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Skyworks Solutions Inc. (NASDAQ:SWKS)

Q2 2014 Results Earnings Conference Call

April 22, 2014 5:00 PM ET

Executives

Steve Ferranti - Senior Director of Investor Relations

Dave Aldrich - President and CEO

Don Palette - Chief Financial Officer

Liam Griffin - Corporate General Manager

Analysts

Rick Schafer - Oppenheimer & Co.

Alex Gauna - JMP Securities

Vivek Arya - BofA ML

Steve Smigie - Raymond James

Anthony Stoss - Craig-Hallum

Mike Walkley - Canaccord Genuity

Craig Ellis - B. Riley

Edward Snyder - Charter Equity

Suji De Silva – Topeka

Vijay Rakesh - Sterne Agee

Mike Burton - Brean Capital

Quinn Bolton - Needham & Company

Blayne Curtis - Barclays

JoAnne Feeney - ABR

Tom Sepenzis - Northland

Richard Sewell - Stephens

Operator

Good afternoon, and welcome to Skyworks Solutions Second Quarter FY 2014 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.

Steve Ferranti

Thank you, Rick. Good afternoon, everyone, and welcome to Skyworks' second fiscal quarter 2014 conference call. Joining me today are Dave Aldrich, Don Palette and Liam Griffin. Dave will begin today's call with the 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 a non-GAAP income statement consistent with the format we've used in the past. Please refer to our press release within the Investor Relations section of our company website for complete reconciliation to GAAP.

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

Dave Aldrich

Thanks, Steve, and welcome, everyone. I'm happy to report that Skyworks delivered another very strong performance in the second quarter of fiscal 2014, outpacing normal seasonality and exceeding expectations across our key metrics.

The combination of robust year-over-year revenue growth, earnings leverage and strong cash flow we posted in the seasonally soft March quarter is a clear testament to the benefits of our diversification strategy. All-in-all, I’m quite pleased with our accomplishments in the first half and expect our momentum to continue as our market footprint and customer engagement expand.

The world is rapidly becoming more interconnected from the cloud to the data center, to wide area networks, into the enterprise and vertical markets and within the home. Skyworks is a key enabler of this global megatrend, providing custom analog solutions that facilitate connectivity across a wide range of communications protocol.

These positive market dynamics create complementary growth opportunities for us with a new product categories like media gateways, like small cells and tablets, and in entirely new verticals like the enterprise, medical and automotive. And as analog design complexity rises, it creates the need for highly specialized systems, driving higher addressable content opportunities.

We’re capitalizing on this today by leveraging our analog design expertise, expanding our product portfolio and integration capabilities, which when combined with our consistent execution, translates into superior financial results. Specifically during the quarter, we delivered revenue of $481 million that’s ahead of our guidance of $470 million and up more than 13% year-over-year.

We produced operating income of $130 million, which is up over 30% from a year ago. And we posted $0.62 in earnings per share, that’s up 29% versus a year ago and our fourth consecutive quarter above 20% earnings growth. We generated $214 million in cash flow from operations which is another record for the company. And we also repurchased 2 million shares of our common stock and we announced the quarterly dividend of 11% per share.

So in summary, Q2 was an excellent quarter for us across the board. Looking, ahead we see strong demand signal spending our end markets in 4G solutions for emerging market and new 802.11ac deployments in network infrastructure but connected home and other key vertical market opportunities.

In short, fiscal 2014 is shaping up to be a very good year for Skyworks. With the opportunity pipeline we have in place, the stage is set for continued revenue growth, margin expansion and earnings leverage.

So for more in-depth review of our financials, I’ll turn it over to Don for his commentary and his outlook.

Don Palette

Thanks Dave and thanks again for joining us everyone. Revenue for the second quarter was $481 million, ahead of our prior guidance and up more than 30% versus the year-ago quarter.

Gross profit was $215.2 million or 44.7% of revenue, better than our prior guidance and up 250 basis points from a year ago quarter. Gross margin upside was driven by strong adoption of our integrated system solutions, margin accretive new product introductions and strength in key vertical markets.

Operating expenses were $84.8 million consisting of R&D expense of $53.1 million to support organic growth initiatives and SG&A expense of $31.7 million. We generated $130.4 million of operating income yielding 27.1% operating margins, that’s a 370 basis point increase versus the year-ago quarter and it highlights the continued strength of our business model in our execution.

Operator profits were up 31% year-on-year. And let’s put this in perspective. We have delivered an incremental of $107 million in revenue year-to-date versus the first half of fiscal 2013.

We successfully converted this into $58 million in operating profits and that represents a 54% contribution margin as we leverage capital investments and reap the benefits of our margin enhancing integrated custom solutions and precision analog products. Cash tax rate for the second quarter was 9%, producing net income of $118.6 million or $0.62 of diluted earnings per share and that’s $0.03 better than our guidance.

Turning to our second quarter balance sheet and cash flow statement, we generated $214 million in cash flow from operations and invested $41.8 million in capital expenditures in support of upcoming program ramps. Depreciation was $21.7 million.

We also repurchased 2 million shares of our common stock during the quarter, representing a $61.5 million investment. With the confidence we have in our business outlook, we continue to believe that repurchasing shares, common stock represent a highly accretive use of our cash. And finally, we exited the quarter with $798 million in cash and no debt.

