思佳訊 (SWKS) 2016 Q1 法說會逐字稿

Ladies and gentlemen, good afternoon and welcome to Skyworks Solutions first-quarter FY16 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, Kathy.

Good afternoon, everyone, and welcome to Skyworks first FY16 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 investor relations section of our Company website for a complete reconciliation to GAAP.

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

Thanks, Steve, and welcome, everyone.

We had a solid first-quarter performance with revenue profitability in earnings ahead of expectations, in spite the challenging macro environment.

Specifically during the quarter, we delivered revenue of $927 million; that's up 15% year over year.

We produced operating income of $367 million; that's up 30% year over year, translating into a 39.6% operating margin.

And we posted $1.60 in earnings per share; that's up 27% versus the prior year.

We also generated more than $345 million in operating cash flow, and ended the quarter with just over $1.2 billion in cash on hand and with no debt.

This was another well-executed quarter from the Skyworks team.

Our content gains, our diversification, and our disciplined approach (inaudible) with operational focus were key factors in achieving these Q1 results.

And as we look ahead, we continue to see tangible opportunities to capitalize on a number of high-level growth trends across the technology landscape.

These include growing consumption of wireless data within consumer and enterprise applications, advancements in cloud-based services, the proliferation of connectivity within the emerging markets, and increasing adoption of the Internet of Things.

These macro themes are irrefutable and they're far-reaching, creating expanding uses for our technology and higher addressable content opportunities with each new product generation.

Leveraging our industry-leading integration capabilities, we position Skyworks to capitalize on these powerful market tailwinds.

Now, despite these positive long-term drivers, this year, the March quarter, which is normally a seasonally soft period, has been impacted by above-normal forecast reductions and inventory adjustments at one of our top customers.

This dynamic has been well-documented across the supply chain over the last few weeks.

After closely analyzing the market environment, we have adopted an appropriately conservative outlook for our Q2 revenue guidance.

However, through strong gross margin performance and a disciplined focus on cost, the overall impact to EPS is relatively small, and our guidance represents high single-digit earnings growth on a year-over-year basis.

Don will provide more specifics later in the call.

It is worth emphasizing that we are well-positioned for a strong second half of calendar 2016 based on clear visibility into design wins across our flagship smartphone customers.

And from this vantage point, we are highly confident in our prospect for gaining dollar content within upcoming generations, putting us on track to continue delivering above-market revenue growth with expanding profit margins and earnings leverage.

Before providing a more detailed view of the market, I'll turn it over now to Don for a more in-depth review of the financial results.

Thanks, Dave.

Thanks for joining us, everyone.

Revenue for the first quarter was $926.8 million, in line with our guidance and up 15% versus the year-ago quarter.

Gross profit was $476.1 million, or 51.4% of revenue, ahead of guidance and up 470 basis points from the quarter of FY15.

Operating expenses were $109.5 million (sic -- see press release "$141.6 million"), consisting of R&D expense of $71.9 million (sic -- see press release "$81.5 million"), and SG&A expense of $37.6 million (sic -- see press release "$51.7 million").

We generated $366.6 million of operating income, up 30% from the year-ago quarter, translating into a 39.6% operating margin.

Our cash tax rate was 15%, resulting in net income of $311.2 million, or $1.60 of diluted earnings per share as compared with diluted EPS of $1.26 in the year-ago quarter.

That equates to a 27% year-over-year earnings growth.

Turning to our first-quarter balance sheet and cash flow statement, we invested $79.5 million in capital expenditures, with depreciation of $51.5 million.

We generated $345 million in cash flow from operations, which includes the $88.5 million termination fee from PMC-Sierra, and exited the quarter with over $1.2 billion in cash on hand and no debt.

Moving to product mix, for the first quarter of FY16, power amplifiers represented 16% of revenue, integrated mobile systems was 64%, and broad markets was 20%.

We saw healthy growth in both integrated mobile systems and broad markets.

In fact, IMS was up a full 16 points versus a year ago as a percentage of our mix.

Power amplifier products continued to decline as a percentage of our revenue, as the market shifts toward higher value integrated solutions.

Now for our second-quarter business outlook.

We expect second-quarter revenue to be approximately $775 million.

We suggest modeling gross margin in the range of 50.5% to 51%, with operating expenses flat to Q1 at approximately $109.5 million (sic -- see press release "$141.6 million)".

It's worth noting that the midpoint of our gross margin guidance range implies over a 400-basis-point improvement versus the prior year.

Our strong gross margin outlook in the face of current market dynamics highlights the benefits of our higher value integrated systems, along with our scale, and flexible manufacturing operations.

