思佳訊 (SWKS) 2006 Q4 法說會逐字稿

Good day, and welcome to the Skyworks Solutions fourth quarter and fiscal year end 2006 earnings call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Tom Schiller.

Please go ahead, sir.

Thank you.

Good afternoon, everyone and welcome to Skyworks fourth 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 Allan's financial review and outlook.

We'll 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 and guidance 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.

With that out of the way, I'll turn the call over to Dave for his comments on the quarter.

Thank you, Tom.

Welcome, everyone.

Today, we announced our fourth fiscal quarter results and I'm pleased to report that we delivered revenue within our previous guidance range with operating leverage enabling bottom line upside.

Specifically for the fourth quarter, we recorded revenue of just over $198 million with the core analog and RF business up 18% year- over-year and 4% sequentially to $194.00.

We grew operating income 31% year-over-year and 15% sequentially to $11.6 million.

We delivered net income of $10.5 million or $0.07 of earnings per share.

This is $0.02 ahead of consensus estimates, and we generated $22 million of cash flow from operations.

We delivered this financial performance despite some well-publicized pockets of market weakness.

As you are all very well aware, we recently exited our base band business and undertook a strategic restructuring to sharpen our focus on high growth and highly profitable power amplifier front end module, radio and linear products businesses.

Given the fact that our core business has grown 17% annually on average from the time of the merger in 2002, versus the research and development intensive broadband--based band product area, we implemented a very sweeping restructuring to eliminate all base band related infrastructure, while at the same time strengthening R & D, marketing and sales efforts within our core businesses.

Now, this effort is largely complete and I must say I'm particularly pleased to report that this was a very far-reaching initiative that was executed on time and on budget, without any disruption to our core business.

In fact, we're already beginning to realize both financial as well as strategic benefits from this realignment.

And as Allan will discuss in detail within his business outlook, we expect to expand gross margins, we expect to deliver an approximate doubling of operating income and again to generate positive cash flow from operations in the December quarter.

At a higher level, the entire Skyworks team is focused on substantially improved performance, not just for the current quarter but for the year and going forward, and we're going to achieve this through above market top line growth.

This growth will no longer be masked by tier three base band customers and it will be consistent with the historical 17% average annual growth rate of our core business that we've demonstrated since 2002.

This growth will be coupled with operational excellence which we're pursuing throughout the entire company as we look to increase our asset turns via shorter cycle times providing the dual advantage of generating cash while reducing customer lead times.

Under the new Skyworks which is fully funding our investments to gain share, our financial model now supports R & D at roughly 15% of sales and SG&A of 10%, and this enables us to generate returns north of 15% as we move forward.

That's operating income.

With the restructuring largely behind us, we plan to deliver EBITDA approaching $35 million in the current quarter.

It is a major step towards our goal of $150 million in fiscal year '07.

This is all toward becoming we believe the most profitable company in the sector.

As we articulated at the time of our announcement of the base band exit, we intend to partner with rather than compete against leading base band suppliers.

To that end, we recently captured a strategic design win with Media Tech, a former base band competitor and a leading supplier of chipsets in China.

Media Tech will soon be incorporating our Helios, that's our brand in radio, across several of their next generation EDGE base platforms.

This win is important for a couple of reasons.

First, it really represents a significant incremental revenue opportunity for us in that they are shipping, Media Tech is shipping about four million chipsets a month.

But even more telling is that it exemplifies our new ability to effectively partner with key system providers, key base band providers.

As tier one OEMs increasingly petition to fall between best in class base band and best in class RF functionality, we expect to enter into similar partnerships with others in the near future.

So, entering fiscal 2007, the new Skyworks emerges with an intense focus on our analog, mixed signal and RF design competencies to gain share across three legs of the stool.

First, our newest linear products businesses.

Second, power amplifiers and front end modules.

And third, highly integrated radio solutions.

I would like to take just a minute to address each of the three along with quarter highlights, Q4 highlights.

First in our linear products business, we delivered just north of $40 million in revenue last quarter.

That's a record for us.

And as many of you know, we launched our linear products business to aggressively leverage our core analog capabilities along with our catalog sales channels and specialized rep and distribution networks into non-handset applications.

Our approach is really very simple.

We look for the intersection point of what--between what we're good at and the needs of the markets we've targeted.

Markets like infrastructure, medical, automotive, broadband, among others.

