思佳訊 (SWKS) 2013 Q2 法說會逐字稿

Good afternoon, and welcome to Skyworks Solutions second-quarter fiscal-year 2013 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.

Thank you, Kathy.

Good afternoon, everyone, and welcome to Skyworks' second fiscal quarter 2013 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 within the investor relations section of our Company website for a complete reconciliation to GAAP.

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

Thanks, Steve, and welcome, everyone.

I'm pleased to report a strong performance for the second quarter with revenue and earnings that exceeded prior guidance and outpaced seasonal trends.

Our diversification across end markets and customers and our expanding addressable content were key factors in our outperformance.

During the quarter, we posted revenue of $425 million.

That is up almost 17% year over year.

We produced operating income of $100 million.

That is up 19% versus a year ago.

We earned $0.48 per share, $0.01 better than our guidance.

We generated $130 million in cash flow from operations.

And we repurchased 1.4 million shares of our common stock, exiting the quarter with $459 million of cash on hand.

And for the current quarter, we are guiding revenue to be $435 million, representing 15% growth through the first three quarters of fiscal 2013.

Now as many of you know, the June quarter is a transitional period between the March trough and the second-half ramp.

Within this backdrop, our output reflects the strategic transition from some lower-margin components in our portfolio towards more margin-rich custom solutions.

And this is the direct result of our success in migrating customers from discrete implementations towards more integrated solutions, a win-win scenario in which we capture more content, we have fewer competitors, while our customers reap the benefit of reduced complexity at lower BOM costs.

In conjunction with this, we are forecasting strong sequential improvement in gross margin during this quarter and we see a clear path to further margin expansion ahead.

This puts us firmly on track toward our goal of delivering the growth of the mobile Internet with the financial returns of a diversified analog Company.

Looking forward, market trends continued clearly in our favor, based on rising adoption of our integrated mobile systems portfolio and a full pipeline of accretive opportunities in new vertical markets.

The stage is set for above-market growth through the remainder of the year and beyond.

Now before going into a more detailed market update, I'd like to turn it over to Don for an in-depth review of our financial results and outlook.

Thanks, Dave, and thanks for joining, everyone.

Revenue for the second quarter was $425.2 million, ahead of our prior guidance of $420 million, representing better-than-normal seasonality and a year-over-year growth of 17%.

Gross profit was $179.4 million, or 42.2% of revenue.

Operating expenses were $79.7 million, consisting of R&D expense of $49 million and SG&A expense of $30.9 million.

We generated $99.7 million of operating income, yielding a 23.4% operating margin, which is a 45 basis-point improvement versus the year-ago quarter.

Below the line, we recorded $1.4 million in other expenses and had a cash tax rate of 6.4%.

Net income was $92 million, or $0.48 of diluted earnings per share, and that is $0.01 better than our guidance.

Turning to our second-quarter balance sheet and cash flow statement, we generated $130.2 million in cash flow from operations.

We invested $25.6 million in capital expenditures, with depreciation for the quarter of $18.5 million, and we repurchased 1.4 million shares of our common stock, representing an investment of just over $30 million.

And we exited the quarter with $459 million in cash and no debt.

And given our high confidence in our business trends, we continue to believe that repurchasing shares of our common stock represent a highly attractive use of our cash.

Turning to our third-quarter outlook.

Based on current demand forecasts and order visibility, we expect Q3 revenue to be $435 million, providing a solid baseline heading into the stronger second half of the calendar year.

As Dave mentioned, our third-quarter outlook factors in the transition of our product portfolio toward more differentiated performance-based system solutions.

We continue to see the opportunity for mid-teens revenue growth.

We expect gross margin between 43.5% and 44% in the third quarter, representing over 150 basis-point sequential increase at the midpoint, and that is driven primarily by improved product mix.

We see a path to continue to drive further margin expansion in the second half and beyond.

As a result, we now suggest modeling 48% incremental margins from the third-quarter baseline.

We project operating expenses to be roughly flat at $80 million.

Below the line, we anticipate $100,000 in net expense from interest income and other expense, with a cash tax rate around 7%.

Using our guidance of $435 million in revenue, with gross margin at the midpoint of 43.7% and $80 million in operating expenses, we anticipate third-quarter operating margins of more than 25% and EPS of $0.53 on a base of 192.5 million shares.

We are very pleased with our performance thus far in fiscal 2013, and before turning it back to Dave, I would like to just take a moment to put our first-half results into broader context.

Over the last five years, on a comparative basis, we have grown revenue at 16% compounded, more than tripled our earnings per share, and cumulatively generated over $1 billion in free cash flow.

The industry has gone through considerable change over this time, through macroeconomic cycles, market-share shifts among OEMs, and technology evolution, yet through all of this we have maintained a consistent track record of providing above-market growth and best-in-class financial returns.

