思佳訊 (SWKS) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to Skyworks Solutions' first-quarter FY17 earnings call.

This call is being recorded.

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

Mr. Haws, please go ahead.

Thank you, operator.

Good afternoon everyone, and welcome to Skyworks' FY17 first-quarter conference call.

With me on the call today are Liam Griffin, our President and Chief Executive Officer; and Kris Sennesael, our Chief Financial Officer.

Before I begin, I'd 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 recent 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 non-GAAP financial measures, consistent with our past practice.

Please refer to our press release within the Investor Relations section of our Company website for a complete reconciliation to GAAP.

With that, I'll turn the call to Liam.

Thanks Mitch, and welcome everyone.

The Skyworks team delivered exceptional results in the December quarter.

Let me begin with a few highlights.

We achieved revenue of $914 million, up 9.4% sequentially and above our guidance range.

We expanded gross margins to 51.2% and operating margins to 38.8%, illustrating strong operational execution and prudent expense management.

We produced record earnings per share of $1.61, $0.03 better than our guidance.

And perhaps most importantly, we generated nearly $0.5 billion in cash flow from operations in the quarter, another record for Skyworks.

In addition to our strong P&L and balance sheet performance, I'm especially pleased with our design win execution, particularly at marquee customers.

Of note, we secured SkyOne platform wins with multiple Tier 1 OEMs, extended our leadership position in diversity receipt systems and secured a key win in our custom high band PAD portfolio.

We ramped fully integrated low- mid- and high-band solutions, integrating SkyBlue technology for Huawei's Mate 9 platform, their flagship phone.

We launched multiple devices across Samsung's entire portfolio, and gained momentum in China, with key wins at market leaders Oppo, Vivo, Meizu, and Xiaomi.

All of these wins were captured by resolving the growing complexity and performance requirements inherent in today's advanced global architectures.

Specifically, we're seeing the continued shift to highly integrated transmit solutions, leveraging our core capabilities in gallium arsenide, temperature compensated soft filtering, and enhanced power management.

In addition, we are benefiting from the rapid move toward carrier aggregation, a major catalyst in driving higher data rates with expanding bandwidth in both up-link and down-link transmission.

In parallel, we continue to expand our opportunity by growing our content reach, with new revolutionary diversity receipt systems specifically targeted at the most complex carrier aggregation challenges, as well as a growing suite of analog solutions from Wi-Fi, GTF, antenna tuning, signal conditioning, and more.

Now moving onto our broad markets portfolio and IoT.

We expanded our design win pipeline to include wins with Netgear home security systems, Arris cable modems, as well as Comcast, and Rogers, with carrier grade broadband gateways.

In addition we secured design wins supporting the latest voice assistant technology from Amazon, Google, and Microsoft.

We also capitalized on the newest trend towards home Wi-Fi mesh networking with key wins at Linksys, Ubiquiti Networks, and other leading OEMs.

Finally, we broadened our footprint across the automotive sector, leveraging a diverse array of wireless protocols supporting connected car applications, vehicle-to-vehicle communication, and 4G telematics.

In this past quarter we're pleased to have consummated a strategic design win at the leading US electric car OEM.

Our Q1 results, strong outlook and design win momentum reflect solid traction spanning our mobile, IoT, and broad market portfolio.

The success we are demonstrating is part of a secular multi-year theme, and we are still in the early innings.

At a higher level, Skyworks is at the epicenter of a sea change in mobility.

Our end markets are driving a substantial move from brick and mortar to a rapidly growing mobile economy.

This trend places an unprecedented burden on analog RF and mixed signal performance, vastly increasing the value and utility of our solutions.

It's compelling to see how many different avenues mobile technology now supports, whether it's streaming 4K video, social media, mobile payment, or rapidly evolving areas such as augmented reality, virtual assistance, and the connected car.

Popular apps including Facebook, Uber, Netflix, YouTube, Spotify, and Wave all share key characteristics.

They require ultrafast, low latency, highly secure, and efficient connectivity, as well as location-based services.

These challenging needs are invariably facilitated by an integrated Skyworks engine.

Importantly, we uniquely support all of the wireless protocols enabling these diverse applications, including Wi-Fi, Bluetooth, ZigBee, GPS, and LTE.

Further, 5G represents a massive growth opportunity for our industry, and certainly for Skyworks.

In fact, market projections suggest 5G data rates will approach 10x the speed of card 4G and LTE systems.

To put this into perspective, downloading a full-length HD movie in 3G took one day.

In 4G, the same file took minutes.

On a 5G network this content will be downloaded in mere seconds.

At the same time the connected car is yet another catalyst that offers significant opportunity for Skyworks.

Looking out over the next few years, the amount of data that will be delivered to and from the car is estimated to be 5 to 10 times more than the bandwidth used by today's smartphone.

For instance, by 2020 a single autonomous car is expected to consume 4,000 gigabits of data per day in realtime diagnostics, positioning, vehicle-to-vehicle communications, and that's equivalent to the daily data consumed by more than 2,000 smartphone users in 2017.

Skyworks is uniquely positioned to capitalize with solutions that solve all of these daunting connectivity challenges, setting the stage for out-performance across current and new markets.

With that, I will turn the call over to Kris for a review of our financial results and Q2 outlook.