Now, let’s turn to our third quarter business outlook. Based on the order backlog we have in place today, we expect third quarter revenue to be $535 million and that’s up 23% year-over-year driven by strength in the emerging markets, content gains in key programs, 802.11ac deployments in an expanding set of opportunities within the internet of things.

At this revenue level, we suggest modeling gross margin in the 45% range with operating expenses of approximately $86 million. Below the line, we anticipate $100,000 in expenses from interest income and other expenses and the cash tax rate around 10%.

We project our tax rate to remain at these levels for the remainder of the 2014 fiscal year. We expect the share count to be around 193 million shares resulting in third quarter EPS of $0.73 and that’s up 35% year-over-year.

It’s worth noting that our third quarter guidance represents our fifth consecutive quarter of about 20% year-over-year earnings growth, reflecting the strength of our demand for our products, our differentiation in the market place and the consistency of our execution.

As Dave mentioned earlier, we initiated a quarterly dividend with initial payment set at $0.11 per share, implying roughly at 1.2% dividend yield. With the combination of the newly initiated dividend in our ongoing share repurchase activity, we are returning roughly 40% of free cash flow to shareholders, a pace which we believe strike the appropriate balance between internal investment for growth initiatives and shareholders returns.

Finally, I’d like to briefly recap our previously announced revenue split, in order to provide investors with better visibility for the growth and profit drivers of our business. Last quarter, we highlighted three new subgroups, power amplifiers, integrated mobile systems and broad markets. For the first half of fiscal 2014, power amplifiers was 40% of revenue, integrated mobile systems was 33% and broad markets was 27%.

We expect these percentages to stay relatively consistent throughout the remainder of the fiscal year. In fiscal 2015 and beyond, we see integrated mobile systems and broad markets revenue continuing to grow as an overall percentage of our mix, which should support improved returns based on the high differentiation and better margins associated with these products.

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

Dave Aldrich

Thanks, Don. While it’s clear that our business fundamentals remain quite healthy, but the outlook for Skyworks is strong. To review the high-level drivers for our business in 2014 and 2015, we see three key trends powering our growth.

First, increasing worldwide demand for high-performance, high data rate broadband services like 802.11ac and 4G LTE. Uptake of this technologies are still in their infancy, accounting for just the fraction of connected devices today. These technologies underpin lucrative new revenue streams for carriers and ecosystem providers alike and are being very aggressively deployed.

And today, we are seeing tremendous demand within the emerging markets across large global brands as well as regional players. As one measure of this, Credit Suisse estimates that the number of LTE connected smartphones in Asia will grow by over 70% over the next two years.

Second, connectivity is proliferating in new vertical markets in new device categories. A recent report on Morgan Stanley suggests that by 2020, the total number of connected devices could reach a staggering 75 billion, dramatically expanding our addressable opportunities.

And we spend the last few years positioning the company for this trend, investing significant resources in new growth verticals outside of mobile, within markets like automotive, medical and industrial. While these new products are still in the early stages of adoption, we have already developed strong traction in these exciting new growth avenues.

And third, dollar content opportunities for connected devices is expanding. In some cases, this is driven by products incorporating multiple network standards in concert like 4G LTE, 802.11ac and GPS. In other cases, it maybe driven by our expanded product offering where we are more fully integrating our power management and antenna tuning and received diversity product portfolios.

But in all cases, we are driving our addressable content higher in each successive generation of technology. And just to give one example, the leading 802.11ac chipset provider recently announced the industry’s first six stream MIMO router solution, which provides data speeds of up to 3.2 gigabits per second and that’s 50% faster than current generation ac products, providing users with the availability to stream simultaneous HD or high definition content wirelessly on several devices at once. This is an analog content rich application where performance is paramount.

Skyworks is enabling this lead architecture with an entire suite of analog products and we expect to benefit from the roll out of these during the second half of this calendar year. In all cases, the fundamental need is the same, ensuring seamless connectivity across multiple communications standards, while maximizing overall system performance within the smallest possible footprint.

This underlying market need creates tremendous design challenges for our customers, as they contend with issues like battery life, signal interference and data throughput. To solve these challenges, customers are demanding more than just the best standalone component and our increasing aligning with Skyworks based on our end-to-end product portfolios, our broad technology footprint, our robust system design capabilities and our integration roadmap.

We see a very limited number of other competitors with this whole [Technical Difficulty] growth of capabilities. And to highlight some examples of our recent success, during Q2, we captured other new design wins across a number of diverse applications. These include analog control ICs at Medtronic or implantable hard monitors, a suite of five front-end devices for the Moto G smartphone, home automation solutions with security sensors motion detectors, lighting and meters.

Switching Wi-Fi and GPS within a set-top box application from EchoStar and tuning IC's see for Audi's HomeLink programmable system, complementing the navigational assist design we announced with Volkswagen last quarter. And finally, we have secured our fourth production customer for SkyOne, which includes a full suite of Skyworks products including our generation 2.0s SkyOne module, our Sky Hi LTE power amplifiers, power management, antenna switching and diversity switch modules.

