思佳訊 (SWKS) 2014 Q3 法說會逐字稿

Ladies and gentlemen, good afternoon, and welcome to Skyworks Solutions Third-Quarter Fiscal Year 2014 Earnings Call.

This call is being recorded.

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

Mr. Ferranti, please go ahead.

Thank you, Kathy.

Good afternoon, everyone, and welcome to Skyworks third 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 a complete reconciliation to GAAP.

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

Thank you, Steve, and welcome, everyone.

Skyworks delivered very strong financial results again in the third quarter of FY14, exceeding our upwardly revised guidance.

I'm proud of our achievements during the quarter, and particularly pleased with the broad-based strength in demand.

Our continuing outperformance reflects the sound underlying industry trends in our served markets, and underscores the effectiveness of our diversification strategy and our execution.

At a high-level, our business results are being fueled by a surge in global adoption of connectivity, in all its forms, across a diverse set of end markets.

We are riding a wave of powerful underlying market forces, all enabled by the availability of efficient, high-performance connectivity solutions.

Among these are the enabling of billions of unconnected users with a first-time internet access in the emerging economies.

Advancing new forms of content delivery, such as streaming music services, on-demand media, and over the content distribution.

Supporting cloud services and mobile e-commerce, and fueling the growth of the internet of things.

All of these megatrends are in their early stages, and Skyworks is uniquely positioned to capitalize, leveraging a broad portfolio of specialized technologies, advanced system integration capabilities, and unmatched operational efficiency.

These core competencies enable us to deliver differentiated customized solutions, translating directly into superior financial returns for the Company.

During the quarter, we generated revenue of $587 million, that's up 35% year-over-year, and ahead of our updated guidance of $570 million.

We produced operating income of $179 million, that's up 60% from a year ago.

We posted operating margins of 30.5%, surpassing the midterm target profitability model we set in FY13.

We produced EPS of $0.83, that's up 54% versus a year ago.

And we repurchased 1 million shares of our common stock, and paid a quarterly dividend of $0.11 per share.

And finally, we guided to $1 of earnings-per-share for the fourth quarter.

By all measures, Q3 was an outstanding quarter, and we see our momentum continuing.

Now I'll provide more color on some of our specific growth opportunities later in the call.

But now, I'll turn it over to Don for a more in-depth review of our financial results and our outlook.

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

Revenue for the third quarter was $587 million, ahead of our upwardly revised outlook, and up 34.6% versus the year-ago quarter.

Gross profit was $266.6 million or 45.4% of revenue, and that's 140 basis point increase from the year-ago quarter.

The upside to guidance was driven by the better-than-expected top line contribution, coupled with strength in our integrated systems solutions portfolio.

Operating expenses were $87.5 million, consisting of R&D expense of $53.8 million, and SG&A expense of $33.7 million.

We generated $179.1 million of operating income, yielding a 30.5% operating margin.

That represents a 480 basis point increase versus the year-ago quarter.

Operating profits were up 60% year-on-year, as we leveraged operating expenses, reaped the benefits of recent capital investments, and continued to expand our margin enhancing custom integrated solutions and precision analog products.

Cash tax rate for the third quarter was 10.2%, producing net income of $160.8 million or $0.83 of diluted earnings-per-share and that's $0.03 better than our updated guidance.

Now let's turn to the balance sheet and cash flow statement.

Generated $199 million in cash flow from operations.

Invested $68 million in capital expenditures in support of upcoming demand forecast, and the majority of that was deployed to expand our assembly and test capabilities.

Depreciation was $24 million.

We repurchased 1 million shares of our common stock during the quarter, representing a $41 million investment.

Our share repurchases reflect the confidence we have in our business outlook, which we believe represent a highly attractive the use of cash.

And finally, we exited the quarter with $893 million in cash, and no debt.

For the third quarter of FY14, power amplifier had 41% of revenue, integrated mobile systems was 33%, and broad markets was 26%.

And that's roughly in line with the percentages from the first half of 2014.

It's worth noting that these percentages can fluctuate on a quarterly basis, and as a result, we believe it's more important to focus on longer-term directional trends in these categories.

Turning to our fourth quarter business outlook.

Based on our backlog, we expect fourth-quarter revenue to be between $670 million and $900 million, reflecting broad-based strength.

Driven by new product ramps, content gains, growth across the emerging markets, ongoing 802.11 AC deployments, and an expanding set of opportunities within the internet of things.

At the midpoint of $680 million, we suggest modeling gross margin in the 45.5% to 46% range, with operating expenses of approximately $92 million.

It's worth pointing out that our guidance for September quarter includes an extra week of operating expenses this year, which is a normal occurrence for us approximately every sixth year on the fiscal calendar.

We estimate around $3 million of our fourth-quarter operating expense will be attributable to the extra week.

Below the line, we anticipate $100,000 in expenses from interest income and other expenses, and a cash tax rate of around 11%.

