Skyworks Solutions, Inc. F1Q09 (Qtr End 01/02/09) Earnings Call Transcript

Feb. 5.09 | About: Skyworks Solutions, (SWKS)

Skyworks Solutions, Inc. (NASDAQ:SWKS)

F1Q09 Earnings Call

February 5, 2009 5:00 pm ET

Executives

Tom Schiller – Investor Relations

Dave Aldrich – Chief Executive Officer and President

Don Palette – Chief Financial Officer and VP

Liam Griffin – Sr. VP of Sales and Marketing

Analysts

Cody Acree – Stifel Nicolaus

George Iwanyc – Oppenheimer

Stephen Ferranti – Stevens Inc.

Todd Koffman – Raymond James

Michael Alexander – Charter Equity Research

Sanjay Devgan – Morgan Stanley

Uche Orji – UBS

Anthony Stoss – Craig-Hallum Capital

Tim Luke – Barclays Capital

Edward Snyder – Charter Equity Research

Jay Goldberg – Deutsche Bank

Aalok Shah – Davidson and Company

Nathan Johnson – Pacific Crest

Operator

Welcome to Skyworks Solutions first quarter fiscal year 2009 earnings call. This call is being recorded. At this time, I would like to turn the conference over to Mr. Tom Schiller, Investor Relations for Skyworks.

Tom Schiller

Good afternoon everyone, and welcome to Skyworks first fiscal quarter 2009 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 non-GAAP income statement consistent with the format we have used in the past. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP.

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

Dave Aldrich

Welcome everyone! Despite ongoing market weakness, Skyworks delivered solid financial performance in our first fiscal quarter of ’09. Most notably, our revenue of $210 million was in line with one year ago, $0.17 of earnings per share was $0.02 better than consensus. We generated $75 million of cash flow from operations. As a result, we ended the quarter with $250 million in cash, and on today’s call, we will discuss what we believe is differentiating Skyworks in this challenging market and the steps we’ve taken to improve our competitive position towards emerging an even more stronger and an even more profitable company when the markets recover.

First and foremost, throughout all of Skyworks, we are intensely focused on executing to our strategic initiatives which we’ve outlined in several previously calls, namely market diversification, share gains, and operational execution. In particular, we believe our financial performance is beginning to demonstrate the success of our fab-lite manufacturing strategy and diversification initiatives that we commenced several years ago, and by fab-lite what I mean to imply is that our hybrid manufacturing model where we partnered with existing foundry suppliers, and we’ve created a copy exact replica of our capabilities including our quality systems and our tool sets, and as a result, we are now much better able to balance external capacity with the demands of the marketplace.

Internally, our utilization remains high, and we are therefore able to maintain margins and maintain return on invested capital over a much broader range of revenues. Now, this model is quite unique in the handset market though it’s much more common in the precision analog markets. At the same time, we are driving continuous improvements in our yields, in our equipment utilization, and in our cycle times. Together, our fab-lite model and our operational focus have resulted in higher gross and operating margins and generated strong cash flow.

On the diversification front, we are gaining share in a variety of exciting growth applications, and one example is during the quarter we ramped energy management semiconductors in support of Itron, Sensus, and Landis and Gear which translated into a more than 30% sequential growth in this sector. This is proving to be the start of what we believe to be a macro transition to smart grid wireless technology with Skyworks at the forefront of the market’s development.

Additionally, we are ramping our recently introduced suite of silicone based voltage control oscillators or VCOs and frequency synthesizers. These devices play a critical role in the signal generation and timing performance of our customers’ architectures. These products we believe showcase the breadth of our analog silicone design initiatives where we are aiming at a number of high margin products in underserved end-markets.

Across these and other program ramps, we are leveraging core analog and mix signal technologies into emerging applications. These applications are defined by much longer product lifecycles, higher margin profiles, and these margin profiles are commensurate with the value of our technical innovation. In other words, our customers are quite willing to pay for performance in these markets.