And this is creating a business that will increasingly be characterized by much longer product life cycles than a handset.

Almost annuity-like profiles, very diverse applications, with higher margins than our handset business.

Now, it is important to keep in mind that this addressable market--the addressable market for our linear products is quite fragmented and yet it is easily four times that of the handset RF opportunity.

The results of these efforts that have been going on now for about nine quarters have begun to pay off with linear products posting record bookings and solid growth throughout '06 and into '07.

Some specific linear products during the quarter, we unveiled the market's highest dynamic range mixers for mobile products targeted at infrastructure, medical and scientific applications.

We've been awarded high volume--a high volume contract for high isolation switches for third generation Bay Station reference designs.

We've now secured additional designs with Alcatel, Ericsson, Nortel, Huawei and ZTE supported by our infrastructure portfolio used by these Bay Station OEMs in system upgrades or development of 3G and 4G designs.

From an integration perspective, where we historically addressed roughly $10.00 per 2G radio transceiver in a Bay Station, today we're capturing about $35.00 with an integrated system for Wideband CDMA so from $10.00 to $35.00.

We've begun shipment of our 802.11N wireless networking solution as part of our--BroadComs intensified chipset and we've begun to ramp into production a very broad portfolio of analog products into brand new markets including wireless meter reading, tire pressure sensors, speed pay toll applications and others.

So, in short, over the last couple of years, we've embarked on building upon our leadership franchise via significantly higher investment in R & D and linear products, expanding our field sales support, we have a stronger rep and distribution network and these feet on the street are fully trained with these new products, and we just released a 900 page catalog.

We're looking to begin the snowball effect of incremental revenue, long product life cycles and over time, build this diversified business.

Okay, that's linear products.

Second, in our power amplifier and front-end module business.

In the quarter, we more than doubled our Wideband CDMA shipments.

We increased our dollar content now at Sony Ericsson through our highly integrated Incara front end modules spanning now the GSM, GPRS, EDGE and Wideband CDMA Walkman platforms.

We're now powering Cingular's very popular triband pan tech C300 multimedia handset.

This is the world's smallest camera flip phone and it has an ultra compact power amplifier from Skyworks.

We've received production orders from Motorola for front end modules supporting their next generation EDGE handsets including CRAZR and Riser.

Now this compliments our position as their primary supplier on the Moto Phone, the Scalpel, the Q, the RAZR and 3G RAZR Max.

The development at Motorola is particularly exciting for us as we previously have been supporting virtually all of their CDMA, GPRS, IDEN and Wideband CDMA but we have not been supporting EDGE.

We've not been in EDGE, and as a result for the past few quarters, while we have achieved a lot of design milestones, we have been weak within our largest account, given the lack of EDGE.

We now are in the final stages of the product transition and we expect to begin volume shipments of EDGE front-end modules this quarter with the full impact of the ramp now hitting the March time frame.

Okay, now let me talk about the third leg of the stool, our radio solutions business.

During the quarter, we shipped over 5 million Helios EDGE radios, this was up from a little over 2 million shipments in the prior quarter and a little over 100,000 a year ago.

Our product strategy here is to expand our radio presence with the Helios platform which bundles a single chip silicon direct conversion transceiver with a front-end module.

'Today we're supporting Samsungs, fast and decisive migration to EDGE enabled phones with Helios Incorporated on now nearly 20 models.

As shipments accelerated in the fourth quarter, I'm pleased to report that they now have become a significantly greater than 10% customer.

Meanwhile, at Motorola, we're now making--we continue to make strides towards the launch of our Helios DigiRF radio as they lay out 3G EDGE phones which incorporate our architecture, setting the stage for substantial ramp later on in '07.

To put our growth in transceivers in perspective, we're now supporting three out of five handset OEMs with Helios and we look for even greater traction with WEDGE and WiMax RF solutions in the coming year.

So, in summary, the new Skyworks will be led by these three growth engines which have historically demonstrated 17% average compound growth rate from the time of our launch.

And with what we expect will be a similar trajectory going forward, leveraging our strong tier one market position and relationships, our increasingly rich ASP profile and differentiated products, but let's keep in mind that not all revenue is created equal.

Going forward, we'll not fall into the trap of pursuing low return products just to generate unit growth at the expensive margin.

So we are focused not only on growing our business but growing it sustainably and profitably.

