Skyworks Solutions' CEO Presents at the UBS Global Technology Conference (Transcript)

Nov.14.12 | About: Skyworks Solutions, (SWKS)

Skyworks Solutions, Inc. (NASDAQ:SWKS)

UBS Global Technology Conference

November 14, 2012 11:00 a.m. ET


David Aldrich – President & CEO

Steve Ferranti – Director of Investor Relations


Steven Eliscu

Good morning. Welcome to UBS’ Global Technology Conference. My name is Steve Eliscu, UBS semiconductor analyst. I’d like to welcome David Aldrich, President and CEO, along with Steve Ferranti, Director of Investor Relations from Skyworks Solutions.

David Aldrich

Thank you. Good morning everyone. Can you hear me out – oh I guess I am mic’d up thanks. Okay, why don’t we jump right in, I think we’ve got about 20 minutes of prepared comments and a little bit of time for Q&A and then a breakout session. So again thank you for joining us.

For those of you who have known us for a while, I think you’ll find that our strategy is pretty straight forward. It’s basically to focus exclusively on what we consider to be high-growth markets, markets where the wind is at our back and where we have differentiated technology. Today it’s all about scale and the ability to provide a better system performance, an easier time of integration for our customers who are struggling to deal with all the analog complexity of delivering smartphones and tablets and so on and so forth.

So our strategy is to focus on growth markets, to diversify technically and through scale advantages and to make sure that those markets and the technology we’re developing is differentiated long term, so we can have a sustainable advantage and we believe we have.

And then finally to make sure that as we increase our revenue and market share that we’re able to reliably convert that to earnings. And the mantra we use internally all the time and I think I’ve used with you in the past is that we look to produce diversified analog returns with the growth of the mobile Internet, and we’ll talk about what that means and specifically the returns we’ve been delivering, and we will deliver. But we think that’s quite unique because in today’s world, many companies who are highly diversified with high margins are struggling with growth. And then many growth companies are struggling to deliver high incremental margins and we believe we’ve got a mix of businesses that allows us to do both.

So, this chart just talks about that first element of strategy which is diversification. We went back five years, just to sort of do a little retrospective, and as you can see from the markets addressed, the customers we address, and ultimately the right products, we’ve moved technically from a pure RF company, PAEs and switches, to an analog and an analog mixed signal company. So when I talk today about our diversification and our differentiation, it’s much less about the traditional businesses you may have thought of us five years ago and it’s more about again the whole system experience. In a smartphone for example, it’s going from the power management or the transceiver all the way through the antenna and back. Power amplifiers, GPS, WiFi, antenna switch modules, PAs, complicated switches.

So we’ve moved our product offering up from pure RF into analog, and diversified analog because our customers need reliable system performance. And in order to deliver that, we needed to get broader. We needed to get bigger but we needed to get broader. In the middle from a customer standpoint, we’re quite proud of the fact that if you went back five years ago, we were delivering to the biggest mobile phone manufacturers in the world. And as those OEMs have shifted rather dramatically, our shift has followed that path without any loss in market share. In fact we’ve gained market share as each new OEM has emerged and today you see a lot of concentration particularly in smartphones and those are our best positioned companies. So we think we’ve navigated very well the shifts in OEM.

And then over to the left, our market footprint continues to expand, because not only do we want to ship more content into a smartphone or a tablet but we want to take that same technology and apply it into markets that have longer product lifecycles, that have a different degree of seasonality and cyclicality. So, you’ll hear us talk a lot about new businesses in home automation, in automotive and in medical, that uses similar or the same technology platform, but where we’re able to derive much greater margin and less volatility frankly. So, we diversify and you can see from this period of time that went back now to 2010, it wasn’t that long ago when we were about 80% mobile cellular telephones and 20% other. And other was infrastructure, smart energy and so on.

