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Skyworks Solutions, Inc. (NASDAQ:SWKS)

F2Q10 Earnings Call

April 29, 2009 5:00 pm ET

Executives

Thomas Schiller – Investor Relations

David J. Aldrich – President & Chief Executive Officer.

Donald W. Palette – Chief Financial Officer & Vice President

Liam K. Griffin – Senior Vice President Sales & Marketing

Analysts

Alex Gauna – JMP Securities

Ittai Kidron – Oppenheimer & Co.

Craig Ellis – Caris & Company

Cody Acree – Williams Financial Group

Analyst for Stephen Ferranti – Stephens, Inc.

Suji DeSilva – Kaufman Brothers

Patrick Newton – Stifel Nicolaus

Tim Luke – Barclays Capital

Aalok Shah – D. A. Davidson & Co.

Anthony Stoss – Craig-Hallum Capital

Todd Koffman – Raymond James

Dunham Winoto – Avian Securities

Jonathan Goldberg – Deutsche Bank North America

Edward Snyder – Charter Equities

Nathan Johnson – Pacific Crest Securities

Operator

Welcome to the Skyworks Solutions second quarter fiscal year 2010 earnings conference call. This call is being recorded. Now, at this time I’d like to turn the conference over to Tom Schiller, Investor Relations.

Thomas Schiller

Welcome to Skyworks second fiscal quarter 2010 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. Dan 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 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’s website for a complete reconciliation of GAAP.

With that I’ll now turn the call over to Dave for his comments on the quarter.

David J. Aldrich

I’m pleased to report today that the Skyworks team delivered better than seasonal performance in the March quarter, demonstrating solid operating leverage with both gross and operating margin expansion. As a result we exceeded our updated top and bottom line financial guidance provided back in March and at a higher level we are making progress across each of our strategic objectives and are benefitting from several macro growth trends as Skyworks transitions to a highly diversified analog company.

Specifically for the quarter, we delivered revenue of $238 million. We improved our gross margins by $230 basis points year-over-year to 42.3% and we increased our operating margins by 820 basis points to 20.5%. In turn, we grew operating income by 130% year-over-year to $49 million and we posted $0.24 of diluted earnings per share versus our updated guidance of $0.22 to $0.23.

Of note and to give you a sense of our broad diversification, during the quarter we shipped to nearly 1,000 customers of which only one exceeded 10% of our total revenue. Now, with respect to cash we generated $60 million of cash flow from operations and we exited the quarter with $412 million of cash. Now, this is even after a $40 million outlay for convertible debt retirement.

Finally, we are guiding to 10% to 15% sequential revenue growth with earnings per share of $0.30 in the June quarter. Now, just to digress a bit from the numbers and to give you a more macro perspective, we believe our results today and outlook underscore several accelerating market trends. First is the increasing ubiquity of broadband access across both wireless and wire lined networks. The second trend is the apparent insatiable consumer demand for always on connectivity for things like audio, video, text and social networking. Third, the emergence of a host of new wireless applications and really slick consumer friendly platforms enabled by reliable and affordable technologies.

Now, I’d like to step back for a moment. Quite frankly, each of these macro trends is still in the early stages of development. At the same time we are increasingly beginning to see multiple mobile internet access to devices per person beyond the traditional cellular handset and even Smartphones to now encompassing things like high resolution tablets, netbooks and other products we haven’t even yet thought of.

Meanwhile, wireless local area networking [inaudible] functionality is being integrated within things like gaming consoles, LED televisions, Blu-Ray players and smart appliances. So in short, virtually all next generation electronics are embedding some form of wireless network connectivity. So on today’s call we’ll talk about how Skyworks is capitalizing of these trends and even in some small ways enabling these rapidly expanding opportunities with analog semiconductors.

More specifically, we’ll highlight our traction within Smartphones, within network infrastructure and smart grid applications, three of our key growth engines and we’ll discuss why we’re confident in our ability to continue to outpace market growth.

To start with regard to Smartphones, this is perhaps the most exciting mobile communications market today given the ever expanding range of applications and broad consumer acceptance. Skyworks is uniquely positioned as a supplier to all leading Smartphones OEMs and according to Oppenheimer, this category is enjoying three to four times the 8% to 10% anticipated overall handset growth rate in 2010 and 2011.

In our case, this market is growing at an even steeper trajectory given the rising analog content opportunity as consumers shift to 3G and OEMs increasingly offer carriers phones with global roaming capability. Compounding this growth, we are gaining additional share as OEMs seek to lower their bill of materials and integrate edge front end modules with multiple WCDMA bands in smaller, more power efficient and more cost effective modules.

