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Skyworks Solutions, Inc. (NASDAQ:SWKS)

FYQ4 2008 Earnings Call

November 6, 2008 5:00 pm ET

Executives

David Aldrich – President and Chief Executive Officer

Donald Palette – Vice President and Chief Financial Officer

Gregory Waters – Executive Vice President and General Manager, Front-End Solutions

Liam Griffin – Senior Vice President, Sales and Marketing

Bruce Freyman – Vice President, Worldwide Operations

George LeVan – Vice President, Human Resources

Thomas Schiller – Vice President, Corporate Development

Nien-Tsu Shen – Vice President, Quality

Mark Tremallo – Vice President, General Counsel and Secretary

Analysts

Cody Acree – Stifel Nicolaus

Sanjay Devgan – Morgan Stanley

[Althea – Citigroup]

[George Awani – Oppenheimer & Company]

[Mike Burden – Think Equity]

Suji De Silva – Kaufman Brothers, L.P.

Steven Ferranti – Stevens Incorporated

Todd Koffman – Raymond James & Associates

Tore Svanberg – Thomas Weisel Partners

Edward Snyder – Charter Equity Research

Anthony Stoss – Craig-Hallum Capital Group

[Unidentified Analyst]

Operator

Welcome to the Skyworks fourth quarter fiscal year 2008 earnings conference call. (Operator Instructions) At this time I'd like to turn the conference over to Tom Schiller, Investor Relations for Skyworks. Mr. Schiller, please go ahead.

Thomas Schiller

Thanks, operator. Good afternoon everyone and welcome to Skyworks fourth fiscal quarter of 2008 conference call. Joining me today are Dave Aldrich, our President and Chief Executive Officer, Don Palette our Chief Financial Officer, and Liam Griffin, our Senior Vice President of Sales and Marketing.

Dave will begin today’s call with a business overview followed by Don’s financial review and outlook. We will then open the lines for your questions.

Please note that our comments today will include statements relating to future results that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially and adversely from those projected as a result of certain risks and uncertainties including, but not limited to those noted in our earnings release and those detailed from time to time in our SEC filings.

I would also like to remind everyone that the results and guidance we will discuss today are from our Pro Forma 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.

I will now turn the call over to Dave for his comments on the quarter and fiscal year of 2008.

David Aldrich

Thank you, Tom and welcome everybody. I am pleased to report today that Skyworks delivered 22% revenue growth and a 59% operating income improvement in our fourth fiscal quarter, with several new programs and with linear product ramps enabling us to more than offset the slowing economy. I believe our performance and growth outlook in the current environment demonstrates significant progress on our primary strategic objective. Namely we’re continuing to diversify Skyworks, we’re gaining market share, we’re capitalizing on content growth, and we’re executing operationally.

Specifically during the quarter, we achieved record-levels across our key financial metrics. We exceeded our top line guidance of $225 million with revenue of $233 million. We expanded our gross margins to 40.8%, that’s up 140 basis points year over-year, and incidentally our sixth consecutive quarter of improvement. We achieved a 15.5% operating margin and we post a $0.21 of earning per share that’s $0.01 cent better than our guidance and up $0.14 in a year ago period. We generated $52 million of cash flow from operations and we retired $62 million of convertible debt. Our fourth quarter performance closed out a solid 2008, a year in which we exceeded our guidance in each and every quarter.

Now special note, we delivered revenue of $860 million that’s up 16% versus 2007 and up 22% in the second half versus the comparable period reflecting the momentum in new market and with our new customers. We’ve improved our operating income by more than 50% year over year. We produced $0.71 of earnings per share, now that’s up $0.48 from $0.48 in fiscal of 2007 and $0.21 in fiscal 2006. And finally, we generated $174 million of cash flow from operations.

With regard our to our diversifications strategy, we continue to gain momentum with linear products portfolio. This products leverage our catalog business, our intellectual property and worldwide distribution network by expanding into a broader set of end-markets. With nearly 1,000 global customers and over 2500 analog SKUs we are bolstering our product pipeline and expanding our addressable markets with each and every new customer engagement.

Few examples during the quarter, we won a multiyear multimillion dollar defense contract with Lockheed Martin to supply microwave components for radar applications, airborne aircraft carriers, and fighter jets. We’ve also ramped Pentose Cell Base Station solutions and Samsungs and others in support of Verizon, Sprint and Nextel deployments. We’ve increased shipments of our remote meter readings solutions at Itron senses and senses in others. We’ve launched a portfolio of voltage control oscillators or VCOs, frequency synthesizers and mixers targeting home area networks and industrial automation applications.

Finally, we extended our Cisco relationship with a suite of new wireless access point solutions. Now at the same time we’re continuing to diversify within our handset business with increasing support of all five top Tier 1 handset OEMs as well two of the leading smart phone suppliers. We’re also aligned with each and every base band supplier, and this has been a terrific source of diversification for us.

