思佳訊 (SWKS) 2015 Q2 法說會逐字稿

Good afternoon, and welcome to Skyworks Solutions second-quarter FY15 earnings conference call.

This call is being recorded.

At this time, I'll turn the call over to Steve Ferranti, Vice President of Investor Relations for Skyworks.

Mr. Ferranti, please go ahead.

Thank you, Greg.

Good afternoon, everyone, and welcome to Skyworks second fiscal quarter 2015 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, included but not limited to, those noted in 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 to the call to Dave for his comments on the quarter.

Thanks, Steve.

And welcome, everyone.

I'm very pleased to announce Skyworks strong financial results for the second quarter of FY15.

With revenue and EPS exceeding our guidance and significantly outpacing normal seasonal patterns, our outperformance underscores the success of our diversification strategy.

As broad-based contributions across our customer base and markets and product lines drives growth well in excess of the market.

Our business continues to perform at a very high level as we capitalize on powerful drivers, fueled by the global proliferation of connectivity.

At the same time, by leveraging our architectural and integration leadership, we are enhancing our competitive differentiation, expanding profitability, while creating greater value for our customers.

This combination of strong industry tailwinds and an enriched value proposition, enables us to consistently provide above-market growth and to deliver best-in-class financial returns with robust cash flow.

Specifically during the quarter, we produced revenue of $762 million, representing a 58% year-over-year top-line growth.

We maintained gross margin of 46.7%, offsetting quarterly seasonal patterns and up 200 basis points year over year.

We also generated operating income of $259 million, that's up 99% year over year.

We posted $1.15 in earnings per share, and we guided revenue in June to be up to $800 million, that's 36% up year over year, along with 130 basis point sequential improvement in gross margins and $1.28 in EPS.

We are reaping the benefits of our dual-edge strategy of providing leadership and custom integrated solutions, while continuing to diversify into high-margin verticals.

And as a measure of our progress, in 2011, around 60% of our revenue came from single-function devices for mobile applications.

Today, more than two-thirds of our revenue is comprised of integrated mobile systems and broad markets.

Which are our fastest growth areas, driving improved financial returns and putting us on a clear path towards 50% gross margins and above.

And, as the leader in complex RF and analog integration, we are the primary beneficiary of the ongoing industry shift towards system solutions, and as a communications architectures continue to advance in complexity, we are becoming an integral part of our customers' development roadmaps, providing more value in the overall supply chain.

This is creating a fundamental shift in our business model.

Simply put, more complex systems drive increased profitability.

Our Q2 design wins highlight some examples of the success we've had in capturing new high-value system-level opportunities.

In our broad markets business, we've recently won a complete Wi-Fi system module, integrating a third-party SoC and supporting Skyworks analog content for video monitoring solutions from Google.

We've won a suite of Skyworks products in machine-to-machine modules for industrial applications from Sierra Wireless, and over $20 of content powering a new small-cell base-station platform.

We also have multiple design wins for OnStar telematics platforms in GM's global fleet.

In mobile, we're now enabling Samsung's Galaxy S6 platform with SkyOne Ultra, as well as our switching and Wi-Fi connectivity products.

We've ramped our SkyOne mini platform within numerous Chinese smartphone OEMs, expanding our SkyOne family.

And we launched switching and connectivity modules in Google's Nexus 6 smartphone platform.

These design wins highlight a competitive edge in complex integration and will positively contribute to our growth trajectory for the next few years.

Now, I'll turn it over to Don for more in-depth review of our financial results.

Thanks, Dave, and thanks for joining us, everyone, we appreciate that.

Revenue for the quarter was $762.1 million, ahead of our prior guidance of $750 million and up more than 58% versus the year-ago quarter.

Gross profit was $356 million, or 46.7 % of revenue, ahead of our guidance and up 200 basis points from the second quarter of FY14.

We maintain gross margins on a sequential basis in spite of the seasonal revenue impact, highlighting the strength of our underlying business fundamentals.

Operating expenses were $97 million, consisting of R&D expense of $63 million and SG&A expense of $34 million.

We generated $258.9 million of operating income, roughly twice that of the year-ago quarter, yielding a 34% operating margin.

Our cash tax rate for the quarter was 13.5%, resulting in net income of $224.6 million, or $1.15 of diluted earnings per share, as compared with diluted EPS of $0.62 in the year-ago quarter.

Turning to our second-quarter balance sheet and cash flow statement, we generated $155 million in cash flow from operations, putting our first-half total at $538 million.

We also invested $84 million in capital expenditures, with depreciation of $39 million.

We distributed $73 million to shareholders through our dividend and stock repurchase activity and exited the quarter with just over $1 billion in cash on hand and no debt.