By sweeping more functionality in to our analog solutions, we’re able to improve size, battery life and affordability increasing our dollar content while at the same time raising competitive barriers. In other words, we’re in a unique position today where our competitive playing field is narrowing even as our customers increasingly require system level expertise and highly integrated solutions built on proprietary intellectual property rather than a more costly discreet implementation. This trend increasingly favors Skyworks. As a result we believe we will continue to outpace the market growth rate towards our goal of achieving clear market leadership within this strategic segment.

Moving from Smartphones, secondly we continue to gain momentum on the other side of the mobile Internet connection and that is network infrastructure. As mobile operators begin to install new base stations, routers and back haul network equipment to avoid network traffic jams and to preserve their highly profitable data service revenue. According to CISCO’s latest forecast, worldwide mobile data traffic is expected to double every year through 2014 to nearly four Exabyte per month.

Now, just to give you a sense, one Exabyte of data is equivalent to the content including within 250 million DVDs, 250 million. So obviously Internet infrastructure will require significant capacity expansion to support this growth. To that end, we’ve developed a portfolio of network infrastructure solutions including attenuators, VCO synthesizers, mixers, low noise amplifiers and demodulators.

Additionally during the quarter we launched the industries first suite of high performance broadband synthesizers, spanning ultra wide frequency ranges and we’ve captured key design wins at CISCO, at Ericsson, at Huawei, at Nokia Siemens. These complex RF subsystems are designed to reduce the size and complexity of networking equipment while enabling greater networking reliability, capacity and efficiency which of course translates in to more service revenue.

Thirdly, as we’ve discussed on prior calls, we continue to see significant growth in the emerging smart grid market as utilities and consumers alike seek to better measure and manage energy utilization. Just to frame the opportunity here, consider that there are nearly three billion meters worldwide of which only 8% are automated today. So, we see a massive retrofit and new deployment opportunities as utilities strive to more efficiently manage their grids in the name of lower administration costs and higher returns on capital.

Like the Internet itself, smart grids are complex, multilayer networks of networks and are increasing becoming interactive. This market landscape is made up of a wide variety of components, applications, sensors and control, thus enabling us to leverage several key RF building blocks across a broad ecosystem of energy management suppliers.

For Skyworks over the past few year, we have made very targeted investments in this area to position ourselves to capture share early. By virtue of our recent design wins, today Skyworks is servicing several multiyear advanced metering infrastructure contracts supporting a variety of US and international utilities. For example, we’re in high volume production with a number of smart meter suppliers including Itron, Landis&Gyr, Neptune, Sensus and Badger.

We also continue to enable home automation systems for the consumer. Here we’re providing ZigBee solutions linking thermostats, air conditioners and appliances. Of special note, we recently won new business at Honeywell in support of their home security systems and we captured our very first designs at LG Consumer Appliance Group, enabling wireless connectivity amongst a range of smart white good products. According to IMS Research, in this segment alone shipments of smart meters with home area network gateways are expected to grow at a compounded annual rate of 59% from the years 2009 to 2014.

Finally, we continue to leverage our standard analog catalog business to address a variety of mature as well as new vertical markets including automotive, avionics, satellite, medical, military and industrial. With our global customer base and over 250 analog products we continue to bolster our portfolio with each new customer engagement. This business increasingly provides us a high margin, diversified customer base along with annuity product life cycles.

In summary, given all of these growth engines, we are setting the stage for an even stronger second half of 2010 and we believe widening of the GAAP between overall market growth and our performance. In fact, by simply annualizing our June quarter outlook, we are now on a greater than $1 billion revenue run rate with earnings of $1 per share. This is even before the second half of 2010 ramp.

These financial milestones represent yet another step in the transformation of Skyworks in to a high margin, diversified analog semiconductor market leader, all positioning us to create a greater competitive advantage and to continue to create shareholder value. I’ll now turn this over to Don for his review.

Donald W. Palette

I will first provide a quick summary of our second fiscal quarter results and then outline our business outlook. Revenue for the period was $238.1 million, up 38% year-over-year and surpassing our updated guidance range of $230 to $235 million which we provided on March 1st. Gross profit was $100.7 million or 42.3% of revenue, a 230 basis point year-over-year expansion which was driven by a product mix that increasingly includes higher margin, vertical market and 3G solutions, a volume ramp of new products, continued manufacturing productivity enhancements, product end-to-end yield improvements and significant material cost reductions.

Operating expenses were $52 million of which R&D was $30.3 million and SG&A was $21.7 million, yielding $48.7 million of operating income and a 20.5% operating margin. Our net interest and other expense for the quarter was $700,000 of expense while taxes were $3.8 million, a cash tax rate of 8%. As a result, our net income was $44.2 million or $0.24 of diluted earnings per share.