Looking ahead to FY15, we suggest modeling a cash tax rate of around 13%.

We expect the share count to be around 194.5 million shares, resulting in fourth quarter EPS of $1 at the midpoint of the revenue range.

Our EPS guidance represents a 56% year-over-year increase, and the 6th consecutive quarter above 20% year-over-year earnings growth.

Reflecting sustained strength and demand for products, our differentiation in the marketplace, and the consistency of our execution.

We remain on track to close our joint venture with Panasonic before the end of the fiscal year.

Post close, Skyworks will own a controlling interest in the performance leader in TC soft filters, with cumulative shipments approaching 0.25 billion units.

We expect the venture to broaden our technology portfolio, further enrich our assistance capabilities, and enhance our financial returns.

And just as a reminder, we anticipate the transaction will provide at least 100 basis points of gross margin accretion in FY15.

We continue to see tremendous earnings potential ahead.

We expect the combination of above market top line growth, gross margin expansion, and earnings leverage to fuel continued outperformance in our financials.

Putting us on a path of $5 in annualized EPS over the next couple of years.

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

Thanks, Don.

So to put the strength of our recent results into a broader context, I'd like to spend just a few minutes addressing one of the key questions that we often hear from investors.

What are the specific factors powering our accelerating growth and expanding profitability, and more importantly, can they continue?

While at a high level we see a powerful combination of content gains, new market penetration, and share consolidation fueling our performance.

In fact, we're actively engaged right now in architecting platforms for deployment in 2015 and 2016, which provide us with a unique vantage point into the market dynamics that will fuel our growth over the years to come.

To be more specific, starting with the mobile market, we see three key drivers.

First, the number of operating frequencies is trending higher.

In support of improved service coverage and higher data rates, we see band content continuing to rise across high-end mid tier and entry-level 4G LTE devices.

This drives greater addressable content throughout our entire product lines.

Second, the system complexity continues to rise.

The combined impact of band proliferation and the adoption of sophisticated new techniques, including advanced antenna architectures, carrier aggregation, tuning, and filtering, is resulting in a rapid shift away from discrete components, and towards more customized and integrated solutions.

Which sweep in adjacent analog content, and Skyworks is absolutely at the forefront of this transition.

Third, our addressable content continues to expand.

OEMs are increasingly focused on new ways to improve signal quality and download speeds to support seamless access to on-demand content, streaming media, and cloud-based services.

And this is driving more complex downlink architectures, and creating entirely new growth avenues for us in the receive path.

In addition, we're continuing to broaden our portfolio of mobile analog products in areas like power management, backlighting, and GPS, and are seeing increasing customer traction here.

Outside of mobile, we also see a number of positive trends.

First, data capacity requirements are growing dramatically.

Next generation connectivity standards like 802.11 AC with multiple transmit receive channels, drive even higher performance levels, resulting in significant content for Skyworks.

Not only in routers, but also in set top boxes we see in immediate gateways, network storage devices, and other high-performance networking applications.

Second, connectivity is expanding into brand-new device categories.

These include: wearable electronics, fitness and wellness applications, and new opportunities within the connected home like lighting, like security, and automation.

These all serve to enhance our diversification, by providing new incremental growth avenues for Skyworks.

And finally, our vertical market penetration is increasing.

We've spent the last decade investing significant resources and leveraging our technology to expand our presence in traditional analog markets like automotive, medical, and industrial.

We have established significant traction in these higher-margin growth avenues, and we see tremendous opportunity ahead.

It's worth noting that the growth of our precision analog business has kept pace with the strong growth in our mobile segment over the last few years.

And I think equally important is our ability to convert these strong top line growth trends into superior financial returns.

Over the last few years, we've established a solid track record of doing so, significantly outperforming the analog semiconductor market by all measures.

Since 2010, we've more than doubled our revenue.

We've expanded profit margins by over 600 basis points, and we've surpassed our 30% operating margin.

We've grown earnings-per-share at a 25% compounded rate, and we've consistently posted over 20% returns on invested capital.

These metrics are a testament not only to our execution and the inherent operational efficiency of our flexible business model, but also to our growing stature within the overall value chain.

As customers recognize that connectivity has become a key factor in defining the overall user experience.

We see all of these drivers creating an addressable market that is growing at least at the mid teens pace.

Which when combined with the earnings leverage in our business model, result in significant earnings power over the next two to three years.

Hopefully, our call today and these comments has provided a better sense of the positive underlying drivers for our business, and why we have such high confidence in our prospect for 2015 and beyond.

That concludes our prepared remarks.

Operator, let's open the line for questions please.

(Operator Instructions)

Our first question will come from Rick Schafer with Oppenheimer.

Hello, and congrats on another nice quarter, guys.

Thank you.

I just had a couple questions.

First is, you're coming off of a very big June quarter, now we're looking at another great September quarter.

