思佳訊 (SWKS) 2009 Q2 法說會逐字稿

Good afternoon and welcome to the Skyworks Solutions Second Quarter Fiscal 2009 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 Fiscal Quarter 2009 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 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.

Thank you, Tom, and welcome, everyone.

This afternoon, we released second fiscal quarter 2009 results and I'm pleased to report that we've made substantial progress on our strategic initiatives, namely gaining share in our core markets, diversifying into adjacent analog segments.

And improving upon our operational execution.

Specifically, the Skyworks team delivered revenue of $173 million versus guidance of $168 million and we maintained gross margins essentially flat sequentially at 40% and on a year over year basis despite the dramatic economic downturn.

We've reduced our operating expenses by more than $25 million on an annualized basis and we posted $0.12 of EPS.

This is $0.02 better than consensus and above our guidance of between $0.10 and $0.11.

We generated positive cash flow from operations and we exited with $268 million of cash.

Our performance was highlighted by strength in newer applications, including energy management and smart grid technologies.

We'll talk more about that in a moment.

China 3G base stations, e-book reading devices, smart phones, and push to talk platforms.

On today's call, we'll be discussing how we're broadening our market and product footprint while improving our operational execution to emerge an even stronger and an even more profitable Company as the markets recover.

So, first on the diversification front, during the quarter we captured energy management design wins in support of Itron, Sensus, and Landis+Gyr.

This particular space has impressive growth potential.

Utilities, business, and consumers are demanding enhanced billing efficiency, usage monitoring, and increasingly, power control to prevent costly brownouts and potentially catastrophic blackouts.

In fact, Gartner, a leading third-party research firm, expects more than 150 million smart readers to be installed worldwide in the next five years.

This is creating an incremental semiconductor opportunity of roughly $2 billion by the year 2012.

I think it's also worth noting that the recent American Recovery and Reinvestment Act has allocated $4 billion for advanced metering projects.

Given our engagements with key energy management system providers, we're seeking to win a significant share of this opportunity.

During the quarter, we also ramped our suite of infrastructure solutions at Huawei and have recently secured several design wins at ZTE, both in support of strengthening 3G demand within China.

Specifically, we're delivering mixers, amplifiers and receivers, and are moving from $3.00 of addressable content per line card to upwards of about $20.00 for some of our more highly integrated solutions.

Meanwhile, we continue to broaden our analog product catalog business.

This business supports a wider range of applications including medical, avionics, automotive, broadband, industrial applications.

During this quarter we released a number of new products including low noise amplifiers, silicon VCO synthesizers, and variable voltage attenuators.

I'm particularly excited about our newest family of LNAs, our low noise amplifiers, based on our recent design traction within high performance infrastructure, GPS, and satellite radio applications.

On the smart phone front, this is another key diversification sector for Skyworks.

We're gaining momentum across several key OEMs, particularly as they seek to integrate more bands, more modes.

Bands one, bands two, five, and eight, as well as Wi-Fi functionality for efficient global network roaming and seamless handoffs.

Skyworks is uniquely positioned to provide all of this required functionality with improved power efficiency, with smaller footprint, and with lower product cost structure.

As a result, we're also strengthening our design partnerships with the key baseband suppliers, including Qualcomm, Broadcom, Mediatech, Texas Instruments, Infineon, Ma Bell, and ST-Ericsson.

Speaking of Qualcomm, we recently expanded our partnership, leveraging our integrated frontend modules into a growing number of their 2G, 3G, and HSDPA reference designs.

I think it's also worth mentioning the recent reemergence of push to talk applications at RIM and Motorola driven by Sprint's Nextel network.

Given the complex power and network handshake issues related to the iDEN protocol, we've developed over the years, highly customized modules for this application.

Skyworks maintains a majority position in this segment.

To the degree the push to talk continues its rebirth as an effective field communication tool, we tend to be the main beneficiary.

And finally, as a very timely example, we're providing solutions for an entirely new and increasingly popular e-book reading platform, developed by one of the world's largest online retailers.

This represents another analog intensive and power critical application for us.

So, what's common across all of these as well as other program ramps is that we are leveraging our core analog mixed signal and systems integration expertise into emerging applications that are defined by much longer product lifecycles, higher margin profiles that are commensurate with the value of our technical innovation.