In 2012, we grew the business to about $1.6 billion, but if you see the front-end solutions business, which is primarily PAs, power amplifiers, okay, transmit path stuff. That business grew, but what really grew faster even was that HPA mobile. HPA, high performance analog mobile, that means that we’re taking that PA and if you look at the latest teardown reports of the Galaxy S III for example or others, look at big smartphones. You’ll see that not only is it a PA from Skyworks, but it’s a power management device. It’s a camera, flash device. It’s a GPS device. It’s multimode WiFi, all from Skyworks that we’re then able to shield, develop and bundle in a way that makes the system work better and our customers appreciate that for which we get a lot more revenue. And then vertical markets where today it’s not just about infrastructure, it’s smart energy, it’s the connected home, it’s the connected automobile. So, we’ve grown our business in a far more diversified way and that’s made us more profitable and to some degree less volatile.

Okay, so that’s the strategy, growth, differentiation, focus. Now let’s get specific about growth drivers. First in our core FES business, the TAM is growing. It’s growing at roughly 2x, the unit growth rate of total cell phones. And if you went back a few years ago it was primarily Edge and GPRS and today it’s no secret that there are just a lot more bands. And whether or not we’re integrating PAs and filters into power amplifier duplexers or simply integrating all those bands of functionality into a single dye, the fact is that it requires a lot of system expertise, it requires a lot of switching, a lot of modulations of those signals and we’re very good at that. We’re the best in the world at integrating lots of bands and doing it the way that our customers can drop it on their phones, reliably, easily. But I think equally important, if you look back to that pie, is this chart, that says over on the right. That was kind of traditionally what we did.

You see the core FES in blue on the upper right. But if you look around it, these are products in production today that didn’t exist at Skyworks three years ago. Many of them didn’t exist two years ago. So, when you look at teardown reports, when you look at our quarterly earnings reports, what you see is a company that’s talking a lot more about diversified markets, talking a lot more about product diversification and bundling within our core set of markets.

With the common theme being improving the system level performance of mobility using scale and technology, and there’s a whole host of products, antenna switch, buck converters, power management devices, LED devices. All in volume production today and all being sold into top tier smartphone manufacturers. And that yields us this chart. So when we talk about our business, this quarter about $450 million in revenue, but we look at a market, for us, a target that’s growing at 15% compounded per annum and it’s the growth in the PA/TAM plus the growth in the analog content that we’re able to bolt around that system.

So we have a business that we think quite reliably is going to grow sequentially with wind at our back at a growth rate of roughly 15%, which means that we ought to have high growth, right. Because our aspiration is not only to grow with the market, we want to take share. And this is beyond mobile. We’ve talked about that piece of the pie that was HPA or high performance analog vertical market. This is what I’m talking about. We bought a company that does power management. We’re aiming that power management technology at markets where we can bundle the rest of our technology. We can use our scale and use our customer relationships and begin to add more content.

So, these are all targets that are on our radar today where we have volume production and we’re increasing our penetration using that core RF, analog and mixed signal technology. So we’ve expanded our TAM opportunity by about $6 billion through acquisitions, through organic product development into these adjacent markets.

And just here is an example, today if you look at our largest growth sector within HPA, you would see it in thermostats, intelligent thermostats, in smart meters where we have the highest market share in the world among – the analog RF content of smart meters. You can see our products, ZigBee devices that are in white goods, because we’re doing business with the big guys, putting devices that would network the home around a ZigBee network.

If you bought a CD player or a DVD player or Wii GameCube, you’ll see connectivity at the router level and at the consumer device with high Skyworks content. And we’ll continue to push that because we think that the home is just becoming such a target rich environment for mobility with the pipe being LTE, the pipe being a 11ac, MIMO, high-speed WiFi and then networking the entire home, which gives us a great deal of content.

And here’s an example, the very first – I think that most people with whom I speak, are really underestimating the impact of a 11ac. 11ac routers are going to provide a complete – a downstream streaming capability that we’ve never seen in the home in a wireless environment. There’s absolutely nothing you can’t do with a MIMO AC that you can do with wireline in any form – any form.