More importantly over this period, we have assembled a sustainable growth engine for the future, and that is fueled by healthy underlying market trends, well-defined competitive advantages, and a success-driven corporate culture.

All of the underlying drivers are in place for Skyworks to continue to outperform, putting us on a path to achieving our mid-term business model of 30% operating margin, which, as a reminder, would generate around $3 in annualized earnings per share.

And with that, I will turn the call back over to Dave for his comments on the market.

Okay, thank you, Don.

Now for the remainder of the call, I will discuss our market opportunities in more detail and I will provide some perspective on why we remain so optimistic about the road ahead.

There is no doubt that the world is rapidly becoming more interconnected, which began several years ago with the introduction of smartphones.

Today, we are in the early stages of the next phase of this megatrend, the proliferation of universal data connectivity.

Now it is important to keep in mind that the connectivity revolution is by no means limited to smartphones.

The need for integrated high-performance RF and analog systems is propagating across new product categories and new end markets, driving an expanded opportunity set where Skyworks is uniquely positioned.

I would like to share a few examples of how we are taking advantage today.

First, we are serving an increasingly diverse set of vertical markets, as many forms of connectivity proliferate within the Internet of things.

Connectivity is rapidly becoming an integral part of traditional analog markets, like medical, industrial, automotive, smart grid, green energy, infrastructure and others.

Within these markets, we are seeing tremendous success in leveraging our technology and our scale advantages for mobile into an expanding market footprint that we began building out several years ago as part of our catalog business.

As some examples of our growth and product diversity during the quarter, we captured a number of new program wins.

These include an innovative power management solution enabling photovoltaic battery charging for mobile devices; a lead position on Texas Instruments' reference designs for utility metering, street lighting, telematics, and tracking systems applications; advanced infrastructure solutions for Aclara's Smart Gas meter products; switch modules for in-dash infotainment consoles for Ford, Kia, and others; and filter resonator modules for scanners in homeland security applications.

These are just a few examples of our traction within new vertical markets.

In all cases, these markets are complementary to our mobile business and provide accretive new growth avenues for Skyworks.

Second is the network of the connected home.

This represents another major category of opportunity for Skyworks and one that is still in its infancy.

Based on our underlying core competencies in RF, mixed signal, analog, and power management, we are establishing a strong footprint spanning connected devices like smart thermostats, security systems, sensors, gaming platforms, appliances, televisions, and set-top boxes.

Within these applications, we see performance requirements, complexity, and content trending higher.

Third is in emerging markets where we are enabling a massive smart grown upgrade cycle that is just getting underway.

According to Credit Suisse, Chinese local vendors alone are expected to ship over 450 million units this year, representing 80% annual growth.

Skyworks is facilitating this transition through close alignment with all the major baseband providers, as well as local OEMs like Huawei, ZTE, Lenovo, and others.

Addressable content in these devices is two to three times that of a 2G phone.

And with the innovation required to deliver these advanced analog systems at the right price point, the playing field of viable competitors is narrowing.

And fourth, and finally, in developed markets our addressable content opportunity continues to rise.

Complexity is exploding as devices incorporate multiple forms of connectivity, including 4G LTE, 802.11, Bluetooth, GPS, ZigBee, and near field, all within shrinking form factors.

And on top of this, carriers and OEMs are implementing a plethora of new operating frequency bands for global data access, along with sophisticated new technologies like carrier aggregation, receive side diversity, envelope tracking, and antenna tuning to maximize spectrum utilization, data throughput, and battery life.

Now this all translates into new content opportunities for Skyworks.

As a result, we see our addressable content ratcheting higher with each successive generation, with as much as $10 to $12 of addressable content in high-end devices.

And a perfect example of this is our SkyOne family, which uniquely integrates all amplification, switching, filtering, and control in a single device.

And as these specific examples illustrate, whether we're talking about a mobile device or a new vertical market, the fundamental need is the same -- ensuring seamless connectivity across multiple communication standards, while maximizing overall system performance within the smallest possible footprint.

And this underlying market need creates tremendous design challenges for our customers and opportunities for Skyworks as they contend with issues like power efficiency, coexistence, harmonics, and linearity.

So to recap, our addressable markets are expanding.

And we are capitalizing on, first, end market diversification; second, the connected home; third, smartphone adoption in emerging markets; and fourth, increasing content in high-end mobile devices.

In closing, we are quite optimistic about our prospects for the remainder of 2013 and beyond.

Trends in our served markets are moving in our favor, and our strategy of continuing to diversify and expand into new verticals, while maintaining a laser focus on operational execution, is clearly working.

That concludes our prepared comments.

Operator, let's open the lines, please.

(Operator Instructions).

Vivek Arya, Bank of America Merrill Lynch.

The June quarter guidance, I think somewhat below seasonal trends.

Is it related to a product transition at one customer?

Are there any other impacts?