Another source to diversification has been our growth in the high growth smart phone segment. Here, we’ve been consistently doubling shipments over the past few years and we closed fiscal 2008 at roughly 40 million units. As our smart phone unit growth trajectory at two times the market growth rate highlights, we’re clearly gaining market share. More broadly, our 22% year-over-year revenue performance coupled with continued growth in the December quarter underscores that we’re beginning to demonstrably outperform our traditional markets, while also penetrating new applications.

And in fact the weakening industry backdrop is accelerating vendors’ share consolidation as both our linear and cellular handset customers are increasingly awarding programs based on highly integrated, low cost architectures, innovative roadmaps, operational scale and balance sheet strength. Let me expand a bit on this point. Many of our customers today are increasingly focused on designing highly complex multi-mode platforms.

Now these product offerings present multi-band switching, filtering, digital control and amplifications challenges to our customers. These are system level requirements which intersect with what we at Skyworks do quite well, and have proven to be elusive to our traditional competitor base. Speaking further on these multi-mode trends, we’re also capitalizing on the three times increase, the 3x increase in handset FEM or front-end module content.

The migration to higher end 3G and smart phone devices is happening albeit slower than market expectations, given the current economy. Nevertheless this macro trend is being fueled by carriers who see the value in data, in data services, in multi-media and web browsing. Now positive user experience is simply impossible without high-performance devices which seamlessly manage voice and data hand offs and roaming in multiple modes and bands. This trend expands our addressable market by literally billions of dollars from roughly $2 per phone in 2G to $6 when in 3G multi-mode, as we’re uniquely able to sweep in switching, logic, filtering and wireless local area network functionality. So in short, market share gains along with this higher dollar content multi-mode content trend are having a compounding effect on the top line of our business. This trend is enabling us to continue to grow even under the most pessimistic handset forecast scenarios.

And finally, we’re executing operationally. As increasingly reflected in our results, at Skyworks, we’re an extremely metrics driven company with an intense focus on continuous improvement in our yields, in our equipment utilization, in our cycle time and return on invested capital. This focus is beginning to show through with six consecutive quarters of gross margin expansion and improving cash flow. Importantly we now see a path to a 20% operating margin model beyond the $1 billion annualized revenue run rate.

Okay, in summary, while we fully recognize the slowing global economy, Skyworks’ financial position and growth outlook continues to improve, driven simply by diversification, by content growth and by operational execution. And while we certainly feel the impact of the market downturn, we’re fortunate that we have several product investment areas that are just now beginning to ramp, allowing us to demonstrate sequential improvements. And just to be very clear, we are not wasting any time celebrating our 2008 results instead we enter fiscal 2009 intensely focused on making continuous progress towards realizing our vision of becoming the world leader in analog mobile connectivity semiconductor solutions, and in the process creating shareholder value.

Okay, I’ll now turn this over to Don for his review.

Donald Palette

Thanks Dave. Good evening everyone and thanks for joining us tonight. Revenue for the fourth fiscal quarter was 232.6 million, up 22% year-over-year and up 8% sequentially. Gross profit for the quarter was 94.9 million or 40.8% of revenue driven by higher equipment efficiencies in all of our factories, progress on yield improvement initiatives and double-digit year-over-year material cost reductions.

Operating expenses were 58.9 million of which R&D expenses totaled 36.3 million and SG&A cost were 22.6 million. As a result, our operating income for the quarter was 36 million, up 59 % year-over-year and representing a 15.5% operating margin. Our net interest and other expense for the quarter was 700,000 while taxes were 100,000. Net income was 35.3 million, translating into $0.21 of earnings per share, $0.01 ahead of guidance.

Turning to the balance sheet, we exited the quarter with cash and cash equivalents of 231 million. During the quarter, we recorded 11 million of depreciation generated $52 million in cash flow from operations, invested $13 million in capital expenditures and retired $62 million in convertible debt.

The recent volatility in the financial markets presented us the opportunity to retire one-half of our debt at a significant discount from previous trading levels. Specifically, $50 million was for debt coming due in 2010 while $12 million was used to retired 2012 notes. Further, post the quarter we have retired an additional $38 million of the 2012 notes which will be reflected in our December quarter balance sheet.

With the retirement of one-half of our convertible debt, we have effectively eliminated approximately 10.5 million shares that could have been convertible above $9.52 per share price while maintaining our positive net cash position. Given our strong growth outlook, these transactions serve the dough (ph 00:18:08) benefit of de-levering our balance sheet and allowing us to maintain our positive net cash profile while effectively eliminating a significant portion of the diluted impact of the convertible debt.