Now, turning to the balance sheet, during the quarter we generated $60 million in cash flow from operations. We recorded $11 million of depreciation, retired our March 2010 convertible debt at maturity with a $40 million outlay and we invested $20 million in capital expenditures. As a result, we exited the quarter with cash and cash equivalents of $412 million or $2.25 on a per share basis.

Now, to our business outlook, based on strong demand across multiple markets we anticipate 10% to 15% sequential revenue growth in our third fiscal quarter. Assuming revenue of $268 million at the midpoint of this range, we are forecasting gross margin of 43%, operating expenses between $54 and $55 million yielding an operating margin approaching 23%. Below the line we expect $700,000 of net interest expense and an 8% cash tax rate.

In turn we are forecasting diluted earnings per share of $0.30 off of a base of 185 million shares. This trajectory is consistent with our medium term financial targets outlined previously, namely operating margins in the mid 20s on revenues in the $280 to $300 million range. This model was highly achievable in the near term and strikes the right balance between gaining market share, enhancing margins and most importantly maximizing our return on invested capital.

Further, given the strengthen of our business model, we expect additional leverage well beyond the mid 20% range as we continue to scale and further diversify Skyworks. That concludes our prepared remarks. Operator go ahead and open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Alex Gauna – JMP Securities.

Alex Gauna – JMP Securities

I was wondering if you could help with that leverage beyond 25%, what is driving it? Is it the new product areas, is it the upgrade cycle to 3G/4G, the modular, just maybe some color beyond what’s giving you that confidence and maybe some timeline behind that as well?

David J. Aldrich

It is a lot of what you suggested, I’ll let Don comment specifically on where the financial leverage is but it is a combination of continuing to see higher dollar content platforms being introduced in to the market. Those platforms typically have high contribution margins, higher than the ones they’ve replaced frankly. There is sort of an indication that our customers are indeed willing to pay for integration, they’re willing to pay for innovation and I think you can sort of begin to see that in the results.

We’re also seeing more vertical market opportunities as we move from infrastructure in to smart grid which today is our highest growth business even though it started at a relatively small base with very high margins in our catalog business and increasing set of vertical markets. So it’s a combination of high dollar content within our mobile business, high contribution margins and more vertical opportunities.

Donald W. Palette

Just to comment on the model, we just went through the guidance which $268 and 43% margins, $54.5 million in operating expenses, you’re closer to that 23%. The operating margin is going to continue to expand as we continue to grow the top line. The operating expenses at this point are relatively fixed, minor changes in that. You’re going to get tremendous leverage on that line and we are going to continue to expand product margins, leveraged off of what Dave talked about in the market place is what’s really going to move us beyond the 25%.

Operator

Your next question comes from Ittai Kidron – Oppenheimer & Co.

Ittai Kidron – Oppenheimer & Co.

I wanted to dig in a little bit in to first of all the sources of the outside relative to your own internal plan. Don, maybe you can highlight the one or two things that really surprised you to the upside in the quarter? Second, in regards to the outlook, any color in there on the cellular contribution versus the linear products? Sort of what is going to grow faster, what is it that incrementally is making that push?

David J. Aldrich

I think with respect to what upside we saw in the margins, we do try to be conservative in our guidance. We factor in all the inputs from our customers, we go bottoms up and top down, we look at our bookings level and Don’s pretty conservative. We try to approach it in a prudent way and in this case our assumptions were a bit more conservative. We did see some specific traction in smart grid, that business grew nicely in the quarter and we continue to see 3G platforms introduced where we get much higher dollar content than the 2 to 2.5 platforms that they replace. As we discussed in our prepared comments, it’s really all of those things.

Donald W. Palette

Also, as far as for the product margins this is the first quarter where we had full six inch production and until you actually start producing wafers, see what the yields are going to be, you really don’t know for sure what benefits you’re going to get. From that end, the benefit was a little bit better than expected so that roll out has gone very, very well and that has contributed as well.

Ittai Kidron – Oppenheimer & Co.

Just to follow up with a couple specific customers, is there a way you can give us an update on your progress with Nokia? Also, the Chinese, they’ve been very strong all around, how is your business shaping out there, how do you see yourself positioned there?

Liam K. Griffin

With respect to Nokia, we continue along a path towards success here with this account. This last quarter they were a high single digit customer. They’re going to grow throughout the year. We are now moving from supporting largely WCDMA in to now addressing their mid tier portfolios and I think what’s really notable for us and I think strategically an advantage is that we are participating with each and every one of their base band suppliers, ST-Ericsson, Infineon, Qualcomm and even Broadcom. So we expect Nokia to be a meaningful driver for share in the back half of 2010 and through 2011.

Ittai Kidron – Oppenheimer & Co.

And the Chinese?

