guidance, and that's a 6% sequential increase.

Our operating income was up $10 million, and that's about 50% sequentially, and we delivered a $0.05 of EPS, basically in line with our guidance.

These results reflect the production ramp now of several of the design wins we discussed on several of our last calls.

Today, our Intera branded front and models and Helios radios are increasingly powering some of the world's most powerful EDGE, WEDGE, and wide-bands CDMA handsets and I will discuss some of them specifically in a moment.

Now, before Alan and I provide some specific commentary on the quarter, I'd like to provide our perspective on market trends and some of which we have discussed in prior calls.

These market dynamics have a profound impact on the way in which we compete and infect the way in which our customers engage with us.

So let me give a couple of highlights.

Historically, the mobile handset market was characterized by an new subscriber growth, and primarily in developed countries and voice centric.

Today as subscriber base has increased, replacement rates are now driving growth.

An interesting statistic is today about 4 out of every 5 phones are replacement units, that's a different dynamic in that it implies a much will higher level of functionality than a simple voice centric product.

At the heart of this trend is the need for more and more functionality.

These handsets are moving from voice to simultaneous voice and data and multimedia.

This implies much more complexity in the products we design.

Now according to Deutsche Bank, the number of EDGE, WEDGE, and wideband CDMA handsets is more than doubling to about 153 million in '05 to 325 million units this year.

Now we have all been questioning how fast the transition to EDGE and wideband CDMA will happen.

The fact is it is happening and it is happening now.

This technology works and it is greatly improved from earlier architectures.

Now in our world, the RF architecture for today's phones must be concerned with things like phase noise, bit error rates.

As well as size and power consumption.

And there is a greater need for compatibility among the RF, the analog mixed signal, and the software.

It's not simply a bunch of chips cobbled together to be just good enough for voice.

Now these trends are being led by Tier 1 OEMs who collectively are gaining share, while establishing road maps for future advancements.

In fact a whopping 80% of the handset market is now controlled by 5 OEMs. 80% controlled by 5 OEMs.

Now, that's up nearly 10 points, 10 percentage points over the last several quarters.

With the size of scale that the Tier 1s possess, we believe they'll continue to dominate the mobile handset landscape.

So clearly, this new model, this new world of cellular and mobile is favoring suppliers with first proven OEM relationships.

Longstanding relationships.

In fact is there's not much room for [newbies] in this environment.

It favors suppliers with critical mass to support very steep ramps.

And it favors suppliers with technology breadth to develop what is an increasingly complex set of features.

Okay.

Now, with these market dynamics as a backdrop, let me reiterate on the four strategic objectives we outlined in the last several calls with you.

Namely, first, to gain power amplifier and front end module market share.

And increase the dollar content through higher levels of integration.

Second, to expand our radio presence via our Helios EDGE platform.

Third, to diversify our business with an increasing footprint of linear products.

And finally, to improve our financial performance, both the bottom and the top line.

I'm going to comment on each.

First, during the quarter we shipped a total more than 110 million PAs, 110 million power amplifiers and front end modules.

That's up 40% year-over-year and 20% sequentially.

This is a new record for us here at Skyworks.

In particular, were supporting the majority of Samsung and Motorola's PA requirements.

At Motorola, our power amplifiers and front end modules are incorporated in their CDMA Q phone, almost all of [Eidman] and TETRA, RAZR Series for GPRS, CDMA, and now 3 G.

But you'll notice that we're not in EDGE today.

We're not in EDGE today at Motorola.

You should expect to see new EDGE phones with our front-end modules in the fall.

That's a new event for Skyworks, but you'll begin to see EDGE PA's and front end modules in the fall, not today.

Now, this is not to be confused with our digiRF solution, which is a front end module and a radio that will be ramping and '07 and I will get into a little bit more detail in a moment.

Second, at Sony Ericsson, we are again a leading supplier with Sony, powering their stylish W710 EDGE Walkman, their EDGE business handset, their Cyber Shot digital camera models.

And speaking of Sony Ericsson, they are perhaps the best example today of our ability to gain both market share and increased contact with on an models.

Last year we were supporting, for example, their T610 RJ GTS phone.

This was with a stand-alone P A and it was about a $1.25 of Skyworks content per phone.

Today with the Walkman, or the WA10, this music phone has an EDGE front end module, again front-end modules sweeps in filters and switches and the like and the contents about 2X.

So when we moved from a GPRS PA to an EDGE front end module, the dollar content doubled.

Going forward now as they move to multimode, we are providing a combination EDGE FBM and wideband CDMA PA, and that's most notably in the P-990.

And in those phones and that platform, it's about $4 a phone, or roughly 3 times the addressable content from just a few quarters ago.