In other words, our customers are willing to pay us for our efforts in these segments.

So, in addition to expanding our market presence, we're continuing to drive operational improvements and believe that the success of our fab-lite manufacturing strategy, by the way, which we commenced several years ago, is beginning to exhibit meaningful financial results for us.

To be clear, our fab-lite strategy refers to our hybrid manufacturing model where we have partnered with external foundry suppliers in Taiwan and China to create second sources of our capability utilizing our quality systems and our tool sets.

This approach allows us to better balance external capacity with the demands of the market.

Internally, our utilization remains high and we therefore are able to maintain margins and return on invested capital on a much broader range of revenues.

We believe we demonstrated this capability last quarter as we were able to maintain 40% gross margin on a lower revenue basis and as we guided, we expect improving gross margins in the June quarter.

At the same time, we are continuously driving improved yields, higher equipment utilization, and lower cycle times.

Together, our fab-lite model and disciplined cost reduction initiatives have resulted in a lower overall cost structure, driving higher margins as well as strong cash flow generation.

So, in closing, we're creating a uniquely diversified Company with the scale derived from high volume applications, applied to a broad range of margin rich analog products and markets.

Accordingly, the stage is set for accelerating top and bottom line growth as the markets eventually stabilize and as they recover.

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

Don?

Thanks, Dave, and thanks again, everyone, for joining us today.

Revenue for the quarter was $173 million versus guidance of $168 million and $201.7 million a year ago.

Gross profit was $69.2 million or 40% of revenue.

Our ability to maintain gross margin levels in the 40% range despite the decrease in revenue is being driven by the flexibility of our fab-lite model enabling us to maintain high levels of utilization, improved equipment efficiencies at all of our factories, progress on yield improvement initiatives, double-digit year over year material cost reductions, and continued migration to a richer product mix.

Operating expenses were $47.9 million of which R&D was $27.4 million and SG&A was $20.5 million, yielding $21.2 million of operating income.

Our net interest and other expense for the quarter was $800,000 of expense while taxes were $400,000.

As a result, net income was $20 million or $0.12 of diluted earnings per share.

Turning to the balance sheet, we exited the quarter with cash and cash equivalents of $268 million.

Of note, we generated $22 million in cash flow from operations, reported $12 million of depreciation, and invested $6 million in capital expenditures.

At a higher level, we continue to focus on strengthening our balance sheet, translating improving business performance into a higher cash balance.

To that end, over the past year we've increased our cash balance from $228 million at the end of Q2 fiscal 2008 to $268 million at the end of Q2 fiscal 2009 while simultaneously reducing our convertible debt from $200 million last year to $97 million today.

That's an increase in our net cash position of $143 million.

As we have discussed over the past several quarters, balance sheet strength is increasingly a key competitive advantage in winning business, particularly in this challenging economic environment.

Customers and suppliers alike are seeking partners who not only provide innovative solutions but are also financially well positioned to support their long-term road maps.

This is yet another area where we believe Skyworks is distinguishing itself.

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

Although we remain cautious on the macro economy, we intend to resume top and bottom line growth in the current quarter through share gains and broader participation in new markets.

Specifically, we're guiding June quarterly revenue to be up 5% sequentially to $182 million.

Operationally, we expect gross margin to expand to between 40% and 40.5% and project operating expenses of approximately $49 million.

Below the line we anticipate $800,000 in expense for net interest and other expense and taxes at a 3% tax rate driving $0.14 of non-GAAP diluted earnings per share, a 15% sequential improvement in profitability off a base of 168 million shares.

That concludes our prepared remarks.

Operator, let's open the lines for questions.

Very good.

(Operator Instructions) We'll take our first question from Suji De Silva with Kaufman Brothers.

Hi, Dave.

Hi, Don.

Nice quarter, guys.

Hi, Suji.

Thank you.

Quick question.

I guess where are you on 10% customers and are you still progressing toward having more of them at the end of this year?

Hi, Suji.

This is Don.

The 10% customers for the quarter were Samsung, Sony-Ericsson, and Motorola and just it's worth noting that LP and Nokia were right behind in the high single digits for the quarter.

Great.

And you talk about diversifying out with smart phones.

