Skyworks Solutions Management Discusses Q2 2013 Results - Earnings Call Transcript

Apr.25.13 | About: Skyworks Solutions, (SWKS)

Skyworks Solutions (NASDAQ:SWKS)

Q2 2013 Earnings Call

April 25, 2013 5:00 pm ET

Executives

Stephen Ferranti

David J. Aldrich - Chief Executive Officer, President and Director

Donald W. Palette - Chief Financial Officer, Principal Accounting Officer and Vice President

Liam K. Griffin - Executive Vice President and Corporate General Manager

Analysts

Vivek Arya - BofA Merrill Lynch, Research Division

Matthew D. Ramsay - Canaccord Genuity, Research Division

Craig A. Ellis - B. Riley Caris, Research Division

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Alex Gauna - JMP Securities LLC, Research Division

Blayne Curtis - Barclays Capital, Research Division

Harsh N. Kumar - Stephens Inc., Research Division

Jaeson Schmidt - Craig-Hallum Capital Group LLC, Research Division

Edward F. Snyder - Charter Equity Research

Michael A. Burton - Brean Capital LLC, Research Division

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Quinn Bolton - Needham & Company, LLC, Research Division

Cody G. Acree - Williams Financial Group, Inc., Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

Thomas A. Sepenzis - Northland Capital Markets, Research Division

Brad Erickson

Operator

Good afternoon, and welcome to Skyworks Solutions Second Quarter Fiscal Year 2013 Earnings Call. This call is being recorded. At this time, I will turn the call over to Steve Ferranti, Senior Director of Investor Relations for Skyworks. Mr. Ferranti, please go ahead.www.skyworksinc.com

Stephen Ferranti

Thank you, Kathy. Good afternoon, everyone, and welcome to Skyworks' Second Fiscal Quarter 2013 Conference Call. Joining me today are Dave Aldrich, Don Palette and Liam Griffin. 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 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'd 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, I'll turn over the call to Dave for his comments on the quarter.

David J. Aldrich

Thanks, Steve, and welcome, everyone. While I'm pleased to report a strong performance for the second quarter with revenue and earnings that exceeded prior guidance and outpaced seasonal trends, our diversification across end markets and customers and our expanding addressable content were key factors in our outperformance. During the quarter, we posted revenue of $425 million. That's up almost 17% year-over-year. We produced operating income of $100 million. That's up 19% versus a year ago. We earned $0.48 per share, a $0.01 better than our guidance. We generated $130 million in cash flow from operations, and we repurchased 1.4 million shares of our common stock, exiting the quarter with $459 million of cash on hand. And for the current quarter, we're guiding revenue to be $435 million, representing 15% growth through the first 3 quarters of fiscal 2013.

Now as many of you know, the June quarter is a transitional period between the March trough and the second half ramp. Within this backdrop, our output reflects the strategic transition from some lower margin components in our portfolio towards more margin-rich custom solutions. And this is the direct result of our success in migrating customers from discrete implementations towards more integrated solutions, a win-win scenario in which we capture more content, we have fewer competitors, while our customers reap the benefit of reduced complexity at lower bond cost.

In conjunction with this, we are forecasting strong sequential improvement in gross margin during this quarter, and we see a clear path to further margin expansion ahead. This puts us firmly on track toward our goal of delivering the growth of the mobile Internet with the financial returns of a diversified analog company.

Looking forward, market trends continued clearly in our favor based on rising adoptions of our integrated mobile systems portfolio and a full pipeline of accretive opportunities in new vertical markets. The stage is set for above market growth through the remainder of the year and beyond.

Now before going into more detailed market update, I'd like to turn it over to Don for an in-depth review of our financial results and outlook.

Donald W. Palette

Thanks, Dave, and thanks for joining, everyone. Revenue for the second quarter was $425.2 million, ahead of our prior guidance of $420 million, representing better than normal seasonality and a year-over-year growth of 17%. Gross profit was $179.4 million or 42.2% of revenue. Operating expenses were $79.7 million, consisting of R&D expense of $49 million and SG&A expense of $30.9 million.

We generated $99.7 million of operating income, yielding a 23.4% operating margin, which is a 45-basis-point improvement versus the year-ago quarter. Below the line, we recorded $1.4 million in other expenses and had a cash tax rate of 6.4%. Net income was $92 million or $0.48 of diluted earnings per share, and that's a $0.01 better than our guidance.

Turning to our second quarter balance sheet and cash flow statement. We generated $130.2 million in cash flow from operations. We invested $25.6 million in capital expenditures with depreciation for the quarter of $18.5 million, and we repurchased 1.4 million shares of our common stock, representing an investment of just over $30 million. And we exited the quarter with $459 million in cash and no debt.

And given our high confidence on our business trends, we continue to believe that repurchasing shares of our common stock represent a highly attractive use of our cash.

Turning to our third quarter outlook. Based on current demand forecast and order visibility, we expect Q3 revenue to be $435 million, providing a solid baseline heading into the stronger second half of the calendar year. As Dave mentioned, our third quarter outlook factors in the transition of our product portfolio toward more differentiated performance-based system solutions. We continue to see the opportunity for mid-teens revenue growth. We expect gross margin between 43.5% and 44% in the third quarter, representing over 150-basis-point sequential increase at the midpoint and that's driven primarily by improved product mix.