Moving to our product mix for the second quarter of FY15, power amplifiers represented 31% of revenue, integrated mobile systems was 47% and broad markets was 22%.

Once again, integrated mobile systems was our fastest growing category, up 139% year over year.

Highlighting the ongoing shift towards higher-margin system solution, which is taking place across our customer base.

Our broad market product lines, which serve the connected home, networking, media, automotive, and medical markets, has grown at 27% year to date.

And that's well ahead of the diversified analog market, helping to mitigate some of the seasonal trends in the mobile business.

Turning to our third-quarter business outlook, we expect revenue to be $800 million, and that's up 36% year over year.

At this revenue level, we anticipate gross margin to be 48%, representing a 130 basis point sequential increase.

That's driven by a combination of growing adoption of our custom integrated solutions and precision analog products, increasing global scale and enhanced vertical integration, and our ongoing operational initiatives.

These factors have created a new baseline for our business model, and we now recommend modelling 55% incremental gross margin from the new Q3 level, providing a path to continued margin improvement ahead.

And all of this puts us on a firm path towards our target of at least 50% gross margin for the Company.

We expect operating expenses to be approximately $99.5 million, below the line we anticipate around $100,000 in income from interest income and other expenses, and a cash tax rate around 12%.

We project our tax rate to stay at this level for the remainder of FY15.

Looking forward, we continue to see a cash tax rate in the 14% to 15% range for FY16.

We expect our share count to be around 195.5 million shares, and that results in a third-quarter EPS of $1.28.

The stage has been set for a strong 2015, giving us a high level of confidence in our near-term trajectory and accelerating our progress towards $7 in annualized EPS.

With that, I'll turn the call back over to Dave.

Thank you, Don.

For the remainder of the call, I would like to provide some added perspective on the underlying trends that we see fueling our growth in the coming years.

At the highest level, the world is rapidly becoming more interconnected, fueling an explosion of network devices along with massive growth in wireless data traffic.

According to recent reports, mobile data usage grew by 69% last year, driven by a proliferation of smartphones and other interconnected devices within the Internet of Things.

Along with the adoption of high data-rate services like 4G, LTE, and 802.11ac.

For service providers, this growing ecosystem of connected devices provides a vital gateway for new revenue streams, linking millions of subscribers with lucrative services like on-demand music and video content, over-the-top programming, security, and cloud-based enterprise services.

At the same time, consumers are recognizing that the quality of the connectivity pipe is a key factor in their overall user experience and are upgrading to more powerful devices, bigger data plans and faster connections.

The end result is a race by OEMs across our served markets to provide leading-edge performance, creating a market opportunity that is growing at a mid-teens pace for the foreseeable future.

And an addressable market for Skyworks that's growing even faster.

I'd like to highlight three key trends that fuel this.

First, there is an explosion in RF and analog complexity.

And it's driving robust growth in our served markets and a consolidation of market share.

Skyworks' mission is to simplify this increasingly more challenging technical environment for our customers.

Across the board, we see more content opportunities in each successive generation of device.

And, integrated solution is displacing conventional discrete components.

As this happens, a host of component providers, who lack our technology breadth, our integration capabilities and systems expertise, are simply unable to keep pace.

Second, we are rapidly expanding our footprint within existing customers and existing markets, increasing our serviceable opportunity.

Our system solutions enable us to sweep in an unprecedented amount of new Skyworks content, like filtering, like tuning and power management.

A prime example is our high-performance filter portfolio, where our unique technology edge is enabling higher levels of system performance through tighter band spacing, less interference and a more efficient signal path.

On top of this, we're launching entirely new product categories, like received diversity modules, which support enhanced download speeds and represent a substantial expansion of our addressable opportunity.

Third and finally, we're leveraging our decades of experience in mobile.

We are enabling a growing array of devices in adjacent markets to become seamlessly interconnected, like wearable technologies, home automation, and the connected car, utilizing enabling technologies like 4G, like GPS, local area networking standards, and low-energy near-field protocols like ZigBee and Bluetooth.

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

We have created a unique business model, tethered to the global wave of connectivity, and combining consistent above-market top-line growth, with the financial returns of a best-in-class diversified analog company.

This concludes our prepared remarks.

Operator, let's open the line, please.

Thank you.

(Operator Instructions)

Your first question comes from the line of Mike Walkley, Canaccord.

Please go ahead.

Thank you very much.

Congratulations on a strong results and guidance.

Just want to talk about the smartphone market, there's been some concern of inventory in China and I was wondering if you could comment on your China business.

If you saw any impact from inventories related to March results or June guidance?

And also there's been some concern of some android OEMs pausing the higher end smartphones to avoid competition with a strong Apple and Samsung's new launch and I was wondering if you had seen any pushouts from your android customers and how that might affect your September quarter seasonal outlook?

Thank you.

