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Skyworks Solutions (NASDAQ:SWKS)

Q3 2012 Earnings Call

July 18, 2012 5:00 pm ET

Executives

Stephen Ferranti

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

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

Liam K. Griffin - Executive Vice President and General Manager of High Performance Analog

Analysts

Craig A. Ellis - Caris & Company, Inc., Research Division

Vivek Arya - BofA Merrill Lynch, Research Division

Alex Gauna - JMP Securities LLC, Research Division

Steven Chin - UBS Investment Bank, Research Division

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Matt Ramsay - Canaccord Genuity, Research Division

Blayne Curtis - Barclays Capital, Research Division

Edward F. Snyder - Charter Equity Research

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Aalok K. Shah - D.A. Davidson & Co., Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Jonathan Goldberg - Deutsche Bank AG, Research Division

Quinn Bolton - Needham & Company, LLC, Research Division

Blaine R. Carroll - Avian Securities, LLC, Research Division

Thomas A. Sepenzis - Northland Capital Markets, Research Division

Operator

Good afternoon, and welcome to Skyworks Solutions' Third Quarter Fiscal Year 2012 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.

Stephen Ferranti

Thanks, Kathy. Good afternoon, everyone, and welcome to Skyworks' Third Fiscal Quarter 2012 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 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've used in the past. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP.

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

David J. Aldrich

Thanks, Steve, and welcome, everyone. Well, I'm pleased to report that Skyworks posted another strong performance during our third fiscal quarter, in which we again exceeded prior guidance and we outpaced our addressable markets. Our diversification into new adjacent analog products and in complementary vertical markets, along with an intense focus on operational excellence, have enabled us to produce consistently strong operating results through a variety of market conditions. And from where we stand today, we're well positioned to extend our track record of outperformance.

Turning to the third quarter results. We posted revenue of $389 million, better than our prior guidance of $383 million. We produced third quarter operating income of $91.8 million, and we earned $0.45 in diluted earnings per share. This is $0.01 better than our original guidance.

Globally, consumer appetite for smartphones, for tablets, data cards and an array of other mobile Internet devices remains high, driven by the boom in social networking and driven by an accelerating shift towards cloud-based content, by mobile computing displacing traditional PCs, and the growing popularity of photo-sharing applications like Flickr, Instagram and Picasa, and the explosion in video conferencing and streaming video. These global themes are in the early stages of adoption and should provide a tailwind for our business for years to come.

So while the long-term trends for us are clear, there's no denying that more recently, the macroeconomic climate and other factors have skewed normal demand patterns within the industry. Skyworks' ability to maintain consistently strong growth and operating results in spite of this is the result of key 3 factors -- or 3 key factors. First, new vertical market opportunities. The opportunity for Skyworks is quickly expanding. It's well known that broadband connectivity is proliferating across a growing array of previously unconnected consumer electronics. What's more, the need for high-performance analog solutions is expanding into brand-new markets like medical, automotive, military and industrial.

Second, the rising RF content per device. This is driven by a dramatic increase in the number of LTE-enabled devices and a major smartphone upgrade cycle just beginning in the emerging markets. Average RF dollar content per device continues to move higher. This creates a rising tide for the foreseeable future and translates into TAM growth rate significantly above unit growth. This is playing out real time today across major development platforms on which we're engaged.

And third, expanding our product portfolio between -- beyond traditional served markets. Through a combination of internal developments and targeted acquisitions, we have added an incremental $2 to $3 of addressable content per device to our core RF TAM. Today, we're seeing tremendous traction by cross-selling these new products throughout our existing customer base. It's worth noting that none of these products were in our portfolio just 18 months ago.

So in short, we have strategically positioned the company to outperform our addressable market, independent of underlying market conditions, and we remain quite optimistic about the second half of 2012 and beyond.

Looking ahead, we see our target markets continuing to expand for many years to come. And for example, industry analysts project that over the next 5 years, mobile broadband users will grow at a 38% compound rate. In fact, tablet shipments alone could reach more than 350 million units within the next 3 years according to recent reports by Morgan Stanley.

And wireless connectivity is becoming the critical link to enable access to a growing library of cloud-based content, including music, online media and publications, on-demand video, personal photos, home movies and enterprise data. And the recent introduction of a -- of family data plans from major network operators will allow an increasing number of devices per household to enable shared access to cloud content on an anytime-anywhere basis.

However, one of the greatest challenges facing mobile device OEMs within this landscape is managing escalating RF complexity. And this is resulting from the proliferation of air interface technologies, including 2G, 3G and 4G cellular, dual-band wireless local area networking, Bluetooth, GPS and Near Field Communications.

The number of cellular bands alone is increasing exponentially. In fact, we see upcoming smartphone platforms that will support more than 14 different bands, each requiring distinct amplification, filtering, switching and shielding. All of this is happening in smaller form factors with increased battery life requirements, while trying to manage bond costs.

This increasing complexity plays directly into Skyworks' core strengths and uniquely positions us to address these challenges. Today, we're providing the broadest portfolio of RF and analog solutions right from the transceiver to the antenna. We're offering an unmatched technology portfolio that includes deep expertise in SOI, high power, CMOS, HBT, pHEMT, BiFET and silicon germanium, along with a library of nearly 1,000 patents and supporting intellectual property. We maintain unrivaled scale and world-class facilities for integrating multiple technologies into highly sophisticated multiple chip -- multichip modules.