Looking ahead, we see continued opportunity for margin improvement, as we leverage our recent capital investments and ramp our custom integrated solutions and precision analog products.

For modeling purposes, we recommend using a 60% incremental gross margin off of the second-quarter baseline.

We are targeting a goal of at least 53% gross margin for the Company and have a number of initiatives in place to accelerate our progress toward achieving this goal.

Below the line, we anticipate $500,000 in interest and other expenses, and a cash tax rate around 15%.

We project our tax rate to remain at these levels for the remainder of our FY16.

We expect share count to be around 194.5 million shares, resulting in second-quarter EPS of $1.24, and that's up 8% versus last year.

Finally, we recently entered into an agreement to divest Trans-Tech, a small subsidiary of ours, to Kyocera for roughly $42 million.

Trans-Tech produces ceramic substrates and materials for a number of broad market applications and had become non-critical to our corporate strategy.

We expect the transaction to close sometime in early April.

For modeling purpose, we recommend assuming around $14 million per quarter of revenue impact, starting in the June quarter, with no impact to EPS.

This transaction helps to improve the financial returns of our business, while sharpening focus on our core strategy.

Our Q2 margin and EPS guidance highlights the robustness of our business model within the context of challenging market conditions.

For the second half of calendar 2016, we see momentum building off of this baseline.

Many of the drivers supporting this are already in place, giving us a high level of confidence to extend our track record of best-in-class financial results.

And we remain on track toward our mid-term goal of $8 in annualized EPS.

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

Okay, thank you, Don.

Before closing and taking your questions, I wanted to take a moment to reiterate a few market realities that will continue to fuel our growth in the coming years.

First, demand for wireless data continues to skyrocket with no end in sight, driven by the adoption of streaming media and cloud-based services across consumer and enterprise applications.

These services are in their infancy and consume a tremendous amount of bandwidth, drastically increasing demands on networks and on devices.

Secondly, growing data consumption requires dramatically higher levels of analog performance at the semiconductor level.

To improve throughput, our customers are facing mounting technical challenges, including navigating spectrum limitations, improving signal reality -- reliability, and mitigating interference, all while extending battery life.

The end result is greater addressable content per device and TAM growth well in excess of the semiconductor sector.

Third, as the technology integration leader, we are consolidating market share and our visibility to new content wins and future architectures is very strong.

The solutions we are developing for future generations are tremendously complex, and they require best-in-class core technologies, advanced integration capabilities, and deep system-level expertise.

Skyworks is uniquely positioned in all this regard to address these opportunities.

This focuses -- this fosters closer engagement with customers and higher value solutions across the board, with a narrowing field of capable competitors.

And fourth, the Internet of Things is real and is happening today, facilitating entirely new growth avenues for us and enhancing our diversification.

At this year's Consumer Electronics Show, there was a showcase of groundbreaking new devices, leveraging the power of wireless connectivity.

Much of the excitement at CES this year was around innovations in the connected car, in the automated home, wearable technologies, and in entirely new categories like drones, utilizing enabling technologies like GPS, Wi-Fi, ZigBee, Bluetooth, and others.

And we participate at Skyworks in all of these markets through our suite of connectivity solutions.

And lastly, we've successfully redefined our business model, combining a strategic focus on higher value-added integrated solutions with unrivaled scale, with advanced manufacturing capabilities and deep operational know-how.

The end result is that we are consistently delivering among the best financial returns in the semiconductor sector in a variety of market conditions.

As just one measure of this, our return on invested capital for 2015 was 33%, and over the last two years, we've averaged 30%.

So in closing, looking past the near-term volatility, we've created a unique and a robust business model fueled by the proliferation of connectivity, and combining above-market top-line growth, healthy cash flow, and the financial returns of a best-in-class diversified analog Company.

That concludes our prepared remarks.

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

(Operator Instructions)

Rick Schafer, Oppenheimer.

Hey guys, just want to give my congratulations for reacting so quickly to that change on the top line there, preserving EPS.

Thank you.

My first question is just really what are your expectations for the overall RF content growth for the overall market over the next couple years?

And if you guys expect to outgrow the market, where do you have the most leverage there to take share?

Well, we think the market for smartphones, for example is going to grow in mid-single digits.

And if, however, if you look at the complexity, analog and RF complexity, driven by increasing band count, by a higher adoption rate of AC, carrier aggregation, and other complex switching algorithms, looking to improve the signal integrity on the receive side through DRX technologies, high-performance low-noise amplifiers we think the market growth rate would be at least double that for our class of products.

And of course, we look to a broadening array of vertical markets and IoT to continue to round out the business and become more diversified with higher margins.