Or I guess the other way of asking the question is, are you still comfortable with the roughly 15% sales growth target that you had set for this fiscal year?

First, thank you.

First, historically June is up, let's say, 4% to 5% sequentially.

However, more recently it has been heavily influenced by the timing of specific program ramps.

We are also benefiting from some new opportunities.

We see strength in wireless LAN and some of our antenna switch modules, some of our vertical markets.

Antenna tuning is another example.

So our Q3 guidance underscores gain from those diversification activities, and as Don mentioned in his prepared comments, we exceeded the 15% in the first three quarters of the year and we are very comfortable that we can continue on a mid-teens trajectory.

Thank you, Dave.

And then, the other question is recently we have seen more acquisitions in the CMOS RF space with Avago acquiring Javelin, and of course, RFMD bought Amalfi before.

And then, Qualcomm has been vocal about its RF360 solution.

Is this the start of some major disruptive trend that we should be worried about?

Like when you talk with your customers and look at design wins, is this a trend that's accelerating or is this still somewhat limited?

I think that the consolidation of the CMOS players, and we acquired a company a couple of years ago, is a simple function of the fact that a standalone 2G company isn't a sustainable model, I believe, sustainable economic or financial model.

The unit volumes for 2G continue to decline dramatically, and what is far more important than what you're seeing in the, I think, the substantial rise in our gross margin as we go into the June quarter, as Don outlined in our guidance, is the fact that we are successfully working with our customers on migrating them to more integrated solutions where we have more content; helping them make the tough leap from 2G to 3G, whether it is TD or WCDMA, as we bolt-on more analog content that serves to reduce the footprint and make it easier for them to get to market and provides for us a more margin-rich opportunities.

And the competitive landscape is narrowing.

So I think it is more simple than that, Vivek.

I think it is simply not a sustainable model to be a 2G-only company.

Mike Walkley, Canaccord Genuity.

This is Matt Ramsay on for Mike.

I guess the first one, maybe, Dave, one of the strengths of Skyworks' business, in our view, has been your customer diversification and near-top market share with many handset OEMs.

I guess earlier this week two of your traditional competitors in this space announced earnings and talked about better trends throughout the year, driven by more diversification in their businesses as they had been recently customer constrained at particular customers.

Maybe you could talk about the competitive position you have across your customer base and maybe where you see opportunities for market-share gains or losses for Skyworks, relative to the more bullish commentary from some of your competitors.

Thanks.

Okay, I think it is basically outlined in the prepared comments is that we see tremendous growth for us in both margin and revenue as we are successfully penetrating more vertical markets.

We are gaining more content in the connected home, more content in the automobile, some medical applications, and so on.

So we are doing a very good job of rounding out our business and continuing to expand our target of addressable markets.

We also are adding a lot more content.

If you look at recent teardown reports versus, say, traditional RF competitors, we continue to participate in this wave of complexity with more bands of amplification, but we are adding increasingly more filtering, more switching, more antenna tuning, more GPS products, more power management, and more WiFi connectivity.

So I think what you will see from us is not only vertical market expansion, but you will see the TAM increasing in our core markets.

And as a result of the complexity that we have talked so much about, it really is the case that customers are looking for a narrower set of suppliers to provide much more of the overall systems solution, and we think we are the best at that.

So I would expect you to see on the high end more content with more functions provided by Skyworks at higher market share, and increasingly a broad set of vertical markets.

Thank you for that.

That is helpful, and I guess a follow-up to that, maybe for Don or maybe even Liam, the SiGe and AATI acquisitions, I guess, are both now roughly a year in the past, give or take.

Maybe you could give a brief postmortem comment on those two different acquisitions and their effect on your product diversification offerings.

And maybe if you're willing, remind us of what the revenue run rate of those businesses were when you acquired them and how they have trended, both from a sales and margin perspective, since those acquisitions.

That would be really helpful.

Thank you very much.

Sure, this is Liam.

I will give you a little color on the acquisitions.

Certainly the WLAN business saw, buoyed by the SiGe acquisition, continues to be very robust and very strong for us.

We are in the early stages of a 11ac product line ramp.

We've got the first 11ac handset in the market today by virtue of some partnerships with Broadcom and others.

We're also seeing great strength in routers and access points, and quite bullish on that.

I think what we brought to the market there is a combination of technology from the SiGe team, coupled with a systems approach at Skyworks, and we have gone well beyond the initial portfolio to gain share.

In addition and in parallel, the power management portfolio acquired by AATI is also making great progress in some areas.

We had some releases regarding Samsung recently.

We had DC-to-DC and camouflage technology.

We started -- we are now getting into non-mobile applications -- video, digital camera -- and we think the opportunity for the power space for us is really tremendous and we are in very early innings of upside there.

Craig Ellis, B. Riley.

Thanks for taking the question and congratulations on the results.

