思佳訊 (SWKS) 2016 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon and welcome to Skyworks Solutions second-quarter fiscal year 2016 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 second-fiscal-quarter 2016 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, 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 complete reconciliation to GAAP.

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

Thanks, Steve, and welcome, everyone.

We delivered another solid financial performance for the second fiscal quarter of 2016, posting year-over-year growth in revenue profitability and earnings, even as we navigated through a combination of inventory adjustments and forecast reductions at one of our major customers.

During the quarter we delivered revenue of $775 million.

That's in line with our guidance.

We posted gross margin of 50.8%.

That is up 410 basis points year over year.

We generated operating income of $285 million.

That's up 10% year over year.

We produced operating margin of 36.8% and we provided $1.25 in earnings per share.

That's up 9% versus the prior year.

For the first half of fiscal 2016 we generated roughly $383 million in free cash flow, redistributing over 60%, or $234 million, to shareholders through our dividend plan and our share repurchase activity.

Q2 was a solid quarter, highlighting the strong execution of our team and the robustness of our financial model.

Our gross margin initiatives and operating expense discipline and enabled us to both expand margins and earnings in a seasonally down quarter.

The market environment remains challenging entering the third fiscal quarter.

The June quarter is normally a transitional period in our sector, bridging the March quarter seasonal trough with a stronger second half of the calendar year.

This year, inventory draw downs and slower sell-through trends at our top customer are providing a drag on overall demand levels, impacting our Q3 guidance despite our strong growth and growing markets and with other OEMs.

As we navigate through this customer's -- through these customers' specific dynamics, our competitive position and our financial model remain quite strong.

We continue to improve our gross margins and our overall financial returns while investing aggressively in innovation and in incapacity.

It is also worth emphasizing a couple of important points.

First, among our top customers, we see complexity and increasing performance requirements driving content expansion across the board.

As an example, our overall content on some Samsung's flagship Galaxy S7 platform is up 20% versus prior-year models.

We have also secured by $9 of content within Huawe's new flagship smartphone platforms, helping to drive over 40% year-over-year growth with this customer.

Secondly we continue to be highly successful in leading the market transition toward integrated solutions and we are consolidating share while extending our technology leadership.

Third, we continue to see significant traction with the Internet of Things, as evidenced by our 18% year-over-year growth in our broad markets products segment.

These factors give us high confidence in our longer-term growth prospects.

Before providing more specifics on the market environment, I will turn the call over to Don for a more in-depth review of our financial results.

Thanks, Dave, and thanks for joining us everyone.

We appreciate it.

Revenue for the second quarter was $775.1 million in line with our guidance and up 1.7% versus the year-ago quarter.

Gross profit was $393.6 million, or 50.8% of revenue, in line with our guidance and up 410 basis points from the second quarter of fiscal 2015.

Operating expenses were $108.6 million consisting of R&D expense of $73.1 million and SG&A expense of $35.5 million.

We generated $285 million of operating income, up 10% from the year-ago quarter and that translates into a 36.8% operating margin.

Our cash tax rate was 14.3%, resulting in net income of $242.3 million, or $1.25 of diluted earnings per share, and that is $0.01 ahead of our guidance and represents around the 9% year-over-year earnings growth.

Turning to our second-quarter balance sheet and cash flow statement we invested $37 million in capital expenditures with depreciation of $53.6 million.

We generated $154.5 million in cash flow from operations and we exited the quarter with roughly $1.2 billion in cash on hand and no debt.

We also repurchased 2 million shares of our common stock during the quarter at an average price of just over $67.50 a share.

Given our confidence in our long-term business trends, we expect to continue to be very active with our share repurchase activity at current levels.

Moving to product mix, for the second quarter of fiscal 2016, power amplifiers represented 70% of revenue, integrated mobile systems was 58% and broad markets was 25%.

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

We are quite pleased that our broad markets portfolio grew over 18% year over year in the second quarter.

We continue to expect IMS to remain our strongest growth segment, followed by broad markets, while power amplifier products continued to decline as a percentage of our revenue as the market shifts toward higher value integrated solutions.

Now for our third-quarter business outlook.

We expect third-quarter revenue to be approximately $750 million, with softness at our largest customer being partially offset by strong year-over-year growth at Samsung, in China and across the broad markets.

At this revenue level, we suggest modeling gross margin at 51%, with operating expenses flat to Q2 at approximately $108.5 million.

It is worth noting that our Q3 gross margin guidance implies a 200 basis point improvement versus the prior year.

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

Looking ahead, we see opportunity for additional margin improvement as we continue to ramp our custom solutions and leverage our recent capital investments.

