思佳訊 (SWKS) 2010 Q2 法說會逐字稿

Thank you for standing by and welcome to the Skyworks Solutions second-quarter fiscal-year 2010 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.

Mr.

Schiller, please go ahead.

Thank you, operator.

Good afternoon, everyone, and welcome to Skyworks second fiscal quarter of 2010 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.

Today we'll 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 will include statements relating to future results that are forward looking 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 that we'll discuss today are from our non-GAAP income statement, consistent with the format that 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.

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

Thank you, Tom, and welcome, everyone.

I'm pleased to report today that the Skyworks' team delivered better-than-seasonal performance in the March quarter, demonstrating solid operating leverage, with both gross and operating margin expansion.

As a result, we exceeded our upgraded -- updated top and bottom-line financial guidance provided back in March and at a higher level, we are making progress across each of our strategic objectives and are benefiting from several macro growth trends, as Skyworks transitions to a highly-diversified analog company.

Specifically for the quarter, we delivered revenue of $238 million, we improved our gross margins by 230-basis points year over year to 42.3%, and we increased our operating margins by 820-basis points to 20.5%.

In turn, we grew operating income by 130% year over year to $49 million and we posted $0.24 of diluted earnings per share versus our updated guidance of $0.22 to $0.23.

Of note and to give you a sense of our broad diversification, during the quarter we shipped to nearly 1,000 customers, of which only one exceeded 10% of our total revenue.

With respect to cash, we generated $60 million of cash flow from operations, and we exited the quarter with $412 million of cash.

Now this is even after a $40 million outlay for convertible debt retirement.

And finally, we are guiding to 10% to 15% sequential revenue growth, with earnings per share of $0.30 in the June quarter.

Just to digress a bit from the numbers and to give you a more macro perspective, we believe our results today and outlook underscore several accelerating market trends.

First, the increasing -- first is the increasing ubiquity of broadband access across both wireless and wireline networks.

The second trend is the apparent insatiable consumer demand for always-on connectivity for things like audio, video, text, and social networking.

And third, the emergence of a host of new wireless applications and really slick consumer-friendly platforms enabled by reliable and affordable technologies.

Now I'd like to step back for a moment and talk about these dynamics.

Quite frankly, each of those macro trends is still in the early stages of development.

At the same time, we are now increasingly beginning to see multiple mobile internet access devices per person, beyond the traditional cellular handset and even smartphones, to now encompassing things like high-resolution tablets, netbooks, and other products we haven't even yet thought of.

Meanwhile, wireless local area networking and ZigBee functionality is being integrated within things like gaming consoles, LED televisions, blu-ray players and smart appliances.

So in short, virtually all next-generation electronics are embedding to some form of wireless connectivity.

On today's call we'll talk about how Skyworks is capitalizing on these trends and even in some small ways enabling these rapidly-expanding opportunities with analog semiconductors.

And more specifically, we'll highlight our traction within smartphones, within network infrastructure, and smart grid applications, three of our key growth engines.

And we'll discuss why we're confident in our ability to continue to outpace market growth.

Okay, to start with with regard to smartphones, this is perhaps the most exciting mobile communications market today given the ever-expanding range of applications and broad consumer acceptance.

Skyworks is uniquely positioned as a supplier to all leading smartphone OEMs, and according to Oppenheimer, this category is enjoying three to four times the 8% to 10% anticipated overall handset sales in 2010 and 2011.

In our case it's growing at a steeper trajectory, given the rising analog content opportunity as consumers shift to 3G and OEMs increasingly offer carriers phones with global roaming capability.

Now compounding this growth we are gaining additional share as OEMs seek to lower their bill of materials and integrate edge front-end modules with multiple WCDMA band in smaller, more power-efficient and more cost-effective modules.

And by sweeping more functionality into our analog solutions, we're able to improve size, battery life, and affordability, increasing our dollar content while at the same time raising competitive barriers.

In other words, we're in a unique position today where our competitive playing field is narrowing, even as our customers increasingly require system-level expertise and highly-integrated solutions built on proprietary intellectual property, rather than a more costly discreet implementation.

This trend increasingly favors Skyworks and as a result, we will -- we believe we will continue to outpace the market growth rate toward our goal of achieving clear market leadership within this strategic segment.

Okay, moving from smartphones, secondly we continue to gain momentum on the other side of the mobile internet connection, and that is network infrastructure, as mobile operators begin to install new bay stations, routers, and backhaul network equipment to avoid network traffic jams, and to preserve their highly-profitable data service revenue.

According to Cisco's latest forecasts, worldwide mobile data traffic is expected to double every year through 2014 to nearly four exabytes per month.

