思佳訊 (SWKS) 2013 Q3 法說會逐字稿

Good afternoon, and welcome to Skyworks Solutions' third-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.

Thanks, Laurie.

Good afternoon, everyone, and welcome to Skyworks' third fiscal quarter 2013 conference call.

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

Dave will begin today's call with the 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 are detailed from time to time in our SEC filings.

I'd 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 for the Investor Relations section of our Company website for a complete reconciliation of GAAP.

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

Thank you, Steve.

And welcome, everyone.

We had another strong performance in the third quarter of fiscal 2013, exceeding guidance across all key metrics.

I'm pleased with the progress we have made towards our overarching strategic goals of diversification and market expansion.

Both of these initiatives contributed towards our outperformance in the third quarter.

Along with this, our growing portfolio of highly integrated, high-performance analog solutions helped to drive strong sequential margin improvement, and helped to drive earning upside.

During the quarter, we posted revenue of $436 million, that's up 12% year-over-year.

We delivered gross margin of 44%, nearly a 200 basis point increase versus the prior quarter.

We produced operating profit of $112 million.

That's up 22% versus a year ago.

And we earned $0.54 per share, and that's up over 20% year-over-year and $0.01 better than our guidance.

We also repurchased roughly 4 million shares of our common stock during the quarter, and ending with a cash balance of $400 million.

And, finally, our return on invested capital was over 20%.

This is well in excess of our cost of capital.

And for the current quarter, we are guiding revenue to be up nearly 9% sequentially to $475 million, driven by contributions from new market initiatives, program ramps and share gains.

During the fourth quarter, we will continue to demonstrate the significant earnings leverage in our business model.

Based on the outlook for strong revenue growth, gross margin expansion and operating expense leverage, we are guiding for fourth-quarter EPS of $0.62, representing a 17% year-over-year growth.

Our near-term results continue to be quite healthy, but more importantly, our long-term outlook remains very bright.

We are in a unique position to capitalize, as advanced forms of connectivity spread across a widening array of end markets.

As our guidance implies, fiscal 2013 will be a record earnings year for Skyworks.

And with our current opportunity funnel and recent design momentum, we've put in place the groundwork to continue our above-market growth trajectory, realizing our vision of providing mobile Internet growth with the financial returns of a diversified analog company.

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

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

Revenue for the third quarter was $436.1 million, slightly ahead of our prior guidance of $435 million.

Gross profit was $191.8 million or 44% of revenue.

That's up 180 basis points sequentially, and 80 basis points from the third quarter of 2012.

Our strong margin performance reflects the strategic shift in our product portfolio toward more differentiated performance-based solutions.

Operating expenses were $80 million, in line with our guidance, and consisting of R&D expense of $49.3 million and SG&A expense of $30.7 million.

We generated $111.9 million of operating income, up 22% versus last year.

Operating margin was 25.7%, a 220 basis point increase versus the year-ago quarter.

Below the line, we recorded $200,000 in other expenses and had a cash tax rate of 7.5%.

Net income was $103.8 million or $0.54 of diluted earnings per share.

And that's $0.01 better than the guidance, and representing earnings growth of 20% year-over-year.

Turning to our third-quarter balance sheet and cash flow statement, we generated $65 million in cash flow from operations.

We invested $33.4 million in capital expenditures, and had depreciation of $18.5 million.

And we also repurchased nearly 4 million shares of our common stock, representing an investment of roughly $92 million.

And we exited the quarter with $400 million in cash and no debt.

Our business continues to generate very strong cash flow, and we are on a path to produce over $450 million in cash flow from operations for fiscal 2013.

Given the positive momentum in our business, and our high confidence in our future prospects, we continue to believe that repurchasing shares of our common stock represents a highly accretive use of cash.

As a result of our more aggressive activity over the last three quarters, we have largely completed the 200 million repurchase program that we initiated back in November 2012.

We expect to remain active in the market.

And, to that end, we are pleased to announce that our Board has authorized a new [$250 million] program, providing us with the capacity for additional repurchases in the coming quarters.

Turning to our fourth-quarter outlook, based on our current backlog and order visibility, we expect revenue to be $475 million, up -- roughly up 9% sequentially and 13% year-over-year.

We expect gross margin to be between 44% and [44.5%], And as a reminder, going forward, we suggest modeling incremental gross margins at a 48% rate from the fourth-quarter baseline.

We project fourth-quarter operating expenses to be around $81 million.

Below the line, we anticipate $200,000 in expenses from interest income and other expense, with a cash tax rate around 8.5%.

Putting all this together, at $475 million in revenue, with gross margin at the midpoint of 44.25%, and $81 million in operating expenses, we anticipate fourth-quarter operating margins to be over 27%, with EPS of $0.62 on a base of 190 million shares.

In summary, we are continuing our track record of execution, producing above-market growth and best-in-class financial returns.

All of the underlying drivers are in place for Skyworks to continue to outperform, putting us on a clear path to achieving our mid-term business model of 30% operating margin -- which, as a reminder, generates earnings per share of around $0.75 per quarter.

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

Thank you, Don.

For the remainder of the call, I will discuss our ongoing diversification efforts, and in more detail, and provide some additional perspective on our growth ahead.