We see a path to continue to drive further margin expansion in the second half and beyond. As a result, we now suggest modeling 48% incremental margins from the third quarter baseline. We project operating expenses to be roughly flat at $80 million. Below the line, we anticipate $100,000 in net expense from interest income and other expense with a cash tax rate around 7%.

Using our guidance of $435 million in revenue with gross margin at the midpoint of 43.7% and $80 million in operating expenses, we anticipate third quarter operating margins of more than 25% and EPS of $0.53 on a base of 192.5 million shares.

We're very pleased with our performance thus far in fiscal 2013. And before turning it back to Dave, I'd like to just take a moment to put our first half results into broader context. Over the last 5 years on a comparative basis, we've grown revenue at 16% compounded, more than triple our earnings per share and cumulatively generated over $1 billion in free cash flow.

The industry's gone through considerable change over this time through macroeconomic cycles, market share shifts among OEMs and technology evolution. Yet, through all of this, we've maintained a consistent track record of providing above market growth and best-in-class financial returns. More importantly, over this period, we have assembled a sustainable growth engine for the future, and that's fueled by healthy underlying market trends, well-defined competitive advantages and a success-driven corporate culture. All of the underlying drivers are in place for Skyworks to continue to outperform, putting us on a path to achieving our midterm business model of 30% operating margin, which, as a reminder, would generate around $3 in annualized earnings per share.

And with that, I'll turn the call back over to Dave for his comments on the market.

David J. Aldrich

Okay. Thank you, Don. Now for the remainder of the call, I'll discuss our market opportunities in more detail, and I'll provide some perspective on why we remain so optimistic about the road ahead. There's no doubt that the world is rapidly becoming more interconnected, which began several years ago with the introduction of smartphones. Today, we're in the early stages of the next phase of this megatrend, the proliferation of universal data connectivity.

Now it's important to keep in mind that the connectivity revolution is by no means limited to smartphones. The need for integrated, high-performance RF and analog systems is propagating across new product categories and new end markets, driving an expanded opportunity set where Skyworks is uniquely positioned.

I'd like to share a few examples of how we're taking advantage today. First, we're serving an increasingly diverse set of vertical markets, as many forms of connectivity proliferate through -- within the Internet of Things. Connectivity is rapidly becoming an integral part of traditional analog markets like medical, industrial, automotive, smart grid, green energy, infrastructure and others. Within these markets, we're seeing tremendous success in leveraging our technology and our scale advantages for mobile into an expanding market footprint that we began building out several years ago as part of our catalog business.

As some examples of our growth and product diversity during the quarter, we captured a number of new program wins. These include an innovative power management solution enabling photovoltaic battery charging for mobile devices; a lead position on Texas Instruments' reference designs for utility metering, street lighting, telematics and tracking systems applications; advanced infrastructure solutions for Aclara's smart gas meter products; switch modules for in-dash infotainment consoles for Ford, Kia and others; and filter resonator modules for scanners in homeland security applications. These are just a few examples of our traction within new vertical markets. In all cases, these markets are complementary to our mobile business and provide accretive new growth avenues for Skyworks.

Second is the network of a connected home. This represents another major category of opportunity for Skyworks and one that is still on its infancy. Based on our underlying core competencies in RF mixed signal, analog and power management, we're establishing a strong footprint spanning connected devices like smart thermostats, security systems, sensors, gaming platforms, appliances, televisions and set-top boxes. Within these applications, we see performance requirements, complexity and content trending higher.

Third is in emerging markets where we are enabling a massive smartphone upgrade cycle that is just getting underway. According to Crédit Suisse, Chinese local vendors alone are expected to ship over 450 million units this year, representing 80% annual growth. Skyworks has facilitated this transition through close alignment with all the major baseband providers, as well as local OEMs like Huawei, ZTE, Lenovo and others. Addressable content in these devices is 2 to 3x that of a 2G phone. And with the innovation required to deliver these advanced analog systems at the right price point, the playing field of viable competitors is narrowing.

And fourth and finally in developed markets, our addressable content opportunity continues to rise. Complexity is exploding, as devices incorporate multiple forms of connectivity, including 4G LTE, 802.11, Bluetooth, GPS, ZigBee and Near Field, all within shrinking form factors. And on top of this, carriers and OEMs are implementing a plethora of new operating frequency bands for global data access, along with sophisticated new technologies like carrier aggregation, receive-side diversity, envelop tracking and antenna tuning to maximize spectrum utilization, data throughput and battery life. Now this all translates into new content opportunities for Skyworks. As a result, we see our addressable content ratcheting higher with each successive generation with as much as $10 to $12 of addressable content in high-end devices.

And a perfect example of this is our SkyOne family, which uniquely integrates all amplification, switching, filtering and control in a single device. And as these specific examples illustrate whether we're talking about a mobile device or a new vertical market, the fundamental need is the same, ensuring seamless connectivity across multiple communication standards while maximizing overall system performance within the smallest possible footprint. And this underlying market need creates tremendous design challenges for our customers and opportunities for Skyworks, as they contend with issues like power efficiency, coexistence, harmonics and linearity.

So to recap, our addressable markets are expanding, and we're capitalizing on first, end market diversification; second, the connected home; third, smartphone adoption in emerging markets; and fourth, increasing content in high-end mobile devices.