So again, without talking about, you know, the increase of content to radio technology, this is in the PA front end spave, where it's moving from north of $1 to about $4 when we get into multiple modes of operation.

So that's a summary of our first strategy, which is to increase PA and front end share.

Second, with respect to our strategy to expand our radio presence with Helios, which incidentally bundles a single chip transceiver with an FEM.

Today we are supporting Samsung in their migration to EDGE-enabled phones with our Helios design.

It's ramping and now at nearly 20 models.

We were a few last quarter, we added a few more this quarter and a steep ramp is beginning over the summer and fall months.

It includes their E770, with expandable memory, the E900 tri-band, and that very slim that ultra-slim new phone, the X820.

And the S400i slider.

So a lot of traction with Helios at Samsung.

It's driven by its size and is elegantly simple and is very easy for them to manufacture, no calibration required.

In CDMA, our radio architecture will help both the CDMA and its GPRS EDGE provider of radios.

In CDMA, our radios are several phones that will be launched at LG.

Today were in an award willing winning LG 5900 model they call the Chocolate Phone.

This is what they see complete CDMA radio at about $6 of Skyworks come at content for its own.

These constant supports each features like touch sensitive keypad, camera, MP3 player, and EBDO.

It is already the best-selling phone and Korea and it's now won Europe's 2006 Red Dot and IF Design awards.

This two chip radio system, compliments of Qualcomm baseband, and reduces PCB and printed circuit board space by about 75% versus discrete implementation.

So the value that it adds is that it provides all the functionality in a very thin and small footprint and enables ultra-slim, feature rich handsets.

Our family of CDMA radios is now also now supporting several configurations of bands and modes from CDMA or KPCS first single band markets such as South Korea, China, and India, to tri-band CDMA RF subsystems for North and South America.

And very recently LG released a GPRS version of the Chocolate family, which is supported by a single chip transceiver and power and complier module.

Further, at Motorola, we continue to make strides through the launch of our Helios digiRF radios as they begin to move from design to actually laying out second-generation EDGE phones which incorporate our architecture.

Again this is for early 2007 launch.

And to date, Motorola has announced only one supplier for their next generation EDGE phones and that supplier is Skyworks.

The but we expect there to be two sources.

Keep in mind the transition to our radio platform that's at Motorola marks the very first time we provided Motorola with radios and only the second time we have outsourced this functionality.

Okay.

To put our growing transceiver position and perspective, we are now supporting 3 out of the top 5 handset OEMs with Helios.

LG, Samsung, Motorola with the introduction of digiRF and '07, and when you consider CDMA we're now and 4 of 5 OEMs with Radius.

During the June quarter and we delivered just over 8 million complete radios with Helios EDGE amounting for just over 2 million units, doubling on a sequential basis and we expect that to be repeated in the current quarter.

Okay.

With respect to our third objective, which is to diversify our business with linear products, as many of you know, we launched this business a couple of years ago.

And the strategy is to leverage our core strengths along with our established sales channel.

We have a longstanding catalog sales channel and very specialized distribution network.

And we will be leveraging this channel into non-handset applications.

And our portfolio basically looks to take the intersection point of the things that were good at, analog, mixed Signal RF and the needs of the markets we have targeted infrastructure, medical, automotive broadband.

And this creates a business within Skyworks that's characterized by much larger product cycles than a handset, annuity like revenue profiles.

Since the product line cycle is so long and each individual socket tends to be smaller than a handsets socket, it's quite expensive over the long haul so it's an annuity like revenue profile.

A diverse set of applications, and contribution margins that are typically 10 to 15 points higher than a mobile business.

I'd like to give you a few examples.

During the quarter our infrastructure portfolio which is by the way ideal for base station OEMs implementing system upgrades or developing 3G and 3.5G designs, we continue to to gain design wins and tractions now with Alcatel, Ericsson, and Nortel, and most recently we have been leveraging our Asian sales channel by adding [Walway] and ZTE.

Incidently, while Walway and ZTE may not be household names, they're becoming key worldwide infrastructure players.

This portfolio of the Skyworks linear products portfolio has expanded to include high-performance receiver front end integrated receiver front ends and down converters, linear amplifiers and drivers, as well as all the necessary RF, microwave discrete and passive components.

From integration perspective, while we were historically addressing about $10 of content at the 2G base station, when you move to 3G, we're about $35 per system, a little more than 3X.

With RF intensive widebands CDMA products.

Now in the medical arena, we captured design wins with now two leading suppliers of patient diagnostic systems with very, very low-power Analog ICs where extended by every life is of critical importance.

While in the automotive space last quarter we launched general purpose amplifiers and game blocks for applications ranging from things like toll tags to GPS and RFID in support of the customer base that as of today includes BMW, Delphi, and Garmin.