Our strategy of continuing to diversify and expand its new verticals, while maintaining a laser focus on operational execution is clearly working. We are quite optimistic about our prospects for 2014 and beyond and it is clear that we are riding a wave of powerful underlying market focus. We expect these positive trends to fuel growth in our addressable markets for years to come and as our product highlights demonstrated, we are capitalizing today.

This concludes our prepared remarks. Operator, let’s open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Rick Schafer. Please go ahead.

Rick Schafer - Oppenheimer & Co.

Yeah. Thanks guys, and congrats on a great quarter. I guess I was hoping -- my first question is if, Dave, you can provide maybe a little more color on what's driving or what's behind the better than seasonal -- much better than seasonal June quarter, is there any particular customers or end markets or anything you can highlight there?

Dave Aldrich

Thanks, Rick. Well, it’s really very broad based. It’s across our mobile customer set and our broad market customer set. It’s within the three categories that we described in the prepared comments. And specifically what we are seeing is very high content in early stage of an LTE ramp in emerging markets. This is China but it’s also outside of China in Central, Latin America.

We are seeing signs of some strengthening demand in network infrastructure. But more importantly, 802.11ac rollouts in mobile and across vertical segments are very strong for us right now. We are seeing in the connected home and as we said, we are begging to ramp even further and deeper with our SkyOne customer set. And as we mentioned earlier with the guidance in Q3, the year-to-date total is over 15% year-over-year growth. So it’s really very broad-based and there is no single customer and there is no single platform that’s having -- that’s driving in.

Rick Schafer - Oppenheimer & Co.

Got it. And then just as my follow-up, could you give some color to describe sort of the recent GS 5 launch and your content there? I mean I guess, were there any surprises there for you guys versus your expectation and maybe as part of that answer, how does that Samsung content opportunity here in the first half compare to the other big platform launch later this year for you guys?

Liam Griffin

Sure, Rick. This is Liam. With respect to the Galaxy S5, as we know, there are a number of different regional SKUs. We actually did quite well in the platform in aggregate, number of designs wins with MMMB solutions, power management solutions. We're diversified across two major baseband platforms. And overall, our revenue growth there within Samsung is going to be up in 2014. And as we look beyond 2014, we are starting to now engage early with the Galaxy S6 and we are seeing another opportunity where performance is up, content opportunities are up and we expect to pick up share there as well.

Operator

Next question comes from Alex Gauna. Please go ahead.

Alex Gauna - JMP Securities

Hey, thanks. Let me echo the congratulations on the powerful result. I was wondering with regard to the June quarter guidance, I know you said it was broad-based, but I'm wondering based on the magnitude of these emerging market ramps, what does that say about the dry powder that is left for seasonality in the September quarter? Could we still see a typical double-digit or double-digitish type of growth then or are we robbed from some of that?

Dave Aldrich

No, it would be lot easier to answer that question if it was really been driven by one phenomenon and it’s not. I mean, we are seeing, as I said, there is trend around, instead of things product moving into the home, there is a lot of fairly early stage ramps that we are seeing irrespective of seasonality in the March quarter that we are seeing extended to June. We are seeing LTE ramp in China, but we are also seeing other rollouts in connectivity ac and so on. So it’s really not anyone customer or anyone on region. If I look at what I can see in September today, I think expect September to be normal season. I think September will be up and I think it will be a strong quarter for the industry and a strong quarter for us.

Alex Gauna - JMP Securities

All right. Thank you. And then you've done a great job getting to your gross margin targets. I'm wondering with the merger of TriQuint and RFMD and what you're seeing in the market in new opportunities, what's your potential to move beyond that and actually I'd like to know what you think or what your customers are telling you about what they think of the TriQuint-RFMD merger? Thank you.

Dave Aldrich

Thanks, Alex. Good question. You know I will you what I think about, I think consolidation is very healthy for our industry, particularly when it involves companies, competitors who have excess capacity. I think the fact that there will be a need to collapse some of that capacity, consolidate design centers and so on, which my understanding of the merger, I think that’s very good for the industry and it’s particularly good for Skyworks. I think a broader, like if I move up a little bit and think about this more broadly, we are seeing fewer and fewer competitors with the capability require to deal with this analog complexity.

When we talk about SkyOne or we talk about the content gains we are gaining in platforms both in connectivity or within mobile, it’s a lot of GPS, it’s a lot of power management, it’s sliding and display, location-based services, it’s from pretty sophisticated tuning using SOI technology, it’s very broad. And our customers are -- one of the reasons why we are growing much faster than market is our customers are asking us to solve the overall analog front end. It maybe a bundle, it maybe integrated in the case of SkyOne and there just aren’t many competitors that can do that. So I expect more consolidation because I think it’s getting harder and harder to sell even the best among point products and components. And that’s very good for us.

Operator

Next question comes from Vivek Arya with BofA ML. Please go ahead.

Vivek Arya - BofA ML

Thank you for taking my question. Dave, I am curious about the WiFi growth that you are seeing in 802.11ac because we are hearing that the Broadcom is now starting to integrate more power amplifiers in their WiFi combo chips. And I am wondering does that cannibalize the Europe business in any way, how should we think about competition in that market?

