思佳訊 (SWKS) 2008 Q4 法說會逐字稿

And welcome to the Skyworks' Fourth 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' fourth fiscal quarter of 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 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 non-GAAP 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 website for a complete reconciliation to GAAP.

I will now turn the call over to Dave for his comments on the quarter and fiscal year 2008.

Thank you, Tom, and welcome, everyone.

I'm pleased to report today that Skyworks delivered 22% revenue growth and a 59% operating income improvement in our fourth fiscal quarter.

With several new programs and with linear product ramps enabling us to more than offset the slowing economy, I believe our performance and growth outlook in the current environment demonstrates significant progress on our primary strategic objectives.

Namely, we're continuing to diversify Skyworks, we're gaining market share, we're capitalizing on content growth, and we're executing operationally.

Now, specifically during the quarter we achieved record levels across our key financial metrics.

We exceeded our top line guidance of $225 million, with revenue of $233 million.

We expanded our gross margins to 40.8%.

That's up 140 basis points year-over-year and, incidentally, our 6th consecutive quarter of improvement.

We achieved a 15.5% operating margin and we posted $0.21 of earnings per share, and that's $0.01 better than our guidance and up $0.14 in the year-ago period.

We generated $52 million of cash flow from operations and we retired $62 million of convertible debt.

Our fourth quarter performance closed out a solid 2008, a year in which we exceeded our guidance in each and every quarter.

Now, of special note, we delivered revenue of $860 million.

That's up 16% versus 2007 and up 22% in the second half versus the comparable period, reflecting the momentum in new markets and with our new customers.

We've improved our operating income by more than 50% year-over-year.

We produced $0.71 of earnings per share.

Now, that's up $0.48 -- from $0.48 in fiscal 2007 and $0.21 in fiscal 2006.

And finally, we generated $174 million of cash flow from operations.

Now, with regard to our diversification strategy, we continue to gain momentum with our linear products portfolio.

These products leverage our catalog business, our intellectual property and worldwide distribution network by expanding into a broader set of end markets.

With nearly 1,000 global customers and over 2,500 analog SKUs, we are bolstering our product pipeline and expanding our addressable markets with each and every new customer engagement.

Now, a few examples during the quarter.

We won a multi-year, multi-million dollar defense contract with Lockheed Martin to supply microwave components for radar applications onboard aircraft carriers and fighter jets.

We've also ramped femtocell base station solutions at Samsung and others in support of Verizon, Sprint and Nextel deployments.

We've increased shipments of our remote meter reading solutions at Itron and Sensus and others.

We've launched a portfolio of voltage control oscillators, or VCOs, frequency synthesizers and mixers targeting home area networks and industrial automation applications.

Finally, we extended our Cisco relationship with a suite of new wireless access point solutions.

Now, at the same time we're continuing to diversify within our handset business with increasing support of all five top Tier 1 handset OEMs, as well as two of the leading Smartphone suppliers.

We're also aligned with each and every baseband supplier.

And this has been a terrific source of diversification for us.

Another source of diversification has been our growth in the high-growth Smartphone segment.

Here, we've been consistently doubling shipments over the past few years, and we closed fiscal 2008 at roughly 40 million units.

As our Smartphone unit growth trajectory at two times the market growth rate highlights, we're clearly gaining market share.

More broadly, our 22% year-over-year revenue performance, coupled with continued growth in the December quarter, underscores that we're beginning to demonstratively outperform our traditional markets while also penetrating new applications.

And in fact, the weakening industry backdrop is accelerating vendors' share consolidation as both our linear and cellular handset customers are increasingly awarding programs based on highly integrated, low cost architectures, innovative roadmaps, operational scale and balance sheet strength.

Now, let me expand a bit on this point.

Many of our customers today are increasingly focused on designing highly complex multimode platforms.

Now, these product offerings present multiband switching, filtering, digital control and amplification challenges to our customers.

These are system level requirements which intersect with what we at Skyworks do quite well and have proven to be illusive to our traditional competitor base.

Speaking further on these multimode trends, we're also capitalizing on the three times increase, the 3X increase in handset FEM, or front-end module, content.

The migration to higher end 3G and Smartphone devices is happening, albeit slower than market expectations given the current economy.

