思佳訊 (SWKS) 2008 Q2 法說會逐字稿

And welcome to the Skyworks Solution Second Quarter Fiscal Year 2008 Earnings Conference Call.

This call is being recorded.

Now at this time, I'd like to turn the conference over to Tom Schiller, Investor Relations for Skyworks.

Mr.

Schiller, please go ahead.

Thank you, operator.

Good afternoon, everyone, and welcome to Skyworks' Second Quarter 2008 Conference Call.

Joining me today are Dave Aldrich, our President and Chief Executive Officer; Don Palette, 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 Don's financial review and outlook.

We will then open the lines to your questions.

Please note that our comments today will include 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 non-GAAP 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 2008 results, and am I pleased to report that the Skyworks team posted solid performance, highlighted by increasing diversification, by market share gains and dollar content, coupled with strong operational execution.

Now, specifically during the quarter, we delivered $202 million of revenue.

Now this was ahead of our guidance and substantially better than market seasonality.

We expanded our gross margins to 40.3%.

Now this is a 200-basis point increase year over year and our fourth consecutive quarter of improvement.

We increased our net income by 52% from $16.7 million last year to $25.3 million in Q2.

At the same time, we delivered earnings per share of $0.16.

This is a penny ahead of consensus.

And a 60% growth on a year-over-year basis.

We generated $40 million of cash flow from operations.

This set of improving fundamentals reflects the strength of our new business model, and this is particularly important given the current market environment.

In many respects, Skyworks has entered a new and exciting phase, and by way of background, through 2006 -- throughout 2006 and 2007, we increased our focus and investments in our core linear products business, leveraging analog and mixed signal technologies in support of a very broad set of adjacent markets.

Now in parallel, we directed our handset efforts squarely on the top-tier OEM's and on the top baseband providers, with clear and measurable goals for share gains across each and every customer.

As a result, today we're poised to deliver sustainable, above-market growth and improving profitability without the headwinds of a low return baseband business or reliance on one or two customers.

Our competence is based on several key strategies, which I first outlined, if you recall, last quarter.

I'd like to spend some time today providing an update on our progress along each of these four initiatives, the first being that we're diversifying Skyworks.

We're leveraging our catalog business and our worldwide distribution network.

We're expanding into a broader set of end markets.

These markets include broadband, industrial, medical, computing, wireless networking, cellular infrastructure.

And keep in mind today, we support nearly 1,000 customers and over 2,500 product SKU's.

This list continues to grow with each new customer engagement and is backed by an expanding product pipeline.

And to get a little bit more granular, more specifically during the quarter, we added a new suite of low-power RF solutions targeting ISM, or Industrial, Scientific and Medical applications.

We ramped production of an integrated RF system with Samsung's award-winning FEMTO cell base stations.

We launched programmable solutions for Harris's Metropolitan point-to-point infrastructure business.

We introduced custom control IC's to a leading supplier of automotive entertainment and navigation appliances.

We also won designs at Cisco with wireless LAN access point solutions, leveraging our switch and filter capabilities.

We ramped [game] block amplifiers for intelligent energy management deployments.

And we increased shipments of RF subsystems at Siemens in support of remote maintenance, traffic systems, vending management applications -- telemetry, basically.

And speaking of Siemens, our TransTech subsidiary is providing advanced ceramic materials in support of their gas turbine power business for low-cost energy.

Now in parallel to these examples of analog market growth, we're aggressively also diversifying in our handset business.

Now as you may recall, back in 2005, our revenues were heavily concentrated with three of the top five OEM's, whereas today, we're shipping both highly specialized 2G front-end modules, or emerging market FEM's, as well as higher value-added EDGE and wideband CDMA FEM's to the world-leading handset suppliers.

And I think of particular note, or special note -- we believe we're the only PAFEM supplier in high volume production across all tier one handset OEM's, as well as the two leading Smartphone suppliers.

Now secondly, we're delivering higher-margin products.

Now with the development and introduction of a host of new, highly-customized solutions, we've created a product portfolio that's characterized by not only longer product life cycles -- and in some cases, almost annuity-like revenue profiles -- but also higher contribution margin.

The transition is occurring on multiple levels, including, again, our standard catalog products and custom analog and RF solutions in new markets, while on the handset side, with front-end modules for system-on-a-chip, or SoC applications, where there's an emerging requirement for higher integration.

This is the result of some baseband petitioning trends.

And finally, multi-mode front-end modules.

Now across the board, both our handset and our new linear products customers place high value on architectures that reduce size, that reduce (inaudible) materials complexity, that improve reliability and enhance performance, while enabling competitive cost structures.

Our customers place a very high premium on these functions, and it's the intersection of what we believe we do very well.

Our third initiative is we're capitalizing on the increase in handset front-end module content.

The migration to 3G multi-mode -- that's EDGE, WEDGE, wideband CDMA -- from voicecentric phones is happening.

That migration is happening.

Further, during the quarter, we introduced the industry's first front-end module for long-term evolution, or LTE, 3.9G applications.