So you’re going to see a real proliferation in devices that are going to be delivering high definition television signals, it’s going to be delivering multiple antennas and radios to various points throughout the home for true high-definition experience. And this is the very first router on the market, it’s a NETGEAR router. It’s using a Broadcom reference design. And we’ve got power management devices, switches and PAs. Believe it or not, we’ve got 19 parts on this router – 19 parts.

We are by far the biggest AC provider and I think AC is an underappreciated market driver in our space just because of what it can do. And then, of course, we talk about the automobile, but if you think about the automobile and our content within it today, it’s really a mobile internet access device; whether it’s Bluetooth, whether its RF technology, WiFi enabled, up converting high power signals using cellular networks, we have parts in keyless entry, we have parts in airbag deployment, we have parts in RF tags, we have parts in tollbooth collection devices. We want to continue this market. The volumes are nowhere as near to what they would be in the mobile phone world, but the ASPs are high, the product life cycles are long and the need for technology is very high. So, we like this business just like we like the home, just like we like the tablet, just like we like the smartphone.

Okay. So, those are the markets we address and where we intend to see growth. I’ll talk just briefly about differentiation because we have tough competitors and the fact is that we not only want to win sockets today because we have a scale or cost advantage or because we have good system capability, but we want to get stickiness with our customers and be able to solve system problems where they increasingly come to us and say do this for us. We’ll pay you a fair amount, but do this for us. And so we need to be able to differentiate and here are a couple of graphs, don’t worry we don’t need to spend much time on it, but what it really shows is that first graph is size. And size is so important because with increased bands, with more bandwidth requirement, with the need to preserve battery time in a mobile device. There is too much stuff, there is too much analog size, too much content and it’s crowding out the need to have high definition cameras, more high resolution screens, all kinds of functionality.

So, we’ve taken a dramatic decrease in size of the overall analog front-end. We just introduced products today that are chip-scale base and we’re not using packages, we’re using leadless devices that are processed to be chip-scaled and are bumped and flipped on a device that are tiny, tiny. So our customers can say, you could do all this content and we can do it in a footprint that allows more board space for what customers really want to pay for.

The other half is efficiency. We have the most power efficient devices in the world today, which means battery consumption. So if you are going to transmit LTE, if you’re going to transmit 3G, multi-bands with handoffs to WiFi, and you’re going to be deploying GPS simultaneously, and so on, on and on. Battery is a real problem. So what we’ve done is we’ve innovated in ways it gives, what they call, points of power added efficiency with each and every subsequent designs so that today we can add those LTE bands without any penalty in power added efficiency; battery time.

And this is a product we launched a few months ago. We have a lead customer going into production early in 2013. It’s called SkyOne. It’s a platform that simply says in one package, one device you have all the analog content to move from the chipset, Qualcomm, Intel, the chipset all the way to the antenna and back. That means every band of amplification, every switch, all the filters, all the logic that controls and interface between the base station, we do it one device. And we can do it for European models. We can do it for Asian-based models. We can do it for World Phones.

And our customers love this concept because it’s fully shielded. It’s a fixed footprint. You can move bands in and out depending upon your geographical aspirations of the OEM. And you can do it with one bill of materials, one PCB. Nobody in the world has anything that comes close to this level of integration at a time when I think our customers need it.

And of course scale, today we’re vertically integrated in packaging that gives us a huge cost and innovation advantage. We produce about 5 million to 6 million parts a day, 365 days a year. Why is that important? Because some of our markets are so price sensitive, a $99 smartphone, that we can’t stack margin.

So, we have a high utilization factory that gives us very innovated packaging. Very innovated access to gallium arsenide devices for amplification and so on. And we just drive the volume. We have the biggest multi-chip module manufacturing facility in the world and that’s only important because I can produce a package for half of what my competitor can buy it for and I can innovate time to market quicker.

