思佳訊 (SWKS) 2014 Q2 法說會逐字稿

Good afternoon and welcome to Skyworks Solutions second quarter FY14 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, Rick.

Good afternoon, everyone, and welcome to Skyworks' second fiscal quarter 2014 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'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've used in the past.

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

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

Thanks, Steve, and welcome, everyone.

I'm happy to report that Skyworks delivered another very strong performance in the second quarter of fiscal 2014, outpacing normal seasonality and exceeding expectations across our key metrics.

The combination of robust year-over-year revenue growth, earnings leverage, and strong cash flow we posted in the seasonally soft March quarter is a clear testament to the benefits of our diversification strategy.

All in all, I'm quite pleased with our accomplishments in the first half and expect our momentum to continue as our market footprint and customer engagements expand.

The world is rapidly becoming more interconnected from the cloud to the data center to wide area networks into the enterprise and vertical markets and within the home.

Skyworks is a key enabler of this global mega trend, providing custom analog solutions that facilitate connectivity across a wide range of communications and protocols.

These positive market dynamics create complementary growth opportunities for us with new product categories like media gateways, like small cells and tablets.

And in entirely new verticals like the enterprise, medical, and automotive.

And as analog design complexity rises, it creates a need for highly specialized systems, driving higher addressable content opportunities.

We're capitalizing on this today by leveraging our analog design expertise, expanding our product portfolio and integration capabilities which, when combined with our consistent execution, translates into superior financial results.

Specifically, during the quarter we delivered revenue of $481 million at the head of our guidance of $470 million and up more than 13% year-over-year.

We produced operating income of $130 million which is up over 30% from a year ago.

And we posted $0.62 in earnings per share, that's up 29% versus a year go and our fourth consecutive quarter above 20% earnings growth.

We generated $214 million in cash flow from operations which is another record for the Company.

And we also repurchased 2 million shares of our common stock and we announced a quarterly dividend of $0.11 per share.

So, in summary Q2 was an excellent quarter for us across the board.

Looking ahead, we see strong demand signals spanning our end markets in 4G solutions for emerging markets and new 802.11ac deployments in network infrastructure that connected home and other key vertical market opportunities.

In short, Fiscal 2014 is shaping up to be a very good year for Skyworks.

With the opportunity pipeline we have in place, the stage is set for continued revenue growth, margin expansion and earnings leverage.

So, for a more in-depth review of our financials, I will turn it over to Don for his commentary and his outlook.

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

Revenue for the second quarter was $481 million, ahead of our prior guidance and up more than 13% versus the year-ago quarter.

Gross profit was $215.2 million or 44.7% of revenue, better than our prior guidance, and up 250 basis points from the year-ago quarter.

Gross margin upside was driven by strong adoption of our integrated system solutions, margin accretive new product introductions, and strength in key vertical markets.

Operating expenses were $84.8 million consisting of R&D expense of $53.1 million to support organic growth initiatives and SG&A expense of $31.7 million.

We generated $130.4 million of operating income yielding 27.1% operating margin.

That's a 370 basis point increase versus the year-ago quarter and it highlights the continued strength of our business model and our execution.

Operating profits were up 31% year-on-year.

Let's put this in perspective.

We have delivered an incremental $107 million in revenue year-to-date versus the first half of Fiscal 2013.

We successfully converted this into $58 million in operating profits and that represents a 54% contribution margin as we leverage capital investments and reap benefits of our margin enhancing integrated custom solutions and precision analog products.

Cash tax rate for the second quarter was 9%, producing net income of $118.6 million or $0.62 of diluted earnings per share, and that is $0.03 better than our guidance.

Turning to our second quarter balance sheet and cash flow statement, we generated $214 million in cash flow from operations and invested $41.8 million in capital expenditures in support of upcoming program ramps.

Depreciation was $21.7 million.

We also repurchased 2 million shares of our common stock during the quarter representing a $61.5 million investment.

With the confidence we have in our business outlook, we continue to believe that repurchasing shares of common stock represent a highly accretive use of our cash.

And, finally, we exited the quarter was $798 million in cash and no debt.

Now, let's turn to our third quarter business outlook.

Based on the order backlog we have in place today, we expect third quarter revenue to be $535 million.

And that's up 23% year-over-year driven by strength in the emerging markets, content gains in key programs, 802.11ac deployments, and an expanding set of opportunities within the internet of things.

At this revenue level, we suggest modeling gross margin in the 45% range with operating expenses of approximately $86 million.

Below the line, we anticipate $100,000 in expenses from interest income and other expenses, and a cash tax rate around 10%.

We project our tax rate to remain at these levels for the remainder of the 2014 fiscal year.

We expect the share count to be around 193 million shares resulting in third quarter EPS of $0.73, and that is up 35% year-over-year.