Now just to give you a sense one exabytes of data is equivalent to the content included within 250 million DVDs, 250 million, so obviously internet infrastructure will require significant capacity expansion to support this growth.

And to that end, we've developed a portfolio of network infrastructure solutions, including attenuators, VCO synthesizes, mixers, low noise amplifiers and demodulators.

And additionally during the quarter we launched the industry's first suite of high-performance broadband synthesizes, spanning ultrawide frequency ranges and we captured key design wins at Cisco and Erickson, at Wahway and at Nokia Siemens.

These complex RF subsystems are designed to reduce the size and complexity of networking equipment while enabling greater network reliability, capacity and efficiency, which, of course, translates into more service revenue.

And thirdly, as we've discussed on prior calls, we continue to significant growth in the emerging smart grid market as utilities and consumers alike seek to better measure and to manage energy utilization.

And just to frame the opportunity here, consider that there are nearly three billion meters worldwide of which only 8% are automated today.

So we see a massive retrofit and new deployment opportunities, as utilities strive to more efficiently manage grids in the name of lower administration costs and higher returns on capital.

And like the internet itself, smart grids are complex, multi-layer networks of networks, and are increasingly becoming interactive.

This market landscape is made up of a wide variety of components, applications, sensors, and controls, and thus enabling us to leverage several key RF building blocks across a broad ecosystem of energy management suppliers.

For Skyworks over the past few years we have made very targeted investments in this area to position ourselves to capture share early.

And by virtue of our recent design wins, today Skyworks is servicing several multi-year advanced metering infrastructure contracts, supporting a variety of US and international utilities.

For example, we're in high-value production with a number of smart meter suppliers, including Itron, Landis+Gyr, Neptune, Census, and Badger.

We also continue to enable home automation systems for the consumer.

Here we're supplying ZigBee solutions, linking thermostats, air conditioners, and appliances.

And of special note, we recently won new business at Honeywell in support of their home security systems, and we captured our very first designs at LG Consumer Appliance Group, enabling wireless connectivity amongst a range of smart white good products.

According to IMS research, in this segment alone shipment of smart meters with home area network gateways are expected to grow at a compounded annual rate of 59% from the years 2009 to 2014.

And finally, we continue to leverage our standard analog catalog business to address a variety of mature, as well as new market -- vertical markets, including automotive, avionics, satellite, medical, military, and industrial.

With our global customer base and over 2,500 analog products we continue to bolster our portfolio with each new customer engagement.

This business increasingly provides us a high-margin, diversified customer base, along with annuity-like product life cycles.

In summary given all of these growth engines we are setting the strong for a stronger second half of 2010 and we believe widening of the gap between overall market growth and our performance.

And in fact, by simply annualizing our June quarter outlook we are now on a greater than $1 billion revenue run rate with earnings of $1 per share and this is before the second half of 2010 ramp.

These financial milestones represent yet another step in the transformation of Skyworks into a high-margin, into a diversified analog semiconductor market leader, all positioning us to create a greater competitive advantage and to continue to create shareholder value.

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

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

I will first provide a quick summary of our second fiscal quarter results and then outline our business outlook.

Revenue for the period was $238.1 million, up 38% year over year, and surpassing our updated guidance range of $230 million to $235 million, which we provided on March 1st.

Gross profit was $100.7 million, or 42.3% of revenue, a 230-basis points year-over-year expansion, which was driven by a product mix that increasingly includes higher-margin vertical market and 3G solutions, a volume ramp of new products, continued manufacturing productivity enhancements, product end-to-end yield improvements, and significant material cost reductions.

Operating expenses were $52 million, of which R&D was $30.3 million and SG&A was $21.7 million, yielding $48.7 million of operating income and a 20.5% operating margin.

Our net interest and other expense for the quarter was $700,000 of expense, while taxes were $3.8 million, a cash tax rate of 8%.

As a result, our net income was $44.2 million, or $0.24 of diluted earnings per share.

Now turning to the balance sheet, during the quarter we generated $60 million in cash flow from operations, we recorded $11 million of depreciation, retired our March, 2010, convertible debt at maturity with a $40 million outlay, and we invested $20 million in capital expenditures.

As a result, we exited the quarter with cash and cash equivalents of $412 million, or $2.25 on a per share basis.

Now to our business outlook.

Based on strong demand across multiple markets we anticipate 10% to 15% sequential revenue growth in our third fiscal quarter.

Assuming revenue of $268 million at the mid point of this range, we are forecasting gross margin of 43%, operating expenses between $54 million and $55 million, yielding an operating margin approaching 23%.

Below the line, we expect $700,000 of net interest expense, and an 8% cash tax rate.