I know it's broad-based, but can you guys highlight the top two or three one or two upside there?

And part of that question too is, should we assume as we look into the December quarter that we'd revert to a more normal seasonal pattern for you guys, or are some of those megatrends that you mentioned, Dave, has something changed fundamentally?

Have we shifted to a higher growth pattern for the foreseeable?

So that's my first question.

Thank you very much.

Great question.

Well first of all, I'm delighted to see that this strength is very broad-based.

We're seeing it in all of our business segments today.

Probably the biggest driver is an uptake in the content rich integrated mobile systems.

We provided that split for you a couple of quarters ago.

We're seeing a lot of growth there, and it's a direct result of architectures a getting much more complex.

We've also seen strong growth in our broad markets business.

And I think I mentioned it, and I don't think it's no small feat, that we've been growing the broad market business as fast as we've been growing mobile.

And that really says something in this industry.

And it's being driven by 802 powder 11 AC deployments, new vertical market opportunities, we call it IOT, but there are a slew of them and we've got a strong foothold and they continue to grow.

And as a marker, our broad markets portfolio year-to-date is up 26%.

And we do see success within one of our largest customers by adding content in some flagship models.

And so, Dave, that leads me to my second question.

And I don't know much color you can give us on this, but you guys have obviously been capitalizing on that trend toward greater RF complexity and content.

Can you give us any color or any sense how much of that growth with one of your or your biggest customers is coming from just units looking better versus your guys increased content there?

Well I would say across the board, that when we look at high-end smart phones, and even entry-level smartphones in markets like China, we're seeing a dramatic uptake in the analog content that we call integrated mobile systems.

We're sweeping in and more and more GPS, very complex switching architectures, using silicon insulator.

The transmit chain is becoming more complicated.

Carrier aggregation is adding more switch content.

And we're doing a really nice job with our power lighting and display products.

We're seeing display drivers, we're seeing camera flash devices.

And so I think it's really much more the latter, which is just continuing to see this increasing complexity driving our business.

And we are truly the only player out there today that can wrap all that functionality, either into an MCM or some IC level.

We're quite unique, and that's why we're taking share.

Our next question will come from Mike Walkley with Canaccord Genuity.

Great, thank you.

Just to follow on to that question, because I don't think I heard the answer on seasonal trends you expect into the December quarter given the very strong results in one of your customers.

It sounds like it's been a big ramp here into their new product launches.

So how should we think about normal or seasonal trends into the December quarter?

I guess let me reiterate, our growth is not being driven by any single OEM or any single platform.

It's quite broad-based.

And it's a little early to talk about December, but I see nothing to deter us from thinking that December will be another up quarter and that the market will be strong and we'll be stronger than the market.

And that's been relatively consistent for us.

These underlying trends will continue in December and beyond.

Okay, good.

That's very helpful.

And then just a question on the model, and congratulations for blowing through the targets you set two years ago, and now it's a $5 annual run rate target.

Don, can you just help us think on modeling, what was the time horizon for maybe the $5 run rate?

And is a 13% tax rate what we should think about the next couple years as you go towards that target?

Thank you.

Yes, Mike, and as you model us going forward, you can expect a lot of the same dynamics that we've talked about in the model over the last couple of years.

It's all based on the top line growth opportunity, so you start with those assumptions.

And the gross margin, you'll continue depending on what level of revenue growth, you'll drop the margin through at 49%.

We're going to continue to see operating leverage.

And the goal of $5 in annualized EPS, if you take it off of the $680 million that we've just guided, it's going to require, and you do modest increases in the OpEx on a quarterly basis because we'll continue to make some investments, it will require growth of about 20% to 25%.

That's the best way to think about it.

And if you do that, you can run different scenarios and get a feel for the timeframe.

Thank you.

We'll go next to Vivek Arya with Bank of America.

Thank you for taking my question.

Dave, I know you gave a very good overview of the content expansion story at Skyworks.

I think there's been some concern about the China market, perhaps an overbid of LTE.

And I know you mentioned that your growth is not just one market, that it's more broad-based.

Have you seen any overbuild of IT in that particular market?

And for you to report an up quarter in December, is it necessary for that specific market to grow very fast?

Well, Vivek, I would say if I look at the big picture, we are in the early days of a very large upgrade cycle that's going to be the multi-years within China.

And we've been talking about this opportunity for a long time.

Just a couple of interesting statistics.

There are over 1 billion mobile subscribers in China, and over half of them still use 2G.

And of course, we benefit tremendously from content gains as 2G goes to 3G, and we benefit again at 4G and with the smart phone.

And as you know, we're well-positioned there.

We've got terrific relationships with all the leading base band providers there, and we're adding in a lot of analog content, just as we are elsewhere.

That being said, there will be winners and losers among the device OEMs.

That's for sure.

And as we've seen over the years in the past, we find that we need to really handicap our demand forecast.

We've got a good track record of doing that, we take a conservative approach when we factor it into our outlook.

