思佳訊 (SWKS) 2010 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Skyworks Solutions third quarter fiscal year 2010 earnings 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 third fiscal quarter 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.

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 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.

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 Skyworks exceeded third fiscal quarter guidance for revenue for gross and operating margin as well as earnings per share.

This is driven by our momentum in mobile internet and continued penetration into new vertical markets and a broad set of diversified analog applications.

Specifically for the quarter, we delivered revenue of $275 million.

This is up 44% year-over-year and up 16% sequentially.

We expanded our gross margins to 30 -- 43.3% and our operating margin to 23.1%.

In turn, we grew operating income 122% year-over-year to $64 million,and we posted $0.32 of EPS.

Now, this is $0.02 better than our guidance.

With respect to the balance sheet, we retired another $20 million of March 2012 convertible debt and we exited the quarter with $390 million of cash.

As our results reflect, we continue to make progress along our strategic objectives, and these are namely first, diversifying across both end markets and customers, second, continuously improving our operational execution and in turn, delivering leverage and higher financial returns.

Now, I'll go through each briefly.

First on the diversification front.

We are adding new customers, and we're entering new vertical markets.

When we talk about vertical markets, we're really referring to underserved high margin segments where we can provide a custom analog solution that leverages our broad technology footprint to improve our customers' overall system performance.

In addition to entering new markets, we're expanding our customer base.

Not that long ago, you may recall our revenue was heavily concentrated with a few tier one handset OEMs.

And today, not only do we support the industry leading handset manufacturers and smart phone providers, we're also delivering highly integrated solutions to key energy management suppliers such as Itron, Silver Spring Network, CentOS, Atlantis and Gear ,while addressing new markets in vertical applications.

I'd like to give just a few examples of our diversification, specifically during the quarter.

Some examples are we've ramped DBS solutions in support of DirecTV and the Dish Network, we commenced shipments of attenuators for Cisco's multi-room DVR for use in Verizon FIOS applications, we captured key design wins with broadband control ICs at some leading network -- I'm sorry, net book and net book OEMs, we supported Garmen's GPS business and Europe's largest supplier of electric toll tag systems with next generation analog components.

And finally, we powered Samsung's 4G USB motor.

This is the world's first commercialized LTE device.

These are just among a few concrete examples of our diversification strategy and practice.

Okay, now with respect to operational execution, we improved end to end manufacturing yields during the quarter.

We continue to drive to reduce our development cycle times, while increasing inventory turns.

And in addition, we continue to see operations to leverage our scale advantage and our hybrid outsourcing model.

And finally, as our improving fundamentals reflect, we've made substantial progress towards our established financial targets.

Last quarter we delivered a 280 basis point year-over-year expansion in gross margin and an 820 basis point increase in our operating margin.

And we have specific action plans in place to deliver further improvements.

Okay.

Now that we've hopefully put our strategy into context, let me elaborate on what's fueling Skyworks' top line growth and how we've positioned ourselves to outpace our addressable markets.

Today we're capitalizing on three distinct business segments, mobile internet, vertical markets and analog components.

So first with regard to the mobile internet, we believe the smart phone segment is poised to grow at three to four times the 8% to 10% growth rate anticipated for the overall cellular handset market.

For Skyworks, this market is growing at an even faster pace, giving our -- given our increasingly customized solutions and our very strong relationships with both -- with leading OEMs, along with the rising tide of analog content as carriers and consumers shift to band intensive 3 and 4G platforms.

And we're very fortunate today to be shipping to virtually all cellular OEMs and smart phone providers.

Another rapidly growing segment that is often overlooked is embedded wireless.

We estimate that there are 50 million units of USB modems, tablets and mobile hot spots were sold in 2009, scaling to roughly 250 million by 2013.

This is an 83% compounded growth rate.

And this outlook we think could provide conservative given the opportunity to easily upgrade the world's online computers with 3 and 4G USB modems, on top of this entirely new tablet category, which is clearly off to a very strong start.

And we continue to gain traction on the other side of the mobile internet connection as well within network infrastructure as mobile operators begin to install new base stations, routers and backhaul network equipment to avoid network traffic jams and to preserve their highly profitable data service revenue stream.

To support this growth, we've developed a portfolio of network infrastructure solutions that include attenuators, DCO synthesizers, mixers, low noise amplifiers and demodulators.

And specifically during the quarter, we introduced high performance broadband synthesizers, spanning ultra wide frequency ranges.

