思佳訊 (SWKS) 2015 Q1 法說會逐字稿

Good afternoon, and welcome to Skyworks Solutions first-quarter FY15 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, Rochelle.

Good afternoon, everyone, and welcome to Skyworks' first-quarter FY15 conference call.

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

Dave will begin today's call with a business overview, followed by Don's financial review and outlook.

We will then open the lines for your questions.

Please note that our comments today will include statements relating to future results that are forward-looking, as defined in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially and adversely from those projected, as a result of certain risks and uncertainties, including, but not limited to, those noted in our earnings release, and those detailed from time to time in our SEC filings.

I would also like to remind everyone that the results and guidance we will discuss today are from our non-GAAP income statement, consistent with the format we've used in the past.

Please refer to our press release in the investor relations section of our Company website for a complete reconciliation to GAAP.

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

Thanks, Steve.

And welcome, everyone.

Well, we're off to a great start to FY15, with first-quarter revenue, profitability, and earnings all exceeding our guidance, driven by strong demand across our served markets and increasing adoption of our integrated system solutions.

We increased revenue by 59% year over year.

We grew EPS by nearly 90%, and we posted record cash flow, as we continued to efficiently convert our strong earnings growth into cash returns.

These financial results reflect our success in capitalizing on a number of powerful industry dynamics, while expanding our addressable opportunities, and enhancing our value-add in the marketplace.

In particular, we're benefiting from the proliferation of many forms of wireless data, as more and more applications leverage the power of connectivity.

Along with this, we're seeing a dramatic increase in analog complexity, driven by higher performance requirements, and these market dynamics have created greater content opportunities, closer engagements with our customers, and higher value solutions across the board, with a narrowing field of capable competitors.

Skyworks is uniquely positioned to capitalize in this environment, by providing integrated RF and analog solutions, which enable our customers to navigate increasingly more complex design challenges, resulting in above-market growth and superior financial returns for our shareholders.

This is playing out across our served markets today, as evidenced by our first-quarter results.

Specifically during the quarter, we delivered revenue of $806 million.

That's ahead of our guidance and up more than 59% year over year.

We produced operating income of $282 million.

That's roughly double that of a year ago, translating into a 35% operating margin.

We posted $1.26 in earnings per share.

That's up 88% versus a year ago.

We generated $383 million in cash flow from operations.

And we ended the quarter with over $1 billion of cash on hand with no debt.

Looking ahead, we see our momentum continuing, and while March is normally a seasonal slower quarter in the mobile industry, our broadening market footprint, our new product ramps and an expanding solutions portfolio enable us to mitigate these seasonal patterns, a clear testament to our diversification.

Our Q1 design wins highlight some of these diverse opportunities.

In mobile, our more notable wins include diversity received modules and smartphone platforms at several OEM customers, including Samsung.

Now, this is a new product category for us, representing a compelling growth avenue for Skyworks.

We also launched SkyLiTE.

These are highly integrated systems supporting MediaTek's latest SOC reference design across multiple smartphone platforms.

Switching and connectivity modules across Xiaomi's leading smartphone platforms as well.

In the broad markets, we've successfully captured a suite of 10 Skyworks' products for Cisco's latest home gateway solution, supporting multiple cable operators; multiple analog devices and a leading telematics platform for GM vehicles; high reliability analog ICs and avionics systems for Talus; ZigBee connectivity modules for smart light bulbs with Phillips, LG and others; local area connectivity solutions for Echo and Fire TV; and streaming media devices at the leading online retailer.

And we captured more than $10 of analog content, supporting Technicolor's latest set-top box platform for DIRECTV.

So in total, 2015 is shaping up to be another great year for Skyworks.

With the design momentum we have in place today, we're poised to continue our track record of above-market revenue growth, expanding profit margins, and earnings leverage.

Now, before providing a more detailed view of our market position, I'll turn the call over to Don for a more in-depth review of the financials.

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

We appreciate that.

Revenue for the first quarter was $805.5 million, ahead of our prior guidance of $770 million, and up more than 59% versus the year-ago quarter.

Profit was $376.4 million, or 46.7% of revenue, ahead of our guidance, and up 220 basis points from the first quarter of FY14.

Operating expenses were $94.4 million, consisting of R&D expense of $58.7 million, and SG&A expense of $35.7 million.

We generated $282 million of operating income, roughly twice that of the year-ago quarter, yielding a 35% operating margin.

Our cash tax rate for the quarter was 13.5%, resulting in net income of $244.8 million, or $1.26 of diluted earnings per share, as compared with diluted EPS of $0.67 in the year-ago quarter.

That's $0.08 ahead of our guidance, surpassing $5 in annualized EPS.

Turning to our first quarter balance sheet and cash flow statement, we generated $383 million in cash flow from operations, invested $87 million in capital expenditures, with depreciation of $36 million, and we exited the quarter with just over $1 billion in cash on hand and no debt.

Moving to our product mix for the first quarter of FY15, power amplifiers represented 31% of revenue, integrated mobile systems was 48%, and broad markets was 21%.

We saw healthy growth across all product categories, with the strongest being integrated mobile systems, which benefits from strong December quarter seasonal patterns.

As a reminder, this product category includes SkyOne, SkyLiTE, and our power amplifier duplexers, as well as analog products like power management, Wi-Fi and GPS.