Now to our business outlook for the first fiscal quarter of 2009. As Dave outlined, customer and market diversification along with strong execution are enabling us to continue to grow our top and bottom lines even in the face of the broader industry downturn. Specifically, we are forecasting December quarter revenue to be $240 million based on our strong backlog position. Operationally, we planned to further expand gross margin to the 41% to 41.5% range with operating expenses of $59 million driving an operating margin approaching 17%.

Below the line, we suggest modeling approximately $600,000 in net interest and other expense and taxes at a 3.5% to 4% cash tax rate. In turn, we intend to deliver diluted earnings per share at $0.23 of a base of $166.5 million shares.

We believe our guidance in corporate’s current market uncertainty and at the same time reflects our ability to outperform our addressable markets. It is worth noting that during the fourth quarter based on the strength of our 2008 financial performance and our earnings outlook, we reversed approximately 34 million of our deferred tax asset valuation allowance in our GAAP income statement. There was no benefit to our non-GAAP results and this accounting reversal has no impact on our 3.5% to 4% projected cash tax rate to fiscal 2009.

Looking beyond the current fiscal year, we have tax initiatives underway that when implemented and combined with the use of remaining R&D tax credits will equate to an estimated 2010 cash tax rate of approximately 15% to 18%. We’re providing this key cash tax rate range a year advance to several investors who have expressed concern over the possibility of a 30% plus cash tax rate beginning in 2010. Instead, we are projecting roughly half that rate post-2009.

In closing, our financial performance has never been stronger. We believe we’re well positioned to navigate through the current market weakness and as a result, we are very positive on both the short term and strategic outlook for Skyworks. That concludes our prepared remarks then operator please open the lines up for questions.

Question-and-Answer Session

Operator

(Operator’s instruction) Our first question is from Cody Acree with Stifel Nicolaus.

Cody Acree – Stifel Nicolaus

Hey guys congratulations and thanks for taking my call here. Can you talk a little bit about new customers versus the end market? Obviously you are giving guidance to perform advance guidance, is a bit divergent from what we are hearing from most of the rest of your peers and if you can give some quantification of how the (inaudible 00:21:16)?

David Aldrich

Cody, thank you. This is Dave. Obviously, we are seeing a broad based slowdown in the market and it’s particularly true in 3G and in some of our broad linear market statements. Fortunately at the same time, we are shipping some recently introduced products and we are ramping some new customer programs and just to be a little bit more general, our customers Cody, have increasingly been much more selective. For example, we’re ramping in production with customers who experienced some supply chain disruptions a year ago, so we are in fact, seemed to share gains for being awarded, I think that business. Now we enter 2009 because we stepped up, we are able to deliver. Also our customers are really in this multi-mode environments struggling with somebody’s new highly-complex designs, so increasingly we’re getting higher dollar content platforms, many of them ramping now and into 2009. That instead of being a PA, we would have some pretty complex logic amplification switching and filtering. So the combination of those things are allowing us to offset what is clearly some broad-based softness.

Cody Acree – Stifel Nicolaus

Let me take it one step further, these market share gains, I would expect to extend on and through the first half, do you have enough visibility from some new customers that are coming in that help to offset some of typical seasonality through Q1/Q2?

David Aldrich

Well, are you starting (ph 00:22:55) at March quarter, Cody?

Cody Acree – Stifel Nicolaus

Yes. No, sorry, seasonal Q1/ Q2?

David Aldrich

Right. Well, yes, we are. As we’ve mentioned, we are ramping this new programs, we have introduced some new products in our linear products catalog. Those are being received pretty well. It’s awfully (ph 00:23:10) early to talk about March. In fact, we do expect there to be a fairly significant decline in March, perhaps worse than we’ve seen in prior years. But nonetheless, we do have programs moving in the production, as you asked and we’re entering a growth phase with some new markets. And we’ve talked in the past about energy management, we’re now ramping some energy management products, wireless meter readers and the like. We also have some military microwave programs that are just better going into production, so it’s the combination of those kinds of new market and applications that allow us we believe to outperform the March seasonality which will certainly be there.

Operator

Our next question is from Sanjay Devgan with Morgan Stanley.

Sanjay Devgan – Morgan Stanley

Hey guys, thanks so much for taking my call and congratulations on the great quarter. Looking at your guidance for next quarter, I mean giving the macro issues and you guys are obviously very different from a lot of other companies that have reported. I was wondering if you can give us a sense of the amount of conservatives that we’ve taken into a guidance, i.e. relative to past quarters when you’ve guided, is your backlog coverage higher than previous, the same or how should we kind of view that?

David Aldrich

Well, we have absolutely tempered what would have been our growth expectation under normal circumstances. So, one of the advantages we have is we are shipping to all the top Handset OEMs, we’re partnered with all the top baseband OEMs and we’re shipping into the top Smartphone manufacturers.

