思佳訊 (SWKS) 2015 Q3 法說會逐字稿

Welcome to the Skyworks Solutions' third-quarter FY15 earnings call.

This call is being recorded.

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

Mr Ferranti, please go ahead.

Thank you, Cathy.

Good afternoon, everyone.

Welcome to Skyworks third 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 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 within the Investors Relations' section of our Company website for a complete reconciliation to GAAP.

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

Okay.

Thanks, Steve.

Good afternoon, everyone.

I'm pleased to announce another strong performance for Skyworks in the third quarter FY15, with revenue, profitability and earnings all exceeding our guidance.

We had a number of key business highlights during the quarter and these include: expanding the design win funnel of our integrated platforms like SkyOne, SkyLiTE, high-performance PADS and advanced diversity receive modules; broadening the scale and capabilities of our growing filter portfolio; increasing our momentum in broad markets; and enhancing our capital returns to shareholders.

As the world becomes more interconnected, we are capitalizing on powerful secular growth trends, including the rising adoption of streaming media services, the proliferation of connectivity in the emerging markets and the Internet of Things, driving growth well in excess of the broader semiconductor market.

The common thread across all of these market trends is the need for seamless access to content and the ability to transmit large amounts of data to the cloud efficiently, reliability, anytime and anywhere.

Technology leaders like Google, like Facebook, Amazon, Netflix and others all recognize this and are prioritizing mobility with their corporate strategies as they strive to provide users with a great connected experience.

These market dynamics translate into much more complex architectures and higher performance specifications, providing an opportunity for Skyworks to offer differentiated solutions with high barriers to entry.

We accomplished this by leveraging our combination of core technology expertise, integration capabilities and systems leadership.

Our solutions have become mission-critical within the overall value chain, facilitating deeper strategic relationship with our customers, a more defensible business model with enhanced financial returns.

Our third-quarter results are clear evidence of this.

Specifically, during the quarter, we produced revenue of $810 million.

That's up 38% year-over-year.

We expanded our gross margins to 49%.

That's up 360 basis points year-over-year.

We generated operating income of $295 million, with operating margins of 36.5%.

We posted $1.34 in earnings per share.

That's up more than 60% year-over-year and $0.06 ahead of our guidance.

We're guiding fourth-quarter revenue to be $875 million, with gross margins of 50% and $1.51 of EPS.

Finally, we announced during the quarter that we will be doubling our dividend.

Adding to our solid financial performance, our Q3 design wins highlight the success we've had in capturing new high-value system-level opportunities.

Our recent broad market wins include: Zigbee front-end solutions within Home Depot's smart lighting platform; multiple analog designs supporting telematics capabilities in Subaru's 2016 models; this is complementing prior telematics wins at Ford and at Audi; a customized system-in-a-package including processor and all supporting analog content across Google's refreshed smart home portfolio.

We've also won analog IC's within Gemalto's machine-to-machine models -- modules, rather, supporting industrial and transportation verticals and over $14 of content in a femtocell design with a leading SoC provider.

Now, in mobile, we delivered a complete system portfolio.

This includes a transmit chain and antenna tuning and switching functions to support Huawei's Honor smartphones.

We ramped a carrier aggregation-enabled version of our SkyOne Mini, along with diversity modules in ZTE's quadcore Star-II mobile platform.

We enabled Meizu's LTE portfolio with SkyLiTE solution, supporting MediaTek's latest octa-core chipset.

These design wins illustrate the diverse pipeline of rich content opportunities that we're servicing today.

They highlight our competitive edge in applications that require complex systems capabilities.

So overall, I'm quite pleased with our third quarter.

More importantly, looking ahead we continue to find new avenues to further enhance the financial returns of the Company.

With that, I'll turn that over to Don for a more in-depth review of our financials.

Thanks, Dave.

Thanks for joining us, everyone.

Revenue for the third quarter was $810 million, ahead of our prior guidance of $800 million and up 38% versus the year-ago quarter.

Gross profit was $396.7 million.

That is 49% of revenue, 1 point higher than our guidance and up 360 basis points from the third quarter of FY14.

The Q3 margin upside was driven by gains from accretive new product launches, enhancements in our filter business and improved operational efficiencies.

Operating expenses were $101.3 million, consisting of R&D expense of $65.1 million and SG&A expense of $36.2 million.

We generated $295.4 million of operating income.

That's up 65% year-over-year and yields at 36.5% operating margin.