By contrast, allow me to reiterate that under the new business model we plan to expand gross margin, and drive operating leverage in support of a record EPS of between $0.55 and $0.60 in '07 and EBITDA of roughly $150 million this year.

All of us on the Skyworks team are squarely focused on achieving these targets through the combination of crisp execution, taking market share and our unique ability to capture higher dollar content per platform through analog and RF integration.

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

Allan?

Thanks, Dave.

I'll now summarize our pro forma results.

Revenue for the fourth fiscal quarter was $198.2 million within the guidance range of $197 to $200 that we provided to you 90 days ago.

Gross profit for the quarter was $74.2 million, and that's 37.5% of revenue in line with our guidance.

Operating expenses of $62.6 million with R&D at $38.7 million and SG&A at $23.9 million for the period.

And that drove operating income of $11.6 million, up 31% year-over-year and 15% sequentially.

Meanwhile, net interest expense for the quarter was $1.6 million and we recorded a $400,000 tax credit yielding net income of $10.4 million or earnings per share of $0.07 beating consensus by $0.02.

Now, keep in mind we had originally guided you to a $1 million of tax expense versus the credit we ultimately achieved.

Therefore, we achieved $0.01 cent of the upside through operational performance and an incremental $0.01 cent through this tax benefit.

And as long as I'm on taxes, during the quarter, we recorded a $12 million non-cash charge that was part of an international tax reorganization.

This was separate from the exit of the base band business.

And we opted to undertake this restructuring as it will lower our future cash tax liabilities.

Turning to the balance sheet, we exited the quarter with cash and cash equivalents as well as short-term investments of $171 million, an increase of $17 million sequentially.

And that was driven by $22 million in cash flow from operations.

We realize $7 million from the sale of a vacated facility this quarter and that was offset by $12 million in capital expenditures.

Now, to discuss our business outlook for the first fiscal quarter.

Our outlook reflects sheer gains and new product ramps as well as the realities of the broader market and our ongoing product transition at Motorola as Dave outlined earlier.

Even with only modest growth in the core business, we expect 100 basis points sequential improvement in gross margins to 38.5%, as we improve cycle times, yields and mix.

With operating expenses of between $52 and $53 million, we'll yield an approximate doubling of our operating income, sequentially.

Below the line, we suggest that you model $1.5 million of net interest expense and $1 million of taxes.

In turn, we expect earnings per share in the range of $0.12 to $0.14 off the base of 161 million shares, well on our way to our 2007 goal of $0.55 to $0.60 a share.

Incidentally, estimated pro forma earnings per share excludes approximately $7 million of charges primarily for lease terminations related to the previously-announced restructuring.

This balance of our restructuring expenses is a Q1 charge under GAAP as we ceased use of those facilities this quarter.

Additionally, we anticipate $3 million of FAS 123 related expenses in the quarter.

Perhaps most importantly, we plan to, again, generate positive cash flow from operations even as we complete our strategic restructuring.

That completes our prepared remarks.

Gwen, please open the line for Q&A.

Thank you. [OPERATOR INSTRUCTIONS]

We'll go first to Ittai Kidron with CIBC World Markets.

Hi, guys.

Congratulations on a good quarter.

Dave, thanks for the detail on business.

Thank you.

Could you give us a little bit more detail on linear.

How should we think about that going forward from a growth standpoint.

I would assume that seasonality is less of an issue in this business.

So, as we go forward, what kind of sort of dollar steps would you, on average, expect from quarter to quarter?

Well, we're running just--we're over $40 million a quarter, this last quarter.

We began the year a little over $30 million a quarter.

We began '06 and our goal, frankly is by the end of '07 is to get this business darn close to $50 million a quarter or a $200 million run rate.

That's the way we're thinking about it, Ittai.

Very good, and as we look into the next quarter, you have an implied flat revenue.

If we take a look at the September quarter that you just reported excluding the base band business, meaning the revenue of $193 million, it seems like the growth into the next quarter, if we-- another $1 million, $2 million growth in linear, that the growth in wireless itself is very low, around the 1% to 2%.

Can you give us a little bit more color on why, given this strong seasonality you typically see in the December quarter, you're somewhat flattish even on your RF business excluding base band?

Well, that's right.

What we specifically said is that we would be up in that business modestly and you're absolutely right.

It's not going to be up a lot, and the reason for that is, first, our tier one business is quite solid.