As we touched on earlier in the call, diversification across end markets, customers, and product offering has been a contributor to our recent outperformance and a cornerstone of Skyworks' long-term growth strategy.

Over the last several years, we have established a strong track record of identifying high-growth market opportunities, of utilizing our technology advantages, advanced integration capabilities, and customer relationships to carve out a leading share position, and leveraging our scale and flexible business model to translate these revenue drivers into superior financial returns.

And as our performance over the last few years indicates, we have been highly successful in executing on this strategy.

And following this very same game plan, we are currently in the early innings of the next phase of growth at Skyworks, as advanced forms of connectivity expand from the mobile markets into a broader analog world.

In fact, we see connectivity and mobility as being the biggest secular drivers within the analog landscape over the next several years, all of which are long-standing core competencies of Skyworks.

So with this in mind, I would like to highlight three key themes, as you consider the opportunities ahead for Skyworks.

First, the Internet of things is upon us and the opportunity is enormous.

It's virtually impossible to find an end market today that is not incorporating some form of always-on access.

Whether it's within mobile devices, or the connected home, the automobile, medical devices, machine-to-machine applications, or in completely new areas of innovation like smart lighting, connectivity is on the rise across a broad array of end markets.

In fact, a recent white paper from Cisco Systems projects a tremendous surge in connected things within the next few years, suggesting that the number of connected devices will exceed the world's population over the next few years.

And the opportunity increases even further when factoring in technologies like 802.11, ZigBee and others.

In total, the market is projected to reach a staggering 50 billion connections by the year 2020.

All of this translates directly into new growth avenues for Skyworks.

In fact, some of our fastest-growing segments are within areas like medical, industrial, automotive, and smart energy, where connectivity is being adopted for the very first time.

Second, complexity is going up across our addressable markets.

By all accounts, data consumption is skyrocketing.

And along with it, so are the ways in which consumers stay connected by seamlessly utilizing multiple modes of connectivity.

Many applications we see today involve the integration of several different communications protocols like cellular, like Wi-Fi, GPS, Bluetooth in their field of communications, to transmit sensitive signals within close spectral proximity across crowded licensed and unlicensed frequencies.

Further complicating matters, customers are desperately seeking efficiency gains within their system power budgets to bring out additional battery life, to support more processor power, higher resolution displays, and a host of new functionality.

Third, and perhaps most important, analog complexity translates into more addressable content and higher value add for Skyworks.

This technology evolution is happening today, driving our addressable dollar content higher across the board in product areas like signal transmission and switching, voltage regulation, filtering, and power management, among others.

And as you know, we've spent the last few years broadening our technology portfolio, extending our product lines, and investing in applications teams in key vertical markets to address these challenges and to create new incremental revenue opportunities for us.

And as some examples of our recent success, we have captured a number of new program wins during this quarter that include a complete suite of RF and analog products for leading 802.11ac enterprise routers from Cisco, Netgear and others; backlighting and power management ICs for tablet and e-book applications; telematics and infotainment system design wins with a strategic global automotive supplier; integrated systems incorporating mixers, down converters, and IQ modulators for 4G base stations.

Incidentally, these devices represent a three-fold increase in content for Skyworks.

And silicon based, ultra high-speed switch ICs for carrier aggregation applications.

So, in summary, it's a great time for Skyworks.

And before closing, I'd like to reiterate some of the key messages from the call.

Skyworks is levered directly to the global megatrend of rising connectivity attach rates across a broadening array of analog markets.

Our addressable content is on the rise, driven by increasing complexity.

We have the critical mass and we have the financial strength to capitalize on this financial opportunity.

And, finally, we have a long track record of converting these positive dynamics into consistently strong operating results.

This concludes our prepared remarks.

Operator, please turn the call over for questions.

(Operator Instructions).

Craig Ellis, B. Riley & Co.

Thank you for taking the question, and congratulations on navigating a difficult demand environment.

Hi, David.

Just looking at the businesses, cellular and high-performance analog, can you give us the typical split-out in the businesses?

And as you get traction with a number of the vertical market opportunities, and as you succeed with diversifying the customer base, do you expect the relative growth rate of those businesses to change over time?

More specifically, do you expect high-performance analog to accelerate relative to cellular from here?

Yes, Craig, the mix was really -- relatively consistent with what we have seen.

Linear HPA was 40% of the revenue and in the handsets, smartphones was 60%.

And, Craig, for all the dynamics we described in our prepared comments, I would expect over time to see the more diversified elements grow faster than traditional business for Skyworks, incidentally with accretive margins.

And then as my follow-up, looking within the high-performance analog business, the business has good exposure to communications infrastructure.

It has been a very -- fairly muted end market, but there are signs of spending improvement in China and other areas.

What are you seeing in that end market?

And how does that end market impact the way you're looking at the back half of the year?

Sure, Craig.

Well, we are seeing a great opportunity for the infrastructure space to pick up.

It's been somewhat soft now, and it really isn't a meaningful change in our near-term guidance.

But we continue to gain market share.

We have noted some recent design wins with companies like Ericsson, where we've increased 3X our content on LTA base stations.

We're also doing some very good work with a small cell opportunity, which we think is going to be big driver for us, also some attach with WLAN.

So the design win position for us actually is getting much, much better.

And we are confident that the carriers are going to be spending shortly, and we're going to see some upside.