Now that said, we are in no way immune from this unprecedented economic downturn. Consumer confidence levels are approaching all-time lows, and it’s really unclear just when we’ll see a market recovery. Nonetheless, we’re not waiting for perfect information, and we’ve taken steps to align our cost structure with the economic realities. At Skyworks, we’re really quite fortunate that we’re not opportunity constrained, and therefore we’re able to approach our cost reductions in a much more strategic way.

Specifically, we’ve undertaken a very rigorous portfolio management approach, the result of which is that we have ceased our development of low margin 3.5G and 4G cellular transceivers, and we’ve increased our R&D investment in higher growth, higher margin adjacent analog markets. Actions which beginning this quarter will net-net improve our operating income by more than $20 million annually and I think much more importantly will yield higher future returns.

Leveraging our analog and our mixed signal integration competencies, we’ve enhanced focus within our linear products business by creating two dedicated development and marketing teams at a much lower R&D burn rate. These activities are directed at custom vertical markets or adjacent markets and standard analog component applications, complementing our leadership front-end solutions franchise.

Before turning this over to Don, let me close by saying that we are creating we believe a uniquely diversified company with the scale derived from volume wireless applications applied to a range of analog product markets and applications.

Don Palette

Revenue for the first fiscal quarter was $210.2 million versus $210.5 million in the year ago period and representing a 9.6% sequential decrease. Gross profit was $84.8 million or 40.3% of revenue, a 50 basis point expansion year over year. Our ability to maintain gross margins in the 40% range is being driven by the flexibility of our fab-lite model, improved equipment efficiencies at all of our factories, progress on yield improvement initiatives, double digit year-over-year material cost reductions, and the continued migration to a richer product mix.

Operating expenses were $56.2 million, of which R &D expenses totaled $33 million and SG&A costs were $23.2 million. As a result, our operating income for the quarter was $28.6 million, equal to our operating income in the first fiscal quarter of 2008 and representing a 13.6% operating margin.

Our net interest and other income for the quarter was $263,000.00, while taxes were $1.2 million. As a result, net income was $27.6 million, or $0.17 of earnings per share.

Turning to the balance sheet, we exited the quarter with cash and cash equivalents of $250 million. During the quarter, we generated $75 million in cash flow from operations. We recorded $11 million in depreciation, invested $13 million in capital expenditures, and retired $41 million in convertible debt for $0.93 on the dollar. Our strong cash flow position and continued volatility in the financial markets, presented us with the opportunity to retire an additional $41 million of our 2012 convertible debt. With the retirement of over half of our convertible debt, we have effectively reduced potential future dilution by 11 million shares.

Perhaps more importantly, over the past year, we have increased our cash balance from $207 million at the end of Q1 fiscal 2008 to $250 million most recently, while simultaneously reducing our convertible debt from $200 million last year to $97 million today. Balance sheet strength is increasingly a key determining factor in winning business, particularly during this challenging economic time. Customers and suppliers alike want to partner with companies who not only provide innovative solutions but with those who are financially well positioned to support their long-term roadmaps. This is yet another area where we believe we are distinguishing ourselves.

Now, to our business outlook for the second fiscal quarter of 2009. First some market color. We believe traditional market seasonality of 15% is being magnified by the ongoing inventory correction, creating a 20 to 30% sequential sell in market decline as OEMs and distributors reduce their inventory levels. Against this backdrop, we are forecasting our revenue to decline 20% sequentially.

Operationally, our fab-lite hybrid manufacturing strategy is enabling us to maintain gross margin in the 39-40% range. Additionally, with the completion of our expense reduction initiatives, we are planning for operating expenses of $49 to $50 million of which $28 million is R&D. Below the line, we anticipate $300,000 in net interest and other expense, and taxes at a 4% cash tax rate. In turn, we expect to deliver non-GAAP diluted earnings per share of $0.10 to $0.11 off of a base of 166 million shares.