And finally, we're leveraging a deep heritage in system-level design and a global force of system and applications engineers often deployed within steps of our customers' facilities. These competitive advantages took years to put in place and facilitate the highest level of integration and better system performance, ultimately providing more value to our customers.

A prime example of how we leverage these core competencies to extend our technology leadership is the recent introduction of our SkyOne platform. SkyOne is a revolutionary patented front-end system that incorporates all of the RF and analog content between the transceiver and the antenna into a single ultracompact device. This is a complete system in a package, incorporating multiband amplifiers, supporting global 2G, 3G and 4G coverage, along with all associated filtering, duplexers, switching and control functionality in less than 1/2 the footprint of even the most advanced approaches in the industry today.

The end result is significant board space savings, ease of implementation, high performance and time-to-market advantages for our customers. In these types of applications, we see a much narrower competitive landscape. Looking ahead, we expect to extend our technology lead as we introduce solutions incorporating sophisticated RF signal processing, more complex switching and even higher levels of integration.

Okay, so turning now to specific third quarter product highlights. Across our mobile customer base, we've seen tremendous traction in cross-selling our portfolio of new analog product lines, alongside our traditional RF front-end components. In some recently launched models, Skyworks has secured a total of 7 or more devices, including multimode power amplifier, Antenna Switch Modules, camera flash, DC-DC converters, high-efficiency LTE amplifiers, backlighting ICs, GPS low-noise amplifiers and wireless LAN front-end modules. This level of content was unheard of for us just a couple of years ago.

Outside of mobile devices, we are also captured new design wins across a number of diverse applications within our high performance analog products group. These include wireless LAN sockets on a recently introduced ultrathin high-end notebook PC, which includes a total of 9 Skyworks parts. This includes a receiver protection module within a heart monitor application with Medtronic, a high sensitivity mixers for an automotive toll tag application and major set-top box win containing multiple Skyworks components, including the switch matrix and low-noise amplifier modules.

And finally, the first 802.11ac router products are now commercially available, containing up to 6 Skyworks devices per router. In total, we've already secured over 20 design wins across a variety of 802.11ac-enabled devices, including routers, set-top boxes, notebook PCs and USB dongles.

So in closing, our third quarter marked another strong performance for Skyworks. We believe that our strategy of continuing to diversify our business, expanding into new verticals and maintaining a laser focus on operational execution is clearly working.

With that, I'll now turn it over to Don for his financial review.

Donald W. Palette

Thanks, Dave, and thanks again for joining us, everyone, today. We appreciate that. Well first I'll provide a summary of our third quarter results and then outline our business outlook for the fourth quarter of our fiscal 2012.

Revenue for the third fiscal quarter was $389 million, which was up 7% sequentially and more than 9% year-over-year. Gross profit was $168.1 million or 43.2% of revenue. Operating expenses were $76.3 million, consisting of R&D expense of $48.6 million and SG&A expense of $27.7 million, yielding $91.7 million of operating income and a 23.6% operating margin.

Cash taxes were $5.7 million, and that translates into a 6.2% tax rate. Net income was $86.1 million or $0.45 of diluted earnings per share, and that's $0.01 better than our guidance.

Turning to our third quarter balance sheet and cash flow statement. We generated $44 million in cash flow from operations, and that brings us year-to-date to a total of $244 million.

We exited the quarter with $327.9 million in cash, and we invested $31 million in capital expenditures during the third quarter, with depreciation of $17 million. The elevated levels of capital expenditures are a result of our continuing capacity expansion across all of our facilities to support second half product ramps. And as a reminder, these investments consist of equipment adds when our existing facilities gave a very quick payback and they enhanced our return on invested capital.

Now for our fourth quarter 2012 business outlook. We are guiding the fourth quarter revenue to be $415 million to $420 million. At this revenue level, we expect gross margin to be in the range of 43% to 43.5%. Looking ahead, we see gross margins continuing to improve as we realize synergies associated with our recent acquisitions and as we capture the margin benefits of some of our recent capital investments.

We expect the fourth quarter operating expense to be approximately $77 million. And below the line, we expect $100,000 in expenses from interest income and other expenses and a cash tax rate around 6.5%. And as a result, we expect EPS of $0.50 to $0.51 using a base of 193.5 million shares.

That concludes our prepared remarks. So, operator, go ahead and open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Craig Ellis with Caris & Company.

Craig A. Ellis - Caris & Company, Inc., Research Division

First is a clarification. Looking at the quarter's performance, you were $6 million above your guidance. Don, can you tell us how that broke out between either strength on the cellular part of the business or linear products business or was it strength in both that did the results?

Donald W. Palette

It was really strength in both. We didn't see a significant shift in the percentage revenue slip between the 2, so that increase was really split fairly evenly as we normally would see between those 2 segments.

Craig A. Ellis - Caris & Company, Inc., Research Division

Okay, so you're still at 65-35 per year?

Donald W. Palette

Correct.