In closing, we're quite optimistic about our prospects for the remainder of 2013 and beyond. Trends in our served markets are moving in our favor, and our strategy of continuing to diversify and expand into new verticals while maintaining a laser focus on operational execution is clearly working.

That concludes our prepared comments. Operator, let's open the lines, please.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Vivek Arya with Bank of America Merrill Lynch.

Vivek Arya - BofA Merrill Lynch, Research Division

The June quarter guidance, I think is somewhat below seasonal trends. Is it related to a product transition at one customer? Are there any other impacts? Or I guess, the other way of asking the question is, are you still comfortable with sort of the roughly 15% sales growth target that you had set for this fiscal year?

David J. Aldrich

Well, first, thank you. First, historically June is up, let's say, 4% to 5% sequentially. However, more recently, it's been heavily influenced by the timing of the specific program ramps. We're also benefiting from some of new opportunities. We see strength in wireless LAN and some of our antenna switch modules. Some of our vertical markets. Antenna tuning is another example. So our Q3 guidance underscores gain from those diversification activities. And as Don mentioned in his prepared comments, we exceeded the 15% in the first 3 quarters of the year, and we're very comfortable that we can continue on a mid-teens trajectory.

Vivek Arya - BofA Merrill Lynch, Research Division

And then the other question is recently, we have seen more acquisitions in the CMOS RF space with Avago acquiring Javelin, and of course, RFMD bought Amalfi before. And then Qualcomm has been vocal about its RF360 solution. Is this the start of some major disruptive trend that we should be worried about? Like when you talk with your customers and look at design wins, is this a trend that's accelerating? Or is this still somewhat limited?

David J. Aldrich

I think that the consolidation of the CMOS players -- and we acquired a company a couple of years ago -- is a simple function of the fact that a stand-alone 2G company isn't a sustainable model I believe, sustainable economic or financial model. The unit volumes for 2G continue to decline dramatically. And what's far more important and what you're seeing in the, I think, the substantial rise in our gross margins as we go into the June quarter, as Don outlined in our guidance, is the fact that we're successfully working with our customers on migrating them to more integrated solutions where we have more content, helping them make the tough leap from 2G to 3G whether it's TD or WCDMA, as we bolt on more analog content that serves to reduce the footprint and make it easier for them to get to market and provide for us more margin-rich opportunities, and the competitive landscape is narrowing. So I think it's more simple than that, Vivek. I think it's simply not a sustainable model to be a 2G-only company.

Operator

Your next question is from Mike Walkley with Canaccord Genuity.

Matthew D. Ramsay - Canaccord Genuity, Research Division

This is Matt Ramsay on for Mike. I guess, the first one, maybe, Dave, one of the strengths of Skyworks' business in our view has been kind of your customer diversification and near top market share with many handset OEMs. So I guess, earlier this week, 2 of your traditional competitors in this space announced earnings and kind of talked about better trends throughout the year driven by more diversification in their businesses, as they have been recently customer constrained at particular customers. Maybe you could talk about the competitive position you have across your customer base and maybe where you see opportunities for market share gains or losses for Skyworks relative to the more bullish commentary from some of your competitors.

David J. Aldrich

Okay. Well, I think it's basically outlined in the prepared comments is that we see tremendous growth for us in both margin and revenue, as we are successfully penetrating more vertical markets. We're gaining more content in the connected home, more content in the automobile, some medical applications and so on. So we're doing a very good job of rounding out our business and continuing to expand our target of addressable markets. We also are adding a lot more content. If you look at recent tear-down reports. Versus a traditional RF competitor's, we continue to participate in this wave of complexity with more bands of amplification. But we're adding increasingly more filtering, more switching, more antenna tuning, more GPS products, more power management and more Wi-Fi connectivity. So I think what you'll see from us is not only vertical market expansion, but you'll see the TAM increasing in our core markets. And as a result of the complexity that we talk so much about, it really is the case that customers are looking for a narrower set of suppliers to provide much more of the overall system solution, and we think we're the best at that. So I would expect you to see, on the high end, more content with more functions provided by Skyworks at higher market share and increasingly a broad set of vertical markets.

Matthew D. Ramsay - Canaccord Genuity, Research Division

That's helpful. And I guess, a follow-up to that maybe for Don or maybe even Liam, the SiGe and AATI

Acquisitions, I guess, are both now roughly a year in the past, give or take. Maybe you could give a brief post-mortem comment on those 2 different acquisitions and their effect on your product diversification offerings. And maybe if you're willing, remind us of what the revenue run rates of those businesses were when you acquired them and how they've trended both from a sales and margin perspective since those acquisitions. That'd be really helpful.

Liam K. Griffin

Sure. This is Liam. I'll give you a little color on the acquisition. Certainly, the WiLAN business saw, buoyed by the SiGe acquisition continues to be very robust and very strong for us. We're in the early stages of a 11ac product line ramp. We've got the first 11ac handset in the market today by virtue of some partnerships, Broadcom and others. We're also seeing great strength in routers and access points and quite bullish on that. And I think what we've brought to the market there is a combination of technology from the SiGe team coupled with a systems approach at Skyworks, and we've gone well beyond the initial portfolio to gain share. In addition and in parallel, the power management portfolio acquired by AATI is also making great progress in some areas. We had some releases regarding Samsung recently. We had DC to DC in camera flash technology. We started -- we're now getting into nonmobile applications, video, digital still camera, and we think the opportunity for the powers space for us is really tremendous, and we're in very early innings of upside there.