With this trend, the complexity in the front-end module significantly increases, expanding our addressable content by three-fold.

The reason, frankly, is that the phones have a need for backward compatibility with installed networks, there's a requirement to manage multiple standards and frequency within the same device, and the inclusion of broadband functionality enabling music, data and video.

The integration of these various bands for reliable high-speed access requires complex modules, which [must] remain physically small, power-efficient and cost-effective.

This complexity is creating an incremental RF market opportunity measured in the billions of dollars.

Now at the same time, while we're taking about WEDGE and wideband CDMA and the like -- and this may be a little bit counterintuitive -- the emerging market is moving aggressively to low-cost system-on-chip solutions, but this SoC migration is placing a higher burden on the front end, given the analog functionality that is being merged into the digital baseband device.

In other words, our addressable opportunity increases with the move to SoC on the low end.

So with ramps in various stages of progress across all tier one handset OEM's, Skyworks is positioned to gain further share in the FEM product segment.

The competitive landscape is narrowing, with fewer and fewer suppliers able to support both the technical requirements and the manufacturing scale required by the leading handset OEM's.

This dynamic has the very real side benefit of stabilizing the industry's pricing environment.

I guess I'd encourage you to think of it this way.

By increasing the functionality of the front end, Skyworks adds more value, while at the same time saving our customers development time and lowering their overall cost, a true win-win scenario.

Fourth and finally, we're executing operationally.

Our worldwide operations team is intensely focused on continuing improvements in yields, in equipment efficiency, cycle times and return on invested capital.

We're extremely metrics-driven within our Newbury Park, Mexicali and Woburn factories, and have effectively implemented a hybrid manufacturing model, lowering multiple -- or leveraging multiple external foundries and partnerships.

Now this unique approach allows us to maintain high internal capacity utilization by creating second sources for high fixed cost services like foundry and like assembly.

This model provides us with supply chain flexibility, lower overall capital investment, as long as -- as well as the ability to meet upside demand.

The benefits of this outsourcing approach, now three years in the making, are beginning to show in our improving performance and the crossing of the 40% gross margin threshold last quarter, a key step towards reaching our long-term profitability targets.

So to recap, our second quarter performance demonstrates progress in our four initiatives.

One, we're diversifying our company.

We're diversifying as we penetrate new adjacent markets and add new handset customers.

Two, we're delivering higher margin products.

Three, we're capitalizing on the increase in front-end module content.

And four, we're executing operationally.

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

Thank you, Dave.

Revenue for the second fiscal quarter was $201.7 million, up 12% year over year, ahead of our guidance of $200 million and better than market seasonality.

Gross profit fro the quarter was $18.4 million, or 40.3% of revenue, a 200-basis point year-over-year expansion, 50-basis point improvement sequentially, and better than our guidance for sequentially flat gross margin on a percentage basis.

This performance is a testament to our focus on margin improvement.

Our continuous expansion over the last four quarters reflects higher equipment and labor efficiencies at all of our factories, progress on yield improvement initiatives, double-digit year-over-year material cost reductions.

Operating expenses were $55.5 million, of which R&D expenses totaled $34 million and SG&A costs were $21.5 million.

As a result, our operating income for the quarter was $25.9 million, up 47% year over year, and representing a 13% operating margin.

Our net interest income and other income for the quarter was $114,000, while taxes were $696,000 at approximately our 3% cash tax rate.

Net income was $25.3 million, yielding $0.16 of earnings per share, one penny ahead of our consensus estimates.

Now turning to the balance sheet.

We exited the quarter with cash and cash equivalents of $228.5 million.

During the quarter, we recorded $11.1 million of depreciation, generated $40.4 million in cash flow from operations, and invested $17.5 million in demand-driven capital expenditures, primarily for fab and assembly and test capacity.

Successfully converting our improved earnings profile and business fundamentals into cash flow continues to be an area of emphasis for the Skyworks management team.

As a result, over the past three quarters alone, we've generated $126 million in cash flow from operations.

Now to our business outlook for the third fiscal quarter.

As Dave has underscored, based on new product ramps at leading handset customers and continued end-market diversification, we are experiencing healthy demand and accelerating growth.

Through continued crisp execution to our operating plan, we expect to further expand both gross and operating margins.

Assuming revenue of $210 million -- which is, incidentally, a 20% growth on a year-over-year basis -- we suggest modeling gross margin of 40.5% and operating expenses slightly above $57 million.

Below the line, we suggest modeling interest expense and income offsetting one another, and $700,000 for taxes.

In turn, we intend to deliver $0.17 of diluted earnings per share off a base of 163 million shares, a 55% year-over-year improvement in bottom-line performance.

To put our proved performance in better context, it's worth noting that in fiscal 2006, we recorded $0.21 of diluted earnings per share.

In fiscal 2007, we posted $0.48 for the entire year.

And for the first six months of fiscal 2008, we've already delivered $0.33.

And, by virtue of our guidance for $0.17 this quarter, we are now on a $0.68 annualized EPS run rate, with further improvements in store during the back half of 2008 and into 2009.