Finally, we just, just recently gained approval from the leading -- from the world's leading handset Local Area Network chipset supplier to participate on their 802.11N reference design.

With a suite of front-end modules.

These up front-end modules are designed in conjunction with chipsets that facilitate initial data rates of over 200 megabits per second.

And are designed for broad commercial applications like laptops, set top boxes, games.

And if you were to actually observe these modules or look at these modules, they look exactly like a front end module for a multimode handsets switching, filtering, complex multi-layer board technology in a multi-chip module.

So again, it's an example of taking the manufacturing infrastructure, the design and modeling expertise and applying it to different models with higher ASPs, high margins, longer life cycles.

We're delighted not to be playing a key role in the deployment of a 802.11N.

So in conclusion, with respect to gaining a share in growing our linear product business, over the last 2 years we have invested a significant amount in R&D, we've created a complete new catalog of products.

We've expanded our field sales support with feet on the street that are now fully trained on the applications were targeting.

We have strengthened our distribution network.

And as a result, we're capturing more wins in the medical, broadband, automotive, and industrial markets.

Just to give you a couple of markers, perhaps most telling, today we have in the last quarter we have record bookings across linear markets and our expectations are that during the September quarter, we'll be up more than 10% sequentially.

So you're beginning to see the fruits of the labor of the last 2 years and this catalog now being in the marketplace.

Okay.

Finally, with respect to our fourth objective, which is to improve both our top and bottom-line financial performance.

Throughout the out last year we were quite explicit with you about our growth plans in the second half of 2006.

As we have outlined, our key programs are on track and are moving from committed designs to production.

Our key programs are moving ahead.

And as a result, in the current quarter, in the September quarter, we expect strong growth in our RF and linear product portfolio.

However, however, while handset demand remains strong, we experienced a couple of isolated forecast changes that reduced our demand signal for this fiscal quarter over the fourth fiscal quarter.

In our case, the impact of these forecast reductions is on the order of about 15 to $20 million.

Its 2 customers.

Let me try to be clear.

This is not a proxy per handset demand.

Instead, it's a function of an overheated forecast from a couple of customers that will be corrected in the current quarter.

Now with these 2 customers we are in their current and future design, so it's not a market share issue.

We just need to work through this forecast that, I had a little ahead of itself and is being adjusted in the fourth quarter.

In any case, we believe the growth prospects heading into the December quarter remain intact and set the stage for a strong exit of '06 and a strong 2007.

With respect to gross margin, while performance may be at the higher end of the peer group, quite frankly it is below our expectations and is below the targets we discussed with you in the past.

The there are several factors that are impacting our gross margin.

First, there is an industrywide phenomenon that is -- that is import costs that are increasing in what we produce.

Everything from gold and oil has increased significantly over the past several months.

So we've seen some increase in input costs.

Second, given the tight capacity in the last couple of quarters, some of our silicon and assembly houses have used it as an opportunity to raise prices due to this tightening capacity.

And third, as we have highlighted, we are going through a dramatic ramp of several new products and programs and production as we work through the learning curve and it cannot month over month our yields improve.

So we have seen some instances industry-wide that have impacted our margins.

Nonetheless, we remain absolutely committed to achieving higher gross margin performance over the longer term.

Particularly as we increase revenues the current quarter notwithstanding, increasing revenue improves our inter-utilization and therefore our margins.

Our margins will improve as our linear product portfolio grows, and most importantly as we work out the production learning curve on these newer solutions.

In the meantime, our focus will remain on delivering operating leverage and increasing profitability.

Just as we've done in the last several -- just as we did last quarter with a 6% topline growth driving in more than 50% sequential improvement in operating income.

So please let me be clear that the Skyworks team remains squarely focused on growing not only the top line but the bottom line in creating long-term shareholder value.

So in summary, we've made progress along each of the 4 strategic fronts with been describing for the last couple of years.

As we've navigated -- as we navigate the tactical market gyrations and capitalize on the longer-term market trends.

We're bringing innovation to the market, we're moving away from commodity type products where ASP pressure was so intense, to customer specific platforms, we're in each of the top 5 OEMs and now 80% market share and were more and more leveraging the breadth of our capabilities and experience to provide value for our customers and ultimately differentiate Skyworks.

Okay.

I'll now turn the call over to Allan for his review.

Thanks, Dave.

Revenue for the third quarter was$197.1 million.

That was up 6% sequentially versus our guidance of $195 million, and it reflects the ramp of our Intera front end modules and Helios radios across multiple Tier 1 OEMs.

Excluding baseband products and legacy assembly and test services, revenue was up 14% on a year-over-year basis.

Gross profit for the quarter was $74 million, or 37.5% of revenue.

