思佳訊 (SWKS) 2007 Q2 法說會逐字稿

Good day and welcome to the Skyworks Solutions Second Quarter Fiscal Year 2007 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' Second Fiscal Quarter 2007 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 will then open the lines for your questions.

Please note that our comments today will include statements relating to future results that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially and adversely from those projected as a result of certain risks and uncertainties including, but not limited to, those noted in our earnings release and those detailed from time to time in our SEC filings.

I would also like to remind everyone that the results and guidance we will discuss today are from our pro forma income statement consistent with the format we have used in the past.

Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP.

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

Thanks, Tom, and welcome, everyone.

Today we announced our second fiscal quarter results and I'm pleased to report that our profitability improved more than three-fold on a year-over-year basis.

This performance demonstrates the strength of our new business model and reflects our efforts since exiting the baseband product area two quarters ago.

We have since focused exclusively on our core analog and RF businesses and are beginning to reap the benefits of being a far more streamlined and a more profitable company.

More specifically, for the second fiscal quarter, we generated revenue of $180 million, consistent with our guidance.

We maintained gross margins above 38%.

We delivered $0.10 of diluted earnings per share, which is an increase of 233% when compared to the second fiscal quarter of 2006.

And to give you a little better sense of our progress, during the first half of fiscal 2007, we recorded $0.23 of earnings per share, and this compares to $0.21 for all of 2006.

From a balance sheet perspective, we raised $200 million via a convertible debt offering at an average interest rate of 1.357%.

We redeemed $130 million of short-term 4.75% convertible debt.

We repurchased 4.3 million shares of our common stock.

And we generated $26 million of cash flow from operations.

Now from a product perspective, we enhanced our linear products portfolio with 15 brand new products in the quarter; we expanded our family of Intera front-end modules; and we introduced several next-generation Helios radio solutions I'll discuss in a moment.

Now with this in mind, let me take a moment to provide an update on our three strategic product lines.

Linear products, front-end modules and multimode radios.

First, in linear products, which leverages our core analog capabilities into non-handset applications.

During the quarter, we expanded our catalog by introducing a number of new products for applications as broad-ranging as RF identification tags, meter reading and consumer electronics.

We introduced a very highly-integrated module for WiMAX.

We unveiled the industry's highest isolation and lowest loss switch for the infrastructure market.

And we secured a new design win with a low-noise amplifier [ACIK] for Ericsson's GSM base stations.

Now what makes us successful here is that we find the intersection between what we're good at at Skyworks and the needs of the markets we've targeted to create a business that has some unique characteristics relative to our handset business.

Much longer product life cycles.

Almost annuity-like revenue streams.

Very diverse applications.

And as a result, much higher contribution margins than our handset business.

And as we look to the remainder of fiscal 2007 and beyond, there are a number of other specific catalysts that will provide us with long-term growth, and a few of these include diverse opportunities with our standard analog catalog business.

We are developing many products for numerous applications.

We've now secured orders for CMOS switches, very high performance integrated mixers, simple gain blocks, personal area networking solutions in broadband, and infrastructure in medical and automotive.

And just to comment on automotive, during this last quarter, we just completed our ISO/TS 16949 certification.

This audit or this certification is an internationally-accepted automotive standard, and the certification will allow Skyworks to become a serious contender in the growing semiconductor automotive market, supporting the applications we're targeting, which include a keyless entry, GPS, telematics and satellite radio, just to name a few.

Second, our comprehensive infrastructure solution -- that is wireless infrastructure solutions.

Here, our portfolio is comprised of high-performance receiver front-ends, down-converters, linear PA's and drivers, as well as all the necessary RF microwave discrete and passive components.

Today we're capturing more dollar content with RF intensive platforms with top-tier infrastructure OEM's like Alcatel-Lucent, Ericsson, Nokia-Siemens and Nortel, as well as emerging suppliers such as Huawei in China and ZTE.

In particular, commenting on Huawei, they are fast becoming one of our largest base station OEM accounts.