Okay, and then a follow-up to that, can you discuss content trends that you're seeing with the Chinese handset OEMs, and maybe putting in context how that growth there compares with what you're seeing with from the tier-one guys, maybe in Korea, North America, wherever?

And maybe part of that answer, I'm curious what you're expected -- what you expect to see in terms of the impact from the move to five mode, the five-mode rollout in China

Sure Rick.

Great question.

Well, China is certainly a growth driver for Skyworks.

We're in the early innings of a 4G upgrade cycle, and just in the last quarter, December quarter, we were up about 20% year over year across China.

There's been some choppiness and near-term volatility, and we understand that well.

We've been in this market for quite a while.

We are encouraged by the content growth and the move towards these system solutions that we speak of.

We're starting to see that with the larger tier ones in China, and also the white box players.

And we're continuing to go behind just the [transit] receive solutions to start to move into things like Wi-Fi and GPS and power management, so that's all positive.

And as we see this move to five-mode, clearly, that's incremental content.

So we are seeing that move up, in line with the China subscribers wanting more and more functionality and more capability, and hat plays right into our strength.

So we're very positive about that and expect China to be a long-term grower for us.

Vivek Arya, Bank of America.

Thanks for taking my question.

Dave, beyond [the advertised] slowdown or inventory adjustment at your largest customer, what has been the trend that your Korean and your Chinese customer -- I think they're all trying to assess whether this was a one-quarter problem for your industry or whether there are any other longer-term impacts.

If you could give us some insights into that, I think would be very useful for investors

I think as Liam commented a moment ago, Vivek, the China TAM story and the upgrade to 4G has been very positive for the Company.

In fact, I think we were something like 20% year-over-year growth in our China revenue in the December quarter.

And that's content, that's share, that's being lined out with the right set of baseband and SOC partners.

And if you look at our customers Samsung, on our second largest customer, we've seen very high attach rate now with our more complex solutions the Galaxy 7 and then their emerging 16 platforms.

And in fact, Vivek, it is our China customers and Samsung, they're all adopting, virtually across the board, a more complex system, RF system that's highly integrated for size, for current consumption and just to merely handle the complexity and get these designs, these SKUs out into the market on time.

And that's been very, very good for us, very bad for the discrete companies; very, very good for us.

Got it.

And then one more near-term question, if you could discuss the puts and takes for the June quarter, because your largest customer still has some seasonal headwinds building that quarter.

And I think you also mentioned a divestiture.

I believe, Don, you mentioned that it could have a $14 million impact.

So if you could just run us to the puts and takes to how to think conceptually about the June quarter.

Thank you

It's obviously we're monitoring the demand environment in China and elsewhere very closely, and the ramp timing of large programs, which participating and increasing content.

Generally June is up somewhat from March; that's our current expectation, although it's a little early.

However, the visibility in new designs and in new platforms, both in terms of flagship, but also some of our IoT platforms gives us a very keen sense that the second half of calendar 2016 will be very strong and the growth rate will be very high after we work through obviously, as you said the well-publicized issue an inventory burn with a large customer Maybe Don, you could comment on the TTI transaction.

Sure, yes, Vivek.

The way to think about it is when we're doing our models, you look of the business as it is today and assign the appropriate growth rates throughout the fiscal period.

And then off of that, you would just the deduct $14 million a quarter for the June and September quarter and beyond, as you're starting at that point.

And there's no earnings impact with that $14 million.

So it's a much lower margin business for us, and then that's also offset by their OpEx.

So there's no earnings associated with that.

Mike Burton, Brean Capital.

Hi and thank you for taking my questions and congratulations on the good execution in a tough environment.

Just following up on the China side, we did see the weakness from your top customer.

It did seem that the Chinese handset OEMs rebounded pretty nicely in the December quarter and ramping into Chinese New Year.

So I'm just wondering if that's affected your customer mix?

If you could give us an update on how big China is as a percent, and do you expect that to grow into the March quarter?

And then also, we heard a lot about India last night from your partner competitor.

I'm curious what your exposure is out there in the outlook.

Sure, Mike.

With respect to China, as we've spoken, it's a very diverse set of customers; it's not just mobile, we do a great deal of business in IoT markets, Wi-Fi, and even infrastructure.

But we are seeing within China names like Huawei really accelerate, Xiaomi to some degree, and some of the other white-box players.

And if you take the China mobile businesses, as well as our broad market in China is about 20% of our revenue at Skyworks.

We do see them coming up this quarter again in March sequentially, so they're going to be one of the drivers for us in the March quarter, and again, throughout the year, as we mentioned before, there's just a tremendous opportunity with the 2G and 3G customers and subscribers moving up into 4G.

So we're encouraged by that, but you're going to see some improvement in China in the March quarter following a strong December.