Can you tell me where you are split wise?

3G EDGE versus Fuji and what?

Are smart phones the material part of that?

Yes.

For the quarter, for 2G and iDEN we were at 50% and for WEDGE 3G, we were at 50%.

Our next question comes from Uche Orji from UBS.

Hello?

Uche, your line is open.

Pick up your handset.

Again, Uche Orji, UBS, are you there?

Pause just a moment.

You may have to pick up your handset.

We're not hearing you.

Check your mute button.

Yes, please.

Can you hear me?

Yes, we can.

Alright.

Can I just ask you, starting off with how much more gains in terms of market share, you mentioned specifically, look at the Nokia position to await put Infineon on the EDGE platform.

Is that an opportunity for you?

So, any more color to how much opportunity to gain share, that would be helpful.

Maybe Liam and I will both answer that.

We are today just beginning a ramp at Nokia that's been perhaps a little over a year from now.

We are heavily weighted on -- a year ago.

We are heavily weighted in 3G and of course we've seen some of their volumes have shifted to the middle, low tier; however, I'm really happy to say that our relationship has deepened and now we're being lined out across their product spectrum.

We expect to see sequential growth continuing at Nokia although their not quite a 10% customer.

The fact is we're probably in less than 10% of Nokia's phones today and we fully expect to be at least a third of that over the course of the next couple years.

The platform that you mentioned, Uche, can you mention that again please?

Nokia announced that Infineon was going to be on the EDGE platform so I'm not sure whether they're going to have those big products in there yet.

They're going to be shipping.

There was an announcement that Nokia made and I was wondering whether you were involved with Infineon in any way?

Yes.

We are onboard and that platform is shipping starting this quarter.

Okay.

Just one more question.

If I look at your margins, they've held steady even through the difficult revenue environment.

If I look forward, how should I expect the drivers of the margin to trend?

I know you say it's going to be up next quarter, but my sense is should ASPs utilization rates which you mentioned have higher already, what could keep gross margins going if I look down the line, say for the rest of the year?

I'll start with that.

I think Dave and I will both jump in on that question.

One of the things is that our utilization rates are high, but there's still going to be some volume upside that you'll see given our fixed cost base.

That's one of the things that are going to drive that.

We'll have the six inch line coming on in early 2010.

That's another step function for us to drive margin improvement.

We continue to drive one of the things that we do a very good job of is driving year over year material cost reductions which in a lot of cases more than offset any of the pricing adjustments.

That's going to continue.

And then as you see the shift to 3G and the multimode components that we're providing, there's higher dollar content and with that we believe comes higher margins.

Those are some of the big drivers that we expect to see in the business.

We're also seeing with this expanding footprint in our catalogue business and some of the newer applications we were talking about, they are materially higher margins than what you think of traditionally at Skyworks.

So, the combination of the utilization and operational aspects that Don described and an improving mix is going to continue to give us, we believe, head room and growth and gross margin and then operating income because our OpEx will remain relatively flat as we grow the top line.

Our next question is from George Iwanyc with Oppenheimer.

Thank you for taking my question.

Dave, when you look at the smart remote meter opportunity, can you give us an idea of how much revenue you're getting from that right now and how you expect that to grow, either with the stimulus spending and just the normal plans the utility companies have?

Sure.

This is Liam.

So, with respect to the smart metering opportunity, we think this is a tremendous potential for Skyworks.

Today, it's a relatively small source of revenue for us.

It is not falling.

It was up sequentially in the March quarter.

It will be up again in June.

And what we're seeing here is a market that's -- if you look at the Gartner estimates we mentioned, we're seeing at least 150 million meters being upgraded to wireless technology from '09 to 2012 and each meter could have $3.00 to $5.00 to $6.00 of content available for Skyworks.

We are seeing this come together quite nicely.

A number of utilities have rolled out platforms.

Southern Cal Edison, Pacific Gas and Electric, San Diego Gas and Electric, and the customers that we're working with, of course, are on the metering side -- Itron, Sensus, Aclara.

So, it's early innings for us.

We really like the dynamics.

It's a definite convergence to wireless technology and I believe this is going to be a strong driver for us over the next several years.

If you look at the products, we've been developing products now from this market -- we identified this some time ago as a nice adjacent segment for us.