As a guideline, we recommend modeling a 60% incremental gross margin off of the third-quarter baseline.

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

Below the line, we anticipate around $1 million in interest and other expenses and a cash tax rate between 14.5% to 15%.

We project our tax rate to remain in this range for the remainder of our 2016 fiscal year.

We expect share count to be around 192.5 million shares, which results in a third-quarter EPS of $1.21.

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

Thanks, Don.

I am very pleased by the resilience of our financial model in spite of the well-publicized market challenges to our near-term top-line growth.

Even more importantly, I'm highly confident that the underlying technology themes fueling our long-term growth remain quite positive.

We're fortunate to be levered to powerful secular technology trends and we have spent the last decade aligning the Company to capitalize on these.

With that in mind, I want to take just a moment to reiterate a couple of the more significant drivers that we see fueling our growth in the coming years.

First is the Internet of Things.

This opportunity is measured in the tens of billions of units and projected to grow at 83% CAGR through 2020.

Our success here has been borne out by broad and a growing list of wins in new markets like automotive, medical, industrial, wearables, and the smart home.

Today we participate in all of these verticals through our suite of connectivity solutions, which now includes support for low power, for wide-area networking, for Wi-Fi, ZigBee, Bluetooth and GPS standards.

Our design win pipeline provides a number of tangible examples of our success in this market.

In fact, in this quarter alone we landed new opportunities which include vehicle-to-vehicle communication systems with Cadillac's 2017 platform, GPS-based industrial tracking devices for Iotera, a new connected home hub designed -- for a leading online retailer, cat-M solutions for machine-to-machine applications in a variety of end markets, connectivity modules and set-top boxes for Arris, temperature control systems for multiple smart-home solutions, analog IC supporting new smart watch platforms, and 16 Skyworks devices in Cisco's latest large enterprise access points systems.

The second major growth theme for us is the skyrocketing demand for data, wireless data, which is being fueled by a growing number of new applications like streaming media, like mobile advertising, virtual reality and cloud-based services across consumer and enterprise applications.

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

As sophisticated as today's devices are, they are simply not good enough to support the immense data requirements of these types of new applications, which will be rolling out over the next few years.

To address this performance gap, OEMs today are implementing techniques like carrier aggregation, received diversity, MIMO and ultimately 5G, which require dramatically higher levels of analog performance at the semiconductor level.

As a technology enabler to these system upgrades, our addressable content per device is rising, driving TAM growth well in excess of the broader semiconductor space.

Both of these secular growth themes are playing out for us in real time and we are capitalizing by combining a strategic focus on higher value-added integrated solutions with unrivaled scale, advanced manufacturing capabilities, and a deep system-level know how.

This is the key reason that we are consistently delivering among the best financial returns in the semiconductor sector in a variety of market conditions.

In closing, looking past the near-term volatility, we have 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 line, please.

Thank you.

(Operator Instructions)

Our first question will come from Rick Schafer with Oppenheimer.

Go ahead, please.

Thanks, guys.

My first question is, I guess, basically how do you see revenues trending through the quarter, through the June quarter, maybe what the shape of that revenue curve is.

Do we expect to see a V at any point during the quarter or does that come in the July timeframe?

Hi, Rick.

As we mentioned in the prepared remarks, I think June is normally a seasonal and a transitional period for us.

It's a little bit challenging this year for a couple of reasons and it's with our largest customer.

Unlike prior years, units will be down year over year really for the first time, and they are also absorbing some excess inventory, which adds a headwind.

I think as we absorbed that issue, outside of this we expect all of the areas of the business to be very strong.

We think our revenue will be up over 10% when we exclude this customer.

We have seen strength at Samson on G-7, growth in China, our broad markets business will be up 15% to 20% on a year-over-year basis.

We're obviously not immune, though, to significant reductions from this customer, but I think we will fare better than most and we'll continue to focus on returns to the business.

Okay.

Maybe a related question, Dave.

If you look at how your internal capacity today, how does it line up with the current demand and what -- can you quantify or is there a discernible impact on gross margin today that will see a natural are noticeable uptick in the second half as volumes improve?

Hi, Rick, this is Don.

One of the things, if you looked at the forecasts continued to change in this quarter.

One of the things to see that in is our inventory is up a little bit more than normally would be up for us and that's, you're seeing there where we just continued the product.

It was a lot easier to do that in the short-term than to worry about taking labor out and making changes so that all made sense for us.

As far as going forward, our fabs in our Mexicali facility were pretty much at utilization we don't expect that to change a lot going forward.

