思佳訊 (SWKS) 2012 Q1 法說會逐字稿

Good afternoon and welcome to the Skyworks Solutions first-quarter fiscal-year 2012 earnings conference call.

This call is being recorded.

At this time, I will turn the call over to Steve Ferranti, Investor Relations for Skyworks.

Mr.

Ferranti, please go ahead.

Thank you Elizabeth.

Good afternoon, everyone, and welcome to Skyworks' first fiscal quarter 2012 conference call.

Joining me today are Dave Aldrich, Don Palette and Liam Griffin.

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 discussed today are from our non-GAAP income statement, consistent with the format we've used in the past.

Please refer to our press release within the Investor Relations section of our Company website for complete reconciliation of GAAP.

With that, I'll turn over the call to Dave for his comments on the quarter.

Thank you Steve and welcome everyone.

Well, I am pleased to report that we are off to a strong start to our 2012 fiscal year.

Despite a challenging macroeconomic backdrop, we have once again exceeded our prior guidance.

Our first-quarter financial performance demonstrates how our market diversification strategy and our focus on operational excellence continues to drive stronger financial returns for the Company.

During the quarter, we delivered revenue of $394 million.

That's ahead of our guidance of $390 million and up more than 17% year-over-year.

We generated strong operating profits, producing first-quarter operating income of $105 million and cash flow from operations of $77 million.

We earned $0.51 in diluted earnings per share, and this is $0.01 better than our prior guidance.

Also during the quarter, we repurchased approximately 750,000 shares of our stock, and we retired $9 million of our convertible debt.

Following the close of the quarter, we further enhanced our balance sheet and eliminated dilution by retiring the remaining [$17 million] of our outstanding debt.

This leaves us now completely debt-free.

We successfully closed our acquisition of Advanced Analogic Technologies, or AATI.

Before delving into the specifics of the quarter, I'd like to first describe for you in broad terms some of the key dynamics we are seeing in our business environment today.

As I'm sure everyone is aware, the market backdrop remains challenging, given the current global macroeconomic climate.

But despite this, we have continued to generate strong profits and cash flow, even while absorbing the impact of a product transition within one of our major customers.

Furthermore, we believe that the trough of our business occurs in this quarter, the March quarter.

There are two primary reasons that Skyworks has been able to navigate through these crosscurrents and to maintain our track record of strong financial results.

The first is, over the last couple of years, we have strategically positioned ourselves as a significantly more diversified company, not just in terms of served markets, but also in terms of our addressable content within these markets.

Secondly, we maintain a relentless focus on being the most efficient operator in the space, leveraging our scale and leveraging our flexible manufacturing model.

This dual-edged strategy has enabled us to perform during tough market conditions, but more importantly, positions us for substantial growth as the market environment improves.

Now, while the economic climate has created challenges in some of our segments, we saw healthy holiday season demand across all categories of mobile Internet devices, including smartphones, e-readers and tablets.

In fact, these were some of the season's biggest sellers.

Recent market research suggests that a staggering 6.8 million new smartphones were activated on Christmas Day alone with application download surpassing 242 million in one day.

More broadly, there are a number of irrefutable market trends that are playing out today that are bullish indicators for the long-term industry fundamentals.

The first is wireless data usage is exploding.

Ericsson recently projected a tenfold increase in wireless network data traffic over the next five years as the mobile Internet supplants the wired Internet.

Second, driving this usage, smartphones are proliferating on a global basis.

Unit shipments are now expected to exceed 450 million during 2011, which still only accounts for less than 30% of overall handset unit shipments.

In fact, some forecasts are predicting 4 billion cumulative smartphone unit shipments between 2011 and 2015.

Furthermore, tablets are replacing PCs.

More than 60 million tablets are estimated to have shipped during 2011, 60 million, with some projections calling for more than 100 million in 2012.

The adoption rate of tablets and similar devices like Ultrabooks should accelerate as applications like cloud computing and digital textbooks becomes mainstream.

An increasing number of these are shipping with 3G and 4G connectivity, I might add.

Finally, more and more consumer devices are going wireless.

The number of wireless radios shipped into nonmobile segments like gaming, like PCs, televisions, like set-top boxes, crossed the 1 billion mark in 2011 and is expected to grow 27% compounded rate through the year 2015.

These are all quite positive trends for our Company, for Skyworks, and will provide healthy growth in our core TAM for years to come.

The proliferation of air interfaces, cellular frequencies, and global roaming dramatically increases front-end complexity, placing a premium on integration and a premium on performance.

Quite incredibly I think, today's smartphones can operate on as many as 12 different RF frequencies as compared to only a dual-band 2G phone from just a few years ago.

We see the number of frequency bands only continuing to rise.

In fact, we are now seeing architectures on the drawing board that incorporate a whopping -- a staggering 23 bands, 23 frequency bands.

So, to be clear, this translates not only to higher average dollar content per mobile device but, frankly, fewer qualified suppliers with the engineering depth and the technical breadth to address these advanced RF design challenges.

So at the highest level, we have positioned Skyworks as an enabler of mobile data in all its forms.

We believe we are uniquely positioned to capitalize on these mega-trends.

