思佳訊 (SWKS) 2016 Q3 法說會逐字稿

Good afternoon and welcome to the Skyworks Solutions third-quarter FY16 earnings call.

This call is being recorded.

At this time I will turn the call over to Mitch Haws, Investor Relations for Skyworks.

Mr. Haws, please go ahead.

Thank you, operator.

Good afternoon, everyone, and welcome to the Skyworks third fiscal quarter 2016 conference call.

With me on the call today are Chief Executive Officer, Liam Griffin, and Chief Financial Officer, Don Palette.

Before we begin, I would like to remind everyone that our discussion will include statements relating to future results and expectations that are or may be considered forward-looking statements.

Please refer to our earnings press release and other SEC filings, including our annual report on Form 10-K, for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today.

Additionally, the results and guidance we will discuss today are from our non-GAAP income statement consistent with the format we have 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 let me turn the call over to Liam.

Thanks, Mitch, and welcome, everyone.

Q3 marked another quarter of solid execution on the part of the Skyworks team.

We exceeded our guidance, returned over $240 million in cash to our shareholders, and importantly, continued to broaden our design win pipeline, setting the stage for sustained market out performance.

Looking at the results in more detail, we delivered revenue of $752 million, ahead of our guidance, expanded gross margins to 50.9%, up 190 basis points year over year, produced operating income of $275 million with operating margins over 36%.

Finally, we generated $1.24 in earnings per share, $0.03 above consensus.

Execution on revenue and margins, along with operating costs discipline, were all key elements of this performance.

In addition to the strong financial results, we continue to gain broad market traction.

Specifically during the quarter, we powered Huawei's P9 phone incorporating 10 unique devices including our SkyOne systems across low, mid and high bands, launched advanced carrier aggregation capabilities across a suite of premium and value [tier] accounts, including Samsung, Motorola, as well as OPPO, Vevo, [and CPE].

We secured design wins for Continental's 4G LTE automotive systems, captured digital attenuator and multimode repeater designs at Audi and enabled Enterprise Radio for Google 3.5 GHz band echo system.

We also achieved several other milestones including surpassing production of 2 billion filters cumulatively from our joint venture with Panasonic, ramping SkyBlue Innovative technology for enhanced power management and LED flash drivers, commencing volume production of proprietary diversity received solutions and supporting the world's first head cam with LTE connectivity and 4K video streaming.

These major wins and others demonstrate our expanding customer and end market reach across both mobile platforms and the internet of things.

At this point, I will turn the call over to Don for a more in-depth review of our financial results.

Thanks, Liam, and thanks again for joining us, everyone.

We appreciate it.

Revenue for the third quarter was $751.7 million and that's ahead of our guidance.

Gross profit was $382.3 million or 50.9% of revenue, and that's in line with our guidance, and up 190 basis points from our third quarter last year.

Operating expenses were $107.6 million, that consists of R&D expense of $70.2 million and SG&A expense of $37.4 million.

We generated $274.7 million of operating income, translating into a 36.5% operating margin.

Our cash tax rate was 12.7%, resulting in net income of $238.1 million or $1.24 of diluted earnings per share, $0.03 ahead of our guidance.

Our cash tax rate is now projected lower for FY16 at 14%.

The Q3 rate was favorably impacted by a year-to-date adjustment from the prior 14%, 14.7% annual rate.

Turning to a summary of our third fiscal quarter cash flow metrics, we invested $57 million in capital expenditures with depreciation of $54.6 million, generated $141 million in cash flow from operations.

We returned over $240 million to shareholders via dividends and the repurchase of 3 million shares during the quarter.

Looking at product mix for the third quarter of FY16, integrated mobile systems was 55% of revenue, broad markets was 29%, and power amplifiers was 16%.

Now moving on to our fourth fiscal quarter business outlook.

Based on the broad market traction, our new program ramps, as well as the content gains Liam has outlined, we expect fourth-quarter revenue to be up 10% to 11% sequentially to $831 million at the midpoint.

The double-digit revenue growth we expect in Q4, followed by continued growth into our first fiscal quarter, will reduce inventory.

We have level ordered our factories and positioned ourselves well to address a series of new filter rich program ramps with leading customers.

For fiscal Q4 we suggest modeling gross margin at 51%.

It is worth noting that our Q4 gross margin guidance implies 100 basis point improvement versus the prior year fourth quarter, even with a lower revenue base.

Looking at OpEx, we expect R&D and SG&A expenses to be flat with Q3, reflecting continued cost structure discipline.

Below the line we anticipate around $1 million in interest and other expenses and a cash tax rate of 14%.

We expect share count to be roughly 190 million shares driving fourth fiscal quarter fully diluted EPS of $1.43.

Lastly, we also announced today that our board has authorized an 8% dividend increase and a new $400 million stock repurchase program.

Underscoring the confidence we have in our business model and our ability to deliver superior returns to our shareholders.

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

Thanks, Don.

Our third -quarter execution highlights our differentiated competitive positioning and the strength of our business model.

We are levered to powerable secular technology forces and we have spent the last decade aligning the company to capitalize on these strategic macro trends propelling our mobile IOT and broad market opportunity.