Craig A. Ellis - Caris & Company, Inc., Research Division

Okay. And then the question I think on the last call, one of the things you indicated is you expected an above seasonal revenue profile in the back half of the year. Is that still the expectation? And can you just remind us what calendar fourth quarter seasonality would be for you?

David J. Aldrich

Craig, this is Dave. Well, we think there'll be traditional seasonal strength. However, in our space, we're starting to see more and more rather than a simple Q4 growth strength, that being split between the September and the December quarters as we shift into those builds. It's a bit too early to tell what March seasonality might look like a normal seasonality. We have no reason to believe it will be terribly different, but we're feeling good about, again, about those second half ramps.

Operator

Our next question will come from Vivek Arya with Bank of America Merrill Lynch.

Vivek Arya - BofA Merrill Lynch, Research Division

Dave, you mentioned the word diversification many times. I was wondering if you could talk about diversification on 2 sides. Side one, how are you diversifying in your customer base outside of the Apples and Samsungs of the world? And then secondly, diversification in terms of sockets. Is there a way to get -- to size what your addressable content was last year versus what it is now?

David J. Aldrich

Okay, good questions, Vivek. First, with respect to sockets, one of the things, you probably seen some reason Teardown report, so I think that's probably the best testament to what we've been able to accomplish. We -- you may think of us as a traditional kind of a PA supplier -- PA switch supplier, but in the more recent designs, we've been getting increasingly attach rate -- high attach rates with our GPS LNA products, with our Antenna Switch Modules, with some power management devices, camera flash devices and our wireless LAN portfolio. And so we're seeing as much as more than $2 of incremental content per smartphone and tablet, and we're pretty excited about that. So we are leveraging not only recent acquisitions, but some organic development to continue to look to bolt on to what's been our traditional product offering more and more content. It helps our customers in the process, terrific for us. We're also diversifying into new adjacent markets, and I think we've talked about that fairly extensively. But medical, for example, we talked about medical devices being designed in on the call. We're in infrastructure. We're in various home automation markets that are extremely exciting and growing. And I think from a customer standpoint, there isn't a customer in the cellular smartphone space that isn't a customer of Skyworks. So we're designed into every baseband suppliers, to offering as a reference design partner, and we're also designed into virtually every OEM.

Vivek Arya - BofA Merrill Lynch, Research Division

Got it. And one follow up on operating expenses and operating margins. What is the progress in integrating your acquisitions? When can we expect to see operating margins get back to your traditional levels of 26%, 27%?

Liam K. Griffin

Sure, this is Liam. Well with respect to the acquisitions, we are making great progress through the integration synergies, improvements in margin and also customer traction. So we're doing the right things there as outlined in the past, and I think we'll see continued performance going forward.

Donald W. Palette

And, Vivek, to follow-up on how that affects the overall Skyworks model, the new product lines are on track. They're still scaling up though, so it has had a little bit of a muting impact on the operating model and the returns. But as you could see, our margins in Q3 was 23.6%. The guidance implies 25%, so we're still very focused on the 30% target. And as we continue to gain share and grow the top line, we're going to be on our way towards that number again. So some of it is the impact of getting the acquisitions up to scale, and that's the top line growth.

Operator

.

We will go next to Alex Gauna with JMP Securities.

Alex Gauna - JMP Securities LLC, Research Division

I was wondering if you could give a -- could you give us an idea of how far we are, in your opinion, into the LTE upgrade cycle right now? And if you could maybe give us an idea of how you feel positioned in LTE for the second half and maybe what percentage of it is contributing to the mix.

Liam K. Griffin

Sure, Alex. This is Liam. Well, I think overall in the industry, we're very early innings with respect to LTE. We have a very powerful LTE platform in a number of different devices including multimode devices that address the LTE standard. We do see, however, the design win traction going forward and our ability to gain share in LTE to be very bullish. And if you look at the platforms that we've addressed over the last 6 months and platforms that we're going to be addressing now, we're very confident that LTE is going to play a major role in 2013 for us.

Alex Gauna - JMP Securities LLC, Research Division

As a follow-up, I was wondering and you might not have all the details because their call is going on concurrently, but Qualcomm guided units down fairly significantly sequentially for the September quarter. How was your exposure there? And how does that fit in with your guidance for the September -- September quarter?

David J. Aldrich

Sure, Alex. Well, our attach rate with Qualcomm is quite high, and so we see the same or similar dynamics obviously that they would in those segments of the market. If you look at our guidance, what's really driving it are very specific programs that are ramping into production, as well as some of these devices that are continuing to ramp. They're relatively early in that ramp. So there really may -- there are some very specific Skyworks reasons why we may be bucking some of the normal market trends as we go into the second half.

Operator

.

We'll go next to Parag Agarwal with UBS.

Steven Chin - UBS Investment Bank, Research Division

This is Steven Chin calling on behalf of Parag. Just a throw down on that previous question regarding some of the exposure that you have in platforms where Qualcomm is as well. Can you discuss in terms of your component content introduced that you may be seeing, any kind of rough numbers you can speak to in terms of rough percentage of the bandwidth you have out there where you're seeing content grow? Or is it a mix shift to higher LTE content perhaps that's helping you to see your revenues grow in the -- grow sequentially as opposed to some of the unit-related headwinds that Qualcomm may be seeing?