We are ramping--we're going through the EDGE--as you're well aware of, as these EDGE FEMs are going into production this quarter, they won't get to full volume production until the March quarter.

We're going through the transition away from the TSM modules in RAZR.

We're dealing with that product transition and there's some pretty well publicized choppiness that's existed in the broader market.

So, when you put that all together, we'll be up but we won't be up by a lot.

But a lot of it really is that product transition.

We'll go next to Amit Kapur with Piper Jaffray.

Hi, this is [Poutash Manshi] filling in for Amit.

Good job on the quarter, guys.

Thank you.

Couple of quick questions.

What should we be looking at in terms of tax rate for your fiscal '07 and also if you could provide a little more color on the revenue--more importantly, like how your Tier 2 business is tracking or what are you seeing there in terms of volatility or just kind of long-term if you can give us a little more sense there?

Thanks.

Sure, Poutash, I'll help with you the tax rate.

We're guiding down.

We have been guiding on the cash foreign taxes at a 1.5 million a quarter.

We're guiding down now to 1 million, $500,000 lower.

With the restructuring we still have an NOL north of $200 million.

We didn't adjust our valuation allowance at all this year.

We're going to go through '07 with the GAAP taxes will get adjusted out, and we'll be looking at that 1 million a quarter for pro forma tax rate.

Great, thanks.

If you can comment on your Tier 2 business.

I might have missed that part, if you could give me a comment on that.

Sure.

Yes, sure.

I'll take that.

As Dave indicated, as our Tier 1s right now actually look pretty solid, we've got a couple of ramps in EDGE and WCDMA that are looking strong there.

The second tier market is where we're seeing more of the choppiness.

As you know, we have a pretty broad footprint across that space.

It isn't anything we're alarmed by.

It is within our guidance.

The linear products business we do expect to firm up but at the second and third tier markets broadly across some of the infrastructure territories and accounts and then specifically, China and Korea look a little bit light.

We'll go next to Daniel Amir with WR Hambrecht.

Thanks a lot.

Can you expand on--you talked a bit about Motorola and their front-end module business that you have a recent design win I guess and you're expecting momentum here or production in Q4.

Can you elaborate a bit on that and what we kind of should expect there?

Is this going to become one of your biggest customers in this segment?

Or is this just the beginning of the ramp?

Sure.

Well, first of all, Motorola is one of our largest customers right now.

Without this business, and we continue to support their full range of products across GPRS, CDMA, 3G and IDEN.

This device is an EDGE front-end module that leverages a PA and switch and it's quite a rich ASP and what's important for us, it is our first EDGE design with Motorola.

Up until this point, we've talked about some flatness within this account as we've weathered this transition going through EDGE and again, that was a position that we didn't have share.

So, we will be shipping for the first time, EDGE devices beginning this quarter, the December quarter and ramping to full production in March.

Okay, thanks, and I guess the second question is if we look at the different product families and the different customers for you guys, what should we be looking at?

Sony, Ericsson, Walkman family is definitely one of them, the LG Chocolate family is another one that you've mentioned in the past.

What else should people focus on?

Well, as we've outlined, right now, we have three 10% customers.

Motorola, Sony Ericsson and we've recently added Samsung.

In addition to that, you've mentioned LG, they're an important customer for us, didn't quite hit the 10% level, and we're certainly pursuing Nokia and several others.

We're across Motorola's entire Wideband CDMA line up.

We expect to be across their entire EDGE line up as well as IDEN and others.

We're a pretty broad proxy for a lot of the growing EDGE, WEDGE, Wideband, CDMA designs where increasing complexity whether it is modes of operation, frequencies of operation or enabling a growing list of multi-media functions.

Size constraints, linearity consumption and just basic raw system know-how is causing us to have a great deal more share in EDGE or Wideband CDMA than we did in 2G.

We'll go next to Mike Burton with Think Equity Partners.

Thanks, guys.

Nice quarter.

Thank you.

What was your capacity utilization in the quarter and maybe you could talk a little bit more about how you're preceding with your ramp from your subcons?

Our capacity in assembly and test is oh, in the 80% range.

During '06, we added capital there.

So, we're running at a fairly high level utilization which we like a lot.

Our foundries are adding--have added capacity, we again funded last year, an increase in p-hemp wafers, up about 30%, an increase of HBT wafers of about 15% and those being operationalized as we speak.