It's worth noting that our third quarter guidance represents our fifth consecutive quarter about 20% year-over-year earnings growth, reflecting the strength of our demand for products, our differentiation in the marketplace, and the consistency of our execution.

As Dave mentioned earlier, we initiated a quarterly dividend with initial payment set at $0.11 per share, implying roughly a 1.2% dividend yield.

With a combination of the newly initiated dividend and our ongoing share repurchase activity, we are returning roughly 40% of free cash flow to shareholders, a pace which we believe strikes the appropriate balance between internal investment for growth initiatives and shareholder returns.

Finally, I'd like to briefly recap our previously announced revenue split.

In order to provide investors with better visibility for the growth and profit drivers of our business, last quarter we highlighted three new subgroups; power amplifiers, integrated mobile systems, and broad markets.

For the first half of fiscal 2014, power amplifiers was 40% of revenue, integrated mobile systems was 33%, and broad markets was 27%.

We expect these percentages to stay relatively consistent throughout the remainder of the fiscal year.

In Fiscal 2015 and beyond we see integrated mobile systems in broad markets revenue continue to grow as an overall percentage of our mix which should support returns based on the higher differentiation better margins associated with these products.

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

Thanks, Don.

Well, it's clear that our business fundamentals remain quite healthy and that the outlook for Skyworks is strong.

To review the high level drivers for our business in 2014 and 2015, we see three key trends powering our growth.

First, increasing worldwide demand for high-performance, high [gatorate] broadband services like 802.11ac and 4G LTE.

The uptake of these technologies are still in their infancy, accounting for just a fraction of connected devices today.

These technologies underpin lucrative new revenue streams for carriers and ecosystem providers alike and are being very aggressively deployed.

And today we are seeing tremendous demand within the emerging markets across large global brands as well as regional players.

As one measure of this, Credit Suisse estimates that the number of LTE connected smart phones in Asia will grow by over 70% over the next two years.

Second, connectivity is proliferating in new vertical markets and new device categories.

A recent report by Morgan Stanley suggested by 2020 the total number of connected devices could reach a staggering 75 billion, dramatically expanding our addressable opportunities.

And we spent the last few years positioning the Company for this trend investing significant resources in new growth verticals outside of mobile within markets like automotive, medical, and industrial.

While these new products are still in the early stages of adoption, we have already developed strong traction in these exciting new growth avenues.

And, third, dollar content opportunities per connected device is expanding.

In some cases this is driven by product incorporating multiple network standards in concert like 4G LTE, 802.11ac, and GPS.

In other cases it may be driven by our expanded product offering where we are more fully integrating our power management antenna tuning and received diversity product portfolios.

But in all cases we're driving our addressable content higher in each successive generation of technology.

Just to give one example, the leading 802.11ac chip set provider recently announced the industry's first six stream MIMO router solution which provides data speeds of up to 3.2 gigahertz per second.

Now that's 50% faster than current generation AC products, providing users with the ability to stream simultaneous HD or high definition content wirelessly on several devices at once.

This is an analog content rich application where performance is paramount.

Skyworks is enabling this lead architecture with an entire suite of analog products and we expect to benefit from the rollout of these during the second half of this calendar year.

In all cases, the fundamental need is the same, ensuring seamless connectivity across multiple communications hundreds while maximizing overall system performance within the smallest possible footprint.

This underlying market need creates tremendous design challenges for our customers as they contend with issues like battery life, signal interference, and data throughput.

To solve these challenges, customers are demanding more than just the best standalone component.

And are increasing aligning with Skyworks based on our end-to-end product portfolios, our broad technology footprint, our robust system design capabilities, and our integration road map.

We see a very limited number of other competitors with this (technical difficulty) capabilities.

And to highlight some examples of our recent success, during Q2 we captured other new design wins across a number of diverse applications.

These include analog control IC's at Medtronics for implantable heart monitors, a suite of five front-end devices for the Moto G smart phone.

Home automation solutions for security sensors, motion detectors, lighting, and meters.

Switching Wi-Fi and GPS within the set top box application from EchoStar and tuning IC's see for Audi's HomeLink programmable system complementing the navigational assist design we announced for Volkswagen last quarter.

And, finally, we have secured our fourth production customer for SkyOne which includes a full suite of Skyworks products including our generation 2.0 SkyOne module, our SkyHi LTE power amplifiers, power management, antenna switching, and diversity switch modules.

Our strategy of continuing to diversify and expand its new verticals while maintaining a laser focus on operational execution is clearly working.

We're quite optimistic about our prospects for 2014 and beyond and it's clear that we're riding a wave of powerful underlying market focus.

We expect these positive trends to fuel growth in our addressable markets for years to come and as our product highlights demonstrate, we're capitalizing today.

This concludes our prepared remarks.

Operator, let's open the line for questions.

(Operator Instructions)

Rick Schafer.

Thanks, and congratulations on a great quarter.