David J. Aldrich

Well, I think it's difficult to be -- it's hard for me right now to be terribly precise. I will say that the -- if you look at those Teardown reports, we are seeing, for example, the Samsung Galaxy Teardown reports that recently came out. I don't have the [indiscernible] 6 parts of Skyworks, 7 parts. So it had a pretty broad suite of Skyworks products. So what was -- the dynamic, it kind of goes like this. Smartphones continue to displace 2G devices. So we see that little bit of a wind at our back as we always get more dollar content for the traditional products in smartphones and tablets than we did in 2G. Our attach rate continues to improve starting with our top customers where we start to put more of those new products bolted around the existing products. That's growing. And then we have been gaining quite a bit of leverage and traction from things like home automation, where we're putting our Wi-Fi devices in gaming consoles, or we're putting them in various applications and appliances around the home. So that's an example where those markets really were nascent a couple of years ago. They continue to grow, and I think they're really beginning to explode in the early innings, frankly.

Liam K. Griffin

Right. And if you look at the smartphone, as Dave articulated, you've got the core RF TAM increasing by virtue of multiple bands. But now that'd there be more explicit. We have wireless LAN devices both 2-, 4- and 5-gig. We have powered management, backlighting, DC-DC converters. We have Antenna Switch Modules. We have GPS. The last set of products I mentioned were really not in play for us over the last 2 years. They're new products. Some of those were organic, some came by virtue of deals, but they're absolute drivers now going forward.

Steven Chin - UBS Investment Bank, Research Division

Great. And just a -- follow-up question is on some of the new products that you highlighted in the prepared remarks, products such as the Antenna Switch Modules, the GPS LNA and also the SkyOne products. Can you give us a little color on the sort of design time for those new products? Like is it comparable to your existing RF components? Or is it a longer or shorter lead time? And what's the sort of revenue ramp that you'd expect from the different product lines later this year or going to 2013?

Donald W. Palette

The SkyOne product is new. It's been in development for a couple of years, but the product has sampled, the feedback has been good and we expect lead customer production sometime later in this year. So there's no revenue contribution right now from the SkyOne products, but I will tell you there's a lot of development activity, and this truly is an unprecedented level of integration. And I don't know if you really listened to the comments when we described it or looked at the press release. It has all the analog and RF functionality between the chipset, the radio, the RF, the antenna and back, filters, amplifier, switches, all of the shielding. So I this is a product that for those customers who really want to have a world phone but looking for ease-of-integration, size, it has great current consumption, we think that's going to be a real winner for us, but it's brand new.

David J. Aldrich

Right. With respect to GPS and the ASM product, I mean, GPS location-based systems and services, you see now in every smartphone, every tablet, even in netbooks and notebooks. So we developed a cutting-edge product internally organically that we believe meets all the needs of leading tier ones. We're fortunate to have a suite of new design wins, and that's looking very good. And again, it's new business for us. The Antenna Switch Module really is built off of our core strength and RF switch. We have great in-house technology in pHEMT. We have SOI capability and then also some filtering capabilities in packages to bring that to bear to the market. So both of those of those products are a combination of organic work and then understanding what our customers need.

Operator

We have a question from Ittai Kidron with Oppenheimer.

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Dave, can you talk about your underlying assumption for market growth in September? It looks like -- I mean, 7% sequential growth into September is well below your historical averages. So I'm just trying to understand how bad of a scenario are you modeling from a market standpoint.

David J. Aldrich

Well, there are a couple of things that I think is going on right now. We do see seasonal strength. We do see customers gearing up for that year-end push with products and, again, in the August, September, October timeframe. I do believe that there's been a bit of a mix shift away from the smartphone sales because there are different phone launches that kind of impact that and create some choppiness to the markets. So I would say in general, the September quarter is been a bit muted. We expect December to be strong. But I would say that, that's probably the biggest impact is simply some -- looking at the big -- looking at program launches and how that kind of changes that dynamic a bit, and it makes it hard to handicap normal seasonality.

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Okay. And Dave -- Don, I'm sorry, maybe can you talk about the customer concentration? I know you don't give the exact specific percentages of your largest 10% customers, but can you tell us in aggregate your top 3 customers account for what percent of your revenue this quarter and what was it last?

Donald W. Palette

Ittai, I will give you the top 10% customers this quarter. It was Foxconn and Samsung. Nokia dropped out of the top 10%, but they're still high-single digits, but we don't disclose anything besides that on a quarterly basis, so we don't aggregate that, give you a specific number.

Operator

We will go next to Mike Walkley with Canaccord Genuity.

Matt Ramsay - Canaccord Genuity, Research Division

This is actually Matt Ramsay on for Mike. A couple of questions for me. I guess the first one is have you disclosed, or will you, the 2G to 3G to 4G mix of your wireless business in the quarter?

Donald W. Palette

Sure, Matt. It was roughly the same as it was last quarter, 20% 2G and 80% EDGE and WCDMA.