We've been very fortunate to be able to get in with the right set of customers.

I think from a design and from a relationship, an OEM relationship standpoint, I think we're way ahead of this market.

Are the margins in line with the rest of the margins in the linear business?

And when you look at those 150 million meters that are coming on, what type of share do you think you could have?

Or at least the customers you're working with, what kind of share do they have right now?

The margins are terrific in this space, as you'd expect from a utility based market.

The margins are terrific for us.

We expect to have a very high share.

The products that we are addressing today are serving -- think about it as an underutilized market where a lot of these current solutions are the older solutions in place today are very discreet.

They consume a lot of power.

They require more diagnostics.

We develop solutions that are elegantly simple, we think, for these providers to deploy.

Our next question is from Tim Luke with Barclays.

Thanks so much.

Just to codify with respect to the going on SMV, is this a business that could be a sort of double digit percentage of the mix in say exiting 2010 or in 2011?

How should we think about that?

I think that's pretty intuitive.

In that time frame, that's a good way to think about it.

It's going to take a little while.

It's not insignificant today and it's growing very healthy sequentially.

It grew in this quarter in a down market.

It's a little bit, if you will, recession proof in many ways.

There's a lot of green initiatives underway.

Incidentally, the stimulus package has monies earmarked for our customers here or at least in territories and areas in which we'll be deploying product.

I think you're thinking about this right.

We do believe it can be a double digit percentage of our revenue.

We also believe it's going to take a period of time to get there.

Let me just add that right now much of the data that we've discussed is largely U.S.

based, North American based.

Europe is always engaged.

If you look out five to seven years from now, I think this is going to be a very big deal in markets like China where there's quite a bit of work being done right now on the conservation side, on the clean energy side.

So, as Dave pointed out, there are a number of initiatives in place to make this happen.

By the way, the pay back for the utility is almost immediate here, just in cost savings and power control.

So, a lot of macro things behind this.

If you look forward at the landscape, could you give some color on how you feel about broad inventories levels with your customers and how you think seasonality may trend now with you having a strong second quarter?

Do you feel now that you're likely to see a firmer September period as well or how should we think about it?

And then separately, if I may, in recent commentary from some players selling into the China 3G market, they're suggesting it's been strong in the first quarter and it's going to be strong in the second quarter but they'd expect something of a pause as the deployments are absorbed in the second half of the year.

How do you think about that for you guys?

Let me start with the inventory question.

We did see for the most part inventory levels begin to stabilize but there are independent pockets which would be above or below the equilibrium line here in the March quarter.

But generally the trends on inventory look better.

There was a burn in most markets.

So, we do see that stabilizing.

That again sets us up, we believe, for a better second half for the market in general.

We believe that.

With respect to China, we commented on the opening remarks here that we are seeing a rollout of 3G technologies.

We are seeing carriers like China Mobile begin to spend in a meaningful way.

For us, Huawei and ZTE are the drivers.

We have a very good position in Huawei and the ZTE share for Skyworks has been growing every quarter.

We're going to benefit from that.

I'm not seeing any reason for that business to come down in the second half.

We feel pretty good about it.

Our next question is from Cody Acree with Stifel Nicolaus.

Thanks, guys, and congrats.

Back to an earlier question on diversification of Nokia's baseband players, you said you were in the Infineon platforms.

The other new baseband players for Nokia, Broadcom, Qualcomm, and potentially others, how do you feel your position is with those and is that a driver?

Is that the primary driver?

Or is that just an ancillary driver of your growth at Nokia?

I think there are -- the driver of the growth in Nokia is their desire to diversify their supplier base with companies who started out being to really fill a gap on the EDGE, wideband CDMA, and increasingly have the supply chain and the scale to drive volumes across their portfolio.

So, we have spent several years now being qualified and getting to a position where they have the confidence in us and we have the roadmap for them that is going to allow us to be lined out not only on the mid to high end but in the low mid and high end.

As such, this is a very discipline Company, they are a very disciplined company.

As they have entertained new baseband partners, they've essentially, in a sense, limited the engagement of those baseband suppliers to qualified PA suppliers.

There aren't many PA suppliers in Nokia and there aren't all that many baseband suppliers.

You can kind of see how the alignment would be.