And just to give you an example, our content per radio board at Ericsson recently jumped from about $10, right about $10, to over $30 with the introduction of silicon radio [ACIK's] for their newest systems.

Now our strategy is here, we intend to migrate this approach, this architecture, to other OEM's as standard products.

High margin standard products.

Third, wireless LAN front-end modules for 802.11N.

Now, these solutions are virtually indistinguishable from the architecture we pioneered for handsets.

They look the same, same processes, and they're designed to complement industry-leading chipset suppliers like Broadcom, like Atheros.

We expect to see quite high volumes of these high ASP modules in time for the year-end seasonal PC push.

We've been developing these products for over a year.

And finally, as another area of growth, is our BAW filter business.

We have commenced shipments of our first high-performance bulk acoustic wave filters.

Initially, they'll be deployed in wireless local area networks, specifically 802.11B and G access points.

We're also introducing BAW filters in duplexers for use in personal communication systems in UMTS transmit modules for cellular handsets.

Here, we're leveraging the product development investment we made two years ago with a 6-inch filter line right here in our Woburn, Massachusetts facility, leveraging those assets.

When you aggregate all of these various linear products opportunities, spanning segments as diverse as medical, automotive, RFID, industrial and broadband, I hope you can see why we're excited about our participation in this market, where the entire addressable market is nearly four times the size of the cellular handset RF industry.

Okay.

Now let me turn to handsets.

Now, before I discuss some of the quarter's highlights, I'd like to take just a moment to discuss Skyworks' strategy for the system-on-a-chip, or SOC segment.

And this area has been an area of very strong investor interest.

First, let me start with some definitions.

SOC architectures essentially couple the baseband processor with analog functions in a single silicon chip implementation.

It, however, does not incorporate the power amplifier or multiple power amplifiers for many systems.

It doesn't incorporate switching the filters or filter banks.

It doesn't include power leveling and control functions.

Those functions are not well-implemented in the CMOS type of process.

This type of partitioning works well for the low-end or voice-centric segment of the market, where cost is the driving factor.

Cost is the driving factor and performance is, relatively speaking, less important.

For the foreseeable future, we see a very clear market bifurcation between SOC platforms for the lower end and multimode data-enabled phones that would not use an SOC.

Now at Skyworks, we're aggressively addressing both of these high-growth opportunities.

Both.

On the SOC front, we're collaborating with several leading baseband suppliers, such as TI, suppliers like Qualcomm.

And, in fact -- it's a little known fact -- we're in over 90% of TI's low-cost [inaudible] based platforms.

Over 90% today.

Given our unique systems knowledge, our manufacturing scale and muscles, and our ability to achieve very high levels of integration, we're looking to become and we are becoming the preferred front-end module supplier to SOC providers.

Now keep in mind, over the years, Skyworks has made a decision -- a concerted decision -- to control all the essential functions of the transmit chain.

In other words, we're vertically integrated in PA's.

We're vertically integrated in switches, now in filters.

We're vertically integrated in assembly and test.

Now by eliminating the need to stack margins with all of these components or these processes, we are, we believe, the low-cost leader.

This is a healthy margin product for us and it is within the sweet spot of our portfolio.

So at the same time as we're addressing SOC's, we're also obviously addressing the multimode radio market with a whole portfolio or suite of highly-customized solutions that, on the front end, bundle, again, filters, switches, PA's, along with transceivers in some cases, increasing our dollar content, while ultimately reducing our handset OEM's bill of materials, or the cost of their bill of materials.

Today, we're supporting a majority of the tier 1 handset OEM's and our roadmap includes the all CMOS [inaudible] Helios EDGE system, our newest introduction of the Helios 3 for 2008 and Helios WEDGE for 2008-2009.

These radio solutions support architectures alongside the leading baseband providers -- today, companies like Agere, ADI, TI, MediaTek in China, among others.

In summary, given our broad RF CMOS and compound semiconductor capabilities, our scale, our in-house assembly and test, we are well-positioned to capitalize on both of these rapidly growing market segments.