We ramped LTE attenuators at Ericsson, and we're very proud that we received a milestone technology award from Huawei in recognition of excellence in base station innovation.

Very proud of that.

So in short, global penetration of the mobile internet will entail upgrades to both existing client devices, as well as to the supporting network infrastructure.

And at Skywork, we've deployed resources to secure an early mover advantage as these segments continue to ramp.

Now, the second leg of our growth strategy is within a new vertical markets.

As we've outlined in the past, we continue to make investments in systems applications and design with adjacent -- within adjacent high margin analog segments.

A couple of recent examples include smart grid and home and building automation applications.

According to a recent study by ABI research, cumulative growth investment in smart grids will exceed $45 billion in the next five years as both government and utilities repair, upgrade and transform their aging infrastructure.

Smart grids offer utilities real time two-way communications with each segment of the electrical grid assessing local -- loads, usage and efficiency 24 hours a day.

Much of the developed world relies on energy transmission technology and infrastructure that was built between 60 and 80 years ago, and it's beginning to show its age, particularly as consumers experience usage restrictions and brown outs.

Meanwhile, we're beginning to see home and building automation applications take shape.

Here we're providing ZigBee-based solutions for security, monitoring and management, specific applications include lighting control, door and window sensors, as well as wireless appliance and temperature controllers.

The customer set here includes Honeywell, GE, LG and Whirlpool.

Following more than a decade of promise, we now see the home and building automation market gaining real momentum, given demand for green technologies for enhanced security and energy conservation.

Skyworks can add significant value through analog integration and by leveraging our scale.

Finally, as a third growth sector, we are leveraging our standard analog catalog business to address a myriad of mature and emerging segments.

Today with more than a thousand customers and with over 2,500 analog products, our solutions are being leveraged across a broad set of applications including automotive, avionics, satellite, medical, military and industrial, just to name a few.

This business increasingly provides us higher margins, a very diversified customer base and long, almost annuity like product life cycles.

In summary, given these growth drivers, we are entering the back half of 2010 on a steep growth trajectory, underpinned by our accelerating design and win momentum and our deep product pipeline.

Stepping back, Skyworks continues to execute towards the multi-year business transformation we've outlined.

We've made the investments necessary to capitalize on the growth in our addressable markets, to deliver operating leverage and, in turn, we believe to continue to create shareholder value.

I will now turn this call over to Don for his financial review.

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

First, I will provide a quick summary of our third quarter fiscal results and then outline our business outlook.

Revenue for the period was $275.4 million, up 44% year-over-year and 16% sequentially versus our guidance of 10% to 15% sequential growth.

Gross profit was $119.2 million, or 43.3% of revenue, a 280 basis point year-over-year expansion which was driven by a product mix that increasingly includes higher margin vertical market and 3G solutions, volume ramp of new products, continued manufacturing productivity enhancements, product and end yield improvements and significant material cost reductions.

Operating expenses were $55.6 million, of which R&D was $33 million and SG&A was $22.6 million, yielding $63.5 million of operating income and a 23.1% operating margin, an 820 basis point improvement year-over-year.

Our net interest and other income expense for the quarter was $400,000 of expense while taxes were $4.4 million, a 7% tax rate.

As a result, our net income was $58.7 million, or $0.32 of diluted earnings per share versus our guidance of $0.30.

Turning to the balance sheet, during the quarter, we recorded $12 million of depreciation, we retired $20 million of convertible debt and we invested $25 million in capital expenditures as we anticipate a strong second half ramp.

As a result, we exited the quarter with cash and cash equivalents of $390 million.

Now to our business outlook.

Based on specific program ramps and backlog coverage, we are forecasting fourth fiscal quarter revenue of $300 million, gross margin expansion to between 43.5% and 44% and operating expenses of approximately $55.5 million to $56 million, yielding a 25% operating margin, which is squarely on track to our previously outlined medium term operating model target.

Below the line we expect $400,000 of net interest expense and other income expense and a 7% cash tax rate.

In turn, we expect to deliver diluted earnings per share of $0.37 off of a base of 186 million shares.

Further, based on our innovative product portfolio and strong operational execution, we expect to deliver sustainable growth, expanding margins and operating leverage from our current $1.2 billion annualized revenue run rate and earnings base of nearly $1.50 per share.

In fact, we plan to elaborate on our growth drivers and introduce our new financial model at our upcoming analyst day on September 21 in Boston.