So, we're starting to see sequential increases in capacity.

So, that is good news for us.

We're a little bit different in that we have been partnering with a couple of folks who are beginning to produce more volume for us.

We intend to have two factories able to produce, whether it's assembly and test, whether it's p-hemp or HBT, we run our factories with a high level of utilization doing all of the advanced development and IP work there.

But we want to have a non-Skyworks second source.

Our customers like it a lot.

It is going to allow us weather downturns in the market.

It will allow us to have a manageable capital expenditure while at the same time increasing capacity.

We're very, very fond of that model.

We think it is going to play well for us over '07 and '08 and '09.

Ok, great.

Thanks.

Can you talk a little bit maybe as it relates to your wireless guidance and commentary from some of the OEMs about industry component levels for inventory?

Well, I think--and Liam can help me with this.

When we talk about choppy, it's not a technical term, but what we really mean by that is there are a lot of OEMs that are looking to gain share, and we're doing business with virtually all of them.

And so, what we mean by choppy is that when you're on a platform that's hot, it is very hot.

There's no inventory in the channel.

But not everybody can take share at the same time.

So, it really depends upon where you sit and that's the way we see it today.

There are some areas where it is just pedal to the medal and other areas where a couple of customers got a bit ahead of themselves and as Liam outlined, in some of the broader markets, is where we're seeing--we're seeing a bit of softness and by softness, I really mean less visibility than we would frankly expect in the seasonably high quarter.

No, that's fair, and by that we mean if you look at some of the handset players out there that are sub-5% market share, they're not many, but there still are a few, we have a little bit of exposure to those accounts.

We don't see them doing as well, but at the same time, what you're seeing now and what you will see in '07 is an increasing percentage of Tier 1 business from Skyworks and we're going to do it for the reasons we outlined, higher ASP, more future rich solutions that are differentiated and actually are very strong in withstanding the ASP pressure as well.

That's really going to be the game plan.

We're trying to create some immunity to the second and third tier accounts.

We have the game plan to do that in '07.

We'll go next to Jeff Quall with Lehman Brothers.

Thank you very much for taking my question.

Both of my questions are with regard to the revenue outlook.

First one is Dave, you were suggesting that some of the Motorola EDGE stuff would start to fall in to the March quarter.

Other factors that may offset the typical 10% seasonality that we see in the March quarter?

It is a little early to tell but the answer is yes.

We are going to be ramping these EDGE products.

There are some [NFEM] Products that we're ramping, some linear products is clearly a less seasonal or those individual markets are different seasonality but in aggregate, they're less seasonal.

It is too early to be specific.

But I think your premise is right on.

We're gaining share and we have a growing segment of our business that is not seasonal the way a handset business is seasonal.

Okay, great.

Then the second question is it seems as though your revenue targets that you laid out earlier this month suggest a decent amount of growth in the second half of the year.

Could you talk about some of the factors that would contribute to that and how much confidence do you have at this stage of the game in the lower or higher end of that 820 to 840 range that you provided.

Thanks.

Jeff, sure, absolutely.

No, we are committed to the 820 to 840 range that we outlined, and we have defined programs and again, these are with Tier 1s that will support that.

Examples are this front end module that we're just starting to ramp now with a little bit of volume in December and a good quarter in March coming.

We also have the Motorola DigiRF platform.

The position that we've gained at Sony Ericsson, we are quite proud of and pleased with and we think that Ericsson is going to continue to gain share and we're going to be there with them.

Samsung moved into the 10% level this quarter for the first time in years.

That's going to sustain.

Our Helios business looks strong.

And then behind that, the burgeoning linear products business we think is going to continue to put up sequential growth.

In an aggregate coupled with our current base, we're comfortable with the second half.

We'll go next to Satya Chillara with Pacific Growth Equities.

Hi, guys.

Dave, question on this Motorola EDGE business.

I know you're going to ramp in the March quarter.

At this point looking for the entire fiscal '07, is there a stab you can take where your market share could end up by the end of '07, fiscal '07?

We are ramping in the December quarter.

But again, the transition I described was really they're ramping down the GSN products in favor of these new EDGE products.

In March, we'll be a full-blown production and we expect--we fully expect to have majority share at that time.

Majority share of all -- of the EDGE platforms.

Correct.

Okay, great.