In turn, we are forecasting diluted earnings per share of $0.30 off of a base of 185 million shares.

This trajectory is consistent with our medium-term financial targets outlined previously; namely operating margins in the mid-20s on revenues in the $280 million to $300 million range.

This model was highly achievable in the near term and strikes the right balance between gaining market share, enhancing margins, and most importantly, maximizing our return on invested capital.

Further, given the strength of our business model we expect additional leverage well beyond the mid-20% range as we continue to scale and further diversify Skyworks.

Well, that concludes our prepared remarks and operator, go ahead and open up the lines for questions.

Certainly.

(Operator Instructions).

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

Congratulations on the powerful quarter.

I was wondering if you could help with that leverage beyond 25%.

What is driving it?

Is it the new product areas, is it the upgrade cycle to 3G, 4G, the module works?

Just maybe color beyond what's giving you that confidence and maybe some timeline behind that, as well.

Thank you.

Thank you, Alex.

Well, it is a lot of what you suggested and I'll let Don comment specifically on where the financial leverage is, but it is a combination of continuing to see higher dollar content platforms being introduced into the market.

Those platforms typically have high contribution margins, higher than the ones they've replaced, frankly.

There is sort of an indication that our customers are, indeed, willing to pay for integration, they're willing to pay for innovation and I think you can sort of see that -- begin to that in the results.

We're also seeing more vertical market opportunities as we move from infrastructure into smart grid, which is today our highest growth business even though it started at a relatively small base, with even higher margins in our catalog business and increasing sets of vertical markets.So it's a combination of high-dollarf content within our mobile business, high contribution margins, and more vertical opportunities.

Yes, Alex, just to comment on the model.

We just went through the guidance, which is $268 million and 43% margin, $55.5 million -- $54.5 million in operating expenses you're close to the 23%.

The margin's going to continue -- the operating margins going to continue to expand as we continue to grow the top line.

The operating expenses at this point are relatively fixed, minor changes in that, you're going to get tremendous leverage on that line, and we are going to continue to expand product margins.

So that combination is -- and leveraged off of what Dave talked about in the marketplace is what's really going to move us beyond the 25%.

Okay, thank you.

Congratulations again.

Thank you.

Our next question is from Ittai Kidron with Oppenheimer.

Congratulations, great quarter and great guidance.

Thanks, Ittai.

I wanted to dig in a little bit into the source -- first of all the sources of the outside relative to your own internal plan, Don, maybe you can highlight the one or two things that really surprised you to the upside in the quarter.

And second, with regards to the outlook, any color in there on the cellular contribution versus the linear products and sort of what's going to grow faster, what is it that incrementally is making that push?

Ittai, I think that -- this is Dave.

I think with respect to what upside we saw in the margins we do try to be conservative in our guidance.

We factor in all the inputs from our customers, we go bottoms up, top down, we look at our bookings level.

And Don's pretty conservative.

We try to approach it in a prudent way and in this case, our assumptions were a bit more conservative.

We did see some specific traction in smart grid, that business grew nicely in the quarter, and we continue to 3G platforms introduced where we get much higher dollar content than the 2G and 2.5G platforms that they replaced.

So as we discussed in our prepared comments, it's really all of though things.

And Ittai, this is Don.

Also as far as for the product margins, this is the first quarter where we had full six-inch production and until you actually start producing wafers, see what the yields are going to be, you really don't know for sure what benefits you're going to get from that and the benefit was a lid better than expected.

So this rollout's gone very well and that's contributed, as well.

Okay.

Just to follow up with a couple specific customers.

Is there a way you can give us an update on your progress with Nokia and also the Chinese.

They've been very strong all around, how is your business shaping out there?

How do you see yourself positioned there?

Sure, Ittai, this is Liam.

Well, with respect to Nokia we continue along the path toward success with this account.

This last quarter they were a high single-digit customer, they're going to grow throughout the and I think that's really notable for us, I think, strategically an advantage is that we are participating with each and every one of their baseband suppliers.

ST-Ericsson, Infineon, Qualcomm and even Broadcom, so we expect Nokia to be a meaningful driver per share in the back half of 2010 and through 2011.

And the Chinese?

With respect to China, yes, China has always been a strong position for Skyworks our share continues to look very strong here, our relationships with Mediatech are outstanding.

We've actually augmented our position in 2G handsets with some upside in infrastructure.

We have new designs at Wahway, we're even now penetrating ZT on data card.

So in addition to the Mediatech position, I like the way we diversified here in some of the non-handset markets.

Very good.

Good luck, keep it up.

Thanks, Ittai.

Our next question is from Craig Ellis with Caris & Company.

Nice job on the quarter, guys.