I was hoping -- my first question is if, Dave, you can provide a little more color on what's driving or what's behind the better than seasonal -- much better than seasonal June quarter.

Is there any particular customers or end markets or anything you can highlight there?

Thanks, Rick.

It is really very broad-based.

It's across our mobile customer set and broad market customer set.

It's within the three categories that we described in our prepared comments.

And specifically what we're seeing is very high content in early stage of an LTE ramp in emerging markets.

This is China, but it's also outside of China in Central and Latin America.

We're seeing signs or some strengthening demand in network infrastructure, but more importantly 802.11ac rollouts in mobile and across vertical segments are very strong for us right now.

We've seen it in the connected home, and, as we said, we are beginning to ramp even further and deeper with our SkyOne customer set.

And as we mentioned earlier, with the guidance in Q3, the year-to-date total is over 15% year over year growth.

So, it's really very broad-based and there is no single customer and there is no single platform that's driving it.

Got it.

And then just as my followup, could you give some color to describe the recent GS 5 launch and your content there?

Were there any surprises there versus your expectation, and as part of that answer, how does that Samsung content opportunity here in the first half compare to the other big platform launch later this year for you?

Sure, Rick.

This is Liam.

With respect to the Galaxy S5, as you know, there are a number of different regional SKUs.

We actually did quite well in the platform in aggregate.

A number of design wins with MMMB solutions, power management solutions, we're diversified across two major base band platforms, and overall our revenue growth there within Samsung is going to be up in 2014.

And as we look beyond 2014, we are starting to now engage early with the Galaxy S6, and we're seeing another opportunity where performance is up content opportunities are up, and we expect to pick up share there, as well.

Alex Gauna.

Let me echo the congratulations on the powerful result.

I was wondering with regard to the June quarter guidance, I know you said it was broad-based, but I'm wondering, based on the magnitude of these emerging market ramps, what does that say about the dry powder that is left for seasonality in the September quarter?

Could we still see a typical double-digit or double-digitish type of growth then, or have we robbed from some of that?

It would be a lot easier to answer the question if it was being driven by one phenomenon, and it's not.

We are seeing, as I said, this trend around our inset of things, product moving into the home.

There is a lot of fairly early stage ramps that we're seeing irrespective of seasonality in the March quarter that we're seeing extend into June.

We are seeing LTE ramp in China, but we're also seeing other rollouts in connectivity AC and so on.

So, it's really not any one customer or any one region.

If I look at what I can see in September today, I expect September to be normal seasonal.

I think September will be up and I think it will be a strong quarter for the industry and a strong quarter for us.

All right.

Thank you.

And then you've done a great job getting to your gross margin targets.

I'm wondering with the merger of TriQuint and RFMD and what you're seeing in the market in new opportunities, what's your potential to move beyond that and actually I'd like to know what you think or what your customers are telling you about what they think of the TriQuint-RFMD merger?

Thank you.

Good question.

I tell you what I think about it, I think consolidation is very healthy for our industry, particularly when it involves companies, competitors who have excess capacity.

I think the fact that there will be a need to collapse some of that capacity, consolidate design centers and so on, which in my understanding of the merger, I think it's very good for the industry and it's particularly good for Skyworks.

I think the broader -- if I move up a little bit and think about this more broadly, we're seeing fewer and fewer competitors with the capability required to deal with this analog complexity.

When we talk about SkyOne or we talk about the content gains we're gaining in platforms, connectivity within mobile, it's a lot of GPS, it's a lot of power management, it's lighting and display, location-based services.

It's pretty sophisticated tuning using SOI technology.

It's very broad and our customers -- one of the reasons why we're growing much faster than the market is our customers are asking us to solve the overall analog front end.

It may be a bundle, it may be integrated in the case of SkyOne, and there just aren't many competitors that can do that.

So, I expect more consolidation, because I think it's getting harder and harder to sell even the best among point products and components, and that's very good for us.

Next question comes from Vivek Arya with BofA ML.

Thank you for taking my question.

Dave, I'm curious about the Wi-Fi growth that you are seeing in 802.11ac, because we are hearing that Broadcom is now starting to integrate more power amplifiers in their Wi-Fi combo chips, and I'm wondering does that cannibalize on the Europe business in any way?

How should we think about competition in that market?

Vivek, this is Liam.

What we see in Wi-Fi is a certain set of customers that will adopt an integrated PA solution.

So, by that I mean they take the transmit PA and integrate that to SOC.

For that part of the market we have a very compelling receive side strategy.

We take SOI switch and LNA's on the receive side and we deploy solutions there, and that's going well.

But the larger part of the market today is still adopting 802.11ac with both 5 gig and 2-4 FEMs.

Our position there is outstanding.

We're seeing some of the leading smartphone companies now go to two by two MIMO in mobile again with 5 gig and 2-4, so that's playing out well.