So, as a result, when we do in a deep sea (ph 00:24:40) reductions from certain customers, we’re not as vulnerable to a single-point issue with a customer or a couple of customers. That being said, clearly the market is sought. But we do have some programs with pretty high ASPs that are ramping. We have terrific visibility into those, as we always do when a new program ramp and we are getting very good performance out of our sort of a broad-based catalogue business. So the visibility is good but clearly there are areas of softness and we've tempered out our overall guidance to be conservative.

Sanjay Devgan – Morgan Stanley

And then just another question if I may. Can you give us a sense of your revenue mix by interface if possible?

[Unidentified Executive]

Sure, for the 4th quarter Sanjay, we were 50% 2G, 50% 3G, and our multimode business, just as a note, doubled year over year as well. That’s consistent with the previous quarter. We were 50/50 as well.

Operator

Our next question is from George Awani (ph 00:25:41) with Oppenheimer.

[George Awani – Oppenheimer & Company]

Congratulations on the rent results guys. When you look at the growth prospects for the handset business and the linear business. Are they still both kind of wrapping at the same rate or is linear going to maybe see a little bit stronger growth near-term?

[Unidentified Executive]

Well we typically see, in a December quarter, we would see more seasonal growth, more seasonality in our handset business. Then when you move into a March quarter, you’d see a stronger relative linear product segment because we see less seasonality, seasonal downturn in a down quarter, which is March.

Having said that, we are seeing sequential growth in both our handset and our linear product segment. We saw that in September and we’re seeing that in December.

[George Awani – Oppenheimer & Company]

Is linear still about 25% of the overall business?

[Unidentified Executive]

Linear was, both linear and handset were up sequentially in year over year in the quarter and linear products remained at approximately 23% of revenue, which is consistent with last quarter.

[George Awani – Oppenheimer & Company]

Okay. And just following up on your comments on the front end traction. How’s the traction compare relative to 3G handsets and the 2G handsets?

[Unidentified Executive]

Yeah, well regarding mix, I think what we meant to say there is 3G for us is (inaudible 00:26:59). It’s WCDMA. So that business, that has slowed somewhat through the year. I think that’s been well communicated across the market. We do expect, as you move into 2009, despite whatever handset unit outlet may be there, we see an increase in 3G adoption and that is going to be a big driver for Skyworks as Dave noted in the opening remarks.

There’s a high degree of complexity in those models and those phones and Skyworks is well positioned to capitalize. So we see that becoming an increasing part of the mix for us going forward.

Operator

Our next question is from (inaudible 00:27:32).

[Unidentified Analyst]

Hi. This is (inaudible 00:27:36). Just a question on your linear segment. Can you highlight what you are seeing in terms of various end markets and also if you could provide some color on what you’re hearing from your Chinese infrastructure place?

[Unidentified Executive]

Sure. Yeah with respect to linear, we cover a diverse set of markets. We certainly do a great deal of business in the core infrastructure market with companies like Eriksson, Nokia, Siemans, Wa Wei (ph 00:28:00) and BT. We are seeing particular strength with Wa Wei (ph 00:28:05) and BT as they ramp GS Sound (ph 00:28:07) and start moving in higher end systems. We also see WCDMA infrastructure starting to pick up going into 2009. So we see that segment as one of the elements for linear.

We’re also moving into some markets that really are not traditional wireless markets. So segments like energy management, we supply customized solutions that bring wireless technology from the meter to the utility and we’ve even moved inside of the hallway from Zigby products to do home automation and those markets are very new for Skyworks. They have tremendous growth profiles and they’re just not subject to the seasonality that we’re seeing in some of the consumer segments.

[Unidentified Analyst]

Okay and coming to your handset business, you earlier (inaudible 00:28:47) some shared gains. Are the shared gains coming just from the smaller players or you’re getting shares from the larger players as well?

[Unidentified Executive]

No. It’s actually, we really are gaining share right now across the board. Each and every one of the top 5 OEMs, we’re shipping WCD (inaudible 00:29:01) as in many cases, GSM to each one of those accounts. We’ve gained tremendous share in this smart phone space and I think from my seat here, I think one of the drivers to our story has been share gains and we’ve been able to accomplish that. In this market, we’ll accomplish it in 2009.

[Unidentified Executive]

Please keep in mind, just to augment that and say what’s really happening is at the level of complexity required to deliver these new solutions and that’s also true incidentally on the low end where it’s more front end logical, less single function amplifiers and clearly on the mid to high end with multibands and challenges with shielding, filtering as well as typically amplification. What our customers are looking for is to engage early with a solution so the competitive base, if you’ve been in this market a while, 3 years ago we were competing with 12 to 13 companies, a couple of years ago it was 6 or 7.