Okay.

Enough about SOC.

But towards that end, let me provide some specific highlights during last quarter.

During the quarter, we enhanced our Intera -- Intera's the brand of our front-end modules -- adding a brand new high power, high efficiency, Quad-Band solution compatible with leading SOC architectures.

The new Intera Light portfolio of solutions addresses emerging markets and provides many of the same competitive advantage as our current dual-band transmit and receive GSM/GPRS front-end modules.

Very low cost and very small form factor.

We were awarded new phones this last quarter with Motorola for WiB and CDMA, CDMA, iDEN and EDGE.

At Sony Ericsson, we continue to support their popular GSM/GPRS EDGE and Wideband CDMA Walkman series, and we're now delivering new HSDPA capable solutions for data rates up to 3.6 megabits per second.

On another note, I am really very pleased to report that just today, we were named Supplier of the Year, and we're awarded Best Quality Honors at Sony Ericsson.

Just today.

And we're just delighted to receive this recognition from such a valued customer.

Now meanwhile, at Samsung, we've secured new [FBM] sockets across a number of Qualcomm-based 3G platforms -- Qualcomm-based 3G -- including the flagship SGH-U700 slider phone.

And finally, we've received production orders for a front-end solution in support of an exciting multimedia music platform with a new handset entrant, and we look forward to providing you updates on this key program as it ramps later in the year.

Okay.

That's the discussion on front-end modules.

Now for the quarter with our multimode radio business.

Again, this couples our front-end modules with a direct conversion transceiver, a CMOS radio, to create some of the world's sleekest handsets.

We are expanding our family of multimode radios branded solutions and now are enabling some of the world's more popular handsets.

And specifically in the quarter, we've won LG's popular GPRS Chocolate phone with Helios power transceiver.

This now is expanding support beyond our current participation in their CDMA Chocolate phones introduced last year.

We're supporting Samsung's ramp of the next-generation EDGE models, including the ultraslim Trace phones with Helios, and we've just begun shipments in support of MediaTek, a leading supplier of complete reference design, as they gain share within China.

So the bottom line is, as handsets become increasingly more complex and as they become more data-rich, our customers seek partners who can provide more value through integration, partners who have the necessary scale and manufacturing muscle, suppliers who have the ability to manufacture a broad range of key RF technologies.

And with our current family of Helios radios, we believe we can take advantage of this trend through engagements with all tier 1 OEM's and key baseband suppliers.

So in summary, our second quarter results demonstrate the continued success of our recent restructuring.

We're now squarely focused on three growth engines -- linear products, front-end modules and multimode radios.

And our earnings leverage will become even more evident as we ramp several key high-profile programs over the next several months.

Okay.

I'll now turn this over to Allan, our CFO, for the financial review.

Allan?

Thanks, Dave.

Revenue for the second fiscal quarter was $180.2 million, up 5% when compared to core revenue, which excluded baseband sales in the same period a year ago.

Gross profit for the quarter was $69 million, or 38.3% of revenue.

Operating expenses were $51.4 million, with R&D at $29.8 million and SG&A at $21.6 million for the period, driving operating income of $17.6 million.

Meanwhile, net interest expense for the quarter was $846,000, and we recorded $296,000 in taxes, yielding net income of $16.7 million, and that compared to $4.6 million in the year-ago period, or up 263%.

Earnings per share were $0.10, an increase of 233% when compared to the $0.03 for the second fiscal quarter of 2006.

And as Dave mentioned, this is particularly noteworthy, given that just six months into 2007, we've already surpassed all of our earnings per share for all of fiscal 2006.

All of 2006.

Turning to the balance sheet.

In March, we completed a $200 million debt offering, which consisted of $100 million of convertible notes with a 1.25% interest due in 2010, and $100 million of convertible notes with a 1.5% interest due in 2012.

The notes are convertible into common stock at an initial share price of $9.52, and that represents a 35% conversion premium at the time we did the offering.