First is the explosive growth of mobile data across a vast set of applications and usage cases driving performance from device to cloud and beyond.

Next, we are seeing an ever increasing expansion of connected things, with tens of billions of newly connected devices brought to market over the next five years.

Finally, we address a tremendous ecosystem and new economy that thrives on the ability to leverage high-speed and secure connectivity at the heart of their business.

Enabling these connections is the sweet spot of our franchise.

In mobile, we have growing content positions across all of the world's premier OEMs leveraging our unique capabilities to meet out customers' increasing need for a higher performance solutions.

We are also building momentum in broad markets, particularly in IOT, with engagements at leading players including Amazon, Arris, Cisco, Fitbit, GE, Google Nest, Honeywell, Itron LG and others.

Our [secure] has been born about by a broad and growing list of wins in adjacent markets, like industrial, energy management, security, health and fitness, and the smart home.

Today we participate in all of these verticals through our suite of diverse technologies, including support for WiFi, ZigBee, Bluetooth, GPS, small cell and LTE standards.

At the same time, we are building presence in key verticals like automotive, with leaders such as Continental, Audi, Ford, Kia, GM and Volkswagen.

Underpinning all of our solutions is the skyrocketing demand for wireless data.

Whether it's Facebook, Amazon, Netflix, Google or Tesla, there is a powerful and expanding ecosystem monetizing and relying upon efficient high-speed low latency seamless and secure connections.

This ecosystem spans across enterprise to eCommerce to social media and a burgeoning set of entirely new applications fueled by connectivity.

In an effort to facilitate this massive and growing wave of data delivery, creation, movement and storage, our customers are implementing methods to improve performance with carrier aggregation, received diversity, MIMO and ultimately 5G capabilities.

This dynamic requires a continuous increase in the levels of analog and mixed signal performance, enhanced power efficiency, high precision filtering, as well as configurable systems integration capabilities.

Skyworks suite of products and systems solutions are squarely aimed at resolving the intense performance demands facing our customers.

So to summarize, we delivered above guidance results in the quarter driven by increasing global demand for high-speed connectivity coupled with strong operational execution.

And as our guidance reflects, we are planning for sustained market out performance with operating leverage and strong cash flow generation.

Clearly we remain well positioned to realize our vision of connecting everyone and everything all the time.

That concludes our prepared remarks.

Operator, let's open the lines for questions.

(Operator Instructions)

The first question comes from the line of Toshiya Hari of Goldman-Sachs.

Please go ahead.

Hello, this is Charles on for Toshiya.

Thanks for taking the question.

I was wondering with inventory at these levels, can you kind of walk through some of the content and unit assumptions that underpin your confidence in being able to get inventory down going into Q1?

Sure.

Well, as we discussed in the prepared remarks, a lot of that inventory is filter-driven, and really filters that are designed into known programs with known ramps in the second half.

Not only transmit solutions but also receive-side technology, some GPS technologies, and an expanding set of customers now that will be taking those filters and those solutions into their applications.

So the lion's share of that material at inventory, [largely]filters, is really wind up relative to second-half ramps with known customers and a very clear demand curve.

To follow up generically on the inventory, just keep in mind that that inventory growth that you're seeing in the Q3 supports the second half.

Volumes were up about 11% quarter over quarter, and then there is growth as we continue into fiscal Q1 of 2017.

There are multiple things that -- Liam was talking about burning the inventory down.

I'm just going to give you a summary of why the level is where it is at.

We were level loading factories to meet that second-half demand, the share gains and filters, especially silicon, driven by new programs.

There's specific growth assigned to some ramps, and there is essentially no risk with this inventory.

We also had a new hub arrangement for a large customer in Asia that is a one-time stocking bump in inventory.

And some of the projected product mix into Q4 just has longer lead times for some of the outsourced materials, and it's primarily silicon wafer.

The bottom line, we are very confident in the decline going forward and getting the turns back to historical levels.

So this is a short-term issue that we are working through based on those dynamics.

Got it.

That is helpful.

And then as a follow-up, given the buyback, can you just maybe run through some of your thoughts on M&A and your strategy on diversification via M&A?

Sure.

We, first and foremost, are committed to running our core business.

And we think there is great opportunity to leverage not only our strength in mobile, but now you're hearing more and more about our opportunities in broad markets, specifically IoT.

So we're committed to that.

Now, in parallel, we have a disciplined view on M&A; but we certainly are looking at potential opportunities.

We'll share more with you as they come about.

But we're focussed on our core, but have the power or the balance sheet and the opportunity to certainly augment that with M&A as needed.

Vivek Arya, Bank of America Merrill Lynch.

Please go ahead.

Thanks for taking my question.

For the first one, Liam, I was wondering if you could just give us a sense of the overall demand environment.

Obviously, the industry has come through an inventory correction at your largest customer.

Are we past all those problems?

So now we should start to expect more normalized growth?

If you could address that.

And then also if you could take it more broadly to the trends you are seeing at your Korean and Chinese customers.