At a higher level, our December quarter margin performance and cost reduction initiatives underscore the resiliency of our operating model in the phase of this market downturn. Most importantly, as the market recovers, our path to sustainable 20% plus operating margins is now that much faster. That concludes our prepared comments.

Operator, let’s open the lines now for questions.

Question-and-Answer Session

Operator

(Operator Instructions.) Our first question will come from Cody Acree from Stifel Nicolaus.

Cody Acree – Stifel Nicolaus

Could you talk a little bit about a couple of things – one, channel inventory help, obviously sell-in versus sell-out is going to be a little bit different this quarter, so there’s still some burn, but channel or OEM inventory health, and then also what you’re seeing from order linearity, cancellations, push-outs. We’ve seen some commentary during the quarter that maybe things have firmed up just a bit, maybe not yet improving but firmed and not continuing to decline.

Dave Aldrich

As we mentioned in our comments, we are seeing entering March what we consider to be a relatively normal seasonality if not a little worse, maybe 15%, but of course we’ve been tracking very closely the inventory position, and we are seeing an inventory contraction or an inventory burn that’s going on, so we think that the sell-in at the component or at the semiconductor level is perhaps 20 to 30% or so. That’s what we’re seeing. It’s really no different than comments you’ve heard elsewhere, but we’re actually watching that inventory burn. It began in December, and we’re seeing it continue a bit into the March quarter.

Don Palette

With respect to your comments on order dynamics, certainly the end market is down and we’ve factored that into our guidance, but having said that order patterns right now have actually been quite steady and consistent with our outlook. We’re seeing demand come through multiple channels, not just handsets, but also infrastructure, and backlog generation thus far has been quite steady.

Operator

We’ll take our next question from George Iwanyc with Oppenheimer.

George Iwanyc – Oppenheimer

Just following up on the order outlook, what percentage of your business is linear right now, and how do the orders trend there? Are you seeing that become a bigger part of your overall business in the near term?

Dave Aldrich

What was really quite remarkable the November-December downturn was how broad based it was. We track it by customer, we track it by market segment, or at least those market segments in which we participate, and we saw it was just universal. There was this general trend or desire to exit the calendar year with as little inventory as possible. It was clear that March was going to be seasonal and every bit as seasonal as prior years. There was no incentive to get out in front of any inventory or capacity position, so I must say that it was no different really in general between our linear products business and our handset business or between customers or between regions.

George Iwanyc – Oppenheimer

Does that mean linear stayed around that 23% contribution area?

Dave Aldrich

Yes.

George Iwanyc – Oppenheimer

How do you see order patterns progressing right now? Do you believe that at least from a Skyworks perspective that by the end of the quarter you will be back on track relative to channel inventory?

Don Palette

The inventory across the market space certainly varies sector to sector, but order patterns right now are consistent with our guidance. We have taken a very conservative view of some of leading OEMs. We’ve also studied inventory in the channel that we can manage through our distribution partners, so to the extent that we would be impacted, we feel that we’ve put the diligence in place for that. Now, certainly there are some market dynamics out there. Some customers have handsets in inventory, etc., but we believe we’ve done a healthy job in managing that and understanding that as we got it.

Dave Aldrich

As you’ll notice from the balance sheet, even though the demand signaled real falloff mid quarter or so or relatively late in the quarter, we were able to throttle back our suppliers from a capacity standpoint. We think we have quite a short cycle time, so we were able to react to that, so our own component inventory in the sell-in to Skyworks is in pretty good shape.

Operator

We’ll take our next question from Steve Ferranti with Stevens.

Stephen Ferranti – Stevens Inc.

Do you believe that in the March quarter you will be running your production rates below the underlying demand level, or are we at a point where you are actually just sort of running in line with demand?