Thanks, Craig.

With respect to the outlook in the three segments -- energy efficiency, linear products, and then the core business -- how should we expect the relative growth rates to shake out?

About even, or is one going to be much stronger than the other two?

Energy management will grow faster off of, as I say, a relatively modest basis.

Now 20% of our non-handset business, but it's growing faster.

We believe in a targeted way, as we discussed in the prepared comments, that infrastructure's going to begin to get more play for us as these new products, these synthesizers, these VCOs, which are highly integrated, highly valued we believe by the selected customers we're going after and so I think we're going to gain some traction there.

But you know, this whole phenomena of always-on connectivity and driving more smartphones, more exciting apps, tablets, ebooks, that's not going to go away any time soon so it's going to be a horse race here, but clearly we think between the linear products opportunities and handsets will grow, and I think remain roughly stable as a percentage.

Energy management will grow faster and I think begin to become meaningful for us over the next few quarters.

Okay, that's helpful, David.

And as you look at the part of the TA and front-end opportunity, that is tablets and PC dongles, et cetera, that content that's cellular but not in handset devices, how big do you see that market being now, what do you think the growth rates are, and how important is that business as you think about your growth over the next 12 months or so?

Craig, yes, this is Liam.

It's difficult to actually understand the market at hand because each and every quarter there's a new, innovative solution that's released to the market.

and I think to Dave's opening remarks, you can see this proliferation.

So we are seeing a lot of devices that we'll call internet appliances.

They may be USB dongles, they may be tablets, we're even seeing potentially a move where some of the plasma TV folks that now have Wi-Fi are considering a cellular radio.

So right now we think that market is very roughly 80 to 100 million units or more market that is above and beyond our 1.2, 1.25 billion handset space and it will grow materially over the next several years.

And quite frankly, again, we're not sure how many new devices could be added, but -- so that [hand] is on the move.

Our next question is from Cody Acree with Williams Financial.

Hey, guys, thanks a lot.

(inaudible) the OpEx outlook --

Sorry, Cody, repeat that, we didn't hear you very well.

Yes, sorry about that.

Your OpEx outlook for Q2?

Q3.

Q3.

And your question about the OpEx was the number --

Yes, I just dropped off for a second.

Oh, okay.

Yes, it's between $54 million and $55 million.

And as far as capacity goes with six-inch ramping, how do we look at that in future quarters?

One of the things about -- Cody, about six-inch conversion and just going in general, adding a step function increases as the diameter of wafers increases, when you clip on the switch it really doesn't do a heck of a lot for margins initially because you simply need more.

It allows you and enables a great deal more revenue, so what it really does is it allows you to increase your contribution margin as your revenue increases.

So you should begin to see -- we have a lot of capacity now on the (inaudible) side and we have ability to continue to modulate what we purchase on the outside versus what we produce on the inside and that gives us -- our customers a great deal of comfort and gives us a lot upside and it has increased our contribution margin here as we run the business.

We've got bricks and mortar capacity to double the size of the revenue of this Company with high contribution margins as it relates to now HVT, so it gives us just tons of upside and you'll see us begin to grow into that high contribution as each subsequent quarter's revenue increases.

Our next question comes from Steve Ferranti with Stephens.

Hey, guys, this is Neil for Steve.

In the smart meter business, I know that you guys have been doing business with the likes of Itron and Esco, just to name a few.

Who are the other big players in the market that you'd like to be doing more business with and are most of the smart meter opportunities that you're seeing North American based or are you also seeing international opportunities, as well?

Neil, yes, this is Liam.

As we mentioned it's a global market, I think the US has really been at the forefront of this and a lot with the utilities on the West Coast have really led the drive.

You mentioned a few of our current customers, Itron, Esco, Neptune and Sentus.

There are several others that we are pursuing, one notable account that we're working today that we don't do business with but we certainly have line of sight to new revenue streams would be a company called Silver Spring Networks in the Bay area.

With respect to geographies, as much as this is a success here in the US we absolutely think this will move to Europe and eventually I think there could be a huge play in the Asian markets.

But again, as we've outlined, the current customers that we have and the backlog and position that we have with wins that are on the table look very promising this year.

Okay, thanks, guys.

Thanks, Neil.

Next question comes from Suji De Silva with Kaufman Brothers.

Hi, Dave, hi, Don, nice job on the quarter, guys.

Thank you, Suji.

Can you talk about the calendar second half of this year.

It looks like (inaudible) in the handset industry but also for your share opportunity should we expect seasonality or are there some factors you would say that would mitigate that in either direction?

Suji, I'm sorry, I'm going to have to ask you to repeat that.

You broke up for the first half of that question.