Liam K. Griffin

With respect to China? China has always been a strong position for Skyworks. Our share continues to look very strong here. Our relationships Mediatech are outstanding. We’ve actually augmented our position in 2G handsets with some upside in infrastructure. We have new designs at Huawei, we’re even now penetrating ZT on datacards. So in addition to the Mediatech position, I like the way we diversified here in some of the non-handset markets.

Operator

Your next question comes from Craig Ellis – Caris & Company.

Craig Ellis – Caris & Company

With respect to the outlook in the three segments: energy efficiency; linear products; and then the core business, how should we expect the relative growth rates to shake out? About even or is one going to be much stronger than the other two?

David J. Aldrich

Well, energy management will grow faster off of as I said relatively modest basis, now, 20% of our non handset business but it is growing faster. We believe in a targeted way, as we discussed in the prepared comments that infrastructure is going to begin to get more play for us as these new products, these synthesizers, these VCOs which are highly integrated, highly valued we believe by the selected customers we’re going after and so I think we’re going to gain some traction there.

But, this whole phenomena of always on connectivity and driving more Smartphones, more exciting apps, tablets, ebooks, that’s not going to go away any time soon. It’s going to be a little bit of a horse race here but clearly we think between the linear product opportunities and handsets will grow, I think we’ll remain roughly stable as a percentage. Energy management will grow faster and I think begin to become meaningful for us over the next few quarters.

Craig Ellis – Caris & Company

As you look at the part of the PA and front end opportunity that is tablet and PC dongles, etc., that content that’s cellular but not in handset devices, how big do you see that market being now? What do you think the growth rates are and how important is that business as you think about your growth over the next 12 months or so?

Liam K. Griffin

It’s difficult to exactly understand the market TAM because each and every quarter there is a new innovative solution that is released to the market. I think to Dave’s opening remarks, you can see this proliferation. So we are seeing a lot of devices that we’ll call Internet appliances. They may be USB dongles, they may be tablets, we’re even seeing potentially a move where some of the plasma TV folks that now have Wi-Fi are considering a cellular radio.

Right now, we think that market is very roughly 80 to 100 million unit market or more that is above and beyond our $1.25 billion handset space. It will grow materially over the next several years and quite frankly again, we’re not sure how many new devices could be added but that TAM is on the move.

Operator

Your next question comes from Cody Acree – Williams Financial Group.

Cody Acree – Williams Financial Group

Your op ex outlook for Q3?

Donald W. Palette

It’s between $54 and $55 million.

Cody Acree – Williams Financial Group

As far as capacity goes with six inch ramping, how do we look at that in future quarters?

David J. Aldrich

One of the things Cody about six inch conversion is just going in general adding a step function increase as the diameter of wafers increase. When you flip on the switch it really doesn’t do a heck of a lot for margins initially because it enables a great deal more revenue. So what it really does is it allows you to increase your contribution margin as your revenue increases. So you should begin to see we have a lot of capacity now in gallium arsenide, we have ability to continue to modulate what we purchase on the outside versus what we produce on the inside.

That gives our customers a great deal of comfort and it gives us a lot of upside and it has increased our contribution margin here as we run the business. We’ve got bricks and mortar capacity to double the size of the revenue of this company with high contribution margin as it relates to now HPT so it gives us tons of upside. You’ll see us begin to grow in to that high contribution as each subsequent quarter’s revenue increases.

Operator

Your next question comes from Analyst for Stephen Ferranti – Stephens, Inc.

Analyst for Stephen Ferranti – Stephens, Inc.

In the smart meter business I know that you guys have been doing business with the likes of Itron and [ESCO] just to name a few. Who are the other big players in that market that you’d like to be doing more business with? Are most of the small meter opportunities that you’re seeing North American based or are you also seeing international opportunities as well?

Liam K. Griffin

As we mentioned it’s a global market. I think the US has really been at the forefront of this and a lot of the utilities in the west coast have really led the drive. You’ve mentioned a few of our current customers Itron, [ESCO], Neptune, Sensus, there are several others that are pursuing. One notable account that we’re working with today what we don’t have business with that we certainly have a line of sight to new revenue streams would be a company called Silver Spring Networks in the bay area.

With respect to geographies, as much as this is a success here in the US, we absolute think this will move to Europe and eventually I think there could be a huge play in the Asian market. But again, as we’ve outlined the current customers that we have and the backlog and the position that we have, wins that are on the table, look very promising this year.

Operator

Your next question comes from Suji DeSilva – Kaufman Brothers.

Suji DeSilva – Kaufman Brothers

Calendar second half of this year given your momentum and some of the share opportunity that you have, should we be expecting seasonality or will there be factors that would affect that in either direction better or worse than seasonality?