Again consistent with our guidance.

Operating expenses were $63.9 million, with R&D at $39.1 million and SG&A $24.8 million, driving operating income of $10.1 million.

A more than 50% sequential increase, more than 50% sequential increase.

Meanwhile, net interest expense for the quarter was $1.5 million and our provision for taxes, $650,000, yielding net income of $8 million or earnings per share of $0.05, in line with our guidance and in line with consensus estimates.

Comments on cash and cash equivalent short-term investments, which were $154 million as we exited the quarter.

The change in cash was primarily predominantly driven by accounts receivable and inventory.

The increase in accounts receivable can be explained by roughly half of the increase which was in transit cash right at the end of the quarter, and we received that over the weekend and the following week, end of the quarter.

So that cash is in.

And the other half relates to two accounts, and both of these accounts are on payment plans in order to get them current.

The increase in inventory is related to the forecast reductions that Dave mentioned and long lead time die in support of our new program ramps.

We expect this inventory to be consumed this quarter.

Capital expenditures were $11 million and they were related to the expansion of our internal capacity.

We fully expect to generate positive cash flow from operations in the current quarter.

We expect to lower receivables, lower inventories, much as we have done in the past 12 quarters.

Now to our business outlook for the fourth quarter.

Our RF solutions continue to gain momentum along with leading -- among leading handset OEMs, highlighted by ramps at Samsung and Sony Ericsson.

At the same time, our linear product portfolio is at record backlog with design wins transitioning into production.

However, while the handset to demand remains robust, we experienced isolated forecast changes that reduced our demand signal for the fourth quarter.

Accordingly, we are forecasting September quarterly revenues in the range of $197 million to $200 million with pro forma operating income between 10 and $11 million on flat gross margins and flat operating expenses.

Below the line, we are suggesting modeling $1.5 million of net interest and other expense and taxes of $1 million.

Translating into pro forma diluted earnings per share of $0.05 off the base of 161 million shares.

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

That completes our prepared remarks.

Blanche, please open the lines for the question and answer session.

Thank you very much. [OPERATOR INSTRUCTIONS] And the first question is from Ittai Kidron with CIBC World Markets.

Please proceed with your question.

Hi, guys.

The disappointing guidance.

Maybe could give us a little more color, if you look at this quarter, your PAs are up 20%, yet your revenue is up barely 12 million units.

You're talking about Helios doubling this quarter and doubling next quarter.

Yet again, revenues are flat.

I'm looking at 2004 revenue, it looks like this year is going to have lower revenue than 2004, yet the handset market is 50% higher.

How do we get confidence that over the next I don't know and you tell me what is the right frame to think about this, in the next 2 quarters, 3 quarters, things truly change, and why you believe this will truly change for you?

Well, there's a lot involved in that question.

Let me talk specifically about the current quarter.

We were up $12 million.

That was driven by power amplifiers and Helios designs.

That just beginning to ramp in the production program, we're in a few handset models we've have a lot of backlog, and we're ramping those into production.

We had a very strong -- we had a very positive book to bill in linear products.

That's ramping into production.

We did have 1 OEM customer and 1 large ODM who had a very aggressive forecasts that we're ramping into the third quarter that got have themselves a little bit and throttled that back.

That's about 15 to 20 million in revenue that we should have scored this quarter, but we won't as the channel works through the forecast reduction.

If you go back a long time ago, if you want to go back into the '04 and '05 timeframe, please keep in mind that we talked about the market dynamics were the top tier OEMs have now consolidated a great deal of market share, double digit points over the last several quarters over the period you're describing, and at the time of the formation of Skyworks, we were very much focused on many indigenous Chinese OEMs and ODMs that in our view and the market's view at the time, were going to take a lot of share, and we completed the complete line up system solution, baseband, RF, mixed signal, analog $15 a phone in fact.

But the reality is that those customers in aggregate have lost a tremendous amount of share to the top tier OEMs.

As a result, we had a business that was well north of $40 billion a quarter that is now about 10, and I think we correctly reallocated those resources towards adding value in the digiRF domain and the mixed signal analog and software driver functionality that makes for a more robust reliable and differentiated radio systems solution, and began to hunker down and invest more R&D in linear products as a way to diversify and add margin.

So the reason why are not seeing the growth of this quarter is ,it is happening in radios.

We're seeing growth in power amplifiers.

We do have to work for this $15 to $20 million impact.

If you go back in time it is really the dynamic of shifting our business to mirror the reality of the market's move away from ODMs and new OEMs.

When I look at your gross margin and your guidance for next quarter and taking into consideration the different components that weigh on it right now, are we to assume, then, that your gross margin opportunity going forward, then, is to a certain point permanently hampered now?