Nevertheless, this marked macro tend is being fueled by carriers who see the value in data, in data services, in multimedia and web browsing.

Now, a positive user experience is simply impossible without high-performance devices which seamlessly manage voice and data handoffs and roaming in multiple modes and bands.

This trend expands our addressable market by literally billions of dollars, from roughly $2 per phone in 2G to $6 when in 3G multimode, as we're uniquely able to sweep in switching, logic, filtering and wireless local area network functionality.

So in short, market share gains, along with this higher dollar content multimode content trend, are having a compounding effect on the top line of our business.

This trend is enabling us to continue to grow, even under the most pessimistic handset forecast scenarios.

And finally, we're executing operationally.

As increasingly reflected in our results, at Skyworks we're an extremely metrics-driven company, with an intense focus on continuous improvement in our yields, in our equipment utilization, in our cycle time and return on invested capital.

This focus is beginning to show through with six consecutive quarters of gross margin expansion and improving cash flow.

Importantly, we now see a path to a 20% operating margin model beyond a $1 billion annualized revenue run rate.

Okay.

In summary, while we fully recognize the slowing global economy, Skyworks' financial position and growth outlook continues to improve, driven simply by diversification, by content growth and by operational execution.

And while we certainly feel the impact of the market downturn, we're fortunate that we have several product investment areas that are just now beginning to ramp, allowing us to demonstrate sequential improvements.

And just to be very clear, we are not wasting any time celebrating our 2008 results.

Instead, we enter fiscal 2009 intensely focused on making continuous progress towards realizing our vision of becoming the world leader in analog mobile connectivity semiconductor solutions and, in the process, creating shareholder value.

Okay.

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

Thanks, Dave.

Good evening, everyone, and thanks for joining us tonight.

Revenue for the fourth fiscal quarter was $232.6 million, up 22% year-over-year, and up 8% sequentially.

Gross profit for the quarter was $94.9 million, or 40.8% of revenue, driven by higher equipment efficiencies at all of our factories, progress on yield improvement initiatives, and double-digit year-over-year material cost reductions.

Operating expenses were $58.9 million, of which R&D expenses totaled $36.3 million and SG&A costs were $22.6 million.

As a result, our operating income for the quarter was $36 million, up 59% year-over-year, and representing a 15.5% operating margin.

Our net interest and other expense for the quarter was $700,000, while taxes were $100,000.

Net income was $35.3 million, translating into $0.21 of earnings per share, $0.01 ahead of guidance.

Turning to the balance sheet.

We exited the quarter with cash and cash equivalents of $231 million.

During the quarter, we recorded $11 million of depreciation, generated $52 million in cash flow from operations, invested $13 million in capital expenditures, and retired $62 million in convertible debt.

The recent volatility in the financial markets presented us the opportunity to retire one-half of our debt at a significant discount from previous trading levels.

Specifically, $50 million was for debt coming due in 2010, while $12 million was used to retire 2012 notes.

Further, post the quarter, we have retired an additional $38 million of the 2012 notes, which will be reflected in our December quarter balance sheet.

With the retirement of one-half of our convertible debt, we have effectively eliminated approximately 10.5 million shares that could have been convertible above $9.52 per share price, while maintaining our positive net cash position.

Given our strong growth outlook, these transactions serve the dual benefit of delivering our balance sheet and allowing us to maintain our positive net cash profile while effectively eliminating a sign portion of the dilutive impact of the convertible debt.

Now, to our business outlook for the first fiscal quarter of 2009.

As Dave outlined, customers and market diversification, along with strong execution, are enabling us to continue to grow our top and bottom lines, even in the face of the broader industry downturn.

Specifically, we are forecasting December quarter revenue to be $240 million based on our strong backlog position.

Operationally, we plan to further expand gross margin to the 41% to 41.5% range, with operating expenses of $59 million driving an operating margin approaching 17%.

Below the line, we suggest modeling approximately $600,000 in net interest and other expense and taxes at our 3.5% to 4% cash tax rate.

In turn, we intend to deliver diluted earnings per share of $0.23 off a base of 166.5 million shares

We believe our guidance incorporates current market uncertainty and, at the same time, reflects our ability to outperform our addressable markets.

It is worth noting that, during the fourth quarter, based on the strength of our 2008 financial performance and our earnings outlook, we reversed approximately $34 million of our deferred tax asset valuation allowance in our GAAP income statement.