The margin improvement you seeing it's just the normal improvements that we would build off of the product mix that we're shipping.

I wouldn't expect a big change because of that.

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

Please go ahead.

Thank you very much.

On a big picture, if you look at the RF TAM market from 2016 and 2017, obviously with Apple going through its product transition and softer demand in the premier tier week, that's impacting the growth for 2016.

Do you still see this growth in this market as a mid-teens CAGR and do you think it would reaccelerated in 2017 and do you think the industry could be below 10% growth this year?

Thank you.

I think there, Mike, is some positives and negatives going on in current environment.

On the positive side, answering the growth question, we continue to see our content go up with each and every new generation.

This year is no different.

No different.

We're pulling more functionality into our integrated mobile systems.

We're expanding our footprint with more functionality.

In fact, we're continuing to see a few of our competitors who were unable consolidate share.

Our IoT business, as we mentioned in the prepared comments, is up both sequentially and year over year and these are very positive tail winds.

I think 2016 is a little bit of a unique year because I think you're going to see some high-level smart phone softness, given global macroeconomic choppiness, and of course, as we discussed, with our top customer there's overall unit sales declined in the second half of the year, which gives unfavorable comps.

Of course, they are aggressively ramping down the legacy models, which creates an inventory burn.

2016, we have to look at as a unique phenomenon I suspect is you go through on the second half of 2016 it will be much more positive.

We will start to see some strong sequential growth in 2017.

I do absolutely see growth in the overall RF and analog TAM being double digits year over year.

Was at all, Mr. Walkley?

Yes.

Thank you.

We will go next to Vivek Arya, BofA Merrill Lynch.

Please go ahead.

Thanks for taking my question.

Good job on the execution.

I know there are headwinds that the industry is facing.

As my first question, Dave, how should we think about the back half and what the visibility looks like in terms of content growth and if there are any differences if your flagship customers go with an Intel-based band versus Qualcomm base band?

I think we answered it.

I think you're going to see this inventory headwind with our large customer is well (technical difficulty) year-over-year growth.

That's an issue were going to deal with here in 2016.

I would expect that in September you will see double-digit sequential growth, so I think that's going to be no different.

We will see a very strong back half of the year moving into 2017 on the backs of more content, a larger target for our newer products, broad markets being up.

Maybe Liam you could add --

With respect to the baseband partitioning that you may have mentioned there, certainly we do quite well with both Qualcomm as well as Intel.

Let me give you some confidence that we fully expect in the second half of the year to be launching with our flagship models with incremental gains year over year, significant incremental gains regardless of baseband.

Well diversified across both and also well diversified across our product reach.

Very useful.

As my follow-up, Dave, what are your latest thoughts on M&A, because I understand you do have very good organic growth prospects but the volatility around your largest customer is not going away anytime soon.

But you do have a very good balance sheet, you have a very good record of operational consistency, you have good (inaudible) assets.

How do you average those aspects to diversify and as part of that, if you could also rule in what were the learnings and feedback from the PMC bid that might inform you as you think about any potential M&A?

Vivek, thanks for the question.

We think of diversification two ways.

First of all, we have been consistently diversifying our business.

We've used M&A each year since we formed the Company to continue to look for more functionality, more relevance in the broad market sector, more content in both mobile and our broad markets business.

The most recent addition was filter as part of that power management Wi-Fi and the like.

We view acquisitions as an important element of our growth where we are selective.

We do not need to buy growth.

What we need to do is continue to look for ways to differentiate ourselves in our target markets.

You should look for us to continue to add strategically acquisitions that makes sense.

They'll primarily be, as you mentioned, in diversification, in driving diversification of the new markets and more content in new markets.

Thank you.

We now have a question from Blayne Curtis with Barclays.

Go ahead, please.

Hey, guys.

Don, I want to make sure I understood.

You built inventory in the March quarter on these sales levels and then I guess you're down into Junes.

It sounded like you're going to keep utilizations the same.

Does that mean inventories go up?

The second part is, can you talk about your visibility?

You said new products should higher margins.

As you look in the second half, that is the other put to gross margin.

Are you seeing a drag on utilization?

What is the new products?

What is your visibility into the uplift there?

Keep in mind, and thanks for the question, because it needed to fill in a piece there that we do have the high remodel.

Recognize that we outsource some wafer supply, we outsource some assembly and test, so were able to modulate that but as far as running our internal operations, we're going to keep that utilization relatively high.

That will in fact allow us to continue the margin story.

We're not going to be building inventory levels that are really far ahead of demand.

We will flesh through what we've seen at the end of this quarter and we would expect that to get to a more normalized rate as we move forward.

