思佳訊 (SWKS) 2012 Q3 法說會逐字稿

Good afternoon, and welcome to Skyworks Solutions' third quarter fiscal year 2012 earnings call.

This call is being recorded.

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

Mr. Ferranti, please go ahead.

Thanks, Kathy.

Good afternoon, everyone, and welcome to Skyworks' third 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 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, in the Investor Relations section of our Company website for a complete reconciliation to GAAP.

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

Thanks, Steve, and welcome, everyone.

Well, I am pleased to report that Skyworks posted another strong performance during our third fiscal quarter, in which we again exceeded prior guidance, and we outpaced our addressable markets.

Our diversification into new adjacent analog products and in complementary vertical markets, along with an intense focus on operational excellence, have enabled us to produce consistently strong operating results through a variety of market conditions.

And from where we stand today, we are well-positioned to extend our track record of our performance.

Turning to the third-quarter results, we posted revenue of $389 million, better than our prior guidance of $383 million.

We produced third quarter operating income of $91.8 million, and we earned $0.45 in diluted earnings per share.

This is a $0.01 better than our original guidance.

Globally, consumer appetite for smart phones for tablets, data cards, and an array of other mobile internet devices remains high, driven by the boom in social networking, and driven by an accelerating shift towards cloud-based content, by mobile computing displacing traditional PCs, and the growing popularity of photo-sharing applications like Flickr, Instagram, and Picasso, and the explosion of video conferencing and streaming video.

These global themes are in the early stage of adoption, and should provide a tailwind for our business for years to come.

So while the long-term trend for us are clear, there is no denying that more recently, the macroeconomic climate and other factors have skewed normal demand patterns within the industry.

Skyworks' ability to maintain consistently strong growth and operating results in spite of this, is the result of key -- three key three factors -- or three key factors.

First, new vertical market opportunities.

The opportunity for Skyworks is quickly expanding.

It is well-known that broadband connectivity is proliferating across a growing way -- a growing array of previously unconnected consumer electronics.

What's more, the need for high performance analog solutions is expanding into brand-new markets like medical, automotive, military and industrial.

Second, the rising RF content per device.

This is driven by a dramatic increase in the number of LTE-enabled devices, and a majority -- and a major smart phone upgrade cycle just beginning in the emerging markets.

Average RF dollar content per device continues to move higher.

This creates a rising tide for the foreseeable future, and translates into TAM growth rates significantly above unit growth.

This is playing out realtime today, across major development platforms on which we are engaged.

And third, expanding our product portfolio between -- beyond traditional served markets.

Through a combination of internal development and targeted acquisitions, we have added an incremental $2.00 to $3.00 of addressable content per device to our core RF TAM.

Today we are seeing tremendous traction, by cross-selling these new products throughout our existing customer base.

It is worth noting that none of these products were in our portfolio just 18 months ago.

So in short, we have strategically positioned the Company to outperform our addressable market, independent of underlying market conditions, and we remain quite optimistic about the second half of 2012 and beyond.

Looking ahead, we see our target markets continuing to expand for many years to come.

And for example, industry analysts project that over the next five years, mobile broadband users will grow at a 38% compound rate.

In fact, tablet shipments alone, could reach more than 350 million units within the next three years, according to recent reports by Morgan Stanley.

And wireless connectivity is becoming the critical link -- critical link to enable access to a growing library of cloud-based content, including music, online medium publications, on-demand video, personal photos, home movies and enterprise data.

And the recent introduction of the family -- of family data plans from major network operators will allow an increasing number of devices per household to enable shared access to cloud content, on a anytime, anywhere basis.

However, one of the greatest challenges facing mobile device OEMs within this landscape is managing escalating RF complexity.

This is resulting from the proliferation of air interface technologies including 2G, 3G, and 4G cellular, dual band wireless, local area networking, Bluetooth, GPS and airfield communications.

The number of cellular bands alone is increasing exponentially.

In fact, we see upcoming smart phone platforms that will support more than 14 different bands, each requiring distinct amplification, filtering, switching and shielding.

All of this is happening in smaller form factors, with increased battery life requirements, while trying to manage BOM costs.

This increasing complexity plays directly into Skyworks' core strengths, and uniquely positions us to address these challenges.

Today, we are providing the broadest portfolio of RF and analog solutions, right from the transceiver to the antenna.

We are offering an unmatched technology portfolio, that includes deep expertise in SOI, high-power, CMOS, HBT, pHEMT, BIFID, and silicon germanium, along with a library of nearly 1,000 patents and supporting intellectual property.

We maintain unrivaled scale and world-class facilities for integrating multiple technologies into highly sophisticated multiple chip -- multi-chip modules.

And finally, we are leveraging a deep heritage in system-level design, and a global force of system and applications engineers, often deployed within steps of our customers facilities.

These competitive advantages took years to put in place, and facilitate the highest level of integration and better system performance, ultimately providing more value to our customers.

A prime example of how we leveraged these competent -- these core competencies to extend our technology leadership is the recent introduction of our SkyOne platform.