It's also worth noting that our broad markets product lines, which serve the connected home, networking, media, automotive and medical markets, grew at 26% year over year, significantly outpacing the broader semiconductor industry.

Now, for our second-quarter business outlook.

We expect second-quarter revenue to be $750 million, representing 56% year-over-year top line growth, and significantly better than normal seasonality.

At this revenue level, we suggest modeling gross margin in a range of 46% to 46.5%, with operating expenses of approximately $95.5 million.

Below the line, we anticipate $100,000 in expenses from interest income and other expenses, and a cash tax rate around 13.5%.

We project our tax rate to remain at these levels for the remainder of our FY15.

We expect the share count to be around 194.5 million shares, resulting in second-quarter EPS of $1.12.

Many of the drivers that support a strong 2015 are already in place, giving us a high level of confidence in our growth trajectory.

We continue to see opportunities for sustainable margin expansion, as we leverage our ongoing capital investments and benefit from growing demand for our custom integrated solutions and precision analog products.

We recommend modeling 52% incremental gross margin, providing a path to continued margin improvement.

Longer-term, we are targeting a goal of a 50% gross margin for the Company, and we have a number of initiatives in place to accelerate our progress towards achieving this goal.

All of this gives us a high confidence level in our ability to extend our track record of best-in-class financial results, putting us on a path toward our goal of $7 in annualized EPS over the long term.

With that, I'll turn the call back over to Dave for his comments on our market trends and growth strategy.

Thank you, Don.

Well, it's clear that our business is performing at a high level, as we execute on our strategy and maintain a clear focus on operational excellence.

Now, for the remainder of the call, I would like to provide some additional perspective on the positive trends in our end markets, and how we positioned the Company to capitalize.

By all measures, wireless connectivity is exploding as an enabling technology.

In fact, this year's CES was a showcase of ground-breaking new devices, leveraging the power of wireless connectivity to enhance our daily lives.

Much of the excitement at CES was around innovations in the connected car, the automated home, wearable technologies, and previously unimagined new categories like drones, all utilizing and enabling technologies like 4G, like GPS, local area networking, and near-field protocols like ZigBee and bluetooth.

Our overarching mission is to make it effortless for customers to embrace these forms of connectivity, leveraging our decades of experience in mobile to enable more and more devices in adjacent markets to become seamlessly connected.

Powering these will be a combination of sensors, micro controllers, and most importantly for Skyworks, connectivity and power management solutions.

With a high proportion of analog content and comparatively low digital processing needs.

These products require high levels of integration and will need customized solutions, produced in massive scale, at attractive cost points.

All of these attributes play directly into Skyworks' core strengths.

In this way, Skyworks is a conduit into the Internet of Things.

This is an exciting opportunity, but just one of many tailwinds we're capitalizing on today.

More broadly, as we enter the calendar year 2015, we see four major trends driving our growth.

First, leverage of our leadership in high-performance integrated systems.

In high end connected devices, performance is paramount for our customers to enable seamless, anytime access to on-demand content, social media, streaming services, and cloud data.

At the same time, technical challenges like band proliferation, like the adoption of advanced uplink architectures, and the implementation of 802.11 AC and precision location services are resulting in an explosion in analog complexity, and the net result for Skyworks is an expanding addressable market, significantly outpacing unit growth.

Second, enabling connectivity in emerging markets.

We see tremendous opportunities for 4G devices in markets like China, India, Latin America, and Eastern Europe, where broadband penetration rates are low, and population densities are high.

Strategy Analytics estimates that smartphone shipments into India alone will grow at 40% compounded rate through the year 2020.

This new generation of devices is replacing a global install base of billions of 2G voice-only phones, where we have minimal addressable content.

Over the next few years, we see significantly increased content opportunities in these markets, driven by more stringent performance requirements, and much higher complexity.

Third, cultivating the Internet of Things.

Market analysts estimate that the number of connected devices is poised to explode over the next five years.

Analysts project that the machine-to-machine connections alone will increase four-fold through 2020, accounting for nearly 800 million connections, adding to our other opportunities in the connected home, in wearables and other markets.

These applications all rely heavily on efficient connectivity solutions, providing incremental new growth opportunities for Skyworks, and enhancing our diversification, while dramatically expanding our served addressable markets.

And finally, aggressively expanding into new vertical markets.

We're investing heavily to increase our market footprint in traditional analog segments like automotive, like medical, and industrial.

These are highly attractive markets for us, characterized by longer product lifecycles, fewer competitors and higher margins.

These new growth verticals outside of mobile remain a strategic priority for us, and we are investing significant resources in building out our presence in these markets.

These elements of our strategy have enabled us to consistently expand our served markets, and to significantly outpace the growth of the semiconductor industry, while offsetting the seasonal trends at the mobile market.

So in closing, we're quite optimistic about our prospects for the remainder of 2015 and beyond.

We've created a unique business model, combining strong, consistent top line growth with the financial returns of a best-in-class diversified analog company.

And we've established a solid track record of delivering on that vision to produce superior financial returns.

This concludes our prepared remarks.

Operator, let's open the lines, please.

(Operator Instructions)

Your first question comes from the line of Harsh Kumar of Stephens.

Please go ahead.