All the line, we had a gain of roughly $900,000 from interest and other income.

Our cash tax rate for the quarter was 11.4%, resulting in net income of $262.5 million, or $1.34 of diluted earnings per share.

That is $0.06 better than our guidance.

Turning to our third-quarter balance sheet and cash flow statement.

We generated $222 million in cash flow from operations, invested $108 million in capital expenditures.

Our depreciation for the quarter was $42 million.

We also distributed $72 million to shareholders through our dividend and stock repurchase activity.

We exited the quarter with over $1.1 billion in cash on hand and no debt.

Finally, we recently announced that we are doubling our quarterly dividend from $0.13 per share to $0.26 per share, payable on August 27, 2015.

The increased dividend represents approximately a 1% yield based on our current stock price and $1.04 per share in annual payout.

This increase is supported by our expanding cash flow base.

Our quarterly dividend, along with our ongoing share repurchase initiatives, reflect the high confidence we have in our business fundamentals and remain an important component of our ongoing commitment to return approximately 40% of free cash flow to shareholders.

Moving to product mix.

For the third quarter of FY15, power amplifiers represented 24% of revenue, integrated mobile systems was 53% and broad markets was 23%.

Once again, integrated mobile systems was our fastest growing category, up 120% year-over-year, highlighting the shift toward a higher-margin system solutions, which is ongoing across our customer base.

Our broad market products, again, grew over 20% during the quarter, well-ahead of the diversified analog market, fuelled by the spread of connectivity through our broad range of end markets.

Now, turning to our fourth-quarter business outlook.

We expect revenue to be $875 million.

That's up 22% year-over-year.

At this level, we anticipate gross margin to be 50%.

That represents more than a 400 basis point improvement year-over-year.

This increase is driven by the continued adoption of our integrated solutions and the precision analog products, integration efficiencies and ongoing operational initiatives.

We continue to recommend modeling 55% incremental gross margin from the new Q4 baseline, providing additional runway for margin improvement ahead.

We expect operating expenses to be $104 million to $105 million, driven primarily by incremental investments in engineering and development teams.

These investments expand our footprint within new verticals and our serviceable market opportunity, as well as further enhancing our integration capabilities.

We expect fourth-quarter operating margins to exceed 38%.

Below the line, we anticipate around $900,000 in income from interest and other income and a cash tax rate around 11.5%.

For FY16, we continue to recommend modeling a cash tax rate in the 14% to 15% range.

We expect our Q4 share count to be around 196 million shares, resulting in EPS of $1.51.

We maintain a high-level of confidence in our growth trajectory through 2016 and beyond.

Having just guided over $6 in earnings per share on an annualized basis, we continue to accelerate our progress towards our $7 EPS target.

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

Thanks, Don.

For remainder of my commentary, I'd like to provide more insight into the dynamics in our end markets, which are enabling us to drive higher market share and higher profitability.

As wireless technology in general continues to advance, our customers are embedding significantly more capability into progressively smaller footprints, while pushing for higher performance and improved battery life, all with perfect quality.

We see this trend repeating itself across our served markets and throughout our customer base, in mobile devices, in the connected home, as well as the automobile and even on the factory floor.

The challenges our customers face today are numerous and they include: managing coexistence of multiple communications protocols, like 4G, like Wi-Fi, GPS, Bluetooth and Zigbee, accommodating more and more operating frequency bands with tighter and tighter band spacing; implementing advanced data techniques like diversity, carrier aggregation, multi-stream Wi-Fi, to improve throughput; and employing envelope tracking to improve power efficiency.

In short, design challenges are skyrocketing and customers who often have limited expertise of analog systems design are struggling to keep up.

This creates a pressing need to align with the right supply partners to provide solutions that speed time-to-market, that increase reliability and that reduce supply chain risk.

Because of this today, we are on the drawing board with customers much earlier in the design cycle, in many cases two or three years ahead of current generation products.

This provides significantly better visibility and influence of the technology roadmaps and architectural decisions.

So, to reiterate, as the leader in complex integration, Skyworks is increasingly a partner of choice for customers, I think for three primary reasons.

First, we have unmatched system design capabilities dating back to the inception of our Company, including a substantial force of system expertise, of experts with backgrounds in mobile device design and backgrounds in diversified analog.

Second, we have extensive product breadth and core-enabling technologies like GaAs, SOI, silicon-germanium, CMOS and filtering, enable us to leverage the best technology for any particular application.