SkyOne is a revolutionary patented front-end system that incorporates all of the RF and analog content between the transceiver and the antenna into a single ultra compact device.

This is a complete system in a package, incorporating multi-band amplifiers, supporting global 2G, 3G, and 4G coverage, along with all associated filtering, duplexers, switching and control functionality in less than half of the footprint, of even the most advanced approaches in the industry today.

The end result is significant board space savings, ease of implementation, high performance and time-to-market advantages for our customers.

In these types of applications, we see a much narrower competitive landscape.

Looking ahead, we expect to extend our technology lead, as we introduce solutions incorporating sophisticated RF signal processing, more complex switching, and even higher levels of integration.

Okay.

So turning now to specific third quarter product highlights, across our mobile customer base, we have seen tremendous traction in cross-selling our portfolio of new analog product lines, alongside our traditional RF front-end components.

In some recently launched models, Skyworks has secured a total of seven or more devices, including multi-mode power amplifier, antenna switch modules, camera flash, DC to DC converters high-efficiency LTE amplifiers, back lighting ICs, GPS low-noise amplifiers, and wireless land front-end modules.

And this level of content was unheard of for us, just a couple of years ago.

Outside of mobile devices, we are have also captured new design wins across a number of diverse applications, within our high performance analog products group.

These include wireless LAN sockets on a recently introduced ultra-thin high-end notebook PC, which includes a total of nine Skyworks parts.

This includes a receiver protection module within a heart monitor application with Medtronic, a high sensitivity mixers for an automotive toll tail -- a toll tag application, and a major set-top box win containing multiple Skyworks components, including a switch matrix and low noise amplifier modules.

And finally, the first 802.11ac router products, and now commercially available, containing up to six Skyworks devices per router.

In total, we've already secured over 20 design wins, across a variety of 802.11ac enabled devices, including routers, set-top boxes, notebook PCs and USB dongles.

So in closing, our third quarter marked another strong performance for Skyworks.

We believe that our strategy of continuing to diversify our business, expanding into new verticals, and maintaining a laser focus on operational execution is clearly working.

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

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

We appreciate that.

Well, first I will provide a summary of our third quarter results, and then outline our business outlook for the fourth quarter of fiscal 2012.

Revenue for the third fiscal quarter was $389 million, which was up 7% sequentially, and more than 9% year-over-year.

Gross profit was $168.1 million or 43.2% of revenue.

Operating expenses were $76.3 million, consisting of R&D expense of $48.6 million and SG&A expense of $27.7 million, yielding $91.7 million of operating income, and a 23.6% operating margin.

Cash taxes were $5.7 million, and that translates into a 6.2% tax rate.

Net income was $86.1 million or $0.45 of diluted earnings per share, and that is a $0.01 better than our guidance.

Turning to our third quarter balance sheet and cash flow statement, we generated $44 million in cash flow from operations.

And that brings us year-to-date to a total of $244 million.

We exited the quarter with $327.9 million in cash, and we invested $31 million in capital expenditures during the third quarter, with depreciation of $17 million.

The elevated levels of capital expenditures are the result of our continuing capacity expansion, across all of our facilities to support second half product ramps.

And as a reminder, these investments consist of equipment adds in our existing facilities.

They have a very quick payback, and they enhance our return on invested capital.

Now for our fourth quarter 2012 business outlook.

We are guiding the fourth quarter revenue to be $415 million to $420 million.

At this revenue level, we expect gross margin to be in the range of 43% to 43.5%.

Looking ahead, we see gross margins continuing to improve as we realize synergies associated with our recent acquisitions, and as we capture the margin benefits of some of our recent capital investments.

We expect the fourth quarter operating expense to be approximately $77 million.

And below the line, we expect $100,000 in expenses from interest income and other expenses, and a cash tax rate of around 6.5%.

And as a result, we expect EPS of $0.50 to $0.51, using a base of 193.5 million shares.

That concludes our prepared remarks.

So operator, go ahead, and open the lines for questions.

(Operator Instructions).

Our first question will come from Craig Ellis with Caris & Company.

Please go ahead.

Thank you for taking the question, and nice job against an uncertain backdrop.

First, as a clarification, looking at the quarter's performance you were $6 million above your guidance.

Don, can you tell us how that broke out between, either strength on the cellular part of the business, or linear products business?

Or was it strength in both that lifted results?

It was really strength in both.

We didn't see -- we didn't see significant shift in the percentage revenue split between the two.

So that increase was really split fairly evenly, as we would normally see between those two segments.

Okay.

So you're still at 65/35 for your -- ?

Correct.

Okay.

And then the question, I think on the last call, one of the things you indicated is you expected an above seasonal revenue profile in the back half of the year.

Is that still the expectation, and can you just remind us what calendar fourth quarter seasonality would be for you?

Hi, Craig.

This is Dave.

Well, we think there will be traditional seasonal strength.

However, in our space, we're starting to see more and more -- rather than a simple Q4 growth or strength, that being split between the September and the December quarters, as we ship into those builds.

It is a bit too early to tell what March seasonality might look like, a normal seasonality.

We have no reason to believe that it will be terribly different.