And then in parallel as Dave alluded to earlier, there's a very strong networking and access point and router market that is growing quickly and here we see three streams, six streams, up to nine streams of MIMO, where you have 5 gig 2-4 and switches, as well.

So, in total, the Wi-Fi opportunity for Skyworks is outstanding.

We continue to take share, we have great technology, we partner with Broadcom, we partner with Qualcomm and others, and the outlook there is quite bright.

Thanks, Liam, very helpful.

And then maybe, Dave, if we take a step back and look at the overall industry.

Recently RFMD and TriQuint announced that they plan to merge.

I'm wondering what your view is of that industry consolidation, and as part of that I think you have also spoken about looking for opportunities on the M&A front.

So, how do you think about the RF industry structure, and then how do you think about your own long-term strategy, and what Skyworks would look like say three, four, or five years from now?

Thanks, Vivek.

I would broaden it a little bit.

It's really not the RF industry, it's the analog connectivity and mobile industry because it's hard to sell an RF- only product today.

Therein lies some of the problem and some of the need for consolidation.

So, when we're engaging today, we're engaging typically with multiple dollars and a broad target within our customer set, because they're asking us to look at the voltage being provided to the transmit path, they're asking us to filter and switch and tune in a new way that preserves battery life even beyond the power-added efficiency of the amplifier.

And when we move into receiver or GPS there are a lot of coexistence problems, a lot of interference problems, so we do things in manufacturing, proprietary shielding, we're able to do things with filtering whether it's a PAD or designing around a duplex or filter or architecture, and so that is just going to continue.

So, I think that there are going to -- there is going to be a shake out most likely in the analog space where there are companies who have scale, customer relationships, and the breadth of technology that can wrap a system integration mindset and capability.

I think companies who can do that, and there aren't many, are going to win and they are going to win a lot because this market is going to grow and I think that will continue.

So, as we look at our M&A strategy, we have -- if you look at what we've done in the past starting with Kenexa and look at what we did with AATI or even SiGe, we've been able to convert a broader technology footprint where we have the customers, we have the scale, we have the manufacturing into high returns and into a much broader target.

We'd like to continue to do that.

So, as we see M&A opportunities to expand into new vertical markets or expand the content, add more value, more relevance to our customers we'll continue to do that, and we don't rule out highly accretive businesses that we could acquire that will give us a materially bigger footprint outside of mobile.

We like those as well, but they need to be rationalized in terms of our ability to add sales leverage and some degree of operational synergy.

(Operator Instructions)

Steve Smigie with Raymond James.

Great.

Thanks a lot.

I'll add my congratulations on a great quarter and guide.

Just as we look out to the June guidance, can you talk if you picked up maybe a major socket at your leading customer that's maybe you'd already started shipping that in the June quarter that helped that, or is that not something that would be part of that?

No, there is no customer ramp, there's no specific socket that is driving June.

As I said, it is broad-based, it's a number of customers, it's emerging markets and it's non-mobile vertical markets.

Okay.

And the 802.11ac, again it sounds like that's broad-based, as well, in terms of being across the enterprise networking, but also the gear-type products but also on the handset.

And on that handset side, would you -- if you shipped in the same modules for a large customer there, would that already be occurring this quarter?

Would you ship in a model -- a module say a quarter and a half ahead of a major launch?

The answer to that -- the simple answer to that is no.

Anthony Stoss with Craig-Hallum.

Hi.

My congratulations as well.

Don, I don't know if you have this handy, but the percentage of year around mobile revenue that's in China?

Also, a little more information on SkyOne, Dave, in terms of you've got four customers now?

What kind of feedback are you expecting to continue to add new customers?

Is that largely finding its way into the China market?

And last but not least, I'd love to hear your further thoughts on content on the IOT side, if you're to cross sell power management and other chip sets into those devices in addition to connectivity?

Thanks.

I will take the first one, Tony, on China.

If you were to look at China combined as a customer, it would be 10%.

Very diverse customer base.

Yes, and I think with respect to SkyOne and I will let Liam jump in on this one, but to be clear SkyOne is a broad platform approach and it is -- it embodies that we're moving away from point solution towards more integrated solutions, typically SkyOne platform for us is highly reconfigurable but it hasn't comped.

It has a lot of switching and control content moving up to the antenna, filtering, duplexing, power amplification, we're moving in to more product categories that could be integrated at an MCM and BIC level.

It is quite margin accretive and it is very unique and it is without competition, so it's by definition competitive unique and sticky.

Yes, and the follow on to that I think what is really winning the hearts and minds of our customers is our ability to configure and customize on-site customer by customer.

So, we're very pleased by the systems level approach that we've been taking.

It's been well received by customers.

We have a number of production today.

We're adding new accounts and, as you mentioned China, that market is perfect for this.

We can come in there with a solution that is fully tuned and match specifically for each customer and get in there and do the work to get those accounts to market.