And then for Don, if I could, just in the OpEx, great job on the gross margins, but how should we think about puts and takes for OpEx going forward after -- into this next calendar year?

And then also just any thoughts on cash.

Obviously, it's, given the macro environment uncertainty or was your plan really to get more aggressive on the buyback or would you still be looking at some fairly large acquisitions?

Yes, on the OpEx side, we said in the prepared remarks that we see the $109.5 million level for the next several fiscal quarters.

After that, modeling up $2 million a quarter as we've talked -- $2 million to $3 million, as we've talked about before, I think is a safe bet.

As far as the cash, yes, we continue to generate very strong cash off of the earnings.

We have that 40% target of free cash flow that we want to distribute to the shareholders through dividend buybacks.

We didn't do any buybacks this quarter.

We also balance it about what's going on and potential M&A activity, what we're looking at and those things.

And bottom line is that 40% will continue to do, so stay tuned.

Blayne Curtis, Barclays.

Hi guys, thanks for taking my question and nice results.

Maybe just following up on the use of cash, Don, if you could talk about what your CapEx was and what your plans are this year?

And maybe Dave, you could talk about just update on your filter strategy as you build that out as it becomes more and more of these integrated modules.

Yes, we spent $80 million in the first fiscal quarter.

We would expect that to come down closer to more like -- we don't really guide it, but more like the depreciation level, the depreciation in high 40%s to 50% level, so it is coming down.

And some of that -- when we're spending capital to direct results of the volume that we're looking at, the back drop right now, that number is going to be able to come down a little bit.

The use of cash, as we said, we like the 40% target for our shareholders, and that will be through dividend and buybacks.

We will continue to focus on doing that

Blayne, with respect to filters, in the last few quarters, as we've discussed on each call, we've dramatically increased our footprint in Japan and again, processing in Singapore.

We're probably roughly quadruple the capability from a facility standpoint where we're hiring, we're getting very good performance at the RF level, as well as yields.

And so we continue to see advantages in using really the highest performance temperature compensated surface device in the world.

And we are starting to see more bands at higher frequencies that are capable of using [TC], so of course, we see a real performance and cost advantage, both on the transmit and the receive side.

So I think you should look for us to continue to line out module SkyOne and other type of products, power duplexers, more and more of our internal devices, as well as receive DRX with temperature compensated SAW for better receive performance

Thanks.

And then just as follow-up, as you look out this year, you talked about content gains at your large smartphone customers.

Could you maybe just talk about where -- what types of products you're seeing the best traction for content gain, that would be helpful, thanks.

Sure, Blayne.

With regard to large flagship programs in general, what you're seeing is, as Dave articulated, more and more adoption of our SkyOne filter-rich multiple bands -- multiple power amplifier band switching, integrated in a transmit section.

Coupled with that, we're doing really good work on the receive chain with these DRX solutions, a look at LNAs, again switching, again filtering, integrating into a single engine.

And then to augment that, we're really seeing great traction in our 11AC portfolio, often MIMO, often two per smartphone.

We're seeing power management devices and Bluetooth connectivity, etc.

So we're really rounding out this analog content around very rich filter integrated system.

So that is what you will see in the flagship phones, and we are starting to see our value tier customers even move up into that area.

Harsh Kumar, Stephens.

Hey guys, great execution.

A question on your content in the Chinese handset guys versus the tier one and what opportunity do you see as the Chinese handset guys try to move up and match what the tier-one guys are offering?

Hi Harsh.

I think that the upgrade cycle in China is the largest content gain in the history of the Company.

Because the volumes are so very high in the embedded base there of 2G and 3G is relatively low content for us, and now as the world is adopting these more integrated system solutions for all the well-publicized performance, size, cost, just a reality of how do you deal with the complexity when you're a customer who has other things to worry about than the RF portion.

So we continue to see a great deal of content gain.

And in fact, frankly,, share consolidation is turning into a big scale advantage to have the breadth of content as well as the cost structure around high volume.

So I think you'll continue to see that.

And then as a follow-up, a couple of companies such as Avago and others talk about content growing about 15% I know you guys are somewhere in there.

Most of you guys talk about greater than 10%.

I'm curious what the latest, greatest standpoint is with respect to how you guys see content growth for smartphones

I would echo what the -- what you stated.

I think the content growth is every bit of a low mid teens and could be higher.

We have to decouple the true content growth that's driven by complexity, which everybody talks about.

There's more bands, there's more high frequency bands, there's more complexity around delivering, as Liam mentioned, MIMO-based solutions on the receive side.

Powered voltage is becoming an increasing issue, and of course you remember we did an acquisition that gives us some unique IP around driving more refined voltage through the transmit path and that's a real advantage in our system solution that can't be replicated by an RF-only company.