And we're quite comfortable where we are today.

But you raise a good point on the risk of over driving with some customers.

All right.

And I had a question, not on fundamentals, but on the stock, It's obviously done very well, but I'm amazed that it's really being driven more by a very solid earnings growth and there hasn't been as much PE multiple expansion.

Why is that, and what can you do to help expand the PE multiple in the stock?

Thank you.

Well that's an interesting question coming from an analyst.

I think what we can do is consistently meet or exceed our guidance, and try to be as transparent as we possibly can of what's driving the growth.

And it's been long-term for us.

We take a very long-term strategic view of our business, and we think we're positioned extremely well.

I don't think we've ever been positioned as well as we are today for the long-term.

We'll go next to Harsh Kumar with Stephens Inc.

Hey, guys, let me add my congratulations as well.

These are obviously tremendous numbers, and tremendous guide.

Dave, I wanted to ask you a question.

Towards the end of your comments, you mentioned you see, if I'm correct, a mid teens industry growth for the parts and pieces of some of your business that you play in.

I'm curious why you don't think it's a higher growth sector?

You just put up tremendous numbers.

You're probably solidly in the 20% plus range for growth teen the year before.

Why is that number not higher?

I think it could be higher.

But I think you ought to think about it as being in that range.

But I absolutely believe you could be right, it could be higher.

Got it.

Thank you for that clarification.

And then, Dave, a lot of people have already asked about where the strength is coming from.

Let me ask you a different question.

You were very optimistic about the internet of things.

Is there any piece you feel that you're missing, whether it's the computing piece or some other area that you feel like there's a hole in your portfolio to adequately go out and capture that market?

I'll let Liam help me with that one.

We've done -- we're reasonably happy with the content that we've been able to add.

It is broad, it's broader than the competition.

But there are some pieces that we'd like to add to the portfolio.

We are investing in sensors, we're investing in advanced switch architectures.

And so we continue to push very hard into new areas that we think leverage our system capability in analog.

Sure.

As a follow, and the IOT story, it's really early innings and we are very well positioned with some of our core technologies.

Our 802.11 technology, our ZigBee technology, some of our advanced switching, and even packaging is important now as you look at these size reduced applications.

So, we like our position within IOT, but we're very keen on expanding our organic we have through some partnerships.

We have a question from Suji De Silva with Topeka.

Hello, guys.

Nice job on the quarter.

First of all, a couple months into two of the larger competitors merged.

I want to know if you anecdotally have seen any changes in the environment in terms of design wins behavior, so forth, or if nothing has really happened yet material?

No.

The short answer is no.

We said in the last quarter, I think consolidation is very healthy for our industry, particularly along competitors that have excess capacity.

It's just not healthy to have empty fabs, and so we're really happy to see it.

But the fact remains that there fewer and fewer competitors with the capabilities to deal with the system requirements that our customers are asking for today.

So I think you're going to see more consolidation coming.

The component of supply chain that had been popular in this business just doesn't work anymore.

And I guess I'd end it with we've done big mergers, and they take a lot of time, resources and focus.

So I think it's a good question.

Great.

And then a question for Don perhaps.

I know you guys just introduced the dividend, but can you talk about what your metrics are for if you would increase that, how you think about the payout ratio and so forth?

Thanks.

Yes.

We're constantly looking at our capital structure.

The earnings are strong.

We're generating a lot of cash.

We've really been focused on that 40% return to shareholders, and we're doing that with the combination of the dividend and share buybacks.

We think that's working really well.

There's no doubt that as earnings continue to grow that we're going to be looking at increasing the dividend over time.

As far as the specifics of what that ratio is, we're not going to get into that.

But clearly, that is something we're going to do over time.

Our next question is from Anthony Stoss with Craig Hallum.

Hello, guys.

My congrats as well, and pretty impressive that you skipped over the $4 target and right onto $5.

Two parters, one for Don, and one for Liam.

Got to make sure Liam is involved.

On the $5 annual run rate, Don, what do you think in terms at longer-term OpEx?

What kind of growth you would need to achieve that $5?

And then if Liam wouldn't mind, maybe you could talk a little bit about SkyOne and recent design activity there.

Thanks.

Yes, so the way to think of the growth rate on the $5, as I said, it's probably going to take 20% to 25% off that $680 million, and that's impacted by multiple things.

That depends on the year and tax rate.

So we said that approximately to use 13%, if in fact it would go beyond a year, it could be a little higher rate of maybe 14%, 14.5%.

So it depends on what year you're putting in those growth rates.

As far as OpEx, we just guided $92 million.

Now $3 million of that is a one-time event, because of the calendar.

So you'd start with -- that's $89 million as an expense level, and from that, we're going to have modest growth over time.

So if you want to add $750,000 quarter or a number like that in expenses, [$750,000], that -- maybe $1 million, but that -- is just you can run some scenarios and you get a real good feel for when that's achievable.