And think about it, there really are three approaches that we use to go to market.

One is the SkyOne highly integrated filtering switching the amplification.

Another is a power amplifier duplex in kind of a market where we would then wrap switching functionality around that: maybe GPS, maybe some power management, and almost always Wi-Fi.

And a third would be kind of an MMMB multi-mode power amplifier, and again we would wrap a lot of analog content around it.

And we have different customers that favor one architecture over another.

Some use all three.

Increasingly, though, the trend is toward more integration and less discrete.

Mike Walkley with Canaccord Genuity.

Great, thank you.

Just jumping back into the China market, can you talk maybe about the sequential growth you're seeing from China in your strong June quarter guidance, and were there any near-term supply constraints in the March quarter that might have affected your ability to ship into the TDLT ramps in China in the March quarter?

Yes, well, with respect to -- I'll take the June quarter first.

China will be up in June.

It's pretty much in line with our total business.

There could be some upside with LTE.

We are seeing some rollouts there across a number of indigenous China customers.

We're also seeing, as Dave mentioned, emerging markets in general.

We have some customers today that are gaining share in Latin America.

We're populating those devices.

We see some of our customers gain share in India.

We're populating those devices, as well.

And we're also seeing in terms of content there is a drive -- because if you look at the indigenous China players which we're shipping, cool pad for example, obviously [walionovo], and others, they're not -- they don't view their competition to be among other indigenous Chinese.

They view their competition to be the big world wide players of smartphones.

And so the pressure is to improve the performance of Wi-Fi so the very same dynamic moving to more high-performance Wi-Fi, adding more switching, filtering, perhaps amplification moving towards AC in some cases.

There is an ASM play for us in addition to Wi-Fi, power amplifier, and switching, so I think that we don't make the distinction of what a China customer who may be looking to ship internally or to export versus other big brands.

The dynamics are the same and they're competing with one another for the hearts and minds of the very same consumer.

Great.

Thank you.

And just on a followup question for Don.

Now that your June quarter guidance is very close to your $0.75 longer-term target and with seasonal trends in September you could be above those levels.

Any longer term milestones we should think about for modeling, given the new size of the business?

And then, just on a previous question, were there any supply constraints in TDLT that might have impacted you in the short term?

Thanks.

Yes, Mike.

On the performance and going out to September as it relates to the model, we're obviously close to achieving the midterm model we have been talking about for the past year.

We just guided $535 million, right around $0.73, so that's, obviously, knocking on the door of $0.75.

It's too early for us to really give any formal view of what's beyond the midterm model, but one thing I can tell you as you are stepping back and modeling the business, we would expect a lot of the dynamics, the business dynamics to play out beyond that $0.75 per quarter, the same as you saw building up to that.

So gross margin expansion of 48% to 50%, and there's clearly going to be operating leverage as we move forward.

So, that's the best way to think about our business as you add revenue going forward.

Craig Ellis with B. Riley.

Thanks for taking the question.

And congratulations on what appears to be two milestones, both the dividend initiation, and what I think is record gross margins in the outlook.

Thank you.

You're welcome.

My question first is on the vertical markets business, and it's a short-term and intermediate-term question.

As we look at the progress that you're making, and there were seven different applications identified in the press release that you penetrated within those initiatives, where are we in the build out of the vertical markets program?

Are we in the second inning, the fifth inning, the eighth inning?

Can you put recent progress in perspective for us?

What I love about the vertical markets obviously, and we've been talking about it and investing for -- we started moving from infrastructure into smart energy and then into the connected home and so on and so forth.

We did a couple of acquisitions which give us much bigger target-rich environment, probably six or seven years now, in fact.

What I like about it is while there isn't any one individual socket that could drive huge amounts of revenue like you might see in a smartphone or a tablet, we have been very successful in creating system design teams that work very closely with our customers in the field, phone applications approach, and being able to identify where we can serve that set customers with custom differentiated products that will last throughout multiple cycles, long product life cycles, very margin accretive.

And I must say that we're very much on track to our strategic plan long range to continue to do that, and we continue to grow sequentially.

It's helping our margins, it's reducing our volatility, it makes us a much stronger, broader Company.

I'd say we are in the very early stages, because as the price points of this technology have gotten more affordable, and as consumers have become more used to the technology, and as device manufacturers are creating more intuitive easy-to-use devices, it's starting to continue to penetrate more and more markets.

Today, it is astounding the array of products we're working with our customers on, all trying to figure out how to remain connected, do it at the rate budget and at the right level of user ease.

So, the followup would be related to that.

What percent of revenue is vertical markets currently and where would they potentially go over a two- to three-year period?

Today it's about 27%, as Don mentioned in the prepared comments, and I think that the combination of vertical markets as well as those analog products going into some of our mobile customers platforms like GPS, like Wi-Fi, I think that grows much faster than our PA revenue, PA business, which is good for the overall returns of the business.