Today when we go into an engagement, it’s very early in the phone design and we’re competing with another company. When we win it, it’s typically sole source for that platform. At most, there’s two. So it’s just a very different dynamic. It’s complicated product that is driving consolidation among the competitors as we’ve been predicting out here for a couple of years.

Operator

And we’re next go to Mike. Well Mike, he just took himself out. No, there you are, Mike Burden, Think Equity.

Mike Burden – Think Equity

Hey thanks guys. Great job. Just wondering if you could perhaps take us through, I know the visibility’s real tough right now but your expectations for the linear group as we get, I know you said for next quarter, should be up but into next year, I think before you kind of expected each quarter to go sequentially up a little bit, can you talk a little bit about that, how you see that market progressing in 2009? Thanks.

[Unidentified Executive]

Well maybe Liam and I will take this together. The play for us in linear products, remember we generated this organic growth engine for the company about 3 years ago. We’ve doubled down on R&D over that period of time. Now we’ve got a nice steady state, team of developers and applications, and marketing people leveraging the distribution of rep sales channel that we have. It’s quite specialized and each quarter, we’re putting many new products into a catalogue. The name of the game here is you characterize from across as many operating frequencies, voltages. You’re trying to get as many hits on a given platform as is possible and to keep them as general purpose as is possible,

So part of it has to do with the nascent nature of our business. We are growing sequentially as we’re adding new markets that are being facilitated by a whole host of new products. Having said that, it’s not immune from a market slowdown but we do have the benefit of each and every quarter, we are ramping new stuff in addition to exploiting the older installed base.

So we’re very different than what you may think of about as a typical analogue company that has a very high penetration of a niche. We’re entering new markets with relatively, today, low penetration and growing into those market segments.

Mike Burden – Think Equity

Okay and then over on the wireless side, could you give us a sense of how big the Chinese white box market is for you guys and what you see developing within China?

Liam Griffin

Yeah, well I mean we’re not going to specifically comment on the white box market. That’s difficult to ascertain but certainly China is a very big part of the story in wireless for Skyworks and for everyone in our industry and it is also a market that has quite a bit of volatility. We understand that but a couple things and we consider China to be a very strategic part of our story. We’ve gained a lot of market share. We commented earlier on supply chain disruption. There were customers in that market that were hit with shortages. We stepped up. We gained a lot of market share and we’re going to keep that.

We’ve also done a great job on the infrastructure side. So it does become a big part of our story but I will say that when we move into this quarter and even looking into 2009, we have taken a very cautious view on China. We discounted our outlook to reflect that yet we remained long-term positive on the space.

Operator

Our next question is from Steve Ferranti with Stevens Incorporated.

Steve Ferranti – Stevens Incorporated

Yes, thanks. Great job guys. Can you give us any sort of sense for some of the newer OEMs that you’re gaining share with? What inning would you say we’re in, in that ramp and we’re over how long into fiscal ‘09, might that ramp continue?

[Unidentified Executive]

Sure. Steve well on the handset side, we know who the players are. So in many cases, it’s deeper penetration into accounts that we may have had a small share in right? We’ve got a very large tier 1 that we’re, I would say, we’re maybe in the 3rd inning of the game with that account and we have a long way to go.

Some of our Korean customers have been very strong for us in this later year, we’ve gained a lot of share but I will say that there’s quite a bit of upsides specifically in WCDMA and we’ve done very well in the smart phone space and I think that’s a space we really have to watch in this market. We alluded to the benefit that carriers are seeing with data services and an increase in (inaudible 00:34:02). What that’s doing in the smart phone space is driving complexity and requirements higher and providing us an opportunity to add more value.

So we see a lot of strength in those areas on mobile and then on the LP side, switching gears, we mentioned some of the names in energy management companies like Itron and Census (ph 00:34:18) company in Europe called Landis and Gear (ph 00:34:20). Some real interesting diversified markets in new customers on LP. So collectively, all that brings a great deal of diversity to the business.

[Unidentified Executive]

And let me just add that the largest OEM, they’re not a 10% customer today. We intend to participate across all of our customers with mid, low, and high-tier product. So I give you a sense for the growth even in just one account.

Steve Ferranti – Stevens Incorporated

Okay. That’s very helpful and then a general question, I guess, in some of these newer wins, how often are you seeing awards in both the 3G and I guess edge slots on wedge phones.

[Unidentified Executive]

Yeah, actually invariably for us, we’re going in after certainly the core edge device, which is typically a (inaudible 00:35:05) bringing in a very high (inaudible 00:35:08) complex PM switch coupling out with our gap HP (ph 00:35:10) device, packaging in Mexicali in our own shop and then we take that as an anchor and then span multiple bands of WCDMA and we could hit all those bands and what we are seeing is an increase. We’re seeing customers now that want band 1-8 in Europe, 2 and 5 for Americas and often putting those all in one phone. So we’re seeing increases in content and our ability to satisfy that goes up as the complexity increases.