Yes, and I would add that our highest growth customers in that segment today are Huawei followed by ZTE.

But as Liam said, we don't think that market is reliable enough to count on it in short mid-term growth.

So we're simply not factoring in any growth and hope to someday be surprised.

Harsh Kumar, Stephens.

First of all, congratulations.

These are great numbers, great guidance in light of everything we have heard.

Thank you.

Quick question for you.

We heard from another company that plays in the smartphone area this morning talking about negative trends.

I am curious what was the offset in your business?

In other words, what part did you see strength in, if you saw weakness in one or two other parts?

We saw our strength in connectivity, broadly speaking -- in our Wi-Fi business, our home business.

We saw the early program ramps of some automotive programs and some industrial applications.

So that was a nice uptick for us.

Those segments in aggregate are becoming meaningful growth drivers for us now.

We also saw some nice growth in emerging markets with highly integrated systems and devices going into some of the smartphones.

As you probably know, or have seen the teardown reports, we're aligned very tightly with, for example, MediaTek, with some pretty slick, highly integrated devices that are beginning to ramp.

So we are seeing some uptake in the emerging markets and expect that to continue.

Fair enough.

And as a follow-up, very nice job on the margins, gross margins, particularly.

So what's the -- in your mind, what's the single biggest driver of that number moving up?

Yes, well, Harsh, I mean, it's, as we had guided, we expected and we did deliver some meaningful expansion in the third quarter.

We ended at 44%.

There are multiple factors.

I would say that two of the critical ones is -- as Dave said, we are seeing an increase in the diversified analog content in our mobile space as well as in the other vertical markets.

And those all have accretive margins.

And we're also seeing with the new products that we are ramping across a lot of different markets, this isn't just mobile or diversified analog; we're just seeing accretive margins.

And we're starting to realize a lot of benefit from our design for cost focus, and the value that our customers are assigning to the differentiated performance-based solutions that we are providing.

And the volume helps as well.

And, you know, we're a company that continues to focus on factory performance and product cost.

And it's about yields, it's about productivity; the CapEx you see us spending, that has very quick paybacks.

All that contributes to incremental margin performance.

So it's a lot of things.

Mike Walkley, Canaccord Genuity.

On the guidance, it was much better, I think, some investor fears out there.

Could you maybe elaborate on some of your comments.

You talked about some share gains embedded in the guidance.

Can you give us some color on where you are seeing share gains relative to the overall market?

Well, I believe Liam can help me with this question as well, Mike.

I don't -- it's not really share gains that's driving the growth and that's driving the margin expansion.

It is much more a function -- I would put it in this order.

One, is we are gaining a lot more content as we bundle our system solution around what had been traditional analog and RF content.

So you're seeing a very high attach rate with GPS, power management, Wi-Fi in addition to switching and control and amplification.

So that's a big driver for us.

I would put right up there with that just penetration into new markets.

We're getting high ASP with very high contribution for products that have been custom-designed into some of the vertical markets we have been talking about.

You know, you thought about -- and if you think about energy management and infrastructure, but this is much broader than that now.

We are seeing the connected home, the automobile.

And these are meaningful revenue drivers, with really nice margin.

So I think it's that.

We're in the right place at the right time with the right chipset partners in the case of the emerging market growth.

So that was also a contributor.

So I wouldn't call it share gains as much as I would just a concerted effort to diversify and to add more value to our customers.

And, yes, as a result, you do gain share and you box out competitors as you raise the bar technically with these more integrated solutions.

But the intent is really to service our customers with more content and a better overall system experience.

Okay, thanks.

And just a follow-up to that, with your more integrated solution for the lower end 3G smartphone market upgrading from 2G in China.

As you mentioned, MediaTek's reference design.

Is that business growing again sequentially in Q3?

There is some concerns of some inventory in China, but it might be some other customers and not MediaTek.

Can you comment at all about your guidance?

Would the China-related business be up sequentially in that guidance?

Yes, Mike, this is Liam.

The China business, as Dave outlined earlier, is actually really moving in the right direction for us now.

We have been engaged with MediaTek and Spreadtrum for quite a while.

We're seeing the early stages of an upgrade cycle there, where content can go up 2X to 3X from the baseline 2G business.

The other important thing about China, you still have the majority of the subscribers carrying 2G feature phones.

So there is opportunity in our core business, but we're also seeing an extended reach.

As you go into the smartphone world in China, you're increasingly seeing Wi-Fi for the first time.

You're seeing more complexity in antenna switch modules, GPS applications and power.

So, it's -- as Dave said, it's share gains, but it's also a broadening reach for us.

And China, for the most part, has been really slow to adopt some of those new technologies.

And we're looking forward to some upside there.

Ed Snyder, Charter Equity Research.

A couple of questions.

Dave, last year around this time, you'd -- we chatted about product mix, especially in the cellular one, and you made a prediction that turned out to be accurate, that you would be the largest manufacturer of pads in the space.

Do you still feel that's going to be the case over the next six months?

Or do you think your mix shift is more to analog now that it has to [FAS]?

And increasingly, SOI is becoming a very big deal in some of the leading smartphones.

One of your competitors has led in that area, but it sounds like you guys are gaining a lot of ground.