There was no benefit to our non-GAAP results and this accounting reversal has no impact on our 3.5% to 4% projected cash tax rate through fiscal 2009.

Looking beyond the current fiscal year, we have tax initiatives underway that, when implemented and combined with the use of remaining R&D tax credits, will equate to an estimated 2010 cash tax rate of approximately 15% to 18%.

We're providing this key cash tax rate range a year in advance as several investors have expressed concern over the possibility of a 30%-plus cash tax rate beginning in 2010.

Instead, we are projecting roughly half that rate post-2009.

In closing, our financial performance has never been stronger.

We believe we're well positioned to navigate through the current market weakness and, as a result, we are very positive on both the short term and strategic outlook for Skyworks.

That concludes our prepared remarks and, Operator, let's open the lines up for questions.

Very good.

(OPERATOR INSTRUCTIONS.) Our first question is from Cody Acree with Stifel Nicolaus.

Hi, guys.

Congratulations.

Thanks for taking my call here.

Can you talk a little bit about new customers versus the end market?

Obviously, you are giving guidance -- your performance and guidance is a bit divergent from what we're hearing from most of the rest of your peers.

And if you can give some quantification of how those two break out?

Sure, Cody, and thank you.

This is Dave.

Obviously, we are seeing a broad based slowdown in the market.

And this has been particularly true in 3G and in some of our broad linear market segments.

Fortunately, at the same time we are shipping some recently introduced products and we're ramping some new customer programs.

And just to be a little bit more general, our customers, Cody, are increasingly being much more selective.

For example, we're ramping in production with customers who experienced some supply chain disruptions a year ago.

So, we are in fact seeing share gains.

We're being awarded, I think, that business now in -- as we enter 2009 because we stepped up and we were able to deliver.

Also, our customers are really in this multimode environment, struggling with some of these new highly complex designs.

So, increasingly we're getting higher dollar content platforms, many of them ramping now and into 2009 that, instead of being a PA, would have some pretty complex logic, amplification, switching and filtering.

So, it's a combination of those things that are allowing us to offset what is clearly some broad-based softness.

Let me take it one step further.

These market share gains I would expend to extend on and through the first half.

Do you have enough visibility from some new customers that are coming in that help to offset some of the typical seasonality through Q1 and Q2?

Well, are you talking about the March quarter, Cody?

Yes.

Sorry.

Sorry, seasonal is still in Q2.

Right.

Well, we are -- as we mentioned, we are ramping these new programs.

We have introduced some new products in our linear products catalog.

Those are being received pretty well.

It's awfully early to talk about March.

And in fact, we do expect there to be a fairly significant decline in March, perhaps worse than we've seen in prior years.

But nonetheless, we do have programs moving into production, as you asked, and we're entering a growth phase with some new markets.

We've talked in the past about energy management.

We're now ramping some energy management products, wireless meter readers and the like.

We also have some military microwave programs that are just -- that are going into production.

So, it's a combination of those kinds of new markets and applications that allow us, we believe, to outperform the March seasonality which will certainly be there.

Our next question is from Sanjay Devgan with Morgan Stanley.

Hey, guys.

Thanks so much for taking my call and congratulations on a great quarter.

Thank you.

Just looking at your guidance for next quarter, I mean, given the macro issues -- and you guys were obviously very different from a lot of the other companies that have reported.

I was wondering if you can give us a sense of the amount of conservatism you've taken into your guidance, i.e., relative to past quarters when you've guided, is your backlog coverage higher than previous?

Is it the same or how should we kind of view that?

Well, we have absolutely tempered what would have been our growth expectation under normal circumstances.

So, one of the advantages we have is we are shipping to all the top handset OEMs.

We're partnered with all the top baseband OEMs.

And we're shipping into the top Smartphone manufacturers.

So, as a result, when we do -- and indeed see reductions from certain customers, we're not as vulnerable to a single point issue with a customer or a couple of customers.

That being said, clearly the market is soft.

But we do have some programs with pretty high ASPs that are ramping.

We have terrific visibility into those, as we always do in a new program ramp.

And we're getting very good performance out of our -- sort of a broad-based catalog business.

So, the visibility is good but clearly there are areas of softness.