Thanks, Liam.

Revenue for the first fiscal quarter was $914 million, up 9.4% sequentially and exceeding our guidance and consensus estimates.

Gross profit was $468 million, or 51.2% of revenue, and operating expenses were $113 million.

As a result, we generated $354 million of operating income, translating into 38.8% of operating margin.

Our tax rate was 14.7%, driving net income of $302 million, or $1.61 of diluted earnings per share, exceeding our guidance by $0.03.

Turning to the balance sheet and cash flow.

Cash flow from operations was a record $496 million, driven by higher profitability and ongoing improvements in working capital.

In particular, DSOs declined from 45 to 37 days, while days of inventory declined from 94 to 86 days.

Improvements in overall working capital generated over $100 million of cash flow in Q1.

Capital expenditures were $50 million, about 5% of revenue, and in line with our target model.

Further, in Q1 we repurchased 1.4 million shares of our common stock at an average price of roughly $76.

Finally, we ended the first quarter with a cash balance of $1.35 billion, up from $1.8 billion (sic - see fourth quarter 2016 press release, "1.08 billion") at the end of Q4.

Now moving to our outlook for fiscal Q2.

For the second quarter of 2017 we anticipate our revenue to be $840 million, up about 8% compared to Q2 of last year.

At this revenue level we expect gross margins to be in the low 50% range, with operating expenses of approximately $115 million as we continue to invest and grow initiatives, including our IoT business.

Below the line we anticipate roughly $0.5 million in interest and other expense and a tax rate of approximately 15%.

We expect our share count to be roughly 186 million shares.

Accordingly, we plan to generate earnings per share of $1.40 in the second quarter, up 12% year over year.

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

Thank you, Kris.

As our first-quarter results and outlook illustrate, we are off to a strong start in FY17.

We delivered solid revenue and earnings, set a record for EPS and quarterly cash flow, while guiding above March quarter consensus estimates.

Our profitability and increasingly strong cash generation is allowing us to fund growth and deliver higher returns to our shareholders.

In fact, the new $500 million share buyback authorization announced today reflects the confidence of both the executive team and our Board with respect to our strategic outlook.

Skyworks' systems level expertise, operational scale, and deep customer engagements are enabling us to capitalize on the rapidly expanding mobile and IoT ecosystems while positioning us for 5G leadership.

That concludes our prepared remarks.

Operator, let's set the lines up for questions.

(Operator Instructions)

The first question will come from the line of Harsh Kumar with Stephens.

Please go ahead.

Hey, guys.

Hey, congratulations.

Tremendous quarter and guide.

Liam, let me ask you.

At this time usually in the year there's a lot of movement and a lot of concern amongst investors about the end markets and the different geos.

Would you be able to comment for us on where the inventory stand and what you are able to see in the marketplace at this time?

Sure, Harsh.

For us right now, [what] the market backdrop looks quite good.

We continue to see an increasing push in mobile for higher complexity, higher performance and that for us, as you know, translates into opportunity.

It's not all with one or two accounts.

We're starting to see some great penetration with leaders in China, we mentioned Huawei, certainly large players in the US, large players in Korea are all exhibiting that.

And then in parallel, and we've talked about this for awhile, but it's really coming together nicely that our broad business, our broad market portfolio's continue to grow.

Looking at a year-over-year basis we're in the 10% to 15% year-over-year growth rate with that opportunity.

And that provides us another boost for us in terms of top line.

And Liam as my follow-up, would you be able to tell us what your largest customer was as a percentage of revenues?

It was slightly above 40%.

Thanks guys.

Congrats again.

Thanks, Harsh.

Next we'll go to the line of Blayne Curtis with Barclays.

Please go ahead.

Hey, guys.

Thanks for taking my question, and I'll echo the nice results.

Liam, maybe just -- you talked about you're happy with design progress at marquee customers.

Maybe as you look at the rest of the year, where do you see the biggest opportunity to gain content, if you can add any color by product or customer region would be helpful?

Sure.

Sure, Blayne.

Well, what we're seeing is very good success in keeping pace with our core architecture, SkyOne architectures, switching architectures.

We are now augmenting this with new technology and what I call an expanding product reach, doing great work in carrier aggregation both up-link and down-link.

We have some unique solutions that we've really pioneered in the industry around down-link receive side, addressing CA and the complexities.

We're taking that kind of an engine and pushing that forward to names like Huawei and names like Samsung and some of the other China players.

Our GPS technology is getting adopted now on a quite consistent basis.

Wi-Fi has moving to MIMO architectures in mobile and also in some of the broader markets.

So it's really quite a mix.

And what I'm really pleased about is our ability, our team's ability, to look long at these challenges in mobile and then architect, very unique solutions with customers hand in hand to finally deliver what makes Skyworks special.

So we see that trend continuing.

Thanks.

And I just wanted to ask on the gross margin, I know it's seasonally weakest period, down 100 basis points.

If you could talk about the puts and takes, and then maybe your outlook for margins for the rest of the year.

Yes, absolutely.

So first of all, I'm pleased with our execution in Q1 with gross margin coming in at 51.2%.

Looking at Q2, obviously this is a seasonally softer quarter with revenue down approximately $74 million, $75 million.