Sure, Mike.

With respect to China, as you know that is a very large multi-year growth opportunity for Skyworks.

We're actually quite encouraged by the print with China mobile with 50 million LTE adds in the March quarter, that's real bullish for us and we see that trending to the mid-250 million level or higher, going into the balance of the year.

Now on the near-term there wasn't choppiness in the March quarter as noted.

Some of the 2G and 3G players lost some share, had some declines.

4G continue to ramp and we also saw some real strong performance with global tier1s participating in the China and the China region.

Net-net it's a great cycle for us and it's opportunity.

We love the 4G upgrade and we're well-positioned.

Great.

Thank you.

Follow-up, with the ramp in [LTE], any comments on September quarter seasonality as it relates to China and maybe overall market trends?

Well, it's Dave, it's a little too early to be specific about September.

As you know, second half is the strongest part of the year and much of our business and it's usually up sequentially high single-digits.

I think that the traction we have in China and the position we have with our SoC partners or our baseband partners will allow us to continue to ride that 4G wave and we expect to have a very strong second half in China.

But as Liem mentioned, there's also competition from foreign brands and fortunately we're well-positioned there as well.

I think we'll have less volatility given OEM share shifts.

I do expect the second half, the LT upgrade cycle to begin to March towards a -- call it a conservatively a 225 million to 250 million number for 2015.

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

Please go ahead.

Thanks and congrats guys.

It's tough out there right now.

Maybe just a quick update on the competitive landscape that you see, any changes there?

Maybe just specifically what do you make of some of the speculation out there that Marotta has secured some content, some bad comtent, with your largest customer in the coming refresh later this year?

We haven't seen much of a change in the competitive landscape.

Specifically with respect to Marotta, they're not a new competitor.

They've been around for long time and their strength has traditionally been in passive and soft filters and in some modules, particularly on the receive side.

We do come across them in a limited number of fairly niche segments and we've been quite successful competing head-to-head.

We haven't seen any change in the competitive landscape.

And our confidence that we can continue to leverage more content and benefit from increasing complexity with more TAM is very solid for us.

Maybe just a follow-up into that.

You guys obviously had nice content bump with the latest Samsung, the Geo 6 refresh, what are your expectations or can you give us any color what your expectations are later this year with your largest customer on their refresh?

Thanks.

Sure.

Obviously, we can't comment on that specific customer.

But in general, the architectures are getting much more complex, and we're very fortunate to have visibility out two and in some cases three years, in terms of the overall architectures that are being deployed to deal with all this complexity.

We see nothing slowing that down, so it's obviously a tailwind for us.

We're seeing more addressable content in those kinds of functions you typically think about (inaudible) powered by duplexers, Wi-Fi, switching, and control; but we're seeing an awful lot now in what we're able to produce in terms of complex antenna tuning, devices on the receive path, lighting, power management.

I will say that as an incumbent, we've been very successful and quite proud of maintaining and growing our footprint with each successive design with all our major customers.

Your next question comes from the line of Vivek Arya from Banc of America.

Please go ahead.

Thank you for taking my question.

Great job on the execution.

My question is, is there a way to contrast either the amount of content or the number of sockets, what addressable by you guys last year versus this year.

I'm trying to get a sense for what is a diversity of the kind of content that you are going after, versus say the last one or two years?

It's been a steady [margin] effect.

It's hard to talk about it in one year cycles.

If you went back three years, we were very strong in multi-mode and discrete power amplifiers.

We had a lot of strong switch portfolio, and we were entering connectivity in our Wi-Fi portfolio and we did an acquisition in fact and we also bought a power management company.

And over the last couple of years, we've seen a huge increase in Wi-Fi connectivity, starting with our lead customers in flagship phones and now populating across the smartphone landscape.

That's been a huge upside for us.

I think we've got about 50% or more of that market, we just have the best overall solution.

We can shield it, we can integrate it, we can lessen some of the interference impact of having more and more Wi-Fi sitting side-by-side and next to more and more cellular bands.

We've seen our power devices, both at the display, at the camera flash, particularly dual-mode, that's been adding content for us.

So, an AC upgrade cycle is very important to us, power amplifier duplexes.

And we introduced SkyOne as an opportunity to really leverage the breadth of products in the system capability of the Company.

While that's become a diversified set of products within that family, it's really taking off in terms of been able to enable more filters, less filters, more switching.

Hard to say it's all the same.

As we commented on earlier, I think a 15% is a good market for existing TM growth.

I think we do much better than that because we're not only riding that wave of existing TM growth, but more functionality.

Got it.

And then, Dave, how do you look at the right mix of handsets versus the non-handset opportunity for Skyworks?

Obviously, you are doing very well in both.

But is there a target mix as you look out the next few years and you think M&A sort of fits somewhere in getting towards that target mix?