David J. Aldrich

I think you should expect seasonality. I think you will see factors that will offset it as this quarter the change between December and March was far less than normal seasonality. It was because we were gaining share and continuing to outpace the market by penetrating new verticals as well as gaining customers and sockets within mobile. So I do think you should expect seasonality, I expect a strong overall market and I expect that we will outperform it rather handily as we continue to ramp some of these new programs that we have been discussing and as we continue to ramp programs that are outside the handset space.

Suji DeSilva – Kaufman Brothers

Then I don’t know if you gave this or not but if the mix this quarter of analog versus handset within analog how much of that is smart meter at this point?

Donald W. Palette

The actual mix of our broad line analog business was roughly a quarter of revenue with handset revenue being about 75% which has been consistent with where we have been running the last three or four quarters. As far as where we were this quarter on smart meter a little bit below 20% of the analog total.

Suji DeSilva – Kaufman Brothers

The last question, really data cards you guys talked about that being kind of more silent growth opportunity that is happening. How is that proceeding for you guys? Is that significantly outgrowing the company growth for you guys? Is your share there stable or improving?

David J. Aldrich

Well our share is growing in that space and that element itself within the market is growing quite a bit. What you see is you see the USB dongle, you also see embedded chipsets that are really taking off. I think some of the most significant base band players now are really developing some really cutting edge solutions that you’ll see embedded within netbooks and laptops and we’re well positioned to see some upside from that as well. So I think it’s a great new use for cellular technology and our devices and again, it will continue to expand through this year and then several years beyond.

Operator

Your next question comes from Patrick Newton – Stifel Nicolaus.

Patrick Newton – Stifel Nicolaus

A question I guess for Liam, regarding smart meter with the product already representing 20% of your revenue and I think previously you had said the target for the full year was 20% with the higher growth rate than the linear market as a whole where do you think smart meter can now exit the year as a contribution to analog?

Liam K. Griffin

That’s a good question. It will probably tick up a few points. We’ve been on a very steady progressive growth rate here. We’re adding customers, our customers have well defined program ramps for utilities. We have opportunities. I think really the big opportunity right now for expansion is going to be in the home area network with our ZigBee technology. We alluded to a couple of design wins here in the prepared remarks and one of the most notable for us is moving in to an account like LG and their consumer appliance division where they’re going to be rolling out ZigBee enabled white goods appliances.

I think the upside in my opinion, the meters themselves are well characterized, the home area network is where we could see some real material gains here late this year and over the next certainly 2012 through 2015 even.

Patrick Newton – Stifel Nicolaus

Don, one for you, I think previously you had given the expectation of an 8% tax rate through 2010 and then tax planning allowing about a 12% in 2011. I was wondering if you can update us on the progress made towards that 2011 goal? Maybe even walk us through how you manage to keep the rate so low and then perhaps the sustainability of that 12% rate in the out years?

Donald W. Palette

We’ve given 8% for the balance of the year and we actually for 2011 and 2012 we’re looking at a rate between 10% and 12%. That rate is going to be dependent upon where earnings go too because there are some variables in that rate that change as earnings increase but that’s a good number for you guys to use in your models now. The way that we’re doing that, if you look at this year, this year we have $90 million of NOLs remaining that are shielding our income that’s allowing us to keep it at 8%.

We are putting some business initiatives in place, actually one was implemented for the second half of this year, one will be implemented for the first quarter of next year that will allow us to do some tax strategies and some tax planning that allow us to keep that rate at 10% to 12% for 2011 and 2012. Beyond that, up to 15% is probably a good number and we think those are very, very competitive rates.

Operator

Your next question comes from Tim Luke – Barclays Capital.

Tim Luke – Barclays Capital

I was wondering Don, maybe you could talk about how having guided your gross margins up again, how you perceive the different puts and takes there and what sort of ranges do you think over time you might be able to touch? And, perhaps if you see the six inch but also some of the mix change?

Donald W. Palette

As I said earlier when we were talking about the model, as we drive towards the goal of 25% and beyond it’s a combination of both margin expansion and leveraging our operating expense base. We just guided to 43% so you can model this as we grow to $280 to $300 or beyond in revenue and use a contribution of in excess of 50%, you can see that margin is going to continue to expand and that’s our expectation.

It’s a combination of things that we are currently doing, will continue to do and that is focus on the material cost reductions, continuing to drive productivity and yield improvements. It’s also the releases Dave had talked about earlier of a lot of the new product suites, the higher dollar content, more value add in the market place, we believe all that is going to drive margin expansion. It is the six inch conversion as well which is going to give us more internal capacity. All those things are contributing to it.

Tim Luke – Barclays Capital

Do you have an upper framework where you think you’d say, “Okay, we want to go for more growth here than margin?” At the sort of 45 level or something or how should we think about it over time?