Don, just to further clarify the dynamics in gross margin, are you seeing gross margin improvement in the quarter because of increased value with new products in existing platforms and customers, or is the gross margin uplift due to penetration of new markets and increased -- the increased margin profile that might go along with those new markets?

And as a third part of that question, is there any manufacturing or sourcing element to the margin improvement that you are seeing?

Thanks, Craig, for the question.

It is actually fairly evenly split.

It is both.

It is new product wins and ramps and designs, and it's also leveraging additional content with existing customers and platforms.

So it is a combination of both.

And overall, it really relates to what we talked about earlier.

It is just with the 2G component market is just continuing to decline and the product mix is successfully transitioning, we're seeing this growing adoption of the accretive portfolio towards integrated systems solutions, and they're clearly margin accretive for us.

And that is driving the majority of the expansion.

There is a little bit of manufacturing efficiency.

We see benefits from that every quarter.

That is our job, to continue to do that.

But the lion's share of this margin expansion relates to what we just described on the product side.

Okay, that is helpful.

And then, as a follow-up for either you or David, typically the Company gets a split out in its revenues between linear products and cellular.

Can you give us that?

And can you help us understand how you see the growth dynamics of those two businesses as you go through the rest of the calendar year?

Yes, the revenue from the product split, linear is 40% and handset, 60%.

That is similar to the percentage that we have seen over the last several quarters.

Tavis McCourt, Raymond James.

First, Don, in terms of tax rate the next few quarters, what should we be thinking about, and same question with CapEx?

I would -- we are guiding, for the June quarter, 7%.

I would keep it at that level through the September quarter.

When you -- actually through December, through calendar December.

And we really haven't guided anything further than that, but I think directionally if you use 10% in 2014, that is probably a safe number for modeling purposes.

CapEx, I would -- what we would assume on CapEx is it is going to be above, probably a little bit above depreciation levels for the next couple quarters, but it will be ramping down the back end of the calendar 2013.

Got you.

And David, I wonder if you could give us an update on SkyOne in terms of -- are there devices shipping this year with that or design win updates?

How is that going in terms of the sales process in the marketplace?

It has been an interesting process because the product is so highly integrated.

Just to recap, SkyOne takes everything from the output of the transceiver, or the chipset, to the antenna and back.

So it has got all the duplexing filters.

It has got amplification.

It has got switching.

It has got frequency control and logic and so on.

And so, it is -- the uptake with the customers is very strong.

We have several lead customers who are tuning it, putting it through its paces.

It is a very different product because our customers see a lack of competition as an interesting switch from the normal paradigm in our market.

It is a product that performs wonderfully because, while it is highly integrated, it is highly integrated using a mix of silicon advanced multichip module technology, the best filter technologies on the planet tailored for each frequency, as well as high-performance compound semiconductor amplifiers.

So it is a unique product.

It is very sole source.

And so, we're getting great feedback.

They like it.

And I think our customers are trying to digest what it means to have a supply chain now that is completely sole-sourced on the front end.

You will see production this year and the customer uptake has been very good.

Alex Gauna, JMP Securities.

Thanks for taking my question.

I was wondering, Don, implicit with your outlook, if it anticipates a similar set of greater than 10% customers?

Are there possibilities to add a third or fourth?

And then, also, maybe if you could talk about within the quarter, has there been any material change?

Do you still have two greater than 10% customers?

Have they converged in size or maybe inverted?

Thank you.

The 10% customers for the quarter were Foxconn and Samsung, which is consistent with what we have seen for the last several quarters.

That hasn't changed.

We really don't guide what our customer mix is going out, as far as are there going to be additional customers that go into that top 10%.

It is just not something that we typically would put into the forecast.

Okay, fair enough.

And I was wondering, you recently announced a pretty rich set of design wins targeting Samsung's GALAXY S4 refresh.

Can you give any color behind that press release?

Are you seeing an average ASP increase over the S3?

Some of these wins that you have, maybe what kind of dollar content we're talking about, or a range.

And then, lastly, I believe Liam mentioned AATI on the camera flash, but if I read the press release right, you now have new wins on the RF -- DC-to-DC RF deck with AATI, and I'm wondering how material that is?

Thank you.

Sure, Alex.

So I think what we are looking at here would be the Galaxy S4.

It's a great example of what Dave articulated earlier.

We have our core MMMB technology, which we have been continuing to develop and gain share and gain design wins, and also baseband partnerships.

And the S4 is an example of that technology, but now we have wrapped around WiFi technology, switch, ASM, high throw, very, very highly integrated switch, DC-to-DC converters for the first time, and then also some additional componentry in analog.

So you have got an opportunity there to really see what Skyworks is capable of doing.

We are quite happy to have demonstrated that with the leading platform going forward.

And we think this is really an indication of what you should expect from us with all the leading smartphone players.

Blayne Curtis, Barclays.

Thanks for taking my question.