Yes, I would look at this way.

It's on a mix of mobile, non-mobile, it's a mix of integrated devices and non-integrated devices.

We see, if you look at our core market business plus our integrated mobile business, that's where we're very sticky, where our customers see a great deal of value, where there's more and more content for us and far fewer competitors, versus for example, a discrete PA.

So when look at that business, we like that mix of business growing to the vast majority of our Company.

That's what's happening today, our PA business continues to get smaller and smaller and smaller, our discrete business gets smaller and smaller.

We're overwhelming becoming a system solution provider.

M&A continues to be, and has been a central element of that, if you think about it.

The last few years we bought a Wi-Fi business, a connectivity business, we bought power and lighting business, we also bought a high-performance filter business.

Those have all been part of a vertical market strategy where we can add more value, but an effort, a concerted effort, to be more sticky and to compete on the basis of system performance where we have few, if any competitors, less on how good is our component.

Just one quick point, Vivek.

If you look at the way we with the revenue, that broad market space is up 27% for the first half of this year versus last year.

And there aren't any diversified analog companies growing like that.

It's really got a lot of momentum behind it.

Your next question comes to the line of Cody Acree from Ascendiant.

Please go ahead.

Thank you.

Congratulations.

Maybe follow up on that question just for the next quarter, when you look at handsets versus the broad-based, when you look at your growth expectations, can you maybe talk about the contribution of each?

Sure.

We certainly expect growth in both segments.

We will deliver growth in both segments.

You have a great opportunity in smartphones, in our core markets in mobile as we've outlined with our global tier 1 and also the China cycle.

As Dave mentioned, it really is about a growing TAM and our ability to capture more and more of this with [skippy] system solutions.

On the broad market side, we're seeing a vast majority of the opportunities in new markets, automotive, wearable technology and then our core business in broad, includes infrastructure and axis points, all those segments are moving up and will continue to be upside for the second half.

In the last quarter we were up nearly 30% in the broad market business and of course if you track, the diversified companies they're nowhere near that.

So you can see that we're really focused on the right device categories, leveraging what we're good at, at mobile with some of these markets becoming interconnected in a wireless way or in a mobile way for the first time.

Just a specifically, the segments that you've got both broad markets and integrated mobile systems growing and our stand-alone paid business is down, but flat to down slightly.

So again, the growth is coming from those two areas, when you look at the guidance.

Great.

Thanks for those details.

Don, obviously the gross margin expectations are getting to be very attractive.

Can you talk about operating margin leverage?

Are you seeing any similar, I guess, delta from where you are today to what your expectations might eventually be?

While, you know there's a tremendous amount of leverage still in the model.

The best way to handle that is, we've now given you new guidance on a baseline of what we just guided, the 48% margin.

And you're going to drop that through on whatever, how you handicap the top line growth, the 55%, the incremental margin.

So that is going to trend very quickly to 50% and beyond.

We're going to continue see leverage on our OpEx space.

I think we've got a proven track record of being able to do that.

When you layer those two things together, you're going to see you have some very attractive returns as you go forward.

Your next question comes in the line of Suji Desilva from Topeka.

Please go ahead.

Hi guys.

Nice job on the quarter.

Can you tell us where we are in the (inaudible) option of diversity received modules versus just a switch for diversity received?

How far along are we in that cycle and what's the content of the few as that takes off?

Sure.

We're actually in the very early innings of deployment of that technology, we have a great opportunity to advance data rates with this technology.

Our customers love it.

It's a significant content boost to our mobile portfolio.

But in terms of what we're doing right now, we have a couple meaningful design wins, but there's a whole slate of opportunities that we're pursuing right now.

We're in sampling stage, we're in development stage, high degree of customization.

Also bring in technologies like filters and SOI switch, some really interesting things being brought together.

And as you look forward to more commentary on this as we go through the year.

Okay.

Great.

And on the switch business, can you update us on whether the supply has caught up to demand yet and how the demand has been met?

On the switch business?

Yes.

I think we were certainly seeing a lot of appetite for switching as you see more and more of these bands and traditional phones where you don't have a diversity architecture.

You're dealing with SOI or PM switching.

It's been a robust run in that technology.

Supply and demand are about in balance right now and we still continue to do quite a bit of business in that segment.

Your next question comes to the line of Edward Snyder from Charter Equity.

Please go ahead.

Thank a lot.

Good job guys.

Excellent business.

Several questions.

If I could on the filter business, mostly internal here, would you say this is one of your larger drivers for the margin given you don't have to buy them in the open market anymore, or is it just mostly just integrated modules?

And then to your DRX received diversity modules, are those active parts or are those mostly passive, and if they are passive would you be competing with someone like Marotta for those?

Yes, just on the margin piece of that.