First, we have the broadest product portfolio in the industry by far today, which encompasses all RF architectures, including highly integrated multi-mode PAs, power amplifier duplexers, in hybrids of all forms supporting all standards.

Second, and in a similar manner, we have deep relationships spanning all major device OEMs and all major baseband partners.

None of our competitors have the breadth of engagement that Skyworks has today.

It is no coincidence that Skyworks is currently designed into every one of the world's leading smartphone and tablet platforms.

Third, on top of this, we are now capturing incremental dollar content within mobile devices.

We are having a great deal of success leveraging our strong customer relationships, leveraging our scale and technology advantages to drive additional expansion of our TAM with our portfolio of antenna switch modules, or ASMs, diversity in band switches, wireless networking front-end modules spanning both 2 gigahertz and 5 gigahertz bands, GPS low-noise amplifiers, and now power management and display -- power management and display and backlighting solutions.

The end result is a target-rich environment for Skyworks within today's most advanced mobile devices, where we are competing for as many as seven or more addressable sockets per device.

So we are clearly not just a PA company, but rather a full-service RF and analog specialist focused on the mobile Internet and adjacent high-growth market opportunities.

So let me give you a specific example of how these opportunities can play out in a real-world application.

A recent tear-down of the Galaxy Note from Samsung that was published by Chipworks highlights Skyworks as a supplier of the RF engine using our multi-mode, multiband Sky 604 product.

Further, the tear-down revealed a complete suite of supporting Skyworks products, including our ASM, or antenna switch module, our band switches, our GPS LNA, and a wireless networking front-end module.

In total, we captured five sockets with this particular platform.

Looking ahead, we only see this trend accelerating with more complex architectures as we incorporate more sophisticated signal processing, antenna tuning, advanced switching, multitransmit chain, wireless LAN technologies, and power management.

With these incremental addressable opportunities, some of the upcoming platforms we are currently engaged on contain more than $10 of addressable content for Skyworks.

Okay, now, switching gears, within HPA, our HPA business, our high-performance analog products, we're also seeing increasing traction across a wider range of end markets through both our catalog analog component products and our custom vertical market solutions.

This has been a key contributor to our ability to outperform.

Specifically, during the quarter, we captured numerous design wins across a number of diverse applications.

Some of these include an entire lineup of General Electric smart appliances, including washers, dryers, refrigerators, dishwashers, and ovens.

We expect these products to ramp over the course of fiscal 2012.

We captured new content within a remote heart monitoring device for Medtronic, leveraging our portfolio of advanced-tuning ICs.

Land mobile radio applications for emergency responders utilizing up to 20 of our low insertion loss switch arrays, and a new residential femto platform using our fully integrated receiver subsystem; with Ericsson, a TDD-LTE base station for our high-power transmit and receive switching module was incorporated; and wireless networking front-end modules for an ultrathin notebook platform with a leading OEM.

This high-performance module features 3x3 MIMO connectivity and incorporates a total of five Skyworks devices.

We think all of these wins clearly demonstrate our success in diversifying our business into highly profitable adjacent market segments.

Additionally, we continue to seek new avenues for expanding our high-performance analog business.

Last week, we closed our acquisition of Advanced Analogic Technologies, which provides us with an entree into an incremental $2 billion in TAM with power management ICs, with display, and backlighting solutions.

AATI further strengthens Skyworks' technology leadership position with complementary new product, process, and technologies, as well as a portfolio of nearly 300 patents and patent applications.

By combining AATI's leading-edge product portfolio with Skyworks' strong sales channel, this acquisition further expands our product offering within the mobile Internet, but it also brought broadens our market footprint into exciting new growth markets like e-books, like digital cameras, and cable modems, and LED lighting, where AATI already has significant momentum and design wins.

We are excited to have this acquisition complete, as it opens up several new market opportunities and is accretive to our 2012 earnings.

So, in closing, our first fiscal quarter marked another solid performance for Skyworks in which we added to an already strong design win pipeline.

We believe that our strategy of diversifying across baseband partners, across OEM customers and now new vertical markets while capturing new dollar content and continuously improving operational execution is clearly working.

With that, I'll now turn this over to Don for his financial review.

Thanks Dave.

Thanks again for joining us everyone.

We appreciate that.

I will first provide a summary of our first-quarter results and then outline our business outlook for the second quarter of fiscal 2012.

Revenue for the first fiscal quarter was $393.7 million, up more than 17% year-over-year.

Gross profit was $174.4 million, or 44.3% of revenue.

Operating expenses were $69.3 million; that includes R&D expense of $41.4 million and SG&A expense of $27.9 million yielding $105.2 million of operating income and a 26.7% operating margin.

Cash taxes were $8.9 million.

That translates into an 8.5% tax rate, which is in line with our prior guidance.

Net income was $96.2 million or $0.51 of diluted earnings per share, $0.01 better than our guidance.

Turning to our first-quarter balance sheet and cash flow statement, we generated $77.2 million in cash flow from operations.

We also invested $6.4 million in capital expenditures with depreciation of $17.3 million.

We expect our CapEx to remain below depreciation levels until the second half of fiscal 2012 as we increase volumes.