But we are feeling good about, again, about the second-half ramps.

Thank you.

Our next question will come from Vivek Arya with BofA Merrill Lunch.

Please go ahead.

Thanks for taking my question.

Dave, you mentioned the word diversification many times.

I was wondering if you could talk about diversification on two sides.

Side one, how are you diversifying your customer base outside of the Apples and Samsungs of the world?

And then secondly, diversification in terms of sockets.

Like is it a way to get -- to size, what your addressable content was last year, versus what it is now?

Okay, thanks.

Good questions, Vivek.

As first, with respect to sockets, one of the things you have probably seen some recent teardown reports.

I think that is the probably the best testament to what we been able to accomplish.

We, you may think of us as a traditional kind of PA supplier, a PA switch supplier.

But in the more recent designs, we have been getting increasingly attach rate, high attach rates with our GPS LNA products, with our antenna switch modules, with some power management devices, camera flash devices and wireless, our wireless LAN portfolio.

And so we are seeing as much as more than $2 of incremental content per smartphone and tablet, and we're pretty excited about that.

So, we are leveraging, not only recent acquisitions, but some organic development to continue to look to bolt-on to what has been our traditional product offering, more and more content.

It helps our customers, and of course, it's terrific for us.

We are also diversifying into new adjacent markets.

And I think we've talked about that fairly extensively.

But medical, for example, talk about medical devices being designed in, on the call.

We are in infrastructure.

We are in various home automation markets that are extremely exciting and growing.

And I think from a customer standpoint, I -- there isn't a customer in the cellular smartphone space, that isn't a customer of Skyworks.

So we are designed into every base band supplier's offering, as a reference design partner.

And we are also designed into virtually every OEM.

Got it.

And one follow-up on operating expenses and operating margins.

What is the progress in integrating your acquisitions?

When can we expect to see operating margins get back to your traditional levels of 26%, 27%?

Sure, this is Liam.

With respect to the acquisitions, we're making great progress through the integration, synergies, and improvements in margin and also customer traction.

So we're doing the right things there, as outlined in the past.

And I think we'll see continued performance going forward.

And Vivek, to follow-up on how that as specs the overall Skyworks model.

The new product lines are on track, they are still scaling up though.

So it has had a little bit of muting impact on the operating model and the returns.

But as you could see, in Op margins in Q3 was 23.6%.

The guidance implies 25%.

So were still very focused on the 30% target.

And as we continue to gain share and grow the top line, we're going to be our way towards that number again.

So some of it is the impact of getting the acquisitions up to scale.

And that is the topline growth.

We will go next to Alex Gauna with JMP Securities.

Please go ahead.

Thanks very much for taking my question, and congratulations on the strong result.

I was wondering -- ?

Thank you.

If you could you give -- thank you.

Could you give us an idea of how far we are in your opinion into the LTE upgrade cycle right now?

And if you could maybe give us an idea of how you feel positioned in LTE for the second half, and maybe what percentage of it is contributing to the mix?

Sure, Alex.

This is Liam.

Well, I think overall in the industry, we are very early innings, with respect to LTE.

We have a very powerful LTE platform, a number of different devices, including multi-mode devices that address the LTE standard.

We do see, however, the design win traction going forward, and our ability to gain share in LTE to be very bullish.

And if you look at the platforms that we have addressed over the past six months, and platforms that we are going to be addressing now, we are very confident that LTE is going to play a major role in 2013 for us.

And as a follow-up, I was wondering, and you might not have all the details because their call is going on concurrently, but Qualcomm guided you as down fairly significantly, sequentially for this September quarter.

How was your exposure there, and how does that fit in with your guidance for the September guidance -- the September quarter?

Thank you.

Sure, Alex.

Well, our attach rate with Qualcomm is quite high, and we see the same or similar dynamics obviously, that they would in those segments of the market.

If you look at our guidance, what is really driving it are very specific programs that are ramping into production, as well as some of these new devices that are continuing to ramp up.

They are relatively early in that ramp.

So, there really may -- there is some very specific Skyworks reasons why we may be bucking some of the normal market trends as we go into the second half.

We will go next to Parag Agarwal with UBS.

Go ahead, please.

Hi, this is Stephen Chin, calling on behalf of Parag.

I just want to drill down on that previous question regarding some of the exposure that you have in platforms, where Qualcomm is as well.

Can you discuss, in terms of your component content increase that you may be seeing?

Any kind of rough numbers you can speak to, in terms of rough percentage of design wins that you have out there where you are seeing content grow?

Or is it a mix shift to higher LTE content perhaps, that is helping to see your revenues grow in a -- grow sequentially as opposed to some of the headwinds that Qualcomm has seen?

Well, I think it is difficult to be -- it is hard for me right now to be terribly precise.

I will say that the -- if you look at those teardown reports, we are seeing -- for example, the Samsung Galaxy teardown report that recently came out.

[They had between] -- six parts of Skyworks, seven parts, so a pretty broad suite of Skyworks products.

So what was -- the dynamic goes like this.

Smartphones continue to displace 2G devices.