Liam Griffin

This is Liam. What we see in WiFi is a certain set of customers that will adopt an integrated PA solution. So by that, I mean, they take the transmit PA and integrate that to SoC. For that part of the market, we have a very compelling receive side strategy. We take SOI switch and LNAs on the receive side and we deploy solutions there and that’s going well. But the larger part of the market today is still adopting 802.11ac with both 5 gig and [2.4] (ph). Our position there is outstanding. We are seeing some of the leading smartphones companies now go to 2 x 2 MIMO in mobile again with 5 gig and 2.4. So that’s playing out well. And in parallel as Dave alluded to earlier, there is a very strong networking in access point and router market that is growing quickly. And here we see three streams, six streams up and nine streams of MIMO, you have 5 gig, 2.4 and switches as well. So in total, the WiFi opportunity for Skyworks is outstanding. We continue to take share. We have great technology. We partnered with Broadcom. We partnered with Qualcomm and others and the outlook there is quite bright.

Vivek Arya - BofA ML

Thanks, Liam. Very helpful. And then maybe Dave if you take a step back and look at the overall industry right recently RFMD and Triquint announced that they plan to merge. I am wondering what your view is of that industry consolidation. And as part of that, I think you have also spoken about looking for opportunities on the M&A front. So how do you think about the RF industry structure and then how do you think about your own long-term strategy and what Skyworks will look like say three, four, five years from now?

Dave Aldrich

Thanks, Vivek. (indiscernible) RF industry. It’s the analog connectivity of mobile industry because it’s hard to sell an RF-only product today and there in lies some of the problem and some of the need for consolidation. So when we are engaging today, we are engaging typically with multiple dollars in a broad target within our customers say because they are asking us to look at the voltage being provided to the transmit path, they are asking us to filter and switch and tune in a way that preserves battery life even beyond the power added efficiencies of the amplifier. And when we move in to receive or GPS, there are lot of coexistence problems, a lot of interference problems, so we do things in manufacturing for the proprietary shielding or we are able to do things with filtering, whether it’s a PAD or designing around duplex or filter architecture. And so that is just going to continue.

So I think that there are going to -- there is a going to be a shake out most likely in the analog space where there are companies who have scale, customer relationships and the breadth of technology that can ramp a system integration mindset and capability. And I think companies who can do that, there aren’t many are going to win, they are going to win a lot because this market is going to grow. And I think that will continue.

So as we look at our M&A strategy, we have, if you look what we have done in the past starting Conexant, if you look at what we did with AATI or even SGI, we have been to convert a broader technology footprint where we have the customers, we have the scale, we have the manufacturing into high returns into a much broader target. We’d like to continue to do that. So as we see M&A opportunities to expand into new vertical markets or expand the content, add more value, more relevance to our customers we will continue to do that. And we don’t rule out highly accretive businesses that required would give us materially bigger footprint outside of mobile. We like those as well, but they need to be rationalized in terms of our ability to add sales leverage in some degree of operational synergy.

Operator

(Operator Instruction) Our next question comes from Steve Smigie with Raymond James. Please go ahead.

Steve Smigie - Raymond James

Great. Thanks a lot. And I will add my congratulations on the great quarter and guide. Just as we look to the June guidance, can you talk if you picked up maybe a major socket at your leading customer, that’s maybe you already start shipping that say in the June quarter that helped that or is that nothing to be part of that?

Dave Aldrich

No, there is no customer ramp, there is no specific socket that’s driving, that’s driving June. As I said, it’s broad-based. It’s a number of customers. It’s emerging markets, and it’s a non global vertical market.

Steve Smigie - Raymond James

Okay. And the 802.11ac, I mean, again it sounds like that’s broad-based as well in terms of being across enterprise networking but also connect your device but also on a handset. And on the handset side, I mean would you -- if you shipped in say modules for large customer end, would that already be occurring this quarter, I mean would you ship in the model say -- a module say quarter and half ahead of a major launch?

Dave Aldrich

The answer to that, the simple answer is no.

Operator

Next question comes from Anthony Stoss with Craig-Hallum. Please go ahead.

Anthony Stoss - Craig-Hallum

Hey, guys, my congrats as well. Don, I don’t know if you have this handy but the percentage of your mobile revenue that’s in China, also a little more information on SkyOne date in terms of you got forecast raise now. What kind of feedback you expect to continue to add, new customers, is that largely finding its way into the China market, and last but not least, I would love to hear your further thoughts on content on the [IOT] (ph) side if you are able to get across car management other chipsets into those devices in addition to connectivity? Thanks.

Don Palette

I will just go first one on, I’ll take Tony on China. If you were to look at China combined as a customer, it would be 10%, very diverse customer base.

Dave Aldrich

And I think with respect to SkyOne and let we have jumped it on this one. But to be clear SkyOne is a broad platform approach and it embodies that we’re moving away from point solutions to its more integrated solutions. Typically, SkyOne platform for us is highly reconfigurable, but it hasn’t common, it has a lot of switching control content moving up to the antenna filtering, duplexing, power amplification. And when we will get the more product categories, it could be integrated at [MCM] (ph) and at the IC level. It is quite margin accretive and it is very unique and it is without competition. So it’s by definition competitive, unique and sticky.