It is for Don or David.

I just wanted to make sure I heard you right.

It seems like you are reiterating your target of 15% growth for the fiscal year.

I think you had some easy compares in the first half; Q3 guides below that rate.

If you could talk -- if that is correct, if you could just talk about the drivers into the back half of the year for you, that would be helpful.

Thanks.

Yes, I think that is right, and we are comfortable with that growth rate.

I think the June quarter is, as we mentioned earlier, it is becoming in our industry, at least in the mobile side of our business, a transitional quarter between the seasonal trough in March and what is strong growth in the second half.

And as we are confident in our platform participation and we see vertical markets continuing to expand, we see that growth rate.

June is a transition quarter, and I think that is what you are seeing.

But having said that, the growth rate through the three quarters is about 17%.

And we are growing much faster than the overall seasonality in the June quarter, if you were to aggregate everything.

Thanks.

And then, it seems like the long-term incremental gross margin, you ticked that up.

I remember when you brought it down.

Part of it was due to the mix as you're seeing a lot of growth with SOI, not GaAs.

Could you just talk about what is driving the higher -- is a different mix of products, more analog, or are you seeing a mix shift back to GaAs?

That would be helpful.

No, as Don mentioned, it really is -- there are ongoing continuous improvement in manufacturing efficiencies, and we continue to drive very hard for those.

But the vast majority of the improvement in gross margin is the product mix and the focus we have had on more highly integrated and differentiated products where we have much less competition.

We add a great deal more value for our customers that they're willing to pay for, in addition to which is we are continuing to see more vertical market penetration where we get accretive gross margins across the board.

But the way to think of it, Blayne, is that that doesn't assume a dramatic change in the mix that we have already described between linear and handset.

So what that is saying is within those categories, we are expanding margin for those factors we talked about earlier.

So that is the way to think about it.

It doesn't require a big mix shift in order to drive that.

That is the way to think about it.

Harsh Kumar, Stephens.

Dave and Don, tremendous execution in the quarter and the guidance, so congratulations.

Thank you.

Thank you.

It is very well advertised and publicized that one of your customers is going through an upgrade cycle.

I know you have talked about tremendous prospects in the back half, but I was wondering if you could give us a little bit more color on what makes you so excited about the September and the December quarters on the cellular side, specifically?

In the September/December quarters, you see normal seasonality, and we expect to see that as well.

And at this stage of the year, we are very comfortable and knowledgeable about where we participate, what our participation is on the drivers of the market.

And as Liam commented earlier, we have not only the wind at our back with increasing complexity driving content and traditional RF sockets, but we are doing a really good job of adding margin-accretive products in connectivity, in power management, in WiFi, and then in completely integrated solutions.

So it is participation in the right platforms and it is content increasing.

And that content increases with higher margins almost across the board.

Great.

And as a follow-up, I was wondering if you could give us some color on the Tier 2 and Tier 3 markets.

Usually in the March quarter, they tend to be a little bit shaky.

Have you seen anything like that?

And what are your prospects for those second and Tier 3 guys -- customers going forward?

Sure, Harsh.

This is Liam.

Actually, we think the opportunity for the Tier 2 and Tier 3, specifically in emerging markets, is quite bullish.

We are seeing an upgrade cycle now occurring in China, specifically, where 2G demand has come down a bit, but there is a commensurate upside in 3G and TD technologies.

And fortunately, it is with customers where we've had strong incumbency and base position, and we are working with them right now to get them through that upgrade cycle.

So we are quite bullish on it.

This is not a Q3 effect.

This is a long-term sustainable upside.

And I think our ability to deliver customized solutions, great on-the-ground application support, that systems know-how really puts ourselves in a great position to support those companies as they move up.

Jaeson Schmidt, Craig-Hallum.

First off, I was wondering how much of your revenue is currently coming from the 2G market?

Or just if we could get a split of the revenue of 3G, 4G, and 2G.

2G was 15% this quarter.

And then, we just combine 3G, 4G, it was 85%.

And that's changed slightly.

It had been running 80%/20% for probably the last three or four quarters, so this is a little bit of a change in the 2G.

Thanks.

And then, Don, what should we think of your inventory level in the June quarter, and then going forward?

We had -- we just finished -- we were down slightly in the March quarter from the December quarter.

Our turns run roughly about 4.5.

We would expect that to continue, so based on whatever you think the cost of goods sold is, or revenue you are modeling, you can calculate that number.

That is the best way to do it.

But assume turns of about 4.5.

(Multiple speakers).

Thanks.

Edward Snyder, Charter Equity Research.

You mentioned at the start that the low-margin components versus integrated was one of the reasons for the gross margin compression this period.

Can you give me a little bit of an example what components you're talking about in terms of low-margin products, just to get our heads around how the shift is going?

And then, the out periods, you have been particularly strong.