By every measure, 2008 is off to an excellent start.

That completes our prepared comments.

Operator, please open the lines for the question-and-answer session.

Very good.

(OPERATOR INSTRUCTIONS) Our first question will come from a Tore Svanberg with Thomas Weisel.

Actually, we've opened up Aalok Shah.

Hi, guys.

Can you hear me?

Yes we can.

Alright.

Congrats.

Just a quick question for you.

First, on the margin front, you've hit the 40% kind of goal.

Kind of where do you think the stretch is now and when do you think -- what do you think we can kind of end up by the end of the year?

Well, we've hit -- we were 40.3%.

We think the margins will tick up again in the June quarter, and we would expect, as we continue to ship these higher margin, higher value-added products both in our handset and diversified linear products, you'll see some accretion in gross margins.

So they'll improve as we move throughout '07.

And we have been encouraging you to think about a business that runs in the 42% gross margin range and about $250 million in revenue and with an OpEx profile that grows much, much more slowly than revenue.

We think that would get us into the very high teens in operating income as a percentage of sales.

Okay.

Thanks, Dave.

And then just a quick question on the front-end module front -- and I know you spent some time talking about that.

Kind of tell us where you're at and what the landscape looks like for you guys right now and what -- where do you think you're taking some share.

Is it mostly 3G side of things?

Is it -- I know you mentioned some SoC designs as well.

Can you kind of share kind of what's going on in that space?

I think I'll have -- Liam and I will answer this question in tandem.

First, I guess I would say the general trend that we outlined in the prepared comments is that we're learning, as we engage our baseband partners over a longer period of time, that the SoC is driving some interesting specs and an opportunity for more integrated front-end modules on the low end.

That's a function of the baseband integration with analog in essentially a CMOS process.

On the higher end, it's all about multiple frequencies and the challenge in filtering, switching and amplifying across several bands, if not many bands.

So the general trend is higher ASP's on the mid to high end, but an interesting emerging trend on the low end as well.

That's a front-end module; not a simple cheap discrete PA.

Right.

To follow that, I think the diversity comment that Dave outlined is very important.

We are shipping now to all the top tier handset OEM's and are in a great position to capture any of the share shifts that you may see across that market.

And are these BAW filters that you're shipping into these or are these still SAW filters?

Well, actually, we have -- the majority of our products today in the FEM category are gallium arsenide products coupled with PHEMT switching.

We are now folding in the internal BAW capability, particularly in the some of the WCDMA devices that you'll see shipping this quarter and throughout the year.

That's a (inaudible) on the high end or the high band, we find bulk acoustic is a small and elegantly simple way to effectively filter at a low cost and high performance.

Our next question will come from Ittai Kidron with Oppenheimer.

Hi, guys.

Congratulations on good results.

Thank you.

Dave, wanted to look a little bit closer at the sequential trends, both from a historical going a quarter back and also, with regards to your guidance, going a quarter forward.

With regards to the June guidance, $210 million -- that's only an $8 and change million sequential improvement, and I'm assuming that $1 or $2 million out of that is your linear business that continues to -- with the step-ups.

Nokia keeps on ramping another one to (inaudible), at the very least.

Is it fair to say that most of the other businesses -- you're expecting kind of flattish?

Can you go a little bit more color by the OEM's, sort of which ones do you expect to be a little bit more positive for you contributing in June versus where you're a little bit more cautious?

Well, I just -- Ittai, thank you for the comments.

I would say that it is our intent to be conservative and credible in our guidance, and so we attempt to do that each and every quarter.

So having said that as a backdrop, we are a little unique.

As we mentioned in the prepared comments, we do think we're the only company today in high volume production across all the OEM's and most of the second tiers, including some emerging Smartphone suppliers.

So we didn't decline as much in March, as you know.

We declined much less in our handset business in the overall market seasonality.

And this diversification is allowing us to actually be in a unique position where we clearly see and are not immune from OEM share shifts.

We see some OEM's down; some OEM's are up; some OEM's are flat or right on target.

The net effect, though, is when we see an OEM lose some share, chances are at this point we're actually beginning to see a pick-up with another OEM.

So I think the general -- the comment would be a combination of wanting to be prudent in our guidance in a choppy market and being competent in growth, having high visibility to that guidance, and being quite diversified in the overall handset space.

Very good.

So let me drill a little bit into that.

Are you as optimistic as you've been a quarter ago about your ramp within Nokia, just considering the mix shift that they're -- they've suggested on their last earnings call [where you] see a little bit more of the low end being much more stronger and some softness on the high end where you guys have most of your design activity currently (inaudible)?

Yes.

No, we appreciate the question.

We really can't get into the specific details of the customer that you outlined.

That's our commitment to that company.

But I will tell you that we are very bullish about the program ramps that we outlined last quarter.

We continue to see share gains as we move throughout the year, and we don't see anything really that will impact our success, as we've outlined in the past.

Our next question is from Cody Acree with Stifel Nicolaus.

Hi, guys.