Donald W. Palette

We haven’t set any specific targets, we just think there is a lot of opportunity with just leveraging the fixed cost base and the operations as you continue to expand revenue that that number is certainly going to go to a number of 45% and potentially beyond. You can run the models as I described and you can see where the potential is.

Operator

Your next question comes from Aalok Shah – D. A. Davidson & Co.

Aalok Shah – D. A. Davidson & Co.

In terms of the 10% customer did you mention that that was Samsung or not?

Donald W. Palette

We had one 10% customer for the quarter and it was Samsung.

Aalok Shah – D. A. Davidson & Co.

Then on the Q3 revenue growth guidance is there a way to think about it between linear versus handset? Is it 50/50, is it more skewed towards linear?

David J. Aldrich

I think it’s going to be pretty well balanced. We’re really excited about the growth in these vertical markets that we talked about and the catalog business keeps chugging along. I think it’s going to be very well balanced for the second half of the year and that’s up against some pretty steep growth in these programs that we described and customer ramps in mobile. I’m pretty pleased with that but I think you should expect the linear business to absolutely stay up with handsets.

Operator

Your next question comes from Anthony Stoss – Craig-Hallum Capital.

Anthony Stoss – Craig-Hallum Capital

A couple of quick questions, I don’t know if you gave this but your percentage of revenue by interface?

Donald W. Palette

It was we’re now actually slightly more than half 3G versus 2G. It was 52% wedge and 48% CMDA and GPRS.

Anthony Stoss – Craig-Hallum Capital

Any component constraints that you guys are keeping an eye on that would hinder your growth going forward here in the near term? Are you having any troubles getting materials to meet demand?

David J. Aldrich

No, we’re not although it is admittedly tight out there. We are really able to leverage this hybrid model that we have where we not only have increased our own internal capacity, you see the targeted capital we put in place over the last couple of quarters has gone right at any potential bottleneck providing us upside to what we see as our customers’ upside forecast. We don’t want to miss any share opportunities.

Our purchasing people are frankly out there and they’re doing a good job to make sure that we get more than our fair share of visibility and supply for those components and PCVs and so on that we purchase. Of course, we did flip the switch on the six inch here so we’ve got not only lots of capacity externally but we’ve got lots of capacity internally for perhaps our most important component in the front end solution which is the gallium arsenide content. I’m pleased with what our supply people have done and this hybrid model is going to serve us well even if we see surprising upside coming through in the second half ramp.

Operator

Your next question comes from Todd Koffman – Raymond James.

Todd Koffman – Raymond James

What are the capital spending plans for the remainder of the current fiscal year?

Donald W. Palette

I think you can model to expect, we don’t guide balance sheet information, but I think in your models if you just assume the same kind of run rate you’ve seen for the first half of the year for the second half that’s safe.

Operator

Your next question comes from Dunham Winoto – Avian Securities.

Dunham Winoto – Avian Securities

A couple of questions for me, first of all can you give us an idea March versus June, I know that if you look at industry analyst estimates out there obviously the Smartphones are going to be outgrowing the overall market but just by a quarter-by-quarter basis of where you sit if you can give us an idea on the growth rates that you saw on the entry level phones versus the Smartphones in March and June?

David J. Aldrich

Typically, the March to June quarter in handsets is about a 3% to 5% sequential growth in units. We do see as noted, some great uptick in Smartphones and that really is the vehicle today of choice with consumers and carriers. Carriers love it for the data service it provides. Penetration is very, very low in Smartphones outside of the US and Europe. You still have a big market in Asia that is moving.

So we think Smartphones on a unit basis will continue to outgrow 2G handsets, there’s no question about that. But, at the same time some of the major markets in 2G, China for example, continue to look solid. So overall we would put about 3% to 5% at the high end, mid range about 3% to 4% for unit growth in handsets in general but Smartphones clearly outpacing.

Dunham Winoto – Avian Securities

What do you think is the Smartphone growth rate?

David J. Aldrich

Well, the annual growth rate in Smartphones is 35% to 40% year-over-year and we think that will continue over the next five years.

Operator

Your next question comes from Jonathan Goldberg – Deutsche Bank North America.

Jonathan Goldberg – Deutsche Bank North America

I was hoping you could talk just a little bit more, give us a little bit more color on your China business? How is the margin profile of that business shaping up? I know it’s a lower priced product but what’s the cost structure in the margin look like and how do you expect it to trend during the year?

Liam K. Griffin

I’ll start a little bit on the customer dynamics and then I’ll pass it to Don on margin. One of the things that we like about our business in China is we deal directly with the most powerful chipset player there, that’s Mediatech. So our products are specifically tuned and designed to meet the architectures, the requirements, the specifications and the costs of that customer set. Beyond that as I’ve mentioned, we’ve augmented our handset business in China with some great strengthen now in infrastructure. Certainly big differences in gross margins between the infrastructure business and what we see in 2G but in both case this is an accretive business for Skyworks and high growth.