To see a change in these 2 components that you mentioned that weigh on your gross margin that the input costs are higher and the silicon costs going up?

Is there any point in time that you see that changing?

If not, should we expect current gross margins to pretty much expect to see the way they are for a while now?

The reason why we spend so much time on gross margin, it was clear that with high contribution margin products ramping into production, the opportunity to leverage and improve gross margin has been very strong for us.

It hasn't happened, to your point.

We've been range bound in this 37, 38% range to to higher input costs and we're now ramping a whole bunch of new products.

We have had some suppliers, across the industry, have raised prices, namely assembly and test houses and silicon.

In the industry, if you're in it long enough, it does go through cycles, when capacity gets tight, it's commodity suppliers do use it as an opportunity to raise price, and that's exactly what we're seeing today.

So in terms of "is it permanent?" here's some of the things we're doing about it.

Revenue does drive contribution.

So more revenue will drive higher margin.

Linear products drive contribution in excess of mobile.

So a richer mix of linear products drives margin.

We are qualifying second sources on major commodity purchases where we don't like the pricing behavior.

And we will be bringing those suppliers online, silicon in particular, we have second sources and third sources.

So we need to be working the supply chain, working pricing.

But I really believe you will see in this dynamic now for the next couple of quarters, you'll see the industry dealing with issues of higher input costs due to capacity constraints.

It's not isolated to Skyworks but it has more impact of our gross margin.

And lastly, in regards to Motorola, is the reason Motorola is not moving right now to the digiRF and also with the current EDGE solution that you're going to send them, ship them later this year, is there a dollar concept difference between that and the digiRF solution top dollar content?

Yes With respect to Motorola on the digiRF side we know we are soundly designed into those platforms, that has been announced by Motorola.

Our engineering teams collectively have worked together and made excellent progress.

The actual launch date, quite frankly, is in the hands of our customers there.

So we really can't comment on the specific timing.

We know it's important to Motorola, certainly important to us, and there shouldn't be any roadblocks.

With respect to the front end module that we alluded to, this is a new opportunity for us that has accelerated nicely and we expect to be supplying a front end module, that's the power amplifier/switch combination.

It's going to be worth north of $2 per phone.

We will be mating that with a competitor's transceiver and shipping it to platforms fall of '06.

Thank you very much.

The next question is from Jeff Kvaal from Lehman Brothers.

Please proceed with your question.

Thank you very much.

Dave or perhaps better for Allen, in terms of the September outlook, that's a few million dollars less than you would have thought it might have been.

To what extent should we expect a recovery in terms of normal seasonality in the December quarter and somewhere above where your September revenues come and if there's a one time inventory tick up there?

I think maybe Liam and I can double up on that.

You're asking about the general market dynamic coupled with this correction on this couple of customers.

I think that the -- that the impact of the couple of customers will largely be behind us in this quarter, I think that's going to flush through very quickly.

And incidently, with these 2, the OEM and ODM, they're on the current design, and in one case they're transitioning to another design and were on the future design as well.

So it is not a share issue in these 2 customers, in the case of these 2 customers.

So that will come back and I do believe you'll see normal seasonality.

And the real growth trajectory for us will be, Samsung is really going to drive a lot of growth with our 137, our Helios product.

There's a lot of backlog now and we're ramping up very quickly going to FTA on multiple fronts.

We got some wideband CDMA front end module sockets, that we have backlogged down.

They're transitioning in these newer complex multimode designs into production.

And then as to get into '07, the digiRF is a very high dollar content and very high unit volume.

Okay.

So the way to think about it for thinking about modeling the December quarter is normal seasonality plus a bit from the 197 or 200 guidance that you guys have suggested?

Were not providing guidance out to December, but you're thinking about it the right way.

This issue I think what you try to get at is this $15 or $20 million, I think it's been well publicized that there are a couple pockets where it got pretty hot, where there were some expectations after the first half of the year that I think we're appropriately throttled back.

That is an event.

That's the question that you're asking and I think you should think about it that way.

Thank you very much.

Your next question is from Amit Kapur from Piper Jaffray.

Please proceed with your question.

Thanks a lot guys.

I was wondering, just getting back to your September quarter outlook, could you maybe indicate was this more for legacy products or was it a case of some of the new product ramps taking a bit longer than expected to accelerate?

Yes.

As we outlined, there is really two specific customers that are involved.

One was more of an older product, legacy products, and on the ODM front it was more of a standard GPRS low-cost PA that we will continue to ship in high volume.

It's just as a matter of a forecast that really ran ahead of itself and should correct going into the next quarter.

Okay, great.

And maybe my follow-up, can you comment just generally across the industry as you look, what is the pricing environment and lead time environment in the component area and how has that changed over the past couple of weeks?