Third, we have unrivaled advanced multi-technology, multi-chip production capabilities with proprietary processes allowing us to provide customers with highly customized system solutions.

A key advantage for us today is our high-performance filters.

Our unique technology edge in premium filters enables higher system performance through tighter band spacing with improved isolation and a more efficient signal path.

As the market continues to evolve, we see tremendous demand as system solutions sweep in an unprecedented amount of filter content.

In response to this strong demand outlook, we are investing in new capabilities and ramping capacity both internally and with our outside fab partners.

Finally, during the quarter, we acquired Quantance, an innovator in envelope tracking technologies.

This technology acquisition provide us with a rich portfolio of fundamental ET patents and design expertise aimed at enhancing power efficiency and minimizing heat and energy dissipation in connected devices.

We see numerous opportunities to leverage this technology across our product lines.

To summarize, the end result is that we are able to develop the smallest, the most efficient, the most integrated products in the market today, incorporating all amplification, switching, logic and filtering.

This is both in-transit and receive functions.

The value of these systems provided to customers translates directly into best-in-class returns.

I think this dynamic is validated by our 50% gross margin outlook for September quarter and our 55% incremental margin guidance.

In closing, we've 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.

Operator, that concludes our prepared comments.

We can open it for questions.

(Operator Instructions)

Harsh Kumar, Stephens.

First of all, congratulations.

Again, once again, stellar, phenomenal execution.

Quick question, Don.

The baseline, I think, in the press release you mentioned now is 50% -- 38% on the op side, 50% on the gross side.

Just wanted to clarify, as we look in the future, is that predicated on a certain revenue level?

Does that even apply in seasonally off quarters?

If you can just give us a color, so we can model out in the future a little bit better?

Yes, it's consistent with -- we've talked about modeling from before, it's just a new baseline.

It's a new incremental percentage.

So, when you are modeling as you go forward quarter-to-quarter, you start with the guide that we did, that's the new baseline and then any incremental revenue that you add to that you'd op through at 55%.

The OpEx, we're recommending adding about $3 million a quarter.

You'll see that there's a tremendous amount of leverage left in the model.

We continue to focus on growing the gross margin.

You will see that it grows as we move forward.

Quite frankly, if you model out that way -- we've talked about mid teens growth potential and about years -- you'll see we get to that annualized $7 number about -- sometime in calendar 2016.

Fantastic.

As a follow-up, maybe a question for Dave.

I know that one of your large customers is in a build mode.

Could you maybe give us some color on how that build plays out versus between the September and December quarter for you guys?

Well, September quarter is normally a seasonally strong quarter for us.

It is the early part of seasonal ramps for certain customers.

We're also seeing strong growth in the connected home in some of our IoT verticals.

I think as Don commented, we're guiding revenue to be up about 22% with very strong earnings leverage.

I think we will play that into December as well, which is normally up seasonally.

Given our current visibility and our expectations across our markets, we think we can exceed that.

Vivek Arya, Bank of America.

Congrats also on delivering I think, what is some of the best growth and execution and consistency in this industry.

Thanks, Vivek.

Dave, maybe as a first question, I think you answered the near-term Q3 and Q4 trends.

Just longer-term, what innings of the growth cycle do you think we are in?

Because I understand the content growth, but high-end smartphone unit demand seems to be peaking.

It seems to be sort of a zero-sum game between the top two players.

Do you think there are enough content growth opportunities for you in the mid-range and low-end to drive overall growth for the Company?

Okay, Vivek, well, that's a big question.

I will say this, I do believe we are in the early innings in an upgrade cycle, with 4G being kind of the operative technology.

You can see -- you can go country by country, you can look at China.

You can look at India.

You can look at Central and Latin America and you'll get the number of customers who continue to be either unconnected or connected through a 2G or 3G device.

So we think there is an upgrade.

But this complexity that we have spoken so much about in the past and that we highlighted on the call today is not abating.

It's not lessening.

So there are going to be fewer competitors capable of delivering the product breadth with the scale of Skyworks.

More customers who are looking for that content expansion is simply to get them to time on market -- to time-to-market with a reliable product.

So I think the long-term growth is, for us, in mobile is very strong.

We think that the growth rate in the TAM is about 15%.

We like to always try to do better than the growth rate in the TAM.

Of course, we are in the infancies of many of these vertical markets, many which are becoming vertical -- becoming connected for the first time.

We've got a strong systems engineering team.