And so that you can see reflecting into the gross margin.

Having said that, we are feeling, and we are very well positioned for further margin expansion in the second half of 2017, as we expect the next three quarters to see sequential revenue growth going forward.

Thanks so much.

The next question comes from the line of Vivek Arya with Bank of America.

Please go ahead.

Thanks for taking my question.

Just one more on gross margins, Kris, if I could.

When I look at last year, there was a bigger revenue drop from December to March, and I believe gross margins declined about 60 basis points.

I think this time you're guiding to somewhat higher decline in gross margins.

Is it just prudent factory management, utilization management?

What is giving a bigger hit to gross margins this time versus last year?

So we are talking here a couple basis points, right.

So we will see where we come in with the actual Q2, but it's definitely showed that last year there was some impact to rebuild.

Well, now for the last two quarters in a row, we have been working on an inventory reduction program.

Again, it's on or about the same level of gross margins.

And it's really important for us to go and further drive gross margin expansion in the second half of 2017 as we see the strength in the business and the revenue growth coming in.

Let me add to that, Vivek.

We're very confident that, as Kris articulated, as we step through the second half fiscal and second half calendar year you're going to see revenue and margin step up.

So we are committed to continuing that path.

Got it.

And as my follow-up.

Liam, if you could just give us the breakdown you usually give between the different product lines and integrated mobile, broad markets, et cetera.

But the bigger question is, you gave a lot of detail around your IoT and automotive wins.

When I go back to the 10-K you had filed, outside of Apple your sales grew about 8% last year or so.

I'm just wondering, how are your sales doing outside of Apple in December and in March?

If you could just give us some color, what your design win and progress has been outside of that large customer, whether it's by product or segment or what have you.

Thank you.

Sure.

Our growth and success outside of our largest customer has been outstanding.

Huawei became the number two account for us this last quarter.

They are going to continue to be one of our leaders.

We have our customer in Korea, will continue to grow significantly into 2017.

And our largest customers will set up very well for us as well as we address very complex architectures with compelling products.

So we feel really good about that on the mobile side.

Then let me remind you that the broad market portfolio from infrastructure to IoT to early stages of automotive all look good.

And the staff there are double digit year over year.

Thank you.

Next we'll go to the line of John Vinh with Pacific Crest Securities.

Please go ahead.

Hi.

Thanks for taking my question.

My question is, can you talk about what your expectations for the RF TAM growth for the industry and flagship smartphones this year?

And maybe talk about what your expectations of growth is relative to that TAM?

I know historically you've talked about that TAM growing at a 10% to 15% CAGR?

Sure, John.

I think part of the driver there, as you probably know, is just really the upgrade cycle across the board.

So you have your most developed accounts that will be moving up with higher levels of complexity bringing in more complex CA architectures, maybe even going MIMO on the radio, potentially that's out there.

And then you have your kind of value tier players that are moving up at maybe at a higher rate percentage-wise but haven't quite hit the dollar value of the top tier.

So we address all of that.

We're not a player that spends much time with the 2G or 3G market.

So the segments that we address, we think it is a double digit TAM opportunity.

One of the things that we've been doing at Skyworks is we continue to innovate and elevate our portfolio.

So there's products today that we are selling and enjoying share gains that just didn't exist three or four years ago.

So we're continuing to push the envelope.

There's also a lot of technology that flows between mobile and IoT, our very strong portfolio in Wi-Fi, we have a Bluetooth portfolio, we have a GPS portfolio.

None of that is really part of the traditional RF TAM, but it matters.

Our SkyBlue technology for power management is becoming more and more pivotal for us in design wins.

So it's really a broadening suite.

The overall TAM, probably 10% to 12%, but I think we have some unique opportunities to address it with our portfolio.

Great, thank you.

My follow-up question is on 5G.

Liam, you seem to be very optimistic about your prospects in 5G.

If I look at some of the initial frequencies being discussed on 5G, they tend to be much higher than what we've even seen at 4G.

Can you just break down the opportunities for you to benefit from content growth in 5G?

And also maybe can you talk about the role of TC SAW within 5G, given the higher frequencies?

Yes, absolutely.

So in 5G, it's really going to be a game changer for the space.

It could present up to 10 times the data rate that we see today in 4G.

There's three big themes when you look at 5G.

You're trying to create a faster data pipe, lower latency, more efficient.

It's about increasing bandwidth, which is going to drive carrier aggregation up a click; higher modulation schemes, so you're going from 256 QAM maybe to 1,024; higher density, that's complexity.

There's MIMO architectures that will stretch that pipe.

All of these themes are very important.

And if you think about frequency for a minute, John, if you move up to some of these higher frequencies in 5G, they are very often TDD modulation.

So time division duplexing.

And TDD requires band pass filtering.

It doesn't require duplexers.

So we have a unique opportunity there to stretch our TC SAW capability to higher frequencies in a TDD domain and gain additional share.

Great, thank you.

The next question will come from the line of Craig Hettenbach with Morgan Stanley.

Please go ahead.

Yes, thank you.

Question on growth for this year.

As you look through, can you give us some sense in terms of whether it's the leading smartphone OEMs in North America and Korea versus China, where you think your growth will skew in 2017?