Utilizing a portion of these proceeds, we redeemed $130 million of short-term 4.75% convertible notes due later this year.

This transaction effectively allows us to lower our interest rate on the convertible debt from 4.75 to 1.375% -- blended percent -- while essentially extending the debt maturing and increasing the conversion price.

Consequently, our net interest expense in 2007 will be lower, thereby improving our earnings per share.

We also repurchased 4.3 million shares of common stock in connection with the offering.

As a result, we exited the quarter with cash and cash equivalents, as well as short-term investments, of $223 million.

During the quarter, we also generated $26 million in cash flow from operations, recorded $9 million in depreciation, invested $11 million in capital expenditures and reduced our revolver by $10 million.

Now to our business outlook for the third quarter.

We expect sequential growth at Samsung, at Sony Ericsson, at LG, at reference design partners and several Taiwanese ODM's, as well as growth across our linear products business, enabling us to largely offset the softness at a tier 1 handset OEM.

More specifically, we anticipate revenue to be flat to slightly down, sequentially.

Quite frankly, with this one particular customer on an inventory consignment arrangement, we think it's prudent to be somewhat conservative as they work through their inventory and product transitions.

Nevertheless, even assuming revenue of $175 million, we anticipate maintaining gross margins of approximately 38% and expect to deliver earnings per share in the range of $0.08 to $0.11.

That's $0.08 to $0.11, even at $175 million.

Given our recent stock buyback, we suggest modeling 160 million shares with $1 million of net interest expense and $500,000 of taxes.

Incidentally, we anticipate recording approximately $3.2 million of FAS-123-related expenses in the third quarter.

That completes our prepared comments.

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

Thank you.

(OPERATOR INSTRUCTIONS) And we'll start with Jeff Kvaal with Lehman Brothers.

That's very kind of you.

Thanks very much.

I was wondering if you could talk a little bit about how you see the magnitude of the inventory correction across the industry.

Is that something that is burning through now and may contribute to growth rates in the second half of the year?

Thanks very much.

Sure.

Thanks, Jeff.

This is Dave.

Well, I don't see build-up -- significant build-up of inventory in a broad sense across the industry.

I think it -- for us -- from our perspective, it's quite isolated, and we expect with this one customer to be obviously working through it this quarter, and I expect that customer to be up in the September quarter and up again in the December quarter.

So we're quite bullish as these products ramp and as we work through this transition with this one particular customer.

We're quite bullish for the second half of the year.

In fact, were it not for working through this transition in the June quarter, I think our sequential growth rate would have been certainly something we'd have been proud of.

Okay.

So for a recovery -- what is a fairly sizeable customer for your folks, Dave, that would suggest that, all else being equal, that would be a better than seasonal trajectory for you in the second half of the year.

Yes.

Okay.

Thanks very much.

And we'll go next to Amit Kapur with Piper Jaffray.

Great.

Thanks a lot.

Maybe I can kind of follow up in terms of how do you see the WCDMA market playing out this year?

Well, the WCDMA market looks to be quite strong.

We are seeing excellent uptake with Sony Ericsson in particular.

Starting to see some improvements with our market share in Korea.

And also working on some transitions with Motorola.

And we see Motorola specifically in the back half of the year to be an important part of our WCDMA growth.

Okay.

Great.

And maybe kind of switching over to the linear products, you kind of talked about expectations for that to continue ramping through the year.

Can you maybe remind us as to how -- are there any incremental investments you need to make in some of the distribution channels, or are you kind of comfortable with the expense run rate you have in that particular division?

I think the -- we're very comfortable with the expense run rate, although I must say, over the last two years, the R&D, we did bulk that -- the research and development investment up not insignificantly.

But that's been in the past, and so the run rate is -- from an engineering spend -- is about where we want it to be.

We're developing, oh, a dozen, 15 or 15 products every quarter.

Our catalog now looks like a phone book, and that's part of the ways in which you actually get out in front of this business.