We've got feet on the street.

We think we can continue to penetrate new market opportunities with new growth vectors.

Got it.

Very helpful, Dave.

Then as a follow-up, you highlighted the growth in the broad markets, where you have grown over 20%, much better than the diversified analog peers.

Do you think adding other building blocks through M&A could help accelerate that growth?

Where I am going with that is, you have a very clean balance sheet, no debt.

You're generating good cash.

Is there a way to leverage that and accelerate growth in some of these new broad markets?

Yes.

I think the short answer is, yes.

Quantance is a small acquisition but gives us a capability into envelope tracking.

We're -- we invested in the JV, which we will complete 100% ownership here in the not-to-distant future.

That gave us a real strong base of high-performance filter technology.

We've done acquisitions in the past which added power management and very specific strength in connectivity.

So we'll continue to look at these kind of acquisitions that allow us to do two things.

One is to increase the stickiness of our designs within mobile and add a broader target -- a larger target of TAM.

Secondly, that we can leverage into this growing list of vertical markets and Internet of Things that give us again, more relevance and give us more of an overall system approach.

Rick Schafer, Oppenheimer.

I will add my congratulations, Dave and Don, Steve.

My first question is, just what impact you guys think Apple's recent success in China has had on the local OEM's design and build plans?

Maybe part of that answer, what do you think average, overall RF content sort of looks like amongst the local Chinese OEMs today in 4G versus what you think it could look like in one year or two.

Sure, Rick, this is Liam.

We participate broadly through China, certainly, with the local brands, names like Huawei, Xiaomi, OPPO, Vivo, et cetera and also through the large global Tier-1's that have also benefited from the strength.

So there has been some bumpiness in China, but the 4G opportunity for Skyworks is very strong.

It remains a growth catalyst for us.

We see content expansion up 2 to 3 times what you would see in a 2G or 3G phone, so we're excited about it.

We're also pleased to see that the content for us has moved well-beyond amplification and receive technology.

We're bringing in Wi-Fi.

We're bringing in GPS, even power management.

So we have a long way to go in that cycle.

We feel very good about it.

Okay, great.

Then maybe a follow-up on an earlier question on your largest customer.

If you agree that band counts -- I don't know if you do, but if you agree that band counts aren't rising a whole lot in the coming iPhone refresh, maybe can you help us understand where the content gains are -- opportunities are for RF?

Or in the RF world?

Maybe what total RF content sort of looks like -- this current -- the current generation versus what's coming here in a couple months?

Yes.

I will take that, this is Dave.

Without being specific with any one particular customer launch, in general, we are seeing -- it's not true that band count isn't increasing.

In fact, it's increasing a lot.

In fact if you look at the roadmaps of many of our customers both low and very high frequency bands that are quite tight in terms of spacing need to be added and will continue to be added.

The problem is, there's no universal standard.

So in some cases, it will be region and even country specific, which makes -- adds a great deal of complexity, more filter, more switch arms, more amplification.

When we think about where the content is coming from, it's really across the board.

It's -- we -- most people understand that there are more filters on the transmit path, more amplifiers, more need to switch; that's clear.

That continues to go up.

What's interesting going forward is the receive has -- as more and more streaming is required, the receive content is going way up.

In fact, in many cases, we are seeing our customers and our chipset partners beginning to disintegrate, if you will, or pull functions out like low-noise amplifiers and so on in the receive side and try to figure out a way to get across multiple bands, better receive performance.

Wi-Fi is moving to AC and MIMO technology, that's a big plus for us.

We're doing much more in power management and voltage control.

We are able to control the voltage that a power amplifier sees on the input side.

It gives us much higher current -- much better current consumption, much higher efficiency.

More switching, I think you understand that.

So, we're doing lighting and power.

So I would say all of those categories are continuing to add content.

Craig Ellis, B Riley.

I will echo the congratulations on the execution around profitable growth.

Thanks.

I wanted to start with a question for Don on gross margins.

There is two parts to it, Don.

One is a near-term question.

One is a long-term question.

The near-term question is, with incremental gross margins being nicely above the 55% level, what causes them to move back towards 55% near-term?

In the longer term, part of the question is, if we look out over a multi-year basis with your 55% incrementals, is there anything out there on the horizon that would create a ceiling with gross margins at some lower level than 50%, 55% whether its 52%, 53%, 54%, what have you?

Yes.