Edward Snyder with Charter Equity.

Thank you.

A couple here.

First off on SkyOne, if you understand the platforms that both Samsung and Apple are moving towards, it seems like the end game on that is going to be something like SkyOne.

They're not there yet, but certainly seems to be the direction everybody is moving to.

First, is SkyOne material today to revenue?

Are we talking 1%, 5%, 10%, or is this more of the test year, where people are trying it out, and then we could expect much more material growth in say 2014, as maybe the top OEMs move more to that kind of an architecture given the complexity of the LTE compliance?

Thanks, guys.

Yes, it is material.

It is not yet 5%, but it's getting close, but remember, it's in an early stage of ramp and the ASP is very high.

So, the customers we're launching, they're actually quite big, so I think it's going to be very significant, and it will be significant, more significant in the second half than it was in the first half.

In 2015, we expect to be a big SkyOne year.

But keep in mind it is a platform, so SkyOne will take on many different shapes and forms as our customers get comfortable with the technology and comfortable with allowing a supplier partner to architect the entire front end.

That's been a little bit of a learning curve and something we've needed to work very closely with our customers to get them comfortable with, because they gave up a lot of control in favor of the ease of use.

And we're having a lot of success with that, but it's not fast.

As a followup, I was a little confused by the answer to the last question, you said verticals are probably around just under 30%.

Your largest customer was well over 30% last year.

Does that break obviously out between horizontal and vertical markets, you're looking at definitional thing there?

And to the larger question, you've been exceedingly well in Wi-Fi.

It seems to continue to be a growth engine here.

Is Wi-Fi spread between all three of your (technical difficulty) integrated mobile systems in broad markets or is it more concentrated heavily in one of those?

Thanks.

Broad market numbers, as Dave said, and we said in our prepared remarks, it is 27%.

Our top customer last year was in the mid-30s, or a little above that.

But that revenue into that customer is across multiple revenue areas.

It can be in mobile, it can be in broad markets, as well.

So, it's mixed.

I think what you're getting at is there is no Wi-Fi that winds up in a smartphone or a tablet that we are including in the 27%.

That is all non-mobile broad market.

Suji De Silva with Topeka.

Hi, guys.

Nice job on the quarter.

Thanks for breaking out the three segments here.

Can you talk what the relative margins of each maybe qualitatively or quantitatively if you can?

And what do you expect the core PA business to grow longer term versus the other two?

As we talked about, we did the initial presentation, the relative margins for the PA is in the low 40s, slightly below what the corporate average is.

Integrated mobile is slightly above that and our best margins are the broad market.

Understand within each that there are products that there is some variability.

Those are averages within those categories.

Thank you.

And then the PA segment itself, what do you think the growth there can be versus the other ones which are clearly going faster?

I think the PA business is going to grow in revenue dollars and shrink as a percentage.

I would put a low to mid -- I would put a 5-ish percent growth rate in PA dollars, which will be materially less than the growth rate of the Company.

Therefore, as it has been trending for the last few years it will get smaller, though will remain meaningful.

Vijay Rakesh with Sterne, Agee.

Solid quarter.

You might've answer this question already, but as you look at the second half and you look at tier one market forms, how do you feel about your share and those going to second half?

I believe that two things are going to happen.

One is industry dynamic in the second half and 2015 and 2016, the content will go up.

The number of bands that are being added, the amount of functionality around higher performance connectivity and what we see our customers trying to do with the intent of improved current consumption, using things like carrier aggregation and sophisticated tuning techniques, there is no doubt in our minds that content over the next several years is going to go up.

And I am -- as we engage our customers today, I am really pleased with the fact that our technology offering is unique.

We're engaging at the system level early in the customers' decision as to which SOC they're going to use and so on, and that we're really able to have a system-level conversation, not a component conversation.

So, I am absolutely convinced that the TAM overall in the industry is going to go up that and we are going to continue to gain share.

Great.

And just a housekeeping question here.

Did you add 10% customers in the quarter here?

And keep it up guys.

Thanks.

Thanks.

We had two 10%, Foxconn and Samsung.

Mike Burton with Brean Capital.

Hey, guys.

Congratulations on a great quarter and guide.

Don, if I could on the margin side, you mentioned 48% to 50% contribution margin going forward, but I'm wondering on OpEx expectations into next year, can we stay in kind of the mid to high 80s here, or would we expect that to tick up as IOT and the broader markets become a bigger portion of the mix?

The increases that you're seeing in the guide is with the majority of the increases on the R&D line, and it's some targeted investments that we're making to support new growth opportunities.

And quite frankly you're seeing the benefits of these initiatives in our top-line outperformance.

We're expecting to continue to see strong leverage, so expect the revenue growth to be well ahead of the OpEx growth, and that leverage is a key component of continuing to drive improved returns.