Operator

And we'll go next to Craig Ellis with B. Riley.

Craig A. Ellis - B. Riley Caris, Research Division

Don, just to further clarify the dynamics in gross margin, are you seeing gross margin improvement in the quarter because of increased value with new products in existing platforms and customers? Or is the gross margin uplift due to penetration of new markets and increased -- the increased margin profile that might go along with those new markets? And as a third part of that question, is there any manufacturing or sourcing element to the margin improvement that you're seeing?

Donald W. Palette

Yes. Thanks, Craig, for the question. It's actually fairly evenly split. It's both. It's new product wins and ramps and designs, and it's also leveraging additional content with existing customers and platform. So it's a combination of both. And overall, it really relates to what we talked about earlier that it's just with the 2G component market just continuing to decline, and the product mix is successfully transitioning. We're seeing this growing adoption of the accretive portfolio towards integrated system solutions, and they're clearly margin accretive for us. And that's driving the majority of the expansion. There is a little bit of manufacturing efficiency. I mean, we do -- we see benefits from that every quarter. That's our job, to continue to do that. But the lion's share of this margin expansion relates to what we just described on the product side.

Craig A. Ellis - B. Riley Caris, Research Division

Okay. That's helpful. And then as a follow-up for either you or David, typically the company gives a split-out in its revenues between linear products and cellular. Can you give us that? And can you help us understand how you see the growth dynamics of those 2 businesses as you go through the rest of the calendar year?

Donald W. Palette

Yes, the revenue from the product split of linear is 40% and handset 60%. That's similar to the percentage that we've seen over the last several quarters.

Operator

Your next question is from Tavis McCourt with Raymond James.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

First, Don, in terms of tax rate the next few quarters, what should we be thinking about? And then the same question with CapEx.

Donald W. Palette

Yes. I would -- we're guiding for the June quarter 7%. I would keep it at that level through the September quarter when you -- actually, through December, through calendar December, and we really haven't guided anything further than that. But I think directionally, if you use 10% in '14, that's probably a safe number for modeling purposes. CapEx, I would -- what we would assume on CapEx is it's going to be above, probably a little bit above depreciation levels for the next couple of quarters, but it'll be ramping down the back end of the calendar '13.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Got you. And David, I wonder if you can give us an update on SkyOne in terms of other devices shipping this year with that or design win updates or kind of how is that going in terms of sales process in the marketplace?

David J. Aldrich

It's been an interesting process because the product is so highly integrated. Just to recap, the SkyOne takes everything from the output of the transceiver or the chipset to the antenna and back. So it's got all the duplexing filters. It's got amplification. It's got switching. It's got frequency control and logic and so on. And so it is -- the uptake with the customers is very strong. We have several lead customers who are tuning it, putting it through its paces. It's a very different product because our customers see a lack of competition as an interesting switch from the normal paradigm in our market. It is a product that is -- that performs wonderfully because it -- while it is highly integrated is highly integrating using a mix of silicon advanced multi-chip module technology, the best filter technologies on the planet tailored for each frequency, as well as high-performance compound semiconductor amplifiers. So it's a unique product. It is very sole sourced, and so we're getting great feedback. They like it, and I think our customers are trying to digest what it means to have a supply chain now that it's completely sole sourced on the front end. You will see production this year, and the customer uptake has been very good.

Operator

We'll go next to Alex Gauna with JMP Securities.

Alex Gauna - JMP Securities LLC, Research Division

I was wondering, Don, implicit with your outlook, if it anticipates a similar set of greater than 10% customers? Or are there possibilities to add a third or fourth? And then also maybe if you could talk about within the quarter, has there been any material change? Do you still have 2 greater than 10% customers? Have they converged in size or maybe inverted?

Donald W. Palette

Yes, the 10% customers for the quarter were Octagon and Samsung, which is consistent with what we've seen for the last several quarters. That hasn't changed. We really don't guide what our customer mix is going out as far as are there going to be additional customers that go into that. The top 10% is just not something that we typically would put into the forecast.

Alex Gauna - JMP Securities LLC, Research Division

Okay, fair enough. And I was wondering, you recently announced a pretty rich set of design wins, targeting Samsung's GALAXY S4 refresh. Can you give any color behind that press release? Are you seeing an average ASP increase over the S3? Some of these wins that you have, maybe what kind of dollar content we're talking about or a range? And then lastly, I believe Liam mentioned AATI on the camera flash. But if I read the press release right, you now have new wins on the RF, DC to DC RF deck with AATI, and I'm wondering how material that is.

Liam K. Griffin

Sure, Alex. Yes. So I think what we're looking here with the GALAXY S4, it's a great example of what Dave articulated earlier. We have our core MMMB technology, which we've been continuing to develop and gain share, gain design wins and also baseband partnerships. And the S4 is an example of that technology. But now we've wrapped around Wi-Fi technology, switch ASM, high throw, very, very highly integrated switch, DC-to-DC converters for the first time and then also some additional componentry in analog. So you've got an opportunity there that get to really see what Skyworks is capable of doing. We're quite happy that demonstrated that with a leading platform going forward, and we think this is really an indication of what you should expect from us with all the leading smartphone players.