Dave Aldrich

We’re running below, and let me make sure I understand the question. I’m quite sure that we’re not at equilibrium in that the sell-through or the sell-out of the channel to consumers is higher than the sell-in at the component level because there is inventory of phones and there is inventory of components that are being burned, so that’s what we see right now, and December was the same thing. If you look at the sequential, September to December, handset sales, they were down, but they were down modest single digits. If you look at the aggregate reduction, we were down around 9 and change, but the market was down anywhere between 20 to 30%. That’s the aggregate of all the suppliers who’ve reported publicly. That difference is purely inventory burn.

Stephen Ferranti – Stevens Inc.

So it sounds like we’ll still have a bit of a burn here in the March quarter going on.

Dave Aldrich

That’s what’s reflected in our guidance, and that’s correct.

Stephen Ferranti – Stevens Inc.

Can you give us some sense of what percentage of your business you are running in house versus outsourcing at this point?

Don Palette

Steve, it depends on the activity. On assembly and test, it’s virtually zero being outsourced, and on our wafers, it’s approximately 20 to 25%.

Dave Aldrich

One of the things we were able to do in the seasonal down quarter is we throttled way back externally, and we maintained reasonable utilization at our factories, so that number isn’t normally quite that low or quite that high, internal versus external, but that’s what we were able to accomplish in the seasonally low quarter, and as you can see hopefully from the way we guided in the gross margin and operating income models, that’s what we’re seeing a big benefit from.

Operator

Your next question comes from the line of Todd Koffman with Raymond James.

Todd Koffman – Raymond James

When you look at your December quarter performance relative to some of your larger competitors, your downturn in the December quarter was very modest relative to the pretty sharp declines some of your competitors saw. The share gains that you saw, were they in both sides of your business in the cellular and the linear, or was there one side where you seemed to have done a better job relative to the competition?

Dave Aldrich

As we mentioned in an answer to an earlier question about how was the balance, it was pretty broad based. If you look at our base business, if you will, we saw exactly what many of the competitors had seen, which is a pretty dramatic year-over-year and sequential decline, but we offset that by some program ramps with smart phones. We had some analog component introductions where the takeup in the market has been pretty strong, and what we call adjacent markets where we are doing custom solutions and identified adjacent markets, we had a couple of those, like energy management for example that did well, and that offset a pretty tough base business.

Todd Koffman – Raymond James

You’re getting out of the transceiver development business. You called out a pretty sizable savings. How much revenue today are you doing in transceivers?

Don Palette

Last year, we were roughly around $30 million, and in the first quarter, it’s 1% of revenues. It’s a very insignificant amount of our revenue.

Operator

Your next question comes from Uche Orji with UBS.

Uche Orji – UBS

First let me follow up on the comments on transceiver. Can you just explain to what its strategic objective really is in terms of why you are continuing with its development? Is this something that will eventually in the future contribute to a sizable revenue? I know you are moving from 3.5G to 4G, but can you just help me understand what the strategy is?

Dave Aldrich

Let me try to make it clear. We were partnered with a very large baseband supplier targeting a couple of OEMs. That baseband supplier recently lost that business, and as a result the uptake that we might have seen in LTE and in some 3.5G, we think it’s going to be less probable, and what we have been analyzing and the decision that we made entering this quarter was that there are non-cellular handset analog opportunities, VCO synthesizers is one, up covert and down covert functions, energy management, cellular infrastructure, other applications that use the very same silicon RF integration techniques, but those customers frankly pay a whole lot more. They value the technology, and they pay for the performance of the cellular handset. Customers typically don’t today because it’s becoming a solution bundled with a baseband or a modem offering more and more. So it’s more of a pure bulk volume CMOS play, so we have ceased development of 3.5G and 4G products, stopped, and we have applied a subset of those resources, in fact some extremely talented engineers and applications and systems people towards clearly identified vertical market opportunities that we knew if we apply those people that we had the customers lined up, and that we know that we could hit the ground running, and I think you’re going to find long term that while we are in RF, we are in RF and non-handset markets, and the returns will be much higher.

Uche Orji – UBS

In terms of understanding the gross margin dynamics, first of all can you talk to me about what happened so far with pricing and looking out into the future even as your shipments are below the sell-through? Do you anticipate that there will be any impact to pricing and what is a level that we can bottom at?