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

Very good.

(Operator Instruction) Our first question will come from Parag Agarwal with UBS.

Thanks for taking my question, and great job on the quarter.

Thank you.

First I wanted to drill down on your gross margin, expanded where you are.

As we go forward and as you add capacity, just wondering how much headroom we have in the gross margins and, also, could you elaborate about your manufacturing strategy given that you are bringing in a lot of capacity in house?

Well Parag, thanks for the question.

This is Don.

Clearly, we believe we have a lot of headroom left in the margin, and we talk about a number of -- a minimum of 45% on a go forward basis as we continue to expand the top line.

And a lot of the levers that are going to allow us to do that are the same that you've seen in the past.

One of the key things will be product mix.

As we ramp our new margin accretive products, which are a higher percentage of vertical market and 3G solutions, and they have accretive margins, the overall margin of the business, we're going to get a nice benefit from that.

We're going to continue to diversify our revenue base.

Clearly, volume and scale will allow us to continue to expand margins.

And something that we focus on on a day-to-day basis, operational execution, we're going to continue to deliver improvements in key metrics in all of our factories and, we've also got our cut over to 6-inch wafers, and then there's targeted margin expanding CapEx investments we're making, as well.

So all those things are going to contribute to moving our margins forward.

Okay.

And as a follow-up, you hinted towards a strong ramp in second half.

Just wondering if you could provide more color on that.

And also, can you talk about ramp -- the Nokia ramp, update us on the Nokia ramp into the second half?

Okay.

Well, we think -- we only guide, obviously one quarter out, but we do see that the programs we've identified in both our cellular business and smart phones, as well as our vertical markets continue to gain some traction, so we expect to see ongoing sequential growth in those areas, and so we're pretty excited about that.

As we outlined in prepared comments, we now have the three legs of the stool, which is not only our smart phone and cellular business, but increasing list of vertical markets that have a lot of headway for us, as well as our ongoing growth in our catalog business.

With respect to Nokia, this quarter they're roughly a 10% customer.

We're very happy with that, we're very proud of that, and we have just begun to ramp into some of the segments where we hadn't previously participated.

So we see ourselves rounding out that portfolio.

And as we've identified in the past, continue to see sequential growth as we move from being primarily a 3G provider in the past to being lined out throughout their entire portfolio by now -- sometime between now and 2011.

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

Thanks for taking my question.

This is Brett Piira for Craig Ellis.

How should we think about that growth profile of your smart meter going forward?

Is that going to be lumpy or pretty steady, and what are your thoughts on when it can become a $100 million business?

Sure, this is Liam.

Well, that portfolio for us continues to be one of the most dynamic within our vertical markets business.

It is a multi billion dollar end market, there's no question about that.

There's a great deal of stimulus money behind that in the US, initiatives from utilities and even from the administration.

Right now it continues to be a leading driver within our non-handset portfolio.

We've done a nice job of engagement with some of the top providers of the meters themselves.

And then kind of an adjacent market that is really pulling from this is the home automation space, and we see that growing very rapidly through 2011 all the way through 2015 and beyond.

So it's a business that will continue to grow.

It's not really bumpy, it's slow, steady growth for us, and we're going to be up again this quarter, and I think you're going to see sequential growth into 2011.

Okay.

Thanks.

And then on your backlog coverage, I know last quarter you were pretty close to 100% booked.

What's it looking like this quarter?

Brett, this is Don.

It's a very similar percentage as we discussed last quarter.

It really goes to the whole process and approach we take to forecasting.

We take a very conservative view, and we like to have a very, very high coverage and a backlog before we'll commit and guide to a revenue number.

Our next question comes from Alex Gauna with JMP Securities.

Thanks very much.

Congratulations on the strong quarter.

I was wondering if you could talk to maybe some of your exposure in China.

There was a little bit of a fall off in media tech momentum.

I'm wondering if you saw that late in the quarter, if that was disruptive to you and what the outlook might be for some of the upgrade cycle that's going on in that market as well?

Yes, sure.

China is certainly an important market for Skyworks.

We're a big fan of that region, we've invested quite a bit in the ecosystem.

To your point, we did see some choppiness with the account base there, and we serve up to 100 small OEMs in that market.

There's some choppiness.

We think it is righting itself right now and should improve as we get into the second half of the year to some degree.