Tony, and with respect to SkyOne, it continues to be a strategic part of our integrated systems portfolio.

We're very pleased today that customers increasingly have an appetite for these advanced systems that we bring to market.

And the complexity, that Dave articulated, is really going up.

So our ability to go in and really take that RF chain, sweep in filtering, sweep in power management, and provide a customized solution.

We're seeing some value there.

Also, we've been adding customers.

We have four customers in production today, five or six on the hook for new designs going into 2015.

We're pleased that we just added Nokia's Lumia suite of smartphones to our list.

And we look forward to accelerated growth, and continued design win success in 2015.

We now have a question from Craig Ellis with B. Riley.

Thanks for taking the question, and, Dave, congratulations to you and the management team on the strong results and the good outlook.

Thank you.

You're welcome.

I wanted to come back to the Panasonic announcement and just get your point of view on the benefits of that deal.

For one, your technology capabilities.

And then related to that, what you think it does from a TAM expansion or customer expansion standpoint for the business?

Sure.

Well first of all, we've recognized for years the importance of filters in all flavors.

And as Dave mentioned in the past, there really are many different frequencies, many different applications, and a variety of filter technologies that can be deployed.

For us today, we love the asset that we're about acquire here with Panasonic.

It brings surface acoustic wave devices, also temperature compensated saw devices that truly hit the sweet spot today of some critical frequencies.

So what we can do with Panasonic is expand our portfolio, create a footpin for [piazo] in filtering technologies, immediately lever this back into design wins that we'll launch in 2015 and beyond.

And build out a suite and a platform for us to go forward into higher frequencies, more selectivity, higher performance levels with the engineering team and the production capacity that we have there.

And the follow-up would be for Don, related to Panasonic.

Once you have Panasonic in-house, does it change the way we think about the incremental gross margins on the business as you gain synergies with that capability?

Yes, Craig.

The 49%, we've before we said use 48%, so the 49% already incorporates that extra point of margin.

And it's certainly our goal over time to do better than that, but we're not -- we're suggesting modeling the 49%.

But, we're always striving to do better than our initial targets for sure.

We have a question from Alex Gauna with JMP Securities.

So, wow, and congratulations as well.

If my math is correct, your inventory days have fallen to about 55, which is the lowest that I can see in quite some time.

Can you reflect upon your ability to meet incremental demand, maybe where you are in terms of capacity utilization, and you're thinking around how you're going to do your mix of internal external going forward?

Sure, Alex.

You're looking at days, we look at turn, same thing.

But, yes, our turns were very, very good this quarter.

And part of that is, we're getting some really strong demand inputs, and we're ramping both our internal capacity and external capacity in the hybrid model as we speak, and we've been working that.

So as a result, the inventory that we have both in the hubs and the inventory that we have on hand and we're building just a lean this quarter, that will get a little more robust as we move into the September and the December quarter.

Because we're ramping the supply chain as we speak.

So, those numbers are a little higher than they should normally be for us.

And we're working through those issues.

But at this point, we're working very effectively with the customers in order for them to meet the demand that they have.

And then I know, Dave, you touched on some of the new analog wins and power management wins that are going on.

Could we, just conceptually, think about what sort of percentage of your revenue either this last quarter or going forward might now be coming from let's say non-RF your core competency in RF areas?

Well that would be the integrated mobile system portfolio, which is everything we -- including SkyOne, GPS, Wi-Fi that is in a smartphone device.

And it was 33%, which is consistent what where we were in the first half.

We'll go next to Steve Smigie with Raymond James.

Great.

Thanks a lot, and I'll add my congratulations.

Thank you.

Yes, sure.

Just on here on your gross margin, you guys just talked about gross margin expansion going forward and you listed some of the drivers.

But I was hoping you go into a little bit more detail over the next 18 months, two years, what are going to be the main elements of the gross margin expansion?

Steve, it's going to continue to be us making select CapEx investments, and being able to leverage the hybrid model.

And making sure that we're keeping the right percentage of internal versus external sourcing, and that gives us the right contribution.

And we do day to day, we're doing the blocking and tackling of looking at yields, and looking at productivity, and what we're spending, working our supply chain.

Those are all things that we've done for a long, long period of time that have allowed us to be best in class in this space as far as the margins.

But I think the real next step function for us is we're continuing to move the mix into more and more integrated mobile solutions where there's more complexity.

Complexity for us drives profitability, and there's fewer and fewer people in the space that can do it.

And so as that continues to grow as a percent of revenue, it's going to be a nice step function for us as far as margin expansion.

Okay, great.

And then just turning back to SkyOne, your thoughts on what that could be as a percentage of revenue maybe exiting the calendar year.

And then for more complex devices like that, exiting 2015, where do you think the industry is in terms of adoption of that?

It seems like it's still early days, but I'm curious, your thoughts there.