Remember in the June guide, too, we have a merit increase, salary merit increase mid year, so that's in the number, as well.

Going forward, that number is going to continue to ramp some as revenue grows and investments grow.

So, as far as what you model next year, I think by the time you get to mid year when you have another merit increase, that that number is going to be high 80s to 90s kind of number for sure.

Some incremental investment every quarter is the right way to model it.

Thank you.

That's helpful.

Then, Dave, if you could comment on the BAW for a second.

Do you have any concerns with the RFMD-TriQuint merger as a potential supplier, a borrower, or are you still comfortable with the BAW available to you from the non-domestic suppliers?

And have you actually started to ship some of the BAW in SkyOne platforms or any other modules so far this year?

The answer to the latter question is yes, and I'm actually extremely comfortable with it and the reason is that today we're participating in filters more broadly than any competitors in power amplified duplexes in SkyOne and most of our GPS modules in fact.

And the more we engage with the filter ecosystem, more convinced I am that there is no one-size-fits-all.

We're seeing the vast majority of bands using some form of saw and with more narrow bands spacing at higher frequency, we're having a lot of success using a temperature compensated saw, and we're shipping both.

And there are a limited number of bands with very high frequency and tight spacing, tight frequency spacing to benefit from a bulk device, a BAW, or some other bulk acoustic device.

And our strategy is to be flexible, is to work with our filter partners on a foundry level, and to really get involved in the packaging and the design to make sure we're hitting performance.

And when we match it to our PA or we match it into SkyOne it gives the absolute best possible performance.

And if you look at recent tear downs, I think we are the largest integrator of filters in the world today, in fact.

Quinn Bolton with Needham & Company.

Hey, guys.

Let me add my congratulations on the results and guidance.

Dave, just wondering on the sequential June, you've named a number of factors that are behind roughly $55 million sequential increase.

Can you give us some sense, is it fairly broad-based or is the LTE opportunity in China and emerging markets, just given the content in LTE phones?

Would that be the single biggest factor accounting for that $55 million increase.

And then I have a quick followup?

Yes, I think the biggest single factor would be, although I have got to say, it is really very broad, but the biggest single factor would be in content gains within mobile devices, where we talked about integrated mobile systems.

So, our ability in each successive design sweep in much more dollar content than the traditional PA and switch is a big driver of this, and we're applying much of that in China, but a lot into Central America.

We have a customer that's doing very well in India and some of the brands that are not Chinese brands are doing extremely well penetrating emerging markets with our technology.

So, that is a big -- that is, Quinn, indeed a big piece of it.

The 802 -- the Wi-Fi component of our business in the connected home and within AC rollout and the enterprise and in the home, and then as well into our mobile customers upgrading to AC or upgrading to more bands, MIMO, that's a big driver.

We're seeing that as well.

We're seeing it not only in the home, we're seeing it in verticals, we're seeing it in mobile, and SkyOne is a nice bump for us, as well: the very large and rich high dollar content.

Great.

And then just on a followup, TriQuint and RFMD in their synergy discussions said they don't anticipate any revenue dysynergies.

I was wondering if you might comment on opportunities you see as those two companies come together, where you might have opportunities to either pick off sockets or perhaps as they shut down a fab and may have to translate products, are there opportunities for you to come in as an alternative source of supply?

Thanks.

Having done mergers and a couple of sizable ones, they are -- they take a lot of time, they take a lot of resources and a lot of focus.

But I will say this that when we look at our business and our guidance in our 2014 and 2015 plan, it has nothing to do with a competitor having struggles and becoming de-focused.

It's all about dovetailing into the trends in the market where our customers just need more help and more technology for us to solve these thorny analog problems, and that's what we do.

That's what we wake up every day trying to do and do it better than our competitors.

But, more importantly, do it in a way that we add value to our customers and they're willing to pay us for it.

Next question comes from Blayne Curtis with Barclays.

Thanks and I'll a strong quarter, guys.

Going back to just the emerging markets, maybe just looking at your view of the entire market, I know the China mobile has thrown out 100 million units.

Given the builds that you have shipped to and are looking at for June, what's your sense of just how big that market is so far in the first half?

Yes, Blayne, without getting into all the details, carrier-specific details, we certainly see it ramp in China, an LTE ramp, as Dave alluded.

We also see emerging markets in general being a content and a unit driver for us.

That includes Latin America and India.

The good news for Skyworks is that we've been very well positioned with leading players that enable this.

Companies like Media Tek, like Spreadtrum, like Qualcomm, like MarBelle.

So, we have our bets hedged very, very nicely with all those players.

The content is MMMB solutions.

It's switching, its power management, to GPS as a real nice analog suite that wraps around our mobile, but it's also tethered with the leading base print provider.

So, wherever they went, we're going to be attached.

We're seeing it in China, we're seeing it in emerging markets, and we think it is early innings in this ramp.