Matt Ramsay - Canaccord Genuity, Research Division

Okay, great. That's helpful. And I guess as a follow-up, no one really brought it up yet, Don, but I wanted to dig into this $5 million -- $5.4 million credit that you guys got on the pro forma SG&A line around contingent liabilities for acquisitions. Maybe you could dig into a little bit more what that was around. And I guess maybe discuss what your pro forma numbers and results would've looked like absent that and discuss where it would have been relative to your guidance.

Donald W. Palette

As far as the $5 million, that $5 million relates to some M&A activity where we consummated some deals with earn-out potential for the people who own the company that we purchased. And that's just shoring up what that liability is going to be for us based on a 12-month period after the acquisition. So that's all it is. And as far as what the numbers would be, you just basically back that out of the numbers. I mean, it's a one-time adjustment. It's related to -- it was an earn-out related M&A activity. That's all it is. And just so you understand, you have to make an estimate upfront, and then you just shore it up at the end of the period. That's all.

Matt Ramsay - Canaccord Genuity, Research Division

Okay, great. I think I understand the mechanics of it. But I mean, does it then imply that the numbers would've been a bit lighter on the earnings line than where maybe your guidance was before?

Donald W. Palette

No, absolutely not.

Operator

And we'll go next to Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

Just maybe a little clarity on the guidance. If you could talk -- clearly doing better than the market. Talk about what the drivers there are. And then I think, Don, you mentioned that the linear and the RF business was roughly the same contributor in Q2. Do you expect that to continue into September?

David J. Aldrich

Yes, Blayne, I would say that the primary driver, our specific programs where we're beginning to ramp production and shipment of those sockets that are second half drivers for us. So that's it. Plus some of the organic and acquired product lines where the attach rate to our traditional OEM customers is getting higher. So as we're launching programs, we're launching them with more dollar content, not just LTE and traditional expansion of PA bands, but also the analog functionality that bolts around it in the system. So I would say that's probably the second largest driver. And I don't expect -- Don, maybe you could comment on this, but I don't expect the September to see any meaningful split -- difference in the split between our high-performance analog business and our mobile business.

Donald W. Palette

No, that's exactly where the forecast was. We don't expect any major change in that percentage.

Blayne Curtis - Barclays Capital, Research Division

And then maybe just talk about the consolidations of some of these RF blocks. You highlighted SkyOne. You're also shipping a lot more multiband chips. You highlighted the GALAXY S III. Maybe address kind of where you see particularly the SkyOne fitting in the market. I mean, you say it will address all the bands. Is this kind of low end or across all spectrums of phones? And then would tier ones be using this? Or -- and then maybe just talk about how that places you versus the competitors? I mean, clearly, you're the only guys who introduced something now, but how do you see the competitive field?

David J. Aldrich

It's a big question. I would say that whether or not this hits the high end of the market really depends because when you -- the level of integration, to be clear, is we're taking all the bands -- all the popular bands -- of transmitting amplification, we're integrating the amplifiers with the switches using various process techniques. We're adding the duplexers as well as other filters. So it's fully shielded, so it truly is the, by far, by far the most highly integrated device in the world today. Now whether or not -- now inherent in that level of integration is a certain degree of inflexibility. The device is very small, but it is highly integrated. We've developed it as a platform strategy to allow us to reconfigure bands over time and to be able to address OEM customers as they look to either be perhaps more regionally based or add bands that others don't want to add. So we've anticipated that. That will determine in large part whether or not it's broadly applicable among the tier ones. There are different approaches with each different baseband partner, different approaches with the OEM, which will determine how broadly applicable it is. But there is a segment of the market, low end for sure, but I think maybe even some high-end sockets, where this is going to be an opportunity for a customer to get in the market quickly with a product that's fully shielded, where they can drop it in and run. With respect to the competitive landscape, the problem for many of our competitors is that either they lack the system expertise because there's a lot of system integration thought that goes into how you architect a device like this. So it's difficult for component players. It's also difficult, if not impossible, if you're, for example, a filter company or a switch company or a PA company to be able to deal with this level of integration. So we think that, that kind of rules out some of the point product folks. And finally, the level of manufacturing and packaging integration is really unprecedented for this device. Remember, we are vertically integrated in packaging. That helps us both in the design time-to-market and the cost side. So the ability for us to make high margins on this product is really, we think, somewhat unique to Skyworks. You wouldn't want to source all these components and try to compete with us. So we think the competitive landscape is quite narrow.

Operator

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

Edward F. Snyder - Charter Equity Research

A couple of questions. You are a little bit weaker seasonally than we would've expected, which suggests maybe some more upside or shift towards the December period. Dave, how do you see that content would again be -- 35% linear? Or do you expect given some of your new acquisitions and maybe some new slots and the tablets or smartphones to favor more of the linear product once the ramps start picking up?

David J. Aldrich

I think December -- my expectation is the December quarter will be a strong quarter for smartphones, a seasonally strong quarter for smartphones. And within those -- within smartphones, we expect to not only see our traditional PA products, but some, as you mentioned, some of these other products. So there will be a lift to both our traditional PA business, as well as to some of these high performance analog products that are bolted around those PAs. So I still see that split being reasonably constant. Now it's quite -- it is possible you might see a slight shift towards the mobile devices just given there's more seasonality there, but I don't think it will move the dial much beyond that ratio.