So we see that, little bit of wind at our back, as we always get more dollar content for the traditional products in smartphones and tablets, than we did in 2G.

Our attach rate continues to improve starting with our top customers, where we start to put more of those new products bolted around the existing products.

That is growing.

And then we have been gaining quite a bit of leverage and traction, from things like home automation where we are putting our wi-fi devices in gaming consoles.

Or we are putting them in various applications and appliances around the home.

So that is an example where those markets really were nascent a couple of years ago.

They continue to grow, and I think they are really beginning to explode, in the early innings, frankly.

Right.

If you look at the smartphone as Dave articulated, you've got the core RF TAM increasing by virtue of multiple bands.

But now to be more explicit, we have wireless LAN devices both 2, 4, and 5 gig.

We have power management, backlighting, DC to DC converters.

We have a ton of switch modules, we have GPS.

The last set of products I mentioned, were really not in place for us over the last two years.

They are new products.

Some of those were organic, some came by virtue of deals.

But they are absolute drivers now, going forward.

Great, thanks for the color.

And then the follow-up question is on some of the new products that you highlighted in the prepared remarks.

Products such as the antenna switch modules, the GPS, LNA, and also the SkyOne products.

Can you give us a little color on the design time for those new products?

Like is it comparable to your existing RF components, or is it longer or shorter feed time?

And what is sort of the revenue ramp that you expect from the different product lines later this year or going into 2013?

Thanks.

Thank you.

The SkyOne product is new.

It's been in development for a couple of years, but the product has sampled.

The feedback has been good, and we expect lead customer production sometime later this year.

So there is no revenue contribution right now from the SkyOne products.

But I would tell you there's a lot of development activity.

And this is truly is an unprecedented level of integration.

I don't know if you really listened to the comments, where we described it or looked at the press release.

It has all the analog and RF functionality between the chipset, the radio, the RF, the antenna and back, filters, amplifiers, switches, all the shielding.

So I think this is a product that, for those customers who really want to have a world phone, but looking for ease of integration, size.

It has great current consumption.

We think that's going to be a real winner for us, but it's brand new.

Right.

With respect to GPS, and the ASM products, I mean the GPS location-based systems and services you see now, in every smartphone, every tablet, even in netbooks and notebooks.

So we developed a cutting-edge product internally, organically, that we believe meets all the needs of leading Tier 1s.

We are fortunate to have a suite of new design wins, and that's looking very good.

And again, it's new business for us.

The antenna switch module really is built off of our core strength in RF switch.

We have great in-house technology in pHEMT.

We have SOI capability.

And then also some filtering capabilities in packages, to bring that to bear to the market.

So both of those products are a combination of organic work, and then understanding what our customers need.

We have a question from Ittai Kidron with Oppenheimer.

Please go ahead.

Hi.

Congrats on a great quarter.

Thank you.

Thanks.

Dave, can you talk about your underlying assumption for market growth in September?

It looks like 7% sequential growth into September is well below your historical averages.

I'm just trying to understand how bad of a scenario are you are modeling from a market standpoint?

Well, I -- there are a couple of things that are going on right now.

We do see seasonal strength, we do see customers gearing up for that year-end push with products, and again in the August, September, October time frame.

I do believe that there has been a bit of a mix shift away from the smartphone sales, because there are different phone launches that kind of impact that, and create some choppiness to the market.

So I would say in general, the September quarter has been a bit muted.

We expect December to be strong.

But I would say that, that is probably the biggest impact is simply some, looking at the big -- looking at program launches, and how that changes the dynamic a bit.

And it makes it hard to handicap normal seasonality.

Okay.

And, Dave, Don, I'm sorry, maybe you could talk about the customer concentration?

I know you don't give the exact specific percentages of your largest 10% customers.

But can you tell us in aggregate your top three customers that account for what percent of your revenue this quarter, and what was it last?

No, Ittai, what we will give you the top 10 10% customers this quarter.

It was Foxconn and Samsung.

Nokia dropped out of the top 10%, but they are still high single digits.

But we don't disclose anything besides that number on a quarterly basis.

So we don't aggregate that, give you a specific number.

We will go next to Mike Walkley with Canaccord Genuity.

Yes.

Thank you very much for taking my questions.

This is actually Matt Ramsay on for Mike.

Congrats on a good quarter, in what people is said is a very turbulent handset environment, especially given the results and guidance Qualcomm just put up.

A couple questions for me.

I guess the first one is, have you disclosed or will you -- the 2G to 3G to 4G mix of your wireless business in the quarter?

Sure, Matt.

It was roughly the same as it was last quarter, 20% 2G, and 80% Edge and WCDMA.

Okay.

Great, that is helpful.

And I guess as a follow-up, no one really brought it up yet, Don, but I wanted to dig into this $5.4 million credit that you have got on the pro forma SG&A line around contingent liabilities for acquisitions.

Maybe you could dig into a little bit more what that was around?

And I guess maybe discuss what your pro forma numbers and results would have looked like absent that, and discuss where it would have been relative to your guidance?

As far as the $5 million, that $5 million relates to some M&A activity where we consummated some deals with earnout potential for the people who own the Company that we purchased.