The second question in terms of gross margin improvement, sounds like you're improving the gross margin mix here.

What is contributing right now and also, where do you see the gross margins trending up?

What kind of confidence do you have that could go beyond 40% at this point?

Well, a month ago, we said that you should expect margins of 38% to 40% this year.

Exiting the year at 40, we just guided to 38.5.

Some of that is the mix because of linear products.

Some of it is yields, improving yields and more Tier 1, a richer content to the Tier 1 customer solutions.

We'll go next to Mark Keller with Merrill Lynch.

Good afternoon, guys.

Just had two quick questions.

One is on Samsung, have all your platforms more or less ramped at this point or do you think there's more to go?

Absolutely more to go.

They're constantly in flux with their designs.

They have some very slick phones out there if it you've been watching their portfolio.

We're quite pleased to be aboard.

Samsung is an account that they turn their SKUs over very, very quickly.

There is a lot of engagement involved, a lot of selling and marketing efforts involved.

As we noted in the opening comments, we shipped over five million units in the last quarter of our Helios solution, and clearly Samsung was the majority of that business.

Any update on the design wins.

I know you mentioned I think 20 in the past has that number increased over the past quarter?

The number of phone models?

It is roughly 20.

That's correct.

The other thing that's happened is the percentage of volume that Samsung is shipping that is EDGE enabled is going way up in '07 so we have the dual benefit, we have higher dollar content, we have a great position and they are increasing the percentage of their output that's EDGE.

You're right, last quarter, Samsung did about 31 million phones.

We think maybe eight, maximum ten of those were EDGE.

When you get into '07, that number doubles.

Got it.

And I know we're about a year away but any plan for the convert debt that comes due next year?

Mark, we just finished a quarter where cash was up $17 million to $171.

We expect to increase the cash.

It will be over what the convert is.

We would expect to be able to retire for cash if we choose to but with our profitability, we have a lot of financing options.

Ok.

Thanks.

We'll go next to James Faucette with Pacific Crest.

Thanks, I just wanted to follow up on the questions on margins.

Now that you seem to have pretty good runway into 2007 with your design wins and feel confident about your targets in terms of top line growth, can you help us think about after 2007, what the--where you see the potential for both gross and operating margins going if things continue to develop particularly as you increase your content per device.

That's a great question.

In '07, the way to think about it is at the current revenue run rate, we're 38 to 39 maybe gross margin roughly.

I think to get to 40, we think in terms of a--to get to 40, we're maybe in a 210 revenue range.

We get around 40 and that's facilitated by the growth of linear products and just volume.

Remember, the base band product line did have a lower than a corporate average gross margin so just by virtue of being out of that business, we're more heavily focused on Tier 1 RF business as a linear product so by definition, we have a higher gross margin.

As we exit '07, at that revenue run rate, we should be comfortably peaking above 40% gross margin and at 40 or 41 or 42 or 43, we expect to have below the line operating expenses be somewhere in the 25% range.

So, at 40% gross margin, we ought to be right around 15% operating income, and you can take the math from there because the operating expenses will be really quite flat.

We'll pay a little bit of commissions and that sort of thing but it is not volume-dependent.

And we really called through our product portfolio and did, we think, a really good job of fully funding the programs that are going to drive our '07 and our advanced development for '08 and '09 and we're quite comfortable with this current level of operating spending, so you'll see a lot of the below gross margin leverage as well.

Great.

And then just -- if I could follow up on a product specific comment you made.

You said that you have a new front-end module designed at Motorola that represented a bit of an--a content step up or value per phone step up for you.

How much of an increase would you be thinking about for those new products as those ramp?

It's about a 2X times a 2G, GSM.

Pretty complicated front-end module.

Just try to be clear, we are on and we've been designed in '06 virtually every single platform they've launched.

We're in the vast majority of their phones.

We're in Wideband CDMA, we're in CDMA, we're in the Q phone, we're in the Motto Phone, we're on the low end, medium end, high end.

But we have not been in EDGE.

So, while we've been increasing the participation among their entire line-up, that lack of EDGE and given their focus on EDGE and their growth in EDGE has meant that a sore spot for us as we've been flat at Motorola.

You add EDGE to that mix in '07, we're no longer flat in Motorola, you're going to see growth, sequential growth.

And then as we get further on into '07 and DigiRF kicks in, we get another doubling of content as we move from a front end module be it Wideband CDMA, WEDGE or EDGE, into a transceiver plus front end module.