We produced free cash flow of $70.8 million, which implies a 9% free cash flow yield based on our recent equity value and our calendar 2011 free cash flow.

We repurchased 750,000 shares of our common stock and $9 million of our convertible debt, and exited the quarter with $446.5 million in cash.

Following the close of the first quarter, we completed the acquisition of AATI for roughly $200 million in net cash.

It is worth pointing out that we elected to pursue an all-cash structure for this transaction in order to avoid issuing equity.

In addition, we repurchased the remaining of our 2007 convertible notes.

We are pleased to report that we are now completely debt-free.

Now, for our second-quarter 2012 business outlook, we are guiding second-quarter revenue to be approximately $360 million, including roughly a $14 million sub contribution from the acquisition of AATI.

Excluding AATI, our second-quarter guidance reflects slightly better-than-normal seasonality.

At this revenue level, we suggest modeling gross margin in the 43% to 43.5% range, which factors in the impact of the seasonally lower revenue base.

Looking ahead, we see gross margins improving in the third quarter as sequential revenue growth resumes and as we realize synergies associated with the AATI acquisition.

We expect second-quarter operating expense to be in the range of $74 million to $75 million, including AATI expenses for the period.

Below the line, we expect no contribution from interest income and other expenses.

We expect our cash tax rate for the remainder of fiscal 2012 to remain steady at around 8.5%.

As a result, we expect our non-GAAP diluted earnings per share to be $0.40 on a base of 189 million shares.

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

(Operator Instructions).

Alex Gauna, JMP Securities.

Thanks very much for taking my question.

Dave, I was wondering if you could touch on some of the puts and takes during the quarter, what allowed you to exceed your guidance.

I was also wondering about linearity.

If you could touch on here visibility into Q1.

I know you said it's little better than seasonal.

What are the puts and takes on that with regard to visibility on backlog, where we are in the uptick of LTE, and also maybe where we are in wireless infrastructure spend.

Thank you.

I would say it was reasonably linear this quarter.

It wasn't anything out of the ordinary in the December quarter.

December has a slightly different profile than others, as you can imagine, but nothing out of the ordinary.

I think some of the puts and takes -- our business with for example Samsung was very strong with the launch of new products.

Our HPA business in general was quite good.

Our home automation and mobile connectivity business performed very well.

Our standard catalog business went along strong; it was sequentially up for the quarter.

We saw some softness in pockets, pockets of 2G open-market China, which was offset by the introduction of 3G and some of the momentum we are now seeing with customers like Huawei and ZTE.

So I would say those were kind of the puts and takes.

Infrastructure was a little soft as well.

I think, in Q2, we expect kind of more of the same.

It's a seasonally low quarter.

I don't see anything out of the ordinary in terms of overall inventory.

I still see choppiness in the low end of the market in China.

I still see a lot of launches, new launches, we are participating in for 3G that are penetrating the same market, tremendous amount of design activity which I think bodes pretty well for the second half of the year.

There was a large analog peer of yours that reported recently some more encouraging trends in terms of business picking up.

Are you getting any glimmers of that that would make you encouraged on the kind of broader semiconductor cycle?

Sure Alex.

This is Liam.

Yes, we are seeing signs of improvement across the broader landscape in HPA.

The last -- the end of December seemed to get a little bit brighter and as we get into the March quarter now, we feel like we have an ability here to perform very well against the market.

Our mobile connectivity wireless LAN portfolio looks very good.

The antenna switch module business which is heavily weighted towards multiple modes and multiple bands across all our RF applications is going quite well.

Then we believe that infrastructure is going to start to pick back up.

That had been soft, as Dave mentioned, in December, so we do see some encouragement there across the broader market.

Parag Agarwal, UBS.

Hi guys.

Thanks for taking my question.

Dave, I just wanted to get a feel for your design win pipeline.

So if you look at your pipeline right now, and compare it to, say, six months back, do you see your design win momentum increasing?

Do you think you can grow faster than the market in calendar 2012?

I do see it increasing because there have been a great deal -- there's been a great deal of emphasis on incorporating bands of LTE, creating more world-based ubiquitous products, more tablet design activity where the complexity is very high.

So I think that the basic trend of increasing content and all that implies from a design win standpoint is very much alive and well.

It had been playing out now relative to six months ago, and I think that trend will continue, frankly.

I think you'll see that throughout 2012/2013.

Okay.

Secondly, you hinted at your design win activity at LTE.

How would you handicap your share in LTE versus your competitors?

And what -- do you think that you would be able to gain sockets in some of the upcoming marquee LTE [play] phones?

Yes, our Sky Hy LTE is now demonstrating and in real-world environments is showing really -- our customers are quite impressed with the power added efficiency and the low current consumption.

We are seeing PAEs north of 50% for this product line.

They are quite rugged.

We have been sampling them for some time.

They are in production.

We've been picking up reference design sockets.

I would say we probably are in the 40% overall marketshare range in terms of the total business.

I think LTE is going to be a similar platform for us.

I expect very high growth, and an awful lot of design momentum right now as carriers are demanding this, even in networks that don't have that, they're not enabled with LTE, they want these products to have LTE.