Don Palette

Yes, and a follow-on to that, I think what is really kind of winning the hearts and minds of our customers is our ability to configure and customize on-site customer by customer. So what we are pleased by the systems level approach that we have been taking, it’s been well received by customers. We have got a number of introductions today. We are adding new accounts. And as you mentioned China, I mean that market is perfect for us. We can come in there with a solution that is fully tuned and matched specifically for each customer again there and due to work we get those accounts to market.

Dave Aldrich

And think about it, there are really three approaches that we use to go to market. One is the SkyOne, highly integrated filtering switching amplification. Another is a power amplifier duplexing kind of a market where we would then wrap switching functionality around that maybe GPS, maybe some power management, and a almost always WiFi. And the third would be which would be kind of an MM/MB multimode power. And again, we would wrap a lot of analog content around it and we have different customers that favor one architecture over another. So some use all three, increasingly through the trend is toward more integration and less discrete.

Operator

The next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.

Mike Walkley - Canaccord Genuity

All right, thank you. Just jumping back into the China market, can you talk maybe about the sequential growth you’re seeing from China and your strong June quarter guidance. And were there any near-term supply constraints in the March quarter that might have been -- affected your ability ship into the TD-LTE ramps in China in the March quarter?

Don Palette

Yeah. With respect to -- I will take the June quarter first. I mean, China will be up in June. It’s pretty much in line with our total business. There could be some upside with LTE. We are seeing some roll off there across a number of indigenous China customers. We are also seeing as Dave mentioned emerging markets in general. We have some customers today that are gaining share in Latin America, we’re populating those devices. We see some of our customers gain share in India. We’re populating those devices as well.

Dave Aldrich

And we also see in terms of content, there is a drive because if you look at the indigenous China players, which we are shipping. Coolpad, for example, obviously Vaio, Lenovo and others. I mean, they’re not -- they don’t view their competition to be among other indigenous Chinese. They view the competition to be the big worldwide players of smartphones.

And so the pressure is to improve the performance of Wi-Fi so the very same dynamic will be to more high performance Wi-Fi, adding more, switching, filtering more, perhaps amplification moving towards ac in some cases.

There is an ASM play for us in addition to Wi-Fi power amplifying switching. So I think that really we don’t make the distinction of what a China customer maybe looking to ship internally or export versus other big brand. The dynamics are the same and they are competing with one another for the hearts and minds of the very same consumer.

Mike Walkley - Canaccord Genuity

Okay. Thank you and just on a follow-up question for Don. Now that your June quarter guidance is very close to your $0.75 longer term target with seasonal trends in September, you could be above those levels. Any longer term milestones maybe we should think about from modeling given the new size of the business. And then just on the previous question, were there any supply constraints in TDLP that might have impact you on the short term? Thanks.

Don Palette

Yeah. Mike, on the performance and going out to September as it relates to a model. We’re obviously very close to achieving the mid-term model we’ve being talking about for over the past year. We just guided $535 million revenue and $0.73 so that’s obviously knocking on the door for $0.75. Its too early for us to really give any formal view what’s beyond the mid-term model.

But one thing I can tell you as you’re stepping back in modeling the business, we would expect a lot of the dynamics, business dynamics to play out beyond that $0.75 per quarter, the same as you saw building after that, so gross margin expansion of 48% to 50% and there’s clearly going to be operating leverages as we move forward. So that’s the best way to think about our business that you add revenue going forward.

Operator

Next question comes from Craig Ellis with B. Riley. Please go ahead.

Craig Ellis - B. Riley

Thanks for taking the question and guys congratulations on what appears to be two milestones, both the dividend initiation and what I think is record gross margins in the outlook. My question first is on the vertical markets business and it’s a short term and intermediate term question. As we look at the progress that you’re making and there were seven different applications identified in the press release that you penetrated with those initiatives. Where are we in the build out of the vertical markets program? Are we in the second inning, the fifth inning, the eight inning, can you put recent progress in perspective points?

Don Palette

What I love about the vertical markets obviously and we have been talking about it and investing for, we started moving from infrastructure into smart energy and then into the connected home and so on and so forth. We got a couple of acquisitions which gave much bigger target rich environment, probably six or seven years now in fact. So what I like about it is while there isn’t any one individual stock that they could drive huge amounts of revenue like you might see in the smartphone or tablet.

But we have been very successful in creating system design team that we’re very closely with our customers in the field, phone applications approach and being able to identify where we can serve that set of customers. Well, the customer differentiated products that will last throughout multiple product cycles, long product life cycles very margin accretive. And I must say that we’re very much on track to our strategic plan in long range to continue to do that.

And we continue to grow sequentially in helping our margins that reducing our volatility which make us a much stronger, broader company. I would say, we are in a very early stages because as the price points of this technology have gotten more affordable. And as consumers have become more use to the technology and as our device manufactures are creating more intuitive easy to use devices, its starting to continue penetrate more and more markets and today its just a astounding the array of products we're working with our customers on. All trying to figure out how to remain connected, do it at the right budget and at the right level of user ease.

Craig Ellis - B. Riley

So the follow-up would be related to that, what percent of revenue is vertical markets currently in and where would it potentially go over a two to three-year period?