Sure, Craig.

Yes, the growth should span across our larger customers.

It should also span across kind of what I would consider a value tier portfolio, the Oppo and Vivo and maybe a lesser extent Meizu and Xiaomi moving up.

Huawei we mentioned today is now a clear number two customer for us.

They have really stepped up in terms of the content, the richness of content and the reach of technology providing opportunity for us to deliver mid band, high band, low band solutions, power management, diversity receive, address CA, up-link and down link.

We see a great opportunity with kind of the value tier moving up, and then the high tier actually increasing their content.

Those will be important themes.

And then the additional in parallel opportunities in broad markets continues to span, and we expect double-digit growth there for the foreseeable future.

Got it.

And then as my follow-up on the buyback announcement, can you put that into the context in terms of as you evaluate internal growth opportunities and also just M&A in the industry?

Yes, we are definitely are committed to continuing to return cash to the shareholder with our dividend program and our share buyback program.

We returned $106 million in Q1, repurchasing 1.4 million shares in Q1.

And so we have now put in place a new $500 million program.

Historically we have been returning 40%, 50% of our free cash flow to the shareholders.

And so that's something that we will continue to do so.

The next question will come from the line of Steve Smigie with Raymond James.

Please go ahead.

Great.

Thanks a lot, guys.

You guys have been seeing pretty good dollar content gain on flagship phones, I think about the order of about 20%.

And maybe you addressed this a little bit, but I was hoping you could talk a little bit about if you expect to continue to see 20% growth, dollar content growth across flagships?

But I also want to drill down on the midrange phones where it seems like there's a lot of opportunity.

Could you see sort of 20% growth at this point on midrange phones, or is it -- should I be looking at a different relative growth?

Yes, sure.

We'll both for the equation there are critical for us.

Certainly flagship phones and what we are seeing there, it's really the great opportunity.

Actually, what we're really happy about is we talked a lot about this technology and this ecosystem within mobile, and that tremendous ecosystem, all these great applications that we enjoy driving change in hardware, and it's happening.

And each year, every customer has different cycles, but every successive generation of smartphone technology that we address has had increasing burden, increasing challenge, and increasing opportunity for Skyworks.

That's what drives the content for us.

We've also been able to push our reach and move into areas within this technology, new areas to enjoy further gain.

So we feel really good about that trend continuing.

Our teams are doing a phenomenal job right now with the most critical customers with the smartest people on the customer end and in Skyworks to make sure that happens.

So that's a big part of the story.

But in parallel, you hit on the other key point.

There's a tremendous volume of mid value tier players producing smartphones today that haven't yet enjoyed that big step up in performance.

And if you look at Huawei as a case study, we've worked with them for many, many years and had a great relationship and been involved in just about every platform.

And the big swing for us is when finally the technology and PAD technology and power management and Wi-Fi and some of these complex systems were adopted, the revenue accelerated.

There's a value tier today that's significant that hasn't yet made that movement.

And we're going to work very closely to make that happen with them.

Okay, great.

And I was wondering if you could talk a little bit about China overall as a percentage?

Huawei's shot up a lot.

I was wondering if you could still quantify, say, China on its own as a percent, as a bucket, and maybe with and without Huawei?

And then if you're willing, what Samsung was as a percentage of revenue in the quarter?

Sure, well China all-in for us is about 25% as revenue, and it's not just mobile.

We have a pretty strong infrastructure position in China across Huawei, across DTE and others.

The mobile business is strong.

And then there's other broad market portfolios there.

It's about 20%, 25% of all the revenues there.

What was the second part of the question?

It was Samsung.

So Samsung just fell below the 10% level.

And we all know why that is, but we see a nice bounce back of the Samsung business already starting in Q2 and in the second half of 2017.

Okay, thanks.

Congrats on a good quarter.

Thank you.

Next we will go to the line of Ambrish Srivastava with BMO.

Please go ahead.

Hi, thank you.

I wanted to focus on the free cash flow.

Last couple of quarters, so now this is two quarters in a row, your free cash flow margin has gone up to 50%, and you laid out -- thanks for laying out the contribution from the working capital levers that you were able to put.

The question is, how should we think about what is the steady state free cash flow margin profile for the Company, because it has jumped up significantly?

And then second, tied to that, and I'm not sure if you answered the question that was asked earlier, how to think about the buyback that you just announced vis-a-vis your appetite for M&A?

Is that a sign that you're more comfortable in the business and returning shareholder value just via that, or it's a sign of that plus the fact that you're now generating enough cash that you can make an acquisition as well as follow this path?

Thank you.

So I'll take the first part on free cash flow, and I'm really happy with the performance there, especially in Q1 with almost $0.5 billion of cash flow from operations.

We have been focusing very strongly on working capital management, driving down DSOs, driving down days of inventory.

And so that has helped a lot in the quarter.

We're at the level right now that there is not a lot of improvement from that level now.

And so you won't see a repeat of those further improvements in working capital.

But having said that, when you look at our business model, we will continue to generate a ton of cash every quarter going forward.

Yes.

With respect to the M&A element there, just to remind everyone that we are very focused on our core franchise in connectivity.

It's a significant market.

There's a great deal of investment going forward there that is turned to be profitable for us and fruitful for us.