Okay.

Over the past couple of weeks we haven't seen much of a change, but over the last quarter or so, we have found that pricing has been -- has stabilized and as a little more pricing power going quite frankly in the hands of suppliers like Skyworks.

Lead times are still rather long, but I think that's a very specific account by account situation and supplier by supply situation.

We've been fortunate to be vertically integrated so we feel that in a constrained your environment we're more agile than our competitors and that's helped us.

Okay, great.

Thanks guys.

Thank you.

Thank you.

And the next question is from Brian Modoff with Deutsche Bank.

Hi, guys, a couple of questions.

First, in terms of the digiRF with Motorola, from our checks inside their [freescale] is wrapping their EDGE transceivers now and it seems like your lagging on that.

Is this something we would expect -- do you see a ramp more in Q4 or is this something you're going to see more in the first of next year and then I have a follow on.

When you talk specifically about digiRF, the digiRF, that architecture hasn't wrapped and the suppliers have not been announced.

We believe that Motorola has said there will be two and we're one of them.

That's been announced, it's on their website.

There's been a press release with quotes from their CTO.

Liam, perhaps you would comment on the Q4 ramp.

And your comment to the Q4 ramp, the Q4 ramp will be participating alongside one of our competitors and that competitor will have the transceiver.

We will have the front end module.

Yes.

So that is a near-term dynamic for us.

It's a near-term opportunity for us to gain EDGE share.

DigiRF is an '07 event and we intend, quite honestly, we should be able to run both platforms for a while concurrently.

Okay, I heard from a similar source it was the digiRF was starting to go with Freescale there.

The second question, we had Infineon on get a complete design win in one of the major Korean vendors here, it was announced here very recently.

Baseband and transceiver for EDGE.

How do you see that kind of -- those kinds of captures affecting your business over time?

And you've got these players like Infineon, and Qualcomm and [INAUDIBLE] trying to [INAUDIBLE] control solutions?

How do you respond to that over time?

Well, we've been competing with full solution vendors all along and we do that ourselves.

I think one of the dynamics that we see just a different go to market strategy and some of the Korean based accounts versus what we see with our European and North American based customers.

The Korean accounts tend to deliver multiple platforms and in many many different SKUs, and allow more vendors enter into the equation.

Now, we've seen that change in some cases, with Samsung.

If you look at our digiRF design and our Helios design win at Samsung, this is one of the first engagements where a single design win is supporting more than 20 SKUs in their EDGE portfolio, and we really like that.

We hope that will continue going forward.

Also seeing with Motorola and Nokia both launching a single chip, low end albeit, products for Q4 this year.

So, as you know, technology tends to work its way in where it is easiest to grow from there.

I think is seeing, if you think about the market bifurcating, there is the very low end of the market that voice centric, typically, dual band, GPRS primarily, where the competition there will be between in some cases a forward integrated transceiver there will be integrated with mixed signal and baseband, although, we've seen very little, been a lot more talk about that actual demand because of natural production.

Because it's extremely difficult, there's not much architectural flexibility.

And so on.

And there's performance hit one takes when you do analog functionality designed in bulk CMOS, it's a little bit less than 10% of the market.

So I think you'll see competition between that and some kind of a baseband made as in the case with LG and others with a radio solution that's small and quite inexpensive.

For the EDGE, for the WEDGE, wideband CDMA and multiple modes, because of the functionality required in the multi-media aspects, and the requirement for phase noise and very efficient linear performance, we don't see anybody with an integrated transceiver baseband in the fact the laws of physics is very tough even with the smallest geometries of CMOS to compete with some kind of an RF CMOS, or a partitioning at least between the digital portion and the mixed signal analog portion.

So I think you'll see the market bifurcating, and that's exactly what we're seeing.

Thank you very much.

And the next question is from James Faucette from Pacific Crest Securities.

Please proceed with their question Good afternoon, gentlemen.

Just a quick question back on pricing.

During the kind of wrapping up the middle of the first half of the year, there has been speculation, I think you alluded to it again today, that maybe next year our or over the next 12 months that pricing can be substantially better for the components that you sell, and see less than normal declines.

On a like to like basis, does that continue to be what expect you'll be able to enjoy better pricing environment and maybe even be able to raise prices in some respects or in some circumstances?

Well we certainly -- we see again the pricing stabilizing right now and what we like about the portfolio going forward is were delivering more differentiation than ever.

And that is really the way to insure your pricing strategy.

So the digiRF products, the Helios ramps, some of the items that were delivered to LG, they all provide differentiation and that's really the way to deliver the best pricing.

So even, I guess, leaving aside the strategy of just trying to gain more content within the phone, do you think that, once again on a like to like basis, that your pricing should be better over the next 12 months than they have been?