Dave Aldrich

Maybe Liam and I will answer that question together. It is the case today that unlike 2, 3, or 4 years ago that the vast majority of the designs that we produce are custom designs, designed for a customer with a specific baseband, implementation or baseband architecture, and a as a result, we are much more often than not sole source in a platform, not sole source within a customer but sole source platform, in a given platform, and that’s much more often the case today than not, and in those cases, it’s much more about are you able to deliver the customer’s required system level performance, and are you able to sweep in the functionality that allows them to justify paying you a reasonable price for the component, if you will, with a solution, while at the same time achieving their bill of material objectives. That’s a big way of saying, maybe a long way of saying. It’s a win-win scenario we look to create by doing things like transmit front-end modules for multi-band, multi-mode handsets providing a price that’s much lower than doing it with a more discrete implementation. They get a lower BOM cost, a more reliable product, and we get higher ASP, and of course in the blended Skyworks sense as we are doing more multi-market linear product analog markets, our blended ASP is benefiting from that.

Operator

Next question comes from Anthony Stoss with Craig-Hallum Capital.

Anthony Stoss – Craig-Hallum Capital

Could you give us the number of 10% customers if there were any changes from last quarter?

Don Palette

The two 10% customers we had during the quarter were Samsung and Sony Ericsson.

Anthony Stoss – Craig-Hallum Capital

What percentage of your business was 3G versus 2G?

Don Palette

Very similar, 55% 2G and 45% multimode and WEDGE.

Anthony Stoss – Craig-Hallum Capital

Can you give us a sense of your CapEx plans for 2009?

Don Palette

For the first half of this year, when you look at our actual and our first quarter forecast, we are planning our CapEx investment to approximate our depreciation level of about $11 million a quarter. For the second half of the year, while we don’t give guidance, we’re expecting that number to be below depreciation level in the second half based on what’s going on in the economy.

Anthony Stoss – Craig-Hallum Capital

You mentioned $20 million in annual cost cuts. Are those complete or what can we expect perhaps in the June quarter in operating expnse side?

Don Palette

They were announced and completed in January.

Anthony Stoss – Craig-Hallum Capital

Also you mentioned that your cycle times are better. Can you quantify that a little bit more and how much further can you go? Just wondering what other further gains we could see there.

Don Palette

Cycle time for our front-end products for example where there is not a lot of silicone or CMOS content, the cycle time for those is measured in weeks, perhaps 9 weeks or so. We can make them shorter than that if we need to with lead lot or hot lot capabilities, but I would say the end to end is around 9 weeks, and if there is silicone content and we don’t have a standing inventory level, it could be 16 weeks or so, but in this phase, really quite short.

Operator

The next question comes from Tim Luke with Barclays Capital.

Tim Luke – Barclays Capital

I was just wondering in terms of the shape of gross margin, what you think some of the different puts and takes may be there and whether we should expect it to be broadly flattish from the current level or how you would expect that to trend? I was also wondering given the restructuring that you are doing, what the headcount was at the end of the quarter, and how we should think about that going forward?

Dave Aldrich

Well, longer term, the business that we’ve chosen not to participate in which was cellular transceivers in 3.5 and in LTE, those were just about the lowest gross margin products in the company. There was a lot of revenue there, but that $30 million last year, that was about the lowest gross margin products in the company. We are replacing it, we hope over time, with these targeted adjacent market linear solutions like VCO synthesizers. They are about the highest gross margin products in the company, so that diversification play for is having a blended gross margin benefit. Also as we increase revenue, of course, we get benefit in utilization from that, so we’ve flexed the supply chain, improved our mix, and that’s how we are maintaining we think pretty strong gross margin in the seasonally low quarter during an inventory burn, but as revenue increases, you should expect gross margin accretion and a lot of leverage at the operating expense line.

Tim Luke – Barclays Capital

On the headcount, could you also comment on that?