I think basically investors want to understand, are we past some of the issues we saw in the first half and it's a more normalized growth environment going forward?

Or is the industry still struggling with a little bit of the inventory issues that came about in the first half?

Sure, Vivek, I'll take both of those questions.

Yes, we have been through a challenging first half of the calendar year, for sure.

And I think that has been well-publicized and reflected in our numbers in the past.

We are seeing improving conditions right now.

We are seeing all of our Tier 1s grow.

And more importantly, we are seeing our content position expand and their need for the content expands.

So the dynamic around performance and our ability to resolve performance with systems-level solutions is coming together quite well.

And you can see in this guide, 10% to 11%, a pretty solid guide up into Q4.

We feel that that is sustainable.

It is a little early for Q1, but we do expect to be up again into Q1.

That is kind of a broad statement.

And if you look at China and Samsung, both of those opportunities -- China being more of a broad opportunity with some of the flagship names, like Huawei, doing very, very well for us.

And China will be one of our faster growing areas.

Samsung -- we have got content games on the GS7.

That is looking good this year.

Samsung will be probably a 15%-plus account for us year over year.

We are lining out for the GS8.

What you can look at here at a high level is this continuous need for performance and Skyworks' ability to address not only our core positions in SkyOne and some of the trends in the chain, but also an increasing position in analog and increasing position in the receive side, Wi-Fi and other technologies that will allow us to grow our share.

Okay.

Thank you.

Atif Malik of Citigroup.

Please go ahead.

Thanks for taking my question.

A question on the gross margins.

Your gross margins were a smidge below the 51% guidance you gave, even with the higher revenue level and broad markets doing better.

And your guidance of 51% is flat and higher revenues.

Can you just talk about incremental gross margins?

We have not seen this low incremental gross margins in the last six quarters or so.

So if you can just talk about the puts and takes in your gross margin line.

And should we be thinking about 60% incremental gross margins moving forward and also 53% midterm model that you have shared in the past?

And then I have a follow-up.

We'll talk about the incremental contribution margin that we saw in Q3 being that that was, you know, a down revenue quarter.

It was actually a number that was very good, in the high 40%s.

And when you're in down revenue, you want the number to be down below what you're normally posting.

So that's good.

When you do look at the guidance, we are at 52.5% on an incremental basis.

And that is simply reflective of the backdrop, the unique elements that we highlighted in the Q4 inventory.

Going forward, when you are looking at our earnings model opportunity, the 53% is absolutely still our target.

And we expect these incremental margins very, very quickly to get back to the 58% kind of level, which is what we have communicated consistently externally.

So there are no issues there.

We're just working through the inventory issues and the tough backdrop issues that Liam mentioned, but nothing else specific.

You mentioned in your prepared remarks about the low, mid and high socket wins in the Huawei phone.

Can you just talk about why we don't see you in mid and high band and some of the other flagship models and in Korea and in the US and if you are planning to get to those sockets?

Or maybe the specifications the Huawei phones are different than those other two.

Thanks.

Yes, that is a great question.

So first off, I will tell you that we are encroaching some of the mid and high bands organically with enhanced performance in our TC SAW factory.

And as noted in the prepared remarks, we have shipped over 2.5 billion filters, all of which were consumed by our systems solutions.

So we're not a discrete filter Company.

Having said that, our performance level is not only with the filter but the entirety of the system.

So if you think about what customers want from us, they want solutions that resolve this tremendous complexity.

And those solutions from Skyworks are really system level.

They include our own Gallium Arsenide HBT process that we have in house; our SOI process; our DEEP IP and switching; our ability to craft MCMs for very, very low loss and high efficiency, delivering a complete module.

Our modules can often include our own TC SAW.

We have been able to move the TC frequency up to mid-band.

And in some cases, if the frequencies are not applicable for TC SAW, we can address by our foundry partners for bulk acoustic wave.

So that is what you're seeing now in the Huawei phone.

I think you'll continue to see us extend our reach in frequencies and continue to do what customers want.

Really simplify their solutions.

Give them the best end-to-end efficiency and the best systems-level performance.

Timothy Arcuri of Cowen and Company.

Please go ahead.

Thanks a lot.

I guess I'm still trying to understand the inventory.

You said that you're building ahead of the ramp.

But the revenue is guided down like $50 million year over year at the midpoint.

So I would have thought that if you're building for more content gains that you would think that the revenue guidance would have been a little bit better year over year.

Is the answer really that it's going to sell through more in the fourth calendar quarter?

Because I guess if you could commit to a big up fourth calendar quarter, then the inventory build would make a little more sense.

So I am wondering if you can comment on that.

Thanks.

As part of the sell through, you will see both Q4 and then into Q1 as well.

You will see both of those.

So that is clearly part of it.

And then also, just recall that we've 3x'd the size of our filter franchise, so to speak.

When we did the deal with Panasonic, we had one site in Kadoma.

We have added a large site in Osaka.

We have many more customers now that are engaged with us with filter based solutions.

So running that larger factory, running that larger footprint in high performance filters, there is more whip.

There is more inventory.

And there are more programs by which we are going to sell into.