It is a slow, steady, snowballing effect of lots of small orders that aggregate to high margin, long product life cycle and far less seasonality and cyclicality than the traditional handset business.

And the sales channel -- we're kind of fortunate because, prior to the merger that created Skyworks at -- the Alpha Industries half of our business was really a catalog distribution component business, and we maintained that many of those distribution networks and specialty reps who intimately understand how to sell a high application, sell low dollar value per order but very high ASP mix.

So we're in -- I think we're in very good shape on the channel, and we continue to invest on -- understand the applications better so that we can hit the sweet spot with more and more products.

Great.

Thanks a lot, guys.

And we'll go next to Cody Acree with Stifel Nicolaus.

Hi, guys.

Thank you.

Maybe if we can go back and talk about some of those growth drivers that you went through in your prepared remarks.

Could you give us maybe a little bit of a handicapping of the -- maybe the ranking of those drivers through the second half of this year, and then how you expect that to proceed on into '08?

Yes, sure.

Well, if you look through our business, at a high level, you're going to see an increasing level of tier 1 revenue in the second half of the year across all the major accounts.

We're definitely going to benefit from the upgrade cycle in WCDMA and EDGE, both with front-end modules and also with EDGE with transceivers and Helios radio.

So you're going to see growth at Samsung specifically.

We're starting to see some uptick at LG, and then eventually, as we move out into early '08, we expect Motorola to be on board.

We're also seeing, as Dave mentioned, a very strong linear products design momentum and product ramp momentum.

The infrastructure business specifically right now looks great.

Some of the R&D investments that were outlined are starting to pay off in very high ASP solutions -- VCO synthesizers, variable gain amplifiers.

Companies like Ericsson, Huawei, Nokia-Siemens, all part of that story.

So it's actually quite balanced, but I think if you look at it from a high level, expect more revenue in the tier 1's for handsets and a broader fill in linear products aggregated around our major infrastructure customers.

Great.

And then if you kind of expound on that a bit as you go into '08, what kind of an impact does the linear product mix increase have on total profitability and gross margins?

Well, Cody, the -- let's see.

If we think about that business a year or so ago, it was kind of a 30 million-ish run rate.

It's now 40 or so.

20, low 20's, 22, 23% of our revenue.

It has been growing pretty steady, a couple of million dollars a quarter.

We think there's an opportunity to accelerate that.

You recall when I talked about linear products, we talked about the catalog distribution business and then also some nice opportunities in some specific targeted areas like automotive where we think we can grow rather substantially because the [TAM] is increasing so much.

And the margin there -- the contribution margins in that product line are as high as well into the 80's and the gross margins quite a bit higher than our handset business.

So that's the way I think about it.

I'd look at it as steady, quarter-over-quarter growth of high contribution, high gross margin business.

It will tend not to spike, but it will be meaningful.

Great.

Thanks, guys.

Thanks.

And we'll go next to George Iwanyc with CIBC World Markets.

Thanks.

Dave, looking at the overall split, how much is coming from front-end modules and how much is coming from the multimode complete solutions?

Well, within our handset business today, substantially more -- we don't break the business down that way, but substantially more of our business is coming from front-end modules than radios.

But remember, we developed our Helios solutions -- that is Helios EDGE, our CMOS, Helios 3 and our Helios WEDGE.

We designed those products to intersect to the multimode component of the market.

We felt that the 2G or the GSM, even for us, the CDMA -- remember, we do CDMA and GSM -- that those markets were becoming pretty heavily commoditized with low ASP.

We took our R&D engine and aimed it squarely to intersect the market with these higher ASP devices and systems where we're much more differentiated.

And quite frankly, where there's a lot more front-end module content.

Because one of the ways you differentiate yourself is not just that CMOS transceiver, but with these multimode front-end -- think about a WEDGE with multiple bands of WiB and CDMA.

You've got a filter bank that's complicated, a 9-throw switch maybe, lots of PA's, multiple power amplifiers.