Congratulations in --

Thanks, Cody.

Thanks.

I know there's only a limited amount you can say about Nokia, but we've obviously -- that's been the topic of conversation recently with not just yourself, but several larger players.

Can you talk about where you're making inroads, whether it be 2G, 2.5G, 3G?

Is it across the board and do you have any geographic comments you can make there with Nok?

I think, without getting in to customer specifics, where, as Liam mentioned, we just need to -- we need to honor those confidentiality agreements.

We are seeing strength in 2G and in EDGE.

We're seeing strength with our SoC baseband suppliers, and with these front-end modules -- they're some pretty slick devices, both from a size footprint as well as in overall performance and functionality.

So we are seeing strength in the low end.

EDGE/WEDGE -- we did see a shift in the last quarter with a bit more of the mid to low end, a bit less of the high end.

So we did see that occurrence in the market.

But in general, where we're seeing growth is we're seeing growth with reference designs with baseband companies like Qualcomm in markets where they, in the past, had been using perhaps somebody else's wideband CDMA device -- a competitor's device.

Maybe they had a more discrete quadband EDGE implementation.

We're now offering complete RF front-end systems, and so we're seeing strength there.

We're seeing strength, again, at the very top tier OEM's as they migrate to their new sort of highly-customized multi-mode architectures while, at the same time, I think being a little -- getting a little close to the baseband folks on the mid to low end where we're kind of partnering in R&D activity.

So it's bifurcating between a high-end, high value-added, highly customized, OEM-driven front-end for WEDGE and a system that's custom designed for an -- with an SoC partner for the mid to low end.

That's where we're seeing the growth.

Great.

Great.

And then maybe staying at that high level, do you have -- Dave, obviously, you're gaining share and you've got a lot of things ramping that are coloring your optimistic view.

Do you -- can you take a step back and look at the wireless industry as a whole, outside of maybe just what you're seeing and maybe hearing what your customers are saying and comment on inventory health, demand trend health and just the kind of backdrop you're participating in?

Cody, I think if you think about the market this way.

It's -- our crystal ball is no better than our customers'.

Obviously not as good.

But we dial in around a 10%, maybe a little bit better, year-over-year overall unit growth.

Typically, that means maybe 10 to 12, perhaps 13% down in March.

Now, we were down less than that for some of the reasons we just cited.

And then June, maybe you get a half of that back -- a few points back.

And then September's usually a very strong quarter and December is kind of the -- obviously, the very strongest quarter.

And so we don't see anything altering our view of that trend.

We don't see inventory issues out there that are worth mentioning that are moving the dial at all.

We do see OEM share shifts, and we've seen some infrastructure softness.

We've seen some shift to the low end versus the high end, and of course, we see that in our business and we've factored that in to our guidance.

So overall, I think, pretty strong unit growth.

But in the end, the overall trend is going to be, we think, from a -- for a smaller subset of front-end suppliers -- capturing a lot more dollar content, simply driven by the need for scale, for engineering capability -- because these are complicated devices -- and manufacturing cost structures that allow you to support those roadmaps.

So I think the overall trend will be a lot of top tier volume being generated now across virtually everybody, as well as linear products portfolio that continues to grow sequentially.

And the other thing to note here is that the emerging market trends are meaningful because they're adding a subscriber base, and so the subscriber base now is well above 3 billion.

It'll approach 4 billion very soon.

And those customers will then upgrade.

So when we start to move into 3G over the next several years, the baseline to replace (inaudible) goes way up.

Our next question is from Edward Snyder with Charter Equities.

Thank you.

Good quarter, guys.

Thanks, Ed.

Several kind of housekeeping questions here.

How large was linear on the quarter?

I think you were looking at about 30% last quarter.

Did we grow on that, or where are we on linear?

And then what kind of contribution did you get from your Freescale RF business, as well as anything at RIM yet?

I know [this could fall in] later in the year, but how big was RIM, if anything, for you?

Ed, linear products -- this is Don -- was up slightly from Q1 to Q2, but it's roughly a quarter of the overall sales of the business, which is consistent with what it was in Q1.

So I don't know where you got the 30% number, but it's roughly a quarter of the business.

And Ed, if I could add -- you asked a question about Freescale.

Just sort of to refresh your memory, we acquired Freescale for patents, IP, as well as some exclusive design rights into Motorola and RIM.

We are transitioning RIM designs from Freescale designs in factories to Skyworks as we speak.

But the real -- in fact, that's the real value is it does increase our position at RIM, which was a real target strategic customer of ours.

So we are seeing more business at RIM.

We were already positioned a couple quarters ago.

We expect to be the majority, and across all standards, at RIM by the June-September timeframe.

Yes, I guess maybe a sharper version of the same question.

I wasn't looking at what you acquired from Freescale, but the slots that you won at Motorola and RIM are going to hopefully provide incremental sales opportunity that will generate incremental revenue, and it sounds like RIM's going to be mid-year or later.

What about Motorola?

Does -- I know you had Plug 'n Play designs because you were second source to Skywork on a lot of those designs.