We're feeling very good about Motorola.

We've just had to work through this product transition and like many things, it has been a little bit longer than we would have earlier hoped.

But we'll be through it by December.

We'll go next to Ambrish Srivastava with BMO Capital Markets

Hi, Dave, question on the linear product segment.

In terms of the margins structure and correct me if I'm wrong, this is basically the--what you're doing is building on the base you had from the alpha business which used to be called infrastructure business, correct?

The alpha business--the infrastructure business was a segment of alpha but it is building upon some of that technology and a lot of the catalog distribution and specialty rep network.

But it isn't really--infrastructure was only up a fraction of that business.

Okay.

So, marginwise, where can this business go to and is this more like mixed signal analog or is it more high performance?

A quick follow-up.

What is the CapEx and DNA guidance for '07, Allan?

I think as you increase the revenue and you begin to cover the cost of R & D and that business unit, the gross margins are blended, should be around 50.

They could be higher than that depending upon the component of standard linear.

Even within linear products, you've got wireless infrastructure which is great margin.

You've got some data products that has good margin, better than handsets but not to where an infrastructure product is and then the standard catalog linear products have very high margin.

So, we're looking at that business.

We have pegged it over the foreseeable future to drive to a 50% gross margin profile.

It is not quite there yet but we'll get it there.

You asked Cap Ex and what was the other question?

Depreciation guidance for '07.

Yes, we don't guide out for the whole year although several of you have asked me to do it.

The $12 million CapEx in Q4 and depreciation is about $10 million.

That $12 million is about the number that we're going to spend in Q1.

That's a pretty good run rate to use.

In the back half of the year as our business grows and we want to capitalize a little of that in-house to keep the margins up, it might tick up a little.

But $12 million a quarter is a good number to use.

Thanks, guys.

Thank you.

We'll go next to Edward Snyder with Charter Equity Research.

Thanks very much.

How's price erosion look this last quarter?

It is lower, greater than or about the average from what you've seen historically?

Because we've heard stories of firming prices, and then regarding Motorola, you have the SDM that's ramping over the next through quarters of EDGE but do you have a transceiver win with Helios other than the platform you're doing with DigiRF and why wouldn't Motorola turn to Skyworks since you have Samsung already you're shipping an EDGE transceiver as the preferred second source in '07 for transceivers?

That's a terrific question.

As far as ASP, it is really a tale of two markets.

For EDGE, WEDGE, and Wideband CDMA, for front-end modules, the ASP has been surprisingly stable and in fact, blended ASPs are increasing as more Wideband CDMA and WEDGE displaces pure EDGE, and TSM.

By contrast, for example, a single band or a dual band single function voice CDMA PA is pretty darn competitive and the pricing there continues to decline, so it's everything from flat to increasing, believe it or not.

To declining at historical rates.

And quite frankly, some markets declining to a level where it is not that attractive to us anymore.

And so that's the story there.

And the reason why DigiRF is really our first radio opportunity is because Motorola, unlike some other customers, they are very much platform-driven.

They put a great deal of care and thought into their platform structure and then when they flip to a platform, it very much drives a generation of designs.

So, it isn't--you're right, we are in volume.

We understand Motorola extremely well.

We have a great relationship with them but we have to wait for them to go through a platform transition.

They won't shoe horn--they will not shoe horn anybody into an existing platform structure for the reason I described.

It is a very disciplined strategy.

One thing I will add, Ed, some positive news for us here.

We've been collaborating on DigiRF as you know and as we've discussed for quite a while.

Into the last couple of weeks, we were successful in making the first phone call with a Motorola phone and our DigiRF solution on board, so we really have been celebrating that milestone.

As Dave pointed out, the timing of the launch is truly in the hands of our customer now.

[OPERATOR INSTRUCTIONS]

We'll take a follow-up from Jeff Loff with Credit Suisse.

Just relative to business trends, how did order rates track through the quarter and how have they been to start the current quarter?

Order rates through Q4?

Through Q4 and then current point in time.

Again, I said we're about--I guess 90% or so booked towards the low end of our guidance.

It is a little cloudy.

The visibility is not what I would expect in a seasonably high quarter in some of these second and third tier markets, I must say.

The Tier 1s is quite visible.

So again, you have that--you have that dynamic.