Operator

Our next question is from Suji De Silva with Kaufman Brothers.

Suji De Silva – Kaufman Brothers, L.P.

Hello, Dave, Liam, Don. Congratulations on the quarter. So on the shared gains, I just want to press a little more here. You talk about, I think you said the prepared remarks that some supply chain disruption about a year ago got you some (inaudible 00:35:52), which are wrapping now, is that a one quarter phenomenon or is that, do more of those layer in in extra quarters?

[Unidentified Executive]

No. That’s been a phenomenon now for about a year. We’re just really the tip of the iceberg in some of those opportunities. I think it’s a general, so the answer is no. I think we earned that business and I think our customers will continue to reward us with more of their business because we stepped up. We’re giving them, we think, a terrific product with terrific quality at a price point that’s very competitive so and they provide good margins for us.

So we’re going to hold on to that business. The other supply chain agility that we’ve been able to create with the model that we talked about for a couple years now is really giving us an opportunity with short cycle times to ramp very, very quickly. So I don’t view that as an event at all and nor do our customers.

Suji De Silva – Kaufman Brothers, L.P.

Okay and then maybe just digging one layer down on both the handset and linear side, it sounds like on the handset side, 3G was weaker. I’m curious of any other parts, business, or GOs where we could expect it and in linear, were any particular segments weaker? Thanks.

[Unidentified Executive]

Yeah, I mean Suji, there are certainly some pluses and minuses in the business and as we’ve mentioned in a typical market environment, the December numbers could be up even higher. So we’ve tempered that. We are seeing certain OEMs, LG for example and Sony Arts and to some degree be a little softer than some others but in balance with our footprint today, diversified across the top 5, we’re able to accommodate that and manage it through diversification.

Operator

Our next question is from Todd Koffman, Raymond James.

Todd Koffman – Raymond James & Company

Thank you very much and congratulations on the performance. I wanted to ask you about your pricing now compared to your competitors. There’s now this stark differential in your profitability, very impressive. Is there a stark differential in your pricing as you’ve gained all this market share?

[Unidentified Executive]

No. No there isn’t a differential in the pricing if you’re talking about relative to the competition. The differential is in the level of complexity. Here’s what happened. Here’s what’s happening Todd. In the not-too-distant past, companies were buying multiple single bands of Y band and CDMA in the case of wedge with maybe an edge quad band PA, a separate filter, a switch, a whole bunch of discreets and as an example in wedge, where that has moved towards is a typical offering for us.

We’ll have us in a single package as much as a 9 or 10 throw switch meaning it’s covering all the functionality of the various bands and transmit and receive and mode switching, it’ll have some content of filtering, have some pretty sophisticated logic to essentially provide a traffic flow, if you will, for all those frequencies. A lot of issues around shielding at ESD and then clearly very linear amplifiers that are combining bands so that they’re not only, they’re operating very efficiently for battery voltage standpoint while doing simultaneous voice and data.

And so those produces are really hard to design. It’s taken us literally thousands of man years, years to do this. They’re really hard to design. They get designed in early because it’ has such a big implication on the overall system performance that it’s not your grandfather’s PA and that’s the difference. So it is our ability to design a product that while we’re not the only people who could address it clearly far, far fewer. So the dollar content is going up in our addressable handset market.

The number of competitors is going down in our addressable handset market. It’s the combination of those two that is allowing us and should allow us to continue to outperform.

Todd Koffman – Raymond James & Company

Thank you very much. Good luck.

[Unidentified Executive]

Thank you.

Operator

Our next question is from Edward Snyder with Charter Equity.

Edward Snyder – Charter Equity Research

Dave, Todd’s last question, I think it’s pretty clear that there are a few competitors who have the same kind of technologies and the same kind of products. (Inaudible 00:39:46) also did in quarters. I guess this speaks to you difference in the cost spaces. Apparently they don’t, neither of these guys have the margins you do and you have a flexible manufacturing model. How much of that is contributing to your superior margins and then along the same lines, those other companies, almost everybody’s reported this point and besides Anadigics (ph 00:40:05), everybody’s been showing very strong quarters. How much of your caution is because you’re seeing a slow down or you’re anticipating a slow down.

David Aldrich

Well our caution is reflecting what we see in the general market and in spite of that, we’re up and I think that’s in December, and I think that’s pretty unique and we’re pretty proud of that. the caution comes about because we are becoming so diversified within handsets and within our linear product business addressing more and more segments. We are absolutely seeing softness, demonstrated softness, in our order flow with certain segments and among certain customers in handsets.