Dave Aldrich

Today it’s about 27% as Don mentioned in the prepared comments. And I think that the combination of vertical markets as well as those analog products going into some of our mobile customers platform like GPS, like Wi-Fi, I think that grows much faster than our PA revenue, PA business which is good to the overall returns of the business.

Operator

Next question comes from Edward Snyder with Charter Equity. Please go ahead.

Edward Snyder - Charter Equity

Thank you. Couple here, first off on SkyOne. We understand the platforms of both Samsung and Apple are moving toward, its seems like the end game on that is going to something like SkyOne. They’re not there yet but certainly seems to be direction everybody is moving into.

First, is SkyOne material today to revenue, we talking 1%, 5%, 10% or is this more of a test year for where people are trying it out. And then we could expect much more material growth in say 2014 as maybe the top OEMs move more to that what kind of occupation given the complexity of the LTE. Thanks guys.

Don Palette

Yeah. It is material, it is not yet 5% but it’s getting close. But remember it’s in early stage of ramp and the ASP is very high. So the customers are launching, they are actually quite big. So I think its going to be very significant and it will be significant, more significant in the second half than it was in the first half. In 2015 we expect to be a big SkyOne here but keep in mind that it is a platform. So SkyOne will take on many different shapes and forms as our customers get comfortable with the technology and comfortable with allowing us supply our partner to architect the entire front end.

That’s being a little bit of a learning curve. It’s something we’ve needed to work very closely with our customers to get them comfortable with because they give up a lot of control in favor of the user views. And we’re having a lot of success with that was not fast.

Edward Snyder - Charter Equity

Don, as a follow-up, I was little confused by the answer to the last question. You said verticals are probably around just under 30%. Your largest customer was well over 30% last year. Is that break obviously out between horizontal and verticals markets you looking at definitional thing there. And the larger question you’ve done exceedingly well on Wi-Fi, it seems to be continue to be a growth engine here. Is Wi-Fi spread between all three of your [Technical Difficulty] integrated mobile systems in broad markets or is it more concentrated heavily more on those? Thanks.

Don Palette

Pulled it back to broad market number as Dave said and we said the program mark is 27%. And our top customer last year was in mid 30s or little above that and -- but that the revenue for the customers across multiple revenue areas, they can be a mobile, they can be in broad markets as well, so it’s mixed.

Dave Aldrich

I think, what you’re getting that there is no Wi-Fi that winds up in a smartphone or tablet that we are including in that 27%, that is all non-mobile broad market.

Operator

Suji De Silva with Topeka. Please go ahead.

Suji De Silva - Topeka

Hi guys, nice job on the quarter. Thanks for breaking out the pre-segment here. Can you talk about the relative margins of each either qualitatively or I think we can and what do you expect the core PA business to grow longer term versus the other business?

Don Palette

As we talked about, the initial presentation, the relative margins for the PAs are in low 40 is slightly below what the corporate average is. Integrated mobile is slightly above that that and our best margins in the broad market. But understand within each of that their products that there is some variability on that, those are averages within those categories.

Suji De Silva - Topeka

Thanks. And on the PA segment, I think the growth there can be versus the other ones which is clearly going faster?

Don Palette

I think the PA business is going to grow in revenue dollars shrink as a percentage. I would put a 5 percentage growth rate in PA dollars, which will be materially less than the growth rate of the company therefore and it has been trending for the last few years, it will get smaller but will remain meaningful.

Operator

Next question comes from Vijay Rakesh with Sterne Agee. Please go ahead.

Vijay Rakesh - Sterne Agee

Hi guys. Congratulations again.

Dave Aldrich

Thanks Vijay.

Vijay Rakesh - Sterne Agee

As for the quarter and you might have answered this question already, but if you look at the second half and you look at the tier one marquee phones, how do you see about your share in those going to second half?

Dave Aldrich

I think -- I believe that two things are going to happen. One is industry dynamic in the second half in 2015 and 2016, as the content will go up. The number of bands that are being added, the amount of functionality around higher performance connectivity and what we see our customers trying to do with the intend or improved current consumptions using things like carrier aggregation and sophisticated tooling techniques. It is no doubt in our mind that content over the next several years is going to go up.

And I am -- as we engage our customers today, I am really pleased with the fact that our technology offering is unique. We are engaging at the system level early in the customer’s decisions as to which SOC they are going to use which and so on. And they will really able to have a system level conversation not a component conversation. So, I am absolutely convinced that the TAM overall in the industry is going to go up and that we are going to continue to gain share.

Vijay Rakesh - Sterne Agee

Right. And just housekeeping question here, did you add any 10% customers in the quarter here and keep it up, guys? Thanks.

Don Palette

Yeah. Thanks Vijay. We had two, 10% Foxconn and Samsung.

Operator

Next question comes from Mike Burton with Brean Capital. Please go ahead.

Mike Burton - Brean Capital

Hey, guys. Congratulations on the great quarter and guide. Don, if I could just on the margin side that you mentioned the 48% to 50% contribution margin going forward. But I'm wondering on OpEx expectations into next year, can we stay in the kind of the mid to high 80 tier or would we expect that pick up as IoT and that the broader markets become a bigger portion of the mix?