Operator

Next question is from Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

It's for Don or David. I just wanted to make sure I heard you right. It seems like you're reiterating your target of 15% growth for the fiscal year. I think you guys made an easy comparison in the first half. Q3 guide's below that rate. If you could talk -- if that is correct, if you could just talk about the drivers into the back half of the year for you, that would be helpful.

David J. Aldrich

Yes, I think that's right, and we are comfortable with that growth rate. I think the June quarter is, as we mentioned earlier, it is becoming in our industry at least in the mobile side of our business a transitional quarter between the seasonal trough in March and what is a strong growth in the second half. And as we're confident in our platform participation and we see vertical markets continuing to expand, we see that growth rate. June is kind of a transition quarter, and I think that's kind of what you're seeing. But having said that, the growth rate through the 3 quarters is about 17%, and we're growing much faster than the overall seasonality in the June quarter if you were to aggregate everything.

Blayne Curtis - Barclays Capital, Research Division

And then it seems like the long-term incremental gross margin, you ticked that up by -- I remember when you brought it down. A part of it was due to the mix as you're seeing a lot of growth with SOI and on GaAs. Can you just talk about what's driving the higher -- is it a different mix of products more analog? Or are you seeing a mix shift back to GaAs? That would be helpful.

David J. Aldrich

No, as Don mentioned, it really is -- there are ongoing continuous improvement in manufacturing efficiencies, and we continue to drive very hard for those. But the vast majority of the improvement in gross margin is the product mix and the focus we've had on more highly integrated and differentiated products where we have a much less of competition, and we add a great deal more value for our customers that they're willing to pay for. In addition to which is we are continuing to see more vertical market penetration where we get accretive gross margins across the board.

Donald W. Palette

But the way to think about it, Blayne, is that doesn't assume a dramatic change in the mix that we've already described between linear and handsets. So what that's saying is within those categories, we're expanding margin for those factors we talked about earlier. So that's the way to think about it. It doesn't require a big mix shift in order to drive that. That's the way to think about it.

Operator

Our next question is from Harsh Kumar with Stephens.

Harsh N. Kumar - Stephens Inc., Research Division

It's very well advertised and publicized that one of your customers is going through an upgrade cycle. I know you've talked about tremendous prospects in the back half, but I was wondering if you could give us a little bit more color. What makes you so excited about the September and the December quarters on the cellular side specifically?

David J. Aldrich

Well, in the September, December quarters, you see normal seasonality, and we expect to see that as well. And at this stage of the year, we're very comfortable and knowledgeable about where we participate, what our participation is on the drivers of the market. And as Liam commented earlier, we have, not only the wind at our back with increasing complexity, driving content and Traditional RF sockets, but we are doing a really good job of adding margin-accretive products in connectivity, in power management, in Wi-Fi and then in completely integrated solutions. So it's participation in the right platforms, and its content increasing. And that content increases with higher margins almost across the board.

Harsh N. Kumar - Stephens Inc., Research Division

Great. And as a follow-up, I was wondering if you could give us some color on the Tier 2 and Tier 3 markets. Usually in the March quarter, they tend to be a little bit shaky. Have you seen anything like that? And what are your prospects for those kind of second and Tier 3 guys, customers going forward?

Liam K. Griffin

Sure, Harsh. This is Liam. Actually, we think the opportunity for the Tier 2 and Tier 3 specifically in emerging markets is quite bullish. We're seeing an upgrade cycle now occurring in China specifically where 2G demand has come down a bit, but there's a commensurate upside in 3G and TD technologies. And fortunately, it's with customers who've had strong incumbency and base position, and we're working with them right now to get them through that upgrade cycle. So we're quite bullish on it. This is not a Q3 effect. This is a long-term sustainable upside. And I think our ability to deliver customized solutions, great on-the-ground application support, that systems know-how really puts ourselves in a great position to support those companies as they move up.

Operator

Your next question is from Jaeson Schmidt with Craig-Hallum.

Jaeson Schmidt - Craig-Hallum Capital Group LLC, Research Division

First off, I was wondering how much of your revenue is currently coming from the 2G market or just get a split of the revenue of 3G, 4G and 2G.

Donald W. Palette

Well, 2G was 15% this quarter, and we just combined 3G, 4G was at 85%. And that's changed slightly. It had been running 80-20 for probably the last 3 or 4 quarters, so this is a little bit of a change in the 2G.

Jaeson Schmidt - Craig-Hallum Capital Group LLC, Research Division

And then Don, what should we think of your inventory level in the June quarter and then going forward?

Donald W. Palette

Well, we had -- we just finished. We were down slightly in the March quarter from the December quarter. Our turns run roughly about 4.5. We would expect that to continue. So based on whatever you think the cost of goods sold or the revenue you're modeling, you can kind of sort of calculate that number. That's the best way to do it. But assume turns of about 4.5.

Operator

We have a question from Edward Snyder with Charter Equity Research.