Well the complexity theme actually is accelerating, and there's a couple of leading OEMs that have forged the path.

And you would be surprised to see how this is catching on with a number of customers.

So we think the ability to deliver integrated mobile solutions, whether they be SkyOne or derivatives, also back to our filter comment, we have a great deal of flexibility now in architecting these customized solutions.

And not only on the transmit side, but also on the receive side of the smart phone.

A lot of rich content there.

So we think the complexity theme will continue.

It's a small portion of the market today.

We've been capitalizing.

But our position there is outstanding.

We have the core technology.

We have the switching technology, GPS, power, core RF.

And then also weaving in some of our packaging and assembly techniques makes it really special.

So we look forward to this upgrade cycle throughout the industry, and it's still quite early.

One thing we've learned, when we first launched SkyOne 1.0, if you will, it was a highly integrated all bands that was intended to hit a slot to the market where companies would look for -- OEMs would look at that as a solution, a complete integrated solution.

And what we've learned is, that doesn't work.

What works is a SkyOne architecture that's very reconfigurable and customized.

It's really good for our business, because we know how to do that.

But there isn't anybody out there who seems to have the very same idea as another major OEM in how they want to architect these systems.

It's all quite unique.

Our next question will come from Quinn Bolton with Needham.

Let me first offer congratulations.

But just wanted to follow-up on that last question.

I guess if we would look out at the front ends for mobile devices, it seems you've got two common architectures.

One, the broadband or MMPA, the other is the pad moving to wide band pads.

Do you have a viewpoint?

Is the industry going to stay diverse, or do you think one of those architectures wins out over time?

And if one of those architectures does win out, are you better positioned from a content perspective one way or the other?

And then I've got a follow-up for Don.

Yes, I think that if you look at today, it seems that some form of a power amplifier duplex or architecture made it to a very complex received set of products, switching and control products, seems to be gaining some traction.

I think it's really a hybrid.

As I mentioned earlier with SkyOne, what we've seen is SkyOne is very important with some combination of amplifiers, duplexes, switching control and logic, and maybe voltage on the front end, maybe antenna tuning on the back end.

That's where the architecture wants to go.

That can be implemented with the PADs, as well as discretes, (inaudible) MMPA, and a couple of PADs believe it or not, or overlaying some high-performance LTE bands with just a discrete PA.

There is not one-size-fits-all.

But the trend is more integration and more integration and matching of PAs and filters, and more customization on the receive path.

Great.

And then for Don, just coming back to the dividend buyback policy.

You get close to your $5 of EPS target, my quick calculation would say your cash from operations would be something around $1.2 billion, $1.3 billion.

Is 40% of that going to shareholders the right percentage, or as you could closer to that $5 target would you consider increasing the percent of cash flow that might be paid back to shareholders?

I think that was the same question.

You said the same thing twice.

But I understand the question.

But, yes.

As we continue to grow and there's more and more dollars available to us, we're going to at multiple options.

It could continue to be an expansion of the share buyback and dividend expansion.

Certainly as earnings go up, the valuation of Company is going to go up, and we would be looking at a certain yield potentially that would go up.

And it's just going to strengthen, and we're going to continue to expand.

We'll need CapEx dollars.

So all those things we'll do, and we like having enough cash available to also fund anything that potentially happens externally where we want to grow from a non-organic basis.

So, it's just a question of managing all those things in concert.

And you're right, as the numbers continue to grow, you have different options.

The key is -- the key with a strong balance sheet and a strong cash flow is it's a competitive advantage.

It gives a strategic advantage, and we like that.

So it gives you a lot of options.

And next we have Vijay Rakesh with Sterne Agee.

Hello, congratulations, guys.

(inaudible) guide.

Actually look at Panasonic here, obviously it's helping you reduce your cost of the packaging side.

But where do you see -- do you see incremental marketshare opportunity either with the SAW or TC SAW as in corporate debt?

Yes, I think the short answer is yes.

First of all, it's an integral part of our PADs, our SkyOne, and even our GPS modules.

As I mentioned earlier, on customization, no one-size-fits-all.

The majority of bands still use a SAW.

There are more and more narrow bands spacing where we can provide a great differentiated project with a TC SAW, and Panasonic is a performance and IP leader there hands-down.

And we see limited number of bands, where we need to partner for bulk acoustic processes, which we are doing.

So we have a complete offering, and I think we're the only company in the world that is offering modules that incorporate SAW, TC SAW, and BAW.

And so, it not only gives us the ability to eliminate margin stacking as we buy filters, we now will produce them.

But it also gives us a competitive advantage to move TC SAW into more and more bands.

Got it.

And just a housekeeping question here.

What is your 3G, 4G mix?

And with the strong ramp here in the second half, does the PA plus IMS mix versus analog shift quite a bit?

Thanks.

Yes, on the 2G versus 3G, 4G, that's really not that meaningful of a number for us anymore.