Edward F. Snyder - Charter Equity Research

I mean, if we look at both sides in your ATI and we -- as separate for mobile products, and if we believe -- I mean you purchased them for a reason, and part of that would be the traction you can bring to bear with those companies into the smartphone world, one would almost expect to see kind of a shift, I won't say away, but a higher mix of those products than you've seen in the past, given you've acquired these guys since the first holiday season and you're truly running with them full bore. That doesn't sound like that's going to be the case though?

David J. Aldrich

Well, you will see a higher -- certainly higher revenue for those products. I don't know that it's necessary a higher mix, see higher revenue in the traditional products. Don mentioned that we're 65-35. Not that long ago, we were 75-25 and prior...

Liam K. Griffin

And 80-20.

Donald W. Palette

Yes, not that long ago.

David J. Aldrich

So I think that's a relatively new phenomena that we're...

Donald W. Palette

So you're seeing some of that percentages already. I mean, that's the way to think about it.

Liam K. Griffin

Right. Exactly. And the other thing in here is that we are really expanding the design win footprint with those products. So I think you should expect as we go through 2013 to see more evidence of success with both the WLAN portfolio and power management. One of the things we do is certainly cross-sell inside of smartphones, but there's a lot of new markets that were entering by virtue of those products. We're getting into cloud-based sharing, we're getting into infrastructure spaces where we can put in DC-DC converters, and there's going to be collaborative plays where we use power management within our front-end modules to try to create differentiated architectures. So as we move forward, I think we'll continue to hear growth in both sides, but hopefully in some different applications.

Operator

Your next question is from Anthony Stoss with Craig Hallum.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Dave, can you -- are you comfortable with your production capabilities or capacity, both internally and externally later on this year and entering 2013? And also let me hear your thoughts on AC, when do you think it's really going to have a role to play in the handset marketplace.

David J. Aldrich

Well, I am comfortable with the capacity. And if you look at this quarter as an example, we spent, I think, just over $30 million against depreciation of $17 million, and that's all addressing any bottleneck that we may see for the second half ramp. So I do feel good about that. We made investments over the last 3 years, 2.5 years for sure, and the big-ticket items like bringing up more HBT capacity, going from 4 to 6 inches and so on. So there are no bricks and mortar requirements. So I feel quite good about not only our internal capacity, but what we've been able to do with our supplier partners to keep that hybrid model so we're able to offload some of that capacity to take some of the volatility out of the seasonality of the volatility. So I feel good about the supply side.

Liam K. Griffin

Right. And with respect to 11ac, I mean, we are right now building product, supporting routers and supporting kind of the first leg in the infrastructure for 802.11ac. Following that today, the handset applications, the smartphones that we're looking at, right now a high percentage of those are looking at 11ac attached. So starts with the routers, we're well positioned there. We have a great deal of content. As you know, it's multiple in, multiple out. You can have up to 8 streams in our router. We typically see 4 to 5, tremendous content. And then following that, we are starting to see leading OEMs now embed 11ac into their handsets.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Okay. If I can sneak in one more quick question. Is there a -- can you just comment on the pricing environment if there's any considerable changes from last quarter?

Donald W. Palette

Anthony, this is Don. Nothing from last quarter. I mean, just a reminder, we're-- overall, our current erosion's within historical range. The only place that you might see -- we're seeing some slight change, that's the open 2G segment that's maybe increased slightly from what we'd experienced in prior years. But that's continues to be the only segment where pricing you have a chance to win business on price only. And the majority of our customers are making those decisions based on performance. And with us having the lowest cost structure in the industry, that allows us to continue to deliver strong margins. So we're really not seeing anything different than that, and we've articulated that the past several quarters.

Operator

We'll go next to Suji De Silva with ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC, Research Division

So visibility, what kind of turns do you need for the quarter?

David J. Aldrich

I'm sorry, Suji, could you...

Sujeeva De Silva - ThinkEquity LLC, Research Division

How well booked are you to the guidance for the September quarter?

David J. Aldrich

Typical for us. We've got between hub pulls and actual POs in hand, we're pretty much 100% booked, which is not unusual for us.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Got it. And then for the China low-end smartphone market, I'm imagining that's a more competitive market from a price perspective. How do you expect to compete there? And do you consider that a significant opportunity for yourself?

David J. Aldrich

We do consider it a significant opportunity because we think that there is a great deal of pent-up demand. We think it's not only for the traditional chipset-enabled smaller local players, the indigenous OEMs. We also think that's an opportunity for the major international brands to really address that market using brand recognition and great products. So we think it's going to be a terrific market for us. There will be price pressure on those devices for sure, but we really compare it to what it's really -- what that customer will be upgrading from, which is a 2G device with less -- much less than $1.00 content. So it won't be the -- perhaps some of them won't be high-end world phones, but they will certainly have a great deal more content than a 2G product sold into that market. So we're -- and we're positioned with it with a number of products. We've got multi-converged devices or multimode devices that are low cost that will be tailored for that market. We have hybrid and high-performance devices as well. We've got a whole bunch of content that we're bolting around it in a way that we hope will facilitate ease of entry to market for some of these customers as well as increasing our dollar content. So I'm excited about the market, aware of the price pressures, but I think we're prepared to have a real strong play there.