In general, it has been a little choppier than we have seen in the past going into the December quarter.

Right, and the turns business that we expect to close the quarter is actually in a broader market space.

Some of that being linear market products and some of that as the nature of that business.

Jeff, it is going to be okay, and the reason it is going to be okay is that data and complexity in multiple modes are increasingly becoming a bigger footprint of the overall phone production and unit sell through is going to be up.

It was up in '06, it's going to be up in calendar Q4, it's going to be up in '07.

It just is a market where many OEMs are trying to take share so that term we probably overused today, choppiness, is the dynamic we see, it reduces visibility but the market, this market is going to play out with higher volumes and more share and more dollar content for companies who can facilitate that level of increasing complexity.

And that's Skyworks.

Right.

How much of your business that you classify as Tier 2, how much of your business was tied to Tier 2?

Well, that's always a tricky line to draw.

But I will tell you that the diversification at Skyworks is pretty broad and if you look at the Tier 1s, the Tier 1s today are really about 50% to 60% of our business.

And going forward, you're going to see that increase throughout '07, and we think by the end of '07, Tier 1s are going to be 70% of our revenue.

That Tier 2 and Tier 3 business is a lot smaller now that we've exited base band, that's what really drove that Tier 3 business was base band.

You made some questions about the pricing environment a second ago on front end modules.

What about the pricing environment on transceivers for example as your Korean customers?

Right now, it is pretty solid.

We're delivering very unique EDGE solutions.

Those are certainly a step up in complexity and price versus GPRS.

We consider right now the EDGE business to be highly complex and fortunately, it is not a product line especially in transceivers where you're going to have point to point competition.

By that, I mean you're not able to switch on the fly.

We also are integrating our power amplifier with each one of these solutions that is more imparting our technical signature into the product.

This is a very different dynamic than what we had seen in the GPRS space where GPRS had been commoditized on the 2G markets really drove aggressive ASP erosion.

But that's a good point, to the extent the 2G market has very aggressive pricing on transceivers, just like the PA and the base band.

The 2G market is very much like the PAs, more aggressive pricing 2.5 to 3 G less so.

Thank you.

We'll go next to Jeff Quall with Lehman Brothers.

Yes, thanks, guys.

Quick follow-up.

First is just one question and that is there's been some talk this earnings season about weakness either in the WCDMA market all told or certainly I think Motorola was lighter than they had hoped on the IDEN side of things.

Are either of those trends that have shown up either in the third quarter or in your fiscal fourth quarter or fiscal first quarter?

Thanks.

That's a good question, actually, WCDMA and even EDGE units have been up sharply for us and we see that continuing.

WCDMA in fact was double quarter-over-quarter units.

Now, IDEN is kind of the interesting one because we have do exposure to IDEN, it is limited to a very narrow set of customers, but to your point IDEN was softer than we expected, and it is one of the areas that we're trying to get some clarity on in Q4.

It is not going to be a meaningful change in our revenue stream, it is not a significant part of the portfolio, but it was one area that came in a little bit light.

We'll go next to Satya Chillara with Pacific Growth Equities.

Quick follow-up, Dave on Samsung.

Your company is talking about a lot of design wins with the EDGE transceivers so similar to the question I asked you about Motorola EDGE business, by the end of fiscal '07, where do you see Samsung?

Would you keep the market share or at this point, you have 100%, right?

No, finish your question, but no, we don't have 100% today.

Okay, so, maybe characterize where exactly is your market share and where do you expect the market share to go by the end of '07 please?

We have about half or maybe a little bit more than half today.

And the way Samsung has designed these platforms has really been a drive from the share of the base band competitors.

So, there are a couple of big base band competitors who have all of that EDGE business.

It is far less--far more concentrated than it was in the 2G domain.

And with one of the base band competitors, we have the majority of those phones, the vast majority of those phones and with the other base band competitor, we have none.

So, that's where we are.

So, we expect to stay in this share range because Samsung very much wants to have at least a couple of competitors.

That makes sense.

And we expect to ride not only more platforms as they come on-line but ride the wave of Samsung increasing their concentration in EDGE versus GSM as they move throughout '07.

But we have a little more than half.

There are no further questions at this time.

I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you so much for joining us today.

This concludes our call.

We'll all look forward to updating you again shortly.

Thank you, everyone for joining, that concludes today's conference, you may now disconnect.