I'll do the first question, Craig, is that the incrementals -- if you look what we delivered in the Q3 actual and what we guided, they are actually above the 50% or 55% range, which we have traditionally seen.

That's really sort of a reset step function of what you are seeing in the products that we are now designing and releasing and the fact that we have captive filters, we have been driving costs down.

All of that sort of resets where we are from a margin profile.

So that's the way to think of it.

That now there's -- we've looked at -- we've changed the portfolio as we are shifting new products.

There's more value added, more integration and it's reset the margin baseline.

So that now going forward, we'll be at that 55%.

As far as ceilings years out?

It's hard to think in those terms.

We clearly have -- will continue to be very focused on driving margin improvement and expansion.

We see over the next several years, a clear path to continue to do that.

So that isn't anything that when we are looking at the products that we are going to be trying to win in designs for that we think there's continued accretion on the margin line.

So it's something we think we can deliver.

Then the follow-up question is for Dave.

Dave, as you look at the product portfolio now, it's got some of the broadest diversity I can recall seeing.

There are things like diversity received that coming in and adding to growth.

But can you just speak qualitatively to your confidence in the growth potential of the portfolio?

In your ability to continue to add incremental products that can have a material impact on the Company's growth?

I think the confidence is high because as we commented in the prepared remarks, we are seeing -- we are participating earlier in the design cycle.

So we know what's being lined out in one or two years out.

That's very helpful to us in terms of being able to align our technology footprint and our engineering resources.

I'm very confident that the combination of manufacturing technologies with multi-chip modules, bumping flip chip and size reduction, shielding and so on, along with a broad portfolio of semiconductor technologies will allow us to be able to be flexible and agile in terms of what the market demands.

We're not wedded to any one particular technology.

We're vertically integrated in the manufacturing of those technologies at the assembly level.

So, I'm very confident.

We've been very successful at hiring.

Skyworks is an attractive Company to work for today, I'm proud to say.

So, we've had great results in hiring terrific people and in opening design centers.

The turnover remains very low in terms of our overall headcount.

So I think we are in good shape.

Cody Acree, Ascendiant Capital.

Let me echo my congratulations.

Thanks, Cody.

Maybe can you just compare the expectations for growth over the next couple quarters between the handsets versus non-handset applications?

Sure, Cody.

I think we have, as Dave indicated, the next couple of quarters we go through seasonal ramps on the back half of the year in mobile.

There is some content gains and opportunities for us there that we have lined out on with large accounts.

But in the broad markets, we are seeing a great proliferation of design wins across IoT, connected home, access points and routers, media boxes, a number of applications, as I mentioned, in appliances, in remote video monitoring, things like that.

So those are all building up.

Our broad market business will still grow probably 20% year-over-year.

So we're comfortable with the blend of the mix.

We have outstanding visibility into both sides of the business right now.

So we feel good about that.

We'll continue to report, hopefully, incremental gains in broad.

Dave, historically your customers have really played the different suppliers, specifically, back when they were just point solution PA vendors.

But as you talked about fewer players being able to give full systems-level solutions, are your customers starting to get to a point where they have become sensitive to any one of you or your competitors gaining to much market share?

Well, the way we think about it -- the way we've tried to position this with our customers is, at the end of the day, if we can provide them with a very solid supply chain backed up by a track record of execution and we can help them solve these really problematic changes in design and complexity, they've welcomed giving us more content as long as we continue to execute.

It's the case, I think, in the world of RF many years ago, that was a unique function where there were lots of competitors and you could go pin to pin from one to another and swap out.

It hasn't really been the case in display.

It's not in the case in audio codec.

It's not in the case of baseband.

It's no longer the case in RF.

So we think it's coming down to higher market share capability with those with the breadth and scale of what Skyworks has won.

We think the best position.

Edward Snyder, Charter Equity.

Yesterday, Qualcomm talked a lot about share loss in the premium modems, some at the expense of internal solutions like Shannon and Samsung and then Hisilicon and Huawei and I guess some to MediaTek.

How should we look at that with regard to Skyworks' content on the different designs?

Is that shift positive?

Negative?

Or neutral to you?

Then I had another question on flagship phones released in the second half of the year.

There's been different lead times, not only for the phones themselves, but also for the different types of components you ship into the phones.

Skyworks has experienced just about every variant of this over the years.

We've had strong ramps in June and then more modest growth in September, December, et cetera.

How does that going to shake out this year?

Are you more Wi-Fi content?