But at the same time, we do evaluate M&A opportunities.

We look at a lot of potential transactions.

We have a very high VAR with our financial consideration on that end, but we keep an open mind.

We announced the $500 million share repurchase program here today.

And we certainly have the opportunity if the right deal comes about to exercise an M&A transaction.

Next question comes from the line of Quinn Bolton with Needham.

Please go ahead.

Hi, guys.

Let me add my congratulations.

Liam, wanted to first ask the guidance with the better than seasonal trend.

What do you attribute that to?

Is it dollar content gains on new platforms?

Is it the end of the inventory reduction program you mentioned earlier on the call?

Yes, absolutely.

It's really about our ability to outperform on design wins that were consummated kind of in the middle of the prior year and now flowing forward.

So we really are excited about that.

The content reach again is expanding.

We're engaging more and more with fully integrated SkyOne solutions rather than power amplifiers and filters separated.

The carrier aggregation products that we put forth and diversity receive are quite compelling in the market.

And then again, the roster of IoT accounts that we're bringing forward continues to grow; and the content within those applications where maybe we started with a single Wi-Fi device and now we have 3x3 devices; we're embedding GPS more and more; we've got Bluetooth opportunities.

So the whole spectrum has expanded.

And as we look at March, we feel very good about our guidance there.

As Chris indicated, backlog coverage is solid, we're fully booked.

And it's a very balanced quarter as well.

Great.

And then the follow-up, just you mentioned on the prepared comments a couple of high band PAD wins.

That an area you've been under-penetrated.

What's your outlook for that business going forward, and can you comment whether those are using outsourced BA filters, or are you starting to be able to source some of those filters in the high band with TC SAW internal capacity?

Yes, sure.

Sure.

Great question.

As you know, when we go to market our strategy is to sell a system solution.

So it's input to output performance, it incorporates our highly customized and curated gallium arsenide technology, unique filtering technology, SOI, packaging, testing.

The whole engine is really a Skyworks' signature.

And within that engine we select the best process and the best technology to deliver what our customers want and outperform technically.

So this is not the first high band win.

We had been clocking including design wins here for awhile.

This one was meaningful for us.

It did move us up to higher frequencies above 3 gigahertz.

Let me also remind you, I answered the question earlier, that in some of these domains there's a need for a TDD time division duplexing versus FDD, frequency division.

And that can change the technology curve and the selection as well.

So we'll continue to grow in that space, we'll continue to grow in mid band, we'll continue to move our TC technology up higher and continue to lead in low band as well.

Great, thank you.

Next question comes from Timothy Arcuri with Cowen & Company.

Please go ahead.

Thank you.

I guess the first question.

You did not answer before, revenue breakout by broad market, mobile and PA.

And then I had another question.

Yes, so the broad market was approximately 25% of total revenue, mobile was slightly above 60%, and so the rest, the power amplifiers, is slightly below 15%.

Great, thank you.

And then just a follow-up on BAW.

Given the trend in carrier ag to have front ends that are going to cover a mix of high and low bands, is there a trigger point where -- you guys are obviously bullish on TC SAW, but is there a trigger point where you decide you have to invest to add captive BAW?

And if so, what is that?

I'm just sort of wondering how you think about the decision to (technical difficulties) BAW on a emergent basis or to invest in it captively?

Thanks.

Sure.

Well, let me start with -- you mentioned carrier aggregation.

We have an incredible portfolio in carrier aggregation that -- it's nothing to do with BAW.

We can use TC SAW, we can use other capabilities, organic capabilities, and we're a market leader there without question.

Looking out, there are opportunities where higher frequency, high performance BAW filtering makes a lot of sense.

But we don't sell discrete devices.

So our plan is to try to create the best engine, the best complete subsystem that meets our customers' needs.

Many cases we can do it with our organic technology.

We do have a path, foundry partners to bring in BAW within our modules, if needed.

Our TC SAW capabilities continue to improve.

And if you look at spectrum, the most crowded spectrum is in the lower frequency bands, 700 meg up to 1.1 gig, very, very crowded.

TC SAW capabilities are ideal, bulk acoustic wave can't play at those lower frequencies.

And then there's frequencies that are very high with extremely tight performance needs where BAW is critical.

So we're not hindered by any of that.

We feel very comfortable with our outlook.

We have a lot of great technology choices.

And if you look across the peer group, there are some players in our space that don't have in-house gallium arsenide, they go to foundry partners.

So it's not uncommon to have a few points of technology where you outsource and partner, and we do that on occasion.

But invariably we use our own organic products.

Thank you.

Next question to go to the line of Cody Acree with Drexel Hamilton.

Please go ahead.

Thanks for taking my question.

Congrats on the progress.

Liam, maybe if I could ask that last question another way.

I guess, could you just talk about your filter road map, your capacity plans?

You had talked, or maybe your predecessor had talked previously, about specifically getting into BAW capability.

And I guess with those foundry partners in BAW, are you capacity constrained, are you limited as to some of the sockets you can get into just from a market availability?

Sure, sure.

Well, let me start with the organic product line.

So we have a really strong competitive weapon with our TC SAW facility in Osaka, Japan.

As you may remember, this came about through our joint venture with Panasonic, which is now a wholly owned entity with Skyworks.