Sure, is that better?

Yes.

Yes.

Okay, good.

The calendar second half this year, given your momentum and some of the share opportunity that you have should we be expecting seasonality, or what would be factors that affect it in either direction, better or worse, in seasonality?

Well, I think you should expect seasonality.

I think you will see factors that offset it as this quarter, where the change between December and March was far less than normal seasonality and it was because we were gaining share and continuing to outpace the market by penetrating new verticals, as well as gaining customers in sockets within mobile.

So I do think you should expect seasonality, I expect a strong overall market, and I expect that we will outperform it rather handily as we continue to ramp new programs we've been discussing, and as we continue to ramp programs that are outside of the handsets space.

Okay.

And then I don't know if you gave this or not, but is the mix this quarter of analog versus handset, within analog how much of that is smart meter at this point?

Well, the actual mix of our broadline analog business was roughly a quarter of revenue with handset revenue being 75%, which has been consistent with where we've been running for the last three or four quarters.

And as far where we were this quarter on smart meter, about -- a little below 20% of that total -- of the analog total.

Great, good, and last question.

[Really data cards, you guys talked about that being the more silent kind of growth opportunity that's happening, how is that proceeding for you guys?

Is that specifically not growing with the Company growth for you guys and is your share there stable or improving?] Thanks.

Well, our share is growing in that space and that element itself within the market is growing quite a bit, so what you see is you see the USB dongle, you also see embedded chips that are really taking off, and I think some of the most significant bay span players now are developing some really cutting edge solutions that you'll see embedded within netbooks and laptops and we're well positioned to see some upside from that, as well.

So I think it's a great new use for cellular technology and our devices and again, it'll continue to expand through this year and then several years beyond.

Our next question comes from Patrick Newton with Stifel Nicolaus.

Hey, thank you, congratulations on the good quarter.

Question, I guess, for Liam.

With-- regarding smart meter, with the product already representing approximately 20% of your revenue and I think previously you said the target for the full year was 20%, with the higher growth rate than the linear market as a whole where do you think smart meter with exit the year as a contribution to the analog?

Yes.

You know, that's a good question.

It's-- it will probably tick up a few points.

We've been on a very steady, progressive growth rate here.

We're adding customers, our customers have well defined program ramps for utilities.

We have opportunities.

I think, really, the big opportunity right now for expansion is going to be in the home area network with our ZigBee technology.

We alluded to a couple of design wins here in the prepared remarks and one of the most notable for us is moving into an account like LG in their consumer appliance division where they're going to be rolling out ZigBee-enabled white goods appliances.

So I think the upside, in my opinion the meters themselves are well characterized.

The home area network is where we could see some real material gains here late this year and over the next, certainly 2012 through 2015 even.

All right, thank you, Liam.

And then, Don, one for you.

I think previously you'd given the expectation of 8% tax rate through 2010 and then tax planning allowing about a 12% in 2011, I was wondering if you can update us on progress made toward that 2011 goal, maybe walk us through how you managed to keep the rate so low and then perhaps the sustainability of that 12% rate in the out years?

Sure, Patrick.

The guidance that -- we've given 8% for the balance of the year and we actually for 2011 and 2012, we're looking at a rate between 10% and 12%.

Now that rate's going to be dependent on where earnings go, too, because there are certain variables in that rate that change as earnings increase, but that's a good number for you guys to use in your models now.

The way that we're doing that, if you look at this year, this year we have $90 million of NOLs remaining that are shielding our income that's allowing us to keep it at 8%.

We are putting some business initiatives in place, actually one was implemented for the second half of this year, one will be implemented for the first quarter of next year that'll allow us to do tax strategies and some tax plannings that allow us to keep the rate at 10% to 12% for 2011 and 2012.

Beyond that, up to 15% is probably a good number and we think those are very, very competitive rates.

Our next question is from Tim Luke with Barclays Capital.

Thank you and congratulations on your quarter and your guidance.

Thanks.

I was wondering, Don, maybe you could talk about how you -- having guided your growth margins up again, how you perceive the different puts and takes there, and what sort of ranges do you think over time you might be able to touch perhaps as you see like the six inch, but also some of the mix change?

Thank you.

ure, Tim, thanks.

As I said earlier when we were talking about the model, as we drive toward the goal of 25% and beyond, it's a combination of both gross margin expansion and leveraging our operating expense base.

We just guided to 43% so you can model this as we grow to $280 million, $300 million or beyond in revenue and use a contribution of an excess of 50% you can see that that margin is going to continue to expand and that's our expectation.

It's a combination of things that we are currently doing, will continue to do and that's focus on the material cost reductions, continuing to drive productivity and yield improvements.