That is the difference when you look at year over year.

The size of our filter franchise is quite a bit bigger.

The number of customers that we address is quite a bit larger.

And specifically in the second half calendar year, you are going to see that action come to bear.

And we are going to see the inventories come down as well.

One thing that I wanted to add too is that when you look at the build that we had this quarter, it's all raw materials and whip.

There is literally no finished goods build -- very little.

That just supports that future growth opportunity.

Blayne Curtis of Barclays.

Please go ahead.

Hello, thanks for taking my questions.

Maybe just when you look at the September guidance, just trying to better understand what you're embedding in there.

If you can talk about what you think broad markets would do into September.

And then assuming that's not down a ton, it looks like integrated mobile is down year over year.

Obviously, your largest customer has got a unit headwind to deal with.

You have content gains offsetting.

Are there any other headwinds that you're dealing with in integrated mobile?

I think for the most part if you look at the quarter here, we're speaking Q4 guide, there is some headwind and some ways of Legacy mix, SAW, that really hasn't come to bear but we've factored that in.

We are seeing overall growth.

If you were to exclude our largest customer, we're up 10% to 12% year over year in the quarter.

So some of the headwinds with our larger customers still are reflected in our numbers.

We are growing the non-core PAD business quite well.

And that is IoT, that's diversity received technologies that are quite new for us.

Our Wi-Fi business is strong.

All of those portfolios look very good on a year-over-year basis.

And we're starting to get out of the inventory hole that we mentioned with some of our larger customers.

And things definitely look better in the second half with respect to that.

Liam, just on broad markets, you had a very strong quarter in June despite the divestiture was up.

Could you talk about the trajectories out into September?

Yes, we'll be up little bit in September, probably 5 to 8%.

I will tell you this though; within broad market, IoT will be up 10 to 15%.

And year over year, IoT is probably headed for high teens.

Within the broad market space, what you have there, Blayne, is some markets that are doing well IoT.

We also have some legacy markets, like infrastructure, that are great markets and have super margin but just have been flattish in terms of top line.

The blend together looks good.

But IoT is a sweet spot, within broad is really special for us right now.

Steve Smigie of Raymond James.

Please go ahead.

Great.

Thanks a lot.

You introduced a whole bunch of new products here, such as the digital attenuators, antenna tuning, et cetera.

Can you talk a little bit about how much of your content on the phone now comes from outside of, say, a pad-type device?

I know there is a lot of skews out there, but just trying to get a sense of how broad you're getting now across the phone outside of just some plastic parts.

Yes, that's a great -- I don't have an exact stat for you.

But I will tell you it has definitely increased over the last year, and it will increase in the second half of this year.

You know, some examples -- you've mentioned us talking about diversity receive.

This is some real elegant proprietary technology that Skyworks has created.

It levers our filter technology.

It levers our LNA, low noise and amplifier expertise; our switching; and again, that configurability with our own MCM.

Great technology -- and what it does is just tremendous, tremendous improvements in the downlinks portion of a phone.

And if you think about the way typical usage cases work on a phone, downlink is critical.

So we provide a great enhancement to downlink speed.

That's one area that is relatively new for us, and it should be a big growth driver.

Some of the SkyBlue technology that we mentioned before is unique for us.

Driving power efficiency through the system.

We have had Wi-Fi for quite a while, but now what we're starting to see is MIMO Wi-Fi in some of the leading flagship phones, so our content virtually can bubble with MIMO.

There are a lot of great things happening -- antenna tuning, another point, GPS for location-based services.

If you think about, we have talked about the ecosystem with some of the big tech players now engaged in mobile.

A lot of these folks are involved in payment.

They want to know exactly where people are, precise location.

We have a GPS portfolio now that is really emerging and increasing attach rate with some of our customers.

So all those things blend in and you're seeing definitely a larger increase in kind of the non-traditional pad business -- although that remains core -- but a bigger swing now to some of these newer devices.

Okay.

Great.

Thanks.

I'm just wondering, obviously as other folks mentioned, it has been a little tough with some big customers out there being challenged.

But do you have some sense of what quarter you might return to year-over-year growth rates?

Yes.

Year-over-year -- yes, so 2016 to 2015?

Right.

Yes, is it possible, say like March of 2017, would that be a quarter where we would expect to start to see year-over-year growth rates resuming?

Yes, yes, absolutely.

Okay, I got your question now.

Yes, certainly we'll get through the second half here.

Obviously, coming off of a 752, 10% off.

We expect to be up again in Q1.

We don't have a full guide yet for that quarter.

But I think when we get into the March quarter, we should be back on track with year-over-year growth.

I mean, just also just to remind you, I think we mentioned it before, but even in the September quarter we are looking at comparable levels of operating income percentage.

So comparable levels of profitability even at lower revenue.

It has been a challenging period for us the last couple of quarters; but I think you can see some financial discipline here, at least in the P&L.

Yes, and you'll see sort of normal sequential growth patterns starting again.

But the year over year, as Liam said, is going to be in the second quarter when we see that.

Okay.

Thank you.

Edward Snyder of Charter Equity.

Please go ahead.