Dave Aldrich

The head count reduction was about 150.

Tim Luke – Barclays Capital

So what does that take you to?

Dave Aldrich

It takes us to about 3150, of which about 1600 of those are engaged in assembly and test in Mexico.

Tim Luke – Barclays Capital

With respect to your inventory on hand, how should we think about that trending going forward?

Don Palette

We were down about $5 million from the September quarter to the December quarter. We would expect based on where we are at right now and the inventory build plans in place and the market demand that that number is going to be relatively flat at the end of March. That’s our expectation.

Operator

The next question comes from Sanjay Devgan with Morgan Stanley.

Sanjay Devgan – Morgan Stanley

Just a question on your plans regarding your conversion from the 4-inch to 6-inch wafers, how do you view that and how should we think about that in terms of your CapEx outlay? I know you talked about CapEx being lower than it is in the first half of year, so does that mean those plans are slowing down, or how should we think about that?

Don Palette

Given what's been going on, we have definitely slowed down that investment. It's still an investment. It's a core part of our long-term margin growth strategy. Right now our expectation is with the slight slow down in investment that we're going to go live with the 6-inch early next year in 2010, but during that interim period, we expect no margin erosion as a result of the push out, so those are our plans right now.

Operator

The next question comes from Nathan Johnson with Pacific Crest.

Nathan Johnson – Pacific Crest

You've talked in the past about the number of competing suppliers being significantly smaller when you going after the WCDMA platforms because of the technology difficulties with often only one other supplier at the table. I was wondering if you guys expect that to change at all going forward or the other competitor beyond just that one beginning to catch up. How much of a lead do you guys think that you have over the rest of the field? Secondly, I was just wondering if you give us an update on your tax expectations for fiscal 2010 given the current market conditions and earnings expectations. Does that ramp in taxes push out at all?

Dave Aldrich

Let me make a general comment that hopefully answers that question, and then Don can help on the latter part. In general if you were to look at 2007, 2006, the transition began to happen in earnest more in 2008, you are looking at north of a billion units a year, most being dominated by 2G, very little high band count if you will multimode, and as a result, you would have seen power amplifier companies a few year ago, maybe as many as 12, 14 on the pure PA. In 2007-2008, that began to transition to more of a transmit module, and the difference is that they are high complicated switch counts or throw count switches. There’s more filtering, there’s more digital logic control to control all the frequency transmit received in band modes, essentially playing traffic cop, and because of all that complexity, a real hard time going through FTA and shielding all of that RF content, so when we compete with some of the newer reference designs with Qualcomm and others or when we go after our top-tier customers, these modules are pretty complicated, but the technology and process and the complexity of the packaging is high, so today we see typically in a customer application perhaps one other viable competitor. It’s not always the same competitor, but one other viable competitor, and I would say that rather than having a dozen companies going after a buck and a half of phone over a billion units, you now have 2 or 3 much more broad-based companies with scale who I think are going to have the lion’s share of what’s becoming a $3 billion or so market as the average content in smart phones, CDMA, and EDGE is quite a bit higher than 2G.

Don Palette

On the tax question followup, if you recall, in the last call, we were trying to put some color and highlights around where we expected our cash tax rate with our NOL position to be in 2010, and we may get some slight benefit from what’s going on in the economy and some of the slowdown in the top line, but I think the safe takeaway here is to assume in 2010 we are going to be about 15% to 18% in the cash tax rate, and that’s not dramatically different than what we have told you in the past.

Operator

The next question comes from Edward Snyder with Charter Equity Research.