And so we are now seeing just proportionate growth in that solution, which is both a front-end module and a silicon transceiver.

Sometimes we just sell just a front-end module.

Sometimes we sell the front-end module plus the transceiver.

And as I described in the case of the low end of the market, we said that we will sell a customized front-end module just to integrate with that SOC, specifically to integrate with that low-end system.

And could you maybe get a little bit more color on how Helios shipments have just trended on a sequential growth basis?

I think our transceivers are running -- total transceiver unit volumes are running now just over 10 million a quarter.

Does that help?

Yes.

And one final question.

What -- how do you feel your total dollar content per handset has changed over the last several months or several quarters?

Well, this is going to be counterintuitive to you, because believe it or not, obviously on the low end where there's been a lot of ASP pressure, I think it's quite fortunate that it's moving into this bifurcated model that we talked about because these front-end modules, the idea there is size, size, size and cost.

So we're able to sweep in a lot of the passive functionality and the ASP's there are holding up better than they had in the last couple years.

That's good news.

But our blended ASP per phone is actually flat to slightly increasing, and that's because the phones themselves are becoming so much more complicated in terms of the bands, the frequencies which it needs to cover, and that creates a lot of need to switch filter and do a lot of linear amplifications at discrete frequency.

And that means, fortunately for us, complication around those front-end functions and particularly those transmit functions, and of course, we love complication because it's things that we can uniquely do in compound semiconductorland that can't be integrated in that CMOS technology.

(OPERATOR INSTRUCTIONS) We'll now go to Ed Snyder with Charter Equity Research.

Yes, thanks for taking my question.

I have a couple, actually.

What do you estimate your content per phone in Motorola is?

I know that's difficult because you're a big supplier there, but I'm trying to get a feel for just generally what your exposure is and have you seen any push-outs or delays towards the end of the quarter and were they linear in the last weeks or the last days?

Ed, with respect to Motorola, it really varies by air interface.

We actually have very broad penetration at Mot right now.

As you know, today it's power amplifiers.

So we have exposure in their emerging market phones alongside (inaudible), typically a GPRS PA of $1 or $0.95.

We have content in CDMA, multiple PA's that will take us over $1.

Some of the WCDMA and EDGE platforms, though, will get us in $2-plus range and in some cases even higher with multiple PA's.

Then have you -- did you see any unusual order activity with Motorola?

I know you're on a hub arrangement there so you only have so much visibility but clearly they're struggling here with inventory (inaudible).

Trying to wonder how that affected you on the current quarter and if any of that pushed out into future periods?

Yes.

I mean, certainly that's been a major element of our guidance here today and I think it's been outlined and the Motorola story has been well-publicized.

And you're correct, we are in a inventory consignment model, so we're going to support their needs through that arrangement and we look forward to their recovery and playing a part in it.

And then when do you anticipate ramping any of your shipments of 3G power modules?

I know there's been a lot of talk about landing another top three handset OEM in 3G.

You've not made any public announcement to that that I know of, but your forecast for 3G -- is it -- do you expect a ramp of it towards the end of this year, and how widespread -- is it an entire platform or specific models?

Can you give us any color on that at all?

I'm not sure, Ed, I understand the question.

Let me -- if I heard you right, it's new customers and also specifically around 3G.

We are in volume production now with many customers in 3G.

Motorola (inaudible).

Right.

Motorola, Sony-Ericsson, to name a few.

Samsung.

So I think that's a historical fact and we do see it beginning to increase and we expect to have a strong second half or towards the latter part of this year as those phones -- as there are a lot of new phones in the channel.

With respect to new customers, I can't think of a new customer that is only going to buy WiB and CDMA from us.

We tend to be -- our strength is in WEDGE and WiB and CDMA where we're able to solve the multiple Quad-Band EDGE PA, the linearity stacks, the filtering and the switching, and then bolt to it a system that has whatever bands in WiB and CDMA are required, in the case of a WEDGE system, for example.