As far as the margin expansion in the back half of the year, it has been a consistent story and you see it in our margin gains quarter over quarter that as we release new products, we're seeing better margins on those products that whether it be in emerging market like China, whether it be large OEMs.

There is nothing in that story this going to continue to slow down.

It's more about integration adding value and customers are paying for it.

Okay.

Thanks, guys.

Our next question is from Toshiya Hari Goldman Sachs.

Go ahead please.

Hi.

Thank you for taking my question.

My first question is regarding the pricing environment.

Clearly, your customers are experiencing pressure in their gross margins.

Have you sensed any change in how you guys price product and the amount of pressure that you are seeing from them?

Sure.

There's always going to be a dynamic there where suppliers and customers negotiate, but I will tell you what's happening, as Don alluded to in gross margin, invariably our technologies have become more and more unique as we wrestle with customer complexity.

The engines that we provide, the solutions that we provide, tend to be very, very elegant, integrate lots of technology, are perfect fit for a specific base and a specific application.

They're very different than what our suppliers do.

It is really about differentiation and delivering performance, number one, and from there we can command better pricing and margins.

Okay.

Thank you.

As my follow-up, just a question on your long-term gross margin target of 53%.

You mentioned how you have a number of initiatives in place.

Maybe if you can elaborate on what the initiatives are, what the timeline is going forward.

That would be helpful.

Thank you.

If you step back and you look at the things that we do on a quarterly and annual basis, first from an operation standpoint, it's about the CapEx investments we make and the productivity improvements and driving the operational improvements in things like yield.

It is focusing on our material sourcing and being able to deliver year-over-year annual reductions that support that.

That is a piece of it.

That's kind of the blocking and tackling of margin improvement.

Then where you get step function for us is when you talk about the new products, the releases and the integration.

Maybe Liam could talk a little bit about the things we're doing as we move forward, but those two pieces together are really what drives margin for Skyworks.

Thank you.

We will go next to Craig Ellis with B. Riley.

Go ahead, please.

Thank you for taking the question.

I wanted to go back to the comments that you made, Dave, regarding some of the new product activity.

SkyBlue seemed to be quite successful in the first half with one of your big customers in terms of contributing to significant content.

As we look into back half, do you expect SkyBlue to broaden out across your broader customer base?

Can you talk a little bit about some of the other developments that might be occurring within the product portfolio that would add further to content as we look at the second half of 2017?

Thank you and I'm glad you brought that particular platform.

The customer is Huawei and their flagship model.

We have over $9 in content and I'm particularly pleased by the fact that it's low-, mid-, and high-band PAD.

There is power management, there is wi-fi, there is pretty sophisticated switching architectures we're controlling.

We're using an architecture that's allowing us to control power management levels and voltage across all bands.

We are starting to see the ability to take a very sophisticated module and integrate using different approaches, much lower current consuming functions.

We are incorporating things like temperature-compensated SAW, regular SAW, bulk acoustic devices and it's an architecture that our customers see simply as being elegantly easy for them to use in the sense that it's very highly integrated.

It tunes up at the antenna and saves them point of current and size.

We absolutely will see that in other customers, architectural approaches that will be customized for different markets that you will see continue to contribute to our gross margin, but a bit more of a winner-take-all capability because it is so easy for our customers to use and far fewer competitors.

Thanks for that.

The follow-up is for Don.

Don, as we look at the other part of the target financial model below gross margin, at the $8 in annualized earnings, can you just walk us through your thinking in terms the timeframe with which you think we can get to that earnings level?

When you step back and look at the core elements of the financial model that's gross margin expansion, that's top-line growth, that's managing OpEx, they continue to strengthen and you see that, for instance, on the margin line, what we just guided at 51%.

We're up sequentially in margin even though we are down some in revenue.

The assumptions underlying the new target model are very, very solid, gross margin, our ability to manage OpEx.

We know how to do all those things.

As far as handicapping when it happens, right now we're in a little bit of a tough backdrop that we're working through.

As you model growth opportunities off of, let's say, the September quarter, or December, pick a quarter, you apply whatever annual growth rate you want to that.

The 60% drop, you will see the model still in place and that will get you there in a reasonable timeframe.

But you have to model that and make your own assumptions to get to that timeframe.

Our next question is from Atif Malik with Citi.

Go ahead, please.

Hi.

Thanks for taking my question.

A question on carrier aggregation, David, you guys have talked about ramping a ball filter next year.

If you can share the update on what are the latest plans on how you plan to ramp that.

Are you looking through licensing that technology or you have it in-house?

I have a follow-up.