We are also seeing a, in parallel, if you talk about infrastructure, the real driver right now infrastructure is to put out that ecosystem and develop the carrier model to support high-frequency LTE.

So you're starting to see it build out with Ericsson, Nokia Siemens, Huawei, names like that.

So that's a little bit more back half of 2012, but that infrastructure is also rolling.

I think as 2012 rolls out, we get into late 2012, 2013, I think we will be by far the number one producer of LTE.

I think we will lead that space.

Thank you very much guys.

Nathan Johnsen, Pacific Crest Securities.

Thanks for taking my questions.

On the LTE side, I'm wondering if you could talk a little bit about in you guys' expectations for the year, how many or what percentage of smartphones do you expect to be LTE enabled?

Then when you look at how many LTE bands kind of the typical LTE smartphone would support, I was wondering if you could give an idea whether they will typically be dual-band LTE or if there's other variations that you see kind of dominating.

Then secondly, just in terms of looking at the competition, clearly you've got a couple of competitors that are in an underutilized situation.

Just wondering what your strategy is for keeping ASP pressure from bleeding into the mix in the mid part of the year.

Thanks.

Sure.

With respect to LTE timing, you are starting to see the initial launches across some of our OEMs.

We think that the real excitement around LTE in the consumers' hands will occur later in 2012.

You'll see it in smartphones, potentially even in tablets, which would be an ideal platform.

So that's one part here.

The second question that you had related to content.

We are absolutely amazed with the number of frequencies and the RF addressable content that we see in a typical LTE device.

You'll often have two or three bands of LTE, maybe four bans of LTE, backward compatibility to WCDMA where there could be another three or four bands and then even an edge device.

So when we speak of content of $8 to $10, it's absolutely true.

It's power amplifiers.

We bring in our ASM.

We could also add wireless connectivity through 5 gig and 2.4 gig modules.

But we are looking at $8 to $10 in content in these devices.

Nathan, as far -- this is Don on the pricing issue.

There's been a lot of talk, you're right, from competitors in this space.

Actually, we are not seeing anything unusual in the marketplace regarding pricing.

Our current erosion and projected erosion is well within historical ranges.

The ASP erosion is a market dynamic we are well accustomed to dealing with.

What's important is, now more than ever, this isn't a commodity business where pricing alone wins share.

Customers are making decisions based on your product performance, technical capabilities and breadth.

In the baseband partnerships you have scale and supplier reliability.

Aggressive pricing really only works in the open market -- open China market with 2G.

As the low cost producer in this space, we are in a much stronger position to manage this dynamic and our financials consistently reflect that.

So it's really that it's our ability to manage through that and our ability to have the products in place and take advantage of the requirements that the customers need.

It's just we don't see any different dynamic than we've been used to dealing with over the last several years.

Furthermore, to add what Don said, under-utilization in this space is not a function of bad pricing decisions.

It's a product issue.

So if you -- there's plenty of market demand to fill capacity.

We've been incrementally adding it.

So, I think, if you look at where there are pockets of excess capacity, it's a product issue.

It's not a pricing problem.

Ittai Kidron, Oppenheimer.

Hi guys.

Good numbers.

I had a few questions.

Can you talk about your revenue concentration in your cellular business now that, outside of Samsung and Apple, it seems like every other vendor is stumbling?

Sony Ericsson, bad numbers; Motorola, bad numbers; HTC, bad numbers.

Can you tell us what -- how many 10% customers, how many 20% customers you have in your cellular business and how do you expect that to change going forward?

This is Don.

The 10%, which is the number that we talk about on a quarterly basis, it was Foxconn, Samsung and Nokia, consistent with what it's been over the last multiple quarters.

So that did not change in the quarter.

Have any of them been above 20%, at least without calling who?

No.

No.

With regards to your guidance, so $40 million is coming from AATI.

A, can you give us a little bit more color why such a low number?

This is a company that typically does in the mid $20s million, and since the deal closed in January (inaudible) you are just being overly conservative here, just feel that number should be higher.

And also on the gross margin, AATI gross margins in the upper 40s%, why should we see a decline in gross margin in your second quarter?

Why should we actually see flat if not up?

The AATI in the December quarter was around $15 million and change -- was around $16 million --

$16 million, yes.

Our $14 million -- remember there was a stop period here, so our $14 million is only part of the quarter.

If you really go back it's been quite some time since they were in the mid $20s million.

They been running at sub $20 million.

I think, if you look at the analog peers in the power management space, they've seen some pretty significant downturns and AATI has not been immune to that.

So I think our guidance is pretty consistent with how they have been running since the market for these products sort of corrected a little bit.

The other thing we are doing is we are looking very, very hard at the product portfolio and making sure that we launch this business where we have the most competitive advantages.

So we are doing some product line pruning and expect AATI to be emerging much stronger as we go through that process which began when we closed last week.

Vivek Arya, Bank of America Merrill Lynch.

Thanks for taking my question.

My question is I think, on the pricing issue, you addressed the competitive pressures before.

But I'm curious.

What role is technology integration playing in pricing where multiple bands are being integrated?