And that is just showing up what that liability is going to be for us, based on 12 month period after the acquisition.

So, that is all it is.

And as far as what the numbers would be, you just basically back that out of the numbers.

I mean, it is a one-time adjustment.

Okay, great.

It is related to the earnout related to M&A activity.

That is all it is.

Okay.

So does that -- ?

Just so you understand, you have to make an estimate up front, and you just shore it up at the end of the period.

That is all.

Okay, great.

I think I understand the mechanics of it.

But I mean, does it -- does it then imply that the numbers would have been a bit lighter on the earnings line, than where maybe where your guidance was or?

No.

Absolutely not.

Okay.

All right.

Just wanted to clear that up.

Thank you very much.

Okay.

Thank you.

And next we will go to Blayne Curtis with Barclays.

Go ahead, please.

Hi.

Congrats on the quarter.

Just maybe a little clarity on the guidance.

If you could talk about, I'm clearly doing better than the market.

Talk about what the drivers there are?

And then I think, Don, you mentioned that the linear and the RF business was roughly the same contributor in Q2.

Do you expect that to continue into September?

Yes, Blayne, I would say that the -- and thank you.

I would say that the primary driver are specific programs, where we are beginning to ramp production and ship into those sockets that are second half drivers for us.

So, that's it.

Plus some of the organic and acquired product lines where the attach rate to our traditional OEM customers is getting higher.

So as we are launching programs, we're launching them with more dollar content, not just LTE and traditional expansion of PA bands.

But also the analog functionality that bolts around it in the system.

So I would say that is probably the second largest driver.

And I don't expect, Don, maybe you can comment on this, but I don't expect the September to see any meaningful split, difference in the split between our high performance analog business and our mobile business.

No, that is exactly where the forecast.

We don't expect any major change in that percentage.

Thanks.

And then maybe just talk about the consolidation of some of these RF blocks.

You highlight SkyOne.

You are also shipping a lot more multi-band chips.

You highlighted the Galaxy S3.

Maybe address kind of where you see, particularly the SkyOne fitting in the market.

I mean, you say it will address all the bands.

Is this low end, or across all spectrums of phones?

And then would Tier 1s be using this?

Or -- and then maybe just talk about how that places you versus the competitors?

And then clearly, you are the only guys who has introduced something now, but how do you see the competitive field?

Well, that -- it's a big question.

I would say that whether or not this hits the high end of the market really depends, because when you -- the level of integration to be clear, is we are taking all of the bands of -- all the popular bands of worldwide transmit amplification.

We are integrating the amplifiers with the switches, using various process techniques.

We are adding the duplexers, as well as other filters.

So, it's fully shielded.

So it truly is the -- by far, by far the most highly integrated device in the world today.

Now whether or not -- now inherent in that level of integration, is a certain degree of inflexibility.

The device is very small, but it is highly integrated.

We've developed it as a platform strategy to allow us to reconfigure bands over time, and to be able to address OEM customers, as they look to either be perhaps more regionally-based, or add bands that others don't want to add.

So we have anticipated that.

And that will determine, in large part, whether or not it's broadly applicable among the Tier 1s.

There are different approaches, with each different base band partner, different approaches with the OEM which will determine how broadly applicable it is.

But there is a segment of the market, low end for sure.

But I think maybe even some high-end sockets, where this is going to be an opportunity for a customer to get into the market quickly, with a product that is fully shielded where they can drop in and run.

With respect to the competitive landscape, the problem for many of our competitors is that, either they lack the system expertise, because there's a lot of system integration thought that goes into how you architect a device like this.

So it is difficult for component players.

It is also difficult, if not impossible, if you are for exactly filter company, or a switch company, or a PA company to be able to deal with this level of integration.

So we think that kind of rules out, some of the point product folks.

And finally, the level of manufacturing and packaging integration is really unprecedented for this device.

Remember, we are vertically integrated in packaging.

That helps us, both in the design time-to-market and the cost side.

So the ability for us to make high margins on this product is really we think somewhat unique to Skyworks.

You wouldn't want to source all these components, and try to compete with us.

So we think the competitive landscape is quite narrow.

Now we have a question from Edward Snyder with Charter Equity Research.

Go ahead, please.

Thank you very much.

A couple of questions.

You are a little bit weaker seasonally than we would have expected, which would suggests maybe some more upside, or a shift towards the December period.

Dave, how do you see that content?

Would it again been more 35% linear?

Or do you expect given some of the new acquisitions and maybe some new slots in either tablets or smartphones to favor more of a linear product, and once the ramps start picking up?

Well, I think December -- my expectation is the December quarter will be a strong quarter for smartphones, a seasonally strong quarter for smartphones.

And within smartphones, we expect to not only see our traditional PA products, but some as you mentioned, of some of these other products.

So, they will be a lift to both our traditional PA business, as well as to some of these high performance analog products that are bolted around those PAs.

So, I still see that split, being reasonably constant.

Now it is quite -- it is possible you might see a slight shift towards the mobile devices, just given there is more seasonality there.

But I don't think it will move the dial much beyond that -- beyond that ratio.