Blayne, unlike 2G, or even 3G upgrade cycles in early smartphones, 2G-based or edged-based, the difference we're seeing today is the system performance requirements that this new -- that this classic customer is requiring and it is very much competition on a world stage.

So, we are not seeing the small component companies with the threat of lowering price, this albeit inferior products being able to penetrate this customer set.

It's not working in its architecture.

The technology doesn't play, and that's very, very good for us and companies like us who can field a real robust system.

Thanks.

Don, on the new breakout, thanks for providing that.

On your slide deck you talked about integrated mobile having multi-band pads.

Is that inclusive of single band pads as well, just a clarification?

And then if you can talk about in broad markets, maybe rank some of the bigger end markets.

I'm assuming Wi-Fi is probably the biggest, but any clarity there would be helpful?

Yes, Blayne, on the PADs, the PAD devices would be included in IMF, integrated mobile.

We really don't have any single PADs.

They tend to be multi-band, couple filters, multi-mode, multi-band PA.

So, there's really no instances where we have a single PAD with one filter.

Those solutions to get included in IMS.

JoAnne Feeney with ABR.

Congratulations on a great quarter and a nice outlook.

I had a question about -- a quick followup on another question about the timing issues for the year.

In the past there have been instances where you have shipped components that have been assembled into modules by partners.

It sounds like this year that is not something that's a big impairment of their business.

Can you just clarify that more broadly?

I believe the earlier question referred specifically to Wi-Fi.

I think that the question is are we, in June, benefiting from big program ramps by shipping in the module manufactures, be they Wi-Fi or something else, and the answer to that is no.

And so we wouldn't expect an earlier decline in your business because of that timing?

Absolutely not.

And in fact I expect given what I'm seeing the second half of the calendar year to be seasonally up and really quite strong for us.

Tom Sepenzis with Northland.

Congratulations, as well, from me.

I'm just wondering, Dave, if you could talk a little bit more about AC specifically as we go from 1 to 2, 2 by 2 to 4 to 6 MIMO?

What are you -- how are you thinking about the potential TAM benefit there?

Sure.

That's a great question and you've seen some recent releases from some of our chip set partners that are really demonstrating MIMO to 3, 6, even 9 streams.

You literally get a -- if you go from 3 streams to 6, it's 2X content for us.

And we start with very high content.

We can double it, we can triple it.

You'll be able to see some routers and access points now that have substantial Skyworks content, 11 AC FEMs, switching, and even power management in some cases.

So, this is deployed very well in routers.

But, again, as I mention, we are starting to see mobile handsets adopt 2 by 2 technology next-generation platform.

So, that would be 2 streams in a mobile handset.

Potentially two 5 gigabyte devices, two 2.4 gigabyte devices together with switching, so that trend is really good.

And, by the way, the benefits that one would see on delivering these higher data rates through the home, delivering these high rates through a hand held, a tablet, or a mobile device are outstanding.

So, it's a win/win for the customers and we're in a great position to capitalize.

Harsh Kumar with Stephens.

Thanks.

This is Richard in for Harsh.

Let me pass along my congratulations, as well.

For my first question, can you give any color on how your visibility compares to prior years, and how the lead times on integrated solutions compare to discrete PAs?

The visibility is as good if not better.

And I would say better in the sense that the -- that we're participating earlier in the product lifecycle in almost all cases.

In fact, we're beginning to participate at the point at which the overall SOC or chip set is being selected.

So, we have much more visibility.

In fact, we're looking now at products that will be launching in the second half.

We're well into designing late 2015 and in some cases 2016 products today because the architecture choices among our customers is occurring.

In some of the product life cycles, the vertical markets are very, very [well].

In fact most of them are, and so we're doing some connectivity enablement up front.

And so, our customers -- these new customers are coming to us, and we're helping to figure out how to deal with these thorny analog connectivity problems for the very first time, and they're engaging us right up front.

So, the visibility today, I would have to say, in general, is better.

Great.

And then a quick follow-on.

We're seeing a couple of your peers launch integrated solutions.

What do you think is driving the more integrated solutions approach across the industry?

I think it's quite simple, and that is that in order for our customers to meet their performance requirements, their design time to market requirements, and to just reduce their need to get into the detailed architecture as these analog systems become more and more complex, they are looking for a partner, and that partner has to have system expertise, that partner has to have good solid manufacturing capabilities to do unique things, bumping, flipping dye, being able to stack, and a broad product portfolio.

And so we've been a leader in integration, we were in front in FEMs, we were out front with PADs, we're out front in SkyOne, we are out front in Wi-Fi and integration of devices.

And we think that's a big, big advantage for us and a trend that I think will not stop for many years.

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.

Okay.

Well, thank you very much everybody for participating, and I look forward to seeing you at upcoming conferences.

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

We thank you for your participation.