Don Palette

Yeah, I mean the increases that you've seen and guided as, the majority of the increase is on the R&D line and it's some target investments that we're making to support new growth opportunities and quite frankly we are saying the benefits of these initiatives in topline out performance. We're going to -- we are expecting to continue to see strong leverage, so we expect the revenue growth will be well ahead of the OpEx growth and that leverage is a key component of continuing to drive improved returns.

Remember in the June guide, we have a merit increase, solid merit increase mid-year so that's in the number as well. On going forward, that number is going to continue to ramp some as revenue grows and investment grow. So as far as what you model next year, I think by the time you get to mid-year when you have another merit increase to that number is going to be high-80s and the 90s kind of number for sure. But there is some incremental investment every quarter in way that we model it.

Mike Burton - Brean Capital

Thank you. That is helpful. And then, Dave, a few comment on bulk for a second. Do you have any concerns with the RFMD or TriQuint merger as a potential supplier or borrower, or are you still comfortable with the bar available to you from the non-domestic suppliers and have you actually started to shift some of the bar into any SkyOne platform or any other modules so far this year?

Dave Aldrich

The answer to latter question is yes. And I am actually extremely comfortable with it and the reason is that today, we're participating in filters more broadly than any competitors in power profile duplexes in SkyOne and in most of our GPS modules in fact. And the more we engage with the filter ecosystem, more convinced I am that there is no one side that's all. We are seeing the vast majority of bands using some form of saw and with more narrow band spacing at an higher frequency, we're having a lot of success using a temperature compensated saw and we are shipping both and there are limited number of bands with very high frequency and type spacing, type frequency spacing the benefit from bulk device if there are or some other bulk acoustic device.

And our strategy is to be flexible. It is to work with our filter partners on a foundry level and to really get involved in the packaging and the design to make sure we are hitting performance and we match it to our PA or we match it into SkyOne. It gives the absolute best possible performance. And if you look at recent teardowns, I think we are the largest integrator of filters in the world today in fact.

Operator

Next question comes from Quinn Bolton with Needham & Company. Please go ahead.

Quinn Bolton - Needham & Company

Hey guys. Let me add my congratulations on the results and guidance. Dave, just wondering on the sequential June, you've named a number of factors that are behind that roughly $55 million sequential increase. Can you give us some sense is it fairly broad-based or is the LTE opportunity in China at emerging market just given the content in LTE phone, would that be the single biggest factor accounted for that $55 million increase and then I have a quick follow-up?

Dave Palette

Yeah. I think the biggest single factor would be -- although, I’ve got to say, it is really very broad, but the biggest single factor would be in content games within mobile devices when we talked about our integrated mobile systems. So our ability to release successive design suite and much more dollar content than the traditional PA and switch is a big driver of this. And we're applying much of that in China, but a lot into Central America. We have customers doing very well in India and some of the brands that are not Chinese brands are doing extremely well, penetrating emerging markets with our technology. So that is a big -- that is going to be indeed a big piece of it.

The 802, the Wi-Fi component of our business in the connected home and within ac rollout of the enterprise, within the home and then as well as into our mobile customers upgraded ac or upgrading to more bands MIMO, that's a big driver. We're seeing that as well. We're seeing it not only in the home we're seeing in verticals, we're seeing in the mobile. And SkyOne is a nice top force as well with very margin rich high dollar content.

Quinn Bolton - Needham & Company

Great. And then just on a follow-up on TriQuint, RFMD in there sort of synergy discussions, so they don't anticipate any revenue this synergies. I was wondering if you might comment on opportunities you see as those come together where you might have opportunities to either pick up sockets or perhaps as they shut down in fact, we may have to translate products? Are there opportunities for you to coming as an alternative source of supply? Thanks.

Don Palette

Having done mergers and a couple of sizable ones, I mean they are, they take a lot of time, they take a lot of resources and a lot of focus. But I will say this that when we look at our business and our guidance in our 2014, 2015 plan, it has nothing to do with the notion of competitor having struggled or becoming defocused. It's all about ducktailing into trends of the market where our customers just need more help and more technology breadth to solve these phony analog problems and that's what we do, that's what we wake up everyday trying to do and do it better than our competitors. But more importantly do it in a way that we add value to our customers and they're willing to pay us for it.

Operator

Next question comes from Blayne Curtis with Barclays. Please go ahead.

Blayne Curtis - Barclays

Thanks and I will echo strong quarter guys. Going back to just the emerging markets. Maybe just looking at your view of the entire market, I know the China mobile, it's still not a 100 million units given the builts that you have shift to and are looking at for June, what's your sense of just how big that market is so far in the first half?

Dave Aldrich

Yeah. Blayne, without getting into all of the details so our care specific details, we certainly see a ramp in China, I know the ramp as Dave alluded, we also see emerging markets in general being a content and a unit driver for us and includes Latin America and India. The good news for Skyworks is that we've been very well positioned with all the leading players that enabled. There is companies like MediaTek, like Broadcom, like Qualcomm like Marvel.

So we have our best hedge very, very nicely with all those players. The content is MMMB solutions, its switching, its power management. GPS is a real nice analog switch that ramps around our mobile. But it's also tether with the leading basement provider, so wherever they win, we're going to be attached. We're seeing in China. We're seeing in emerging markets and we think it is all unique in this ramp.