It's also the release that Dave talked about earlier of a lot of the new product suites, the higher dollar content, more value add in the marketplace, we believe all that's going to drive margin expansion.

And it is the six-inch conversion, as well, which is going to give us more internal capacity.

All of though things are contributing to it.

Do you have a upward framework that you think that -- where you'd say, okay, we want to get for more growth here than margin, at sort of the 45% level or something, or how should we think about it over time?

We haven't set any specific targets, w We just think there's a lot of opportunity just with leveraging the fixed cost base in the operations as you continue to expand revenue that that number is certainly going go to a number of 45% and potentially beyond.

You can run the models as I described and you can see where the potential is.

Our next question is from Aalok Shah with D A Davidson.

Hey, guys, congratulations.

A couple of quick questions.

I'm assuming the 10% customer, was that -- (inaudible) Samsung (inaudible)?

We had one 10% customer for the quarter and it was Samsung.

Okay.

And then on the Q3 revenue growth guidance, do you expect that to be more -- is there a way to think of it between linear versus handset.

Is it 50/50 or is it more skewed toward linear?

I think it's going to be well balanced.

It's going to be well balanced.

We're really excited about the growth in the vertical markets we talked about, and the catalog business keeps chugging along so I think it's going to be very well balanced for the second half of the year and that's up against some steep growth in these programs we described and customer ramps in mobile.

So I'm pretty pleased with that but I think you should expect it in the linear business to absolutely stay up with handsets.

Our next question is from Anthony Stoss with Craig-Hallum.

Hey, guys, a couple of quick questions.

I don't know if you gave this, but your percentage of revenue by air interface?

Sure, Anthony.

It was -- we're now actually slightly more than half 3G versus 2G.

It was 52% EDGE and 42% CDM and DPRS.

(inaudible) constraints that you guys are keeping an eye on that would hinder your growth going forward here in the near term?

Did you say constraints?

Yes, constraints?

Are you having any trouble getting material to meet demand?

No.

You know we're not, although it is admittedly tight out there.

We are really able to leverage this hybrid model that we have where we not only have increased our own internal capacity.

You see the targeted capital we put in place over the last couple of quarters.

It's gone right at any potential bottleneck providing us upside to what we see as our customers' upside forecast.

We don't want to miss any share opportunities.

And our purchasing people, frankly, out there, and I think they're doing a good job make sure that we get more than our fair share of visibility and supply for those components and PCB's and so on that we purchase.

And of course we did flip the switch on the six inch here so we've got -- not only lots of capacity externally but but we have lots of capacity internally for perhaps our most important component in the front-end solution, which is the [galliumarsenid] content.

So I'm pleased with what our supply people have done and this hybrid model is going to serve us well even if we're seeing surprising upside coming through in the second half ramp.

The next question is from Todd Koffman, Raymond James.

Thank you.

What are the capital spending plans for the remainder of the current fiscal year?

Oh, hi, Todd, this is Don.

I think you can model this.

We don't guide balance sheet information but I think in your models if you just assume the same kind of run rate you've seen the first half of the year for the second half, that's safe.

Thank you very much.

Thank you.

Next question is from Denim Winetow with Avian.

Hi, guys, thanks for taking my question.

A couple of questions from me.

First of all, can you give us an idea March versus June.

I know that if you look at industry, analysts' estimates out there, obviously the smartphones are going to be outgrowing the overall market, but just by a quarter-over-quarter basis from where you sit, can you give us an idea (inaudible) growth rates that you saw on the entry level phone versus smartphones in March and June?

Sure.

Well, typically, the March to June quarter in handsets is about a 3% to 5% sequential growth in units.

We do see, as noted, some great uptick in smartphones and that really is the vehicle today of choice for consumers and carriers.

Carriers love it for the data service that it provides, and penetration is very, very low in smartphones outside of the US and Europe.

You have a big market in Asia that's moving.

We think smartphones on a unit basis will ton outgrow 2G handsets, there's no question about that.

At the same time, some of the major markets in 2G, China, for example, continue to look solid.

So overall, we would put about 3% to 5% at the high end, 5%, mid-range, about 3% to 4% for unit growth in handsets in general but smartphones clearly outpacing.

What do you think is the smartphone growth rate?

Well, the annual growth rate in smartphones is 35%, 40% year over year and we think that'll continue over the next five years.

Our next question is from Jonathan Goldberg with Deutsche Bank.

Hi, guys, thanks for taking my question.

I was hoping you'd just talk a little more -- give us a little bit more color on your China business.

How is the margin profile of that business shaping up?

I know it's a lower-priced product but what's the cost structure and the margin look like and how do you expect it to trend during the year?