First of all, congratulations.

Stellar quarter.

Stellar guide.

And special congratulations on hitting that 35% mark.

That's like the gold standard in the semi business.

Thank you.

I just wanted to say, your numbers in March, your guidance in march is better than seasonal.

I guess if there was any overarching reason why that is so, if you would just give us some color around that?

Yes, thank you very much.

Some of the assumptions in our Q2 guidance that allow us to offset seasonality are first, our broad markets products and the aggregate of all of our vertical markets are much less than seasonal, so that's helping.

We're seeing new opportunities that we're ramping, specifically in the connected home, significant wearables products, in fact.

We also have some customers that are starting to ramp new mobile platforms for 2015 and they are doing so in the March quarter.

So we're seeing content gains.

We're seeing more high value-added analog systems, both in the mobile and in non-mobile, and that's helping Q2.

Great.

As a follow-up, if you look beyond March, I think one of your customers had a pretty substantial ramp.

As you look beyond March, I'm not asking you to give color, but maybe some -- I'm not asking you to give numbers, but just some color.

What would be the puts and takes on growth, let's say in the June and the September quarter and the rest of the year?

Well, that's a good question.

Obviously, we don't provide guidance for the year, but if you look at our Q1 results and add our Q2 guidance, we're well over 50% top line growth through the first half.

And so, if one were to take normal seasonal patterns for the rest of the year, and our track record of growing faster than market, we're looking at a very attractive, we think another high growth 2015.

Of course we've got strong visibility today, because we're actually ramping programs now.

So I think the positive dynamics that are going to continue to fuel this above-market performance for us, we'll continue to see big content gains in mobile and connectivity, particularly 4G and 11 AC, by the way.

We continue to see a small number of competitors and consolidation of share favoring those companies and led by Skyworks that can do a complete overall solution.

And our broad markets and vertical segments continue to outperform.

I think all of these will play out not only in Q1, Q2, but over the long haul.

Okay, thank you.

Your next question is from the line of Rick Schafer of Oppenheimer.

Please go ahead.

Great, thanks.

I'll add my congratulations Nice job on the quarter.

I had a quick follow-up question, just kind of talking about the, or looking at what you guys sort of expect to see or what your expectations are for content increases this year with your two top wireless customers?

As well as China and emerging markets.

Is it too early to have a sense of what kind of content increase you could see, at particularly your two largest OEMs?

Okay.

Well, thanks, Rick.

So obviously we can't comment specifically on customers.

However, in general, these analog architectures are getting much more complex, and that's across our entire customer base.

And mobile and non-mobile, by the way.

But in terms of our largest customers, this provides a tailwind for us.

We have consistently more addressable content with each successive design.

And in fact, we continue to look out two to three years, as we become more of a systems producer, we're engaging very early in architectural selection.

So we have very good visibility in terms of how the architectures are going.

And so I guess I would say that our clearly stated goal has been for a long time, is to gain content with each model, and as an incumbent, we've been very successful at maintaining and in fact growing our footprint.

And that's aided, of course, by complexity that all of our customers need help in solving, particularly on the analog side, and that's our strength.

Maybe Liam could comment on China?

Sure, Rick.

This is Liam on China.

If you look at the China dynamic, we are very excited about the LTE opportunities this year.

We've seen an LTE number in China that was probably about 92 million or so.

We think that number could go up 2X, maybe 3X over the next 12 months.

Here, we have an opportunity to bring in our multimode system solutions.

Invariably, there's Wi-Fi, there's GPS, there's power management, very content-rich opportunities.

Then adjacent to that, you mention emerging markets.

There's yet another set of developing markets that are looking for their first wave of connectivity.

We support that and often times that could be $2 to $3 of incremental content, in markets where there really was no subscriber.

We're excited about both of those opportunities.

It's early for that cycle to evolve.

Great, and just switching gears onto auto, I know Dave mentioned auto in his prepared remarks.

Can you give us an idea, I guess, maybe what you're targeting or how you look at growth in that business, whether it's this year or the next couple of years, however you're comfortable talking about it?

In terms of are you going to outgrow the auto unit market by 2 or 3X, just some kind of target on what kind of growth rates we could see there, and actually what's primarily driving growth there for you?

Sure.

As we've outlined with CES, and as you've seen with some of the new models that have been released, connectivity, infotainment, all a big part of the auto story.

So what we've been doing so far is really leveraging our strength in SOI switching, in GPS technology, and in Wi-Fi technology, and leveraging some of the great tech products that we've built through our mobile portfolio.

And we're growing that business quite well.

We have initiatives to further increase content.

We're looking at unique solutions, even some cellular-based solutions are entering into automotive.

We look at that as a key part of the IoT portfolio.

We have design wins with companies that we named here in the call, and we think that's going to continue to proliferate.

And we're excited about it, we have dedicated teams working that market as well, and we'll report more to you as the quarters transpire.

Thank you.

And the next question comes from the line of Vivek Arya of Bank of America Merrill Lynch.

Please go ahead.

Thank you for taking my question.

Dave, when you look at the high end of the market in mobile phones, I think there's a perception that perhaps overall content might have saturated, because these phones already have so many LTE bands, and it's just not possible to grow anymore bands.

What are you seeing on the ground?

What do you think can help to drive content up, even in the high end phones?