And we have capacity to do about 3 billion units of TC SAW per year.

And we have room right now.

We're not at full utilization, but have a really strong pipeline going forward that's going to enjoy the benefit of those filters.

If you look at what we can do, just really again, it depends on the customers' need, it depends on whether you're in a frequency duplexing domain or a time division duplexing domain, there's nuances there.

We try to match the best complete system with the customer need.

We do have -- we are completely aware of bulk acoustic wave technology and what it can and can't do.

We have strong partners right now that we can bring it in on a foundry basis.

We continue to look within the walls of our Company to do it organically or construct devices that are just as competitive organically.

Some of that is TBD.

But I will tell you today, we enjoy a robust opportunity with the filtering we have today augmented by our gallium arsenide, our switching, our packaging, and our complete systems focus.

And then Kris, on the OpEx side.

You constrained spending through this last year where revenue was in decline but it sounds like you're getting right back into a bit of spending on IoT and other areas.

Can you talk about where you're spending and what your plans are for this year?

Absolutely.

So Q1 came in at $113 million, up $6 million from Q4.

But keep in mind that we started accruing for incentives again.

And so going forward we target to have our OpEx on or about 13% of revenue.

So you will continue to see some modest increases quarter over quarter there as well.

13% is actually, I believe, world-class, and so I feel good about that level of investments that we make.

We definitely make sure that we continue to make the necessary investments to further diversify the business in the broader market in IoT, and we won't hesitate to make those investments.

Thanks.

Congrats.

Thank you.

Next we go to the line of Toshiya Hari with Goldman Sachs.

Please go ahead.

Great.

Thanks for taking my question.

My first one is on China.

I was hoping you could provide a little bit more detail on what trends you saw in fiscal Q1.

If you can provide kind of a year-over-year number that would be great.

And also if you can talk about your expectations for fiscal Q2, again specific to China?

And then on inventory, how comfortable are you today in terms of inventory in China, both in the supply chain and also in retail?

Sure, sure.

Well, China of course is a meaningful growth driver for Skyworks.

I've mentioned earlier on the call it's about 25% of our revenue all-in.

And it's a market that consumes and exports.

So you have Tier 1 players moving up, names like Huawei.

And then there's an export market as well, and we can enjoy both sides of that.

One of the things that helped us in China is having a strong baseband partnerships, very tight coupling with high silicon captive to Huawei today, also a lengthy relationship with Mediatek.

And Mediatek it is really en route now to move towards higher levels of integration adopting SkyOne like structures from Skyworks, that's a big prop.

And the names like Oppo and Vivo continue to look strong for us.

We don't do much at all with the 3G and 2G white box market, so our revenues are really driven around the market leaders.

And I will tell you that right now Huawei is the one that's really stepping up in content and the others are moving along that curve.

So I think there's going to be some upgrade opportunities within 4G with some of the mid- and value-tier players within China.

And so on your second question on inventory in the channel, we actually feel very good about the level of inventory in the channel.

Most, if not all, of the inventory that we have with our largest customer has been consummated.

And so we don't see an issue in terms of inventory in the channel.

Right.

That's China as well.

So that's global and China specifically.

Okay, great.

And as my follow-up, I had a question on your production ramp in Japan.

I guess I'm curious, which inning are we in the ramp, and what are the implications for gross margins going forward as you continue to ramp that facility?

The facility has several innings of opportunity ahead.

It continues to be a competitive weapon.

And we've got a growing list of customers, an expanding set of new frequencies that we're going to be addressing.

So it continues to be an important weapon.

I believe right now, if we look at our outlook, we'll probably be okay for capacity for a bit.

But it just depends on how big our design wins are here going into the second half.

But nice thing is, factory's running well, increasing number of customers enjoying that benefit, and the demand signal for integration, integrated duplexes, integrated filtering for us has been tremendous.

And so we continue to in-source some of the filter fabrication there as well.

And we haven't really quantified that, but it's going to have a meaningful impact on our further gross margin improvement in the second half of 2017.

Okay.

Great, thank you.

Next we go to the line of Craig Ellis with B. Riley.

Please go ahead.

Thanks for taking the question, guys, and nice job on the execution.

Liam, I wanted to ask an intermediate to long-term question.

It's nice to see the business back to 8% year-on-year growth in the fiscal second quarter.

So the question is, is as you look at the business, what's your view on the potential for this return to year-on-year growth to be sustainable year-on-year growth?

And what do you think the right level of longer term growth is for Skyworks, given the portfolio mix that you have and the investments that you're making in the business?

Yes.

No, I appreciate that.

And you're right.

I think we've weathered a bit of a storm here in 2016 and most of the clouds there have abated.

And it's not just market shifts.

We're gaining share, we're creating new content, we're expanding in IoT and in broad markets, and it's meaningful and it's sustainable.

We're confident that the second half for us should be a double-digit growth rate year over year.

We think we'll have strength going into the next fiscal year as well, given our outlook and our design wins that we've secured recently.

So we feel good about it.

Again, there's room to go on the margin line, we're going to work that.

The demand side today looks very good and more diversified, I should add.

Thanks for that.

And then the follow-up, Kris, regarding the quarter.