Don Palette

Unlike 2G, or even 3G upgrade cycles in early smartphones, they have made in 2G base. They were EDGE based. The difference we're seeing today in the system performance requirements that this class of customer is requiring and it is very much competition on the world stage. So we are not seeing the small component companies with the threat of lowering price with albeit inferior products being able to penetrate this customer set. It’s not working in this architecture, the technology doesn't play and that's very, very good for us and companies like us who can feel a real robust system.

Blayne Curtis - Barclays

Thanks. And then just on the new breakout. Thanks for providing that. On your slide deck, you talked about integrated mobile having multi-band pads. Does that inclusive of single band pads as well just a clarification and then you can talk about in broad market, maybe rank some of the bigger end markets I am assuming Wi-Fi is probably the biggest but any clarity there would be helpful.

Don Palette

Yeah, playing on the pads, the pad devices would be included in IMS integrated but we only have a single pad. I mean, they attend to be multi-band, couple of filters, multi-mode, multi-band PA. So there is really no instances where we have a single pad with one filter. But those solutions do get included in IMS.

Operator

Next question comes from JoAnne Feeney with ABR. Please go ahead.

JoAnne Feeney - ABR

Hi, guys. Congrats on a great quarter and a nice outlook. I had a question about a quick follow-up on another question about the timing issued for the year. In the past there have been instances where you have shift components that have been assembled into modules by partners. It sounds like this year that is not something, that's a big components of your business. Can you just clarify that more broadly? I believe the earlier question was more specifically to Wi-Fi?

Dave Aldrich

I think that the -- the question is, are we in June benefiting from big program ramps by shipping in the module manufacturer, be it Wi-Fi or something else. And the answer to that is no.

JoAnne Feeney - ABR

And so we wouldn't expect an earlier declining of business because of that timing emptiness?

Dave Aldrich

Absolutely not, in fact -- absolutely not in fact, I expect, given what I'm seeing in the second half of the calendar year to be seasonally up and really quite strong for us.

Operator

Next question comes from Tom Sepenzis with Northland. Please go ahead.

Tom Sepenzis - Northland

Hi, congratulations as well for me. I'm just wondering, if you could talk a little bit more about ac specifically as we go from 1 to 2, 2 by 2, 4 to 6 MIMO, what do you -- how you are thinking about the potential TAM benefit there?

Dave Aldrich

Sure. That is a -- it's a great question and you've seen some recent releases from some of our chipset partners that are really demonstrating MIMO to 3, 6, even 9 streams. I mean, you literally get a -- if you go from 3 streams to 6, its 2x content for us. And we start with very high content, we can double it, we can triple it and you will able to see some routers and access points now that have substantial Skyworks content 11ac FEMs, switching and even power management in some cases.

So this is deployed very well in routers. But again as I mentioned, we're starting to see mobile handsets adopt 2-by-2 technology on next generation platform, so that would be two streams in the mobile handsets, potentially 2.5 gig devices, 2.4 gig devices together with switching. So that trend is really good and by the way, the benefits that when we see on delivering this higher data rates through the home, delivering these higher rates to handheld the tablet or mobile device are outstanding. So it's a win-win for the customers and we're in a great position to capitalize.

Operator

Next question comes from Harsh Kumar with Stephens. Please go ahead.

Richard Sewell - Stephens

Yeah guys, thanks. This is Richard in for Harsh. Let me pass along my congratulations as well.

Dave Aldrich

Thank you.

Richard Sewell - Stephens

So my first question. Can you give any color on how your visibility compares to prior years and how the lead times in the integrated solutions compare to discrete PA?

Dave Aldrich

The visibility is as good if not better and I would say better in the sense that the -- that we’re participating earlier in the product lifecycle in almost all cases. In fact, we're beginning to participate at the point at which the overall SOC or chipset has been selected. So we have much more visibility. In fact, we're looking now at products that will be launching in the second half. We're well into designing late 50 and some cases 60 products today. Because the architecture choices among our customers differ and some other product lifecycles at vertical markets are very, very low, in fact, most of them are.

And so we're doing some connectivity enablement upfront. And so our customers -- these new customers are coming to us and we're helping to figure out how to deal with these phone analog connectivity problems for the very first and they're engaging us right upfront. So the visibility today, I would have to say in general is better.

Richard Sewell - Stephens

Great. And then a quick follow-on, we're seeing a couple of year peers launch integrated solutions. What do you think driving a more integrated solutions approach across the industry?

Dave Aldrich

I think it's quite simple and that is in order for our customers to meet their performance requirements, their design time to market -- and to just reduce their need to get into the detail of architecture as these comps -- as these analog systems become more and more complex. They're looking for a partner and that partner has to have system expertise and partners has to have good solid manufacturing capability to do unique things, bumping, flipping, diving and a broad product portfolio. And so we've been a leader in integration. We were in front in FEMs, we're upfront with Pads, we're upfront in SkyOne, we're upfront in WiFi and integration of devices and we think that's a big, big advantage for us and the trends that I think we'll not stop for many years.

Operator

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.

Dave Aldrich

Okay. Well, thank you very much everybody for participating and I look forward to see you in upcoming conferences.

Operator

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.

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