Thanks a lot.

Filters -- you mentioned over 2 billion of those filters; all but probably 37 were TC SAW.

Is the big expansion in Panasonic facility all for TC SAW, Liam; or will you get into SAW manufacturing?

And if you do, how is that going impact your GM?

Because I know you're buying those in the outside world now.

And then the second question, the competitive environment, when you're done.

Okay.

No, great question.

Certainly the filters that we've produced thus far have largely been TC SAW.

As you know well, that is a flavor of high-performance filters that is in high demand.

And it's allowed us to lever that up into SkyOne systems for low-, and in some cases, mid-band.

It has served us very well.

Now going back to standard SAW filters, it is actually quite easy.

It is fewer process steps.

You will eliminate silicon dioxide plating.

It is a cheaper process for us.

You are correct that we do still spend quite a bit of money outside for third-party SAW, so there is a potential opportunity for us to bring that in-house.

And then finally that site in Osaka has the ability -- it's a phenomenal site, class 10 clean room, beautiful facility.

And we do have the opportunity to expand further in higher frequencies if needed.

You're clearly number one in TC SAW by a distant margin here.

So it sounds like your expansion plans are going to be even further.

Now, in the competitive environment, it seems like it is shifting pretty dramatically here.

Murata has already stated that it is losing share.

It is your largest customer this year, and it looks like that is all to you.

But then you are also splitting a little bit of that with (inaudible); you did not do that last year.

(Inaudible) has also entered the DRX section at Samsung, but they weren't last year.

So how do you see, Liam, the competitive environment shaking out in, say, calendar year 2017?

Are the Japanese firms which are disappearing -- I mean, you guys got Panasonic, (inaudible).

Are they going to disappear faster than, say, (inaudible) shows up in some of these pockets?

And is all of this going to be kind of a footnote to overall TAM growth in the RF section in 2017?

I'm just trying to get your view of the bigger picture.

Yes, that's a lot.

Let me try to help you with that.

I'll tell you what we see.

We see the performance nodes going up and up and up with each successive generation.

Whether it be our largest customer or the next two or three down, we really see that happening.

And that's actually - that has propelled our growth more than anything.

Our ability to hit the more challenging architectures and do it with profitable solutions and integrated solutions has served us very, very well.

We are confident that you will be able to see content gains with all of the leading accounts, regardless of baseband partitioning.

We are agnostic to baseband.

We work with Qualcomm, we work with Intel, we work with MediaTek, High Silicon, all of those players.

And so we don't expect any issue with that.

But, yes, competitively the companies that can hit the performance, and the companies that can do it elegantly and unburden our customers with these daunting challenges that they're facing, those are the ones that are going to win.

And we'll be at the top of that list.

The whole essence of Skyworks is to drive a strategy around performance, integrate as much as we can, work with our customers, listen to what they need.

It may be different.

Every account wants something different.

But be flexible enough, leveraging our internal capabilities, leveraging Mexicali for highly configurable devices, picking the right flavor of filter but really looking at systems performance from input to output.

If we do that well, our business will follow.

Cody Acree of Drexel Hamilton.

Please go ahead.

Thanks for taking my questions.

Maybe just continuing on that theme.

With your expansion in capacity and really seeing significant expansion at Qorvo and at Broadcom as well, are you concerned at all about the supply/demand balance of this industry, as we get maybe better over the next few quarters?

It is funny.

If you look at what is happening in these devices now, it is incredible the filter count that is absolutely required by our customers and just by virtue of the crowded spectrum that we see.

So, you know, there's going to be I think a shake on who's going to win and who isn't going to win based on how we put those filters into the complete systems.

Our customers really are less interested in buying discrete components today and more interested on those highly efficient engines that we spoke of.

So we are very confident with our ability to address -- and as you know from history with Skyworks, we're very disciplined on our CapEx and we're careful with where we invest.

So we certainly know where our filter strategy is going, our ability to win.

And with respect to our competition, we've competed with Avago and Qorvo and others for years and years; and we certainly like our outlook here at Skyworks.

Just trying to get maybe a little clearer picture on the September guide.

I know you have been asked and answered those questions about inventory.

But do you believe that you're still dealing with anything that's either causing you to be conservative or weighing a bit on that 10% to 11% guide?

You've got to -- obviously, there are major customer build that you're prepping for.

You've got some seasonality happening.

You've got what appears to be a relatively healthy market in China.

Maybe I think I'm just a bit surprised that this wasn't a bit stronger guide.

Sure.

Yes,10% to 11% I think is a pretty healthy move up for us.

There has been, of course, some lingering effects of legacy platforms that we've had to manage through; and that is being managed through.

So all of that is reflected in the numbers.

I'll tell you one thing that we really need to highlight here again is absent our largest customer, we're up 10% to 12% year over year.

And also in across mobile, we're specifically expanding our content reach.

It was a question that was asked earlier on the call.

But the percentage of revenue we derive in mobile with technologies that are really more like analog mixed signal, that percentage is going up.

Our IoT business looks very strong right now.

Our broad market business looks very strong.