Where do you think that mix is going over the next, say six to nine months, Skyworks going to start showing up in a larger presence, say, in antenna/tuners that you have in the past, and in SOI in general?

So we can get some color on the CMOS/SOI mix, if you could, thanks.

Yes, okay.

I think, Ed, the first part of your question was about filters specifically, I take it?

Our participation in filters, you mentioned pads and so on.

So let me try to clarify that a little bit.

We participate in filters when it's part of a more integrated system.

A pad is a good example.

SkyOne as a product family incorporates many of the duplexers.

We can use our manufacturing techniques to do a lot of die stacking and inexpensive small footprint integration that's pretty unique.

And we have some proprietary capabilities there that we're exploiting.

And we are one of the largest integrator of filters in the world.

I think we are the largest by unit volume today.

Again, we don't sell discrete filters; that's not our business.

And I expect to continue to do extremely well there.

We are in a unique competitive advantage, oddly enough, because since we don't -- we are not vertically integrated in filter nor do we want to be.

We think that's a long-term, lower margin, more commoditized segment of the mobile business.

However, because we are not in the filter business, we have got great relationships and strategic partnerships with a growing list of filter suppliers.

Because we use a different filter below 2 gigahertz.

We use simple saws that are cheap.

We temperature-compensate a SAW for certain applications where spectrum is very tight.

And that temperature compensation improves the frequency performance.

Above 2 gigahertz, we use some devices from a couple of different suppliers that really give us an advantage, again, with spectral crowding at higher frequencies.

So we're a really good partner for these filter suppliers, because we're really their only conduit to some of these very high-volume sockets.

And they view us that way, and they're opening capacity up for us.

And we're doing some proprietary packaging and designs to make it sticky.

Yes, Ed, and with respect to SOI, silicon product, we certainly have been deploying those technologies in our switching business.

And when you move into high-throw ASMs, which now is the prevailing approach, 6 to 8, and it's up to 12 throws.

Carrier aggregation, as you noted, is becoming a very important part of the equation now, as you stitch channel bandwidths wider and wider in upcoming smartphones.

Even in Wi-Fi, we've been using SOI technology broadly.

So, we feel real good about our position there.

We have pHEMT technology as well.

And whatever the market needs, we're going to be ready to deliver.

Blayne Curtis, Barclays Capital.

Thanks for taking the question.

I just wanted to fall back on the China business.

If you could maybe just quantify, one, just about how much that was of your business in the June quarter?

And then I just wanted to clarify -- you clearly have an opportunity as 2G goes to 3G.

I was just curious in the near-term here, your outlook for September.

Are you still seeing growth there?

Because there definitely is a lot of concern there.

I just wanted to make -- clarify that you weren't just talking about the longer-term trends there.

Thanks.

Our China business has been running in the mid-single digits.

That's been fairly consistent.

And it has really been the intersection of less investment in 2G, a technology that's in decline unit-volume-wise.

And, I think, profit-wise, it's in decline.

So we have focused exclusively on those areas of integration where we have a competitive advantage.

And I think the market is, over the long-term, going to see that it is very difficult to hit the bomb cost targets with the amount of complexity that's inherent in the smartphone, even for -- even in China.

And so we have done some things that are very unique around low-cost but high-performance, highly integrated.

And we get good margin on those products.

So it is relatively small today, though it had hit -- it has passed the inflection point where 2G was declining faster than the uptake in 3G.

And we now are seeing growth.

And we saw growth this quarter.

And we are ramping some new programs, and we expect to see some growth in the next quarter as well.

Thanks for that.

And then I just wanted to ask you about SkyOne, if you could just update on some timing and some milestones, and whether you still feel as positively there?

Thanks.

Sure, Blayne.

Well, we've made great progress over the last quarter with SkyOne.

And let me just remind you that this is really an engine that provides our customers with a unique value proposition.

We're delivering a fully functional yet highly simplified solution.

It is configurable.

It sweeps in all the key elements of the RF chain, and we do all the tuning and matching.

It addresses the challenges that we've all discussed here about increasing complexity and band count, also matched with the need for power, efficiency, and size.

So, with that said, we have made great progress.

We are sampling a number of customers.

We continue to do that.

And we actually have design wins now that we would expect to be shipping by the end of the year.

Vivek Arya, Bank of America Merrill Lynch.

Thanks for taking my question.

Dave, could you address the competitive and pricing dynamics in the market?

Because I think this has been a key concern about not just Skyworks, but all the other vendors, is that there is customer concentration risks, and that pricing is likely to get more aggressive as the mix moves more towards the lower end.

So can you just help set the record there as to what are the pricing dynamics?

Are you seeing more pricing pressure than you have experienced before?

Any color would be very helpful.

No, I would say, this year, in our pricing negotiations for next year, we are seeing a little bit less pricing pressure than we saw last year.

I think it is partly the mix.

Remember, pricing pressure is in direct proportion to the number of competitors and how sticky a product is, or how much value the product adds.

And what we are increasingly finding with the products we are addressing, is that we don't see multiple competitors.

It's custom; it's virtually all custom.

So what we're trying to do is develop a product that, from its onset, hits the customers' desired bomb point, but does so in a way where we have high contribution because the product is very unique.