The 2G is sub 10%, and the rest of it's 3G, 4G.

And as we move forward, yes, we would expect in the September and December quarter that the PA percentage would drop a little bit.

It's still going to be growth year-over-year, and the integrated mobile systems would increase and the percentage we would expect --

The analog split would be about the same in broad markets basically.

Yes, we're probably talking-- it would stay about the same percentage.

We'll go next to Mike Burton with Brean Capital.

Hey, guys, thanks for taking the question.

And congrats on another strong quarter and guide.

Just to follow-up on that last couple questions on filters and BAW.

Dave, if you could update us, how many suppliers do you currently have that you can get supply for BAW if you do need it?

I know it's not something that's been a huge priority for you in the past.

And then, as we've seen the shift to 4G in China, are you starting to see the Avagos and TriQuints start to compete in that market?

A market which has really been you and RF&D in the past.

Well first, we're getting BAW now from two or three.

And I think that was -- and it will grow a little bit.

And I'm sorry, the second part of the question, we see new competitors you mentioned a couple.

We have seen the competitor list within open market China drop dramatically.

We've had 15 competitors for discrete PAs, and then other competitors for switches, then other competitors for filters.

We no longer see that.

If you look at the reference design of Mediatech or Qualcomm or others, you will see one or two suppliers capable of really capturing the bulk of that analog content.

So I don't think it's -- I think it's not as you've described, Mike, I think it's more the opposite there.

And there's were we're gaining.

The complexity in all these smart phones, even the low-end smart phone, is making it impossible, very tough if not impossible, for component only companies to compete.

Very helpful.

And then just a follow-up on there's been a few questions already on the SkyOne.

But I'm just wondering, Liam, if you actually on the competitive landscape, do you see anything from Qualcomm or from Micro at this point?

And would you actually view a successful offering from one of those guys actually as something that could actually accelerate that product category and today's point and actually consolidate the marketing even further?

Sure.

Certainly Qualcomm has been in this space for a while.

And as David pointed out, with the more preconfigured approach CMOS strip and approach that they featured, there may be some customers that will adopt that.

But what we continue to see is performance really mattering now in this industry.

It matters a lot, and efficiency matters, and gas HBT has been critical to that.

But we also weave in CMOS and SOI in a lot of our solutions as well, so we have a balance.

I think what will happen, and we're seeing it already, and when we talked about the market growth and the overall TAM expansion, it's that this complexity theme is going up.

The appetite for our customers to take upon more complex solutions delivered by OEMs and delivered by suppliers like Skyworks, I think is there.

But we're really not seeing any others offer that.

It's a very, very small set of companies that have the architectural leadership skill set systems knowledge to deliver to this new hurdle within mobile.

And we think this hurdle is going to continue to go up.

Our customers are very pleased with what we've been able to do.

And as I mentioned before, the appetite for this type of technology is increasing.

And we'll go next to Edward Snyder with Charter Equity Research.

Thanks a lot.

Liam, you mentioned expansion of capabilities, especially integrated mobile products once Panasonic is in-house.

Other than eliminating the stacked margin issue, what can you do with Panasonic in-house that you couldn't do with them externally?

Does it suggest that you'll be offering discrete filter products that don't include amplifiers or devices, or it just expands your flexibility in addressing more integrated products?

Well, it does a lot of things.

It certainly does open up a discrete filter opportunity for us, and there's a number of things we can do there.

You're quite familiar with the industry.

There's products that can address Wi-Fi.

There's frequency bands that we can sell discreetly.

We fully intend to advance the technology, and build a platform and filtering capability center of excellence in Japan.

We also, if back to the core, we have usage within SkyOne of course, usage within our PADs.

And as you know, being able to design and couple your filters under the same roof as your PA team is critical.

And that's an advantage.

And then the receive side, if you look at some of these diversity FEMs that we see with LNA and switch and many, many filters, that's a whole new opportunity for us to address.

We've had some wins, but having the filter technology in-house is really going to accelerate our hit right there.

So there's many, many ways to play Panasonic.

Immediately, we see filling modules that we've already progressed on, but we see an opportunity to expand, as I outlined.

Because in terms of TC SAW, in terms of high-performance TC SAW, it's really only Panasonic and TriQuint, and TriQuint is probably going to be a bit distracted coming up here pretty quickly.

So if you win in a discrete market, it would seem like an opportunity that you could capitalize on, given the shortage in SOI.

Yes.

No, that is right.

And as I said, our goal is to try to move that forward into some of the higher frequencies.

And we've found in many cases, appropriately designed PC SAW can take the space of BAW, and perhaps even FBAR eventually.

Our next question is from Cody Acree with Ascendiant Capital.

Thanks.

And then maybe, Liam, just following up on that.

Does that then eliminate any real thought of progressing the Panasonic technology into BAW filters, or do you think you can manage everything you need with TC SAW?

No, we will keep an open mind to that.