It has been a tough opening two quarters of the calendar year, quite frankly.

We're coming out of that now.

Are there some lingering headwinds that are reflected in the number?

Yes, possibly so, but that's in the guide.

Anthony Stoss of Craig-Hallum.

Please go ahead.

Hello.

Just drilling down a little bit further, Liam, on China.

Can you talk how much it was up in June?

And do you expect it to be up also in the September quarter?

And what percent China currently makes for your business overall in total revenues, and what you think the inventory in the channel looks like into China?

Thanks.

Sure, Tony.

Well, at a high level, China is about 25% of our company revenue.

And they were up sequentially more than 10%.

They look good in the second-half calendar year.

I think one of the accounts that we highlighted in the prepared remarks was Huawei.

We have got a great position there, not only with the P9 phone but with the honor series and others.

There is also another opportunity in China, I think most of you know.

But China is a tremendous export player to the rest of the world.

And there are still 2 to 3 billion people out there who have no connectivity.

So we are able to feed that through our partnerships with MediaTek and Spreadtrum.

And even high silicon that often make models that will go to India, the Middle East, Africa, and some of the other emerging markets.

We look good there.

The recent numbers in China have been strong.

We are also seeing -- I think some of this came through, some of our peers groups calls as well -- we're seeing a move more towards 5 mode from 3 mode.

That increases our content.

The recent carrier data shows some better pick up in 4G LTE.

That's good.

So for the most part, China has been really an improving story here in the last few months.

Ambrish Srivastava of BMO Capital.

Please go ahead.

This is (inaudible) Patel in for Ambrish.

Thanks for taking my question.

On China, we also heard from others talking about strength in China recently.

Are you concerned about overbuilding there, given the strength in China?

No, no, we're not concerned about overbuilding.

One of the larger accounts that we have in China now we have moved to a hub arrangement which is, again, part of the inventory issue.

But it is fully lined out.

You can't overbuild in that environment.

So you basically just meet your customers' hub needs.

They pull.

The open market broad customers in China, we work very closely with MediaTek and some of the other baseband partners to get a broad forecast.

Some of the solutions that we sell into that ecosystem are fungible.

So they can be sold to multiple customers that will net out the puts and takes of kind of the broader market within China.

But, no, we feel very, very solid about the inventory dynamics and the revenue dynamics with respect to China.

We have been in that market for a long time.

We were a 2G player, a 3G player.

And now actually with 4G and our ability to expand reach, the market for us now is probably the best it's ever been.

Earlier in the year, you talked about divesting Trans-Tech.

I think it was a ceramic filter company.

And I think in your last 10-Q it looks like you're no longer are divesting this asset.

Can you talk what made you change your mind on that?

To answer your question specifically, they continue to be part of a business.

We haven't gone ahead with that sale, and it's just a business that at this point we're comfortable keeping.

And we think that there is some growth opportunity going forward associated with it.

Craig Hettenbach of Morgan Stanley.

Please go ahead.

Yes, thank you.

Just going back to the inventory build, do you think this will be kind of a one-quarter issue?

Or is it something that, you know, it takes kind of into December quarter to work down?

And then any kind of sense of just for the gross margin impact that you are seeing as you have to throttle back a bit?

Yes, as far as where we think it's going to be, it's going to be flat to slightly down going into this quarter.

But remember that's also supporting higher revenue growth going forward.

So some of that is impact of the revenue growth.

The turns are going to begin to move back to historical levels.

So as far as the velocity of the inventory, you are going to see us get back there very, very quickly.

Got it.

And then just going from a dollar content perspective as you look into the full and upcoming launches, just the general sense as to how you feel about the growth in dollar content?

We feel very positive about the growth in dollar content.

And I know I have said it a couple of times already in the call.

It is really two-fold; it is continuing to do well in our core business and our core opportunities in mobile.

But also getting a larger reach into some of these other opportunities within a handset.

And you'll see that borne out by leading customers.

Harsh Kumar of Stephens, Inc.

Please go ahead.

Hello, Liam.

First of all, congratulations on your new position.

One of the questions we get a lot from investors is about your bar strategy or lack of it.

How many of the upper end slots in filters can TC SAW address?

And eventually what would you have to do to be able to get to that upper level of filters?

Sure, thanks, Harsh.

Well, as I outlined earlier, we can address the upper level of filters today.

We do it with Foundry Partners, for example.

We would love to be able to build it in-house, and that is something not out of our reach.

It just isn't there today.

Our TC SAW capability has moved up in frequency.

Where it was largely just a low band play, maybe 600 mg or 900 mg, we now have that technology well over 1 gig, getting close to 2.0 and 2.5 gig.

And again, back to what I was mentioning, we don't have an appetite for selling discrete filters.

When we sell a filter, it is wrapped within a complete system.

So the filter contributes some level of performance.

But you also have your HBT, your switch, your MCM and your ability to minimize losses within your layout.

So with Skyworks, virtually all that I mentioned is controlled in-house.

So think about us as a system solution player.

Filters play a role in that system, but the entirety of the architecture is what matters.

So we have won programs with Huawei; we're close with other customers.