And as subsequent generations of designs, and if you look at -- in fact, if you look at recent teardowns, you'll see a lot more Skyworks content with devices that are fully shield, that are integrated, or they're at least bundled and optimized for the ultimate system performance.

You're seeing a lot more power devices, more voltage regulation devices, more connectivity devices.

So, Vivek, I think it's not the case that we are selling components with a bunch of competitors.

We are selling system solutions with a narrow set of competitors to change, as we move from market to market.

And that has been a concerted effort on our part to migrate our business away from components and commodities.

And we're being much more successful today.

And, Vivek, that's part of what you're seeing in the margin profile too.

Absolutely.

And then just one follow-up on that.

As you look at the opportunities you have, both in your traditional power amplifier and front-end module segment, versus the high-performance analog, are you seeing better attach rate -- so better attach with your high-performance analog solutions?

How should we think about sort of the -- you're selling more of these complementary solutions into a bigger TAM than you had been able to do before?

Well, I mean it's a combination.

We certainly will take advantage of opportunities to bring what we would call traditional analog technology into our mobile suite.

And we've done well with that.

But we are seeing an increasing suite of opportunities and application in broad markets, where we've talked a lot about smart energy.

We're also doing work now supporting connectivity in LED lighting.

We are doing panel power for tablets.

We have been doing work with video security.

There is just a whole plethora of opportunities that we're going after with our high-performance business.

Some of it uses traditional products, like our 802.11ac.

Some of it is new, organic technology that we've grown in-house.

But we are very, very pleased with that opportunity.

And quite frankly, as much as our numbers have been strong, there is tremendous market share there that we haven't yet tapped.

And I think to follow on to Liam's comment, I really should stress that almost no one is buying a PA today or a switch.

They are concerned with -- look, I've got a number of bands that's exploding.

I need to go from the output of that transceiver; I need to know what voltage and power that front-end is going to see.

I need to turn it at the antenna, and I need you to shield all of this and frequency, synthesize and convert it in a matter that I don't have harmonics problems, and I can fit it in the physical footprint of the board.

And that's very different than a model that I think you are referring to when you talk about commodity pricing and that.

Yes, if you are only selling -- for those few customers that want to buy a discrete PA and a 2G, there's too many competitors.

I don't -- that's not a business focus.

Alex Gauna, JMP Securities.

A number of the prior questions addressed some of the turbulence being seen in the end markets.

I just wanted to check with you.

Are you, in fact, seeing any slowdowns, adjustment-downs and build plans for some of your key OEMs?

Is that a factor in the outlook?

Or is there somehow through mix that you're actually not seeing that?

And then a follow-up on the China question, I know you addressed the longer-term opportunity for content to go up 2X to 3X.

You've got the MediaTek attach as well as the Lenovo, Huawei, and CTU wins.

Are you seeing both unit volume attach and ASPs go up or content per device go up right now?

Or is it more one or the other?

Thank you.

Hey, Alex.

The first part of the question, with respect to mix and slowdowns and so on, I think it's helpful to point out that there isn't an OEM with meaningful volume today that we don't have some business with.

And overall, that business is increasing in content and TAM share, if you will.

We're adding more functionality.

So, yes, well, of course, we're not immune from any OEM who is having difficulty.

We see it.

If there is another customer who is taking some of that share, we typically see it as well.

And so we're more of a broad proxy in terms of the overall growth in unit volume.

And then we add to that incremental content.

And then we had to that the higher attach rate in these focused vertical markets, which are coming from a relatively small position and seeing strong sequential growth for several quarters now.

Sure.

And Alex, with respect to China, you've got two dynamics.

You have just a richer content mix in smartphones, whether they're 3G or 3G TD-SCDMA.

You've got that benefit.

And then you have the actual subscriber upgrade cycle going now, where the majority of new subscribers are moving into that category.

So you have more units of smartphone increasing.

And then you have a content gain in each smartphone.

So, you're seeing it be accretive to content as well as profitability?

And then also, your latest thoughts on the TDD LTE opportunity ahead of you?

Yes, I think -- well, it's -- exactly.

So we are seeing accretive for sure.

And the TD LTE opportunity for us is actually quite positive.

We have been working with a number of the key players.

We're also starting to talk with carriers a bit, and looking for ways to do something unique, create more of that systems approach, that really, in markets like China, when you're dealing with customers like Lenovo and some of the smaller players, the benefit for us to come in and provide more systems architectural solutions really plays well.

So I think that will all come together, and we have the right people on the ground to make it happen.

Thank you.

Congratulations, great quarter.

Thank you.

Anthony Stoss, Craig-Hallum Capital.

Congrats on the gross margins also.

Hey, Dave, on -- or maybe, Liam, getting back to SkyOne, you're going to start shipping by the end of the year.

So in addition just to additional bands and more content in China, do you think your overall content can go up once you start launching SkyOne?

And where do you think SkyOne goes, say, by the end of next year?

And then, lastly, is it fair to say that Wi-Fi is growing faster than your cellular side?

Thanks.

Thank you, Anthony.

With respect to SkyOne, SkyOne is a unique product.

It is, as Liam mentioned, highly configurable to region of the specific customer architectures, but it has one common theme.

And that is, it is all bands of amplification with matched to the duplexer with all the switching and frequency conversion.

And so it is a pretty unique product.