I think, Dave, last year you mentioned that you'd probably be the biggest producer of pads in 2012.

I think that probably wound up being the case.

Do you see that to be the case again in 2013?

And similar with SOI, you've had a big ramp here with SOI.

It sounds like it is going to get stronger, especially with regard to antenna tuners.

So I'm just getting a grasp of what you see the rest of the year looked like in those products, specifically?

Thanks.

Thanks, Ed.

On the margin products, let me give you a couple of examples.

We were -- we have been very big in WiFi and in mobile, for example, doing three- and four-throw pHEMT switches.

And we have sold them by the tens of millions a quarter.

We are seeing an upgrade cycle to more of a silicon-based, silicon on insulator switch with seven-, eight-, nine-9, 10-, 11-, 14-, 15-throw switches, with a lot of switching control embedded on the die so we get higher ASP at a higher gross margin.

That is a good example.

We are seeing fewer dual-band low-end PAs and more of an upgrade to a 3G or a low-end smartphone transition.

We see that as a benefit.

Some of the ASM products and antenna products had been quite discrete.

And whenever it is discrete, it implies that the barrier to entry is a little bit lower.

So you see more competition.

You see more price pressure.

We are seeing less opportunities for those kind of products, and with the number of bands and the complexity and the number of antennas, we see that -- and we are leading that upgrade to far more integrated products.

And I do think we will be the largest producer of filters integrated with PAs.

We will not be the biggest producer of filters, of course, because that is not our strategy, but we will be the biggest supplier, I believe, in 2013 and 2014 in filters that are matched with the transmit chain.

Excellent.

And then, in terms of your SOI products, since you seem to be really accelerating there, are you open to grabbing market share through some of the module manufacturers, given they oftentimes have access to design wins that aren't open to a lot of -- Murata, specifically, with the LTC substrates, et cetera?

Is that something that Skyworks would be interested in, giving the outsourcing model you have?

It doesn't add any CapEx for you to do that.

You could use your designs.

I'm just curious about your business model for the SOIs.

This is Liam.

We have great position and relationships with all the key module manufacturers.

Some of those have been born through WiFi opportunities.

And we speak with them all the time about opportunities to look at our portfolio, whether it be in die form or chip scale.

And we will vet those out, and if they make sense, we will absolutely execute there.

So I think it is something that is on our radar screen.

We've been doing very well today with fully packaged products that have been coming out of Skyworks and packaged in our Mexicali site and doing quite well.

But we have an open mind on what our customers want and our partners and would certainly look hard at that opportunity.

Ed, for us, we really instill a lot of discipline on the margin side.

So to the extent that a module manufacturer needs our technology and will pay such that it has good margin performance, we will do it.

We do have some instances of that, but we won't chase it if it is dilutive.

Mike Burton, Brean Capital.

Congratulations on the execution and great guidance.

I just -- I am sorry if I missed this, but what was the percent of HPA versus cellular?

And then, within that, you guys have done clearly very well on the WiFi product.

I am wondering if you could break out WiFi for us.

And then, also, you gave us the mix on 2G, 3G, 4G, but Dave, I am wondering if you can give us your thoughts about where you think that percentage is going to trend towards and what that does to your margins?

Mike, the percentage was 40% linear and 60% handsets, smartphones, which is where we have been running.

I think, Mike, the answer to the second part of your question is I think it will continue to accelerate.

I believe that the -- we passed the crossover where the upgrade cycle is now -- there is more revenue being derived, and obviously much, much higher growth rates being derived, from that low-end smartphone, if you will, versus the 2G phone.

So I think that is going to continue to accelerate.

So Don said it used to be 80%/20%.

It is now 85%/15% 3G/4G versus 2G.

I suspect you will continue to see that.

And in virtually every single case, an upgrade cycle is a product that is more integrated and carries higher margin with fewer competitors.

Great, and then, any signs or updates on RF360 since Barcelona?

Have you seen it at customers and do you have any more intel on how it compares to your product offerings?

Thanks, guys.

Yes, sure.

I think that we have seen it with some customers.

We are partnering with Qualcomm today on some of the most exciting platforms in the market, so that relationship is very strong.

I think the market niche they're trying to address, we are also addressing, which is driven by the exploding complexity in RF.

It is not a one-size-fits-all market, I will say.

Customers are making solution around more customized.

However, I will say this.

There may be a narrow segment that does have less stringent performance requirements that could utilize a preconfigured what is called a system in a package.

And in this case, we compete with the SkyOne product.

It is fully configurable.

And it also has -- uses the best performance -- has the best performance using the best process per function.

So it will be interesting, as we talked about earlier, to watch SkyOne uptake because it is highly customized.

The difference is it is also high performance and it is very configurable.

Vijay Rakesh, Sterne, Agee.

Good execution here.

Just on the gross margin side, I know your gross margins expand very nicely versus peers and versus your topline, too.