You have these multi-mode amplifiers, you have the converge amplifiers.

So what role is that integration playing in the pricing dynamic?

That's a great question.

So the way we look at it is that our customers today are, as you can imagine, really struggling with all the shielding and interference and filtering problems created by so many bands.

Really it's quite unprecedented to see this level of complexity, given the current consumption requirements, the battery voltage issues, size, real physical size.

So what our customers are jumping to as quickly as we can provide it, as the industry can provide it, is some way to preserve performance as measured by battery talk time, among others, while at the same time just enabling the number of bands.

So we see a steady march where each successive generation for the most part in general has higher dollar content.

That doesn't mean higher content per band.

So the way to play this is we are able to integrate where we have some relatively modest incremental cost as we add more functionality, but our customer gets the value of not having to replicate the cost for each discrete band.

So we get more dollar content.

They get a more affordable BOM.

They get a more integrated device which takes up less size and most importantly consumes no more current or less current hopefully.

So the game is very much think of the microprocessor business.

We are adding functionality which is keeping us ahead of the overall ASP curve while adding value, enabling them to have more complexity that they can afford, that the market can afford.

Now, the fact is, as we said in the prepared comments, the ability to do that is limited to a very small handful of suppliers, which is very, very good for us, stable for pricing.

As Liam mentioned, we are adding a great deal more content.

We really love the fact that now when we go to an engagement, it's not just a multi-mode PA with discrete bands of LTE bolted on.

It's an antenna switch module.

It's a 5 gig PA module incorporating backward compatibility to [2/4] on WiFi.

It's a GPS product.

This isn't a dream of ours.

We are doing that right now.

You're going to see products today that you can buy on the shelf that have all that content of Skyworks.

Unheard of a year ago.

Very helpful.

One follow-up, one of your competitors, Avago, has very as I say very differentiated FBAR and BAW filter technology that they have been able to leverage, and they have had a very good relationship with QUALCOMM and on CDMA in the past.

Just so conceptually, does a lack of an FBAR filter hurt you from a long-term perspective?

I know that you're looking at partnerships, but how do you look at that competitive threat long-term?

We've talked about this before, and it's playing out pretty quickly.

First of all, FBAR technology is a great technology.

The problem is that these filters are becoming increasingly multi-band and low, medium, and high band.

So SAW filter from a price-performance is absolutely a requirement.

So what we're finding is FBAR is great for certain high-frequency applications, but more and more on our customers' roadmap and our roadmap is a combination of these bands that are making a single technology not sufficient.

So what we have been doing is we have been partnering with companies who view us as -- remember, we are the best in the PA space.

We are the biggest in the PA space.

We also think we're the best.

We're the biggest by far.

And so the filter providers in the world view us as a wonderful partner to them and an entree to the market.

So we are not -- these aren't on our roadmap.

We are in high-volume production and we are winning PAD sockets of singleband, multiband, and they are low, medium, and high frequency.

So while we think FBAR is a great technology, so is SAW.

It has a different, different performance characteristic.

We intend to play across the entire suite and you'll increasingly see that as you crack open smartphones in 2012.

Todd Koffman, Raymond James.

Yes, can I just ask a follow-on to the comments you made on AATI?

I think you said they did around $15 million in December, $14 million for March.

They were doing comfortably north of $20 million for many, many quarters.

Is there something about their business that you've changed or you've gotten out of, or is permanently impaired, or do you expect to get their business back to what they were doing in a quarter or two?

First of all, December -- and Don could -- December was $15.7 million --

Yes.

-- or just under $16 million.

This quarter is $14 million for part of the quarter.

We didn't own it for the whole quarter.

What was the September quarter, Don?

Do you recall?

About $20 million.

About $20 million.

So they really have been at $20 million or sub $20 million for now going on nine months.

As I mentioned earlier, we think that's a function of the power management space in which they compete.

You've seen other -- you've seen their competitors do pretty much the same thing.

But we are also tuning up that product line very much like we did with SiGe.

We really expect to be able to put them on the right trajectory because we are adding our scale, our cost structure, and our ability to bundle and integrate.

We feel very, very good about that acquisition.

But it's not correct that they have been in the mid $20s million.

They've been $20 million to sub $20 million.

I thought the September quarter was $22 million and the June quarter was $24 million, but maybe I have my numbers wrong.

Just an unrelated question, if you look at the margins of your business in the last, I don't know, three, or four, five quarters, the gross margins, operating margins, they have now flattened out at a very attractive level, but you're continuing to put up fairly very healthy growth rates.

I was wondering, as we go forward, you signaled that you thought that gross margins might lean higher through the year.

Are we now at a point where the margins are likely capped and the business can grow with the topline, or that's not the case?

This is Don.

That's absolutely not the case.

We are going to be -- our expectation is to continue to deliver the margin expansion.

It will be in step with revenue growth.

It is volume and revenue dependent, but we've got the opportunities to drive the expansion clearly defined and they include the increasing dollar content as the migration to more complex architectures continue.

We're going to leverage the hybrid manufacturing model with engineering focused on low-cost designs.

We are making targeted productivity improvement, CapEx investments, and we're going to grow the HPA business.