But, Alex, in addition to the traditional handset guys that we work with, we are seeing some very good progress across the infrastructure space, namely with companies like Huawei and BTE and as Dave noted, we were awarded not only a technology award plaque, but also some great business with Huawei over the last quarter.

And I think one thing I would add is that the business model that we've worked very hard to create has been one where we're diversified across OEM customer set as well as region.

So as Liam talked about, we have seen softness in China as well publicized, but we also saw relative strength elsewhere.

So then we factor all that in, even as we've seen OEM share shifts, for example, we've been able to capitalize where there's been strength and able to weather where there's weakness, and I think that's just a factor in our business.

Overall, the total market looks quite strong, and we were tend to ride that overall market as we are diversified so broadly and we're able to take share.

As a follow-up, is some of that chop expected to continue into the current quarter?

And if you could remind us then, what normal seasonality is for the December quarter and if that chop might turn into a benefit in that timeframe if it recovers?

Well, we -- when we tabulated our forecast, we made the assumption that there would be continued chop.

So we factored that into our planning as an attempt to be conservative.

Normal seasonality for us is that December quarter would be up maybe 5% to 10%.

Okay.

Thanks very much.

You're welcome.

We'll next go to Sanjay Devgan with Morgan Stanley.

Hey you guys, thank you so much for taking my call and great job on the quarter.

Thanks.

Just had a question.

You've had some sizable growth the last couple of quarters ,and I just wanted to touch on your manufacturing strategy.

If you could just kind of help us understand, or I guess put a -- if you had to put a confidence level around your ability to meet demand, is it -- are you guys kind of capacity constrained with -- internally and externally?

Or is that not an issue and kind of the guidance is more indicative of the end market demand?

That's a great question.

We're working very hard.

In fact, our supply chain people have been with our suppliers across the board here all the time trying to make sure we secure mind share and secure all the capacity that we need to support our customers.

We did a couple of things.

Don talked about in the prepared comments, the investment we've made this last quarter in capital expenditures.

And if you go back and look at what we said the last couple of quarters, we are seeing tightness in supply, in assembly and test, and we're seeing it wafer supply.

We're seeing some minor component shortages, but they're very, very manageable, we believe.

So what we've done the last couple of years, the beauty of our -- or last couple of quarters, the beauty of our hybrid model, we have licensed or we can produce internally as well as externally assembly, test, PF and HPT foundry capability.

So what we've done is we've assessed -- we've addressed the bottlenecks in all of our internal areas and we've essentially doubled down and we've added investment there, so that we have the flexibility moving through really the October, November timeframe and December, that we can pull in what we need to pull in if we get disappointed by either assembly, test or on the wafer side.

So I'm -- I think, if I judge by the tone of your comment, I share the concern that there's tightness in supply, but we've increased in the investment we've already spent here in a way to address it internally and to dial up the amount of internal manufacturing if we need to, and I think we may.

But we're going to meet the customers' demand in either event.

Great.

And then just as a follow-up, I was just wondering if you could touch a little bit more on the cut over to the 6-inch wafers.

If you can kind of give us a sense on how that's progressing relative to expectations and when we can kind of see that cut over to occur?

Sanjay, that cut over has occurred.

That --

I guess -- I mean in terms of when you see volume shipments going over 50% with the new 6-inch.

Well, everything we're producing now is 6-inch.

I think maybe what you -- so what happened was we converted -- we took our 4-inch line, and I got to hand it to our operating folks, they actually converted to 6-inch while running the 4-inch at very high capacity utilization.

You typically don't see anybody do that.

So I'm frankly pretty proud of the way the team operated and executed to that plan.

And so when we flipped the switch to 6 inches, when we migrated to 6 inches, the utilization was reasonably high and you saw no roll off in margin.

In fact, you saw an improvement -- we see an improvement or accretion in margin.

Now what we are doing is as demand increases, we've got plenty of headroom capacity to go internal with this 6-inch HPT with relatively short lead time, equipment and human resources or people.

So we're on that path.

We see more margin expansion as we grow and we're able to modulate how much we do internally versus as how much we do outside.

Sanjay, that's the key, it allows us to keep the balance and percentage where it needs to be to grow margins.

Great, thank you, guys.

Thank you.

We'll next go to Ittai Kidron with Oppenheimer.

Hi, guys, congratulations on a good quarter.

Thank you.

A few questions, Don, first of all on the OpEx, it's finally starting to move up.

How do we think about that going forward?