And we've tempered our overall guidance to be conservative.

Fantastic.

And then just another question, if I may.

Can you give us a sense of your revenue mix by interface if possible?

Sure.

For the fourth quarter, Sanjay, we were 50% 2G and 50% 3G.

And our multimode business, just as a note, doubled year-over-year as well.

That's consistent with the third -- the previous quarter we were 50/50 as well.

Our next question is from George Iwanyc with Oppenheimer.

Congratulations on the results, guys.

When you look at the growth prospects for the handset business and the linear business, are they still both kind of ramping at the same rate or is linear going to maybe see a little bit stronger growth near term?

Well, we typically see -- in a December quarter we would see more seasonal growth -- more seasonality in our handset business.

Now, when you move into a March quarter you'd see a stronger relative linear product segment because we see less seasonality, seasonal downturn in a down quarter which is March.

Having said that, we are seeing sequential growth in both our handset and our linear product segment.

We did -- we saw that in September and we're seeing that in December.

And is linear still about 25% of the overall business?

Linear was -- both linear and handset were up sequentially and year-over-year in the quarter.

And linear products remained at approximately 23% of revenue, which is consistent with last quarter.

Okay.

And just following up on your comments on the front-end traction, how's the traction compare relative to the 3G handsets and the 2G handsets?

Yes.

Well, regarding mix, I think what we meant to say there is 3G for us is WEDGE.

It's WCDMA and EDGE.

So, that business -- that has slowed somewhat through the year and I think that's been well communicated across the market.

We do expect as you move into 2009, despite whatever handset unit outlook may be there, we see an increase in 3G adoption.

And that is going to be a big driver for Skyworks, as Dave noted in the opening remarks.

There's a high degree of complexity in those models and those phones.

And Skyworks is well positioned to capitalize.

So, we see that becoming an increasing part of the mix for us going forward.

Our next question is from Uche Orji with UBS.

Hi.

This is Polo for Uche.

Just a question on your linear segment.

Can you highlight what you're seeing in terms of various end markets?

And also, if you could provide some color on what you're hearing from your Chinese infrastructure players.

Sure.

Yes.

With respect to linear, we cover a diverse set of markets.

We certainly do a great deal of business in the core infrastructure market with companies like Ericsson, Nokia, Siemens, Huawei and DT.

We are seeing particular strength with Huawei and DT as they ramp GSM and start moving into higher-end systems.

We also see WCDMA infrastructure starting to pick up going into 2009.

So, we see that segment as one of the elements for linear.

We're also moving into some markets that really are not traditional wireless markets.

Segments like energy management.

We supply customized solutions that bring wireless technology from the meter to the utility.

And we've even moved inside of the home with some ZigBee products to do home automation.

And those markets are very new for Skyworks.

They have tremendous growth profiles and they're just not subject to the seasonality that we're seeing in some of the consumer segments.

Okay.

And coming to your handset business, you alluded to some share gains.

Are the share gains coming just from the smaller players or you're gaining share from the larger players as well?

No, we really are gaining share right now across the board.

Each and every one of the top five OEMs we're shipping WCDMA and, in my cases GSM, to each one of those accounts.

We've gained tremendous share in the Smartphone space.

And I think, from my seat here, I think one of the drivers to our story has been share gains.

And we've been able to accomplish that in this market and we'll accomplish it in 2009.

Please keep in mind you just augment that (inaudible).

What's really happening is that the level of complexity required to deliver these new solutions -- and that's also true, incidentally, on the low end where it's more front-end module, less single-function amplifiers.

And clearly, on the mid to high-end with multibands and challenges with shielding, filtering, as well as typically amplification.

What our customers are looking for is to engage early with a solution.

So, the competitive base -- if you've been in this market awhile, three years ago, two -- three years ago we were competing with 12 or 13 companies.

A couple years ago it was 6 or 7.

Today when we go into an engagement it's very early in the phone design and we're competing with another company.

And when we win it, it's typically sole source for that platform.

At most, there's two.

So, it's just a very different dynamic.

It's complicated product that is driving consolidation among the competitors, as we've been predicting now here for a couple of years.

Alright.

We'll next go to Mike -- let's see.

Well, Mike, he just took himself out.

No, there you are.

Mike Burton, ThinkEquity.

Hey, thanks, guys.