All those things are going to continue to move the margins forward.

I do want to point out.

If you look at incremental changes that we build a model off of, if you look at the margin change from the December to the March quarter that we guided, that's about a 50% drop which is what you expect.

Now, there is some short-term pressure that you've seen with the two acquisitions.

We've said they were a little bit -- SiGe was a little bit below corporate average.

We're moving that forward.

We said the target is by the end of this year that they are going to be at or above Skyworks' averages.

So when you've added some of this incremental revenue, it's just put a little bit of pressure on it, but there's really nothing inherently different in the model.

That's the take-away.

Blayne Curtis, Barclays Capital.

Good afternoon guys.

A couple of questions.

You mentioned the Galaxy node.

Obviously there's two parts in there, the MMPA you could address a little bit, and then the [TANF] switch modules.

On the MMPA or the converged market, clearly that's with Infineon.

I think QUALCOMM is clearly moving to this.

Just any perspective as to what percentage of the market is going to move these architectures?

Then kind of the competitive view I think everybody at this point has kind of some multi-mode PAs.

And then just any comments on your switch business, kind of any relative -- how big that is for you today and what you're pipeline is.

The switch business is small for us today because we only entered the ASM business in 2011.

That's where the action is.

I'd say we've had a lot of discrete switches -- our market discrete switches has been very high for us, multiband discrete switches.

We moved that portfolio over to a great deal of SOI incorporated, it's silicon on insulator, incorporated filter technology, and we've now been producing ASMs and we are getting really good traction for those products, very important on the receive side, insertion loss and how they impact current consumption.

Again, the challenge is multibands and we are quite good at that.

So in fact, some of these devices, ten-throw switches in them, unheard-of a couple of years ago.

I think multi-mode is continuing to have its play.

But remember, these are -- these MMB devices are really hybrids that will have bands of LTE bolted onto them, so picture this device and others could have -- like it could have an MMB, could have bands of discrete or PADs, an ASM.

This product has a GPS LNA, has a 2.4 and a 5 gig WiFi module.

So I think, in general, converged is going to continue or multi-mode will continue, but it will be part of a hybrid front-end architecture because the performance requirements are so high.

Craig Ellis, Caris & Co.

Dale Pfau, Cantor Fitzgerald.

Good afternoon gentlemen.

Congratulations on a nice quarter.

Could you give us a rough breakdown of your HPA business compared to your wireless business?

Then my follow-up is, on operating margin, the SiGe and the AATI business, I know you said on SiGe you thought the margins would come up.

Could you talk about operating margins and where you think those are going to be relative to your overall business by the end of the year?

Yes, the breakout is 30% HPA this quarter and 70% handset smartphones, which is consistent with where it was last quarter.

The follow-up on the SiGe operating margins, we don't -- it's a business segment for us.

It's rolled into our mobile connectivity business, and it's clearly an important part of the business going forward, but it is in a business that we report separate margins on.

The only point I was making is we were cleared in the acquisition, and if you followed them and some of their filings, you saw that their product margins and operating margins were slightly below corporate average.

We've said we had a specific target in place, which we are well on track for, for those to be at or above Skyworks' averages by 2012.

How about on AATI, the same thing?

Yes, it's a similar story.

They have little higher product margins, but when you add in at their revenue level their operating expenses that they had, there was -- it's a little bit below the overall Skyworks return.

But again, the plan in place to drive margins forward, we've made some targeted OpEx reductions and all that combined we think, again, is within three quarters or so of the acquisition, we are going to be very close, if not at the Skyworks operating margins.

Aalok Shah, D.A.

Davidson.

Don, just a couple of quick housekeeping questions.

In terms of AATI, I think you guys said revenues in the September quarter were I think, what, 6 in the teens?

In the 10-Q that I just pulled up, it looks like it's $22 million.

Can you tell me what happened between September and December to see a 27% drop off in revenue?

I said, we're talking about the December quarter, they were $16 million.

Okay.

Yes.

September, I believe they were around $21 million?

Yes.

We said $20 million to $21 million.

So that's the number you are referring to.

No, the $16 million was -- what we were saying is there were $16 million in December, and at basically flat sequentially.

The difference between the $16 million and $14 million is the $2 million stub period before we owned them.

That's --

Okay.

Do you guys believe this is a trough level for them as well?

How -- because that's a pretty big drop off between September and December for them.

Yes, I mean, the September to December decline, a lot of that was market driven.

It was a pretty challenging quarter for the analog group in general if you looked at some of the power management players.

I think AATI endured the same headwind.

As we bring that portfolio into Skyworks, we certainly think we can expand the addressable customer set dramatically.

We have tremendous position across all the tier 1 OEMs.

We like the technology.

We think power management is a very core expertise and competency to have, and the IP there is significant.

So we absolutely believe we are going to be able to grow the business.

We've right-sized the OpEx.

We can leverage a great sales channel.

I think our operational team here at Skyworks is world-class.

They will be a part they will be a part of the story.

We'll be hopefully reporting more good news to you as we go forward.

Suji De Silva, ThinkEquity.

Nice job on the quarter.