Well, I mean, if we look at, there is both sides (inaudible) ATI.

And we, as separate from mobile products, and if we are to believe that you purchase them for reason.

And part of that would be the traction you can bring to bear with those companies in the smartphone world, one would almost expect to see kind of a shift -- I won't say a wave, but a higher mix of those products than you have seen in the past, given you acquired these guys, and this is the first holiday season that you are really running with them full bore.

That doesn't sound like that's going to be the case, though?

You will see a higher, certainly, a higher revenue for those products.

I don't know that it's necessarily a higher mix, you will see a higher revenue in the traditional products.

As Don mentioned that we are 65/35, not that long ago, we were 75/25.

And probably --

And 80/20 which --

Yes.

Not that long ago.

So I think that is a relatively new phenomena that we are --

So you are seeing some of that, Ed, in the percentages already.

I mean, that is the way to think about that.

Right, exactly.

And the other thing there is that we are really expanding the design win footprint with those products.

So I think you should expect, as we go through 2013 to see more evidence of success, with both the wire LAN portfolio and power management.

One of the things we do is certainly cross-sell inside of smartphones, but there are new markets we are entering by virtue of those products.

We're getting into cloud-based sharing.

We are getting into infrastructure spaces, where we can put in DC to DC converters.

And there's going to be some collaborative plays, where we use power management within our front-end modules, to try to create, to differentiate architecture.

So as we move forward, I think we will continue to hear growth in both sides.

But hopefully in some different applications.

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

Please go ahead.

My congrats as well.

Dave, can you -- are you comfortable with your production capabilities, or capacity both internally and externally later on this year and entering 2013?

And also let me hear your thoughts on AC, when you think it's really going to have a role to play in the handset marketplace?

Thank you.

Well, I am -- and thank you, Anthony, I am comfortable with the capacity.

And if you look at this quarter as an example, we spent I think, just over $30 million against depreciation of $17 million.

And that is all addressing the bottleneck that we may see for the second half ramp.

So, I do feel good about that.

We have made investments over the last three years, 2.5 years for sure, in the big-ticket items, like bringing up more HBT capacity, going from 4 to 6 inches and so on.

So there are no brick-and-mortar requirements.

So I feel quite good about, not only our internal capacity, but what we have been able to do with our supplier partners to keep that hybrid model, so we are able to offload some of that capacity, to take some of the volatility out of the seasonality or the volatility.

So, I feel good about the supply side.

Right and with respect to 11ac, I mean we are right now, building products supporting routers, and supporting kind of first leg on the infrastructure for the 802.11ac.

Following that today, the handset applications, the smartphones that we are looking at right now, a high percentage of those are looking at 11ac attach.

So starts with the routers, we are well-positioned there.

We have a great deal of content.

As you know, it's multiple in, multiple out.

You can have up to 8 streams in a router.

We typically see 4 to 5, tremendous content.

And then following that, we are starting to see leading OEMs now embed 11ac into their handsets.

Okay.

If I could sneak in one more quick question.

Is there -- can you just comment on the pricing environment, if there's any considerable changes from last quarter?

Thanks.

Anthony, this is Don.

Nothing from last quarter.

I mean, and just a reminder, we are, overall, our current erosion is within historical range.

The only place that you might see -- we are seeing some slight change in that's in the open 2G segment, that has maybe increased slightly from what we had experienced in prior years.

But that's -- continues to be the only segment where pricing, you have a chance to win business on price only.

And the majority of our customers are making those decisions based on performance, and with us having lowest cost structure in the industry that allows us to continue to deliver strong margins.

So, we are really not seeing anything different than that.

And we have articulated that in the past several quarters.

We will go next to Suji De Silva with ThinkEquity.

Please go ahead.

Hi Dave, hi, Don, hi, Liam.

Nice job in the quarter.

Thank you.

So visibility, what kind of turns do you need for the quarter?

I'm sorry, Suji.

Could you repeat that?

How well booked are you to the guidance, the September quarter?

It's typical for us.

We've got between [hub polls] and actual POs in hand, we are pretty much 100% booked, which is not unusual for us.

Got it.

And then for the China low end smartphone market.

I imagine that that is a more competitive market from a price perspective.

How do you expect to compete there, and do you consider that a significant opportunity for you?

We do consider it a significant opportunity because we think there is a great deal of pent-up demand.

We think it is not only for the traditional chipset enabled smaller local players, the indigenous OEMs.

We also think that it's an opportunity for the major international brands, to really address that market using brand recognition and great products.

So, we think it's going to be a terrific market for us.

There will be price pressure on those devices for sure.

But we were really compare it to, what is really, what that consumer will be upgrading from, which is a 2G device with much less than a dollar content.

So it won't be the -- perhaps some of them won't be high end world phones, but they will certainly have a great deal more content than the 2G products sold into that market.

So, and we're positioned with a number of products.

We have got multi, converged devices or multi-mode devices that are low-cost that will be tailored for that market.

We have hybrid and high-performance devices as well.

We have got a whole bunch of content that we are bolting around it in a way that a way that will facilitate ease of entry to market for some of these customers, as well as increasing our dollar content.