Great job.

Thank you.

Just wondering if you could perhaps take us through -- I know the visibility's real tough right now, but your expectations for the linear group as we get -- I know you said for next quarter it should be up, but into next year.

I think before you kind of expected each quarter to go sequentially up a little bit.

Can you talk a little bit about that, how you see that market progressing in 2009?

Thanks.

Well, maybe Liam and I will take this together.

The play for us in linear products -- remember, a couple of years -- we generated this organic growth engine for the Company about three years ago and we've doubled down on R&D over that period of time.

Now, we've got a nice steady state team of developers and applications and marketing people leveraging the distribution of rep sales channel that we have is quite specialized.

And each quarter we're putting many new products into a catalog.

The name of the game here is you characterize them across as many operating frequencies, voltages.

You're trying to get as many hits on a given platform as is possible and to keep them as general purpose as is possible.

So, part of it has to do with the nascent nature of our business.

We are growing sequentially as we're adding new markets that are being facilitated by a whole host of new products.

Now, having said that, it's not immune from a market slowdown, but we do have the benefit of each and every quarter we are ramping new stuff in addition to exploiting the older installed base.

So, we're very different than what you may think about as a typical analog company that has a very high penetration of a niche.

We're entering new markets with relatively, today, low penetration and growing into those market segments.

Okay.

And then over on the wireless side, could you give us a sense of how big the Chinese white box market is for you guys and what you see developing within China?

Yes.

Well, I mean, we're not going to specifically comment on the white box market.

That's difficult to ascertain.

But certainly, China is a very big part of the story in wireless for Skyworks, and for everyone in our industry.

And it is also a market that has quite a bit of volatility.

We understand that.

But a couple things.

And we consider China to be a very strategic part of our story.

We've gained a lot of market share.

We commented earlier on supply chain disruption.

There were customers in that market that were hit with shortages.

We stepped up.

We gained a lot of market share and we're going to keep that.

We've also done a great job on the infrastructure side.

So, it does become a big part of our story.

But I will say that, when we move into this quarter, and even looking into 2009, we have taken a very cautious view on China.

We've discounted our outlook to reflect that, yet we remain long-term positive on the space.

Our next question is from Steve Ferranti with Stephens, Inc.

Yes, thanks.

A great job, guys.

Thank you.

Thanks, Steve.

Can you give us any sort of sense for some of the newer OEMs that you're gaining share with?

What inning would you say we're in, in that ramp, and over how long into fiscal '09 might that ramp continue?

Sure, Steve.

Well, on the handset side we know who the players are.

So, in many cases, it's deeper penetration into accounts that we may have had a small share in, right?

We've got a very large Tier 1 that we're -- I would say we're maybe in the third inning of the game with that account, and we have a long way to go.

Some of our Korean customers have been very strong for us in this last year.

We've gained a lot of share.

But I will say that there's quite a bit of upside, specifically in WCDMA.

And we've done very well in the Smartphone space.

And I think that's a space we really have to watch in this market.

We alluded to the benefit that carriers are seeing with data services and an increase in RPU.

What that's doing in the Smartphone space is driving complexity and requirements higher and providing us an opportunity to add more value.

So, we see a lot of strength in those areas on mobile.

And then on the LP side, switching gears, we mentioned some of the names in energy management, companies like Itron and Sensus, a company in Europe called Landis & Gyr.

Some real interesting diversified markets and new customers on LP.

So collectively, all that brings a great deal of diversity to the business.

And let me just add, with the largest OEM, they're not a 10% customer today.

And we intend to participate across all of our customers with mid, low and high-tier product.

So, it'd give you a sense for the growth even in just one account.

Okay.

That's very helpful.

And then just sort of a more general question, I guess.

In some of these newer wins, how often are you seeing awards in both the 3G and I guess EDGE slots on WEDGE phones?

Yes.

Actually, invariably for us we're going in after certainly the core EDGE device, which is typically a FEM, bringing in a very high-throw complex PM switch, coupling that with our GaAs HBT device, packaging in Mexicali in our own shop.

And then we take that as an anchor and then span multiple bands of WCDMA.

And we can hit all those bands.

And what we are seeing is an increase.

We're seeing customers now that want band 1 and 8 in Europe, 2 and 5 for Americas and putting those all in one phone.