I'm glad you asked the question because I'm going take a two-pronged approach to it.

First, the details are that when we look at the carrier aggregation requirements with the advanced switching, with the tuning, with the module capabilities that you require, different band aggregation and combinations that are quite challenging to our customers, there is a lot of content expansion.

What we have been doing is we're leveraging a lot of in-house filter expertise, you asked specifically about filters and intellectual property.

We've been making investments in foundry partnerships to support bulk acoustic technologies.

Of course, we have our own increasingly relevant and high-frequency temperature-compensated SAW.

We will continue to -- you'll continue to see wins at the higher frequencies.

The SkyBlue system architecture allows for more content because were able to control all the system parameters in a way that they get the current consumption and they are able to do it and we're turning it in a quite sophisticated way between the amplifiers, the switchers, the filters and obviously the antenna on the transmit side.

If you take a step back, our customers truly do not care what the process technology is in those filters.

What they want is current, they need size, they need time to market, obviously they need overall performance so I think over time, the question of what filter technology is chosen for which band will be with less relevant and what will be relevant will be having a system architecture that provides the kind of current that they need to add the functionality that their customers demand.

Very helpful.

And then follow-up, when I look at the tier down, the project tier down, the Galaxy 7 versus Galaxy 6, I see an RF sockets getting swapped among suppliers and then when I look at, iPhone it seems like there is a lot of [VUs] going on of iPhone 6S components.

The question is, has anything changed with respect to the sockets being more specific to each phone and its impact on pricing going forward?

Every customer has a different way to go to market and Samsung has been traditionally a high-SKU company where they have potentially regional SKUs where you may open up a regional SKU, we have low content, global SKU we have high content on Galaxy and at Samsung, where they may have eight or nine SKUs, our blended content is up about 20% to 25%, generation to generation.

Our revenues at Samsung will be up about 20%.

Our largest customer, similar story.

There can be some partition changes but here again, our ability to engage early, we are agnostic with baseband, by the way, let me just clear that up.

There is no issue with us relative to Qualcomm, relative to Intel, or internal basebands at Huawei high silician, Samsung LSI.

We're with all of those players.

We have the ability to work with our customer and make sure we have the right solution.

Fortunately, as Dave was outlining, customers really want complexity solved and we do it in unique ways and we are continuing to gain share on the leading flagship models across all the major accounts and we will continue to do that this year and next.

Our next question is from Edward Snyder, Charter Equity Research.

Please go ahead.

Thanks a lot.

There were a lot of reports of strength in China, especially in low- and mid-tier.

(Inaudible) was talking it up on Monday.

Qualcomm was even bragging about it last week.

Can you characterize how that affected you?

I know you were very big in phase two at MediaTek but it sounds like things moved more to the five mode.

I know there was a little bit of a share give back there.

I'm interested in how much of an offset China was, specifically in the white box area, where you're dealing with these references designs.

Don, you're sitting on record high inventory while your largest customer is winding down the flagship model.

With the big declines in demand that, that model is going to go through here, what gives you confidence you can work through that inventory?

The parts, I would assume, are not interchangeable with the new model coming up in the fall, so I'm a little confused here because you're talking about running the fabs in your path facility relatively high utilization rates, but then also burning off inventory.

I'm trying to figure out what I'm missing here.

Thanks.

This is Liam, I'll start with the China piece.

China, actually the story's been getting better for us with China, consistent with your remarks.

The open market, or the white box China, which not only serves the domestic market but also is a catalyst for serving emerging markets.

China, for example, in Q2, we were up about 14% sequentially.

We think year over year, when we finished FY16, China will be up about 20% to 25% so we have great traction with a OPPO, Vivo, Xiaomi, and a number of other white box players.

But really today what we're seeing is nice content gains and real material revenue gains from Huawei.

We talked about it earlier but that's a customer that's adopted high-, mid- low-band solutions, receive-side solutions, Wi-Fi, as well as some of our power solutions.

We're really pleased with that.

That is a customer that's our clear number three now for Skyworks.

We expect solid growth there next year and also continuing to do the work with MediaTek and others to make sure we pick up the white box players.

Yes, and on the inventory question, remember we said we're going to keep our internal facilities relatively high utilization, but we're pulling back capacity from outsourcing, so that's a big piece of that equation.

All of the inventory that we have completed to date, we're very comfortable is going to get consumed.

There's going to be no issue there.

Thank you.

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

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

Thank you.

Thank you everyone for listening and see you at upcoming conferences.

Thank you, ladies and gentlemen.

That does conclude today's conference call.

We thank you for your participation.

You may now disconnect.