So even if, let's say, units decelerate or are flattish, you could still see growth even on the high end of the market?

Yes, thank you, Vivek.

It's a little bit of a complicated question.

I would say from a band standpoint into the foreseeable future, and I'm talking a few years out, we don't see any trend that is narrowing the number of bands.

And in fact, we see the opposite.

If you pay attention to some of the auctions that are occurring right now for spectrum, I mean, they are moving higher and higher in frequency, on narrow bandwidths.

I think that's going to drive a lot of complexity and the higher in frequency you go, by the way, the more differentiated the kinds of technologies we can produce are.

So that's a very good trend for us.

That implies complex switching, complex amplification, filtering, and so on.

On the receive side, by the way, now it's becoming equally important to have more and more of it streaming.

So we're starting to see downlink architectures get very complicated.

That's adding a lot of content in the next five years, we think, because it isn't just that you're transmitting all the time, you're actually streaming.

So the performance of the battery, the bandwidth and so on is very important, how the antenna plays in that environment.

And remember, Vivek, Skyworks is a little unique, because as, for example, as connectivity moves to AC and multiple modes of backward compatibility and Wi-Fi, that's a real strength of ours.

We're the leader in that space.

Power management and the voltage that these devices see is important, so we have a suite of power management devices.

We're in the camera flash, particularly in dual and high performance, and so on.

So our systems capability is serving us very well.

I think it would be a mistake to interpret the current suite of phones as being some kind of a high point in band proliferation.

I don't think there's anything that can stop that for the next several years.

Got it.

Very useful.

And then as my follow-up, more on the operational and the supply chain side, you're growing at this 50% rate, probably seven to eight times the broader semiconductor industry, and I'm wondering, do you see any supply constraints on that growth?

How are your front end and back end facilities owning up and supporting this kind of growth?

Thank you.

Well, if you look at our CapEx the last couple of years, you can see that we've had to grow our capacity.

We've done that significantly.

We've maintained our flexible model where we have outsource partners for all of our critical processes and cooling, assembly and test and so on.

So I -- we've made provisions for that.

We have the capacity.

Our on-time delivery remains very high.

I think we're all set, but we've had to make a significant investment over the last several quarters.

Vivek, you look, we spent $200 million last year and we had $87 million from Q1, so it's, as Dave said, it's spending the CapEx to maintain that right ratio and those products that we do both internally and externally.

Remember, we outsource a significant percentage of our products.

The SOI products for power management, we run fabless.

So it's a nice balance, and we feel very comfortable about our ability to get products.

Vivek, I would make one final comment.

The other piece in the last couple quarters, you've seen a significant investment in filter capacity.

Our high performance temp comp duplexers, we're on track now to ship a billion in 2015.

A billion.

And we're in good shape to do that as well.

So we're -- we know how to do this, but it's a lot of capacity, I will admit.

Thank you.

Next question from the line of Sid Sinha of Canaccord Genuity.

Please go ahead.

Great, thanks for taking my questions, and congratulations on the strong results.

Dave, one of your leading Korean customers is trying to reduce the number of SKUs on handset models it produces by roughly a third, and focus perhaps more on super-regional phones.

I interpret this as more content for Skyworks as these phones should not support more regional bands and frequencies.

Is that a fair assessment?

Yes, I'll let Liam address that.

Yes, sure.

I understand what you're alluding to there.

What we are seeing with one of our larger customers is a move towards fewer SKUs, but the SKUs that are being provided are much more complex, and will handle more of a broader geography.

That's actually a great trend for us.

That's what we do best.

We integrate solutions.

We're able to provide the breadth of not only the amplification, but the filtering, the power management switching, and the Wi-Fi.

So we see an opportunity uniquely with this customer now to gain significant content, platform over platform, and enable what we think to be a step up in functionality and performance on their end.

We're excited about it.

You are on to that by your question, and we're seeing that coming to fruition this year.

Great, thanks.

And just a follow-up to that question.

The very same way you are facing competitive market dynamics from the Chinese smartphone OEM base.

I guess simple way to ask, if the Chinese smartphone makers gain share from some of your existing non-Chinese android customers, would that in totality be a net positive or negative or neutral for Skyworks?

Well, actually, I think it's a net positive.

We're starting to see a tremendous growth here in China.

We talked about that in a prior question.

You're seeing names like Xiaomi and OPPO and TCL and Lenovo that are executing very well in China, which is a huge market, but they are also delivering some compelling solutions into another set of emerging markets outside of China, so we're benefiting from that and we think the unit volume opportunity there, coupled with content gains, is a real compelling driver for us.

And that will be around here for many years.

Thank you.

Next question, from the line of Anthony Stoss of Craig-Hallum.

Please go ahead.

My congrats as well to all Skyworks employees.

Two parts.

If you could talk a bit more on what you're seeing on the infrastructure side, what you saw in December, and what you might think infrastructure-related business, up, down, or flat in the March quarter?

And then more of a bigger picture, Dave, now that it seems like the handful of the RF players in this space are all playing within their subsegments.

Are you seeing less pricing pressure overall now than you did, say, a couple years ago, since everybody seems to be doing well and focused on their niches?

Thanks.

I'll answer that, and then Liam can talk about infrastructure.