So, we're seeing increases in content.

And our ability to satisfy that goes up as the complexity increases.

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

Hello, Dave, Liam, Don.

Congratulations on the quarter.

Thank you.

So, on these share gains, just want to press a little bit more here.

You talk about -- I think you said in the prepared remarks that some supply chain disruption about a year ago got you some sockets which are ramping now.

Is that a one quarter phenomenon or do more of those layer in the next few quarters?

No.

That's been a phenomenon now for about a year.

We're -- just really the tip of the iceberg in some of those opportunities.

I think it's a general -- so the answer is no.

I think we earned that business and I think our customers will continue to reward us with more of their business because we've stepped up.

We're giving them we think a terrific product with terrific quality at a price point that's very competitive.

So -- and they provide good margins for us.

So, we're going to hold on to that business.

The supply chain agility that we've been able to create with the model that we've talked about for a couple of years now is really giving us an opportunity with short cycle times to ramp very, very quickly.

So, I don't view that as an event at all and nor do our customers.

Okay.

And then maybe just digging one layer down on both the handset and linear side, it sounds like on the handset side 3G was weaker.

I'm curious if any other parts of the business or GOs were weaker than expected?

And on linear, were any particular segments weaker?

Thanks.

Yes.

I mean, Suji, there were certainly some pluses and minuses in the business.

And as we've mentioned, in a typical market environment the December numbers could be up even higher so we've tempered that.

We are seeing certain OEMs, LG for example, and Sony Ericsson to some degree, be a little softer than some others.

But in balance with our footprint today, diversified across the top five, we're able to accommodate that and mange it through diversification.

Our next question is from Todd Koffman, Raymond James.

Thank you very much and congratulations on the performance.

I wanted to ask you about your pricing now compared to your competitors.

There's now this stark differential in your profitability.

Very impressive.

Is there a stark differential in your pricing as you've gained all this market share?

No.

No, there isn't a differential in the pricing if you're talking about relative to the competitive.

The differential is in the level of complexity.

Here's what happened.

Here's what's happened, Todd.

In the not too distant past, companies were buying multiple single bands of wide band CDMA in the case of WEDGE, with maybe an EDGE quad-band PA, a separate filter, a switch, whole bunch of discretes.

And -- as an example in WEDGE.

Where that has moved towards, is a typical offering for us will have this in a single package, as much as a 9 or 10-throw switch, meaning it's covering all the functionality of the various bands and transmit and receive and mode switching.

It'll have some content of filtering.

And some pretty sophisticated logic to essentially provide traffic flow, if you will, for all those frequencies.

A lot of issues around shielding ESD.

And then clearly, very linear amplifiers that are combining bands so that they're not only -- they're operating very efficiently from a battery voltage standpoint while doing simultaneous voice and data.

And so, those products are really hard to design.

They've taken up literally thousands of man years -- years to do this.

They're really hard to design.

They get designed in early because it's such an -- it has such a big implication on the overall system performance that it's not -- it's not your grandfather's PA.

And that's the difference.

So, it is our ability to design a product.

And while we're not the only people who can address it, clearly far, far fewer.

So, the dollar content is going up in our addressable handset market.

The number of competitors is going down in our addressable handset market.

It's the combination of those two that is allowing us, and should allow us, to continue to outperform.

Thank you very much.

Good luck.

Thank you.

Our next question is from Edward Snyder with Charter Equity.

Dave, just on Todd's last question.

I think it's pretty clear that there are few competitors who have the same kind of technologies and the same kind of products.

RF Micro and TriQuint also did well in the quarters.

I guess this speaks to your difference in the cost basis.

Apparently they don't -- neither of these guys have the margins you do and you have a flexible manufacturing model.

How much of that is contributing to your superior margins?

And then, along the same lines, those other companies, almost everybody's reported at this point and besides Anadigics, everybody's been showing very strong quarters.

How much of your caution is because you're seeing a slowdown or you're anticipating a slowdown?

Well, our caution is reflecting what we see in the general market.

And in spite of that, we're up and I think that's in December and I think that's pretty unique.

And we're pretty proud of that.

The caution comes about because we are becoming so diversified within handsets and within our linear products business, addressing more and more segments.

We are absolutely seeing softness, demonstrated softness in our order flow in certain segments and among certain customers in handsets.