Did any of that show up in this period, or should we just plan for that in the second half of the year?

Yes, Ed.

This is Liam.

Right now, those designs are still being ramped, so it's more of a second half of the year impact.

Specifically with Motorola, they've outlined some of the RIM portfolio.

We're seeing launches more towards the near-term.

You see, Motorola needed to work through some Freescale inventory.

That was part of the transaction.

We didn't take finished goods.

So they've been doing that, and RIM, on the other hand, was a faster conversion, really dictated by the recertification or requalification of their customers.

So we're seeing -- we saw some of that this quarter, some more of that in June and more again in September.

I hope that answers the question.

Our next question is from Suji De Silva with Kaufman Brothers.

And by accident there -- we're returning to Edward Snyder with Charter Equity.

Thanks.

10% customers on the quarter and, Dave, you were talking about long-term, much slower growth in OpEx than revenue so that you get into the high double digits.

Is that '09-type timeframe, or should we start seeing that perhaps in the next quarter or two?

Ed, this is Don.

The top 10% customers were Sony Ericsson, Samsung and Motorola.

And with respect to that target of high teens, we're moving from the low to the mid teens as we speak.

That's sort of a position we'll step through here relatively quickly.

We haven't guided out that far, Ed, as you know.

But the market's going to be up maybe a little bit more than 10%.

We will grow faster than the market '08.

We believe we'll grow faster than the market in '09 and we'll continue to see linear products chugging along with incremental sequential revenue.

So I think if you model it that way, we expect to see sequential growth each quarter and -- in both of those business at something that's pretty materially higher than the overall market growth rate for the trends we've discussed.

And we'll go to Suji De Silva with Kaufman Brothers.

Hi, guys.

Can you hear me now?

Yes.

Hi, Suji.

Great.

Hi, Dave.

So real quick, on the mix shift in the industry going from high end to low end.

Dave, how should we think about your content in low end versus high end, and particularly as martphones start to ramp up here, maybe your content opportunity there as well?

Well, I think that the content on the low end -- on the 2G CDMA, for example, those parts had been driven to a fairly low cost structure, well sub a dollar.

And the -- when we think about the front-end modules, they're well over a dollar.

They're not $2, but they're well over a dollar, and when we move in to EDGE, which is mid-end and, in some markets, low-end, it's in the $2, $2.50, $2.60, and then a wideband CDMA, depending upon the number of bands -- if it's a band 1 with an EDGE FEM, it's maybe $3 to $3.50, and you can add $1.25 or so, $1.35 per band of wideband CDMA, depending upon the implementation.

So it runs anywhere from, let's say, $3.50 or so to as much as $6.

And would Smartphones, Dave, be at the higher end there?

It depends upon the network for the Smartphones.

So I -- if the Smartphone is EDGE only, it would be similar in that $2 to $3.

If the Smartphone is wideband CDMA designed to be a world phone, it would be on the high end of that range, or $5 or so.

It's really not a lot different for us.

Okay.

It's the same front-end analog functionality.

It's just how many bands, how much filtering, how much switching and how many bands of amplification are required in the system.

Okay.

That's what I was getting at.

And then also, on the mix -- analog versus the handset part -- what were the gross margins?

Perhaps (inaudible) if you can't discuss that quantitatively, what were the trends and what do you think the drivers are for each of the gross margins of the segments?

We don't disclose the margins by segment.

And as we've consistently said, the margins in our linear product business are accretive to the overall business.

But clearly, with 75% of our revenue coming from the handset market and a lot of the improvements that we're seeing operationally -- both product yields, factory efficiencies and material cost out -- relate to the handset business.

So we are seeing movement in both sides of this.

It's just not a mix shift that's driving [is it's] real operational improvement.

We can't move the margins in this direction without getting benefits in handset as well, so there's really good performance on both sides.

I'll give you an example, just as an anecdote.

On the very low end, these front-end modules for the very lowest end phone have very attractive gross margins.

We've been able to drive (inaudible) low.

We've been able to sweep in some analog functionality, put in a very small footprint with a low profile, which is very important -- size and current consumption -- very, very important.

And it's a misnomer, and perhaps counterintuitive, that on the low end of the market that perhaps they would suffer and there would be poor margins.

That's not the case at Skyworks.

We're running a lot of scale, a lot of volume.

Highly vertically integrated for those particular devices, including packaging, assembly and test and PHEMT and HPT content to the margins.

The margins are very strong, and we run in some of those product yields that are in the high 90's.

So we like that low end -- may be counterintuitive, again, but we like the low end a lot from a margin standpoint.

Next question is from Sanjay Devgan with Morgan Stanley.

Hi, guys.

Thanks so much for taking my questions and congratulations on the quarter.

Thanks, Sanjay.

Thanks.

Just a quick question.

First off, specifically on the Asian handset market, I was just wondering if you could provide us with some color on how your relationship is with the incumbent suppliers -- MediaTek and (inaudible) in Asia.

I know you have a reference design win.

So if you could provide any color there, I'd really appreciate it.