And also, your cash generation this quarter was not all that stellar, big jump in accounts payable.

If you can give us some color around that.

This is Don, Ittai.

The first, on the cash usage for the quarter, we actually did consume cash this quarter, roughly around $20 million, but the big driver of that was we spent $33 million to retire some additional convertible debt.

That's $20 million -- a little over $20 million of face value.

We continue to focus on optimizing the capital structure.

That's part of that program.

There's only $27 million of our convertible debt remaining, that's due March 2012.

We also, as Dave just alluded to, as part of this making sure that we're able to handle the customer demand we expect in the future, we increased our capital expenditures for planned program ramps and internal capacity expansion.

So the take away on that is we expect a very strong cash flow in Q4.

Can you give us more color, though, around the increase in accounts receivables and payables?

It's one of the biggest I've seen in your balance sheet for some time.

Receivables is a combination just of revenue growth.

Our DSO is right in line with where it's been, there's no change there, it's just the timing of revenue shipments.

That does affect how quickly you collect.

And as far as payables, it's just a relation -- inventory, we did ramp inventory.

Again, that's in anticipation of demand in Q4.

So that AP just follows the inventory build, there's nothing special going on there.

Our next question will come from Jonathan Goldberg at Deutsche Bank.

Hi, guys, thanks.

I was wondering if you could just expand on a question you were talking about earlier in terms of capacity, and I'd like to look more at long term.

Do you think the industry can scale -- do you think there's enough gas capacity out there that you guys can keep up as we start hitting 1.6 billion, 1.7 billion handsets, those kind of markets?

Well, we needed the 6-inch conversion because when you get 6-inch conversion rough order of magnitude, you get a little bit -- you get each wafer produces a little more than 2 X the number of dye.

So we needed to do that, and now that we've got to 6 inches, we have opportunities for relatively small amount of capital to expand that further.

We also have an ongoing relationship with an outside provider with a copy exact process, we can ramp those folks as well.

So I think from an HBT standpoint, we are in very good shape.

And so the answer to your question is as the units go to $1.6 billion, we have the capacity to produce what is even at our most aggressive,, unit volume increase and our share aspirations.

When we factor both of those in on the most aggressive side, we have plenty of capacity.

I don't think that's an issue.

There is tightness of gallium arsenide supply elsewhere in the merchant market, but that's not a concern of ours because we can do it internally.

Okay.

Thank you.

Thank you.

Your next question is from Todd Koffman with Raymond James.

Can I just ask again the question with regard to the pretty sharp increase in accounts receivable.

It grew significantly outpacing your growth in your revenue.

What was behind that?

Todd, this is Don.

Yes, it went up roughly $50 million from Q2 to Q3.

We had a $50 million increase last Q2 to Q3.

It really just is a result of revenue ramp and the timing of the shipments.

The DSO is actually flat to what we've been performing over the last three to four quarters.

So it's not a velocity issue, it's just a timing of when the revenue ships.

That does drive how -- whether we can collect within a 45 to 50-day window, that revenue.

Nothing else at all impacted that.

And then just a follow-up, is the -- it's sounding like when I hear you that the visibility of your business the last couple of quarters is actually much better than it was, more normalized environment going back a few years.

Is that pretty accurate, or could you cull out this kind of annual revenue run rate, annual earnings run rate now?

I think you've done that a couple of quarters in a row.

Is that true, or the visibility is still basically one quarter looking forward?

I think the difference -- there is a difference, you mentioned going back a couple of years, there's a big difference in the last couple of years.

One is that increasingly, our business -- our products are customized to either a base band solution or an OEM solution, some cases both.

So what we see today is we're getting designed in much, much earlier in the chip set solution and architecture selection, which means that once we've won an order, we've won it.

Once we've won a socket, we've won it ,and it runs the life cycle of that, in this case, say a baseband solution, a baseband chip set or a customer OEM platform.

So if you go back a couple of three years ago, you had a situation where they would tip many of the, 2G systems were dual sourced, and so there could be an opportunity to win and lose business based upon phone refreshes.

The only way we lose or win business today is on a platform or a complete base band refresh.

So once we're in, we're in and the only trick then is to be able to accurately forecast what our customers -- how many phones are customers are going to ship, because we absolutely know the share we've got.

We absolutely know it.

It doesn't shift, it doesn't change throughout the life of the program.

That's a big, big difference.