We however are also seeing relative strength in certain segments and with certain customers.

And we're adding new products and new program ramps.

So, when you net all of that out, even with a very conservative eye towards making sure we factor in the general market conditions, we come up with the guidance that we presented today and the comments we have about 2009.

I think the margin -- my comment earlier was -- on margin was that these higher dollar content gives us a great deal more utilization.

We can throw up more operating income as we generate more average dollars per phone, if you will, or more average dollars per base station or through femtocell or energy management device.

We are -- and I think you know this.

We are extremely focused on the metrics throughout our entire business.

We measure every machine's operational efficiency, yield, labor content per device.

We drive those metrics through a system of KPIs throughout each and every factory, right down to the individual operator level.

And we think those things are giving us consistency of new program ramp yields and overall continuous improvement in yields and factory utilization.

If you blend all that together, I think that's why we have the margins that we have today.

Well, you certainly have an exceptional profitability model compared to your competitors.

And I know that you're continually improving.

And this is something that's been a theme on many of your calls, where you're pushing efficiencies and yields.

I notice that you kind of maybe indirectly upped your target operating margin to 20% from 18% because things are going so well.

How much of that gain from where you are to where you think you're going to be is going to come from additional yields or efficiencies versus say OpEx controls or six-inch or more revenue?

I'm just trying to get an idea of where can we expect the gains.

At some point you've got to run out of room on just squeezing more efficiencies, right?

Well, yes -- no.

The fact is, you've never done.

You're just simply never done.

Whether it's on-time delivery, whether it's failure part per million from a customer satisfaction, whether it's squeezing our more efficiency on your equipment, on your fixed equipment set.

You're never, ever done.

We've also worked very hard to maintain ASPs and to reduce -- you know, we measure -- Ed, for an example.

We measure every single part we produce.

We measure the cost reduction at the minutia level for every single part and we compare that to ASP.

And we make sure, on every single part, that we're able to reduce our cost faster than we're reducing our price.

And where we can't it's a big point of discussion within the management team and within the ranks of Skyworks.

So, it's just -- the fact is you're just simply never done.

We're also going to go to six-inch.

That will give us a material reduction in the overall die cost sometimes very late in 2009, 2010.

And we're augmenting our handset business with we believe some pretty innovative linear products that have a higher overall -- higher average gross margin so that our mix is becoming a bit more profitable sequentially as we move throughout the years.

Our next question is from Tore Svanberg with Thomas Weisel Partners.

Yes.

Congratulations on the results.

First of all, I think you were expecting a 50 basis point improvement in gross margin this quarter.

How much of that is coming from mix versus from continued cost improvements?

We have a lot of -- thousands of SKUs, so mix is always an important part of the margin equation.

But as Dave stated, we're extremely metric driven.

And I mean, to put it in perspective, we've had six consecutive quarters of margin improvement.

We're up 165 basis points year-over-year.

So, the majority of what you're seeing driving that is the continuous improvement on our yields.

We're still making some targeted CapEx investments to improve productivity and our overall cost structure.

So, the majority of that's coming from performance, from things that we're focused on improving.

Great.

And do you have a CapEx target for fiscal '09 at this point?

We don't give CapEx guidance that far out.

Okay.

Then lastly, can you comment a little bit on where you expect inventories to trend in the December quarter?

Relatively flat.

No significant movement in inventories.

Our next question then is from Craig Ellis with Citi.

Hey, guys.

[Alcia] here for Craig.

Just pretty quickly on your operating margin, how should we think about you hitting that target of 20% in fiscal '09 or in fiscal 2010?

Well, the way to think about that, as we've consistently talked about the former targets where -- at $250 million a quarter we were going to deliver 18%.

Now, to put that in perspective, our guidance at $240 million's delivering 17%.

So, we stepped back and said we're driving a lot of improvement in the business.

And we really needed to look at higher than $250 million and what are our targets.

That's where we came from the 20%.

And it's going to be a combination of both leveraging our operating expenses -- those are relatively fixed, going from a 240 to a 260 or a $270 million a quarter revenue level.

You don't see a lot of movement there.

But in order to get there, you do need some margin expansion.

We just haven't commented to what extent that's going to be.

But as volume goes up, you can expect some leveraging of fixed costs.