So, we've been fortunately in parallel to the Nokia's drive to diversify and to bring us up to speed and so on over the last couple of years.

We've been working very hard across markets and applications with the very same baseband providers, the very same baseband providers.

So, our relationship with them is very strong.

Our designs are consistent with their roadmaps.

So, it is going to be a driver, both coming at it from Nokia's desire and coming at it from our baseband relationships.

Great.

And then, actually I have a couple quick ones here.

Break down -- any color on break down of end markets or in segments of revenue?

I know you've shied away from giving those, but you used to give a bit more color and it would definitely help for modeling.

Cody, this is Don.

The only break down we've typically given is the split between the LP business and handset.

The number that came in this quarter was the same as what we've previously seen.

LP was in the 20% to 25% range and our handset business, 75% to 80% of our revenue.

And the numbers can move a few points within that, but that's the range we've seen consistently for some period of time.

That hasn't changed.

Alright.

And then just finally, OpEx trends?

Revenue starting to turn?

Can you take your foot off of the OpEx break there a bit or do you -- are there initiatives in place that will continue to drive those OpEx lower throughout the year?

We just guided for Q3 $49 million, Q4 $49 million, $49.5 million is a reasonable number to assume.

No.

We're very focused on maintaining the cost profile and base we have in place right now.

We have a business model that as revenue ramps, we're not going to see a lot of incremental expenses.

That's where we're going to get the power of this leverage as we go forward.

I wouldn't expect that to move a lot.

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

Hey, guys.

This is Neil for Steve.

You guys have talked about targeting long-term gross margins in the 42% range and operating margins in the 20% range.

I guess, one, is that still the case?

And then, two, given your lower cost structure today, what kind of revenue run rate are you now assuming in those longer-term rates?

Hi, Neil.

This is Don.

Yes.

For the past year, we've talked a lot about our operating model and in those presentations and given the cost structure we had in place at the time, we were targeting at $250 million a quarter in revenue to be at approximately 18% operating margin.

And now with the cost reductions that we implemented this quarter through the initiative that we disclosed, we're now looking at and we see a clear path to be 18% to 20% operating margin at about $230 million in quarterly revenue.

Okay.

Thanks, guys.

Our next question is from Todd Koffman with Raymond James.

Thank you.

With regard to the June quarter, comments on gross margin bumping up a little bit off I think you said 40% to 40.5%?

What is your current mix between internal manufacturing and external outsourced manufacturing?

Thank you.

Right now for our assembly and tech services, it's all internal.

We're not outsourcing any of that.

We have a copy exact gas wafer provider in Taiwan that does continue to run, that we keep moving.

We're looking at about 10%.

10% to 15% of our wafer volume is coming from that fab in Taiwan.

The rest of it's all internally generated.

Thank you.

Our next question is from Mike Burton with ThinkEquity.

Hey, guys.

Congrats on the quarter.

First, can you talk a little bit about the pricing environment right now?

There's been some discussion from some of the OEMs about extracting some price concessions out of the component suppliers?

We've seen -- there's always pricing pressure in the most commoditized segment of the handset business.

We're seeing - kind of think about it bifurcated this way.

On the WEDGE and smart phone, it's really a play where we're adding more content and as each subsequent generation has come in, we're tending to have more complicated switching and amplification over more bands and modes.

So, while there's always a desire on our part to work with our OEMs to lower the billed material costs, it hasn't translated into lower dollar content per phone.

In fact, it's been going the other way.

On the other hand, on the very low end, we've been developing new products and processes that are allowing us to support the most sensitive area which is the emerging markets which I think is the right kind of delicate mix between the right performance and the right cost structure.

So, we've been picking up some share on the ultra-low end.

Last year, we saw our ASPs decline in the 7% range and that part to part.

We didn't see that decline in a dollar per phone.

We saw that in an overall.

I think year to date, Liam, that's been roughly the same?

Right.

That's right.

Is the margin structure roughly the same between smart phone and the low end segment?

There's certainly more margin dollars on the high end.

Because if you think about it in our business, we're driving those similar processes and that fixed cost structure across a certain set of markets and customers.

So, as the dollar content goes up the variable contribution margin is high across the board.

I would say that we clearly get more dollars in contribution from the high end, margins are similar.