I will say that we continue to see dramatic changes in the competitive dynamics in the market, for a couple of reasons.

One is that, the simple reality is that, our customers don't want, in fact many cases don't know what to do with discrete components.

Even the best in breed companies with whom we used to compete are unable to compete, many of them, in these advanced system architectures.

That's allowing us to capture content, simply because we have a solution, a breadth of product, and we have scale in this solution dynamic.

We understand it, we approach it as a system, not as a bag of chips, if you will.

That's helping us.

So we see consolidation of share, with or without consolidation of companies.

Where we have seen consolidation that you alluded to, is actually I think healthy long-term for the market, because I'm really encouraged to see a reduction in underutilized manufacturing assets.

Where we've seen some of these RF companies come together, that seems to be the trend, which is to shutter underutilized assets in the form of foundries, and so on, consolidate design centers.

So we're finding it making it easier for us to hire the absolute best in breed engineers, and we're certainly seeing less -- a more rational environment from a pricing standpoint.

I would put it that way.

Sure, and with respect to infrastructure, we are seeing that market slowly improve, commensurate with the increases in LTE developments and increasing data rates and demand for streaming and services.

Some of the beneficiaries that we see that we also supply to, companies like Nokia-Siemens, Huawei, Ericsson, ZTE, all now are starting to show vibrant signs of demand going into 2015, and even into 2016 in long-term forecasts.

So that market, as we've outlined in the past, is a margin-rich portfolio for Skyworks.

It's a big part of our story in broad market, and we're looking forward to rolling out some new design wins here this year.

Thank you.

Next question from the line of Tim Long of BMO Capital Markets.

Please go ahead.

Tim Long, your line is open.

We'll move on, operator.

Okay, thank you.

Next question is from the line of Cody Acree of Ascendiant Capital.

Please go ahead.

Thanks for taking my questions, and congratulations.

Maybe if we can look at a split of revenue to the best you can, the details that you can give us on handset versus non-handset.

Obviously, the March quarter is much better than seasonal, and to the extent maybe you can give us a mix split, that's helping to drive that?

Well, I think clearly December marks a high point in terms of the amount of mobile revenue you see, because obviously that's where you see some big programs ramping.

Our March guidance is to be much less than seasonal, as we expect a strong March quarter, and that will be driven by a lot of broad market activity, there will be some mobile phones launching, but in general, the outperformance there is broad market based.

You'll see a reduction in mobile volume and an increase in broad market and vertical markets.

Within mobile, where we're seeing by far the greatest strength is in these integrated system solutions, the power amplifier duplexers, SkyOne, Wi-Fi based products, power management, and the like.

I hope that answers your question.

Well, Dave, I guess as you look into -- really through the first half, are you seeing the non-handset markets grow as quickly as you're seeing opportunities for the handsets in units, or are you just seeing numerous new applications coming in that are driving that?

And then I would also like to get maybe your view on the inventory health as we wrap up the year, both China and non-China handsets.

Well, Cody, I think if you look at our last quarter, our year-over-year growth in broad markets was about 26%.

We've been growing that business 25% to 30%, which is far greater than anybody's estimation of what broad market semiconductor content is growing.

We're doing it with connectivity.

We're doing it in the home.

We're doing it in the automobile.

And I expect that to continue.

Now, you know, over time, we see our mix shifting, less discrete power amplifier-like products, more integrated mobile systems within our mobile products, and more and more vertical market and broad market, but we are performing pretty darn well in our mobile business, so we don't see dramatic shifts in that overall split.

Okay.

Thank you.

Next question from the line of Craig Ellis of B Riley.

Please go ahead.

Thank you for taking the questions, and congratulations on the very strong execution.

Dave, I wanted to follow up on the helpful color you provided around calendar 2015 growth drivers.

When talking about internet of things and machine-to-machine, you mentioned a number of technologies.

Clearly, Skyworks is very strong in connectivity, but there are other areas like MCU and sensing, where you can go down different paths, either developing or acquiring that technology, or partnering up.

What makes the most sense for Skyworks longer term?

Well, that's a great question, a complex one again.

If you look at some applications, if you open up the hottest-selling thermostats, for example, like Nest, you'll see a module that has a combination of controllers and code that has been provided by a partner where we've added connectivity, switching, filtering to create a module that's really easy for the system to use.

We like that model.

It leverages our strength.

We're doing more than -- yes, it's connectivity, but it's also the switching, the antenna tuning, the filtering, and all the logic that drives that -- the adoption of these connected devices in the markets you described.

We are -- the long-term strategy is not to be a micro controller company.

We think that the relatively level of processing horsepower required is nominal, so we think we can partner, acquire and license, frankly, MCU technology.

We are looking at investing in various forms of sensing, so you could picture that we have connectivity, analog system wrapped into an MCM that we produce, perhaps in our Mexicali factory with all the requisite componentry, we license an MCU and the piece of the puzzle we're working on very hard right now is how to do the sensing and control.

And we're on track to use a couple different approaches, but they will likely be with partners.

That's helpful.

And then I wanted to clarify a related comment that you had.

You indicated that broad market strength is helping to offset seasonality.

Was that, was that pointedly at the current quarter's outlook, or is that longer term?

Should we expect to see a year from now, relative to historic patterns a little less seasonality from the December quarter into the March quarter?