So, I mean, you can expect some margin expansion.

Our final question will be from Suji De Silva with Kaufman Brothers.

Hi, guys.

Just a couple quick follow-ups here.

We've seen some movement here with announcements from some of the baseband vendors in terms of exiting.

Is this -- how are they affecting you guys?

Is it neutral or is it an opportunity or a threat potentially?

Well, it can be both an opportunity and a threat, obviously.

Like our handset approach, we have been working very hard to try to partner with and add value to each and every one of the top baseband providers and we've been able to do that.

So, we're ramping programs with Qualcomm, with Infineon.

Obviously -- are you talking about Texas Instrument?

Their public announcement is that they're going to remain in the customer solutions.

And so, as we participate in those we'll continue to support those.

So, the best job we can do, as with our OEM customers, is just to support all the major baseband guys.

And I think we've been very successful.

Most recently by adding Qualcomm as a significant partner to us.

Sure.

And then the other question I have is you guys appear to be sort of getting to be kind of one of the better in class executors in this industry.

Would you be adverse, Dave, to consolidating the industry?

Do you think there will be consolidation or is that something you'd rather kind of stay with the profile you have right now in terms of executing on what you have?

Well, I think we'd rather stay with the profile we have today.

There will be consolidation of share for sure.

And that will continue.

As the dollar content goes up there will be a consolidation of share just given the complexity, number one and, number two, scale.

If you look at what we're being asked to do by our customers today, with our hundreds of engineers, I've had experience with smaller companies.

I just don't know how you compete across a broad spectrum.

You have to be very selective.

We don't want to be very selective.

We want to be very broad and very diversified.

So, I don't -- I think organically we can do a terrific job of being a consolidator of market share by focusing on what we're doing today.

Great.

Okay.

Thanks.

We do have another question.

It is from Anthony Stoss with Craig-Hallum.

Hi, guys.

Great job.

Most of my questions were asked.

However, if you could comment on where do you think content exit per multimode phone exit in 2009 is.

Love to hear your thoughts on how many bands, also.

Sure, sure.

Yes.

Well, as we move out into 2009, you're already seeing evidence of some very innovative 3G models that are clearly not voice-only.

You've seen these Smartphones.

So, we see content moving now -- traditional 3G phone typically has two or three bands basically anchored by an EDGE FEM content, maybe about $3 to $4.

We see that moving now $5 to $6 into 2009.

And again, we go back to where the carriers are making money with data service.

They are driving higher requirements and more complexity in the handset.

Our handset customers are willing to pay a little bit more for performance.

Carriers will pay a little more for that handset.

They'll get a payback in 30 days on RPU.

So, the whole food chain is working well for us in that domain.

Okay.

Any change in 10% customers in the quarter and what are your expectations for December?

I know you're expecting for the five top by the end of December to be 10%.

There was no change.

We have Sony Ericsson and Samsung were top 10% in the fourth quarter, consistent with the third quarter.

We are still -- we still have a shot at having four of our OEM customers in the top 10%.

If they're not in the top 10%, just based on the way things roll out, they're going to be in high significant single digits.

So, that's still something we're trying to drive home.

We'll see how it works out.

Okay.

One final question for you.

On your six-inch transition, maybe a little bit more color on how that's going.

Also, what kind of uptick in gross margins do you think you might see in the second half of '09 as a result?

Well, it's late '09 into 2010.

Minimal impact in '09.

Minimal.

And I've got to tell you, I think the team -- it's up in Newbury Park, California, by the way.

And I think the team is just doing outstanding.

I mean, they're continuing to operate with their day jobs, they're executing these process qualifications.

We are absolutely on track.

We have an advantage because we have a partner in HBT that we can ramp outside of Skyworks.

We're able to ramp and create buffers of capacity so that we could actually do sort of an in-line transition machine by machine, process step by process step.

You won't see any disruption to that.

I'm very confident -- from that.

I'm very confident in the team.

It'll be late in '09.

And I've got to -- my hat's off to the groups.

I know they're working very hard, but they are indeed getting it done.

Great.

Great job, guys.

Thank you.

Thank you.

And this does conclude the question and answer session.

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

Okay.

Well, thank you very much for listening and for participating today.

And on behalf of the entire Skyworks team, we look forward to updating you in the future.