We've got a lot of things that are driving that and continued strong top line growth volume, volume matters clearly in our business.

You've got this favorable mix towards integrated mobile systems growth, which have very nice attractive incremental margins.

Operation execution and the filters are part of it.

So there's multiple facets of the margin expansion.

The filters are part of it.

With respect to the receipts out on DRX, the interesting part there is obviously you have complex low loss switching, a lot of filtering.

The filtering is becoming very tricky and the need for very tight spacing in high-performance.

The other thing is that there are architectures that I think, will begin to look for in that receive path, the effication of very low noise amplifier that could be segmented around frequency bands.

So I think the content there is -- I'm glad you ask the question, I think it's very understated in most people's models.

I think it's going to be a big growth driver and the competitive nature is going to be very tough, because it's going to be a combination of active compounds, semi-conductors, passive devices and it's going to be an MCM.

I don't think it's going to be a slug of ceramic.

I think it's going to be a complex multilayer MCM that pulls all that together and as you know, we're quite strong there.

And then if I could, in terms of filter capacity, I know it's been tough and you've got the Panasonic asset now which is (inaudible) especially [ECT].

Dave, you said 1 billion filters last quarter, is your capacity keeping up or are you going to have to spend more to stay up on that, given what you just said DRX is and a bunch of the other products now are going to be pulling through those filters.

And you're one of only two that can even make those products.

So how does your capacity look in that regard?

And doesn't, what you just said in terms of a -- eliminate many of your competitors, only maybe two, maybe three people can do that [part]?

Yes, that's right.

And the capacity has been a little tight because we've just ramped it so fast.

I will say we've really been able to hire some terrific folks, we've put a lot of capital in place, the yields have come way up from when it was an asset owned by Panasonic.

So I'm actually thrilled with the performance of that team.

If you look at our capital expenditures and Don's comment on what to expect going forward, that's really in two areas, it's in filters and it's in modules.

So you should expect us to continue to ramp that up.

I think we'll do more than $1 billion this year.

In high-performance, soft filters, and I think next year it's going to be, hold on to your hats, I think the filter demand is going to be really high, and temp comp is really starting to tackle some pretty thorny system issues, we think we can deploy it in lieu of certainly a soft filter, and in some cases a bolt device.

Your next question comes from the line of Anthony Stoss from Craig Hallum.

Please go ahead.

Great execution guys.

Congratulations.

Let me hear your views on carrier aggregation and how you see that continue to play out, going forward?

I don't know if I missed this, Don, your CapEx spend last quarter and what to expect for the remainder of the year?

Thanks.

Sure, Tony.

Certainly carrier aggregation is becoming more and more critical now as you go into these highly complex 4G phones, data rates are really in high demand and the complexity in the system goes up.

So we have tremendous solutions.

Some of our SkyOne Ultra technology is actually build in, in carrier aggregation capability inside of this complex PAD module.

That's one of the nuances of our architectures, how we take this complexity and not only manage the amplification, but also the switching and the threading together these bands that you see in carrier aggregation.

That's another market where we've got some design wins with the leading industry players, but we are starting to see more and more folks in China and other markets pick up the technology.

And on the CapEx, we spent $87 million in Q1 and $84 million in the past quarter.

So what we're seeing for the second half, and that split we're making those investments both for filter and module capacity, that's typically where you're seeing the spending.

Based on our outlook, we believe that we see second half levels probably somewhere what we've seen in the first half.

The thing with the CapEx investments for us is clearly [on of the enables] -- we just made a step function change in the margin, both new starting point and the incremental.

Part of the benefit you're seeing is from these CapEx investments that we're making.

So it's a very positive leading indicator for us.

We're spending that money, we've got very good visibility into volume and it's going to generate shareholder returns and benefits.

So it's a positive thing for us.

Great job, guys.

Thank you.

Your next question comes from the line of Tim Long from BMO Capital Markets.

Thank you.

Two questions if I could.

First, you mentioned SkyOne and SkyOne ultra traction, just curious if you can give us a sense, do you think these winds are coming for new sockets for you or do you think it's just kind of upgrades from people that were using some of your more discrete products?

Is it really resulting in market share by new wins?

Secondly, if you could talk a little bit about the Wi-Fi market, a lot of interactions there as well.

Do think that wave two could potentially be kind of a step function increase there with all the different radios?

Just curious on your take on that and timing.

Thank you.

With respect to SkyOne, it's been a combination of upgrading existing customers and in many cases forging our initial engagement with SkyOne and new accounts.

We're seeing the platform count go up, we've got about 8 products in production right now and by the time we exit the calendar year, we'll probably have 10 more platforms in production.

Again, the ability to customize and put the specific bands, leveraging our filters in many cases, has been one of the differentiators.

So that portfolio is doing quite well.