Yes, absolutely.

First of all, we're very focused on the APAC market -- China and also Taiwan.

Our relationship with MediaTek is quite strong.

We've developed a portfolio of low-end products, much like Dave outlined, that include now, for the most part, FEM's that are gallium arsenide devices with a switch.

ASP's have come up a bit on that, but their value has come up.

We think the market for China is still going to be very strong this year.

There was some volatility towards the end of December and into the early part of March, but the outlook looks very strong for the rest of the year.

(Inaudible) is a smaller player, as you know, doing more TDS-CDMA.

We are working with them.

The revenues are a bit smaller than MediaTek but also an important -- an account to stay focused on.

So we are bullish in that market and we think, as I mentioned, the emerging segment is critical for the industry, and we're well-positioned to capitalize.

And just a quick follow-up, if I may.

On the linear -- your linear products business, how should we kind of view that long-term in terms of long-term growth?

How do you kind of view that just for modeling purposes?

What kind of growth do you expect from that, I guess, year on year, or what is typical to -- reasonable to expect from that business?

That -- that's a great question.

That business has all been grown organically.

We really began an intensified focus moving from what had been a wireless infrastructure business primarily into a more diversified set of end markets, first with catalog standards, and then into some identified adjacent markets.

We mentioned a few in our prepared comments.

And back in 2006 -- early 2006 -- we were a little over $20 million a quarter, as I recall.

2007, we intersected 30.

Late 2007, early 2008, we exceeded $40 million per quarter -- million dollars of revenue per quarter.

And I think by the time we get to the end of 2008, early 2009, we'll be intersecting with $50 million a quarter, or a $200 million run rate.

So that's the way we're thinking about that business.

It's a lot of singles and doubles, not the $20 million orders that you get in the handset.

But the life cycles are just so long and the margins are so good.

No particular socket has a great deal of competition.

When [you're] designed in, there's no incentive to design you out throughout the product life cycle.

So that's the way the analog franchises grow revenue is that you add new markets, add new customers, with very little concentration, either on the customer side or on the product side.

That's exactly what our linear products business looks like today.

(Inaudible) helpful.

And our next question is from Stephen Ferranti with Stephens Inc.

Hi, guys.

This is Neal for Steve.

Gross margins were impressive in the quarter.

How would you weight the impact of factors driving the improvement in gross margins for the quarter?

The -- this is Don, Neal.

The primary driver, as we said, has really been our -- was our ability to continue to execute operationally.

We've got a pretty nice progression -- four quarters in a row -- of margin improvement, and if you step back and look at it, it's really been our ability to continue to focus on improving yields, focus on driving -- we typically drive about double-digit material cost reductions year over year.

That's continued to go very well.

And continuing to focus on our efficiencies in our factory.

All those things are continuing to pay dividends.

So that's really -- that drove the lion's share of the increase in the quarter, was the focus in that area.

Now we also get a nice benefit -- Dave's comments talked about the hybrid manufacturing model -- and one of the things that -- that provides us flexibility, it provides us upside, ability to ramp, with having those partners on the outside.

But what it really also does is it keeps our factory utilization very, very high, and that's another way for us to continue to drive margin improvement in the company.

So it's really operational execution.

That's what drove it.

Okay.

And just one more quick follow-up.

You guys talked a little bit about the transition to the 6-inch wafer.

Can you guys talk about how we should expect that transition to impact profitability going forward?

It is -- Don can help me with this.

We are well underway.

The transition will be completed some time in 2009.

We have, in fact -- you'll notice Don talked about the, I think, $126 million of cash flow from operations, and increasing net cash in the last few quarters.

We've been doing that while paying for the 6-inch equipment, so much of that -- it's not all in, but much of it is in and is being installed as we speak.

So it -- to the extent that it has a margin impact, it's having a margin impact now, and that would be -- and as measured by the need to create room for space and the costs associated with beginning to ramp those processes.

So we factored that in to our model, and so I don't think you will see a reduction in gross margin driven by the 6-inch.

Now when we come out of the other end of 6-inch, we will have lowered our (inaudible) cost by a little bit over 20% and we'll get a [step] function of capacity, and with that hybrid model, that means we're able to pull in volume so that we can increase our utilization in line with that increase in capacity while, at the same time, keeping our foundry partners health.

So that's the goal.

So you should see -- you're kind of seeing the impact now and you'll see the benefit in mid-'09 or so.

Our next question is from James Faucette with Pacific Crest.

Thank you very much.

I just wanted to go back to your 10% customers as group, etc.

I'm just -- obviously, there's been a little bit of movement there, particularly Samsung coming in now as a 10% customer.

Again, how should we think about the opportunities over the course of the rest of this year and into 2009?

Do you think we'll see new names among those 10% customer lists or some movement there, or -- I guess I'm just trying to get a feel for your opportunities for new customers to be significant contributors.

Yes, James.

That's a great question.

Let me start by saying we absolutely expect to add 10% names to the list in -- if you look at our internal view, we believe, by the end of the calendar year, we should have at least four of the five top -- top five OEM's as 10% accounts for Skyworks.