There may be a few opportunities where optimal filter performance is the number one requirement.

That may be the case for some of the discrete applications or maybe some super high performance high-band sockets.

Today, perhaps, we can't address that.

But we have the engineering talent, the filter assets, the people and the processes is in place to continue to push that envelope and grow.

Great.

For my follow-up, Liam, what are the one or two major focus areas for you in the first 12 months of your CEO hood?

Yes.

Yes.

Sure.

Thanks.

Well, number one, we definitely want to continue this push by leveraging our core in mobile and taking advantage of this expanding opportunity that we mentioned: receive side technology, Wi-Fi technology, GPS power management and others.

And try to create the same systems level approach in that section that has worked so well for us in SkyOne and in transmit.

That is one.

The second is stepping up in IoT.

I mean, this is a market we've talked about for the last few years.

We talked about broad market.

But within that, the IoT landscape and the class of customers that we engage with today is phenomenal.

And we have a unique opportunity because most of the players in IoT feature one or two connectivity topologies.

We have Wi-Fi, we have Bluetooth, we have ZigBee, we have low power technology, we have power management, and we have a tremendous know-how in how to make connected things work and make them work wirelessly.

We're excited about that.

We are going to put more resources around that part of our business.

Some other opportunities that have really come along nicely, albeit still quite small, are markets like automotive.

We are being pulled into some of the premier players that we mentioned in the opening remarks.

Bringing in full LTE modules in automotive -- very high performance, high reliability modules.

That's looking good.

So we're going to fire on all of those cylinder; and then from there, continue to drive with the best people and the best execution in our space.

Craig Ellis of B. Riley.

Please go ahead.

Thanks for taking the question.

I'll start with the question for Don.

Don, if I approach the gross margin issue in a different way.

As you look at getting from where you are back to those 58% incremental gross margins and prioritizing the improvement drivers that can close that gap.

What is on the list?

It sounds like getting inventory down is one item.

I think I heard you mention that filter insourcing is another.

But what else is on the list?

And how quickly do those different factors come into play and really provide tailwinds for the margin structure of the business?

Yes.

They come in very, very quickly.

Part of it when we talked about the inventory issue and the level loading that has been going on, even though the hybrid model serves us really well where in a down quarter we're able to pull production capacity and externally.

You are still not during this period -- we weren't running completely full.

So that is going to be something that is very quickly going to get us back up into the incremental margin tract and that is a big driver of this.

The other thing is the new product launches as we move forward.

We have said we are very focused on every new generation of products.

going to provide incremental margins.

So that will all be in the mix as we move forward.

We're excited about some of the IoT opportunities, as Liam talked about.

Those are the things, Craig.

And we have a lot of confidence in the visibility to get, down the road, to the 53% target.

That's still right in front of us for sure.

Okay, and the follow-up is for Liam.

Liam, Skyworks I think has been well-known for being an above-industry average grower.

It doesn't look like it is playing out that way this year, but we understand the challenges that exist with the large customer.

The question is how patient will you be with the business in getting back to above-industry average growth organically?

And at what point will you feel like you have to press for M&A to diversify the business and get back to some of the growth rates and relative growth rates that we are used to seeing from the Company?

Sure, Craig, that's a great question.

First of all, I am committed and have great confidence that the organic business, the organic franchise, will be an outperformer in items of growth.

We are a bigger Company than we were a couple of years ago.

There is some level of maturity in unit growth and mobile which has been the biggest market for us.

But we're able to augment that with the share moves that we've talked about.

And think again about the usage case -- the entities that use mobile technology and what they want -- and it is daunting.

So I think we will be solid in core mobile.

And I'm very comfortable with the opportunity with TAM, given some of the new architectures and road maps that we have visibility into.

Broad market needs to become much more of an IoT play for us.

I think that is really what broad markets means now, and we have great solutions for it.

I think we need to put more people behind it and more engineering and help bound folks behind that.

That should work.

Now in parallel, M&A is absolutely an opportunity for Skyworks.

And we have a tremendous balance sheet.

We generate a ton of cash, and I think we will be able to do the right deal when it comes about.

Having said all that, day-to-day we're running the franchise; optimizing the franchise; doing everything we can to continue to put the growth up, the margins up, and satisfy our customers.

M&A is another area that we will continue to pursue.

Mike Burton of Brean Capital.

Please go ahead.

Hello, thanks for letting me in.

Obviously we're a little early to be talking about the December quarter.

But given your visibility into product ramps and inventory levels, how do you think we should think about the December quarter relative to kind of normal seasonality?

I think it has been bouncing around quite a bit, but kind of in the mid-single digits historically.

Yes, Mike, I think at this point again we can provide some color on it.

We're not into guiding the numbers.

But I think if you look at some of the historical growth opportunity of high-single digits, that is a number that I think is reasonable for you to be modeling right now when you think about that opportunity.

Great.

Thanks.

And, Don, also your thoughts on OpEx going forward.

Anything relative to BAW development or anything else that we should think about as we frame out our models?

Thanks.

No.

I mean BAW OpEx, the engineers that we have in the joint venture are our operations in Japan are already in the run rates.