Our next question is from Nathan Johnsen with Pacific Crest.

Hi.

Thanks for taking my call.

I was wondering if you could elaborate in looking at the sequential growth you expect in revenue for next quarter?

How much of that is expected to be from market share gains?

How much is expected to be from actual improvement in end market demand and how much of that is more due to inventory rebalancing at key customers?

Let me try to answer -- there was a lot in that question.

I would say that if you look at the way we're guiding and we're thinking about our business today, while we are cautiously optimistic about the end markets in the second half, we still need to work through some inventory.

We are seeing improved visibility.

That's a very important first step in recovery and we are seeing new programs ramping that we're excited about.

So, I think that if you look at our guidance, we are attempting to be very, very conservative because the market is still going through a choppy patch here.

So, we guided to be 5% up and we did that to be appropriately conservative given the uncertainty that still exists in the market despite our cautious optimism.

Great.

That's helpful.

I was also hoping if you could elaborate on -- you talked a little bit about base station deployments or equipment for deployment in China.

I was wondering if you could elaborate on what you were seeing on the handset front?

Are you guys seeing inventory build ahead of the 3G launches and Labor Day holidays?

Or is there kind of more of a wait and see attitude for handsets going into China?

Yes.

I think the market in China appears to be showing some signs of improvement here.

We are seeing some TDS CDMA deployments on the handsets.

We're even seeing some CDMA deployments.

But we're also seeing some pickup driven by China Mobile.

Not only on GSN, but also for the first time some meaningful volumes in EDGE.

So, in general, that market looks good.

It is an important part of our business, as you know.

We're quite pleased with our position there.

Our next question comes from Edward Snyder with Charter Equity Research.

Thank you very much.

I want to go back to Nokia for a minute if we could.

Last year, Dave, I think your expectation was that Nokia would probably be about a 10% customer on a run rate level by the December quarter.

That didn't happen.

It appears the Broadcom EDGE project now is being delayed several quarters.

I know you were a primary FTM supplier to that line.

Where is Nokia in your planning today?

Do you expect them to hit 10% anytime this year on a run rate level?

Should we model a slower growth rate but consistent gains there?

Because you've got a lot of upside still and it sounds like you're being deployed on more and more products.

I'm just trying to get a feel for if some of the main platforms that you're on that were giving you such optimism last year were just delayed or if there were other problems going on.

And then secondly where are those gains?

You're doing very well on revenue.

You're growing better than most of your peers.

Where are you making these gains?

Is it the Koreans?

RIM?

The Chinese via Qualcomm?

I'm just trying to get a feel for where you're filling up and where you have all the growth left to go.

The situation with Nokia is that when we entered that account, our initial design wins were all in the WEDGE platforms.

As you know, the markets for 3G were hit pretty hard here.

The fact that we were participating in the mid to high tier, not in the mid to low tier meant that this particular customer's volume was weighted towards a segment in which we didn't participate.

We're fixing that.

It sounds like you've been doing some due diligence there.

But we're fixing that.

They want us to participate and we're going to participate.

You should absolutely think of them as becoming a 10% customer and our expectation and our aspirations are obviously much higher than that.

In terms of where we're seeing strength, as we talked about in our prepared comments, we are seeing strength in the smart phone segment.

We're seeing strength among some of these newer application that are beginning to ramp.

We're seeing strength in China infrastructure.

We're seeing relative strength coming from our Korean customers in that they have taken share.

We've taken share with them.

We have some pretty strong partnerships in China that are allowing us to address a very, very broad footprint of indigenous OEMs within China.

We're very close to Mediatech, for example.

And we've been working very, very hard for the last couple of years and are beginning to see the fruits of that with our Qualcomm reference designs.

In the past we participated with a Qualcomm baseband but it's been designed in after the reference design was release.

We've rectified that situation and we're on increasingly more of those platforms.

That's where it's coming from.

Our next question will then come from Aalok Shah with D.A.

Davidson.

Hi, guys.

Couple quick questions.

Don, can you hear me?

Yes.

Okay.

A couple on the cost of goods sold line, it looks like you had an inventory write-off.

Was that all related to the transceiver business?

Correct.

That was part of the restructuring.

So, 100% of that was transceiver?