Donald W. Palette

Just to reiterate what Liam said, when you look at the business profile of Skyworks and the numerous SKUs that we have and you look across interfaces, a lot of the 2G products in China that we’re serving, we’ve been making those products for a long period of time. We’re very efficient at those, high yields, high productivity and quite frankly the 2G margins are right in line with the other product profiles that we have. So there hasn’t been any pressure and in fact, as Liam said, when you look at the overall volume it actually can be slightly accretive, the overall return on the business. So no negatives there at all.

Jonathan Goldberg – Deutsche Bank North America

Moving to the other end of the spectrum, have you guys made any sort of significant design wins that you maybe can’t talk about but you can sort of hint at that we might be seeing in the next few months?

David J. Aldrich

I think that without talking about specifics if we do our jobs, and we intend to, if we continue to do our jobs the strength of our design capabilities and the scale that we bring to the party and plus the fact that we’re shipping to everybody today, or virtually every major OEM in both the Smartphone and the cellular category. We would be failing to not have content peppered across the board with various OEMs.

So we don’t look upon one socket or another socket, we think we’ve done a pretty good job of continuing to diversify our customer base and we’re disappointed by any 3G or Smartphone, or high end socket where we don’t participate. We think the technology of ours is superior and our scale is both broader and deeper from a manufacturing standpoint. We aspire to get a disproportionate share across every customer.

Operator

Your next question comes from Edward Snyder – Charter Equities.

Edward Snyder – Charter Equities

A couple of quick housekeeping questions, Don you said the 3G/2G split that you’re now favoring 3G wedge, is that all wide band CDMAs or wide band CDMAs and edge just to be clear?

Donald W. Palette

Both.

Edward Snyder – Charter Equities

Price erosion, we’ve heard from several of your competitors on that subject this quarter, things are a bit different. What are you seeing? The same, more, less, any changes from historic?

Liam K. Griffin

Ed, we’re seeing nothing out of the ordinary right now and ASP erosion for us is actually a little bit less erosion than we saw last year. Our content per phone though is increasing and in some cases we’re looking at blended ASPs that are actually going up on a year-over-year basis.

Edward Snyder – Charter Equities

That’s primarily content, if you’re dealing with one modular one band are we still seeing the standard 15% to 20% a year erosion in that?

Liam K. Griffin

No, nothing like that. If you’re taking same part year-over-year we’re in the single digits here.

Donald W. Palette

First of all, we never saw 20%. We’ve been seeing 6%, or 7%, or 8% here now the third year in a row on a part-to-part basis whereas each new solution or each new platform tends to be a little higher in revenue. So I don’t think you should look at it that way. The real change has been in the last couple of years as there are increasingly more complexity behind these devices. We’re being designed in upfront with the base band solution and we’re sole sourcing more often than not in the platform so the pricing structure of the yield curve, the cost structure is known, it’s negotiated in advanced, it’s well understood.

We’re we think as good as anybody in the industry in predicting what those production ramps are going to be. So, you shouldn’t be looking at 20% ASP erosion across any of our markets and customers. As Liam mentioned, it’s typically been for the third year in a row now in the 7% to 8% range part-to-part with increasing dollar content on average per phone.

Edward Snyder – Charter Equities

It certainly seems like we’ve gotten in to the second phase of the growth in the industry, you have to go back to I guess ’97 to 2000 when HPT first showed up to see such consistent improvement in the content for RSM. We’re hearing it across all the other OEMs. To that end, everybody is talking about relatively tight capacity in their production, I heard it out of RFMicro, I heard it out of [inaudible] last night, not so much your supply of wafers but in your ability to produce nothing drastic but you outsource a portion of yours, is that capacity also seeing some tightness and does that affect your ability in the flexible manufacturing realm?

David J. Aldrich

In terms of HPT we discussed earlier we now have lots of capacity both dedicated externally and what we’re able to exercise now as the result of the six inch conversion. That’s a great big deal for us. We have heard of potential constraints for example in the packaging area. Here’s an areas where we have the capability to do it all in house and we have the capability and the desire to do some of it on the outside based upon wanting to maintain flexibility.

So on packaging we’re in very good shape but on the assembly case you may hear some shortages with others. Remember, we’re kind of unique in that we can produce the majority and if we need to all of our own packaging, all of our own assembly. We think that’s a competitive supply chain advantage, it’s a time to market advantage and it is definitely a margin and a cost advantage for us.

Donald W. Palette

To reiterate that, we’re still outsourcing roughly about 15% of our assembly operation. That number isn’t changing in our forecast dramatically and with some of these targeted cap ex investments that Dave described, that puts us in a position to handle the demand that we need to handle.