Yes, sure, Jay, this is Liam.

I'll start a little bit on the customer dynamics and then I'll pass it to Don on margin.

One of the things that we like about our business in China is we deal directly with the most powerful chip set player that, that's Mediatech, so our products are specifically tuned and designed to meet the architectures, the requirements, specifications, and the costs of that customer set.

And beyond that, as I mentioned, we've augmented our handset business in China with some great strength now in infrastructure.

Certainly big differences in gross margins between the infrastructure business and what we see in 2G, but in both cases, this is an accretive business for Skyworks and high growth.

Yes, Jonathan, just to reiterate what Liam said.

When you look at the business profile of Skyworks and the numerous SKUs that we have and you look at it across their interfaces a lot of the 2G products in China that serving we've been making those products for a long period of time.

Very efficient at those, high yields, high productivity, and quite frankly, the 2G margins are right in line with the other product profiles that we have so there isn't -- there hasn't been any pressure impact, as Liam said.

When you look at the overall volume they actually can be slightly accretive to the overall return on the return on the business, so no negative there at all.

Okay.

So and moving to the other end of the spectrum.

Have you guys made any sort of significant design wins that you maybe can talk about but can sort of hint at that we might be seeing in the next few months?

I think that without talking about specifics, if we do our jobs and we intend to, if we continue to do our jobs, the strength of our design capabilities and the scale that we bring to the party, plus the fact we're shipping to everybody today or virtually every major OEM in both the smartphone and the cellular category, we would be failing to not have content across the -- peppered across the board with various OEMs.

So we don't look upon one socket or another socket.

We think we've done a pretty good job of continuing to diversify our customer base and we're disappointed by any 3G or smartphone or high-end socket where we don't participate.

We think the technology of ours is superior, and our scale is both broader and deeper from a manufacturing standpoint.

We aspire to get a disproportionate share across every customer.

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

Thank you very much.

A couple of quick housekeeping questions.

Don, you said the 3G-2G split that is now favoring 3G EDGE is that all wideband CDMA, is that wideband CDMA and EDGE, just to be clear?

Both, yes.

Both, okay.

And then price erosion, we've heard from several of your competitors on that subject this quarter and things are a bit different, what are you seeing?

The same, more, less?

Any changes from historic?

Yes, Ed.

We're seeing nothing out of the ordinary right now and ASP erosion for us is actually a little bit less erosion than we saw last year.

Our content per phone, though, is increasing and in some cases we're looking at blended ASPs that are actually going up on a year-over-year basis.

Yes, but that's primarily content.

If you're dealing with one module, one band are we seeing the standard 15% to 20% per year erosion in that or --?

No, no, nothing like that.

So if your same part year over over we're in the single digits here.

And that 20% -- first of all, we never saw -- we never saw 20%.

We've been seeing 6% or 7% or 8% now for the third year in a row on a part-to-part, whereas each new solution or each new platform tends to be a little bit higher in revenues, so I don't really -- I don't think you should look at it that way because the real change has been in the last couple of years as there are increasingly more complexity behind these devices we're being designed in up-front with the baseband solution, and we're a sole source more often than not in the platform.

So the pricing structure, the yield curve, the cost structure is known, is negotiated in advance, is well understood where we think as good as anybody in the industry of predicting what those ramps through the production ramp are going to be.

And so you shouldn't be looking at 20% ASP erosion across any of our markets and customers.

And as I -- as Liam mentioned It's typically been for three -- for the third year if a row now in the 7%, 8% range part to part with increasing dollar content on average per phone.

Yes, it certainly seems like we've gotten into the second phase of growth in the industry.

You have to go back to, I guess, 1997 to 2000 when HBT first showed up to see such consistent improvement in the content for RSMs and we're hearing it across all the other OEMs.

To that end, everybody's talking about relatively tight capacity in their production.

Heard (inaudible) of micro and Triquint last night.

Not so so much your supply of wafers but in your able to produce nothing drastic, but you outsource a portion of yours.

Is that capacity also seeing some tightness, and does that affect your ability to -- any of your ability in the flexible manufacturing realm?

Well, the -- in terms of HBT we discussed earlier, we now have lots of capacity, both dedicated externally and what we're able to exercise now as a result of the six-inch conversion and that's a great big deal for us.

We have heard of -- of potential constraints, for example, in the packaging area.

And it is an area where we have the capability to do it all in house, and we have the capability and desire to do some of it on the outside based wanting to maintain flexibility.

And so on packaging, we're in very good shape, but on the assembly case you may hear some shortages with others.

Remember, we're kind of unique in that we can produce the majority and if we need to all of our own packaging or our own assembly.