What was the percent of 2G versus WWE this quarter?

It was 25% 2G and 75% edge WCDMA.

Then also, perhaps for Dave, it seems like you have a lot of products that go along with the power amplifiers, or the handset.

Do you get a benefit from a power amplifier being in the design with any other sockets, or are the wins relatively independent from each other?

No, it's absolutely a bundling benefit.

If I take a SiGe as an example, not only were we able to sort of tune up, if you will, the product portfolio, but by presenting it to those individuals sourcing and engineering within our customers where we have a long history, they went from sort of a small company where customers were worried about engaging in these high-volume sockets to one in which they had confidence.

So there is an immediate bundling and I think supply-chain reputation advantage that then becomes a product advantage in some cases.

So we were able to take our mobile connectivity business and theirs, our experience with SOI, their experience with SOI, our packaging experience, we were able to drive some pretty compelling multiband WiFi devices as an example.

I think, if you look at AATI, if you look at what they are doing in camera flash drivers for example in smartphones, they are doing it with LG and Samsung and HTC, we think we have an opportunity to take those to other customers where they were kind of boxed out based upon scale.

We also have, as you know, Suji, we have -- we come from a deep experience, systems level experience at Skyworks.

So our engineering teams, our applications folks, coupled with the sales guys, are able to really go in and architect optimal solutions.

We understand the current budget for our customers.

We know where we can apply some of that budget to 5 gig WiFi, some of it's multi-mode PA, and I think our ability to kind of work collaboratively with the customer has been really helpful.

I'll give you an example.

When we introduced a family of ASM products quite recently, one thing we were able to do was we were able to put the hands onto design benches and into platforms for them to test immediately across all our top customers.

They didn't all buy it, some did, but I think that's a tremendous advantage that these smaller companies lack.

Anthony Stoss, Craig-Hallum.

Hi guys.

Nice execution from me.

AATI had call it three customers in the wireless side.

Given your scale, Liam, how quickly do you think you could add significantly more customers?

Also, if you wouldn't mind talking about 2x2 and 3x3 MIMO, what kind of content jump that you expect to see in 2012 and how you think that plays out.

Sure.

With respect to AATI, one of the things you said is it exactly attracts us.

As you probably observed, they have really done well with a small set of customers, and they have done real well.

Their share has been high.

We think we can replicate that model across all of our tier 1 accounts.

We like -- in general, I think the market for LED drivers, backlighting, more screens in one's hand, from TDs to smartphones to tablets, there's a TAM opportunity across the board and their customer set has been very narrow.

Their camera flash technology we think is outstanding, yet it's only playing in a few accounts.

I think they lack the scale, they lack the sales channel to really penetrate some of the other big drivers out there from a customer perspective.

We think we can turn that around.

With respect to MIMO technology, if you look at what's happening in wireless LAN, that is an area where it's been explosive growth for us.

It's been a performance-driven market, as Dave articulated.

We see the same thing in cellular.

Basically, a 2x2 MIMO is two times the content of a 1x1.

It's linear.

A 3x3 is three times the content.

So you get multiple inputs, multiple outputs, multiple radios, and multiple bands.

We see that trend moving forward as video becomes more important to the user.

One last quick question.

Can you talk about reference design activity on the LTE side?

Thanks.

Sure.

We are engaged with all the significant players that would be porting LTE of course -- QUALCOMM, Infineon Mobile and others.

We have a great portfolio.

We have OEM relationships.

As Dave mentioned before, we have the R&D horsepower and the application savvy to make sure the best-in-class products are appropriately positioned with the leading baseband providers.

That ultimately will flow through to the OEMs.

Edward Snyder, Charter Equity Research.

Thank you very much.

Nice quarter guys.

A couple of questions.

You pointed to the proliferation of bands and modes in these phones getting to some very high teen rates for the largest ones.

I thing to just about every OEM is looking at deploying some form of MMPA in 2012, but the pricing for most of these devices seems to be less than sum of the parts.

I know for example the Avago part that went into Apple, which is the three die part, is less than sum of that part, and some of the pricing we are hearing from Samsung is a similar trend.

So the question is as we move to these converged and hybrid devices, won't we expect to see a significant increase in overall TAM compression?

If so, are you going to make that up through some of the other parts like the TAM switch module you spoke of and the SiGe acquisition and maybe some of the stuff out of AATI?

I will say that, on average, it's absolutely the case, on average, that as more bands are being added, the TAM is up.

So there are couple of examples, but that hasn't been the case.

But on average, overall, that's not the case.

It's more bands have been added as the transition from feature phones to smartphones, the TAM is up, and not up a little bit, up substantially.

There aren't that many smartphones today that aren't engaging in not only multi-modes, multiband for 3G but also 4G and all the content that implies it, bolts around it.

Yes, there's a PA.

You can integrate bands in the PA but you've got to figure out the filtering, the switching, the receive side.

It's very complicated and the ASM is higher.

So I think there will be more multi-mode.

We welcome multi-mode because we think that, by moving from a discrete implementation to more higher levels of integration, the competitive landscape gets much narrower, much narrower.