I think it's both.

I think it's both.

It is clearly the case that the shift from mobile to broad market in Q2 is helping moderate some seasonality.

If you were, if you were a company focused purely on mobile, purely on high-end mobile, you would see far more seasonality than we're able to see.

If you go back and look last year, the year before that, I would expect you to think this way in years to come, we will be far less seasonal as a result of the diversification of our business model, both within mobile, but outside of mobile.

Okay.

Thank you.

Next question from the line of Edward Snyder of Charter Equity.

Please go ahead.

Dave, clarification, if you will.

Have you are or are adding premium filter capacity right now, and will you offer those discrete filters in the open market or are you planning on just consuming all that you build for your own use?

We are, we are more -- in fact, we are significantly more than doubling our filter capacity.

I think we'll probably ship -- our plan is, if not a billion, very close to a billion in 2015.

These are all high-performance TC duplexers, high frequency, narrow band.

We're expanding into new bands that previously weren't addressable by SAW, by temperature compensating with some really slick processes.

We're doing it across multiple customers and multiple applications, both on the transmit and the receive side.

And no, I don't think for the time being we'll offer merchant discrete filters.

Okay, thank you.

Next question, from the line of Vijay Rakesh of Sterne Agee.

Please go ahead.

Congratulations on a strong quarter here and good guide.

Looking at your content as you go into 2015, you talked about filters here growing to 1 billion.

Is that also doubling year on year in 2015?

And how have you been able to improve the opportunity, the performance on SAW or TC SAW versus let's say BAW actually going to the high frequency modes?

Thanks.

Sure.

Well, I think when you do a comparison year over year, of course we didn't have that joint venture in-house the prior year.

But it is true that we are ramping our production substantially.

We have customers lined up to consume that capacity.

As Dave mentioned, we're going to continue to add capital, and that's going to be a great driver for us.

And I think we have an opportunity now to leverage a proprietary temp comp process that will move us up from some of the traditional frequency bands that would be, to remain through SAW or TC SAW and move into areas that allow us to address an even greater set of end devices.

And when we talk about less devices going discretely or today really no devices discretely, what we're saying is these billion filters are enabling system-level solutions.

PAD-like solutions.

SkyOne-like solutions that have very rich ASPs and a tremendous amount of systems level knowledge and know how that comes in through our team at Skyworks.

So it's not just the filter, but it's our ability to leverage our gallium arsenide technology, our switching technology, the Mexicali configurability of custom assembly and test house.

Bringing all of that together is really special, and we're starting to see the benefits of that today.

Got it.

And just moving on to the capital allocation side of it, obviously very strong cash flow and big wads of cash now.

What do you see in terms of, dividends, share repurchases, or other mandates?

Thanks.

Thanks, Vijay.

Our allocation strategy, I think we've been pretty clear that we're -- and we're going to continue to focus on trying to distribute about 40% of the free cash flow to shareholders.

We returned over 35% in 2014.

We initiated a dividend in 2014, and we've actually increased that in two quarters in 2014.

And we've repurchased a significant amount of shares.

We're going to continue to do both of those.

As far as the dividend, the model looks really good.

Earnings look good.

At a minimum, we're going to look at adjustments to that on an annual basis.

That's at a minimum.

So we like -- having a strong cash balance gives us a competitive advantage.

We like being in that position.

Okay, and the next question is from the line of Steve Smigie of Raymond James.

Please go ahead.

Great.

Thanks a lot.

I was hoping you could talk a little bit about market share in terms of units of handsets that you're on, and some dynamics around that, such as LTE increases as a percentage of the mix, does that suggest you might gain share as you're typically providing some higher-performance solutions?

Or is it, as you see, maybe a proliferation of more customers, like more Chinese handset guys, is it difficult to have the resources to keep up with all the new players there?

So hoping you could talk about your market share potential from a unit basis.

Thanks.

I think it's a little hard to answer, because if you, if you look at our product portfolio within smartphones, there aren't very many smartphones -- there are no smartphone manufacturers where we don't have a position.

And in fact, there aren't very many smartphone platforms in the world today where we don't have something.

The real -- so they are so complex, it isn't like you have 30% PA share or whatever, that's not the case.

We're participating with virtually everybody and on every baseband platform.

So some cases like MediaTek where we'll go to a broad market, we're on that platform and we gain a lot of content and pull-through by working together with, for example, the indigenous subset of China customers.

So for us, it's more about more content.

Now, the tailwind is that there is more content period to given complexities.

There's more Wi-Fi, more modes of Wi-Fi, there's more bands, there's more filtering, there's more downlink architectures, more need for power and voltage management.

So that trend is going to happen anyways, and what's helping us in addition to that tailwind is that we see consolidation of share benefiting us, because our customers simply aren't going to the traditional discrete customer base any longer.

They are looking for a system solution that may be a complicated set of integrated circuits, integrated in a multichip module with filtering and passives.

That's what we think we do better than anybody in the world.

It's those two things.

It's share capture by virtue of our system solution, our strong customer relationships, and it's a tailwind of content continuing to increase.

Okay, thanks.

And just a question on fully integrated solutions.

Could you talk about what a 2015 SkyOne solution might incorporate?

I realize you have shared multiple wins but they are not all the same.