By definition, Anthony, when we capture those socket, we capture the entire analog front-end.

There isn't anything outside of it.

And then, of course, the attach rate with Wi-Fi for us is very, very high.

So I think you should think of it in terms of -- the SkyOne isn't for every application.

It's not for every socket.

But it's a great product platform for a number of customers who are going to be able to get to market quickly, where otherwise, they simply could not deal with the complexity, even of a strong reference design.

They need to take that -- they need this to be shielded, drop, and have it be completely bulletproof.

And that's what SkyOne does.

Right.

Now with respect to Wi LAM, I mean, we're seeing ubiquitous attachment now.

It's an incredible market for us.

We are benefiting with an 11ac rollout in the handsets that's just starting.

And we have great position there.

We are seeing an access point opportunity that is incredible.

We have MIMO technology, multiple in/multiple out, teardowns available across the board that show the richness of that opportunity.

And the need for the speed.

When you think of what is available today for content to the consumer, you need 11ac technology to bring that home.

So that's great.

And then we are seeing Wi-Fi move into some of our home automation markets, where we see Wi-Fi for video security, set-top box with customers like Comcast and others.

So, Wi-Fi for us now just creates such a broad opportunity that some of it's mobile; some of it's analog; some of it's home automation.

It has a pretty amazing growth rate to it.

Anthony, in the public domain now there are a couple of the early high-running AC routers, for example.

And those products, we've got $5, $6, $7.

We've got upwards of 10 devices, power management devices going to multiple antennas, with amplifiers and switches and filters -- I mean, it is amazing how complex those devices are and how much value we can add by being out in front of AC.

And then to be able to do some unique things to integrate and package -- that's a great business for us.

Thanks.

Great job, guys.

Rick Schafer, Oppenheimer.

Thanks and I'll add my congratulations, guys, on a nice quarter.

(multiple speakers) Yes, I just had a couple questions.

One is kind of a follow-on to the earlier stuff on the smartphone tablet.

I'm just curious, I know it's early to discuss the December quarter, but how do you think it shapes up for that vertical for smartphone tablet?

I mean, do you expect that it could be a little slower quarter if Samsung kind of follows their typical seasonal end-of-the-year kind of pattern of flushing inventory, and maybe Apple reorders fall a little short?

I, I guess I'm curious what your process is; if you could walk us through your process for sort of evaluating or even haircutting some of your customers' forecasts?

Boy.

Well, the December quarter we expect to be seasonally up, as it normally is.

We could debate how to handicap what up means, but we expect it to be up relative to September.

I think more importantly, we have good visibility for December, because a number of phones and smartphones and tablets and that segment of our business you will be seeing new platforms hitting the market.

That's just the way it is at the end of the calendar year.

And we like a position there a lot.

So we think the market will be up in December.

We think we'll be up more than the market, and we can identify those programs today.

Okay.

And then a question on RF360.

I'm just curious what your customers -- what you have seen from your customers in terms of their reaction to that part?

How do you guys look at it?

And maybe, I don't know, give us any color you have on -- what's going to be sort of key to that part getting traction?

And when do you think that will be?

Yes, that's a great question.

I think in one sense, the RF360 and Skyworks' highly integrated products including SkyOne, are really addressing a fundamental issue that we have common to both of us.

And that is that RF complexity is exploding dozens of bands.

Harmonics, coexistence issues are real issue.

OEMs need to simplify all of this complexity.

So I completely agree with QUALCOMM on that front.

And there are painfully few suppliers who can do anything close to the level of integration our customers need today, which is why we are seeing the margin accretion that we're seeing in the mobile space.

However, here is where we differ -- every customer is different.

No one-size-fits-all.

They have differences in terms of the regions they want to address, the number of bands, how they look to implement, where they see the sensitivity in the system, given what they're trying to deliver in terms of functionality.

So we do not see a one-size-fits-all design approach, which is why we have made SkyOne, for example, to be highly reconfigurable, even though it's highly integrated.

The other place where we differ is we do not see any customers willing to take any iota of compromise on performance, particularly with respect to current consumption.

And so if you look at SkyOne, it has the very best process functionality, the very best packaging technology to deliver the best performance for each functional block within that transmit chain.

Because we just don't see any customers willing to say, well, you know, it's not that -- the performance isn't as good, but it's highly integrated.

Well, so what?

So we see this is an area where Skyworks excels, in fact.

Steve Smigie, Raymond James.

I will add my congratulations on the great performance.

First question was just on the operating expense.

If I look at what you did last quarter, what you just reported and what you have guided, you're doing a pretty good job of keeping those dollars pretty flat despite growing revenue.

Can you talk a little bit how we should think about those dollars over the next several quarters?

Are you going to try to keep those dollars flat there still?

Or would we expect to see a little bit of growth as well?

Well, we just guided $81 million, which is a little bit up from where we've been running around $80 million for the prior -- several prior quarters before that.

We were making some targeted R&D and field apps investments that are going to support some new growth opportunities.

We think they're going to drive shareholder value, so we'll do that whenever that opportunity presents itself.

So, you're going to see some increases as we move forward.

There is a pay increase mid-fiscal period for us that does move OpEx a little bit.

So, I would think about you can ramp that so that we are at that kind of $84 million level by the end of 2014.

That's kind of a good way to think about it.