So we continue to see that as a real differential advantage for Skyworks.

Atif Malik, Citigroup.

Hi, thanks for taking my question and congratulations on strong execution.

Dave, can you just talk about your strategy on filters?

Do you need a BAW solution for carrier aggregation opportunity, which is getting off this year?

And I have a follow-up.

What we do need a high performance filter technology, and we're finding that we're able to do very high frequency, very tight frequency spacing with our temperature compensated SAW.

We also have BAW filter partners and a lot of IP that's giving us the capability to enter in strategic band configurations using a BAW device coupled with a temperature-compensated coupled with a SAW.

But you know, you mentioned carrier aggregation, but we're really seeing is we can get the performance, for example, on the transmit path or in a carrier aggregation system.

If we can drive the right [pathology] and the right device performance, we can -- we find that it's a little bit less dependent than one normally thinks about the actual filter technology and process than it is about the whole link budget, that is from the transceiver to the antenna and back.

And so we're getting some of the power-added efficiency numbers and the current consumption reduction we are getting out of these newest generation SkyOne, Skylight PAD architectures, it really frankly, unheard of in this space.

And it's not all about the filters it's much more about the device performance and the way we architect it.

Okay, and then how does the TDK QUALCOMM JV impact your relationship or arrangement in outsourcing parts at TDK?

Well, we buy SAW filters from TDK.

We have a long-term supply agreement; that deal's not going to close for a while.

We're very lucky that we have a big footprint now in filters, so we can build our own SAWs and our own TC SAWs.

We'll see how that plays out, but I don't think it has any material impact on supply at all.

And in fact, it's been on our road map, particularly when you look at DRX technology, which is a lot of filters, a lot of passives.

It's always been on our road map for margins, frankly, for margin as well as performance to pull that technology more and more in-house.

So we can pull it in if we have to, and it really will be -- will play out over time.

But I wouldn't worry about it from a supply constraint.,

Edward Snyder, Charter Equity Research.

Thanks a lot.

Dave, I want to hit on the same point.

You're -- just getting a glimpse of your capacity in Panasonic.

They used to build their own SAW, then you guys converted them over to TC.

Bit it sounds like you can go back fairly easily if you had the capacity.

And then QUALCOMM's been making a lot of this JV, but could you just refresh our memory, before the JV was announced, were you seeing QUALCOMM in any of the competitions for any of the RF in any of the major players?

I know they've been doing RF 360 for like three years now.

And so, I just want to get a snapshot before we lose our minds on the JV on what was going on with QUALCOMM before then.

And then Don, the 6% incremental gross margins, what's the primary driver that you're going to need to get there?

What's driving it?

And the 53% target margin, the primary driver there, is it a higher mix of integrated products or is it just throughput?

And then if you could maybe give us an update on the gas capacity, and most importantly your packaging assembly test capacity in Mexico.

Thank you

That was a long question Ed, thank you.

With respect to the first half of the question, I think you're absolutely right, that TDK and QUALCOMM have been working closely together and fielding designs for a long time.

We've competed very successfully against those design, so there hasn't been a lot of traction in the sweet spot of what we do.

There have been other RF360 components of that system in which we don't compete where they've had success.

But these decades of gallium arsenide performance and driving switch technologies and multichip module technology and getting to put our own high performance filters has really given us a system-level performance that has not been easy for competition to replicate.

We know TDK very well.

We've used them in the past in mostly SAW.

They've got some limited capability in BAW.

But remember, I think as your question alluded to, our customers are wanting business based purely on performance and on configurability and what it does at the system level.

And we have a clear advantage at the system level over anybody.

We've not seen the combination of QUALCOMM TDK to be any meaningful threat over the last three years.

On the margins, Ed, yes, the modeling, we suggested a 60% and the targets' 53%.

And at[ 51%] for this quarter, we obviously feel good about, we're well on our way.

We've had some nice gains and consecutive quarters.

And it's really a lot of things, you're right.

One of the things is the overall suite of new products we released, because there's more integration, more value for the customer.

We're just seeing better margins on that.

So that's -- you could -- that's a mix but it's not mix.

It's more value-added integrated solutions, and that's really helping.

And it's the things we do on CapEx, it's things we do on driving productivity improvements through the fab, through the assembly and test operation in Mexicali.

We've driven filter costs down dramatically, so we're executing as we have for a long time pretty well across all fonts and they're all contributing to the margin story.

As far as capacity, we're in really good shape.

We've got square footage and a new lease facility in Mexicali, so it's short money for equipment.

We can expand that very, very quickly, that pays back quickly.