You may have mentioned earlier, perhaps I missed it, but can you specify where the upside was from on a segment basis?

It looks like on a revenue mix basis it must have been coming from integrated mobile, but is that correct or was it somewhere else?

Yes, on a sequential basis, mobile was the strongest growth driver, absolutely.

Thanks, guys.

Next we go to the line of Anthony Stoss with Craig-Hallum.

Please go ahead.

Hi, guys.

My congrats as well.

You bumped up CapEx in the quarter.

I'm curious if you can give us more detail on what percentage of that is going towards TC SAW?

Also Liam, if you wouldn't mind giving us an update on -- I know your GPS newer solutions are starting to ramp.

An update on that as well as SkyBlue?

Thanks.

The vast majority of the CapEx was actually in our backend facility where we continue to expand our capacity.

And also on GPS.

Yes, GPS has really been prolific here over the last two or three quarters and forward-looking outlook as more and more devices now, location services matter, highly precise locations matter.

And we have some really unique things that we do in our Mexicali factory to shield and manage a complexity of GPS and the size requirements.

That continues to rollout.

And again, it's a big driver in IoT.

So we have attachments across mobile, but the number of IoT nodes that we could lever with GPS, I think, is quite compelling.

And that's another case where we are just starting to rack up the design wins.

We have really good technology, it takes advantage of the core IP that we have and the amplifiers that we have today in cellular and trying to design and shape those for other applications.

As a follow-up, I know you guys in the past have talked about a midterm goal of 52% gross margins.

Has anything changed in your view in getting there?

No, absolutely not.

We have our goal to get to the 53% gross margin with 30% operating expense.

And that gets you to 40% operating margin.

And so we're committed to that, and driving the whole organization very hard to go and execute towards it.

Great job, guys.

Thank you.

Thank you.

The next question comes from the line of Atif Malik with Citigroup.

Please go ahead.

Hi.

Thanks for taking my question.

Liam, good job on the execution since you took over last year.

My question is on the guidance.

Can you just qualitatively talk about how do you see the mobile and the broad markets in the March quarter relative to the down 8% sequential decline?

Sure, the broad Markets in IoT space should be up about 10% to 12% roughly.

Mobile is not typically bullish here in the March quarter, we do have unique customer dynamics where some customers in fact are up, even within mobile.

And that's all about content.

So it's not a particularly unusual signal.

One of the reasons why we're doing better than seasonal is just, again, a higher growth rate in the broad space, and also with one of our larger customers in Korea, a content step up which also provides a sequential gain in revenue.

Okay, Then Kris, on the last call you talked about 100 basis points of gross margin improvement exiting FY17.

And I understand that there's some sequential weakness in the gross margin guide because the revenues are coming down.

Are we still on track for that 100 basis points improvement exiting FY17?

Yes.

As I said before, Q2 is a seasonal soft quarter.

It's the low end of the gross margin.

And so we are driving really hard to further improvements in Q2 and Q3, as we see strength in the business and expect to substantially grow the revenue in the next two, three quarters.

Next we go to the line of Vijay Rakesh with Mizuho Securities.

Please go ahead.

Yes.

Hi, guys.

Just looking at the inventory, it looks like it stayed flat through the December quarter.

How do you see inventory exiting the March quarter?

Yes.

First of all, again I'm very pleased with the fact that we have been able to drive down inventory days.

Remember in Q3 it was 108 days.

It came down in Q4 to 94 days and we're now at 86 days.

Again, Q1 is a seasonally soft quarter.

And we do see a lot of strength in our business in the second half with double-digit year-over-year growth in the second half.

And (technical difficulties) the second quarter we are going to prepare for that, and so we are increasing our factory loadings.

And as a result of that you will see a increase in inventory during the March quarter, as well in absolute dollars as in days of inventories.

Got it.

And just one follow-up here.

On the gross margin, I saw you mentioned you still see a (technical difficulties) gross margin target.

The gross margin sustained at 50%, 51% for the last four quarters.

Can you give us what the puts and takes are?

Is there a [6-inch to 8-inch] transition, or how do you see the margins, what drives that?

Thanks.

So the further gross margin expansion is basically coming from three ways.

First of all, and I repeat myself here, but we do see drastic revenue growth in the second half of 2017.

And of course revenue growth helps with the fixed cost absorption and the margin expansion.

Secondly, we continue to execute on our cost reduction programs and operational efficiencies that will continue to help further margin improvements.

And then last, and we talked already a little bit about that; we continue to ramp the filter factory, continue with our insourcing into the filter factory.

And that will also further drive margin improvements.

Next we go to Rick Shafer with Oppenheimer.

Please go ahead.

This is Josh Burkhalter on behalf of Rick.

Congratulations on the great results.

I wanted to sort of re-ask a question that was asked previously, but on the longer term.

In the medium term, you mentioned you think you can grow above the RF industry in general.

I was wondering how much of that do you think is derived from broad markets versus mobile?

Sure, we'll take a shot at that.

The broad market opportunity is more unbounded, right?

There's really an infinity set of customers that we're addressing and moving the dial across the board, whether it be adding to new applications and new customers.

And then even within IoT, there's a content opportunity where the customers and consumers that get used to a low range technology want to augment it, perhaps, with higher end solutions.