Operator

Your next question comes from Nathan Johnson – Pacific Crest Securities.

Nathan Johnson – Pacific Crest Securities

One housekeeping I was curious if you guys had mentioned how far booked you guys are to the midpoint of your guidance?

Donald W. Palette

We’re approaching 100%, a very, very high percentage at this point.

Nathan Johnson – Pacific Crest Securities

Then on operating expenses, it looks like you’re looking for a little bit of a step up this quarter. I was wondering how we should view op ex going forward as you see revenue increase? Are we at a level that you can be consistent at for a while or do you see SG&A tracking upwards with revenue?

Donald W. Palette

I think it’s at this roughly $54.5 to $55 million level. I think that we’re going to be relatively static, it just depends on the revenue growth that you’re describing and that certainly shouldn’t be something that’s not going to move a lot in the short term. Annually, you have pay increases, there are other things that can drive that number up a little bit but it isn’t anything that’s going to move in the short term.

David J. Aldrich

It’s our expectation that our op ex will drop substantially as a percentage of revenue as we move throughout 2010 and 2011. If we see targeted investments or small increases they will nonetheless be a lot lower than the overall revenue growth rate.

Nathan Johnson – Pacific Crest Securities

One last one out of me, just looking at the better than seasonal guide, you guys obviously highlighted a lot of new programs in your press release and then on the call. I was wondering of that better than seasonal guide, how much of that is associated with new programs versus ones that you already have gone?

David J. Aldrich

The majority of that ramp is really new designs. New design wins in many cases we captured the business last quarter or the December quarter and it’s now coming to fruition. It’s a good mix of healthy base and diversification as well as new program ramps in both non handsets and in targeted handset platforms.

Operator

Your next question comes from Alex Gauna – JMP Securities.

Alex Gauna – JMP Securities

I wanted to ask Dave, I know you mentioned seasonality for the third quarter but given the booming second quarter you have do you mean it more along the lines of the typical 8% to 10% type of seasonality or do we have that potential to see with new design wins coming on acceleration from what you just put up in Q2?

David J. Aldrich

Well, I think to be clear are we talking about the market or are we talking about Skyworks?

Alex Gauna – JMP Securities

We’re talking about Skyworks that I’m curious about there. With your pipeline of new design wins and improving mix of 3G, obviously we’d expect and you’ve mentioned this, we’d expect some improved seasonality. How does that leverage continue that you saw in Q2?

David J. Aldrich

Well, we do think that it continues and it’s for the reasons we talked about in our prepared comments. We are seeing some targeted program ramps in and outside of the handsets. We are participating disproportionately in the Smartphone sector and that’s the highest growth rate within mobile. March is a seasonally low quarter in the market, we did much better than that. Our guidance is for much higher growth rate in June than the market and we expect it to continue. I’ll be very clear, we’re going to take share and we’re targeting those applications and margins that are higher ASP and higher margin. We’ll be very disappointed if we don’t significantly outpace the sequential growth rate of this market.

Alex Gauna – JMP Securities

With regard to those higher ASP products, I was wondering if you could describe whether either by naming the platform or just the type of platform, what is your highest ASP? What is that radio content look like, how many modules or what type of module? If you had a marquee design win that you’re pointing to this is what Skyworks can do, can you describe that for us?

David J. Aldrich

It’s roughly $8. A marquee design would be on a quad band edge device with multiple bands of wide band CDMA where we have swept in not only the amplification but we’ve swept in the filtering, switching and conditioning integrated in to a module that pulled in much of the passive content and so the total content gets you to maybe $10. Since we don’t do higher power duplexes for example we would max out today at about $8.

But you know what I think is an even better way of looking at this, there are very, very few platforms that give us or anybody else $8 in analog content. There are a whole slew, and the majority of phones today are still in the GPRS range that are $1. So what’s really going to happen is by integrating all of these passive functions and by continuing to come out with these new multimode devices it is going to be the $1 moving to $4 that’s going to drive the TAM of our business much much more than what happens to the $8.

The $8 is a drop in the bucket compared to the $1s and $2s that are rapidly going to $3 and $4. That’s where the market is going to land over the next three to four years. I would caution you don’t worry about the $8, we don’t think about the $8 we think about the $1.

Operator

With that this does conclude today’s Q&A portion of the call. I’d like to turn the call now to Dave Aldrich for any additional or closing comments.

David J. Aldrich

Thank you very much for participating. This concludes our conference call today and we look forward to updating you in the future.

Operator

Again, thank you for your participation. This does conclude today’s conference call.

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Source: Skyworks Solutions, Inc. F2Q10 (Quarter End 04/02/10) Earnings Call Transcript
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