Okay. So the financial model is pretty simple. We look for strong top line growth. We look to maintain a contribution model through a mix of in-sourcing and outsourcing and through good product execution and to drive high return. And if you look at this chart, it’s execution we’ve grown about 25% revenue compounded. Our gross margins are up nearly 300 basis point. You see the flattening in 2012. It was up slightly, but that was through a real difficult economic environment and through frankly a big product transition with one of our major customers, yet we were still able to grow our revenue and grow our margin. And you could see this in cash flow from operations. We consistently generate cash and you could see on the right, we’ve used that cash to acquire highly accretive bolt-on acquisitions that broaden our market footprint and we bought back stock and we are debt free.

And this is just a kind of a pictorial, its real data. In 2012, we generated just over 20% return on invested capital and our WACC or weighted cost of capital of about 10%. Important point being we look for returns that are consistently adding shareholder value by adding – by consistent business returns well above our cost of capital. We look at the small acquisitions we’ve done that way. We look at each bit of capital we buy, each employee we hire, each market we go after, how do we generate returns that are well in excess of what it costs us to acquire that capital.

And our financial model long-term, we rolled this out at our Analyst Day today on the left, that’s the current quarter about $450 million in revenue give or take. Gross margins of 43%, OpEx just below 18% and we’re 25 points of operating income, EPS of $0.54.

As we grow the revenue by say another 20%, remember I said our market is going to grow 15%, if you look at the addressable market with all this analog content we’ve added. If we could grow as we grow to this level, which is four to six quarters from now which is what we targeted in this target model, the gross margin will accrete. Our drop through is about $0.45, $0.46, $0.40 on every incremental dollar drops through to the gross margin line. Our operating expense is reasonably flat. We don’t have to add a lot more people and our margins should grow into the 30% range, which has been our long-term target as we’ve moved from 20% to 25%, we’re going to move through 30% and that should generate about $3 of annualized EPS versus today just above $2.

And the growth drivers, just to remind you for 2013 specifically is the new vertical markets with more content. The global uptake of LTE is a big driver for our business. There’s a lot more content and a lot more complexity that we need to solve on behalf of our customers.

Smartphone adoption in emerging markets is going to mean 2013 should be the first year in about three where the entry market, if you will, is going to crossover from the decline of 2G, which has been an issue. The 2G market units have been up, but it’s highly contested market and now 3G is beginning to take hold and you’ll see a crossover point where now those markets will begin to grow again on the backs of high content in a low-end smartphone. We’re very much eager to see that $99 and $129 smartphone that converts a 2G platform where they may buy $0.75 or $1 of Skyworks total content to one in which they’ll buy $3 or so, of total analog content in those phones. Tablets of course add a lot of volume as well as mobile connectivity.

So in summary we’re taking share in target markets and we’re laser focused on those markets where we can differentiate and differentiate over the long-haul. We’ve got the right set of customers, they rely on us, so there is lot of stickiness in what we do today. And again we’re going to look to 2013 and 2014 to be years in which we generate superior returns leveraging that growth in revenue. Thank you.

Steven Eliscu

Okay, thank you, David. I’ll start off with a couple of questions. If we look at the growth of RF content, we’ve seen a pretty dramatic increase in the number of bands that are supported. Are we potentially at the end of that trend and maybe even a reversal as the carriers start to refarm some of the 2G frequency bands?

David Aldrich

If I understand the question, no, in fact if we look at the products we’re designing and the platforms we’re designing today, one thing is constant, is there are a lot more bands, they are not only our LTE bands overlaid to a 3G and to a 2.5G infrastructure. But there is a lot more spectral frequency being dedicated in different markets. So in a regional phone it means you’ve got to address the local bands as well as have some roaming capability, but for a World Phone, a high level smartphone, there’s just a whole lot of bands. We’re designing products today for 25 bands of cellular frequency in one device, not one chip, but one phone.