Is it you're putting three power amplifiers, two filters, switch, something in there?

Just give us a sense of what you've had in terms of -- just get some sense of the complexity of what you're building for 2015?

Sure, Steve.

Absolutely.

SkyOne is really becoming a mainstream part of our portfolio.

As you've outlined and what we've learned is that one size does not fit all.

And our ability to customize and configure account by account has been critical to our success.

So we have SkyOne solutions that could be six or seven bands with multiple filters, with power management, some switching, of course, all integrated with a very rich ASP.

We could find some customers that want very specific regional SKUs, where you might have three or four filters and three or four frequency bands of amplification with maybe some receive side technology and some power.

It's really a unique development for each account.

What makes it special for us, again, is our ability to do that systems work, knowledge of multiple baseband partners.

So this is the baseband agnostic set of solutions.

And now with our filtering technology in house, we can be much more agile in how we pick and place and manage and select the right frequencies, the right technologies for that customer.

Okay, thank you.

Next question is from the line of Mike Burton of Brean Capital.

Please go ahead.

Congrats on the great results and guidance.

Don, first for you, just wondering if you could help us understand how we should be looking at OpEx going forward this fiscal year, especially as you have to support the broad markets ramp of many products across a bunch of diverse customer sets?

Sure, Mike.

We just spent $94.5 million for our Q1 results and guided up $1 million from that.

I would expect, we have a merit increase midyear in our fiscal year.

So I would expect to add $1.5 million to $2 million a quarter as you model out through the balance of the year.

That's a safe thing to do as we continue to grow when you have the model.

When you look at the revenue, the top line revenue opportunities that we have, you'll see there's still a tremendous amount of leverage.

Okay, great.

For Dave and Liam, very impressive guidance relative to seasonality.

I was hoping you could help us understand how the China market has done for you in December, and the outlook for that important region in the March quarter, as it heads into Chinese New Year?

Thanks again.

Sure.

With respect to China, actually, we're seeing China as a grower here in the March quarter, where there's something interesting dynamics now, with LTE really picking up.

We mentioned some of our lead customers Xiaomi, TCL, Lenovo, et cetera, so we're seeing that pick up.

And we're also seeing, as Dave outlined, the content opportunity in each one of these phones increase.

And of course, our ability to grow into that content has been important as well.

China looks good.

Last quarter was about flat.

As we go into the December quarter, it wasn't a big part of our growth story.

We continued to work on design wins.

And we're much more of the 4G play, and as you know, in China, the 2G and 3G market has sort of rolled off with the uptake of LTE, which is very good for us.

And it's early stages.

This is a long-term growth cycle.

We're well positioned.

We've talked about some of our relationships with players like MediaTek and Spreadtrum, and of course Qualcomm.

We're real fortunate to be in that position, and we look forward to a long-term growth cycle there.

Thank you.

The next question is from the line of Suji De Silva of Topeka.

Please go ahead.

Congratulations on the quarter.

In terms of the overall filter capacity for the industry, not just for you, would you say it's tight and the people are chasing demand, or you're taking share versus other guys?

I think, I think it's tight across the board.

In the case of high-performance filters, which is where we're producing our own, that is something where we're servicing our customers was very specific proprietary designs.

But in general, the filter capacity industry-wide is quite tight.

Okay, great.

Then on SkyOne, it occurs to me you guys are providing a lot of value with integration and helping people get to market quickly.

I don't know if you could talk about the relative margins of SkyOne versus your core margins, but are they going to be 10 points higher or something like that?

You can walk people up the price curve with that?

I mean, is that something that SkyOne growth could be a material tailwind for your margins for several quarters?

We haven't given a specific number, a specific 10 points, but they are meaningfully above our stand-alone power amplifiers, and they are accretive to where the business is typically today.

The value-add proposition, for sure.

Okay, thank you.

Next question from the line of Alex Gauna of JMP Securities.

Please go ahead.

Just wondering, has the favorable exchange rate, specifically for the Yen, improved or changed the way people are thinking about the value proposition of TC SAW versus BAW or F BAW alternatives?

No, I would say that has minimal impact.

It's had minimal impact on our results.

Okay, and you have had a great track record of exceeding your guidance, but you absolutely crushed it now a couple quarters in a row.

I'm wondering, is there something that has materially exceeded your calculus that's led to such upside?

Where were you off in terms of how you set guidance over the past couple of quarters?

Is it a single customer?

Is it a certain platform ramp?

Can you give us some color on that?

I think we're capturing more of the -- we were probably most successful in the last few quarters, relative to our expectations, it would have to be in the amount of content we're sweeping in.

So if we capture -- let's suppose we engage with a, not a full up, but a SkyLiTE, kind of a light version of SkyOne product for a regional phone.

And then, of course, we're competing to try to then capture the receive side, we're trying to capture the antenna switching and tuning, we're trying to capture both Wi-Fi bands, if there are more than one.

And so we're continuing to do a better and better job of making the argument that it's easier for you to engage with Skyworks as a customer for the complete solution.

Fewer moving parts.

You let us handle more of the complexity.

We can help you solve the overall analog system solutions.

That's such a benefit that when we are surprised, we're being surprised with more content within an existing win, I would say.

Okay, thank you.

And next question from the line of Ian Ing of MKM Partners, please go ahead.