Yes, absolutely.

Okay, great, thank you.

Thank you, and the next question is from Jeff Loff from Credit Suisse.

Please proceed with your question.

You said customers got a little over-aggressive ordering that drives this 15 to $20 million of forecasting.

What would you figure, then, is normalized revenue for the June quarter?

It sounds like it would be 180.

And of its down sequentially, why would be down sequentially?

I think given the September quarter would be --

I mean the June quarter if customers about over-optimistic too early, you're going to this correction now?

I think the correction is much more related to the September quarter, not to the June quarter.

It wasn't a -- our customers provide forecasts that then turn into firm commits on a rolling basis.

In the quarter in which we were in, we had a great deal of visibility.

We delivered that backlog or the hubs were polled, as in the case of our hub customers.

It really is a rolling forecast, our demand poll schedule if you will, that was reduced.

So was a statement of guidance, doesn't relate to June.

So the answer to the September quarter should of been at 15 to 20 higher than our guidance of 197 to 200.

So it would be in the 215 range or so.

Okay.

You talked about the top 5 OEMs being 80% of the handset market.

Can you talk about what portion of your sales the top 5 OEMs represent?

That's a great question.

Actually, it's an increasing percentage right now.

It's definitely the dominant percentage, probably on the 60% level.

It will get higher and higher.

And that's one of the themes, if you listened to the opening comments, as we see that the market now really consolidate around the top 5 and even within the top 5, 2 or 3 are really gaining share.

We are very well positioned with those accounts.

Some of that revenue is demonstrated the quarter we have today and quarter were guiding to, but most of that is going to be delivered until '07 and beyond.

So we like our position there.

We're spending more of our with the top 5.

The types of platforms that we're developing our highly customized.

There's pricing protection, the margin looks better.

And the longevity of the cycles tend to be much higher as well.

Thank very much.

And the next question is from Ambrish Srivastava from BMO Capital Markets.

Hi, this is Visijer for Ambrish.

Nokia has announced they are getting out of the CDMA manufacturing by April 2007.

What is your exposure there and when can you see it affect your revenues?

Well actually as you know, we are a partner with Nokia in that area.

So to be clear, and we've been in direct communication with them.

They're not exiting this CDMA market.

What they told us is they're not going to be manufacturing the phones themselves.

So there still will be, as far as we know and as we've communicated, Nokia phones in the market but they will be made by ODMs.

We are closely in touch with everyone of the ODMs.

By the way, we continue to deliver the CDMA RF transceiver products and it's quite possible those products could be partitioned and delivered back to the ODMs as well.

Thus the that this was made public by Nokia.

Okay.

The other question I had was to do give out, the CFO, cash flow from operations?

Did I give the cash flow from operations?

Yes.

That will be in the Q, but the biggest impacts were capital expenditures were 10 million, depreciation 10 million, mentioned in it that inventory went up 9 million and explained that what was related to, the push out in the long lead time silicon.

It was mostly in whip.

And then the 30 million-dollar increase in receivables, half of which has been collected.

So cash dropped 28 million.

Thank you very much. [OPERATOR INSTRUCTIONS] And the next question is from Sandy Harrison from Pacific Growth.

Please proceed with your question.

Thanks, good afternoon, guys.

Hi, Sandy.

A quick question on some of the linear products.

That is obviously an area for a great opportunity to expand gross margins and also add some leverage as far as being tied in as a key supplier.

What sort of it strategy when we could really see that become, you know, meaningful to your business and release are to contribute to the bottom line?

Is there a plan that you guys are looking at?

Is there something we should be modeling so we can see it sort of a stairstep or does it kind of layer in over time?

I think as is the case with most good things in our business, it requires a level of investment in advance of any real meaningful revenue growth.

So we've been up to is -- and it's been 2 years now.

And we have an arsenal of products now, we have been generating several products every quarter.

We have a catalog that we have just released and it's up on the web, and it is a complete catalog, around half a dozen targeted markets, and most recently we have been transitioned from developing a product into making sure that we have applications and sales feet on the street in the targeted regions.

And that has now happened.

So it was about 18% of revenue, but frankly that has been kind of flat.

It has been 15 to 20% of revenue for the last couple of quarters.

This last, in the current quarter, or the last quarter if you will, Q3, the book-to-bill was very positive.

And it was driven by these new programs.

And so we'll be north of 10% growth sequentially up this quarter.

I think you will see that again moving forward.

It really is very much -- in this case it's a little bit different, it's not elephant hunting for big sockets with a few customers who control the market.

It's many, many, many smaller opportunities.

But once you score it in backlog, those programs last for multiple years, in some cases many years.

And you add more and more customers it gets bigger and bigger.