It's really a turning point in our SkyOne architecture and our SkyOne traction.

With respect to Wi-Fi, Wi-Fi continues to be a leadership portfolio for us as Skyworks.

It hits the IOT space.

It's been hitting mobile.

We're seeing opportunities in media over the top boxes, we're seeing opportunities in automotive that we mentioned.

And we see the 11ac strength that we bring to market as one of our differentiators, and it will be a portfolio that grows well in the second half through 2016 and beyond.

Thank you.

Your next question comes from the line of Mike Burton with Brean Capital.

Hello guys.

Congratulations on the strong results and guidance.

Just wanted to talk a little bit about pricing.

Looks like the low and mid tier smartphone segments have been hurting at the expensive high end where you guys have been clearly gaining content.

Just was just wondering if you're seeing any change in any of the pricing dynamics?

Nothing in particular.

As we have -- as we've migrated our portfolio into the device that we've been describing in this entire call, whether it's SkyOne Ultra, SkyOne mini for the open market, China and so on and so forth.

They're really not products that are subject to the same kind of pricing dynamics.

So we see kind of gentle, low to mid-single digit pricing on a year-over-year basis for most of our devices.

I don't see anything changing there at all.

Great.

Thanks.

Also a follow-up on the previous comments on China, obviously Liam mentioned that there's been some pockets there.

I'm just curious as to how Q1 performed for you guys versus your expectation for Q2?

And if you're seeing growth in Q2 are you starting to see more of a mix up from three mode to five mode devices in that segment?

Thanks again.

Sure.

In fiscal Q2, the March quarter, we were flattish, maybe down a point or two.

In the current quarter, in the June quarter we are seeing growth and it's coming across a number of platforms.

We do a really good job of working with all the chipset providers, MediaTek, [SpreadChum], Qualcomm.

We're seeing some success with names like Xiaomi and Lenovo and even [Whaway] GTE.

We feel really good about the second half in China.

Little bit of a bumpy start.

We were able to navigate through that with our heavy allocation towards 4G, but we're starting to see the momentum come back into that market.

Your next question customer the line of Steve Smigie from Raymond James.

Please go ahead.

Great.

Thanks a lot.

It seems like one of the big drivers here is the shift to LTE and I was hoping you can talk to little bit about how you see LTE rolling out regionally over the next couple years.

Obviously, China helpful this year, but how does that extend over the next couple of years?

Sure.

We speak a lot about China but in some of the developed nations, United States and Europe et cetera, LTE has been rolling for a while.

China is a great opportunity because you have nearly 1 billion subscribers and less than 20% are carrying a LTE product.

So there is a huge upgrade cycle.

That upgrade cycle will then create additional turnover in the years to come.

So that's why we make such an important distinction around the China market.

And if you think about it, you've got a band count increase for sure, you have a filter count increase that we can leverage in the modules.

You also have more switching ons, you have the carrier aggregation technology we talked about, the ability to deliver high-performance receive side technology with DRX, power management, and when you build this kind of an engine, invariable there's a Wi-Fi attached.

So we're trading opportunity against what were 2, 3 years ago 2G and 3G phones in China, that may have had 150 to 250 of content.

So that's really where you see that opportunity.

I think you should think about as being something that will sweep into all territories over time throughout the world.

And it's really the same dynamic that will drive an end from an ac implementation.

In 802.11, I think there's 5G behind it by the way.

We're doing architectures today that are sweeping millimeter wave functionality as the world looks for allocation of more frequency.

The problem is bandwidth at high-speed.

And bandwidth at high speed is only going to be solved as consumers demand it more and more and more, and carriers find it as a way to follow the money that you are going to see it sweep across the entire world.

And there will be a generation of technology right behind it, because it's all about bandwidth.

Okay.

Great.

That's very helpful.

And the numbers are good, so I'm curious is there any FX impact that you guys had as well, would numbers been a little bit better without any FX headwinds?

No, all of our top line's in dollars so the only impact we have is a dollar peso for our Mexicali expenses and a little bit now at the end with the filter acquisition.

Because of their liability position with the strong dollar that was actually favorable.

Not material, but we haven't had any, no.

We haven't had any.

Your next question can't the line of Harsh Kumar from Stephens.

Hello guys.

Let me add my congratulations for the numbers in the guide as well.

Dave, I was wondering if I could get some good intake around your US-based customer, your large Korean customer in China as you look into the June guidance?

Thank you.

You know, June's typically kind of that transitional quarter.

We're going to be up because as we have mentioned we see some strong growth in China, and we see some reasonable growth going to June in China.

We see quite a bit in our broad markets, continue to chug along and shows us sequential growth in year-over-year growth.

You know, I believe that we're in the enviable position of not needing to worrying too much about OEM share shifts.