We, however, are also seeing relative strength in certain segments and with certain customers and we’re adding new products and new program (inaudible 00:40:49). So when you net all of that out even with a very conservative eye towards making sure we factor in the general market conditions, we come up with the guidance that we presented today and the comments we have about 2009.

I think the margin, my comment earlier was on margin, was that these higher dollar content gives us a great deal more utilization. We could throw off more operating income as we generate more average dollar for phone if you will, a more average dollar per base station or through Phento (ph 00:41:17) cell or energy management device.

We are, and I think you know this, we are extremely focused on the metrics in throughout our entire business. We measure every machine’s operational efficiency, yield, labor content per device. We drive those metrics through a system of KPIs, throughout each and every factory right down to the individual operator level and we think those things are giving us consistency of new program ramp yields and overall continuous improvement in yields and factory utilization. If you blend all that together, I think that’s why we have the margins that we have today.

Edward Snyder – Charter Equity Research

Well you certainly have an exceptional profitability model compared to your competitors and I know that you’re continually improving and this is something that’s been a theme on many of your calls, you’re pushing efficiencies and yields. I notice that you’ve kind of maybe indirectly upped your target operating margin to 20% from 18 because things are going so well. How much of that gain from where you are to where you think you’re going to be is going to come from additional yields or efficiencies versus say (inaudible 00:42:19) controls or 6-inch or more revenue. I’m just trying to get an idea of where can we expect the gains. At some point, you’ve got to run out of room on to squeeze in more efficiencies right?

David Aldrich

Well yeah. No, the fact is you’re never done. You’re just simply never done whether it’s on time delivery, whether it’s failure part per million or customer satisfaction, whether it’s squeezing out more efficiency on your equipment, on your fixed equipment set, you’re never ever done.

We’ve also worked very hard to maintain ASPs and to reduce, we measure, Ed for an example, we measure every single part we produce. We measure a cost reduction at the minutia level for every single part and we compare that to ASP and we make sure on every single part that we’re able to reduce our costs faster than we’re reducing our price and where we can’t, it’s a big point of discussion within the management team and within the ranks of Skyworks.

So it’s just the fact is you’re just simply never done. We’re also going to go to 6-inch. That will give us a material reduction in the overall dye costs, sometime in the very late 2009, 2010 and we’re augmenting our handset business with, we believe, some pretty innovative linear products that have a higher overall, higher average growth margin so that our mix is becoming a bit more profitable sequentially as we move throughout the years.

Operator

Our next question is from Tore Svanberg with Thomas Weisel Partners.

Tore Svanberg – Thomas Weisel Partners

Yes. Congratulations on the results. First of all, I think you’re expecting a 50-base point improvement in gross margins this quarter. How much of that is coming from mix versus some continuous cost improvements?

Donald Palette

You know we have a lot of, thousands of SKUs so mix is always an important part of the margin equation but as Dave stated, we’re extremely metric-driven and I mean to put it in perspective, we’ve had 6 consecutive quarters of margin improvement. We’re up 165 basis points year over year. So the majority of what you’re seeing driving that is a continuous improvement on our yields. We’re still making some targeted Capex (ph 00:44:21) investments to improve productivity and our overall cost structure. So the majority of that’s coming from performance, from things that we’re focused on improving.

Tore Svanberg – Thomas Weisel Partners

Great and the other Capex target for fiscal ‘09, at this point?

Donald Palette

We don’t give Capex guidance that far out.

Tore Svanberg – Thomas Weisel Partners

Okay then lastly can you comment a little bit on where you expect inventories to trend in the December quarter?

Donald Palette

Relatively flat. No significant movement on inventories.

Operator

Our next question then is from Craig Ellis with Citi.

[Althea – Citigroup]

Hey guys, Althea here for Craig. Just very quickly on your operating margin, how should we think about you hitting that target of 20% in fiscal ‘09 or even fiscal 2010?

[Unidentified Executive]

Well the way to think about that is as we’ve consistently talked about the former targets were $250 million a quarter. We were going to deliver 18%. Now to put that in perspective, our guidance at $240 million’s delivering 17% so we stepped back and said we’re driving a lot of improvement in the business and we really needed to look at higher than $250 million what are our targets. That’s where we came from the 20%. It’s going to be a combination of both leveraging our operating expenses.

Those are relatively fixed going from a $240 to a $260 or a $270 million a quarter revenue level. You don’t see a lot of movement there but in order to get there, you do need some margin expansion. We just haven’t commented to what extent that’s going to be but as volume goes up, you’re going to expect some leveraging of fixed costs. So, I mean you could expect some margin expansion.

Operator

Our final question will be from Suji De Silva with Kaufman Brothers .

Suji De Silva – Kaufman Brothers, L.P.