I share in my congratulations.

In mobile, you've got top reference design exposure to all the merchant baseband partners, but how are your relationships with the internal baseband teams at OEMs that are trying to in-source, and what do you think their prospects are for success?

That's a good question.

We certainly are engaged with every potential developer on the chipset side, and we have seen in some cases, specifically in Korea, there's been some success with an in-house solution, and we'll be lined up with that, with our product as well.

We do still see a couple of real big players out there, who you know.

Qualcomm, MediaTek very powerful.

We have great position with both.

And, there's a lot happening in the space right now.

As Dave mentioned, a lot of complexity.

Our customers are having to do much, much more with this technology, in addition to things outside of mobile.

If you look at the processing speeds, the display.

So what we're finding is for the most part, our job is to enable connectivity, enable solutions, be customer-friendly, be flexible.

We're doing that.

And our products, we'll work with just about every baseband.

Great.

For my follow-up, the China 4G opportunity potentially doubling or tripling this year, what's your reliance on the two smaller carriers in China?

To the best of my knowledge, they currently have trial 4G license in FDD, but not full commercial at this point.

Yes, I mean, we're still believing that we're going to see a number here, if you go off of a 90 million or so LTE shipment in 2014, and if we look at the estimates, the estimates are as high as 250 million to 300 million.

We think the number, even if it's below that, it's going to be very explosive for us.

We work directly with the carriers, but we also work closely with all the OEMs that we mentioned and the chipset partners that we mentioned.

We just had a special note with MediaTek and our SkyLiTE reference design with close collaboration, and that's tied closely to their OEM suite.

We're not seeing any particular advantage or disadvantage from one carrier to the next, if that's the nature -- if that's your question.

We really don't see a particular difference one way or another.

Okay, thank you.

And next question from the line of Tom Diffely of DA Davidson.

Please go ahead.

Yes, good afternoon.

Maybe one more question on the Chinese market then.

Do you see the relative pricing or margin trends, dealing with either the large or the smaller Chinese customers, versus your traditional customers?

No, not really.

We're going in and selling systems-based solutions.

We think the market there has been great.

We don't have any pricing issues there.

And Tom, they are often different -- not often.

They're usually different products designed for that price point and designed for perhaps that regional approach, or whether it's a three-mode design versus a five-mode design.

The products are different.

So the margins there are very good.

But the products are usually quite different, tailored for that product.

We know what the market can bear, so we're able to tailor our design around that price point.

Okay, thank you.

A question from the line of JoAnne Feeney of ABR Investment.

Please go ahead.

Congrats, everybody.

Great execution.

I wanted to get into a longer-term question.

I think we all understand the content increases driven by higher bands and carrier aggregation.

We're clearly in a situation where carrier aggregation is just being implemented first for uploads, and then as you pointed out, two-speed download streaming.

One question, that I think is important, is what happens after a couple of years?

And do you think the second level of carrier aggregation is complete in a couple of years?

And do you have your sights on other technology changes and complexities, that might come after we get through that download improvement, from the second wave of carrier aggregation?

What is it that's going to drive content higher, once we're through that stage?

Well, I think -- JoAnne, I think the content, I think downlink, you're right, there will be successive future generations of downlink.

I think that's going to be increasingly important.

You can see what's being driven by the carrier, user models, and simply what the user appetite is for streaming, and streaming of video and streaming of 4K video.

You can just imagine that there will be constant demand for more bandwidth.

So we think complexity is downlink.

We think complexity is on the transmit side, I will tell you, our experience, and our design activity today is very much around solving more and more and more complexity with more high frequency bands crowded on top of one another, coexistence issues across the board.

I don't see anything turning the tables on this natural tendency towards complexity for the next five years.

I mean, there really isn't any elegant solution that somehow says we got it.

You can do this a lot easier.

It's going to be more of this kind of approach to analog design, and our ability to integrate more functionality into a system.

Okay, thank you.

And you have a question from the line of Quinn Bolton of Needham.

Please go ahead.

Nice job on the results.

Just wanted to ask, you talked about the receive diversity opportunity in the prepared comments.

Wonder if you could shed a little bit more light on that?

What number of bands are you seeing being aggregated in those receive diversity modules?

And then a second question, you talked about emerging markets, specifically India as a future opportunity.

Sounds like India 4G's been pretty quiet to date.

When do you think India starts to see a ramp on the 4G handset side?

Thank you.

Sure.

On the diversity received solutions, it really varies customer by customer.

We've seen some that the carrier aggregation band count could be quite small, but it's still incrementally beneficial.

But as Dave has mentioned, if we look out at the road map and some of the designs that we're cementing today, we see very rich diversity received technologies on downlink, that have up to six or seven filters, multiple LNAs, low noise amplifiers, and their function to receive that signal and amplify it back through the chipset.

So we're seeing that happening.

SOI switching is embedded there.

And it's a content-rich opportunity that we're seeing today just in a few leading OEMs, but if you look out through 2015 and 2016 road maps, more and more customers will adopt this technology.

Okay, thank you.

And ladies and gentlemen, that concludes today's question and answer session.

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

Okay.

Well, thank you so much, everyone, for participating, and we look forward to seeing you at upcoming conferences.

Okay, thank you.

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

We thank you for your participation.

You may now disconnect.