But it is a methodical process that isn't as fast as any of us would like.

But for the first time, though, we're seeing significant positive book-to-bill and sequential growth.

Thanks, guys.

Thanks.

Thank you very much and the discussion is from Craig Ellis from Citigroup.

Please proceed with your question.

Hi, it's Terrence Waylon for Craig Ellis.

I have a couple of questions.

The first question relates to the timing of when you saw your customer forecast for the 15 to 20 million revenue pull-in.

When did you begin to see that, please and then I have a follow-up.

This was something that came toward the latter half of the last quarter.

So it was something that was coming in as David outlined, it really did impact our June delivery.

But it certainly impacted our guidance here into Q4.

Okay, great.

Then a couple housekeeping questions.

How many 10%+ customers do you have, also do you have a 20% + customer?

Thanks.

We had two 10% customers.

Anyone over 20?

No.

Thank you.

Thank you very much.

And the next question is from Edward Snyder from Charter Equity Research.

Please proceed with the question.

Thank you.

What was your utilization in the quarter?

Are you capacity limited here?

Also on the HBA or the EDGE device that your sourcing that will be shipped this year into Motorola, are you sole source on that socket or are you sharing it with one of your competitors?

And is that a linear, polar, what type of device is that?

The first question was on capacity utilization and I think, and we have added capital in the last couple of quarters.

So capacity utilization in our internal factories is quite high.

Let's call it 90% in our two foundries for both [INAUDIBLE] and HBT.

We have, however brought on sources, Asian partners, that are ramping into production with our processes.

So we are now expanding our capacity, but it is our target and our goal to have high utilization in our own factories, but have multiple sources to give our customers comfort and also have flex.

So we have fat capacity but is shared between ourselves and our partners.

And we have a relatively short lead time, capital being added continuously in Mexicali and the SMT and final test.

So we have our pretty tight suit there.

But the capital is quite short term.

Short lead time, rather.

So that's how we've been managing that.

So the capacity is quite full, but we have the ability to crack capacity of as we need to.

Ed, with respect to the device we mentioned which would launch by the end of '06 or fall of '06, this is an EDGE front end module, so it's a switch/PA integration.

And it would be mated with a competitor's transceiver and there will be some competition on that.

So you will share that socket, so the PA portion or whatever you want to call it?

Yeah the PA FEM portion.

So there will be a second source for that?

Yes.

Okay, and in terms of the PA itself, is that a linear, polar, what kind of PIA is that?

Its not --

What I'm looking for is how did you implement the PA?

I know it's EDGE but it obviously works in an EDGE device.

We've worked closely with the vendor that we will be alongside in this application.

As you heard from Skyworks, it is very important that the PA and the transceiver have compatibility.

So this is a solution that we've been able to work very closely, even though it's a competitor we have had the chance to work closely to try to partner to get this designed in.

Okay.

I guess I'm still confused.

I'm just looking to see what the technology that you're planning is.

Well, we're not going to get into the nuts and bolts of that here.

That's fine.

And then, obviously there's this trend and we saw it in the quarterly reports we've heard so far this quarter, that the OEMs, the big guys are also taking more share again this quarter, which means the ODMs looks like they're giving up share.

Are you folding that into your forecast for basebands, some of the other products?

Basically what is your sense of it, your dealing with the ODMs on a more direct basis than we do.

Is your feeling that their business continues to shrink and what you think is going to do in the next year or 18 months?

Well, I think that the share of the ODMs -- let me make a distinction.

I think that the ODMs, or the indigenous OEM's in China, that's one market were clearly there has been a lot of share loss and we are factoring that into our full system, our baseband drive revenue.

And that is an area where we have seen and think will continue to see strength of the top tier OEMs.

The ODM channel where we're seeing partnerships between the OEMs that will brand and ODM manufactured phone, that's a longer discussion.

There has been -- we had one ODM throttle back, but over time I think the ODM is a very viable channel, particularly for the low end of the market, and the ODM phones will compete with OEM design and perhaps contracts manufacturers and that will look to compete with who can produce a more feature rich very low-cost phone as our OEM customers look to expand the serviceable market with the very, very low tier.

The question that exists that is yet to be answered is the very, very low tier better serviced by the low-cost production and the scale of an ODM or through a bottoms up design OEM driven phone that was designed to be inexpensive?

And that's going to play out over the next couple of years, I think

Thank you very much, sir.

At this time there are no questions.

Please proceed with your closing statements.

Okay, thank you very much for joining us and on behalf of the Skyworks team, thank you for your participation.

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

Thank you for joining the Skyworks Solutions Third Quarter Fiscal Year 2006 Earnings Call.

Today's call has concluded.

You may now disconnect.