Obviously, growth is continuing with each and every one of those accounts.

We're focused on those.

The three that Don mentioned are very important, and there are several new ones that we expect to (inaudible).

Our next question is from Jeff Kvaal with Lehman.

Thanks very much, guys.

I was wondering if you'd comment a little bit about the balance sheet.

In particular, I wanted to ask about inventories, which are up a little bit this quarter.

Sure, Jeff.

This is Don.

We at -- in our internal forecast, we fully anticipated an inventory build, and it was really based on customer demands for product going into the third quarter, so nothing unusual about it except for us ramping opportunities externally.

And I think as Don pointed out in his guidance, we guided for June, but we're seeing evidence of visibility for an accelerating growth prospect as we move throughout 2008 as these new customers come online and some of these new analog products ramping in production.

So we're just getting prepared for that.

Okay.

So should we then expect for the inventory days to come down again in the June quarter or in the September quarter?

I would model it relatively flat.

I would expect a reduction.

We're now going into a different revenue profile.

Okay.

So -- yes.

I would expect inventory -- yes.

But inventory days should be -- should stay this new level --

Oh, yes.

We're managing to the same turn number.

We don't -- that's our job, to make sure the turns don't drop.

Okay.

So inventory turn target of around 6 times?

That's our internal target.

Okay.

Yes.

Alright.

Fantastic.

And then also, Dave, you had talked a little bit about a choppy environment.

I was wondering if you wouldn't mind spending a little bit more time talking about that.

Sure.

Well, we have seen -- we've seen some share shifts among our customer base, and when we see that, that creates some choppiness.

I think that hopefully you're getting the sense that, as we increase our penetration across a broader set of customers, we're beginning to see puts and pulls or ups and downs with different customers, and I think that's our goal, is to be a diversified -- as diversified a proxy for wireless handsets within that segment of our business as we can.

That still means we'll see choppiness as this OEM share shifts.

So I think that's what we mean.

We also saw more EDGE and 2G product than we expected and a little bit less of 3G product than we expected, although the visibility is that that isn't altered materially over the next several quarters, but that is some of the choppiness to which we were referring.

Our next question is from Uche Orji with UBS.

Hi.

This is (inaudible) for Uche.

Just wanted to (inaudible) question.

Just wondering, can you verify the composition of the (inaudible) is more towards analog or it's more towards handsets?

More towards handset.

Okay.

Thanks.

And previously, you talked about (inaudible) improvements on your [CG4X].

Just wondering where that is and when do you expect to get to 90+% (inaudible)?

Would you mind repeating that question?

I'm sorry.

You broke up just a bit.

Yes.

On [CG4X], you said in the previous call you were at 85%.

I was just wondering when you expect to reach 90+% on CG?

Yes.

The comments are yields, I take it.

We've been running -- on our 2G products, the yields are very high -- well into the 90's.

And our 3G products -- depending upon where they are in the (inaudible).

What we typically see is a learning curve where, at early introduction, if we really hit the center of the design, we may launch in the 70's.

If not, we may launch in the 60's.

But we quickly move into the 80's and then, through test work and through optimization of the design, in some cases, we're able to move it up into the 90's and ultimately well into the 90's.

So we're -- we've been pretty predictable.

I would say, in 3G, we are firmly in the 80's.

In some products, we are in the 90's.

Thank you.

You're welcome.

Our next question is from Tore Svanberg with Thomas Weisel.

Yes.

Thank you.

Can you hear me?

Yes.

The first question -- you talked about some lumpiness because of your end customers and market share shift.

How does that relate to your reference partners?

Are you seeing some lumpiness there as well, or is it still quite stable?

Well, with regard to the reference partners, those are engagements that are done kind of at a high level -- a long-term relationship -- and then those designs get ported out to multiple OEM's, so I think, from a reference partnership viewpoint, things have never looked better for Skyworks, quite frankly.

We're doing quite well with TI, Qualcomm.

MediaTek -- we mentioned before.

And there's several others that we're working on today.

So I don't think the order flow within a given quarter really has much to do with the reference partners.

Those are longer term engagements.

They've never looked brighter.

And we continue to be a valuable part of their overall solutions.

Great.

And then on the analog business, you mentioned some of the new areas that you're penetrating, but if we look at that business, that's (inaudible) revenues today, what are some of the bigger components of that -- where we stand today?

Yes, it's actually becoming more and more diversified every quarter.

We do have a core base business in wireless infrastructure.

We started adding new markets, such as automotive, in the last several quarters, and automotive was a meaningful part of our business this last quarter.

We started working on engagements with companies that do energy management or meter reading systems.

We started working on medical.

So there's a number of new markets that are becoming quite diversified, and not any one segment represents more than 20% of the overall portfolio.

Our next question is from Mark Heller with Merrill Lynch.

Hi.

Good afternoon, guys.

I was wondering if you could give me your current mix between insource and outsource manufacturing and what your utilization rate is currently?