So I'm excited about the market, aware of the price pressures, but I think we are prepared to have a real strong play there.

We have a question from Aalok Shah with DA Davidson.

Please go ahead.

Hi, just a couple quick questions.

Liam, just if I could, and Dave kind of addressed this a little bit.

I just wanted to be clear.

Are you winning PA market share now because of the additional solutions that you offer?

Or is it the other way around, that your PAs are simply better, and you are just bring along all these other things like LNA drivers, LNA switches and other things like that at this point?

Sure.

Well, I would say that the relationships that we've built over the duration of Skyworks, since we started our Company, the deep relationships with OEMs and also chipset providers has put us in a great position to win with power amplifiers.

And we been doing that for a while.

And then won, inside the account, collaboratively sell power management, Wi, LAN, GPS whatever is needed.

So I think the leadership that we have provided over the years in our power amplifier suite has really kind of paved the way for success in these other products.

And we are doing a great job of satisfying customer needs, and leveraging technologies in house and through acquisition.

The products have to be competitive.

But it is clear the credibility, and for example, when we have acquired a couple of businesses, I think their biggest stumbling block was just having the credibility to sell into these huge companies, and satisfy these big ramps.

And our balance sheet is quite strong, and our customer is increasingly looking for a profitable supplier/partner with a good balance sheet, who can weather the storm.

So we think that the viability that we have is critically important.

So it is easy for us to get product evaluated, but it has to be competitive.

Thanks.

And then can you give us an update on where you are right now with the BAW filters?

Sorry, where we are with -- we don't make BAW filters, we source them, and we are in high volume production in multiple sockets with PA SAW and BAW devices, mostly SAW, frankly, because that is where the market demand is the highest, and where the price is the lowest -- or the price is most competitive, I should say.

But we are in production with PA duplexers in multiple sockets, in high volume production -- have been for some time.

And we are winning some sockets there as well.

Our next question comes from Dale Pfau with Cantor Fitzgerald.

Please go ahead.

Thought you were going to miss me today.

Congratulations.

Yes, thank you.

Let's talk just a little bit more about this, the emerging markets and the trend from 2G to 3G.

Could you talk about how that's affecting your share our there?

What you are seeing the trends are?

And then the other question I've got is, what you think your total attach rate and percentage of businesses is from laptop -- I mean tablets and notebooks -- are right now?

Well, we think the 2G market continues to not only decline in dollars, but decline in units.

So the market is becoming, the 2G market is becoming a smaller percentage.

And in fact, our 2G into the local China market if you will, the open market is, is probably in the order of magnitude of a mid-single-digit percentage of revenue.

So it's pretty small, Dale.

Now we do sell more 2G products than that, because we have big business with other customers who sell into that market or sell elsewhere but.

So we are pretty convinced that the 2G market is going to remain in fairly steady decline.

It won't go away, but in fairly steady decline.

Right.

And with respect to tablets, Dale, I think we are in very good position there.

We have market share in tablets that at least as good as what we have in smartphone on the RF amplifier side.

But tablets is a great opportunity to leverage the highest performance wireless LAN mobile connectivity product.

We are doing very well there.

We are also bringing in switch and some of the other technologies that we mentioned.

So, we're very upbeat about the general market outlook for tablets.

We think they are going to be rapidly adopted.

We have high expectations going forward, and we expect to be a share leader.

Next we have Jonathan Goldberg with Deutsche Bank.

Go ahead, please.

Hello, thanks for taking my question.

Most of my questions have been answered.

I just wanted to talk a little bit about -- I guess all that is left is the 2G feature phone market in China, That used to be a pretty big opportunity for you.

It seems like you are still there, are you still active there?

Is that true?

Is that or should we just stop worrying about that market entirely?

We're very active there.

We have got a reasonably high market share.

And it's been a good market for us, right?

It's been kind of a workhorse market.

It's been around for a long time.

It is declining.

It is -- if you think about the way that, the way we look at that market is a couple of different ways.

We have, we do believe we have the lowest cost structure.

We address it with a combination of pure CMOS devices, as well as very low cost gallium arsenide devices, and we're sold with partners like MediaTek, for example.

The issue with the market is that it is declining.

The consumers in those markets want smartphones or they want high-end feature phones.

And that is just where it is headed.

And we like that transition because frankly there are more margin dollars there, there are more dollars per phone.

So we think that's going to be a growth driver.

But we don't shy away from the 2G market.

We expect there to be the most price pressure there because frankly for companies who -- competitors who have been unable to kind of make the leap to multi-mode designs, and now, even more integrated devices we are talking about today, that sort of is one of the last frontiers to go at it.

And you go at it with price as a primary weapon.

So we do see ASP pressure there, but we make money there, and we're going to continue to ride it.

Yes.

And along side that, as we start to see the 2G market in China trade down.

And as you know that was the market that was less than $1 per SKU for us, in terms of content.

You are seeing local players like ZT and Huawei really deliver low end smartphones, some cases high end smartphones.

We are seeing datacards, where you have a couple bands of WCDMA with GSM.