So I can't think of a single major customer that we're ramping or will ramp in '07 and '08 that would buy only WiB and CDMA.

It would be a mix of both, in every case for us.

I guess (inaudible) a little more specific, then.

I mean, there's been obviously some speculation of landing a new slot at, say, Nokia in 3G of one form or another, and I was just wondering, is that already codified in your guidance now or is there any -- have you spoken to directly -- can you give me any kind of color on that at all?

Well, obviously, Ed, with Nokia being such a big player in the market and we've been a strong supporter of Nokia over the years in both infrastructure and CDMA for both RF and PA -- our radios and PA's.

They are and remain a target customer for us.

What's unique today is that, as the market has moved -- again, the complexity -- multimode, GSM EDGE and WEDGE, with the data handling requirements and just all the plain -- just the complexity around the multiple bands and frequencies -- their needs, like the needs of all top tier OEM's are tending to intersect, we believe, more and more frequently with the content of our company, with what we do best.

Nokia being the largest OEM in the world and Skyworks aspiring to be the largest RF cellular supplier in the world is an absolute target of ours and we will penetrate that account.

And then finally, Motorola's made secret of its intent to diversify away from Freescale to other baseband providers.

Does this pose any kind of threat to your share there?

I don't know -- you've been very tightly coupled with Freescale in the past, but you've worked with everyone else, or is this really an opportunity -- more of an opportunity for Helios at Motorola, given their next-generation EDGE phones are on the drawing board now.

If they use more of other content, doesn't that play towards your strength?

No, Ed, that's a great question, and in fact, we feel that Motorola's diversification in baseband is upside for us.

We are closely engaged right now with a couple of players in baseband.

I'm not going to get into all the details, but we feel very optimistic that we can pick up some transceiver design wins by partnering with some of the future providers to Motorola.

And we'll go to Jeff Loff with Credit Suisse.

Yes.

Just on gross margin, it looks like you guys are doing a good job there, even with revenue coming down.

I'm just curious.

What have been the key factors behind the gross margin stability and what kind of leverage do you think you see as revenue starts to grow?

That's a good question, Jeff.

We're at -- we're over 38% now, even in a low quarter, and 10% [OI], and we think the second half, we'll continue to leverage that, the yields.

As Dave mentioned, the linear product mix has a higher gross margin content.

We're just now starting to bring and integrate BAW filters on line, and we think gross margin should expand as revenue expands later in the year.

Got it.

And just on the linear products, some of the areas like wireless LAN and WiMAX.

When do you think you'll start to see material pickup there, something that's noticeable, because it sounds like there's a lot of activity there?

Well, actually, on the wireless LAN front, we're already shipping right now 802.11N modules and we see that increasing pretty sharply as you get towards the December period.

WiMAX is also an important area.

That's certainly further out in terms of volume production, but we are securing design wins with some of our best customers.

But wireless LAN is something that we'll definitely look forward to updating you on as we move (inaudible).

Jeff, just to be more specific.

We're on, for example -- and we'll be on more soon -- but we're on the broadband reference design for 802.11 [Broadcomp] reference design for 802.11N, and we're on laptops that will be ramping at the end of the year with multiple dollars of content.

So we expect there to be, as is usually the case, a seasonal push towards the end of the year as new models come to the market.

We think that's going to be the sort of the coming-out party, for the most part, for 802.11, and that's where you'll start to see much more revenue.

But we're shipping today.

Yes.

And one other thing to add.

In addition to selling in support of the PC market or the datacard market, we're also seeing some of these meaningful chipset providers converge into cellular where we're developing unique solutions in very small form factors and specific power levels to make that technology into cellular handsets, and we think that's going to be a major upswing as you move into '08, '09, etc.

Got it.

Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) And Mr.

Aldrich, it appears we have no further questions.

I'd like to turn the conference back over to you for any additional or closing remarks.

Okay.

Well, thank you so much for joining us today.

This concludes our conference call.

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

We'll update you again shortly.

And ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.

You may now disconnect.