The other thing that’s happening is that WiFi, is the attach rate of WiFi on high-end phones is becoming almost complete, it’s going to move from b/g/n there’ll be AC, you’ll start to see AC devices. And those frequencies sit right on top of many of those cellular frequencies. So you have problems not only with the number of bands, and the need to switch and filter, but also the need to provide power and real great performance over that entire frequency band. So it tends to favor what we do given our breadth of technology, but we see no sense for the next five years that the number of bands will go in reverse.

Steven Eliscu

And just in terms of your TAM expansion as you drive growth based on expanding your addressable market. Can you give us a sense as to internally, what is your process for doing this in a disciplined way? Clearly, you’ve talked about diversification as part of the strategy, but how do you do it in a way, where you are prioritizing the right market opportunities and then executing on those?

David Aldrich

Yeah, that’s a good question. One we rarely get. So if we look long-term, what are we looking for, we are looking for markets, we want to go into markets where there is a tailwind. The tailwind can be unit volume, and typically some degree of analog problem that needs to be solved in a way that’s unique to our process set or our design systems capability. So we want to see kind of that convergence of a good high growth market, with a market that’s being underserved by existing technology, and where that technology that will do a better job of serving that market is something that we possess in a differentiated way.

So it’s a long way of saying that we look at automotive for example. We think automotive is high volume, it’s growth – it’s growth in analog and RF content, and it’s an underserved market today, because it has tended to be a very discrete, very expensive, and the performance isn’t as good as it could otherwise be. So we look at that as a perfect – it’s a perfect opportunity. We’ve already exploited that in the home, if you look at the way the home is going to be the networked today, you need ZigBee, you need WiFi, you need Broadband connectivity and you need to deal with a lot of coexistence issues with frequencies competing with other appliances within the home. We think that’s a unique opportunity for us, so that’s how we filter.

Steven Eliscu

Are there any questions from the audience?

Question-and-Answer Session

Unidentified Analyst

Yes, my question, you talked about the 15% growth rate, and if you look at your growth and your competitors on an organic basis, no one has really been close to that over the past 12 months or so, and we obviously have a weaker macro and you mentioned product transitions and so forth, but can you help understand what the gap is between the 15% and what it has been, and when you might return to that 15% at some point?

David Aldrich

Yeah, that’s a great question. I think 2012 was kind of a unique year, a couple of things happened. One was the environment isn’t very good for most consumer electronics devices, so we see a big leg down in PC, a big leg up in tablet fortunately. We’ve also seen in 2012 just slower unit growth in lots of our end markets, that kind of tempered the overall growth rate, but if you look at – our growth in the second half, for example for the first half is about 15%, just look at 2012, second half was about 15%. We grew pretty strong year-over-year relative to the rest of the market. I think it depends upon who you look at, because if you look at a company that does PA, Just a PA company. They are going to struggle a little bit unless they’re in one or two platforms because the PA TAM in China has been dropping based on ASP pressure with pent-up demand for 3G.

So 2G PA hasn’t been a very good place to be. And, if you’re not with one of the top two guys or both of the top two winners in smartphones, your life in PA hasn’t been very lucrative. However, the mobile analog content has grown every bit of 15% this year and that’s really been the wind that has been at our back. So, I think its part economic. It’s part the companies that you may be looking at and it really is the headwind that is the 2G market, which is still the majority of the installed base today. As I said by the time you get to 2013, I think it will be the first year in three where that part of the world begins to generate net revenue dollars, net TAM dollars, because 2G will stop dropping or its decline will be more than offset by why I think is going to be a massive wave of 3G low-end smartphone adoption in that part of the world.

And finally, I would say some of the markets that have very high margin that usually grows somewhat reasonably for us have not grown. smart energy was a terrible year 2012 that just wasn’t the pull or the push from many municipalities. Infrastructure, why was infrastructure which needs to grow to support all of these users of smartphones and all this massive amount of streaming, they just for mostly economic reasons didn’t happen in 2012. So...

Steven Eliscu

We’re out of time. Dave, Steve, thank you very much.

David Aldrich

Thank you.

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