The other difference is that our non-handset business that was mostly component driven a couple of years ago, today tends to be more custom IC driven into these verticals and even within our analog components business.

So that those programs programs, again, like the handset example, rather than being commodities sold to a distribution channel, they're customized into a solution, whether it's a base station or an energy management device or a CATB modem.

So it's the difference between a custom analog business and a component business.

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

Hey guys, if you wouldn't mind commenting on your percent, 2G versus 3G, also what percentage you sent over to AWS or how much you utilized them in the quarter.

And give us a sense of your CapEx needs maybe this quarter and next.

Thanks.

Anthony, this is Don.

The mix for the quarter, we were -- we're now slightly more than half 3G versus 2G.

We were 52% 3G and 48% 2G.

Your other question on CapEx, I would anticipate it's going to be at a level that you've seen in the past few quarters, in the $20 million to $25 million range.

We don't guide cash flow, but that's a number that is not out of a realm of possibilities for us.

And then AWS, was that about the same as 15% of production?

Yes.

That number runs is 15% to 20%, it's in that range.

Okay.

Great, thank you.

Thank you.

Yes.

Our next question is from Cody Acree with Williams Financial Group.

Hey, guys, great quarter.

Thanks.

I can't believe we got this far in and no one has mentioned inventories.

How are things looking within the channel and internal?

You broke up, Cody, the last sentence.

Say it again, you want inventory in the channel and what?

And internal.

Well, our inventory turns internally have remained very consistent, they're up a bit.

So we continue to reduce our cycle times and work the inventory turns, so those -- I think they're as high as -- they're higher than anybody in the space.

Our inventory turns run in the high fives and six turns, and that's quite good in our environment.

Externally, remember Cody, that much more than half of our revenue today now is going through either a hub or to a stocking distributor where we have complete visibility to sell in versus sell through.

So one thing we can say for the majority of our business is that there really is no opportunity to see a glut or inventory build, because we simply replenish that which is drawn down and used and consumed in manufacturing by our customer.

That's the nature of these hub contracts.

So we don't worry about component inventory builds of our stuff sitting on a shelf somewhere.

Now, there's a broader end market question, but in terms of our -- the question you asked which is componentry, we have lean inventory in the distribution channel and no excess inventory in any of the hubs.

And how about that end market visibility?

Well, the end market visibility is quite good among the -- our major customers.

The area that Liam referred to, and that is in China, where the visibility gets a little bit more choppy, there's been some OEM share shifts, there's been some build up and then take down as the government has tried to push back on some of the gray market and reduce perhaps the number -- growing number of OEMs shipping into that gray market.

So we did see some impact there.

We factored that into our guidance.

There's where the visibility is the lowest.

It's quite good elsewhere.

Great, and then lastly, with this new structural product mix change, not relying quite so much on the handsets, how does this affect seasonality?

Well, it should for the most part offset the typical handset seasonality.

So you see more annuity-like growth through these complex analog, mixed signal vertical market portfolios.

If you had to go into a range of quarterly waves, how does this look first half, second half of Q1 to Q2?

What do we expect going forward?

Well, yes, we really -- it's difficult to try and triangulate late that.

Certainly, I think we're all pretty familiar with the types of ramps and seasonality that you see in the consumer handset oriented markets, a better September and December and then some softening in March.

The non-handset businesses don't exhibit that so for the most part, you can see steady growth.

March may be down a touch there, but certainly we'll offset to some degree the seasonal declines that you see in consumer handsets.

Our next question is from Nathan Johnson with Pacific Crest.

I may have missed it, but did you guys say what the percentage of revenue came from the linear business this quarter, and just, I guess to dig in a little further, how do you anticipate that percentage to be in the September quarter and then in fiscal 2011?

Hi, Nathan, this is Don.

For Q3, our analog business remained in the 20% to 25% range, which it's been for the past multiple quarters.

Handset revenue was in the 75% to 80% range.

We wouldn't expect that percentage to change into Q4.

2011, we've spoke before about our overall goal, and our strategy is to continue to expand our analog business.

We're going to be focused on moving that percentage as we move into 2011.

Keep in mind, all the financial models that we've talked through and the performance to date has been with that analog business being 20% to 25% annual return.

So as we're successful in moving that percentage forward, that's going to mean overall improvement to the business model as well.

I think -- this is Dave, I also think we should point out that even within that 20% to 25% or 75% to 80% on the handset side, it really masks a big shift within the handset sector, which is we're moving pretty dramatically away from the 2G segment ,more towards 3G.