Edward Snyder – Charter Equity Research

It sounds like you’ve gotten really good control of your utilization and your capacity, but your days of sales still went up this last quarter which is actually pretty typical for this space, the only company that has gone down seems to be Nokia, even in an absolute sense when inventories have gone down because the sales have slowed down. You said you are under producing so that you got the room to burn off more inventory, but you are looking for flat on an absolute basis. Should we expect to see days of sales decline before you maybe inch that capacity up and will that take a couple of quarters? I’m trying to figure out when does this chain tighten up so that you’ll start seeing the whiplash on the upside of the rain because if Nokia or some of your larger customers start to tighten up and quits selling out of inventory, your orders are naturally going to go up even if handset demand doesn’t increase, so I’m trying to get a feel for where you are on that kind of curve.

Liam Griffin

Well, clearly this quarter, the signals were pretty late, and so I thought we reacted pretty well to maintain the turns that we did. I think the inventory was slightly down, and we had a slight impact on the turns because of exactly what Dave described. Those signals came in past October, and so it did have some impact. To your point, we are expecting the overall gross inventory to be relatively flat going into March. That’s going to impact the turns slightly, but we are well positioned as we balance our production in the second half of year that we are going to drive those turns back up to prior levels. That’s our target.

Edward Snyder – Charter Equity Research

It affected your competitors and your customers much worse than it affected you, so it looks like you guys responded very well, and you are holding production load in order to keep the turns up. When do you think you’ll get to the point where your turns will either be back in line or maybe even a little bit lower than historic, so you start seeing utilizations go back up, and if that happens, will we see corresponding improvement in margins or are you running your internal factories pretty heavy now and just lighted up on your outsourcing?

Dave Aldrich

We will see a corresponding improvement in our margins because we will improve the overall utilization of our assembly and test assets, and as I said, we are balancing external and internal, but nonetheless running at a lower overall level of utilization, and we are working very hard to maintain the kind of margins and returns with the range of revenue possibilities that are out there if you try to model this business during a time of uncertainty. So margins as utilization goes up and revenue goes up will indeed go up because there’s a lot of operating expense leverage. I think it’s really tough to predict today when the snap back will occur, which I think was the second part of your question. Certainly, my hope that with all the inventory that was burned in December or the lack of equilibrium between sell-in and sell-through and again in March, that by the time we get into the second half, the first thing you’ll see is equilibrium. You will see the benefit of no longer an inventory burn exacerbating the actual sell-through and it is my hope that you start to see a return to normal seasonal pattern where each subsequent quarter throughout the year gets a bit higher than the last, but it’s too early to tell in this environment.

Operator

The next question comes from Brian Modoff with Deutsche Bank.

Jay Goldberg – Deutsche Bank

You mentioned something in your prepared remarks about your balance sheet becoming a competitive tool. Could you just expand on that a little bit? I wanted to hear how that’s actually playing out in the marketplace, and also a just a housekeeping question, if you could just repeat your guidance for interest expense.

Liam Griffin

With respect to the balance sheet and competitive dynamics, one of the things that we are seeing is that vendor selection criteria is really increasing right now, and there is much more scrutiny placed on suppliers. When we start to look at a smaller cam, our customers realize that maybe two suppliers or one really good one is what we are looking for for some of these platforms, so what we are seeing is in addition to the technology that we use to differentiate, as Dave pointed out, our customers increasingly want to see our factories, they want to look at our fabs, and they want to look at balance sheets. They want to have vendors and partners that are going to be able to stand up and endure this market correction and also be there when the market returns and be able to deliver on the upside, so that has been an increasingly important part of our strategy right now with our customers, and our results have done the talking for us so to speak here. I can tell you that we’ve actually in one business increased our share as a result of our financial strength and operational utility and performance.

Jay Goldberg – Deutsche Bank

It doesn’t seem like your competitors have much of a balance sheet to stand on.