Great.

And then just to dig a little bit into the diversification story, I think in the past, one item you have talked about is you partnered with Texas Instruments on some smart meters.

I think those guys do a pretty good job in that market, as somebody like a Maxim.

And overall, that looks like it's going to grow pretty nicely.

Would you say that is going to be a significant driver for you?

Or is that even the wrong way to think about it?

Are there so many of the things out there like smart meters that, over the next 18 months, there is not going to be one or two big diversification platforms but a whole bunch of them?

Yes, I think that there will be many platforms.

We do work with TI on some ZigBee sockets.

There is also Silicon Labs and some others that we work with there.

So that business is great.

We have been in that market for quite a while, doing a lot of work with Itron and Sensus, Landis+

Gyr, Silver Spring Networks in the Bay Area.

But you know what's equally exciting now is this proliferation of what we call home automation, where the unit count goes way up.

We've got, as I said earlier, opportunities to connect lighting, to connect appliances, to connect security systems.

And the unit count there is much higher than it would be just with a meter communicating back to the utility.

So the good news for us is that we have the technology to play.

We have the ZigBee technology; we have the Wi-Fi technology, the switching and systems capability to deliver solution as the customers may see.

But back to the opening comments about 50 billion connected things, however that number goes, it's going to be much higher.

And the ability to connect is going to be there, and Skyworks has the rights of apology.

So we're very -- we're excited about it and look forward to updating you over the next couple of quarters.

Vijay Rakesh, Sterne Agee.

Hi, guys, good job.

Just want to ask a question on the China market.

I know you said your content is going up.

You have good partnership with MediaTek.

How do you see your share overall as you move to these higher content 3G market, and TDs picking up there?

Yes, as the markets moving up, one of the important point is that the competitive landscape is narrowing.

The 2G market, we have been a player there for years; still do some work.

But the landscape there is somewhat commoditized by the simplicity of the products.

When you're moving to the next generation, whether it's to quad core, MediaTek design or some of the new TD-SCDMA devices out of Spreadtrum, there is a great deal more complexity.

There is more energy around efficiency in the design.

There are smartphones now, so they are driving more current.

And our ability to kind of flex our engineering muscle and to lever our differentiated products goes up as these phones launch.

So we think it's a better field for us to play on.

Margins should be better, and content will continue to grow.

Got it.

And I know you mentioned in your press remarks that second half '13 should be pretty strong.

You operate your diversified very well.

How do you see, as you look out into December, I know it's a little far out, but given that you are diversified, and there's a little bit of a SKU in builds, do you see expand continuing out?

We do.

My expectation is that December we'll have -- be seasonally high.

It always is.

We're not trying to handicap what that number is.

But we have got some strong program ramps, some content gains and some verticals that are ramping going into the December quarter.

So we expect to outperform whatever that seasonal number is.

Mike Burton, Brean Capital.

Hi, guys, great job on the execution in a tough environment.

On the gross margins, you mentioned that mix played a role, but obviously, given your guidance for contribution margins, you expect more upside.

I was just wondering what is driving that going forward?

Is it all mix?

Or are there other opportunities on increasing utilization or cost reduction?

And should we get a new update on the mid-term model for our target?

Well, it's, as I said, Mike, that it's a combination of factors.

It's the increased diversified analog content.

It's better margins on products, new products that we are ramping.

We are seeing the benefit of the differentiated performance that we're providing the customers as well as the cost focus.

Volume always helps, and it's driving improvements across all the metrics in the factory.

It's all those things that are driving margin expansion.

And we have said to use off of this new forecast we just provided you, which is 44.25%, is to drop the incremental revenue in your models through at 48%.

And what that gets you when you look at the 30% model, we had originally targeted around [5.50%], that drops that number down to a slightly lower revenue level when you do that.

Okay, fair enough.

And then, also, just 10% customers in the quarter?

Foxconn and Samsung.

Tom Diffely, D.A. Davidson.

Maybe another content question for you.

So in the past, you have talked about how the high-end smartphone has a total addressable market of somewhere between $10 and $12 per phone.

I'm curious what your view is of kind of low to midrange smartphone at this point?

Well, it's -- it depends on -- I think the upgrade cycle from 2G to 3G, particularly in China, is going to -- it's going to take a lot of different forms.

It will be ultimately very high-end smartphones.

And they will have similar content.

I think there won't be that many of those, frankly, because I think a lot of the upgrade will be more regional or be TD LTE and bypass some of the bands.

I think they need to do that to hit those, what the market price will bear from a price point standpoint.

So I think it's anywhere from a few dollars to several dollars.

And that's a big uptick, obviously, from the $0.50 in 2G.

But that's where I kind of see it.

A few dollars.

It's not the $10 or $12, at least not for many phones.

Okay.

And then when you look at the adoption of the highly integrated products, does that impact revenue, even though it gives you higher margin?

Well, it impacts revenue, because we, by definition, capture more content.

Yes.

Ian Ing, Lazard Capital Markets.

Yes, thanks, back to this Internet of things.

Sounds like a potential big opportunity, lots of units, but lower content.

So any sense of when that could become potentially 10% of revenues?

What would have to happen for that to occur?

And then what sort of content do you have?

Is it mostly like ZigBee or analog, et cetera?