Our goal is to leverage the platform.

We have a great group of engineers that come with us in this JV.

We've been adding designers, filter designers, ourselves.

We have incredible insight on how the power amplifier filter and the system works together.

So our role here is to advance the technology at Panasonic.

We'll take advantage of the IP, we'll continue to have partners as well, and ensure that we have the best possible solutions.

How long might it be before you think you could advance the tech to include BAW?

I think we could put the equivalent performance through Panasonic within the next 12 months.

Our next question is from JoAnne Feeney with ABR Investment.

Yes, thanks for taking my questions.

If we go back to the revised guidance in early June, and we looked where we ended up now, what would you say made it challenging to be more aggressive when you made that revision?

What changed in the month of June?

Was it anything specifically, or was it something about which you have less visibility typically than other things?

And then how does that play into the guidance for this quarter?

Joanne, I'm not sure I understand.

Are you asking why -- what happened to cause us to exceed the revised guidance or was there some other question?

Why wasn't it more predictable?

Why wasn't the revision more predictable?

No.

Why wasn't the result after the revision something you were able to predict in June?

Was the quarter more backend loaded than usual?

What changed basically in the month of June?

Well, we exceeded the revised guidance, but I think we exceeded it by a reasonable amount.

So not that much change.

I think we remain conservative whenever we provide an outlook.

And things just happened more right than the opposite.

That's all.

It wasn't a huge difference.

No, and from the original guidance to the updated guidance, we knew there was a potential for some improvement, but we needed some things to materialize before we were going to do that.

That's really all it was.

Okay.

That's helpful, thanks.

And then on the cost front, you said you've asked your foundries it sounds like to step up production.

What are you seeing by the way of pricing from the foundries?

There's still certainly some excess capacity out there.

Has the pricing environment changed very much?

And due the pricing declines, if you're seeing them, keep up with any component price declines that you might be facing?

Sure.

We have great relationships with our partners, our outside partners, foundries, et cetera, and they're pleased to see our demand.

We haven't seen anything out of the ordinary on pricing.

We continue to work negotiations into 2015.

And the fact that we have been driving a lot of results through our OEMs, it puts us in a very good position for those discussions.

Our next question is from Tim Long with BMO Capital Markets.

Thank you.

Two, if I could.

First, on the broad markets, I said it should be a similar percentage.

Just curious, because a lot of the highlights for the quarter that you talked about in the press release were non-mobile.

So I'm just curious on that business, how important is the 3G versus Wi-Fi for that segment of the business?

And then the second question, just going back to China, love the perspective on impacts of two things.

One being, the potential for more three mode now than five mode.

And on the other side, more of an opportunity to talk about the other carriers getting FDD licenses.

What do you think that could mean for that important end market?

Thank you.

Sure.

On the broad market piece, you asked about 3G and Wi-Fi.

For us, broad market doesn't include any 3G.

There's no cellular technology.

So broad market for us, is our advanced analog capabilities.

It's [P EMP], it's SOI switching, ZigBee, some Wi-Fi.

And in that space, we have a growing.

As we noted, 26% year-over-year.

A number of end applications, some that we noted in the highlights from very creative IOT devices like Sonos high def audio to mesh thermostats, automotive opportunities, et cetera.

There's a whole host of things.

Networking and routers, all big parts of that story.

And with respect to China, you had a question on 3 mode and 5 mode.

Yes, we monitor that split.

And it's quite interesting, because if you step back, and as Dave had pointed out, half of that market or more than half is 2G.

So a move to 3 mode is substantial, a move to 5 mode is perhaps even more substantial for us.

But also remember, if you see more of a swing back to the 3 mode phone with a drop FD and WCD, they're typically sold at lower price points.

So there could be a volume benefit to us there as well.

But in any case, the China upgrade cycle is going to be substantial for us.

We're starting to see a little bit of that now.

4G is a little bit late.

It's backed into our numbers, but multiple bands, multiple switching, a lot of content gains will certainly be on the horizon.

We have a question from Tom Sepenzis with Northland Capital.

Thank you, and congratulations.

I think most of it's been asked at this point.

But I'm just curious, with Qualcomm buying Wilocity, have you done any work at 60 GHz?

Is that a market that you're thinking of going after for 60GHz Wi-Fi?

Yes.

We've monitored that.

We're a pretty substantial player in Wi-Fi.

We work with Qualcomm, we work with Broadcom, and a number of the other players.

But we haven't done anything specifically there.

But we are evaluating next leg technology SAW, and certainly expect this to be a big part of our story for years.

Do you have any sense of the timing on when you think that will actually become a thing?

The 60 gig standard?

No, I don't have any specific timeline for that.

We predict it to be around the corner for about eight years.

Thank you.

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

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

Okay, well thank you, everyone, for participating today, and we look forward to seeing you at upcoming conferences.

Thank you.

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

We thank you for your participation.

You may now disconnect.