Dave already talked about quadrupling the filter capacity as far square footage in Japan, so with equipment, again, we can do that very quickly.

And we've got our outsource partners for our wafers.

So we're in really good shape to be able to expand capacity when it's required.

Tim Long, BMO Capital Markets.

Thank you, just two quick ones if I could.

You covered China pretty well.

I was wondering if you could just talk a little bit about what you're seeing or what your customers are seeing about some of the other emerging markets right now.

And then back to QUALCOMM, obviously they haven't, as you've talked about, they haven't had a lot of success.

They are talking about now a little bit more aggressively about gallium arsenide.

So from the competitive landscape, do you think that can change anything?

And I guess while we're on that topic, anything else from anyone in the CMOS camp> Thank you.

Maybe I'll do the second half first, and Liam, you can talk to the other emerging markets.

Tim, it really is the case that there hasn't been a single successful new PA Company in many, many years, with PA device technology.

And merchant gas boundaries are, I would estimate at least five years behind what Skyworks is able to do today, state-of-the-art at the device level.

And it's been through decades of experience,

So I think that the merchant gas merchant gas capability pales in comparison to the stellar device performance that companies like Skyworks that we specifically are getting.

I'm not too worried about any new gas entering, and I'm definitely now worried about CMOS technology being able to accomplish the kind of current consumption, the kind of transmit requirements that we're seeing across our markets today.

Every single time there is an advance in a different technology or with a different competitor, what we're finding is that the next-generation system has increased the bar so high that it doesn't matter that improvement isn't anywhere near capable of delivering the system-level performance that our customers require.

And we're designing platforms now that are 2018, and in those platforms, boy, I tell you, it is the best of the best who are going to compete successfully and we think we've got a unique capability there.

Yes, and then following up on the emerging markets, what we do see there is certainly are larger global brands participate across the emerging markets.

But more frequently we see some of the China players drive a great deal of their exports through markets like India, Middle East, Latin America.

Of those, the India market has actually been consuming probably at the highest level, again buying product typically manufactured by our China OEMs, so we play it through that channel.

And there's definitely a lot of room to grow in that geography.

Thank you.

Gabriela Borges, Goldman Sachs,

Great, thank you for taking my question.

Maybe just one on the near-term environment if I could.

You mentioned the above normal inventory reductions, but I'd love to get your thoughts on where you think we are with that inventory correction, whether inventory is getting more back in line with -- into modern sell-through.

Thank you.

I think it's clearly, there's been a disruption in the December and March timeframe, as a very large flagship phone model has seen the numbers come down and we're working through that.

And I think that from my standpoint, any inventory correction in the systems should be gone in the June quarter and we ought to be off to the races in the second half of the year

That's helpful, thank you.

And then just on the broad market segment, clearly a number of drivers of that business segment, but maybe could highlight for us one or two applications that you think can contribute the most from a dollar revenue growth perspective as we look out over the next few quarters.

Thanks.

Sure.

The broad markets business has been doing quite well, we're up about 12% year over year in Q1 and will continue to be a team level or higher growth rate into the calendar year.

So what we're seeing is really a wide variety of applications in the broad portfolio.

We've got some great IoT programs that go into set top box and streaming media, in many cases, $10 to $12 per box, Wi-Fi switching, ZigBee technology, there's a connected home opportunity now that's really playing out, got some great content there.

And one of the markets that we're excited about now it's early innings but we are seeing some uptick in automotive.

We're starting to see high-end LTE telematics applications.

We've got design wins in vehicle-to-vehicle communication.

We've got customers like GM, like Volkswagen, Continental, so that's a market that we think will do very well for several years, and the opportunity there for us is outstanding.

So that's a little color and where we are, but broad has been growing quite well and quite steady

Craig Ellis, B Riley.

Thanks for taking the question and congratulations on the performance in the quarter.

I'll start with one that relates to the longer-term financial targets.

In the quarter, you were a hair's distance from your operating margin target, and it looks like you're making very good progress towards the gross margin target.

How should investors think about the time frame to the revenue target and the earnings-per-share target guys?

Thanks for the question, Craig.

Despite the backdrop right now, when you look at -- the model for us is absolutely intact, you look at the drivers we're making -- continue to make progress on the gross margin front.

Volume will have some impact on that in the short term, but we're continuing to drive that.

We know disciplined OpEx investments, we know how to measure those to manage that very effectively.

So when you roll all that together, once we get through this [pause] that we're seeing right now, when we get into the back half of the year and beyond, we see an opportunity to get there in a couple of years.

And by the way, we are not at -- what we delivered, we are not at the OpEx target, because the model will be in the low 40s.

We're not quite there yet so we got room to run.

Okay, good stuff.