And the investments we make will continue to be the headcount, which is primarily going to be engineering focus.

That has tended to be where we've done it.

And I would go ahead and model after the December quarter.

If you're adding about $2 million a quarter from that level, I think that's a reasonable assumption as we move forward.

You can see during this last three quarters that with the backdrop that we have been dealing with, we've done a good job of managing that number fairly flat during that time frame.

But going forward, we will be making investments; and it will be primarily headcount.

Vijay Rakesh of Mizuho.

Please go ahead.

Hello.

Just on the filter capacity, how much capacity are you adding this year?

And is TDK completely insourced now?

Could you repeat that?

In terms of filter capacity, how much capacity are you adding this year?

I know you were sourcing some filters from TDK.

Is that completely insourced now?

Yes, I mean the filter capacity right now we are in pretty good shape.

There is a possibility, as we try to move into certain specialty filters and perhaps move up in frequency, there could be additional CapEx.

But we made a very robust move in capital, expanding our line that we talked about.

We now have about 3X the capacity that we had a couple of years ago, again, with a number of platforms and customers lined up to consume that.

So that is where we are in filters.

Yes, we do continue to buy standard devices, standard filters from third parties, TDK one of those.

And that is potentially something that could change over time.

But right now, they are our supplier for some of our filters.

That is correct.

And then on the BAW side, you talked about building out your own BAW filters; you licensed it.

Where are you in that road map?

Thanks.

We're still looking into that as what is the right path to continue on that pace.

And we absolutely plan to play in high band.

We're playing in it now.

I talked about the Huawei platform, and there are a few others.

That is something we will give you a little bit more color on perhaps in the next call.

But it is an area that we absolutely understand what is needed to win.

We are winning today with our current strategy, and we will look at enhancing our strategy as we go forward.

Thank you.

Quinn Bolton of Needham & Company.

Please go ahead.

Thanks for taking my questions.

Liam, I just wanted to ask.

As you look back over the last year given some of the inventory problems especially with large customers, to the extent you had more of your products flowing through consignment hubs, do you think that would have limited some of the volatility seen in the business?

And if so, is there a push to try and bring more customers into consignment hubs going forward?

And then I have a follow-up for Don.

Yes, Quinn, well, hindsight you never how it would look.

So consignment and hub, some of our customers demand it; and we work with them on it and it is fine.

Others, they don't operate with that model; and it works out fine too.

I think we have a unique situation here in the early part of the year.

I think all of us in tech, at least in mobile on the ecosystem and our peer group, felt the wrinkles on that.

We have learned from it to some degree, but I don't know if that would have been mitigated or altered with a different supply chain model.

Ultimately, the products that we build go into end products that get sold through the channel.

I think that ultimately that's all going to level out at some point.

We're not too concerned about it.

Again, we have one of your larger customers now in Asia that is requiring a hub arrangement with us.

So we have to work through that, and that was actually part of our inventory here that Don mentioned.

One-time build.

But there isn't anything significant around being in or out of the hub consignment play.

Got it.

And then for Don, with the higher dividend in the share repurchase, is 40% of free cash flow to shareholders still a good target?

Or are you thinking of moving that up to a higher level?

We have been running a little higher than that.

I think you could use 50%.

That's kind of a good - that's what they are trying to model.

I think that's fair.

Okay.

Great.

Thank you.

Our final questions come from the line of Chris Caso of CLSA.

Please go ahead.

Yes, thank you.

Just some clarification from some of the earlier comments, particularly with regard to utilization plans in the second half of the year.

As the inventory comes down, are you expecting the utilization levels in the facilities to remain constant?

And then I guess according to the answer for that question, what impact on gross margins would you report?

As we go forward, we actually would expect them to go up slightly.

We have kept the factories fairly full with the hybrid.

But if anything, as you look into the earnings growth as we go forward, we expect that to come up a little bit.

So that is a positive impact to the margins as we move forward obviously -- whenever we can maximize the internal capacity.

Great.

That is clear.

Thanks.

Just a follow-up with the comments on China.

You understand -- it sounds like you feel comfortable with what you're shipping against demand levels in China right now.

Just to be clear, are you expecting growth from your China customers in the second half versus the first half?

Yes, Chris, we are; we are expecting that.

I think what we're seeing is kind of a nice bundle of higher-performing players that are adopting some of that real rich content that we spoke about.

That's one area.

And then secondary, kind of a value tier, we're seeing a nice move here in customers that become exporters into emerging markets.

So it is twofold.

Performance is going up in China.

We are starting to see some real richness.

Huawei is one example.

There are a few others; Huawei is one.

And then we're also seeing this great emerging market play that allows us, through MediaTek and Spreadtrum and others, to participate in an opportunity to connect that 3 billion unconnected.

So it is twofold; and second half, we'll be stronger in China.

Very helpful.

Thank you.

Thanks.

Thank you.

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

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

Thank you, Operator.

And thank you all for participating on today's call.

We look forward to seeing you at upcoming conferences and events.

Thank you.

Thank you.

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

We thank you for your participation.

You may now hang up.