Operator

We have a question from Aalok Shah with D.A. Davidson.

Aalok K. Shah - D.A. Davidson & Co., Research Division

Just a couple of quick questions. Liam, just if I could, and I know Dave kind of addressed this a little bit, but I'm just -- I just want to make clear, you guys are winning PA market share now because of the additional solutions that you offer? Or is it the other way around that your PAs are simply better and you're just kind of bringing along all these other things like LNA drivers and LNA switches and other things like that at this point?

Liam K. Griffin

Sure. Well, I mean, I would say that the relationships that we've built over the duration of Skyworks since we started our company, the deep relationships with OEMs and also chipset providers, has put us in great position to win with power amplifiers and we've been doing that for a while. And then one inside the account collaboratively sell power management, WLAN, GPS, whatever is needed. So I think the leadership that we provided over the years in our power amplifier suite has really kind of paved the way for success in these other products. And we're doing a great job of satisfying customer needs and leveraging technologies in-house and through acquisition.

David J. Aldrich

The products have to be competitive. But it's clear that the credibility -- for example, when we acquired a couple of businesses, I think their biggest stumbling block was just having the credibility to sell into these huge companies and satisfy these big ramps. And our balance sheet is quite strong, our customers increasingly look for a profitable supplier partner with a good balance sheet, who can weather the storm. So we think that the viability that we have is critically important. So it's easy for us to get a product evaluated, but it has to be competitive.

Aalok K. Shah - D.A. Davidson & Co., Research Division

Then can you guys give us an update on where you are now with the BAW filters?

David J. Aldrich

Sorry, where we are with BAW -- we don't make BAW filters. We source them, and we are in high-volume production in multiple sockets with PA, SAW and BAW devices, mostly SAW, frankly, because that's where the market demand is the highest and where the price is the lowest, or the price is most competitive, I should say. But we are in production with PA duplexers and multiple sockets in high-volume production, have been for sometime, and we're winning some sockets there as well.

Operator

Your next question comes from Dale Pfau with Cantor Fitzgerald.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Let's talk just a little bit more about the emerging markets and the trend from 2G to 3G. Could you talk about how that's affecting your share out there, what you're seeing the trends are? And then the other question I've got is what do you think your total attach rate and percentage of business is from laptop, I mean, tablets and notebooks are right now?

David J. Aldrich

We think the 2G market continues to not only decline in dollars but decline in units. So the market is becoming -- the 2G market is becoming a smaller percentage. And in fact, our 2G into the local China market, if you will or the open market, is probably in the order of magnitude of mid-single-digit percentage of revenue, so it's pretty small, Dale. Now we do sell more 2G products in that because we have big business with other customers who sell into that market or sell elsewhere. But -- so we're pretty convinced that the 2G market is going to remain in fairly steady decline. It won't go away, but in fairly steady decline.

Liam K. Griffin

Right. And with respect to tablets, Dale, I think we -- we're in very good position there. We have market share in tablets that's at least as good as what we have in smartphones on the RF amplifier side. But tablets is a great opportunity to leverage the highest performance wireless LAN mobile connectivity product. We're doing very well there. We're also bringing in switch and some of the other technologies that we mentioned. So we're very upbeat about the general market outlook for tablets. We think they're going to be rapidly adopted. We have high expectations going forward, and we expect to be a share leader.

Operator

And next, we have Jonathan Goldberg with Deutsche Bank.

Jonathan Goldberg - Deutsche Bank AG, Research Division

I just wanted to talk a little bit about -- I guess all that's left is the 2G feature phone market in China. That used to be a pretty big opportunity for you guys. It seems like you're still there, you're still active there. Is that true? Is that -- or should we just stop worrying about that market entirely?

David J. Aldrich

We're very active there. We've got a reasonably high market share, and it's been a good market for us, right. It's been kind of a workhorse market. It's been around for a long time. It is declining. It is -- if you think about that, the way we look at that market is a couple of different ways. We do have -- believe we have the lowest cost structure. We address it with a combination of pure CMOS devices as well as very low-cost gallium arsenide devices, and we're sold with partners like MediaTek, for example. The issue with the market is it is declining. The consumers in those markets want smartphones or they want high-end feature phones, and that's just where it's headed. And we like that transition because, frankly, there are more margin dollars there, there are more dollars per phone, so we think that's going to be a growth driver. But we don't shy away from the 2G market. We expect there to be the most price pressure there because frankly, for companies who -- competitors who have been unable to kind of make the leap to multimode designs and now even more integrated devices we're talking about today, that's sort of one of the last frontiers to go at it, and you go at it with price as the primary weapon. So we do see ASP pressure there. But we make money there, and we're going to continue to ride it.

Liam K. Griffin

Yes, and alongside that, as we start to see the 2G market in China trade down, and as you know, that was a market that was less than $1.00 per SKU for us in terms of content, you're seeing local players like ZTE and Huawei really deliver low-end smartphones, in some cases high-end smartphones. We're seeing data cards where you have a couple of bands of WCDMA with GSM. So there's an active market there. And as Dave indicated, there's an appetite for global brands. And I think we're well positioned with some of the premier smartphones globally, and those products will eventually be big drivers in China.