Thanks.

Well, it's not the Internet of things.

It's not one thing.

We kind of -- we are talking about the connected home and all the various forms that connectivity is taking in automobiles and other applications.

And I'm not sure -- maybe I don't understand the question.

It's well over 10% today, if you look at what the Internet of things means to us.

It's huge.

(multiple speakers).

Liam?

Yes, I think in the -- yes.

In the unaddressable -- on the markets that we haven't yet addressed, let me put it that way, there's a lot of upside.

So we are just starting to tackle markets like medical and home automation, and tackle markets like automotive.

And we're actually very surprised -- pleasantly surprised -- with the opportunity that we see, as many of these markets move to connectivity.

Telematics and automotive, for example, really wasn't a market two or three years ago, and we are addressing that.

We are doing home monitoring and medical.

So there is a number of things that we are now going after and seeing kind of a convergence to wireless that we can take advantage of.

And we haven't done it yet.

It's just early innings.

So like a ZigBee connection would be like a sub-dollar type of content then?

Well, some of our ZigBee connections are more than sub-dollar.

It depends on where you are.

When you tend to be -- if you're at the meter, for example, there is higher end product than you are if you're an LED light.

So it can vary depending on the opportunity.

Okay, thanks.

And then my follow-up, just a couple of housekeeping questions.

2G versus non-2G, percent of sales?

And then how should we model net OI&E going forward?

It's moved around a bit in the past few quarters.

Thanks.

Yes, the 2G was 15% in the quarter and so, the 3G/4G was 85%.

I'm sorry, repeat that second question again.

This is the operator.

Just a moment, please.

Yes, hi.

Go ahead and repeat your question.

Yes, net OI&E, it's moved around a bit past several quarters.

Just wanted to get some sense of how to model that going forward.

I would use the $200,000 expense.

Every once in a while, we will get some impact from currency, but it's minimal for us.

That's the right thing to do.

Great, thanks a lot.

James Faucette, Pacific Crest.

Just a few follow-up questions here.

First, you've talked a little bit about ultimately high-performance analog growing faster than cellular, but yet the portion seems to remain relatively stable, at least over the last few quarters.

How should we think about timing to when we will start to see that faster growth manifest?

Yes, James, it's hard to say, to handicap it, because there are an awful lot of high-performance analog devices in our mobile products.

So, for example, take a look at a teardown report of a phone today, of a smartphone -- and there's a number of them out there.

We have several dollars of content that has nothing to do with kind of a PA switch sort of a thing.

So, it's really hard, and in some ways, not quite as relevant, right?

Because if it's high-performance analog in a tablet, so be it.

Right?

Or in a smartphone.

Yes, we're just scoring it.

Yes.

So I think it will, over time, it will continue to trend faster and higher.

But the distinction, when we talk about the connectivity of things, the distinction between that which is a mobile device and that which is not, is getting increasingly hard to do.

Because the challenges are the same and the products are quite similar.

Right, absolutely.

And I guess just for future reference, we're looking at it from the standpoint of, hey, those particular high-performance analog, they tend to go into longer lifecycle products, and ultimately drive better margin contribution in general.

That's true.

Good point.

That's true.

So it will trend higher over time, but it won't be a big needle or curve; we think it will be graceful.

And, certainly, James, we have a lot of headroom there.

I think we are doing very well in mobile and we're bringing analog into mobile, of course.

But there is a lot of work and opportunity in front of us, where we can bring accretive margins in with our high-performance analog in the markets that we talked about before -- whether it's infrastructure, whether it's automotive markets that typically have the 50 point-plus GM's.

Quinn Bolton, Needham & Company.

Thanks for taking the question.

Just a quick clarification first on the China business.

When you talk about China as mid-single digits, does that include the branded players like Huawei, ZTE and Lenovo?

Or is that really more of a reflection on the white box percentage?

I think it's more a reflection on the white box percentage.

We're seeing -- we have a lot of business now with Lenovo, Huawei, ZTE.

So I think it's more sort of the open market stuff.

Okay, great.

And then just trying to get a sense on the September quarter guide.

You talked one of the drivers being program ramps.

I'm wondering, can you make any comments about how diversified your -- the growth is in the September quarter?

Or is it more concentrated to a couple of larger program ramps in the quarter?

You know, Quinn, I'm glad you asked that question, because what I'm really thrilled about is that if I look at this quarter, if I look at September, it is very diversified.

It's diversified in the sense that it's a diverse set of customers.

It's diversified in the sense that those existing customers are buying more content from us.

Across the board, Quinn, across the board.

And I really like the work that our high-performance analog teams have done with these teams focused on specific verticals, and what they've been able to undercover in terms of underserved opportunities for us.

Sometimes it's manufacturing integration.

Often it's the intersection of manufacturing with high-performance devices with a newly connected market -- existing market that becomes newly connected.

And so I am thrilled with the degree of diversification that we are rolling out in September.

And you see it in the -- you see it in the margins.

Thank you.

And, ladies and gentlemen, that's going to conclude today's question-and-answer session.

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

Well, thank you, everyone, for participating.

And I look forward to seeing you in upcoming conferences.

Thank you, ladies and gentlemen.

This will conclude our conference call for today.

Thank you for your participation and for using AT&T's Executive Teleconference Service.

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