But as you look at the levers there with production mix and 2G coming down, how do you see long-term trends on the gross margins?

You are already close to your 44% target.

How do you see that over the next couple of quarters?

Vijay, the easiest way to model that is you have got the new guidance here, so that is the start-off point.

And as you layer in incremental revenue, we'd suggest you do the drop-through at 48%.

As I said, that assumes no significant shift in the linear handset mix.

And obviously, we've been very vocal about our goals to continue to grow that.

If that happens, that drop-through gets better.

So there is upside to that.

But for modeling purposes, we're saying use 48%.

That is how you can look at the different scenarios and see where we are going to be at different revenue levels.

Got it.

And you mentioned the 15% growth year on year that you should still be good with.

That would imply a pretty nice snapback as you look at September and -- should snap back probably 10%, 12% on the topline.

But is that more driven by the cellular side?

Obviously, that tends to be more product cycle driven.

Our second-half outlook, we are not guiding the full year, but we certainly expect to grow both cellular, the analog within mobile, and also the diversified markets.

I think it is a combination.

If you look at the margin opportunity, as Don outlined, we are going to drive margins in every category.

There is a lot of great technology going on in our core cellular as we roll out complex MMMB solutions, as we roll out SkyOne.

There is accretive analog that we can bolt right on into mobile.

And then, we have adjacent verticals that are very rich in margin, and quite frankly, we have a lot of headroom to grow there.

All right, great.

Thanks a lot.

Quinn Bolton, Needham & Company.

Dave, previously you have talked about the China white box 2G segment of the business being only about 5% of sales.

With 2G declining, my guess is it is even lower than that now.

But with emerging-market smartphones being a significant opportunity and growing 80% year on year, can you give us some sense, what is emerging-market smartphones or 3G phones for you today and how do you see that ramping over the next several quarters?

I think you're right, and just to be clear, that 15% of our revenue that is derived from 2G, about a third of that is true open market, true open market, for example, on a MediaTek reference design.

We have already passed the crossover point where we're generating more revenue, substantially more revenue on 3G that is going into the low end of the market.

And as I think we cited a source earlier, like 80% this year growth in the emerging smartphone.

I think that business is a strong growth driver for us.

And our reference design position is stronger in the sense that we have products that carry a higher ASP, and with our chipset partners in that space, we are first on their bills of materials as they enter the market.

So I am very pleased with our position for the chipset [partions] who are well positioned in open market with higher dollar content with far fewer competitors.

It is going to be a great market for the next three years.

And then, as a quick follow-up, one of your competitors on their call talked about securing additional capacity for filters.

You talked about your expectations being one of the largest sellers of filter-based product this year, where you partner with third parties.

Can you talk about whether you are seeing the filter supply getting tight in the market, or are you comfortable that you have adequate access to both SAW and BAW filters going forward to meet your demands?

I am satisfied, although it has come a great deal of work with our supply chain team and a lot of partnering, lots of discussions, lots of airline miles.

So we have teams of folks that have been working, that work daily with our filter partners, and there are multiple partners because there isn't one-size-fits-all for filter technology.

And so, we have got their attention as we are the ideal partner.

If you think about it, if you're a filter supplier or you don't make PAs, which the big filter suppliers do not, then we are the perfect partner.

We are the market-share leader and we have had a very clear strategy that we don't intend to produce filters.

So that makes us the perfect partner, and we have -- we are getting good capacity answers from them as they continue to invest.

So I'm comfortable that we have the capacity.

Cody Acree, Williams Financial.

Thanks for taking my question, guys, and Dave, congratulations.

Dave, with the linear and the cellular mix being relatively steady, with all of the opportunities outside of cellular that you highlighted from the initial comments on, a little surprised that maybe, I guess -- first off, do you expect that to remain relatively steady, or into the out quarters, do you expect to see maybe that linear piece start to outpace?

I think over time the linear piece will outpace.

But Cody, let me be clear, within a mobile platform.

For example, we have our PA products, but if you look at it, I think the great example is -- we tried to demonstrate that with the press release on the Samsung S4 -- if you look at the content, I think there is eight parts on that device and only a couple of PAs.

So it is the case that we will have a lot more analog and even some mixed-signal and power management-type content in mobile devices, while we also round it out with increasing vertical markets.

And so, if you looked at that 40/60 split, if you had to go down -- I don't know if you looked at it this way, but you look down at your bottom line, what does that split look like, given the margin difference between the two profiles?

Step back and you looked at the split, it is going to be a little higher percentage for the linear piece because that business overall has better margins and better returns, but we don't -- we wouldn't provide that exact percentage, but the takeaway is that that number would be higher.

Yes, we don't segment the business because we are using the same basic core manufacturing and design platforms across -- it is the beauty of our business model, right?

So the analog products that we develop for mobile, we also then reconfigure those for specific system performance in these vertical markets.