Dave Aldrich

Here is another way to answer that question. We have been, there’s a silver lining, and it’s not a very big one, but there is a silver lining in this downturn and that is that, as Don in the prepared comments, we’re a profitable company, we are generating cash, had $75 million last quarter, I think $50 or something the quarter before, and we were able to apply that cash to buying convertible debt back at a discount, so what we are seeing is that not only the customers like it because they are engaged in platform that perhaps won’t be launched in two or three years, so they want to make sure you’re going to be around and that you’ll continue to invest. It’s a tactical pragmatic question that they ask of their suppliers, but the other thing that’s happening is if you look at our behavior throughout this downturn, because our margins are reasonably high because we can flex the fab-lite and because we continue to generate cash flow, we are able to be very selective about where we cut, so we think the actions we took in January were really quite strategic. There wasn’t anything panicky about. It wasn’t defensive. We were able to apply some of our most talented resources to areas where we were quite confident we were going to make money, and we were able to portfolio manage in a very methodical way out of areas that we are not going to add a lot of value. It wasn’t let’s cut across the board because we need to generate cash to satisfy debt or anything like that. We think that’s a big differentiator.

Don Palette

Jay, just one last thing and I’ll put that in perspective. Dave mentioned it, but we generated $174 million in cash from operation in ‘08, $75 million in the first quarter, that’s $250 million cash flow from operations in the last five quarters, so it really has strengthened the company, and to your interest expense question, it is about $300K. That is what you should assume in the model.

Operator

The next question comes from Aalok Shah with Davidson & Co.

Aalok Shah – Davidson & Company

Dave, on new product front, how should we be thinking about that this year? We’ve been talking about one major new customer this year ramping. How should we start to frame around that?

David Aldrich

You know what’s interesting is that in spite of the softness nobody is taking their pedal off the metal in terms of our customers on product introduction. In fact, in some cases it accelerated as they try to differentiate and get back into saddle with new products, so the challenge here is that you’re navigating through this period of uncertainty while at the same time it seems like the rate of introduction is accelerating. So you should see more of these vertical market or these adjacent market products rolling out. We’ve got platforms aimed at new smart phone introductions that are being introduced in the first half of this year, and again these broad catalog linear products where we continue to try to create the snowball effect of more highly characterized broad-based components that we sell through distribution and then through a rep network that is part of the catalog business.

Aalok Shah – Davidson & Company

Do you think you’re going to see a lot more of an edge mix in the first half or second half of the year given the uncertainty in the market right now, or are you going to start see some more traction on the WCDMA side of things?

Liam Griffin

Certainly WCDMA was lackluster in 2008, but that is one area of the market that everybody expects to grow in 2009, so we are going to see some growth in WCDMA, and that’s going to drive $3 to $4 of content, typically with an EDGE FEM that may be a couple of dollars with multiple WCDMA bands, so that’s going to happen. We’re also seeing something that is very promising for us. We have a pretty deep position in China on handsets, and that’s largely been GPRS FEMs. We’re starting to now see our baseband partner deliver EDGE-based solutions. Skyworks in on board, and we’re seeing quite healthy demand for that, so we may be surprised with some EDGE growth in China as well.

Operator

Your next question comes from the line of Michael Alexander with Charter Equity Research.

Michael Alexander – Charter Equity Research

In your fab-lite strategy, are there any formal obligations you have with your partners and our suppliers?

Dave Aldrich

We do keep these relationships very close. We also have more of a we-get, you-get kind of a strategy, so when the markets are strong, our supply partners benefit. When the markets are soft, they obviously don’t, and we don’t have what you might call condo capacity agreements, take or pay agreements. In fact, I don’t think we have any of those at this point. It’s not a contractual obligation. It is more the nature of the partnership which is that we want to share the business in a way that it’s good business for both our suppliers and ourselves, and so we maintain our high level of utilization and we keep some business going through our supply chain.

Michael Alexander – Charter Equity Research

The composition of the debt that’s left?

Don Palette

We have $97 million of converts, $47 million of that is a 2012 tranche at 1.5% interest and $50 million is due March 2010, and that’s at 1.25%.

Operator

At this time, there appear to be no further questions. I’d like to turn the conference back over to Mr. Aldrich for any additional or closing comments.

Dave Aldrich

Thank you so much for listening. This concludes our call today. On behalf of the entire Skyworks team, we look forward to updating you in the future.

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