So you're going to be strong early and then more modest later?

How can we look at that because it's a big determinant in terms of what people think about the second half growth?

Thanks, guys.

Sure, Ed.

With respect to Qualcomm and baseband proliferation, or participation, I should say, we are agnostic.

So we have a number of platforms with Qualcomm baseband.

We have got some real exciting platforms now with MediaTek, we mentioned octa-core; Samsung, LSI, even Spreadtrum domestically in China.

So we feel very comfortable about the way we're diversified across the baseband partitioning.

The content opportunities that we discussed -- they play across all of those as well.

So that part of your question, I think, we're in good shape.

We feel comfortable with our mix.

Our teams are working with every one of those chipset providers.

Ed, it's increasingly less about a reference design participation, although, that's still important.

It's more about how the customer feels about the portfolio and how comfortable they are with your technology roadmap.

They tend to drive the content expansion for us.

So I think as you see different choices on who's the application's processor, whose modem, I think that's less an issue than what the customer's trying to accomplish and the relationship we have with that customer.

Your question about the percentage mix, if there's anything different.

Ed, I would say that if you looked at the profile of the ramp and the shipment, it's going to be consistent with what we've seen the last several years, where there's little or no revenue in June quarter.

It starts in September quarter and ramps into the December quarter.

So that's the pattern we would expect to see, very similar to the last couple of years.

Dave, your comments, does that suggest that a lot of, especially low-influence -- I know you're doing a lot more of SkyLiTE sky modules.

There are people who are kind of leaving the reservation of the reference design because LTE is so much more complicated.

Are you getting more guys turning to you and saying, hey, solve all these problems for us?

I don't want to say forget reference design, but if we have to do something special -- because Samsung has always done that.

They've designed their own front-ends.

Apple does.

Is that now spreading to some of the big Chinese, or the white-label Chinese guys, where they're just turning to the RF guys and saying, you respected what's on the design, give us a solution that works?

Yes.

That's a good question.

Clearly, among the companies you mentioned, Samsung and others, it's becoming increasingly -- we know what we want to do.

It may be on the reference design, it may be not, usually it's not, in fact.

So they're looking to us very early in the selection process and the architectural design process to help them figure out a way to architect it within, for example, their current consumption budget, their size constraints and so on.

China is an interesting plate because what we're doing today with some customers, we're customizing.

We're completely customizing, around Huawei, for example and others.

In others, the customization occurs with our tight relationship with, for example, MediaTek, where we're actually doing custom designed for them with that chipset, that don't plate with any other chipset.

So that is the way it is in China today, it's a bit of a mix.

Tim Long, BMO Capital Markets.

First, if you could just touch on China, again.

What are you guys seeing there from an overall demand perspective?

There's a lot of moving parts over a lot of different data points talking about some slowdowns.

So if you could talk a little bit about what you are seeing there from a demand standpoint?

Maybe just an update on how you see the 3-mode, 5-mode going?

I understand that both are content increases but obviously 5-mode a little bit better.

Then the second one, if you could just talk a little bit about some of the new products like carrier ag and envelope tracking?

How long do you think before those can become more meaningful parts of the revenue base?

Thank you.

Sure, Tim.

Let's start with China.

Certainly, there's been well-reported choppiness, I would say, in that market.

But, most of it has really been 2G and 3G ramp-downs as 4G accelerates.

If you look at 4G, that's the opportunity that we're excited about.

We have a tremendous content gain there, we talked about that already today.

But in addition to the content gain, which could be $2, $3, $4 per phone, we're also seeing units start to look a little bit better through China, just in the last month of June -- in the full quarter of June, we saw 60 million net ads on the 4G cycle.

So we feel good about that continuing through 2015, hopefully, hitting about a 250-million unit number.

Now some of that business is won through local brands that we mentioned.

Some of it we benefit with global Tier-1's that sell into China.

So that's working out pretty well for us.

A little bit of a slow start but we see it picking up in the second half.

Alex Gauna, JMP Securities.

Great quarter, congratulations.

Thanks, Alex.

I know you guys are very conservative in terms of how you set expectations or at least you are very responsible in how you do it.

But you managed to blow away numbers in an environment where a lot of people are stepping on landmines here and there.

Can you be maybe a little bit more specific on what upsided in the quarter to allowed you to deliver such impressive results?

Especially relative to the backdrop of the overall industry?

Alex, thank you for that.

I think it's a combination of things.