If we see that as we are now completing typically in our larger sockets with our customers, if we are competing with -- we are competing with one other company usually.

That company differs from standard to standard.

And we like that a lot; we like to see the nature of the competition getting a little bit more nichey as we become more broad.

Yes, let me add to that.

If you look at what's happening in China, we talk about the China market contracting and being a difficult space for pricing.

But while we see that $1 ASP market go down, we see more plays with Huawei and DT HTC now bringing on true smartphones that are $3, $4, $5 in content.

So in addition to the net unit to unit TAM increase that we see in a given smartphones portfolio, we are seeing the subscriber base gravitate towards smartphones at a much faster rate.

There is still a big upside there in emerging markets.

That was my follow-on question there because, Dave, I agree.

I mean we've seen a massive increase in content just on bands alone, much less additional modes.

But we only have maybe three models out there that are converged.

Now you've got Lenco, you've got the Galaxy parts out there.

Apple's got a part out there.

So you've only got maybe two or three models that are even using hybrids much less converged.

So I guess the question is as -- let's just pretend overnight that every handset OEM put half of their phones on the block for converged or MMPAs.

I guess what you're saying is that wouldn't be enough to offset the one to two bands going two to three bands in the massive phones that are still (multiple speakers)

Yes, that's right.

The upgrade cycle from feature phones to 3Gs and smartphones is always an increase in content that's rather significant.

Even among the company -- we talked about in our prepared comments what's going on at Samsung today in those product.

There's a lot more RF content in those products than the one they replace, a lot more.

We have the advantage of sitting here and designing products that are late 2012/2013 and I will tell you the average content is substantially higher.

Sanjay Devgan, Morgan Stanley.

Good job on the quarter.

Thanks for taking my call.

First question, just kind of dovetailing off of the question on MIMO and wireless LAN, you talked about the content uplift going 2x2 to 3x3.

I wanted to get your thoughts on 802.11ac.

I know it's kind of nascent, but we've heard some folks in the ecosystem talk about ac and potentially rolling out ac solutions to access points and I'm guessing eventually to handsets.

I was wondering how that plays into you guys in terms of a content adder

Then the second question is just on AATI.

Now that you've done the SiGe acquisition and you've done AATI, I was wondering how difficult -- obviously there's a revenue synergy opportunity in terms of leverage in the customer basis for each company.

But on an R&D basis, how difficult is it to leverage engineering resources across different process technologies, i.e.

gallium arsenide, CMOS, silicon germanium.

If you could talk about that and what kind of R&D synergies can we expect to get from that?

Let me start with wireless LAN.

You absolutely nailed it, a very key move for us in technology.

The 802.11ac space is really the next upgrade cycle in wireless LAN.

It would be what LTE is to cellular, 802.11ac is to WiFi.

We have an outstanding position in that category.

We are partnered up very closely with Broadcom, one of the leaders in the chipset space.

This technology is really made perfectly for video distribution and video communication -- higher data rates, higher performance.

We think it's going to be a great new category, an extension of WiFi.

It will raise the TAM.

It will raise the performance requirements, be deployed in access points.

I think, on the receive side, you are going to see this technology in tablet and TDs.

Feel real good about it, and you'll see more releases from Skyworks this year.

With respect to AATI and R&D, one of the advantages that we have at Skyworks is that we are a technology leader.

We are also a manufacturer.

We have fabs in house, we have partners outside, and we have a team here that is well equipped to manage the most complex engineering tasks.

So as we bring this company in and we make some changes to OpEx and work on portfolio management, there will be a lot of leverage from the talent pool within Skyworks today to lean into this technology to support ongoing R&D efforts.

So you're going to actually see an increase in the ability to deliver complex products as this company comes inside.

Ittai Kidron.

Thanks.

Don, I wanted to ask about your CapEx comments.

I think you mentioned, if I got that right, that in the second half of the year, your CapEx is going to start rising above your depreciation.

Can you give us a little bit more color on that, and for how long should we assume CapEx would be above depreciation and by how much?

Just to frame that, with what we spent in Q1 and where we are projecting Q2, we are going to be in roughly $20 million, maybe a little over $20 million in CapEx.

Q2 is the trough, and as the market continues to rebound and we think we continue to gain share and strengthen our position, that's going to mean some incremental CapEx investment, but it's not a significant amount above those levels.

Okay.

As far as your OpEx is concerned, clearly your OpEx now includes AATI, but under the assumption that you are working quite aggressively right now to reduce that headcount, should we expect OpEx to be flat for the next two or three quarters, down potentially for the next two or three quarters?

No, and the forecast does include the AATI operating expenses.

It will move forward with post-synergies after the acquisition.

But there will be -- we are adding some targeted headcount for opportunities in the second half, and there are some other expense drivers where you really take the Q2 forecast, you need to model some increase into that for the second half of the year.

But it won't be material but you do need to add some increases to that.

Ladies and gentlemen, that does conclude today's question-and-answer session.

I'll turn the call back over to Mr.

Aldrich for any closing comments.

Thank you very much for participating.

We look forward to seeing you all at upcoming conferences.

Ladies and gentlemen, that does conclude today's conference call.

We thank you for your participation.