And then a follow-up just on gross margins, Don.

If I look at the last three quarters which represents the bulk of calendar 2015, the incrementals were 75% on average, which is amongst the best in semis.

And I understand that the 60% incremental target is a nice uptick from where the Company had been, but what would cause, given the initiatives that you have in play and the business divestiture, which is low-margin, what would cause a regression back to 60% rather than staying at the levels the business has recently been at?

That's a fair question, but you got to remember that those are averages to assume over a period.

There are events that happen quarter to quarter that can move those.

And what happened in those quarters, there were multiple things.

We were seeing some benefit from the filter asset in driving cost down, we had new product launches, all of those things can create a short-term step function that moves you in a different spot.

But sustaining 75% that's off the charts; 60% is very, very good.

So modeling 60%, you'll see you get a very, very good answer.

Anthony Stoss, Craig-Hallum.

Nice job also.

So you talked about China being up, your biggest customer being down in March.

Can you talk about Samsung?

And also, Don, if you wouldn't mind taking us through what CapEx was in the quarter and what we should expect in 2016.

Thanks.

Sure, Tony.

With respect to Samsung, yes, we actually are seeing some improving conditions at Samsung.

We should be up in the March quarter.

We've got some new design wins that will be ramping with the GS7 platform.

And we're actually -- reiterating what David said about content and SkyOne and filters, we're seeing Samsung really now [soft] in earnest, some of these content-rich solutions, not only on the transmit chain but also on the receive side.

So that's a move up for us that will be sustainable.

Samsung is our number two customer.

We've got a great relationship there, so you should expect some solid results through the year.

CapEx, Don.

Yes, CapEx we've talked about that a little earlier, $79.5 million for the quarter, and we're just recommending there will be a couple of quarters we'll be real close to the depreciation of around $50, and it might go up a little as we get in the back half with volumes going up.

And there may be some more investments that we make, so that's the way to think of it.

Thanks guys.

Thank you.

Steve Raymond James

Great, thanks a lot, guys.

Just following up on your comments about the strength in the back half, would it be fair to argue that if you say like a September quarter, that could be up double digit year over year?

Excluding the divestiture.

Yes.

Great.

That's calendar, just remember that.

I was just asking like a September quarter over September quarter

Yes.

Great.

And then as far as BAW filters for yourself, I think you had talked on the last call about 2017 getting there.

How necessary is that and as we push into higher frequency stuff later in later years, is it -- is that the right technology or will we have to see some other technology emerge in filtering to handle that?

That's a great question.

Clearly, for today, we're doing low band and now mid-band.

We're well up above 2 gigahertz with great performance using temperature-compensated devices.

I think BAW technology, what it will do for us in that 2017 timeframe will open up the high band, the very highest band in some of these pad configurations.

I think that'll be very good for us.

We'll be able to have the enviable trade-off between using SAW, temperature-compensated SAW in both devices and using the right application for the function.

Because if you look across the world today, most world phones, smartphones don't use BAW technology; they have a different configuration or a different band line up that doesn't require it.

But for those customers who are looking for a low, mid, high, very high performance, truly a world phone, what BAW will do will open up high band for us in which we don't participate, market we do not participate in today.

So it will increase our TAM and we'll there by 2017.

Cody Acree, Drexel Hamilton.

Thanks for taking my question, guys.

Maybe just following up on that, Dave and maybe for Liam as well, with your filtered capacity, expanded filter capacity, is there a way to quantify some of the dollar [kind] increases that you're able to attack today that maybe you weren't able to get into a couple years ago, knowing that so much of the RF content increases is coming on the filter side?

I would say that the increase over the last couple years and for the next couple of years on the RF side in smartphones or mobile is probably equally weighted between filter-enabled devices, receive and transmit, and other functionality that we talked about, which is voltage regulation, power management, receive technology and higher performance Wi-Fi and the like.

So I'm going to just broad brush it and tell you roughly equal growth within mobile coming about through filter-enabled solutions and coming about through other system-level blocks that we didn't previously address.

And to add to that, I think one of the real unique characteristics of what we do here, and we talked about in this call, is our ability to integrate.

So it isn't just taking the filter and taking the amplifier and integrating it; there's a lot of unique Skyworks DNA that develops these engines.

They're highly customizable.

Each baseband partner, each OEM we configure to their needs.

We look at their current budget, we look at what they need to do in terms of bands.

We look at the filter technology wanted to deploy, and all that comes together, and it's worked out great.

And the TC capabilities that we have today are unbelievable, they're world-class manufacturer.

In this last calendar year, we manufactured about 1.5 billion TC SAWs, all of which were consumed by our integrated systems.