Edward F. Snyder - Charter Equity Research

You mentioned the start that the low-margin components versus integrated was one of the reasons for the gross margin compression this period. Can you give me a little bit of example what components you're talking about in terms of low-margin products just to get our heads around how the shift is going? And then the out periods, you've been particularly strong. I think, Dave, last year, you mentioned that you're probably the biggest producer of PADs in 2012. I think that probably wound up being the case. Do you see that to be the case again in 2013? And similar with SOI, you've had a big ramp here with SOI. It sounds like it's getting stronger especially with regard to antenna tuners. So I'm just going to grasp what you see the rest of the year look like in those products specifically.

David J. Aldrich

Yes. Thank, Ed. Yes. On the margin products, let me give you a couple of examples. We were -- we've been very big in Wi-Fi and in mobile, for example, doing like 3- and 4-throw PM switches. And we've sold them by the tens of millions a quarter. We're seeing an upgrade cycle to more of a silicon-based silicon-on-insulator switch with 7-, 8-, 9-, 10-, 11-, 14-, 15-throw switches with a lot of switch control embedded on the dies. So we get higher ASP at higher gross margin. That's a good example. We're seeing fewer dual band, low NPAs and more of an upgrade to a 3G or kind of a low-end smartphone transition. We see that as a benefit. Some of the ASM products and antenna products have been quite discrete. And whenever it's discrete, it implies that the barrier to entry's a little bit lower, so you see more competition. You see more price pressure. We're seeing less opportunities for those kind of products. And with the number of bands and the complexity in the number of antennas, we see that, and we're leading that upgrade to far more integrated products. And I do think we'll be the largest producer of filters integrated with PAs. We will not be the biggest producer of filters, of course, because that's not our strategy. But we will be the biggest supplier, I believe, in 2013 and 2014 in filters that are matched with the transmit chain.

Edward F. Snyder - Charter Equity Research

Excellent. And then in terms of your SOI products, since you seem to be really accelerating there, are you open to grabbing market share through some of the module manufacturers given they often times have access to design wins that aren't open to specifically a lot of -- Murata, specifically with the LTC substrate, et cetera? Is that something that Skyworks would be interested in given the outsourcing kind of model you have? It doesn't add any CapEx for you to do that. You could use your designs. I'm just curious about your business model for the SOI.

Liam K. Griffin

Yes, Ed. this is Liam. We have great position and relationships with all the key module manufacturers. Some of those have been born through Wi-Fi opportunities. And we speak with them all the time about opportunities to look at our portfolio whether it be in die form or chip scale. And we'll get those goes out, and if they make sense, we'll absolutely execute there. So I think it's something that's on our radar screen. We've been doing very well today with fully packaged products that have been coming out of Skyworks and packaged in our Mexicali site and doing quite well. But we have an open mind on what our customers want and our partners and would certainly look hard at that opportunity.

Donald W. Palette

And for us, we really instill a lot of discipline on the margin side. So to the extent that our module manufacturer needs our technology and we'll pay such that it has strong -- a good margin performance, we'll do it. We do have some instances of that, but we won't chase it if it's dilutive.

Operator

We'll go next to Mike Burton with Brean Capital.

Michael A. Burton - Brean Capital LLC, Research Division

I just -- I'm sorry if I missed this, but what's the percent of HPA versus cellular? And then within that, you have done clearly well on the Wi-Fi product. I'm wondering if you could break out Wi-Fi for us. And then also, you gave us the mix on 2G, 3G, 4G, but Dave, I'm wondering if you can give us your thoughts about where you think that percentage is going to trend towards and what that does to your margins.

Donald W. Palette

Yes. Just, Mike, the percentage was 40% linear and 60% handset smartphones, which is where we've been running.

David J. Aldrich

And I think, Mike, the answer to the second part of your question is I think it will continue to accelerate. I believe that the -- we passed the crossover where the upgrade cycle is now -- there's more revenue being derived and obviously, much, much higher growth rates being derived from that low-end smartphone, if you will, versus the 2G phone. So I think that's going to continue to accelerate. So Don said it used to 80-20. It's now 85-15, 3G, 4G versus 2G. I suspect you will continue to see that. And in virtually every single case, an upgrade cycle is a product that's more integrated and carries higher margin with fewer competitors.

Michael A. Burton - Brean Capital LLC, Research Division

Okay. And then any signs or updates on RF360 since Barcelona? I mean, have you seen that at customers? And do you have any more intel on how it compares in -- to your product offerings?

David J. Aldrich

Yes, sure. I think that we have seen it with some customers. We are partnering with Qualcomm today on some of the most exciting platforms in the market, so that relationship is very strong. I think the market niche they're trying to address, we're also addressing, which is driven by the exploding complexity in RF. It's not a "one size fits all" market I will say. Customers are making solution around more customized. However, I'll say this. There is -- there may be a narrow segment that does have less stringent performance requirements that could utilize a preconfigured, let's call it, a system in a package. And in this case, we compete with the SkyOne product. It's fully configurable, and it also has -- uses the best performance, has the best performance using the best process for function. So it'll be interesting, as we talked about earlier, to watch SkyOne uptake because it is highly customized. The difference is it's also high performance, and it is very configurable.

Operator

Our next question is from Vijay Rakesh with Sterne Agee.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Just on the gross margin side, I know your gross margins expanded nicely versus peers and obviously, your top line, too. But as you look at the levers there with production mix and the 2G coming down, how do you see long-term trends on the gross margin? You're already close to your 44% target. How do you see that over the next couple of quarters?