Was there any other write downs also in there?

No.

None at all.

Okay.

And then in terms of tax rate, what should we think about going forward now?

Consistent with what we've communicate the last several calls.

We guided 3% this quarter.

You can use 3% to 4% in the fourth quarter.

That's going to be in the ballpark.

And the 2010 and 2011, we have enough of our OLs to carry forward that we're projecting and some R&D tax credits as well.

We're projecting our cash tax rate to be approximately 15% in 2010 and 2011.

That's the way you should build your models.

Okay.

Then last question from me.

In terms of bookings this quarter, are you guys fully booked to the guidance amount at this point?

Yes.

If we look at the orders we have in hand today, coupled with our hub forecast, we're right around 90% at this stage.

Okay.

Great.

Thanks a lot, guys.

Thank you.

Our next question will come from Alex Gauna with JMP Securities.

Thanks very much.

I was wondering if I could ask a question about the passive wireless subscription model or the e-book model.

I was wondering what kind of engagement you're seeing right now, how much interest?

Is there any way you could quantify maybe the opportunity beyond what's already in the marketplace and what your expectations might be to see in 2010?

Thank you.

We think this is an entirely new category.

It's difficult to see what the long-term growth prospects are going to be.

But we believe what we've been seeing so far has been great and it's been ahead of our expectations.

So, one of the things to remember is that this technology is relatively new.

It typically engages 3G networks which means a lot of content for Skyworks as with smart phone.

There appears to be a whole different subscriber base that's interested in this type of technology.

So, it's very early.

The forecast that we've seen so far have been exceeded by our customers and we think this could be a nice addition to our existing wireless sector going forward.

Okay.

Then as a follow-up, I'm wondering what kind of activity are you seeing on GN, the 3G transition to LT 4G and also maybe a breakdown in your expectations between what the market might be doing in terms of multimode and backwards compatibility.

Sure.

Obviously 3G is right now a very important part of the business and we've got great technology for that and it's going to be growing in 2009 for the industry and for Skyworks.

With respect to LT, we think that's going to be a nice addition to overall market growth.

One of the things that we are seeing, we've been speaking with customers this week specifically on that, we are seeing a nice addition with respect to data cards where 3G devices or LT devices will be deployed within data cards which actually will add to the subscriber base.

So, when we talk about our normal handset pocket, $1.1 billion, $1.2 billion, we see a complementary data card market today that could compete with DSL and cable and very high speed broadband networks typically deployed with LT capability.

We'll next go to Tim Luke with Barclays.

Tim Luke?

And again, with Barclays, your line is open.

You may have to pick up your handset .Check your mute button.

Thank you so much.

Just my follow-up was on how you think about the potential sort of levers for a target gross margin as you move into over the next 12 to 18 months?

How do you think about that?

Do you think moving to 41%, 42% level could be achievable going forward?

Thank you.

The answer is "Yes".

We're quite sure it's achievable.

And the way we get to -- Don talked about the fact that given the restructured Company, the point at which we get to 20% or 18% to 20% operating income now is lowered from $250 million to the $225 million or $230 million.

And the way we get there is a combination of continuing to see high dollar content for phone in 3G and smart phone, continuing to add new market applications like energy, like e-book applications, like our 3G infrastructure, 4G data card products.

And the third is we don't talk about it much, but we've added some new ammunition, if you will, to our catalog products business.

We now have a team of folks, our applications team over the last few years have gotten better and smarter at identifying opportunities where we can intersect the capability of the Company with an undisturbed market with LNA, with VCO synthesizers and so on, mixers.

As we build that business, that's very much an annuity.

I love that business.

The annuity business, product life cycles measured in five, ten, 15 years, you get designed in.

No simple single socket is large enough to entice a lot of competitors.

There's not a lot of -- there's not much at all price sensitivity.

So, you get in at a high margin, you stay in.

And it's simply a business that builds and snowballs slowly but quite predictably over time.

And that business now is getting bigger and we're getting better at it, frankly.

Thank you so much.

With that, this does conclude the Q&A session.

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

Thank you, everyone, for participating.

We very much look forward to updating you next quarter.

With that, this does conclude today's conference call.

Again, we do thank everyone for your participation.

You may now disconnect.