Operator

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

Quinn Bolton - Needham & Company, LLC, Research Division

Dave, I wanted to follow-up on the SkyOne product. You talked about sort of data more mainstream smartphone product. But wondering if you could talk from the baseband supplier perspective. Was this developed in conjunction with, a, your multiple baseband partners? Or do you anticipate this as really more a sale to sort of leading tier one or high-volume OEMs? And then I've got a quick follow-up on LTE.

David J. Aldrich

Well, Quinn, I would say it was really to address a worldwide OEM market demand for ease of integration as the complexity increases. It really is a challenge with all those filters and all those PAs and switches and shielding it and coexistence or interference between, for example, Wi-Fi and 2-plus gigahertz cellular bands, so it's a real problem. And the more bands you layer in, the size constraint becomes an issue as well as just shielding it and handling all that RF complexity. So we really addressed it to try to figure out a way to make life easier for our customers. It won't be for all, and it wasn't geared towards any specific baseband. It was really more of a world product. It can be baseband independent. The interface was designed that way, so we weren't approaching it with any one specific platform in mind, although we have leading customers who have been sampled and who will be first to production with it.

Quinn Bolton - Needham & Company, LLC, Research Division

Great. And then just quickly on LTE. You talked about LTE becoming obviously important in 2013. I think there's something like 10 to 14 different bands being used for LTE around the world. Any sort of sense you can give us as to how many bands on average you think you'll see in phones in 2013? I mean, it gets hard to imagine you're going to see full 10- to 14-band LTE phones plus 2G and 3G backward compatibility. So just trying to wonder, do you think it's on average 3 to 4, 4 to 6? Any thoughts you have on kind of the 2013 LTE devices?

David J. Aldrich

Yes, I think it depends on the architecture. Some of the higher-end smartphones really will have, I mean, 8 devices or more. There are multiple bands of LTE. There's multiple bands of WCDMA. And then you have backward compatibility. So we have seen a trend at least today to drive as many bands the carriers will support, and we see those smartphones being designed today going into production next year.

Donald W. Palette

And we're using 2 approaches. One is were looking to continue to integrate at the die level these multimode designs and sweep in more bands and where performance demands it, we're having other -- using other manufacturing and packaging techniques to make it small and relatively low-cost. So that's where the kind of the system expertise of being able to play the ability to integrate upward within IC as well as in the package as well as in the MCM is an advantage for us. And that's where the customers are struggling as they -- LTE was in many ways the straw that broke the camel's back. Layering in those bands sort of made it impossible to go through a traditional discrete model.

Operator

We now have a question from Blaine Carroll with Avian Securities.

Blaine R. Carroll - Avian Securities, LLC, Research Division

I guess a couple of questions if I can. First of all, Dave, you talked about the 2G dollar being down, units being down. Don, did you give out the split of what the 2G versus 3G revenue was during the quarter?

Donald W. Palette

Yes, I did. It was roughly the same as last quarter. It was 20% 2G and 80% EDGE and WCDMA.

David J. Aldrich

But even within that -- even within that 2G, most of that is foreign brands sold into the China -- the open market 2G is somewhere below 10%.

Donald W. Palette

Yes.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Okay. And then, Liam, when you think of those, the LTE bands are the popular right now, I'm assuming that it's 13, 17, maybe some activity up around 26 and 4, are there any other bands that we -- that are sort of bubbling up as far as LTE and LTE capabilities?

Liam K. Griffin

Well, there are a few that will go out further into 2014. But I think if you look at those 4 and then you go and look at typical WCDMA Band I, Band II, Band V, Band VIII. Okay, now you've got 8 bands and you add your GSM or your EDGE. So there you go. That's how you get your 8 or 9, and that is the type of architecture that we're seeing today. We're seeing that type of layout.

Operator

We have a question now from Tom Sepenzis with Northland Securities.

Thomas A. Sepenzis - Northland Capital Markets, Research Division

I'm just wondering if you could give us any kind of insight into the geographical strength or weaknesses that you're seeing.

David J. Aldrich

Yes, I mean, it's actually tough because we don't really look at the business that way. I mean we have our key customers, and we do see regionally within the HPA space pretty good traction in the Americas and also in APAC. The smartphones players are real global brands, and we look at our sales directly to those accounts and we really have to kind of follow the money where they sell.

Thomas A. Sepenzis - Northland Capital Markets, Research Division

Okay, great. And in terms of the new markets like medical that you're targeting, are any of these -- I take it none of these are 10% of the business at this point, but are you targeting any of them to be in the next say 12 to 24 months?

David J. Aldrich

Tom, right now, no. The answer is that they're not 10%, but we have our eye on growing a lot of the key vertical markets that we're just seeing some traction in because they're accretive to the margin, the overall return of the business. So our goal will be to continue to grow those to a more meaningful revenue number for the company.

Operator

Ladies and gentlemen, that does conclude today's question-and-answer session. I'll now turn the call back over to Mr. Aldrich for any closing remark.

David J. Aldrich

Okay. Well, thank you, everyone for participating. And we look forward to seeing you at upcoming conferences.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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