Donald W. Palette

Well, yes, Vijay, the easiest way to model that is you've got the new guidance here, so that's the start-off point. And as you layer in incremental revenue, we'd suggest you do the drop-through at 48%. As I said, that assumes no significant shift in the linear handset mix, and obviously, we've been very vocal our goal to continue to grow that. If that happens, that drop-through gets better. So there's upside to that. But for modeling purposes, we're saying this is 48%. That's how you can look at the different scenarios and see where we're going be at different revenue level.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Got it. And then you mentioned the 15% growth year-on-year that you should still be good with. That would imply the pretty nice snapback as you look at September and should bounce back by [ph] 10%, 12% on the top line. But is that more driven by the cellular side? Obviously, that tends to be more product cycle driven.

Liam K. Griffin

Yes. I mean, our second half outlook, I mean, we're not guiding the full year, but we certainly expect to grow both cellular, the analog within mobile and also the diversified markets. I think it's a combination. And if you look at the margin opportunity that Don outlined, we're going to drive margins in every category. There's a lot of great technology going on in our core cellular as we roll out complex MMMB solutions, as we rollout SkyOne. There's accretive analog that we can bolt right on into mobile, and then we have adjacent verticals that are very rich in margin. And quite frankly, we have a lot of headroom to grow there.

Operator

Your next question is from Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Company, LLC, Research Division

Dave, previously, you've talked about the China white box 2G segment of the business being only about 5% of sales. With 2G declining, my guess is it's even lower than that now. But with emerging market, smartphones being a significant opportunity and growing 80% year-on-year, can you give us some sense what is emerging market smartphones or 3G phones for you today and how do you see that ramping over the next several quarters?

David J. Aldrich

Well, I think you're right. Just to be clear, that 15% of our revenue is derived from 2G. About 1/3 of that is true open market -- true open market, for example, on a media; tech reference design. We've already passed the crossover point where we're generating more revenue, substantially more revenue on 3G that's going into the low end of the market. And as I think we cited a source earlier, like 80% this year growth in the emerging smartphone. I think that business is a strong growth driver for us. And our reference design position is stronger in the sense that we have products that carry a higher ASP. And with our chipset partners in that space, we are first on their bills materials as they enter the market. So I am very pleased with our position for the chipset partners who are well positioned in open market with higher dollar content with far fewer competitors. This is going to be a great market for the next 3 years.

Quinn Bolton - Needham & Company, LLC, Research Division

And then as a quick follow-up, one of your competitors on their call talked about securing additional capacity for filters. You talked about your expectations being one of the largest sellers of filter-based product this year where you partner with third parties. Can you talk about whether you're seeing the filter supply getting tight in the market? Or you are comfortable that you have adequate access to both SAW and BAW filters going forward to meet your demands?

David J. Aldrich

Yes, I am satisfied, although it's come with a great deal of work with our supply chain team and a lot of partnering, lots of discussions, lots of airline miles. So we have teams and folks that have been working, that have worked daily with our filter partners, and there are multiple partners because there isn't one size fits all for filter technology. And so we've got their attention as we are the ideal partner. Think about it. If you're a filter supplier and you don't make PA, whereas the big filter suppliers do not, then we're the perfect partner. We're the market share leader, and we have had a very clear strategy that we don't intend to produce filters. So that makes us the perfect partner, and we have -- we're getting good capacity answers from them as they continue to invest. So I'm comfortable with -- that we have the capacity.

Operator

Our next question is from Cody Acree with Williams Financial.

Cody G. Acree - Williams Financial Group, Inc., Research Division

Dave, with the linear and the cellular mix being relatively steady, with all of the opportunities outside of cellular that you highlighted from the initial comments on, a little surprised that maybe -- I guess, first off, do you expect that to remain relatively steady? Or into the out orders, do you expect to see maybe that linear piece start to outpace?

David J. Aldrich

I think over time, the linear piece will outpace. But Cody, let me be clear. Within a mobile platform, for example, we have our PA products. And if you look at it, I think the great example is we try to demonstrate that with the press release on the Samsung S4. If you look at the content, I think there's 8 parts on that device and only a couple of PAs. So it is the case that we will have a lot more analog and even some mixed signal and power management type content in mobile devices, while we also round it out with increasing vertical markets.

Cody G. Acree - Williams Financial Group, Inc., Research Division

And so if you look at that 40/60 split, if you have to look down -- I guess, when you look at it this way, but you looked down at your bottom line. What does that split look like given the margin difference between the 2 profiles?

Donald W. Palette

The step-back and you look at the split, it's going to be a little higher percentage for the linear piece because that business overall has better margins and better returns, so -- but we don't -- we wouldn't provide that exact percentage. But the takeaway is that, that number would be higher.

David J. Aldrich

Yes, we don't segment the business because we're using the same basic core manufacturing and design platforms across. That's the beauty of our business model, right? So the analog products that we develop for mobile, we also, then, reconfigure those for specific system performance in these vertical markets. They do pass, so we think about it as sort of contribution margin. The contribution margin is higher in those vertical markets, but the volume is much lower. So we have more margin dollars in mobile. We have higher contribution, but when you blend it all together, we come up with an accretive model.