We're seeing more 4G, more multi mode and highly integrated solutions with more content.

So I think it's -- it's almost a little bit of disservice to think of it as 80/20, yes, that's true, or 75/25, but there's a big shift going on within that 75% to 80%, which we're benefiting from a lot.

So we like the growth in the smart phone segment and the 3 and 4G segment, and we're quite comfortable with while we are growing aggressively the non-handset business, we're going to grow the handset business we think just as fast here in the short run, but we're going to see that underlying shift which helps our margins a lot.

Great, and then I guess expanding on the 4G discussion, can you just remind us for a typical 4G handset what that looks like in terms of additional dollar content for you guys?

Is it equivalent to just another 3G band or is there some other dynamic there?

Yes, absolutely.

Well typically, when you start to port LTE into a device, and we're seeing it now, we mentioned in the call that we just launched the first commercial LTE device, which is really in the form of a USB dongle provided by Samsung.

That is a great model for what you may see.

Now that device has an edge FPM, several WCDMA bands and two or three, actually three LTE bands.

So quite a bit of content.

We're now looking at customers that are thinking about 2011, 2012 with as many as six different discreet devices that Skyworks can provide, two or three LTE, two or three WCDMA.

So it is going to be a material gain in content for us and it's also quite a challenge in terms of complexity and performance.

And those attributes, the content, the value that you derive and the performance and the requirements that actually limit some of the competitors, it's a perfect intersection for us.

(Operator Instructions) We'll next go to Luke Shaw with D.A.

Davidson.

Hey guys, just a quick clarification question.

You guys have talked about smart meters for quite a bit of time now, and trying to get a sense of how big that business is for you guys.

Can you guys give a range of how big that business is and maybe what you think the potential is?

It's been the fastest growing segment in our non-handset business.

It's right now about 20% of our non-handset business.

And you're right, we think that is a great example of where we were able to identify an underserved market, try to de-embed with applications and system engineering support where we could go in and add value to our customers.

And we're trying to superimpose that model to now a number of verticals.

You'll hear us talking not only about energy management, but as of today, we talked about home automation, we're doing the same thing in network infrastructure, wireless infrastructure and broadband communication.

So we do like to talk about it in the context of a successful penetration of a vertical market where the margins are quite high, and we want to see that increasingly a lot of those at Skyworks.

And then one other quick question, just a follow-up on Nokia.

Have you guys started to see incremental new platform wins at Nokia, or is kind of the winds that you've seen over the last six months may be starting to come to fruition?

Actually right now we are gaining share with multiple platforms.

We're one of the few vendors that is aligned with each and every one of Nokia's base band partners, Broadcom, STE, Qualcomm even.

So we have a great relationship with each and every one of the base band partners and a great relationship with the OEM itself.

So you see today design wins that had been in queue for a while.

There's several new programs they're going to ship in September and December and through 2011 and 2012, we'll continue to grow at that account.

It will be -- we believe that between now and 2011, you'll see us participating in the low, medium, high end of Nokia's business and that has not been the case for us in the past.

So we're really thrilled with the platform penetration at Nokia.

We do have a follow-up from Tim Luke with Barclays Capital.

Hello?

Go ahead, Tim.

You may have to pick up your handset.

So sorry.

Thank you so much.

With your cash generation that you've been seeing, how should we think about your strategy going forward?

Will we continue to look to you to pay down the balance of the debt?

Do you see opportunities for share buyback going forward?

And eventually, Dave, do you see opportunities to add to the portfolio in terms of smaller acquisitions?

Thanks.

Tim, this is Don.

Yes, as far as how we look at our capital structure, absolutely, those things are distinct possibilities as we go forward.

We've been very aggressive and successful at paying our debt down over the past year and a half.

We have 27 million left of the converts.

Given where we are on the balance sheet with $390 million of cash and $315 million of net cash, we think that gives us a very strong competitive advantage, and we're always on a regular basis analyzing the capital structure.

And clearly, two of the possibilities are buying more debt and buying shares back ,and both of those -- the NPV or the payback to the Company to do both of those are share price driven.

So it's something that we believe there's still opportunity for equity appreciation.

With that in mind, buying both of those back have pretty high return,s we believe to the Company.

So it's something that we are looking at on a very regular basis, and they are possibilities.

Thank you so much, guys.