We are starting to see the planets align increasingly with the increased content.

We've always had strong participation on the transmit side and in the last few years on the Wi-Fi connectivity.

Some of these products are relatively new to us: power management; some of the display products; voltage regulators; the receive side, for sure; some of these filtering based, filter-enabled systems.

What we are finding is that we're just getting a higher hit rate, with higher dollar content and higher margin.

It's as simple as that.

We track of the designs.

We sample how many of them go through preproduction, get verified, get validated and in volume production.

To the extent, as in most cases, we're sweeping in multiple devices in the same phone.

Where we win two devices, three devices, the whole suite.

We're increasingly finding our customers willing to let us help them architect right at the PCB level so that we could -- with more and more of our content that benefits them because they get one-stop shopping and they get confidence in the interplay between those components.

Secondly, I'm really thrilled with the development team's performance in these vertical markets and our ability to put, in many cases, new associates on the street to support our customers' architectures as we learn what it takes to win in the home, in the automobile, on the factory floor, in the hospital.

That business just is doing great.

It turns out that the technology footprint we've deployed in mobile is exactly what these markets require.

Our team is just doing a terrific job, I think.

Not perfect, but a terrific job of lining those customers up, understanding their system-level needs and then executing.

Steve Smigie, Raymond James.

I will add my congratulations to good results in a really tough environment.

Thank you.

Just looking at the broad markets business, you guys are really diversifying in a whole bunch of stuff there.

Can you provide some more detail maybe on say the first half of 2015?

How much might have come from say automotive -- how much revenue might have come from automotive versus say IoT versus say enterprise and home routing?

Sure.

The majority of the business comes through IoT, in general.

We actually include some of the automotive portfolios within that.

So we have an opportunity in the connected home that we mentioned, some access points, home routers, media, set-top box.

It's all been strong for us.

Automotive coming off a very low base for Skyworks is picking up.

We talked about the telematics opportunities, the in-dash opportunities.

That's a portfolio or a product line I think has great potential over the next several years.

We're finally getting deep engagements with some of the automotive manufacturers, we hadn't been working with at all.

We see their opportunity looking out.

Then you have this proliferation of wearables, connecting appliances, connecting, as I mentioned, in home security, et cetera using Zigbee, using Wi-Fi, using Bluetooth, using cellular.

All that is coming together.

It's a buildup of design wins and revenue that will be certainly a multi-year opportunity for Skyworks.

Gabriela Borges, Goldman Sachs.

Congratulations on the strong results.

Thanks.

I wanted to ask on the filter business in particular, I think you mentioned in the prepared remarks that some of the gross margin upside is being driven by enhancements to the cost profile and the yield profiles of their business.

So maybe just a little more on what you're doing there?

Whether that can continue to be a tailwind as we go through the next several quarters?

The second part of this is just on the performance side.

Any details on what you are doing with premium filters, TC-SAW in particular, to improve the performance of that product?

Thank you.

Sure.

As you have noted, the filter business for Skyworks has been incredible.

It's early innings for us but we will ship by the end of this calendar year over 1 billion filters, all of which will be integrated into our system solutions.

So the appetite for the technology has been unprecedented.

We continue to improve the technology.

We continue to move up in frequency and tighter in our performance specifications.

We expect this to be a long-term cycle for us.

We expect to be adding opportunities, adding customers and continuing to leverage our manufacturing prowess and our technology strength in that area.

As far as contribution to the profitability, clearly, when the acquisition was initiated, you're not stacking margin any longer.

We're manufacturing.

But we've done a really good job with some CapEx investments, productivity yield improvements where we've done a really nice job of driving the cost down.

We think we can continue to do that.

That's all really helped our overall margin profile.

So if you look at the CapEx we have been spending, because we're making investments based on volume visibility.

A good percentage of that has been investments in our filter business.

So they're paying off.

You're seeing that's part of the reason the margins are improving.

That is certainly part of it.

Vijay Rakesh, Mizuho.

Congratulations on a solid quarter and guide here.

Thanks, Vijay.

Just briefly here, as we try to gage what part of content growth is -- how would you look at carrier aggregation?

There's one- and two-band and three-band carrier aggregation.

What's the penetration today?

How do you see that progress over the next couple of -- next year, let's say?

Sure.

No, that's a great question.

So we have a lot of great design techniques and approaches to deliver carrier aggregation, whether it's intra-brand or non-continuous bands.

There's a lot of complexity.