So there is an active market there.

And as Dave indicated, there is an appetite for global brands.

And I think we are well-positioned with some of the premier smartphones globally, and those products will eventually be big drivers in China.

All right.

Thanks.

Thank you.

Our next question is from Quinn Bolton with Needham & Company.

Please go ahead.

Hi, thanks for squeezing me in.

Dave, I wanted to follow up on the SkyOne product.

You talked about it being a more mainstream smartphone product.

But wondering, if you could talk from the base band supplier perspective.

Was this developed in conjunction, with multiple baseband partners?

Or do you anticipate this is more a sale to sort of leading Tier 1 or high-volume OEMs?

And then I've got a quick follow-up on LTE.

Well, Quinn, I would say it was really to address a worldwide OEM market demand for ease of integration, as the complexity increases.

It really is a challenge with all those filters and all those PAs, and switches and shielding it, and co-existence or interference between for example WiFi and 2 plus gigahertz cellular bands.

So it is a real problem.

And the more bands you layer in, the size constraint becomes an issue, as well as just shielding it, and handling all of that RF complexity.

So we really addressed it to try to figure out a way to make life easier for our customers.

It won't be for all -- and it wasn't geared towards any specific baseband.

It was really more of a world product.

It could be base band independent, the interface was designed that way.

So, we -- but we weren't approaching it with any one specific platform in mind.

Although we have leading customers who have been sampled, and who are -- who will be first to production with it.

Great, thanks for that.

And then just quickly on the LTE.

You talked about LTE becoming obviously important in 2013,.

I think there are something like 10 to 14 different bands being used for LTE around the world.

Any sort of sense you can give us as two how many bands on average you think you will see in phones in 2013?

I guess, it's hard to imagine you are going to see full 10 to 14 band LTE phones plus 2G and 3G backward compatibility.

So just trying to wonder if you think it is on average, 3 to 4, 4 to 6?

Any thoughts you have on, kind of 2013 LTE devices?

Yes, I think it depends on the architecture, some of the higher end smartphones really will have 8 devices or more.

There are multiple bands of LTE, there are multiple bands WCDMA.

And then you have backward compatibility.

So we have seen a trend, at least today to drive as many bands as the carriers will support.

And we see those smartphones being designed today, going into production next year.

Yes, and we're using two approaches.

One is that we are looking to continue to integrate at the die level, these multi-mode designs and sweep in more bands.

And where performance demands it, we are having other -- using other manufacturing and packaging techniques to make it small and relatively low cost.

So, that's where kind of the system expertise of being able to play the ability to integrate upward in the IC, as well as in the package, as well as in the MCM, is an advantage for us.

And that is where the customer are struggling.

LTE was in many ways, the straw that broke the camel's back.

Layering those bands, made it impossible to go through a traditional discrete model.

We now have a question from Blaine Carroll from Avian Securities.

Go ahead, please

Yes, thank you, and nice quarter.

Thanks.

I guess, a couple of questions if I can.

First of all, Dave, you talked about the 2G dollar being down, units being down.

Don, did you give out the split of what the 2G versus 3G revenue was during the quarter?

Yes, I did.

It was roughly the same as last quarter.

It was 20% 2G and 80% Edge and WCDMA.

But even within that 2G, most of that is foreign brand sold into the China -- the open market 2G, is somewhere below 10%.

Yes.

And then, Liam, when you think of those LTE bands that are popular right now.

And I'm assuming that is 13, 17, maybe some activity up around 26 and 4, are there any other bands that are sort of bubbling up, as far as LTE and LTE capabilities?

Well there are a few that will go out further into 2014.

But I think if you look at those four, and then you go and look at typical WCDMA band one, band two, band five, band eight.

Okay?

Now you have got eight bands, and you add your GSM or your Edge.

So there you go.

That's where you get your eight or nine.

And that is the type of architecture that we are seeing today.

We are seeing that type of layout.

And we have question now from Tom Sepenzis with Northland Securities.

Hello, and my congratulations as well.

I am just wondering, if you could give us any kind of insight into the geographical strength or weaknesses that you are seeing?

Yes, it is actually tough, because we don't really look at the business that way.

We have our key customers, and we do see regionally within the HPA space, pretty good traction in the Americas, and also in APAC.

The smartphone players are real global brands, And we look at our sales directly to those accounts, and we really have to kind of follow the money where they sell.

Okay, great.

And in terms of the new markets like medical, that you're targeting, are any of these in the -- I take it none of these are 10% of the business at this point.

But are you targeting any of them to be, in the next, say 12 to 24 months?

Well, Tom, right now, no, the answer is that they are not 10%, but we have our eye on growing a lot of the key vertical markets that we are just seeing some traction in because they are accretive to the margin and the overall return of the business.

So our goal would be to continue to grow those to a more meaningful revenue number for the Company.

Thank you.

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

I will now turn the call back over to Mr. Aldrich for any closing remarks.

Thank you everyone for participating, and we look forward to seeing you at upcoming conferences.

Thank you, ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation, and for using AT&T executive teleconference.

You may now disconnect.