They do perhaps -- and we think about it as contribution margin, the contribution margin is higher in those vertical markets, but the volume is much lower.

So we have more margin dollars in mobile.

We have higher contribution, but when you blend it all together, we come up with an accretive model.

Ian Ing, Lazard Capital Markets.

First of all, you're talking more about the connected home, Internet of things, machine-to-machine opportunities.

How do you see those opportunities grow?

Can units start become material, perhaps rivaling phones one day?

And also, what are the margins there, given that these are somewhat low bandwidth opportunities, perhaps cost sensitive?

Sure.

We think the connected home and the Internet of things is a real significant upside for the overall industry, the wireless industry, the connected industry.

And we have had some early success with ZigBee technology in smart energy.

We have done a lot of good work with utility and metering companies.

We have moved into home automation.

We've now also moved into smart appliances, thermostats, and even white good appliances, Whirlpool, for example.

So we think that this could be a tremendous opportunity for the market.

Fortunately for Skyworks, we do have some technology in (multiple speakers) data rate.

ZigBee, we mentioned.

There is implementations in WiFi that could be beneficial for us.

So we think we can outperform in this space, and it has an entirely different demand curve and market structure than what we see in mobile.

So we are looking forward to it.

And the margins there should be accretive.

Great.

And my follow-up, this guidance on incremental gross margins, 48%.

Is that largely reflecting just the gross margins of the new revenues coming in or is there also a manufacturing component there, utilizations, and -- . So do you have a peak capacity at this point per quarter?

No, the beauty and what we have is when you look at utilization, there's two types of utilization.

There is your line, your manufacturing line utilization.

We run that typically at 100% or at theoretical capacity.

But you also have square footage utilization, and we have got the opportunity for very short CapEx to expand.

So we put ourselves in a position where we can drive the right incremental returns very efficiently.

Tom Sepenzis, Northland.

Congratulations, and thank you for taking my question.

I am just curious.

You've talked about several new product categories in automotive and home appliances, utility metering.

Do you have -- how big is that business right now and what do you see it going to over the next, let's say, two or three years?

In aggregate, the nonmobile portion of our business is around 40%.

And it is, by definition, not a very volatile group of businesses because it is so broad.

So think of the classic diversified analog businesses that have certain core competencies, which we have outlined, and we just keep applying them with more system know-how in underserved vertical markets and we get a disproportionate ASP and a lot of stickiness because the product lifecycles are very, very long, so that is the strategy there.

It is very diversified.

Not terribly customer concentrated.

Great, thank you.

I am sorry if this was asked, but I'm just curious as to why the tax rate was so low and why you think it is going to remain the 7% to 10% range over the next year and a half.

It is just based on some business restructuring initiatives that we successfully implemented.

You know how that translates into, the end of the day, to our cash tax rate.

So something we work very hard at, and if you go back and look at our trend, we have effectively been able to manage that at a number around what you are seeing of 7% or so.

Brad Erickson, Pacific Crest Securities.

Two quick ones for me.

First, you talked about the back half of the calendar year ramp and on the shoulders of dollar content increases.

Curious to know if there's any expectation of share gain, particularly with your handset customers built into that expectation, or are you just talking about basically grabbing most of the available market growth?

We are making an assumption of some share gains.

As we have said, if you look at our prepared remarks, our recent press releases, and Samsung and elsewhere, we expected complexity facing our customers is playing uniquely into Skyworks' capability with a broad system footprint.

And as a result, with each successive design, subsequent design, in the smartphone space, for example, or the tablet space, we see the need for more integration in order to hit the size, price performance requirements.

And that integration plays well into the fact that we're the only supplier in this space that produces about 6 million multichip modules every single day.

We have unique IP in how one integrates chip scale and the like.

So I think the more there is complexity, the more share we expect to gain and the more content we expect to be able to add.

That is our strategy.

Great, that is helpful.

And then, on the pricing front, can you just give us an update on how the pricing environment looks?

It would seem that you're obviously speaking quite bullishly around the low-end smartphone growth, and historically have talked about how the high end has supported those declines you have seen in the 2G market.

Can you give us an update how -- if anything has changed there in terms of the pricing in the market?

Sure.

As Don and Dave had indicated, we are taking more of a systems solutions orientation to dealing with customers and working with our customers.

The complexity is going way up, and the types of products that we deliver to solve that challenge, to overcome that complexity with our customers, are changing rapidly.

They tend to be highly customized, defensible IP, real architectural solutions.

And with that approach, we have seen much less ASP pressure.

And we think that will continue.

The vertical market is much less ASP pressure.

Some cases, the lower-end space, where you have more of a commoditized portfolio, the ASPs will run a little faster there, but that is becoming a smaller percentage of the business.

Thank you.

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

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

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

Thank you.

Then ladies and gentlemen, that does conclude today's conference call and we thank you for your participation.