So we're very bullish on that concept and we'll continue to use the best technologies to win.

Dave, just on a high level on the M&A approach, after what happened with PMC, what's your interest?

Are you looking at ways to expand vertically?

What would you be looking at?

I think, Cody, similar to what we've done in the past, we're always looking for, if you think about the power management acquisition that we did through AATI or SiGe or the Panasonic filter capability, they all do two things for us: they gave us a much bigger target and more relevance at the system-performance level for our mobile customers and they also opened up new target markets and gave us opportunities within IoT.

So we would continue to look at that, whether its cloud-based computing, whether it's machine to machine, whether it's being able to do more at the IoT sensor MCU RF module capability.

We see those as being attractive, surgical, strategic, accretive deals.

Mark [Esta-Garibio], Desjardins Capital Markets.

Thank you for the call -- for the question.

Just wanted to get into the broad markets a little bit.

20% of the revenue around $185 million came from IoT in broad markets.

If you can just comment a little bit about the incremental growth in 2016, where it's coming from.

Is it a broad stroke amongst auto, connected, home, wearables, drone?

And also if you can comment on the outlook for margins in the quarter if it's about [50%] or if it's a different range for the different verticals please.

Sure.

The broad market business, it is actually quite diversified.

I would say the strongest elements are around the streaming media, the Wi-Fi integration, connected home.

We have just a large roster of design wins in that part of the space, and we're also seeing, and if you look at some of the tear downs of these boxes, we're seeing three-by-three streams, which will triple our content.

And so you get $10 to $12 per box.

We're in markets like DirecTV, Technicolor, some of the Neatgear routers.

Those are just examples, so that's a real strong area.

And there's a lot of upgrades to go here in the US and in developing markets, so we like that.

Connected, home, I mentioned, some of these appliance opportunities, customers like Nest, lots of names like that.

Automotive, relatively new.

You have not only the traditional IoT applications like Wi-Fi and Bluetooth, but you have a telematics play there.

And then the other space that has been a bit quiet but we do think will turn is (inaudible) infrastructure.

We have a great deal of content with companies like Nokia Siemens, Ericsson, Huawei, and we do see that getting a little stronger, probably back half of 2016, a little bit soft so far but it's another market where we have some solid designs.

And margins, the broad markets category is by far our highest.

Margins in those average 55% plus on the application market, but those are our highest products.

So as that percentage goes up it's always for Skyworks.

One follow-up on the question with regards to the June quarter, they industry goes up 5% to 6% obviously, the next quarter we're looking for a drop of 16% from the $775 million guidance.

Is there some makeup we can put in our numbers on the back half of the year, or should we stick to the industry averages?

I think that's a little difficult to answer right now.

I think you should expect that the adjustment that's occurring in the late December through the March quarter and into maybe into June a little bit will then be behind us, and that's an unnatural event.

And so as I say, as we stated in the prepared comments, we think that the second half of calendar 2016 looks very strong.

And it's not wishful thinking, it's more designs that we're filling both in the mobile and on the broad market side.

That as we fulfill those orders, you'll see an uptick in revenue that's pretty substantial.

Ian Ing, MKM Partners.

Thank you.

Don, could you help us with how you got to this appropriately conservative guidance?

Did you rely on higher backlog coverage?

Are you [derating] forecast or do you have other tools in the toolbox?

No, it's our normal approach.

I think we do an excellent job of forecasting.

It starts with our sales marketing team and how they -- the information they get from customers, distributors, and OEMs and we always are able to that and translate that into the right kind of revenue projection.

So it's our typical process; there wasn't any new magic involved in that.

Okay great.

And for my follow-up, reference design partners in China, you've talked about being working with MediaTek and working with QUALCOMM; those are good partners.

Looks like Spreadtrum is making a lot of activity in China, also.

They're trying to double their LTE shipments this year.

Do you guys partner with them in terms of SkyOne and things like that or?

Absolutely, our roster in China certainly includes QUALCOMM, MediaTek, quad core, opticore designs, great position there, higher-end 4G LTE, Hisilicon, which is the in-house brand with Huawei.

And then Spreadtrum as well, you're right.

TDS, CDMA, another opportunity.

So they're not the biggest driver for us, but they are important and they're very specific to the China market.

We're seeing improvement out of MediaTek, and it's a very high-end content rich engines that we enjoy.

And the Hisilicon-Huawei partnership has been quite strong, so we have got a well-diversified set of products and programs, very different for each one of those partners, but we're engaged with each of them.

Thank you.

And ladies and gentlemen, does conclude today's question-and-answer session.

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

Well thank you everyone for your participation and for listening, and we look forward to seeing you at upcoming conferences.

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

We thank you for your participation.