Because if you look at the content and the tear down reports, whether they're MediaTek enabled indigenous OEM, Xiaomi, or if it's Samsung or others, we just continue to look to drive that content higher.

We're very well positioned.

I just don't worry too, too much in terms of Skyworks' overall financial performance about the overall OEM share shifts.

We're well positioned among the flagship models that I think you're referring to.

Thanks, Dave, that was helpful.

Follow-up if I can ask you, you're clearly diversifying into non-handset markets.

What is the most exciting non-handset market, buy-in market, that you see for yourself and Skyworks?

Well, it's been really around the home.

So if you think about it, if you look at the devices, thermostats, it really kind of started with smart meters and it moved into all kinds of categories from gaming, now lighting, the 802.11 ac space with these really complex home routers.

There's a huge opportunity for us, these media gateways that are being provided by the various cable and wireless service providers have many dollars of content for us.

So that's exciting.

I like wearables a lot because the consumer content there is high, and we've got a good entree with our low-power, Wi-Fi and switching products.

Automotive has been is a bit of a sleeper, we've had high dollar content with high-margin, but only recently do you start to see with the advent of the smart automobile, it's kind of a connected hub environment that exists in the car.

We're seeing a lot of design activity there and a lot of very high-margin wind, so it's no longer trivial amount of our revenue, it's becoming rather meaningful.

Operator, we will take the next question, please.

Your next question comes from the line of Craig Ellis from B Riley.

Please go ahead.

Thank you for taking the question and congratulations you guys.

You're welcome.

Don, I want to go back to your guidance on incremental gross margins, which is very robust and at a level that I think a lot of us thought was possible and you're giving a nice long runway there.

As you look at the underlying drivers to those incrementals going forward, integrated solution mix, the scale, and operational advantages that you have, it seems like one is more related to pricing for functional value and other related to driving your unit cost lower.

How should we think about the relative contribution of those different factors over time?

Everything that we talked about is important.

The volume helps, the strong top line is always going to allow us to improve the incremental returns.

The favorable product mix is probably right now with the value add proposition you described, that's probably slightly ahead of some of the operational executions.

They're both critical and important and when you add filters in, they're all driving that.

But I would say the number one driver is going to a system solution and the value add to the customers.

Our ability to package solutions, which really drives the cost down for us so at the end of the day, that's probably the number one, but they're all important.

You need them all to move the increment to 55%.

That's very helpful.

The follow-up is somewhat related to that.

It's more of a philosophical question.

I'll direct it to you, Dave.

The Company's done a very good job moving the mix of business towards integrated over time.

There's still quite a ways to go.

Are there any discontinuities either with capital intensity or with R&D intensity, is the portfolio shifts that you see on the horizon?

A philosophical question?

Okay.

Well, the discontinuities have been -- maybe ongoing for the last several years.

We're are seeing the need to have more direct engagement with our customers, with field folks and business unit people who have a much broader set of experiences around how to optimize the overall system performance right from the SoC to the antenna and back.

That's been new for us, so we have been kind of upgrading our capability, hiring a lot of folks, so that's a discontinuity.

I think we've got it under control.

I think capital really isn't the issue because fortunately for us the investments we've made in these complex multichip modules really are allowing us to kind of dovetail into a nice mix of internal production versus external production.

Keep that flexible model, but we're really able to leverage what our customers want and use an MCM type approach for much of it.

And I guess in terms of skill, so the skill upgrade cycle we've been going through has been ongoing for a while.

Probably the biggest discontinuity for us that we needed to solve and we're well on our way to hopefully doing that, is we really needed to have more of a filter passive offering within our active portfolio, and that was a change for us.

That hasn't been traditionally our skill, we've avoided those discrete markets because they've tended to be very gross margin challenged, but now it's part of an overall system solution they become an integral set of capabilities for us.

That was a discontinuity that we're continuing to work through.

Your next question comes from the line of Ian Ing from MKM Partners.

Please go ahead.

Yes, I'd like to share my congratulations.

Question, not the most exciting parts of smartphones, but this trend towards the thinner flagships smartphones perhaps, do you have any advantages in your shielding and packaging solutions you might be able to exploit.

Theme (inaudible) disapation is a big issue especially for these big chips that's on the digital side.

Yes, that's right.

That's a good question actually because while at the same time you've got heat dissipation, you've got more bands, you've got more things amplifying that want to interfere one another, there's a tremendous amount of pressure on size, both the x and y axis.

It's a challenge.

It's a fun challenge for our engineers but you have arsenal of capabilities, as you say, to shield and mold and overmold to thin and so on.

So yes, it is a challenge.

It is an opportunity because it's really hard, if not impossible, to architect using a set of components, no matter how good those components are.