Maybe they add MIMO and Wi-Fi, or maybe they go from a wearable technology that is just Wi-Fi and then it stretches to LT.

So there's an action there that I think has tremendous upside, and really the market continues to expand.

In mobile, mobile is more characterized.

I know there's a lot of detail on the unit count, there's a lot of detail on customer innovation and interaction.

But what is missed in mobile is, again, this tremendous economy that relies upon the hardware, relies upon the kind of technology that we offer.

And so what we see there, and it's been increasing, is a continued push for performance oriented solutions.

And every year there's a different requirement, there's a different opportunity for us to expand upon.

Maybe it's frequency bands, maybe it's bringing in new technologies.

We talked about Wi-Fi and GPS, they're happening, it happened.

In some cases, diversity received is a new solution for Skyworks.

So all that continues to move.

And then we have this major 5G upgrade cycle on the horizon.

It's a few years out, but Skyworks will be very well positioned there.

And when that does occur, you will have the backward compatibility for 4G and 3G.

So you'll basically have some duplication of content or some enrichment in content without the legacy going away.

So there's a lot of things on the horizon if you look out.

Again, the near term looks good, we talked about it.

But if you think long about where the markets are headed and the continuous demand for mobile technology and mobile data and the economy that we've been speaking of, it looks promising.

Great, thank you.

And then on the last earnings call you mentioned you had some mid band wins in China and also selling some SkyOne integrated products to Mediatek customers.

Are there any -- are those meaningfully contributing yet, and how should we expect -- how are you viewing the traction there so far?

Thank you.

Good question.

They're contributing, but there's a long way to go in terms of the adoption.

Huawei's talked a lot about they are embracing this technology now and its been great for them, it's been great for us, and I think it's going to propel their business with a performance driven product, a number of products.

We're seeing that move up a bit.

Mediatek is a partner of ours.

We're working with them and their reference designs to continue to bring the integration to the masses in China.

Some of the value tier players, Oppo and Vivo for example, are moving along that curve but they're still not to where we expect them to be.

So that's a continuous process.

And that doesn't mean units have to co-op, that's really content.

And again, that's a big, big opportunity for us, Value Tier moving up to mid level and high levels of performance and bringing the kind of technology that we have into their products.

As we are approaching the top of the hour and our allocated time, we have one final question.

It'll come from the line of Bill Peterson from JPMorgan.

Please go ahead.

Yes, thanks for sneaking me in and congrats on the quarterly execution.

I wanted to maybe ask within broad markets a few questions.

I guess first, can you help us understand some of the more, let's say, higher growth segments within broad markets and then compare that with the more legacy products for the [ample] base stations?

How should we think about growth in that in this 2017?

Sure.

Yes, I think the highest growth categories are really around the connected home, high speed access points and routers.

You've got these HD cameras.

We have design wins with the whole Google net suite.

We have design wins with the Netgear, Linksys, Ubiquiti, Wi-Fi mesh, that continues to roll.

And the content in some of these access points and routers and gateways can be very high, can be double digit content.

A lot of it is Wi-Fi, and there's other switching technology as well.

We are then taking that and spanning out into a variety of newer opportunities, early innings with products like drones and we have designs there.

Automotive we think could be a phenomenal catalyst for us for semiconductors in general and for Skyworks.

If you think about what really matters in an autonomous car, it's the connectivity piece.

We have cars today.

We're all driving cars, but connectivity is going to really matter.

So in order to make that market work, you're going to need very aggressive 5G solutions, massively expanded pipe, data pipe for both transmit and down-link.

All of that's going to be incredible opportunity for us in broad markets, and that's going to be out there a few years.

Cellular infrastructure has been a market we've enjoyed for awhile.

It's not the fastest growing market.

It's solid from a margin perspective.

And we have a number of players there that we're engaged with.

That will also go through a 5G upgrade cycle.

Thanks for that.

And then within broad markets too, I notice in the recent investor call last year, you talked about your various, let's say, tools in your tool chest.

And one of them you mentioned was in the presentation was actually GAN.

Just curious, where do you stand on GAN in terms of productization and strategy with GAN?

Maybe you're -- it seems like it's already (inaudible) anyway within GAN, but wanted to ask more of a longer ranging question relative to that part of your portfolio.

Yes, I mean, we have it within the portfolio.

It's not a significant piece but it does play in some of the infrastructure markets.

It plays in some optical products, we have a little bit of business there.

But we monitor the right technology for the application, for the customer need.

The gallium arsenide technology that we have, and as you know we have two very significant fabs and really highly customized and curated gas solutions that proliferate our portfolio.

We do have some opportunities with foundry partners to bring in SOI and some other variance around the semiconductor space.

So we have access to GAN, as needed.

It's not a mission critical technology.

We have access to it.

It may play further out in 5G, but at this point it's on our radar screen and it's an opportunity.

Thanks for the color, and congrats again.

Thank you.

Ladies and gentlemen, that does conclude our question-and-answer session.

I'll now turn the call back over for any closing comments.

Thank you, operator.

Thank you all for participating on today's call.

We look forward to seeing you at upcoming investor conferences and other events during the quarter.

Thank you.

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

Thank you for your participation.

You may now disconnect.