We think that's a competitive supply chain advantage, it's a time-to-market advantage, and definitely a margin and a cost advantage for us.

And so -- and Ed, to reiterate that, we're still outsourcing roughly about 15% of our assembly operations.

That number isn't changing in our forecast dramatically and with some of those targeted CapEx investments Dave described that puts us in position to handle the demand that we need to handle.

Our next question comes from Nathan Johnsen with Pacific Crest.

Yes, hi, thanks for taking my question.

Just one housekeeping, was curious if you guys had mentioned how far booked you guys are to the mid-point of your guidance?

We're, you know, approaching 100%, a very, very high percentage at this point.

Great, that's really helpful.

And then on operating expenses looks like you're looking for a little bit of a step up this quarter.

Was wondering how we should view OpEx going forward as you see revenue increase.

Are we at a level that you can be consistent at for a while or do you see SG&A tracking upwards with revenue?

I think it's -- at this roughly $54.5 million to $55 million level I think that we're going to be relatively static.

It depends on the revenue growth that you're describing and that certainly should be something that's not going to move a lot in the short term.

Annually you have pay increases, there are things that can drive that number up a little bit but it isn't anything that's going to move in the short term.

And it's our expectation that our OpEx will drop substantially as a percentage of revenue as we move throughout 2010, 2011.

If we see targeted investments or small increases they will nonetheless be a lot lower than the overall revenue growth rate.

Got it, that's really helpful.

Then one last one out of me.

Just looking at the better-than-seasonal guide you guys obviously highlighted a lot of new programs in your press release and then on the call.

Was wondering of that better-than-seasonal guide how much of that is associated with new programs versus ones that you guys already have going?

Yes, the majority of that ramp is really new designs.

New design wins in many cases we captured the business last quarter, in the December quarter, and it's now coming to fruition.

So it's a good mix of healthy base and diversification, as well as new program ramps in both non-handsets and in targeted handset platforms.

Great, thanks a lot.

Thank you.

We do have a follow up from Alex Gauna with JMP Securities.

Yes, thanks very much.

I wanted to ask, Dave, I know you mentioned seasonality for the third quarter but given the booming second quarter you have do you mean it more along the lines of a typical 8% to 10% type of seasonality, or do we have potential to see with new design wins coming on acceleration from what you just put up in Q2?

Well, I think that you're -- maybe have to be clear where we were talking -- are we talking about the market or talking about Skyworks?

We're talking about Skyworks that I'm curious about here, With your pipeline of new design wins and improving mix of 3G, obviously we'd expect -- and you've mentioned this -- we'd expect improved seasonality.

How does that leverage continue that you saw in Q2?

Well, we do think that it continues and it's for the reasons we've talked about in our prepared comments.

We are seeing some targeted program ramps in and outside of the handset.

We are participating disproportionately in the smartphone sector -- excuse me -- and that's the highest growth rate within mobile.

So March is a seasonally low quarter in the market, we did much better than that.

Our guidance is for much higher growth rate in June than the market and we expect to continue to -- I'll be clear, we're going to take share and we're targeting those applications in markets that are higher ASP and higher margin.

So we'll be very disappointed if we don't significantly outpace the sequential growth rate of this market.

Okay, very good.

And then with regard to those higher ASP products, I was wondering if you could describe whether, either by naming the platform or just the type of platform, what is your highest ASP?

What does that radio content look like?

How many modules or what type of module?

What is that if you had a marquis design win that you're pointing to that this what Skyworks can do.

Can you describe that to us?

It's roughly $8, so a marquee design would be a quad (inaudible) EDGE device with multiple bands or wideband CDMA where we have swept in not only the amplification but we've swept in the filtering, switching and conditioning into -- integrated into a module that pulls in much of the passive content.

And so the total content gets you to maybe $10 and since we don't do high=powered duplexes, for example, we would max out today at about $8.

But you know, what's I think an even better way to look at this, there are very, very few, very few platforms that give us or anybody else $8 in analog content.

There are a whole slew, and the majority of phones today, are still in the GPS range that are $1.

So what's really going to happen is by integrating all of these passive functions and by continuing to come out with these new multiload devices, it's going to be the dollar moving to four that's going to drive the tam of our business much, much more than what happens to the $8.

The $8 is a drop in the bucket compared to the ones and twos that are rapidly going to three and 4.

four and that's where the market's going to land over the next three to four years.

So I guess I would caution you, don't worry about the $8.

We don't think about the $8, we think about the one..

With that, this does conclude today's Q&A portion of the call.

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

Thank you very much for participating.

This concludes our conference call today and we look forward to updating you in the future.

Again, thank you for your participation.

This does conclude today's conference call.