You need to find a way to create a module or set of modules and ICs that interplay well together that can drop on that PCB and not add a lot of height and multi-layers.

We can do in-house, which is unique.

Great.

For my follow-up I know your integrated mobile system is doing really well here.

Can discrete PAs, one time you set a target of maybe growing modestly, up say 5%, is that still the case?

And perhaps you can remind us where discrete PAs are still doing very well, like in feature phones and perhaps non-mobile applications.

Thanks.

The discrete PA's will continue to grow through this year and into the foreseeable future.

It's certainly got the lowest growth rate and so the dollars are going to grow year over year.

It's going to become a smaller and smaller percentage of our total revenue mix that's clearly -- that's been happening every quarter.

But they will grow.

There's still growth there.

Your next question comes from the line of Quinn Bolton from Needham & Company.

Let me add my congratulations especially on the gross margin outlook.

I wanted to just come back, you guys now for couple quarters have highlighted the opportunity that you see in the diversity received modules, sort of a question for you.

Received diversity has been around for a while, I think it's been pretty common on Qualcomm chipsets for a number of years.

What's really driving the opportunity?

Are you seeing greater attach with received diversity and other chipsets, is it just really a greater percentage of phones now shipping with LTE, where received diversity is more commonplace?

I think it's even simpler than that in a sense, Quinn.

It's really all about the capability of streaming and being able to do it with multiple high-performance, high-speed bands, high-speed paths do that antenna.

So first of all, the filtering is more bands to filter on the receive side and those filters have to have -- be able to accommodate tighter spacing, with what they call really tight skirt if you will, in using filter lingo.

That means you're going to have a very high performance filter, even on the receive side which is a lot higher dollar content.

In the past, you could take a passive duplex and it was good enough, it's nowhere near good enough.

The other thing is, because of the performance it's starting to disintegrate the low noise amplifier that receive power boost that you need because it needs to be narrower band around the desired frequency, and to introduce less loss you can do on a typical bolt.

So that adds a lot more device category capability for us.

That's really what is.

You think of it if you got a stream video on that phone over multiple bands, you can't do it through a sloppy duplex or in a lossy switch.

I think the application of the real benefit here is substantial increase in data rate.

Think of it as a milow architectural for receipt.

And it has a radical improvement in performance, now it's not cheap.

It's a lot of complexity, it is a lot of value, but we're seeing the high end customer adapt this quickly and we're also seeing a lot of opportunity in mid tier.

So that's essentially the benefit that we see.

Just a follow-up question.

It sounds like it's really tame extension, was wondering if you also think there's a share gain opportunity as part of your strong outlook on the diversity received market?

Thanks.

It is a share gain opportunity.

First and foremost it is not part of the SoC.

It is in the domain of the analog module combination of compounds, semiconductor passive and integration at multilayer things like PCBs and LTCs.

It's not the domain of the SoC.

And there aren't many companies -- you've got companies that can do a duplexer, a company that do a passive or could do a switch.

Not very many companies can pull together at the right price point and have the kind of performance sensitivity that we can.

Your final question today is from the line of Alex Gauna from JMP Securities.

Please go ahead.

Great quarter, gentlemen and thanks for to my question.

You were talking little bit earlier about the Internet of Things, the Wi-Fi opportunity out here at the tradeshow and seeing exactly what you're talking about.

We now have 8 by 8 on the table and multiuser coming.

I'm just curious, back in a previous day you used to break it out by analog, which kind of captured some of the Wi-Fi attach and it seemed to be growing as fast as cellular.

Is that still the case when think about this?

The Wi-Fi opportunity, the Internet of Things opportunity.

Is that commensurate with your cellular growth and any chance you'd give us a ballpark about what give of the percentage contribution it is to the business model?

Well, maybe we can do this one with Liam.

We said in the last quarter that it was up 27% year over year, so it's been growing very rapidly.

Much of that is connectivity, it's the upgrade cycle to AC, it's new device category throughout the home on the factory floor and the automobile.

It's kind of all of that.

It's in the market, so if you think about that from a product perspective, Wi-Fi, Bluetooth, switching, creating connectivity and the applications that it's serving now is this proliferation of IOT, whether it's media devices, automotive, machine and machine wearables, energy management, and we're seeing that roster expand each and every quarter.

So it's a combination of the great technology and then also hitting a market that's on a growth rate.

Okay.

Curious, obviously, people have already noted the spectacular gross margin, is the Internet of Things, the Wi-Fi opportunity, is that commensurate with your gross margin profile, or is that a negative weight of what you're achieving --?

No, it's accretive to the line with incremental returns at a minimum.

Depends on the specific application, but it certainly doesn't bring that number down.

At this time, there are no further questions.

Thank you everyone for listening and participating and I look forward to seeing you soon.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation.

You may now disconnect.