Roughly 80/20 in our foundries.

In our assembly, it's perhaps a little bit less than 20% is outsourced.

And our utilization is running in the 80's in PHEMT.

In HPT, it's fluctuating a little bit.

It's impacted by the 6-inch conversion that we've been talking about.

So we -- I think we'd like to run in the 90% range, as long as we've got a fully-qualified (inaudible) exact partner for those processes.

And that's our -- that is our goal.

We're not there in PHEMT.

We're closer to that in HPT.

And we are there in assembly and test.

Got it.

And any change to your tax rate at this point?

It's still running in the 2 to 3% range on a non-GAAP basis.

Any change to that going forward?

We talked a little bit more in detail about this in the last call.

With the tax valuation allowance on the book, the rules require us to look at every quarter.

There's no change at this point in time.

We're going to continue to look at that.

We have about $185 million of NOL's on the books, so for modeling purposes this year and next year, continue to use about the 3% cash tax rate.

Our next question is from Craig Ellis with Citi.

Hi, this is Ken [So] calling in for Craig Ellis.

Great quarter, guys.

Thank you.

Thanks.

Just had a couple question.

As far as the pricing environment, first of all, could you talk a little bit about the pricing trend in the March quarter and your -- perhaps your expectation going forward in the June quarter relative to the norm?

Yes, with respect to pricing, it really -- it's actually a difficult question to answer as the portfolio has so many components and there's blended ASP's.

But basically, we're seeing the pricing environment stabilizing a little bit here as we've exited March and we move into the back half of the year, and for Skyworks specifically, we have a few unique advantages in bringing in some of our technology, such as PHEMT and BAW filter, to create a blended solution that is quite differentiated and offers very high value to the customer, and I think it's the increase in value that's doing the most for us in terms of stabilizing pricing.

Okay.

So just to follow up on that, given the diversification programs that you talked about in your prepared remarks, and also your comment on the Asian market, could you give us a sense of sort of your pricing outlook for calendar 2008 relative to '07 which, I believe, was down mid-single digits?

Okay.

And this is a handset-centric question versus linear products, I take it?

Perhaps linear -- let's start with handset and then (inaudible).

Okay.

Let me try to give you a little bit of color.

Before the move to some of the low end phones that began to adopt the front-end module technology, the ASP erosion had been about 15% a year, and I would say that that was the case in 2005, 2006.

The shift began to occur in 2007.

Thus, in 2007, you saw single digit -- in some cases, low single digit -- ASP erosion, and it was a combination of the front-end modules just declined less.

That blended with some of the older designs in 2G.

As we're going through 2008 and 2009, the actual ASP's are quite healthy in these new multi-mode designs, and they're stabilizing on the low end by virtue of these more complicated FEM's.

So I think the blended ASP for us on product-to-product is again -- will be in the single digit, but the blended -- that is, if you looked at product-to-product, on average, it will be in the single digits -- perhaps the mid-single digits.

But at the end of the day, we're actually seeing an increase in our overall average ASP as we ship more FEM's, more linear products and less of the older simplified 2G solutions.

So the -- that's what we mean by a better, a more stable pricing environment.

And our final question will be a follow-up from Ittai Kidron with Oppenheimer.

Hi, guys.

Just a little bit more focused on cash.

Can you -- Don, can you talk a little bit about your CapEx plan for the year?

And Dave, you are starting to have a different problem of lots of cash.

Has the thought of a buyback ever crossed your mind, or how close are we, do you think, to doing an M&A deal that expands your linear business?

This is Don, Ittai.

As you know, we spent almost $20 million -- $19.5 million -- in Q1 in capital, $17.5 this quarter.

We would expect -- and we don't guide cash specifically, but we would expect capital spending to be roughly in line, maybe down a little bit, to what you just saw in Q2 and Q3, and then a little bit of a drop into Q4.

So remember, we're continuing to invest in 6-inch.

We're investing in -- the CapEx that we invest in assembly and test in Mexicali, because you have square footage available, pays for itself in a relatively short period of time, and it's a real nice lever to continue the margin improvements.

So hopefully, that gives you a view on CapEx.

And you're right.

What we're really doing a good job of here is the improved business model -- effectively converting that to cash.

And you're right.

The balance sheet's getting a lot stronger.

We believe our currency's significantly undervalued.

We are looking at a stock buyback, but we haven't committed to do that yet, but it is something we're continuing to look at.

And I think Dave wants to address the M&A question.

Yes, I think the M&A -- if you live long enough and you do enough deals, you know just how perilous they can be, so I must say that we are -- we would only even consider an M&A deal that was so overwhelmingly creating shareholder value and low risk that our hurdle is so high that we have nothing on the horizon, but clearly it's an option for us, but we are -- we're really quite conservative on the M&A front.

Very good.

We'll take it as buyback then.

This does conclude today's question-and-answer session.

I'd like to turn the call to Dave Aldrich for any additional or closing comments.

Well, thank you so much for participating, and on behalf of the entire Skyworks team, thank you and we look forward to updating you next quarter.