Thank you.

And we'll next go to Quinn Bolton with Needham.

Hi, guys, I apologize if this has been asked.

I came on late.

But you talked about strength in smart phones in the LTE.

I was just wondering, if you look across the higher end of the design wins, are you seeing a trend towards more module solutions?

I think some of your recent wins are actually PAD (inaudible) modules in the smart phone area, and looked like a lot of your LTE actually include the duplexer.

So just kind of wondering if you're seeing a trend towards more highly integrated solutions as you get more bands,or is there still a good market for discreet PAs and some of these smart phone and LTE devices?

Yes, well, the trend -- here's the trend.

The trend is towards a great deal of complexity in the front end, and that can be delivered discreetly, there are certainly customers and designs that we're working on that are more integrated.

But I'll tell you, lately the performance requirements have been so demanding and what the consumer wants today in these hand held devices has been just astounding.

They want tremendous performance, they want to download video, they're on social networking, and the challenge within these -- with these mobile platforms now has never been greater.

So with that said, what we're seeing now is a shift more towards very powerful, complex, discreet devices that bring in galimarsonite technology switching that we have in-house, advanced multi chip module assembly and task and just skills and DNA that Skyworks fortunately has under the hood here.

It's really all over the map.

Where there's a performance orientation, you see more discreet bands because they can be optimized at that frequency range for -- optimized for current consumption and linearity and so on.

And then in other areas we're seeing a great deal of push towards integration of multi bands and then pulling in the switching, filtering and so on.

So we see it all over the map, depending upon the segment of the market that's being addressed.

One thing that we're seeing, though, that's really quite consistent, is even where they're looking to optimize performance using a single band to optimize performance over a frequency, the bands themselves are being bundled within an overall solution.

So we're seeing less often an opportunity to come in and say, well you know, I'll take that band from you and that band from someone else.

That's not what they're doing.

They're taking, for example, a single switch that may do the control functionality for all the bands and logic that would control the transmit and receive functionality across all those bands.

And even though they may go with discreet power amplifier, they're less and less apt to mix and match between suppliers.

They need the overall system proven out, integrated, tested and not have to worry about trying to architecturally mess around with different suppliers.

Great.

Thank you.

Thank you.

And you have a follow-up Parag Agarwal with UBS.

Hi, guys.

There has been some chatter about so-called adaptive power amplifiers or (inaudible) power amplifiers.

Just wanted to get your views on that as to when you think this will become mainstream and what you are doing on these new products?

I'm sorry, I -- maybe you could repeat it.

I just didn't understand the question.

One of your competitors have been talking about adaptive power amplifiers in the sense that they can be programmed to a particular frequency on the fly, they're programmable power amplifiers.

And the idea is that as we move to newer technologies or bands, instead of having four to five bands, you can have just one power amplifier which can be tuned to your particular frequency.

So just wondering --

Yes.

We have these configurable adaptable power amplifiers that can be very broadband in frequency.

They can be driven by their base band and transceiver to cover multiple bands and multiple modes.

The problem -- I would say the vast majority of what we're seeing today is that the base band configuration, that is the chip set ecosystem, is around a very specified front end architecture optimized for the frequencies of bands and where they can configure it to go after their customer OEM base and provide the adequate performance for each frequency band.

So we don't see -- while we do see push towards having broader band amplifiers and multi mode amplifiers, we absolutely do not see the case where an adaptive amplifier can be programmed and therefore you can take a PA and say, why don't you base band guys -- I don't need to work so closely with the base band manufacturer, I can down load software and the OEM can configure my PA to work.

It doesn't work like that.

We've seen zero examples of that

That kind of technology here is available at Skyworks, and we use it in infrastructure, broadband amplifiers and infrastructure in the cellular domain where the frequencies are known, and there's so much focus on efficiency and power, that the strategy is developing a high performance discreet or an integrated device with a known frequency has been the way to go.

We see zero forgiveness on current consumption.

The architectures you're talking about tends to have a tradeoff on overall power add efficiency.

And we can do it, but frankly, we see zero, zero opportunity for us to go with a customer with something that is more broadband, but costs points in current consumption.

We just don't see that as an option.

That was very helpful, guys.

Thank you very much.

Thank you.

No further questions in the queue.

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

Well, thank you so much for participating.

That concludes our call today, and on behalf of the entire team, thank you.

Again, this does conclude today's conference call.

Thank you for your participation.