Hi guys, a couple quick follow-ups here. You seen some movement here with announcements from some of the base (ph 00:46:05) band vendors in terms of, does this have an effect on you guys, is it neutral or is it an opportunity or a threat potentially?

[Unidentified Executive]

Well it could be both an opportunity and a threat obviously. Like our handset approach, we have been working very hard to try to partner with and add value to each and every one of the top base band providers and we’ve been able to do that so we’re ramping programs, SmallCom (ph 00:46:29) with Infinion. Obviously you’re talking about Texas Instruments, their public announcement is that they’re gong to remain in the customs solutions and so as we participate in those, we’ll continue to support those.

So the best job we can do as with our OEM customers is just to support all the major base band guides and I think we’ve been very successful , most recently, by adding Qualcom as a significant partner to us.

Suji De Silva – Kaufman Brothers, L.P.

Sure and then the other question I have is you guys appear to be sort of getting to be kind of one of the better in class executors in this industry, would you be averse Dave to consolidating the industry? Do you think there will be consolidation or is that something you’d rather kind of stay with the profile you have right now in terms of executing on what you have?

David Aldrich

Oh I think we’d rather stay with the profile we have today. There will be consolidation of share for sure and that will continue as the dollar content goes up. There will be consolidation of share just given the complexity number one and number two, scale. If you look at what we’re being asked to do by our customers today with our hundreds of engineers, I’ve had experience with smaller companies. I just don’t know how you compete across a broad spectrum. You have to be very selective. We don’t want to be very selective. We want to be very broad and very diversified. So I think organically, we can do a terrific job of being a consolidator of market share by focusing on what we’re doing today.

Suji De Silva – Kaufman Brothers, L.P.

Great Dave, thanks.

Operator

Now we do have another question. It is from Anthony Stoss with Craig-Hallum.

Anthony Stoss – Craig–Hallum Capital Group

Hi guys. Great job. Most of my questions were asked. However, if you could comment on where you think content per multi-mode phone, actually in 2009 is, I’d love to hear your thoughts on how many bands also.

[Unidentified Executive]

Sure. Sure. Yeah. Well as we move out into 2009, you’re already seeing the evidence of some very innovative 3G models that are clearly not voice only. You’re seeing the smart phone. So we see content moving now, traditional 3G phones, if we had 2 or 3 bands basically anchored by an (inaudible 00:48:28) content, maybe about $3 to $4.

We see that moving now $5 to $6 into 2009 and again, we go back to where the carriers are making money with data service. They are driving higher requirements and more complexity in the handset. Our handset customers are willing to pay a little bit more for performance. Carriers will pay a little more for that handset. They’ll get a payback in 30 days on (inaudible 00:48:50). So the whole food chain is working well for us in that domain.

Anthony Stoss – Craig–Hallum Capital Group

Okay. Any change in 10% customers in the quarter and what are your expectations for December? I know you’re expecting 4 to 5 top by the end of December to be 10%.

[Unidentified Executive]

There was no change. We had Sony, Eriksson, and Samsung were top 10% in the 4th quarter consistent with the 3rd quarter. We still have a shot at having 4 of our OEM customers in the top 10%. If they are not in the top 10%, just based on the things roll out, they’re going to be in high, significant digits. So that’s still something we’re trying to drive home. We’ll see how it works out.

Anthony Stoss – Craig–Hallum Capital Group

Okay. One final question for you. On your 6-inch transition, maybe a little bit more color on how that scaling also what can uptake and gross margins, you think, do you might see in the second half of ‘09 as a result?

[Unidentified Executive]

Well it’s late ‘09 into 2010…

[Unidentified Executive]

Minimal impact in ‘09, minimal.

[Unidentified Executive]

And I’ve got to tell you I think that’s up in Newbury Park, California by the way and I think the team is just doing outstanding. I mean they’re continuing to operate with their day jobs. They’re executing the process qualification. We are absolutely on track. We have an advantage because we have a partner in HBT that we can ramp outside of Skyworks. We’re able to ramp and create buffers of capacity so that we could actually do sort of an in-line transition, machine-by-machine, process step by process step. You won’t see any disruption for that. I’m very confident from that, I’m very confident the team. It’ll be late in ’09 and I got, my hat’s off to the groups. I know they’re working very hard but they are indeed getting it done.

Anthony Stoss – Craig–Hallum Capital Group

Great. Great job guys.

[Unidentified Executive]

Thanks.

[Unidentified Executive]

Thank you.

Operator

And this does conclude the question and answer session. I’d like to turn the call to Dave Aldridge for an additional or closing comment.

David Aldridge

Okay. Well thank you very much for listening and for participating today and on behalf of the entire Skyworks team, we look forward to updating you in the future.

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Source: Skyworks Solutions, Inc. FYQ4 2008 Earnings Call Transcript
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