Operator

We will go next to Ian Ing with Lazard Capital Markets.

Ian Ing - Lazard Capital Markets LLC, Research Division

First of all, you're talking more about the connected home, Internet of Things, machine-to-machine opportunities. How do you see those opportunities grow? I mean, can units start becoming material, perhaps, rivaling phones one day? And also, what are the margins there given that these are somewhat low-bandwidth opportunities, perhaps cost sensitive?

David J. Aldrich

Sure. We think the connected home and the Internet of Things is a real significant upside for the overall industry, the wireless industry, the connected industry. And we've had some early success with ZigBee technology and smart energy. We've done a lot of good work with utility and metering companies. We've moved into home automation. We've now also moved into smart appliances, thermostats and even white good appliances, Whirlpool, for example. So we think that this could be a tremendous opportunity for the market. Fortunately for Skyworks, we do have some technology in works data like [ph] ZigBee, we mentioned. There's implementations in Wi-Fi that could be beneficial for us. So we think we can outperform in this space, and it has an entirely different demand curve and market structure than what we see in mobile. So we're looking forward to it, and the margin there should be accretive.

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay. Great. And my follow-up is guidance on incremental gross margins, 48%. Is that largely reflecting just the gross margins of the new revenues coming in? Or is there also a manufacturing component there, utilizations and -- okay. So do you have like a peak capacity at this point per quarter?

Donald W. Palette

No. I mean, the beauty in -- that what we have is when you look at utilization, there's 2 types of utilization. There is sort of your line, your manufacturing line utilization. We run that, typically at 100% or theoretical capacity, but you also have square footage utilization, and we've got the opportunity for very short CapEx to expand. So we put ourselves in a position where we can drive the right incremental returns very efficiently, so...

Operator

We have a question from Tom Sepenzis with Northland.

Thomas A. Sepenzis - Northland Capital Markets, Research Division

I'm just curious. You've talked about several product categories in automotive and home appliances, utility metering. Do you have -- what -- how big is that business right now? And where do you see it going to over the next, let's say, 2 or 3 years?

David J. Aldrich

Well, in aggregate, the nonmobile portion of our business is around 40%, and it is, by definition, not a very volatile group of businesses because it's so broad. So think of the classic diversified analog businesses that have certain core competencies which we've outlined, and we just keep applying them with a more system know-how in underserved vertical markets, and we get a disproportionate ASP and a lot of stickiness because the product life cycles are very, very long. So that's kind of the strategy there. It's very diversified, not terribly customer concentrated.

Thomas A. Sepenzis - Northland Capital Markets, Research Division

And I'm sorry if this was asked, but I'm just curious as to why the tax rate was so low and why you think it's going to remain the 7% to 10% range over the next 1.5 years?

Donald W. Palette

It's just based on some business restructuring initiatives that we successfully implemented and how that translates into the end of the day or cash tax rate, so something we worked very hard at. And if you go back and look at our trend, we've been effectively been able to manage that at a number around what you're seeing as 7% or so.

Operator

Going next, we have Brad Erickson with Pacific Crest Securities.

Brad Erickson

Two quick ones for me. First, can you talk about the back half of the calendar year ramp and on the shoulders of dollar content increases? Curious to know if there's any expectation of share gain, particularly with your handset customers built into that expectation. Are you just kind of talking about basically grabbing most of the available market growth?

Donald W. Palette

We're making an assumption of some share gains, as we've said. If you look at our prepared remarks, our recent press releases and Samsung and elsewhere, we expect that the complexity facing our customers is playing uniquely into Skyworks' capability with a broad system footprint. And as a result, with each successive design, subsequent design in smartphone space, for example, or the tablet space, we see the need for more integration in order to hit the size, price performance requirements. And that integration plays well into the fact that we're the only supplier in this space that produces about 6 million multi-chip modules every single day. We have unique IP in how one integrates chip scale and the like. And So I think the more there is complexity, the more share we expect to gain, and the more content we expect to be able to add. That's our strategy.

Brad Erickson

Great. That's helpful. And then on the pricing front, can you kind of just give us an update on how the pricing environment looks? It would seem that you're obviously speaking quite bullishly around the low-end smartphone growth and historically, have talked about how the high end has sort of supported those declines you've seen in the 2G market. Can you kind of give us an update how -- if anything's changed there in terms of the pricing in the market?

Liam K. Griffin

Sure. As Don and David indicated, we're taking more of a system solutions orientation to dealing with customers and working with our customers. The complexity is going way up, and the types of products that we deliver to solve that challenge or to overcome that complexity with our customers are changing rapidly. They tend to be highly customized, defensible IP, real architectural solutions. And with that approach, we've seen much less ASP pressure, and we think that will continue the vertical markets much less ASP pressure, some cases, the lower-end space where you have more of a commoditized portfolio. The ASPs will run a little faster there, but that's becoming a smaller percentage of the business.

Operator

And ladies and gentlemen, that concludes today's question-and-answer session. I'll now turn the call back over to Mr. Aldrich for any closing comments.

David J. Aldrich

Well, thank you, everyone, for participating tonight, and we look forward to seeing you in upcoming conferences.

Operator

Thank you, then, ladies and gentlemen. That does conclude today's conference call, and we thank you for your participation.

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