There's a lot of switching opportunity, leveraging SOI.

There's a lot of LNA opportunities for us.

It speaks also to these diversity receive modules that we've mentioned in the past.

The good news for us is, the complexity is extremely high.

The number of players that can compete and actually develop and deliver the types of solutions that are required, very, very few.

We're one of the leaders.

The adoption rate right now is low.

So we see this as a long-term cycle for us.

It does tremendous work in terms of bringing downlink rates, data rates up significantly.

It brings tremendous design opportunity for Skyworks.

So it's a type of product that you're going to see in the market here in 2016.

It will continue to expand.

You'll see more and more content with us on board.

Ian Ing, MKM Partners.

Congratulations on the very consistent execution every quarter, every environment.

Thank you, Ian.

Really, more on this trend towards RF customization in China.

I think in the past, the top two OEMs would get a lot of customization and the rest got something closer to reference designs.

So any implications there in terms of servicing those customers and operating expenses?

Why do you think they prefer custom when off-the-shelf has worked for the third largest OEM and higher in the past?

Sure.

I understand.

Really, what is happening is the complexity has gone up.

We have been talking about that theme for a while.

You have a lot of very compelling brands in China that really don't have the RF infrastructure.

They don't have the technology infrastructure, the engineering headcount to deliver and develop the very complex 4G solutions.

So as we've mentioned before, our engagement has begun in many of these accounts in 2G and 3G.

As they have evolved and our partnership with chipset providers has become more sticky, we have been invited in earlier in the cycle to develop customized solutions that meet the specific needs of a Huawei, of a Xiaomi, OPPO or Vivo.

So it's a great opportunity for us, but we also help these OEMs get to market quickly.

I would also add that we have a strategy, call it, rapid customization if you want.

We have SkyLiTE, Sky Mini.

We have platforms that allow us to very quickly facilitate the customers' ability to drop bands if they want to, to go more regional, to take filter content out, switching content out and do it within a fixed, if you will, a fixed footprint, even a fixed pin-out, fixed volume.

So, is it custom?

Yes, it is, in that we can reconfigure it in our factory, no one else can do and it's not -- no one else can replicate it.

But it's giving some degree of customization and cost optimization for even those second and third tier indigenous OEMs within China that previously, they had to just take one-size-fits-all.

Quinn Bolton, Needham.

This is Krysten Sciacca in for Quinn Bolton.

Congrats on the quarter, you guys.

Thanks.

Can you talk about possible capacity additions in the filtering business?

When you expect these adds to come online?

We don't have capacity constraints today, although as Don mentioned, a great deal of our capital investment this quarter and in prior quarters has gone into that footprint.

The yields are coming up.

One thing we didn't talk about earlier is that we are finding increasing bands that we can address with our newest technology that's quite proprietary and unique, that's allowing us to go up to 2-gigahertz.

We're confidently producing bands-2, bands-3.

We're adding more frequency bands with a roadmap to go above 2-gigahertz.

So we're seeing a combination of pure volume and more and more bands that are appropriately using at least our version of high-performance Temp Comp SAW in lieu of a bulk device, a bulk acoustic device.

Tom Diffely, DA Davidson.

So on that same line, when you look at your portfolio of high-performance filters today, what percent of the bands in a high-end 4G phone do you think you cover at this point?

Yes, it all depends on the specific architecture.

There is some regional SKUs and different approaches.

But the majority of the bands that we address make up the majority of the phone, in many cases.

So we probably have 60% to 70% of the coverage with our technology.

Suji Desilva, Topeka.

Congrats on the quarter, again.

Thank you.

Just following -- staying on the filter theme here, as you improve the TC-SAW products and get the technology higher, can you remind us what the inherent advantages of TC-SAW are versus BAW?

I'd imagine cost is one.

But if you could walk us through that?

It's always cost, in the sense that it's just less -- fewer process steps and so on.

The throughput is higher on any given level of capital investment.

The advantage is that you can put very tight spacing, particularly at the sweet spot of the frequency band that goes up to about 2-gigahertz.

Size is an advantage when you get in the lower frequencies, less of an advantage when you get in the high frequencies.

Okay.

Thank you.

Ladies and gentlemen, we have reached our allotted time.

That concludes today's question-and-answer session.

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

Well, thank you very much for joining us, everyone.

We look forward to seeing you in the near future.

Thank you, ladies and gentlemen.

That does conclude today's conference call.

We thank you for your participation.